Chapter 4 Reconstitution of Partnership (Retirement of Partner) l Book-keeping and Accountancy

 

Chapter 4
Reconstitution of Partnership 
(Retirement of Partner)

 (A) Select the most appropriate alternatives from those given below and rewrite the sentence. 

1. The Profit or Loss from revaluation on retirement of partner is shared by ................. 

a) The remaining partners 

b) All the partners 

c) Only retiring partner 

d) Bank

Ans: b) All the partners 

2. Decrease in the value of assets should be ................. to Profit and Loss Adjustment Account. 

 a) Debited 

b) Credited 

c) Added 

d) Equal 

Ans:  a) Debited 

3. The balance of the capital account of retired partner is transferred to his ................. account if it is not paid. 

 a) Loan 

b) Personal 

c) Current 

d) Son’s 

Ans:  a) Loan 

4. Gain ratio = ................., Ratio less Old Ratio. 

 a) New 

b) Equal 

c) Capital 

d) Sacrifice 

Ans:  a) New 

5. New Ratio = Old Ratio + ................. Ratio 

a) Gain 

b) Capital 

c) Sacrifice 

d) Current 

Ans: a) Gain 

 6. Apte, Bhate and Chitale are sharing 1/2, 3/10, and 1/5 if Apte retire their new ratio will be ................. a) 5:2 

b) 3:2 

c) 5:3 

d) 2:5 

Ans: b) 3:2 

(B) Write the word, term, phrase, which can substitute each of the following statement. 

1 Credit balance of Profit and Loss Adjustment Account. 

Ans: Profit and Loss Adjustment  Profit 

2 The Ratio in which the continuing partners are benefited due to Retirement of Partner. 

Ans: Gain Ratio

3 Debit balance of Revaluation Account 

Ans: Revaluation Loss

4 The ratio which is obtained by deducting Old Ratio from New Ratio. 

Ans: Gain Ratio

5 Money value of business reputation earned by the firm over a number of years. 

Ans: Goodwill

 6 Partner’s Account where Loss or Profit on revaluation is transferred.

Ans : Capital / Current A/c

(C) State whether the following statement are true or false with reasons. 

1. Gain ratio means New ratio minus old ratio. 

Ans: True

2. Retiring partners share in Profit up to the date of his retirement will be debited to Profit and Loss Suspense Account.

Ans: 

3. On retirement of a partner sacrifice ratio is considered. 

4. Retiring Partner is called an outgoing partner 

5. On retirement of a partner, remaining partner will share the goodwill in their profit sharing ratio 

6. Retiring partner is not entitled to share in General Reserve and Accumulated Profit. 

(D) Fill in the blanks and rewrite the following sentence : 

 1. New Ratio (less) ................. = Gain ratio 

Ans: Old Ratio

 2. Retiring Partner’s share of goodwill is ................. to remaining partner’s capital account . 

Ans: Debited

 3. Revaluation A/c is also known as ................. account 

Ans: Profit and Loss Adjustment

4. On retirement, the balance at a current Account of a partner is transferred to his ................. account. 

Ans: Capital

 5. A proportion in which the continuing partners get the share of retiring partner is known as .................ratio. 

Ans: Gain

 (E) Answer in one sentense. 

 1 What is meent by Retirement of a Partner? 

2 What is Benefit Ratio? 

 3 What is New Ratio? 

 4 How is the amount due to the retiring partner settled? 

 5 How is Gain Ratio calculated? 

6 Why is retiring partner’s capital account credited with goodwill?

Practical Problems [Pages 183 - 186]

 Q.1 The Balance Sheet of Mr. Mama, Kaka and Mr. Baba who shared profit and losses as 4:3:3 respectively.

Balance Sheet as on 31^st March 2018

Liabilities	Amount ₹	Amount ₹	Assets	Amount ₹	Amount ₹
Suppliers(Creditors)		7,000	Cash		4,500
Loan		5,000	Sundry Debtors	5,000
General Reserve(PC Cr,)		6,250	Less: R:D:D®	500	4,500
Capital Account:			Live Stock		12,500
Mama		20,000	Motor Car		4,000
Kaka		15,000	Furniture		17,500
Baba		12,250	Plant		22,500
		65,500			65,500

Kaka retires on 1st April 2018 on the following terms.

