CUET UG Accountancy Booster Test 3 Fundamentals of Dissolution of Partnership Firm -

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CUET UG Accountancy Booster Test 2 Fundamentals of Dissolution of Partnership Firm

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 2 Fundamentals of Dissolution of Partnership Firm

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QUESTION 1 OF 20

Assertion (A): The firm may continue its business after the dissolution of partnership.
Reason (R): Reconstitution of a partnership changes the existing economic relationship among partners without necessarily closing the firm.

Answer Review

1 Assertion (A): The firm may continue its business after the dissolution of partnership.
Reason (R): Reconstitution of a partnership changes the existing economic relationship among partners without necessarily closing the firm.

A A is false, but R is true.

B A is true, but R is false.

C Both A and R are true, but R is not the correct explanation of A.

D Both A and R are true, and R is the correct explanation of A.

💡 Short Explanation

Dissolution of partnership differs from dissolution of firm. Reconstitution changes relationships only. Business may continue despite partnership changes.

✅ Correct Answer Explanation

Dissolution of partnership refers to change in relationship among partners due to admission, retirement, death, or change in profit-sharing ratio. In such cases, the business may continue. This continuation is called reconstitution of partnership. Hence, both Assertion and Reason are true, and the Reason correctly explains the Assertion.

❓ Why Other Options Are Incorrect

Option A → Assertion is true.
Option B → Reason is also true.
Option C → Reason directly explains assertion.

🎯 Strategy

Used: Contextual/Tonal Matching

Application:

The reason clearly explains how reconstitution allows business continuity.

Final Logic:

Partnership changes do not always dissolve the firm.

🧠 Memory Trick

"Reconstitution means continuation."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Meaning of Dissolution – Page X

2 What fundamentally distinguishes the dissolution defined under Section 39 from general reconstitution?

A It only occurs through court intervention.

B It requires the admission of a corporate entity.

C It mandates the complete breaking of the relationship between all the partners.

D It allows the firm to retain its original name while trading.

💡 Short Explanation

Section 39 defines dissolution of firm. All partner relationships end completely. Reconstitution only changes relationships partially.

✅ Correct Answer Explanation

Section 39 defines dissolution of firm as the complete breakdown of relationship among all partners, resulting in closure of the business. Reconstitution, on the other hand, only changes relationships among some partners while the business continues. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Dissolution need not always involve court.
Option B → Corporate admission is irrelevant.
Option D → Name retention does not define dissolution.

🎯 Strategy

Used: Direct Concept Recall

Application:

The question directly asks the legal distinction under Section 39.

Final Logic:

Complete relationship termination defines dissolution of firm.

🧠 Memory Trick

"All relations end = Firm dissolved."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Section 39 Definition – Page X

3 Consider the following regarding the nature of dissolution:
1. Dissolution of a firm necessarily involves the dissolution of the partnership.
2. Dissolution of a partnership necessarily involves the dissolution of the firm.

A Both 1 and 2 are true.

B Only 1 is true.

C Only 2 is true.

D Neither 1 nor 2 is true.

💡 Short Explanation

Firm dissolution always dissolves partnership. Partnership dissolution may only mean reconstitution. Business may continue after partnership changes.

✅ Correct Answer Explanation

Dissolution of a firm always includes dissolution of partnership because all relationships among partners end. However, dissolution of partnership does not necessarily dissolve the firm since the business may continue with reconstituted partners. Therefore, only statement 1 is true.

❓ Why Other Options Are Incorrect

Option A → Statement 2 is false.
Option C → Statement 1 is true.
Option D → Statement 1 is correct.

🎯 Strategy

Used: Elimination

Application:

The distinction between dissolution of firm and partnership helps reject statement 2.

Final Logic:

All firm dissolutions involve partnership dissolution, not vice versa.

🧠 Memory Trick

"Firm includes partnership."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Nature of Dissolution – Page X

4 Which of the following scenarios depicts mandatory business closure rather than continuity?

A Adjudication of all partners, or all but one, as insolvent.

B Change in the profit-sharing ratio.

C Admission of a new incoming partner.

D Retirement of a minor partner.

💡 Short Explanation

Insolvency prevents continuation. Firm cannot legally continue with insufficient partners. Other options involve reconstitution only.

✅ Correct Answer Explanation

If all partners or all except one become insolvent, the firm must compulsorily dissolve because the business cannot legally continue. The remaining options merely represent reconstitution where business continuity remains possible. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Profit-sharing changes only reconstitute the firm.
Option C → Admission continues the business.
Option D → Retirement does not mandate closure.

