Unit – 5
INSOLVENCY A/C, PARTNERSHIP DISSOLUTION, INSOLVENCY OF PARTNERS – GARNER vs Murray
Q1) Explain the concept of Dissolution of Partnership Firm.
A1)
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.
This process includes the disposing the assets of firm or and settlements of accounts, assets, and liabilities.
In case of dissolution of partnership of firm, the firm ceases to exist. Upon dissolution, the firm cannot enter into contract with anybody.
The Partnership Act, 1932 deals with the provisions related to the Dissolution of Partnership Firms.
A court may 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.
A firm may also be dissolved without the interference of a Court. This can happen in the following situations-
- When the agreement to the partnership comes to end and
- When the business of the firm has become subsequently illegal.
A Partnership Firm is also dissolved when any of its partner or all of its partners except one, becomes insolvent.
Assets are disposed off and the amounts are utilised as follows:
- Third party liabilities are paid off.
- Loans taken by the firm from any of its partner.
- Capital contributed by partners are paid in the Capital contribution ratio.
- Balance amount, if available, is shared among the partners in Profit Sharing Ratio.
Q2) Explain in brief the case of Garner v/s Murray.
A2)
According to the Indian Partnership Act, 1932, if a partner of the firm becomes insolvent, the firm gets dissolved.
In case the Insolvent Partner’s Capital A/c shows debit balance, this means he owes that amount to the firm.
But, if he is unable to bring in cash, then such loss have to be borne by the solvent partners as per the terms decided in the agreement.
If the agreement is silent in this behalf, then the rule prescribed as per Garner v/s Murray case shall be applicable.
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.
Q3) When does a Partnership Firm get dissolved? What are the effects of its dissolution?
A3)
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 firm may also be dissolved without the interference of a Court. This can happen in the following situations-
- When the agreement to the partnership comes to end and
- When the business of the firm has become subsequently illegal.
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.
- Until public notice is not given about the dissolution, the partners continue to be liable to the third parties.
- The partners cannot make any personal profit out of the transactions linked with the firm.
Q4) Karan and Kamal are partners in a firm. They share profits and losses in the proportion of 3:2. They decided to dissolve the partnership on 31st March, 2011, when their Balance Sheet was as under.
Balance Sheet as on 31st March, 2011
Liabilities | Amount | Assets | Amount |
Sundry Creditors Reserve Fund Capitals - Karan - Kamal | 22,900 5,000
40,000 30,000
| Stock Plant Lease Furniture Sundry Debtors Cash at Bank | 24,300 24,000 10,000 5,000 29,600 5,000 |
| 97,900 |
| 97,900 |
The Lease was sold for Rs.10,720, Furniture for Rs.6,000 and Stock for Rs.15,300. The debtors realised only Rs.24,500. Whereas plant realised Rs.25,200. The creditors were paid Rs.22,000 in full settlement. Expenses of Realisation amounted to Rs.1,000.
Pass Necessary Journal Entries in the books of firm.
A4) In the Books of M/S Karan and Kamal
Journal Entries
Date | Particulars | L.F. | Debit Amount | Credit Amount |
2011 March,31
March,31
March,31
March,31
March,31
March,31
March,31
March,31 | Realisation A/c Dr. To Stock A/c To Plant A/c To Lease A/c To Furniture A/c To Sundry Debtors A/c (Being assets transferred to realisation) Sundry Creditors A/c Dr. To Realisation A/c (Being Creditors transferred to Realisation A/c)
Reserve Fund A/c Dr. To Karan’s Capital A/c To Kamal’s Capital A/c (Being Reserve fund transferred to partner’s Capital Accounts)
Bank A/c Dr. To Realisation A/c (Being assets realised)
Realisation A/c Dr. To Bank A/c (Being the amount of creditors paid in full Settlement)
Realisation A/c Dr. To Bank A/c (Being realisation expenses paid)
Karan’s Capital A/c Dr. Kamal’s Capital A/c Dr. To Realisation A/c (Being loss on realisation transferred to Partners Capital Accounts)
Karan’s Capital A/c Dr. Kamal’s Capital A/c Dr. To Bank A/c |
| 92,900
22,900
5,000
80,720
22,000
1,000
7,368 4,912
35,632 27,088 |
24,300 24,000 10,000 5,000 29,600
22,900
3,000 2,000
80,720
22,000
1,000
12,280
62,720 |
| Total |
| 2,99,520 | 2,99,520 |
Q5) Kishor and Suresh were partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet as on 31st March was as follows:
Liabilities | Amount | Assets | Amount |
Creditors Bills Payables Kishor’s Capital A/c Suresh’s Capital A/c Kishor’s Current A/c Suresh’s Current A/c | 90,000 25,000 2,00,000 1,50,000 18,000 12,000 | Bank Stock Buildings Plant Debtors | 55,000 55,000 2,50,000 1,00,000 35,000 |
| 4,95,000 |
| 4,95,000 |
The firm was dissolved on the above date and the assets were realised as under:
1) Stock Rs.50,000, Debtors Rs.25,000, Plant Rs.80,000 and Building Rs.2,00,000.
