Closing the Business

Correct answer: B. Book value

At dissolution, a non-current intangible asset such as a patent is transferred to the debit of the Realisation Account at its book value. Any profit or loss arising from its sale or takeover by a partner is recorded subsequently in the Realisation Account. Exam tip: Normally, all assets except cash and bank balances are transferred to Realisation at their book values.

Correct answer: B. Credit

Paying the realisation expense in cash decreases the firm’s cash balance. Since cash is an asset, a decrease in an asset is recorded on the credit side; therefore, the Cash Account is credited by ₹1,800. Debit is incorrect because it represents an increase in cash. Exam tip: debit the Cash Account for cash receipts and credit it for cash payments.

Correct answer: C. Assets are sold at their book value

When assets are sold at their book value, there is no difference between their book value and sale proceeds. Therefore, the transaction produces neither profit nor loss in the Realisation Account. In contrast, selling assets above book value or settling liabilities for less than their book value creates a profit; proceeds from an unrecorded asset are also generally credited to the Realisation Account as a gain. Exam tip: compare the sale proceeds with the book value to determine the result.

Correct answer: A. Realisation Account

The Realisation Account records transferred assets, external liabilities, sale proceeds and dissolution expenses. Its balance shows realisation profit or loss. Revaluation Account is generally used on reconstitution. Exam tip: for dissolution, identify ‘Realisation’.

Correct answer: A. Debit side

A building is a non-cash asset, so its book value is transferred to the debit side of the Realisation Account. Liabilities and proceeds from the sale of assets are generally recorded on the credit side. Exam tip: At dissolution, transfer non-cash assets to the debit side and liabilities to the credit side.

Correct answer: A. ₹800 Gain

The liability was recorded at ₹25,000 but was settled for only ₹24,200. Therefore, the firm gains ₹25,000 − ₹24,200 = ₹800, which is recorded as a gain in the Realisation Account. An ₹800 loss would arise only if the settlement amount exceeded the liability. Exam tip: Settlement of a liability below its book value results in a gain; settlement above it results in a loss.

Correct answer: B. Realisation Account

The Realisation Account records the realization of assets and the settlement of liabilities and determines the resulting profit or loss on dissolution. The Capital Account records adjustments in the partners’ capital, not the overall realization result. Exam tip: In dissolution questions, profit or loss from assets and liabilities is transferred through the Realisation Account.

Correct answer: B. Credit ₹48,000

When a partner takes over a firm’s asset, the partner’s capital account is debited with the agreed value and the Realisation Account is credited by the same amount. Therefore, the Realisation Account will be credited by ₹48,000. Exam tip: An asset taken over by a partner is credited to the Realisation Account; do not confuse this with a sale to an outsider, where the cash or bank account is debited.

Correct answer: B. Realisation profit decreases or loss increases

An unrecorded liability was not transferred to the Realisation Account earlier, so its payment is debited to the Realisation Account. This reduces the realisation profit or increases the realisation loss. Therefore, option B is correct; option C is incorrect because the payment does affect the Realisation Account. Exam tip: payment of an unrecorded liability is recorded by debiting Realisation Account and crediting Cash/Bank Account.

Correct answer: B. ₹6,000

Profit on the sale of an asset during dissolution = Sale proceeds − Book value. Therefore, profit = ₹45,000 − ₹39,000 = ₹6,000. The other amounts do not represent this difference. Exam tip: a sale price higher than book value indicates a profit, while a lower sale price indicates a loss.

Correct answer: B. Partners’ Capital Accounts

The reserve fund represents accumulated profits belonging to the partners. Therefore, on dissolution, its balance is transferred to the partners’ capital accounts in their profit-sharing ratio; it is not paid to creditors or the bank. Exam tip: the accounting entry debits Reserve Fund A/c and credits Partners’ Capital A/c.

Correct answer: B. ₹5,000 Loss

The debit side exceeds the credit side by ₹5,000. Therefore, the Realisation Account shows a debit balance of ₹5,000, representing a loss on realisation, which is transferred to the partners’ Capital Accounts in their profit-sharing ratio. Exam tip: a higher credit side indicates profit, while a higher debit side indicates loss.

Correct answer: A. Cash Account

At dissolution, cash recovered from debtors is recorded on the debit side of the Cash Account, with a corresponding credit to the Realisation Account. It is not recorded directly in the Capital Account, since the profit or loss on realisation is transferred there. Exam tip: whenever an asset is realised for cash, debit Cash/Bank and credit Realisation.

