Dissolution of Partnership Firms

Table of contents

---

Dissolution of Partnership Firms including Piecemeal Distribution

Whenever a reconstitution takes place within a Partnership in the form of admission, retirement or death of a Partner, the existing partnership is dissolved. The Partnership firm, may however, continue, if the remaining partners desire so.

But if the partnership firm is discontinued for any reason, that is called Dissolution of the firm. Dissolution of Firm – when does it take place [in accordance with the Indian Partnership Act of 1932]

1. By Mutual consent of all the partners or in accordance with a contract made by them [Section 40]
2. By Notice – given in writing, by any partner to all other partners if the Partnership is at will [Section 43].
3. On the happening of any one of the following events : [Section 42] :
   1. expiry of the term, where the Partnership was constituted for a fixed term;
   2. completion of the adventure for which the firm was constituted;
   3. Death of a partner,
   4. Adjudication of a Partner as insolvent.
4. Compulsory Revaluation of Dissolution [Section 41]
   1. Where all the partners or all but one are adjudged insolvent.
   2. If any event occurs making it unlawful for the business of the firm to be carried on.
5. Dissolution by Court: According to Section 44 of the Indian Partnership Act the court, at the suit of a partner, may dissolve a firm on any one of the grounds namely
   1. insanity of a partner;
   2. permanent incapability of a partner to do his duties;
   3. if a partner is guilty of misconduct that might affect prejudicially the carrying on of the business;
   4.  If a partner willfully or persistently commits breach of agreement;
   5. If a partner transfers all his shares to a third party or has allowed his share to be charged under the Provisions of Rule 49 of order XXI of the First Schedule to the Code of Civil Procedure, 1908;
   6. If the court considers that the business cannot be carried on except at loss;
   7. On any other ground on which the  court considers the dissolution as just and equitable.

Settlement of Accounts on Dissolution

According to Section 48 of the Indian Partnership Act the following rules should be observed for settlement of Accounts after dissolution, subject to agreement by partners :

1. Regarding Losses : “Losses, including deficiencies of capital, shall be paid first out of profits, next out of  capital, and lastly if necessary, by the partners individually in the proportions in which they are entitled to share profits”. [Section 48(1)]
2. Regarding Assets : “The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :
   1. in paying the debts of the firm to third parties;
   2. In paying each partner ratably what is due to him from the firm for advances as distinguished from capital;
   3. In paying to each partner ratably what is due to him as capital; and
   4. The residue, if any, shall be divided among the partners in the proportions in which they are entitled to share profits.” [Section 48(2)]

Accounting Entries Regarding Dissolution

The two separate aspects of Dissolution for which accounting entries have to be made are:

[A] Realization of Assets and Payment of liabilities and [B] Settlement of the dues of the Partners,

[A] Realization of Assets and Payment of liabilities

1. Prepare Realisation Account
2. Trausfer all assets (except cash, bank & fictitious assets) and liabilities at book values to Realisation Account.

Journal Entries 

Item/Purpose	Entry	Special Points to be noted
Transfer of book values of assets as recorded in the Balance Sheet	Realization A/c	(a) Cash or Bank A/c are not to be credited unless the firm, as a whole, is sold out as a going concern. (b) Debit balance of any Cap. A/c etc. or Debit balance of P/L A/c not to be transferred to Realization A/c. (c) If there is any Provision for bad Debts, debit Realization A/c and credit Debtors A/c with gross figure. Then debit Provision A/c and credit Realization A/c. Same treatment for Provision for Depreciation.
	To, Sundry Assets [Book value](including goodwill if any, shown in the Balance Sheet)
	Realization A/c
	To, Debtors A/c
	Provision for Bad Debts A/c
	To, Realization A/c.
Realization/Sale of above assets	Cash/Bank A/c (amt. realized) Or Partners Cap. A/c  (agreed value at which a partner takes over an asset/assets)
	To, Realization A/c.
Shares etc. received as purchase consideration	In exchange of the firm’s assets. Shares A/c
	To, Realization A/c.
Closing the External liabilities	External Liabilities A/c(such as creditors, outstanding expenses, Bank Loan etc.)	(a) Alternatively – this entry may be passed (combining 4,5 & 6)  Liability A/c To, Bank A/c (actual amt. paid) Or, To, Partners Cap. A/c  (agreed value)  To, Realization A/c (Discount, if any received on payment/discharge) (b) Where assets and liabilities are taken over by another business on making some lump sum payment, separate entries for realization of assets and / payment of liabilities need not be made
	To, Realization A/c. (book value)
External liabilities paid off	Realization A/c.
	To, Cash/Bank A/c (actual amt. paid)
External liabilities taken over by any partner	Realization A/c.
	To, Particular Partner’s Cap. A/c (agreed value)
Unrecorded asset sold or taken over by any partner	Cash / Bank A/c
	Partners Capital A/c
	To, Realization A/c.
If any unrecorded liability is paid.	Realization A/c
	To, Cash/Bank A/c (actual amt.)
If shares etc. received and shown in (3) above are sold out or transferred to partners.	Cash/Bank A/c  Or Partners Cap. A/c [excluding insolvent partner]	For sale, there may be profit or loss on sale which is transferred to Realization A/c.
	To, shares A/c
Payment  of  Expenses of Realization.	Realization A/c	If a partner bears such Revaluation of expenses personally in pursuance of a separate agreement – NO ENTRY is required.
	To, Cash/Bank A/c (if paid by the firm)  Or, To, Partners Cap. A/c (if paid by any partner)
Balance of Realization Account representing Profit or Loss on Realization.	Realization A/c.
	To, Partners Cap. A/c(Profit shared in Profit Sharing Ratio)
	Or,
	Partner’s Cap. A/c
	To, Realization A/c (Loss shared in Profit Sharing Ratio)

 [B] Settlement of Partners Dues – through Capital Accounts 

Item/Purpose	Entry	Special Points to be noted
Prepare Capital Accounts with balance as per Balance Sheet before the dissolution.	By Balance b/d (Cr. balance)
	To, Balance b/d (Dr. balance)
Transfer of Current A/c, if any.	Partner’s Current A/c …
	To, Partner’s Cap. A/c.(Credit Balance)
	Or
	Partner’s Capital A/c …
	To, Partner’s Current A/c  (Debit balance)
Undistributed Profit, Reserve, Joint Life Policy Reserve, Investment Fluctuation Fund, Contingency Reserve etc. transfer.	Profit & Loss (Cr.) A/c… Or, Any Reserve A/c ……..
	To, Partner’s Capital A/cs [Profit sharing ratio]
Undistributed Loss, Fictitious/ Unrealizable Assets etc. transfer.	Partners Capital A/c…	Example of unrealizable Asset-Advertisement Suspense A/c
	To, Profit & Loss (Dr.) A/c Or, To, Fictitious Assets A/c (Profit Sharing Ratio)
Any loan taken from any partner	Partner’s Loan A/c ….	u/s 48 Repayment of loan should enjoy priority over repayment of capital.
	To, Cash/Bank A/c
Any loan given to any partner	Cash/Bank A/c…..	If such amount is realized. Adjustment of loan against Capital
	To, Partner’s Loan A/c
	Or
	Partner's Capital A/c .....
	To Partner’s Loan A/c
If any Partner’s Capital A/c shows a debit balance (after balancing)	Cash/Bank A/c…..	If the deficient partner is insolvent, treatment will be different-Vide–Insolvency of Partner.
	To, Particulars Partner’ Capital A/c [Cash brought in to make up the  shortfall]
Payment of credit balance (after final balancing)	Particulars Partner’s Cap. A/c	Same as above
	To, Cash/Bank A/c

Illustration 22

A, B and C sharing profits in 3 : 1 : 1 agree upon dissolution. They each decide to take over certain assets and liabilities and continue business separately.

Balance Sheet as on date of dissolution

Liabilities	Amount ₹	Assets	Amount ₹
Creditors	6,000	Cash at Bank	3,200
Loan	1,500	Sundry Assets	17,000
Capitals:		Debtors 24,200
A 27,500		Less: Bad Debts Provision 1,200	23,000
B 10,000		Stock	7,800
C 7,000	44,500	Furniture	1,000
	52,000		52,000

It is agreed as follows:

(1) Goodwill is to be ignored.

(2) A is to take over all the Fixtures at ₹ 800; Debtors amounting to ₹ 20,000 at ₹ 17,200. The creditors of ₹ 6,000 to be assumed by A at the figure.

(3) B is to take over all the stocks at ₹ 7,000 and certain of the sundry assets at ₹ 7,200 (being book value less 10%)

(4) C is take over the remaining sundry assets at 90% of book values less ₹ 100 allowances and assume responsibility for the discharge of the loan, together with accruing interest of ₹ 30 which has not been recorded in the books of the firm.

(5) The expenses of dissolution were ₹ 270. The remaining debtors were sold to a debt collecting agency for 50% of book values.

Prepare Realization Account, partners’ Capital Accounts and Bank Account.

