Retirement of Partner
By Asok Nadhani
23.1 Retirement of Partner
i)
A
partner may retire from the partnership firm (because of old age, illness, or
any other reason) etc.
ii)
The
partnership firm may not come to an end when one of the partners retires, as other
partners may continue to run the business of the firm. In such case, readjustment
takes place as in case of admission of a partner.
iii)
On
retirement, Assets and Liabilities are revalued, value of goodwill is raised
and surrender value of joint life policy, if any, is taken into account. Also
Revaluation Profit and Reserves are transferred to Capital Account and Current
Accounts of Partners’ Accounts.
23.2 Calculation of Continuing Partners’ Gaining Ratio
On retirement of a partner, the continuing partners
will gain in terms of Profit Sharing Ratio (PSR).
Gaining ratio is the difference between New Profit
Sharing Ratio and Old Profit Sharing Ratio.
Example:
If X, Y and Z were sharing Profits and Losses in the Ratio
of 5:3:2 and Y retires, X and Z now have to decide at which ratio they will
share Profits and Losses in future.
If the new ratio is 3:2, then
X gains 1/10th i.e. (3/5th – 5/10th)
and
Z gains 2/10th i.e. (2/5th – 2/10th).
So, the Gaining Ratio between X and Z is (1/10) :
(2/10), i.e. 1:2.
Gaining Ratio = New Profit Sharing Ratio – Old Profit
Sharing Ratio
Or New Profit Sharing Ratio = Old Profit Sharing Ratio
+ Gaining Ratio
Sometimes, the Old Profit Sharing Ratio acts as a
Gaining Ratio between the existing partners if nothing is mentioned about New
Profit Sharing Ratio.
Example:
P, Q and R are in partnership sharing profits and
losses at the ratio of 3:2:1. Now P wants to retire and Q and R want to
continue sharing profits and losses at the ratio of 2:1. Then find the Gaining
Ratio.
Solution:
In this case, Q and R decide to continue sharing
profits and losses at the ratio of 2:1 i.e. the existing profit sharing ratio
between them then,
Q would gain (2/3rd – 2/6th) =
2/6th share.
R would gain (1/3rd – 1/6th) =
1/6th share.
Gaining ratio of Q and R would be 2:1. It reveals that the Old Profit Sharing Ratio
acts as a Gaining Ratio between the existing partners.
23.3 Partnership Goodwill
1. a) Goodwill Raised (When goodwill is not shown in the books of the firm
and is raised in full value)
|
Goodwill A/c
|
Dr.
|
|
|
To Partners’ Capital A/c
|
|
(in the Old PSR)
|
b)
Goodwill written off
|
Partners’ Capital A/c
|
Dr.
|
(excluding the retiring or
deceased partner)
|
|
To Goodwill A/c
|
|
(in the New PSR)
|
2. a) Goodwill for Retiring Partner raised (When only the share of the retiring
partners is brought or raised into books and written off)
|
Goodwill A/c
|
Dr.
|
|
|
To Retiring
Partners’ Capital A/c
|
|
(in the Old PSR)
|
b) Goodwill
written off
|
Continuing Partners’
Capital A/c
|
Dr.
|
|
|
To Goodwill A/c
|
|
(in the Gaining Ratio)
|
Example:
R, S and T are partners sharing profit and losses in
the ratio of 4:3:2. S retires and goodwill is valued Rs. 27,000. No goodwill is
shown in the books of the firm. Assuming that R and T will share profit in
future in the ratio of 5:3 pass the journal entries
(a) When goodwill account is raised but written off and
(b) When only S’ s goodwill account is raised and
written off.
