Test: Retirement Of A Partner - 1 - Commerce MCQ

Calculation of gaining ratio 

Old ratio (A, B and C) = 4 : 3 : 2

B retires from the firm

New artio (A and C ) = 5 : 3

Gaining ratio = New ratio - Old ratio

A's new share = (5/8) - (4/9) = (45 - 32) /72 = 13/72

C's new share = (3/8) - (2/9) = (27 - 16) / 36 = 11/72

gaining ratio = 13 : 11

2. Adjustment of goodwill 

C's share of goodwill = (10800 * 3) / 9 = 3600

This share of goodwill is to be debited to remaining partners' capital account in their gaining ratio (i.e., 13 : 11 )

Journal entry for the above will be:

A's capital A/c                    Dr.          1950

C's capital A/c                    Dr.          1650

          To B's capital A/c                          3600

Retiring or outgoing partner:

A retiring partner is liable for obligations incurred before their retirement. This means:

• The partner remains responsible for any debts or liabilities that arose while they were still part of the firm.
• They are not liable for any new obligations that occur after their retirement.
• If the retiring partner consented to any obligations, they may also be liable for those.

In summary, a retiring partner's liability is limited to obligations incurred prior to their exit from the firm.

To determine the amount transferred to B's loan account upon retirement, follow these steps:

• Calculate B's share of goodwill:

  Goodwill is valued at Rs. 30,000. B's share (2/5) is:

  Rs. 30,000 × (2/5) = Rs. 12,000.

• Determine profit on revaluation:

  The profit on revaluation is Rs. 7,050. B's share (2/5) is:

  Rs. 7,050 × (2/5) = Rs. 2,820.

• Calculate total amount due to B:

  Combine B's share of goodwill and profit on revaluation:

  Rs. 12,000 + Rs. 2,820 = Rs. 14,820.

• Include B's capital balance:

  B's capital balance is Rs. 50,000.

• Account for reserves:

  Balance in reserve is Rs. 15,000. B's share (2/5) is:

  Rs. 15,000 × (2/5) = Rs. 6,000.

• Calculate total amount transferred to B's loan account:

  Add B's capital balance, share of goodwill, profit on revaluation, and share of reserves:

  Rs. 50,000 + Rs. 12,000 + Rs. 2,820 + Rs. 6,000 = Rs. 70,820.

Final Amount: Rs. 70,820 will be transferred to B's loan account.

At the time of retirement of a partner, the firm receives a payment from the insurance company related to the Joint Life Policy taken out for all partners. The correct option is:

• The firm receives the Surrender Value from the insurance company.
• This value represents the amount payable upon the retirement of a partner.
• It is important to note that the Surrender Value is different from the policy amount.

Joint Life Policy is a type of insurance taken by a firm on the lives of:

• All the partners jointly.
• All the partners severely.
• On the life of all the partners and employees of the firm.
• ‘a’ and ‘b’.

The correct answer is D.

How unrecorded assets are treated at the time of retirement of a partner?

When a partner retires, any unrecorded assets must be accounted for. The treatment of these assets is as follows:

• Unrecorded assets are credited to the Revaluation Account.
• This process helps in reflecting the true value of the firm's assets.
• The net gain or loss from this revaluation is then transferred to the capital accounts of all partners.
• It is important to distribute this adjustment in the old profit-sharing ratio, including the retiring partner.

In summary, unrecorded assets are recognised through the Revaluation Account, ensuring all partners, including the retiring one, receive their fair share based on the firm's actual asset value.

Out going partner is compensated for parting with firm’s future profits in favour of remaining partners. The remaining partners contribute to such compensation in:

• Gaining Ratio: This is the ratio in which the continuing partners acquire the share from the retiring partner. It reflects how much each partner gains from the outgoing partner's share.
• Capital Ratio: This refers to the ratio of the partners' capital contributions, which is not directly related to the compensation for the retiring partner.
• Sacrificing Ratio: This is the ratio in which the remaining partners sacrifice their shares to compensate the outgoing partner. It is relevant but not the primary method of compensation.
• Profit Sharing Ratio: This is the ratio in which profits are shared among the partners, but it does not specifically address the compensation for the retiring partner.

The correct answer is the Gaining Ratio, as it specifically addresses how the remaining partners compensate the outgoing partner for their share of future profits.

