Question

Plant and Machinery (book value 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value. What journal entry will be passed in the books of the firm at the time of dissolution of the firm?

• A. Realisation A/c ...... Dr. 54,000
  To Machinery A/c 54,000
• B. No Entry will be passed
• C. Creditors A/c ...... Dr. 54,000
  To Machinery A/c 54,000
• D. Realisation A/c ...... Dr. 54,000
  To Cash A/c 54,000

Answer 1

The Correct Option is A

When plant and machinery are handed over to a creditor at an agreed valuation of 10% less than the book value, the following steps occur:

• Book Value of Plant and Machinery = ₹60,000
• Agreed Valuation = 10% less than the book value

Agreed Valuation = ₹60,000 × (1 - 10/100) = ₹60,000 × 0.9 = ₹54,000

At the time of dissolution, the asset (Plant and Machinery) is transferred at the agreed valuation of ₹54,000. This will be recorded as a transfer to Realisation Account for ₹54,000, and the Machinery account will be credited with its book value of ₹60,000. The difference of ₹6,000 (₹60,000 - ₹54,000) will be recorded as a loss on realisation.

Therefore, the correct journal entry would be:

Realisation A/c ...... Dr. 54,000 To Machinery A/c 54,000

This reflects the agreed valuation of the asset handed over to the creditor.

Thus, the correct answer is: (1) Realisation A/c ...... Dr. 54,000
To Machinery A/c 54,000

Answer 2

The plant and machinery is being transferred to the creditor at an agreed valuation that is 10\% less than its book value. 1. Book Value of Plant and Machinery: 60,000 2. Valuation Agreed with Creditor: \[ \text{Valuation} = \text{Book Value} - (10\% \text{ of Book Value}) = 60,000 - 6,000 = 54,000 \] At the time of dissolution, the entry to record the transfer of assets to creditors involves debiting the Realisation Account (to recognize the asset disposal) and crediting the Machinery Account (to remove the asset from the books). Therefore, the journal entry will be: \[ \text{Realisation A/c} \quad \text{Dr.} \quad 54,000 \quad \text{To Machinery A/c} \quad 54,000 \] Thus, the correct journal entry reflects the agreed valuation.