Chapter-6-Dissolution of Partnership Firm
Class-12-Commerce-Book Keeping and Accountancy-Maharashtra Board
Solutions
Question 1. Objective Questions :
(A) Select most appropriate answer from the alternatives given below and rewrite the sentences.
(1) In case of dissolution, assets and liabilities are transferred to ............. Account.
(a) Bank Account
(b) Partner’s Capital Account
(c) Realisation Account
(d) Partner’s Current Account
(c) Realisation Account
(2) Dissolution expenses are credited to ............. Account.
(a) Realisaton Account
(b) Cash / Bank Account
(c) Partner’s Capital Account
(d) Partner’s Loan Account
(b) Cash / Bank Account
(3) Deficiency of insolvent partner will be suffered by solvent partners in their ............. ratio.
(a) Capital ratio
(b) Profit sharing ratio
(c) Sale ratio
(d) Liquidity ratio
(b) Profit sharing ratio
(4) If any asset is taken over by partner from firm his capital account will be .............
(a) Credited
(b) Debited
(c) Added
(d) Divided
(b) Debited
(5) If any unrecorded liability is paid on dissolution of the firm ............. account is debited.
(a) Cash / Bank Account
(b) Realisation Account
(c) Partners capital Account
(d) Loan Account
(b) Realisation Account
(6) Partnership is completely dissolved when the partners of the firm become .............
(a) Solvent
(b) Insolvent
(c) Creditor
(d) Debtors
(b) Insolvent
(7) Assets and liabilities are transferred to Realisation account at their ............. values.
(a) Market
(b) Purchases
(c) Sale
(d) Book
(d) Book
(8) If the number of partners in a firm falls below two, the firm stands .............
(a) Dissolved
(b) Established
(c) Realisation
(d) Restructured
(a) Dissolved
(9) Realisation account is ............. on realisation of asset.
(a) Debited
(b) Credited
(c) Deducted
(d) Closed
(b) Credited
(10) All activities of partnership firm ceases on ............. of firm.
(a) Dissolution
(b) Admission
(c) Retirement
(d) Death
(a) Dissolution
(B) Give the word / term / phrase which can substitute each of the following statement.
(1) Debit balance of Realisation account.
(2) Winding up of partnership business.
(3) An account opened to find out the Profit or Loss on realisation of Assets and settlement of Liabilities.
(4) Debit balance of an Insolvent Partner’s Capital Account.
(5) Credit balance of Realisation Account.
(6) Conversion of asset into cash on dissolution of firm.
(7) Liability likely to arise in future on happening of certain event.
(8) Assets which are not recorded in the books of account.
(9) The Accounts which show realisation of Assets and discharge of Liabilities.
(10) Expenses incurred on dissolution of firm.
| No. | Statement | Answer |
| 1 | Debit balance of Realisation account. | Loss on Realisation |
| 2 | Winding up of partnership business. | Dissolution of Partnership Firm |
| 3 | An account opened to find out the Profit or Loss on realisation of Assets and settlement of Liabilities. | Realisation Account |
| 4 | Debit balance of an Insolvent Partner's Capital Account. | Capital Deficiency |
| 5 | Credit balance of Realisation Account. | Profit on Realisation |
| 6 | Conversion of asset into cash on dissolution of firm. | Realisation |
| 7 | Liability likely to arise in future on happening of certain event. | Contingent Liability |
| 8 | Assets which are not recorded in the books of account. | Unrecorded Assets |
| 9 | The Accounts which show realisation of Assets and discharge of Liabilities. | Realisation Account |
| 10 | Expenses incurred on dissolution of firm. | Realisation (Dissolution) Expenses |
(C) State whether the following statements are True of False with reasons.
(1) The firm must be dissolved on the retirement of a partner.
Statement is : False
Reason : Retirement of a partner leads to reconstitution (dissolution of partnership), not necessarily dissolution of the firm; the remaining partners can continue the business.
(2) On dissolution Cash / Bank Account is closed automatically.
