Reconstitution of a partnership Firm – Retirement and Death of a Partner
When the retirement or death of a Partner, the existing partnership deed comes to an end and a new partnership deed prepared for the reconstituted firm.The firm will continue its business with new terms and conditions.
Retirement of a Partner
A partner’s withdrawal from the business with the consent of other partners or as per the provisions or partnership deed or by giving notice of retirement is called retirement.
Accounting Treatment on Retirement
Change in profit sharing ratio
Calculation of gaining ratio
Adjustment regarding goodwill
Adjustment of reserves and accumulated profit or losses
Revaluation of assets and liabilities
Ascertainment of profit or loss up to the date of retirement
Calculation of total amount due to the retiring partner
Settlement of total amount due to the retiring partner
Adjustment of capitals of continuing partners.
1-Change in Profit Sharing Ratio
The share in the profit of the retiring partner is often acquired by the continuing partners in their profit sharing ratio, unless otherwise agreed.If the share acquired by old partners in their old PSR , the new ratio among the remaining partners will not change.
Ex: A,B and C are Partners, Their PSR 3:2:1, if B retires, the New PSR of A and C is 3:1
New Profit sharing Ratio = Old ratio + Share acquired from old partner
Q 1 – Asha , Deepthi and Nisha are partners in a firm sharing profits and losses in the ratio of 3:2:1.Deepthi retires from the firm. Calculate New profit sharing ratio of continuing partners.
Note: New profits sharing ratio is calculated by striking out the share of retiring partner and bu finding out the denominator of the ratio.
Q 2 – Naveen ,Suresh and tarun are partners sharing profits and losses in the ratio of 5:3:2.Suresh retires from the firm and his share was acquired by Naveen and Tarun in the ratio of 2:1. Calculate the new profit sharing ratio of Naveen and Tarun.
Ans : 7:3
Q 3 – Sruthi, Aleena and Febina are partners in the ratio of 3 : 2 : 1. Sruthi retires and her share is acquired by the remaining partners in the ratio of 3 : 2. Calculate the new ratio. Ans : New Ratio 19:11
Q 4 – Ameena, Fidha and Gayathri are partners sharing profits and losses in the ratio of 5 : 3 : 2. Fidha retires from the firm and her share was acquired by Ameena and Gayathri in the ratio of 2 : 1. Calculate the new ratio. (3Marks)
Ans : 7 : 3
2-Calculation of Gaining Ratio
The ratio in which the continuing partners decide to share the outgoing partner’s profit share is called gaining ratio.
Gaining Ratio of Contng.Partner’s = New Share – Old Share
Note: if a partner retires and the new profit sharing ratio(PSR)of the continuing partners are not given, Gaining ratio will be same as the Old Ratio.
Q 5 – A,B and C were sharing profits in the ratio of 3:2:1. C retires from the firm. Calculate the Gaining ratio of A and B.
Q 6 – A , B and C were sharing profits in the ratio of 3:2:1. C retires from the firm. A and B decide to share future profits in the ratio of 7:5. Calculate the gaining ratio.
Q 7 – M,N and O are Partners sharing profits in the ratio of 3:4:1 .M retires and surrenders ⅔ of his share to N and the remaining share ⅓ to O. Calculate new profit sharing ratio and the gaining ratio of the remaining partners.
Ans : NPSR 3:1, GR 2:1
3-Adjustment regarding Goodwill
A retiring partner is entitled to his share of goodwill.The goodwill earned by the firm with the effort of all partners including retiring partner.He is not going to share future profits.so he has to compensate by the continuing partners in their gaining ratio.
The Good will is adjusted through the capital accounts of partners asper the accounting statndards 10(AS10)
The following journal entry is recorded for this purpose
Continuing Partner’s Capital A/c Dr To Retiring partner’s capital A/c
Q 8 – X ,Y and Z are partners sharing profits in the ratio of 5:3:2. Z retires and the goodwill is valued at Rs.40,000. Give entries in the books of the firm regarding treatment of goodwill. (Ans : X-5000,Y-3000)
Q 9 – A ,B and C are partners sharing profits in the ratio of 5:3:2. A retires and for this purpose goodwill is valued at Rs.25,000. Continuing partners agree that their new profit sharing ratio shall be equal.Record necessary journal entry.
