Ch : 4 – Retirement and Death of a Partner

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

  1. Change in profit sharing ratio
  2. Calculation of gaining ratio
  3. Adjustment regarding goodwill
  4. Adjustment of reserves and accumulated profit or losses
  5. Revaluation of assets and liabilities
  6. Ascertainment of profit or loss up to the date of retirement
  7. Calculation of total amount due to the retiring partner
  8. Settlement of total amount due to the retiring partner
  9. 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

Questions

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.

Questions

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.

Ans :1:1

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

Questions

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


Hidden Goodwill

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.

Questions

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.

Journal entry

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

2-Transferring loss

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.

Questions

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.

Journal entries

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)

   

6-if loss,

All Partners capital a/c
To revaluation a/c    

   

Questions

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

  1. Calculate the average profit of required years from the given details
  2. Reduce average annual profit for the period up to the date of retirement of partner.
  3. 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

Journal entries

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

Questions

 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.

Questions

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

Journal entries

  1. 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)

Questions

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.