Question

Pass necessary journal entries for the following transactions on the dissolution of the firm of Sanya and Manya after various assets (other than cash) and external liabilities have been transferred to Realisation Account :

(i) Machinery of the book value of Rs 90,000 was sold for Rs 1,00,000 through a broker who charged 4% commission.
(ii) Stock was worth Rs 52,000 out of which stock worth Rs 42,000 was taken over by Sanya at Rs 45,000 and the balance of the stock was sold for Rs 11,000.
(iii) Debtors of Rs 23,000 were sold to a debt collection agency who charged commission of Rs 1,500.
(iv) Furniture of Rs 49,000 was accepted by Manya against settlement of her loan of Rs 55,000.

Hint:

Credit the Realisation Account with the net amount realised in each case: Rs. 96,000, Rs. 56,000 (Sanya Capital Rs. 45,000 plus cash Rs. 11,000), Rs. 21,500, and Manya Loan Rs. 55,000.

Answer 1

Step 1: Recall the rule:
On dissolution, assets other than cash are moved to the Realisation Account at book value, and outside liabilities are moved too.
So each sale or settlement is recorded by crediting the Realisation Account with the value realised.
A cost of realising is a loss to the firm. It is either set off against the cash received or debited to the Realisation Account.

Step 2: Journal entries:

Particulars	Dr. (Rs.)	Cr. (Rs.)
Cash/Bank A/c ............ Dr.	96,000
To Realisation A/c		96,000
(Machinery sold for Rs. 1,00,000 and broker commission of Rs. 4,000 deducted)
Sanya Capital A/c ............ Dr.	45,000
Cash/Bank A/c ............ Dr.	11,000
To Realisation A/c		56,000
(Stock taken over by Sanya and balance stock sold)
Cash/Bank A/c ............ Dr.	21,500
To Realisation A/c		21,500
(Debtors sold to a debt collection agency, net of commission Rs. 1,500)
Manya Loan A/c ............ Dr.	55,000
To Realisation A/c		55,000
(Furniture accepted by Manya in settlement of her loan)

Step 3: Explain entry (i):
Machinery is sold for Rs. 1,00,000. The broker takes 4% of Rs. 1,00,000, which is Rs. 4,000.
Net cash received is Rs. 1,00,000 - Rs. 4,000 = Rs. 96,000.
The book value of Rs. 90,000 was already moved to the Realisation Account, so it does not appear in this entry.

Step 4: Explain entry (ii):
Stock of Rs. 42,000 goes to Sanya at Rs. 45,000. This is not a cash receipt, so her Capital Account is debited with Rs. 45,000.
The balance stock of Rs. 52,000 - Rs. 42,000 = Rs. 10,000 is sold for Rs. 11,000. This brings in cash of Rs. 11,000.
The Realisation Account is credited with Rs. 45,000 + Rs. 11,000 = Rs. 56,000.

Step 5: Explain entry (iii):
Debtors of Rs. 23,000 are sold to the agency, which charges Rs. 1,500.
Cash received is Rs. 23,000 - Rs. 1,500 = Rs. 21,500.

Step 6: Explain entry (iv):
Manya loan is a liability to a partner, not an outside liability, so it was not moved to the Realisation Account.
She accepts furniture in full settlement of Rs. 55,000, so her loan account is debited with Rs. 55,000.
The Realisation Account is credited with the same Rs. 55,000, since the asset is taken over against the loan.

Step 7: Alternative way for (i) and (iii):
Entry (i) can be split in two. First, Cash/Bank A/c Dr. 1,00,000 To Realisation A/c 1,00,000. Then, Realisation A/c Dr. 4,000 To Cash/Bank A/c 4,000.
Entry (iii) can be split the same way. First, Cash/Bank A/c Dr. 23,000 To Realisation A/c 23,000. Then, Realisation A/c Dr. 1,500 To Cash/Bank A/c 1,500.
The net effect on the Realisation Account is the same.

Final Answer:
Entries: (i) Cash/Bank Rs. 96,000; (ii) Sanya Capital Rs. 45,000 and Cash/Bank Rs. 11,000 against Realisation Rs. 56,000; (iii) Cash/Bank Rs. 21,500; (iv) Manya Loan Rs. 55,000.