2) Kishor agreed to pay off bills payable
3) Creditors were paid off Rs.80,000
4) Dissolution Expenses were Rs.5,000.
Prepare: 1) Realisation Account
2) Partner’s Current Account
3) Partner’s Capital Account
4) Bank Account
A5) Ledger Accounts
Realisation Account
Particulars | Amount | Particulars | Amount |
To Stock A/c To Buildings A/c To Plant A/c To Debtors A/c To Bank A/c (Creditors) To Kishor’s Current A/c (Bills Payable) To Bank A/c (Realisation Exp.) | 55,000 2,50,000 1,00,000 35,000 80,000 25,000
5,000 | By Creditors A/c By Bills Payable A/c By Bank A/c Stock 50,000 Debtors 25,000 Plant 80,000 Building 2,00,000 (Assets realised) By partner’s current A/c (Realisation Loss) Kishor 48,000 Suresh 32,000
| 90,000 25,000
3,55,000
80,000 |
| 5,50,000 |
| 5,50,000 |
Partner’s Current Accounts
Particulars | Kishor | Suresh | Particulars | Kishor | Suresh |
To Realisation A/c (Loss) | 48,000 | 32,000 | By Balance b/d By Realisation A/c By Capital A/c | 18,000 25,000 5,000 | 12,000 - 20,000 |
| 48,000 | 32,000 |
| 48,000 | 32,000 |
Dr. Partner’s Capital Accounts Cr.
Particulars | Kishor | Suresh | Particulars | Kishor | Suresh |
To Current A/c To Bank A/c (Final payment) | 5,000 1,30,000 | 20,000 1,30,000 | By Balance b/d | 2,00,000 | 1,50,000 |
| 2,00,000 | 1,50,000 |
| 2,00,000 | 1,50,000 |
Bank Account
Particulars | Amount | Particulars | Amount |
To Balance b/d To Realisation A/c (Assets Realised) | 55,000 3,55,000
| By Realisation A/c By Realisation A/c By Kishor’s Capital A/c By Suresh’s Capital A/c | 80,000 5,000 1,95,000 1,30,000 |
| 4,10,000 |
| 4,10,000 |
Q6) M/s Xavier, Yasin, Zuber were partners sharing profits and losses in the ratio 3:2:1. They decided to dissolve the firm on 31.3.2018.
Balance Sheet as on 31.3.2018
Liabilities | Amount | Assets | Amount |
Capitals: Xavier Yasin Zuber
Bank Loan
Leasehold Redemption Fund
Life Policy Fund
Sundry Creditors
|
30,000 10,000 10,000
11,500
6,000
12,000
16,200 | Goodwill
Leasehold Building
Machinery
Stock Investments Joint Life Policy
Sundry Debtors 5,880 (-) RDD 500 Cash at Bank | 20,000
12,500
30,520
7,550 6,330 12,000
5,300 1,500 |
| 95,700 |
| 95,700 |
The assets were realised as under:
Life Policy is surrendered for Rs. 10,000. The Investments were taken over by Mr. Yasin for Rs. 8,000. Mr. Xavier agreed to discharge the Bank Loan. The remaining assets were sold for 86,700. The expenses of realisation amounted for Rs. 900.
Prepare necessary ledger accounts in the books of the firm.
A6) Realisation A/c
Particulars | Amount | Particulars | Amount |
To Sundry Assets
To Xavier’s Capital
To Bank A/c
To Bank A/c (Realisation Exp.)
To Partner’s Capital: (Profits) Xavier Yasin Zuber | 94,700
11,500
16,200
900
13,800 9,200 4,600
| By Sundry Creditors
By Bank Life Policy 10,000 Other Assets 86,700
By Yasin’s Capital | 46,200
96,700
8,000 |
| 1,50,900 |
| 1,50,900 |
Dr. Partner’s Capital Accounts Cr.
Particulars | Xavier | Yasin | Zuber | Particulars | Xavier | Yasin | Zuber |
To Realisation
To Bank A/c (Final payment) | -
55,300 | 8,000
11,200 | -
14,600 | By Balance b/d
By Realisation A/c (Profit)
By Realisation A/c | 30,000
13,800
11,500
| 10,000
9,200
- | 10,000
4,600
- |
| 55,300 | 19,200 | 14,600 |
| 55,300 | 19,200 | 14,600 |
Dr. Bank Account Cr.
Particulars | Amount | Particulars | Amount |
To Balance b/d To Realisation A/c (Assets Realised) | 1,500 96,700
| By Realisation A/c By Realisation A/c By Xavier’s Capital A/c By Yasin’s Capital A/c By Zuber’s Capital A/c | 16,200 900 55,300 11,200 14,600 |
| 98,200 |
| 98,200 |
