Objective type Questions. Chapter 6 - Dissolution Of Partnership Firm Book Keeping Accountancy Solutions for Class 12 Commerce Accountancy

Objective type Questions.
Answer in one Sentence only.
What is dissolution of partnership firm?

ANSWER:

Dissolution means termination of the existing relationship between the partners of a firm. It means that the business will come to an end and the firm will wind up its business. Accordingly, all the assets will be realised and liabilities will be paid off. It can be dissolved either voluntarily by the partners or compulsorily by the order of the court.

When is Realisation Account opened?

ANSWER:

Realisation Account is opened at the time of dissolution of a partnership firm. In this account, the assets and liabilities are transferred at their book values. Also, the firm’s assets are realised and liabilities are paid off.

Which accounts are not transferred to Realisation Account?

ANSWER:

The following accounts are not transferred to Realisation Account:

1. Cash/Bank A/c,
2. Bank overdraft,
3. Reserve fund,
4. Credit/Debit balance of Profit & Loss Account,
5. Partners’ Capital Accounts and
6. Partner’s Loan Account.

Who is called Insolvent person?

ANSWER:

When a person is unable to contribute fully or partially to discharge his/her liabilities out of his/her private assets, then that person is regarded as an insolvent. Thus, in the following two situations, a partner is declared as insolvent:
a. When his/her personal assets are insufficient
b. When his/her debit capital balance cannot be covered

What is Capital Deficiency?

ANSWER:

The debit balance of an insolvent partner’s capital account that cannot be satisfied due to lack of surplus balance is called capital deficiency. This deficiency is to be borne by all the solvent partners in their profit sharing ratio.

In what proportion is the balance on Realisation Account transferred to Partner’s Capital Account?

ANSWER:

The balance of the Realisation Account is to be transferred to Partners’ Capital Accounts in their profit-sharing ratio. If the partnership deed is silent, then profits or losses arising from Realisation Account are to be distributed in equal proportion amongst all the partners of the firm.

Who should bear the capital deficiency of an insolvent partner?

ANSWER:

The capital deficiency of an insolvent partner is borne by all other solvent partners in their profit-sharing ratio.

Which account is debited on repayment of Partner’s Loan?

ANSWER:

Partner’s loan appearing in the Balance Sheet is not transferred to Realisation Account. In fact, a separate account named as Partner’s Loan Account is maintained. At the time of repayment of partner’s loan, Partner’s Loan A/c is debited and Cash A/c is credited.

Why is Realisation Account opened?

ANSWER:

Realisation Account is opened to determine the amount of profit or loss from the realisation of assets and payment of liabilities at the time of dissolution of a partnership firm.

Which account is debited on payment of dissolution expenses?

ANSWER:

On payment of dissolution expenses, Realisation Account is to be debited. These are a firm’s expenses and should be paid by the firm. However, when such expenses are paid by the firm on behalf of a partner, then the Concerned Partner’s Capital Account is debited.

Write the word / term / phrase, which can substitute each of the following statements.

Debit balance in realisation account.

ANSWER:

Realisation Loss

Explanation: Debit balance in Realisation Account is regarded as ‘Loss on Realisation’. It arises when the debit side of Realisation A/c is more than its credit side. This loss is borne by all the partners’ in their profit-sharing ratio.

Winding up of partnership business.

ANSWER:

Dissolution of Partnership

Explanation: Winding-up of partnership business is known as dissolution of partnership, which means there is a change in the business relationship among the partners but the firm may continue its business.

An account opened to find out the Profit or Loss on Sale of Assets and Settlement of Liabilities.

ANSWER:

Realisation Account

Explanation: Realisation Account is opened to find out the profit or loss on sale of assets and settlement of liabilities at the time of dissolution of the firm.

Debit balance of an insolvent Partner’s Capital Account.

ANSWER:

Capital Deficiency

Explanation: The debit balance of an insolvent partner’s capital account is known as capital deficiency. This deficiency is to be borne by all the solvent partners in their profit-sharing ratio.

Credit balance in Realisation Account.

ANSWER:

Realisation Profit

Explanation: Credit balance in Realisation Account is regarded as ‘Profit on Realisation’. It arises when the credit side of Realisation A/c is more than the debit side. This profit is distributed among all the partners in their profit-sharing ratio.

Conversion of assets into cash on dissolution of firm.

