Partnership Accounts - Retirement or Death of a Partner

 

Partnership Accounts

Retirement or Death of a Partner

 

Part A: Discussion of relevant accounting theories including different formulae, formats and tables

Part B: 8 Illustrations with Solutions

Part A

      

General Guidelines on Retirement or Death of a Partner

1.    Calculation of new profit sharing ratio and gaining ratio.

2.    Adjustment with regard to goodwill including hidden goodwill.

3.    Adjustment with regard to undistributed profits and losses.

4.    Adjustment with regard to retiring or deceased partner’s share of profit from the date of the last Balance Sheet to the date of retirement or death (on the basis of time or turnover).

(a)     Through P & L Suspense A/c (in case of no change in PSR of remaining partners).

         Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	P and L Suspense A/c                  Dr
	To Retiring / Deceased Partner’s Capital A/c

(b)  Through Gaining Partners capital / current A/c (in case of change in PSR of remaining partners).

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Remaining Partners’ Capital A/c     Dr
	To Retiring / Deceased Partner’s Capital A/c
	(In the gaining ratio)

 

5.    Preparation of Revaluation Account on retirement or death of a partner.

6.    Adjustment of capitals.

(a)   Readjusting the adjusted capital of the continuing partners in the new profit sharing ratio.

(b)   Adjusting the capitals of the continuing partners on the basis of the total capital of the new firm.

          (c)    When the continuing partners bring in cash to pay off the retiring partners.

7.  Calculation and payment of amount due to retiring partner.

8.  Preparation of retiring partner’s loan accounts and deceased partner’s executor’s loan account (with interest on loan accrued and due and interest on loan accrued but not due).

9.  Change in Profit Sharing Ratio.

(a)      Change in PSR takes place at the time of retirement / death of a partnership firm.

(b)     Accounting treatment of accumulated profits and losses through one journal entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Gaining partners cap/current A/c          Dr
	To Sacrificing Partners cap/current A/c
	(In case of accumulated profits)
	Sacrificing partners’ cap/current A/c      Dr
	To Gaining Partners cap/current A/c
	(In case of accumulated losses)

NOTE:

Accumulated Profits:

General Reserve / Reserve fund, Workmen Compensation Reserve / Fund, Investment Fluctuation Reserve / Fund, Contingency Reserve, Profit and Loss Account (Credit Balance)

Accumulated Losses:

Profit and Loss Account (Debit Balance), Advertisement Suspense Account, Deferred Revenue Expenditure.

Introduction

When a partner is retired from the firm or deceased, following different aspects are required to be taken into consideration:

1.      Calculation of New Profit Sharing Ratio (PSR);

2.      Calculation of Gaining Ratio for the remaining partners:

[Gaining Share = New Share – Old Share];

3.      Valuation of Goodwill;

4.      Accounting Treatment of Goodwill;

5.      Preparation of Revaluation Account;

6.      Accounting Treatment of Reserves and Profit and Loss Account balances;

7.      Adjustment with regard to share of profits of the retiring or deceased partner from the date of the last Balance Sheet to the date of retirement or death (on the basis of time or turnover).

8.      Preparation of Partners’ Capital Accounts;

9.      Preparation of Retiring Partner’s Loan Account;

10.   Preparation of Deceased Partner’s Executors Account;

11.   Adjustment of Partners’ Capitals;

12.   Preparation of New Balance Sheet.

Accounting Treatment of Goodwill

A. Existing Goodwill

Existing non-purchased goodwill appearing in the balance sheet on the date of retirement or death should be written off by debiting all the partners’ capital accounts including the retiring / deceased partner in the old profit sharing ratio.

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	All Partners’ Capital A/c                       Dr
	To Goodwill A/c
	(In the old profit sharing ratio)

 

B. Revalued Goodwill

Retiring / deceased partner’s share of revalued goodwill will be credited to him by debiting the remaining partners in their gaining ratio.

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Remaining Partners’ Capital A/c          Dr
	To Retiring / Deceased Partner’s Capital A/c
	(In their gaining ratio)

 

Accounting treatment of reserve and accumulated profits

Any reserve (not created against any particular asset) and profit and loss account (credit balance) appearing in the balance sheet at the time of retirement / death of a partner will be distributed to all the partners including the retiring / deceased partner in the old PSR.

