NOTES

CHAPTER 6: Retirement and Death of a Partner

Retirement of a partner means retiring from the partnership i.e. ceasing to be a partner of the firm.

Example 1:

A, B and C are sharing profits and losses in the ratio of 5 : 3 : 2. B retires. His share is taken by A and C in the ratio of 2 : 1. Calculate new profit sharing ratio.

Solution:

Since B was taking $\frac{3}{10}$ share in the profits on his retirement his share will be distributed between A and C in the ratio of 2 : 1. Thus,

Share taken by A out of B’s share = $\frac{3}{10}\times \frac{2}{3}=\frac{2}{10}$

A’s new share = old share + Gain = $\frac{5}{10}+\frac{2}{10}=\frac{7}{10}$

Share taken by C out of B’s share = $\frac{3}{10}\times \frac{1}{3}=\frac{1}{10}$

C’s new share = old share + gain = $\frac{2}{10}+\frac{1}{10}=\frac{3}{10}$

New profit sharing ratio of A and C = 7 : 3

Example 2:

A, B and C were partners sharing profits in the ratio of 3 : 2 : 1. Find the gaining ratio when

1. A retires
2. B retires

Solution:

Since new profit sharing ratio of the remaining partners is not given gain to their remaining partner is in their old ratio.

1. When A retires gain to B and C is in 2 : 1 ratio
2. When B retires gain to A and C is in 3 : 1 ratio

Treatment of goodwill

Example 3:

X, Y and Z are partners sharing profit in the ratio of 3 : 2 : 1. Y retires and on the date of Y’s retirement goodwill is valued at Rs. 75,000. Goodwill already appears in the books at a value of 48,000. New ratio of X & Y is 3 : 2. Pass the necessary entries;

Solution:

Date	Particulars	L.F.	Debit	Credit
	X’s capital A/c Dr. Y’s capital A/c Dr. Z’s capital A/c Dr.  To goodwill A/c		24,000 16,000 8,000	48,000
	X’s capital A/c Dr. Z’s capital A/c Dr.  To Y’s capital		7,500 17,500	25,000

Working notes:

Y’s share of goodwill = 75000 × $\frac{2}{6}$ = 25,000

Gaining ratio = New Ratio − Existing Ratio

X’s gain = $\frac{3}{5}-\frac{3}{6}=\frac{(18-15)}{30}=\frac{3}{30}$

Z’s gain = $\frac{2}{5}-\frac{1}{6}=\frac{(12-5)}{30}=\frac{7}{30}$

Gaining ratio between X and Z = 3 : 7

Hidden goodwill

Question:

X, Y & Z are partners sharing profits and losses in the ratio of 1 : 2 : 3. Z retires and his capital after making adjustment for reserves and profits on revaluation stands at 2, 20,000. X and Y agreed to pay him Rs. 2,50,000 in full settlement of his claim. Record necessary entries for the treatment of goodwill if the new profit sharing ratio is decided 1 : 3.

Revaluation of assets and liabilities:

Example 4:

X, Y & Z are partners sharing profits In the ratio 3 : 2 : 1. X retires from the partnership. In order to settle his claim the following revaluation of assets and liabilities was agreed upon:

1. The value of machinery is increased by Rs. 50,000
2. The value of investment is increased by 4,000
3. A provision for outstanding bill standing in the books at 2,000 is now not required
4. The value of land & building is decreased by 24,000

Give journal entries if:

1. Partners decide to show revaluated amount in the balance sheet.

Revaluation Account

Dr.			Cr.
Date	Paticulars	Amount	Date	Paticulars	Amount
	To land & building To partner’s capital A/c  X16,000  Y10,667  Z5,333	24,000 32,000		By machinery A/c By investment A/c By provision for outstanding bill A/c	50,000 4,000 2,000
		56,000			56,000

Memorandum Revaluation A/c

Dr.			Cr.
Date	Paticulars	Amount	Date	Paticulars	Amount
	To land & Building To machinery A/c To investment A/c To provision for outstanding bills To partners’ capital A/c  X16,000  Y10,667  Z5,333	24,000 50,000 4,000 2,000 32,000		By machinery A/c By investment A/c By provision for outstanding bill A/c By land & building By partner’s capital A/c  X21,333  Z10,667	50,000 4,000 2,000 24,000 32,000
		1,12,000			1,12,000

Solution:

Date	Particulars	L.F.	Debit	Credit
	Machinery A/cDr. Investments A/cDr. Provisions for outstanding billDr.  To revaluation A/c		50,000 4,000 2,000	56,000
	Revaluation A/c Dr.  To land & building		24,000	24,000
	Revaluation A/c Dr.  To X’s capital  To Y’s capital  To Z’s capital		32,000	16,000 10,667 5,333

Treatment of Reserves

Example 5:

A, B & C are partners in a firm sharing profits in 3 : 2 : 1 ratio. Their balance sheet as on March 31^st, 2015 was as follows:

Liabilities	Amount	Assets	Amount
Capital A40,000 B30,000 C25,000 General Reserve Workmen compensation Fund Profit & loss account Creditors	95,000 9,000 4,000 6,000 20,000	Building Machinery Furniture Stock Debtors Less: provision for bad debts Cash	35,000 30,000 10,000 20,000 25,000 (2,000) 16,000
	1,34,000		1,34,000

On April 2014, B decided to retire. Partners decided as follows:

1. Building is to be revalued higher by Rs. 10,500.
2. Goodwill is to be valued at 60,000.
3. Machinery & furniture to be depreciated by 10%.
4. Pending claim for compensation of a worker Rs. 5,000 to be admitted.
5. 20% of general reserve is to remain as a provision against bad and doubtful debts.
6. Expenses include 1,500 personal expenses of B.

