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**CBSE accountancy class 12 chapter Reconstitution of a Partnership Firm – Retirement/Death of a Partner**. You can find the questions/answers/solutions for the**chapter 4**of**CBSE class 12 accountancy**in this page. So is the case if you are looking for**CBSE class 12 Commerce**related topic**Reconstitution of a Partnership Firm – Retirement/Death of a Partner**. This page contains theretical questions, Test Your Understanding, Do It Yourself, Short Answers and Long Answers. If you’re looking for Numerical Questions Solutions, you can find them at Numerical Questions SolutionsDo it Yourself – I

Distinguish between Gaining Ratio and Sacrificing Ratio in terms of:

1.

Meaning

2.

Effect on Partner’s Share of Profit

3.

Mode of calculation

4.

When to calculate

The following are the differences between Gaining Ratio and Sacrificing Ratio.

Basis

Gaining Ratio

Sacrificing Ratio

1. Meaning

The ratio in which the continuing partners have acquired the share from the

retiring/deceased partner is called the gaining ratio.

retiring/deceased partner is called the gaining ratio.

The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called sacrificing ratio.

2. Effect on Partner’s Share of Profit

Increases the profit share of the continuing partners

Decreases the profit share of the old partners.

3. Mode of calculation

The gain by a partner is equal to:

New Ratio – Old Ratio

New Ratio – Old Ratio

The sacrifice by a partner is equal to:

Old Ratio – New Ratio

Old Ratio – New Ratio

4. When to Calculate

i.

Admission of a new partner

ii.

When the existing partners decide to change the profit sharing ratio (one of more of them has to sacrifice the profits)

i.

When one/more of the partner(s) retire

ii.

Due to death of one/more of the partner(s)

iii.

When the existing partners decide to change the profit sharing ratio (one of more of them has to sacrifice the profits)

Do It Yourself – II

1. Anita, Jaya and Nisha are partners sharing profits and losses in the ratio of 1 : 1 : 1 Jaya retires from the firm. Anita and Nisha decided to share the profit in future in the ratio 4:3. Calculate the gaining ratio.

We know that Gain in share = New Share – Old Share

Anita

Nisha

New Share

{= \dfrac{4}{7}}

{= \dfrac{3}{7}}

Old Share

{= \dfrac{1}{3}}

{= \dfrac{1}{3}}

Gain in share

{= \dfrac{4}{7} - \dfrac{1}{3}}

{= \dfrac{3}{7} - \dfrac{1}{3}}

{= \dfrac{12 - 7}{21}}

{= \dfrac{9 - 7}{21}}

{= \dfrac{5}{21}}

{= \dfrac{2}{21}}

∴ Gaining Ratio

{= \dfrac{5}{21} : \dfrac{2}{21}}

= 5 : 2

2. Azad, Vijay and Amit are partners sharing profits and losses in the proportion of \dfrac{1}{4}, \dfrac{1}{8} and \dfrac{10}{16}. Calculate the new profit sharing ratio between continuing partners if (a) Azad retires; (b) Vijay retires; (c) Amit retires.

The continuing partners acquire the share of retiring partners in the old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as it will be same as the old profit sharing ratio among them.

Old Profit Sharing Ratio

{= \dfrac{1}{4} : \dfrac{1}{8} : \dfrac{10}{16}}

= 2:1:5

(a) When Azad retires

Vijay and Amit will share the profits and losses in the ratio 1:5

(a) When Vijay retires

Azad and Amit will share the profits and losses in the ratio 2:5

(a) When Amit retires

Azad and Vijay will share the profits and losses in the ratio 2:1

3. Calculate the gaining ratio in each of the above situations.

The ratio in which the continuing partners have acquired the share from the retiring partner is in their old profit sharing ratio. So, the gaining ratio of the remaining partners will be the same as their old profit sharing ratio among them and there is no need to compute the gaining ratio. So,

(a) When Azad retires

Gaining ratio of Vijay and Amit will be 1:5

(a) When Vijay retires

Gaining ratio of Azad and Amit will be 2:5

(a) When Amit retires

Gaining ratio of Azad and Vijay will be 2:1

4. Anu, Prabha and Milli are partners. Anu retires. Calculate the future profit sharing ratio of continuing partners and gaining ratio if they agree to acquire her share : (a) in the ratio of 5:3; (b) equally.

As no information is provided regarding the old profit sharing ratio, we assume that Anu, Prabha and Milli are equal partners i.e. their profit and losses sharing ratio is 1:1:1. Their future profit sharing ratio and gaining ratios will be as follows in each of the given cases:

(a) When Prabha and Milli agree to acquire Anu’s share in the ratio of 5:3

Prabha

Milli

Gain in Share

{= \dfrac{1}{3} × \dfrac{5}{8}}

{= \dfrac{1}{3} × \dfrac{3}{8}}

{= \dfrac{5}{24}}

{= \dfrac{3}{24}}

New Share

{= \dfrac{1}{3} + \dfrac{5}{24}}

{= \dfrac{1}{3} + \dfrac{3}{24}}

{= \dfrac{8 + 5}{24}}

{= \dfrac{8 + 3}{24}}

{= \dfrac{13}{24}}

{= \dfrac{11}{24}}

New Ratio

{= \dfrac{13}{24} : \dfrac{11}{24}}

= 13 : 11

(b) When Prabha and Milli agree to acquire Anu’s share equally i.e. 1:1:

The old profit sharing ratio of Prabha and Milli is 1:1. The ratio in which both Prabha and Milli have acquired the share from the retiring partner Anu is in their old profit sharing ratio i.e. 1:1. So, the future sharing ratio and the gaining ratio will same as their old profit sharing ratio i.e. 1:1

5. Rahul, Robin and Rajesh are partners sharing profits in the ratio of 3 : 2 : 1. Calculate the new profit sharing ratio of the remaining partners if (i) Rahul retires; (ii) Robin retires; (iii) Rajesh retires.

