Go through this Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.
Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting Notes
Topic:
Important highlight:
1. Dissolution of a firm means putting an end to the partnership i.e. closing down the firm as a whole.
2. When the firm is dissolved, all assets are disposed off and all liabilities are paid off.
3. Dissolution of partnership is different from dissolution of a firm.
| Dissolution of Partnership | Dissolution of Firm |
| (1) The partnership dissolves but the business of the firm is continued. | The business of the firm comes to an- end. |
| (2) Partnership among partners does not exist. | The partnership does not comes to an end but the business comes to an end. |
| (3) Dissolution of partnership may occur because of expiry of the term, death, retirement or insolvency of the partner. | Dissolution of firm may occur due to the following reasons – mutual agreement, insolvency of all partners except one, business of firm become illegal, etc. |
Note : Dissolution of a partnership does not necessarily means dissolution of a firm whereas dissolution of a firm necessarily implies dissolution of partnership. However if, after dissolution of partnership the partners are not willing to carry on the business then, the firm automatically dissolves.
Types of dissolution:
- Voluntary dissolution
- Forced dissolution
(i) Voluntary dissolution:
- This occurs when the partners mutually decide to dissolve the firm.
- In case the partnership is at will then any partner can give notice of dissolution and the firm will be dissolved there after.
(ii) Forced dissolution:
(a) When the court orders dissolution, it is known as forced dissolution.
The court may order dissolution based on following reasons:
- Where a partner has become of unsound mind
- Where partner suffers from permanent incapacity
- Where a partner is guilty of misconduct affecting business.
- Where the court thinks that the dissolution is just and equitable.
- Where the partners disregard the partnership agreement
- Where any of the partner transfers his share to a third person
- Where the business cannot be carried on except for loss i.e. there is no profit.
(b) Where all the partners except one become illegal
(c) Where the business of the firm is declared as illegal.
Settlement of Accounts:
According to Section 48, in setting the accounts of a firm after dissolution. The accounts will be settled as follows:
1. All assets will be disposed off and liabilities paid off.
2. From the amount realized from the sale of assets the payment to the third parties will be made.
3. Any surplus remaining after settling the claims of the third parties, the remaining amount will be distributed among the partners.
| Revaluation Account | Realisation Account |
| It records the effect of assets and liabilities. | It records the sale of assets and liabilities. |
| It is prepared at the time of reconstitution of the firm. | It is prepared at the time of dissolution of the firm. |
| It contains only those assets and liabilities which are revalued. | It generally contains all the assets and liabilities. |
| On revaluation, the accounts of the assets and liabilities are not closed. | On preparing the realisation account the accounts of assets and liabilities are closed. |
| It is prepared to find out the profit or loss on revaluation of the assets. | It is prepared to calculate the profit or loss on sale of assets and settlement of liabilities. |
| The balance of this A/c is transferred to the old partner’s Capital A/c. | Accounting entries are made at the book values of asset and liabilities. |
Some General Principles Regarding Settlement of Accounts:
(a) Losses or any deficiencies of capital shall be first paid out of profits, then out of capital and lastly, by the partners individually.
(b) The amount realized from sale of assets shall be applied in the following order-
- for paying debts of the firm due to third parties.
- for paying any loans or advances which the firm has taken from partners
- for paying partner’s capital.
- any surplus remaining after that shall be distributed among partners in their profit sharing ratio.
(c) The private property of the partners shall be first used for paying private debts first and remaining amount can be used for paying firm’s liabilities.
Similarly, firm’s asset should first be used for paying firm’s liabilities.
(d) The liabilities of the partners are joint and several.
Accounting Treatment on Dissolution:
- Preparation of Realization Account for settling assets and liabilities.
- Transfer of’profit/loss on realization to Partner’s Capital A/c.
- Repayment of loans of the partners.
- Transfer of accumulated reserves and profit or loss to the capital account of partners.
- Closing the books of account by paying the balances to the partners.
After all above treatments, the books of account will close.
1. Preparation of Realization Account:
(a) For transfer of assets to Realization A/c:
Realization A/c Dr. (at book values)
To Asset A/c
Note:
- Cash and bank balances should not be transferred as they are realized assets.
