6(a) State the two circumstances under which Rule of Garner vs. Murray can not be applied. State the basic presumption in
Maximum Loss Method and Proportionate Capital Method of Piecemeal Distribution among the partners.
When is it equitable to distribute cash among the partners in their profit sharing ratio without following Maximum Loss Method
/Proportionate Capital Method of Piecemeal Distribution among the partners ? [2+2+1=5 Marks)
(b) Following is the Balance Sheet of A,B,C and D who were sharing in the ratio of 3: 3: 2:2 as at 31st March, 2020, when they
decided to dissolve the firm:
Liabilities
₹
Assets
₹
Trade Creditors
83,000 Cash at Bank
21,000
A's Loan
18,500 Other Assets
1,42,000
C's Loan
12,500 B's Drawings
4,000
A's Capital
60,000 C‘s Capital
48,000
B's Capital
44,000 D's Capital
13,000
General Reserve
20,000 Profit & Loss Alc
10,000
2,38,000
2,38,000
After preparing the Balance Sheet as at 31st March, it was discovered that purchases amounting to * 10,000 in March, were not
recorded in books, though the goods were received during March. Other Assets realized 3 68,000.B was appointed to realise the
assets and to pay off the liabilities. He was entitled to receive 5% commission on the amount finally paid to other partners as
capital. He was to bear 15% of realisation expenses. Expenses of realisation amounted to # 10,000. Calculate the commission paid
to B if Rule of Garner vs Murray is to be applied and the private position of the partners was as follows:
Particulars
A
B
с
D
Private Estate (*)
1,00,000
2,00,000
3,00,000
4,00,000
Private Liabilities(T)
75,000 1,75,000
2,97,500
3,70,000
Required: Prepare Realisation A/c, Partners' Capital Alcs and Bank A/c. (4+6+3.33=13.33 Marks/
Answers
Answer:
Answer of (a) part only
The two circumstances under which Rule of Garner vs. Murray can not be applied are as follows :
1) If only one partner is solvent and all the other partners are insolvent
2) If all partners become insolvent then there is no one to bring the cash, so Garner vs. Murray Rule can not be applied.
Note : And if Partnership deed provides a method to follow then that method will be followed only.
The basic presumption in Maximum Loss Method and Proportionate capital Method of Piecemeal Distribution among the partners is that if a partner's share of the loss is more than the capital, he should be treated as "insolvent" and, in accordance with Garner vs. Murray, the loss should be transferred to the other partners in the ratio of capitals just before dissolution.
It is equitable to distribute cash among the partners in their profit sharing ratio without following Maximum Loss Method /Proportionate Capital Method of Piecemeal Distribution among the partners by following Maximum Possible Loss Method i.e. to calculate the maximum possible loss on every realisation after the outside liabilities and the partner's loan has been paid. The amount available for distribution amongst partners is compared with the total amount of capital payable to the partners and the maximum loss is ascertained on the assumption that in future assets will realize any amount. The maximum not possible loss so ascertained is deducted from the capital balances of the partners in their profit and loss sharing ratio and the balance left in the capital account after deducting the maximum possible loss will be the amount payable to the partner.
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