ANSWER:

Realisation

Explanation: The procedure of converting assets into cash at the time of dissolution of a firm is termed as realisation. In this procedure, Realisation Account is opened in order to determine the correct amount of profits or losses.

Liability likely to arise in future on happening of certain events.

ANSWER:

Contingent Liabilities

Explanation: Liability likely to arise in future on happening of certain events is known as contingent liabilities. These are termed as contingent, as their occurrence is dependent upon the happening of a future event, which may or may not happen (i.e. it is uncertain). Therefore, these are not shown in a company’s Balance Sheet.

Assets which are not recorded in the books of accounts.

ANSWER:

Unrecorded Assets

Explanation: Those assets that go unrecorded or are skipped in the books of accounts are termed as unrecorded assets. Thus, as these are unrecorded in the books, they are not transferred to the Realisation Account. However, if any unrecorded asset is taken over by any partner, then it is recorded by crediting the Realisation Account and debiting the Concerned Partner’s Capital Account.

The account which shows realisation of assets and discharge of liabilities.

ANSWER:

Realisation Account

Explanation: The account that shows realisation of assets and discharge of liabilities is Realisation Account. It is opened to ascertain the profit or the loss on sale of assets and settlement of liabilities.

Expenses incurred on dissolution of a firm.

ANSWER:

Dissolution/Realisation Expenses

Explanation: Dissolution/Realisation Expenses are the expenses incurred on dissolution of a firm. These expenses belong to the firm and hence, they should be paid by the firm. However, sometimes these expenses are paid by the firm on behalf of a partner. In such cases, the Concerned Partner’s Capital Account is debited.

State whether the following statements are True or False.

The firm is dissolved automatically on the retirement of a partner.

ANSWER:

False

Explanation: Change in profit sharing ratio among the existing partners, admission of a new partner, retirement or death of a partner, result in dissolution of partnership. In such instances, the existing partnership deed gets dissolved and it is replaced by a new partnership deed. However, the partnership firm continues to operate. On the other hand, in case of dissolution of a partnership firm, the whole firm is put to an end (along with the partnership deed).

Therefore, it is incorrect to say that a firm dissolves on the retirement of a partner.

On dissolution Cash or Bank Account is closed automatically.

ANSWER:

True

Explanation: On dissolution, the Cash or Bank Account is closed automatically because if the capital accounts show any balance, then such balance is transferred to the Cash or Bank Account. This is done so that both sides of the Cash or Bank Account show the same balance. This is because of the double-entry system of book-keeping.

On dissolution Bank Overdraft is transferred to Realisation Account.

ANSWER:

False

Explanation: The amount of bank overdraft is not transferred to Realisation Account; instead, it is shown on the credit side of Bank Account.

A Solvent partner having debit balance to his Capital Account does not share the deficiency of Insolvent Partner’s Capital Account.

ANSWER:

True

Explanation: A solvent partner who has a debit balance does not share deficiency of an insolvent partner, even though he or she may be more financially sound compared to the other solvent partners. This is because it violates the principle of natural justice and equity.

At the time of dissolution of Partnership Firm all assets should be transferred to Realisation A/c.

ANSWER:

False

Explanation: All assets except the cash or bank balances are transferred to the Realisation Account. Therefore, the given statement is incorrect.

Debit balance of insolvent Partner’s Capital A/c is known as Capital Deficiency.

ANSWER:

True

Explanation: Debit balance of an insolvent partner’s capital account is known as capital deficiency. This deficiency is to be borne by all the solvent partners in their profit sharing ratio.

At the time of dissolution loan from partner will be transferred to Realisation Account.

ANSWER:

False

Explanation: Partner’s loan is transferred to a separate account known as Partner’s Loan Account. This is because partner’s loan is not an external (outside) liability. Its payment can be made only after the settlement of external liabilities.

Dissolution takes place when the relation among the partner’s comes to an end.

ANSWER:

True

Explanation: Dissolution takes place when the business relation among the existing partners comes to an end. This can be done either voluntarily or compulsorily, as per the order of the court of justice.

The insolvency loss at the time of dissolution of the firm is shared by the Solvent Partner’s in their Profit-sharing ratio.

ANSWER:

True

Explanation: Insolvency loss, i.e. capital deficiency (debit balance in the capital account of an insolvent partner) is shared among the solvent partners in their profit sharing ratio.

Realisation loss is not transferred to insolvent partner’s Capital Account.

