2nd Puc Accountancy Chapter 4 Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner Part – 1 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ – 4 ನೋಟ್ಸ್

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2nd Puc Accountancy Chapter 4 Notes

2nd Puc Accountancy Chapter 4 Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner Part - 1 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ - 4 ನೋಟ್ಸ್
2nd Puc Accountancy Chapter 4 Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner Part – 1 Notes

2nd Puc Accountancy Chapter 4

Short Question Answer

Q1. Write the various matters that need adjustments at the time of retirement of partner/partners.

A: At the time of retirement of partner/partners, the following matters need adjustment:

  • Determining the new gaining ratio of the partners who are remaining in the firm.
  • Determine the new ratio of the firm’s remaining partners.
  • Determine the goodwill of the firm and ensure its proper accounting treatment
  • Revaluating liabilities and assets of the new firm.
  • Distributing among all the partners the accumulated profits and losses, along with reserves.
  • Retiring partner’s settlement
  • A revised calculation of capital accounts of remaining partners and their new and updated profit-sharing ratio.
  • Joint life policy treatment.

Q2. What are the different ways in which a partner can retire from the firm?

A: Here are the different ways:

  • For a partner to retire consent of the firm’s co-partners is required. A partner can retire if all partners agree with the decision to retire.
  • A partner can express his desire to retire by issuing a notice to the firm in case there is a written agreement.
  • A partner can retire by giving written notice to all other partners in absence.

Q3. Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

A: A firm earns goodwill by the efforts of its partners and is regarded as one of the most important intangible assets. After a partner retires or is dead, the good work that was done by that partner should be acknowledged and hence proper compensation should be provided to the partner in form of a part of the goodwill of the firm.

Q4. Distinguish between sacrificing ratio and gaining ratio.

Basis of DifferenceSacrificing ratioGaining Ratio
1. MeaningThe ratio is where a partner of a firm agrees to sacrifice the profit share and make it available for a new partner.That ratio in which a partner obtains the profit share from the partner who is leaving the firm.
2. CalculationCalculated as the difference between the old and new ratioCalculated as the difference between a new and old ratio
3. TimeThe calculation is done at the admission of a new partnerThe calculation is done at the retirement/death of a partner.
4. ObjectiveIt is used to determine the profit and loss share that is sacrificed by the current partners at the time of joining a new partner.It is used to determine the profit and loss share that is obtained by the existing partners when a partner retires/becomes deceased
5. EffectThe existing partner’s profit share is reducedContinuing partner profit share is increased.

Q5. Why do firms revaluate assets and reassess their liabilities on retirement or on the event of the death of a partner?

A: As a partner retires or is taken away by death, it becomes critical to determine the liabilities and assets value on the current date to get a fair idea about its true worth. Revaluation becomes essential as liabilities and assets may increase or decrease in value as time passes. It may also happen that certain liabilities and assets had remained unrecorded the last time books are updated. As a partner retires/ death happens, it may have a positive/negative impact on the value of the firm’s liabilities and assets. Therefore, it is a good idea to revaluate the value so that the true profit/loss can be determined so that it can be shared among partners as per sharing ratio as determined at the time of setting up a partnership.

Karnataka 2nd PUC Accountancy Chapter 4 Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Long Questions And Practical Problem With Solution

Q1. How will you compute the amount payable to a deceased partner?

To determine the amount payable to the deceased partner, the legal executor is entitled to calculate that. It is arrived at posting these items in debit and credit side respectively.

Items to be posted on the debit side:

  • The credit balance of the deceased partner’s capital account.
  • The profit share of the partner till his/her death
  • Share of goodwill of the partner.
  • Any gain on revaluation of liabilities and assets
  • Any salary or commission earned, till the date of demise.
  • Share in accumulated reserves and profit account
  • Any interest earned on capital
  • Share in life insurance policy

Items to be posted on the credit side:

  • Deceased Partner’s debit balance from the capital account.
  • Total drawings were done till the death of a partner
  • Interest is charged on drawings if any till the day of death.
  • Reduction in profit share or loss up to date of death.
  • Share of accumulated loss for the partner and firm

A legal executor balances excess of credit over the debit side of a deceased partner.

Deceased Partner’s Capital Account

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
Revaluation A/c (Loss)Balance b/d
Profit and Loss Suspense A/c(Loss share till the date of death)Profit and Loss Suspense A/c(Share of profit up to the date of the death)
Goodwill
Accumulated Losses A/cReserves and Profits
Goodwill A/c (Written off)Revaluation A/c (gain)
Partner Executor’s A/cJoint Life Policy A/c
(Balancing Figure)Interest on Capital A/c
Salary A/c
Commission A/c

Q2. Explain the modes of payment to a retiring partner.

