RETIREMENT OF PARTNER

6 to 8 marks Q.1 The balance sheet of X, V, Z who was sharing profits in proportion of capital as follows :Particulars Amount Sunday creditors 15,600 Capitals 4,900 X Y Z 10,000 P/M Furniture 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. 2. debtors. 3. That a provision of RS.750 be made in respect of That the stock be depreciated by 5% That the provision for doubtful debts be increased to 5% on Amount Particulars 1,000 Cash at bank 25,000 Debtors 20,000 Less provision 15,000 67,000 Stock 11,500 25,000 67,000 5,000 100

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; partners capital account and bank account and revised balance sheet after Vs retirement also indicate the gaining rates. Solution 1 Dr. Revaluation A/c Cr. Rs.

Particulars Rs. Assets 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. Particulars C Rs. Partners Capital Accounts ARs. B Rs. C Rs. Particulars

Cr.

A Rs. B Rs.

To Ys Cap A/c 1350 15,000 To Ys loan A/c 900 To bal C/d 251150

1050 By bal b/d - By Rev. A/c

25,00025,000 1500 1250 - 1350 -

- 2600

- 11850 By Xs Cap A/c (G/W) By Xs cap A/c (G/W)

- 4050 2650026600 25150 -

26500 26600 15900 15900 To bank A/c 11850 To Bal C/d 12150 25150 25150 Dr. - 24000 Bank A/c 24000 - 24000 By Bank 1150 - By bal b/d

2515024000 Cr.

To Bal B/d 1,150 To Zs Capital A/c 26,600

15,600 By Xs cap A/c 12,150 By bal c/d 27,750

27,750 Liabilities 26,600 Outstanding legal charges 4,750 750Sundry debtors (5000-250) BALANCE SHEET OF THE NEW FIRM Rs. Assets 7,000 Cash at bank Rs.

Sundry Creditors

Ys Loan 9,500 Capital 11,500 X 30,000 Z 83,250 24000

26,600 Stock Plan & Machinery Land & Building

24000 48,000 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 As Capital 20,000 Bs Capital 18,000 Cs Capital 20,000 General Reserve 1,20,000 Sundry Creditors 40,000 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: Amount Assets 400,00 Buildings 30,000 Motor Car 20,000 Stock 17,000 Investments 1,23,000 Debtors Patents

i)

20% of the General Reserve is to remain as a reserve for

bad and doubtful debts. ; ii) iii) iv) Motor)r Car is to be decreased by 5%. Stock is to be revalued at Rs.17, 500. Goodwill is valued at 2 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 To Motor Cars A/C To Stock A/C Rs. Particulars 900 By Loss transferred to 2,500 As Capital A/c Rs. Bs Capital A/c Rs. Cs Capital A/c Rs. 3,400 3,400 3,400 1,600 800 1,000 Rs.

PARTNERS CAPITAL ACCOUNT Particulars C Rs. ARs. B Rs. C Rs. Particulars A Rs. B Rs.

To Cs Capital A/c 8,334 4,166 20,000 To Revaluation A/c (Loss)1,600 6,400 To Bank A/c 8,334 Balance c/d 4,166 36,46628,234 3,200 4,000 -

- By Balance b/d

40,00030,000

800 1,000By General Reserve A/c

- 35,500 By As Capital A/c

- By Bs Capital A/c

46,40033,20036,500 36,500 By Balance b/d -

46,40033,200

36,46628,234

BALANCE SHEET OF A AND B Liabilities Sundry creditors 20,000 Bank Loan 17,100 Capital A 17,500 B 1,20,000 Debtors 36,466 Rs. Assets 1,23,000 Building 35,500 Motor Card Stock Rs.

28,234 64,700 Investment 36,600 Patents

12,000

2,23,200 2,23,200 Q.3 A, Band C were partners in a firm sharing profits equally: Balance Sheet on.31.12.2007 stood as: BALANCE SHEET AS AT 31.12.07 Their

Liabilities A 18,000 B 38,000 C 43,000 Bills payable 3,000 Creditors 25,000 Rs. 30,000 Rs. 30,000 Rs. 25,000

Rs. Assets Goodwill Cash 85,000 Debtors

Rs.

20,000 Less: Bad Debt provision 40,000 18,000 Bills Receivable 8,000 Land and Building

Workers Compensation Fund 60,000 Employees provide4nt Fund 40,000 General Reserve 2,21,000 30,000 2,21,000

60,000 Plant and Machinery

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) 4,000. iii) iv) v) vi) claimed. vii)

The Provision for Doubtful Debt was raised to Rs.

To appreciate Land by 15%. To decrease Plant and Machinery by 10%. Create provision of Rs;600 on Creditors. A sum of Rs.5,000 of Bills Payable was not likely to be

The continuing partners decided to show the firms 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 Particulars To Provision for Debts A/c 9,000 To Plant & Machinery A/c 600 To Profit transferred to 5,000 As Capital A/c Bs Capital A/c Cs Capital A/c 14,600

REVALUATION ACCOUNT Rs. Particulars 1,000 By Land A/c Rs.

4,000 By Provision on Creditors A/c By Bills Payable A/c

Rs. 3,200 Rs. 3,200 Rs. 3,200 9,600 14,600

PARTNERS CAPITAL ACCOUNTS Particulars C Rs. To Goodwill A/c 25,000 To Cs Capital A/c 2,250 9,000 10,000 To Cs Loan A/c 2,666 Compensation Fund To Balance c/d 3,200 2,250 By Bs Capital A/c 9,000 By Cash A/c (Deficiency)2,383 29,133 52,116 By Balance b/d 40,00060,000 48,25075,00052,116 48,25075,000 40,00060,000 3,200 By As Capital A/c - By Revalu A/c (profit)3,200 10,000 - 46,116 By Worksmen A/c 2,667 2,667 - By General Reserve 10,000 6,000 6,000 6,000 By Balance b/d 30,00030,000 ARs. B Rs. C Rs. Particulars A Rs. B Rs.

