1

STUDY MATERIAL

COURSE : II B.COM (CA)

SEMESTER : III
SUBJECT : Partnership Accounting
UNIT : IV
SUBJECT CODE: 18BCO31C
Syllabus: Dissolution of firms – Insolvency of partner –Garner Vs Murray-Piecemeal
distribution.

DISSOLUTION OF A FIRM
Dissolution means discontinuance. It may either be dissolution of a partnership or of a
firm. Dissolution of partnership result into change in the existing relationship among partners.
However, the firm continues the business. Dissolution of firm results into cessation of
partnership among all the partners and the firm discontinues the business.

Distinction between the dissolution of partnership and dissolution of a firm:

1.Meaning: Dissolution partnership means change in the existing relations of the partners.
Whereas, the dissolution of a firm means discontinuance of partnership among all the partners in
the firm.
2.Continuance of business: In case of dissolution of partnership, the firm continues its
business with existing partners. Whereas, in case of dissolution of a firm, the firm’s business
comes to an end.
3.Reason:Dissolution of partnership takes place at the time of admission, retirement or
death of a partner. Whereas, the dissolution of a firm takes place mostly because of the
insolvency of partner/s or as per provision of Sec. 40-44 of the Indian Partnership Act, 1932.
4.Reconstituted firm: Dissolution of partnership results into a newly constituted firm.
Whereas, dissolution of a firm does not result into a reconstituted firm because, the firm’s
business comes to an end and the books of accounts are closed.
5.Scope:Dissolution of partnership does not necessarily mean dissolution of a firm.
Whereas, dissolution of a firm necessarily means dissolution of partnership. Hence, the scope of
dissolution of a firm is wider than that of dissolution of partnership.
6.Number of times:Dissolution of partnership may take palce number of times for various
reasons and the business may be reconstituted after dissolution of partnership. Whereas,
dissolution of firm takes place only once.

Settlement of Accounts Regarding Losses and Assets

At the time of dissolution of firm if the partnership deed is silent as regards the settlement
of accounts, the provisions of Sec.48 of Indian Partnership Act, 1932 are applied. The accounts
of the firms are applied. The accounts of the firms are settled as follows:
Regarding the settlement of losses, the following procedure is to be adopted. The losses
of the firm including the deficiencies of capital are to be paid in the following order and manner:
1. The firm’s profits are first used to pay the losses including the deficiencies of capital.
2. If the firm’s profits are not sufficient to settle losses, then the credit balances in the
partner’s capital accounts are used to pay the losses.
3. If the partners’ capital amounts are also not sufficient to settle the losses, then the
losses are to be settled by the partners or borne by the partners individually in their profit sharing
ratio.
As regards the application of assets, the assets of the firm, including any amount
contributed by the partners to set right their deficiencies of capital, are used in the following
order:
1. The debts of the firm to the third parties are paid.
2. The partners’ loans to the firm are paid ratably.
3. The balance in the partners’ capital accounts is paid ratably.
4. The remaining amount, i.e., residue is divided among the partners in the profit sharing
ratio.

Firm’s Debts and Private Debts

At the time of dissolution, if both debts of the firm and private debts of the partners exist,
then the treatment of the same as per sec 49 of Indian Partnership Act, 1932, is as follows:
The debts of the firm are paid first by using the assets of the firm. If there is any surplus
of assets the same is used for paying the partners’ private debts to the extent to which each
partner is entitled to share the profits.
 2
The private debts of the partners are paid firs by using private properties of the concerned
partners. If there is any surplus of private assets, the same is used for paying the firm’s debts,
only if the firm’s liabilities are more than the firm’s assets.

Accounting Treatment
When a firm is dissolved, the accounting steps involved to close the books of the firms
are as follows:
1. Preparation of Realisation Account.
2. Treatment of unrecorded assets and liabilities.
3. Treatment of accumulated reserves, profits or losses
4. Treatment of Goodwill.
5. Closing the Capital Account of partners.
6. Preparation of Balance sheet as on the date of dissolution.

INSOLVENCY
Insolvency refers to inability to pay the debts when they become due. In partnership
business, the firm is compulsory dissolved if all the partners or all except one partner become
insolvent. Thus, one of the reasons for dissolution of a firm is insolvency.