Solution:

In the books of A, B and C

Realisation Account

Dr.					Cr.
To Sundry Assets:			By Provision for bad debts		1,200
Sundry Assets	17,000		Capital Account A :
Debtors	24,200		Fixtures	800
Stock	7,800		Debtors	17,200	18,000
Fixtures	1,000	50,000	B: Stock	7,000
,, Bank – Expenses		270	Sundry Assets	7,200
,, Capital Account					14,200
C- Interest on loan		30	C: Sundry Assets		8,000
			By Bank: Collection from Debtors		2,100
			By Loss on realization:
			A (3/5)	4,080
			B (1/5)	Revaluation of 1,360
			C (1/5)	1,360
		50,300			50,300

Capital Account

Particulars	A	B	C	Particulars	A	B	C
	₹	₹	₹		₹	₹	₹
To Dissolution	18,000	14,200	8,000	By Balance b/d	27,500	10,000	7,000
Assets taken				,, Creditors	6,000	*	-
,, Dissolution A/c	4,080	1,360	1,360	,, Loan(with interest)	-	-	1,530
Loss				,, Bank
,, Bank —Final payment	11,420	-	-	Final receipts	-	5,560	830
	33,500	15,560	9,360		33,500	15,560	9,360

Bank Account

Dr.			Cr.
Particulars	Amount	Particulars	Amount
	₹		₹
To Balance b/d	3,200	By Dissolution Account
,, Dissolution A/c		Expenses	270
Collection from Debtors	2,100	,, Capital Account :
,, Capital Accounts :		A	11,420
B: 5,560
C:  830	6,390
	11,690		11,690

Working Notes :

		₹
1.	Realization of Sundry Assets:	17,000
	Sundry Assets (Book Value)	8,000
	Less: Taken by B [ 7,200 x (100/90)]	9,000
	Remaining at book value
	Taken by C: 90% of Book value i.e. (9,000 x (90/100) = 8,100 – 100 for allowance = 8,000
2.	Collection from Debtors:
	Debtors (Book Value	24,200
	Less: Taken by (Book value)	20,000
		4,200
	Remaining at 50% i.e., ₹ 2100

Illustration 23

X, Y and Z sharing profits & Losses in the ratio of 2 : 2: 1 agreed upon dissolution of their partnership on 31st December,

20X1 on which date their Balance Sheet was as under :

Liabilities		Amount (₹)	Assets		Amount (₹)
Capital :			Fixed Assets		50,000
X		40,000	Joint Life Policy (at surrender Value)		10,000
Y		30,000
Reserve Fund		10,000	Debtors	10,000
Joint Life Policy Fund		10,000	Less : Provision for Bad Debts	500	9,500
Creditors	19,000		Stock at Invoice Price	10,000
Less: Prov	500		Less: Price loading	2,000	8,000
Salary Outstanding		18,500	Investments	8,000
		2,000	Less: Fluctuation Fund	500	7,500
			Capital Account –Z		2,000
			Bank		23,500
		1,10,500			1,10,500

Investments were taken over by X at ₹ 6,000, creditors of ₹ 10,000 were taken over by Y who has agreed to settle account with them at ₹ 9,900. Remaining creditors were paid ₹ 7,500. Joint Life Policy was surrendered and Fixed Assets realized ₹ 70,000, Stock and Debtors realized ₹ 7,000 and ₹ 9,000 respectively. One customer, whose account was written off as bad, now paid ₹ 800 which is not included in ₹ 9,000 mentioned above. There was an unrecorded asset estimated at ₹ 3,000, half of which as handed over to an unrecorded liability of ₹ 5,000 in settlement of claim of ₹ 2,500 and the remaining half was sold in the market which realized ₹ 1,300. Y took over the responsibility of completing the dissolution and he is granted a salary of ₹ 400 per month. Actual expenses amounted to ₹ 1,100. Dissolution was completed and final payments were made on 30th April, 20X2.

You are required to prepare the Realization Account, Capital Account and Bank Account.

Solution: 

Realization Account

Dr.					Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Fixed Assets A/c		50,000	By Provision on Debtors A/c		500
To Joint Life Policy A/c		10,000	By Provision on Stock A/c		2,000
To Debtors A/c		10,000	By Investment Fluctuation Fund A/c		500
To Stock (at I. P.)		10,000	By Joint Life Policy Fund A/c		10,000
To Investments A/c		8,000	By Creditors A/c		19,000
To Pro. for Disc. on Creditors A/c		500	By Outstanding Salary A/c		2,000
To Y’s Capital A/c [Creditors taken over- see Note]		10,000	By X’ Capital A/c (Investments taken over)		6,000
To Bank A/c			By Bank A/c :
Creditors paid off	7,500		Joint Life Policy	10,000
Unrecorded liability paid [1/2 × 5,000]	2,500		Fixed Assets	70,000
Outstanding Salary	2,000		Stock	7,000
Outstanding Expense	1,100	Revaluation of 13,100	Debtors	9,800
To Y’s Cap. A/c [Salary 400 × 4]		1,600	Unrecorded Assets (Sold)	1,300
To Partner’s Capital A/c (Profit on Realization)			Bad Debt Recovered	800	98,100
X [2/5]	9,960
Y [2/5]	9,960
Z [1/5]	4,980	24,900
		1,38,100			1,38,100

Bank Account

Particulars	(₹)	Particulars	(₹)
To, Balance b/f	23,500	By, Realization A/c
To, Realization A/c		Creditors	7,500
Joint Life Policy	10,000	Unrecorded Liability	2,500
Fixed Assets	70,000	Outstanding Salary	2,000
Stock	7,000	Expenses	1,100
Debtors	9,800	By, X’s Capital A/c	47,960
Unrecorded Assets	1,300	By, Y’s Capital A/c	55,560
		By, Z’s Capital A/c	4,980
	1,21,600		1,21,600

Partners Capital Account

Date	Particulars	X	Y	Z	Date	Particulars	X	Y	Z
20X2					20X2
		(₹)	(₹)	(₹)			(₹)	(₹)	(₹)
1 .1	To Balance b/d	-	-	2,000	1 .1	To Balance b/d	40,000	30,000
30.4	To Realization A/c	6,000	-	-	30.4	By Reserve Fund [2:2:1]	4,000	4,000	2,000
	To Bank A/c (Balance withdrawn)	47,960	55,560	4,980		By Realization A/c (Profit)	9,960	9,960	4,980
						By Realization A/c (Creditors)	-	10,000	-
						By Realization A/c (Salary)	-	1,600	-
		53,960	55,560	6,980			53,960	55,560	6,980

Note :

1. Unrecorded Asset and unrecorded liability were not recorded. Any part of such asset utilized to discharge any part of such liability and discount received there on have been ignored. But unrecorded asset realized (debts previously written off now recovered) has been recorded. Similarly unrecorded asset sold has been recorded.

2. Y took over creditors of ₹ 10,000. This has been recorded. How he settles such liability is his personal matter. The discount on payment does not benefit the firm.

Special considerations for a retiring partner and the estate of a deceased partner in relation to debts contracted    by    the    partnership    firm:

1. debts due on the date of retirement/death: the retiring partner and the estate of the deceased partner is liable for the whole of the debts due by the firm at the  date of retirement or death, to the extent of their share.
2. debts incurred after retirement: where the notice of retirement is not published in accordance with law, the retiring partner is liable for debts contracted after retirement.
3. deceased/ insolvent partner: the estate of a deceased or Revaluation of bankrupt partner will not be liable for debts contracted by the firm after the death or bankruptcy.

Applicability of Section 37 of the Partnership Act:

In case of retirement, the retiring partner or in case of death, the executor of the deceased partner, if the dues are not settled, then such retired partner or the executor is entitled to the following :

Maximum of :

Interest @ 6% p.a. on the amount due to them(i.e. if the amount is unsettled, like, rate of interest on loan to be allowed to the retired partner or the executor is not mentioned)

Or

The share of profit earned for the amount due to the partner

Conditions :

1. The surviving partners/continuing partners continue to carry on the business of the firm.
2. The business is carried on without any final settlement of accounts between the continuing partners and the outgoing partners or his estate.
3. There is no contract to the contrary of the options contained in Section 37 i.e. share in the profits or interest @ 6% p.a. on the unsettled capital.

Example : Unsettled capital of C ₹ 52,000 (Date of retirement : 30.09.21, financial year 2021-2022). Net Profit earned by the firm after C’s retirement ₹ 25,000. Capitals of A: ₹ 57,000 and B: ₹ 76,000)
C is entitled to the maximum of the following :
(i) Interest on unsettled capital = ₹ 52,000 × 6% × 6 months = ₹ 1,560
(ii) Profit earned out of unsettled capital = Profit × Retired or Deceased Partner’s unsettled 
Dues/ Total Capital of the firm (including the amount due to the retired or deceased partner)
 = ₹ (25,000 × 52,000)/(₹ 52,000 + 57,000 + 76,000) = ₹ 7,027

Insolvency of a partner

If a partner becomes insolvent and fails to pay his debit balance of Capital A/c either wholly or in part, the unrecoverable portion is a loss to be borne by the solvent partners. The question now arises is that, in what ratio they will share this loss. Prior to the decision in the leading case of Garner vs. Murray this loss was borne by the solvent partners in the profit sharing ratio just like ordinary losses.

Decision in Revaluation of Garner vs. Murray Case

Justice Joyee held in the case of Garner vs. Murray that the loss arising due to the insolvency of a partner must be distinguished from an ordinary loss (including realization loss). Unless otherwise agreed, the decision in Garner vs. Murray requires

1. That the solvent partners should bring in cash equal to their respective shares of the loss on realization;
2. That the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their Last Agreed Capitals.

In case of fixed capital system, capitals as per last Balance Sheet represent last agreed capitals. In case of fluctuating capital system, however, all necessary adjustments in respect of reserved, unappropriated profits or losses (but not realization profit or loss), Drawings A/c., undisclosed liabilities and assets etc. must be made to get last agreed capitals. A partner who has nil or negative balance in his capital account before dissolution does not contribute anything to the loss arising as a result of insolvency of a partner.

Criticism of the decision of Garner vs. Murray

The following criticism may be advocated against the decisions laid down in Garner vs. Murray principle:

1. If any solvent partner has a debit balance in capital account, he must not bear the deficiency of the insolvent partner;
2. This principle does not apply if there are only two partners;
3. In spite of having a credit balance in capital account the solvent partner must bring cash equal to the amount of loss on reasilation which is immaterial and useless; and
4. If any solvent partner who possess more private asset but contributes less capital, he will naturally, as per Garner vs. Murray decision, bear less amount of deficiency of the insolvent partner than the other solvent partner who possess less private assets but contributes more capital to the firm. This is not justified.

