NITIN GOEL

❏ CHARTERED ACCOUNTANT

❏ All India Rankholder

(CPT-9, Inter-7 , Final-9)
❏ Gold Medalist

❏ Educator: CA Inter Accounts

& Advanced Accounts
❏ 3 Years Experience with ITC Ltd.
8 years Teaching Experience

Use Code: CANITIN to get 10% Discount

 PARTNERSHIP ACCOUNTS
TOPIC 1A Dissolution

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Question 1 ICAI Study Material
P, Q and R are partners sharing profits and losses as to [Link]. Their Balance Sheet as on 31st March,
2020 is as follows:
Liabilities ₹ Assets ₹
Partners’ Capitals: Plant and Machinery 1,08,000
P 1,20,000 Fixtures 24,000
Q 48,000 Stock in trade 60,000
R 24,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash in hand 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the business. The following are the amounts realized:
₹
Plant and Machinery 1,02,000
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400
Creditors allowed a discount of 5% and realization expenses amounted to ₹ 1,500. There was an
unrecorded asset of ₹ 6,000 which was taken over by Q at ₹ 4,800. A bill for ₹ 4,200 due for GST was
received during the course of realization and this was also paid.
You are required to prepare:
(i) Realisation account.
(ii) Partners’ capital accounts.
(iii) Cash account.
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Question 2 IPCC Nov 2018 (16 Marks) / RTP Nov 2020 (Similar)/ ICAI Study Material (Similar)
P, Q and R are partners sharing profit and losses in the ratio [Link]. The partners decided to dissolve the
partnership on 31st March, 2020 when their Balance Sheet was as under
Liabilities Amount Assets Amount
Capital Accounts: Land & Building 90,000
P 40,000 Plant & Machinery 30,000
Q 40,000 Furniture- 17,000
General Reserve 41,000 Investments 10,000
R's Loan A/c 10,000 Book Debts 40,000
Loan from D 80,000 Less: Prov. for bad debts (4,000) 36,000
Trade Creditors 20,000 Stock 24,000
Bills Payable 8,000 Bank 9,000
Outstanding Salary 5,000 Deferred Advertisement Expenses 8,000
Capital withdrawn: R 20,000
2,44,000 2,44,000
The following information is given to you:
(i) Realisation expenses amounted to ₹ 12,000 out of which ₹ 2,000 was borne by P.
(ii) A creditor agreed to takeover furniture of book value ₹ 8,000 at ₹ 7,200. The rest of the creditors
were paid off at a discount of 6.25%.
(iii) The other assets realized as follows:
Furniture - Remaining taken over by R at 90% of book value
Stock - Realised 120% of book value
Book Debts - ₹ 8,000 of debts proved bad, remaining were fully realized
Land & Building - Realised ₹ 1,10,000
Investments - Taken over by P at 15% discount
(iv) For half of his loan, D accepted Plant & Machinery and ₹ 5,000 cash. The remaining amount was
paid at a discount of 10%.
(v) Bills payable were due on an average basis of one month after 31st march, 2018, but they were paid
immediately on 31st March @ 6% discount "per annum".
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in columnar form in the
books of Partnership firm.

Solution 2
REALISATION ACCOUNT
To Land and Building 90,000 By Provision for bad debts 4,000
To Plant & Machinery 30,000 By Loan from D 80,000
To Furniture 17,000 By Creditors 20,000
To Investments 10,000 By Bills payable 8,000
To Book Debts 40,000 By Outstanding salary 5,000
To Stock 24,000 By R’s Capital
To P’s Capital (Real. Expenses 2,000) 2,000 Furniture 8,100 (9,000*.09) 8,100
To Bank By P’s Capital
Bill payable 7,960 Investments 8,500 8,500
D’s Loan (5,000+36,000) 41,000 By Bank A/c
Creditors 12,000 Stock 28,800
Salary 5,000 Debtors 32,000
Real. Expenses 10,000 75,960 Land & Building 1,10,000 1,70,800
To Profit transferred
P 6,176
Q 6,176
R 3,088 15,440
3,04,440 3,04,440
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 PARTNER’S CAPITAL ACCOUNTS
P Q R P Q R
To Balance b/d - - 20,000 By Balance b/d 40,000 40,000 -
To Deferred Adv 3,200 3,200 1,600 By General 16,400 16,400 8,200
Expenses reserve
To Realisation 8,500 - 8,100 By R’s Loan - - 10,000
A/c
To Bank 52,876 59,376 - By Realisation A/c 2,000 - -
By Realisation A/c 6,176 6,176 3,088
(Profit)
By Bank - - 8,412
64,576 62,576 29,700 64,576 62,576 29,700

BANK ACCOUNT
₹ ₹
To Balance b/d 9,000 By Realisation A/c 75,960
To Realisation A/c 1,70,800 By P’s Capital 52,876
To R’s Capital 8,412 By Q’s Capital 59,376
1,88,212 1,88,212
Working Notes:
1. Amount paid to creditors
₹
Book Value 20,000
Less: Creditors taking over Furniture (7,200)
12,800
Less: Discount @ 6.25% (800)
12,000
2. Payment to Bills Payable
₹
Book Value 8,000
Less: Discount for early payment {8000 x 6% x (1/12)} (40)
7,960
3. Payment to D’s Loan
₹
Book value 80,000
50% of Loan adjusted as below:
Plant & Machinery accepted at Book Value (₹ 5,000
30,000) and ₹ 5,000 in cash
Balance 50% of Loan adjusted as below:
In cash after allowing discount of 10% i.e. ₹ 36,000
40,000 – ₹ 4,000 = ₹ 36,000.
4. Furniture taken over by R
₹
Book value 17,000
Less: Furniture of Book Value ₹ 8000 (8,000)
accepted by trade creditors
9,000
Less: 10% of Book Value (900)
8,100

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TOPIC 1B Insolvency of Partner

Question 3 ICAI Study Material

P, Q and R were partners sharing profits and losses in the ratio of 3 : 2 : 1, no partnership salary or
interest on capital being allowed. Their balance sheet on 30th June, 2020 is as follows:
Liabilities ₹ Assets ₹
Fixed Capital Fixed Assets:
P- 20,000 Trademark 40,000
Q- 20,000 Freehold Property 8,000
R- 10,000 50,000 Plant and Equipment 12,800
Current Accounts : Motor Vehicle 700
P- 500 Current Assets:
Q- 9,000 9,500 Stock 3,900
Loan from P 8,000 Trade Debtors 2,000
Trade Creditors 12,400 Less : Provision (100) 1,900
Cash at Bank 200
R's Current Account 400
Profit and Loss Account 12,000
79,900 79,900
On 1st July, 2020 the partnership was dissolved. Motor Vehicle was taken over by Q at a value of ₹ 500
but no cash passed specifically in respect of this transaction. Sale of other assets realised the following:
₹
Trademark Nil
Freehold Property 7,000
Plant and Equipment 5,000
Stock 3,000
Trade Debtors 1,600
Trade Creditors were paid ₹ 11,700 in full settlement of their debts. The costs of dissolution amounted to
₹ 1,500. The loan from P was repaid, P and Q were both fully solvent and able to bring in any cash
required but R was forced into bankruptcy and was only able to bring 1/3 of the amount due.
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You are required to show:
(a) Cash and Bank Account,
(b) Realisation Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).

