LESSON - 11
RETIREMENT AND DEATH OF A PARTNER
OBJECTIVES
After studying this chapter, you should be able to understand:
• New and gaining ratio at the time of retirement and death of a partner.
• Value and goodwill at the time of retirement and death of a partner.
• Amount payable to the retiring of the deceased partner.
• Modalities of setting the amount due to the deceased partner.
STRUCTURE
11.1 Introduction
11.2 Adjustment
11.2.1 Revaluation of Assets and Liabilities
11.2.2 Treatment of Goodwill
11.2.3 Readjustment of Capital
Examples
11.3 Death of Partner
Unit Questions
11.1 INTRODUCTION
In partnership business, like admission of a partner, retirement or death of a partner may also take place. If a partner is retired or died, then the firm is to be reconstituted. Through reconstitution, the old partnership comes to an end and a new partnership between continuing partners (excluding the retiring or deceased partner) comes into existence. However, the firm continues its business. Further , the profit sharing ratio of remaining partners, who continue to stay in the business, changes.
According to the Indian Partnership Act 1932, Sec 32(1) a partner may retire (a) With the consent of all other partners (Whether implied or expressed ) or (b) in accordance with an express agreement by the partners: or (c) by conveying his intention to retire (in case of partnership at will) by a written notice. The retiring or deceased partner gets back his share of interest in the business which normally includes his share of capital , goodwill, revaluation profit or loss, profit earned or sustained by the business till the date of retirement or death, accumulated reserves, profits and losses.
DIFFERENCE BETWEEN RETIREMENT AND DEATH
If a partner wants to leave the business of the firm, then he may retire from the firm at any time. By this, he loses his right as a partner from the date of retirement. Death of a partner is a sudden natural event, over which no partner is having control. In both the cases, a reduction in the number of partners is resulted into. The basic differences between retirement and death of a partner are as follows:
The retirement of a partner can be planned and effected from a specified date. Whereas the death of a partner may occur at any time during the year.
In case of retirement, the payment of amount due (i.e., his share of interest in the business) is paid to the retiring partner himself. Whereas, in case of death of partner, the payment of amount due to the deceased partner is paid to his legal representive through an executor. The accounting steps involved and treatment to be given incase of retirement or death of a partner are one and the same.
STEPS IN ACCOUNTING
When a partner is retired or died various accounting adjustments are to be made. As all the partners are responsible for the state of affairs of business till the time or retirement or death of any partner, they have to share the undistributed reserved, profits or losses, profit or loss on the change in the value of assets and liabilities. Thus , the following accounting steps are followed while solving problems, when a partner is retired or died:
Calculation of New Profit Sharing Ratio or continuing partners excluding the retiring or deceased partner.
Calculation of Gaining Ratio of continuing partners.
Revaluation of Assets and Liabilities
Adjustment of accumulated reserves, profits or losses.
Treatment of Goodwell.
Adjustment of Capital Accounts of partners.
CALCULATION OF NEW PROFIT SHARING RATIO
When a partner is retired or died, the profit sharing ratio of continuing partners , changes and hence , a new profit sharing ratio of continuing partners(excluding retiring or deceased partner) is to be found Thus, new profit and losses of the firm. With the given information, the new profit sharing ratio is to be calculated. Following are the different types of examples:
When old ratio of partners alone is given : in this case, future profits of the firms are to be shared by the continuing partners in the old ratio.
When the continuing partners purchase specific share from the retiring partner : In this cas, the continuing partners’ old shares of profit are to be raised by the specific share gained from the retiring partner.
Example : Bansilal, Gujral and Devilai are partners in a firm sharing profits and losses in the ratio of 5:3:2 Calculate the new profit sharing ratio, if (a) Devilal retires: (b) Bansilal retires: and (c) Gujral retires.
Solution :
As the old profit sharing ratio of partners alone is given, it is assumed that the continuing partners share the future profits and losses in their old ratio.
If devilal retires, the new profit sharing ratio between Bansilal and Gujral is 5:3
If Bansilal retires, the new profit sharing ratio between Gujral and Devilal is 3:2
If Gujral retires, the new profit sharing ratio between Bansilal and Devilal is 5:2.
CALCULATION OF GAINING RATIO
When a partner is retired or died, the continuing partners’ profit sharing ratio is raised to the extent they gain from outgoing partner. Thus, Gaining ratio is the ratio in which the continuing partners gain their share of profit from a retiring or deceased partner. After retirement or death, the share of continuing parners increases than what they had before retirement or death. It helps to calculate the amount of compensation to be paid by each of the continuing partners to the outgoing partner. It is calculated by using the following formula:
Gaining Ratio = New Ratio – Old Ratio
Given below are the examples of different situations
1. When old ratio of partners alone is given : In this case the continuing partners gain in their old ratio.
2.When old ratio continuing partners purchase specific share from the retiring partner : In this case, the continuing partners gain their share in the specific ratio given.