Insolvency of a Partner
At the time of dissolution of a firm, all the assets are sold and all the liabilities are paid.
The resulted profit or loss on realisation, accumulated reserves, profit and losses, etc. are
transferred to all partners’ capital or current accounts in their profit sharing ratio.
At the time of dissolution, if partners have private debts, then they are paid by using the
private properties of concerned partners. If there is any surplus or private assets, the same is
used for paying the firm’s debts, provided, the firm’s laibilities are more than the firm’s assets.
After making the above adjustments regarding dissolution and receiving the surplus of
private assets, the capital accounts of partners show either credit balance or debit balance. If the
capital accounts show favourable(i.e., credit balance) balance, then it is paid to the partners. If
the capital show unfavourable(i.e., debit balance) balance, then the problem arises.
If a partner, having a debit balance in his capital account, is not able to bring in the
required cash to make up the deficiency, then he becomes an insolvent. Thus, when a partner is
unable to pay his debt due to the firm, he is said to be insolvent. The debit balance of insolvent
partner cannot be recovered from him and it is considered to be the loss arising from insolvency
of a partner.

Rule in Garner Vs.Murray Case

If a partner becomes insolven, then the loss arising due ot insolvency(ie., debit balance in
his capital account) is not an ordinary loss. The decision to be takn regarding this loss is given in
the leading English case of Garner vs. Murray.
The rule in Garner vs. Murray says that if any partner becomes insolvent, then the loss
due to insolvency is borne by the remaining partner in their capital ratio. Thus, it is clear that the
ordinary loss arising due to realisation of assets and payment of liabilities is shared between all
the partners in the profit sharing ratio and the extraordinary loss due to insolvency of a partner is
borne by the solvent partners in their capital ratio. Besides bearing the loss due to insolvency in
their capital ratio, the solvent partners have to being cash equivalent to their shre of loss on
realisation.
The essence of Garner vs. Murray case is given below:
In case of insolvency of a partner, the solvent partners have to
(1) Bring cash equal to their share of loss on realisation of assets and liabilities.
(2) Bear the loss arising due to insolvency in the ratio of their capitals after they brought
cash equal to their loss on realisation.

Application To India
The decision in Garner vs. Murray Case can be applied to Indian conditions also because
1. This case is based on the provisions of English Partnership Act which is similar to
Sec.48 of Indian Partnership Act, which says the losses including deficiencies of capital are firs
paid out of profits, next out of capital and lastly, if necessary, by the partners individually in their
profit sharing ratio. It is opposed that the decision given in this case is contrary to the provisions
of Sec.48 and they say that unless otherwise agreed, all the losses are to be borne by the partners
in the profit sharing ratio. Hence, to avoid this problem, it is safe to mention in the agreement
that whether the rule in Garner Vs. Murray is followed to treat the losses arising due to
insolvency of a partner or not.
2. There are no previous example case laws available.
 3

Problems
Sum No 1: P, Q, and R are partners sharing profit in ½, ¼, ¼. On the date of dissolution their
balance sheet were
Liabilities Rs Assets Rs.
Creditors 14000 Sundry Assets 40000
Capitals P 10,000
Q 10,000
R 6000
--------- --------
40000 40000
--------- ---------
The assets were realized for Rs.35500, Creditors were fully paid. Realisation exp was 1500.
Close the books of accounts.

Sum No 2: R,S,T were partners for profit-sharing ratio of 3 :2: 1. On balance sheet as follows :
Liabilities Rs Assets Rs.
Creditors 12000 Machinery 25000
General reserve 3000 Goodwill 13000
Capitals R 20,000 Debtors 9500
S 15,000 Stock 11000
T 10000 Cash in bank 1500
--------- --------
60000 60000
--------- ---------
The firm was dissolved after realization of assets except cash @ 60000 and creditors were settled
for 11500. Dissolution charges 800. Give ledger accounts.