Question 4 RTP Nov 2019

P, Q, R and S are sharing profits & losses in the ratio [Link]. Frauds committed by R during year were
found out & it was decided to dissolve partnership on 31st March, 2020 when Balance Sheet was as under
Liabilities ₹ Assets ₹
Capital Accounts: Building 1,90,000
P 1,50,000 Stock 1,30,000
Q 1,50,000 Investments 50,000
R - Debtors 70,000
S 60,000 Cash 30,000
General reserve 40,000 R 40,000
Trade creditors 80,000
Bills payable 30,000
5,10,000 5,10,000
Following information is given to you:
(i) A cheque for ₹ 7,000 received from debtor was not recorded in books and & misappropriated by R
(ii) Investments costing ₹ 8,000 were sold by R at ₹ 11,000 and the funds transferred to his personal
account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of ₹ 9,000 at ₹ 13,000. The rest of the
creditors were paid off at a discount of 5%.
(iv) The other assets realized as follows:
₹
Building 110% of book value
Stock 1,20,000
Investments The rest of investments were sold at a profit of ₹ 7,000
Debtors The rest of the debtors were realized at a discount of 10%
(v) The bills payable were settled at a discount of ₹ 500.
(vi) The expenses of dissolution amounted to ₹ 8,000.
(vii) It was found out that realization from R’s private assets would only be ₹ 7,000.
Prepare Realisation Accounts, Cash Account and Partner’s Capital Account.

Solution
REALISATION ACCOUNT
Particulars ₹ Particulars ₹
To Building 1,90,000 By Trade creditors 80,000
To Stock 1,30,000 By Bills payable 30,000
To Investment 50,000 By Cash
To Debtors 70,000 Building 2,09,000
To Cash Stock 1,20,000
Creditors (W.N.1) 63,650 Investments (W.N.2) 40,000
Expenses 8,000 Debtors (W.N.3) 56,700 4,25,700
Bills payable 29,500 1,01,150 By R (Debtors unrecorded) 7,000
To Partners capital A/cs (Profit) By R (Investments unrecorded) 11,000
P 4,183
Q 4,183
R 2,789
S 1,395 12,550
5,53,700 5,53,700
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 CASH ACCOUNT
Particulars ₹ Particulars ₹
To Balance b/d 30,000 By Realisation (liabilities paid) 1,01,150
To Realisation (Assets realised) 4,25,700 By Capital account
To R’s capital A/c 7,000 P 1,51,095
Q 1,51,095
S 59,360
4,62,700 4,62,700

PARTNERS’ CAPITAL ACCOUNTS

Particulars P Q R S Particulars P Q R S
To Bal. b/d 40,000 By Bal. b/d 1,50,000 1,50,000 - 60,000
To Real. A/c 7,000 By General 13,333 13,333 8,889 4,445
(Debtors ) reserve
To Real. A/c – 11,000 By Real. 4,183 4,183 2,789 1,395
(Investment) (Profit)
To R’s capital 16,421 16,421 6,480 By Cash A/c 7,000
A/c (W.N.4)
To Cash A/c 1,51,095 1,51,095 59,360 By P’s capital 16,421
A/c
By Q’s 16,421
capital A/c
By S’s capital 6,480
A/c
1,67,516 1,67,516 58,000 65,840 1,67,516 1,67,516 58,000 65,840

Working Notes:
1. Amount paid to creditors in cash
₹
Book Value 80,000
Less: Creditors taking over investments (13,000)
67,000
Less: Discount @ 5% (3,350)
63,650

2. Amount received from sale of investments

₹
Book Value 50,000
Less: Misappropriated by R (8,000)
42,000
Less: Taken over by a creditor (9,000)
33,000
Add: Profit on sale of investments 7,000
Cash received from sale of remaining investment 40,000

3. Amount received from debtors

₹
Book value 70,000
Less: Unrecorded receipt (7,000)
63,000
Less: Discount @10% (6,300)
56,700

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 4. Deficiency of R
₹
Balance of capital as on 31st March, 2020 40,000
Debtors-misappropriation 7,000
Investment-misappropriation 11,000
58,000
Less: Realisation Profit (2,789)
General reserve (8,889)
Contribution from private assets (7,000)
Net deficiency of capital 39,322

This deficiency of ₹ 39,322 in R’s capital account will be shared by other partners P, Q and S in their last
agreed capital ratio of 1,63,333: 1,63,333 : 64,445 (After adding general reserve)

TOPIC 2 Piecemeal Distribution

Generally, the assets sold upon dissolution of partnership are realised only in small instalments over a
period of time. In such circumstances, the choice is either to distribute whatever is collected or to wait till
the whole amount is collected. Usually, the first course is adopted.
In order to ensure that the distribution of cash among the partners is in proportion to their interest in the
partnership concern either of the two methods described below may be followed for determining the
order in which the payment should be made.
→ Highest Relative Capital Method
→ Maximum Loss Method

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Question 5 ICAI Study Material
Ajay Enterprises, a Partnership firm in which A,B and C are three partners sharing profits and losses in
the ratio of 4 : 3 : 3. the balance sheet of the firm as on 31st December, 2020 is as below:
Liabilities ₹ Assets ₹
A’ s Capital 15,000 Factory Building 24,160
B’ s Capital 7,500 Plant & Machinery 16,275
C’ s Capital 15,000 Debtors 5,400
B’ s Loan 4,500 Stock 12,390
Sundry Creditors 16,500 Cash at Bank 275
58,500 58,500
On balance sheet date all the three partners have decided to dissolve their partnership. Since the
realization of assets was protracted, they decided to distribute amounts as and when feasible and for this
purpose they appoint C who was to get as his remunerations 1% of the value of the assets realized other
than cash at Bank and 10% of the amount distributed to the partners.
Assets were realized piecemeal as under:
₹
I 18,650
II 17,320
III 10,000
IV 7,000
Dissolution expenses were provided for estimated amount of 3,000
The creditors were settled finally for 15,900
Prepare a statement showing distribution of cash amongst the partners by ‘Higher Relative Capital
Method’.

Question 6 Inter Jan 2021 (15 Marks)

Ananya Enterprises is a partnership firm is which A, B and C are three partners sharing profits and losses
in the ratio of 5 : 3 : 2. The Balance Sheet of the firm as on 31st October, 2020 is as below:
Liabilities ₹ Assets ₹
Capital Accounts Land & Building 45,00,000
A 95,00,000 Plant and Machinery 65,00,000
B 75,00,000 Furniture & Fixture 18,00,000
C 30,00,000 Stock in trade 13,50,000
Sundry Creditors 11,00,000 Cash 7,00,000
Sundry Debtors 7,50,000
Loan-A 25,00,000
Loan-B 30,00,000
2,11,00,000 2,11,00,000
On the Balance Sheet date all the three partners have decided to dissolve their partnership and called you
to assist them in winding up the affairs of the firm. They also agreed that asset realization is distributed
among them at the end of each month.
A summary of liquidation transactions is as follows:
November, 2020:
• ₹ 3,00,000 - collected from debtors, balance is uncollectable
• ₹ 11,00,000 - received from the sale of entire furniture
• ₹ 2,00,000 - liquidation expenses paid
• ₹ 6,00,000 - Cash retained in the business at the end of month

December, 2020:
• ₹ 2,20,000 - Liquidation expenses paid
• As part payment of his capital, C accepted a machinery for ₹ 9,00,000 (Book value ₹ 6,00,000)
• ₹ 2,00,000 - Cash retained in the business at the end of month.
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January, 2021:
• ₹ 28,00,000 - Received on the sale of remaining plant & machinery
• ₹ 9,00,000 - Received from the sale of entire stock
• ₹ 1,50,000 - Liquidation expenses paid
• ₹ 63,00,000 - Received on sale of Land & Buildings
• No cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by "Highest Relative
Capital Method" as on 31st January, 2021.