🎯 Strategy

Used: Odd One Out

Application:

Only one option legally requires compulsory closure.

Final Logic:

Mass insolvency destroys business continuity.

🧠 Memory Trick

"All insolvent = Firm ends."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Continuity vs Closure – Page X

5 In the case of reconstitution (where the firm is not dissolved), what happens to the firm's books of account?

A They are immediately surrendered to the court.

B They are closed through a Realisation Account.

C They are destroyed and new books are made.

D They are not closed, but assets/liabilities are merely revalued.

💡 Short Explanation

Reconstitution means continuation. Books remain open. Revaluation adjusts asset/liability values.

✅ Correct Answer Explanation

During reconstitution, the firm continues operating. Therefore, books of account are not closed. Instead, assets and liabilities are revalued using a Revaluation Account to reflect the new arrangement among partners. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Court involvement is unnecessary.
Option B → Realisation Account is used only in dissolution.
Option C → Existing books continue.

🎯 Strategy

Used: Direct Concept Recall

Application:

The distinction between Realisation and Revaluation identifies the answer.

Final Logic:

Continuing firms use revaluation, not realization.

🧠 Memory Trick

"Continue = Revalue."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Reconstitution Meaning – Page X

6 Match the specific events (List 1) with the correct legal category of dissolution (List 2):

List 1	List 2
1. A partner becomes insane	a. Dissolution by Court
2. Completion of a specific venture	b. Contingent Dissolution
3. All partners become insolvent	c. Compulsory Dissolution
4. In accordance with a pre-decided contract	d. Dissolution by Agreement

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-a, 3-d, 4-c

C 1-c, 2-d, 3-a, 4-b

D 1-d, 2-c, 3-b, 4-a

💡 Short Explanation

Insanity is court dissolution. Venture completion is contingent dissolution. Insolvency causes compulsory dissolution. Contracts lead to agreement dissolution.

✅ Correct Answer Explanation

Correct matching: 1 → b (Insanity → Dissolution by Court) 2 → a (Specific venture completion → Contingent Dissolution) 3 → d (All insolvent → Compulsory Dissolution) 4 → c (Pre-decided contract → Dissolution by Agreement) Thus, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Multiple legal categories mismatched.
Option C → Insolvency wrongly matched.
Option D → Court dissolution incorrectly assigned.

🎯 Strategy

Used: Option Grouping

Application:

Associating legal grounds with their correct dissolution type simplifies matching.

Final Logic:

Only Option B correctly matches all events.

🧠 Memory Trick

"Insane-court, venture-contingent."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Dissolution Distinction – Page X

7 Arrange the sequence of accounting steps taken when a business is closed via Realisation Account:
1. Transfer all assets (except cash/bank) to debit side at book value.
2. Transfer external liabilities to the credit side.
3. Record sale of assets and payment of liabilities.
4. Transfer profit or loss on realisation to partners' capital accounts.

A 1, 3, 2, 4

B 2, 1, 4, 3

C 1, 2, 3, 4

D 4, 3, 2, 1

💡 Short Explanation

Assets transferred first. Liabilities transferred next. Sales/payments recorded afterward. Profit/loss adjusted finally.

✅ Correct Answer Explanation

The Realisation Account process follows: 1. Transfer assets to debit side. 2. Transfer external liabilities to credit side. 3. Record realization and settlement entries. 4. Transfer resulting profit/loss to partners' capital accounts. Thus, the correct sequence is 1 → 2 → 3 → 4.

❓ Why Other Options Are Incorrect

Option A → Liabilities must transfer before settlement.
Option B → Profit/loss cannot be transferred before realization.
Option D → Sequence completely reversed.

🎯 Strategy

Used: Sequential Logic

Application:

Following the standard accounting procedure gives the correct order.

Final Logic:

Transfers occur before realization and final settlement.

🧠 Memory Trick

"Transfer → Settle → Adjust."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Business Closure – Page X

8 In the context of the winding up process, what does the Garner vs. Murray rule stipulate regarding an insolvent partner's capital deficiency?

A The capital loss is borne by the remaining solvent partners in the ratio of their capitals.

B The loss is borne equally by all partners.

C The loss is written off against the firm's creditors.

D The loss is carried forward to the next financial year.

💡 Short Explanation

Insolvent partner cannot contribute deficiency. Solvent partners absorb loss. Sharing based on capital ratio.