Payment modes are discussed below:

1. When the amount due to the retiring partner is paid back in a lump sum amount, on the day of retirement, journal entries are as mentioned below

Retiring Partner’s Capital A/cDr.
To Cash/Bank A/c
(Payment made to the retired partner)

2. Amount to be paid to the retiring partner can be paid in installments to the loan account, which helps the partner earn interest on the loan.

Retiring Partner’s Capital A/cDr.
To Retiring Partner’s Loan A/c
(Capital account balance of Retiring partner transferred to account to the Loan account of retiring partner).

3. Part Payment: When the retiring partner needs to be paid some amount in cash and some as equal installments, then a certain sum of money is paid on the day of retirement, and rest of the sum is paid on a monthly basis to partner’s loan account. The following entries help show this type of transaction.

Retiring Partner’s Capital A/c (total due amount payable to partner) Dr.

To Retiring Partner’s Loan A/c (amount transferred to loan account)

To Cash A/c (part payment in form of cash)

(Part payment to retiring partner in cash as well as transfer to loan account)

Q3. Discuss the various methods of computing the share in profits in the event of death of a partner.

In the unlikely event of the death of a partner during the year, the executor is entitled to a profit sharing up to the date of the death of the partner. Profit sharing can be calculated by two methods:

1. On Time Basis: In this method, profit earned till the date of partner’s death is considered for calculation on the basis of last year/year’s profit or average profit earned in the last few years. It is assumed that profit will remain constant throughout the year and the deceased partner will be eligible for profit share which is proportionate till the date of the partner’s death.

Share of Deceased Partner in Profit =

Chp 4-1

2) On the sale basis: The calculation of profit is based on last year’s sale as per this method and also it is assumed that the net profit of the current year is similar to last year’s profits.

Share of Deceased Partner’s Profit =
Chp 4-2×Sales counted from the beginning of the current year up to the date of death × Share of deceased partner

Q4. Explain the treatment of goodwill at the time of retirement or in the event of the death of a partner.

Goodwill is subjected to treatment on these two conditions:

1. When goodwill is present in the books of a firm.

2. When goodwill is not present in the books of the firm

1. When goodwill is present in books

The first step is to write off the goodwill if it is present in the books and must be distributed among the partners in the firm in the agreed profit-sharing ratio. The journal entry will be like:

All Partners’ Capital A/c Dr.

To Goodwill A/c

(Goodwill written off among partners)

The next step will be adjusting goodwill using the partners’ capital account with the share of goodwill of the deceased or retired partner

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c (partners’ capital account debited and retiring/deceased partners account credited)

2. When goodwill is not present in the books of the firm

As goodwill is not present in the books of the firm, it gets adjusted from the partners’ capital account along with the deceased/retired partners’ share. The following entry is passed:

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c

(Partners’ capital account debited and retiring/deceased partners account credited)

Q5. Aparna, Manisha, and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and the goodwill of the firm is valued at ₹ 1, 80,000. Aparna and Sonia decided to share the future in the ratio of 3:2. Pass necessary Journal entries.

Books of Aparna, and Sonia Journal

DateParticularsL.F.AmountAmount
Aparna’s Capitals A/c Dr.18,000
Sonia’s Capital A/c Dr.42,000
To Manisha’s Capital A/c60,000
(Manisha’s share of goodwill adjusted to Aparna’s andSonia’s Capital Accounts in their gaining ratio )

Working Notes:

1. Manisha’s share in goodwill:

Total goodwill of the firm × Retiring Partner’s Share =
Chp 4-3

2. Gaining Ratio = New Ratio − Old Ratio

Aparna Gaining share
Chp 4-4

Chp 4-5

Gaining Ratio between Aparna and Sonia = 3: 7

3. Aparna’s share in goodwill
Chp 4-6

Sonia’s share in goodwill
f

Q6. Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of ₹ 60,000. Sangeeta retires and goodwill is valued at ₹ 90,000. Saroj and Shanti decided to share future profits equally. Record necessary Journal entries.

 Books of Saroj and Shanti Journal

DateParticularsL.F.AmountAmount
Sangeeta’s Capital A/c Dr12,000
Saroj’s Capital A/c Dr18,000
Shanti’s Capital A/c Dr30,000
To Goodwill A/c60,000
(Goodwill written off)
Saroj’s Capital A/cDr.18,000
To Sangeeta’s Capital A/c18,000
(Sangeeta’s share of goodwill adjusted to Saroj’s CapitalAccount in her gaining ratio)

Working Notes:

1. Sangeeta’s share of goodwill.

Total goodwill of the firm ´ Retiring Partner’s share 

2. Gaining Ratio = New Ratio – Old Ratio

Saroj’s Gaining Share 

Shanti’s Gaining Share 

Q7. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2017, Naman retires.