Statement is : True
Reason : Once all receipts and payments related to dissolution are recorded, the Cash/Bank Account balance becomes nil and is automatically closed.
(3) On dissolution Bank Overdraft is transferred to Realisation Account.
Statement is : True
Reason : Bank Overdraft is a third-party (outside) liability and is transferred to the credit side of Realisation Account like other outside liabilities.
(4) A solvent partner having debit balance to his capital account does not share the deficiency of insolvent partners capital account.
Statement is : False
Reason : All solvent partners, whether their capital shows a debit or credit balance, must bear the insolvent partner's deficiency in their profit-sharing ratio.
(5) At the time of dissolution of partnership firm all assets should be transferred to Realisation account.
Statement is : False
Reason : Cash/Bank balance and fictitious assets (e.g. Profit & Loss debit balance, Advertisement Suspense) are not transferred to Realisation Account.
(6) Debit balance of insolvent partner’s capital account is known as capital deficiency.
Statement is : True
Reason : This is precisely the definition of capital deficiency under the Partnership Act.
(7) At the time of dissolution, Loan from partner will be transferred to Ralisation account.
Statement is : False
Reason : A Partner's Loan is repaid through a separate Loan Account after outside liabilities are settled; it is never transferred to the Realisation Account.
(8) Dissolution takes place when the relation among the partner’s comes to an end.
Statement is : True
Reason : This matches the statutory definition under Sec. 39 of the Indian Partnership Act, 1932.
(9) The insolvency Loss at the time of dissolution of the firm is shared by the solvent partner’s in their profit sharing ratio.
Statement is : True
Reason : As per the Garner vs. Murray principle followed in practice, solvent partners bear an insolvent partner's deficiency in their profit-sharing ratio.
(10) Realisation Loss is not transferred to insolvent partner’s capital account.
Statement is : False
Reason : Realisation Loss is transferred to ALL partners' capital accounts (including the insolvent partner) in the profit-sharing ratio; only the resulting capital deficiency, if unrecoverable, is later shifted to solvent partners.
(D) Calculate the following :
(1) Vinod, Vijay and Vishal are partners in a firm, sharing profit & Losses in the ratio 3:2:1. Vishal becomes insolvent and his capital deficiency is ₹ 6,000. Distribute the capital deficiency among the solvent partners.
The total profit-sharing ratio of Vinod, Vijay, and Vishal is 3 : 2 : 1.
Since Vishal is insolvent, his deficiency is borne by the solvent partners, Vinod and Vijay, in their mutual ratio of 3 : 2.
Vinod's Share of Deficiency: ₹6,000 × \(\frac{3}{5}\) = ₹3,600
Vijay's Share of Deficiency: ₹6,000 × \(\frac{2}{5}\) = ₹2,400
(2) Creditors ₹ 30,000, Bills Payable ₹ 20,000 and Bank Loan ₹ 10,000. Available Bank Balance ₹ 40,000 what will be the amount that creditors will get in case of all partners insolvency.
Total Liabilities = Creditors (₹30,000) + Bills Payable (₹20,000) + Bank Loan (₹10,000) = ₹60,000
Liability Ratio = ₹30,000 : ₹20,000 : ₹10,000 = 3 : 2 : 1
Available Bank Balance = ₹40,000
Amount Creditors will get = ₹40,000 × \(\frac{3}{6}\) = ₹20,000
(3) Insolvent Partners Capital A/c debit side total is ₹ 10,000 & Credit side total is ₹ 6,000 Calculate deficiency
Formula: Deficiency = Debit Side Total − Credit Side Total
Calculation: Deficiency = ₹10,000 − ₹6,000 = ₹4,000
(4) Insolvent partners capital A/c Debit side is ₹ 15,000 & insolvent partner brought cash ₹ 6,000. Calculate the amount of Insolvency Loss to be distributed among the solvent partners.