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 Cs Loan 46,116 Land & Buildings 69,000 As Capital 40000 Plant & Machinery 36,000 BS Capital 600001,00,000 Cash 69,516 2,38,516 2,38,516

Q.4 A, Band C were partners in a firm .sharing profits in the ratio of 5: 3: 2. On 31st March, 2005 their Balance Sheet was as under:

Liabilities Creditors 20,000 Reserve 30,000 Accounts: 10,000 A 6,000

Rs. Assets 7,000 Buildings

Rs.

10,000 Machinery

Stock

30,000

Patents

B 8,000 C 13,000

25,000

Debtors

15,000 70,000

Cash

87,000 87,000 A died on 1st October, 2005. It was agreed between his executors and the remaining partners that a. Goodwill be valued at 2 years purchase of the average profits of the previous five years, which were 2001: Rs. 15,000; 2002: Rs. 13,000; 2003: Rs. 12,000; 2004: Rs. 15,000 and 2005: Rs. 20,000. b. Patents be valued at Rs. 8,000; Machinery at Rs. 28,000;

Buildings at Rs. 30,000. c. Profit for the year 2005-06 is taken as having accrued at the same rate as the previous year. d. e. Interest on capital be provided at 10% p.a. A sum of Rs. 11,500 was to be paid to his executors

immediately. Ans.4 Prepare As Capital Account and his executors

account at the time of his death. As Capital A/c Particulars Rs. Particulars By Balance b/d By Reserves [10,000 ] Rs. 30,000 5,000

Executors A/c61,500

By Bs Capital A/c [15,000 ] By Cs Capital A/c [15/000 By Revaluation A/c [10,00 ] By Profit & Loss Suspense A/c ]

9,000 6,000 5,000 5,000

By Interest on Capital A/c [30/000 ] 1,500 60,500 61,500

As EXECUTORS ACCOUNT Particulars Balance c/d 61,500 61,500 61,500 By Balance b/d 61,500 Rs. Particulars 61,500 By As Capital A/c Rs.

Q.5 A, B and C were partners in ka firm sharing profits in the ratio of 5:3:2 On 31st March 2005 their Balance Sheet was as under : Liabilities Reserves 20,000 Creditors 30,000 As Capital 10,000 30000 Stock 7,000 Machinery Rs. Assets 10,000 Buildings Rs.

Bs Capital 6,000 Cs Capital 21,000 87,000

25000

Patents

15000 70,000 Cash 87,000

C died on 1st Oct. 2005. It was agreed between his executors and the remain partners that: a. Goodwill be valued at 2 years purchase of the average profits of the pre five years, which were 2001 :Rs. 15,000; 2002 : Rs. 13,000; 2003 : Rs. 12,000; Rs. 15,000 : 2004 and 2005 : Rs. 20,000.

b.

Patents be valued at Rs. 8,000; Machinery at Rs. 28,000;

Buildings at Rs. 30, c. Profit for the year 2005-06 be taken as having accrued at the same rate previous year. d. e. Interest on capital be provided at 10% p.a. A sum of Rs. 7,750 was paid to his executors immediately.

Prepare Cs Capital Account and his executors account at the time of his death. Ans.5 CS CAPITAL ACCOUNT Particulars To Cs Executors A/c 15,000 Rs. Particulars 27,750 By Balance b/d Rs.

By Reserves 2,000 By Revaluation A/c 2,000 By p& L Suspense A/c 2,000 By Interest on Capital By As Capital A/c 3,750 By Bs Capital A/c 2,250 27,750 27,750 750

CS EXECUTORS ACCOUNT Particulars To Cash A/c 27,750 To Executors Loan A/c or Bal c/d 27,750 20,000 Rs. Particulars 7,750 By Cs Capital A/c Rs.

Q.6 Anil, Jatin and Ramesh were sharing profit in the ratio of 2:1:1. Their Balance Sheet as at 31.12.2001 stood as follows:BALANCE SHEET as at 31.12. 2001 Liabilities Rs. Assets Rs.

Creditors 1,00,000 Bank Loan Profit and Loss A/c 18,400 Bills Payable 10,000 Anils Capital 20,000 Jatins Capital 14,000 Rameshs Capital 22,000

24,400 Cash

10,000 Debtors 18,000 Less : Provision

20000 1600

2,000 Stock

50,000 Land & Building

40,000 Investment

40,000 Goodwill

1,84,400 1,84,400 Ramesh died on 31st March 2002. The following adjustments were agreed upon(a) (b) (c) were good. (d) (e) Stock be increased by 10 % Goodwill be valued at 2 years purchase of the average profit of the past five years. (f) Rameshs share of profit to the death be calculated on the basis of the profit of the preceding year. profit for the years Building be appreciated by Rs. 2,000 Investments be valued at 10% less than the book value. All debtors (except 20% which are considered as doubtful)

1997, 1998, 1999 and 2000 were Rs. 26,000, Rs. 22,000, Rs. 20,000 and Rs. 24,000 respectively. Ans.6 Prepare revaluation account, partners capital Account, Ramesh s Executors Account and Balance sheet immediately after Rameshs death assuming immediately to Rameshs Executors Account REVALUATION ACCOUNT Particulars To Investment A/c 2,000 To Provision for doubtful debt A/c 1,000 By Loss transferred to Anils Capital A/c Rs.400 Jatins Capital A/c Rs. 200 Rameshs Capital A/c Rs. 200 800 3,800 3,800 2,400 By Stock A/c Rs. Particulars 1,400 By Building A/c Rs. that Rs. 18, 425 be paid his executors and balance to b left to the

PARTNERS CAPITAL ACCOUNTS

Particulars Ramesh Rs. Rs. Rs. Rs. Rs. Rs. Anil Jatin Ramesh Particulars Anil Jatin

To Goodwill A/c 40,000

11,000 5,500

5,500

By Balance b/d

50,00040,000

To Ramesh Capital A/c 7,3333,667 4,500 To Revaluation A/c (Loss)400 200 1,125 To Rameshs Executors A/c To Balance c/d 7,333 -

By Profit and Loss A/c 9,0004,500

200

By Profit &Loss Susp A/c -

50,925 By Anils Capital A/c -

40,267 35,133

By Jatins Capital A/c 3,667 59,000 41,500 56,625 56,625 By Balance b/d

59,00041,500

40,26735,133 -

Date 2002

Particulars

Rs. 18,425 32,500 50,925

Date 2002

Particulars

Rs.