The continuing partners acquire the share of retiring partners in the old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as it will be same as the old profit sharing ratio among them. Also, the gaining ratio of the remaining partners will be the same as their old profit sharing ratio among them. So,

(i) When Rahul retires

New Profit sharing ratio of Robin and Rajesh will be 2:1

(ii) When Robin retires

New Profit sharing ratio of Rahul and Rajesh will be 3:1

(ii) When Rajesh retires

New Profit sharing ratio of Rahul and Robin will be 3:2

6. Puja, Priya, Pratistha are partners sharing profits and losses in the ratio of 5 : 3 : 2. Priya retires. Her share is taken by Priya Puja and Pratistha in the ratio of 2 : 1. Calculate the new profit sharing ratio.

Priya’s share is \dfrac{3}{10}. This is taken by both Puja and Pratishtha in the ratio 2:1

We calculate the new sharing as New Share = Old Share + Gain in Share

Puja’s gain in share

{= \dfrac{3}{10} × \dfrac{2}{3}}

{= \dfrac{2}{10}}

Puja’s new share

{= \dfrac{5}{10} + \dfrac{2}{10}}

{= \dfrac{5 + 2}{10}}

{= \dfrac{7}{10}}

Pratistha’s gain in share

{= \dfrac{3}{10} × \dfrac{1}{3}}

{= \dfrac{1}{10}}

Pratistha’s new share

{= \dfrac{2}{10} + \dfrac{1}{5}}

{= \dfrac{2 + 2}{10}}

{= \dfrac{4}{10}}

New Profit Sharing Ratio

{= \dfrac{7}{10}:\dfrac{4}{10}}

= 7 : 4

7. Ashok, Anil and Ajay are partners sharing profits and losses in the ratio of \dfrac{1}{2}, \dfrac{3}{10} and \dfrac{1}{5}. Anil retires from the firm. Ashok and Ajay decide to share future profits and losses in the ratio of 3 : 2. Calculate the gaining ratio.

Old Profit Sharing Ratio

{= \dfrac{1}{2} : \dfrac{3}{10} : \dfrac{1}{5}}

{= \dfrac{5}{10} : \dfrac{3}{10} : \dfrac{2}{10}}

We know that Gain in Share = New Share – Old Share

Ashok

Ajay

New Share

\dfrac{3}{5}

\dfrac{2}{5}

Old Share

\dfrac{5}{10}

\dfrac{2}{10}

Gain in Share

{= \dfrac{3}{5} -\dfrac{5}{10}}

{= \dfrac{2}{5} - \dfrac{2}{10}}

{= \dfrac{6 - 5}{10}}

{= \dfrac{4 - 2}{10}}

{= \dfrac{1}{10}}

{= \dfrac{2}{10}}

∴ Gaining Ratio

{= \dfrac{1}{10} : \dfrac{2}{10}}

= 1:2

Test your Understanding – I

Choose the correct option in the following questions:

1. Abhishek, Rajat and Vivek are partners sharing profits in the ratio of 5:3:2. If Vivek retires, the New Profit Sharing Ratio between Abhishek and Rajat will be–

(a)

3:2

(b)

5:3 ✔

(c)

5:2

(d)

None of these

2. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1. The New Profit Sharing Ratio after Satish’s retirement is 3:2. The gaining ratio is–

(a)

3:2

(b)

2:1

(c)

1:1 ✔

(d)

2:2

3. Anand, Bahadur and Chander are partners. Sharing Profit equally On Chander’s retirement, his share is acquired by Anand and Bahadur in the ratio of 3:2. The New Profit Sharing Ratio between Anand and Bahadur will be–

(a)

8:7 ✔

(b)

4:5

(c)

3:2

(d)

2:3

4. In the absence of any information regarding the acquisition of share in profit of the retiring/deceased partner by the remaining partners, it is assumed that they will acquire his/her share:-

(a)

Old Profit Sharing Ratio ✔

(b)

New Profit Sharing Ratio

(c)

Equal Ratio

(d)

None of these

Test your Understanding – II

Choose the correct option in the following questions:

1. On retirement/death of a partner, the retiring/deceased partner’s capital account will be credited with

(a)

his/her share of goodwill. ✔

(b)

goodwill of the firm.

(c)

shares of goodwill of remaining partners.

(d)

none of these.

2. Gobind, Hari and Pratap are partners. On retirement of Gobind, the goodwill already appears in the Balance Sheet at ₹ 24,000. The goodwill will be written-off

(a)

by debiting all partners’ capital accounts in their old profit sharing ratio. ✔

(b)

by debiting remaining partners’ capital accounts in their new profit sharing ratio.

(c)

by debiting retiring partners’ capital accounts from his share of goodwill.

(d)

none of these.

3. Chaman, Raman and Suman are partners sharing profits in the ratio of 5:3:2. Raman retires, the new profit sharing ratio between Chaman and Suman will be 1:1. The goodwill of the firm is valued at ₹ 1,00,000 Raman’s share of goodwill will be adjusted

(a)

by debiting Chaman’s Capital account and Suman’s Capital Account with ₹ 15,000 each.

