Explain Garner v. Murray rule applicable in the case of partnership firms. State, when is this rule not applicable? [CA Inter May 2013, 4 Marks]
Options
A
B
C
D
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Partnership and LLP AccountsQ-2 | Partnership and LLP AccountsQuestion 4826 of 108
All Questions Correct Answer
✅ Option — Correct Option
All Options:
- A
- B
- C
- D
Detailed Solution & Explanation
Garner vs. Murray rule - Applicability When a partner is unable to pay his debt due to the
firm, he is said to be insolvent and the share of loss is to be borne by other solvent partners in
accordance with the decision held in the English case of Garner vs. Murray.
According to this decision, normal loss on realisation of assets is to be brought in cash by all
partners (including insolvent partner) in the profit-sharing ratio but a loss due to insolvency
of a partner has to be borne by the solvent partners in their capital ratio. In order to calculate
the capital ratio, no adjustment will be made in case of fixed capitals.
However, in case of fluctuating capitals, ratio should be calculated on the basis of adjusted
capital before considering profit or loss on realization at the time of dissolution.Non-Applicability of Garner vs Murray rule:
1. When the solvent partner has a debit balance in the capital account. Only solvent
partners will bear the loss of capital deficiency of insolvent partner in their capital
ratio. If incidentally a solvent partner has a debit balance in his capital account, he will
escape the liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital
account of insolvent partner.
4. When all the partners of the firm are insolvent.
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Following are the details of Assets and Liabilities of Mr. Sarthak for the year ended 31 March, 2023 and 31 March, 2024: 31.03.2023 31.03.2024 Assets Buildings Furniture Inventory Sundry debtors Cash at bank Cash in hand Liabilities: Loans Sundry Creditors 2,00,000 75,000 1,05,000 68,000 72,500 2,400 1,50,000 58,400 ? ? 1,95,000 94,000 86,800 3,800 1,25,000 79,500 It was decided to depreciate Building by 5% p.a. and Furniture by 10% p.a. On 1st June, 2023 an additional capital of 40,000 was brought in the business. Proprietor has withdrawn @ ₹ 2,500 p.m. for meeting the family expenses. Prepare Statement of Affairs as on 31 March, 2023 and 31 March, 2024. Find the profit or loss earned by Mr. Sarthak for the year ended 31st March, 2024. [Jan. 2025, 5 Marks]
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