Journal entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Reserve A/c                  Dr
	Profit and loss A/c (credit balance)       Dr
	To Partners’ capital A/c
	(In the old profit sharing ratio)

 

Accounting treatment of accumulated losses, Advertisement Suspense Account and Deferred Revenue Expenditure Account

Profit and loss account (debit balance), advertisement suspense account and deferred revenue expenditure account appearing in the balance sheet at the time of retirement / death of a partner will be distributed to all the partners including the retiring / deceased partner in the old PSR.

Journal entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Partners’ capital A/c        Dr
	To Profit and loss A/c (debit balance)
	To Advertisement suspense A/c
	To Deferred revenue expenditure A/c
	(In the old profit sharing ratio)

 

Accounting Treatment of Life Policies

Joint Life Policy

A. If the policy is not surrendered

(a)  Under Expense Method

Under this method, retiring partner’s share of surrender value of the joint life policy is credited to his capital account by debiting the remaining partners’ capital accounts in their gaining ratio.

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Remaining Partners’ Capital A/c     Dr
	To Retiring Partner’s Capital A/c
	(In their gaining ratio)

(b)  Under Joint Life Policy Method

Under this method, retiring partner’s share of excess of surrender value of the joint life policy over the balance in the joint life policy account, as on the date of retirement, is credited to his capital account by debiting the remaining partners’ capital accounts in their gaining ratio.

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Remaining Partners’ Capital A/c      Dr
	To Retiring Partner’s Capital A/c
	(In their gaining ratio)

 

(c)  Under Joint Life Policy Reserve Method

Same accounting treatment as in the case of joint life policy method is to be followed.

 

B. If the policy is surrendered

(a)  Under Expense Method

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Bank A/c          Dr
	To All Partners’ Capital A/c
	(Surrendered value of the policy credited to all partners’ capital accounts in the old profit sharing ratio)

(b)  Under Joint Life Policy Method

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
1	Bank A/c                            Dr
	To Joint Life Policy A/c
	(Surrendered value of the policy received)
2	Joint Life Policy A/c                        Dr
	To All Partners’ Capital A/c
	(Balance in the Joint Life Policy Account transferred to all partners’ capital accounts in the old profit sharing ratio)

                                               

(c)  Under Joint Life Policy Reserve Method

Journal Entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
1	Bank A/c                           Dr
	To Joint Life Policy A/c
	(Surrendered value of the policy received)
2	Joint Life Policy A/c                          Dr
	To Joint Life Policy Reserve A/c
	(Balance in the Joint Life Policy Account transferred to the Joint Life Policy Reserve Account)
3	Joint Life Policy Reserve A/c              Dr
	To All Partners’ Capital A/c
	(Balance in the Joint Life Policy Reserve Account transferred to all partners’ capital accounts in the old profit sharing ratio)

 

Individual Life Policy

A. Individual Life Policies of the remaining partners

Accounting treatment is same as in the case of Joint Life Policy.

 

B. Individual Life Policy of the retiring partner

(a) If the retiring partner surrenders his policy

Accounting treatment is same as in the case of Joint Life Policy (when the Joint Life Policy is surrendered)

(b) If the retiring partner does not surrender his policy

Remaining partners’ share of surrender value of the policy will be debited to the retiring partner’s capital account and credited to the remaining partners’ capital account in their gaining ratio.

Part B

 

Illustration: 1

The Balance Sheet of Bimal, Tamal and Vishal who shared profits and losses in the ratio 3: 3: 2 respectively were as follows on 31^st December, 2017:

 

Liabilities	Rs	Rs	Assets	Rs
Capitals:			Fixed assets:
Bimal	24,000		Machinery	31,600
Tamal	10,000		Furniture	6,400
Vishal	8,000	42,000	Current assets:
Reserve		4,800	Stock	8,500
Creditors		8,700	Debtors	4,300
			Cash at bank	4,700
		55,500		55,500

 

Bimal retired from the business on 1^st January, 2018. Revaluation of assets was made as: Machinery Rs 34,000, Furniture Rs 5,000, Stock Rs 9,600, Debtors Rs 4,000 and Goodwill Rs 10,000.

