LEARNING OBJECTIVES:
After studying this lesson, we are confident, you should be competent
enough to:
·
Identify adjustments arising due to retirement
of a partner.
·
Calculate new and gaining ratio.
·
Make accounting treatment of goodwill in
different cases.
·
Make accounting treatment of the revaluation of
assets and liabilities and distribution of profit or loss on revaluation among
partners.
·
Make accounting treatment of undistributed
profit or loss.
·
Determine the amount payable to retiring partner
and make payment as per agreement and provisions of law.
·
Make adjustment of partners’ capital account
Salient
Points:-
1. An
existing partner may wish to withdraw from a firm for various reasons.
2. The
amount due to a retiring partner will be the total of :-
a.
his capital in the firm
b.
His share in firm’s accumulated profits and losses.
c.
His share of profit or loss on revaluation of assets
and liabilities
d.
;his share of profits till the date of retirement
e.
His remuneration and interest on capital.
f.
His share in firm’s goodwill.
3. The
ratio in which the continuing (remaining) partners have acquired the share from
the outgoing partner is called gaining ratio.
4. Share
of goodwill of outgoing partner will be debited to gaining partners in their
gaining ratio.
5. At
the retirement of a partner Profit & Loss on Revaluation of Assets and
liabilities and balances of accumulated Profits and losses will be distributed
among all partners (including outgoing partner) in their old ratio.
6. The
outstanding balance of outgoing partner’s capital A/C may be settled by fully
or Partly payment and (or) transferring into his loan account.
Q.1 What is meant by
retirement of a partner?
Ans. Retirement of a partner is
one of the modes of reconstituting the firm in which old partnership comes to
an end and a new partner among the continuing (remaining) partners (i.e.,
partners other than the outgoing partner) comes into existence.
Q.2 ‘How can a partner retire from the firm?
Ans. A partner may retire from the firm;
i) in accordance with the terms of agreement; or
ii) with the consent of all other partners; or
iii) where the partnership is at will, by giving a
notice in writing to all the partners of his intention to retire.
Q.3 What do you understand by ‘Gaining Ratio*?
Ans. Gaining Ratio means the ratio by which the share in profit stands
increased. It is computed by deducting old ratio from the new ratio.
Q.4 What do you understand by ‘Gaining Partner’?
Ans Gaining Partner is a partner whose share in profit stands
increased as a result of change in partnership.
Q.5 Distinguish between Sacrificing Ratio and Gaining Ratio.
Ans. Distinction between
Sacrificing Ratio and Gaining Ratio
Q.6 Give two circumstances in which gaining ratio is computed.
Ans. Gaining Ratio is computed in the
following circumstances: (i) When a partner retires or dies. (ii) When there is
a change in profit-sharing ratio.
Q.7 Why is it necessary to revalue assets and reassess liabilities at
the time of retirement of a partner ?
Ans. At the time of retirement or death of a partner, assets are
revalued and liabilities are reassessed so that the profit or loss arising on
account of such revaluation upto
the date of retirement or death
of a partner may be ascertained and adjusted in all partners’ capital accounts
in their old profit-sharing ratio.
Q.8 Why is it necessary to
distribute Reserves Accumulated, Profits and Losses at the time of retirement
or death of a partner?
Ans. Reserves, accumulated profits and losses existing in the books of
account as on the date of retirement or death are transferred to the Capital
Accounts (or Current Accounts) of all the partners (including outgoing or
deceased partner) in their old profit-sharing ratio so that the due share of an
outgoing partner in reserves, accumulated profits/losses gets adjusted in his
Capital or Current Account.
Q.9 What are the adjustments required on the retirement or death of
a partner?
Ans. At the time of the retirement or death of a partner, adjustments
are made for the following:
(i) Adjustment in regard to goodwill.
(ii) Adjustment in regard to revaluation of assets
and reassessment of liabilities.
(iii) Adjustment in regard to undistributed
profits.
(iv) Adjustment in regard to the Joint
Life Policy and individual policies.