- Debit balance of P/L A/c should not be transferred.
(b) For sale or disposal of assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c
(c) For assets taken over by the partner:
Partner’s Capital A/c Dr. (at agreed value)
To Realization A/c
(d) For transfer of liabilities to realization:
Liability A/c Dr.
To Realization A/c
Note : Only outside liabilities are transferred. Partners Capital A/c and Loan A/c are not transferred.
(e) For payment of liabilities:
Realization A/c Dr.
To Cash A/c
(f) For payment of unrecorded liabilities:
Realization A/c Dr.
To Cash A/c
(g) For sale of unrecorded assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c
(h) For any liability assumed by a partner:
Realization A/c Dr.
To Partner’s capital A/c
(i) For payment of realization expenses:
Realization A/c Dr.
To Cash A/c
(2)
(1) For profit on realization:
Realization A/c Dr.
To Partners Capital A/c
(2) For loss on realization:
Partners Capital A/c Dr.
To Realization A/c
(3) Repayment of partner’s loan A/c:
Partners Loan A/c Dr.
To Cash A/c
(4) For transfer of undistributed profits and reserves:
Profit/Loss/Reserve A/c Dr.
To Partners Capital A/c
(5) Settlement of partner’s capital A/c:
(i) If the capital A/c is showing a credit balance
Partner’s Capital A/c Dr.
To Cash A/c
(ii) When the capital A/c shows a debit balance – the partners will be asked to bring sufficient cash to make up the deficiency.
Cash A/c Dr.
To Partner’s Capital A/c
Return of premium on dissolution:
1. Sometimes, an incoming partner pays goodwill to another partner on the assurance that firm will be carried on for a fixed time period.
2. If the firm dissolves before that fixed period then that partner is entitled to claim refund for the goodwill paid by him.
3. If a partner on his admission pays to the other partner an amount for goodwill (also known as premium) and it is agreed that the partnership would be for a fixed term.
4. This refund cannot be claimed:
- When firm is dissolved due to death of a partner.
- When dissolution takes place because of misconduct of the partner making the claim.
- Where dissolution is in pursuance of an agreement that no such refund will be made.
Insolvency of Partner:
1. Insolvency means when nothing can be recovered from a partner.
2. Insolvency can be:
- of a single partner
- of all the partners
(a) Insolvency of a partner
- When dissolution occurs, any amount is due from a partner and he becomes insolvent then, this will be treated as a loss which will be borne by the remaining solvent partners in the Profit sharing ratio.
- The above treatment was changed after the decision of famous case of “Garner Vs Murray”.
Decision of the case: Garner Vs. Murray –
- Loss on realization will be borne by all the partners including the insolvent partner in their profit sharing ratio.
- The solvent partners should then bring in cash equal to their share of realization.
- The deficiency of the insolvent partner must be shared by solvent partners in their capital ratio.
Capital Ratio will be determined based on their capital appearing before dissolution.
In India Garner Vs. Murray Rule is applicable with some modifications:
- Here the loss on realization will not be brought by the solvent partners in cash.
- The deficiency of insolvent partners will be debited to solvent partners in the capital ratio.
- When capital accounts are fluctuating then the balances for determining capital ratio will be taken after necessary adjustments.
- If any partner is having debit balance but is not insolvent, then he will not bear the deficiency of insolvent partner.
Procedure for settlement of account:
- Preparation of Realization Account
- Transfer profit/loss on realization to capital accounts
- Prepare insolvent partners Capital A/c
- The debit balance of insolvent partners capital A/c shall be transferred to solvent partners capital A/c in capital ratio.
- Settle the accounts of solvent partners.
(b) Insolvency of all the partners:
- When all the partners become insolvent, the claims of the creditors will not be satisfied in full.
- Accounting treatment will be done in the following manner
- Prepare Realization A/c (only assets realized and expenses shall be shown in Realization A/c).
- The profit/loss from realization shall be transferred to partner’s capital A/c in profit sharing ratio.
- Prepare Cash A/c and also include the amount which can be recovered from partner’s estate.
- The total cash available shall be distributed to the creditors.