✅ Correct Answer Explanation

Under Garner vs. Murray, the deficiency of an insolvent partner is borne by solvent partners according to their last agreed capital ratio, not profit-sharing ratio. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Equal sharing is incorrect.
Option C → Creditors do not bear the loss.
Option D → Dissolution closes the accounts permanently.

🎯 Strategy

Used: Direct Concept Recall

Application:

The question directly tests Garner vs Murray rule.

Final Logic:

Capital ratio governs deficiency sharing.

🧠 Memory Trick

"Garner = Capital ratio."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Garner vs Murray – Page X

9 Under Section 49, what happens to the surplus of a firm's property after the firm's debts are fully paid?

A It is transferred to the State.

B It is divided among partners as per their claims to be utilised for their private liabilities.

C It is reinvested into a new partnership automatically.

D It is used to pay off the personal debts of the employees.

💡 Short Explanation

Firm debts are settled first. Remaining surplus belongs to partners. Partners may use it for private liabilities.

✅ Correct Answer Explanation

Section 49 states that after payment of firm debts, any surplus from firm property is distributed among partners according to their claims. The partners may then use this amount to settle their private liabilities. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Surplus does not go to the State.
Option C → Automatic reinvestment does not occur.
Option D → Employees' personal debts are irrelevant.

🎯 Strategy

Used: Direct Concept Recall

Application:

The question directly tests Section 49 provisions.

Final Logic:

Surplus belongs to partners after firm liabilities.

🧠 Memory Trick

"Firm surplus goes to partners."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Section 49 – Page X

10 Partner X persistently commits breaches of agreement and transfers his entire interest in the firm to a third party. What legal recognition of dissolution applies here?

A The firm dissolves automatically without any action.

B The firm is compulsorily dissolved immediately.

C The third party becomes the new managing partner.

D The court may order the firm to be dissolved at the suit of another partner.

💡 Short Explanation

Persistent breach is a court ground. Transfer of entire interest also qualifies. Another partner may file suit.

✅ Correct Answer Explanation

Persistent breach of agreement and transfer of a partner's whole interest to a third party are recognized grounds for dissolution by court. Another partner may approach the court seeking dissolution. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Court action is required.
Option B → It is not compulsory dissolution.
Option C → Third party does not automatically become partner.

🎯 Strategy

Used: Contextual/Tonal Matching

Application:

The question combines multiple legal grounds for court dissolution.

Final Logic:

Court may dissolve upon partner's legal suit.

🧠 Memory Trick

"Breach + transfer = Court."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Legal Recognition – Page X

11 What happens to fictitious assets (like accumulated losses) upon the end of the firm's identity?

A They are transferred to partners' capital accounts in their profit-sharing ratio.

B They are sold to third parties for cash.

C They are debited to the Realisation Account.

D They are ignored entirely.

💡 Short Explanation

Fictitious assets are not realizable. They represent losses or expenses. Partners bear them in profit-sharing ratio.

✅ Correct Answer Explanation

Fictitious assets such as debit balance of Profit & Loss Account or preliminary expenses do not have realizable value. Therefore, they are transferred directly to partners' capital accounts in their profit-sharing ratio during dissolution. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Fictitious assets cannot be sold.
Option C → They are not transferred to Realisation Account.
Option D → They must be adjusted before closure.

🎯 Strategy

Used: Direct Concept Recall

Application:

Understanding the nature of fictitious assets identifies their correct treatment.

Final Logic:

Non-realizable losses are borne by partners.

🧠 Memory Trick

"Fictitious goes to partners."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: End of Firm Identity – Page X

12 Partner A is appointed to look after dissolution work for a remuneration of Rs. 15,000 and agrees to bear all dissolution expenses. The actual expenses of Rs. 11,800 were paid personally by A. What is the journal entry in the firm's books?

A Realisation A/c Dr. 11,800 To Bank A/c 11,800

B Realisation A/c Dr. 26,800 To A's Capital A/c 26,800

C Realisation A/c Dr. 15,000 To A's Capital A/c 15,000

D A's Capital A/c Dr. 11,800 To Bank A/c 11,800

💡 Short Explanation

Partner bears actual expenses personally. Firm only records agreed remuneration. No entry for actual payment.

✅ Correct Answer Explanation

Since Partner A agreed to bear all dissolution expenses personally, the firm records only the agreed remuneration payable to A. Journal Entry: Realisation A/c Dr. 15,000 To A's Capital A/c 15,000 The actual expense payment of Rs. 11,800 made personally by A is not recorded in the firm's books. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Firm did not pay expenses through bank.
Option B → Actual expenses are not added to remuneration.
Option D → Bank Account is unaffected.