Solution:
Working Notes:
Calculation of Gaining Ratio
Old Ratio between
R, S and T is 4:3:2
New ratio for R and
T is 5:3
Gaining ratio = New ratio – Old ratio
Gaining ratio of R = (5/8 – 4/9) = 13/72
Gaining ratio of T = (3/8 – 2/9) = 11/72
Gaining ratio of R : T is (13/72) : (11/72) = 13:11
Journal Entries in the Books
of R, S and T
|
Situation (a)
|
|
Dr.
|
Cr.
|
|
Particulars
|
|
Rs.
|
Rs.
|
|
Goodwill A/c
|
Dr.
|
27,000
|
|
|
To R’s Capital A/c [Rs.27,000 x (4/9)]
|
|
|
12,000
|
|
To S’s Capital
A/c [Rs.27,000 x (3/9)]
|
|
|
9,000
|
|
To T’s Capital
A/c [Rs.27,000 x (2/9)]
|
|
|
6,000
|
|
(Goodwill raised
and credited in the old profit sharing ratio of 4:3:2)
|
|
|
|
|
R’s Capital A/c [Rs.27,000 x (5/8)]
|
Dr.
|
16,875
|
|
|
T’s Capital A/c [Rs.27,000 x (3/8)]
|
Dr.
|
10,125
|
|
|
To Goodwill A/c
|
|
|
27,000
|
|
(Goodwill written
off in the new ratio of 5:3).
|
|
|
|
|
Situation (b)
|
|
|
|
|
Goodwill A/c
|
Dr.
|
9,000
|
|
|
To S’s Capital A/c
|
|
|
9,000
|
|
(S’s share of
goodwill raised Rs.27,000 x 3/9)
|
|
|
|
|
R’s Capital A/c [Rs.9,000 x (13/24]
|
Dr.
|
4,875
|
|
|
T’s Capital A/c [Rs.9,000 x (11/24]
|
Dr.
|
4,125
|
|
|
To Goodwill A/c
|
|
|
9,000
|
|
(S’s share of
goodwill written off by debiting the remaining partners in the gaining ratio
13:11)
|
|
|
|
23.4 Revaluation of Assets
and Liabilities on Retirement
i)
On
retirement of a partner revalued assets and liabilities are to be recorded just
as in the case of admission of a partner. Profit or loss resulting from
revaluation should be distributed among the partners, including the retiring
partner at the old profit sharing ratio.
ii)
The
following journal entry for distribution of profit or loss on revaluation, will
appear:
|
Date
|
Particulars
|
|
Amount
(Rs.)
|
Amount
(Rs.)
|
|
|
Revaluation A/c
|
Dr.
|
|
|
|
|
To Partners’ Capital A/c.
|
|
|
|
|
|
(Distribution or Loss on Revaluation to all Partners’
Capital A/c.)
|
|
|
|
|
|
Or
|
|
|
|
|
|
Partners’ Capital A/c
|
Dr.
|
|
|
|
|
To Revaluation A/c.
|
|
|
|
|
|
(Distribution of Profit on Revaluation to all
partners’ Capital A/c.)
|
|
|
|
Example: (When
revaluation Account does not appear in Balance Sheet)
If A, B and C share profits and losses equally and
there is a revaluation profit of Rs.60,000 calculated on A’s retirement, So, Rs.(60,000/3)
= Rs.20,000 becomes due to A which is to be borne by B and C equally. The
journal entry would be
Solution:
|
|
|
Dr.
|
Cr.
|
||
|
Date
|
Particulars
|
|
Amount
(Rs.)
|
Amount
(Rs.)
|
|
|
|
B’s Capital A/c
|
Dr.
|
10,000
|
|
|
|
|
C’s Capital A/c
|
Dr.
|
10,000
|
|
|
|
|
To A’s Capital A/c.
|
|
|
20,000
|
|
Example: (Revaluation of Assets & Liabilities)
A, B and C are partner’s equally sharing Profit or
Loss. A retires, on revaluation, there is an increase in sundry fixed assets of
Rs.15,000 and Rs.3,000 decreases in sundry creditors: Pass the journal entries.