Applicability in India

According to sub section (ii) of Sec 48(b) of the Indian Partnership Act, if a partner becomes insolvent or otherwise incapable of paying his share of the contribution, the solvent partners must share ratably the available assets (including their own contribution to the capital deficiency). That is to say, the available assets will be distributed in proportion to their capitals.

Thus, under the Indian Partnership Act also the solvent partners are required to make good their share of the realization loss (i.e., capital deficiency). The total cash available after making good the solvent partners’ share of capital deficiency shall be shared by the solvent partners in proportion to their capitals. As a result of this the ultimate debit balance of the insolvent partner’s Capital A/c. is borne by the solvent partners in capital ratio.

The provision of the Indian Partnership Act in this respect are, thus, similar to the rules laid down by the decision in Garner vs. Murray.

When there is a specific provision in the Partnership Deed as to how the deficiency of an insolvent partner is to  be borne by the solvent partners, such provision must be followed, because the provision of the Act will apply only when there is no specific agreement.

 Illustration 24

A, B and C are in partnership sharing profit and losses equally and agreed to dissolve the firm on 30.06.20X1. On that date their Balance Sheet stood as follows:

Balance Sheet

as at 30th June, 20X2

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital A/c		Sundry Asset	50,000
A: 34,000		Profit & Loss A/c	12,000
B : 24,000	58,000	Capital A/c
Creditors	12,000	C	8,000
	70,000		70,000

The assets are realised at 50% of the book value. Realization expenses amounted to ₹ 5,000. C became insolvent and received ₹ 2,000 from his estates.

Close the book of the firm under (i) Fixed Capital Method and (ii) Fluctuating Capital Method applying Garner Vs. Murray principles.

Solution: 

In the books of A, B & C

Realization Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Asset A/c	50,000	By Bank A/c
Bank A/c	5,000	Amount Realized	25,000
		Capital A/c
		Loss on Realization
		A 10,000
		B 10,000
		C 10,000	30,000
	Revaluation of 55,000		55,000

Working :

(a) Under Fixed Capital Method

Deficiency of the insolvent partner Mr. C must be borne by the solvent partner A and B as per their last agreed capital given in the Balance Sheet i.e., 17:12.

(b) Under Fluctuating Capital Method

Deficiency of the insolvent partner Mr. C must be borne by the solvent partners A & B as the following adjusted capital which will be considered as the last agreed capital i.e., after adjusting the debit balance of Profit and Loss Account.

Particulars	A	B
	₹	₹
Capital as per Balance Sheet	34,000	24,000
Less: Debit balance of P&L A/c (equally)	(-)4,000	(-)4,000
	30,000	20,000

 Ratio = 3:2

(a) Capital Account under Fixed Capital Method

Capital Account

Particulars	A	B	C	Particulars	A	B	C
	₹	₹	₹		₹	₹	₹
To Balance b/d	-	-	8,000	By Balance b/d	34,000	24,000	-
₹ Realisation A/c Loss	10,000	10,000	10,000	₹ Bank A/c	-	-	2,000
₹ Profit & Loss A/c Loss	4,000	4,000	4,000	₹ Bank A/c	10,000	10,000	-
₹ C’s Capital A/c	Revaluation of 11,724	8,276	-	₹ A’s Capital	-	-	11,724
₹ Bank A/c (bal. fig.)	18,276	11,724	-	₹ B’s Capital	-	-	8,276
	44,000	34,000	22,000		44,000	34,000	22,000

Bank Account

Dr.			Cr.
Particulars	₹	Particulars	₹
To Balance b/d	25,000	By Realisation A/c
₹ Capital A/c		Expenses	5,000
A: 10,000		₹ Creditors	12,000
B :10,000		₹ Capital A/c
C :2,000	22,000	A	18,276
		B	11,724
	47,000		47,000

(b) Under Fluctuating Capital Method

 Capital Account

Particulars	A	B	C	Particulars	A	B	C
	₹	₹	₹		₹	₹	₹
To Balance b/d	-	-	8,000	By Balance b/d	34,000	24,000	-
₹ Realisation A/c Loss	10,000	10,000	10,000	₹ Bank A/c	10,000	10,000	-
₹ Profit & Loss A/c Loss	4,000	4,000	4,000	₹ Bank A/c	-	-	2,000
₹ C’s Capital A/c	12,000	8,000	-	₹ A’s Capital	-	-	12,000
₹ Bank A/c (bal. fig.)	18,000	12,000	-	₹ B’s Capital	-	-	8,000
	44,000	34,000	22,000		44,000	34,000	22,000

Bank Account

Dr.			Cr.
Particulars	₹	Particulars	₹
To Realisation A/c		By Realisation A/c
Assets realized	25,000	Expenses	5,000
₹ Capital A/c		₹ Creditors	12,000
A	10,000	₹ Capital A/c
B	10,000	A	18,000
C	2,000	B	12,000
	47,000		47,000

Illustration 25

Ram, Rahim and Robert are partners of the firm ABC sharing profits and losses in the ratio of 5: 3: 2. The Balance Sheet of the firm as on 01.4.20X1 is given below:

Liabilities	(₹)	Assets	(₹)
Partners Capital:		Goodwill	50,000
Ram	3,00,000	Machinery	4,55,000
Rahim	2,50,000	Furniture	10,000
Robert	2,00,000	Stock	2,00,000
General Reserve	1,05,000	Debtors	3,00,000
Loan	95.000	Cash & Bank	35,000
Sundry Creditors	1,00,000
	10,50,000		10,50,000

Partners of firm decided to dissolve the firm. The firm decided to settle the loan creditors directly. Ram took over goodwill for 75,000. Rahim took over machinery and furniture at 90% of book value and sundry creditors at book value. Robert took over stock at 95% of book value and debtors at 90% of the book value. Partners have to pay cash if the assets taken over had exceeded the amounts due to them. 

Prepare:

(i) Realisation Account;

(ii) Partners Capital Account; and

(iii) Cash Account of the firm to show the dissolution proceedings

Solution:

Realisation Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Goodwill	50,000	By, Loan.	95,000
To, Machinery	4,55,000	By, Sundry creditors	1,00,000
To, Furniture	10,000	By, Ram’s Capital A/c	75,000
To, Stock	2,00,000	By, Rahim’s Capital A/c	4,18,500
To, Debtors	3,00,000	By, Robert’s Capital A/c
To, Cash (Loan)	95,000	95% of 2,00,000
To, Rahim’s Capital A/c	1,00,000	90% of 3.00.000	4,60,000
		By, Ram’s Capital	Revaluation of 30,750
		By, Rahim’s Capital	18,450
		By, Robert’s Capital	12,300
	12,10,000		12,10,000

Partners’ Capital Account 

Dr.							Cr.
Particulars	Ram	Rahim	Robert	Particulars	Ram	Rahim	Robert
To, Realisation Nc	75,000	4,18,500	4,60,000	By, Balance b/d	3,00,000	2,50,000	2,00,000
To, Realisation A/c	30,750	18,450	12,300	By, General Reserve	52.500	31,500	21,000
To, Cash (b/f)	2,46,750			By, Realisation Nc		1.00,000	2,51,300
				By, Cash A/c (b/t)		55,450
	3,52,500	4,36.950	4,72,300		3,52,500	4,36,950	4,72,300

Cash Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance bid	35,000	By, Loans A/c	95,000
To, Rahim Capital A/c	55,450	By, Ram Capital A/c	2,46,750
To, Robert Capital A/c	2,51,300
	3,41,750		3,41,750

Illustration 26

Ram, Rahim and Robert are partners in a firm sharing profits and losses in the proportion of 3:3:2. Their Balance Sheet as on 31.03.20X1 was as follows:

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Partners Current			Bank		55,000
Account:			Stock		69,000
Ram	75,000		Investments		6,000
Rahim	75,000		Debtors		70,000
Robert	1.00.000	2,50,000	Laud and Building		1,25,000
Partners Capital			Goodwill		25,000
Accounts:
Ram	15,000
Rahim	25,000
Robert	12.500	52,500
Sundry creditors		47,500
		3,50,000			3,50,000

They decided to dissolve the firm on 01.04.20X1. They report the result realization as follows:

	(₹)
Land and Buildings	90,000	— realized in cash
Debtors	60,000	— realized in cash
Investments	5,500	— taken over by Ram
Stock	75,500	— taken over by Rahim
Goodwill	18,000	— taken over by Robert

The realization expenses amounted to ₹ 2,000. You are required to close the books of accounts of the firm.

