Dissolution of P, Q and R: Realisation Loss and a Partner Who Cannot Pay
P, Q and R shared profits 2:2:1. Their balance sheet on 31 March 2024 showed creditors ₹1,10,000, Q's loan ₹60,000, capitals of P ₹2,00,000, Q ₹1,20,000 and R ₹10,000, against machinery ₹1,80,000, stock ₹90,000, debtors ₹1,20,000 less provision for doubtful debts ₹10,000, land ₹75,000, goodwill ₹30,000 and cash ₹15,000. The firm was dissolved on that date. Machinery realised ₹1,50,000; P took over the stock at ₹80,000; debtors realised ₹1,00,000; land fetched ₹90,000; goodwill proved worthless. Creditors accepted ₹1,06,000 in full settlement, and dissolution expenses of ₹12,000 were paid by the firm. Q's loan was repaid in full. R has no private funds and cannot contribute anything towards any debit balance.
1. Prepare the Realisation Account and the partners' capital accounts, and show how much cash is finally paid to each partner.
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Realisation Account
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Machinery | 1,80,000 | Provision for doubtful debts | 10,000 |
| Stock | 90,000 | Creditors | 1,10,000 |
| Debtors | 1,20,000 | Bank - machinery | 1,50,000 |
| Land | 75,000 | P's capital - stock taken over | 80,000 |
| Goodwill | 30,000 | Bank - debtors | 1,00,000 |
| Bank - creditors paid | 1,06,000 | Bank - land | 90,000 |
| Bank - dissolution expenses | 12,000 | Loss on realisation | 73,000 |
| Total | 6,13,000 | Total | 6,13,000 |
Cash ₹15,000 is not transferred: cash is the means of settlement, not an asset to be realised. Q's loan is also not transferred - it is an outside liability, repaid through the bank account after trade creditors.
Loss 73,000 in 2:2:1 → P 29,200; Q 29,200; R 14,600.
Capital Accounts
P: 2,00,000 − 29,200 − 80,000 (stock) = 90,800
Q: 1,20,000 − 29,200 = 90,800
R: 10,000 − 14,600 = (4,600) Dr
Bank summary: 15,000 + 1,50,000 + 1,00,000 + 90,000 − 1,06,000 − 12,000 − 60,000 = ₹1,77,000, which equals 90,800 + 90,800 − 4,600. The figures reconcile, confirming the accounts.
2. R pays nothing towards his debit balance. State the rule that governs and show how the deficiency is borne, with the final amount each solvent partner receives.
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Where the deed is silent, the deficiency of an insolvent partner is borne by the solvent partners in the ratio of their capitals as they stood before dissolution (Garner v. Murray), not in the profit-sharing ratio. The last agreed capitals are the balance-sheet figures: P ₹2,00,000 and Q ₹1,20,000, i.e. 5:3.
Deficiency = ₹4,600.
P: 4,600 × 5/8 = ₹2,875
Q: 4,600 × 3/8 = ₹1,725
Final settlement
P: 90,800 − 2,875 = ₹87,925
Q: 90,800 − 1,725 = ₹89,075
Total paid = 87,925 + 89,075 = ₹1,77,000, exactly the cash available.
Two points of judgement: (i) if the deed had prescribed a ratio for such a deficiency, that ratio would override the capital ratio; (ii) R is a debtor to the firm, so he receives nothing, and the loss to P and Q is not a fresh capital debit but a reduction in what they collect. Note also that had the profit-sharing ratio (2:2) been used instead, the answer would be ₹2,300 each - a common and costly error.