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Difficulty: HardDissolution of Partnership and Realization Account

Match each transaction occurring during the dissolution of a partnership firm to its correct double-entry ledger accounting treatment.

  • Payment of dissolution expenses by a partner personally on behalf of the partnershipDebit Realization Account and Credit Partner's Capital Account
  • Takeover of a firm's office equipment by a partner at an agreed valuationDebit Partner's Capital Account and Credit Realization Account
  • Transfer of the book value of inventory to close the asset account upon dissolutionDebit Realization Account and Credit Inventory Account
  • Discount received from trade creditors upon final settlement during realizationDebit Creditors Account and Credit Realization Account

Answer

The correct pairings match each dissolution event to its respective double-entry rule: paying realization expenses via a partner debits Realization Account and credits Partner's Capital Account; taking over an asset debits Partner's Capital Account and credits Realization Account; transferring inventory to close it debits Realization Account and credits Inventory Account; and recording discount received debits Creditors Account and credits Realization Account.
Each matching pair accurately reflects standard double-entry principles on partnership dissolution. Asset closing entries debit Realization and credit the asset account. Asset takeovers by partners debit the Partner's Capital Account and credit Realization. Realization expenses paid by a partner debit Realization and credit the Partner's Capital Account. Discounts received on settling creditors debit Creditors Account and credit Realization.

Step-by-Step Solution

1
Analyze the closing of asset accounts at book value
Assets are closed by transferring their book values to the debit side of the Realization Account. Thus, inventory requires a debit to Realization Account and a credit to Inventory Account.
This establishes the total book value of assets being realized.
2
Analyze asset takeover by a partner
The agreed value of an asset taken over by a partner is treated as a realization proceeds. The partner's capital account is debited to reduce their equity claim, and Realization Account is credited.
The partner absorbs the asset in lieu of receiving cash settlement.
3
Analyze realization expenses borne by the firm but paid by a partner
Realization expenses are costs of winding up (debit Realization Account). Since the partner paid from personal funds, the firm credits the Partner's Capital Account to reimburse them.
This records the expense while recognizing the firm's liability to the partner.
4
Analyze discounts gained when settling liabilities
A discount allowed by creditors reduces the cash needed to discharge the debt. The full book value of creditors is debited, cash paid is credited, and the discount benefit is credited to Realization Account.
Gains on discharging liabilities increase realization profit.

Key Concept

Accounting entries for partnership dissolution and realization account
Estimated Time:2m 0s
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Topics

Dissolution of Partnership and Realization Account

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