Question

What is the mode of dissolution of the firm followed by G, K, and B?

• A. Dissolution by Agreement
• B. On the happening of certain contingencies
• C. Dissolution by Notice
• D. Compulsory Dissolution
• A. (Dr) ₹1,30,000
• B. (Dr) ₹90,000
• C. (Cr) ₹1,30,000
• D. (Cr) ₹90,000
• A. Loss ₹1,70,000
• B. Gain ₹24,000
• C. Loss ₹2,40,000
• D. Loss ₹2,10,000
• A. Realisation A/c Dr.
  To Cash A/c
• B. Realisation A/c Dr.
  To Gs Capital A/c
• C. Gs Capital A/c Dr.
  To Realisation A/c
• D. Cash A/c Dr.
  To Realisation A/c
• A. 5 : 3 : 2
• B. Equal Ratio
• C. 4 : 3 : 2
• D. Ratio of closing capital claims

Answer 1

The Correct Option is A

The dissolution of a partnership firm can occur in various ways, each with its own legal and procedural implications. One common method of dissolution is Dissolution by Agreement. Dissolution by Agreement occurs when all the partners in a firm mutually agree to dissolve the partnership. This agreement can be expressed (written or oral) or implied by the conduct of the partners.

In the given scenario, the dissolution is agreed upon by all partners due to continuous losses. This clearly falls under the category of Dissolution by Agreement, as all partners have consented to terminate the partnership.

Key Characteristics of Dissolution by Agreement

• Mutual Consent: All partners must agree to the dissolution.
• Flexibility: The partners have the freedom to decide the terms and conditions of the dissolution.
• Documentation: It is advisable to document the agreement in writing to avoid future disputes.

Conclusion

Therefore, based on the conditions given in this prompt, the correct answer is Option 1: Dissolution by Agreement.

Answer 2

Dissolution of a Firm: Happening of Certain Contingencies 

When a firm is dissolved due to specific events or circumstances, this is known as dissolution on the happening of certain contingencies. These contingencies are pre-defined events that trigger the dissolution process.

Dissolution Due to Continuous Losses

In the case of the firm being dissolved due to continuous losses, this specifically qualifies as dissolution on the happening of certain contingencies. The ongoing inability to operate profitably constitutes a significant and adverse event that justifies the firm's termination.

Examples of Other Contingencies Leading to Dissolution

• Death of a Partner: Unless the partnership agreement specifies otherwise, the death of a partner can lead to dissolution.
• Insolvency of a Partner: The insolvency of a partner may trigger dissolution, as their ability to contribute to the firm is compromised.
• Expiry of a Fixed Term: If the partnership was formed for a fixed period, it dissolves automatically upon the expiry of that term.
• Completion of a Specific Venture: If the partnership was formed to undertake a specific project, it dissolves upon completion of that project.

Key Takeaway

The dissolution of a firm due to continuous losses highlights the importance of sound financial management and the potential consequences of sustained financial distress. It is a clear example of dissolution occurring due to a specific, predefined contingency.

Answer 3

The Profit and Loss Account reflects the final profit or loss of the firm. In the case of the dissolution of a firm due to continuous losses, the Profit and Loss Account typically shows a Dr. balance (loss). From the information given:

• The firm incurred continuous losses, and the capital balances of the partners show a total decrease. Hence, the Profit and Loss Account is Dr. ₹ 90,000, reflecting the loss in the business.

Thus, the correct answer is: (4) (Dr.) ₹ 90,000

Answer 4

The gain or loss on realisation is calculated by subtracting liabilities from the realised value of assets.

• The assets realised at 80% are valued at ₹ 8,50,000 × 80% = ₹ 6,80,000.
• Liabilities of ₹ 80,000 were paid in full.
• Unrecorded liability of ₹ 50,000 was settled at ₹ 40,000.