Mar. 31 To Cash A/c A/c 50,925 Dec. 31 To Balance A/c

Mar. 31

By Raeeshs Capital

50,925 2003 Jan.1 By Balance b/d 32,500

BATANCE SHEET Liabilities Bank Loan 81,575 Creditors 20,400 Debtors Rs. 20,000 Rs. Assets 10, 000 Cash Rs.

Bills Payable 16,000 Rameshs Executors Loan 11,000 Anils Capital 22,000 Jatins Capital 12,600

2,000 Less: Provision

Rs.

4,000

32,500

Stock

40,267 Land and Building

35,133 Investments

Profit and Loss Suspense A/c 1,125 1,44,300 1,44,300

CHAPTER - III
Reconstitution of Partnership 1 Mark Questions

Admission of a Partner
Q.1 What do you understand by admission of a new Partner ?

Q.2 Q.3

State the two financial rights acquired by a new Partner ? Give the name of the compensation which is paid by a new Partner to sacrificing Partners for sacrificing their share of profits.

Q.4 Q.6

Why a new Partners brings capital into the firm ? Enumeration the matters that need adjustment at the time of admission of a new Partner.

Q.7

What is meant by the new profit - sharing Ratio in case of admission of a Partner ?

Q.8

What is meant by the sacrificing Ratio in case of admission of Partner?

Q.9 Q.10

Give two circumstances in which sacrificing Ratio may be applied. Why is it necessary to revalue assets and reassess liabilities of a firm in case of admission of a new partner ?

Q.11 Q.12

What are the accumulated profit and accumulated losses ? Why is the General reserve distributed among the old Partners before a new Partner is admitted ?

Q.13

What entry is recorded to distribute General Reserve on the profit and loss A/c balance give in Liability sidke of Balance sheet ?

Q.14

Explain the accounting entries of goodwill when at the time of admissio the new Partner brings in his share of goodwill in cash.

Q.15

Explain the treatment of goodwill in the books of a firm on the admission of a new Partner when goodwill already appears in the Balance sheet at its full value and the new partner brings his share of good will in cash.

Q.16 Q.17

What is hidden goodwill ? Under what circumstances the premium for goodwill paid by the incoming Partner will not recorded in the book of A/C ?

Q.18

Sate the ratio in which the old Partners share the amount of cash brought in by the new Partner as premium for goodwill.

Q.19

State two differences between Revolution A/c and Memorandum Revolution A/c.

Q.20

A and B share profits and losses in the Ratio of 4:3, they admit C with 3/7th share; which he gets 2/7th From A and 1/7 from B. What is the new profit sharing ratio ?

Q.21

The capital of A and B are Rs. 50,000 and Rs. 40,000. To Increase the Capital base of the firm to Rs. 1,50,000, they admit C To join the firm, C is required to Pay a sum of Rs. 70,000, what is the amount of premium of goodwill ?

Q.22

Distinguish between New Profit - sharing ratio and sacrificing ratio ?

Answers
Ans.1 When a new person becomes a partner in the firm, it is known as admission of a new partner. On admission of a new partners, an admission of a new partner, old partnership comes to an end new partnership comes into existence. Ans.2 New partner is admitted to the partnership if it provided in the partnership deed or all the existing partners agree to admitting the new

partner. Section 31 of the Indian Partnership Act Provides that a person may be admitted as a new partner into a partnership firm with consent of all the Partners. Ans.3 When a partner joins the firm, he gets the following two rights alongwith others : i) Right to share future profit of the firm and the

ii) Right to share in the assets of the firm. Ans.4 The share of future profits which the incoming partner receives is equal to the sacrifice of profit by an existing partner of a partners of the firm. The compensation he pays against this sacrificing is called goodwill or premium. Ans.5 A new partners brings in capital in a firm to get the rights over the assets of the firm. Ans.6 The matter that need adjustment of the time of admission of a new partner are : i) Adjustment in profit sharing ratio and adjustment of capital

ii) Adjustment for goodwill iii) Adjustment of Profit / Loss arising from the Revolution of Assets and Reassessment of Liabilities. iv) Adjustment of accumulated profits, reserves and losses. Ans.7 The ratio in which all partners including the incoming partner will share the profit and losses in future is known as new profit sharing ratio. Ans.8 The ratio in which the old partners have agreed to sacrifice their share in profit in favour of an incoming partner is called sacrificing ratio. The formula is :

Sacrificing Ratio = Old Ratio - New Ratio Ans.9 Circumstances in which sacrificing Ratio may be applied are : i) At the time of admission of a new partner for distributing goodwill brought in by the new partner. ii) For adjustment goodwill in case of change in Profit - sharing ratio of existing partners. Ans.10 The assets are revalued and liabilities of a firm are reassess, at the time of admission of a partner because the new partner should; neither benefit nor suffer because change in the value of assets and liabilities as on the date of admission. Ans.11 The profit accumulated over the years and have not been credited to partners capital A/c are known as accumulated Profit or undistributed profit, e.g. the General Reserve, Profit and Loss A/c (credit balance). The losses which have not yet been written off to the debit of Partners Capital A/c are known as accumulated Losses, e.g. the Profit and Loss A/c appearing on the assets side of Balance Sheet, etc. Ans.12 General Reserve represents accumulated profits relating to the period prior to the admission of a new partner. It belongs to the old partners and therefore distributed among old partners.

Ans.13 General Reserve A/c Profit & Loss A/c

Dr. ...... Dr ....... [Old Ratio]

To Old partners capital A/c ........ Ans.14 i) For bringing Goodwill in cash Cash Bank A/c Dr. ........