The various liabilities and assets of the firm on the date were as follows:

Cash ₹ 10,000, Building ₹ 1, 00,000, Plant and Machinery ₹ 40,000, Stock ₹ 20,000, Debtors ₹ 20,000, and Investments ₹ 30,000.

The following was agreed upon between the partners on Naman’s retirement:

(i)Building to be appreciated by 20%.
(ii)Plant and Machinery are to be depreciated by 10%.
(iii)A provision of 5% on debtors is to be created for bad and doubtful debts.
(iv)The stock was to be valued at ₹ 18,000 and Investment at ₹ 35,000.

Record the necessary journal entries to the above effect and prepare the Revaluation Account.

 Books of Himanshu and Gagan Journal

DateParticularsL.F.AmountAmount
Building A/cDr.20,000
Investment A/cDr.5,00025,000
To Revaluation A/c
(Value of Building and Investment increased at the time of Naman’s retirement)
Revaluation A/cDr.7,000
To Plant and Machinery A/c4,000
To Provision for Bad and Doubt Debts A/c1,000
To Stock A/c2,000
(Assets revalued and Provision for Bad and Doubtful Debtsmade at the time of Naman’s retirement)
Revaluation A/cDr.18,000
To Himanshu’s Capital A/c9,000
To Gagan’s Capital A/c6,000
To Naman’s Capital A/c3,000
(Profit on revaluation transferred to all Partners’ CapitalAccounts in their old profit sharing ratio)

Revaluation Account

Dr. Cr.

ParticularAmountParticularAmount
Plant and Machinery4,000Building20,000
Stock2,000Investment5,000
Provision for Bad and Doubtful Debts1,000
Profit transferred to Capital Account:
Himanshu 9,000
Gagan 3,000
Naman 3,00018,000
25,00025,000

Q8. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserve’s ₹ 36,000 and Profit and Loss Account (Dr.) ₹ 15,000.

Pass the necessary journal entries to the above effect.

 Books of Naresh and Bishwajeet Journal

DateParticularsL.F.AmountAmount
General Reserve A/cDr.36,000
To Naresh’s Capital A/c12,000
To Raj Kumar’s Capital A/c12,000
To Bishwajeet’s Capital A/c12,000
(General Reserve distributed among old partner in old ratio)
Naresh’s Capital A/cDr.5,000
Raj Kumar’s Capital A/cDr.5,000
Bishwajeet’s Capital A/cDr.5,000
To Profit and Loss A/c15,000
(Debit balance of Profit and Loss Account written off)

Q9. Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2017 was as follows:

LiabilitiesAmountAssetsAmount
Creditors49,000Cash8,000
Reserves18,500Debtors19,000
Digvijay’s Capital82,000Stock42,000
Brijesh’s Capital60,000Buildings2,07,000
Parakaram’s Capital75,500Patents9,000
 2,85,0002,85,000

Brijesh retired on March 31, 2017 on the following terms:

(i)    Goodwill of the firm was valued at ₹ 70,000 and was not to appear in the books.

(ii)   Bad debts amounting to ₹ 2,000 were to be written off.

(iii)  Patents were considered as valueless.

Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

 Books of Digvijay and Parakaram Revaluation Account

Dr. Cr.

ParticularAmountParticularAmount
Bad Debts2,000
Patents9,000Loss transferred to Capital Account:
Digvijay4,400
Brijesh4,400
Parakaram2,200
11,00011,000

Partners’ Capital Account

Dr. Cr.

ParticularsDigvijayBrijeshParakaramParticularsDigvijayBrijeshParakaram
Brijesh’s Capital A/c18,6679,333Balance b/d82,00060,00075,500
Revaluation (Loss)4,4004,4002,200Digvijay’s Capital A/c18,667
Brijesh’s Loan91,000Parakaram’s Capital A/c9,333
Balance c/d66,33367,667Reserves7,4007,4003,700
89,40095,40089,40089,40095,40079,200

Balance Sheet as on March 31, 2017 

LiabilitiesAmountAssetsAmount
Creditors49,000Cash8,000
Brijesh’s Loan91,000Debtors 19,00019,000
Less: Bad Debts 2,0002,000
Digvijay’s Capital A/c66,333Stock42,000
Parakaram’s Capital A/c67,667Buildings2,07,000
2,74,0002,74,000

Note: As sufficient balance is not available to pay the amount due to Brijesh, the balance of his Capital Account transferred to his Loan Account.