Correct answer: B. Profit-Sharing Ratio

The loss on the Realisation Account is transferred to the partners’ capital or current accounts in their profit-sharing ratio. It is not necessarily distributed in the capital ratio because the partners’ capital ratio and profit-sharing ratio may differ. Exam tip: Remember that both realisation profit and realisation loss are transferred in the profit-sharing ratio.

Correct answer: C. ₹600

The firm paid more than the book value of the liability. Loss = settlement amount − book value = ₹14,600 − ₹14,000 = ₹600. Therefore, ₹600 is correct. ₹14,000 is the original liability amount, not the loss. Exam tip: settling a liability for more than its book value results in a loss; settling it for less results in a gain.

Correct answer: B. Profit

A credit balance in the Realisation Account indicates a net profit from disposing of assets and settling liabilities. This profit is transferred to the partners’ Capital Accounts in their profit-sharing ratio. In contrast, a debit balance represents a realisation loss. Exam tip: remember—credit balance means realisation profit, while debit balance means realisation loss.

Correct answer: B. Ends

After dissolution, the firm ceases to exist as a going concern. The remaining activities are limited to winding up, such as realising assets, paying liabilities and settling the partners' accounts. Therefore, it is not merely a temporary suspension. Exam tip: dissolution of the firm ends the firm, whereas dissolution of partnership may allow the firm to continue in some cases.

Correct answer: A. Realisation Account

An unrecorded asset has no existing asset account in the books, so it is not transferred to the Realisation Account. However, the sale proceeds of ₹6200 are credited to the Realisation Account, while Cash or Bank is debited. Purchase, Salary and Drawings Accounts are unrelated to this transaction. Exam tip: For the sale of an unrecorded asset, the usual entry is Cash/Bank Account Dr. to Realisation Account.

Correct answer: C. ₹9,000

The ratio 1:2 has 3 total parts, and the first partner is entitled to 1 part. Therefore, the first partner’s share = ₹27,000 × 1/3 = ₹9,000. Exam tip: divide the profit by the sum of the ratio terms and multiply by the relevant partner’s term.

Correct answer: C. Partners’ Capital Accounts

The Realisation Account is credited when liabilities are transferred, assets are sold for cash, or a partner takes over an asset. Partners’ Capital Accounts are maintained separately and are adjusted for such transactions, so they are not credited to the Realisation Account. Exam tip: remember that transferred liabilities and consideration received for assets generally appear on the credit side of the Realisation Account.

Correct answer: B. ₹6,000

Since the two partners share equally, the distributable cash is divided by 2: ₹12,000 ÷ 2 = ₹6,000. Therefore, each partner receives ₹6,000. Amounts such as ₹7,000 or ₹8,000 per partner would exceed the total cash available. Exam tip: For equal sharing, each partner’s amount equals the total distributable cash divided by the number of partners.

Correct answer: A. Cash Account

The Cash Account records all cash receipts and payments of the firm. Thus, cash received from the sale of assets and cash paid to settle liabilities during dissolution are entered in this account. The Realisation Account records the transfer and realisation of assets, settlement of liabilities, and the resulting profit or loss; it does not record every cash transaction. Exam tip: receipts and payments go to the Cash Account, while realisation profit or loss goes to the Realisation Account.

Correct answer: B. Loss of ₹4,000

The asset’s sale proceeds are ₹52,000, whereas its book value is ₹56,000. Therefore, loss = ₹56,000 − ₹52,000 = ₹4,000. This loss is debited to the Realisation Account and is ultimately transferred to the partners’ capital accounts in their profit-sharing ratio. Choosing ₹2,000 would result from an incorrect calculation; in such questions, always find the difference between the book value and the sale proceeds.

Correct answer: B. External liabilities

On dissolution, the usual order of settlement is external liabilities first, followed by the partner’s loan and then the partners’ capital. Therefore, a partner’s loan is repaid after external liabilities have been settled. A partner’s loan is a liability separate from the partner’s capital and should not be treated as part of capital. Exam tip: remember the order as external liabilities → partner’s loan → partners’ capital.

Correct answer: A. Partner’s Capital Account

When a partner pays realization expenses on behalf of the firm, the amount becomes payable by the firm to that partner. The entry is: Realization Account Dr. ₹3,000; To Partner’s Capital Account ₹3,000. Therefore, the Partner’s Capital Account is credited. The Bank Account would be credited only when the firm actually makes the reimbursement. Exam tip: For expenses paid personally by a partner on behalf of the firm, credit the partner’s capital account when recording the liability.