To Premium for Goodwill A/c

[with share of goodwill]

ii) For distributing the share on new partners goodwill Premium for goodwill A/c Dr.... [in sacrificed ratio] [in sacrificing To sacrificing Partners Capital A/c ( In case of calculating capital ) or To Sacrificing Partners Current A/c Ratio] (In case of Fixed capital) Ans.15 By following accounting standard - 10, the existing goodwill (i.e. goodwill appearing in the Balance Sheet ) is written off to the old partners Capital a/c in their old profit sharing ratio. Old partners capital A/c To Goodwill A/c [Being the existing g/w written off in the old ratio.] Ans.16 If the value of goodwill is not given, it has to be inferred on the basis of the net worth of business. Hidden goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners in other ward, the hidden goodwill refers to the difference between the total required capital and the actual capital. Ans.17 When the premium for goodwill is paid by the incoming partner privately, it is not recorded in the books of A/c as it is as a matter outside the business. Ans.18 The old partners share the amount in sacrificing ratio, i.e. old Ratio New Ratio. Ans.19 Distinction Between Revolution Account and Memorandum Revolution A/c : Dr. ..... [in old Ratio]

Basis Account

Revolution Account

Memorandum

Revolution

Purpose it is prepared to record the effect effect of Revolution of assets and liabilities are to be appear at their revalued figures

it is prepared to record the

of revolution of assets and liabilities when the assets and liabilities are to appear at their old figures.

Parts

it is not divided into two parts

it is divided into two parts.

Ans.20 A : - = B: : = C: New Profit sharing Ratio is 2:3:3. Ans.21 The total capital of the firm is Rs. 90,000. To increase the capital base to Rs. 1,50,000, C is to bring in Rs. 60,000 (Rs. 1,50,000 - 9,00,000) But he bring in Rs. 70,000. Therefore, the excess of Rs. 10,000 represent premium for goodwill. Ans.22 Distinction between New Profit - Sharing ratio and sacrificing ratio :

New Profit sharing Ratio

1) It is related to all the Partners (including new) 2) It is the ratio in which the all partner (including new) will share profit in future. 2) 1)

Sacrificing Ratio
It is related to old partners only

It is the ratio in which old partners have sacrificed their share in favour of new Partner or when profit sharing Ratio is changed.

3)

New Profit sharing Ratio =

3)

Sacrificing Ratio =

Old Ratio - Sacrificing Ratio

Old Ratio - New Ratio

CHAPTER - III Short Answer RECONSTITUTION OF PARTNERSHIP

(CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS, ADMISSION OF A PARTNER, RETIREMENT/DEATH OF A PARTNER)

Ql.

At the time of change in profit sharing ratio among the existing partners, where will you record an unrecorded liability ?

Ans. Q2.

Revaluation Account-Debit side Anand, Bhutan! and Chadha sharing profits in ratio of 3:2:1. On 1st April 2007, they decided to share profits equal. Name the partners who is gaining on consequence of such change.

Ans. Q3. Ans.

Chadha. Give two characteristics of goodwill. (i) it is an intangible asset having a definite value. (ii) It helps in earning more profit.

Q4. Ans. Q5.

Name any two factors attesting goodwill of a partnership firm. (i) Favourable location (ii) Time period

In a partnership firm assets are Rs. 5,00,000 and liabilities are Rs. 2,00,000. The normal profit rate is 15%. State the amount of normal profits. Ans. Rs. 45,000

Q6.

State the amount of goodwill, if goodwill is to be valued on the basis of 2 years purchase of last years profit. 20,000. Profit of the last year was Rs.

Ans. Q7.

Rs. 40,000 Where will you record increase in machinery in case of change in profit sharing ratio among the existing partners?

Ans. Q8.

Revaluation Account- Credit Side. Name two methods for valuation of goodwill in case of partnership firm.

Ans. Q9 Ans. Q IO.

(i) Average Profit Method (ii) Super Profit Method Give formula for calculating goodwill under super profit method. Goodwill = Super Profit x Number of Years Purchase. Pass the journal entry for increase in the value of assets or decrease in the value of liabilities in the Revaluation A/c?

Ans

Assets A/c Liabilities A/c To Revaluation A/c

Dr. Dr.

(with the amount of increase) (with the amount of decrease) (with the total amount of gain)

(Being revaluation of assets and liabilities) Qll. P,Q and R are partners in a firm sharing profits in the ratio of 2:2:1 on 1.4.2007 the partners decided to share future profits in the ratio of 3:2:1 on that day balance sheet of the firm shows General Reserve of Rs 50,000. Pass entry for distribution of reserve. Ans. General Reserve To Ps Capital To Qs Capital A/c A/c A/c A/c Dr. 50,000 30,000 20,000

To Rs Capital 10,000

(Being distribution of reserve) Q12. The gaining partners should compensate to sacrificing partners with the amount of gain. Journalise this statement. Ans. Gaining Partners Capital A/c To Sacrificing Partners Capital A/c Dr

(Being compensation given by gaining partner to sacrificing partner) Q13. What are the two main rights acquired by the incoming new partner in a partnership firm? , Ans, The two main rights are: (i) Right to share the assets of the firm. (ii) Right to share the future profits of the firm. Q14. A and B are partners, sharing profits in the ratio of 3:2. C admits for 1/5 share . State the sacrificing ratio. Ans. Q15. Sacrificing Ratio - 3:2. How should the goodwill of the firm be distributed when the sacrificing ratio of any of the existing partner is negative (i.e. he is gaining) Ans. In this case the partner with a negative sacrificing ratio, i.e. the gaining partner to the extent of his gain should compensate to the sacrificing partner to the extent of his gain. Ql6. In case of admission of a partner, in which ratio profits or loss on revaluation of assets and reassessment of liabilities shall be divided?

Ans. Q17.

Old ratio. Give journal entry for distribution of Accumulated Profits* in case of admission of a partner.

Ans.

Accumulated Profit

A/c

Dr.

To Old Partners Capital A/c (Being distribution of accumulated profits among old partners)

Q18.

At the time of admission of partner where will you record unrecorded investment?

Ans. Q19.

Revaluation Account- Credit side. The goodwill of a partnership is valued at Rs. 20,000. State the amount required by a new partner, if he is coming for 1/5 share in profits.

Ans. Q20.

Rs. 4,000. What journal entries should be passed when the new partner brings his share of goodwill in kind?