Q.10 X wants to retire from
the firm. The profit on revaluation of assets on the date of retirement is Rs.
10,000. X is of the view that it be distributed among all the partners in their
profit-sharing ratio whereas Y and Z are of the view that this profit be divided
between Y and Z in new profit-sharing ratio. Who is correct in this case?
Ans. X is correct because according to the Partnership Act a retiring
partner is entitled to share the profit upto the date of his retirement. Since
the profit on revaluation arises before a partner retires, he is entitled to
the profit.
Q.11 How is goodwill adjusted
in the books of a firm -when a partner retires from partnership?
Ans. When a partner retires (or dies), his share of profit is taken
over by the remaining partners. The remaining partners then compensate the
retiring or deceased partner in the form of goodwill in their gaining ratio.
The following entry is recorded for this purpose:
Remaining Partners’
Capital A/cs ...Dr. [Gaining
Ratio]
To
Retiring/Deceased Partner’s Capital A/c
[With his share of goodwill]
If goodwill (or
Premium) account already appears in the old Balance Sheet, it should be written
off by recording the following entry :
All Partners’
Capital/Current A/cs ...Dr. [Old Ratio]
To
Goodwill (or Premium) A/c
Q.12 X, V and Z are partners
sharing profits and losses in the ratio of 3 : 2 :1. Z retires and the
following Journal entry is passed in respect of Goodwill:
Y’s Capital
A/c ...Dr. 20,000
To X’s Capital
A/c 10,000
To Z’s Capital A/c 10,000
The value of goodwill is Rs. 60,000. What is the new
profit-sharing ratio between X and Y?
Ans. Without
calculating the gaining ratio, the amount to be adjusted in respect of goodwill
can be calculated directly with the help of following statement:
STATEMENT
SHOWING THE REQUIRED ADJUSTMENT FOR GOODWILL
Particulars X(Rs.) V(Rs.) Z(Rs.)
Right
of goodwill before retirement (3:2:1) 30,000 20,000 10,000
(Old
Ratio) Right of goodwill after retirement 20,000 40,000 —
(Balancing
Figure) (New Ratio)
Net
Adjustment (-)
10,000 (+) 20,000 (-) 10,000
The new ratio between
X and Y is 1 : 2.
Q.13 State the ratio in which
profit or loss on revaluation will be shared by the partners when a partner
retires. ;
Ans. Profit or loss on revaluation of assets/liabilities will be shared
by the partners (including the retiring partner) hi their old profit-sharing
ratio.
Q.14 How is the account of retiring partner settled?
Ans. The retiring partner account is settled either by making payment
in cash or by promising the retiring partner to pay in installments along with
interest or by making payment partly in call and partly transferring to his
loan account. The -following Journal entry is passed:
Retiring
Partner’s Capital A/c ...Dr.
To
Cash* [If paid in cash]
Or
To
Retiring Partner’s Loan [If
transferred to loan]
6 to 8
marks questions
Q.1 The balance sheet of X, V, Z who was sharing
profits in proportion of capital as follows :-
Particulars Amount Particulars Amount
Sunday creditors 1,000 Cash at bank 15,600
Capitals 25,000 Debtors
5,000 4,900
X 20,000 Less provision 100
Y 15,000
Z 67,000 Stock 10,000
P/M 11,500
Furniture 25,000
67,000 67,000
Y retires arid the following adjustment
of the assets and liabilities has been made before the ascertainment of the
amount payable by the firm to Y
1. That
the stock be depreciated by 5%
2. That
the provision for doubtful debts be increased to 5% on debtors.
3. That
a provision of RS.750 be made in respect of outstanding legal charges.
4. That
the land and building be appreciated by 20%.
5. That
the goodwill of the entire firm be fixed at Rs. 16,200 and V share of the same
be adjusted into the account of X and Z
(No good will account is to be raised)
6. That
X and Z decide to share future profits of the firm in equal proportions
7. That
the entire capital of the new firm at Rs. 48000 between X and Z in· equal
proportion. For the purpose,
actual cash is to be brought in or paid off.