Solution:
At first the partners’ capital account will be credited
in the in the existing profit sharing ratio. Again the existing partners’
capital account will be debited in respect to the assets and liabilities for
such gain in the new profit sharing ratio.
|
|
|
Dr.
|
Cr.
|
|||
|
Date
|
Particulars
|
|
Amount
(Rs.)
|
Amount
(Rs.)
|
||
|
|
Sundry Fixed Assets A/c
|
Dr.
|
15,000
|
|
||
|
|
Sundry Creditors A/c
|
Dr.
|
3,000
|
|
||
|
|
To A’s Capital A/c.
|
|
|
6,000
|
||
|
|
To B’s Capital A/c.
|
|
|
6,000
|
||
|
|
To C’s Capital A/c.
|
|
|
6,000
|
||
|
|
(Distribution of Revaluation Profit amongst partners
at the old profit sharing ratio.)
|
|
|
|||
|
|
B’s Capital A/c
|
Dr.
|
9,000
|
|
||
|
|
C’s Capital A/c
|
Dr.
|
9,000
|
|
||
|
|
To Sundry Fixed Assets A/c.
|
|
|
15,000
|
||
|
|
To Sundry Creditors A/c.
|
|
|
3,000
|
||
|
|
(Distribution of Revaluation Profit amongst partners
at the old profit sharing ratio.)
|
|
|
|||
|
In the case of the
following journal entry, it is not necessary to open a separate Revaluation
Account.
|
||||||
23.5 Reserve or Undistributed
Profit & Loss
On retirement of a partner, any undistributed profit
or reserve standing at the Balance Sheet is to be credited to the Partners’
Capital Accounts in the old profit sharing ratio. Alternatively, only the
retiring partner’s share may be transferred to his Capital account, if the
other partner’s continue at the same profit sharing ratio.
Example:
X, Y and Z were in partnership sharing profits and
losses at the ratio 3:2:1. X retired and Y and Z agreed to share profits and
losses at the ratio of 2:1. Reserve balance was Rs.12,000. Show the journal
entries-
Solution:
|
|
|
Dr.
|
Cr.
|
||
|
Date
|
Particulars
|
|
Amount
(Rs.)
|
Amount
(Rs.)
|
|
|
|
Reserve A/c
|
Dr.
|
12,000
|
|
|
|
|
To X’s Capital A/c.
|
|
|
6,000
|
|
|
|
To Y’s Capital A/c.
|
|
|
4,000
|
|
|
|
To Z’s Capital A/c.
|
|
|
2,000
|
|
|
|
(Transfer of reserve to Partner’s Capital A/c at
3:2:1 on A’s retirement.)
|
|
|
||
|
|
Reserve A/c
|
Dr.
|
6,000
|
|
|
|
|
To X’s Capital A/c
|
|
|
6,000
|
|
|
|
(Transfer of A’s share of Reserve to the Capital
account on his retirement.)
|
|
|
||
Note: in this case, Y
and Z continued at the same ratio 3:2 as they did before A’s retirement.
Example:
X, Y and Z were equal partners. Z decided to retire. X
and Y decided to continue at the ratio of 3:2. Reserve standing at the date of
retirement of Z was Rs.18,000.
Solution:
Calculation of Gaining Ratio
X’s gain = 3/5th – 1/3rd = 4/15th
Y’s gain = 2/5th – 1/3rd = 1/15th
Gaining Ratio = X: Y = (4/15) : (1/15) = 4 : 1.
So the following journal entry should be passed:-
|
|
|
Dr.
|
Cr.
|
||
|
Date
|
Particulars
|
|
Amount
(Rs.)
|
Amount
(Rs.)
|
|
|
|
Reserve A/c
|
Dr.
|
18,000
|
|
|
|
|
To X’s Capital A/c. [Rs.18,000 x (1/3)]
|
|
|
6,000
|
|
|
|
To Y’s Capital A/c. [Rs.18,000 x (1/3)]
|
|
|
6,000
|
|
|
|
To Z’s Capital A/c. [Rs.18,000 x (1/3)]
|
|
|
6,000
|
|
|
|
(Transfer to reserve on Z’s retirement in the old PSR
3:2:1)
|
|
|
|
|
|
If the continuing partners want to show reserve in
the Balance Sheet, then the following journal entry should be passed.
|
|||||
|
|
X’s Capital A/c. [Rs.6,000 x (4/5)]
|
Dr.
|
4,800
|
|
|
|
|
Y’s Capital A/c. [Rs.6,000 x (1/5)]
|
|
1,200
|
|
|
|
|
To Z’s Capital A/c
|
|
|
6,000
|
|
|
|
(Adjustment entry for Z’s share of reserve in the
gaining ratio 4 :1)
|
|
|
|
|
Note: In this case, adjustment of Z’s share was
not sufficient since the relationship between X and Y was also changed.