When new ratio of containing partners and old ratio of all partners are given: In this case, the gaining ratio is calculated by applying the formula.
Gaining Ratio = New Ratio – Old Ratio
Example:
A,B and R are partners in a firm sharing profits and losses in the ratio of 5:3:2 Calculate the gaining ratio if (a) A is retired (b) b is retired : and (c) if R is retired.
Solution:
As only old ratio of partners is given without any details about what the continuing partners take from the outgoing partner, it is assumed that the continuing partners gain in their old profit sharing ratio .Thus.
If A retires, the gaining ratio B and R is 3:2
If B retires, the gaining ratio A and R is 5:2
If R retires, the gaining ratio A and B is 5:3
Example :
Indira , sonia and Rajiv are partners sharing profits in the ratio of 5:4:3 .Rajiv is retired and his share was taken up by Indira and Sonia in the ratio of 3:2 Calculate the gaining ratio.
Solution:
In this case, the continuing partner gain their share in the specific ratio given., i.e Indira and Sonia gain the Rajiv’s share in the ratio of 3:2
Share of Rajiv = 3:2
Share gained by Indira = 3/12 of 3/5 = 9/60
Share gained by Sonia = 3/12 of 2/5 = 6/60
Gaining Ratio of continuing partners Indira and Sonia is
9/60:6/60 or 9 : 6 or 3:2
Example
Ragul, priya and Lakshmi ae partners sharing profits in the ratio of 5:4:3 lakshmi retires and surrender 1/12th to Ragul and the remaining in favour of Priya Calculate the gaining ratio.
Solutions :
The continuing partners gains from the retiring partner.
Retiring partner, Lakshmi’s share = 3/12
Surrender to Ragul = 1/12
Remaining surrender to Priya = 3/12 – 1/12 = 2/12
Thus, Gaining ratio of Ragul and Priya is 1/12 : 2/12 or 1:2.
Example:
Subash, Stalin and Sarath are partners sharing profits and losses in the ratio of 3:2:1 . Sarath retires and the new profit sharing ratio of remaining Subash and Stalin is agreed at 7:5 respectively. Calculated the gaining ratio.
Solution:
When the old and new profit sharing ratios are given, the gaining ratio is found by applying the following formula:
Gaining Ratio = New Ratio – Old Ratio
Gaining Ratio of Subash - 7/12 – 3/6 = 6/12 = 1/12
Gaining Ratio of Stalin - 5/12 – 2/6 = 4/12 = 1/12
Thus, Gaining Ratio of Subash and Stalin is 1:1
11.2.1 REVALUATION OF ASSETS AND LIABILITIES
When a partner is retired or died, one of the accounting adjustments to be made is revaluation of assets and liabilities. The profit or loss on the revaluation is to be shared between al the partners in the old ratio. By this process,. Share of profit or loss on the revaluation is to be shared between all the partners in the old ratio. By this process, share of profit or loss on any increase or decrease in the value of assets and liabilities is given to the retiring or deceased partner. The effect of revaluation (profit or loss on revaluation) is known with the help of opening an account called “Revaluation Account”. It is also called as “Profit and Loss Adjustments Account” It is nominal in nature. For any profit ,i.e any increase in asset or decrease in liability, the revaluation account is to be credited. For any loss, i.e any decrease in asset or increase in liability, the revaluation account is to be debited.
If any unrecorded assets and liabilities are found in the business, it is to be treated as increase in assets and liabilities and the revaluation account is credited and debited respectively.
There are two methods of maintaining revaluation account:
Revaluation Account Method to record the revised valued of assets and liabilities.
Memorandum Revaluation Account Method to record the original values of assets and liabilities.
REVALUATION ACCOUNT METTHOD
Following are the accounting entries to be passed to record the revised values of assets and liabilities:
1. For any increase in the value of asset:
Asset A/c Dr (With the increased amount)
To Revaluation
2. For any decrease in the value of asset:
To Revaluation A/c Dr.
To Asset A/c (With the decreased amount)
3. For any increase in the value of liability
Revaluation A/c Dr. (With the increased amount)
To liability A/c
4. For any decrease in the value of liability
Liability A/c Dr. (With the decreased amount)
To Revaluation A/c
5. For any unrecorded asset:
Unrecorded Asset A/c Dr. (With the value of asset)
To Revaluation
6.For any unrecorded liability:
Revaluation A/c Dr. (With the value of liability)
To Unrecorded Liability A/c
7.For any decrease in the existing provision for doubtful debts:
It results in increase of existing debtors (assets)and hence the
revaluation account is to be credited.
Provision for Doubtful Debt A/c Dr. (With the decreased amount)
To Revaluation A/c
8.For any decrease in the existing provision for doubtful debts:
It results in increase of new liability and hence the revaluation account is to be debited
Revaluation A/c Dr. (With the amount of new provision)
To Provision for Doubtful Debts A/c
9. For closing the revaluation account:
If Profit:
Revaluation A/c Dr.
