Question

At the time of dissolution of a firm, firm's total assets were Rs 5,00,000, Bank Loan was Rs. 1,00,000. Realisation expenses amounted to Rs 10,000. Assets realised 20% more than the book value and bank loan was agreed to be at paid at Rs. 1,05,000. Gain/loss on realisation will be:

• A. Gain Rs 85,000.
• B. Loss Rs 75,000.
• C. Gain Rs 4,95,000.
• D. Loss Rs 1,00,000.

Hint:

A quick shortcut formula to find Gain/Loss on Realisation:
\[ \text{Gain/Loss} = (\text{Actual Asset Realised} - \text{Asset Book Value}) - (\text{Actual Liability Paid} - \text{Liability Book Value}) - \text{Expenses} \]
Applying the values:
\[ (6,00,000 - 5,00,000) - (1,05,000 - 1,00,000) - 10,000 \]
\[ = 1,00,000 - 5,00,000 - 10,000 = 85,000 \text{ (Gain)} \]
This approach saves valuable time in the exam!

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks us to compute the net gain or loss on the realisation of assets and settlement of liabilities during the dissolution of a partnership firm.

Step 2: Key Formula or Approach:
We can compute the gain or loss by preparing a nominal account called the Realisation Account.
The net gain or loss is the difference between total credits (inflows from asset sales and liability transfers) and total debits (book value of assets and cash outflows for expenses and liability payments).

Step 3: Detailed Explanation:

• Transfer of Assets and Liabilities to Realisation Account:
  Assets (Book Value) transferred to Debit Side = Rs 5,00,000.
  Bank Loan (Book Value) transferred to Credit Side = Rs 1,00,000.
  
• Realisation of Assets:
  Assets realised at 20% more than the book value.
  \[ \text{Realised Value} = 5,00,000 + (20% \text{ of } 5,00,000) \]
  \[ \text{Realised Value} = 5,00,000 + 1,00,000 = Rs 6,00,000 \]
  This amount is credited to the Realisation Account.
  
• Payment of Liabilities and Expenses:
  Bank Loan was agreed to be paid at Rs 1,05,000. This is debited to the Realisation Account.
  Realisation expenses paid amounted to Rs 10,000. This is also debited to the Realisation Account.
  
• Realisation Account Summary:
  Let us total the Debit side and Credit side:
  Debit Side (Expenses and payments):
  1. Transfer of Assets: Rs 5,00,000
  2. Bank Loan payment: Rs 1,05,000
  3. Realisation Expenses: Rs 10,000
  \[ \text{Total Debit} = 5,00,000 + 1,05,000 + 10,000 = Rs 6,15,000 \]
  Credit Side (Receipts and transfers):
  1. Transfer of Bank Loan liability: Rs 1,00,000
  2. Asset realisation: Rs 6,00,000
  \[ \text{Total Credit} = 1,00,000 + 6,00,000 = Rs 7,00,000 \]
  
• Calculation of Net Gain/Loss:
  Since Credit Total is greater than Debit Total, there is a Gain.
  \[ \text{Gain on Realisation} = \text{Total Credit} - \text{Total Debit} \]
  \[ \text{Gain on Realisation} = 7,00,000 - 6,15,000 = Rs 85,000 \]
  

Step 4: Final Answer:
The net gain on realisation is Rs 85,000, which matches Option (A).