Sum No 3: R,S,M were partners for profit-sharing ratio of 2 :2: 1. On balance sheet as follows :
Liabilities Rs Assets Rs.
Creditors 4000 Machinery 9000
General reserve 5000 Fixtures 2000
Capitals R 10,000 Debtors 4000
S 4,000 Stock 5000
M 2000 Cash in bank 5000
--------- --------
25000 25000
--------- ---------
They decided to dissolve the firm after assets realization by Machinery 8500, furniture 1500,
Stock 7000, Debtors 3700. Creditors allowed a discount of 2% and R agreed to bear all
realization expenses. For this service R is paid 120. Actual expenses 900. This was withdrawn by
him from the firm. There was an unrecorded asset of 500 which was taken over by S @ 400. Pass
journal and prepare ledger accounts,

Sum No 4: A, B were partners for ratio of 3: 2. Their B/S as

Liabilities Rs Assets Rs.
Creditors 38000 Fixtures and fitting 4000
Loan from Mrs.A 10000 Plant and mach. 28000
Capitals A 10,000 Debtors 20000
B 8,000 18000 (-) Provision 1000 19000
Reserve fund 5000 P & L A/c 7500
B’s loan 15000 Cash in bank 11500
Investment 10000
Stock 6000
--------- --------
86000 86000
--------- ---------
The firm was dissolved with the following changes for the dissolution expenses of 1100.
A took over the investments @ an agreed value of 8000 and agreed to pay off the loan of Mrs A.
The assets were realized for stock 5000, Drs 18500, fixtures 4500, plant 25000 and Crs were
paid off less 2 ½ % discount . prepare necessary ledgers.
 4

Sum No 5; A and B were equal partners which was dissolved on the same date of balance sheet.
Liabilities Rs Assets Rs.
Creditors 6400 Furniture 2400
Loan from A 4000 Goodwill 2000
Capitals A 19,000 Debtors 5840
B 7,000 Stock 4530
Freehold premises 18000
Cash in bank 3630
--------- --------
36400 36400
--------- ---------
It was agreed that A will take over the freehold premises @ value of 15500 and B will take over
the stock @ discount of 10%. The sundry debtors realized 95% of the book value. Furniture
realized @ 1470 and goodwill was sold only for 500. The realization expenses were 827.show
realization account and close the books.

Sum No 6: A,B and C were partners sharing profits equally..the balance sheet were as shown
which was dissolved. :
Liabilities Rs Assets Rs.
Creditors 40000 Furniture 50000
Loan from Mrs.A 30000 Goodwill 40000
Capitals A 100,000 Debtors 25000
B 60,000 160000 Stock 40000
Life policy fund 42000 Freehold premises 18000
Investment fluctuation fund 15000 Cash in bank 16000
Investment 36000
Joint Life Policy 42000
Current a/c-C 38000
--------- --------
287000 287000
--------- ---------
The life policy is surrendered for 36000. the investment is taken over by A 31000.A agrees to
discharge his wife’s loan. B decides to continue the business and takes up stock @ 26000 and
debtors amounting to 12000 @ 8000 and also agrees to pay 30000 for goodwill. Furniture sold
for 54000.the remaining debtors realized for 7200. The realization expenses were 2400. it was
found that unrecorded investment rs.4000 and was taken by one of the creditors @ 90% of its
value. Show realization account and close the books.

Sum No 7: P and G are equal partners. They decide to dissolve the partnership on 31.12.13 when
their balance sheet stood as follows:
Liabilities Rs. Assets Rs.
Creditors 2400 Cash 6480
Capital Accounts: P 48,000 Debtors 5760
G 48,000 Stock 6960
Plant and Machinery 19200
Factory Buildings 60,000
98400 98400
P is to take over the business and pay 12000 for goodwill which has not been previously valued.
He is also to take over the buildings and stock @ book value and Machinery @ 18000. During
the period unto 31.05.2014, P collects 4800 from the firm’s debtors and pays the liabilities
getting 240 as cash discount also pays dissolution expenses 480. Show realization account and
close the books.

Sum No 8: A, B and C were equal partners. On 31.12.2012 their position was as follows: C is
insolvent and can pay nothing. Close the books of the firm.
A’s Capital 2,000 Cash 1,500
B’s Capital 600 C’s capital 200
Loss on realisation 900
-------- -------
2,600 2,600
-------- -------
 5
Sum No 9: (finished) Given the question in class. X,Y,Z
Sum No 10: (finished) Given the question in class. A,B,C

Sum No 11: Jeeva and Veera were equal partners in a manufacturing business. On 30.6.2012
they dissolved the firm and its balance sheet was:
: Liabilities Rs. Assets Rs.
Creditors 28000 Cash at bank 2500
(-) Provision for discount 1000 27000 Debtors 42000
Reserve for contingencies 5000 Less : provision 2000 40000
Mrs.Veera’s loan 10000 Stock 32000
Reserve fund 15000 Furniture .3500
J’s loan 8000 Plant and machinery 25000
Capital : Jeeva 21000 Prepaid expenses 1000
Veera 18000
-------- ---------
104000 104000
-------- ---------
The following assets were realized Stock 27000, debtors 38000, plant 20000, goodwill 5000.
Furniture did not realize any value. An amount of 6000 was paid on account of contingencies
liabilities. . The realization expenses were 1000. the firm had previously made some investment
in shares of a joint stock company and had written off this investment on finding it useless. The
investment now realized at 1500 .Show realization account and close the books.

