Closing the Business

Correct answer: C. No Profit, No Loss

A profit or loss in the Realisation Account arises from differences between the book values and the actual sale or settlement values, or from realisation expenses. Here, assets are realised and liabilities are settled at their book values, with no additional expenses, so no difference arises. Therefore, the result is no profit and no loss. Exam tip: When book value equals actual realisation or settlement value and expenses are nil, realisation profit or loss is zero.

Correct answer: B. On transferring external liabilities to the Realisation Account

External liabilities are transferred to the credit side of the Realisation Account at the beginning of dissolution, so option B is correct. Assets and realisation expenses are generally debited to this account. When realisation profit is transferred to the partners’ capital accounts, the Realisation Account is debited. Exam tip: remember the basic rule—assets are debited and liabilities are credited.

Correct answer: B. ₹3,000

Profit = Sale value − Book value = ₹35,000 − ₹32,000 = ₹3,000. Therefore, ₹3,000 is the correct answer. On dissolution, the profit arising from the sale of an asset is recorded through the Realisation Account. In such questions, always calculate the difference between the sale value and the book value.

Correct answer: B. External liability

Outstanding salaries represent an amount payable by the firm to its employees, who are not partners. Therefore, they are treated as an external liability and are included in the settlement of outside liabilities on dissolution. They are neither an asset nor part of the partners’ capital. Exam tip: Amounts payable to employees or other non-partners are generally classified as external liabilities.

Correct answer: B. Book value

Furniture is a non-cash asset recorded in the firm’s books. Therefore, at dissolution, it is transferred to the Realisation Account at its book value. Any amount received from its subsequent sale is recorded separately as sale proceeds in the Realisation Account; hence, sale value is not the transfer value. Exam tip: Generally, all assets except cash and bank balances are transferred to the Realisation Account at their book values.

Correct answer: C. ₹500

The creditor’s liability in the books was ₹15,000, but the account was settled in full for only ₹14,500. Hence, gain = ₹15,000 − ₹14,500 = ₹500. This gain is recorded in the Realisation Account. ₹14,500 is the amount paid to the creditor, not the gain. For such questions, subtract the actual settlement payment from the liability transferred to the Realisation Account.

Correct answer: B. Old profit-sharing ratio

On dissolution, accumulated losses, such as the debit balance of the Profit and Loss Account, are transferred to the partners’ capital accounts in their old profit-sharing ratio. Hence, option B is correct. The capital ratio is not used for this purpose because it may differ from the agreed profit-sharing ratio. Exam tip: accumulated profits or losses existing before dissolution are generally distributed in the old profit-sharing ratio.

Correct answer: B. No entry will be passed

When a partner bears the realisation expenses from personal funds and does not seek reimbursement, the firm records neither an expense nor any liability to the partner. Hence, no entry is passed in the firm’s books. Option A would be appropriate only when the firm bears or pays the expense. Exam tip: For realisation expenses, first identify who ultimately bears the cost—the firm or the partner personally.

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

The Realisation Account determines the profit or loss arising from the sale or transfer of the firm’s assets and the payment or settlement of its liabilities at dissolution. This profit or loss is subsequently transferred to the partners’ capital accounts in their profit-sharing ratio. Option A concerns the final adjustment of capital accounts, while options C and D are not the primary purposes of this account. Exam tip: The net result of disposing of assets and settling liabilities is called realisation profit or loss.

Correct answer: C. ₹2,000

Loss on sale of the asset = Book value − Sale value = ₹42,000 − ₹40,000 = ₹2,000. Hence, option C is correct. ₹40,000 is the amount realised from the sale, not the loss. In dissolution questions, when the sale value is lower than the book value, the difference is recorded as a loss in the Realisation Account.

Correct answer: B. External liability

A bank overdraft is an amount borrowed by the firm from the bank and payable to it. Therefore, it is an external liability and is settled as part of the firm’s external liabilities on dissolution. It is not a partner’s capital account because the bank is an outside party, not a partner. Exam tip: Amounts payable to banks, creditors and other third parties are classified as external liabilities.

Correct answer: B. Realisation Account

When a partner takes over a firm’s asset at the time of dissolution, the agreed value is credited to the Realisation Account, while the concerned partner’s Capital Account is debited. Hence, the Realisation Account is correct. The Capital Account is the closest distractor, but it is debited rather than credited in this transaction. Exam tip: remember the entry as Partner’s Capital Account Dr. To Realisation Account.

Correct answer: C. Partners’ capital

On dissolution, the amount realised is generally used first to settle outside liabilities, then partners’ loans, and finally partners’ capital. Hence, partners’ capital is settled last. Employees’ outstanding wages are treated as an outside liability, so they are paid before the partners’ capital is returned. Exam tip: remember the order—outside liabilities → partners’ loans → partners’ capital.