To All partner’s Capital A/c (in the old ratio)
If Loss:
All Partners’ Capital A/c Dr. ( in the old ratio)
To Revaluation A/c
The specimen of a Revaluation Account is given below.
Revaluation A/c
Dr. Cr.
To Decrease in the value of assets
To Increase in the value of liabilities
To Unrecorded Liabilities
To New provision for doubtful debts
To Profit transferred to old partners Capital account (in old ratio)
Rs.
xxx
xxx
xxx
xxx
xxx*
xxx
By Increase in the value of assets
By Decrease in the value of liabilities
By Unrecorded Assets
By Decrease in the existing provision for doubtful debts
By loss transferred to old partners
Capital accounts (in old ratio)
Rs.
xxx
xxx
xxx
xxx
xxx*
xxx
* Only one figure shall appear.
Example:-
Venkat,nagu and Selvam are partners sharing profits and losses in the ratio of 5:3:2 . Their Balance Sheet as on 31st March 2000 was as under.
Liabilites Rs. Rs. Assets Rs. Rs.
Creditors
Outstanding expenses
Capitals:
Venkat
Nagu
Selvam
6,52,500
3,37,500
3,60,000
8,66,250
90,000
13,50,000
23,06,250 Cash
Stock
Prepaid Insurance
Debtors
Less. Provision
Machinery
BuildingsFurniture
2,11,500
9,000
4,05,000
3,37,500
33,750
2,02,500
4,27,500
7,87,500
1,12,500
23,06,250
Selvam retires. The new profit sharing ratio of continuing partners Venkat and nagu is 5:3 .Following are the changes taken place in the assets and liabilities:
Stock to be depreciated at 5%
Provision for doubtful debts is to be Rs.11,250
Funiture to be depreciated at 10%.
Building is valued at Rs. 9,00,000
You are required to pass necessary journal entries and prepare Revaluation Account.
Journal Entries
Date Particulars L.F Rs. Rs.
2000
Mar.31
,,
,,
,,
Revaluation A/c
To Stock A/c
(Depreciation on stock is recorded)
Revaluation A/c
To Provision for Doubtful Debts A/c
(Increase in the provision for doubtful debts is recorded)
Revaluation A/c
To Furniture A/c
(Depreciation on furniture at 10% on Rs.1,12,500 is recorded)
Buildings A/c
Revaluation A/c
(increase in the value of building is recorded)
Revaluation A/c
To Venkat’s Capital A/c
To Nagu’s Capital A/c
To Selvam’s Capital
(Profit on revaluation of assets and liabilities transferred to all partners in the old ratio 5:3/;2)
Dr.
Dr.
Dr.
Dr.
Dr.
16,875
2,250
11,250
1,12,500
82,125
16,875
2,250
11,250
1,12,500
41,062.50
24,637.50
16,425.00
Revaluation A/c
To Stock A/c
To Provision for doubtful debts A/c
To Furniture A/c
To Profit transferred to
Venkat(5/10)
Nagu (3/10)
Selvam (2/10) Rs.
41,062.50
24,637.50
16,425.00
Rs.
16,875
2,250
11,250
82,125
1,12,500
By Building A/c
Rs.
1,12,500
1,12,500
MENORANDUM REVALUATION ACCOUNT METHOD.
The Memorandum Revaluation A/c
Dr. Cr.
To Decrease in the value of assets
To Increase in the value of liabilities
To Unrecorded Liabilities
To New provision for doubtful debts
To Profit transferred to old partners’
Capital accounts (in old ratio)
To Increase in the value of assets
To Decrease in the value of liabilities
To Unrecorded Assets
To Decrease in the existing
Provision for doubtful debts
To Profit transferred to all partners
Capital accounts (in new ratio)
Rs.
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx*
xxx
By Increase in the value of assets
By Decrease in the value of liabilities
By Unrecorded Asserts
By Decrease in the existing provision
for doubtful debts.
By loss transferred to old partners’
Capital accounts (in old ratio)
By Decrease in the value of assets
By Increase in the value of liabilities
By Unrecorded Liabilities
By New provision for doubtful debts
By Loss transferred to all partners’
Capital accounts (in new ratio)
Rs.
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx*
xxx
• Only one figure shall appear.
ADJUSTMENT OF ACCUMULATED RESERVES, PROFITS AND LOSSES
When a partner is retied or died, one of the accounting adjustment to be made is transfer of accumulated reserves, profits and losses This adjustment is done because the retiring or deceased partner is also eligible for his share in the accumulated reserves, profits and losses. Therefore , the past reserves, profits and losses, etc. (for which all the partners are responsible) are transferred to all partners ; (including the retiring or deceased partner) capital accounts in the old profit sharing ratio. In case of fluctuating capitals, they are transferred to capital accounts of partners and in case of fixed capitals, they are transferred to current account of partners, For transfer, the accumulated reserves and profits are credited and the accumulated losses are debited to partners’ capital or current accounts. The accounting entries to be passed in this regard are as follows:
For tranfer of acumualated reserves, profits:
General Reserve A/c Dr.