Solution

Particulars Cash Creditors Capitals

Balance due after loan 11,00,000 70,00,000 45,00,000 30,00,000
November
Balance available 7,00,000
Realization less expenses and cash 6,00,000
retained
Amount available and paid 13,00,000 (11,00,000) - (1,20,000) (80,000)
Balance due - - 70,00,000 43,80,000 29,20,000
December
Opening Balance 6,00,000
Expenses paid and cash carried 4,20,000
forward
Available for distribution 1,80,000
Cash paid to B and Machinery to C - (1,80,000) (9,00,000)
Balance due - 70,00,000 42,00,000 20,20,000
January
Opening Balance 2,00,000
Amount realisation less expenses 98,50,000
Amount paid to partners (1,00,50,000)
First 31,20,000 to A&B in 5:3 (19,50,000) (11,70,000)
Balance 69,30,000 Paid to A,B (34,65,000) (20,79,000) (13,86,000)
& C ([Link])
Loss 15,85,000 9,51,000 6,34,000

Working Note:
(i) Highest Relative Capital Basis
A B C
Scheme of payment for November
Balance of Capital Accounts 95,00,000 75,00,000 30,00,000
Less: Loans (25,00,000) (30,00,000) -
(A) 70,00,000 45,00,000 30,00,000
Profit Sharing Ratio 5 3 2
Capital/Profit sharing ratio 14,00,000 15,00,000 15,00,000
Capital in profit sharing ratio, taking A’s capital as base 70,00,000 42,00,000 28,00,000
(B)
Excess of B’s capital and C’s capital (A-B) (i) 3,00,000 2,00,000
Profit sharing ratio 3 2
Capital/profit sharing ratio 1,00,000 1,00,000
Capital in PSR, taking B’s/C’s capital as base (ii) 3,00,000 2,00,000

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It means realization up to ₹ 5,00,000 is distributed among B and C in the ratio of 3:2. So excess amount
of ₹ 2,00,000 after paying creditors is distributed among B and C in the ratio of 3:2 i.e. ₹1,20,000 and
80,000 respectively

(ii) Scheme of payment for December

In the month of December C has received machinery amounting ₹ 9,00,000 against his excess capital of ₹
1,20,000 (2,00,000 – 80,000). Excess capital of B is ₹3,00,000 out of which ₹1,20,000 already paid to
him, so balance ₹ 1,80,000 available in the month of December will be paid to B.

(iii) Scheme of distribution of available cash for January:

A B C
Balance of capital Account end of December (A) 70,00,000 42,00,000 20,20,000
Profit sharing ratio 5 3 2
Capital/profit sharing ratio 14,00,000 14,00,000 10,10,000
Capital in profit sharing ratio, taking C’s capital as base 50,50,000 30,30,000 20,20,000
(B) (i)
Excess of A’s Capital and B’s capital (A-B) (i) 19,50,000 11,70,000
Profit Sharing Ratio 5 3
Capital/Profit sharing Ratio 3,90,000 3,90,000
Capital in profit sharing ratio taking A’s/B’s Capital 19,50,000 11,70,000
Since ₹ 19,50,000 and 11,70,000 is already in the ratio of 5:3, so amount realized up to ₹ 31,20,000 is
distributed among A and B in the ratio of 5:3. After that any amount realized is distributed among all the
three partners in the ratio of [Link].

Question 7
Amar, Akbar and Antony are in partnership. The following is their Balance Sheet as at March 31, 2020
on which date they dissolved their partnership. They shared profit in the ratio of [Link].
Liabilities ₹ Assets ₹
Creditors 80,000 Plant and machinery 60,000
Loan A/c – Amar 20,000 Premises 80,000
Capital A/cs - Stock 60,000
Amar 1,00,000 Debtors 1,20,000
Akbar 30,000
Antony 90,000
3,20,000 3,20,000
It was agreed to repay the amounts due to the partners as and when the assets were realised, viz.
₹
April 15, 2020 60,000
May 1, 2020 1,46,000
May 31, 2020 94,000
Prepare a statement showing how the distribution should be made under maximum loss method.

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TOPIC 3 Sale of Business to Company or Conversion of Firm into Company

BOOKS OF FIRM

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 BOOKS OF COMPANY
1. Record the acquisition of business from Firm

Business Purchase A/c Dr. (with the Purchase Consideration)

To M/s Firm A/c

2. Taking over Assets & Liabilities of Firm

Assets A/c Dr. (Individually at taken over value)

Goodwill A/c Dr. (Difference)
To Liabilities A/c (Individually at taken over value)
To Business Purchase A/c (with the Purchase Consideration)
To Capital Reserve A/c (Difference)

3. Making Payment to Firm

M/s Firm A/c Dr.

Discount on issue of debentures A/c Dr.
To Equity share capital
To Preference share capital
To Debentures
To Securities Premium
To Bank A/c

4. Record Reimbursement of Realisation expenses of the Firm

Goodwill/Capital Reserve A/c Dr.

To Bank A/c

5. Eliminate unrealized profit included in the unsold stock/ stock reserve

Goodwill/Capital Reserve A/c Dr.

To Stock A/c

6. Elimination of Inter-company/firm owing

Liability A/c Dr.

To Asset A/c
i.e.
Creditors A/c Dr.
To Debtors A/c
Bills Payable A/c Dr.
To Bills Receivable A/c

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Question 8 ICAI Study Material
Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola and Mr. Shiv who share profits
and losses in the ratio of [Link] and Bhagwan Ltd. is a company doing similar business. Following is the
summarized Balance Sheet of the firm and that of the company as at 31.3.2020:
Liabilities Prabhu & Bhagwan Assets Prabhu & Bhagwan
Co. Ltd. Co. Ltd.
Capital: Plant & Machinery 2,50,000 8,00,000
Equity shares of ₹ 10,00,000 Furniture & Fixture 25,000 1,12,500
10 each
Partners’ capital: Inventories 1,00,000 4,25,000
Prabhu 1,00,000 Debtors 1,00,000 4,12,500
Bhola 1,50,000 Cash at bank 5,000 2,00,000
Shiv 50,000 Cash in hand 20,000 50,000
General reserve 50,000 3,50,000
Creditors 1,50,000 6,50,000
5,00,000 20,00,000 5,00,000 20,00,000
It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand and cash at
bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing 25,000 shares of ₹ 10
each at a premium of ₹ 2 per share.
Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit sharing ratio
and bring necessary cash for settlement of their capital. The creditors of Prabhu & Co. includes
₹ 50,000 payable to Bhagwan Ltd. An unrecorded liability of ₹ 12,500 of Prabhu & Co. must also be
taken over by Bhagwan Ltd. Prepare:
(i) Realisation A/c, Partners’ capital A/cs & Cash in hand/Bank account in the books of Prabhu & Co.
(ii) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co.