You are required to prepare the
revolution account; partner’s capital account and bank account and revised
balance sheet after V’s retirement also indicate the gaining rates.
Solution 1
Dr. Revaluation
A/c Cr.
Particulars Rs. Assets Rs.
To stock A/c 500 By land and building 5,000
To provision for doubtful debts a/c 150
To outstanding
Legal charges 750
To profit transferred to
Capital A/c
X 1500
Y 1200
Z 900 3,600
5,000 5,000
Dr. Partner’s
Capital Accounts Cr.
Particulars ARs. B Rs. C
Rs. Particulars A Rs. B
Rs. C Rs.
To Y’s Cap A/c 1350 — 1050 By bal b/d 25,000 25,000 15,000
To Y’s loan A/c - 2600 - By Rev. A/c 1500 1250 900
To bal C/d 251150 - 11850 By X’s Cap A/c - 1350 -
(G/W)
By
X’s cap A/c
(G/W) - 4050 -
26500 26600 15900 26500 26600 15900
To bank A/c 1150 - - By bal b/d 25150 - 11850
To Bal C/d 24000 - 24000 By Bank - - 12150
25150 - 24000 25150 24000 25150
Dr. Bank
A/c Cr.
To Bal B/d 15,600 By X’s cap A/c 1,150
To Z’s Capital A/c 12,150 By bal c/d 26,600
27,750 27,750
BALANCE SHEET OF THE NEW FIRM
Liabilities Rs. Assets Rs.
Sundry Creditors 7,000 Cash at bank 26,600
Outstanding legal charges 750 Sundry debtors (5000-250) 4,750
Y’s Loan 26,600 Stock 9,500
Capital Plan
& Machinery 11,500
X 24000 Land & Building 30,000
Z 24000 48,000
83,250 83,250
Q.2 The Balance Sheet of A, B and C on 31st
December 2007 was as under :
BALANCE SHEET
as at 31.12.2007
Liabilities Amount Assets Amount
A’s Capital 400,00 Buildings 20,000
B’s Capital 30,000 Motor Car 18,000
C’s Capital 20,000 Stock 20,000
General Reserve 17,000 Investments 1,20,000
Sundry Creditors 1,23,000 Debtors 40,000
Patents 12,000
2,30,000 2,30,000
The partners share profits in the ratio
of 8 : 4 : 5. C retires from the firm on the same date subject to the following
term S and conditions:
i) 20%
of the General Reserve is to remain’ as a reserve for bad and doubtful debts. ;
ii) Motor)r
Car is to be decreased by 5%.
iii) Stock
is to be revalued at Rs.17, 500.
iv) Goodwill
is valued at’ 2 ½ years purchase of the average profits of last 3 years.
Profits were; 2001:
Rs.11,000; 200l: Rs. 16,000 and 2003:
Rs.24,000.
C.
was paid in July A and B borrowed the necessary amount from the Bank
on the security of Motor Car and stock to payoff C.
Prepare Revaluation Account, Capital
Accounts and Balance Sheet of A and B.
Ans.2 SOLUTION
REVALUATION ACCOUNT
Particulars Rs. Particulars Rs.
To Motor Cars A/C 900 By Loss transferred to
To Stock A/C 2,500 A’s Capital A/c Rs. 1,600
B’s
Capital A/c Rs. 800
C’s
Capital A/c Rs. 1,000 3,400
3,400 3,400
PARTNERS CAPITAL ACCOUNT
Particulars ARs. B Rs. C
Rs. Particulars A Rs. B
Rs. C Rs.