Profit and Loss A/c Dr.
Workmen Compensation Fund A/c Dr.
Any Other reserve A/c Dr.
To all Partner’s Capital or Current A/c (in old ratio)
For transfer of accumulated losses:
All partner’s Capital or Current A/c Dr. (in old ratio)
To Profit and Loss A/c
To Defered Revenue Expenditure A/c.
11.2.2 TREATMENT OF GOODWILL
When a partner is retied or died, goodwill of the firm is tob e adjusted and treated according to the terms and conditions agreed previously. There are three methods of treating the goodwill of the firm at the time of retirement of death of partner , They are.
When Goodwill is raised.
When Goodwill is written of.
When Goodwill account is not maintained.
When Goodwill is raised:
Under this method, the following are the steps involved.
First, the present value of goodwill of the firm is to b taken . Normally, the present value will be given in the problem. If it is not given , it is to be calculated based on the information given in the problem. Calculation of goodwill may be based on the average profits or super profits or capitalization of profit method
The present value of the goodwill of the firm is compared with the existing book value of goodwill and the diference between them is found. When the book value of the goodwill is equal to the present value of goodwill, then there is no need for any adjustment.
When no goodwill appears in the Balance Sheet, then the book value of goodwill is to be taken as zero. Hence to raise the goodwill to its present value, all the partners’ (including the outgoing partner) capital accounts are to be credited in the old profit sharing ratio. Following is the journal entry to be passed.
Goodwill A/c Dr. (with the present value)
To All Partner’s Capital A/c ( in old ratio)
If the present value of goodwill of the firm is more than the book value of goodwill , then the difference amount of goodwill is to be raised and all the partners’ (including the outgoing partner) capital accounts are to be credited in the old profit sharing ratio, Following is the journal entry to be passed:
Goodwill A/c Dr. (With the difference between
Present value and Book value)
To All Partner’s Capital A/c ( in old ratio)
In the present value of goodwill fo the firm is less than the book value of goodwill , then the difference amount of goodwill is to be reduced and all the partners’ capital accounts are to be debited in the old profit sharing ratio. Following is the journal entry to be passed:
All Partner’s Capital A/c Dr. ( in old ratio)
Goodwill A/c Dr. (With the difference between
Present value and Book value)
Sometimes , the retiring or deceased partner’s goodwill alone may be
raised and recorded . In that case, the journal entry to be passed is:
Goodwill A/c Dr. (With his share of goodwill)
To Retiring or Deceased partner’ Capital A/c
Example:
Patil, Saxena and Dave are partiers in a firm sharing profits and losses in the ratio of 5:3:2 . Dave retired. The goodwill of the firm was valued at Rs.50,000 . Their new profit sharing ratio is 5:3 . Pass the necessary journal entries to record the goodwill under each of the following cases:
If no goodwill appears in the books of the firm and the present value of
goodwill is to be raised.
If the goodwill account appears in the books of the firm at Rs.50,000
If the goodwill account appears in the books of the firm at Rs.35,000
If the goodwill account appears in the books of the firm at Rs.67,000
If no goodwill account appears in the books of the firms and Dave’s share
of goodwill alone is raised.
Solution:
The present value of goodwill = Rs.50,000
Comparing the present value of goodwill of firm with the book value of goodwill : Following are the goodwill amount to be raised for each case:
(a) If no goodwill appears in the books of the firm: In this case, the book
value of goodwill is taken as zero. Hence, the goodwill to be raised is as
follows:
Goodwill = Present value of Goodwill - Book value of Goodwill
= Rs. 50,000 - 0 = Rs.50,000
(b)If the goodwill account appears in the books of the firm at Rs.50,000: In
this case, the goodwill to be raised is as follows:
Goodwill = Present value of Goodwill - Book value of Goodwill
= Rs. 50,000 - Rs. 50,0000 = 0
(c) If the goodwill account appears in the books of the firm at Rs,35,000:
In this case, the goodwill to be raised is as follows:
Goodwill = Present value of Goodwill - Book value of Goodwill
= Rs. 50,000 - 35,0000 = Rs.15,000
(d) If the goodwill account appears in the books of the firm at Rs.67,000: In
this case, the goodwill to be raised is as follows:
Goodwill = Present value of Goodwill - Book value of Goodwill
= Rs. 50,000 - 67,000 = Rs.17,000
If Dave’s share of goodwill alone is raised:
Dave’s share o good will = Rs.50,000 x2/10 = Rs. 10,000
Following are the journal entries to be passed for each case:
Journal Entries
Particulars L.F Rs. Rs.
Good will A/c
To Patil’s Capital A/c
To Saxena’s Capital A/c
To Dave’s Capital A/c
(The value of goodwill raised to its present value.i.e. 50,000 and is credited to all partners’ capital account in the old ratio 5:3:2)
No Entry is required because the book value of goodwill is equivalent to its present value.