 

Bimal was paid Rs 4,225 immediately and the balance was transferred to a Loan Account for payment in 4 equal half-yearly instalments together with interest @ 6% p.a.

 

Show the necessary accounts, the Balance Sheet of the firm immediately after Bimal’s retirement and his Loan Account till finally paid off.

 

Solution:

In the books of Bimal, Tamal and Vishal

Revaluation A/c

Particulars	Rs	Particulars	Rs
To Furniture	1,400	By Machinery	2,400
To Provision on debtors	300	By Stock	1,100
To Partners’ Capital A/cs:
Bimal   (3/8)                675
Tamal  (3/8)                675
Vishal  (2/8)                450	1,800
	3,500		3,500

 

Partners’ Capital A/cs

Particulars	Bimal	Tamal	Vishal	Particulars	Bimal	Tamal	Vishal
Bimal		2,250	1,500	Balance b/d	24,000	10,000	8,000
Bank	4,225			Revaluation	675	675	450
6% Loan A/c	26,000			Reserve	1,800	1,800	1,200
Balance c/d		10,225	8,150	Tamal	2,250
				Vishal	1,500
	30,225	12,475	9,650		30,225	12,475	9,650

Balance sheet of Tamal and Vishal as at 01.01.2018

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital:			Fixed assets:
Tamal	10,225		Machinery	31,600
Vishal	8,150	18,375	Add: Appreciation	2,400	34,000
Bimal’s 6% Loan A/c		26,000	Furniture	6,400
Creditors		8,700	Less: Depreciation	(1,400)	5,000
			Current assets:
			Stock	8,500
			Add: Increase in value	1,100	9,600
			Debtors	4,300
			Less: Provision	(300)	4,000
			Cash at bank	4,700
			Less: Paid to Bimal	(4,225)	475
		53,075			53,075

 

Bimal’s 6% Loan Account

Date	Particulars	Rs	Date	Particulars	Rs
30.06.18	Bank (6,500 + 780)	7,280	01.01.18	Bimal’s Capital A/c	26,000
31.12.18	Bank (6,500 + 585)	7,085	30.06.18	Interest	780
31.12.18	Balance c/d	13,000	31.12.18	Interest	585
		27,365			27,365
30.06.19	Bank (6,500 + 390)	6,890	01.01.19	Balance b/d	13,000
31.12.19	Bank (6,500 + 195)	6,695	30.06.19	Interest	390
			31.12.19	Interest	195
		13,585			13,585

 

Working note:

Bimal’s share of goodwill	Rs 10,000 × 3/8 = Rs 3,750
To be debited to Tamal and Vishal in their gaining ratio 3: 2
Tamal	Rs 3,750 × 3/5 = Rs 2,250
Vishal	Rs 3,750 × 2/5 = Rs 1,500

 

Note:

As per Para – 35 of AS – 26, “internally generated goodwill should not be recognised as an asset” and accordingly, should not be shown in the balance sheet of the firm.

 

Illustration: 2

A, B and C were in partnership sharing profits in the proportion of 5: 4: 3. The Balance Sheet of the firm as on 31^st March, 2019 was as under:

 

Liabilities	Rs	Assets	Rs
Capital accounts:		Goodwill	40,000
A	1,35,930	Fixtures	8,200
B	95,120	Stock	1,57,300
C	61,170	Sundry debtors	93,500
Sundry creditors	41,690	Cash	34,910
	3,33,910		3,33,910

 

A had been suffering from ill-health and gave notice that he wished to retire. An agreement was, therefore, entered into as on 31^st March, 2019, the terms of which were as follows:

i.      The Profit & Loss Account for the year ended 31^st March, 2019, which showed a net profit of Rs 48,000 was to be reopened. B was to be credited with Rs 4,000 as bonus, in consideration of the extra work which had devolved upon him during the year. The profit sharing ratio was to be revised as from 1^st April, 2018 to 3: 4: 4.

 

ii.     Goodwill was to be valued at two years’ purchase of the average profits of the preceding five years.

iii.    The Fixtures were to be revalued by an independent valuer.

iv.   A provision of 2% was to be made for doubtful debts and the remaining assets were to be taken at their book values.