Solution:

Realisation Account

Dr.				Cr.
Particulars	(₹)	Particulars		(₹)
To Stock	69,000	By Sundry Creditors		47,500
To Investments	6,000	By Bank (assets realized)		1,50,000
To Debtors	70,000	By Ram’s Capital A/c (investments)		5,500
To Land & Buildings	1,25,000	By Rahim’s Capital A/c (Stock)		75,500
To Goodwill	25,000	By Rahim’s Capital A/c (Stock)		18,000
To Bank (Expenses)	2,000	By Loss transferred to Current A/c:	(₹)
To Bank (Creditors)	47,500	Ram	18,000
		Rahim	18,000
		Robert	12,000
	Revaluation of 3,44,500			3,44,500

Partners’ Current Account

Dr.							Cr.
Particulars	Ram  (₹)	Rahim  (₹)	Robert  (₹)	Particulars	Ram  (₹)	Rahim  (₹)	Robert  (₹)
To, Realisation Nc	5,500	75,500	18,000	By, Balance b/d	15,000	25,000	12,500
To, Realisation A/c	18,000	18,000	12,000	By, Capital A/c	8,500	68,000	17,500
	23,500	93,500	30,000		23,500	93,500	30,000

Partners’ Capital Account

Dr.							Cr.
Particulars	Ram  (₹)	Rahim  (₹)	Robert  (₹)	Particulars	Ram  (₹)	Rahim  (₹)	Robert  (₹)
To, Current A/c	8,500	68,500	17,500	By, Balance C/d	75,000	75,000	1,00,000
To, Bank A/c (Bal. Fig)	66,500	6,500	82,500
	75,000	75,000	1,00,000		75,000	75,000	1,00,000

Bank Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/d	55,000	By, Realisation A/c (expenses)	2,000
To, Realisation (Assets realized)	1,50,000	By, Realisation A/c (Creditors)	47,500
		By, Ram’s Capital A/c	66,500
		By, Rahim’s Capital A/c	6,500
		By, Robert’s Capital A/c	62,500
	2,05,000		2,05,000

If all the partners are insolvent

Since all partners are insolvent, creditors cannot expect to be paid in full. In such a case Sundry Creditors should not be transferred to Realization Account. Cash in hand together with the amount realized on sale of assets and surplus from private estate of partners, if any, less expenses will be applied in making payment to the creditors. The balance of Creditors Account represents the deficiency to be borne by them which to be transferred to a Deficiency Account. The balance of Capital Accounts should also to be transferred to the Deficiency Account to close the books. Alternatively, the deficiency to be borne by the Creditors may be directly adjusted in between Creditors Account and Capital Accounts

The following entries required to be passed :

 (i) To, pay-off the creditors

Creditors A/c

To, Bank A/c

To, Deficiency A/c

 (ii) When deficiency is transferred 

Deficiency A/c

To, Partners’ Capital A/c

 Illustration 27

A, B and C were equal partners in a firm. Their Balance Sheet as on 31st March, 20X1 was as follows:

Liabilities	(₹)	Assets	(₹)
A’s Capital	1,60,000	Building	4,00,000
C’s Capital	1,00,000	Machinery	4,00,000
A’s Loan	2,00,000	Furniture and Fixtures	1,60,000
Creditors	10,00,000	Stock	1,60,000
		Book Debts	2,00,000
		Cash at Bank	10,000
		B’s Capital (Overdrawn)	1,30,000
	Revaluation of 14,60,000		14,60,000

The firm was dissolved as all the partners were declared insolvent. The assets were realized as under:

Book debts: 45% less; Building: ₹ 1,60,000; Stock: ₹ 1,00,000; Machinery: ₹ 2,00,000; and Furnitures and fixtures; ₹ 40,000. Realization expenses were ₹ 10,000.

Partner	Private Assets (₹)	Private Liabilities (₹)
A	2,50,000	2,50,000
B	2,00,000	1,80,000
C	2,30,000	2,50,000

You are required to prepare:

(i) Realisation Account,

(ii) Bank Account,

(iii) Creditors Account,

(iv) Partners’ Capital Account, and

(v) Deficiency Account.

Solution:

Realisation Account

Dr.				Cr.
Particulars	(₹)	Particulars		(₹)
To, Building	4,00,000	By, Bank
To, Machinery	4,00,000	Book debts	1,10,000
To, Furniture	1,60,000	Building	1,60,000
To, Stock	1,60,000	Stock	1,00,000
To, Book debts	2,00,000	Machinery	2,00,000
To, Bank - Realisation exp.	10,000	Furniture	40,000	6,10,000
		By, Partners’ Capital A/c:		7,20,000
		(Realisation loss)
	13,30,000			13,30,000

Bank Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/d	10,000	By, Realisation	10,000
To, Realisation A/c	6,10,000	By, Creditors A/c (Bal. Fig.)	6,30,000
To, B’s Capital A/c	20,000
(Excess of B’s estate)
	6,40,000		6,40,000

Creditors Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Bank	6,30,000	By, Bal b/d	10,00,000
To, Deficiency A/c (Bal. Fig.)	3,70,000
	10,00,000		10,00,000

Partners’ Capital Account

Dr.							Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To, Bal. b/d		1,30,000		By, Bal. b/d	1,60,000		1,00,000
To, Realisahon loss	2,40,000	2,40,000	2,40,000	By, A’s Loan A/c	2,00,000
(7.20,000 in 1:1:1)				By, Bank A/c.		20,000
To, Deficiency	Revaluation of 1,20,000			By, Deficiency A/c		3,50,000	1,40,000
	3,60,000	3,70,000	2,40,000		3,60,000	3,70,000	2,40,000

 Deficiency Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, B’s Capital A/c	3,50,000	By, Creditors A/c	3,70,000
To, C’s Capital A/c	1,40,000	By, A’s Capital A/c	1,20,000
	4,90,000		4,90,000

 Illustration 28

P, Q, R and T have been carrying on business in partnership sharing profits and losses in the ratio of 4:1:2:3. The following is their Balance Sheet as on 31st March, 20X1: 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Accounts:			Premises		2,80,000
P	7,00,000		Furnitures		30,000
T	3.00.000	10,00,000	Stock-in-Trade		2,00,000
Trade Creditors		3,00,000	Trade Debtors	3,50,000
			Less: Provision for Bad	50,000	3,00,000
			Debts
			Cash at Bank		1,40,000
			Capital Accounts:
			Q	2,00,000
			R	1,50,000	3,50,000
		13,00,000			13,00,000

It has been agreed to dissolve the partnership on 1st April, 20X1, on basis of the following points agreed upon 
between the partners:

(i) P is to take over Trade Debtors at 80% of Book Value ( ₹3,50,000);

(ii) T is to take over the stock in Trade at 95% of the value; and

(iii) R is to discharge Trade Creditors.

(iv) The realisation is: Premises ₹2,75,000 and Furnitures ₹25,000.

(v) The expenses of realisation come to ₹30,000.

(vi) Q is found insolvent and ₹21,900 is realised from his estate.

Note: The loss arising out of capital deficiency may be distributed following decision in Garner vs. Murray.

You are required to prepare:

(a) Realisation Account

(b) Bank/Cash Account

(c) Capital Accounts of the Partners.

Solution:

In the books of Firm Realisation Account 

Date	Particulars	(₹)	Date	Particulars	(₹)
20X1 April 1	To, Trade debtors A/c	3,50,000	20X1 April 1	By, Provision for Bad Debts A/c	50,000
	To, Stock in Trade A/c	2,00,000		By, Trade Creditor A/c	3,00,000
	To, Premises A/c	2,80,000		By, P’s Capital A/c	2,80,000
	To, Furniture A/c	30,000		(Trade Debtors taken over)
	To, R’s Capital A/c	3,00,000		By, T’s Capital A/c	1 ,90,000
	Trade credit discharged)	30,000		(Stock-in-trade taken over)
	Co Bank/Cash (Expenses)			By, Bank A/c	3,00,000
				(Assets realised)
				By, Partners’ Capital A/c	70,000
				(P: 28,000: Q: 7,000; R:
				14,000: T: Z 21,000)
		11,90,000			11,90,000

Bank account 

Dr.	Particulars	(₹)	Date	Particulars	Cr.
20X1 April 1	To Balance b/d	1,40,000	20X1	By Realisation A/c (expenses)	30,000
	To Realization A/c	3,00,000		By Partners’ Capital A/c
	To Partner’s Capital A/c:			P:	2,90,430
	P:	28,000		R:	1,50,000
	Q:	Revaluation of 21,900		T:	54,470
	R:	14,000
	T:	21,000
		5,24,900			5,24,900

Partners’ Capital Account

Dr.									Cr.
Particulars	P (₹)	Q (₹)	R (₹)	T (₹)	Particulars	P (₹)	Q (₹)	R (₹)	T (₹)
To, Balance bid		2,00,000	1,50,000		By, Balance bid	7,00,000			3,00,000
To, Realisation A/c	2,80,000			1,90,000	By, Realisation A/c (Trade Credit  discharged)			3,00,000
To, Realisation A/c (Loss)	28,000	7,000	14,000	21,000	By, Bank/Cash A/c (W.N. 2)	28.000		14,000	21,000
To, Capital A/c  (WN-1)	129,570			55,530	By, Bank/Cash (W.I)		21,900
To, Bank/Cash A/c	2,90,430		1,50,000	54,470	By, P’s Capital A/c		1,29,570
					By, T’s Capital A/c		55,530
	7,28,000	2,07,000	3,14,000	3.21,000		7,28,000	2,07,000	3,14,000	3.21,000

Working Notes::

(1) Q’s deficiency of ₹ 1,85,100 (₹ 2,07,000 - ₹ 21,900) should be shared by P and Tin the ratio of their capital i.e. 7:3. R will not bear any loss on deficiency, because at the time of dissolution he had a debit balance in his Capital Account.

(2) The amount realised from the estate of Q is ₹ 21,900.

 Illustration 29 

Balance Sheet as at 30.10.X1

a

Liabilities	Amount (₹)	Asset	Amount (₹)
Capitals		Fixed Assets	1,00,000
P	5,000	Cash	10,000
Q	3,000
R	2,000
Bank Loan	60,000
Sundry Creditors	40,000
	1,10,000		1,10,000

All the partners were declared insolvent. Profit sharing ratio : 5 : 3 : 2. Assets realized ₹ 60,000. Prepare necessary ledger accounts to close the books of the firm.