Good will A/c..
To Patil’s Capital A/c
To Sazena’s Capital A/c
To Dave’s Capital A/c
(The Value of goodwill is brought up to value ie. 50,000 and is credited all partner’s capital accounts in old ratio 5:3:2)
Patil’s CapitalA/c
Saxena’s Capital A/c
Dave’s Capital A/c
To Goodwill A/c
(The value of goodwill is brought down to its present value ie. 50,000 by reducing the difference of Rs.17,000 and is debited to all partner’s capital accounts in old ratio 5:3:2)
Good will A/c
To Dave’s Capital A/c
9Dave share of good will alone is raised
Dr.
Dr.
Dr
Dr.
Dr.
Dr.
50,000
15,000
8,500
5,100
3,400
10,000
25,000
15,000
10,000
7,500
4,500
3,000
17,000
10,000
When Goodwill is written off:
In this method , the present value of goodwill is determined and raised by following the same procedure given in the first method” Full value of good will is raised” The journal entries to be passed are also the same as given in the first method.
Then, the raised goodwill is written off by debiting the continuing partners’ capital accounts excluding the retiring or deceased partner in the new profit sharing ratio. The amount of goodwill to be written off may be full or part. The accounting entry for writing off goodwill is
Continuing partner’s Capital A/c Dr. (in new ratio)
To Good will A/c (With the value of goodwill written off)
Sometimes, if the retiring or deceased partner’s goodwill alone is raised and recorded. For writing of the same, the journal entry to be passed is
Continuing partner’s Capital A/c Dr. (in gaining ratio)
To Good will A/c (With the Outgoing partner’s share of goodwill )
Example:
For the illustration 9, Pass the required additional journal entry if it is decided that the good will account should not appear in the books of the new firm.
Solution:
As the goodwill account should not appear in the books of the new firm, the goodwill is to be written off among the continuing partners excluding the retiring or deceased partner in the new ratio.
The new profit sharing ratio of continuing partners is 5:3
The gaining Ratio = New Ration – Old Ratio
For patil = 5/8 – 5/10 = 50-40/80=10/80
For Saxena = 3/8 – 3/10 =30-24/80 = 6/80
Thus, the gaining ratio is 10:6 or 5:3
The following additional journal entries are to be passed:
Date Particulars Rs. Rs.
a,c,&d
(b)
( c) Patil’s Capital A/c Dr
Sasena’s Capital A/c Dr
To Goodwill A/c
(The present value of raised goodwill is written off among the continuing partners excluding retiring partner in the new ratio 5:3)
No entry is required
Patil’s Capital A/c Dr.
Saxena’s Capital A/c Dr.
To Goodwill A/c
(Dave’s share of goodwill is written off among the continuing partners in the gaining ratio 5:3)
31,250
18,750
9,375
5,625
50,000
10,000
3. When Goodwill account is not maintained:
This method is followed when the retiring or deceased partner’s share of goodwill alone is raised and written off through the capital accounts of partners. I.e. goodwill account is not raised. The retiring or deceased partner’s share of goodwill is borne by the continuing partners in their gaining ratio. Hence , the outgoing partner’s share of goodwill is credited to his capital account and debited to the continuing partners’ capital accounts in the gaining ratio. Following is the journal entry to be passed.
Continuing partner’s Capital A/c Cr. (in gaining ratio)
To Retiring or Deceased partner’s Capital A/c (with his share of goodwill)
Example:
Prasad, Prakash and Praveen are partners shareing profits and losses in the ratio of 2:1:1 Praveen retires and it is decided to raise his share of goodwill alone without raising a goodwill account. The goodwill of the firm is valued at Rs.12,000 . The new ratio of continuing partner is 2:1 Pass necessary journal entry.
Solution:
Gaining Ratio = New Ratio – Old Ratio.
Gaining Ratio or Prasad = 2/3 –2/4= 8-61/12 = 2/12
Gaining Ratio or Prakash = 1/3-1/4 = 4-3/12 = 1/12
Gaining Ratio of Prasad and prakash is 2/12: 1/12 or 2:1
Prasad’s Capital A/c Dr. 8,000
Prakash’s Capital A/c Dr. 4,000
To praveen’s Capital A/c 12,000
(Praveen’s share of goodwill is raised and written off among the continuing partners in the gaining ratio 2:1.
ADJUSTMENT OF CAPITAL ACCOUNTS
(a) On the basis of availability of total capital of the new firm: Under this method , the total capital of the new firm will be given in the problem and following are the steps followed to adjust the capital accounts of partners:
The old capital of the continuing partners are adjusted with profit or loss on revaluation, goodwill and accumulated reserves, profits or losses, etc.
The new capital of continuing partners is found by dividing the total capital of the firm in their new profit sharing ratio.
The continuing partner’s new capitals are compared with their adjusted old capitals.
If the new capital is more than the adjusted capital, shortage is the result. For the shortage amount of capital, the continuing partners have to bring cash or it will be debited to their current accounts.