Treatment of Joint Life Policy Amount in Partner's Capital Accounts

When a Joint Life Policy (JLP) is maintained at its surrender value, the treatment in the partners' capital accounts is as follows:

• If the JLP amount is received, no treatment is required in the capital accounts.
• The amount from the JLP is not distributed among partners since it is maintained at the surrender value.
• Thus, the capital accounts remain unchanged upon receiving the JLP amount.

In this case, the correct approach is to acknowledge that no adjustments are necessary in the partners' capital accounts when the JLP is maintained at its surrender value.

Given:
A, B, and C share profits and losses based on their capitals.
Capitals: A = Rs. 1,00,000, B = Rs. 75,000, C = Rs. 50,000.

1. Total Capitals:
   Total = Rs. 1,00,000 + Rs. 75,000 + Rs. 50,000 = Rs. 2,25,000.
2. Profit Sharing Ratio:
   A : B : C = 1,00,000 : 75,000 : 50,000 = 4 : 3 : 2.
3. C's Share:
   C's share = 2 parts (out of 9 parts total in the ratio 4:3:2).
4. C's Share Distribution:
   C's share is acquired by A and B in the ratio 6:4.
   Total parts = 6 + 4 = 10.
   A's gain = ⁶⁄₁₀ of C's share.
   B's gain = ⁴⁄₁₀ of C's share.
5. Gaining Ratio:
   A : B = 6 : 4 = 3 : 2.

The gaining ratio is 3:2.

When the goodwill is raised at its full value and written off at retirement of a partner, the remaining partners share goodwill in ______.

The remaining partners share the goodwill in the Gaining Ratio. This ratio reflects the proportionate increase in profit share that each continuing partner receives from the retiring partner.

• The Gaining Ratio is calculated based on the difference between the new and old profit sharing ratios.
• It ensures that the partners who gain from the retirement compensate the retiring partner for their share of goodwill.
• This approach maintains fairness in the distribution of profits among the remaining partners.

To find the new profit sharing ratio after B's retirement:

• The original profit sharing ratio among A, B, and C is 4:3:2.
• When B retires, A and C will share B's profits in the ratio of 5:3.

Steps to calculate the new ratio:

• First, determine the total share of B, which is 3 (from the original ratio).
• A's share after acquiring B's profits:
  • Old share of A = 4
  • Share acquired from B = (5/8) * 3 = 15/8
  • New share of A = 4 + 15/8 = 47/8
• C's share after acquiring B's profits:
  • Old share of C = 2
  • Share acquired from B = (3/8) * 3 = 9/8
  • New share of C = 2 + 9/8 = 25/8

Final new profit sharing ratio:

• A's new share = 47/8
• C's new share = 25/8

Thus, the new profit sharing ratio between A and C is 47:25.

Treatment for Joint Life Policy (JLP)

When a partner retires, the treatment of the Joint Life Policy (JLP) proceeds is crucial. In this case, the cash obtained from the surrender of the JLP is Rs. 60,000. The correct accounting treatment for this amount is as follows:

• The amount of Rs. 60,000 should be credited to the Joint Life Policy Account.
• This reflects the proper allocation of the proceeds from the JLP to the remaining partners.

Thus, the correct option is to credit the JLP account with the amount received.

Treatment of Goodwill on Retirement of a Partner

When a partner retires, the treatment of goodwill is essential for fair compensation. In this case, the goodwill of the firm is valued at Rs. 24,000. The following points outline the correct approach:

• The goodwill should be adjusted through the partners' capital accounts based on their gaining or sacrificing ratio.
• Since A is retiring, A's share of goodwill will be credited to A's capital account.
• The remaining partners, B and C, will adjust their capital accounts according to their new profit-sharing ratio.

In summary, the correct treatment for goodwill is to adjust it through the partners' capital accounts in the gaining or sacrificing ratio, ensuring that the retiring partner is compensated fairly.

Solution:

To determine the new profit-sharing ratio between Hari and Prasad after Roy's retirement, follow these steps:

• Initial ratio of partners: Hari : Roy : Prasad = 3 : 5 : 1.
• Roy's share (5 parts) is purchased by Prasad.
• Prasad's new share = Old share + Acquired share = 1 + 5 = 6 parts.
• Hari retains his share of 3 parts.