1. The share of Kaka in Goodwill of the firm is valued at ₹ 2,700 (Assets)

2. Furniture to be depreciated by 10% and Motor Car by 12.5%

3. Live Stock to be appreciated by 10% and Plant by 20%

4. A provision of ₹ 2,000 to be made for a claim of compensation.

5. R.D.D. is no longer necessary.

6. The amount payable to Kaka should be transferred to his Loan A/c

[ Catch the video solution]

 Solution:

In the books of Partnership firm….

Revaluation A/c

Dr.                                                                                                                                Cr.

Particulars	Amount	Amount	Particulars	Amount	Amount
To Depreciation on: Furniture Motor Car To Compensation Claim To Partner’s Capital A/c Mama (4/10) Kaka (3/10) Baba (3/10)	1,750 500         800 600 600	2,250 2,000         2,000	By R.D.D. By Appreciation: Live stock Plant	1,250 4,500	500     5,750
		6,250			6,250

 Partner’s Capital A/c

Dr.                                                                                                                              Cr.

Particulars	Mama	Kaka	Baba	Particulars	Mama	Kaka	Baba
To Loan A/c   To Balance c/d	23,300	20,175	14,725	By Balance b/d By General Reserve By Goodwill By Revaluation A/c	20,000   2,500       800	15,000   1,875   2,700   600	12,250   1,875       600
	23,300	20,175	14,725		23,300	20,175	14,725

 W:N 1 General Reserve:

Mama = 4/10 x 6,250 = 2,500

Kaka = 3/10 x 6,250 = 1,875

Baba = 3/10 x 6,250 = 1,875

Balance sheet as on 31^st March, 2018

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital A/c Mama Baba Kaka’s Loan Suppliers Loan Compensation Claim	23,300 14,725	38,025 20,175 7,000 5,000 2,000	Cash Sundry debtors Live stock Add: Appreciation Motor car Less:Depreciation Furniture Less:Depreciation Plant Add: appreciation Goodwill	12,500 1250 4,000 500 17,500 1,750 22,500 4,500	4,500 5,000   13,750   3,500   15,750   27,000 2,700
		72,200			72,200

 

 Q.2 The Balance Sheet of Ram, Shyam, and Ghanshyam sharing profits and losses 3:2:1 respectively. Their position on 31-3-2019 were as follows.

Balance Sheet as on 31^st March 2018

Liabilities	Amount ₹	Amount ₹	Assets	Amount ₹	Amount ₹
Capital Account:			Bank		54,000
Ram		1,20,000	Debtors		90,000
Shyam		90,000	Building		60,000
Ghanshyam		60,000	Investment		1,50,000
Creditors		22,000
Bills payable		12,000
Loan		50,000
		65,500			65,500

 Ghanshyam retired on 1st April 2019 on the following terms.

1. Building and Investment to be appreciated by 5% and 10% respectively.

2. Provision for Doubtful Debts to be created at 5% on Debtors.

3. The provision of ₹ 3,000 be made in respect of Outstanding Salary.

4. Goodwill of the firm is valued at ₹ 90,000 and partners decide that goodwill should be written back. (Assets) WN

5. The amount payable to the Retiring partner be transferred to his Loan A/c.

 

Prepare :

Profit and Loss Adjustment A/c,

Partners Capital A/c,

Balance Sheet of New Firm.

 

Ram            3/6

Shyam        2/6

Ghanshyam 1/6

 Solution

In the books of Partnership firm….

Revaluation A/c

Dr.                                                                                                                                  Cr.

Particulars	Amount	Amount	Particulars	Amount	Amount
To R.D.D. (5%) To Outstanding Salary To Partner’s Capital A/c : Ram (3/6) Shyam (2/6) Ghanshyam (1/6)	5,250 3,500 1,750	4,500   3,000       10,500	By Appreciation: Building Investment	3,000 15,000	18,000
		18,000			18,000

 Partner’s Capital A/c

Dr.                                                                                                                                    Cr.