Sum No 12: The balance sheet of A,B and C as on 31.12.13 was as follows:
Sundry creditors 6,300 Cash 2,500
A’s Loan 4,000 Sundry Assets 17,000
A’s Captial 6,400 C’s Capital A/c 7,800
B’s Capital 3,600
Profit and loss a/c 7,000
-------- -------
27,000 27,000
--------- -------
Profit and Losses are shared A 18/35, B 7/35, C 10/35. The firm is dissolved on the
above date. Sundry Assets realised Rs. 14,000, Sundry creditors are paid Rs. 6,000 is full
settlement. Expenses amounted to Rs. 800. C’s insolvent.Give realisation a/c and Capital a/c of
partners.

Sum No 13: Ram, Shyam and Mohan are partners sharing profits and losses as to 2:2:1. Their
balance sheet as on 31st December 2013 is as follows:
Creditors 4,000 Cash 5,000
Capitals: Ram 10,000 Debtors
4,000
Shyam 4,000 Stock 5,000
Mohan 2,000 Fixtures 2,000
Reserve fund 5,000 Plant & Machinery
9,000
--------- --------
25,000 25,000
--------- -------
They decided to dissolve the business. The following are the amounts realised.
Plant&Machinery Rs. 8,500; Fixtures Rs. 1,500; Stock Rs. 7,000; Debtors Rs. 3,700. Creditors
allowed a discount of 2% and Ram agreed to bear all realisation expenses. For this service Ram
is paid Rs. 120. Actual expenses amounted to Rs.900. There was an unrecorded asset of Rs.500
which was taken over by Shyam at Rs. 400.Prepare necessary accounts to close the books of the
partners.

Sum No 14: The balance sheet of X,Y,Z who share profits in 3:1:1 stood as follows on 31.12.13.
Bank Overdraft 60,000 Cash on hand 1,000
S.Creditors 45,000 Debtors 29,000
X’s Capital 15,000 Stock 40,000
Z’s Capital 10,000 Plant 30,000
Goodwill 10,000
Y’s Capital 20,000
---------- ---------
 6
1,30,000 1,30,000
---------- ---------
The assets realised Rs. 79,000. After dissolution expenses Rs. 2,000 the creditors were
paid .75ps in the ruppee. Give necessary ledger a/cs assuming all partners are insolvent.

Sum No15: K and N are partners sharing profits and losses equally. Their balance sheet on 30th
September 2013 is as follows:
Creditors 11,200 Cash 3,500
Bills payable 1,800 Stock 17,800
K’s loan 5,000 Debtors 13,800
Reserve Fund 6,000 Less: Provision 1,400
Capital Accounts: K 15,000 -------- 12,400
N 20,000 Furntiture 2,800
Plant and Machinery 22,500
---------- --------
-
95,000 95,000
---------- ----------
They decide to dissolve the firm. The assets realised as follows:
Stock Rs. 18,200; Debtors Rs. 10,600; Furniture Rs. 1,800; Plant and Machinery Rs.
19,000.Creditors allowed a discount of 2% and expenses of realisation amounted to Rs. 544.Give
the necessary ledger accounts to close the books of the firm.

Sum No16: A and B are partners sharing profits and losses as3:1.They decided to dissolve on
31.3.14. their balance sheet onthat date. Commission outstanding 6000
Investment 20000
Bank Overdraft 60,000 Cash on hand 2,000
S.Creditors 88,000 Debtors 48,000
A’s Capital 1,08,000 Stock 70,000
B’s Capital 54,000 Machinery 70,000
Furniture 14,000
Leasehold premises 80,000
---------- ---------
310,000 310,000
---------- ---------
Leasehold premises, Machinery and Furniture were divided amongst themselves and valuatioons
were agreed @ 120000 & 80000 resp. for A and B. A agreed to pay creditors and B agreed to
meet Overdraft. A conducted dissolution proceeding and was authorised to receive outstanding
commission by way of his expenses and remunaretion. Stock is worth 80% of book value and
investment worth 36000.stock and other assets except those stated above are divided equally.
The accounts are settled by cash payment. Show ledger accounts.