(Ans: 5000,7500 – 12,500)
Q 10 – A , B and C are Partners sharing profits in the ratio of 3:2:1. B retired from the business and his share of profits is completely taken over by C.The goodwill of the firm is valued at Rs.30,000. Pass necessary journal entry. Ans :c -10,b-10
Some of the continuing partners sacrifice on retirement of a partner,while others gain
Q 11 – Anu ,Manu, Binu and Sonu are partners sarong profits and losses in the ratio of 4:3:2:1. Binu retires from the firm and the continuing partners decide to change their profits sharing ratio in to equal.Goodwill of the firm was valued at Rs.2,40,000.Pass necessary journal entry for goodwill treatment.
Ans – Manu – 8000, Sonu – 56000 To Anu – 16000 Binu – 48000.
Goodwill already in the books. If Goodwill is already appearing in the books at the time of retirement of a partner,the same should be written off by passing the following entry All Partner’s capital A/c Dr To Goodwilll A/c (Goodwill existing in the books written off by debiting all partners in the old ratio)
Q 12 – Neeraj, Nima and Aswin are partners sharing profits in the ratio of 4:3:2′ Goodwill is appearing in the books at a value of Rs.45,000. Nima retires. on retirement, goodwill of the firm is valued at Rs. 90,000. Neeraj and Aswin decided to share future profits in the ratio of 3:2 and also not to show goodwill in the books. Give journal entries.
Ans : Neeraj – 20000 Nima – 15000 Aswin – 10000 To goodwill a/c – 45000 Neeraj – 14000 Aswin – 16000 To Nima – 30000
Some times,a firm may agree to settle the retiring partner by making a lumpsum payment.The amount paid may be more than what is due to him based on his capital a/c after all adjustment.(share of accumulated profit,revaluation profit etc).Then the excess paid shall be treated as his share of goodwill.
Q 13 – A ,B and C are partners sharing profits in the ratio of 3:2:1. C retires from the firm.The balance in his capital account after making all adjustments (reserve and revaluation of assets and liabilities) comes to Rs.1,20,000. A and B agreed to pay C Rs.1,50,000 in full settlement of his account. Calculate the value of goodwill and write the journal entry for the same.
Ans: Hidden goodwill -30000)
4-Adjustment of reserve and accumulated profit/loss
General reserve and P&L a/c credit balance and unused reserve like workmen’s compensation reserve (appearing on the liability side of B/S) should be transferred to all the partners capital a/c in the old PSR.
General reserve a/c Dr Workmen’s compensation reserve a/c Dr Profit and loss a/c Dr To All Partners capital A/c (Individually in Old PSR)
*Similarly accumulated losses should be written off by transferring caital a/c
Partners capital a/c Dr To P&L a/c
(If reserve or P&L a/c balance transferred to old partners capital a/c, it should not be shown again in the new B/S prepared after the retirement of Partner)
Alternatively ,only retiring partners share in General reserve and P&L may be credited or debited to his capital a/c
In such a case:-
1-For transferring retiring partner’s share of reserve or accumulated profit
Reserve /accumulated profit A/c Dr To retiring partners capital a/c
Retiring partners capital a/c Dr To P&L a/c
Note: The amount of reserve and P&L a/c balance should be shown in new B/S after deducting retiring partner’s share.
These a/c balance should be transferred to partners capital a/c even if the problem is silent about it.
Q 14 – R, S and T are partners sharing profits and losses in the ratio of 2:2:1. S decided to retire from the firm and other partners decided to share future in the same relative proportions as before. Final accounts prepared at the time of retirement showed the following: General reserve – Rs.16,000 Employees’ compensation fund – Rs.9000
Pass journal entries to record the adjustment of reserve and employees’ compensation fund assuming that there is no claim for employees compensation.
Q 15 – A, B and C are partners sharing profits in the ratio of 5:3:2 . A retired from the firm. On the date of retirement the firm’s balance sheet shows Profit and loss account – Rs.20,000 ( On asset side )
5-Revaluation of Assets and liabilities
The assets and liabilities should be revalued on the same as in the case of admission.A revaluation a/c is prepared for this purpose.The profit or loiss on revaluation is transferred to all the partner’s capital accounts,including retiring partnerscapital a/cs in their old profit sharing ratio.