Formula: Insolvency Loss = Debit Balance − Cash Recovered
Calculation: Insolvency Loss = ₹15,000 − ₹6,000 = ₹9,000
(5) Realisation profit of a firm is ₹ 6,000, partners share Profit & Loss in the ratio of 3:2:1. Calculate the amount of Realisation Profit to be credited to Partners Capital A/c
Total Profit to be Distributed = ₹6,000
Profit-Sharing Ratio = 3 : 2 : 1
Partner 1's Share = ₹6,000 × \(\frac{3}{6}\) = ₹3,000
Partner 2's Share = ₹6,000 × \(\frac{2}{6}\) = ₹2,000
Partner 3's Share = ₹6,000 × \(\frac{1}{6}\) = ₹1,000
(E) Answer in one sentence only.
(1) What is dissolution of partnership firm?
It is the complete breakdown of the relationship of partnership between all the partners of a firm, resulting in the closure of the business (Sec. 39, Indian Partnership Act 1932).
(2) When is Realisation Account opened?
It is opened at the time of dissolution of a firm to record the transfer, sale and settlement of assets and liabilities and to ascertain the profit or loss on realisation.
(3) Which accounts are not transferred to Realisation account?
Cash/Bank Account, fictitious assets, Partners' Capital Account, Partners' Current Account, and Partners' Loan Account are not transferred to the Realisation Account.
(4) Who is called Insolvent person?
A person whose liabilities exceed his assets, and who is unable to pay his debts in full out of his own assets, is called an insolvent person.
(5) What is capital deficiency?
Capital deficiency is the debit balance remaining in an insolvent partner's Capital Account at the time of final settlement, which he is unable to pay.
(6) In what proportion is the balance on Realisation A/c transferred to Partners capital / Current Account?
It is transferred in the partners' agreed Profit Sharing Ratio.
(7) Who should bear the capital deficiency of insolvent partner?
The capital deficiency of an insolvent partner is borne by the solvent partners in their profit-sharing ratio.
(8) Which account is debited on repayment of Partner’s Loan?
Partner's Loan Account is debited, and Cash/Bank Account is credited.
(9) Which account is debited on payment of dissolution expenses?
Realisation Account is debited (unless the expenses are borne by a partner personally, in which case the Partner's Capital/Current Account is credited).
(F) Complete the table.
| 1) | Debit side total of Realisaton A/c |
Credit side total of Realisation A/c |
Loss on Realisations |
| ₹ 20,000 | ? | ₹ 4,000 | |
| 2) | Creditors | Bills Payable | Third Party Liabilities |
| ₹ 16,000 | ₹ 12,000 | ? | |
| 3) | Credit side total
of Realisaton A/c |
Debit side total
of Realisation A/c |
Profit ion
Realisation |
| ₹ 21,000 | ₹ 16,000 | ? | |
| 4) | Debit side total
of Capital A/c |
Credit side total
of Capital A/c |
Cash brought
by partner |
| ₹ 51,000 | ? | ₹ 17,000 | |
| 5) | Capital Deficiency |
Cash brought by Insolvent Partner |
Insolvent Loss |
| ? | ₹ 7,000 | ₹ 21,000 |
| 1) | Debit side total of Realisaton A/c |
Credit side total of Realisation A/c |
Loss on Realisations |
| ₹ 20,000 | ₹ 16,000 | ₹ 4,000 | |
| 2) | Creditors | Bills Payable | Third Party Liabilities |
| ₹ 16,000 | ₹ 12,000 | ₹ 28,000 | |
| 3) | Credit side total
of Realisaton A/c |
Debit side total
of Realisation A/c |
Profit ion
Realisation |
| ₹ 21,000 | ₹ 16,000 | ₹ 5,000 | |
| 4) | Debit side total
of Capital A/c |
Credit side total
of Capital A/c |
Cash brought
by partner |
| ₹ 51,000 | ₹ 34,000 | ₹ 17,000 | |
| 5) | Capital Deficiency |
Cash brought by Insolvent Partner |
Insolvent Loss |
| ₹ 28,000 | ₹ 7,000 | ₹ 21,000 |
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