Worksheet Solutions: Reconstitution of a Partnership Firm : Retirement/Death of a Partner- 1 | Accountancy Class 12 - Commerce PDF Download

Q1: What is meant by gaining ratio on retirement of a partner.
Ans: The ratio in which the continuing partners acquire the outgoing partner's share is called as gaining ratio.

Q2: Aman, Yatin and Uma were partners and were sharing profits and losses in the ratio of 5 : 3 : 2. Uma retired and her share was taken over by Aman and Yatin 5 : 3 in ratio. Calculate gaining ratio of Aman and Yatin.
Ans: Calculation of Gaining Ratio

Explanation: Uma's share in the firm = 2/10 (since 5 : 3 : 2 total = 10).
Aman and Yatin take Uma's share in the ratio 5 : 3, so Aman gets 2/10 × 5/8 = 1/8 and Yatin gets 2/10 × 3/8 = 3/40 as their additional shares.
New shares become Aman = 5/10 + 1/8 = 5/8 and Yatin = 3/10 + 3/40 = 3/8, hence gaining ratio of Aman and Yatin = 1/8 : 3/40 = 10 : 6 = 5 : 3.

Q3: X, Y and Z are partners sharing profits in the ratio of  

= 5 : 4 : 1

Explanation: When Z retires, his share is removed (struck off) and the remaining partners' shares are simply X : Y = 5 : 4.

Thus the new profit-sharing ratio of X and Y is 5 : 4.

Q4: X, Y and Z were partners sharing profits in the ratio of  

= 5 : 3 : 2

Explanation: X has retired, so the remaining partners Y and Z will share profits in the ratio obtained after striking off X's share, i.e. Y : Z = 3 : 2.
Gaining Ratio = New Share - Old Share.

Thus the gaining ratio between Y and Z is 3 : 2 (their new shares are 3/5 and 2/5 respectively and gains are obtained by subtracting old shares from new shares).

Q5: Give any one distinction between sacrificing ratio and gaining ratio.
Ans: The difference between sacrificing ratio and gaining ratio is stated below

Sacrificing ratio:
It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partner(s).

Gaining ratio:
It is the ratio in which continuing partners acquire the share of profit from outgoing partner(s).

Explanation: In short, a sacrificing ratio arises when existing partners give up part of their share for a new partner, while a gaining ratio arises when remaining partners gain on the retirement or death of a partner.

Q6: (i) K, L and Z are partners sharing profits in the ratio of 4 : 3 : 2 respectively. L retired and surrendered 1/9th of his share of profit to K and remaining in favour of Z. Calculate the new profit sharing ratio of K and Z.
(ii) Arun, Varun and Charan are partners sharing profits in the ratio of 1/2, 3/10, and 1/5 respectively. Varun retired from the firm and Arun and Charan decided to share future profits in 3 : 2 ratio. Calculate gaining ratio of Arun and Charan.
Ans: (i) Old ratio between K, L and Z = 4 : 3 : 2.
Explanation: L's share = 3/9. He surrenders 1/9th of his own share to K and the remaining 8/9th of his own share to Z. That means:
- Share given to K = (1/9) of L's share = (1/9) × (3/9) = 3/81.
- Share given to Z = (8/9) of L's share = (8/9) × (3/9) = 24/81.
Convert original shares to 81 parts: K = 4/9 = 36/81; L = 3/9 = 27/81; Z = 2/9 = 18/81.
New K = 36/81 + 3/81 = 39/81; New Z = 18/81 + 24/81 = 42/81.
∴ New ratio = 39 : 42 = 13 : 14.

(ii) Old ratio between Arun, Varun and Charan =

Which is 1/2, 3/10 and 1/5; this equals 5 : 3 : 2 on a common denominator of 10.
Varun retires and Arun and Charan agree new ratio = 3 : 2.
Gaining Ratio = New Share - Old Share.
Arun: New = 3/5 = 6/10; Old = 1/2 = 5/10; Gain = 1/10.
Charan: New = 2/5 = 4/10; Old = 1/5 = 2/10; Gain = 2/10.
Gaining ratio = 1/10 : 2/10 = 1 : 2.