Question 9 ICAI Study Material

Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of [Link]. Balance Sheet of the firm
is as follows:
Liabilities ₹ Assets ₹
Fixed Capital Fixed Assets 45,000
Yash 50,000 Investments 15,000
Tanish 20,000 Current Assets
Ruchika 10,000 80,000 Stock 10,000
Current Account: Debtors 27,500
Yash 6,000 Cash & Bank 12,500 50,000
Ruchika 4,000 10,000 Current Account:
Unsecured Loans 15,000 Tanish 10,000
Current Liabilities 15,000
1,20,000 1,20,000
On 1st April, 2020 all the partners agreed to form a new company YTR Pvt. Ltd., which shall take over
the firm as going concern including goodwill, but excluding cash and bank balances.
The following matters were also agreed upon:
a) Goodwill shall be valued at 3 years’ purchase of super profits.
b) Actual profit for the purpose of goodwill valuation will be ₹ 20,000.
c) The normal rate of return will be 17.50% per annum of Fixed Capital.
d) All other Assets and Liabilities will be taken over at book value.
e) The purchase consideration will be paid partly in share of ₹ 1 each and partly in cash. Yash and
Tanish to acquire interest in new company in the ratio of 3:2 at face value. Ruchika agreed to retire
after taking her share in cash.
f) Realisation expenses amounted to ₹ 5,000.
Prepare Realisation Account, Bank Account, YTR Private Limited A/c & Capital Accounts of partners

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Solution
REALISATION ACCOUNT
₹ ₹
To Sundry assets By Unsecured loans 15,000
Fixed assets 45,000 By Current liabilities 15,000
Investments 15,000 By YTR(P)Ltd. (WN-2) 85,500
Stock 10,000
Debtors 27,500 97,500
To bank a/c 5,000
(Realisation expenses
To Profit on realisation
transferred to
Yash 6,500 13000
Tanish 4,333
Ruchika 2,167
1,15,500 1,15,500

CASH AND BANK ACCOUNT

₹ ₹
To Balance b/d 12,500 By Realisation A/c 5,000
To YTR(P)Ltd. 8,667 By Ruchika capital A/c 16,167
(balancing figure )
21,167 21,167

YTR(P)Ltd.
₹ ₹
To Realisation a/c 85,500 By Cash and Bank a/c 8,667
By equity shares in YTR (P)Ltd 76,833
(balancing figure)
85,500 85,500

PARTNERS CAPITAL ACCOUNTS

Yash Tanish Ruchika Yash Tanish Ruchika
To Current A/c - 10,000 - By Balance b/d 50,000 20,000 10,000
To Cash & bank - - 16,167 By Current A/c 6,000 - 4,000
A/c
To Equity Shares 46,100 30,733 By Realisation A/c 6,500 4,333 2,167
in YTR (P) Ltd.
(in 3:2)
ToTanish’s capital 16,400 - By Yash’s capital 16,400
A/c adjustment A/c adjustment
62,500 40,733 16,167 62,500 40,733 16,167

Working Notes:
Calculation of Goodwill
₹
Actual profits 20,000
Less: Normal rate of return @ 17.5% of fixed capital worth ₹80,000 14,000
Super profits 6,000
Goodwill valued at 3 years’ purchase 18,000

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Calculation of Purchase Consideration
₹
Total value of assets as per Balance Sheet 1,20,000
Less: Cash and Bank Balances 12,500
Current account 10,000
19,500
Add: Goodwill 18,000
1,15,500
Less: Liabilities taken over
Unsecured load 15,000
Current Liabilities 15,000
Purchase Consideration 85,500

Question 10 Inter May 2018 (15 Marks)

A and B carrying on business in partnership sharing profits and losses equally, wished to dissolve the
firm and sell the business to AB Limited Company on 31.03.2020 when the firm's position was as
follows:
Liabilites Amount Assets Amount
A’s Capital 7,50,000 Land & Building 5,00,000
B’s Capital 5,00,000 Furniture 2,00,000
Sundry Creditors 3,00,000 Stock 5,00,000
Debtors 3,30,000
Cash 20,000
15,50,000 15,50,000
The arrangement with AB Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book value less 15%.
(iii) The Goodwill of the firm was valued at ₹ 2,00,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but the company agreed to collect
the book debts of the firm and discharge the creditors of the firm as an agent, for which services the
company was to be paid 5% on all collections from the firm's debtors and 3% on cash paid to firm's
creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of ₹ 10 each at a
premium of ₹ 2 per share.
The company collected all the amounts from the debtors. The creditors were paid off less by ₹ 5,000
allowed as discount. The company paid the balance due to the vendors in cash.
Prepare the Realisation A/c, the Capital Accounts of the Partners and the Cash Account in the books of
the Partnership firm

Solution
In the Books of Partnership Firm
Realization Account
Particulars Amount Particulars Amount
To Land & Building 5,00,000 By Sundry Creditors 3,00,000
To Furniture 2,00,000 By AB Ltd. 13,95,000
(Purchase Consideration)
To Stock 5,00,000 By Cash (Amount from AB Ltd) 9,650
To Debtors 3,30,000
To Profits transferred
A’s Capital 87,325
B’s Capital 87,325 1,74,650
17,04,650 17,04,650
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 Partner’s Capital Accounts
A B A B
To Shares in AB Ltd. 8,19,900 5,75,100 By Balance b/d 7,50,000 5,00,000
To Cash - Final 17,425 12,225 By Realisation (Profit) 87,325 87,325
Payment
8,37,325 5,87,325 8,37,325 5,87,325

Cash Account
Particulars Amount Particulars Amount
To Balance b/d 20,000 By A’s Capital 17,425
To Realisation 9,650 By B’s Capital 12,225
(Amount from AB Ltd.)
29,650 29,650

Working Notes:
1. Calculation of Purchase consideration:
Land & Building 6,00,000
Furniture 1,70,000
Stock 4,25,000
Goodwill 2,00,000
13,95,000

2. Distribution of shares among partners

The shares received from the company have been distributed between the two partners A & B in the ratio
of their final claims i.e., 8,37,325: 5,87,325.
No. of shares received from the company = 13,95,000/12= 1,16,250
A gets [(1,16,250 X 8,37,325)/14,24,650] = 68,325 shares valued at 68,325 x 12 = ₹ 8,19,900.
B gets the remaining 47,925 shares, valued at ₹ 5,75,100 (47,925 X 12)
Note: In the above situation, shares received from AB Ltd. Company have been distributed between two
partners A and B in the ratio of their final claims. Alternatively, shares received from AB Ltd. can be
distributed among the partners in their profit sharing ratio i.e. ₹ 13,95,000 x ½ = ₹ 6,97,500 each. In that
case, firm will pay cash amounting ₹ 1,39,825 to A and will receive cash ₹ 1,10,175 from B. Partners’
capital accounts and cash account will, accordingly get changed.

