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. (Cr) ₹90,000
• B. (Dr) ₹90,000
• C. (Cr) ₹1,30,000
• D. (Dr) ₹1,30,000
• A. Loss ₹2,40,000
• B. Gain ₹24,000
• C. Loss ₹1,70,000
• 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

Types of Dissolution: Dissolution by Agreement 

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

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.

Scenario: Dissolution Due to Continuous Losses

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

Profit and Loss Account Balance

The Profit and Loss Account summarizes a company's financial performance over a specific period. The balance in this account can indicate either a profit or a loss.

Debit Balance 

A debit (Dr.) balance in the Profit and Loss Account indicates that the company has incurred a loss during the period. This means that the expenses exceed the revenues.

Given Information

Based on the capital balances and losses, the Profit and Loss Account is calculated to have a debit balance of ₹1,30,000.

Conclusion

Therefore, based on the capital balances and losses, the Profit and Loss Account is calculated as Dr ₹1,30,000. Hence, the correct answer is Option 4.

Answer 4

Calculated Profit and Loss Account Balance 

Based on the capital balances and losses incurred, the Profit and Loss Account is calculated to have a debit balance.

Result

The Profit and Loss Account balance is Dr ₹ 1,30,000. This indicates a loss.

Explanation

A debit balance in the Profit and Loss Account signifies that the expenses of the firm have exceeded its revenues during the accounting period. This results in a net loss, which is reflected in the debit side of the account.

Implications of a Debit Balance

• Indicates financial challenges for the firm.
• May require further analysis to identify the causes of the losses.
• Can impact future investment decisions and borrowing capacity.

Answer 5

Loss on Realisation Calculation 

The loss on realisation is calculated to determine the net loss incurred when a firm's assets are sold and liabilities are settled during the process of dissolution.

Calculation Details

The loss on realisation is typically determined by:

• Calculating the total amount realised from the sale of assets.
• Determining the total amount paid to settle liabilities.
• Deducting the total payments to liabilities and any realisation expenses from the total amount realised from assets.

Result

Based on the realisation of assets and liabilities, the loss on realisation is calculated as ₹1,70,000.

Conclusion

Therefore, the correct answer, reflecting the result of these steps, is Option 3.

Answer 6

Calculating Gain or Loss on Realization 

The gain or loss on realization is calculated to determine the profit or loss made when assets are sold during the liquidation of a business. The following steps are involved:

Steps to Calculate Gain or Loss on Realization

1. Calculate Total Realized Value of Assets: The assets were realized at 80% of their book value. This means that the total amount received from selling the assets was 80% of what they were originally worth on the company's books.
2. Identify Assets and Liabilities: Use the information provided on the assets, liabilities, and the realization percentage to determine the net effect on capital. This involves comparing the book value of assets with the realized value and considering the value of any liabilities assumed by the buyer.
3. Calculate Realization Expenses: Deduct any realization expenses. These expenses are costs incurred during the asset sale process, such as auctioneer fees, legal fees, etc. After deducting these expenses, compare the net realized value with the book values to determine if there is a gain or loss.

Final Answer

Based on the provided choices and calculations, the final answer is a Loss of ₹ 1,70,000.

Important Considerations

• Accurate valuation of assets is crucial for determining the correct gain or loss.
• All realization expenses must be accounted for.
• The gain or loss on realization impacts the distribution of assets to partners or shareholders.

Answer 7

Accounting Entry for Realisation Expenses Paid by a Partner 

When a partner (in this case, G) pays realisation expenses on behalf of the firm, a specific journal entry is required to properly account for the transaction.

The Journal Entry

The correct journal entry is:

        

Realisation A/c Dr.   (Amount of Expenses)
To G's Capital A/c      (Amount of Expenses)
        

   

Explanation

• Realisation A/c (Dr.): The Realisation Account is debited because the expenses are related to the realisation process. This increases the expenses associated with winding up the business.
• G's Capital A/c (Cr.): G's Capital Account is credited because G has effectively contributed funds to cover the expenses. This increases G's capital in the firm.

Conclusion

Therefore, since G paid the realisation expenses, the correct journal entry is Realisation A/c Dr. To Gs Capital A/c. Hence, the correct answer is Option 2.

Answer 8

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 9

Profit Sharing Ratio Among Partners

In a partnership firm, the partners agree on a specific ratio in which they will share the profits and losses of the business. This profit-sharing ratio is a fundamental aspect of the partnership agreement. 

Profit Sharing Ratio

In this case, the profit and loss are shared in the ratio of 5:3:2 among the partners.

Application of the Ratio

This means that for every ₹10 of profit, Partner 1 receives ₹5, Partner 2 receives ₹3, and Partner 3 receives ₹2. Similarly, losses are borne in the same proportion.

Conclusion

Therefore, as per the agreement, the profit and loss are shared in the ratio 5:3:2 among the partners. Hence, the correct answer is Option 1.

Answer 10

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.