Prepare journal entries regarding adjustment of reserve and accumulated profits and prepare revaluation Account.

Solution:

Date	Particulars	L.F.	Debit	Credit
	General reserve A/c Dr. To provision for doubtful debts  To A’s capital  To B’s capital  To C’s capital		9,000	1,800 3,600 2,400 1,200
	Profit and loss A/c Dr.  To A’s capitalc  To B’s capitalc  To C’s capital		6,000	3,000 2,000 1,000

Revaluation A/c

Particulars	Amount	Particulars	Amount
To machinery A/c To furniture A/c To workmen compensation claim To profits transferred to  A3,500  B2,333  C11,667	3,000 1,000 1,000 7,000	By building A/c By B’s capital A/c	10,500 1,500
	12,000		12,000

Adjustments of capitals

Example 6:

A, B & C are partners in a firm sharing profits & losses in 11 : 5 : 4 ratios. Balance sheet of the firm as on 31^st March was as follows:

Liabilities	Amount	Assets	Amount
Capital  A 1,20,000  B 90,000  C 60,000 Employee provident fund Creditors Bills payable Outstanding expenses	2,70,000 90,000 1,12,500 30,000 15000	Building Machinery Motor van Furniture Debtors Stock Cash Profit and loss account	1,35,000 90,000 60,000 15,000 1,20,000 52,500 15000 30,000
	5,17,500		5,17,500

On April 2014, A retired from the firm

1. Goods to be valued at Rs. 67,500.
2. Provision for doubtful debts to be made at 10%.
3. Value of stock to be increased by 3,000.
4. Fixed assets to be appreciated by 10%.
5. A to be paid instantly and the required amount to be brought by B and C in such a way that their capital to be in proportion of 3 : 1.
6. Unrecorded salary 3000 which is to be recorded.

Prepare revaluation A/c partner’s capital A/c & balance sheet.

Solution:

Revaluation A/c

Particulars	Amount	Particulars	Amount
To motor van To provision for doubtful debts To outstanding electricity bill To profit transferred to  A 3,300  B 1,500  C 1,200	6,000 12,000 3,000 6,000	By building A/c By machinery A/c By furniture A/c By stock A/c	13,500 9,000 1,500 3,000
	27,000		27,000

Partner’s capital A/c

Particulars	A	B	C	Particulars	A	B	C
To profit & loss A/c To A’s capital A/c To Cash A/c To bal c/d	16,500 1,43,825	7,500 20,625 63,375	6,000 16,500 37,500	By bal b/d By revaluation A/c By B’s capital A/c By C’s capital A/c	1,20,000 3,300 20,625 16,500	9,0000 1,500	60,000 1,200
	1,60,425	91,500	61,200		1,60,425	91,500	61,200
To bal c/d		1,84,500	61,500	By bal b/d By bank A/c		63,375 1,21,125	38,700 22,800
		1,84,500	61,500			1,84,500	61,500

Balance Sheet

Liabilities	Amount	Assets	Amount
Capital  B1,84,500  C61,500 Employee provident fund Creditors Bills payable Outstanding expenses	2,46,000 90,000 1,12,500 30,000 18,000	Building Machinery Motor van Furniture Debtors1,20,000 Less: provision 12,000 Stock Cash	1,48,500 99,000 54,000 16,500   1,08,000 55,500 15,000
	4,96,500		4,96,500

Death of a partner

Example 7:

X, Y and Z are partners in a firm sharing profits in the ratio 5 : 3 : 2. On 31^st march 2011 balance sheet was

Balance Sheet

Liabilities	Amount	Asset	Amount
Creditors Reserve fund Capitals:  X1,20,000  Y90,000  Z60,000	1,04,000 30,000       2,70,000	Building Plant Stock Debtors Cash Bank	1,20,000 1,00,000 54,000 50,000 20,000 60,000
	4,04,000		4,04,000

X died on 1^st October 2011. It was agreed between his executor and the remaining partners that:

1. Goodwill is to be valued at 2½ year’s purchase of the average profit of the last four years, which were:
   2007-08 = 50,000
   2008-09 = 40,000
   2009-10 = 80,000
   2010-11 = 70,000
2. Building is valued at Rs. 1,40,000 plant at Rs. 92,000 and stock at 64,000.
3. Profits of the year 2010-11 to be taken as having accrued at the same rate as that of the previous year.
4. Interest on capital is provided at 9% p.a.
5. On 1^st October 2011 drawings account of X, Y & Z showed a balance of 40,000, 20,000 and 10,000 respectively.
6. 51,900 is to be paid immediately to his executors and the balance is transferred to his executor’s loan account.
7. Y and Z decided to show their share of reserves in the balance sheet.

Solution:

Revaluation A/c

Liabilities	Amount	Asset	Amount
To plant A/c To profit transferred to  X’s capital A/c11,000  Y’s capital A/c6,600  Z’s capital A/c4,400	8,000       22,000	By building A/c By stock A/c	20,000 10,000
	30,000		30,000

X’s capital A/c

Particulars	Amount	Particulars	Amount
To drawings A/c To X’s executors A/c	40,000 2,03,900	By bal b/d By reserve fund A/c By Y’s capital By Z’s capital By profit & loss A/c (suspense) By revaluation A/c By interest on capital	1,20,000 15,000 45,000 30,000 17,500 11,000 5,400
	2,43,000		2,43,000

X’s executors A/c

Particulars	Amount	Particulars	Amount
To bank A/c To X’s executor’s loan A/c (loan transfer)	51,900 1,52,000	By X’s capital A/c	2,03,900
	2,03,900		2,03,900