Sum No 17: A,B and C commenced business on 1.1.2012 with capitals of 200000, 160000 and
120000 resp. Profits and losses were shared in the ratio of 4:3:3. Capital carried interest @ 5%
p.a. during 2012 and 2013 , they made a profits of 80000 and 100000 (before allowing interest
on capitals). Drawings of each partner were 20000 per year. On 31.12.2013, the firm was
dissolved. Creditors on that date were 48000. The assets realised 520000 (Net). Give necessary
ledger a/cs to close the books of firm.

Sum No 18: A, B and C were equal partners. On 31.12.2012 their position was as follows:
A’s Capital 21,000 Bank 200
B’s Capital 13000 Debtors 16000
C’s capital 5000 Stock 25000
Creditors 10000 Bill receivable 5000
Bills Payable 3200 Machinery 15000
General reserve 9000
-------- -------
61200 61200
-------- -------
C is insolvent and his private estate could pay only 100. The firm was dissolved. Assets realised
31000 realisation expenses came to 600. Prepare necessary ledger a/c to close the books of the
firm. (Apply Garner Vs Murray rule if capital was fixed )

Sum No 19: X, Y and Z were partners. On 31.12.2012 their position was as follows:
 7
X’s Capital 50000 Bank 12000
Y’s Capital 30000 Debtors 20000
Creditors 10000 Stock 40000
General reserve 30000 Machinery 20000
Z’s capital 18000
Furniture 40000
-------- -------
150000 150000
-------- -------
Z is insolvent and his estate could pay 4000. The firm was dissolved. Assets realised Debtors
15000, furniture 28000, stock 32000, plant 14000. the realisation expenses came to 5000.
Prepare necessary ledger a/c to close the books of the firm. (Apply Garner Vs Murray rule if
capital was fluctuating.)

Sum No 20: The balance sheet of I, J and K who were sharing profits in 3/5th, 1/5th and 1/5th
stood as follows on 31st December, 2013 ie., dissolution.
Bank overdraft 28,000 Cash in hand 500
Creditors 24,500 Bills Receivable 2,000
I’s Capital 7,500 Debtors 12,000
J’s Capital 5,000 Stock 19,000
Plant and machinery 16,000
Goodwill 5,000
K’ Capital account 10,500
--------- ---------
65,000 65,000
--------- ---------
The assets realised Rs. 39,875 and after paying Rs. 1,000 for realisation expenses, the creditors
were paid 0.75 ps in rupee. Prepare dissolution accounts, assuming that they are all insolvent.

Sum No 21: The balance sheet of P, Q and R who were sharing profits equally stood as follows
on 31st December, 2013
Reserve fund 18,000 Cash in bank 8000
Creditors 64,000 Furniture 16000
P’s Capital 16000 Debtors 40,000
R’s Capital 12000 machinery 40,000
Q’ Capital account 6000
--------- ---------
110,000 110000
--------- ---------
The firm was dissolved due to Q ‘s insolvency who is unable to contribute payment. The
machinery realised Rs. 30000, furniture for 6400. Only 24000 was recovered from debtors. the
creditors were paid @ a discount of 5%. Prepare dissolution accounts, assuming that capital are
fluctuating. Apply Garner Vs Murray.

Sum No 22: The balance sheet of D, E ,F and G who were sharing profits in 4:3:2:1 stood as
follows on 31st December, 2013.
Bank loan 60000 Cash in bank 4500
Creditors 120000 Debtors 120000
D’s Capital 90000 Stock 60000
E’s Capital 60000 F’s Capital account 10,500
G’s Capital account 3000
Machinery 132000
--------- ---------
330000 330000
--------- ---------
The firm was dissolved All assets realised Rs. 246000 and after paying Rs. 1,800 for realisation
expenses, the creditors and bank loan were 177000 in full satisfaction. G is insolvent and F paid
only 9000. Prepare dissolution accounts and close books of accounts..

