Question

What journal entries would be recorded for the following transactions on the dissolution of a firm of Arti and Karim after various assets (other than cash) on the third party liabilities have been transferred to Reliasation account. 1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000. 2. There was unrecorded Bike of Rs. 40,000 which was taken over by Mr. Karim. 3. The firm paid Rs. 40,000 as compensation to employees. 4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%. 5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.

Accepted Answer

Journal Entries in the books of Arti and Karim 1. Arti took over Stock: Arti's Capital A/c Dr. 68,000 To Realisation A/c 68,000 (Being stock taken over by Arti at agreed value) 2. Unrecorded Bike taken over: Karim's Capital A/c Dr. 40,000 To Realisation A/c 40,000 (Being unrecorded bike taken over by Karim) 3. Compensation paid: Realisation A/c Dr. 40,000 To Bank A/c 40,000 (Being compensation paid to employees) 4. Settlement of Creditors: Sundry Creditors A/c Dr. 36,000 To Bank A/c 30,600 To Realisation A/c 5,400 (Being creditors settled at 15% discount) 5. Distribution of Loss: Arti's Capital A/c Dr. 18,000 Karim's Capital A/c Dr. 24,000 To Realisation A/c 42,000 (Being loss on realisation distributed in 3:4 ratio) — The solution follows standard dissolution accounting principles. When a partner takes over an asset, their Capital Account is debited and Realisation Account is credited. For unrecorded assets taken over, the treatment is similar. Payment of liabilities like compensation debits Realisation and credits Bank. Settlement of creditors at a discount credits Realisation for the discount gained. Finally, the Realisation loss is distributed to partners' Capital Accounts in their profit-sharing ratio.

Explanation

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