 

The valuations arising out of the above agreement were Goodwill Rs 56,800 and Fixture Rs 10,980. B and C agreed, as between themselves, to continue the business, sharing profits in the ratio of 3: 2 and decided:

a.    To eliminate Goodwill from the Balance Sheet,

b.    To retain the Fixtures on the books at revised value, and

c.    To increase the provision for doubtful debts to 6%.

 

You are required to submit the Journal Entries necessary to give effect to the above arrangement and to draw up the Capital Accounts of the partners after carrying out all adjustment entries as stated above.

 

Solution:

In the books of Partners ‘A’, ‘B’ and ‘C’

Journal Entries

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
31.3.19	A’s Capital A/c                    Dr		8,000
	To B’s Capital A/c			4,000
	To C’s Capital A/c			4,000
	(Past adjustment made due to bonus payable to B and change in profit sharing ratio) – [W.N.]
31.3.19	Goodwill A/c                       Dr		16,800
	To A’s Capital A/c			4,582
	To B’s Capital A/c			6,109
	To C’s Capital A/c			6,109
	(Goodwill raised by Rs 16,800 by crediting all the partners including the retiring partner in the profit sharing ratio 3: 4: 4)
31.3.19	B’s Capital A/c                    Dr		34,080
	C’s Capital A/c                    Dr		22,720
	To Goodwill A/c			56,800
	(Entire goodwill written off by debiting the remaining partners B and C in the profit sharing ratio 3: 2)
31.3.19	Revaluation A/c                   Dr		1,870
	To Provision for doubtful debts			1,870
	(Provision for doubtful debts made @ 2% on debtors)
31.3.19	Fixtures A/c                        Dr		2,780
	To Revaluation A/c			2,780
	(Value of fixtures appreciated)
31.3.19	Revaluation A/c                   Dr		910
	To A’s Capital A/c			248
	To B’s Capital A/c			331
	To C’s Capital A/c			331
	(Profit on revaluation credited to all partners’ capital accounts in the profit sharing ratio    3: 4: 4)

31.3.19	B’s Capital A/c                    Dr		2,244
	C’s Capital A/c                    Dr		1,496
	To Provision for doubtful debts			3,740
	(Provision for doubtful debts further increased 4% after A’s retirement)

 

Partners’ Capital A/cs

Particulars	A	B	C	Particulars	A	B	C
B’s Capital	4,000			Balance b/d	1,35,930	95,120	61,170
C’s Capital	4,000			A’s Capital		4,000	4,000
Goodwill		34,080	22,720	Goodwill	4,582	6,109	6,109
Prov. For d/d		2,244	1,496	Revaluation	248	331	331
A’s Loan A/c	1,32,760
Balance c/d		69,236	47,394
	1,40,760	1,05,560	71,610		1,40,760	1,05,560	71,610

 

Working note:

Statement showing past adjustments

Particulars	Total	A	B	C
Profit already wrongly distributed to the partners in 5: 4: 3 ratio now reversed	48,000	(20,000)	(16,000)	(12,000)
Bonus to B	(4,000)		4,000
Remaining profit now credited to the partners in 3: 4: 4 ratio	(44,000)	12,000	16,000	16,000
	-	(8,000)	4,000	4,000

 

Debit A’s Capital by Rs 8,000, and Credit B’s Capital and C’s Capital by Rs 4,000 each

 

Illustration: 3

P, Q & R were equal partners. R retired on 31^st March, 2019. The Balance Sheet of the firm as on 31^st December, 2018 was as follows:

Liabilities	Rs	Rs	Assets	Rs
Capitals:			Goodwill	18,900
P	30,000		Buildings	40,000
Q	20,000		Investments (at cost)	5,000
R	20,000	70,000	Stock	10,000
Inv. Fluctuation Fund		1,200	Debtors	10,000
Provision for Bad Debts		800	Cash at Bank	10,000
General Reserve		4,000
Trade Creditors		17,900
		93,900		93,900

 

On 31.3.19 the following adjustments were considered:

a.    Buildings were appreciated by Rs 18,000;

b.    Book Debts were considered good;

c.    Investments were considered worth Rs 4,700;

d.    Stock was valued at Rs 9,400;

e.    Goodwill was considered equivalent to the average annual profits of the last three years; and

f.     R’s share of Profit up to the date of his retirement was calculated on the basis of the average annual profits of the preceding three years which were: Rs 8,000, Rs 9,000 and Rs 10,000.

