CPT Section A Fundamentals of Accountancy Chapter 8 Unit 4
Prof. Deepak Jaggi
Learning Objectives (1) Understand the role of retiring partner in the obligations of the firm. (2) Logic Logic of treatment of Reserves and Debit Balances in case of retirement of partner. partner. (3) Techniques of arriving at the various Ratio’s. (4) Understand the Goodwill adjustment. (5) To Lay a solid foundation of accounting treatment in case of retirement retirem ent of partner. partner.
PARTNERSHIP ACCOUNTS (Retirement of a Partner)
A partner who retires from the existing existing partnership firm is known as a retiring partner
A partner who retires will be called as outgoing partner
Conti.. (Retirement of a Partner) A partner may retire from the business due to one or more of the following reasons:
Old age or Health problems of the partner Better Opportunity Difference of opinion among partners
Accounting Treatment • Similar to Admission of Partner Not Same
Information given
To Prepare
• 1. Balance Sheet of Old Firm • 2. Adjustments • • • •
1. Revaluation A/c 2. Partner’s Capital A/c 3. Cash /Bank A/c 4. Balance Sheet of a new Firm
Difference between Admission and Retirement of a Partner
Admission
Retirement
1) 2 Old Partners & 3 New Partners
1) 3 Old Partners & 2 New Partners
2) Old Ratio, New Ratio, Sacrifice Ratio
2) Old Ratio, New Ratio, Gain Ratio (Benefit Ratio)
3) C = Incoming Partner
3) C = Outgoing Partner
4) 2 Cases of Goodwill
4) 1 Case of Goodwill
5) Incoming Partner brings money
5) Outgoing Partner takes money
Goodwill Adjustment Goodwill is raised (Old Ratio) Goodwill A/c ….. Dr. To Old Partner’s Capital A/c GO (Old)
Goodwill is written off (New Ratio) New Partner’s Capital A/c ….. Dr. To Goodwill A/c NG(New) Cont….
Goodwill Conti..
Net Effect of the above 2 entries In Gain Ratio New Partner’s Capital A/c….. Dr. To Retiring Partner’s Capital A/c NR (Gain)
Ratios
Old Ratio = Old Partners New Ratio = New Partners Gain / Benefit Ratio = New Partners
Old Ratio
Given Otherwise Equal among Old Partners
New Ratio
Given Otherwise Just Remove the share of Outgoing Partner
Gain Ratio Same as Old Ratio if Old Ratio and New Ratio of New Partners is same Otherwise Formulae
Gain Received = New Ratio – Old Ratio
Example of Ratios - Question Deepika , Ranbir , Aditya are Old Partners - Ratio 3:2:1. Aditya retires
D
R
A
3/6
2/6
1/6
OR 3:2:1
3/5
2/5
x
NR=3:2 GR=3:2
Time Gap • Partner retires in between the year
• Gap between last Balance Sheet and Date of Retirement.
• Retiring Partner is entitled for share in profits for this Time Gap • Entry – P&L Suspense A/c……. Dr. • To Retiring Partner’s Capital A/c
Settlement of Retiring Partner’s Capital A/c
Credit Side – Debit Side
Amount is Payable to Retiring Partner Either Transfer to Cash / Bank A/c or Retiring Partner’s Loan A/c Question is Silent - Transfer it to his Loan A/c
Practical Problem Kareena Kapoor, Karishma Kapoor and Deepika were partners sharing profits in the ratio of 4:3:3:Balanc e Sheet as on 31st Decemb er, 1996 Liabilities
As sets
Sundry Creditors
38,000 Cash at Bank
Bills Payable
10,000 Debtors
Reserve Fund
25,000 Less: R.D.D.
Capital Accounts
6,000 32,000 2,000
Stock
50,000
Motor Van
16,000
Karishma
80,000 Plant and Machinery Factory Building 60,000
Deepika
49,000
Kareena
30,000
70,000 90,000
Problem no.1 Conti.. Karishma retired on that date on the following terms:1. The Goodwill of the firm to be valued at ₹30,000 and Karishma’s share in it should be raised. 2. Plant to be depreciated by 10% and Motor van y 12.5%. Stock to be appreciated by 10% and Building by 20%. 3. One workman Shahrukh was injured and compensation of ₹ 6,000 payable to him is to be recorded in the firm’s book. 4. Provision for doubtful debts is no longer necessary. 5. Both the partners decided that Goodwill should not appear in the books of accounts of the firm. The amount payable to Karishma shall be kept as Loan. Prepare: Capital Accounts of the Partners. Profit and Loss Adjustment Account, Balance Sheet of Kareena and Deepika.
Solution Revaluation Ac count
Particulars
Amt.
Amt. Particulars
To Plant A/c
7,000 By Stock A/c
To Motor Van A/c
2,000 By Building A/c
To Compensation
By R.D.D. A/c
Payable A/c
Amt.