Particulars	Ram	shyam	Ghanshyam	Particulars	Ram	shyam	Ghanshyam
To Goodwill To Loan A/c To Balance C/d	9,000     116,250	6,000     87,500	- 76,750	By Balance b/d By Goodwill By Revaluation A/c (Profit)	1,20,000        5,250	90,000        3,500	60,000    15,000   1,750
	125,250	93,500	76,750		125,250	93,500	76,750

  Balance sheet as on 31^st March, 2018

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital A/c Ram Shyam Ghanshyam’s Loan A/c Creditors Bills payable Loan Outstanding Salary	116,250 87,500	2,03,750   76,750 22,000 12,000 50,000  3,000	Bank Debtors Less: R.D.D. Building Add: Appreciation(5%) Investment Add: Appreciation(10%)	90,000 4,500 60,000   3,000 1,50,000  15,000	54,000   85,500     63,000    1,65,000
		3,67.500			3,67.500

 

W:N 1 . Goodwill of the firm is valued at ₹ 90,000

Ghanshyam’s Goodwill = 90,000 x 1/6 = 15,000

Ram = 15,000 x 3/5           = 45,000 /5 = 9,000

Shyam = 15,000 x 2/5       = 30,000/5 = 6,000

 Remaining Two Partner's Ratio :

Ram : Shyam

    3  : 2 = 5

Practical Problems | Q 3 | Page 184

 

The Balance Sheet of the Anu, Renu, and Dinu is as follows, the partners are sharing profits and losses in the proportion of 2:2:1 respectively.

 

Liability	Amount	Amount	Assets	Amount	Amount
Creditors		8,000	Bank		5,000
Bill Payable		2,000	Debtors	20,000
General Reserve		5,000	Less: R.D.D.	1,000	19,000
Capital A/c			Furniture		15,000
Anu		40,000	Machinery		4,000
Renu		30,000	Freehold property		27,000
Dinu		15,000	Goodwill		30,000
		1,00,000			1,00,000

Dinu retires from the firms on 1^st April 2019 on the following terms.

 

1. The assets are to be revalued as freehold property ₹ 30,000, Machinery ₹ 5000, Furniture ₹ 12000, All debtors are good.

2. Goodwill of the firm is valued at thrice the average profit for the preceding five years. Profits of the firm for the year. W:N

2014-15	Rs. 1,000
2015-16	Rs. 10,500
2016-17	Rs. 10,000
2017-18	Rs. 16,000
2018-19	Rs. 10,000

 

3. Dinu should be paid ₹ 3,000 by cheque

4. The Balance of Dinu’s capital A/c should be kept in the business as a loan.

 

Prepare:

Profit and loss adjustment A/c,

Capital Accounts of partners,

Balance Sheet of the new firm

Video Solution:

W:N : Ratio (2:2:1)

Anu   = 2/5

Renu = 2/5

Dinu  = 1/5

W:N: 1 General Reserve:

Anu   = 2/5 x 5,000        = 2,000

Renu = 2/5 x 5,000        = 2,000

Dinu  = 1/5 x 5,000        = 1,000

W:N: 2 Goodwill

Average profit = Total Profit / No. of year   

= 1,000+ 10,500 + 10,000 + 16,000 + 10,000 / 5 = 47,500 /5 = Rs. 9,500

Goodwill = Average Profit X No. of year purchase = 9,500 x 3 = Rs. 28,500

In the books of firm

Revaluation A/c

Dr.                                                                                                    Cr.

Particular	Amount	Amount	Particulars	Amount	Amount
To Goodwill To Furniture To Partner’s Capital a/c Anu (2/5) Renu (2/5) Dinu (1/5)	200 200 100	1,500 3,000         500	By R.D.D. By Appreciation on: Machinery Freehold Property	1,000 3,000	1,000       4,000
		5,000			5,000

                                         Partner’s Capital A/c

Dr.                                                                                                                          Cr.

Particulars	Anu	Renu	Dinu	Particulars	Anu	Renu	Dinu
To Bank A/c To Loan A/c To Balance c/d	42,200	32,200	3,000 13,100	By Balance b/d By General Reserve To Revaluation A/c (Profit)	40,000   2,000   200	30,000   2,000   200	15,000   1,000   100
	42,200	32,200	16,100		42,200	32,200	16,100

 

Balance Sheet as on 31^st March, 2019

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital A/c: Anu Renu Dinu’s Loan A/c Creditors Bill payable	42,200 32,200	74,400 13,100 8,000 2,000	Bank (5,000-3,000) Debtors Furniture Less: Depreciation Machinery Add: Appreciation Freehold property Add: Appreciation Goodwill Less: Written off	15,000 3,000 4,000 1,000 27,000 3,000 30,000 1,500	2,000 20,000   12,000   5,000   30,000   28,500
		97,500			97,500

Practical Problems | Q 4 | Page 185

Rohan, Rohit, and Sachin are partners in a firm sharing profit and losses in the proportion 3:1:1 respectively. Their balance sheet as on 31st March 2018 is as shown below 

Balance Sheet as on 31^st March, 2019

Liabilities	Amount	Amount	Assets	Amount	Amount
Sundry Creditors General Reserve Bill payable Capital A/c: Rohan Rohit Sachin		40,000 50,000 25,000   1,25,000 1,00,000 50,000	Bank Debtors Live stock Building Plant and Machinery Motor Truck Goodwill		12,500 60,000 50,000 75,000 35,000 1,00,000 57,500
		3,90,000			3,90,000

 On 1^st April 2018, Sachin retired and the following adjustments have been agreed upon.

