Closing the Business

Correct answer: B. ₹500 Loss

The book value of the liability was ₹8,000, but ₹8,500 was paid to settle it. The excess payment is ₹8,500 − ₹8,000 = ₹500. When a liability is settled for more than its book value, the Realisation Account records a loss. Therefore, there is a loss of ₹500. A profit of ₹500 would arise only if the liability were settled for less than ₹8,000. Exam tip: For liabilities, compare the amount paid with the book value; excess payment represents a loss.

Correct answer: B. To record all final receipts and payments

At dissolution, the Cash Account records cash received from the sale of assets and collection from debtors, along with final payments made to settle liabilities and expenses. It therefore shows the cash balance available at the end of the dissolution process. Profit or loss on dissolution is determined through the Realisation Account, not the Cash Account. Exam tip: associate the Cash Account with receipts and payments, and the Realisation Account with profit or loss on realisation.

Correct answer: B. Return of partners’ capital

On dissolution, the usual order of settlement is: realisation expenses, external liabilities, partners’ loans, and finally the return of partners’ capital. Therefore, a partner’s loan is repaid before partners’ capital is returned. Unrecorded liabilities are also external liabilities and must be settled earlier. Exam tip: remember the sequence—realisation expenses, external liabilities, partner’s loan, and partners’ capital.

Correct answer: C. An asset is sold above its book value

When an asset is sold for more than its book value, the excess of the sale proceeds over the book value is a gain credited to the Realisation Account. Option A causes a loss because the asset is sold below book value, while options B and D also increase the loss or expense. Exam tip: a higher realisation from assets or settlement of liabilities for less than their book value can generate a realisation profit.

Correct answer: B. Dissolution

The complete closure of a partnership firm’s business, followed by the settlement of its assets and liabilities, is called dissolution of the firm. Reconstitution only changes the partnership arrangement or the partners, while the business generally continues, so option A is incorrect. Exam tip: dissolution of the firm ends the business, whereas reconstitution does not necessarily do so.

Correct answer: B. To determine the profit or loss arising from settlement of liabilities

At dissolution, creditors are external liabilities of the firm. Transferring them to the Realisation Account and recording their subsequent settlement brings the effect of settling those liabilities into that account, allowing the profit or loss on realisation to be determined. This transfer does not directly increase capital or stock; cash decreases only when payment is made. Exam tip: Profit or loss arising from the realisation of assets and settlement of external liabilities is determined through the Realisation Account.

Correct answer: A. Realisation Account

Realisation expenses paid by the firm are debited to the Realisation Account, while Cash/Bank is credited by ₹1,500. Sales and Purchase Accounts record normal trading transactions and are not used for dissolution expenses. Exam tip: Expenses incurred for completing the dissolution are generally recorded on the debit side of the Realisation Account.

Correct answer: A. Cash Account

After paying external liabilities and partners’ loans, the amount available for settling the partners’ final capital balances is shown by the Cash Account balance. The Sales, Purchase and Salary Accounts do not determine the cash available for this final settlement. Exam tip: In dissolution questions, check the closing Cash Account after all receipts and payments have been recorded.

Correct answer: A. Debit side

At dissolution, assets recorded in the books, generally excluding cash and bank balances, are transferred to the debit side of the Realisation Account at their book values. Liabilities are transferred to the credit side, so the credit side is the closest but incorrect alternative. Exam tip: remember, “Assets debit, Liabilities credit.”

Correct answer: A. Debited

When a partner takes over a firm’s asset, the partner’s capital account is debited with the agreed value of the asset, while the Realisation Account is credited. Therefore, ₹9,000 will be debited to the partner’s capital account. Exam tip: a partner’s takeover of an asset is recorded as a debit to the partner’s capital account.

Correct answer: B. Capital contribution

A cash deficiency at dissolution means that the firm does not have enough cash to meet the amount required after realisation and settlement of liabilities. When partners are required to bring money into the firm to cover this shortage, the amount is called an additional capital contribution. The partners’ capital accounts are credited for the contribution, and cash is debited. Capital withdrawal has the opposite meaning: money is taken out by a partner, so it cannot solve a shortage. Revaluation means recording changes in the values of assets and liabilities, not bringing cash into the firm. Reservation is not the relevant accounting term for this procedure. Therefore option B is correct. The contribution is generally made by partners in the required manner, often according to the applicable profit-sharing ratio when a loss or deficiency is allocated.

Correct answer: B. Profit on realisation

A credit balance arises when the credit items of the Realisation Account, such as proceeds from the sale of assets and settlement of liabilities, exceed the debit items. It represents a profit on realisation, which is transferred to the partners’ capital or current accounts in their profit-sharing ratio. In contrast, a debit balance represents a loss on realisation. Exam tip: remember—credit balance means profit, while debit balance means loss.