Thus, the net realisation value is:

Realised Assets = ₹ 6,80,000 - ₹ 40,000 = ₹ 6,40,000

The total capital balances of the partners were ₹ 4,00,000, ₹ 3,00,000, and ₹ 2,00,000, which totals ₹ 9,00,000. 
Since the realised value is ₹ 6,40,000, there is a loss of ₹ 2,40,000.

Thus, the correct answer is: (3) Loss ₹ 2,40,000

Answer 5

In the case of dissolution, realisation expenses are generally borne by the partners. Since G has paid the realisation expenses of ₹ 30,000 on behalf of the firm, the journal entry would be as follows:

Realisation A/c Dr. To G’s Capital A/c

This entry reflects the fact that G has borne the realisation expenses, and the amount is now a liability to G, which will be settled from G’s capital account.

Thus, the correct answer is: (2) Realisation A/c Dr. To G’s Capital A/c

Answer 6

Accounting for Realization Expenses Paid by a Partner in Dissolution 

During the dissolution of a firm, if a partner incurs realization expenses on behalf of the firm, the accounting entry should accurately reflect that the expense is being borne by the partner. This situation arises when the partner uses their own funds to cover expenses related to the sale of assets and settlement of liabilities.

Scenario

In this scenario, G has paid realization expenses amounting to ₹ 30,000 on behalf of the firm.

Journal Entry

To properly account for this transaction, the journal entry would debit the Realisation Account and credit G's Capital Account. This reflects the fact that the firm's expenses are increasing (debit to Realisation A/c) and G's investment in the firm is increasing (credit to G's Capital A/c). G is essentially contributing ₹ 30,000 to the firm to cover these expenses.

The journal entry would be:

        

Realisation A/c       Dr.   ₹ 30,000
To G’s Capital A/c    Cr.   ₹ 30,000
        

   

Explanation

This entry acknowledges the payment made by G on behalf of the firm, effectively transferring the liability for the expenses to his capital account rather than using the firm's cash. This maintains the accuracy of the Realisation Account and reflects G's contribution.

Why This Entry is Important

• It accurately reflects the firm's financial position during dissolution.
• It ensures that G is properly compensated for the expenses he covered.
• It is essential for fair distribution of assets to the partners at the end of the dissolution process.

Answer 7

When a firm is dissolved, the profit and loss balance in the books of the firm (after adjusting for assets and liabilities) is generally shared by the partners in their capital ratio or the ratio of their capital claims at the time of dissolution. In this case, G, K, and B have capital balances of ₹ 4,00,000, ₹ 3,00,000, and ₹ 2,00,000 respectively.

The existing Profit and Loss Account will be shared by the partners in the ratio of their capital balances. So, the ratio is 5 : 3 : 2.

Thus, the correct answer is:

(1) 5 : 3 : 2

Answer 8

Sharing Existing Profit and Loss Account in Dissolution 

When a partnership firm dissolves, any existing balance in the Profit and Loss Account (whether a profit or a loss) needs to be distributed among the partners according to their profit-sharing ratio.

Distribution Ratio

The existing Profit and Loss Account balance in the books of the firm will be shared/borne by the partners in the ratio of 5 : 3 : 2.

Explanation

This means that if the Profit and Loss Account has a credit balance (accumulated profit), the profit will be distributed among the partners in the ratio of 5:3:2. Conversely, if the Profit and Loss Account has a debit balance (accumulated loss), the loss will be borne by the partners in the same ratio.

Example

For instance, if the Profit and Loss Account shows a loss of ₹ 100,000, the partners would bear the loss as follows:

• Partner 1: (5 / 10) * ₹ 100,000 = ₹ 50,000
• Partner 2: (3 / 10) * ₹ 100,000 = ₹ 30,000
• Partner 3: (2 / 10) * ₹ 100,000 = ₹ 20,000

Key Takeaway

It is crucial to distribute the existing Profit and Loss Account balance according to the agreed-upon profit-sharing ratio to ensure fairness and accuracy in the final settlement of accounts during dissolution.