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Q7: Aman, Bimal and Deepak are partners sharing profits in the ratio of 2 : 3 : 5 . The goodwill of the firm has been valued at ₹ 37,500. Aman retired, Bimal and Deepak decided to share profits equally in future. Calculate gain/sacrifice of Bimal and Deepak on Aman's retirement and also pass necessary journal entry for the treatment of goodwill.
Ans: Calculation of Sacrificing or Gaining Ratio

Sacrificing Ratio = Old share - New share

Explanation and workings:
- Old shares: Aman = 2/10, Bimal = 3/10, Deepak = 5/10.
- After Aman retires, Bimal and Deepak share equally → each gets 1/2 = 5/10.
- Bimal's gain = New - Old = 5/10 - 3/10 = 2/10.
- Deepak's gain = New - Old = 5/10 - 5/10 = 0.

Aman's share of goodwill = 37,500 × (2/10) = ₹ 7,500 (amount payable to Aman).

Journal entry for treatment of goodwill (amount to be borne by continuing partners in their gaining ratio):
- Since only Bimal gains, he alone will compensate Aman for goodwill:

Arising entry:
Bimal's Capital A/c Dr. ₹ 7,500 To Aman's Capital A/c ₹ 7,500
Explanation: The continuing partner who gains bears the retiring partner's goodwill proportionately; here the entire amount is borne by Bimal because Deepak's share does not increase.

Q8: Neetu, Meetu and Teetu were partners in a firm. On 1st January, 2018, Meetu retired. On Meetu's retirement, the goodwill of the firm was valued at X 4,20,000. Pass necessary journal entry for the treatment of goodwill on Meetu's retirement.
Ans:

Working Note:
Meetu's share of goodwill = 4,20,000 × (1/3) = 1,40,000.
Journal entry (assuming continuing partners Neetu and Teetu share the retiring partner's goodwill equally unless another ratio is stated):

• Neetu's Capital A/c Dr. ₹ 70,000
• Teetu's Capital A/c Dr. ₹ 70,000
• To Meetu's Capital A/c ₹ 1,40,000

Explanation: The amount equal to retiring partner's share of goodwill is brought in (or adjusted) by the continuing partners in the agreed/gaining ratio and credited to the retiring partner's capital account.

Q9: Why are heirs of a retiring/deceased partner entitled to the share of goodwill of the firm?
Ans: The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/death because the goodwill has been earned by the firm at the time when he was a partner.
Explanation: Goodwill represents the firm's reputation created while the partner worked for the firm; hence the outgoing partner (or his heirs) must be compensated for the part of goodwill attributable to his period of association.

Q10: P, Q and R were partners in a firm sharing profits in the ratio of 5 : 4 : 3 respectively. Their capitals were ₹ 50,000, ₹ 40,000 and ₹ 30,000 respectively. State the ratio in which the goodwill of the firm, amounting to ₹ 6,00,000, will be adjusted in the capital accounts of the remaining partners on the retirement of Q.
Ans: The goodwill will be adjusted in the gaining ratio of the continuing partners.

Explanation: On Q's retirement the amount payable for Q's share of goodwill must be borne by those partners who gain Q's share. Therefore the adjustment is made in the gaining ratio of P and R (i.e., the ratio of their increases in share).

Q11: For which share of goodwill, a partner is entitled at the time of his retirement?
Ans: At the time of retirement, a partner is entitled to get an amount equal to his share of the firm's goodwill.
Explanation: This amount represents compensation for the reputation and other intangible benefits built up during his association with the firm.

Q12: P, Q and R were partners in a firm sharing profits in the ratio of 5 : 4 : 3. Their capitals were ₹ 40,000, ₹ 50,000 and ₹ 1,00,000 respectively. State the ratio in which the goodwill of the firm amounting to ₹ 1,20,000 will be adjusted on the retirement of R.
Ans: R's share of goodwill = 1,20,000 × (3/12) = ₹ 30,000.
Explanation: This ₹ 30,000 will be contributed by P and Q in their gaining ratio. If their gaining ratio is 5 : 4, then P will bear ₹ 30,000 × 5/9 and Q will bear ₹ 30,000 × 4/9. Hence the contribution is in the gaining ratio 5 : 4.