1-For increae in the value of assets
Assets A/c Dr To Revaluation A/c
2-For decrease in the value of assets
Reavaluation a/c Dr To Asset a/c
3-For Increase in the value of liability
Revaluation a/c Dr To liability a/c
4-For decrease in the value of liability
Liability a/c Dr To revaluation a/c
5-For transferring revaluation profit to partners capital a/c( balancing figure)
Revaluation a/c Dr To All Partners capital a/c (individually including retiring partner)
All Partners capital a/c To revaluation a/c
Q 16 – Mitali, Indu and Geeta are partners sharing profits and losses in the ratio of 5 : 3 : 2 respectively. On March 31, 2017, their Balance Sheet was as under:
Geeta retires on the above date. It was agreed that Machinery be valued at Rs.1,40,000; Patents at Rs. 40,000; and Buildings at Rs. 1,25,000. Record the necessary journal entries for the above adjustment sand prepare the Revaluation Account. (Ans : Revaluation profit :12500,7500,5000)
6-Ascertainment of Profit/loss upto the date of retirement / When Partner Retires in the Middle of the Year
If a partner retires on any day other than closing day of the accounting year ,his sare of profit should be ascertained for the period from the date of last balance sheet to the date of retirement.
Retiring partner’s share of profit will be calculated the following way
Calculate the average profit of required years from the given details
Reduce average annual profit for the period up to the date of retirement of partner.
Find out the share of the retiring partner.
Note :some times ,profit up to the date of retirement may be based on previous year’s profit alone.
Retiring partner’s share of Profit = Average profit X Proportionate Period X Share of Deceased/Retiring Partner
In case of Profit:-
Profit & loss suspense A/c Dr To Retiring partner’s Capital A/c.
In case of loss:-
Retiring partner’s capital A/c Dr To P&L suspense A/c
Q 17- A ,B and C are partners in a firm and they close their books on December 31 st every year.They are sharing profits and losses in the ratio of 3:2:1.The partnership deed provides that if a partner retires from the firm during the course of an accounting year,his share of profit from the date of last balance sheet to the date of retirement should be calculated on the basis of the average profit of the last three completed years.On 1st april 2009 B retires from the firm.The profits of the firm during the years 2001,2002 and 2003 were Rs.12,500, Rs.8,500 and Rs.6,000 respectively.Write the journal entry to record the share of profit of the retiring partner for the year 2009. (Ans:p&l Suspense A/c Dr to B’s Capital A/c 750)
7-Calculation of Total Amount Due to retiring partner
The total amount due to retiring partner is determined by preparing his capital account on the date of retirement.Retiring partners capital a/c shall have the following items.
Note :If it shows a debit balance it means the amount payable by retiring partner to the firm.
When capital accounts are maintained according to fixed capital method all items are posted in current account of the retiring partner .The final balance in the current a/c is then transferred to his capital A/c.
Q 18 – Ramesh is a partner in a firm with ⅕ th share in profits and losses.The firm closes its books on 31 st december every year,on which date his capital account showed a credit balance of Rs.34,000. On 1st july 2011 , Ramesh decided to retire and on that date goodwill was valued at Rs.35,000.The partnership provides that if a partner retires from the firm during the course of an accounting year ,his share of profit from the date of last balance sheet to the date of retirement should be calculated on the basis of average profit of the last three completed years.Profits for 2008 ,2009 and 2010 were Rs.14,000,rs.22,000 and Rs.24,000 respectively.The books of the firm showed a balance of Rs.15,000 in general reserve account.Ramesh withdrawn Rs.3000 from the business during the year 2011.Interest on drawings comes to Rs.200 for the interim period.Interest on capital and salary payable to him from the date of last balance sheet to the date of retirement was Rs.2,100 and Rs.3,000 respectively.
Calculate the total amount due to Ramesh on retirement. (Ans:47900)
7-Settlement of total Amount due to the Retiring Partner
The amount due to the retiring partner is settled as per the provisions of partnership deed.It may be paid in full at the time of retirement or due amount transferred to retiring partner’s loan account and paid in instalments together with interest.
A – Lumpsum payment
When retiring partner is paid cash in full
Retiring partner’s capital A/c Dr To Cash/ Bank A/c
B – Payment in Instalmets
The out going partner can claim proportionate share in the profit earned on the amount due to him from the date of retirement to the date of final payment or interest @ 6% per annum at his option.
Each Instalemt consists of :
a – Principal Amount b – Interest at an agreed rate.
Interest due on loan is credited to loan account and instalments are paid at agreed intervals, say two,three or four years.
