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.
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.
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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.
Updated On: Jul 19, 2025
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Solution and Explanation
(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 |
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