Amt. 5,000 18,000 2,000
6,000
To Partners Capital A/c. Kareena
4,000
Karishma
3,000
Deepika
3,000
10,000 25,000
25,000
Solution Conti.. Partners Capital Acc ount Particulars
To Karishma’s A/c
Kareena
5,143
To Karishma’s Loan
Karishma
-
Deepika Particulars
3,857
79,500
To Balance c/d
88,857 94,000
79,500
55,643
59,500
Karishma
Deepika
By Balance b/d
80,000
60,000
49,000
By Reserve Fund
10,000
7,500
7,500
4,000
3,000
3,000
By Revaluation A/c
A/c
Kareena
By Kareena A/c
-
5,143
By Deepika A/c
-
3,857
94,000
79,500
Cont.……
-
59,500
Solution Conti.. (After Retirement) Balance Sheet
Liabilities Partner’s Capital A/c Kareena Deepika Compensation Payable Creditors Bills Payable Karishma’s Loan
Amt.
88,857 55,643
Amt. Assets
1,44,500 6,000 38,000 10,000 79,500 2,78,000
Machinery Motor Van Cash Stock Building Debtors
Amt.
Amt. 63,000 14,000 6,000 55,000 1,08,000 32,000
2,78,000
MCQ’s
MCQ.1 Q.1. X, Y and Z are partners with profits sharing ratio 4:3:2. Y retires and Goodwill ₹10,800 shown in books of account. If X and Z shares profits new ratio in 5:3, then find the gain profit sharing ratio.
a) 13:11 b) 17 : 11
c) 31 : 11 d) 14 : 21
Ans. a) 13:11
MCQ.2 Q.2. The Capitals of X, Y and Z are ₹1,00,000, ₹75,000 and ₹50,000 , profits are shared in the ratio of 3:2:1. Y retires on the basis of firm purchased by other partners in the new ratio between X and Z is 3:1. Find the capital of X and Z.
a) ₹1,50,000 and ₹1,00,000 b) ₹1,46,250 and ₹42,000 c) ₹1,56,250 and ₹68,750 d) ₹86,250 and ₹46,250 Ans. c) ₹1,56,250 and
MCQ.3 Q.3. Outgoing partner is compensated for parting with firm’s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount
a) Gaining Ratio b) Capital Ratio
c) Sacrificing Ratio d) Profit Sharing Ratio Ans. a) Gaining Ratio
MCQ.4 Q.4. Claim of the retiring partner is payable in the following form
a) Fully in cash b) Fully transferred to loan account to be paid later with some interest on it
c) Partly in cash and partly as loan repayable later with agreed interest
d) Any of the above method Ans. d) Any of the above method
MCQ.5 Q.5. X, Y and Z were partners in a firm sharing profits and losses in the ratio of 2:2:1 respectively with the capital balance of ₹50,000 for X and Y, for Z ₹25,000. Y declared to retire from the firm and balance in reserve on the date was ₹15,000. If goodwill of the firm was valued as ₹30,000 and profit on revaluation was ₹7,050, then what amount will be transferred to the loan account of Y.
a) ₹70,820 b) ₹50,820 c) ₹25,820 d) ₹60,000 Ans. a) ₹70,820
MCQ.6 Q.6. Aman , Raman and Sunit are partners sharing profits and losses in the ratio of 5:4:3. Sunit retires and if Aman and Raman shares profits of Sunit in 4:3, then new profit sharing ratio will be :
a) 4 : 3 b) 47 : 37 c) 5 : 4 d) 5 : 3 Ans. b) 47 : 37
MCQ.7 Q.7. X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1 . X retired Goodwill of the firm is to be valued at ₹24,000 & Goodwill Account is to be raised which is not appearing in the balance sheet. What will be the treatment for goodwill ?
a) Credited to Revaluation Account at ₹24,000 b) Credited to partners capital account ₹24,000 in profit sharing ratio c) Only X’s capital A/c Credited with ₹12,000 d) Only X’s capital A/c credited with ₹24,000. Ans. b) Credited to partners capital account ₹24,000 in profit
MCQ.8 Q.8. X, Y and Z are partners sharing profits in the ratio 2:2:1. On retirement of Y, goodwill was valued as ₹30,000. Find the contribution of X and Z to compensate Y.
a) ₹20,000 and ₹10,000 b) ₹8,000 and ₹4,000 c) They will not contribute anything. d) Only X’s capital A/c credited with ₹24,000. Ans. b) ₹8,000 and ₹4,000
MCQ.9 Q.9. A, B and C are partners sharing profits and losses in he proportion of 1/2, 1/3 and 1/6. B retired and the new profit sharing ratio between A and C is 3 : 2 and the Reserve of ₹12,000 is divided amount the partners in the ratio:
a) 2,000 : 4,000 : 6,000 b) 5,000 : 5,000 : 2,000 c) 4,000 : 6,000 : 2,000 d) 6,000 : 4,000 : 2,000 Ans. d) 6,000 : 4,000 : 2,000
MCQ.10 Q.10. Retiring or outgoing partner :
a) To be liable for firm’s liabilities. b) Not liable for any liabilities of the firm. c) Is liable for obligation incurred before his retirement. d) Is liable for obligations incurred with his consent only. Ans. c) Is liable for obligation incurred before his retirement
Lesson Summary Partner goes out
Accounting Treatment similar to Admission but not same
Gain Ratio / Benefit Ratio = New Ratio of New Partners, Otherwise Gain Received = New Ratio-Old Ratio
Also Gain Received + Old Ratio = New Ratio
For New Ratio, Just Remove, the share of Outgoing Partner Time Gap between Balance Sheet date and Date of Retirement - P & L Suspense A/c …… Dr. To Retiring Partner’s Capital A/c
Settlement = Cash or Loan , If Question Silent then Loan