 1. Goodwill was revalued at ₹ 50,000

2. Assets and Liabilities were revalued as follows. Debtors ₹ 50,000, Live Stock, ₹ 45,000; Building ₹ 1,25000, Plant and Machinery ₹ 30,000, Motor Truck ₹ 95,000 and Creditors ₹ 30,000

3. Rohan and Rohit contributed additional capital through Net Banking of ₹ 50,000 and ₹ 25,000 respectively. (Additional capital)

4. Balance of Sachin’s Capital Account is transferred to his Loan Account

 Give Journal entries in the books of new firm.

  Video Solution:

Balance b/d (Not pass into journal entries)

In the books of firm..

Journal Entries

Date	Particulars	L/F	Debit (Rs.)	Credit (Rs.)
2018 April 1             1               1         1 1 1	General Reserve A/c               ……Dr.       To Rohan’s Capital A/c       To Rohit’s Capital A/c       To Sachin’s Capital A/c (Being general reserve distributed into partners)   Revaluation A/c                          ….. Dr.      To Debtors A/c      To Live Stock A/c       To Plant and Machinery A/c       To Motor Truck A/c        To Goodwill A/c (Being Assets depreciate)   Building A/c                          …….Dr. Sundry Creditors               ……… Dr.        To Revaluation A/c (Being Building appreciated and Creditors amount payable less)   Bank A/c                                   …..Dr       To Rohan’s Capital A/c       To Rohit’s Capital A/c (Being additional capital brought by partner)   Revaluation A/c             ……. Dr,       To Rohan’s Capital A/c       To Rohit’s Capital A/c       To Sachin’s Capital A/c (Being profit on revaluation transferred to partner capital a/c)   Sachin’s Capital A/c              ……Dr.       To Sachin’ Loan A/c (Being balance of Sachin’s capital transferred to Sachin’s Loan a/c)		50,000             32,500               50,000 10,000         75,000           27,500             65,500	30,000 10,000 10,000         10,000 5,000 5,000 5,000 7,500         60,000         50,000 25,000         16,500 5,500 5,500         65,500

Rohan = 50000 x 3/5 =30000

Rohit / Sachin = 50000 x 1/5          = 10000

 W: N I Revaluation A/c (Profit)

Rohan            = 27,500 x 3/5           = 5500 x 3 = 16,500

Rohit              = 27,500 x 1/5          = 5500 x 1 = 5500

Sachin           = 27,500 x 1/5          = 5500 x 1 = 5500

 W:N: II 

Partner’s Capital A/c

 

Particulars	Rohan	Rohit	Sachin	Particulars	Rohan	Rohit	Sachin	Sachin
To Loan a/c To Balance C/d	2,21,500	1,40,500	65,500	By Balance b/d By General Reserve By Additional Capital A/c (Bank) By Revalution A/c	1,25,000   30,000     50,000       16,500	1,00,000   10,000     25,000       5,500	50,000   10,000             5,500
	2,21.500	1,40,500	65,500		2,21.500	1,40,500	65,500

Video NOTES:

A) If [ Assets are reduce / Liabilities are increase ]the it transfer to Revaluation A/c or P/L Adjustment A/c (Dr. side)

 Revaluation A/c      …..Dr.

            To Assets A/c

            To Liabilities A/c

 

B) If [ Assets are increase / Liabilities are decrease ] then it transfer to Revaluation A/c or P/L Adjustment A/c (Cr. Side)

 Assets A/c                ….. Dr.

Liabilities A/c          ….. Dr.

To Revaluation A/c

 

 Practical Problems | Q 5 | Page 186

 Shah, Lodha, and Dhole were partners sharing profits and losses in the ratio of 4:3:3. Their Balance Sheet as on 31st March 2019 is a given below.