 

Show the Journal Entries and prepare the Balance Sheet immediately after R’s retirement.

 

Solution:

In the books of P, Q and R

Journal Entries

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
31.3.19	P’s Capital A/c                    Dr		6,300
	Q’s Capital A/c                    Dr		6,300
	R’s Capital A/c                    Dr		6,300
	To Goodwill A/c			18,900
	(Existing goodwill written off by debiting all partners in the profit sharing ratio 1: 1: 1)
31.3.19	P’s Capital A/c                     Dr		1,500
	Q’s Capital A/c                    Dr		1,500
	R’s Capital A/c			3,000
	(R’s share of revalued goodwill credited to his capital a/c by debiting the remaining partners’ capital a/c in their gaining ratio      1: 1) – [W.N. 2]
31.3.19	Profit and loss suspense A/c    Dr		750
	To R’s Capital A/c			750
	(R’s share of estimated profit for the interim period 1.1.2019 to 31.3.2019 credited to his capital a/c by debiting profit and loss suspense a/c) – [W.N. 4]
31.3.19	General reserve                  Dr		4,000
	To P’s Capital			1,334
	To Q’s Capital			1,333
	To R’s Capital			1,333
	(General reserve distributed to all partners in the profit sharing ratio 1: 1: 1)
31.3.19	Buildings A/c                       Dr		18,000
	Provision for bad debts A/c    Dr		800
	Investment Fluctuation Fund  Dr		900
	To Revaluation A/c			19,700
	(Adjustment made for revaluation of assets and liabilities)
31.3.19	Revaluation A/c                    Dr		600
	To Stock A/c			600
	(Value of stock reduced on revaluation)
31.3.19	Revaluation A/c                   Dr		19,100
	To P’s Capital A/c			6,366
	To Q’s Capital A/c			6,367
	To R’s Capital A/c			6,367
	(Profit on revaluation transferred to all partners in the profit sharing ratio 1: 1: 1)

Partners’ Capital A/cs

Particulars	P	Q	R	Particulars	P	Q	R
Goodwill	6,300	6,300	6,300	Balance b/d	30,000	20,000	20,000
R’s Capital	1,500	1,500		P’s Capital			1,500
R’s Loan A/c			25,150	Q’s Capital			1,500
Balance c/d	29,900	19,900		P/L Suspense			750
				Gen. Reserve	1,334	1,333	1,333
				Revaluation	6,366	6,367	6,367
	37,700	27,700	31,450		37,700	27,700	31,450

 

Balance sheet of P and Q as at 31.3.2019

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital:			Fixed assets:
P	29,900		Buildings	40,000
Q	19,900	49,800	Add: Appreciation	18,000	58,000
R’s Loan A/c		25,150	Investments (at cost)		5,000
Trade Creditors		17,900	Current assets:
Inv. Fluc. Fund		300	Stock	10,000
			Less: Decrease in value	600	9,400
			Debtors		10,000
			Cash at bank		10,000
			P/L Suspense A/c		750
		93,150			93,150

 

Working notes:

1.    Valuation of goodwill = (8,000 + 9,000 + 10,000) ÷ 3 = Rs 9,000

2.    R’s share of revalued goodwill = Rs 9,000 ÷ 3 = Rs 3,000

3.    Estimated interim profit for 3 months 1.1.19 to 31.3.19 = Rs 9,000 × ³/₁₂ = Rs 2,250

4.    R’s share of estimated interim profit = Rs 2,250 ÷ 3 = Rs 750

Note:

As per Para – 35 of AS – 26, “internally generated goodwill should not be recognised as an asset” and accordingly, should not be shown in the balance sheet of the firm.