23.6 Final Payment to Retiring
Partner
The following adjustments
are necessary in the Capital A/cs:
(i)
Transfer of Reserve.
(ii)
Transfer of Goodwill.
(iii)
Transfer of profit/loss on revaluation.
After adjustment of the
above mentioned items, the Capital Account balance standing to the credit of
the retiring partner represents amount to be paid to him:
(a)
Continuing partner
discharges whole claim to retiring partner: The continuing partnership
may discharge the whole claim at the time of retirement. Then the journal entry
will appear as follows:
|
Retiring Partner’s Capital A/c
|
Dr.
|
|
To Bank A/c
|
|
(b)
Retiring partner
retains a portion of claim: Sometimes the retiring partner agrees to retain
some portion of his claim in the partnership as loan. The journal entry will be
as follows:
|
Retiring Partner’s
Capital A/c
|
Dr.
|
|
To Retiring Partners’
Loan A/c
|
|
|
To Bank A/c
|
|
|
|
|
Example:
A and B are partners in a business, sharing profit and
losses as A - 3/5th and B - 2/5th. Their Balance Sheet as
on 1st January,
2010 is given below:
|
Liabilities
|
|
Amount
(Rs.)
|
Assets
|
|
Amount
(Rs.)
|
|
Capital Accounts
|
|
|
Plant and Machinery
|
|
25,000
|
|
A -
|
25,000
|
|
Stock
|
|
11,000
|
|
B -
|
15,000
|
40,000
|
Debtors
|
|
14,000
|
|
Reserve Account
|
|
15,000
|
Balance at Bank
|
|
6,000
|
|
Sundry Creditors
|
|
2,500
|
Cash in hand
|
|
1,500
|
|
|
|
57,500
|
|
|
57,500
|
B retires from
the business and A takes it over. The following revaluation was made.
(i)
The
goodwill of the firm is valued at Rs.25,000
(ii)
Depreciate
Plant and Machinery by 10% and Stock by 15%
(iii)
Bad
debts provision is raised against debtors at 5% and a discount reserve against
creditors at 2%
Journalize the adjustments and close the Partners’
Accounts as on 1st
January 2009 . Give also the opening Balance Sheet of A.
Solution:
Journal Entries (goodwill
raised in the books)
|
|
|
Dr.
|
Cr.
|
||
|
Date
|
Particulars
|
|
(Rs.)
|
(Rs.)
|
|
|
2009
|
|
|
|
|
|
|
Jan 1
|
Goodwill A/c
|
Dr.
|
25,000
|
|
|
|
|
To A’s Capital A/c [Rs.25,000 x (3/5)]
|
|
|
15,000
|
|
|
|
To B’s Capital A/c [Rs.25,000 x (2/5)]
|
|
|
10,000
|
|
|
|
(The goodwill
raised in full value and credited in the profit sharing ratio of 3:2 on B’s
retirement.)
|
|
|
|
|
|
|
Reserve A/c
|
Dr.
|
15,000
|
|
|
|
|
To A’s Capital A/c [Rs.15,000 x (3/5)]
|
|
|
9,000
|
|
|
|
To B’s Capital A/c [Rs.15,000 x (2/5)]
|
|
|
6,000
|
|
|
|
(Transfer of
reserve to A’s Capital account and B’s Capital Account in the profit sharing
ratio 3 : 2)
|
|
|
|
|
|
|
Profit and Loss
Adjustment A/c
|
Dr.
|
4,850
|
|
|
|
|
To Plant and Machinery A/c
|
|
|
2,500
|
|
|
|
To Stock A/c (15% of Rs.11,000)
|
|
|
1,650
|
|
|
|
To Provision for Bad Debts A/c (5% of Rs.14,000)
|
|
|
700
|
|
|
|
(Reduction in the
values of assets and creation of provision for doubtful debts as per
agreement with B)
|
|
|
|
|
|
|
Reserve for
Discount on Creditors A/c
|
Dr.