And. (i) Assets A/c To Premium A/c (ii) Premium A/c To Sacrificing Partners Capital A/c Q21. What journal entries will be passed when the new partner is unable to bring his share of goodwill in cash? Ans. New Partners Capital A/c To Sacrificing Partners Capital A/c Q22. In case of admission of a new partner, goodwill was already appearing in the books of the firm. Give journal entry for its treatment Ans Old Partners* Capital A/c Dr. To Goodwill A/c Dr Dr -

(Being old goodwill written off among old partners) Q23. At the time of admission of a new partner, workmens compensation reserve in appearing in the Balance sheet as Rs 1,000. Give journal entry if workmens compensation at the time of admission is estimated at Rs 1,200. Ans: Revaluation A/c 200 200

To Workmens Compensation Reserve A/c (Being workmens compensation estimated at Rs. 1,200) Q24.

Give journal entry for recording deceased partners share in profit from the closure of last balance sheet till the date of his death.

Ans.

Profit & Loss Suspense Account

Dr.

To Deceased Partners Capital Account (Being share of profit to deceased partners) Q25. Ans. Define gaining ratio. Gaining ratio is the ratio in which remaining/continuing partners acquire the share of the outgoing partner(s). Q26. Ans. Q27. Give two circumstances in which gaining ratio can be applied. (i) Retirement of a partner (ii) Death of a partner. .

At the time of retirement of a partner give journal entry for writing off the existing goodwill.

Ans.

All Partners Capital (including retiring) A/c To Goodwill A/c

Dr.

(Being old goodwill written off among all partners in, old ratio)

CHAPTER - III ADMISSION OF A PARTNER

6 to 8 marks Answers : Ans 1 BOOKS OF SURENDER, NARENDER AND MAHENDER REVALUATION ACCOUNT Rs. Assets Rs.

Particulars

To provision for doubtful A/c 1,000 To Stock A/c 1,000 To Plant A/c 4,000

200

by creditors A/c

4,000 By furniture A/c 2,000 By building A/c By loss transferred to Surenders Capital A/c 120 Narenders Capital A/c 6,200 80200

6,200

Dr.

PARTNERSS CAPITAL ACCOUNTS Cr.

ParticularsSurenderNarenderMahender ParticularsSurender NarenderMahender To cash a/c 6000 4000 By Balance b/d5600030000 To Revaluation By Cash A/c 40000 A/c (Loss) 120 80 By Premium A/c12000 8000 To Balance c/d6188033920 40000 68000 38000 40000 68000 38000 40000 By Balance b/d6188033920 40000

Particulars Creditors 36000 Capitals :

Rs. Assets 13000 Stock Debtors 22000

Rs.

Surender 19800 Furniture Mahender 8000 Bills Payable 24000 57000

61880

Less : Provision2200 Narender 33000 8000 40000 135800 Plant 4000 Building Cash 152800

152800

Ans.2 Books of Dinesh, Yamine, Farte and Anie REVALUATION ACCOUNT Particulars To Bills Discounted A/c 190 200 By Loss transferred to Dineshs capital A/c 704 Yasmines Capital A/c 1280 1670 1670 PARTNERS CAPITAL ACCOUNTS
Dr. Dr.

Rs. Assets 1670 By Public deposits A/c By Machinery A/c

Rs.

448 Farias Capitla A/c 128

Particulars DineshYasmine Faria Annie ParticularsDineshYasmine Faria Annie Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. To Revaluation By Balance b/d51003000 5000 A/c (Loss) 704 448 128 By Reserve F A/c495 315 90

To Furniture A/c800 800 800 By Cash A/c 4500 To Drawings 2750 1750 500 By Premium A/c917 583 167 A/c To Balance c/d2258 900 3829 4500 6512 3898 5257 4500 6512 3898 5257 4500 By Balance b/d2258 900 3829 4500

BALANCE SHEET as at 31.12.2001

Particulars Rs.
Sundry Creditors 2757 Public Deposits 7350 Capitals : Dinesh 2000 200 Yashmine 1450 Faria Annie 1200 Bills Discounted 14957

Rs. Assets
800 Cash in Hand 1000 Factory Buildings 2258 Machinery Furniture 900 Stock 1500 300

3829 Debtors 4500 11487 Less : Provision 1670 14957

Ans.3

SOLUTION

Books of Sarla, Nikita, Arundhati and Kusum REVALUATION ACCOUNT

Particulars Rs.
Payable A/c

Rs. Assets
To Machinery A/c 540 4032By Bills

To Furniture A/c

2082 By Loss transferred to : Sarlas Capital A/c 2787 Nikitas Capital A/c 1858 Arundhatis Capital A/c929 6114

5574 6114 PARTNERSS CAPITAL ACCOUNTS Dr. Cr. Particulars DineshYasmine Faria Annie ParticularsDineshYasmine Faria Annie Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. To Revaluation 27871858 929 By Balance b/d3192026880 13440 A/c (Loss) By P&L A/c 2700 1800 900 To Sarlas Cur14433 By Bank A/c 11200 A/c By Premium A/c5000 To Nikitas Cur 4422 A/c To Arundhatis Curr A/c 2211 To Balance C/d22400224001120011200 39620 28680 14340 11200 By Balance b/d2240022400 11200 11200

BALANCE SHEET as at 1.1.2007 Particulars Amount Creditors 36288 Bills Payable 11798 Capitals : 23520 Amount Particulars 15120 Plant & Machinery 12500 Furniture Stock

Sarla 21168 Nikita 23112 Arundhati Kusum Current A/c Sarla Nikita Arundhati 115886 Ans. 4 Dr. Particulars Amount To Stock A/c 16500 To furniture A/c 1000 on

22400 22400 11200 11200 14433 4422 2211 21066 115886 67200

Debtors Bank

BOOK OF X, Y AND Z REVALUATION ACCOUNT Cr. Amount Particulars 2000 By land A/c 2420 By creditors A/c 4224By provision of discount 1500 creditors A/c

To Provision for bad debts A/c 3612 To claim against damages A/c To Profit transferred to Xs capital A/c Ys 21112 8266 2742 10968 21112