 

Illustration: 4

Champa, Chameli and Chetana are in partnership sharing profits and losses in the ratio of 3: 2: 1. The Balance Sheet of the firm as on 31^st December, 2019 was as follows:

 

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital accounts:			Machinery (at Cost)	50,000
Champa	40,000		Less: Prov. For dep.	(8,000)	42,000
Chameli	60,000		Furniture		1,000
Chetana	20,000	1,20,000	Sundry Debtors	80,000
Reserve		30,000	Less: Prov. For d/d	(3,000)	77,000
Sundry Creditors		60,000	Stock		50,000
			Cash at Bank		40,000
		2,10,000			2,10,000

 

On 31^st March 2020 Chameli retired and Champa and Chetana continued in partnership, sharing profits and losses in the ratio of 3: 2. It was agreed that adjustments were to be made in the Balance Sheet as on 31^st March, 2020, in respect of the following:

i.      The Machinery was to be revalued at Rs 45,000;

ii.     The Stock was to be reduced by 2%;

iii.    The Furniture was to be reduced to Rs 600;

iv.   The Provision for Doubtful Debts would be Rs 4,000; and

v.    A provision of Rs 300 was to be made for Outstanding Expenses.

 

The Partnership agreement provided that on the retirement of a partner, goodwill was to be valued at Rs 24,000 and Chameli’s share of the same was to be adjusted into the accounts of Champa and Chetana. The profit up to the date of retirement was estimated at Rs 18,000.

 

Chameli was to be paid off in full; Champa and Chetana were to bring such an amount in cash so as to make their capital in proportion to the new profit sharing ratio subject to the condition that a cash balance of Rs 20,000 was to be maintained as working capital.

 

Pass the necessary journal entire to give effect to the above arrangements and prepare the partners’ Capital Accounts and new balance sheet of Champa and Chetana as at 31st March, 2020.

 

Solution:

In the books of Champa, Chameli and Chetana

Journal Entries

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
31.3.20	Champa’s Capital A/c            Dr		2,400
	Chetana’s Capital A/c            Dr		5,600
	Chameli’s Capital A/c			8,000
	(Chameli’s share of goodwill credited to her capital a/c by debiting the remaining partners’ capital a/cs in their gaining ratio    3: 7)       [W.N. 1 and 2]
31.3.20	Champa’s Capital A/c             Dr		1,800
	Chetana’s Capital A/c             Dr		4,200
	To Chameli’s Capital A/c			6,000
	(Chameli’s share of estimated interim profit for the period 1.1.2020 to 31.3.2020 credited to her capital a/c by debiting the remaining partners’ capital a/cs in their gaining ratio    3: 7))      [W.N. 1 and 3]
31.3.20	Reserve                              Dr		30,000
	To Champa’s Capital			15,000
	To Chameli’s Capital			10,000
	To Chetana’s Capital			5,000
	(Reserve distributed to all partners in the profit sharing ratio 3: 2: 1)
31.3.20	Prov. for dep. on machinery A/c    Dr		3,000
	To Revaluation A/c			3,000
	(Book value of machinery increased)
31.3.20	Revaluation A/c                    Dr		2,700
	To Stock A/c			1,000
	To Furniture A/c			400
	To Provision for doubtful debts			1,000
	To Provision for outstanding expenses			300
	(Value of assets reduced on Chameli’s retirement)
31.3.20	Revaluation A/c                   Dr		300
	To Champa’s Capital A/c			150
	To Chameli’s Capital A/c			100
	To Chetana’s Capital A/c			50
	(Profit on revaluation transferred to all partners’ capital accounts in the profit sharing ratio 3: 2: 1)

31.3.20	Chameli’s Capital A/c             Dr		84,100
	To Bank A/c			84,100
	(Payment made to Chameli on her retirement)
31.3.20	Bank A/c                             Dr		64,100
	To Champa’s Capital A/c			27,230
	To Chetana’s Capital A/c			36,870
	(Cash brought in by Champa and Chetana as per agreement on Chameli’s retirement)

 

Partners’ Capital A/cs

Particulars	Champa	Chameli	Chetana	Particulars	Champa	Chameli	Chetana
Chameli	2,400		5,600	Balance b/d	40,000	60,000	20,000
Chameli	1,800		4,200	Champa		2,400
Bank		84,100		Chetana		5,600
Balance c/d [W.N. 4]	78,180		52,120	Champa		1,800
				Chetana		4,200
				Reserve	15,000	10,000	5,000
				Revaluation	150	100	50
				Bank (b/f)	27,230		36,870
	82,380	84,100	61,920		82,380	84,100	61,920