2-When retiring partner is partly paid in cash and the remaining amount treated as loan
Retiring partners capital A/c Dr To cash/Bank A/c To Retiring partners Loan A/c
3-When retiring partner’s whole amount is transferred to his loan account
Retiring Partner’s capital A/c Dr To Retiring partners Loan A/c
4-When loan A/c is settled by paying in instalment include Principal and interest
a-When interest due
Interest on loan A/c Dr To Retiring partners Loan A/c
b-Payment of Instalments
Retiring partners Loan A/c To Cash/Bank A/c
(entries ‘a’ and ‘b’ continue in next years till the loan amount paid full)
Q 19 – A, B and C are partners in a firm.B retires from the firm on 1st January 2014.On his date of retirement ,Rs.60,000 is due to him. A and C promise to pay in three equal annual installments together with interest at 12% per annum.Prepare B’s loan Account for the three years.
Q 20 -X ,Y and Z are partners in a firm.Y retires and on the date of retirement Rs.60,000 becomes due to him. X and Z promise to pay him in instalments every year at the end of the year.Prepare Y’s loan account in the following cases.
1 – When payments is made in 4 yearly instalments plus interest @12% p.a. On the unpaid balance.
2 – When they agree to pay 3 yearly instalments of Rs.20,000 including interest @12% on the outstanding balance during the first three years and balance including interest in the 4 th year.
8-Adjustment of capitals of continuing Partners
Sometimes ,after the retirement of a partner ,the remaining partners decide to adjust their capitals.Such adjustments can be done in the following ways:-
Fix a total capital for the firm and divide it among the continuing partners in their new profit sharing ratio.
Ex: A and B are partners whose Profit Sharing Ratio is 2:3, they fixed Total capital as 50000
Existing capital balance
Required capital (Fixed capital X New PSR)50000*PSR
5000 – shortage
3000 – excess
A should bring Rs 5000 as additional capital, B can withdraw Rs 3000
Journal entries : Cash/bank A/c Dr 5000 To A’s capital A/c Dr 5000
To B’s Capital A/c 3000 To Cash/ Bank A/c 3000
Q 21 – A,B and C are Partners sharing profits in the ratio of 4:3:2. B retires , A and C fix the entire capital of the new firm at Rs.54,000 in the profit sharing ratio.The capital accounts of A and C shows balance of Rs.40,300 and Rs.15,300 respectively immediately after B’s retirement. Show the adjustment of capital account if
A – Partners are to bring in cash deficiency or to withdraw the surplus ,or B – Partner’s capitals are adjusted through current accounts. (Ans : A – 4300 withdraw, B bring 2700, Through current account – Partners current Account instead of cash A/c)
Q 22 – Mohit, Neeraj and Sohan are partners in a firm sharing profits in the ratio of 2 : 1 : 1. Neeraj retires and Mohit and Sohan decided that the capital of the new firm will be fixed at Rs. 1,20,000. The capital accounts of Mohit and Sohan show a credit balance of Rs. 82,000 and Rs. 41,000 respectively after making all the adjustments. Calculate the actual cash to be paid off or to be brought in by the continuing partners and pass the necessary journal entries. (Ans :Excess capital withdrawn by M-2000, S-1000)
When the total capital of new firm is not specified – here total is capital is calculated by adding continuing partners capital balances .Here total capital is not blindly fixed.
With the above example ,Total capital of A & B is , = 15000+33000 = 48000,instead of Rs 50000 specified in question.
Q 23 – Asha, Deepa and Lata are partners in a firm sharing profits in the ratio of 3 : 2 : 1. Deepa retires. After making all adjustments relating to revaluation, goodwill and accumulated profit etc., the capital accounts of Asha and Lata showed a credit balance of Rs. 1,60,000 and Rs. 80,000 respectively. It was decided to adjust the capitals of Asha and Lata in their new profit sharing ratio. You are required to calculate the new capitals of the partners and record necessary journal entries for bringing in or withdrawal of the necessary amounts involved. (Ans : 20000 brought by asha , 20000 withdrawn by lata)
When the amount payable to retiring partner will be contributed by continuing partners in such a way that their capitals are adjusted – here the total capital is calculated by adding all partners capital balances including retiring partner.
Total capital = Continuing partners capital + retiring partners capital
A,B and C, are partners, their PSR is 2:3 If C retires ,his capital balance is Rs40000
Total capital is : 15000+33,000+40,000=88,000, this capital should divide among the continuing partners and bring the shortage .
