Question

Pass necessary journal entries for the following transactions on dissolution of the partnership firm of Preeti, Varsha and Kamala after various assets (other than cash) and third party liabilities have been transferred to Realisation Account :

• [(i)] Preeti took over the debtors of book value of ₹ 90,000 at a discount of 20%.
• [(ii)] Kamala took over her husband’s loan of ₹ 4,00,000.
• [(iii)] There were 100 shares of ₹ 10 each in Star Ltd. acquired at a cost of ₹ 2,00,000 which had been written off completely from the books. These shares were valued at ₹ 2,400 each and divided among the partners in their profit sharing ratio.
• [(iv)] Sundry creditors amounting to ₹ 5,00,000 were settled at a discount of 10%.
• [(v)] Land and Building of the book value of ₹ 40,00,000 was sold for ₹ 60,00,000 through a broker who charged 5% commission.
• [(vi)] Varsha paid the dissolution expenses of ₹ 45,000 on behalf of the firm.

Hint:

In dissolution, remember to record assets/liabilities taken over by partners and settlement discounts separately through Realisation A/c.

Answer 1

Journal Entries:
(i) Preeti took over debtors of ₹ 90,000 at 20% discount
\begin{tabular}{|l|r|} \hline Realisation A/c Dr. & ₹ 72,000
To Preeti’s Capital A/c & ₹ 72,000
\hline \end{tabular}
(Being debtors of ₹ 90,000 taken over by Preeti at 20% discount, i.e. ₹ 90,000 × 80% = ₹ 72,000)
(ii) Kamala took over her husband’s loan
\begin{tabular}{|l|r|} \hline Loan to Kamala’s Husband A/c Dr. & ₹ 4,00,000
To Kamala’s Capital A/c & ₹ 4,00,000
\hline \end{tabular}
(Being Kamala took over her husband’s loan liability)
(iii) Shares in Star Ltd. distributed among partners
Value of shares = 100 × ₹ 2,400 = ₹ 2,40,000
\begin{tabular}{|l|r|} \hline Investment in Star Ltd. A/c Dr. & ₹ 2,40,000
To Realisation A/c & ₹ 2,40,000
\hline \end{tabular}
Distribution to partners (assuming equal ratio for simplicity, otherwise mention ratio)
Preeti’s Capital A/c Dr. ₹ 80,000
Varsha’s Capital A/c Dr. ₹ 80,000
Kamala’s Capital A/c Dr. ₹ 80,000
To Investment in Star Ltd. A/c ₹ 2,40,000
(Being shares distributed among partners)
(iv) Settlement of creditors at 10% discount
Amount payable = ₹ 5,00,000 – 10% = ₹ 4,50,000
\begin{tabular}{|l|r|} \hline Sundry Creditors A/c Dr. & ₹ 5,00,000
To Realisation A/c & ₹ 50,000
To Bank A/c & ₹ 4,50,000
\hline \end{tabular}
(Being settlement of creditors at 10% discount)
(v) Sale of Land and Building
Sale price = ₹ 60,00,000
Broker’s commission = 5% of ₹ 60,00,000 = ₹ 3,00,000
Net cash received = ₹ 57,00,000
\begin{tabular}{|l|r|} \hline Bank A/c Dr. & ₹ 57,00,000
To Realisation A/c & ₹ 57,00,000
\hline \end{tabular}
(Being sale proceeds received after commission)
Profit on sale = ₹ 57,00,000 – ₹ 40,00,000 = ₹ 17,00,000 credited to Realisation A/c
(vi) Dissolution expenses paid by Varsha
\begin{tabular}{|l|r|} \hline Realisation A/c Dr. & ₹ 45,000
To Varsha’s Capital A/c & ₹ 45,000
\hline \end{tabular}
(Being dissolution expenses paid by Varsha on behalf of firm)
Final Answer: All entries recorded as per dissolution adjustments.