If the new capital is less than the adjusted capital, surplus is the result. For the surplus amount, the continuing partners have to withdraw the excess capital or it will be credited to their current accounts.
Example:
Bina, Ganguly and Susan are partner sharing profits and losses in the ration of 5:3:2 . Susan retired . On the date of retirement, the adjusted capitals of Bina, Ganguly and Susan were Rs.50,000 , Rs.40,000 and Rs.20,000 respectively. The total capital of the new firm is agreed at Rs.90,000 between Bina and Ganguly in the ratio of 5:3 .Calculate the actual cash to be paid off or to be brought in by the continuing partners.
Solution:
It is asked to adjust the capitals of the partners on the basis of availability of total capital of the new fire. i.e the total capital of the new firm is given as Rs.90,000 . The following steps are followed:
Adjusted old capital of partners are
Bina = Rs.50,000
Ganguly = Rs.40,000
Susan = Rs.20,000
2.Total Capital of the new firm is given as Rs. 90,000
New capitals of the continuing partners, Bina and Ganguly in new ratio is
Bina = Rs.90,000 x5/8 = Rs.56,250
Ganguly = Rs.90,000 x3/8 = RS.33,750
Comparing new capitals with the adjusted old capital :
Excess or shortage of Capital = New Capital – Adjusted Old Capital
For Bina = Rs.56,250 – Rs.50,000 = Rs.6,250 (Shortage)
For Ganguly = Rs.33,750 – Rs.40,000 = Rs.6,250 (Excess)
Thus, , Birth has to bring cash to the extent of Rs.6,250 for the shortage of capital and Ganguly has to be paid off cash to the extent of Rs. 6,250 for the excess of capital.
b) On the basis of adjusted capitals of continuing partners: Under this method, the total capital of the new firm will not be given in the problem and following are the steps followed to adjust the capital accounts of partner:
The old capitals of the continuing partners are adjusted with profit or loss on revaluation, goodwill and accumulated reserves, profits or losses, etc.
As new firm’s capital is not available , the total of adjusted old capitals of continuing partners is to be assumed as total capital of the new firm.
The continuing partners new capitals are compared with their adjusted old capitals.
If the new capital is more than the adjusted capital, shortage will be the result. For the shortage amount of capital , the continuing partners have to bring cash or it will be debited to their current accounts.
If the new capital is less than the adjusted capital, surplus will be the result. For the surplus amount, the continuing partners have to withdraw the excess capital or it will be credited to their current accounts.
Example:
Magesh, Videsh and Naresh are partners sharing profits and losses equally, Naresh retired. On the date of retirement, the adjusted capitals of Magnesh , Videsh and Naresh were Rs.50,000 , Rs.40,000 paying off cash so that the future capital of Mangesh and Videsh will be in their future profit sharing ratio. Calculate the actual cash to be paid off or to be brought in by the continuing partners.
Solutions:
Iit is asked to adust the capitals of the aprtenrs on the basis of adjusted capitals of continuing partners. The following steps are followed:
Adjusted old capitals of partner are
Magesh = Rs,50,000
Videsh = Rs.40,000
Naresh = Rs,20,000
Total capital of the new firm = Adjusted Old Capitals of continuing partners.
Total capital of the new firm = Adjusted Old Capitals of Magesh + Videsh
= Rs.50,000 + Rs.40,000
= Rs.90,000
As only old ratio of partners alone is given, the continuing partners share future profits and losses in their old ratio ,i.e 1:1
New capitals of the continuing partners, Magesh and Videsh in new ratio is
Magesh = Rs.90,000 x1/2 = Rs.45,000
Videsh = Rs.90,000 x1/2 = Rs.45,000
Comparing new capitals with eh adjusted old capitals:
Excess or shortage of capital = New Capital – Adjusted Old Capital
For Magesh = Rs.45,000 – Rs.50,000 = Rs.5,000 (Excess)
For Videsh = Rs.45,000 – Rs. 40,000= Rs.5,000 (Shortage)
Thus, Videsh has to bring cash to the extent of Rs.5,000 for the shortage of capital and Magesh has to be paid off cash to the extent of Rs.5,000 for the excess of capital.
11.3 CALCULATION AND DISPOSAL OF RETIRING OR DECEASED PARTNER’S INTEREST
When a partner is retired or died, the retiring or the deceased partner gets back his share of interest in the business. Normaly, the calculations of outgoing partner’s share of interest includes the following:
Balance in the capital and current accounts.
His share of goodwill
His share of profit or loss on revaluation of assets and liabilities.
His share of accumulated reserves, profits and losses.
His share of profit earned or loss sustained by the business till date of retirement or death.
Regarding the disposal of retiring or deceased partner’s interest in the business, the following procedure is adopted. In case of retiring partner. The amount due to him from the business is paid to him immediately or transferred to his loan account. In the absence of any agreement, the retiring partner is entitled to receive interest at the rate of 6% on the loan amount, till it is paid out. In case, the firm encounters any financial crisis, the consent of the outgoing partner can be obtained to pay the loan amount in equal instalments.