- The balance remaining in the Creditors A/c and Capital A/c of partners shall be transferred to the Deficiency A/c.
- After this, all accounts will be closed.
Steps to be taken for Accounting in case of insolvency:
- Step 1 : Realisation Account is prepared in the usual manner
- Step 2 : Profit/ Loss on realization is transferred to the capital accounts of partners in the profit sharing ratio.
- Step 3 : Insolvent Partner’s Capital A/c is prepared and any thing realised from his personal property is credited to his account. Step 4 : The debit balance of the insolvent partners capital account is transferred to the Capital A/c of other solvent partners in the ratio of their respective capitals before dissolution.
- Step 5 : Claims of the solvent partners are settled there after.
Limited Liability Partnership (LLP):
Limited Liability Partnership entities, the world wide recognized form of business organization has been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. In all LLP, one partner is not responsible or liable for another partner’s misconduct or negligence; this is an important difference from that of an unlimited partnership.
In an LLP, all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents.
Limited Liability Partnership is managed as per the LLP Agreement, however in the absence of such agreement the LLP would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008 which describes the matters relating to mutual rights and duties of partners of the LLP and of the limited liability partnership and its partners.
LLP has a separate legal entity, liable to the full extent to its assets; the liability of the partners would be limited to their agreed contribution in the LLP. Further no partner would be liable on account of the independent or
un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Difference Between Limited Liability Partnership and Partnership Firm:
| Basis | Limited Liability Partnership | Partnership Firm |
| Governing Law | The Limited Liability Partnership Act, 2008 and various Rules made thereunder | The Indian Partnership Act, 1932 and various Rules made thereunder |
| Registration | Compulsory | Optional |
| Creation | Created by law | Created by contract |
| Separate Legal Entity | It is separate legal entity, separate from its partners/designated partners. | It is not separate legal entity from |
| Perpetual Succession | It has perpetual succession. | Partners are collectively referred as firm. |
| Common Seal | It denotes the signature of the Company and LLP may have its own common seal, if it besides to have one. | It does not have perpetual succession. |
| Legal Proceeding | LLP can also sue and be sued | Not required |
| Liability | Liability of partners is limited up to their capital contribution however in case a partner acts with an intention to conduct fraud, they are personally liable. | Only registered partnership can sue. |
| Transferability of Interest | Rights/interest of partners are transferable as per the provisions of LLP agreement. | Transferability of Interest subject to the mutual consent of all the members. |
| Maximum number of Member | No cap of maximum number of its partners. | Maximum 10 for banking business and 20 for other business. |
Partnership Accounts-Retirement and Death of a Partner MCQ Questions
1. Retirement or death of a partner.
(a) Is dissolution of partnership agreement
(b) Is dissolution of a firm
(c) May or may not be a dissolution of partnership agreement
(d) None of the above
Answer:
(a) Is dissolution of partnership agreement
2. If all the partners, but one are insolvent it is:
(a) Dissolution of an agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm
3. If all the partners, but one, are solvent it is:
(a) Dissolution of partnership agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm
4. At the time of dissolution:
(a) All the assets are transferred to realization A/c
(b) Only current assets are transferred to realization A/c
(c) Non cash assets are transferred to realization A/c
(d) Only liquid and current asset are transferred to realization A/c
Answer:
(c) Non cash assets are transferred to realization A/c
5. At the time of dissolution non-cash assets are credited with:
(a) Market value
(b) Book value
(c) As the agreed amount among the partners
(d) Cost or market which ever is low
Answer:
(b) Book value
6. If a partner takes over an asset of the firm, his capital account:
(a) Will be debited with the amount as agreed
(b) Will be credited with the market value of the asset
(c) Will be debited with book value of the asset
(d) None of the above
Answer:
(a) Will be debited with the amount as agreed
7. Loss on realization is distributed among partners:
(a) According to profit and loss ratio
(b) According to capital ratio
(c) As decided among them
(d) None of the above
Answer:
(a) According to profit and loss ratio
8. Loss on realization is:
(a) Debited to partners capital A/c
(b) Credited to partners capital A/c
(c) Debited to realization A/c
(d) Credited to realization A/c
Answer:
(a) Debited to partners capital A/c
9. When all partners are insolvent creditors will be:
(a) Paid fully
(b) Paid from private estate
(c) Taken over by the partners
(d) Paid by government
Answer:
(a) Paid fully
10. The persons who have entered into a partnership business are individually called:
(a) Realization A/c
(b) Partners capital A/c
(c) Sundry debtors
(d) Provision for bad debts A/c
Answer:
11. The persons who have entered into a partnership business are individually called:
(a) Vendor
(b) Agents
(c) Partners
(d) A firm
Answer:
(c) Partners
12. If no provision is made in agreement regarding the duration of the partnership:
(a) Limited partnership
(b) Partnership at-will
(c) None
(d) Particular partnership
Answer:
(b) Partnership at-will
13. A person who declares by word of mouth as partner of the firm is called:
(a) Active partner
(b) Estopple partner
(c) Dormant partner
(d) Nominal partner
Answer:
(b) Estopple partner
14. At the time of dissolution all the assets of firm are transferred to the realization A/c:
(a) Market value
(b) Book value
(c) Cost value
(d) Bale value
Answer:
(b) Book value
15. Balance of realization A/c is transferred to the capital A/c of the partners in:
(a) Capital ratio
(b) Profit sharing ratio
(c) Interest Ratio
(d) Equally
Answer:
(b) Profit sharing ratio
16. The decision is Garner Vs. Murray was given in:
(a) 1904
(b) 1905
(c) 1933
(d) 1804
Answer:
(a) 1904
17. The profit/loss revealed by realisation account is transferred to the capital accounts of the partners in:
(a) Profit sharing ratio
(b) Capital ratio
(c) Gaining ratio
(d) Sacrificing ratio
Answer:
(a) Profit sharing ratio
18. What entry will be passed if a partner takes over a liability of a firm?
(a) Debit realisation A/c and credit liability A/c
(b) Debit liability A/c and credit realisation A/c
(c) Debit realisation A/c and credit partner’s capital A/c
(d) Debit partners capital A/c and credit liabilities A/c
Answer:
(c) Debit realisation A/c and credit partner’s capital A/c
19. At the time of realisation, balance standing in the accumulated reserve is transferred to _________.
(a) Balance sheet
(b) P & L A/c
(c) Realisation A/c
(d) Partners capital A/c
Answer:
(d) Partners capital A/c
20. Return of premium on dissolution cannot be allowed if _________.
(a) Firm is dissolved due to the death of a partner
(b) Where the dissolution takes place due to the misconduct of the partner making the claim
(c) Where the dissolution takes place in pursuance of an agreement
(d) All of the above
Answer:
(d) All of the above
21. As per Garner v/s. Murray rule, the loss due to the insolvency of a partner is to be borne by the other partner is _________.
(a) Sacrificing ratio
(b) Capital ratio
(c) Profit sharing ratio
(d) Gaining ratio
Answer:
(b) Capital ratio
22. Which of the following statement is true?
(a) If all the partners are insolvent, then the assets are not transferred to the realisation account
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account
23. If all the partners become insolvent, then the balance in the capital accounts should be transferred to
(a) Deficiency account
(b) Realisation account
(c) Balance sheet
(d) General reserve
Answer:
(a) Deficiency account
24. Which of the following is true about a partnership –
(a) All partners invest an equal amount of capital in the partnership’s business
(b) All partners are personally liable for the debts of the Partnership business
(c) Partnerships get favourable tax treatment compared to corporations
(d) A partnership requires at least three persons.
Answer:
(b) All partners are personally liable for the debts of the Partnership business
Since contribution to Capital A/c is decided by partner’s in partnership deed so statement. ‘All partners invest an equal amount of capital in the business’ is not correct. Similarly, the statement ‘partnerships get favourable tax treatment compared to corporations’ and ‘A partnership requires atleast three persons’ is not correct because tax levied on firm according to Acts and maximum or minimum numbers of partner in a firm is defined in the Companies Act, 2013.
Thus, option (b) All partners are personally liable for the debts of the partnership business is right.