3. Calculation of net amount received from AB Ltd on account of amount realized from debtors less
amount paid to creditors
Amount realized from Debtors 3,30,000
Less: Commission for realization from debtors (5% on 3,30,000) (16,500)
Less: Amount paid to creditors (2,95,000)
Less: Commission for cash paid to creditors (3% on 2,95,000) (8,850)
Net amount received 9,650

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Question 11 ICAI Study Material
‘S’ and ‘T’ were carrying on business as equal partner. Their Balance Sheet as on 31st March, 2020:

Liabilities ₹ Assets ₹
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000

The operations of the business were carried on till 30th September, 2020. S and T both withdrew in
equal amounts half the amount of profits made during the current period of 6 months after 10% per
annum had been written off on building and plant and 5% per annum written off on furniture. During
the current period of 6 months, creditors were reduced by ₹ 50,000, Bills payable by ₹ 11,500 and Bank
overdraft by ₹ 75,000. The Joint Life policy was surrendered for ₹ 47,500 on 30th September, 2020.
Stock was valued at ₹ 3,17,000 and debtors at ₹ 3,25,000 on 30th September, 2020. The other items
remained the same as on 31st March, 2020.
On 30th September, 2020 the firm sold its business to ST Ltd. The value of goodwill was estimated at ₹
5,40,000 and the remaining assets were valued on the basis of the Balance Sheet as on 30th September,
2020. The ST Ltd. paid the purchase consideration in equity shares of ₹ 10 each. You are required to
prepare a Realization Account and Capital accounts of the partners

Solution
REALISATION ACCOUNT
Particulars ₹ Particulars ₹
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Shares in ST Ltd. (W.N.3) 18,80,000
Building 8,64,500
Furniture 73,125
To Profit:
S 2,70,000
T 2,70,000
22,83,500 22,83,500

PARTNERS’ CAPITAL ACCOUNTS

Date Particulars S T Date Particulars S T
2020 2020
April 1 To cash Drawings 20,000 20,000 April 1 By Balance 6,40,000 6,60,000
W.N. 2) b/d
Sept. 30 To shares in ST 9,30,000 9,50,000 Sept. 30 By Profit 40,000 40,000
Ltd. (W.N. 2)
By Realisation 2,70,000 2,70,000
A/c (Profit)
9,50,000 9,70,000 9,50,000 9,70,000

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Working Notes:
(1) Ascertainment of total capital:
Balance Sheet as at 30th September, 2020
Liabilities ₹ Assets ₹
Sundry creditors 2,77,500 Building 9,10,000
Bills payable 51,000 Less: Depreciation (45,500) 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (Bal. fig.) 13,40,000 Less: Depreciation (8,625) 1,63,875
Furniture 75,000
Less: Depreciation (1,875) 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500

(2) Profit earned during six months to 30 September, 2020

Total capital (of S and T) on 30th September, 2020 (W.N. 1) 13,40,000
Capital on 1 April, 2020
st

S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is ₹40,000 X 2 = ₹80,000 (shared
equally by partners S and T). Half of the profits, has been withdrawn by both the partners equally i.e.
drawings ₹40,000 (₹80,000 X ½) withdrawn by S and T in 1 : 1 (i.e. ₹20,000 each).

(3) Purchase consideration:

Total Assets (W.N. 1) 17,43,500
Add: Goodwill 5,40,000
22,83,500
Less: Liabilities (2,77,500 + 51,000 + 75,000) (4,03,500)
Purchase consideration 18,80,000
Note: Solution is given on basis that reduction in bank overdraft is after surrender of Joint life policy

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TOPIC 4 Amalgamation of Firms

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Question 12 ICAI Study Material
P and Q are partners of P & Co. sharing Profit and Losses in the ratio of 3:1 and Q and R are partners of
R & Co., sharing profits and losses in the ratio of 2:1. On 31st March, 2020, they decide to amalgamate
and form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing profits and losses
in the ratio of [Link]. The Balance Sheets of two firms on the above date are as under:
Liabilities P & Co. R & Co. Assets P & Co. R & Co.
Capital: Fixed assets:
P 2,40,000 - Building 50,000 60,000
Q 1,60,000 2,00,000 Plant & machinery 1,50,000 1,60,000
R - 1,00,000 Office equipment 20,000 6,000
Reserves 50,000 1,50,000 Current assets:
Sundry creditors 1,20,000 1,16,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. - 1,00,000 Sundry debtors 1,60,000 2,00,000
Bank overdraft 80,000 - Bank balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 -
6,50,000 6,66,000 6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ₹ 1,00,000.
(b) Plant and machinery of P & Co. was valued at ₹ 2,50,000 and that of R & Co. at ₹ 2,00,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill valued of P & Co. at ₹ 1,20,000 and R & Co. at ₹ 60,000, but the same will not appear in
the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals
according to the profit sharing ratio.
(f) Provision for doubtful debts has to be carried forward at ₹ 12,000 in respect of debtors of P & Co. and
₹ 26,000 in respect of debtors of R & Co.
Prepare the Balance Sheet of new firm.

Question 13 RTP Nov 2014 / RTP May 2017/ ICAI Study Material
Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The firm Y &
Co. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.
On 31st March, 2020 it was decided to amalgamate both the firms and form a new firm XY & Co.,
wherein A, B and C would be partners sharing Profits and Losses in the ratio of [Link].

Balance Sheet as at 31.3.2020

Liabilities X & Co. Y & Co. Assets X & Co. Y & Co.
Capital: Cash in hand/bank 40,000 30,000
A 1,50,000 - Debtors 60,000 80,000
B 1,00,000 75,000 Stock 50,000 20,000
C - 50,000 Vehicles - 90,000
Reserve 50,000 40,000 Machinery 1,20,000 -
Creditors 1,20,000 55,000 Building 1,50,000 -
4,20,000 2,20,000 4,20,000 2,20,000
The following were the terms of amalgamation:
(i) Goodwill of X & Co., was valued at ₹ 75,000. Goodwill of Y & Co. was valued at ₹ 40,000.
Goodwill account not to be opened in the books of the new firm but adjusted through the Capital
accounts of the partners.
(ii) Building, Machinery and Vehicles are to be taken over at ₹ 2,00,000, ₹ 1,00,000 and ₹ 74,000
respectively
(iii) Provision for doubtful debts at ₹ 5,000 in respect of X & Co. and ₹ 4,000 in respect of Y & Co. are to
be provided.

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You are required to:
(i) Show, how the Goodwill value is adjusted amongst the partners.
(ii) Prepare the Balance Sheet of XY & Co. as at 31.3.2020 by keeping partners capital in their profit
sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in the
respective Partners’ Current accounts.

Solution
(i) Adjustment for raising and writing off of goodwill
Raised in old profit sharing Total Written off in Difference
ratio new ratio
X & Co. Y & Co.
3:2 5:3 [Link]
₹ ₹ ₹ ₹ ₹
A 45,000 -- 45,000 Cr. 46,000 Dr. 1,000 Dr.
B 30,000 25,000 55,000 Cr. 57,500 Dr. 2,500 Dr.
C - 15,000 15,000 Cr. 11,500 Dr. 3,500 Cr.
75,000 40,000 1,15,000 1,15,000 Nil

(ii) Balance Sheet of XY & Co. (New firm) as on 31.3.2020

Liabilities ₹ Assets ₹
Capital Accounts: Vehicle 74,000
A 1,72,000 Machinery 1,00,000
B 2,15,000 Building 2,00,000
C 43,000 Stock 70,000
Current Accounts: Debtors 1,31,000
A 22,000 Cash & Bank 70,000
C 18,000
Creditors 1,75,000
6,45,000 6,45,000

Working Notes:
1. Balance of Capital Accounts at the time of amalgamation of firms
A’s Capital B’s Capital
X & Co.’s Profit and loss sharing ratio 3:2
Balance as per the balance sheet 1,50,000 1,00,000
Add: Reserves 30,000 20,000
Revaluation profit (Building) 30,000 20,000
Less: Revaluation loss (Machinery) (12,000) (8,000)
Provision for doubtful debts (3,000) (2,000)
1,95,000 1,30,000

