Unit – 5
INSOLVENCY A/C, PARTNERSHIP DISSOLUTION, INSOLVENCY OF PARTNERS – GARNER vs Murray
A Partnership Firm is said to be dissolved when the business of the firm is closed down and the relation amongst the partners comes to an end. A Partnership Firm is also dissolved when any of its partner or all of its partners except one, becomes insolvent.
A court may also declare to dissolve a partnership firm on account of the following reasons-
- When a partner becomes an unsound mind person.
- When a partner is guilty of misconduct
- When the business cannot be carried on except at Losses.
Effects of dissolution:
- Upon dissolution, the activities of the firm are closed down
- The assets are disposed off, i.e. sold.
- Further, the liabilities are settled i.e. paid
- Any amount leftover is distributed amongst the partners.
The FAMOUS Garner vs Murray Rule:
According to the said rule, the loss on account of insolvency of a partner is a capital loss and so, the loss should be borne by the Solvent Partners in the ratio of their Capitals standing on the date of dissolution of the firm.
This means that, the solvent partners should bring in cash equivalent to their respective share of loss on realization and the loss due to the insolvency of a partner should be divided among the solvent partners in the ratio of capitals.
This rule cannot be applied when all the partners have become or declared insolvent, because there is no solvent person left to pay the dues of other partners.
Q1) Sun, Moon and Star were equal Partners. Their Financial position as on 31st March, 2011 was as under.
Balance Sheet as on 31st March, 2011
LIABILITIES | AMOUNT | AMOUNT | ASSETS | AMOUNT | AMOUNT |
Capital Accounts Sun Moon Star Current Accounts Sun Moon Sundry Creditors Bills Payable
|
20,000 16,000 1,000
2,000 1,000
| 37,000
3,000
8,000 2,000 50,000 | Current Account Star Premises Machinery Debtors Less: R.D.D. Furniture Profit & Loss A/c Cash |
11,000 200 |
13,000 9,800 8,500
10,800 900 6,000 1,000 50,000 |
On the above date they decided to dissolve the partnership firms and the results of realisation were as under.
1) Sun to take over premises at an agreed value of 5,000. Machinery realised at 80% of book value and Debtors at 8,300. Furniture was given away free of charge to the office boy.
2) Sundry Creditors were paid 4,100 in full satisfaction of their claims, whereas Bill Payable were discharged by Sun at 1,000 in full settlement.
3) Realisation expenses amounted 2,000 which were met by Sun.
4) Star becomes insolvent and 7,000 could be recovered from his private estate.
Give necessary Ledger Account to close the books of the firm.
Solution: In the books of Sun, Moon and Star
Realisation Account
PARTICULARS | AMOUNT | AMOUNT | PARTICULARS | AMOUNT | AMOUNT |
To Sundry Assets A/c Premises Machinery Debtors Furniture To Cash A/c (Creditors) To Sun’s Current A/c Bills Payable Realisation exps.