25. When firm dissolves, then Goodwill is transferred to which A/c?
(a) Realisation A/c
(b) Goodwill A/c
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Realisation A/c
When the firm is dissolved, all the assets and liabilities are transferred to Realisation A/c which includes goodwill.
26. When is premium of dissolution is not allowed to partners?
(a) If firm is dissolved due to death of partner
(b) If dissolution takes place due to misconduct of partner making claim
(c) Both (a) and (b)
(d) None of the above.
Answer:
(c) Both (a) and (b)
Premium on dissolution cannot be allowed in the following cases as per Partnership Act:
(a) Firm is dissolved due to death of partner.
(b) When dissolution takes place due to the misconduct of partner’s making claim.
Hence, option (c) is correct.
27. If a partner goes insolvent & is not able to bring his share of deficiency in cash, then his deficiency shall be borne by the remaining solvent partners:
(a) Equally
(b) On the basis of profit sharing ratio
(c) On the basis of their adjusted capital ratio
(d) On the basis of their original investment
Answer:
(c) On the basis of their adjusted capital ratio
In India, it is mentioned in the Partnership deed, that on the insolvency of a partner deficiency of his Capital A/c will be borne in particular ratio, it will be borne accordingly in the case of insolvency of the partner. But if nothing is mentioned about ratio in the partnership deed, the deficiency of the insolvent partner’s capital A/c will be shared by the solvent partners in their capital ratio.
28. When is the realisation A/c made in partnership?
(a) At the time of admission of partner
(b) At the time of death of partner
(c) At the time of retirement
(d) At the time of dissolution of firm.
Answer:
(d) At the time of dissolution of firm.
Realisation A/c is the nominal account prepaid at the time of dissolution of partnership firm showing the realisation of assets and settlement of liabilities. Hence, it is made at the time of dissolution of the firm.
29. Loss on Realisation is:
(a) Debited to Partner’s Capital A/c
(b) Credited to Partner’s Capital A/c
(c) Debited to Partner’s Current A/c
(d) Credited to Partner’s Current A/c
Answer:
(a) Debited to Partner’s Capital A/c
Loss on Realisation is the revenue loss to be debited to Partner’s Capital A/c arising from the realisation of assets & settlement of liabilities.
Hence, option (a) is correct.
30. On dissolution of partnership firm, X one of the partners was to receive ₹ 3,000 as remuneration for the dissolution work, the entry in the books of partnership will be:
(a) Debit x’s Capital A/c ₹ 3,000
Credit Realisation A/c ₹ 3,000
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(c) Debit Revaluation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(d) Debit x’s Capital A/c ₹ 3,000
Credit Revaluation A/c ₹ 3,000
Answer:
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
The following entry will be passed.
Realisation A/c Dr. 3,000
To X’s Capital A/c 3,000
(Being ₹ 3,000 received as remuneration by X)
31. A Court may dissolve the partnership firm on the grounds of – (i) insanity of a partner (ii) permanent incapacity of partner (iii) misconduct by a partner. The options are:
(a) All (i), (ii) and (iii)
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i) and (ii) only.
Answer:
(a) All (i), (ii) and (iil)
Partnership is dissolved by mutual agreement but in case of insanity of partner, incapacity of partner and misconduct by a partner, court can dissolve partnership.
32. According to Garner vs. Murray rule, realisation loss should be divided among solvent partners _________.
(a) On the basis of their original investments
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratios
Answer:
(b) In profit and loss sharing ratio
Decision of case Garner Vs. Murray –
Loss on realisation will be borne by partners in their Profit Sharing Ratio
The solvent partner should then bring cash equal to their share of realisation
The deficiency must be shared by solvent partner in their Capital Ratio.
33. Realization A/c of partners at the time of dissolution is closed by _________.
(a) Bank A/c
(b) Loan A/c
(c) Partner’s capital A/c
(d) Partner’s loan A/c
Answer:
(c) Partner’s capital A/c
On dissolution, the books of accounts of the partnership firm are closed. “Realisation Account” is opened and transfer to it all the assets except cash in hand and at bank. Sundry Debtors will be transferred at gross amount. Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed.