(b)

by debiting Chaman’s Capital account and Suman’s Capital Account with ₹ 21,429 and 8,571 respectively.

(c)

by debiting only Suman’s Capital Account with ₹ 30,000. ✔

(d)

by debiting Raman’s Capital account with ₹ 30,000.

4. On retirement/death of a partner, the remaining partner(s) who have gained due to change in profit sharing ratio should compensate the

(a)

retiring partners only.

(b)

remaining partners (who have sacrificed) as well as retiring partners. ✔

(c)

remaining partners only (who have sacrificed).

(d)

none of these.

Do it Yourself – III

Vijay, Ajay and Mohan are friends. They passed B. Com. (Hons) from Delhi University in June, 2016. They decided to start the business of computer hardware.

On Ist of August, 2016, they introduced the capital of ₹ 50,000, ₹ 30,000 and ₹ 20,000 respectively and started the business in partnership at Delhi. The profit sharing ratio decided between there was 4:2:1. The business was running successfully. But on Ist February, 2017, due to certain unavoidable circumstances and family circumstances, Ajay decided to settle in Pune and decided to retires from the partnership on 31st March, 2017; with the consent of partners, Ajay retires as on 31st March, 2017, the position of assets and liabilities are as follows:

Balance Sheet of Vijay, Ajay and Mohan as on March 31, 2017

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

Capital Accounts:

Goodwill

56,000

Vijay

1,80,000

Land and Buildings

1,20,000

Ajay

1,20,000

Machinery

1,59,000

Mohan

1,00,000

4,00,000

Motor Van

31,000

Bills Payable

12,000

Stock

90,000

General Reserve

42,000

Debtors

66,000

Creditors

90,000

Cash at bank

22,000

5,44,000

5,44,000

On the date of retirement, the following adjustments were to be made:

1.

Firm’s goodwill was valued at ₹ 1,48,000.

2.

Assets and Liabilities are to be valued as under: Stock ₹ 72,000; Land and Buildings ₹ 1,35,600; Debtors ₹ 63,000; Machinery ₹ 1,50,000; Creditors ₹ 84,000.

3.

Vijay to bring ₹ 1,20,000 and Mohan ₹ 30,000 as additional capital.

4.

Ajay was to be paid ₹ 97,200 in cash and the balance of his Capital Account to be transferred to his Loan Account Work out the amount due to Ajay and state as to how will you settle his account?

Revaluation A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Stock A/c

18,000

By Land and Building A/c

15,600

To Debtors A/c

3,000

By Creditors A/c

6,000

To Machinery A/c

9,000

By Loss Transferred to:

Vijay’s Capital A/c

4,800

Ajay’s Capital A/c

2,400

Mohan’s Capital A/c

1,200

8,400

30,000

30,000

Partners’ Capital A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

Vijay

₹

Vijay

Amount

₹

Ajay

₹

Ajay

Amount

₹

Mohan

₹

Mohan

Date

Particulars

J.F.

Amount

₹

Vijay

₹

Vijay

Amount

₹

Ajay

₹

Ajay

Amount

₹

Mohan

₹

Mohan

To Goodwill A/c

32,000

16,000

8,000

By Balance b/d

1,80,000

1,20,000

1,00,000

To Loss on Revaluation A/c

4,800

2,000

1,200

By General Reserve A/c

24,000

12,000

6,000

To Ajay’s Capital A/c

33,829

8,457

By Cash A/c

1,20,000

30,000

To Cash A/c

97,200

By Vijay’s Capital A/c

33,829

To Ajay’s Loan A/c

58,686

By Mohan’s Capital A/c

8,457

To Balance c/d

2,53,371

1,18,343

3,24,000

1,74,286

1,36,000

3,24,000

1,74,286

1,36,000

Working Notes:

We’ll first calculate Ajay’s share of goodwill. This goodwill amount will be borne by both Vijay and Mohan in accordance with their gaining ratio. As the original sharing ratio is 4:2:1, when Ajay retires, the sharing ratio of both Vijay and Mohan will still be the same i.e. 4:1. So, the goodwill need to be borne by both Vijay and Mohan in the ratio 4:1

Goodwill

Firm’s Goodwill

= ₹ 1,48,000

Ajay’s share of goodwill

{= ₹~1,48,000 × \dfrac{2}{7}}

= ₹ 42,286

Vijay’s contribution

{= ₹~42,286 × \dfrac{4}{5}}

= ₹ 33,829

Mohan’s contribution

{= ₹~42,286 × \dfrac{1}{5}}

= ₹ 8,457

Revaluation/Reassessment

Reduction in the value of Stock

= ₹ 90,000 – ₹ 72,000

= ₹ 18,000

Increase in the value of Land and Building

= ₹ 1,35,600 – ₹ 1,20,000

= ₹ 15,600

Reduction in the value of Debtors

= ₹ 66,000 – ₹ 63,000

= ₹ 3,000

Reduction in the value of Machinery

= ₹ 1,59,000 – ₹ 1,50,000

= ₹ 9,000

Reduction in the amount of Creditors

= ₹ 90,000 – 84,000

= ₹ 6,000

Do it Yourself – IV

The Balance Sheet of A, B and C who were sharing the profits in proportion to their capitals stood as on March 31, 2017.

