Test: Retirement and Death of Partner - UGC NET MCQ

A partner can get retirement in the following ways:
(1) With the consent of all the partners
(2) Due to ill health
(3) Agreement/contract is over
(4) By giving notice

Outgoing partner cannot take complete goodwill of the firm. Outgoing partner is entitled for the followings:
(i) His capital account balance
(ii) His share of profit reserves & gains etc.
(iii) Revaluation profit or loss
(iv) His share of goodwill
Note: outgoing partner is entitled for his share of goodwill only and not the complete goodwill of the firm.

At the time of retirement of death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner.

Gaining ratio is calculated by deducting the old ratio from the new ratio. The following formula is used to calculate the gain ratio.
Gaining ratio = New ratio – old ratio

At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).

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