|
50
|
|
|
|
|
To Profit and Loss Adjustment A/c
|
|
|
50
|
|
|
|
(Creation of
reserve for discount on creditors at 2% of Rs.2,500)
|
|
|
|
|
|
|
A’s Capital A/c
[4,800 x 3/5]
|
Dr.
|
2,880
|
|
|
|
|
B’s Capital A/c
[4,800 x 2/5]
|
Dr.
|
1,920
|
|
|
|
|
To Profit and Loss Adjustment A/c
|
|
|
4,800
|
|
|
|
(Transfer of loss
on revaluation of assets and liabilities Rs.4,800 (Rs.4,850 – Rs.50) to
Capital Accounts of A and B in the profit sharing ratio of 3 : 2)
|
|
|
|
|
|
|
B’s Capital A/c
|
Dr.
|
29,080
|
|
|
|
|
To B’s Loan A/c
|
|
|
29,080
|
|
|
|
(Transfer of B’s
Capital Account to his Loan A/c [Rs.(10,000+6,000+15,000)-1,920]
|
|
|
|
|
Partners’ Capital Account
|
Dr.
|
|
|
|
|
Cr.
|
|
Particulars
|
A
(Rs.)
|
B
(Rs.)
|
Particulars
|
A
(Rs.)
|
B
(Rs.)
|
|
To P& L Adjustment A/c
|
2,880
|
1,920
|
By Balance b/d
|
25,000
|
15,000
|
|
To B’s Loan A/c
|
-
|
29,080
|
By Goodwill A/c
|
15,000
|
10,000
|
|
To A’s Capital A/c
|
46,120
|
-
|
By Reserve A/c
|
9,000
|
6,000
|
|
|
49,000
|
31,000
|
|
49,000
|
31,000
|
Balance Sheet of A
As on 1st January, 2009
|
Liabilities
|
|
Amount
(Rs.)
|
Assets
|
|
Amount
(Rs.)
|
|
A’s Capital Accounts
Rs.[(25.000+9,000+15,000)-2880]
|
|
46,120
|
Goodwill
Plant and Machinery
|
25,000
|
25,000
|
|
B’s Loan Account
|
|
29,080
|
Less: Depreciation
|
2,500
|
22,500
|
|
Sundry Creditors
|
2,500
|
|
Stock (Rs.11,000 – Rs.1,650)
|
|
9,350
|
|
Less: Reserve for Discount
|
50
|
2,450
|
Debtors
|
14,000
|
|
|
|
|
|
Less: Provision for Bad Debts
|
700
|
13,300
|
|
|
|
|
Balance at Bank
|
|
6,000
|
|
|
|
|
Cash in Hand
|
|
1,500
|
|
|
|
77,650
|
|
|
77,650
|
Note:
As the Business has been sold to A, the goodwill has been raised and it will
appear in the Balance Sheet of A.
23.7 Paying a Partner’s Loan in Installment
Sometimes a partner’s loan is to be paid off in certain
equal installments and that the balance is to carry interest. The interest for
the period should be calculated and the payment should consist of loan
installment plus interest for the period.
Example:
A partner’s loan stands at Rs.60,000 and that it has to
be paid in three annual equal installments carrying interest at 6% p. a. For
the first year, the first interest is Rs.3,600(i.e. 6% on Rs.60,000). In the
first year the amount to be paid will be Rs.23,600 (20,000 + 3,600). Balance of
Rs.40,000 will now be left. Next year the interest will be Rs.2,400 (i.e. 6% on
40,000). The amount to be paid therefore will be Rs.20,000 plus interest Rs.2,400
i.e. Rs.22,400. The loan account will appear in the books as under.
Solution:
Retiring Partner’s Loan A/c
|
Dr.
|
|
|
|
|
Cr.
|
|
Date
|
Particulars
|
Amount
(Rs.)
|
Date
|
Particulars
|
Amount
(Rs.)
|
|
1 year
|
To Cash A/c
|
23,600
|
1 year
|
By Capital A/c
|
60,000
|
|
|
Rs.(20,000 + 3,600)
|
|
|
By Interest A/c.
|
3,600
|
|
|
To Balance c/d
|
40,000
|
|
Rs.60,000 x (6/100)
|
|
|
|
|
63,600
|
|
|
63,600
|
|
2 year
|
To Cash A/c.