Working Note:

1. Brijesh’s Share of Goodwill

Total goodwill of the firm ´ Retiring Partner’s Share 

2. Gaining Ratio = New Ratio – Old Ratio

Digvijay’s Share

Parakaram’s Share

Gaining ratio between Digvijay and Parakaram = 4: 2 or 2: 1

Q10. Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2017, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

LiabilitiesAmount₹AssetsAmount₹
Trade Creditors3,000Cash-in-Hand1,500
Bills Payable4,500Cash at Bank7,500
Expenses Owing4,500Debtors15,000
General Reserve13,500Stock12,000
Capitals:Factory Premises22,500
Radha 15,000Machinery8,000
Sheela 15,000Losse Tools4,000
Meena 15,00045,000
 70,50070,500

The terms were:

a) Goodwill of the firm was valued at ₹ 13,500.

b) Expenses owing to be brought down to ₹ 3,750.

c) Machinery and Loose Tools are to be valued at 10% less than their book value.

d) Factory premises are to be revalued at ₹ 24,300.

Prepare:

1. Revaluation account

2. Partner’s capital accounts and

3. Balance sheet of the firm after the retirement of Sheela.

Books of Radha and Meena Revaluation Account

Dr. Cr.

ParticularsAmountParticularsAmount
Machinery800Expenses Owing750
Loose Tools400Factory Premises1,800
Profit transferred to Capital Account:
Meena 675
Radha 450
Sheela 2251,350
2,5502,550

Parters’ Capital Account

Dr. Cr.

ParticularsRadhaSheelaMeenaParticularsRadhaSheelaMeena
Sheela’s Capital A/c3,3751,125Balance b/d15,00015,00015,000
Sheela’s Loan A/c24,450General Reserve6,7504,5002,250
Balance c/d19,05016,350Revaluation (Profit)675450225
Radha’s Capital A/c3,375
Meena’s Capital A/c1,125
22,42524,45017,47522,42524,45017,475

Balance Sheet as on April 01, 2017 

LiabilitiesAmount₹AssetsAmount₹
Trade Creditors3,000Cash in Hand1,500
Bills Payable4,500Cash at Bank7,500
Expenses Owing3,750Debtors15,000
Sheela’s Loan24,450Stock12,000
Factory Premises24,300
Capitals:Machinery 8,000
Radha 19,050Less: 10% (800)7,200
Meena 16,35035,400Loose Tools 4,000
Less: 10% (400)3,600
71,10071,100

Working Notes:

Working Notes:

1) Sheela’s share of goodwill

Total goodwill of the firm × Retiring Partner’s share =13,500×26=4, 50013x, 500×26=4,500

2) Gaining Ratio = New Ratio − Old Ratio

Radha’s Share
Chp 4-14

Meena’s Shares
Chp 4-15

Gaining Ratio between Radha and Meena = 6:2 or 3:1

Q11. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:

Books of Pankaj, Naresh and Saurabh

Balance Sheet as on March 31, 2017

LiabilitiesAmount ₹AssetsAmount ₹
General Reserve12,000Bank7,600
Sundry Creditors15,000Debtors 6,000
Bills Payable12,000Less: Provision for
Doubtful Debt 400
5,600
Outstanding Salary2,200
Provision for Legal Damages6,000Stock9,000
Capitals:Furniture41,000
Pankaj46,000Premises80,000
Naresh30,000
Saurabh20,000
1,43,2001,43,200

Additional Information

(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for ₹ 1,200 and furniture to be brought up to ₹ 45,000.

(ii) Goodwill of the firm be valued at ₹ 42,000.

(iii) ₹ 26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.

(iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.

Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.

Revaluation Account

Dr. Cr.

ParticularsAmountParticularsAmount
Stock900Premises16,000
Provision for Legal Damages1,200Provision for Doubtful Debts100
Profit transferred to Capital:Furniture4,000
Pankaj 9,000
Naresh 6,000
Saurabh 3,00018,000
20,10020,100

Partners’ Capital Accounts

Dr. Cr.

ParticularsPankajNareshSaurabhParticularsPankajNareshSaurabh
Naresh’s Capital A/c14,000Balance b/d46,00030,00020,000
Naresh’s Loan A/c26,000General Reserve6,0004,0002,000
Bank28,000Revaluation (Profit)9,0006,0003,000
Balance c/d47,00025,000Pankaj’s Capital A/c14,000
61,00054,00025,00061,00054,00025,000

Bank Account

Dr. Cr.