B’s Capital C’s Capital

Y & Co.’s Profit and loss sharing ratio 5:3
Balance as per the balance sheet 75,000 50,000
Add: Reserves 25,000 15,000
Less: Revaluation loss (vehicle) (10,000) (6,000)
Provision for doubtful debts (2,500) (1,500)
87,500 57,500

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 2. Balance of Capital Accounts in the balance sheet of the new firm as on 31.3.2020
A B C
Balance b/d: X & Co. 1,95,000 1,30,000 --
Y & Co. -- 87,500 57,500
1,95,000 2,17,500 57,500
Adjustment for goodwill (1,000) (2,500) 3,500
1,94,000 2,15,000 61,000
Total capital ₹4,30,000 (Taking B’s capital as base i.e. 1,72,000 2,15,000 43,000
₹2,15,000 x 10/5) to be contributed in [Link] ratio.
Transfer to Current Account 22,000 --- 18,000

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 Practice Questions
TOPIC 1A Normal Dissolution

Question 1 ICAI Study Material

X, Y, and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4: 3: 2.
Following is the Balance Sheet of the firm as on 31st March, 2020.
Liabilities ₹ Assets ₹
Partners Capital: Fixed Assets 5,00,000
X 4,00,000 Stock 3,00,000
Y 3,00,000 Debtors 5,00,000
Z 2,00,000 Cash in Hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000
13,10,000 13,10,000
Partners of the firm decided to dissolve the firm on the above-said date.
Fixed assets realized ₹ 5,20,000 and book debts ₹ 4,40,000. Stocks were valued at ₹ 2,50,000 and it was
taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to ₹ 6,000.
You are required to prepare: (i) Realization account; (ii) Partners capital account; and (iii) Cash account.

Question 2 RTP Nov 2021

P and Q were partners sharing profits equally of P & Q Co. Their Balance Sheet as on March 31, 2021
was as follows:
Equity and Liabilities Amount Assets Amount
Capitals: Bank 30,000
P 1,00,000 Debtors 25,000
Q 50,000 1,50,000 Stock 35,000
Creditors 20,000 Furniture 40,000
Q’s current account 10,000 Machinery 60,000
Reserves 15,000 P’s current account 10,000
Bank overdraft 5,000
2,00,000 2,00,000
The firm was dissolved on the above date:
P took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of
15%. Furniture and Machinery realized for ₹ 30,000 and ₹ 50,000 respectively; There was an unrecorded
investment which was sold for ₹ 25,000; Debtors realized 90% only and ₹ 1,245 were recovered for bad
debts written off last year; There was an outstanding bill for repairs which had to be paid for ₹ 2,000.
You are required to prepare Realization Account, Partners’ capital accounts (including transfer of current
account balances) and Bank Account in the books of the firm.

TOPIC 1B Insolvency of Partner

Question 3 ICAI Study Material

‘Thin’, ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of [Link]. On 30th
September, 2020 their Balance Sheet was as follows :
Liabilities ₹ Assets ₹
Capital Accounts : Premises 50,000
Thin 80,000 Fixtures 1,25,000
Short 50,000 Plant 32,500
Fat 20,000 1,50,000 Stock 43,200
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 Current Accounts : Debtors 54,780
Thin 29,700
Short 11,300
Fat(Dr.) (14,500) 26,500
Sundry Creditors 84,650
Bank Overdraft 44,330
3,05,480 3,05,480
‘Thin’ decides to retire on 30th September, 2020 and as ‘Fat’ appears to be short of private assets, ‘Short’
decides that he does not wish to take over Thin’s share of partnership, so all three partners decide to
dissolve the partnership with effect from 30th September, 2020. It then transpires that ‘Fat’ has no private
assets whatsoever.
The premises are sold for ₹ 60,000 and the plant for ₹ 1,07,500. The fixtures realize ₹ 20,000 and the
stock is acquired by another firm at book value less 5%. Debtors realise ₹ 45,900.
Realisation expenses amount to ₹ 4,500. The bank overdraft is discharged and the creditors are also paid
in full.
You are required to write up the following ledger accounts following the rules in Garner vs. Murray:
(i) Realisation Account;
(ii) Partners’ Current Accounts;
(iii) Partners’ Capital Accounts showing the closing of the firm’s books

Question 4 Inter Nov 2019 (15 Marks)

G, S & J were partners sharing profits and losses in the ratio of [Link], no partnership salary or interest on
capital being allowed. Their Balance Sheet as on 31.3.2019 is as follows:
Liabilities Amount Assets Amount
Partners’ fixed capital accounts: Fixed assets:
G 24,000 Goodwill 48,000
S 24,000 Land 9,600
J 12,000 Plant & Machinery 15,360
Partners’ current accounts: Motor Car 840
G 600
S 10,800 Current assets:
J (480) Stock 4,680
Loan from G 9,600 Trade debtors 2,400
Trade creditors 14,880 Less: Provision (120) 2,280
Cash at bank 240
Miscellaneous losses:
Profit & loss 14,400
95,400 95,400

On 1st April, 2019, the partnership was dissolved. Motor car was taken over by G at a value of ₹ 600, but
no cash was given specifically in respect of this transaction. Sale of other assets realized the following
amounts:
Particulars Amount
Goodwill Nil
Land 8,400
Plant & Machinery 6,000
Stock 3,600
Trade Debtors 1,920
Trade creditors were paid ₹ 14,040 in full settlement of their debts. The cost of dissolution amounted to ₹
1,800. The loan from G was repaid; G and S both were fully solvent and able to bring in any cash
required but J was forced into bankruptcy and was only able to bring 1/2 of the amount due.

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You are required to prepare:
(i) Cash & Bank account
(ii) Realization account, and
(iii) Partners’ Fixed Capital Accounts (after transferring current accounts balances)
Apply Garner Vs. Murray rule.

Question 5
P, Q, R and S had been carrying on business in partnership sharing profits & losses in the ratio of [Link].
They decided to dissolve the partnership on the basis of following Balance Sheet as on 30th April, 2020:
Liabilities ₹ Assets ₹
Capital Accounts Capital Accounts
P 1,68,000 R 25,000
Q 1,08,000 2,76,000 S 18,000 43,000
General reserve 95,000 Land & building 2,46,000
Capital reserve 25,000 Furniture & fixtures 65,000
Sundry creditors 36,000 Stock 1,00,000
Mortgage loan 1,10,000 Debtors 72,500
Cash in hand 15,500
5,42,000 5,42,000
(i) The other assets realized as follows:
Land & building 2,30,000
Furniture & fixtures 42,000
Stock 72,000
Debtors 65,000
(ii) Expenses of dissolution amounted to ₹ 7,800.
(iii) Further creditors of ₹ 18,000 had to be met.
(iv) R became insolvent and nothing was realized from his private estate.
Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account, Partners’
Capital Accounts and Cash Account.

TOPIC 2 Piecemeal Distribution

Question 6 RTP May 2016 / ICAI Study Material
The firm of Omega was dissolved on 31.3.2020, at which date its Balance Sheet stood as follows:
Liabilities ₹ Assets ₹
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and
distribute the cash after discharge of liabilities. Their fees which include all expenses is fixed at ₹
1,00,000. No loss is expected on realisation since fixed assets include valuable land and building.
Realisations are:
₹
I (including Cash & Bank) 5,00,000
II 15,00,000
III 15,00,000
IV 30,00,000
V 30,00,000
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The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You
are required to prepare a statement showing distribution of cash with necessary workings.