|
22,400
|
2 year
|
By Balance b/d
|
40,000
|
|
|
Rs.(20,000 + 2,400)
|
|
|
By Interest A/c.
|
2,400
|
|
|
To Balance c/d
|
20,000
|
|
Rs.40,000 x (6/100)
|
|
|
|
|
42,400
|
|
|
42,400
|
|
3 year
|
To Cash A/c
|
21,200
|
3 year
|
By Balance b/d
|
20,000
|
|
|
|
|
|
By interest A/c.
|
1,200
|
|
|
|
|
|
Rs.20,000 x (6/100)
|
|
|
|
|
21,200
|
|
|
21,200
|
Example:
X, Y and Z are partners sharing profits and losses in
the ratio of 5:3:2. On 1st
January, 2009 , Z retires. On that date, the Capital Account of the
partners showed credit balance of X Rs.15,000, Y Rs.12,000 and Z Rs.10,000. Goodwill
of the firm to be calculated at 2 year’s purchase of the average profits of the
last 3 years. It was agreed that the payment of the Capital and share of Goodwill
to the retiring partner shall be made by annual installment of Rs.6,000 each, together
with interest for the first years and the balance in the balance in the last
year, Interest being calculated at 6% on the unpaid balances.
The Profit for the years 2006, 2007 and 2008 were
Rs.6,000, Rs.4,000 and Rs.2,000 respectively.
The first installment was paid on 31st December, 2009
Show Z’s Loan Account until the payment of the whole
amount due to him was made:
Solution:
Computation of Goodwill
Profits for the 3 years were: (2006 to 2008) =
Rs.(6,000 + 4,000 + 2,000) = Rs.12,000.
Average profit = Rs.12,000/3 = Rs.4,000, Value of
Goodwill = Rs.4,000 x 2 = Rs.8,000, Z’s Share of Goodwill
= Rs.8,000 x 2/10th = Rs.1,600.
Z’s Capital Account
|
Dr.
|
|
|
|
|
Cr.
|
|
Date
|
Particulars
|
Amount
(Rs.)
|
Date
|
Particulars
|
Amount
(Rs.)
|
|
2009
|
|
|
2009
|
|
|
|
Jan, 1
|
To Transfer to Z’s Loan A/c.
|
11,600
|
Jan, 1
|
By Balance b/d
|
10,000
|
|
|
|
|
|
By Goodwill A/c.
|
1,600
|
|
|
|
11,600
|
|
|
11,600
|
|
2009
|
|
|
2009
|
|
|
|
Dec
|
To Cash or Bank A/c
|
6,000
|
Jan, 1
|
By Transfer from Z’s Capital A/c
|
11,600
|
|
|
To Balance c/d
|
6,296
|
Dec
|
By Interest A/c
|
696
|
|
|
|
|
|
Rs.11,600 x (6/100)
|
|
|
|
|
12,296
|
|
|
12,296
|
|
2010
|
|
|
2010
|
|
|
|
Dec
|
To Cash or Bank A/c
|
6,674
|
Jan, 1
|
By Balance b/d
|
6,296
|
|
|
|
|
Dec
|
By Interest A/c
|
378
|
|
|
|
|
|
Rs.6,296 x (6/100)
|
|
|
|
|
6,674
|
|
|
6,674
|
Comprehensive Illustration
Example (Goodwill
calculation, Revaluation, Proportionate capital)
The Balance Sheet of A, B, and C who sharing profit and losses of their
capitals i.e. 4:3:2 stood as follows as on 31st December, 2009 .
|
Liabilities
|
|
(Rs.)
|
Assets
|
|
(Rs.)
|
|
Sundry
Creditors
|
|
13,800
|
Land and
Building
|
|
50,000
|
|
Capitals:
|
|
|
Plant &
Machinery
|
|
17,000
|
|
A -
|
40,000
|
|
Stock
|
|
16,000
|
|
B -
|
30,000
|
|
Sundry Debtors
|
10,000
|
|
|
C -
|
20,000
|
90,000
|
Less: Provision
for bad debt
|
200
|
9,800
|
|
|
|
|
Cash at Bank
|
|
11,000
|
|
|
|
1,03,800
|
|
|
1,03,800
|
On 31.12.2009, B retires and the following assets and liabilities are
revalued to ascertain the amount payable to B by the firm.