PARTNERS CAPITAL ACCOUNT Dr. Particulars X Rs. Rs. Ys Current A/c - 64,900 1,45,200 - By Balance b/d 1,76,000 Y Rs. Z Rs. Particulars X Rs. Y Rs. Cr Z

To Balance 2,54,90184,96784,967 By revaluation 8,226 2,742

Profit By premium a/c5,775 1,925 By Cash a/c 84,967 By Xs current 64,900 2,54,9011,49,867 84,967 84,967 BALANCE SHEET AS AT 31.3.07 Liabilities Claim against damages 1,20,167 Creditors Rs. 91,300 1,81,500 Less Rs. 1,000 21,780 Rs. Assets 1,500 Cash Land Furniture 90,300 Stock 1,30,000 Less Prov. 3,612 86,688 Capital 30,976 X Rs. 2,54,901 28,600 Y Rs. 84,967 64,900 Z Rs. 84,967 4,24,835 Current A/c 64,900 5,77,923 5,77,923 Ans.5 Dr. Particulars Amount Amount Particulars 1500 By Creditors A/c Debtors Less prov. Bills receivables Xs current a/c 35,200 4,224 Rs. 2,54,9011,49,867 -

BOOKS OF A, B AND C REVALUATION ACCOUNT Cr.

Employees provided Fund A/c 300 Fixed Assets A/c Stock A/c

3000 By Provision on Debtors A/c 200 900 By Loss transferred to

As Capital A/c Bs Capital A/c 4900 5400 5400 PARTNERS CAPITAL ACCOUNT Dr. Particulars Amount Creditors 25940 Capitals 6600 A 21000 B 6000 C 28440 16420 6000 50860 4480 59540 59540 Ans.6 Dr. Particulars Fixtures 10000 Bills Receivable Stock Provision for B.D. 10000 20000 PARTNERS CAPITAL ACCOUNTS Rs. Particulars 5000 By Land A/c 2000 By Loss transferred to 8000 5000 20000 Amount Particulars 4200 Cash Stock Fixed Assets Debtors

2100 2800

Cr.

Employees provident fund

BOOKS A, B Anc C REVALUATION ACCOUNT Cr. Rs.

As Capital A/c Rs. 6000 Bs Capital A/c Rs. 4000

Dr. Particulars A Rs. Rs. To Revalution A/c (Loss) 6000 4000 B Rs. C Rs. Particulars A Rs. B Rs.

Cr. C

By Balance b/d8000040000

To Balance c/d9980053200 60000 By cash a/c 60000 12000

By General Res.A/c18000 By Premium a/c7800 5200 105800 57200 60000 By Balance b/d9980053200 60000 BALANCE SHEET as at 31st Dec. 2001 Dr. Particulars Sundry creditors 98000 Capitals 60000 A 32000 B 25000 C 8000 Land 263000 Ans.7 BOOKS OF C, P AND M REVALUATION ACCOUNT 99800 53200 Rs. Particulars 50000 Cash Debtors Stock Fixtures Cr. Rs. 60000 105800 57200

60000 213000 Bills Receivables 40000 263000

Dr. Particulars To Plant & Machinery A/c 7500 To Provision on Debtors A/c Rs. Particulars 3000By Land & Building A/c 4725By Loss transferred to Cs Capital A/c Ps Capital A/c 7725 7725 PARTNERS CAPITAL ACCOUNTS Dr. Particulars A Rs. Rs. To Revolution A/c (Loss) 125 100 B Rs. C Rs. Particulars A Rs. B Rs. 125

Cr. Rs.

100225

Cr. C

By Balance B/d189000162000 By Premium A/c 6000

To Balance c/d19487516490086346 3000 86346 195000 165000 86346 86346

By Cash A/c

195000 165000 By Balance b/d494875164900

86346 BALANCE SHEET as on 01.01.2007 Dr. Liabilities Capitals : 105000 Rs. Assets Plant & Machinery Cr. Rs.

C 210000 P M 49815 Creditors 54000 Bills payable 135306 554121

194875 164900

Land & Building Debtors 55350 5535

86346 446121 Less Provision 54000 Stock 45900 Cash 554121

Ans.8REVALUATION ACCOUNTS Dr. Particulars To Stock To Furniture 10000 To Machinery 5000 To Debtors 15000 CAPITAL ACCOUNTS OF PARTNERS Particulars Rashmi Pooja Santosh Santosh Rs. Rs. Rs. 5000 To Revaluation A/c 10000 115000 To Ads Susp. A/c20001000 Particulars Rashmi Rs. Pooja Rs. Rs. Rs. Particulars 1000 6000 3000 15000 Rashmi Pooja Cr. Rs.

5000 By Loss on Revolution u/fd to :

By Balance b/d 115000 8000 -

By Cash A/c

To Balance C/d145000130000 By Premium a/c2000010000 By Reserve 16000 By Work com.Res.60003000

157000 136000

157000 136000 To Balance c/d 145000

To Balance c/d145000130000137500 130000 137500

By Cash A/c

( of (Rs. 145000 137500 + Rs. 130000) 145000 130000 137500 137500 BALANCE SHEET OF A, B & C AS AT Dr. Liabilities Creditors 257500 Bills Payable 114000 Rashmis Capital 9000 Poojas capital 45000 Santoshs capital Rs. Assets 30000 Cash 10000 Machinery 145000 Furniture 130000 Stock 137500 Debtors Less : Provision 452500 452500 Ans.9REVALUATION ACCOUNT Dr. Particulars To Stock 75000 As Capital A/c (1/3) Rs. Particulars 11400 By land & building 5100

145000 130000

Cr. Rs.

30000 3000

Cr. Rs.

To provision for doubtful debtrs 19500

Bs Capital A/c (1/3) Cs Capital A/c (1/3) 75000

19500 19500 75000

CAPITAL ACCOUNTS OF PARTNERS Particulars Rashmi Pooja Santosh Santosh Rs. To Adver. 90000 Sus. A/c 19500 1000 1000 Rs. Rs. Particulars Rashmi Rs. Pooja Rs. Rs.

