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Complete Practical Problems – Dissolution / Insolvency / Sale

Introduction

This chapter contains full-length solved problems similar to 15-mark questions asked in University exams.

Problem 1: Dissolution (Simple) – Preparation of Realisation A/c

Question: A and B (3:2) decided to dissolve the firm.

  • Balance Sheet:
    • Liabilities: Creditors (20,000), B's Loan (5,000), Capital: A (40,000), B (30,000).
    • Assets: Bank (5,000), Debtors (20,000), Stock (30,000), Furniture (40,000).
  • Adjustments:
    1. Assets realized: Debtors (18,000), Stock (25,000), Furniture (35,000).
    2. Creditors were paid at 5% discount.
    3. Realisation Expenses: ₹1,000 paid by firm.

Prepare Realisation Account.

Solution: Realisation Account Preparation 💡

Realisation Account

Dr.Particulars₹Particulars₹Cr.
To Sundry Assets:By Sundry Liabilities:
- Debtors20,000- Creditors20,000
- Stock30,000
- Furniture40,000
To Bank (Liabilities):By Bank (Assets Realized):
- Creditors (20k - 5%)19,000- Debtors18,000
- Expenses1,000- Stock25,000
- Furniture35,000
By Loss on Realisation:
- A (3/5)12,000
- B (2/5)8,000
Total1,10,000Total1,10,000

(Working Note: Total Loss = 1,18,000 (Dr total) - 98,000 (Cr Total) = 20,000).

Problem 2: Insolvency (Garner vs Murray)

Question: X, Y, Z share profits in 2:2:1. Z becomes insolvent.

  • Realisation Loss: ₹5,000 (Calculated).
  • Capital Balances (After Realisation Loss):
    • X: 10,000 (Cr)
    • Y: 6,000 (Cr)
    • Z: 4,000 (Dr - Deficiency)
  • Assume Capitals are Fixed.

Pass Journal Entries to close Z's Account applying Garner vs Murray.

Solution: Insolvency Deficiency Adjustment 💡

Working Note 1: Since Z is insolvent, his deficiency (₹4,000) must be borne by X and Y in their Capital Ratio.

  • Ratio of Capitals (X:Y) = 10,000 : 6,000 = 5:3.

Working Note 2: Solvent partners must bring cash for Realisation Loss first.

  • X Share of Loss: 2/5 of 5,000 = 2,000.
  • Y Share of Loss: 2/5 of 5,000 = 2,000.

Journal Entries:

  1. For Cash brought for Realisation Loss:

    Bank A/c ...Dr          4,000
    To X's Current A/c      2,000
    To Y's Current A/c      2,000

  2. For Distributing Deficiency:

    X's Current A/c ...Dr (5/8 of 4000)  2,500
Y's Current A/c ...Dr (3/8 of 4000)  1,500
    To Z's Current A/c               4,000

Problem 3: Sale to Company (Purchase Consideration)

Question: Firm M&N sold to P Ltd.

  • Assets taken over: ₹8,00,000.
  • Liabilities taken over: ₹2,00,000.
  • Purchase Consideration: ₹6,00,000 settled by issue of 40,000 shares of ₹10 each at ₹12 (Premium), and balance in Cash.

Calculate Mode of Payment.

Solution: Purchase Consideration Mode of Payment 💡

Total PC: ₹6,00,000.

1. Payment in Shares:

  • Number: 40,000
  • Issue Price: ₹12 (10 Face Value + 2 Premium)
  • Value: 40,000 × 12 = ₹4,80,000.

2. Payment in Cash (Balancing Figure):

  • Cash = Total PC - Shares
  • Cash = 6,00,000 - 4,80,000 = ₹1,20,000.

Conclusion: P Ltd pays ₹1.2 Lakhs in cash and gives shares worth ₹4.8 Lakhs.

Exam Tips

  1. Garner vs Murray: Always check if capitals are Fixed or Fluctuating. If fluctuating, create a working note to find "Capital before Realisation Loss".
  2. Realisation A/c: Don't forget to pay off unrecorded liabilities. Even if question is silent, outside liabilities MUST be paid at Book Value.
  3. Partner's Wife Loan: Treat as Outside Liability (Pay in Realisation).
  4. Partner's Loan: Treatment is separate (Bank A/c), NEVER in Realisation A/c.

Quiz Time! 🎯

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