NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

Accountancy Class 12

Created by: Nipun Tuteja

Commerce : NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

The document NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev is a part of the Commerce Course Accountancy Class 12.
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Page No 217:

Short Questions:

Question 1: What are the different ways in which a partner can retire from the firm?
Answer: The following are the different ways in which a partner can retire from a firm.
i. With the consent of all other partners: A partner must take the consent of all the co-partners of the firm before his/her retirement. Thereafter, the partner can retire from the firm if and only if all the partners agree on the decision of his/her retirement.
ii) With an express agreement by all the partners: In case of written agreement among the partners a partner may retire from the firm by expressing his/her intention of leaving the firm though a notice to the other partners of the firm.
iii) By giving a written notice: If partnership among the partners is at will then a partner may retire by giving notice in writing to all the other partners informing them about his/her intention to retire.

Question 2: Write the various matters that need adjustments at the time of retirement of partner/partners.
Answer: The following are the various matters that need to be adjusted at the time of retirement of partners/partner.
1. Calculation of new gaining ratio of all the remaining partners of the firm.
2. Calculation of new ratio of the remaining partners of the firm.
3. Calculation of goodwill of the new firm and its accounting treatment.
4. Revaluation of assets and liabilities of the new firm.
5. Distribution of accumulated profits and losses and reserves among all the partners (including the retiring partner).
6. Treatment of Joint Life Policy
7. Settlement of the amount due to the retiring partner
8. Adjustment of capital accounts of the remaining partners in their new profit sharing ratio.

Question 3: Distinguish between sacrificing ratio and gaining ratio.
Answer :
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev


Page No 218:

Short Questions 

Question 4: Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?
Answer: At the time of retirement or death of a partner, it becomes inevitable to revalue the assets and liabilities of the firm for ascertaining their true and fair values. The revaluation is necessary as the value of assets and liabilities may increase or decrease with the passage of time. Further, it may be possible that there are certain assets and liabilities that remained unrecorded in the books of accounts. The retiring or the deceased partner may be benefited or may bear loss due to change in the values of assets and liabilities. Therefore, the revaluation of the assets and liabilities is necessary in order to ascertain the true profit or loss that is to be divided among all the partners in their old profit sharing ratio.

Question 5: Why a retiring/deceased partner is entitled to a share of goodwill of the firm?
Answer: Goodwill is an intangible asset of a firm that is earned by the efforts of all the partners of the firm. After the retirement or death of a partner, the fruits of the past performance and reputation will be shared only by the remaining partners. Thus the remaining partners should compensate the retiring or the deceased partner by entitling him/her a share of firm's goodwill.

Page No - 218:

Long Questions
Q1: Explain the modes of payment to a retiring partner.
Answer: The following are the modes of payment to a retiring partner.
1. If the amount due to the retiring partner is to be paid in lump sum on the day of his/her retirement then the following Journal entry need to be passed.
Retiring Partner's Capital A/c    Dr.
To Cash/Bank A/c
(Retiring partner paid in cash)
Retiring Partner's Capital A/c   Dr.
To Retiring Partner's Loan A/c
(Retiring partner capital account transferred to the retiring partner's loan account @ -------- % p.a.).
2) If the amount due to the retiring partner is to be paid in installments then the balancing figure of his/her capital account is transferred to his/her loan account. In this case, the retiring partner receives equal installments along with the interest on the amount outstanding. The following necessary Journal entry is to be passed.
Retiring Partner's Capital A/c   Dr.
To Retiring Partner's Loan A/c
(Retiring partner capital account transferred to the retiring partner's loan account @ -------- % p.a.)
3) If the amount due to the retiring partner is to be paid partly in cash and partly in equal  installments then a certain amount is paid in cash to the retiring partner on the date of the retirement and the rest amount due to him/her is transferred to his/her loan account. The following necessary Journal entry is to be passed.
Retiring Partner's Capital A/c (with the total amount due to the retiring partner)  Dr.
To Retiring Partner's Loan A/c (with the amount transferred to the partner's loan account)
To Cash A/c (with the amount paid in cash immediately on the date of the retirement
(Retiring partner partly paid in cash and balance transferred to the partner's loan account)

 

Questions 2: How will you compute the amount payable to a deceased partner?
Answer : The legal executer of the deceased partner is entitled for the balancing figure of the deceased partner's capital account. The balancing figure of the deceased partner's capital account is derived after posting the below mentioned items in Step 1 and Step 2.

Step 1: The following items are posted in the debit side of the deceased partner's capital account.
a) Credit balance of the deceased partner's capital account and/or current account.
b) Deceased partner’s share of profit up to the date of his/her death.
c) Deceased partner’s share of goodwill.
d) Deceased partner’s share in accumulated reserves and profit account.
e) Deceased partner’s share in gain on revaluation of assets and liabilities.
f) Deceased partner’s share of Joint Life Policy.
g) Interest on capital, if any, up to the date of the death.
h) Salary or commission, if any, up to the date of the death.
Step 2: The following items are posted in the credit side of the deceased partner's capital account.
a) Debit balance of the deceased partner's capital account and/or current account.
b) Amount withdrawn in the form of drawings up to the date of death of the partner.
c) Interest on drawings, if any, up to the date of the death.
d) Deceased partner’s share in loss on revaluation of assets and liabilities.
e) Deceased partner’s share of loss up to the date of the death.
f) Deceased partner’s share in the accumulated losses of the firm.
The legal executor is entitled for the balancing figure that is the excess of the credit side over the debit side of the deceased partner's capital account.
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev


Question 3: Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
Answer: At the time of retirement or at the event of death of a partner, the goodwill is adjusted among the partners in gaining ratio with the share of goodwill of the retiring or the deceased partner. As per Para 16 of Accounting Standard 10, it is mandatory to record goodwill in the books only when consideration in money or money’s worth has been paid for it.
In case of retirement and death of a partner, goodwill account cannot be raised. There are namely two probable situations on which the treatment of goodwill rests.
1. If goodwill already appears in the books of the firm.
2. If no goodwill appears in the books of the firm.
Situation 1: If goodwill already appears in the books of the firm.
Step 1: Write off the existing goodwill
If goodwill already appears in the old balance sheet of the firm (if mentioned in the question), then first of all, this goodwill should be written off and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. The following Journal entry is passed to write off the old/existing goodwill.
All Partners' Capital A/c        Dr.
To Goodwill A/c
(Goodwill written of among all the partners in their old ratio)
Step 2: Adjusting goodwill through partner's capital account.
After writing off the old goodwill, the goodwill need to be adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
Remaining Partner's Capital A/c    Dr.
To Retiring/Deceased Partner's Capital A/c
(Gaining Partner's Capital A/c is debited in their gaining share and retiring/deceased partner's capital account in credited for their share of goodwill)

 

Situation 2: If no goodwill appears in the books of the firm.
As no goodwill appears in the books of the firm, so the goodwill is adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
Remaining Partner's Capital A/c   Dr.
To Retiring/Deceased Partner's Capital A/c
(Gaining partner's capital account is debited in their gaining share and retiring/deceased partner's capital account in credited for their share of goodwill)

Question 4: Discuss the various methods of computing the share in profits in the event of death of a partner.
Answer: In case of death of a partner during the year, his/her executer is entitled for share of profit up to the date of death of the partner.
The share of profit can be calculated by one of the two methods.
1) On time basis: Under this method, profit up to the date of the death of the partner is calculated on the basis of the last year's/years' profit or average profit of last few years. In this approach, it is assumed that the profit will be uniform throughout the current year. The deceased partner will be entitled for the share of the profit proportionately up to the date of his/her death.
Share of Deceased Partner in Profit =
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

Example- A, B and C are equal partners. The profit of the firm for the years 2008, 2009 and 2010 are Rs 10,00,000, Rs 7,00,000 and Rs 13,00,000 respectively. C dies on April 30, 2011. The share of C in the firm's profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31.

In this case, C's share in the profits will be calculated for four months, i.e. from January 01, 2011 to April 30, 2011.

NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

2) On the sale basis: Under this method, profit is calculated on the basis of last year's sale. In this situation, it is assumed that the net profit margin of the current year's sale is similar to that of the last year's.

Share of Deceased Partner's Profit =   NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev × Sales from the beginning of the current year up to the date of death × Share of deceased partner

Example- X Y and Z are equal partners. The last year's sales and profit were Rs 25,00,000 and Rs 2,50,000. Z died on the April 30, 2011. Sales of the current year till the date of Z's death amounts to Rs 12,00,000. Firm closes its books on December 31 every year.

NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

PAGE NO - 218:

Numerical Questions
Question 1: Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.
Answer :
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
Working Notes:
1. Manisha’s share in goodwill:
Total goodwill of the firm × Retiring Partner’s Share NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
2. Gaining Ratio = New Ratio − Old Ratio

NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
Gaining Ratio between Aparna and Sonia = 3 : 7
3. Aparna’s share in goodwill  NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
Sonia’s share in goodwill NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

Question 2: 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 Rs 60,000. Sangeeta retires and goodwill is valued at Rs 90,000. Saroj and Shanti decided to share future profits equally. Record necessary Journal entries.

Answer :
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
Working Notes:
1. Sangeeta’s share of goodwill.
Total goodwill of the firm x Retiring Partner’s share  = NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev 
2. Gaining Ratio = New Ratio – Old Ratio

NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev 

Question 3: Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2007, Naman retires.
The various assets and liabilities of the firm on the date were as follows:
Cash Rs 10,000, Building Rs 1,00,000, Plant and Machinery Rs 40,000, Stock Rs 20,000, Debtors Rs 20,000 and Investments Rs 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 to be depreciated by 10%.
(iii) A provision of 5% on debtors to be created for bad and doubtful debts.
(iv) Stock was to be valued at Rs 18,000 and Investment at Rs 35,000.
Record the necessary journal entries to the above effect and prepare the Revaluation Account.
Answer 3:
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

Question 4: 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 Reserves Rs 36,000 and Profit and Loss Account (Dr.) Rs 15,000.
Pass the necessary journal entries to the above effect.
Answer :
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev


Page No 219:

Question 5 : 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, 2007 was as follows:
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev 

Brijesh retired on March 31, 2007 on the following terms:

(i) Goodwill of the firm was valued at Rs 70,000 and was not to appear in the books.
(ii) Bad debts amounting to Rs 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.
Answer :
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

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 NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev
2. Gaining Ratio = New Ratio – Old Ratio

NCERT Solution (Part - 1) - Reconstitution - Retirement/Death of a Partner Commerce Notes | EduRev

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

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