Q13: State the need for treatment of goodwill on the retirement of a partner.
Ans: At the time of retirement, the retiring partner sacrifices his share of profit in favour of continuing partners, so the remaining partners compensate the retiring partner a share of the firm's goodwill.
Explanation: This treatment ensures that the retiring partner receives fair compensation for the intangible value (reputation, customer base) that was built up while he was associated with the firm; it also ensures correct allocation of intangible asset values among the continuing partners.

Q14: Kavi, Ravi, Kumar and Guru were partners in a firm sharing profits in the ratio of 3 : 2 : 2 : 1. On 1st February, 2017, Guru retired and the new profit sharing ratio decided between Kavi, Ravi and Kumar was 3 : 1 : 1. On Guru's retirement, the goodwill of the firm was valued at ₹ 3,60,000. Showing your working notes clearly, pass necessary journal entry in the books of the firm for the treatment of goodwill on Guru's retirement.
Ans:

Working Notes:

• Calculation of Gaining Ratio
  Gaining Ratio = New Share - Old Share
  
  
  
  
  
• Calculation of Share of Goodwill
  Guru's share of goodwill = 3,60,000 × (1/8) = ₹ 45,000.
  Change in shares (expressed on common denominator) gives:
  - Kavi's gain = 9/40 of the firm.
  - Ravi's change = -2/40 (sacrifice).
  - Kumar's change = -2/40 (sacrifice).
  Since only Kavi gains (positive change), Kavi will compensate Guru for the retiring partner's share of goodwill.
  Therefore Kavi's liability towards Guru's goodwill = ₹ 45,000.
  Journal entry to transfer Guru's share of goodwill to Guru's capital (paid by the gaining partner):
  Kavi's Capital A/c Dr. ₹ 45,000
  To Guru's Capital A/c ₹ 45,000

Explanation: Guru's capital is credited with his share of goodwill and the partner(s) who gain compensate that amount in their respective gaining ratio; here the entire amount is borne by Kavi as he alone has a positive gain.

Q15: Arjun, Bheem and Nakul are partners sharing profits and losses in the ratio of 14 : 5 : 6 respectively. Bheem retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits of the last three years are ₹ 50,000, ₹ 55,000 and ₹ 60,000 respectively. The normal profits of the similar firms are ₹ 30,000. Goodwill already appears in the books of the firm at ₹ 75,000. The profit for the first year after the Bheem's retirement was ₹ 1,00,000. Give necessary journal entries to adjust goodwill and distribute profits showing your workings.
Ans:

Working Notes:

• Calculation of New Profit Sharing Ratio and Gaining Ratio
  Old ratio of Arjun, Bheem and Nakul = 14 : 5 : 6 (total 25).
  Bheem surrenders his 5/25 share in favour of Arjun only. Therefore Arjun's new share = 14/25 + 5/25 = 19/25 and Nakul's share = 6/25. New ratio of Arjun and Nakul = 19 : 6.
  Gaining Ratio = New Share - Old Share:
  
  
• Calculation of Bheem's Share of Goodwill
  Average profit =
  
   = ₹ 55,000; Normal profit = ₹ 30,000.
  Super profit = Average Profit - Normal Profit = 55,000 - 30,000 = ₹ 25,000.
  Firm's goodwill = 25,000 × 2 = ₹ 50,000.
  Bheem's share of goodwill = 50,000 × (5/25) = ₹ 10,000 (to be contributed by Arjun alone because Bheem surrendered his entire share in favour of Arjun).
  Journal entry to adjust goodwill contribution by Arjun:
  Arjun's Capital A/c Dr. ₹ 10,000
  To Bheem's Capital A/c ₹ 10,000
  Explanation: As Bheem's share of goodwill is to be compensated by the partner to whom his share is surrendered, Arjun alone pays Bheem's goodwill share.
  For the first year's profit of ₹ 1,00,000 to be distributed between Arjun and Nakul in their new ratio 19 : 6, appropriate division entries would follow (credit partners' current/capital accounts in the ratio 19 : 6).

Note: Goodwill already appearing in the books at ₹ 75,000 would require write-off among old partners in their old ratio before adjustment for the retiring partner, if that treatment is followed. The steps above highlight the normal practical adjustments for goodwill due to retirement and profit distribution afterwards.