🎯 Strategy

Used: Formula/Entry Recall

Application:

Only agreed remuneration appears in the firm's books.

Final Logic:

Personal expense payments stay outside firm accounting.

🧠 Memory Trick

"Firm records remuneration only."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: No Business Transactions – Page X

13 If a creditor owed Rs. 10,000 accepts an unrecorded investment worth Rs. 12,000 in full settlement of his account, what is the required journal entry?

A Debit Realisation A/c 12,000, Credit Bank A/c 12,000

B No journal entry needs to be recorded.

C Debit Creditor A/c 10,000, Credit Realisation A/c 10,000

D Debit Bank 2,000, Credit Realisation 2,000

💡 Short Explanation

Investment was unrecorded. Liability already existed in books. No additional accounting entry required.

✅ Correct Answer Explanation

The investment given to the creditor was unrecorded, meaning it never appeared in the books. Since the creditor's liability had already been transferred through the Realisation Account earlier, no separate entry is required when the unrecorded investment is handed over. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → No bank payment occurred.
Option C → Liability treatment already completed.
Option D → No cash difference is recognized.

🎯 Strategy

Used: Elimination

Application:

Because the asset was never recorded, no realization entry is needed.

Final Logic:

Unrecorded asset settlement requires no additional book entry.

🧠 Memory Trick

"Unrecorded means no entry."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Sale of Assets – Page X

14 A firm has stock of book value Rs. 35,000. Partner Nayana takes over 50% of this stock at 10% less than its book value. At what value is this portion taken over?

A Rs. 31,500

B Rs. 17,500

C Rs. 18,000

D Rs. 15,750

💡 Short Explanation

Half stock value calculated first. 10% reduction applied afterward. Final takeover value becomes Rs. 15,750.

✅ Correct Answer Explanation

50% of stock = (50/100) × 35,000 = 17,500 10% less than book value = 17,500 − [(10/100) × 17,500] = 15,750 Therefore, Nayana takes over the stock at Rs. 15,750.

❓ Why Other Options Are Incorrect

Option A → Represents 10% reduction on total stock.
Option B → Discount not applied.
Option C → Incorrect approximation.

🎯 Strategy

Used: Substitution

Application:

First calculate half stock, then apply discount percentage.

Final Logic:

Discount applies only to the portion taken over.

🧠 Memory Trick

"Half first, discount later."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Realisation Purpose – Page X

15 A firm is being dissolved and has a bank overdraft of Rs. 5,000. According to the Realisation Account format, where is this bank overdraft transferred to close it?

A Credit side of the Realisation Account

B Debit side of the Cash Account

C Debit side of the Realisation Account

D Credit side of the Partners' Capital Accounts

💡 Short Explanation

Bank overdraft is external liability. External liabilities are credited to Realisation. Transfer closes the liability account.

✅ Correct Answer Explanation

A bank overdraft is an external liability. During dissolution, all external liabilities are transferred to the credit side of the Realisation Account. Journal Entry: \text{Bank Overdraft A/c Dr.} \ \text{To Realisation A/c} Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → No such transfer occurs.
Option C → Liabilities are credited, not debited.
Option D → Partners' capital accounts are unrelated here.

🎯 Strategy

Used: Formula/Entry Recall

Application:

External liabilities are always transferred to Realisation credit side.

Final Logic:

Overdraft closure requires crediting Realisation.

🧠 Memory Trick

"Liability goes to Realisation credit."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Payment of Liabilities – Page X

16 When applying the amounts realised from assets, what precedence is followed regarding third-party loans?

A Unsecured loans are paid before secured loans.

B Partners' personal loans are paid before firm loans.

C Secured loans have precedence over unsecured loans.

D All loans are paid proportionately regardless of security.

💡 Short Explanation

Security-backed claims receive priority. Secured lenders have legal protection. Unsecured creditors are paid later.

✅ Correct Answer Explanation

During dissolution, secured creditors are paid first because their loans are backed by specific security or assets of the firm. Unsecured creditors receive payment only after secured claims are settled. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Legal priority is reversed.
Option B → Firm liabilities precede partner claims.
Option D → Security status determines precedence.

🎯 Strategy

Used: Direct Concept Recall

Application:

The question directly tests liability priority rules.

Final Logic:

Security determines repayment precedence.

