Dissolution, an Insolvent Partner and a Discounted Bill
P, Q and R were partners sharing profits 2:2:1. Their capitals were ₹2,00,000, ₹1,20,000 and ₹10,000. The firm was dissolved on 31 March 2024. Its assets were: machinery ₹2,20,000, stock ₹1,10,000, debtors ₹90,000, investments ₹1,00,000 and land ₹2,00,000; cash in hand was ₹10,000. The liabilities were: creditors ₹1,50,000, a bank loan of ₹1,00,000 secured by hypothecation of stock, and P's loan to the firm of ₹40,000. The assets realised: machinery ₹1,50,000, stock ₹70,000, debtors ₹60,000, investments ₹1,20,000 and land ₹2,50,000. Realisation expenses were ₹12,000. During dissolution an unpaid electricity bill of ₹8,000 for March 2024 was discovered; it had not been recorded. R is insolvent and nothing can be recovered from his private estate. P and Q are solvent. A bill of exchange for ₹20,000 discounted earlier had not matured on the dissolution date.
1. Compute the loss on realisation, including the discovered electricity bill, and the balance in each partner's capital account after transferring that loss.
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Book value of assets realised: 2,20,000 + 1,10,000 + 90,000 + 1,00,000 + 2,00,000 = ₹7,20,000. Actual realisation: 1,50,000 + 70,000 + 60,000 + 1,20,000 + 2,50,000 = ₹6,50,000.
Loss on realisation:
- Fall in asset values: 7,20,000 − 6,50,000 = ₹70,000
- Add: realisation expenses ₹12,000
- Add: unrecorded electricity bill ₹8,000
- Total loss = ₹90,000
Share in 2:2:1:
- P: ₹36,000
- Q: ₹36,000
- R: ₹18,000
Capital balances after the loss:
- P: 2,00,000 − 36,000 = ₹1,64,000 credit
- Q: 1,20,000 − 36,000 = ₹84,000 credit
- R: 10,000 − 18,000 = ₹8,000 debit
The unrecorded bill must be brought in because it is a genuine liability existing on the dissolution date; ignoring it would overstate the partners' balances. The bank loan is paid in full even though the hypothecated stock realised only ₹70,000; the ₹30,000 shortfall is met from other realisation proceeds.
2. How should R's debit balance of ₹8,000 be borne by P and Q? State the rule and compute each share.
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R's estate yields nothing, so his ₹8,000 debit balance is a deficiency. If the partnership deed is silent, the rule in Garner v. Murray applies: the deficiency of an insolvent partner is borne by the solvent partners in the ratio of their capitals as they stand at the date of dissolution, not in the profit-sharing ratio.
The capitals after the realisation loss are P ₹1,64,000 and Q ₹84,000, a ratio of 41:21.
- P: 8,000 × 41/62 = ₹5,290 (approx.)
- Q: 8,000 × 21/62 = ₹2,710 (approx.)
Entry: P's Capital A/c Dr 5,290; Q's Capital A/c Dr 2,710; To R's Capital A/c 8,000.
Using 2:2:1 would give ₹3,200 each, which would relieve Q at P's expense. Note the qualification: if the deed specifies a different method for sharing an insolvent partner's deficiency, the deed prevails. The examinable judgement is to identify which rule applies and to apply it to the correct capital figures.
3. Explain how the discounted bill of ₹20,000 and P's loan of ₹40,000 should be treated in the dissolution accounts.
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The discounted bill is a contingent liability on the dissolution date. It has not matured, so no entry is passed merely because the firm has been dissolved. If the bill matures and the acceptor honours it, the firm's liability ends and nothing is recorded. If the acceptor defaults and the firm has to pay the holder, the payment is recorded as a realisation liability: Realisation A/c Dr 20,000; To Bank A/c 20,000. The loss then falls on the partners in the profit-sharing ratio. Disclosing it as a note is prudent until maturity.
P's loan is not capital. It is a liability of the firm to a partner and is paid after outside creditors but before any capital repayment. It is transferred to Realisation or shown separately, and paid from available cash. If cash is insufficient even after the secured loan and creditors are paid, the unpaid portion ranks as a loss borne by the solvent partners in the capital ratio, not by P alone. P cannot set off the loan against his own capital to gain priority.