1.
The stock to be written off by 6%.
2.
The provision for bad debts brought up to 5% on
sundry debtors.
3.
Land and building be appreciated by 20%.
4.
A provision for Rs.1,540 to be made in respect of
outstanding legal charges.
5.
The goodwill of the firm is fixed at Rs.21,600 and
B’s share of the same be adjusted in the accounts of A and C. The future profit
sharing ratio between A and C is fixed as 5:3.
6.
The entire capital of the newly constituted firm is
fixed as Rs.56,000 between A and C in the proportion of 5:3 after passing
entries in the accounts for goodwill.
Pass journal entries to give the effect to the above arrangement and
prepare Balance sheet of the newly constituted firm transferring B’s share of
capital and goodwill to a separate Loan Account on his name on 1st
January.
[Adapted-
C.A Entrance]
Solution:
Working notes
1. Calculation of Gaining ratio between A & C
In the problem, it is
mentioned that B’s share (the retiring partner) of goodwill will be adjusted in
the account of A & C. So only B’s share in goodwill will be raised and the
same written off in the account of A & C in the gaining ratio.
Old Ratio among A, B and C
is 4:3:2
New ratio for A and C is 5:3
Gaining ratio =
New ratio – Old ratio
Gaining ratio of
A = (5/8 – 4/9) = 13/72
Gaining ratio of
C = (3/8 – 2/9) = 11/72
Therefore,
Gaining ratio of A : C is (13/72) : (11/72) = 13:11
2. Calculation of Adjusted capital of A & C
After retirement of B,
Capital of the firm is fixed as Rs.56,000, which will be shared between A &
C in the new ratio after passing entries in goodwill.
A’s capital will be =
Rs.56,000 x 5/8 = Rs.35,000
C’s capital will be =
Rs.56,000 x 3/8 = Rs.21,000
In this case, Partners’
Capital A/cs will be adjusted against their new capital balances after passing
the entries for goodwill (as mentioned). If there is any excess capital, it
will be withdrawn and if there is any deficiency in capital it will be brought
by partners in cash, as the case may be.
Journal
Entries
|
|
|
Dr.
|
Cr.
|
||
|
Date
|
Particulars
|
|
(Rs.)
|
(Rs.)
|
|
|
2009
|
|
|
|
|
|
|
Dec.31
|
Land and Building A/c
|
Dr.
|
10,000
|
|
|
|
|
To Profit &
Loss Adjustment A/c
|
|
|
10,000
|
|
|
|
(Appreciation of land and building by 20% on B’s retirement.)
|
|
|
|
|
|
|
Profit & Loss Adjustment A/c
|
Dr.
|
2,800
|
|
|
|
|
To Stock A/c
(6% on Rs.16,000)
|
|
|
960
|
|
|
|
To Provision
for bad debts A/c [(5% on Rs.10,000) – Rs.200]
|
|
|
300
|
|
|
|
To Provision
for legal charges A/c
|
|
|
1,540
|
|
|
|
(Adjustment of decrease in value of stock, increase in provision on
debtors and legal charges.)
|
|
|
||
|
|
Profit & Loss Adjustment A/c (Rs.10,000 – Rs.2,800)
|
Dr.
|
7,200
|
|
|
|
|
To A’s Capital
A/c (Rs.7,200 x 4/9)
|
|
|
3,200
|
|
|
|
To B’s Capital
A/c (Rs.7,200 x 3/9)
|
|
|
2,400
|
|
|
|
To C’s Capital
A/c (Rs.7,200 x 2/9)
|
|
|
1,600
|
|
|
|
(Profit on revaluation transferred to Partners’ Capital in the profit
sharing ratio of 4:3:2.)
|
|
|
||
|
|
Goodwill A/c
|
Dr.
|
7,200
|
|
|
|
|
To B’s Capital
A/c
|
|
|
7,200
|
|
|
|
(B’s share of goodwill raised [Rs.21,600 x 3/9].)
|
|
|
|
|
|
|
A’s Capital A/c (Rs.7,200 x
13/24)
|
Dr.