Sum No 23: The balance sheet of A, B, C and D who were sharing profits in 3:2:3:2 stood as
follows on 31st December, 2013 ie., dissolution.
Reserve fund 8,000 Assets 34000
Creditors 12000 C’ Capital account 12720
A’s Capital 20000 D’ Capital account 3280
 8

B’s Capital 10000

--------- ---------
50,000 50,000
--------- ---------
On the above date ,C became insolvent and was able to pay only .50 paise in rupee. The assets
realised Rs. 25000 and after paying Rs. 800 for realisation expenses. Prepare dissolution
accounts. Apply Garner Vs Murray.

Sum No 24: A,B and C were partners sharing profits in 3:2:1. the balance sheet were as shown
which was dissolved. : Liabilities Rs Assets
Rs.
Creditors 20000 Plant & Mach. 28500
A’s Loan 5000 Stock 25000
Capitals A 45000 Debtors 25000
B 5000 Cash in bank 1500
C 5000 55000 B’s current a/c 1000
Bills payable 3500 C’s current a/c 2500
A’s current a/c 750 Profit and loss 750
--------- --------
84250 84250
--------- ---------
Plant and mach. Realized for 20000, stock 15000, debtors 21000, goodwill was sold for 300.
Dissolution expenses 600. C is insolvent and a dividend of .50 paise in the rupeeis received from
his pvt. Estate. Pass journal entries and prepare ledger and close the books of accounts. Apply
Garner Vs Murray.

Sum no :25 The following is the balance sheet of A,B,C,D with profit sharing ratio of 4:3:2:1.
Capital A 15000 Fixed assets 20000
B 10000 Current assets 6000
C 1500 Goodwill 5000
Sundry Creditors 5000 D’s capital 500
31500 31500
D has no separate assets and liabilities. They decided to dissolve the firm. Fixed assets realised
15000 and Current assets for 5000. The goodwill is valueless. Realisation expenses 1500. C can
only contribute only 250. Prepare necessary accounts accd. To garner vs. Murray when both C
and D have become insolvent.

Sum no :26 The balance sheet of A and B with equal profit sharing ratio.
Capital A 600 Furniture 400
Sundry Creditors 3900 Plant and Machinery 1475
Debtors 500
Stock 625
Bank 300
B’s capital 1200
4500 4500
The assets realised were stock 350, furniture 200,debtor 500, plant and mach 700. The cost of
collection and distribution of estate was 150. A’s private estate could not contribute anything and
B’s private estate has a surplus of 50. Prepare realisation a/c, cash a/c, creditor’s a/c, capital a/c
and deficiency a/c.

Sum no :27 The balance sheet of X,Y,Z with equal profit sharing ratio.
Capital X 1600 Furniture 1600
Z 1000 Plant and Machinery 4000
X’s loan 2000 Land and Bldgs. 4000
Sundry Creditors 10000 Debtors 2000
Stock 1600
Bank 100
Y’s capital 1300
14600 14600
Due to lack of liquidity and weak financial position of the partners, the firm
Is dissolved. X and Z are not able to contribute anything and a sum of 400 received from Y. All
of them were insolvent. The assets are realised stock 1000, plant 2000, furniture 400, land 1600,
debtors 1100 only. Realisation expenses were 100. Close the books of accounts.
 9

PIECEMEAL DISTRIBUTION
Meaning
At the time of dissolution, all the assets are realised are paid. Hence, it is assumed that
all the assets are realised on the date of dissolution. But in reality, it is not possible to realise all
the assets at the same time. Depending on the type of asset, whether current or fixed, the
realisation of the same takes some time, i.e., the assets are realised, is used in the order of paying
the realisation expenses, outsiders’ liabilities, partners’ loan and finally the partners’ capital.
Piecemeal distribution means distribution of available cash to partners(after paying the
oursiders’ liabilities and partner’s loan) immediately on realisation of any asset(any asset or
portion or piece thereof), without waiting for realisation of all assets.

Surplus Capital Method of Piecemeal Distribution

This method is followed when the capital contributed by the partners is not in the profit
sharing ratio. Thus, it denotes some partners have contributed excess capital than others. To
make the capitals in the proportion of profit sharing ratio, the surplus capital contributed more
than their proportionate share is paid first. Hence, after paying the outsiders’ liabilites and
partners’ loan.