Balance Sheet as on March 31, 2017

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

Bills Payable

6,250

Land and Building

12,000

Sundry Creditors

10,000

Debtors

10,500

General Reserve

2,750

Less: Provision

500

10,000

Capitals

for bad debts

A

20,000

Bills receivables

7,000

B

15,000

Stock

15,500

C

15,000

50,000

Plant and Machinery

11,500

Cash at bank

13,000

69,000

69,000

B retired on the date of Balance Sheet and the following adjustments were to be made:

(a)

Stock was depreciated by 10%

(b)

Factory building was appreciated by 12%

(c)

Provision for doubtful debtos to be created up to 5%

(d)

Provision for legal charges to be made at ₹ 265

(e)

The goodwill of the firm to be fixed at ₹ 10,000

(f)

The capital of the new firm to be fixed at ₹ 30,000. The continuing parners decided to keep their capitals in the new profit sharing ratio of 3:2.

Work out the final balances in capital accounts of the firm, and the amounts to be brought in and/or withdrawn by A and C to make their capitals proportionate to then new profit sharing ratio.

Books of A,B and C

Journal

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Reserve Fund A/c

Dr.

2,750

A’s Capital A/c

1,100

B’s Capital A/c

875

C’s Capital A/c

875

(Being General Reserve fund distributed amoung the partners)

Revaluation A/c

Dr.

1,840

To Stock A/c

1,550

To Provision for Doubtful Debts A/c

25

To Provision for Legal Charges A/c

265

(Being Depreciation of Assets & Additional Expenses on Revaluation)

Land and Building A/c

Dr.

1,440

To Revaluation A/c

1440

(Being Appreciation in the Land and Building asset on revaluation)

A’s Capital A/c

Dr.

160

B’s Capital A/c

Dr.

120

C’s Capital A/c

Dr.

120

To Revaluation A/c

400

(Being Loss on revaluation transferred to the partners’ capital accounts)

A’s Capital A/c

Dr.

2,000

C’s Capital A/c

Dr.

1,000

To B’s Capital A/c

3,000

(Being B’s share of goodwill transferred from A and C’s capital in their gaining ratio)

B’s Capital A/c

Dr.

18,705

B’s Loan A/c

18,705

(Being the capital of retiring partner B is transferred to his Loan account)

A’s Capital A/c

Dr.

940

To Bank A/c

940

(Being the surplus capital of A withdrawn)

C’s Capital A/c

Dr.

2,705

To Bank A/c

2,705

(Being the surplus capital of C withdrawn)

Revaluation A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Stock A/c

1,550

By Land and Building A/c

1,440

To Provision for

25

By Revaluation of Loss

Doubtful Debts A/c

By A’s Capital A/c

160

To Provision for

265

By B’s Capital A/c

120

Legal Charges A/c

By C’s Capital A/c

120

400

1,840

1,840

Partners’ Capital A/c

Dr.

Cr.

Date

Particulars

J.F.

A

Amount

₹

Amount

₹

B

Amount

₹

Amount

₹

C

Amount

₹

Amount

₹

Date

Particulars

J.F.

A

Amount

₹

Amount

₹

B

Amount

₹

Amount

₹

C

Amount

₹

Amount

₹

To Revaluation A/c

160

120

120

By Balance b/d

20,000

15,000

15,000

To B’s Capital A/c

2,200

1,000

By Reserve Fund A/c

1,100

825

825

To B’s Loan A/c

18,705

By A’s Capital A/c

2,000

To Bank A/c

940

2,705

By C’s Capital A/c

1,000

To Balance c/d

18,000

12,000

21,100

18,825

15,825

21,100

18,825

15,825

Bank A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Balance b/d

13,000

By A’s Capital A/c

940

By C’s Capital A/c

2,705

By Balance c/d

9,355

13,000

13,000

Balance Sheet

as on March 2017

as on March 2017

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

Bills Payable

6,250

Land and Building

12,000

Sundry Creditors

10,000

Appreciation

1,440

13,440

Reserve for Legal Charges

265

Debtors

10,500

B’s Loan

18,705

Provision for Bad Debts

525

9,975

Capitals

Bills Receivable

7,000

A

18,000

Stock

15,500

B

12,000

30,000

Depreciation

1,550

13,950

Plant and Machinery

11,500

Bank

9,355

65,220

65,220

Working Notes:

Ratios

Old Ratio

(of A, B and C)

(of A, B and C)

= 20,000:15,000:15,000

= 4:3:3

New Ratio

(of A and C)

(of A and C)