ParticularsAmountParticularsAmount
Balance b/d7,600Naresh’s Capital A/c28,000
Bank Loan (Balancing Figure)20,400
28,00028,000

Balance Sheet as on March 31, 2017

LiabilitiesAmountAssetsAmount
Sundry Creditors15,000Debtors 6,000
Bills Payable12,000Less: Provision for
Doubtful Debts 300
5,700
Bank Loan/overdraft20,400Stock8,100
Outstanding Salaries2,200Furniture45,000
Provision for Legal Damages7,200Premises96,000
Naresh’s Loan26,000
Capitals:
Pankaj 47,000
Saurabh 25,00072,000
1,54,8001,54,800

Q12. Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2017 was as follows:

Books of Puneet, Pankaj and Pammy

Balance Sheet as on March 31, 2017

LiabilitiesAmountAssetsAmount
Sundry Creditors1,00,000Cash at Bank20,000
Capital Accounts:Stock30,000
Puneet 60,000Sundry Debtors80,000
Pankaj 1,00,000Investments70,000
Pammy 40,0002,00,000Furniture35,000
Reserve50,000Buildings1,15,000
3,50,0003,50,000

Mr. Pammy died on September 30, 2017. The partnership deed provided the following:

(i)The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of the previous year’s profit.
(ii)He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of the average of the last 4 years’ profit. The profits for the last four financial years are given below: for 2013–14; ₹ 80,000; for 2014–15, ₹ 50,000; for 2015–16, ₹ 40,000; for 2016–17, ₹ 30,000. The drawings of the deceased partner up to the date of death amounted to ₹ 10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that ₹ 15,400 should be paid to the executors immediately and the balance in four equal yearly installments with interest at 12% p.a. on the outstanding balance. Show Mr. Pammy’s Capital account, and his Executor’s account till the settlement of the amount due.

Pammy’s Capital Account

Dr. Cr.

ParticularsAmountParticularsAmount
Drawings10,000Balance b/d40,000
Pammy Executor’s A/c75,400Profit and Loss (Suspense)3,000
Puneet’s Capital A/c15,000
Pankaj’s Capital A/c15,000
Interest on Capital2,400
Reserve10,000
85,40085,400

Pammy’s Executor Account

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
2017-182017-18
Sep. 30Bank15,400Sep. 30Pammy’s Capital A/c75,400
Mar. 31Balance c/d63,600Mar. 31Interest3,600
79,00079,000
2018-192018-19
Sep. 30Bank22,200April 01Balance b/d63,600
(15,000+3,600+3,600)Sep. 30Interest3,600
Mar. 31Balance c/d47,700Mar. 31Interest2,700
69,90069,900
2019-202019-20
Sep. 30Bank20,400April 01Balance b/d47,700
Mar. 31Balance c/d31,800Sep. 30Interest2,700
Mar. 31Interest1,800
52,20052,200
2020-212020-21
Sep. 30Bank18,600April 01Balance b/d31,800
(15,000+1,800+1,800)Sep. 30Interest1,800
Mar. 31Balance c/d15,900Mar. 31Interest900
34,50034,500
2021-222021-22
Sep. 30Bank16,800April 01Balance b/d15,900
(15,000+900+900)Sep. 30Interest900
16,80016,800

Working Notes:

1) Pammy’s Share of Profit

Previous Year’s Profit ´ Proportionate Period ´ Share of Deceased Partner 

2) Pammy’s Share of Goodwill

Goodwill of the firm = Average Profit ´ Numbers of Year’s Purchase

Average Profit 

Goodwill of the firm = 50,000 ´ 3 = ₹ 1,50,000

Chp 4-19

3) Gaining Ratio = New Ratio – Old Ratio

Puneet’s Share

Pankaj’s Share

Gaining Ratio between Puneet and Pankaj = 2 : 2 or 1 : 1

4) Interest on Capital for 6 months, i.e. from April 1, 2007 to September 30, 2007

Amount of Capital ´ Rate of Interest ´ Period 

5) Interest Amount

The firm closes its books every year on March 31, while instalments to Pammy’s Executor are paid on September 30 every year.

Amount outstanding on 30 September = 75,400 – 15,400 = ₹ 60,000

Chp 4-23

 Q13. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2017.

Books of Prateek, Rockey and Kushal 

Balance Sheet as on March 31, 2017 

LiabilitiesAmountAssetsAmount
Sundry Creditors16,000Bills Receivable16,000
General Reserve16,000Furniture22,600
Capital Accounts:Stock20,400
Prateek 30,000Sundry Debtors22,000
Rockey 20,000Cash at Bank18,000
Kushal 20,00070,000Cash in Hand3,000
 1,02,0001,02,000

Rockey died on June 30, 2017. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

a) Amount standing to the credit of the Partner’s Capital account.

b) Interest on capital at 5% per annum.

c) Share of goodwill on the basis of twice the average of the past three years’ profit and

d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.

