Test: Retirement And Death Of A Partner - 2 - Commerce MCQ

Ratio of A and B will be 5:3 (after adjusting the old share and acquired share).

When a partner is retired from the firm, there will be change in the ratio of remaining partners. It is necessary to find out the new ratio of existing partners.

Loan of the retiring partner is disposed off according to the pre decided terms and conditions among the partners. In such cases interest is credited to the Loan A/c on the basis of the amount outstanding at the beginning of each year and the amount paid is debited to loan A/c.

Journal Entry 

For Interest: Interest A/c Dr.

                           To Partner's Loan A/c.

For Payment: Partner's Loan A/c. Dr.

                             To Cash/Bank A/c.

Retirement or death of a partner will create a situation for the continuing partners, which is known as Reconstitution.

At the time of retirement or death of a partner, gain ratio of remaining partners is calculated as follows:
New Ratio – Old Ratio = Gain Ratio

After the retirement of Z, new ratio of X and Y will be 5:4.

Detailed
The sacrificing ratio and gaining ratio are two important concepts in partnership accounting. They are used to calculate the distribution of profits and losses when there is a change in the partnership.
The sacrificing ratio is the ratio in which the existing partners sacrifice their share in the profits in order to admit a new partner. On the other hand, the gaining ratio is the ratio in which the existing partners gain the share of the outgoing partner.
The mode of calculation for the sacrificing ratio and gaining ratio is different. Let's compare the two:
Sacrificing Ratio:
- The sacrificing ratio is calculated by taking the difference between the old ratio and the new ratio.
- The old ratio is the ratio in which the existing partners share the profits before the change.
- The new ratio is the ratio in which the partners share the profits after the change, including the share of the new partner.
- The sacrificing ratio measures the extent to which the existing partners sacrifice their share in the profits.
Gaining Ratio:
- The gaining ratio is calculated by taking the difference between the new ratio and the old ratio.
- The old ratio is the ratio in which the existing partners share the profits before the change.
- The new ratio is the ratio in which the partners share the profits after the change, including the share of the outgoing partner.
- The gaining ratio measures the extent to which the existing partners gain the share of the outgoing partner.
In summary, the sacrificing ratio is calculated by taking the difference between the old and new ratio, while the gaining ratio is calculated by taking the difference between the new and old ratio.

The profit should be distributed among the Land N in Ratio 3:1. Profits cannot be shared equally because there is partnership deed and profit should be distributed accordingly.

Goodwill earned by the firm is the effort of all the partners. When a partner retires from the firm, he should get his share of goodwill other than his capital amount (adjusted).

The main effect of retirement of a partner is that the combined share of remaining partners increases.

New Ratio of A and C will be 5:2
Old Ratio = 1/2, 3/10 and 1/5 i.e. 5:3:2
Share of B = 3/10
Remaining = 5:2

In the absence of any information regarding interest on loan to the partner, it should be paid @ 6% per annum.

Goodwill given in outside the balance sheet (in adjustment) is used to calculate the share of outgoing partner only. This goodwill is self generated and should not be distributed or not to be shown in the books of accounts.

Old Share 25 : 15 : 9
L’s share = 25/29
Gain Ratio = 45: 75

In the absence of partnership deed profit sharing ratio will be equal. In this case, M is right; profit should be shared equally among the partners i.e. 4,000 equally among all the partners.

At the time of retirement of a partner, general reserve given in the balance sheet should be credited to all the partners (including outgoing partner) in their old profit sharing ratio.

Following accounts are prepared at the time of retirement of a partner except profit and loss suspense account:
•Revaluation Account
•Partner’s capital account
•Balance Sheet

Share of loss is not shown in the credit side it is shown in the debit side of deceased partner’s capital account. Following items are shown in the credit side of his account:
•Share of profit
•Revaluation profit
•Share of reserve

Any asset taken by the partner will be shown in the debit side of his capital account. It means his capital account will be reduced by the same.

After the retirement of Z, new ratio of X and Y will be 5:4. 

Simplifying, 1/2,  2/5, 1/10  , L.C.M.  is 10

Ratio will be 5:4:1 

Hence , If z will retire then new ratio will be 5:4.