Maximum Loss Method

This is an alternate method followed when the capital contributed by the partners are not
in the profit sharing ratio. First the outsiders’ liabilites and partners’ loan are paid. Then the
following steps are involved while solving problems:
1. Capital accounts of all partners are prepared(after making all adjustmenrs regarding the
accumulated reserves, profits and losses, drawings, interest on capital and drawings, etc.) to
ascertain the final amount to be paid.
2. If any asset is realised, then it is compared with the total amount of capital payable to
all the partners. The amount which is unpaid is considered to be the maximum loss and the same
is distributed to the partners in their profit sharing ratio. The folmula is Maximum Loss = Total
amount of capital payable to all partners – available cash. This is based on the assumption that
nothing will be realised in future through the sale of remaining assets. Hence, the amount unpaid
is the maximum loss to the partners.
3. After distributing the maximum loss to the partners, if all the partners’ capital accounts
show credit balance, i.e., positive figure, then the result is the actual cash paid to the partners.
4. The outstanding balance of capital payable to each partner is ascertained by deducting
the cash paid on realisation. Then steps 2to 4 are repeated for each realisation.
5. After distributing the maximum loss to all the partners on final realisation of assets, if
any solvent partner’s capital account shows negative balance, than he has to being cash, which is
used to settle the balance due to other solvent partners whose capital account show positive
balance.

Sum no :28 Proportionate capital method.

Red, White and Blue are partners sharing profits in 5:3:2. They dissolved the firm when their
balance sheet was
Capital Red 50000 Plant 30000
White 15000 Premises 40000
Blue 45000 Debtors 60000
Red’s loan 10000 Stock 30000
Sundry Creditors 40000
160000 160000
It was agreed to repay the amounts due to the partners as and then the assets were realised. 1st
realisation 30000 , 2nd realisation 73000, and 3rd realisation 47000. Prepare a statement showing
distribution to the partners .

Sum no :29 A, B and C are partners sharing profits in 3:2:1. They dissolved the firm when their
balance sheet was
Capital A 54000 Fixed assets 122000
B 40000 cash at bank 10000
C 25000 Other current assets 113000
Bank overdraft 30000
General reserve 6000
Sundry Creditors 90000_ ______
245000 245000
 10

The assets were realised gradually after meeting realisation expenses

1st realisation 75000(including cash @bank balance) , 2nd realisation 32000, 3rd realisation
60000 and 4th realisation 63000.If the distribution of cash is to be made after each instalment of
realisation, Prepare a statement showing distribution to the partners at each inst. Although the
final results were not yet known .

Sum no :30 C, J and T are partners sharing profits in 3:2:1. They dissolved the firm when their
balance sheet as on 30.06.2012 was
Capital C 140000 Debtors 294000
J 70000 cash at hand 28000
T 14000 stock 112000
Sundry Creditors 210000 _____
434000 434000
There was a bill discounted for 10000 due on 30.11.12. it was agreed that net realisation should
be distributed piecemeal @ the end of each month.
Date of realisation Stock and debtors expenses
31.7.12 84000 7000
31.8.12 126000 5400
30.9.12 70000 4900
31.10.12 77000 3500
30.11.12 35500 3500
The stock was completely disposed off. The balance of debtors irrecoverable. The acceptor of
discounted bill paid the amount on the due date. Prepare a statement showing distribution to the
partners.

Sum no :31 M, N and O are partners sharing profits in 4:5:1. They dissolved the firm when their
balance sheet was
Capital M 30000 cash 6000
N 24000 Other assets 112000
O 6000
Contingent reserve 8000
General reserve 12000
M’s loan 12000
N’s loan 6000
Sundry Creditors 20000 ______
118000 118000
The assets were realised 1st realisation 20000, 2nd realisation 40000, 3rd realisation 34000 and
4th realisation 63000. On the date of dissolution, there was a contingent liability of 2000 against
the firm which was settled @ 1400 at the time of 2nd realisation. Realisation expenses were
estimated @ 4000 but actually came to 3000. O took stock worth 1000 @ 3rd realisation. Prepare
a statement showing distribution to the partners.