|
9,800 8,500 11,000 900
1,000 1,000
| 30,200
4,100
2,000
36,300 | By Sundry Liabilities Creditors Bills Payable By R.D.D. A/c By Sun’s Current A/c (Premises taken over) By Cash A/c Machinery Debtors
By Partner’s Current A/cs Sun Moon Star (Loss transferred) |
8,000 2,000
6,800 8,300
2,000 2,000 2,000
| 10,000
200 5,000
15,100
6,000
36,300 |
Combined Partner’s Capital Accounts
PARTICULARS
| SUN | MOON | STAR | PARTICULARS | SUN | MOON | STAR |
To Current A/c To Star’s Capital A/c To Cash A/c | 5,000
4,500 10,500
20,000 | 3,000
4,500 8,500
16,000 | 17,000
- -
17,000 | By Balance b/d By Cash A/c By Sun’s Capital A/c By Moon’s Capital A/c
|
20,000 -
-
-
20,000 |
16,000 -
-
-
16,000 |
1,000 7,000
4,500
4,500
17,000 |
Combined Partner’s Current Accounts
PARTICULARS | SUN | MOON | STAR | PARTICULARS | SUN | MOON | STAR
|
To Balance b/d To Profit & Loss A/c To Realisation A/c (Premises) To Realisation A/c (Loss)
| -
2,000
5,000
2,000
9,000 | -
2,000
-
2,000
4,000 | 13,000
2,000
-
2,000
17,000 | By Balance b/d By Realisation A/c (Bills payable &exps.) By Capital A/c | 2,000 2,000
5,000
9,000 | 1,000 -
3,000
4,000 | - -
17,000
17,000 |
Cash Account
PARTICULARS | AMOUNT | PARTICUARS | AMOUNT
|
To Balance b/d To Realisation A/c To Star’s Capital A/c | 1,000 15,100 7,000
23,100 | By Realisation A/c By Sun’s Capital A/c By Moon’s Capital A/c | 4,100 10,500 8,500
23,100 |
Q2) Mohan, Anand and Krishna are equal partners, whose Balance Sheet as on 30th April, 2012 was as under:
Balance Sheet as on 30th April, 2012
LIABILITIES | AMOUNT | ASSETS | AMOUNT |
Sundry Creditors Mohan’s Loan Capital Account Mohan Krishna
| 25,000 5,000
4,000 2,500
| Cash in Hand Stock Debtors Plant and Machinery Furniture and Fixture Land and Building Anand’s Capital A/c | 250 4,000 5,000 10,000 4,000 10,000 3,250
|
TOTAL | 36,500 | TOTAL | 36,500 |
Due to weak financial position of the partners, the firm is dissolved. Mohan and Krishna are not able to contribute anything and a sum of 1,000 received from Anand. All of them are declared insolvent. The assets are realised:
Stock 2,500, Plant & Machinery 5,000, Furniture & Fittings 1,000, Land & Building 4,000 and Debtors 2,750 only. Realisation expenses amounted 250’
You are required to prepare necessary Ledger Accounts to close the books of the firm.
Solution: In the books of Mohan, Anand and Krishna
Realisation Account
PARTICULARS
| AMOUNT | AMOUNT | PARTICULARS | AMOUNT | AMOUNT |
To Sundry Assets A/c Stock Debtors Plant&Machinery Furniture&Fittings Land&Building To Cash A/c (Realisation Ex.) |
4,000 5,000 10,000 4,000 10,000 | 33,000
250
33,250 | By Cash A/c Stock Plant&Machinery Furniture&Fittings Land&Building Debtors To Partners Capital A/c (Loss) Mohan Anand Krishna
|
2,500 5,000 1,000 4,000 2,750
6,000 6,000 6,000
| 15,250
18,000
33,250 |
Cash Account
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Balance b/d To Realisation A/c (Assets realised) To Anand’s Capital A/c | 250 15,250
1,000
| By Realisation A/c (Expenses) By Sundry Creditors | 250
16,250
|
16,500 | 16,500 |
Sundry Creditors A/c
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Cash A/c To Deficiency A/c
| 16,250 8,750
25,000 | By Balance b/d | 25,000
25,000 |
Combined Partner’s Capital Accounts
Particulars | Mohan | Anand | Krishna | Particulars | Mohan | Anand | Krishna
|
To Balance b/d To Realisation A/c (Loss) To Deficiency A/c |
-
6,000
3,000
|
3,250
6,000
-
|
-
6,000
-
| By Balance b/d By Cash A/c By Deficiency A/c By Mohan’ Loan |
4,000 -
-
5,000
|
- 1,000
8,250
-
|
2,500 -
3,500
-
|
9,000 | 9,250 | 6,000 | 9,000 | 9,250 | 6,000 |
Deficiency Account
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Anand’s Capital A/c To Krishna’s Capital A/c | 8,250 3,500
| By Sundry Creditors A/c By Mohan’s Capital A/c | 8,750 3,000
|
11,750 | 11,750 |
Reference-
- S. M. Shukla : Financial Accounting.
- Singh and Singh : Financial Accounting.
- Bhrigu Nath Ojha & Others. : Company Accounting.
- M. C. Shukla : Advanced Accounts.
- R. D. Gupta : Advanced Accounts.
- T. S. Grewal : Financial Accounts.
- Paul and Paul : Financial Accounting