 

Balance sheet of Champa and Chetana as at 31.3.2020

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital:			Fixed assets:
Champa	78,180		Machinery	50,000
Chetana	52,120	1,30,300	L: Prov. For Dep.	(5,000)	45,000
Sundry Creditors		60,000	Furniture	1,000
Prov. For O/S Exp.		300	L: Depreciation	(400)	600
			Current assets:
			Stock	50,000
			L: Reduction in value	(1,000)	49,000
			Sundry Debtors	80,000
			L: Prov. For D/D	(4,000)	76,000
			Cash at Bank		20,000
		1,90,600			1,90,600

 

Working notes:

1.    Computation of gaining ratio:

Champa’s gain	= 3/5 – 3/6 = 3/30
Chetana’s gain	= 2/5 – 1/6 = 7/30
∴ Gaining ratio	Champa: Chetana = 3: 7

2.    Chameli’s share of goodwill = Rs 24,000 × ²/₆ = Rs 8,000

3.    Chameli’s share of estimated interim profit for the period 1.1.2020 to 31.3.2020

= Rs 18,000 × ²/₆ = Rs 6,000

4.    Computation of new capital balances of Champa and Chetana:

Amount to be brought in by Champa and Chetana	84,100 + 20,000 – 40,000 = Rs 64,100
Total capital of Champa and Chetana after the above amount is brought in	50,950 + 15,250 + 64,100                   = Rs 1,30,300
∴ Champa’s new capital	Rs 1,30,300 × 3/5 = Rs 78,180
Chetana’s new capital	Rs 1,30,300 × 2/5 = Rs 52,120

 

Illustration: 5

The following was the Balance Sheet of A, B and C who shared profits in the ratio of 1: 2: 2 as on 31^st December, 2019:

 

Liabilities	Rs	Rs	Assets	Rs
Sundry Creditors		10,000	Goodwill	15,000
Capital Accounts:			Buildings	30,000
A	10,000		Machinery	20,000
B	20,000		Investments	10,000
C	20,000	50,000	Stock	10,000
General Reserve		5,000	Sundry Debtors	10,000
Investment Fluctuation Fund		3,000	Cash at Bank	5,000
Bad Debts Reserve		2,000
Bank Loan		30,000
		1,00,000		1,00,000

 

C died on 31^st March, 2020. His account is to be settled under the following terms:

i.      Goodwill is to be calculated at the rate of 2 years’ purchase on the basis of the average of last 5 years’ profit or loss;

ii.     Profit for January to March’ 2020 is to be calculated proportionately on the average profit of last 3 years. The profits were: 2015 Rs 3,000, 2016 Rs 7,000, 2017 Rs 10,000, 2018 Rs 14,000, 2019 loss Rs 12,000.

iii.    During 2019 a Moped costing Rs 4,000 was purchased and debited to Travelling Expenses Account on which depreciation is to be calculated @ 25%.

iv.   Other values agreed on assets are: Stock Rs 12,000, Buildings Rs 35,000, Machinery Rs 25,000 and Investments Rs 8,000. Debtors are considered good.

 

Prepare new Balance Sheet of the firm, necessary Journal entries and Ledger Accounts of the Partners.

 

Solution:

In the books of A, B and C

Journal Entries

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
31.3.20	A’s Capital A/c                      Dr		3,000
	B’s Capital A/c                      Dr		6,000
	C’s Capital A/c                      Dr		6,000
	To Goodwill A/c			15,000
	(Existing goodwill written off by debiting all partners’ capital accounts in the profit sharing ratio 1: 2: 2)
31.3.20	A’s Capital A/c                      Dr		1,333
	B’s Capital A/c                      Dr		2,667
	To C’s Capital A/c			4,000
	(C’s share of revalued goodwill credited to his capital a/c by debiting the remaining partners’ capital a/cs in their gaining ratio   1: 2)      [W.N. 1, 2, 3 and 4]
31.3.20	Profit and Loss Suspense A/c     Dr		500
	To C’s Capital A/c			500
	(C’s share of estimated interim profit for the period 1.1.2020 to 31.3.2020 credited to his capital a/c by debiting Profit and Loss Suspense A/c)   [W.N. 5]