In case of deceased partner, the amount due to him from the business is paid to his legal representative (or executor) or transferred to the loan account is repaid. In case, the firm encounters any fiancial crisis, the consent of the legal representative (executor) of the deceased partner can be obtained to pay the loan amount in equal instalments.
Example
Shastri, Patil and Prabu are partner sharing profits and losses in the ratio of 2:1:1 .Following is their Balance Sheet as on 31st December 2000.
Liabilities Rs. Assets Rs. Rs.
Sundry Creditors
Bills Payable
General Reserve
Capital Accounts
Shatri
Patil
Prabu 18,000
2,000
5,000
30,000
25,000
10,000
90,000 Cash in hand and at bank
Sundry Debtors
Less: Provision
Stock in trade
Furniture
45,000
1,000
20,000
44,000
20,000
6,000
90,000
Prabu retired and the partners agree to the following revaluation.
The provision for doubtful debts is to be increased to Rs.1,800
Unrecorded investments amounting to Rs.4,000 are to be recorded
in the books of accounts.
Goodwill account is to be raised at Rs.25,000
The new profit sharing ratio of Shastri and Patil shall be 2:1
respectively.
You are required to give the journal entries to carry out the above arrangements and prepare the Balance Sheet of the new firm if it is decided to (a) show the assets and liabilities at their revised values.
Journal Entries
Date Particulars L.F Rs. Rs.
2000
Mar.31
,,
,,
,,
,,
,,
1994
Jan.1
Revaluation A/c
To Provision for doubtful debts
(Increase in the provision for doubtful debts recorded)
Investment A/c
To Revaluation A/c
(Unrecorded investment recorded
Revaluation A/c
To Shastri’s Capital A/c
T0 Patil’s Capital A/c
To Prabu’s Capital A/c
(Profit on revaluation of assets transferred to all partner ‘s capital accounts in the old ratio 2:1:1
General Reserve A/c
To Shastri’s Capital A/c
T0 Patil’s Capital A/c
To Prabu’s Capital A/c
(General Reserve transferred to all partners, Capital account in old ratio 2:1:1
Goodwill A/c
To Shastri’s Capital A/c
T0 Patil’s Capital A/c
To Prabu’s Capital A/c
(Goodwill of the firm is raised at Rs.25,000 and is credited to all Partners’capital accounts in old Ratio)
Prabu’s Capital A/c
To Cash A/c
(Amount due to Prabu is paid)
Cash A/c
To Shastri’s Capital A/c
To Patil’s Capital A/c
(Cash brought in by continuing partners)
Dr.
Dr.
Dr.
Dr.
Dr.
Dr
800
4,000
3,200
5,000
25,000
18,300
18,300
800
4,000
1,600
800
800
2,500
1,250
1,250
12,500
6,250
6,250
18,300
12,200
6,100
Revaluation A/c
Dr. Cr.
2000
Dec.31
,,
To Provision for doubtful debts
To Profit on Revaluation
Transferred to
Shastri’s Capital A/c (2/4) 1,600
Patil’s Capital A/c (1/4) 800
Prabu’s Capital A/c (1/4) 800
Rs.
800
3,200
4,000 1993
Dec.31
Investment A/c Rs.
4,000
4,000
Capital Accounts of Partners
Shastri
Rs. Patil
Rs. Prabu
Rs. Shastri
Rs. Patil
Rs. Prabu
Rs.
To Cash A/c
To Balance c/d
--
58,000
58,800 --
58,000
39,400 18,300
--
18,300 By Balance b/d
By Revaluation A/c
By General Reserve
By Goodwill A/c
By Cash A/c
By Balance b/d 30,000
1,600
2,500
12,500
12,250
58,800
58,800 25,000
800
2,500
6,250
6,100
39,400
39,400 10,000
800
1,250
6,250
--
18,300
BALANCE SHEET OF SHASTRI AND PATIL AS ON 31.12.2000
Liabilities Rs. Assets Rs. Rs.
Sundry Creditors
Bills Payable
Capital Accounts
Shatri
Patil
18,000
2,000
58,800
39,400
1,18,200 Cash in hand and at bank
Sundry Debtors
Less: Provision
Stock in trade
Furniture
Investment
Goodwill
45,000
1,800
20,000
43,200
20,000
6,000
4,000
25,000
1,18,200
Example:-
Khanna and Krishna are partners sharing profits and issues in the ratio of 3:2 respectively . They close their books of accounts every year on 31st March. Their Balance as on 31st Marth 2000 was as under.
Liabilities Rs. Rs. Assets Rs. Rs.
Capitals
Khanna
Krishna
General Reserve
Creditors
1,35,000
90,000
45,000
30,000
3,00,000 Furniture
Stock
Debtors
Cash
30,000
1,50,000
75,000
45,000
3,00,000
Krishna died on August 31st 2000 .Partnership deed provided that in the event of death of any partner his heirs would be entitled to be paid out:
Capital to his credit at the date of death.