Correct answer: A. Debit side

During dissolution, realisation expenses are costs incurred for disposing of assets and settling liabilities. Therefore, ₹2,500 is recorded on the debit side of the Realisation Account. The credit side generally records proceeds from the sale of assets and the transfer of liabilities, so the credit-side option is incorrect. Exam tip: debit assets transferred and realisation expenses; credit asset-sale proceeds and liabilities transferred.

Correct answer: C. Partner’s Loan

At dissolution, non-cash assets such as stock, furniture and machinery are transferred to the Realisation Account at their book values. A partner’s loan is settled separately because it is an amount payable to the partner, not an asset or liability transferred through the Realisation Account. Exam tip: transfer non-cash assets to Realisation, but settle a partner’s loan directly through the partner’s loan account.

Correct answer: C. ₹10,000

Realisation profit is distributed among partners in their profit-sharing ratio. The total number of ratio parts is \(5+4=9\). Therefore, the first partner’s share is \(₹18,000 \times \frac{5}{9}=₹10,000\). Hence, option C is correct. Exam tip: Divide the total profit by the sum of the ratio parts, then multiply by the concerned partner’s ratio.

Correct answer: A. Credit side of the Realisation Account

An unrecorded asset is not included in the books before dissolution. When it is sold, the amount received is debited to Bank or Cash and credited to the Realisation Account. Therefore, the correct answer is the credit side of the Realisation Account; the debit side generally records the transfer of recorded assets. Exam tip: Treat proceeds from an unrecorded asset as a gain credited to the Realisation Account.

Correct answer: A. The final amount payable to or recoverable from the partner

After all adjustments through the Realisation Account, partners’ capital accounts and Cash Account, the final capital-account balance shows the settlement amount. A credit balance is payable to the partner, whereas a debit balance is recoverable from the partner. Therefore, option A is correct. It is not a dividend; it is the partner’s final settlement under the dissolution process. Exam tip: credit balance means payment to the partner, while debit balance means recovery from the partner.

Correct answer: C. ₹500

The liability recorded in the books was ₹22,000, but only ₹21,500 was paid. Therefore, gain = ₹22,000 − ₹21,500 = ₹500. When a liability is settled for less than its book value during dissolution, the gain is credited to the Realisation Account. Exam tip: Gain on settlement of a liability = book value of liability − amount actually paid.

Correct answer: B. Credit side

At dissolution, external liabilities are transferred to the credit side of the Realisation Account at their book value. Their subsequent payment is recorded on the debit side, which is why the debit-side option is incorrect. Exam tip: remember the basic rule—assets are transferred to the debit side, while external liabilities are transferred to the credit side of the Realisation Account.

Correct answer: A. Debit ₹12,000

When a partner takes over a firm's asset, his capital account is debited with the agreed value of the asset. Therefore, the partner's capital account will be debited by ₹12,000. A credit is incorrect because the partner becomes liable to the firm for the asset taken over. Exam tip: On takeover of an asset by a partner, debit the partner's capital account and credit the Realisation Account.

Correct answer: A. Cash/Bank Account

The sale proceeds are received in cash or through the bank, so the Cash/Bank Account is debited, while the Realisation Account is credited. The Realisation Account records the transfer of assets and the resulting profit or loss; it does not record the actual cash receipt. Exam tip: For cash received from the sale of an asset, remember Cash/Bank A/c Dr. To Realisation A/c.

Correct answer: C. ₹6,000

The total number of ratio parts is 1+2=3. The second partner’s share is 2/3, so the loss borne by that partner is ₹9,000 × 2/3 = ₹6,000. ₹3,000 is the first partner’s share, while ₹4,500 would result from an equal division. In exams, distribute realisation loss in the agreed profit-and-loss-sharing ratio.

Correct answer: A. Old profit-sharing ratio

On dissolution, the profit or loss on realisation arising from the sale of assets and settlement of liabilities is shared by the partners in their old profit-sharing ratio. The new profit-sharing ratio is generally relevant when the partnership is reconstituted, not when it is dissolved. Exam tip: Transfer the final balance of the Realisation Account to partners’ capital accounts in the old profit-sharing ratio.

Correct answer: C. ₹2,000

Loss on sale of the asset = Book value − Sale proceeds = ₹28,000 − ₹26,000 = ₹2,000. Since the sale proceeds are lower than the book value, the firm incurs a loss of ₹2,000, which is recorded as a loss in the Realisation Account. Options such as ₹1,500 result from an incorrect subtraction. Exam tip: when sale proceeds are below book value, the difference is a loss; when they are higher, it is a gain.