What journal entry will be passed for settlement of loan from a partner of ₹50,000 by paying ₹45,000 at the time of dissolution of a firm:-

Loan from Partner A/c Dr. 50,000
      To Bank A/c                     45,000
      To Realisation A/c             5,000

The correct answer is option 1-
Loan from Partner A/c Dr. 50,000
      To Bank A/c                     45,000
      To Realisation A/c             5,000

At the time of dissolution of a partnership firm, any loan from a partner is treated as a liability and is paid off after paying outside liabilities but before settlement of partners’ capital accounts. In this case:

• Loan from partner = ₹50,000
• Amount paid to settle the loan = ₹45,000
• So, the firm settled the loan at a discount of ₹5,000

Journal Entry at the Time of Settlement:
Loan from Partner A/c Dr. ₹50,000
        To Cash/Bank A/c ₹45,000
        To Realisation A/c ₹5,000

• The Loan from Partner Account is debited to remove the liability.
• Cash/Bank is credited with ₹45,000, the actual amount paid.
• The discount (₹5,000) received is a gain for the firm and credited as Gain on Realisation Account