Sum No 32: The balance sheet of A, B, C and D who were sharing profits in 4:3:2:1 stood as
follows on 31st December, 2013 ie., dissolution.
Creditors 5000 Fixed Assets 20000
A’s Capital 15000 D’ Capital 500
B’s Capital 10000 Current assets 6000
C’ Capital 1500 Goodwill 5000
--------- ---------
31500 31500
--------- ---------
On the above date ,D has no separate assets and liabilities. The partners decided to dissolve the
business. F ixed assets realised 15000, and current assets for 5000. The goodwill is valueless.
Realisation expenses 1500. C can only contribute only 250 fromhis separate resources. Prepare
dissolution accounts. Apply Garner Vs Murray assuming both C and D were insolvent.

Sum No 33: A and B are equal partners. They decide to dissolve the partnership on 31.12.13
when their balance sheet stood as follows:
Liabilities Rs. Assets Rs.
Creditors 3900 Bank 300
Capital Accounts: A 600 Debtors 500
B’s capital 1200
Stock 625
 11
Plant and Machinery 1475
Factory Buildings 400
4500 4500
Assets were realised as follows: stock 350, furniture 200, debtors 500, plant and mach. 700. The
cost of collecting and distributing the estate amounted to 150. A’s private estate is not sufficient
even to pay his private liabilities, where as in B’s private estate there is surplus of 50. Show
realization a/c, cash a/c, creditors a/c, capital a/c and deficiency a/c.

Sum No 34: The balance sheet of X, Y and Z who were sharing profits equally stood as follows
on 31st December, 2013
X’s loan 2000 Cash in Hand 100
Creditors 10000 Furniture 1600
X’s Capital 1600 Debtors 2000
Z’s Capital 1000 machinery 4000
Y’ Capital (overdrawn) 1300
Stock 1600
Buidings 4000
--------- ---------
14600 14600
--------- ---------
Due to lack of liquidation and weak financial position of the partners, the firm is dissolved. X
and Z are not able to contribute anything and a sum of 400 received from Y. All of them were
decclared insolvent.
Assets were realised as follows: stock 1000, furniture 400, debtors 1100, plant and mach. 2000,
land and bldg. 1600. Realisation expenses 100. Prepare necessary ledger a/c to close the books of
the firm.
Problems:
Sum No 35: The balance sheet of A,B,C and D showed the following position on dissolution.
Rs. Rs.
Creditors 10,000 Cash at bank 34,000
Capital Account: A 15,000 C’s Capital account 10,000
B 10,000 D’s Capital account 3,000
Realisation account: Profit 12,000
--------- -------
47,000 47,000
--------- -------
Show the final adjustment among the partners assuming that C is insolvent.

Sum No 36: Following is the balance sheet of X,Y,Z who share profits and losses in the ratio of
2:2:1.
Rs. Rs.
Sundry Creditors 15,000 Cash in hand 2,000
Capital : X 15,000 Sundry Debtors 22,000
Y 12,000 Stock 22,000
Z 4,000
---------- ----------
46,000 46,000
---------- ----------
The firm was dissolved and the assets were realised. Rs. 10,000 was received in first
instalment, Rs. 15,000 in the second instalment and Rs. 9,000 in final instalment. Show how
each instalment is to be distributed.

Sum No 37: K,V,G were sharing profits and losses in the ratio of 3:2:1 respectively as partners.
They decided to dissolve the firm on 30,6,93. Their balance sheet as on that date was as follows:
Rs. Rs.
S. Creditors 35,000 Fixed Assets 60,000
K’s Capital 25,000 Curren Assets 40,000
V’s Capital 25,000
G’s Capital 15,000
--------- ---------
1,00,000 1,00,000
--------- ----------
 12
The assets were realised and the amount received in instalments. First Rs. 35,000;
Second- Rs. 25,000. Prepare statement showing distribution of cash under maximum possible
loss method.

Sum No 38: A, B and C share profits and losses in the proportion of A- ½ , B – 1/3 and C – 1/6.
Their balance sheet is as follows:
Rs. Rs.
Creditors 50,000 Land and buildings 70,000
A’s Loan 10,000 Plant and Machinery 40,000
A’s Capital 50,000 Stock 25,000
B’s Capital 10,000 Debtors 20,000
C’s Capital 40,000 Cash 5,000
----------- ----------
1,60,000 1,60,000
---------- ----------
The partnership is dissolved and the assets realised as follows:
Realisation I Rs. 40,000
Realisation II Rs. 30,000
Realisation III Rs. 54,000
Realisation Iv Rs. 7,000
Prepare a statement showing piece meal distribution of cash under “Proportionate Capital
Method”