His share of reserve at the date of the last Balance Sheet.
His share of profits to the date of his death based on the average profits of the last three accounting years.
By way of goodwill his share of total profits for the preceding three accounting years.
The profits for the three proceeding accounting years were as follows:
1999 – 2000 Rs.67,500
1998 – 2000 Rs.58,800
1997 – 1998 Rs.62,700
He is decided to transfer the amount due to Krishna to his heir’s Loan Account Prepare
Solution:
Krishna’s Capital A/c
2000
Aug.31
To Krishna Heir’s Loan A/c Rs.
1,94,100
1,94,100 1999
Apr.1
Aug.31
By Balance b/d
By General Reserve
By P & L A/c
By Goodwill Rs.
90,000
18,000
10,500
75,600
1,94,100
Working Notes:
Calculation of Share of Prifit of Krishna to the date of death:
Profit for three preceding accounting years.
1999 – 2000 Rs.67,500
1998 – 2000 Rs.58,800
1997 – 1998 Rs.62,700
Total profit Rs.1,89,000
Average Profits Rs. 1,89,000/3 = Rs.63,000
Profit up to the date of death of Krishna = Rs.63,000x5/12
= Rs.26,250
Krishna’s share of profit =Rs.26,250 x2/5=Rs.10,500
Calculation of Krishna’s Share of Goodwill:
Goodwill = Average Profit x 3 years
= Rs.63,000 x3 = Rs.1,89,000
Krishna’s share of goodwill = Rs.1,89,000x2/5=Rs.75,600
Unit Questions:
1. What are the adjustments to be made when a partner is retired or died?
2. A, B and C are partners sharing profits in the ratio of 4:3:2. C is retired and his share was purchased by A and B. Calculate the new profit sharing ratio and gaining ratio.
3. A, B, C and D are partners sharing profits in the ratio of 3:3:2:2. D is retired and the new profit sharing ratio among A,B and C will be 3:3:2. Calculate the gaining ratio.
4. A, B and C are partner sharing profits in the ratio 4:3:2. C retired and it is decided to raise only his share of good will only. No goodwill account appears in the books. Goodwill of the firm is valued at Rs.36,000. Pass journal entry.
5. Raja, Bala and Gaja were partners sharing profits and losses in the ration of 3:2:1 respectively. The Balance Sheet of the firm as on 31st December 2000 was as follows:
Liabilities Rs. Assets Rs.
Bills Payable 1,00,000 Cash at Bank 50,000
Sundry Creditors 3,80,000 Debtors 3,20,000
Reserve 2,40,000 Less:Provision 10,000 3,10,000
Capital Accounts
Raja 8,00,000
Bala 6,00,000
Gaja 5,00,000
19,00,000
Stock
Motor Vechicle
Plant and Machinery
Buildings
5,00,000
1,60,000
7,00,000
9,00,000
26,20,000 26,20,000
6. The Balance Sheet of a partnership firm of A, B and C, who were sharing profits and losses in the ratio 5:3:2 respectively, as on 31st March 2000 was as follows:
Liabilities Rs. Assets Rs.
Creditors 75,000 Cash at Bank 33,600
General Reserve 60,000 Bills Receivable 38,400
Capital Account Debtors 60,000
A 2,25,000 Stock 1,05,000
B 1,80,000 Furniture 63,000
C 1,50,000 Land and buildings 1,50,000
5,55,000 Machinery 2,40,000
6,90,000 6,90,000
On the above date C retired on the following terms:
The goodwill of the firm is valued at Rs.2,40,000
Machinery was to be depreciated by 10% and land and building was to be appreciated by 20%
Stock valued at 25% above cost. It was to be brought into the books of the new firm at cost price.
There was a liability for repairs to furniture amounting to Rs.600, the same was to be recorded in the books.
Capital accounts of the continuing partners were to be adjusted in the new profit sharing ratio by opening necessary current accounts.
You are required to prepare Revaluation Account, Capital Accounts and the opening Balance Sheet of the new firm.
7. Following is the Balance Sheet of A, B and C as on 31st December 1999:
Liabilities Rs. Assets Rs.
Sundry Creditors 14,000 Goodwill 16,000
General Reserve 12,800 Furniture 21,200
Fixed Capital Accounts Stock 20,800
A 40,000 Sundry Creditors 24,000
B 20,000 Cash at Bank 16,000
C 20,000 Cash in hand 8,800
1,06,800 1,06,800
C died on 31st March 2000. Under the terms of the partnership deed, the executors of the deceased partner were entitled to:
(a) Amount standing to the credit of partner’s capital account.
(b) Interest on capital at 5% per annum.
(c) Share of goodwill on the basis of thrice the average of the past three years profits and
(d) Share of profit from the closing of the last financial year to the date of death on the basis of the average of the last three years’ profits.
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