Q 24 – Lalit, Pankaj and Rahul are partners sharing profits in the ratio of 4 : 3 : 3. After all adjustments, on Lalit’s retirement with respect to general reserve, goodwill and revaluation etc., the balances in their capital accounts stood at Rs. 70,000, Rs. 60,000 and Rs. 50,000 respectively. It was decided that the amount payable to Lalit will be brought by Pankaj and Rahul in such a way as to make their capitals proportionate to their profit sharing ratio. Calculate the amount to be brought by Pankaj and Rahul and record necessary journal entries for the same. Also record necessary entry for payment to Lalit. (Ans :Bank Ac-70000, P -30000,R – 40000, L 70000 to Cash 70000)
DEATH OF A PARTNER
A partnership comes to an end on the death of any one of the partners , although the firm may continue with the remaining partners .The accounting treatment for various adjustments in case of death of a partner is similar to that of retiring partner.
Difference between Death and Retirement of a Partner
Retirement is a planned one.death may take place at any time
Relation of a partner with the firm voluntarily broken in case of retirement .It is automatic in case of death
Amount payable to a retiring partner is transferred to his loan account, on death the amount due to deceased is transferred to executors account
1-Amount due to deceased partner
Deceased partner’s capital A/c Dr To Executors A/c
2- When loan A/c is settled by paying in instalment include Principal and interest
a-When interest due
Interest on loan A/c Dr To Executors Loan A/c
b-Payment of Instalments
Executors Loan A/c To Cash/Bank A/c
(entries ‘a’ and ‘b’ continue in next years till the loan amount paid full)
Q 25 – Following is the Balance Sheet of Lekshmi, Priya and Deepa, who share profits and losses equally.
Lekshmi died on 31st May 2017. According to the Partnership deed her legal representatives are entitled to :
(1) Balance in the capital account and undistributed profit/loss.
(2) Share of Goodwill under average profit method.
(3) Share in the profit upto the date of death based on last year Profit.
(4) Interest on capital @ 6% p.a.
The goodwill of the firm under average profit method is Rs.42,000, and profit for the year 2016-17 ` 21,600. Calculate the amount payable to Lekshmi’s legal representatives.
Q 26 – Manu, Nithin and Sanu are partners in a firm, sharing profits in the ratio 3 : 1 : 1. Theirvcapital was :
Manu – ` 40,000
Nithin – ` 20,000
Sanu – ` 20,000
The partnership deed provided that
(a) Interest on capital was provided at 10% per annum.
(b) A joint life policy was taken by partners for ` 24,000.
(c) The goodwill of the firm is valued at ` 30,000.
(d) Sanu’s drawings for the previous year were ` 40,000.
(e) The profit of the last 3 years ending 31st December were 8,000, 6,400 and 6,000.
(f) Profit till the date of death is calculated on the basis of last three years average profit.
Sanu died on July 1, 2016. Prepare an account showing the amount payable to the representatives of Sanu.
(Ans: Debit balance 7520)
Q 27 – Gracy, Shiyana and Subisha were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Their balance sheet as on 31-03-2017 stood as follows :
Gracy died on 1-10-2017. Her legal heirs are to be settled on the following terms :
(a) Interest on capital to be provided @ 10% p.a.
(b) Profit till the date of death may be calculated on the basis of last year’s profit, which was Rs. 30,000.
Prepare the Capital Account of the deceased partner.
Q 28 – Prakash, Rajesh and Sareesh are equal partners in a firm. Rajesh retires from the firm. On the date of retirement Rs.1,20.000 became due to him. Prakash and Sareesh promises to pay him in ‘4’ equal installments at the end of every year. plus accrued interest @ 12% p.a. on the unpaid balance.
(a) Pass journal entry for the amount due to Rajesli on the date of retirement.
(b) Prepare ‘Rajesh’s loan account’, till the amount is fully paid off.
Q 29 – Renjith,Sumesh and Aneesh are partners in a firm.Sumesh retires from the firm.On the date of retirement of Sumesh Rs.45,000 become due tohim .Renjith and Aneesh promise to pay the amount in installments.Prepare Sumesh’s loan account ,when they agree to pay three yearly installments of Rs.15,000 including interest at 12% p.a. On the outstanding balance during the first three years and the balance including interest in fourth year.
Q – 30 : P,Q and R are partners in a firm.Q retires.On his date of retirement Rs.60,000 becomes due to him.P and R promise to pay him in installments every yearat the end of the year.Prepare Q’s Loan A/c. in the following cases”
A -When the payment is made four yearly installments plus interest @12% p.a. On the unpaid balance.
B – When they agree to pay three yearly installments of Rs.20,000including interest @12% p.a. On the outstanding balance during the first three years and the balance including interest in the fourth year.