Now, the new ratio of Hari to Prasad is:

• Hari : Prasad = 3 : 6.
• This simplifies to 1 : 2.

Thus, the new ratio of Hari and Prasad is 1 : 2.

Solution:

When partner A retires, the goodwill of the firm is valued at Rs. 1,40,000. Since A is leaving, this amount needs to be adjusted among the remaining partners, B and C, based on their new profit-sharing ratio.

• The total goodwill of Rs. 1,40,000 will be credited to the capital accounts of B and C.
• The new profit-sharing ratio between B and C is equal, meaning they will share the goodwill equally.
• A's share of goodwill is calculated as follows:
• A's share = Total goodwill × A's share of profit = Rs. 1,40,000 × 1/5 = Rs. 28,000
• Since A's capital account is to be credited with Rs. 40,000, the remaining partners (B and C) will adjust their accounts:
• B's Capital Account will be debited by Rs. 10,000.
• C's Capital Account will be debited by Rs. 30,000.

Thus, the final entries will be:

• Credit A's Account with Rs. 40,000.
• Debit B's Capital Account with Rs. 10,000.
• Debit C's Capital Account with Rs. 30,000.

This adjustment ensures that the goodwill is fairly distributed among the remaining partners while compensating A for their share.

Treatment for Joint Life Policy Account

The Joint Life Policy (JLP) account is treated as follows:

• The amount of Rs. 3,50,000 from the JLP is credited to the partners' capital accounts.
• This amount is credited based on the old ratio of profit sharing.
• Since Hari is retiring, the remaining partners will share this amount according to their previous profit-sharing ratio.

Therefore, the correct treatment is to credit the JLP account with the full amount.

Solution:

The joint life policy of Rs. 5,00,000 has a surrender value of Rs. 3,00,000. Since X, Y, and Z initially shared profits and losses equally, the amount from the policy will be divided among them.

Upon Y's retirement, X and Z will share profits and losses in a ratio of 2:1. However, for the purpose of the joint life policy transfer, the total amount will be distributed equally among the three partners before Y's retirement.

• The total amount of the joint life policy is Rs. 3,00,000.
• Each partner (X, Y, and Z) will receive:
• Rs. 1,00,000 each (Rs. 3,00,000 ÷ 3).

Thus, the amount from the joint life policy will be credited to X, Y, and Z's capital accounts with Rs. 1,00,000 each.

A, B and C are partners sharing profits equally. A retires and goodwill appearing in the books at Rs. 3,000 is valued at Rs. 6,000. A will get credit of:

When a partner retires, their share of goodwill must be calculated based on the new valuation. Here's how to determine A's credit:

• The original value of goodwill in the books is Rs. 3,000.
• The new valuation of goodwill is Rs. 6,000.
• The difference in value is Rs. 3,000 (Rs. 6,000 - Rs. 3,000).
• Since A, B, and C share profits equally, A's share of the goodwill is:
• Rs. 3,000 (A's share of the increase in goodwill).

To calculate the amount payable to B upon retirement, follow these steps:

• Initial Capital Contributions:
  • A: Rs. 50,000
  • B: Rs. 70,000
  • C: Rs. 35,000
• Goodwill of the Firm: Rs. 30,000
• Profit on Revaluation: Rs. 7,500
• Balance in Reserve: Rs. 25,000

Calculation of B's Share:

• Total Capital: Rs. 50,000 + Rs. 70,000 + Rs. 35,000 = Rs. 1,55,000
• Share of Goodwill: B's share = (B's Capital / Total Capital) × Goodwill = (70,000 / 1,55,000) × 30,000 = Rs. 13,548
• Share of Profit on Revaluation: B's share = (B's Capital / Total Capital) × Profit on Revaluation = (70,000 / 1,55,000) × 7,500 = Rs. 3,225
• Total Amount Payable to B:
  • Capital: Rs. 70,000
  • Goodwill Share: Rs. 13,548
  • Profit on Revaluation: Rs. 3,225
  • Reserve Share: Rs. 25,000 (B's share of reserve)
  Total: Rs. 70,000 + Rs. 13,548 + Rs. 3,225 + Rs. 25,000 = Rs. 1,11,773

Final Amount Payable to B: Rs. 95,000