Question

Pass necessary journal entries for the following transactions on the dissolution of the partnership firm of Mansha and Rajiv after various assets (other than cash) and external liabilities have been transferred to Realisation Account: (i) Mansha’s loan of ₹ 18,000 was settled by giving her an unrecorded furniture of ₹ 20,000.
(ii) Machinery of the book value of ₹ 80,000 was sold at a loss of 10%.
(iii) A creditor of ₹ 40,000 accepted cash ₹ 21,000 and stock of the book value of ₹ 25,000 in full settlement of his claim.
(iv) Bank loan of ₹ 1,00,000 was paid along with interest of ₹ 10,000.
(v) Investments of the face value of ₹ 52,000 were sold in the open market for ₹ 63,000 for which a commission of ₹ 2,000 was paid to the broker.
(vi) Profit and Loss Account balance of ₹ 30,000 appeared on the asset side of the balance sheet.

Hint:

In dissolution, all assets and liabilities are transferred to the Realisation Account except cash, bank, fictitious assets, and partner-related accounts. Any gain/loss on settlement, sale, or unrecorded items are adjusted through the Realisation A/c.

Answer 1

Dissolution Adjustments & Journal Entries

(i) Settlement of Mansha’s loan with unrecorded furniture:

\[ \text{Mansha’s Loan A/c Dr.} \quad ₹18,000 \\ \text{Profit on settlement (Transferred to Realisation A/c) Dr.} \quad ₹2,000 \\ \text{To Realisation A/c (Unrecorded Furniture)} \quad ₹20,000 \] Explanation: Furniture was not recorded, so its value settled Mansha’s loan and extra ₹2,000 was a loss.

(ii) Sale of Machinery at 10% loss:

\[ \text{Bank A/c Dr.} \quad ₹72,000 \\ \text{Realisation A/c Dr.} \quad ₹8,000 \\ \text{To Machinery A/c / Realisation A/c} \quad ₹80,000 \] Explanation: Machinery sold at a 10% loss. Loss = ₹8,000, sale value = ₹72,000.

(iii) Creditor settled by cash and stock:

\[ \text{Realisation A/c Dr.} \quad ₹6,000 \\ \text{To Bank A/c} \quad ₹21,000 \\ \text{To Stock A/c} \quad ₹25,000 \\ \text{To Creditors A/c} \quad ₹40,000 \] Explanation: Total payment = ₹46,000, but liability = ₹40,000 ⇒ excess paid = ₹6,000 (loss).

(iv) Payment of Bank Loan with Interest:

\[ \text{Bank Loan A/c Dr.} \quad ₹1,00,000 \\ \text{Interest A/c Dr.} \quad ₹10,000 \\ \text{To Bank A/c} \quad ₹1,10,000 \] OR \[ \text{Realisation A/c Dr. ₹10,000} \\ \text{Bank Loan A/c Dr. ₹1,00,000} \\ \text{To Bank A/c ₹1,10,000} \] Explanation: Interest on loan at the time of dissolution is a Realisation expense.

(v) Sale of Investments with brokerage:

\[ \text{Bank A/c Dr.} \quad ₹63,000 \\ \text{To Realisation A/c} \quad ₹63,000 \\ \text{Realisation A/c Dr.} \quad ₹2,000 \\ \text{To Bank A/c} \quad ₹2,000 \] Explanation: Brokerage is an expense on sale, so it’s charged to Realisation A/c.

(vi) Profit and Loss A/c shown on Asset Side:

\[ \text{Partners’ Capital A/c Dr.} \quad ₹30,000 \\ \text{To Profit and Loss A/c} \quad ₹30,000 \] Explanation: Accumulated loss (fictitious asset) is distributed among partners’ capital accounts.