🧠 Memory Trick

"Secured first."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Claims Discharge – Page X

17 If a loan was given by the firm to a partner, causing it to appear on the assets side of the balance sheet, how is it settled during dissolution?

A It is transferred to the credit side of the Realisation account.

B It is completely written off as a firm loss.

C It is transferred to external creditors.

D Cash is received from the partner, or it is adjusted against their Capital Account.

💡 Short Explanation

Loan to partner is recoverable asset. Partner must repay or adjust it. Settlement occurs through capital account if needed.

✅ Correct Answer Explanation

A loan given to a partner represents an amount receivable from that partner. During dissolution, the partner either pays cash to the firm or the amount is adjusted against their capital account balance. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → It is not an external liability.
Option B → It is not automatically written off.
Option C → External creditors are unrelated.

🎯 Strategy

Used: Direct Concept Recall

Application:

The question directly tests treatment of partner loans.

Final Logic:

Loans to partners must be recovered or adjusted.

🧠 Memory Trick

"Partner loan = Recover or adjust."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Capital Settlement – Page X

18 During the dissolution of Sonia, Rohit, and Udit (sharing profits 5:3:2), the Realisation Account shows a total loss of Rs. 43,000. What is Udit's share of the loss to be debited to his Capital Account?

A Rs. 21,500

B Rs. 12,900

C Rs. 8,600

D Rs. 4,300

💡 Short Explanation

Total ratio = 10. Udit's share = 2/10. Apply ratio to total loss.

✅ Correct Answer Explanation

Total ratio: 5+3+2=10 Udit's share = (2/10) × 43,000 = 8,600 Udit's share = Rs. 8,600 Therefore, Udit's share of realization loss is Rs. 8,600.

❓ Why Other Options Are Incorrect

Option A → Represents 5/10 share.
Option B → Represents 3/10 share.
Option D → Incorrect calculation.

🎯 Strategy

Used: Substitution

Application:

Applying the profit-sharing ratio directly gives the loss share.

Final Logic:

Losses are distributed according to agreed ratio.

🧠 Memory Trick

"2 out of 10 = 8,600."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Profit Sharing Settlement – Page X

📄 Passage

When the firm is dissolved, its books of account are to be closed. A Realisation Account is prepared to ascertain the net effect of realisation of assets and payment of liabilities. All assets (other than cash in hand, bank balance, and fictitious assets) and all external liabilities are transferred to this account. It also records the sale of assets and payment of liabilities. The balance is termed as profit or loss on realisation.

According to the passage, which of the following is strictly NOT transferred to the Realisation Account?

A Fixed assets and stock

B Cash in hand and bank balance

C External liabilities

D Provision for doubtful debts

💡 Short Explanation

Cash is already realized. Bank balance needs no realization. Hence excluded from transfer.

✅ Correct Answer Explanation

The passage clearly states that cash in hand and bank balance are not transferred to the Realisation Account because they are already liquid assets. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Fixed assets and stock are transferred.
Option C → External liabilities are transferred.
Option D → Provision accounts are adjusted through Realisation.

🎯 Strategy

Used: Passage Elimination

Application:

The passage directly specifies excluded items.

Final Logic:

Already-liquid assets stay outside Realisation.

🧠 Memory Trick

"Cash stays outside."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Final Accounts Closure – Page X

📄 Passage

Based on the text, what does the final balancing figure of the Realisation Account ultimately represent?

A The profit or loss on realisation.

B The opening capital for the next year.

C The unrecorded assets remaining.

D The exact amount owed strictly to third parties.

💡 Short Explanation

Realisation Account summarizes settlement. Final balance shows net result. It may be profit or loss.

✅ Correct Answer Explanation

The Realisation Account records all transfers, sales, payments, and expenses related to dissolution. The final balancing figure represents the net profit or loss on realization, which is transferred to partners' capital accounts. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Dissolution closes books permanently.
Option C → Unrecorded assets are treated separately.
Option D → Third-party liabilities are only one part of settlement.

🎯 Strategy

Used: Direct Concept Recall

Application:

The purpose of Realisation Account determines the balancing figure.

Final Logic:

Final balance equals realization profit or loss.

🧠 Memory Trick

"Balance tells profit/loss."

📚 Class XII – Accountancy Part I – Chapter: Dissolution of Partnership Firm – Topic: Completion of Dissolution – Page X

CUET UG Accountancy Booster Test 2 Fundamentals of Dissolution of Partnership Firm

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