|
3,900
|
|
|
|
|
C’s Capital A/c (Rs.7,200 x
11/24)
|
Dr.
|
3,300
|
|
|
|
|
To Goodwill A/c
|
|
|
7,200
|
|
|
|
(B’s share of goodwill written off by debiting the remaining partners
in the gaining ratio 13:11)
|
|
|
||
|
|
B’s Capital A/c
|
Dr.
|
39,600
|
|
|
|
|
To B’s Loan A/c
|
|
|
39,600
|
|
|
|
(Balance of B’s Capital transferred to B’s Loan Account.)
|
|
|
|
|
|
|
Bank A/c
|
Dr.
|
2,700
|
|
|
|
|
To C’s Capital
A/c
|
|
|
2,700
|
|
|
|
(Cash brought by C to adjust his Capital balance to 3/8th share)
|
|
|
|
|
|
|
A’s Capital A/c
|
Dr.
|
4,300
|
|
|
|
|
To Bank A/c
|
|
|
4,300
|
|
|
|
(Cash withdrawn by A to adjust his Capital balance to 5/8th
share)
|
|
|
|
|
Partners’
Capital Account
|
Dr.
|
|
|
|
|
|
Cr.
|
|
|
Particulars
|
A
(Rs.)
|
B
(Rs.)
|
C
(Rs.)
|
Particulars
|
A
(Rs.)
|
B
(Rs.)
|
C
(Rs.)
|
|
To Goodwill A/c
[wn.1]
|
3,900
|
-
|
3,300
|
By Balance b/d
|
40,000
|
30,000
|
20,000
|
|
To Bank A/c
(bal. fig.)
|
4,300
|
-
|
-
|
By P& L
Adjustment A/c
|
3,200
|
2,400
|
1,600
|
|
To Balance c/d
[wn.2]
|
35,000
|
-
|
21,000
|
By Goodwill A/c
[wn.1]
|
-
|
7,200
|
-
|
|
To B’s Loan A/c
(trnsfd.)
|
-
|
39,600
|
-
|
By Bank A/c
(bal. fig.)
|
|
|
2,700
|
|
|
43,200
|
39,600
|
24,300
|
|
43,200
|
39,600
|
24,300
|
Balance
Sheet
As
on 1st January,
2010
|
Liabilities
|
|
Amount
(Rs.)
|
Assets
|
|
Amount
(Rs.)
|
|
Capital
Accounts [Wn.2]
|
|
|
Land and
Building
|
50,000
|
|
|
A
-
|
35,000
|
|
Add:
appreciation
|
10,000
|
60,000
|
|
C
-
|
21,000
|
56,000
|
Plant &
Machinery
|
|
17,000
|
|
Sundry
Creditors
|
|
13,800
|
Stock
|
16,000
|
|
|
Provision for
legal charges
|
|
1,540
|
Less: written
off
|
960
|
15,040
|
|
B’s Loan
Account
|
|
39,600
|
Sundry Debtors
|
10,000
|
|
|
|
|
|
Less:
Provision for Bad Debts
|
|
|
|
|
|
|
Rs.(200
+300)
|
500
|
9,500
|
|
|
|
|
Cash
at Bank [Wn.3]
|
|
9,400
|
|
|
|
1,10,940
|
|
|
1,10,940
|
Working notes:
3.
Cash at Bank A/c
|
Dr.
|
|
|
Cr.
|
|
|
Rs.
|
|
Rs.
|
|
To balance b/d
|
11,000
|
By A’s capital A/c
|
4,300
|
|
To C’s Capital A/c
|
2,700
|
By Balance c/d
|
9,400
|
|
|
13,700
|
|
13,700
|
23.8 Joint Life Policy
i)
A
partnership firm may decide to take a Joint Insurance policy on the lives of
all partners. The firm pays the premium and the amount of policy is payable to
the firm on the death of any partner or on the maturity of policy, whichever is
earlier.
ii)
If premium is as expense, Premium paid is debited
to profit and loss account each year. Amount received from Insurance Company
will be treated as firm’s profit and will be credited to capital accounts of
all partners.
No comments:
Post a Comment