= 3:2

Gain in Share

A

{= \dfrac{3}{5} - \dfrac{4}{10}}

{= \dfrac{3}{5} - \dfrac{2}{5}}

{= \dfrac{1}{5}}

B

{= \dfrac{2}{5} - \dfrac{1}{10}}

{= \dfrac{4 - 3}{10}}

{= \dfrac{1}{10}}

Gaining Ratio

{= \dfrac{1}{5}:\dfrac{1}{10}}

{= \dfrac{2}{10}:\dfrac{1}{10}}

= 2:1

Distribution of General Reserve

A’s Share

{= ₹~2,750 × \dfrac{4}{10}}

= ₹ 1,100

B’s Share

{= ₹~2,750 × \dfrac{3}{10}}

= ₹ 825

C’s Share

{= ₹~2,750 × \dfrac{3}{10}}

= ₹ 825

Goodwill

Goodwill

= 10,000

B’s share of goodwill

{= ₹~10,000 × \dfrac{3}{10}}

= ₹ 3,000

Contribution to B’s goodwill

By A

{= ₹~3,000 × \dfrac{2}{3}}

= ₹ 2,000

By C

{= ₹~3,000 × \dfrac{1}{3}}

= ₹ 1,000

Revaluation

Depreciation on Stock

{= ₹~15,500 × \dfrac{10}{100}}

= ₹ 1,550

Total Provision for Doubtful Debts

{= ₹~10,500 × \dfrac{5}{100}}

= ₹ 525

Existing Provision for Doubtful Debts

= ₹ 500

Additional Provision for Doubtful Debts

= ₹ 525 – ₹ 500

= ₹ 25

Appreciation on Factory Building

{= ₹~12,000 × \dfrac{12}{100}}

= ₹ 1,440

Profit/Loss after Revaluation

= Appreciation on Factor Building – Depreciation on Stock – Additoinal Provision for Doubtful Debts – Legal Charges

= 1,440 – ₹ 1,550 – ₹ 25 – ₹ 265

= (₹ 400) (Loss)

Share of Revaluation Loss

A

{= ₹ 400 × \dfrac{4}{10}}

= ₹ 160

B

{= ₹~400 × \dfrac{3}{10}}

= ₹ 100

C

{= ₹~400 × \dfrac{3}{10}}

= ₹ 100

Capitals after Revaluation

A

= Old Capital + Reserve Fund – Loss on Revaluation – B’s Capital

= ₹ 20,000 + ₹ 1,100 – ₹ 160 – ₹ 2,000

= ₹ 18,940

B

= Old Capital + Share of Reserve Fund + Goodwill Contribution from A + Goodwill contribution from C – Loss on Revaluation

= ₹ 15,000 + ₹ 825 + ₹ 2,000 + ₹ 1,000 – ₹ 120

= ₹ 18,705

C

= Old Capital + Reserve Fund – Loss on Revaluation – B’s Capital

= ₹ 15,000 + ₹ 825 – ₹ 120 – ₹ 1,000

= ₹ 14,705

New Total Capital

= ₹ 30,000

New Profit Sharing Ratio

= 3:2

A’s New Capital Share

{= ₹~30,000 × \dfrac{3}{5}}

= ₹ 18,000

C’s New Capital Share

{= ₹~30,000 × \dfrac{2}{5}}

= ₹ 12,000

A’s Capital surplus

= ₹ 18,940 – ₹ 18,000

= ₹ 940

C’s Capital surplus

= ₹ 14,705 – ₹ 12,000

= ₹ 2,705

2. R, S and M were carrying on business in partnership sharing profits in the ratio of 3:2:1, respectively. On March 31, 2017, Balance Sheet of the firm stood as follows :

Balance Sheet as on March 31, 2017

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

Sundry Creditors

16,000

Building

23,000

Capitals

Debtors

7,000

R

20,000

Stock

12,000

S

7,500

Patents

8,000

M

12,500

40,000

Bank

6,000

56,000

56,000

Shyam retired on the above mentioned date on the following terms :

(a)

Buildings to be appreciated by ₹ 8,800.

(b)

Provision for doubtful debts to be made @ 5% on debtors.

(c)

Goodwill of the firm to be valued at ₹ 9,000.

(d)

₹ 5,000 to be paid to S immediately and the balance due to him to be treated as a loan carrying interest @ 6% per annum.

Prepare the balance sheet of the reconstituted firm.

Books of R,S and M

Journal

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Building A/c

Dr.

8,800

To Revaluation A/c

8,800

(Being Appreciation in the Building asset on revaluation)

Revaluation A/c

Dr.

350

To Provision for Doubtful Debts A/c

350

(Being provision for doubtful debts after revaluation)

R’s Capital A/c

Dr.

4,225

S’s Capital A/c

Dr.

2,817

M’s Capital A/c

Dr.

1,408

To Revaluation A/c

8,450

(Being profit on revaluation transferred to the partners’ capital accounts)

R’s Capital A/c

Dr.

2,250

M’s Capital A/c

Dr.

750

To S’s Capital A/c

3,000

(Being share of S’s goodwill borne by the the continuing partners R and M)

S’s Capital A/c

Dr.

5,000

To Bank A/c

5,000

(Being amout paid to the retiring partner S)

Revaluation A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Provision for Doubtful Debts A/c

350

By Building A/c

8,800

Profit on Revaluation Transferred

To R’s Capital A/c

4,225

To S’s Capital A/c

2,817

To M’s Capital A/c

1,408

8,450

8,800

8,800

Partners’ Capital A/c

Dr.

Cr.

Date

Particulars

J.F.

R

Amount

₹

Amount

₹

S

Amount

₹

Amount

₹

M

Amount

₹

Amount

₹

Date

Particulars

J.F.