Profits for the year ending on March 31, 2015, March 31, 2016 and March 31, 2017 were ₹ 12,000, ₹ 16,000 and ₹ 14,000 respectively. Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

 Books of Prateek and Kushal Journal

DateParticularsL.F.AmountAmount₹
2017
June 30Interest on Capital A/cDr.250
Profit and Loss (Suspense) A/cDr.1,000
General Reserve A/cDr.4,571
To Rockey’s Capital A/c5,821
(Share of profit, interest on capital, and share of GeneralReserve credited to Rockey’s Capital Account)
June 30Prateek’s Capital A/cDr.4,800
Kushal’s Capital A/cDr.3,200
To Rockey’s Capital A/c8,000
(Rockey’s share of goodwill adjusted to Prateek’s and Kushal’s Capital Account in their gaining ratio, 3:2)
June 30Rockey’s Capital A/cDr.33,821
To Rockey Executor’s A/c33,821
(Balance of Rockey’s Capital Account transferred to his executors Account)

Rockey’s Capital Account

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
20172017
April 1Rockey’s Executor A/c33,821April 1Balance b/d20,000
Interest on Capital250
Profit and Loss (Suspense) A/c1,000
General Reserve4,571
Prateek’s Capital4,800
Kushal’s Capital3,200
33,82133,821

Working Notes:

1. Rockey’s Share of Profit = Previous year’s profit × Proportionate Period × Share of Deceased Partner

=
Chp 4-24

2. Rockey’s Share of Goodwill

Goodwill of a firm = Average profit × Numbers of year’s Purchase

Chp 4-25

Goodwill of a firm = 14,000 × 2 = ₹ 28,000

Chp 4-26

3. Gaining Ratio = New Ratio − Old Ratio

Chp 4-27
Chp 4-28

Gaining Ratio between Prateek and Kushal = 9:4 or 3:2

4. Interest on Capital for 3 months i.e. from April 1, 2017 to June 30, 2017

Amount of × Rate of Interest × Period
Chp 4-29

Q14. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2016.

Books of Jain, Gupta and MalikBalance Sheet as on March 31, 2016

LiabilitiesAmountAssetsAmount
Sundry Creditors19,800Land and Building26,000
Telephone Bills Outstanding300Bonds14,370
Accounts Payable8,950Cash5,500
Accumulated Profits16,750Bills Receivable23,450
Sundry Debtors26,700
Capitals :Stock18,100
Jain40,000Office Furniture18,250
Gupta60,000Plants and Machinery20,230
1,65,8001,65,800

The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from the business on April 1, 2016, and his share in the business is to be calculated as per the following terms of revaluation of liabilities and assets: Stock, ₹ 20,000; Office furniture, ₹ 14,250; Plant and Machinery ₹ 23,530; Land and Building ₹ 20,000.

A provision of ₹ 1,700 to be created for doubtful debts. The goodwill of the firm is valued at ₹ 9,000.

The continuing partners agreed to pay ₹ 16,500 as cash on the retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as a loan.

Prepare the Revaluation account, capital accounts, and Balance Sheet of the reconstituted firm.

In the books of Jain and GuptaRevaluation Account

Dr. Cr.

ParticularsAmountParticularsAmount
Office Furniture4,000Stock1,900
Land and Building6,000Plant and Machinery3,300
Provision for Doubtful Debts1,700Loss transferred to
Jain’s Capital A/c3,250
Gupta’s Capital A/c1,950
Malik’s Capital A/c1,300
11,70011,700

Partners’ Capital Account

Dr. Cr.

ParticularsJainGuptaMalikParticularsJainGuptaMalik
Revaluation (Loss)3,2501,9501,300Balance b/d40,00060,00020,000
Malik’s Capital1,125675Accumulated Profits8,3755,0253,350
Cash16,500Jain’s Capital A/c1,125
Malik’s Loan7,350Gupta’s Capital A/c675
Balance c/d53,90069,000Cash9,9006,600
58,27571,62525,15058,27571,62525,150

Balance Sheet

LiabilitiesAmountAssetsAmount
Sundry Creditors19,800Stock (18,100 + 1,900)20,000
Telephone Bills Outstanding300Bonds14,370
Accounts Payable8,950Cash5,500
Malik’s Loan7,350Bills Receivable23,450
Sundry Debtors 26,700
Partners’ Capital:Less: Provision for
Bad Debts 1,700
25,000
Jain53,900Land and Building (26,000 – 6,00020,000
Gupta69,000Office Furniture (18,250 – 4,000)14,250
Plant and Machinery (20,230 + 3,300)23,530
Computers13,200
1,59,3001,59,300

Working Note:

1) Malik’s share of goodwill = Total Goodwill × Retiring Partner Share =
Chp 4-38