                                 Balance Sheet as on 31^st March, 2019

Liabilities	Amount	Amount	Assets	Amount	Amount
Sundry Creditors Bill payable Capital A/c: Shah Lodha Dhole		20,000 4,000   45,000 35,000 27,000	Cash Sundry Debtors Less: R.D.D Furniture Computers Vehicle	10,000 1,000	9,000   9,000 25,000 43,000 45,000
		1,31,000			1,31,000

 On 1^st April 2019, Mr. Lodha retired from the firm on the following terms.

 1. Goodwill is to be valued at average Profits and Losses of the last five years which were as follows.

2015	Rs. 35,000
2016	Rs. 20,000
2017	Rs. 30,000
2018	Rs. 20,000
2019	Rs. 25,000

 2. Computers to be depreciated by 10%

3. Furniture to be revalued at ₹ 27,500

4. Vehicles appreciated by 20%

5. R.D.D. was no longer necessary

6. Shah and Dhole will share the future profits and losses in the ratio of 2:1

7. It was decided that goodwill should not appear in the books of a new firm and amount payable to Lodha is to be transferred to his Loan A/c

 Prepare :

Profit and Loss adjustment A/c,

Partners capital accounts,

Balance sheet of new firm

Video Solution:

In the books of firm

Revaluation A/c

Dr.                                                                                                    Cr.

Particular	Amount	Amount	Particulars	Amount	Amount
To Computers To Partner’s Capital A/c Shah (4/10) Lodha (3/10) Dhole (3/10)	3,280 2,760 2,760	4,300         8,200	By Appreciation Furniture Vehicles By R.D.D.	2,500 9,000	11,500 1,000
		12,500			12,500

 

Partner’s Capital A/c

Dr.                                                                                                              Cr.

Particulars	Shah	Lodha	Dhole	Particulars	Shah	Lodha	Dhole
To Goddwill To Loan A/c To Balance c/d	17,333   41,347	45,260	8667   28,593	By Balance b/d By Goodwill A/c By Revaluation A/c (Profit)	45,000   10,400   3,280	35,000   7,800   2,760	27,000   7,800   2,760
	58,680	45,260	37,260		58,680	45,260	37,260

 Balance Sheet as on 31^st March, 2019

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital A/c: Shah Dhole Lodha’s Loan A/c Sundry Creditors Bill payable	41,347 28,593	69,940   45,260 20,000 4,000	Cash Sundry Debtors Furniture Add:Appreciation Computers Less: Depreciated (10%) Vehicles Add:Appreciation (20%)	25,000 2,500 43,000   4300 45,000   9000	9,000 10,000   27,500     38,700     54,000
		1,39,200			1,39,200

 

Working Note: 1 Goodwill

Average profit = Total profit/ No. of years =  

= 35,000 + 20,000 + 30,000 + 20,000 + 25,000 / 5  = 1,30,000 / 5 = Rs. 26,000

Goodwill = Average profit x No. of years purchases = Rs. 26,000

Goodwill distributed into Partners

Shah  = 26,000 x 4/10 = 2600 x 4 = 10,400

Lodha = 26,000 x 3/10 = 2600 x 3 = 7,800

Dhole =26,000 x 3/10 = 2600 x 3 = 7,800

It was decided that goodwill should not appear in the books of a new firm :

 Shah and Dhole will share the future profits and losses in the ratio of 2:1

 Shah           = 26,000 x 2/3 = 8666.66 x 2 = 17333.32 = 17333

Dhole          = 26,000 x 1/3 = 8666.66 x 1 = 8666.66 = 8667

Click Here to Download Practice Question Paper & Get ready for Board Exam:

Bk & Accountancy Practice Test Paper : Chapter 1, 3 & 5

Bk & Accountancy Practice Test Paper: Chapter 2, 4 ,6 & 8

Economics Practice Paper: 1

Economics Practice Paper: 2

Economics Practice Paper: 3

_____________________________________________________________________

FYJC Commerce - Maharashtra State Board Textbook Solutions

Chapter 1 Basic Concept of Economic

HSC Commerce 12th Board Exam- Maharashtra State Board Textbook Solutions

Chapter 1 - Partnership Final Accounts
Chapter 2 - Not for Profit Concerns
Chapter 4 - Retirement of Partner
Chapter 5 - Death of Partner
Chapter 6 - Dissolution of Partner
Chapter 7 Bill of Exchanges