ANSWER:

False

Explanation: Realisation loss is transferred to All Partners’ Capital Accounts (including the insolvent partner). After this, the total amount of capital deficiency is ascertained and is shared by the other solvent partners in their profit-sharing ratio.

Select the most appropriate alternative from those given below :

In case of dissolution assets and liabilities are transferred to _____________A/c.
a) Bank A/c
b) Partner’s capital A/c
c) Realisation A/c
d) Partner’s current A/c

ANSWER:

In case of dissolution, assets and liabilities are transferred to Realisation A/c.

Explanation: All the assets (except cash or bank balances) are transferred to the debit side, whereas all the liabilities (except bank overdraft) are transferred to the credit side of Realisation Account. Thereafter, at the time of realisation, the assets so realised are shown on the credit side and the settlement of liabilities is shown on the debit side.

Dissolution expenses are credited to _____________A/c.
a) Realisation A/c
b) Cash/Bank A/c
c) Partner’s Capital A/c
d) Partner’s Loan A/c

ANSWER:

Dissolution expenses are credited to Cash/Bank A/c.

Explanation: Payment of realisation expenses results in outflow of cash. Therefore, they are credited to Cash/Bank A/c (as these lead to decrease in cash balance).

Deficiency of Insolvent partner will be suffered by solvent partners in their ___________ ratio.
a) capital ratio
b) profit-sharing ratio
c) sale ratio
d) liquidity ratio

ANSWER:

Deficiency of Insolvent partner will be suffered by solvent partners in their profit-sharing ratio.

Explanation: If deficiency of insolvent partner (i.e. the debit balance in the insolvent partner’s capital account) is treated as an ordinary loss, then this loss is to be borne by the other solvent partners in their profit-sharing ratio.

If any asset is taken over by partner from firm his Capital A/c will be____________.
a) credited
b) debited
c) added
d) none of these

ANSWER:

If any asset is taken over by a partner from the firm, then his Capital A/c will be debited.

Explanation: When an asset is taken over by a partner, then the Realisation A/c is credited and the Concerned Partner’s Capital A/c is debited with the agreed price at which the asset is taken over by him.

If any unrecorded liability is paid on dissolution of the firm____________ account is debited.
a) Cash/Bank A/c
b) Realisation A/c
c) Partner’s Capital A/c
d) Loan A/c

ANSWER:

If any unrecorded liability is paid on dissolution of the firm, then Realisation account is debited.

Explanation: All the liabilities are paid-off by debiting the Realisation A/c. This is because all the payments are made through the Realisation Account, so that the true profits or losses can be ascertained.

Partnership is compulsorily dissolved when the partners of the firm become ____________
a) Solvent
b) Insolvent
c) Creditor
d) None of these

ANSWER:

Partnership is compulsorily dissolved when the partners of the firm become insolvent.

Explanation: When the partners of a firm become insolvent, it implies that the assets of the firm have decreased in comparison to the liabilities. Moreover, the partners do not have enough funds to make payment to the creditors; hence, the partnership is compulsorily dissolved as per the order of a court of justice.

Assets and liabilities are transferred to Realisation Account at their ____________values.
a) market
b) purchase
c) sale
d) book

ANSWER:

Assets and liabilities are transferred to the Realisation Account at their book values.

Explanation: In order to determine the correct amount of profit or loss on the eve of dissolution of a partnership firm, all assets and liabilities are transferred to the Realisation Account at their book values.

If the number of partners in a firm falls below two, the firm stands____________
a) dissolved
b) established
c) realisation
d) None of these

ANSWER:

If the number of partners in a firm falls below two, the firm stands dissolved.

Explanation: As per the Indian Partnership Act of 1932, at least two people are required to form a partnership firm. Thus, if the minimum number of members falls below two, then the partnership firm gets automatically dissolved.

Realisation Account is __________on realisation of assets.
a) debited
b) credited
c) deducted
d) None of these

ANSWER:

Realisation Account is credited on realisation of assets.

Explanation: If the assets are realised in cash, then the Realisation A/c is credited and Cash/Bank A/c is debited with the amount actually realised.

All activities of the partnership firm cease (stop) on ____________ of firm.
a) dissolution
b) admission
c) retirement
d) None of these

ANSWER:

All activities of the partnership firm cease (stop) on dissolution of firm.

Explanation: Dissolution of a partnership firm involves discontinuance of the firm’s business, besides the termination of the existing partnership deed. Thus, at the time of dissolution of a partnership firm, all the activities of the firm tend to cease.

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