By Balance c/d217000166000 1000 By Revaluation 1950019500 39000 By General Res.6000 6000 By Premium A/c2000020000 By Current A/c

to goodwill 39000 39000 6000

To Current A/c12250071500 20000

To Balance c/d100000100000100000 4500 262500 211500 140000 140000

262500 211500

BALANCE SHEET OF M/S A, B & C as at 31st march 20x2 Dr. Liabilities Sundry creditors 172000 Rs. Assets 27000 Cash at bank 6000 Debtors 5100 Cr. Rs

Employees Provident Fund 102000 Bills Payable 96900 As Capital Bs Capital 102600

45000 Less : Provision 100000 Mr. X 100000 Stock

Cs Capital 24000 Ds Capital 72000 As Current A/c 200000 Bs Current A/c 4500 672000

100000 Furniture & Fixtures 100000 Plant & Machinery 122500 Land & Building 71500 Cs Current A/c 672000

CHAPTER III ADMISSION OF A PARTNER 6-8 marks Questions Q1. Surender and Narender share profits and losses in the ratio of 3:2. On 1st January 1994, Mahendra was admitted who paid Rs. 40,000 for Capital and Rs. 20,000 for Godwill. Surender and Narender withdrew half of the goodwill. The Balance Sheet of Surender and Narender as on 31st Dec 1993 was as follows: The assets and liabilities of the firm were revalued as under: a. Stock at Rs. 36,000; Furniture Rs. 8,000, Plant at Rs. 8,000 and Buildings at Rs. 24,000. b. Provision for Doubtful Debts is to be maintained at 10% of the Debtors. c. A Liability of Rs. 1,000 included in Creditors was not likely to be paid. Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the reconstituted firm. Mahender was admitted for 1/6th Share in future. Q2. Dinesh, Yasmine and Faria are partners in a firm, sharing profits and losses in 11:7:2 respectively. The Balance Sheet of the firm as on 31st Dec 2001 was as follows: On the same date, Annie is admitted as a partner for on-sixth share in the profits with Capital of Rs. 4,500 and necessary amount for his share of goodwill on the following terms:-

a. Furniture of Rs. 2,400 were to be taken over by Dinesh, Yasmine and Faria equally. b. A Liability of Rs. 1,670 be created against Bills discounted. c. Goodwill of the firm is to be valued at 2.5 years purchase of average profits of 2 years. The profits are as under: 2000:- Rs. 2,000 and 2001 - Rs. 6,000. d. Drawings of Dinesh, Yasmine, and Faria were Rs. 2,750; Rs. 1,750; and Rs. 500 Respectively. e. Machinery and Public Deposits are revalued to Rs. 2,000 and Rs. 1,000 respectively. Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the new firm. Q3 Sarla, Nikita and Arundhati are partners sharing: profits in ration 3:2:1. Following is their Balance Sheet. Balance Sheet as at 31.12.2006 On 01.01.2007, Kusum is admitted into partnership on following termsi. Kusum will bring Rs. 11,200 as capital & Rs. 5,000 as her share of goodwill. ii. New profit sharing ratio will be 2:2:1:1

iii. Machinery & Furniture to be decreased by 10 % and 15% respectively. iv. Bills payable to be reduced to Rs. 12,500.

v. The capitals of all partners to be adjusted on the basis of Kusums capital, adjustments to be made through current accounts. Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the reconstituted firm. Q4. X and Y are partners as they share profits in the proportion of 3:1 their balance sheet as at 31.03.07 as follows. On the same date, Z is admitted into partnership for 1/5th share on the following terms a. Goodwill is to be valued at 3 years purchase of average profits of last for year which were Rs. 20,000 Rs. 17,000 Rs. 9,000 (Loss) respectively. b Stock is fund to be overvalue by Rs. 2,000 Furniture is reduced and

Land to be appreciated by 10% each, a provision for Bad Debts @ 12% is to be created on Debtors and a Provision of Discount of Creditors @ 4% is to be created. c A liability to the extent of Rs. 1,500 should be created for a claim

against the firm for damages. d An item of Rs. 1,000 included in Creditors is not likely to be claimed,

and hence it should be written off. Prepare Revaluation Account, Partners: Capital Accounts and Balance Sheet of the new firm if Z is to contribute proportionate capital and goodwill. The capital of partners are to be in profit sharing ratio by opening current Accounts. Q.5 A and B are partners sharing profits in the ratio 3:4. Their Balance Sheet on 31.012.07 is as under:

C is admitted for 1/7th share in future profits. C brings Rs. 6,000 as capital and Rs. 3,500 for good will in cash. C acquires his share entirely form B. It was further agreed that : 1. Employees Provident Fund is to be increased by Rs. 1,500. 2. Creditors are to be paid Rs. 300 less. 3. All Debtors are good. 4. Fixed Assets are to be revalued at Rs. 21,000. 5. Stock included Rs. 900 for obsolete items. Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of the reconstituted firm.

Q 6.

A and B shares profits and losses in the proportion of 3/5 and 2/5 showed the following Balance sheet on 31st Dec 2001. Liabilities Rs. Assets Rs.

On the same date, they admit C for 1/5th Share. The following term were agreed upon: i. ii. C was to introduce Rs. 60,000 as his capital C would pay cash for goodwill, which would be based on 2 years purchase of average profits of last four years. iii. Assets were revalued as under: Fixtures at Rs. 25,000; Bills Receivable at Rs. 8,000; Stock at Rs. 32,000; Debtors at Rs. 60,000; Land at Rs. 40,000.

Profits for the last four years were:-

Rs. I II III IV 30,000 40,000 35,000 25,000

Prepare necessary ledger accounts and Balance Sheet after Cs admission. Q7. C and P are partners sharing profit and losses in the ratio 5:4 following is the balance sheet of the firm as at 31.12.2006. M is admitted on 1st January, 2007 for 1/6th share in profits which he takes from C and P an the ratio 2:1. Following terms are agreed upona. M will bring capital to extent of 20% of the total capital of the new firm after adjustments. b. Goodwill of the firm is valued at Rs. 54,000 and M will bring his share of goodwill in cash. c. Land and Buildings is to be appreciated by Rs. 7,500 and Plant and Machinery to be decreased by Rs. 3,000. d. Provision on Debtors is to be maintained at 10%. Prepare Revaluation Account, Partners: Capital Accounts and Balance Sheet of the new firm.

