At the time of dissolution, a liability is settled for an amount lower than its book value. What effect will this have on the Realisation Account?

Correct answer: Profit

When a liability is settled for less than its book value, the amount saved is a gain for the firm. The liability is debited at its book value and Bank is credited with the actual amount paid; the difference is recorded as a profit in the Realisation Account. Do not confuse this with a loss on the sale of an asset—settling a liability at a discount creates a gain. Exam tip: liability settled below book value = difference credited as profit to the Realisation Account.