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Monday, April 02, 2012

Financial Accounting 2008 (Solved)


In the case of Garner Vs. Murray, Lord Justice Joyce gave the following decision:
a)      Loss on realisation considered being ordinary loss and therefore to be shared by all the partners according to their profit sharing ratio.
b)      Solvent partners to bring cash equal to their share of loss on realisation
c)       iii.      Loss on account of deficiency of insolvent partner considered being capital loss; therefore   to be shared by solvent partners according to their last agreed capital.

Last Agreed Capital means
1.       In case of Fixed Capitals - Fixed Capital (as given in the Balance Sheet) without any adjustment
2.       In case of Fluctuating Capitals - Capital after making adjustments for past accumulated reserves, profits or
losses, drawings, Interest on capital, Interest on Drawing, remuneration to a partner etc. to the date of dissolution but before making adjustment for profit or loss on realisation.

When there are more than two partners and one becomes insolvent, the solvent partners are liable to bear the loss of insolvent partner. The loss is borne by the solvent partners in the following partners:
i.         When Garner Versus Murray rule is not applicable, the solvent partners are supposed to bear the loss according to the profit sharing ratio.
ii.       When the Garner versus Murray rule is applicable, the solvent partners are liable to bear the loss of insolvent partners according to the current capital ratio.