Correct answer: A. A claim payable after external liabilities but before capital

A partner’s loan is a claim separate from the partner’s capital. On dissolution, external liabilities are settled first, followed by partners’ loans and then partners’ capital. Therefore, option A is correct; treating the loan as capital would be incorrect. Exam tip: remember the order—external liabilities, partners’ loans, capital, and finally any remaining surplus.

Correct answer: A. Profit of ₹4,000

Realisation profit or loss = Sale value − Book value = ₹24,000 − ₹20,000 = ₹4,000. Since the sale value is higher than the book value, the firm earns a realisation profit of ₹4,000. A ₹4,000 loss would arise only if the asset were sold for ₹16,000. Exam tip: subtract the book value from the sale value; a positive difference is profit and a negative difference is loss.

Correct answer: C. Realisation Account and Partners’ Capital Accounts

The Realisation Account records the profit or loss arising from the sale of assets and settlement of liabilities. After this profit or loss is transferred to the partners’ Capital Accounts, the Realisation Account closes with a zero balance. The partners’ Capital Accounts also become zero after the final payment to, or contribution by, the partners. Therefore, both accounts are ultimately closed. Exam tip: remember that the realisation profit or loss is transferred to the partners’ Capital Accounts before the Realisation Account is closed.

Correct answer: B. Realisation

On dissolution, the process of disposing of assets and settling or compromising liabilities is called realisation. Therefore, transferring stock to a creditor in settlement of the amount due is a realisation transaction. Revaluation only records changes in the values of assets and liabilities; it does not represent the final settlement of a liability. Exam tip: At dissolution, link the settlement of assets and liabilities with the Realisation Account.

Correct answer: B. To settle liabilities and claims

On dissolution, the firm’s business is closed and its assets are sold to generate cash. This cash is primarily used to pay dissolution expenses, outside liabilities and other valid claims. Increasing profit is not the main purpose; any profit or loss is determined by comparing the realised value of assets with their book value. Exam tip: remember that liabilities and claims are settled before any remaining amount is distributed among the partners.

Correct answer: A. After preparing the Realisation Account and determining the profit

At dissolution, the profit or loss on the sale of assets and settlement of liabilities is determined through the Realisation Account. If there is a profit, it is transferred to the partners’ capital accounts in their profit-sharing ratio; therefore, option A is correct. It is not a regular monthly profit, so option D is incorrect. Exam tip: remember the sequence—prepare the Realisation Account, determine the profit or loss, and then transfer it to the partners’ accounts.

Correct answer: C. ₹12,000

A realisation loss is shared among partners in their profit-sharing ratio. The total parts are \(2+1=3\), so the first partner’s share is \(₹18,000 \times \frac{2}{3}=₹12,000\). ₹9,000 would result from an equal division, which ignores the 2:1 ratio. Exam tip: Always distribute realisation profit or loss in the partners’ profit-sharing ratio.

Correct answer: A. Additional liability

It means that the firm had an obligation which had not previously been recorded in its books. If it is paid in cash or through the bank, the Realisation Account is debited and the Cash/Bank Account is credited. It is not an additional asset because it increases the firm’s liabilities. Exam tip: Record an unrecorded liability through the Realisation Account during dissolution.

Correct answer: A. Partners’ Capital Accounts

During dissolution, the Realisation Account records the sale of assets and settlement of liabilities, resulting in a realisation profit or loss. This profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio. Purchase and Sales Accounts record trading transactions and are not used for this final adjustment. Exam tip: Remember that realisation profit or loss is transferred to partners’ capital accounts in the profit-sharing ratio.

Correct answer: B. A loss will arise

An asset is transferred to the Realisation Account at its book value. When it is abandoned and no amount is received, its book value results in a loss in the Realisation Account. Therefore, option B is correct; ‘no effect’ is incorrect because the asset must be removed from the books. Exam tip: An asset abandoned without proceeds generally causes a realisation loss.

Correct answer: B. Realising assets and properly settling all liabilities and accounts

Dissolution brings the firm's business to an end. Its assets are realised and the proceeds are used to pay external liabilities; any remaining amount is then used to settle the partners' accounts. Therefore, the final objective is the proper settlement of all liabilities and accounts. Increasing profit or expanding production is not the purpose of dissolution. Exam tip: Remember dissolution as the closure of business followed by settlement of all claims.

Correct answer: B. ₹2500 Profit

The Realisation Account is used during dissolution to record the disposal of assets, settlement of liabilities, and related expenses. Its debit side generally records the book value of assets transferred and expenses, while its credit side records amounts received from assets and liabilities settled or taken over. After all entries are made, the difference represents profit or loss on realisation.

If the credit total exceeds the debit total by ₹2,500, the account has a credit balance of ₹2,500. A credit balance in the Realisation Account is a profit, because the amounts realised are greater than the relevant book values and costs. Therefore the result is a realisation profit of ₹2,500, so option B is correct. A debit excess would instead indicate a loss.

Correct answer: B. Partners' Capital Accounts

Accumulated losses are borne by partners and are transferred to capital accounts. Remember the profit-sharing ratio.