DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH

Name of the Staff : J.Satyanarayana Rao

Designation : Senior Lecturer
Branch : Commercial & Computer Practice
Institute : Govt.Polytechnic for Women,
Guntur.
Year/Semester : IV Semester
Topic : Partnership
Duration : 100 Minutes
Sub Topic : Accounting Treatment- Dissolution-
Non- Appliance of Garner Vs
Murray Case
Teaching Aids : PPT- ANIMATION
CCP402.72 TO 73 1
In dealing with dissolution problems, involving
insolvency, the solution is; crediting the capital
Accounts of the solvent partners by means of Book
entries.
Actually the solvent partners do not bring actual
cash.
With this method the capitals of the solvent partners
are unaffected by losses on realisation as is
required for determining the capital ratio.

CCP402.72 TO 73 2
Case1: Fluctuating Capital:
A,B,C and D were partners sharing profits in the ratio 3:2:3:2,. Their
balance sheet on the date was as follows.

Rs Assets Rs
Liabilities

A’s capital 1,00,000 Assets 1,70,000

B’s capital 50,000 C’s capital 63,600

Reserve A/c 40,000 D’s capital 16,400

Creditors 60,000

2,50,000 2,50,000

On the above date 31st March, 2007, C becomes insolvent and was able to
Contribute only 50 Paise in the rupee. Assets realised as Rs.
1,25,000.Realisation expenses amount to Rs.4,000.
CCP402.72 TO 73 3
 Prepare the necessary ledger accounts.
Solution to case:1
Realisation Account
Dr Cr

To assets 1,70,000 By creditors 60,000

To Bank(creditors) 60,000 By cash(assets) 1,25,000
To Bank (Expenses) 4,000 By A 14,700
By B 9,800
By C 14,700
By D 9,800
49,000

Total 2,34,000 Total 2,34,000

CCP402.72 TO 73 4
 C’s Capital Account
Dr Cr

To Balance b/d 63,600 By Reserve A/c 12,000

To Realisation a/c-loss 14,700 By Cash-1/2*Rs.66,300 33,150

By A 21,840

By B 11,310

33,150

78,300 78,300

CCP402.72 TO 73 5
 Note:1. Loss on account of insolvency of c is not suffered by D.
Although ‘D’ is solvent.
This is because his capital in the business is overdrawn.
2. Capital Ratio is determined after transferring reserve account to
existing capitals in the
Profit-sharing ratio, capitals after transferring reserve accounts are A
Rs.1,12,000
(credit); B.Rs.58,000 (credit); D. Rs.8,400 (DebIt)
3.Capital Ratio is A:B:56:29.
D’s Capital Account
Dr Cr

To Balance b/d 16,400 By Reserve a/c 8,000

To Realisation a/c 9,800 By Bank 18,200

Total 26,200 Total 26,200

CCP402.72 TO 73 6
 A’s Capital a/c
Dr Cr
To Realisation a/c 14,700 By Balance b/d 1,00,000
To C’s capital a/c 21,800 By Reserve a/c 12,000
To Bank 75,460

1,12,000 1,12,000

B’s Capital a/c

Dr Cr

To Realisation a/c 9,800 By Balance b/d 50,000

To c’s Capital a/c 11,310 By Reserve a/c 8,000

To Bank 36,890

Total 58,000CCP402.72
TotalTO 73 58,000 7
Dr
Bank a/c
Cr
To Realisation a/c 1,25,000 By Realisation a/c
To D’s capital 18,200 Creditors 60,000
To C’s capital 33,150 Expenses
4,000
By A’s capital 75,460

By B’s capital 36,890

Total 1,76,350 Total 1,76,350

CCP402.72 TO 73 8
 Case:2 Fixed Capital Method
A,B&C are partners sharing profits in the ratio of 2:2:1. Their
balance sheet on 31st Dec,
2006, the date of dissolution was as follows;
Balance Sheet
Dr Cr

Liabilities Rs Assets Rs

Capital :A 70,000 Assets-Fixed 2,10,000

B 30,000 Current 20,000
C 10,000 Current a/c-c 30,000

Current a/c's-A 20,000

B 10,000
Reserve a/c 20,000

Creditors 1,00,000

Total 2,60,000 Total 2,60,000

CCP402.72 TO 73 9
 All assets leaving Rs. 5,00 out of current assets which constituted bank
balance; Realised Rs. 80,000. C is unable to bring his share of loss and
is declared insolvent. On the date of dissolution, it was found that a
contingent liability in respect of a bill Discounted Rs.8,000 has matured
and the firm recovered only Rs. 2,000 from the acceptor
Of the bill. This amount is not included to Rs.80,000 above. Realisation
expenses amounted To Rs.1,000. Prepare Ledger Accounts.

Solution:-
Dr Realisation Account Cr
To Assets-fixed 2,10,000 By Creditors 1,00,000
Current 15,000 By Cash (assets) 80,000
To Bank(creditors) 1,00,000 By cash (from the acceptor
of the bill) 2,000
To Bank(bills discounted) 8000 By capitals-
To Bank(expenses) 1000 A 60,800
B 60,800
C 30,400
1,52,000
3,34,000 3,34,000
CCP402.72 TO 73 10
 C’s capital Account
Dr Cr

To Current account 56,400 By Balance b/d 10,000

By A’s Capital a/c 32,480
By B’s Capital a/c 13,920 46,400

56,400 56,400

Dr
C’s Current Account Cr

To Balance b/d 30,000 By Reserve a/c 4,000

To Realisation a/c 30,400 By Capital 56,400

60,400 60,400

Dr
B’s Current Account Cr

To Realisation a/c 60,800 By Balance b/d 10,000

To c’s capital a/c 13,920 By Reserve a/c 8,000
By Capital 56,720
CCP402.72 TO 73 11

74,720 74,720
Dr
B’s Capital Account Cr

To Current a/c 56,720 By Balance b/d 30,000

By Bank 26,720

56,720 56,720

Dr
A’s Current Account Cr

To Realisation a/c 60,800 By Balance b/d 20,000

To C’s capital a/c 32,480 By Reserve a/c 8,000
By Capital 65,280

93,280 93,280

Dr
A’s Capital Account Cr

To current a/c 65,280 By Balance b/d 70,000

To Bank 4,720

70,000CCP402.72 TO 73 70,000 12
 Bank Account
Dr Cr

To Balance b/d 5,000 By Realisation a/c

To Realisaton a/c 82,000 Creditors 1,00,000
To B’s a/c 26,720 Bills 8,000
Expenses 1,000
By A’s Capital a/c 4,720

1,13,720 1,13,720

Note:Loss arising due to insolvency has been

distributed in the fixed capital ratio.

CCP402.72 TO 73 13
Summary

We have so far discussed about

Paring the accounts of all the partners when one
partner become Insolvent.
The applicability of garner vs Murray’s case
There are two methods :
1.fluctuating capital method &
2.fixed capital method

CCP402.72 TO 73 14
The insolvent partners capital deficiency should be
bared by all the remaining Solvent partners at their
capital sharing ratio.

The accounts to be opened are Realisation

account, partners capital account And bank
account

CCP402.72 TO 73 15