Solution:

Realisation Account

Particulars	Amount ₹	Particulars	Amount ₹
To Fixed Assets	1,00,000	By Cash A/c (realisation)	60,000
		By Partners Capital A/c (loss on realisation)
		P: 20,000
		Q: 12,000
		R: 8,000
	1,00,000		1,00,000

Partners Capital Acounts

Particulars	P	Q	R	Particulars	P	Q	R
To Realization A/c	20,000	12,000	8,000	By Balance b/d	5,000	3,000	2,000
				By Deficiency A/c	15,000	9,000	6,000
	20,000	12,000	8,000		20,000	12,000	8,000

Deficiency Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Partners Capital A/cs :
P	15,000	By Bank Loan A/c	18,000
Q	9,000	By Creditors	12,000
R	6,000
	30,000		30,000

Bank Loan Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Deficiency A/c	18,000	By Balance b/d	60,000
To Cash A/c	Revaluation of 42,000
	60,000		60,000

Creditors Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Deficiency A/c	12,000	By Balance b/d	40,000
To Cash A/c	28,000
	40,000		40,000

Cash Account

Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
To Balance b/d	10,000	By Bank Loan A/c	42,000
To Realisation A/c	60,000	By Creditors A/c	28,000
	70,000		70,000

Note :

The total deficiency of the partners i.e. the firm is ₹30,000. This is shared between the external liabilities in the ratio of their amount outstanding ₹60,000 : ₹40,000 = 3 : 2

Bank Loan A/c	Dr.	18,000
Creditors A/c	Dr.	12,000
To Deficiency A/c			30,000

Return of Premium to a partner on dissolution before expiry of term :

Conditions :

(i) A partner was admitted in the partnership firm for a fixed term period,

(ii) Such partner had paid a premium for goodwill at the time of admission.

(iii) The partnership firm  has dissolved.

Exceptions : The partner will not be entitled to any claim under any of the following conditions :

(i) the firm is dissolved due to death of a partner

(ii) the dissolution is due to the misconduct of the partner claiming refund

(iii) dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

Amount of Revaluation of Refund: the amount to be repaid will be determined having regard to the terms upon which the admission was made and to the length of the period agreed upon and the period that has expired.

Liability of other partners: the amount of refund payable shall be borne by the other partners in their profit sharing ratio

Illustration 30

X was admitted into partnership for 5 years, for which he paid a premium of ₹ 1,20,000. After 39 months, the partnership firm was dissolved due to misconduct of Mr.Z , another partner of the firm. Y, being the third partner. Profit Sharing Ratio : Y : Z : X = 5 : 3 : 2.

Solution:

X is entitled to claim the refund of premium paid at the time of admission, since the admission was for a fixed term period and the firm is getting dissolved due to a misconduct of Mr.Z, another partner of the firm.

The amount of refund is

= (Total Premium Paid × Unexpired term of the partnership)/Total term of the partnership

= 1,20,000 × 21/60 = Rs.42,000

This shall be shared by the other partners Y and Z in their profit sharing ratio 3 : 2.

Y’s Capital A/c	Dr.	25,200
Z’s Capital A/c	Dr.	Revaluation of 16,800
To X’s Capital A/c			42,000
(Being premium paid during admission now refunded to X after adjusting capitals of other partners)

Piecemeal Distribution

Till now the discussion was based on the implicit assumption that all assets were realized and settlement was done on the same date. In fact, on the dissolution of a partnership, assets are sometimes realized gradually over a period of time. In such a case it may be agreed that different parties are to be paid in order of preference as and when assets are realized without unnecessarily waiting for the final realization of all the assets.

The order of the payment will be as follows :

(i) Realisation expenses

(ii) For provision for expenses that are to be made

(iii) Preferential creditors (say, Income Tax or any payment made to the Government)

(iv) Secured Revaluation of creditors – upto the amount realized from the disposal of assets by which they are secured and for the balance, if any, to be paid to unsecured creditors

(v) Unsecured creditors – in proportion to the amount of debts, if more than one creditor

(vi) Partners’ loan – if there is more than one partner – in that case, in proportion to the amount of loan

(vii) Partners’ capital – the order of payment may be made by any one of the following two methods:

1. Surplus Capital Method/ Proportionate Capital Method/ Highest Relative Capital Method
2. Maximum Possible Loss Method

Surplus Capital Method

This method is applicable when all the partners are solvent. The following steps are to be followed to calculate the surplus capital:

1. Adjusted capital: the balance lying in the capital accounts of the partners are adjusted with the undistributed profit or loss, drawings and reserves.

2. Base capital: the adjusted capital is divided by the unit of profit share and the minimum amount is called the base capital. For example if profit sharing ratio is 5:3:2 the respective capitals will be divided by 5, 3 and 2 respectively.

3. Proportionate capital: the amount is ascertained by multiplying the base capital with unit of profit share. For example if base capital is ₹ 20,000 it is multiplied by 5,3 and 2 respectively.

4. Surplus capital: it is ascertained by the difference of adjusted capital and the proportionate capital.

The process continues until we get an absolute surplus.

Example: (Computation of Surplus Capital)

Balance of Capital Accounts

X : ₹ 35,000, Y: ₹ 33,000, AND  Z : ₹ 18,000.  Reserves ₹ 10,000. Profit sharing ratio 5:3:2.

Statement Showing Surplus Capital

Particulars		(₹)	X (₹)	Y (₹)	Z(₹)
Capital Balance	A		35,000	33,000	18,000
Add Reserves (5:3:2)	B		5,000	3,000	2,000
Adjusted Capital	C		40,000	36,000	20,000
Unit Share of Profit	D		5	3	2
Capital per Unit of Profit Share	E		8,000	12,000	10,000
Base Capital (being minimum)	F	8,000
Unit Share of Profit	G		5	3	2
Proportionate Capital (F × G)	H		40,000	24,000	16,000
Surplus Capital (C – H)	I		0	12,000	4,000
Unit Share of Profit	J			3	2
Capital per Unit of Profit Share	K			4,000	2,000
Base Capital (being minimum)	L	2,000
Unit Share of Profit	M			3	2
Proportionate Capital (L × M)	N			6,000	4,000
Absolute Surplus Capital (I – N)	O			6,000	0

 Implication:

 The above table indicates that Y will get the first preference of settlement by ₹ 6,000. Thereafter, Y and Z will be 
settled in the ratio of 3:2. Any balance left will then be open to X Y and Z in the ratio of 5:3:2. 

Example:  (Distribution of Cash)

A, B and C were partners sharing profits and losses as 2:1:1. The balance sheet as on 31.03.2022 when they dissolved their partnership was as under:

Liabilities	(₹)	Assets	(₹)
Capital :		Sundry assets	1,85,000
A	60,000	Cash	Revaluation of 15,000
B	50,000
C	30,000
Reserves	10,000
B’s Loan	20,000
Creditors	20,000
Government Due	10,000
	2,00,000		2,00,000

₹ 2,000 was spent for packaging of materials before sale. The realization were made on different dates as under:

April ₹15,000; May ₹ 20,000; June ₹ 30,000; July ₹ 60,000; August ₹40,000.

The collections were distributed as and when realized. Prepare a statement showing the distribution of cash collected.

Solution

Computation of Surplus Capital

Particulars		(₹)	X (₹)	Y (₹)	Z(₹)
Capital Balance	A		60,000	50,000	30,000
Add Reserves (2:1:1)	B		5,000	2,500	2,500
Adjusted Capital	C		65,000	52,500	32,500
Unit Share of Profit	D		2	1	1
Capital per Unit of Profit Share	E		32,500	32,500	32,500
Base Capital (being minimum)	F	32,500
Unit Share of Profit	G		2	1	1
Proportionate Capital (F × G)	H		65,000	32,500	32,500
Surplus Capital (C – H)	I		0	0	0
Unit Share of Profit	J		-	-	-
Capital per Unit of Profit Share	K		-	-	-
Base Capital (being minimum)	L		-	-	-
Unit Share of Profit	M		-	-	-
Proportionate Capital (L × M)	N		-	-	-
Absolute Surplus Capital (I – N)	O		-	-	-

Statement Showing Distribution of Cash

Particulars	(₹)	External Debt		B’s Loan(₹)	Partners Capital
		Govt. Due (₹)	Creditors (₹)		A (₹)	B (₹)	C (₹)
Balance as on 31.03.2022	15,000	10,000	20,000	20,000	65,000	52,500	32,500
Less: expense for packaging	2,000
	13,000
Payment of govt. dues	10,000	10,000
	3,000	NIL
Payment to creditors	3,000		3,000
	NIL		17,000	20,000	65,000	52,500	32,500
1ST Realisation	15,000
Payment to creditors	15,000		15,000
			2,000	20,000	65,000	52,500	32,500
2nd Realisation	20,000
Payment to creditors	2,000		2,000
Paid to B	18,000			18,000
				2,000	65,000	52,500	32,500
3rd Realisation	30,000
Paid to B	2,000			2,000
Payment of surplus capital to  B	20,000					20,000
Payment to partners (2:1:1)	8,000				4,000	2,000	2,000
					61,000	30,500	30,500
4th Rrealisation	60,000
Paid to partners (2:1:1)	60,000				30,000	15,000	15,000
					31,000	15,500	15,500
5th Realisation	40,000
Paid to partners (2:1:1)	40,000				20,000	10,000	10,000
Loss on Realisation					11,000	5,500	5,500

Surplus Capital Method/ Proportionate Capital Method/ Highest Relative Capital Method

Under this method, actual capital of the partners on the date of dissolution is compared with their proportionate capital (determined on the basis of minimum capital per unit of profit) to determine Revaluation of surplus capital of the partners. Surplus capital is paid first and any balance left thereafter is distributed in the profit sharing ratio. This ensures that final balances of partners show their share of realisation profit/loss and thus, no settlement need to be dome at that point of time.

