An unrecorded asset is taken over by a creditor in full settlement in such a case

When an unrecorded asset is taken over by a creditor in full settlement, the transaction is not recorded anywhere in the books of the firm.

Understanding the concept:

An unrecorded asset is one that does not appear in the books of accounts. Since it was never recorded initially, it cannot be transferred to the Realization Account during dissolution.

Why no entry is required:

During dissolution, only those assets and liabilities that are already recorded in the books are transferred to the Realization Account.

For an unrecorded asset:

• It never appeared in the Balance Sheet → Cannot be transferred to Realization Account (Debit side)
• When given to creditor → No corresponding book value exists to credit
• The creditor's account also cannot be debited because the asset settling the liability has no book value

The principle: You cannot make accounting entries for items that don't exist in your books.

This is similar to when an unrecorded liability is taken over by a partner - no entry is made because the liability was never in the books to begin with.

If the asset were recorded in the books, then the proper entry would have been:

• Creditor's A/c Dr.
• To Realization A/c (for the agreed value)

But since it's unrecorded, no such entry is possible or required.

Correct Answer: Option 4