Question

Lalit and Madan were partners in a firm sharing profits and losses in the ratio of 7 : 3. On 31st March, 2024 their firm was dissolved. After transferring sundry assets (other than cash) and third-party liabilities to Realisation Account, the following transactions took place: \begin{itemize} \item[(i)] The firm had stock of \rupee2,00,000. 40% of this stock was taken over by a creditor of \rupee1,00,000 in full settlement of his claim. The remaining stock was sold at a loss of 10%. \item[(ii)] The remaining creditors were paid \rupee2,10,000. \item[(iii)] Plant and Machinery of \rupee5,00,000 were accepted by Mrs. Madan against the settlement of her loan of \rupee5,40,000. \item[(iv)] Debtors of \rupee3,50,000 were sold to a debt collection agency who charged a commission of \rupee25,000. \item[(v)] Investments of \rupee1,00,000 were taken over by the partners in their profit-sharing ratio. \item[(vi)] Expenses of dissolution were \rupee8,000. \end{itemize} Pass necessary journal entries for the above transactions in the books of the firm.

Hint:

In dissolution questions, always begin by transferring all non-cash assets and liabilities to the Realisation Account. Then record individual transactions step-by-step, noting any gains or losses.

Answer 1

(i) Stock taken over by creditor: 40% of ₹2,00,000 = ₹80,000
Creditor’s claim = ₹1,00,000 → stock of ₹80,000 given → loss = ₹20,000 (credited to Realisation A/c)
Remaining stock = ₹1,20,000 → sold at 10% loss → sale value = ₹1,08,000

(ii) Remaining creditors paid = ₹2,10,000

(iii) Plant and Machinery worth ₹5,00,000 settled against loan of ₹5,40,000 → loss = ₹40,000

(iv) Debtors sold = ₹3,50,000, commission = ₹25,000 → amount received = ₹3,25,000

(v) Investments taken over in 7:3 ratio:
Lalit = \( \frac{7}{10} \times ₹1,00,000 = ₹70,000 \), Madan = ₹30,000

(vi) Dissolution expenses = ₹8,000 paid by firm

Journal Entries in the books of the firm:

 

Particulars	Dr. (₹)	Cr. (₹)
Creditors A/c Dr. To Realisation A/c (Stock of ₹80,000 given to creditor, ₹20,000 loss)	1,00,000	1,00,000
Cash A/c Dr. To Realisation A/c (Remaining stock sold at 10% loss)	1,08,000	1,08,000
Realisation A/c Dr. To Cash A/c (Payment to remaining creditors)	2,10,000	2,10,000
Mrs. Madan’s Loan A/c Dr. To Realisation A/c To Capital A/c (Asset of ₹5,00,000 given in settlement of ₹5,40,000)	5,40,000	5,00,000 40,000
Cash A/c Dr. Realisation A/c Dr. To Debtors A/c (Debtors sold for ₹3,50,000, ₹25,000 commission)	3,25,000 25,000	3,50,000
Lalit’s Capital A/c Dr. Madan’s Capital A/c Dr. To Realisation A/c (Investments taken over in profit sharing ratio)	70,000 30,000	1,00,000
Realisation A/c Dr. To Cash A/c (Dissolution expenses paid by firm)	8,000	8,000