2) Gaining Ratio = New Ratio – Old Ratio

Chp 4-39
Chp 4-40

Gaining Ratio between Jain and Gupta = 10:6 or 5:3

Q15. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2016 stood as follows:

Books of Arti, Bharti and Seema Balance Sheet as on March 31, 2016 

LiabilitiesAmountAssetsAmount
Bills Payable12,000Buildings21,000
Creditors14,000Cash in Hand12,000
General Reserve12,000Bank13,700
Capitals:Debtors12,000
Arti 20,000Bills Receivable4,300
Bharti12,000Stock1,750
Seema8,000Investment13,250
 78,00078,000

Bharti died on June 12, 2016 and according to the deed of the said partnership, her executors are entitled to be paid as under:

(a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.

(b) Her proportionate share of reserve fund.

(c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as ₹ 1, 00,000. The rate of profit during past three years had been 10% on sales.

(d) Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were:

2013 – ₹ 8,200

2014 – ₹ 9,000

2015 – ₹ 9,800

The investments were sold for ₹ 16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

 Books of Arti and Seema Journal

DateParticularsL.F.AmountAmount₹
2016
June 12Interest on Capital A/cDr.240
General Reserve A/cDr.4,000
Profit and Loss (Suspense) A/cDr.3,333
To Bharti’s Capital A/c7,573
(Profit, interest, and general reserve are in credited to Bharti’s Capital account)
June 12Arti’s Capital A/cDr.3,600
Seema’s Capital A/cDr.1,200
To Bharti’s Capital A/c4,800
(Bharti’s share of goodwill adjusted to Arti’s and Seema’s Capital Account in their gaining ratio, 3:1)
June 12Bharti’s Capital A/cDr.24,373
To Bharti’s Executor’s A/c24,373
(Bharti’s capital account is transferred to her executor’s account)
June 12Bank A/cDr.16,200
To Investment A/c13,250
To Profit on the Sale of Investment2,950
(Investment sold)
June 12Bharti’s Executor A/cDr.24,373
To Bank A/c24,373
(Bharti Executor paid)

Bharti’s Capital Account

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
20162016
June 12Bharti’s Executor’s A/c24,373Mar. 31Balance b/d12,000
June 12Interest on Capital240
Profit and Loss (Suspense)3,333
General Reserve4,000
Arti’s Capital A/c3,600
Seema’s Capital A/c1,200
24,37324,373

Bharti’s Executor’s Account 

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
20162016
June 12Bank24,373June 12Bharti’s Capital A/c24,373
24,37324,373

Working Notes:

1. Bharti’s share of profit = Profit is 10% of sales

Sales during the last year for that period were ₹ 1, 00,000

If sales are ₹ 1, 00,000, then the profit is ₹ 10,000

Chp 4-41

2. Bharti’s Share of Goodwill

Goodwill of the firm = Average Profit × Number of Years Purchase

Chp 4-42

Or, 9,000 − 20% of 9,000 = 9,000 − 1,800 = ₹ 7,200

Goodwill of the firm = 7,200 × 2 = ₹ 14,400

Chp 4-43

3. Gaining Ratio = New Ratio − Old Ratio

Chp 4-44
Chp 4-45

Gaining ratio between Arti and Seema = 3:1

4. Interest on Capital for 73 days, i.e. from April 1, 2016 to June 12, 2016

Interest on capital = Amount of Capital × Ratio of Interest × Period
Chp 4-46

Q16. Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2015 was as follows:

Books of Nithya, Sathya and MithyaBalance Sheet at March 31, 2015

LiabilitiesAmountAssetsAmount
Creditors14,000Investments10,000
Reserve Fund6,000Goodwill5,000
Capitals:Premises20,000
Nithya 30,000Patents6,000
Sathya 30,000Machinery30,000
Mithya 20,00080,000Stock13,000
Debtors8,000
Bank8,000
1,00,0001,00,000

Mithya dies on August 1, 2015. The agreement between the executors of Mithya and the partners stated that:

(a) Goodwill of the firm be valued at  times the average profits of last four years. The profits of four years were : in 2011-12, ₹ 13,000; in 2012-13, ₹ 12,000; in 2013-14, ₹ 16,000; and in 2014-15, ₹ 15,000.

(b) The patents are to be valued at ₹ 8,000, Machinery at ₹ 25,000 and Premises at ₹ 25,000.

(c) The share of profit of Mithya should be calculated on the basis of the profit of 2014-15.

(d) ₹ 4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2015 after giving effect to the adjustments.