Question 7 IPCC May 2014 (16 Marks) / RTP May 2015 / RTP Nov 2017
The partners P, Q & R have called you to assist them in winding up the affairs of their partnership on
31.12.2019. Their balance sheet as on that date is given below:
Liabilities ₹ Assets ₹
Capital Accounts Land & Building 50,000
P 65,000 Plant and Machinery 46,000
Q 50,500 Furniture & Fixture 10,000
R 32,000 Stock in trade 14,500
Sundry Creditors 16,000 Cash at Bank 9,000
Sundry Debtors 14,000
Loan-P 13,000
Loan-Q 7,000
1,63,500 1,63,500
(a) The partners share profit and losses in the ratio of [Link].
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:
January 2020
• ₹ 9,000 - collected from debtors; balance is uncollectable.
• ₹ 8,000 - received from the sale of entire furniture
• ₹ 1,000 - Liquidation expenses paid.
• ₹ 6,000 - Cash retained in the business at the end of month
February 2020
• ₹ 1,000 - Liquidation expenses paid.
• As part payment of his capital, R accepted a machinery for ₹ 9,000 (book value ₹ 3,500)
• ₹ 2,000 - Cash retained in the business at the end of month
March 2020
• ₹ 38,000 - received on the sale of remaining plant and machinery.
• ₹ 10,000 - received from the sale of entire stock.
• ₹ 1,700 - Liquidation expenses paid.
• ₹ 41,000 - Received on sale of land & building.
• No Cash is retained in the business.
Prepare a schedule of cash payments amongst the partners by "Higher Relative Capital Method".

Question 8 IPCC Nov 2016 (16 Marks) / RTP Nov 2018 (Similar) / RTP May 2021
X, Y and Z are in partnership sharing profits and losses in the ratio of [Link]. The Balance Sheet of the
firm as on 31st March, 2020 is as below:
Liabilities ₹ Assets ₹
X’ s Capital 60,000 Factory Building 96,640
Y’ s Capital 40,000 Plant & Machinery 65,100
Z’ s Capital 50,000 Trade Receivables 21,600
Y’ s Loan 18,000 Inventories 49,560
Trade Payables 66,000 Cash at Bank 1,100
2,34,000 2,34,000

On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since the
realisation of assets was protracted, they decided to distribute amounts as and when feasible and for this
purpose they appoint Z who was to get as his remuneration 1% of the value of the assets realised other
than cash at bank and 10% of the amount distributed to the partners.

Assets were realised piecemeal as under:

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 ₹
I 74,600
II 69,301
III 40,000
IV 28,000
Dissolution expenses were provided for estimated amount of 12,000
The creditors were settled finally for 63,600
You are required to prepare a statement showing distribution of cash amongst the partners by "Highest
Relative Capital Method".
Question 9 ICAI Study Material
The following is Balance Sheet of A, B, C on 31st Dec, 2020 when they decided to dissolve partnership:
Liabilities ₹ Assets ₹
Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts :
A 15,000
B 18,000
C 9,000
49,000 49,000

The assets realised the following sums in instalments:

₹
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100
(includes saving in expenses 100)
34,000
The expenses of realisation were expected to be ₹ 500 but ultimately amounted to ₹ 400 only. Show how
at each stage the cash received should be distributed between partners. They share profits in the ratio of
[Link]. Show by Maximum Loss Method.

Question 10 Inter Nov 2019 (5 Marks)

AD, BD & SD are partners sharing profits and losses in the ratio of [Link]. There capitals were ₹13,440,
₹8,400, ₹11,760 respectively.
Liabilities and assets of the firm are as under:
Liabilities: Amount
Trade creditors 2,800
Loan from partners 1,400
Assets of the firm:
Patent 1,400
Furniture 2,800
Machinery 1,680
Stock 5,600
The assets realized in full in the order in which they are listed above. BD is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available, applying
maximum possible loss procedure.

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TOPIC 3 Sale of Business to Company or Conversion of Firm into Company
Question 11 Inter Nov 2020 (15 Marks)
Mohan and Sohan were carrying business in partnership, sharing profit and losses equally. The Balance
Sheet of the firm as on 31st March, 2020 stood as under:
Liabilities ₹ Assets ₹
Trade Payables 72,000 Inventories 72,000
Bank overdraft 42,000 Plant & Machinery 1,80,000
Capital A/cs: Trade Receivables 84,000
Mohan 1,68,000 Joint Life Policy 10,800
Sohan 1,56,000 3,24,000 Leasehold Premises 40,800
Profit & Loss A/c 31,200
Partner’s Current Accounts:
Mohan 12,000
Sohan 7,200 19,200
4,38,000 4,38,000
The business was carried on till 30th September, 2020. The partners withdrew the amounts equal to half
the amount of profit made during the period of six months ended on 30th September, 2020 equally. The
profit was calculated after charging depreciation @5% per annum on Leasehold premises and 10% per
annum on Plant & Machinery.
In the half year, the amounts of Bank Overdraft and Trade Payables stood reduced by ₹ 18,000 and ₹
12,000 respectively. On 30th September, 2020, the inventories were valued at ₹ 90,000 and Trade
Receivables at ₹ 72,000. The Joint Life Policy had been surrendered for ₹ 10,800 before 30th September,
2020 and all other items remained the same as at 31st March, 2020.
On 30th September, 2020, the firm sold off its business to PKR Limited. The value of Goodwill was
fixed at ₹ 1,20,000 and the rest of the assets and liabilities were valued on the basis of their book values as
at 30th September, 2020. PKR Ltd. paid the purchase consideration in equity shares of ₹10 each.
You are requested to prepare the following:
(1) Balance Sheet of the Firm as at 30th September, 2020;
(2) Realization Account;
(3) Partners' Capital Account showing the final settlement between them.

Question 12 Inter May 2019 (20 Marks)

The following is the Balance Sheet of Messers Red and Black as on 31st March 2019:
Liabilities ₹ Assets ₹
Red’s Capital 80,000 Buildings 1,00,000
Black’s Capital 1,00,000 1,80,000 Stock 60,000
Red’s Loan 20,000 Debtors 40,000
General Reserve 20,000 Investment
Creditors 40,000 6% Debentures in Cool Ltd. 40,000
Cash 20,000
2,60,000 2,60,000
It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st April 2019.
He is required to contribute cash towards goodwill and ₹ 20,000 towards capital.
The following further information is furnished:
(i) The partners Red and Black shared the profits in the ratio 3:2.
(ii) Mr. Red was receiving a salary of ₹ 1,000 p.m. from the very inception of the firm in addition to
share of profit.
(iii) The future profit ratio between Red, Black and White will be [Link]. Mr. Red will not get any salary
after the admission of Mr. White.
(iv)

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 a. The goodwill of the firm shall be determined on the basis of 2 years’ purchase of the average profits
from business of the last 5 years. The particulars of the profits are as under :
₹
Year ended 31-03-15 Profit 40,000
Year ended 31-03-16 Loss 20,000
Year ended 31-03-17 Profit 40,000
Year ended 31-03-18 Profit 50,000
Year ended 31-03-19 Profit 60,000
The above profits and losses are after charging the salary of Mr. Red. The profit of the year ended
31st March 2015 included an extraneous profit of ₹ 60,000 and the loss of the year ended 31st
March 2016 was on account of loss by strike to the extent of ₹ 40,000.
b. It was agreed that the value of the goodwill of the firm should not appear in the books of the firm.
(v) The trading profit for the year ended 31st March, 2020 was ₹ 80,000 before depreciation.
(vi) Each partner had drawn ₹ 2,000 per month as drawing during the year 2019-20.
(vii) The value of the other assets and liabilities as on 31st March, 2020 were as under:
Building (before depreciation) 1,20,000
Stock 80,000
Debtors Nil
Investment 40,000
Creditors Nil
(viii) Interest was @ 6% per annum on Red's loan was not paid during the year.
(ix) Interest on Debenture was received during the year.
(x) Depreciation is to be provided @ 5% on Closing Balance of Building.
(xi) Partners applied for conversion of the firm into a private Limited Company i.e. RBW Private
Limited. Certificate received on 1.4.2020.
They decided to convert Capital accounts of the partners into share capital, in the ratio of 3: 1: 1 (on the
basis of total Capital as on 31.3.2020). If necessary, partners have to subscribe to fresh capital or
withdraw.