 Illustration 31

The partners A, B and C have called you to assist them in winding up the affairs of their partnership on 30th June, 20X1. Their Balance Sheet as on that date is given below :

Liabilities	₹	Assets	₹
Sundry Creditors	17,000	Cash at bank	6,000
Capital Accounts:		Sundry Debtors	22,000
A	67,000	Stock in trade	14,000
B	45,000	Plant and equipment	99,000
C	31,500	Loan -A	12,000
		Loan -B	7,500
	1,60,500		1,60,500

(1) The partners share profit and losses in the ratio of 5:3:2

(2) Cash is distributed to the partners at the end of each month

(3) A summary of liquidation transactions are as follows:

July 20X1

     ₹ 16,500 – collected from Debtors; balance is uncollectable.

     ₹ 10,000 – received from sale of entire stock.

     ₹ 1,000 – liquidation expenses paid.

     ₹ 8,000 – cash retained in the business at the end of the month.

August 20X1

     ₹ 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a piece of equipment for ₹ 10,000 (book value ₹ 4,000).

     ₹ 2,500 – cash retained in the business at the end of the month.

September 20X1

     ₹ 75,000 – received on sale of remaining plant and equipment.

     ₹ 1,000 – liquidation expenses paid. No cash retained in the business.

Required : Prepare a schedule of cash payments as of September 30, showing how the cash was distributed under ‘Highest Relative Capital Method’.

Solution:

 Statement showing distribution of cash

Particulars	Creditors		Capitals
	₹	₹	₹	₹	₹
Balance Due after loan (W.N.(i))		17,000	55,000	37,500	31,500
July
Balance available	6,000
Realization less expenses and cash retained	17,500
Amount available and paid	23,500	17,000	-	-	6,500
Balance due			55,000	37,500	25,000
August
Opening balance	8,000
Expenses paid andbalance carried forward	4,000
Available for distribution	4,000
Cash paid to ‘B’ and Equipment given to C.				4,000	10,000
(Excess paid to ‘C’ ₹ 7,333)			55,000	Revaluation of 33,500	15,000
September
Opening balance	2,500
Amount realized less expenses	74,000
Amount paid to partners	76,500		41,500	25,400	9,600
Loss on Realisation			13,500	8,100	5,400

Working Note:

(i) Highest Relative Capital Basis

	A	B	C
	₹	₹	₹
Scheme of Payment for july
Balance of Capital Accounts	67,000	45,000	31,500
Less: Loans	(12,000)	(7,500)	-
A	55,000	37,500	31,500
Profit Sharing ratio	5	3	2
Capital Profit sharing ratio	11,000	12,500	15,750
Capital in profit sharing ratio, taking A's capital as  base
B	55,000	33,000	22,000
Excess of C's Capital and B's Capital (A-B)		4,500	9,500
Profit sharing ratio		3	2
Capital profit sharing ratio		1,500	4,750
Capital in profit sharing
Ratio taking B's Capital as base		4,500	3,000
Excess of C's Capital over B			6,500

(ii) Statement showing the Calculation of Cash Available for Distribution

Particulars	July ₹	August ₹	September ₹
Opening  Balance	6,500	8,000	2,500
Add : Net amount realised	25,000	(1,500)	74,000
(Gross amount — Expenses)
Less : Closing Balance	8,000	2,500	-
Amount available for distribution (A + B – C)	23,500	4,000	76,500

(iii) Statement showing the Manner of Distribution of amount available in August and September

 

Particulars	July ₹	August ₹	September ₹
First ₹ 7,500	-	4,500	3,000
Balance ₹ 83,000	41,500	24,900	16,600
(Cash and Equipment)	41,500	29,400	19,600
Less : Actual Distribution in August	-	4,000	10,000
Manner of Distribution in September	41,500	25,400	9,600

Illustration 32

The firm of Blue Collars presented you with the following Balance Sheet drawn as on 31st March 20X1 :

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	37,700	Cash in hand	3,000
Capital Accounts :		Sundry Debtors	34,000
L : 40,000		Stock in trade	39,000
K : 30,000		Plant and Machinery	51,000
J : 27,000	97,000	Current Accounts :
		K:  4,000
		J :  3,000	7,000
	1,34,000		1,34,000

Partners shared profits and losses in the ratio of 4 : 3 : 3. Due to difference among the partners, it was decided to wind up the firm, realise the assets and distribute cash among the partners at the end of each month.

The following realisations were made :

(i) May — ₹ 15,000 from debtors and ₹ 20,000 by sale of stock. Expenses on realisation were ₹ 500.

(ii) June — Balance of debtors realised ₹ 10,000. Balance of stock fetched ₹ 24,000.

(iii) August — Part of machinery was sold for ₹ 18,000. Expenses incidental to sale were ₹ 600.

(iv) September — Part of machinery valued in the books at ₹ 5,000 was taken by K, in part discharge at an agreed

value of ₹ 10,000. Balance of machinery was sold for ₹ 30,000 (net).

Partners decided to keep a minimum cash balance of ₹ 2,000 in the first 3 months and ₹ 1,000 thereafter.

Required : Show how the amounts due to partners will be settled.

Solution:

(i) Statement showing the Distribution of Cash

(According to Proportionate Capital Method)

	Particulars	Creditors ₹	Capital
			L	K	J
			₹	₹	₹
A	Amount due	37,000	40,000	26,000	24,000
B	Amount distribution as on 31st May	35,500	-	-	-
C	Balance Due (A - B)	1,500	40,000	26,000	24,000
D	Amount Distributed as on 30th June
	First ₹ 1,500	1,500
	Next ₹ 5,333	-	5,3333	-	-
	Next ₹ 4,667	-	2,667	2,000	-
	Balance ₹ 22,500	-	9,000	6,750	6,750
E	Balance due (C - D)		23,000	17,250	17,250
F	Amount Distributed as on 31st August		7,360	5,520	5,520
G	Balance Due (E - F)		Revaluation of 15,640	11,730	11,730
H	Add : Profit on realisation (₹ 41,000 – ₹ 39,100)		760	570	570
I	Amount Distributed (including Machinery taken by K) as on 30th September * Includes value of Machinery ₹ 10,000 and Cash ₹ 2,300		16,400	12,300*	12,300

Working Notes :

(i) Assumption : As the firm is dissolved due to difference among the partners, all partners are presumed to be solvent and the problem has been worked out on the basis of the highest relative capital.

(ii) Statement showing the Calculation of Highest Relative Capitals

	Particulars	L ₹	K ₹
A	Actual Capitals	40,000	26,000	24,000
B	Profit sharing ratio	4	3	3
C	Actual Capitals ÷ Profit ratio	10,000	8,667	8,000
D	Proportionate Capitals taking J’s Capital as Base Capital	32,000	24,000	24,000
E	Surplus Capital of L and K (A - D)	8,000	2,000	-
F	Profit sharing ratio	4	3	-
G	Surplus Capital ÷ Profit sharing ratio	2,000	667	-
H	Revised Proportionate Capital of L and J	2,667	2,000	-
I	Revised Surplus Capital of L (E - H)	5,333	-	-

While distributing surplus among partners, 1st instalment up to ₹ 5,333 will be paid to L, next instalment up to ₹ 4,667 will be distributed between L and K in the ratio of 4 : 3 and the Balance among L, K and J in the ratio of 4 : 3 : 3.

(iii) Statement showing the Calculation of Cash available each month

	Particulars	May	June	August	September
		₹	₹	₹	₹
A	Opening Balance	3,000	2,000	2,000	1,000
B	Add : Amount realised Less Expenses	34,500	34,000	17,400	30,000
C	Less : Closing blance	2,000	2,000	1,000	-
D	Total Cash available for Distribution (A+B–C)	35,500	34,000	18,400	31,000

(iv) Realisation Account

Particulars	Amount ₹	Particulars	Amount ₹
To Sundry Debtors	34,000	By Sundry Creditors	37,000
To Stock in trade	39,000	By Cash/Bank	1,17,000
To Plant and Machinery	51,000	By L (Assets taken over)	10,000
To Cash/Bank :
Creditors	37,000
Expenses	1,100
To Profit transferred to Capital A/c	1,900
	1,64,000		1,64,000

 Illustration 33

A partnership firm was dissolved on 30th June, 20X2. Its Balance Sheet on the date of dissolution was as follows :

Liabilities	Amount (₹)	Assets	Amount (₹)
Capitals :
Atrik	38,000	Cash	5,400
Mohit	24,000	Sundry Assets	94,600
Rupa	18,000
Loan A/c — Mohit	5,000
Sundry Creditors	15,000
	1,00,000		1,00,000

The assets were realised in instalments and the payments were made on the proportionate capital basis. Creditors were paid ₹ 14,500 in full settlement of their account. Expenses of realisation were estimated to be ₹ 2,700 but actual amount spent on this account was ₹ 2,000. This amount was paid on 15th September. Draw up a Memorandum of distribution of Cash, which was realised as follows :

On 5th July	₹12,600
On 30th August	₹ 30,000
On 15th September	₹ 40,000

The partners shared profits and losses in the ratio of 2 : 2 : 1. Give working notes.