To C’s Capital A/c 8,334 4,166 - By
Balance b/d 40,000 30,000 20,000
To Revaluation A/c (Loss) 1,600 800 1,000 By
General Reserve A/c 6,400 3,200 4,000
To Bank A/c - - 35,500 By A’s Capital A/c - - 8,334
Balance c/d 36,466 28,234 - By B’s Capital A/c - - 4,166
46,400 33,200 36,500 46,400 33,200 36,500
By
Balance b/d 36,466 28,234 -
BALANCE SHEET OF A AND B
Liabilities Rs. Assets Rs.
Sundry creditors 1,23,000 Building 20,000
Bank Loan 35,500 Motor Card 17,100
Capital A 36,466 Stock 17,500
B 28,234 64,700 Investment 1,20,000 Debtors 36,600
Patents 12,000
2,23,200 2,23,200
Q.3 A, Band C were partners in a firm sharing profits equally: Their Balance Sheet on.31.12.2007 stood as:
BALANCE SHEET AS AT
31.12.07
Liabilities Rs. Assets Rs.
A
Rs. 30,000 Goodwill 18,000
B
Rs. 30,000 Cash 38,000
C
Rs. 25,000 85,000 Debtors .
43,000
Bills payable 20,000 Less: Bad Debt provision 3,000 40,000
Creditors 18,000 Bills Receivable 25,000
Workers Compensation Fund 8,000 Land and Building 60,000
Employees provide4nt Fund 60,000 Plant and Machinery 40,000
General Reserve 30,000
2,21,000 2,21,000
It was mutually agreed that C will
retire from partnership and for this purpose following terms were agreed upon.
i) Goodwill
to be valued on 3 years’ purchase of average profit of last 4 years which were
2004 : Rs.50,000 (loss); 2005 : Rs. 21,000; 2006: Rs.52,000; 2007 : Rs.22,000.
ii) The
Provision for Doubtful Debt was raised to Rs. 4,000.
iii) To
appreciate Land by 15%.
iv) To
decrease Plant and Machinery by 10%.
v) Create
provision of Rs;600 on Creditors.
vi) A
sum of Rs.5,000 of Bills Payable was not likely to be claimed.
vii) The
continuing partners decided to show the firm’s capital at 1,00,000 which would
be in their new profit sharing ratio which is 2:3. Adjustments to be made in
cash
Make necessary accounts and prepare the
Balance Sheet of the new partners.
Ans.3 REVALUATION ACCOUNT
Particulars Rs. Particulars Rs.
To Provision for Debts A/c 1,000 By Land A/c 9,000
To Plant & Machinery A/c 4,000 By Provision on Creditors A/c 600
To Profit transferred to By
Bills Payable A/c 5,000
A’s Capital A/c Rs. 3,200
B’s Capital A/c Rs. 3,200
C’s Capital A/c Rs. 3,200 9,600
14,600 14,600
PARTNER’S CAPITAL ACCOUNTS
Particulars ARs. B Rs. C
Rs. Particulars A Rs. B
Rs. C Rs.
To Goodwill A/c 6,000 6,000 6,000 By Balance b/d 30,000 30,000 25,000
To C’s Capital A/c 2,250 9,000 - By
General Reserve 10,000 10,000 10,000
To C’s Loan A/c - - 46,116 By Workmen A/c 2,667 2,667 2,666
Compensation
Fund
To Balance c/d 40,000 60,000 - By Rev. A/c (profit) 3,200 3,200 3,200
By
A’s Capital A/c - - 2,250
By
B’s Capital A/c - - 9,000
By
Cash A/c (Deficiency) 2,383 29,133 -
48,250 75,000 52,116 48,250 75,000 52,116
By
Balance b/d 40,000 60,000 -
BALANCE SHEET
as at 31.12.07
Liabilities Rs. Assets Rs.
Bills Payable 15,000 Debtors Rs. 43,000
Creditors 17,400 Less: Provision Rs. 4,000 39,000
Employees Provident Fund 60,000 Bills Receivables 25,000
C’s Loan 46,116 Land & Buildings 69,000
A’s Capital 40000 Plant & Machinery 36,000
B’S Capital 60000 1,00,000 Cash 69,516
2,38,516 2,38,516