R

Amount

₹

Amount

₹

S

Amount

₹

Amount

₹

M

Amount

₹

Amount

₹

To S’s Capital A/c

2,250

750

By Balance b’d

20,000

7,500

12,500

To Cash A/c

5,000

By Revaluation A/c

4,225

2,817

1,408

To S’s Loan A/c

8,317

By R’s Capital A/c

2,250

To Balance c/d

21,975

13,158

24,225

13,317

13,908

24,225

13,317

13,908

Bank A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Balance b/d

6,000

By S’s Capital A/c

5,000

By Balance c/d

1,000

6,000

6,000

Balance Sheet as on March 31, 2017

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

Creditors

16,000

Building

23,000

S’s Loan

8,317

Appreciation

8,800

31,800

Capital

Debtors

7,000

R

21,975

Provision for

350

6,650

M

13,158

35,133

Doubtful Debts

Stock

12,000

Patents

8,000

Bank

1,000

59,450

59,450

Working Notes:

Revaluation Share:

Building Appreciation

= ₹ 8,800

Provision for doubtful Debts

{= ₹~7,000 × \dfrac{5}{100}}

= ₹ 350

Profit after revaluation

= ₹ 8,800 – ₹ 350

= ₹ 8,450

R’s share

{= ₹~8,450 × \dfrac{3}{6}}

= ₹ 4,225

S’s share

{= ₹~8,450 × \dfrac{2}{6}}

= ₹ 2,817

M’s share

{= ₹~8,450 × \dfrac{1}{6}}

= ₹ 1,408

Goodwill Contribution

Goodwill of S

{= ₹~9,000 × \dfrac{2}{6}}

= ₹ 3,000

R’s contribution to S’s goodwill

{= ₹~3,000 × \dfrac{3}{4}}

= ₹ 2,250

M’s contribution to S’s goodwill

{= ₹~3,000 × \dfrac{1}{4}}

= ₹ 750

S’s Capital after revaluation

= Old Capital + Revaluation Profit + Goodwill contribution from R + Goodwill contribution from M

= ₹ 7,500 + ₹ 2,817 + ₹ 2,250 + ₹ 750

= ₹ 13,317

Amount paid to S

= ₹ 5,000

Remaining capital to be paid as Loan

= Capital – Amount Paid

= ₹ 8,317

Do it Yourself – V

On December 31, 2015, the Balance Sheet of Pinki, Qureshi and Rakesh showed as under :

Balance Sheet as on December 2015

Liabilities

Amount

₹

₹

Assets

Amount

₹

₹

General Reserve

20,000

Buildings

26,000

Capitals:

Investments

15,000

Pinki

15,000

Debtors

15,000

Qureshi

10,000

Bills Receivable

6,000

Rakesh

10,000

35,000

Stock

12,000

Sundry Creditors

25,000

Cash

6,000

80,000

80,000

The partnership deed provides that the profit be shared in the ratio of 2:1:1 and that in the event of death of a partner, his executors be entitled to be paid out :

(a)

The capital of his credit at the date of last Balance Sheet.

(b)

His proportion of reserves at the date of last Balance Sheet.

(c)

His proportion of profits to the date of death based on the average profits of the last three completed years, plus 10%, and

(d)

By way of goodwill, his proportion of the total profits for the three preceding years. The net profit for the last three years were:

₹

2013

16,000

2014

16,000

2015

15,400

Rakesh died on April 1, 2015. He had withdrawn ₹ 5,000 to the date of his death. The investment were sold at par and R’s Executors were paid off. Prepare Rakesh’s Capital Account that of his executors.

Rakesh’s Capital A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Drawings A/c

5,000

By Balance b/d

10,000

To Rakesh’s Executor’s A/c

22,936

By Reserve Fund A/c

5,000

By Profit and Loss (Suspense) A/c

1086

By Pinki’s Capital A/c

7,900

By Qureshi’s Capital A/c

3,950

27,936

27,936

Rakesh’s Executor’s A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Balance c/d

22,936

By Rakesh’s Capital A/c

22,936

22,936

22,936

Working Notes:

Average Profit

(Based on last 3 years)

(Based on last 3 years)

{= \dfrac{₹~16,000 + ₹~16,000 + ₹~15,400}{3}}

{= \dfrac{₹~47,400}{3}}

= ₹ 15,800

Profit to be distributed

= Average Profit + 10% of Average Profit

= ₹ 15,800 + 10% of ₹ 15,800

{= ₹~15,800 + ₹~15,800 × \dfrac{10}{100}}

= ₹ 15,800 + ₹ 1,580

= ₹ 17,380

Duration for which profit to be considered

= 3 months

Rakesh’s share of profit

{= ₹~17,380 × \dfrac{1}{4} × \dfrac{3}{12}}

= ₹ 1,086

Goodwill

Goodwill amount

= Last 3 years profit

= ₹ 47,400

Rakesh’s share of goodwill

{= ₹~47,400 × \dfrac{1}{4}}

= ₹ 11,850

Contribution to Goodwill

Pinki

{= ₹~11,850 × \dfrac{2}{4}}

= ₹ 7,900

Qureshi

{= ₹~11,850 × \dfrac{1}{4}}

= ₹ 3,950

Short Answer Questions

1. What are the different ways in which a partner can retire from the firm?

The following are the different ways in which a partner can retire from a firm.

i.

Through Mutual consent of the other partners: The partner willing to retire expresess his desire to the other partners. Once they all approve and provide the consent, he/she can retire.

ii.

Through Provision in the Partnership Deed: In some cases, there will be a provision included in the partnership deed while preparing it. Through such provision, the partner can declare his retirement by submitting a notice to the other partners.

iii.

By Submitting a Written notice: This is applicable when the partnership is at will. Here, the partner can send a notice to the other partners and inform about his decision to retire from the firm.

2. Write the various matters that need adjustments at the time of retirement of a partners.

The various matters that need adjustments at the time of retirement of a partners are as follows:

1.

Calculation of new profit sharing ratio and gaining ratio

2.