Solution:

Statement Showing the Distribution of Cash

(According to Proportionate Capital Method)

	Particulars	Creditors ₹	Mohit’s Loan ₹	Atrik ₹	Mohit ₹	Rupa ₹
A	Balance Due	15,000	5,000	38,000	24,000	18,000
B	Cash paid (₹ 5,400 – ₹ 2,700)	2,700	-	-	-	-
C	Balance unpaid (A - B)	Revaluation of 12,300	5,000	38,000	24,000	18,000
D	1st installment of ₹ 12,600	11,800	800	-	-	-
E	Balance unpaid (C - D)	500	4,200	38,000	24,000	18,000
F	Less : Written-off	500
G	2nd installment of ₹ 30,000		4,200	16,320	2,320	7,160
H	Balance unpaid (E-F-G)			21,680	21,680	10,840
I	3rd installment (₹ 40,000 + ₹ 700)			16,280	16,280	8,140
J	Unpaid Balance (H-I) = Loss on Realisation			5,400	5,400	2,700

Working Notes :

(i) Statement showing the Calculation of Highest Relative Capitals

	Particulars	Atrik ₹	Mohit ₹	Rupa ₹
A	Actual Capitals	38,000	24,000	18,000
B	Profit-sharing ratio	2	2	1
C	Actual Capitals ÷ Profit Sharing Ratio	19,000	12,000	18,000
D	Proportionate Capitals taking Mohit’s Capital as Base Capital	24,000	24,000	12,000
E	Surplus Capital [A-D]	14,000	Nil	6,000
F	Surplus Capital ÷ Profit Sharing Ratio	7,000	-	6,000
G	Revised Proportionate capitals taking Rupa’s Capital as the basis	12,000	-	6,000
H	Revised Surplus Capital (E - G)	2,000	-	-

(ii) Distribution of Second Instalment of ₹ 30,000

Particulars	Mohit’s Loan	Atrik	Mohit	Rupa
First ₹ 4,200	4,200	-	-	-
Next ₹ 2,000 (Absolute Surplus)		2,000	-	-
Next ₹ 18,000 (Balance of Surplus)		12,000	-	6,000
Balance ₹ 5,800 (2 : 2 : 1)	4,200	2,320	2,320	1,160
Total 30,000		16,320	2,320	7,160

 Illustration 34

East, South and North are in partnership sharing profits and losses in the ratio 3 : 2 : 1 respectively. They decide to dissolve the business on 31st July, 20X1 on which date their Balance Sheet was as follows :

Liabilities	Amount ₹	Assets	Amount ₹
Capital Accounts :		Land and Buildings	30,810
East	38,700	Motor car	5,160
South	10,680	Investment	1,080
North	11,100	Stock	19,530
Loan account : North	3,000	Debtors	11,280
Creditors	10,320	Cash	5,940
	73,800		73,800

The assets were realised piecemeal as follows and it was agreed that cash should be distributed as and when realised :

	₹
14th August	10,380
20th September	27,900
16th October	3,600
North took over investment as follows at a value of:-
15th November	1,260
18th November	19,200

Dissolution expenses were originally provided for an estimated amount of ₹ 2,700, but actual amount spent on 25th October was ₹ 1,920. The creditors were settled for ₹ 10,080.

Required : Prepare a statement showing distribution of cash amongst the partners, according to Proportionate Capital Method.

Solution:

Statement Showing the Distribution of Cash

(According to Proportionate Capital Method)

	Particular	Creditors ₹	Loan ₹	East ₹	South ₹	North ₹
A	Balance Due	10,320	3,000	38,700	10,680	11,100
B	Paid to Creditors [₹ 5,940 – ₹ 2,700]	3,240	-	-	-	-
C	Balance Due (A - B)	7,080	3,000	38,700	10,680	11,100
D	Amount paid on 14th August	6,840	3,000	540
		240	-	Revaluation of 38,160	10,680	11,100
E	Less : Written off	(240)	-	-	-	-
F	Balances Due (D - E)			38,160	10,680	11,100
G	Amount paid on 20th September			4,860	-	-
	(i) First 4,860 (i.e. ₹ 5,400 – ₹ 540)			33,300	10,680	11,100
	(ii) Balance ₹ 23,040			17,280	-	5,760
H	Balance Due (F - G)			16,020	10,680	5,340
I	Amount paid on 16th October			1,800	1,200	600
J	Balance Due (H-I)			14,220	9,480	4,740
K	Amount paid on 25th October (being excess overestimated expenses ₹ 780)			390	260	130
L	Balance due (J - K)			13,830	9,220	4,610
M	Cash brought in by North			630	420	210
N	Balance Due (L-M)			13,200	8,800	4,400
O	Amount paid on 18th November			9,600	6,400	3,200
P	Balance unpaid (N-O)			3,600	2,400	1,200

Working Note :

Statement Showing the Calculation of Highest Relative Capitals

	Particulars	East ₹	South ₹	North ₹
A	Actual Capitals	38,700	10,680	11,100
B	Profit Sharing Ratio	3	2	1
C	Actual Capital ÷ Profit Sharing Ratio	12,900	5,340	11,100
D	Proportionate capitals taking South’s Capital as Base Capital (being the smallest) × PSR	16,020	10,680	5,340
E	Surplus capital (i.e. Excess of Actual Capitals over proportionate capital) [A-D]	22,680	-	5,760
F	Profit Sharing Ratio	3	-	1
G	Surplus Capital ÷ Profit Sharing Ratio	7,560	-	5,760
H	Revised Proportionate Capitals taking North’s Capital as Base Capital	17,280	-	5,760
I	Revised Surplus Capital [E-H]	5,400	-	-
J	Distribution Sequence
	First ₹ 5,400 [To East]	5,400	-	-
	Next ₹ 23,040 [To East & North in the ratio of 3 : 1]	17,280	-	5,760
	Balance ₹ 19,200 [To East, South & North in the ratio of 3 : 2 : 1]	9,600	6,400	3,200

Maximum Loss Method :

Steps

(1)  Prepare a statement showing distribution of cash

(2)  Pay off the external Liabilities

(3)  After  all the payment is made for the external liabilities, the partners will be paid off.
Total Due of Partners     xxx
Less : Net/Balance of Realisation   (x)
Maximum Loss   xxx

(4)  The maximum loss shall be shared amongst the partners in their profit sharing ratio, as if, there will be no further realisation.

(5)  If any of the partner capitals, after step (4) is negative, that partner shall be treated like an insolvent partner.

(6)  The deficiency of the Revaluation of insolvent partner as per step (5) shall be shared by the other solvent partners (i.e. those partners who has positive capital balances) in their capital contribution ratio as per Garner vs. Murray Rule.

(7)  Repeat the steps (3) to (6) till final realisation.

PROBLEMS ON MAXIMUM LOSS METHOD 

Illustration 35

The following is the Balance Sheet of X, Y and Z, who were sharing in the ratio 5 : 3 : 2 on 31st December, 20X1 when they decided to dissolve the partnership.

Liabilities	Amount (₹)	Assets	Amount (₹)
X’s Capital	55,0000	Cash	20,000
Y’s Capital	37,500	Other assets	13,04,000
Z’s Capital	31,500
Y’s Loan	2,00,000
Creditors	10,00,000
	13,24,000		13,24,000

Note :

There was a bill for ₹ 4,000 due on 1.4.20X2 under discount.

Other assets realised as under :

1st January : ₹ 8,85,000, 1st February : ₹ 3,00,000 ; 1st March : ₹ 8,000; 1st April : ₹ 5,000; 1st May : ₹ 10,000. The expenses of realisation were expected to be ₹ 5,000, but ultimately amounted to ₹ 4,000 only and were paid on 1st May. The acceptor of the bill under discount met the bill on the due date.

Required : Prepare a statement showing the monthly distribution of cash according to Maximum Loss Method.

Solution:

Statement showing the Distribution towards Firm’s Outside debts’ & Partners’ Loan

	Particulars	Creditors (₹)	Y’s Loan (₹)
A	Amount Due	10,00,000	2,00,000
B	Amount paid on 1st Jan. (₹ 20,000 + ₹ 8,85,000 – ₹ 5,000)	9,00,000	-
C	Balance Due (A - B)	1,00,000	2,00,000
D	Amount paid on 1st February	1,00,000	2,00,000
E	Balance Due (C - D)	Nil	Nil

Statement showing the Distribution of Cash

(According to Maximum Loss Method)

	Particulars	Total	X	Y	Z
		₹	₹	₹	₹
(i)	Distribution of ₹ 4,000
A	Amount due as on 1st March	1,24,000	55,000	37,500	31,500
	Less : Max. Possible Loss if the remaining nothing (₹ 1,24,000 – ₹ 4,000) in the ratio of 5 : 3 : 2	1,20,000	60,000	36,000	24,000
	Note : Cash available = ₹ 8,000 – ₹ 4,000	-	5,000	(2,717)	(2,283)
	(Reserved for discounted B/R) = ₹ 4,000
	Adjustment of X’s Deficiency between Y and Z in their Capital ratio i.e. 375 : 315
	Adjustment of Y’s Deficiency (charged to Z)	-	-	Revaluation of 1,217	(1,217)
B	Cash paid as on 1st March	4,000	-	-	4,000
(ii)	Distribution of ₹ 9,000 (including amount kept reserved for B/R no longer required)
C	Balance due (A-B)	1,20,000	55,000	37,500	27,500
	Less : Max. Possible Loss (₹ 1,20,000 – ₹9,000)	1,11,000	55,500	33,300	22,200
	Note : Cash available = ₹ 5,000 + ₹ 4,000 = ₹ 9,000		(500)	4,200	5,300
	Adjustment of X’s Deficiency between Y and Z in their Capital ratio i.e. 375 : 315	-	500	(272)	(228)
D	Cash paid as on 1st April	9,000	-	3,928	5,072
(iii)	Distribution of ₹ 11,000
E	Balance due (C-D)	1,11,000	55,000	33,572	22,428
	Less : Max. Possible Loss (₹ 1,11,000 – ₹ 11,000)	1,00,000	50,000	30,000	20,000
F	Cash paid as on 1st May	11,000	5,000	3,572	2,428
G	Unpaid Balance (E - F)	1,00,000	50,000	30,000	20,000

 Illustration 36

The following is the Balance Sheet of P, Q and R on 31st August 20X1 when they decided to dissolve the partnership. They share profits in the ratio of 2 : 2 : 1.

Liabilities	Amount ₹	Assets	Amount ₹
Creditors	2,000	Sundry Assets	48,500
P’s Loan	5,000	Cash	500
P’s Capital	15,000
Q’s Capital	18,000
R’s Capial	9,000
	49,000		49,000

The assets realised the following sums in instalments.