 Books of Nithya and SathyaJournal

DateParticularsL.F.AmountAmount₹
2015
Aug. 1Nithya’s Capital A/cDr.2,500
Sathya’s Capital A/cDr.1,500
Mithya’s Capital A/cDr.1,000
To Goodwill A/c5,000
(Goodwill written off among all the partners)
Aug. 1Patents A/cDr.2,000
Premises A/cDr.5,000
To Revaluation A/c7,000
(Increase in the value of patents and premises)
Aug. 1Revaluation A/cDr.5,000
To Machinery A/c5,000
(Decrease in the value of machinery)
Aug. 1Revaluation A/cDr.2,000
To Nithya’s Capital A/c1,000
To Sathya’s Capital A/c600
To Mithya’s Capital A/c400
(Profit on revaluation of liabilities and assets transferred to Partners’ Capital Account)
Aug. 1Reserve Fund A/cDr.6,000
To Nithya’s Capital A/c3,000
To Sathya’s Capital A/c1,800
To Mithya’s Capital A/c1,200
(Reserve Fund transferred to Partners’ Capital Account)
Aug. 1Nithya’s Capital A/cDr.4,375
Sathya’s Capital A/cDr.2,625
To Mithya’s Capital A/c7,000
(Mithya’s share of goodwill adjusted to Nithya’s and Sathya’s Capital Account in their gaining ratio, 5:3)
Aug. 1Profit and Loss A/c (Suspense)Dr.1,000
To Mithya’s Capital A/c1,000
(Profit till date of death credited to Mithya’s CapitalAccount)
Aug. 1Mithya’s Capital A/cDr.28,600
To Mithya Executors A/c28,600
(Mithya’s Capital Account transferred to her executor account)
Aug. 1Mithya Executor’s A/cDr.4,200
To Cash A/c4,200
(Cash paid to Mithya’s executor)

Mithya Executor’s Account

Dr. Cr.

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
20152015
Aug. 12016Bank4,200Aug. 12016Mithya’s Capital A/c28,600
Jan. 31Bank (6,100 + 1220)7,320Jan. 31Interest (24,400×10100×612)(24,400×10100×612)1,220
Mar. 31Balance c/d18,605Mar. 31Interest (18,300×10100×212)(18,300×10100×212)305
30,12530,125
20162016
July 312017Bank (6,100 + 305 + 610)7,015April 01July 312017Balance b/dInterest (18,300×10100×412)(18,300×10100×412)18,605
610
Jan. 31Bank (6,100 + 610)6,710Jan. 31Interest (12,200×10100×612)(12,200×10100×612)610
Mar. 31Balance c/d6202Mar. 31Interest (6,100×10100×212)(6,100×10100×212)102
19,92719,927
20172017
July 31Bank (6,100 + 102 + 203)6,405April 01Balance b/d6,202
July 31Interest (6,100×10100×412)(6,100×10100×412)203
6,4056,405

Balance Sheet As on August 31, 2015

LiabilitiesAmountAssetsAmount
Creditors14,000Investments10,000
Mithya’s Executor’s Loan A/c24,400Premises25,000
Partners’ Capital A/cMachinery25,000
Nithya 27,125Stock13,000
Sathya 28,27555,400Debtors8,000
Patents8,000
Bank (8,000 – 4,200)3,800
Profit and Loss (Suspense)1,000
93,80093,800

Working Notes:

  1. Partners’ Capital Accounts

Dr. Cr.

ParticularsNithyaSathyaMithyaParticularsNithyaSathyaMithya
Goodwill2,5001,5001,000Balance b/d30,00030,00020,000
Mithya’s Capital A/c4,3752,625Revaluation A/c1,000600400
Mithya’s Executor’s A/c28,600Reserve Fund3,0001,8001,200
Balance c/d27,12528,275Profit and Loss A/c (Suspense)1,000
Nithya’s Capital A/c4,375
Sathya’s Capital A/c2,625
34,00032,40029,60034,00032,40029,600

2. Mithya’s Share of Profit:

Previous year’s profit × Proportionate Period × Share of Profit
Chp 4-48

3. Mithya’s share of Goodwill

Goodwill of a firm = Average Profit × Number of Year’s Purchase

Chp 4-49
Chp 4-50
Chp 4-51

4. Gaining Ratio = New Ratio – Old Ratio

Chp 4-52
Chp 4-53

FAQ:

1. What is Sacrificing ratio?

The ratio is where a partner of a firm agrees to sacrifice the profit share and make it available for a new partner.

2. What is the Gaining Ratio

That ratio in which a partner obtains the profit share from the partner who is leaving the firm.

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

A: A firm earns goodwill through the efforts of its partners and is regarded as one of the most important intangible assets. After a partner retires or is dead, the good work that was done by that partner should be acknowledged and hence proper compensation should be provided to the partner in form of a part of the goodwill of the firm.

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