Q8.

Rashmi and Pooja are partners in a firm. They share profits and losses in the ratio of 2:1. They admit Santosh into partnership firm on the condition that she will bring Rs. 30,000 for Goodwill and will bring such an amount that her capital will be 1/3 of the total capital of the new firm. Santosh will be given 1/3 share in future profits. At the time of admission of Santosh, the Balance Sheet of Rashmi and Pooja was as under: It was decided to: a. revalue stock at Rs. 45,000. b. depreciated furniture by 10% and machinery by 5%. c. made provision of Rs. 3,000 on sundry debtors for doubtful debts.

Q9.

A, B and C are equal partners in a firm, their Balance Sheet as on 31st March 2002 was as follows: On that date they agree to take D as equal partner on the following terms:

a. b. c. d. e.

D should bring in Rs. 1,60,000 as his capital and goodwill. His share of goodwill is valued at Rs. 60,000. Goodwill appearing in the books must be written off. Provision for loss on stock and provision for doubtful debts is to be made at 10% and 5% respectively. The value of building is to taken Rs. 2,00,000. The total capital of the new firm has been fixed has been fixed at Rs. 4,00,000 and the partners capital accounts are to be adjusted in the profit sharing ratio. Any excess is to be transferred to current account and any deficit is to be brought in cash. Required : Prepare the Revaluation Account, Partners Capital Accounts, and the Balance Sheet of the new firm.

Retirement and Death of a Partner

Q.1 Ans. What is meant by retirement of a partner? 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 Ans. How can a partner retire from the firm? 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 Ans. What do you understand by Gaining Ratio*? 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 Ans What do you understand by Gaining Partner? Gaining Partner is a partner whose share in profit stands increased as a result of change in partnership. Q.5 Ans. Distinguish between Sacrificing Ratio and Gaining Ratio. 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. (ti) 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 profitsharing 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 [Gaining Ratio] To Retiring/Deceased Partners Capital A/c 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. 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: [Old Ratio] [With his share of ...Dr.

Ys Capital A/c To Xs Capital A/c 10,000 To Zs Capital A/c 10,000

...Dr.

20,000

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 Right of goodwill before retirement (3:2:1) (Old Ratio) Right of goodwill after retirement X(Rs.) 30,000 20,000 V(Rs.) Z(Rs.) 20,000 10,000 40,000

(Balancing Figure) (New Ratio) Net Adjustment 10,000 (-) 10,000 (+) 20,000 (-)

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 Ans.

How is the account of retiring partner settled? 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 Partners Capital A/c To Cash* Or To Retiring Partners Loan [If transferred to loan] ...Dr. [If paid in cash]

Q.15 Ans.

What is Joint Life Policy? Joint Life Policy is an insurance policy taken on the lives of the partners jointly. Premium of the policy is paid by the firm.

Q.16 Ans.

What is the objective of taking a Joint Life Policy by a partnership firm? A partnership firm takes a Joint Life Policy with the objective of receiving sufficient amount in cash and thereby enabling itself to pay the amount payable to the retiring partner or to the representatives of the deceased partner, without adversely affecting the financial position and working of the business.

Q.17 Ans.

When does the Joint Life Policy become due? Joint Life Policy becomes due for payment by the Insurance Company either on the death of any partner or on its maturity, whichever is earlier. The policy may also be surrendered before its maturity.

Q.18

What is Surrender Value?

Ans.

Surrender Value is the value of the insurance policy that the insurance company pays on the surrender of a policy before the date of its maturity.

Q.19

How is the share of profit of a deceased partner calculated from the date of last balance sheet to the date of death?

Ans.

If a partner dies on any date after the date of balance sheet; then his share of profit is calculated from the beginning of the year to the date of death on the basis of average profits or last years profit. It is calculated on either of the following two bases: (i) On the Basis of Time: In this method, it is assumed that the profits had accrued uniformly in the previous year. On the basis of time, deceased partners share in the profits till the date of death is calculated as follows: Share of Deceased Partner = Average Profits x x Proportion of Deceased Partner (ii) On the Basis of Sales: Deceased partners share in profit till the date of death shall be:

= Sales for the period* x x Proportion of Deceased Partner *Period = from the beginning of the year to the date of death. Q.20 How is amount payable to the representative of a deceased partner calculated? Ans. In the case of death of a partner, the legal representatives of a deceased partner are entitled to the following: (i) The amount standing to the credit of the deceased partners capital account.

(ii) His share in the goodwill of the firm. (iii) His share of profit on the revaluation^ assets and reassessment of liabilities. (iv) His share of reserves and accumulated profits. (v) His share of profits earned from the date of last balance sheet of the date of death. (vi) Interest on capital provided in the partnership agreement. (vii) His share of the proceeds of Joint Life Policy. The following amounts will be debited to his account: (i) His share in the reduction in the value of goodwill, if any. (ii) His share of loss on revaluation of assets and reassessment of liabilities. (iii) His drawings. (iv) Interest on drawings, if provided in the partnership deed. (v) His share of loss from the date of last balance sheet to the date of death. The balance in the capital account is transferred to his Executors Account. Q.21 Can an outgoing partner or Legal Representative of Deceased Partner share in the subsequent profits? Or What will happen if deceased or retired partners dues are not settled immediately?

Ans.

As per the provisions of Section 37 of the Partnership Act, 1932 if full or part amount of outgoing partner still remains to be paid then (i) He will be entitled to interest or share in profit or nothing as has been mutually agreed among partners. (ii) If nothing is agreed among the partners, then outgoing partner or his representatives have the choice to get either of the following till final settlement: (a) (b) Interest @ 6% per annum on the balance amount. Share in the profit earned proportionate to their amount outstanding to total capital. Share in Profit = Normally he will opt for the better of (a) or (b).