I— ₹ 1,000, II— ₹ 3,000, III— ₹ 3,900, IV— ₹ 6,000, V— ₹ 20,000.

The expenses of realization were expected to be ₹ 500 but ultimately amounted to ₹ 400 only.

Required : Show, how at each stage, the cash received should be distributed among partners according to Maximum Loss Method.

Solution:

Statement showing the Realisation and Distribution of Cash

Installments	Realisation ₹	Creditors ₹	Partners’ Loans ₹	Partners’ Capital ₹
(I) (After taking into account cash and amount set aside for expenses)
(II)	1,000	1,000
(III)	3,000	1,000	2,000
(IV)	3,900		3,000	9000
(V) (including saving in expenses)	6,000	-	-	6,000
	20,100	-	-	20,100
	34,000	2,000	5,000	27,000

Statement showing the Distribution of Cash among partners

(According to Maximum Loss Method)

	Particulars	Total	P	Q	R
(i)	Distribution of ₹ 900
A	Balance Due	42,000	15,000	18,000	9,000
B	Less : Max. Possible loss, if the remaining assets prove to be worthless (₹ 42,000 – ₹ 900) in the ratio (2 : 2 : 1)	41,100	16,440	16,440	8,220
C	Deficiency of P’s Capital charged to Q and R in the ratio of their Capitals i.e., 18,000 : 9,000 (Garner vs. Murray	-	1,440	(960)	(480)
D	Amount paid	900	-	600	300
(ii)	Distribution of ₹ 6,000
E	Balance after payment (A -D)	41,100	15,000	17,400	8,700
F	Less : Max. Possible loss (₹ 41,100 – ₹ 6,000)	35,100	Revaluation of 14,040	14,040	7,020
G	Amount paid	6,000	960	3,360	1,680
(iii)	Distribution of ₹ 20,100
H	Balance after payment (E - G)	35,100	14,040	14,040	7,020
I	Less : Max. Possible loss (₹ 35,100 – ₹ 20,100)	15,000	6,000	6,000	3,000
J	Amount paid	20,100	8,040	8,040	4,020
K	Unpaid balance (H - J)	15,000	6,000	6,000	3,000

Illustration 37

Rahul, Roshan and Rohan were in partnership sharing profits and losses in the ratio of 3 : 2 : 1 respectively. The partnership was dissolved on 30th June, 2013 when the position was as follows :

Liabilities	Amount Rs.	Assets	Amount Rs.
Capitals :		Cash in hand	28,000
Rahul	1,40,000	Sundry Debtors	2,94,000
Roshan	70,000	Stock in trade	1,12,000
Rohan	14,000
Creditors	2,10,000
	4,34,000		4,34,000

There was bill for Rs. 10,000, due on 30th November, 2013, under discount. It was agreed that the net realisations should be distributed in their due order (at end of each month) but as safely as possible. The realisations and expenses were as under :

Date	Stock and Debtors Rs.	Expenses Rs.
31st July	84,000	7,000
31st August	1,26,000	5,400
30th September	70,000	4,900
31st October	77,000	3,500
30th November	35,500	3,500

The Stock was completely disposed off and amounts due from debtors were realised, the balance being irrecoverable. The acceptor of the bill under discount met the billl on the due date. Prepare a Statement showing the piecemeal distribution of cash according to Maximum Loss Method.

Solution:

Statement showing the Distribution of Cash

(According to Maximum Loss Method)

	Particulars	Creditors Rs.	Rahul Rs.	Roshan Rs.	Rohan Rs.
A	Balance Due	2,10,000	1,40,000	70,000	14,000
B	Cash on hand on 30th June paid to creditors	28,000	-	-	-
C	Balance outstanding (A – B)	1,82,000	1,40,000	70,000	14,000
D	Cash paid on 31st July	77,000	-	-	-
E	Balance outstanding (C – D)	1,05,000	1,40,000	70,000	14,000
F	Rs. 1,05,000 paid to creditors on 31st August	1,05,000	-	-	-
G	Balance outstanding (E – F)	-	1,40,000	70,000	14,000
	Balance available for distribution (Rs.1,20,600 – Rs. 1,05,000 – Rs. 10,000) = Rs. 5,600
	Less : Maximum loss (Rs. 2,24,000 – Rs. 5,600) in ratio of 3 : 2 : 1		(1,09,200)	(72,800)	(36,400)
	Balance		Revaluation of 30,800	(2,800)	(22,400)
	Deficiency of Roshan and Rohan’s capital charged to Rahul		(25,200)	2,800	22,400
H	Cash paid on 31st August		5,600	-	-
I	Balance outstanding (G – H)		1,34,400	70,000	14,000
	Less : Maximum Loss (Rs. 2,18,400 – Rs. 65,100)		(76,650)	(51,100)	(25,550)
	Balance		57,750	18,900	(11,550)
	Deficiency of Rohan’s capital charged to Rahul and Roshan (2 : 1)		(7,700)	(3,850)	11,550
J	Cash paid on 30th September		50,050	15,050	-
K	Balance outstanding (I – J)		84,350	54,950	14,000
	Less : Maximum loss (Rs. 1,53,300 – Rs. 73,500		(39,900)	(26,600)	(13,300)
L	Cash paid on 31st October		44,450	28,350	700
M	Balance outstanding (K – L)		39,900	26,600	13,300
	Less : Maximum loss (Rs. 79,800 – Rs.42,000*)		(18,900)	(12,600)	(6,300)
N	Cash paid on 30th November		21,000	14,000	7,000
O	Unpaid Balance (M – N)		18,900	12,600	6,300

*Note : Cash available on 30th November = (Rs. 35,500 – Rs. 3,500) + Rs. 10,000 (Reserved for Discounted B/R, now no longer required) = Rs. 42,000.

 Illustration 38

E, F and G were partners in a firm, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Due to extreme competition, it was decided to dissolve the partnership on 31st December 20X1. The Balance Sheet on that date was as follows :

Liabilities		Amount ₹		Amount ₹
Capitals Accounts :			Machinery	1,54,000
E	1,13,100		Furniture and Fittings	25,800
F	35,400		Investments	5,400
G	31,500	1,80,000	Stock	97,700
Current Accounts :			Debtors	56,400
E	26,400		Bank	29,700
G	6,000	32,400	Current Account: F	18,000
Reserves		1,08,000
Loan Account : G		15,000
Creditors		51,600
		3,87,000		3,87,000

The realisation of assets is spread over the next few months as follows :

February, Debtors, ₹ 51,900; March : Machinery, ₹ 1,39,500; April, Furniture, etc. ₹ 18,000; May : G agreed to take over Investments at ₹ 6,300; June, Stock, ₹ 96,000.

Dissolution expenses, originally provided, were ₹ 13,500, but actually amounted to ₹ 9,600 and were paid on 30th April. The partners decided that after creditors were settled for ₹ 50,400, all cash received should be distributed at the end of each month in the most equitable manner.

Required : Prepare a statement of actual cash distribution as is received following “Maximum Loss basis”.

Solution:

Statement showing the Distribution of Cash

(According to Maximum Loss Method)

		Creditors G’s Loan		Capital Accounts
				E	F	G	Total
		₹	₹	₹	₹	₹	₹
A	Balance due [Creditors net of discount]	51,600	15,000	1,93,500	53,400	55,500	3,02,400
B	Paid to Creditors and G	50,400	15,000	-	-	-	-
C	Balance due (A - B)	-	-	1,93,500	53,400	55,500	3,02,400
	Max. Possible Loss if remaining assets fetch nothing (₹ 3,02,400 – ₹ 2,700) in the ratio of 3 : 2 : 1			1,49,850	99,900	49,950	2,99,700
	Adjustment of F’s Deficiency between E and G in the ratio of their fixed capitals i.e. 1,13,100 : 31,500			43,650	(46,500)	5,550
				(36,370)	46,500	(10,130)
	Balance Adjustment of G’s Deficiency			7,280	—	(4,580)
	(charged to E)			(4,580)		4,580
D	Cash paid to E on 28th Feb.			2,700	-	-	2,700
E	Balance due (C - D)			Revaluation of 1,90,800	53,400	55,500	2,99,700
F	Possible Max. Loss (₹ 2,99,700 – ₹ 1,39,500)			80,100	53,400	26,700	1,60,200
	Cash paid on 31st Mar.
	Balance Due (E - F)			1,10,700	-	28,800	1,39,500
G	Possible Max. Loss (₹1,60,200 – ₹ 21,900)			80,100	53,400	26,700	1,60,200
H	Cash paid on 30th April			69,150	46,100	23,050	1,38,300
I	Balance Due (G - H)			10,950	7,300	3,650	21,900
				69,150	46,100	23,050	1,38,300
J	Maximum Loss (₹1,38,300 – ₹ 6,300)			66,000	44,000	22,000	1,32,000
K	Cash brought in by G			3,150	2,100	1,050	(6,300)
L	Balance Due (I + K)			66,000	44,000	22,000	1,32,000
	Possible Max. Loss (₹ 1,32,000 – ₹ 96,000)			18,000	12,000	6,000	36,000
M	Cash paid on 30th June			48,000	32,000	16,000	96,000
N	Unpaid Balance (L – M)			18,000	12,000	6,000	36,000

Working Note :

Statement showing the Calculation of Cash Available for Distribution

	Particular	February ₹	March ₹	April ₹	May ₹	June ₹
A	Opening Balance	29,700	-	-	-	-
B	Add : Net Amount realised	51,900	1,39,500	18,000	-	96,000
C	Less : Provision for Expenses	13,500	-	-	-	-
D	Add : Provision no longer required	-	-	3,900	-	-
E	Cash available for distribution (A + B – C + D)	68,100	1,39,500	21,900	-	96,000

Exercise

CMA book unsolved questions solution