Calculation of goodwill and prepare the necessary entries in the books.

3.

Revaluation of assets and re-assessment of the liabilities

4.

Adjustment in respect of unrecorded assets and liabilities

5.

Distribution of accumulated profits and losses among all the partners

6.

Ascertainment of share of profit or loss till the date of retirement/death

7.

Adjustment of capital, if necessary

8.

Settlement of the amounts due to retired/deceased partner

3. Distinguish between sacrificing ratio and gaining ratio.

The following are the differences between the sacrificing ratio and gaining ratio

Basis

Sacrificing Ratio

Gaining Ratio

Definition

The ratio in which the old partners are willing to sacrifice their share of profits/losses in favour of the on-boarding new partner

The ratio in which the continuing partners gain the share of profits and losses from the retiring/deceased partner

Objective

To ascertain the share of profit/losses sacrificed by the existing partners in favour of the on-boarding new partner(s). The new partner(s) pays the goodwill to the existing partners in this ratio.

To ascertain the share of profits/losses gained by the continuing partners from the retiring/deceased partner. The continuing partners contribute to the retiring/deceased partner’s goodwill in their gaining ratio.

Calculation

Sacrificing Ratio = Old Ratio – New Ratio

Gaining Ratio = New Ratio – Old Ratio

Occurrence

At the time of admission of a new partner(s)

At the time of retirement/death of an existing partner

Result

The existing partner(s) profit sharing ratio is reduced

The continuing partner(s) profit sharing ratio is increased

4. Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner.

Firms do the revaluation of assets and reassess their liabilities on retirement or on the event of death of a partner.

1.

To ascertain the true value of assets. The book value of assets might be different from the actual value. As these assets were recorded a while ago, their current value might be different. This ensures that they are valued at a fair value each partner is justified as the assets are neither overvalued nor undervalued.

2.

To ascertain the true value of the liabilties. This also ensures that the retiring partner or deceased partner’s executors are compensated with what they are entitled for.

3.

To identify any unrecorded assets or liabilities and to record them so that the retiring partner or deceased partner’s executors are compensated with what they are entitled for.

4.

It is a legal obligation and a fair practice to do so

5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm.

A retiring/deceased partner is entitled to a share of goodwill of the firm due to the following reason.

Goodwill of the firm is an intangible assets and builds over the life of the firm through the efforts of all the existing partners. Hence, at the time of retirement or death of a partner, goodwill is valued as per the agreement among the partners. Once the goodwill is valued, the deceased partner is compensated for his/her share of goodwill by the continuing partners in their gaining ratio.

Long Answer Questions

1. Explain the modes of payment to a retiring partner.

The following are the modes of payment to a retiring partner.

1.

The outgoing partner is paid immediately in lumpsum as per the terms of the partnership deed. In this case, the following journal entries are made.

Retiring Partner’s Capital A/c

Dr.

To Cash/Bank A/c

(Being the retiring partner paid in lumpsum cash)

2.

When the firm is not able to pay in cash, the retiring partner is paid in installments. In this case, the retiring partner’s capital account is transferred to his/her loan account. The payments are done in equal installments till the loan amount is paid off. In this case, the retiring partner will be paid with an interest on his loan amount as agreement in the partnership deed. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. In this case, the following journal entries are made.

Retiring Partner’s Capital A/c

Dr.

To Retiring Partner’s Loan A/c

(Being the retiring partner’s capital account transferred to his loan account @ _____ % p.a. interest)

3.

When the firm compensates the retiring partner partly in cash/cheque, the rest of the amount is paid to the retiring partner in installments. In this case, the retiring partner’s remaining capital amount is transferred to his/loan account. The payments for the remaining capital amount are done in equal installments till the loan amount is paid off. In this case, the retiring partner will be paid with an interest on his loan amount as agreement in the partnership deed. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. In this case, the following journal entries are made.

Retiring Partner’s Capital A/c

Dr.

To Cash/Bank A/c

To Retiring Partner’s Loan A/c

(Being the retiring partner is partly paid in cash and the balance transferred to his loan account @ _____ % p.a. interest))

2. How will you compute the amount payable to a deceased partner?

We’ll compute the amount payable to a deceased partner as follows:

1. Consider the following amounts due to the legal representatives/executors of the deceased partner. All these amounts should be credited to the deceased partner’s Capital account.

a.

Credit Balance of his/her capital account

b.

Credit Balance of his/her current account (if any)

c.

His/her share of Goodwill

d.

His/her share of accumulated profits (reserves)

e.

His/her share in the gain of revaluation of assets and liabilities

f.

His/her share of profits up to the date of death

g.

If interest is involved on his/her capital, it is considered up to the date of his/her death.

h.

If any salary/commission is due to him, it should also be considered.

2. Consider the following amounts to be charged to the deceased partner’s account. All these amounts should be debited from the deceased partner’s capital account.

a.

Debit balance of his/her current account (if any)

b.

His/her share of goodwill to be written off, if required

c.

His/her share of accumulated losses.

d.

His/her share of loss on revaluation of assets and re-assesment of the liabilities.

e.

His/her share of loss until the date of death

f.

His/her drawings till the date of death

e.