You are required to prepare:

(1) Profit & Loss Account for the year ended 31st March, 2020 in the books of M/s Red and Black.
(2) Balance Sheet as on 1st April, 2020 in the books of RBW Private Limited.

Question 13 ICAI Study Material

X, Y and Z were in partnership sharing profits and losses [Link]. There was no provision in the agreement
for interest on capital or drawings. X died on 31.3.2019 & on that date, partners' balance were as under:
Capital Account: X - ₹ 60,000, Y - ₹ 40,000, Z - ₹ 20,000.
Current Account: X - ₹ 40,000 (Cr.), Y - ₹ 30,000 (Cr.), Z - ₹ 10,000 (Dr.)
By the partnership agreement, the sum due to X's estate was required to be paid within a period of 3
years, and minimum installment of ₹ 30,000 each were to be paid, the first such installment falling due
immediately after death and the subsequent installments at half-yearly intervals. Interest @ 6% p.a. was
to be credited half yearly. In ascertaining his share, goodwill (not recorded in the books) was to be valued
at ₹ 90,000 and the assets, excluding the Joint Endowment Policy (mentioned below), were valued at ₹
60,000 in excess of the book values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets. The
Joint Assurance Policy shown in the books at ₹ 40,000 matured on 1.4.2019, realizing ₹ 52,000;
payments of ₹ 30,000 each were made to X's Executors on 1.4.2019, 30.9.2019 and 31.3.2020. Y and Z
continued trading on the same terms as previously and the· net profit for the year ending 31.3.2020
(before charging the interest due to X's estate) amounted to -- ₹ 52,000. During that period, the partners'
drawings were Y - ₹ 15,000; and Z ₹ 8,000.

On 1.4.2020, the partnership was dissolved and an offer to purchase the business as a going concern for ₹
1,80,000 was accepted on that day. A cheque for that sum was received on 30.6.2020.
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The balance due to X's estate, including interest, was paid on 30.6.2020 and on that day, Y and Z
received the sums due to them.
You are required to write-up the Partners’ Capital and Current Accounts from 1.4.2019 to 30.6.2020.
Show also the account of the executors of X.

TOPIC 4 Amalgamation of Firms

Question 14 IPCC May 2016 (16 Marks) (Similar) / IPCC Nov 2017 (16 Marks)
R and S are partners of RS & Co. sharing the profit and losses in the ratio of 3:2 and S and M were
partners in SM & Co. sharing the profits and losses in the ratio of 4:1. On 31st March, 2020, they decided
to amalgamate their firms and form a new firm namely M/s RSM & Co. wherein R, S, and M will share
the profits and losses in the ratio of 5 : 3 : 2. The Balance Sheets of the two firms as on 31st March, 2020
were as under:
Liabilities RS & Co. SM & Co. Assets RS & Co. SM & Co.
Capital: Building 75,000 80,000
R 2,50,000 - Plant & Machinery 2,00,000 1,50,000
S 1,50,000 1,75,000 Office Equipments 30,000 15,000
M - 1,25,000 Stock in trade 1,30,000 1,25,000
Reserves 40,000 1,25,000 Sundry Debtors 1,50,000 1,75,000
Sundry Creditors 60,000 2,25,000 Bank Balances 40,000 35,000
Due to SM & Co. 50,000 - Cash in hand 25,000 20,000
Bank O/D 1,00,000 - Due from RS& Co - 50,000
6,50,000 6,50,000 6,50,000 6,50,000

The amalgamation of the firms was done on the following terms:

a) Building of both the firms were valued at ₹ 1.00 lac each.
b) Plant and Machinery of RS & Co. was valued at ₹ 1,75,000 and of SM & Co. was at ₹ 1,60,000.
c) Stock in trade of RS & Co. was to be appreciated by 10% and of SM & Co. by 15%.
d) Goodwill of RS & Co. was valued at ₹ 1,50,000 and of SM & Co. at ₹ 1,00,000, but the same will not
appear in the books of accounts of the amalgamated firm.
e) Provisions for doubtful debts @ 5% for debtors of both the firms have to be made.
f) Other assets and liabilities will be taken over at their respective book value.
g) The partners will bring necessary cash as may be required to pay the other partners to adjust their
capitals according to their profit sharing ratio.
Prepare the Balance Sheet of the Amalgamated Firm and Capital Accounts of the partners in the books
of the old Firms.

Question 15
A & B are partners in AB & Co. sharing Profit/Loss in the ratio of 3:2 and B & C are partners in BC &
Co. sharing Profit/Loss in the ratio of 2: 1 carrying on same type of business. On 1st April, 2020, A, B &
C decide to form a new Partnership Firm ABC & Co. by amalgamating AB & Co. and BC & Co. A, B
& C will share Profit/Loss in the ratio of [Link] in ABC & Co.

Their Balance Sheets on 1st April, 2020 were as under:

Liabilities AB & Co. BC & Co. Assets AB & Co. BC & Co.
Capitals Buildings 20,000 10,000
A 66,000 - Plant & Machinery 21,000 29,000
B 67,000 50,000 Vehicles 15,000 5,000
C - 48,000 Furniture 4,000 7,500
Reserves 10,000 5,000 Stock 50,500 19,500
Sundry Creditors Sundry Debtors
Others 41,000 38,000 Others 43,500 37,000
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 BC & Co. 15,000 - AB & Co. - 15,000
XYZ & Co. - 9,000 XYZ & Co. 25,000 -
Cash at Bank 15,000 18,000
Cash in hand 5,000 9,000
1,99,000 1,50,000 1,99,000 1,50,000

Following are the terms for the amalgamation:

(a) Goodwill will be valued at ₹ 25,000 for AB & Co. and ₹ 18,000 for BC & Co. But same will not
appear in the books of the new firm.
(b) Building was taken over as follows:
• Building of AB & Co. was valued with upward revision of ₹ 10,000
• Building of BC & Co. valued at ₹ 16,000.
(c) Plant & Machinery to be taken over with downward valuation by ₹ 2,000 of AB & Co. and with new
value of ₹ 32,000 of BC & Co.
(d) Value of vehicles to be taken over was reduced by ₹ 5,000 of AB & Co. and reduced to ₹ 2,000 of BC
& Co.
(e) Excess/Deficit Capitals for partners taking A's Capital as base with reference to share in profits are to
be transferred to Current Accounts.
You are required to prepare Balance Sheet of the new firm and Capital Accounts of the partners in the
books of old firm.

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