34. At the time of dissolution all the assets of a firm are transferred to realization A/c _________.
(a) Market value
(b) Cost value
(c) Book value
(d) None of these
Answer:
(c) Book value
Realisation account is prepared to find out the profit (loss) on the realization of assets and settlement of liabilities. Accounting entries are made at the book values of assets and liabilities. The accounts of assets and liabilities are closed on preparation of realization account. Hence, option C is correct.
35. Profit on sale will be debited to?
(a) Depreciation A/c
(b) Fixed asset A/c
(c) Realization A/c
(d) None applicable.
Answer:
(c) Realization A/c
Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed. Thus Transfer profit or loss on realization to all the partners in profit sharing ratio.
36. A partner gave loan of ₹ 20,000 to the firm of dissolution of the firm the net losses of the firm were ₹ 30,000. How much money will the partner get on dissolution?
(a) Nil
(b) 20,000
(c) 20,000 + 6% interest
(d) None of above.
Answer:
(c) 20,000 + 6% interest
Losses shall be paid, first out of profits then out of partner’s capital.
In this question partner gave loan of ₹ 20,000 where firm makes a loss of ₹ 30,000. The money partner get on dissolution will be ₹ 20,000 + 6% of interest.
37. X, Y and Z are partners sharing profits and losses equally. Their capital balances on 31st March, 2013 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows: X- ₹ 20,000, Y- ₹ 15,000 and Z-₹ 10,000. In case of dissolution, the extent of their maximum liability in the firm would be (assuming no personal liability)
(a) X – ₹ 1,00,000, Y – ₹ 5,000, Z – ₹ 50,000
(b) X – ₹ 60,000, Y – ₹ 35,000, Z – ₹ 30,000
(c) X – ₹ 20,000, Y – ₹ 15,000, Z – ₹ 10,000
(d) X – ₹ 80,000, Y – ₹ 60,000, Z – ₹ 40,000
Answer:
(c) Maximum liability assuming no personal liability would be:
X ₹ 20,000
Y ₹ 15,000
Z ₹ 10,000
38. X, Y, and Z, are partners sharing profits and losses equality. Their capital balances on March 31.2012 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows:
X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
The extent of their liability in the firm would be:
(a) X – ₹ 80,000, Y – ₹ 60,000 and Z – ₹ 40,000
(b) X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
(c) X – ₹ 1,00,000, Y – ₹ 75,000 and Z – ₹ 50,000
(d) Equal
Answer:
(d) Equal
Partners profit sharing is equally divided. So, they will share equally in the liability of firm as PSR is equal.
39. The capital for LLP should be _________.
(a) ₹ 1 lakh
(b) ₹ 5 lakhs
(c) No limit
(d) ₹ 15 lakhs
Answer:
(c) No limit
The capital for LLP:
The minimum capital required for limited liability partnership is omitted (No such amount is required; no limit); in latest amendment in LLP Act, 2008. Thus, option (c) is correct.
40. A/c to Garner vs Murray rule. Any deficiency would be shared below partners in _________.
(a) Capital ratio
(b) Profit sharing ratio
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Capital ratio
Garner v/s Murray rule any deficiency would be shared between partners in:
The Garner vs. Murray rule is applicable in case of dissolution of a firm; the rule says that the loss an account of insolvency of a partner is capital loss which should be borne by solvent partners in the ratio of their capitals. Hence, option (a) is correct.
41. According to Garner Vs. Murray rule, realisation loss should be divided among solvent partner _________.
(a) On the basis of their original investment
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratio
Answer:
(b) In profit and loss sharing ratio
According to Garner vs. Murray Rule: The loss on account of insolvency of a partner is a capital loss which should be borne by the solvent partners in the ratio of their capital standing in the balance sheet on the date of dissolution of the firm.
42. Dissolution of partnership is in which section?
(a) Sec. 39
(b) Sec. 49
(c) Sec. 32
(d) Sec. 31
Answer:
(a) Sec. 39
Section 39 of the Indian Partnership Act, provided that “the dissolution of the partnership between all the partners of the firm is called dissolution of a firm”. It implies the complete break down of the relation of partnership between all the partners.