If there’re any drawings, the interest on the drawings upto the date of death should be calculated and charged

Deceased Partner’s Capital A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

By Balance b/d

To Profit and Loss (Suspense) A/c

By Profit and Loss (Suspense) A/c

(Share of loss up to the date of death)

(Share of profit up to the date of death)

To Revaluation A/c (loss)

By Revaluation A/c

To Goodwill A/c

By Goodwill A/c

To Accumulated Losses A/c

By Reserves and Profits A/c

To Interest on Drawings A/c

By Interest on Capital A/c

To Partner’s executor’s A/c

By Salary A/c

(Balancing Figure)

By Commission A/c

The deceased partner’s legal executor is entitiled for the balancing figure in case the credit side is more than the debit side.

3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

The following is the treatment of goodwill at the time of retirement or on the event of death of a partner

The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/death. This is because the good will of the firm has been earned with the efforts of all the existing partners. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners. So, the retiring or deceased partner is compensated for his/her share of goodwill by the continuing partners.

The accounting treatment for goodwill in such a situation depends upon whether or not goodwill already appears in the books of the firm.

1. When the goodwill does not appear in the books of the firm:

When goodwill does not appear in the books of the firm, the retiring or deceased partner is compensated by debiting the goodwill account to gaining partners capital accounts (individually) in their gaining ratio. The journal entry in such a scenario will be as follows:

Gaining Partners’s Capital A/c

Dr.

(Individually)

To Retiring Partner’s Capital A/c

(Being share in goodwill of retiring partner adjusted)

2. When the goodwill already appears in the books of the firm:

When the goodwill is already in the books of the firm, then the following two step treatment is carried out:

a.

Write off the goodwill by transaferring it to the partners’ accounts: In this step, we should first writing off the goodwill in the books of account. This is done by distributing the goodwill among all the partners. So, all the partners including the retiring or deceased partner gets their share of goodwill distributed in their old profit sharing ratio. The corresponding journal entries would be as follows:

All partners’s capital A/c

Dr.

(Individually)

To Goodwill A/c

(Being goodwill distributed among all the partners in their profit sharing ratio)

b.

Adjustment of the goodwill through partners’ capital accounts: In this step, the continuing partners’ capital accounts are adjusted with their share of the goodwill distributed in their gaining ratio. The corresponding journal entry would be as follows:

Continuing partners’s capital A/c

Dr.

Individually

To Retiring/deceased partner’s Capital A/c

(Being the continuing partners’ capital accounts adjusted with their share of goodwill to the retiring/deceased partner)

4. Discuss the various methods of computing the share in profits in the event of death of a partner.

Unlike the retirement of a partner which usually takes place at the end of the accounting period, the death of a partner is uncertain and could be somewhere during the accouting period is not yet completed. So, the following are the various methods of computing the share in profits in the event of death of a partner

1. Average Profits Method In this method, we consider the average profit earned by the business in the past few years or last year. The profit during the current year is assumed to be equal to this average profit of the past few years. The deaceased partner’s share of profit is calculated based on this averrage profit.

The time lapse could be in number of months or weeks or days from the start of the accounting period to till the date of death of the deceased partner. The following formula is used to caculate the profit share of the deceased partner.

Profit

{= \dfrac{Average~Profits}{No.~of~Time~Units~in~Accounting~Period} × Lapsed~Time~Units~till~date~of~death × Profit~Share}

Here, Time Unit could be months or weeks or days.

For instance, if the accounting period is one year, the No. of Time Units in the Accounting Period could be 12 Months or 52 weeks or 365/366 days.

If the yearly accounting perod starts on 1st April and a partner is deceased on 2nd June, then the time laps is 2 months (if the time unit is months) or 9 weeks (if the time unit is weeks) or 63 days (if the time unit is days).

For instance, A, B, C and D are partners in a firm sharing the profits in the ratio 1:2:3:4. The profits earned during the past 4 years are ₹ 19,00,000, ₹ 22,00,000, ₹ 25,00,000 and ₹ 30,00,000. The yearly accounting period ends on 31st March and one of the partners D deceased on 30th June.

Average Profits

{= \dfrac{₹~19,00,000 + ₹~22,00,000 + ₹~25,00,000 + ₹~30,00,000}{4}}

{= \dfrac{₹~1,00,00,000}{4}}

= ₹ 24,00,000

Considering that the Time Unit is months,

No. of Time Units in accounting period = 12 (months)

Time lapsed till the date of death of the deceased partner = 3 (months)

∴ Profit

{= \dfrac{₹~24,00,000}{12} × 3 × \dfrac{4}{10}}

= ₹ 2,40,000

2. Sales Basis Method: In this method, the last year’s sales is considered as the basis for calculating the profit. This method is based on the assumption that the net profit margin for the current accounting period is similar to that of the previous account period.

The following formula is used to calculate the deceased partner’s profit from the beginning of the accounting period up to the date of death of the partner.

Profit

{= \dfrac{Profits~in~the~previous~accounting~period}{Sales~in~the~previous~account~period} × Sales~till~up~to~the~date~of~the~death~of~the~deceased~partner~×~His/Her~Profit~Sharing~Ratio}

For instance, A, B, C and D are partners in a firm sharing the profits and the losses in the ratio 1:2:3:4. The sales during the previous year were ₹ 30,00,000 and the profits are ₹ 3,00,000. The partner D deceased on 21st June. The sales from the beginning of the current accounting period up to the death of the partner are ₹ 10,00,000.

For the above scenario, the profit of the deceased partner D is computed as follows:

Profit

{= \dfrac{₹~3,00,000}{₹~30,00,000} × ₹~10,00,000 × \dfrac{4}{10}}

= ₹ 40,000