Q16: P, Q and R were partners in a firm. On 31st March, 2018 R retired. The amount payable to R ₹ 2,17,000 was transferred to his loan account. R agreed to receive interest on this amount as per the provisions of Partnership Act, 1932. State the rate at which interest will be paid to R.
Ans: As per the provisions of Partnership Act, 1932, the rate of interest payable to R will be 6% per annum.
Explanation: Where partners agree to defer payment and no other rate is specified, the Partnership Act prescribes 6% p.a. as the statutory rate of interest.

Q17: Give the journal entry to distribute 'workmen compensation reserve of ₹ 60,000 at the time of retirement of Sajjan, when there is no claim against it. The firm has three partners Rajat, Sajjan and Kavita.
Ans:

Journal entry (distribution equally as profit sharing ratio not given):
Workmen Compensation Reserve A/c Dr. ₹ 60,000

• To Rajat's Capital A/c ₹ 20,000
• To Sajjan's Capital A/c ₹ 20,000
• To Kavita's Capital A/c ₹ 20,000

NOTE: Since the profit sharing ratio is not given, the reserve is distributed equally among partners including the retiring partner.

Q18: Give the journal entry to distribute workmen compensation reserve of ₹ 70,000 at the time of retirement of Neeti, when there is a claim of ₹ 25,000 against it. The firm has three partners Raveena, Neeti and Rajat.
Ans:

Journal entries:

1. To meet the claim:
Workmen Compensation Reserve A/c Dr. ₹ 25,000

To Cash/Bank A/c ₹ 25,000

2. Balance reserve to be distributed among partners equally (₹ 70,000 - ₹ 25,000 = ₹ 45,000; each gets ₹ 15,000):
Workmen Compensation Reserve A/c Dr. ₹ 45,000

• To Raveena's Capital A/c ₹ 15,000
• To Neeti's Capital A/c ₹ 15,000
• To Rajat's Capital A/c ₹ 15,000

NOTE: Since the profit sharing ratio is not given, distribution is taken as equal.

Q19: Ram, Mohan and Sohan were partners in a firm sharing profits in the ratio of 4 : 3 : 2. Mohan retired and his share was taken over equally by Ram and Sohan. In which ratio will the profit or loss on revaluation of assets and liabilities on the retirement of Mohan be transferred to the capital accounts of the partners?
Ans: The profit or loss on revaluation of assets and liabilities on the retirement of Mohan will be transferred to the capital accounts of the partners in their old ratio, i.e. 4 : 3 : 2.

Explanation: Revaluation pertains to the period when all partners were in the firm; hence the profit or loss on revaluation is shared in the old profit-sharing ratio among all partners including the retiring partner.

Q20: Banwari, Girdhari and Murari are partners in a firm sharing profits and losses in the ratio of 4 : 5 : 6. On 31st March, 2014, Girdhari retired. On that date the capitals of Banwari, Girdhari and Murari before the necessary adjustments stood at ₹ 2,00,000, ₹ 1,00,000 and ₹ 50,000, respectively. On Girdhari's retirement, goodwill of the firm was valued at ₹ 1,14,000. Revaluation of assets and re-assessment of liabilities resulted in a profit of ₹ 6,000. General reserve stood in the books of the firm at ₹ 30,000.
The amount payable to Girdhari was transferred to his loan account. Banwari and Murari agreed to pay Girdhari two yearly instalments of ₹ 75,000 each including interest @ 10% per annum on the outstanding balance during the first two years and the balance including interest in the third year. The firm closes its books on 31st March every year.
Prepare Girdhari's loan account till it is finally paid showing the working notes clearly.
Ans:

Working notes and ledger entries have been prepared and are shown above.

Explanation: The steps involved are as follows:
- Compute Girdhari's share of goodwill and transfer to his capital account.
- Credit his capital with his share of general reserve and his share of revaluation profit, and adjust other final balances to arrive at the amount due.
- Transfer the amount payable to Girdhari to Girdhari's Loan A/c.
- Post instalment payments of ₹ 75,000 each and charge interest @ 10% p.a. on the outstanding loan for the relevant periods until final payment in the third year.
The detailed loan account with dates, interest calculations and instalment postings is presented in the images above for clarity and posting to the books.