31.3.20	General Reserve A/c                Dr		5,000
	To A’s Capital A/c			1,000
	To B’s Capital A/c			2,000
	To C’s Capital A/c			2,000
	(General Reserve distributed to all partners in the profit sharing ratio 1: 2: 2)
31.3.20	Stock A/c                             Dr		2,000
	Buildings A/c                         Dr		5,000
	Machinery A/c                       Dr		5,000
	Investment Fluctuation Fund    Dr		1,000
	Bad Debts Reserve A/c            Dr		2,000
	Moped A/c (Rs 4,000 – 1,000)  Dr		3,000
	To Revaluation A/c			18,000
	(Values of assets increased on revaluation)
31.3.20	Revaluation A/c                      Dr		18,000
	To A’s Capital A/c			3,600
	To B’s Capital A/c			7,200
	To C’s Capital A/c			7,200
31.3.20	C’s Capital A/c                        Dr		27,700
	To C’s Executor’s A/c			27,700
	(Total amount payable to the deceased partner transferred to his Executor’s A/c)

 

Partners’ Capital A/cs

Particulars	A	B	C	Particulars	A	B	C
Goodwill	3,000	6,000	6,000	Balance b/d	10,000	20,000	20,000
C’s Capital	1,333	2,667		A’s Capital			1,333
C’s Executor			27,700	B’s Capital			2,667
Balance c/d	10,267	20,533		P/L Suspense			500
				Gen. Reserve	1,000	2,000	2,000
				Revaluation	3,600	7,200	7,200
	14,600	29,200	33,700		14,600	29,200	33,700

 

Balance sheet of A and B as at 31.3.2020

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital:			Fixed assets:
A	10,267		Buildings	30,000
B	20,533	30,800	Add: Appreciation	5,000	35,000
C’s Executor’s A/c		27,700	Machinery	20,000
Bank Loan		30,000	Add: Appreciation	5,000	25,000
Inv. Fluctuation Fund		2,000	Moped	4,000
Sundry Creditors		10,000	Less: Depreciation	(1,000)	3,000
			Investment		10,000
			Current assets:
			Stock	10,000
			Add: Increase in value	2,000	12,000
			Sundry Debtors		10,000
			Cash at Bank		5,000
			P/L Suspense		500
		1,00,500			1,00,500

Working notes:

1.    Computation of gaining ratio:

A’s gain	= 1/3 – 1/5 = 2/15
B’s gain	= 2/3 – 2/5 = 4/15
∴ Gaining ratio	A: B = 2: 4 = 1: 2

 

2.    Adjusted profit for the year 2019:

	Rs
Loss as given in the problem	(12,000)
Add: Cost of moped wrongly treated as travelling expense	4,000
Less: Depreciation on above moped @ 25%	(1,000)
Adjusted loss	(9,000)

 

3.    Valuation of goodwill:

Total profit of last 5 years	3,000 + 7,000 + 10,000 + 14,000 – 9,000 = Rs 25,000
Average profit	25,000 ÷ 5 = Rs 5,000
Goodwill (2 years’ purchase)	5,000 × 2 = Rs 10,000

 

4.    C’s share of goodwill = Rs 10,000 × ²/₅ = Rs 4,000

5.    C’s share of estimated interim profit for the period 1.1.2020 to 31.3.2020:

Total profit of last 3 years	10,000 + 14,000 – 9,000 = Rs 15,000
Average profit	15,000 ÷ 3 = Rs 5,000
Estimated interim profit	5,000 × 3/12 = Rs 1,250
C’s share on above	1,250 × 2/5 = Rs 500

 

 

Illustration: 6

Abhijit, Biswajit and Chiranjit were partners in a firm sharing profits and losses in the ratio of 3: 2: 1. Chiranjit died on 28^th February, 2019. The Balance Sheet of the firm as on that date was as follows:

 

Liabilities	Rs	Assets	Rs
Abhijit’s Capital A/c	1,20,000	Plant and Machinery	1,20,000
Biswajit’s Capital A/c	80,000	Furniture and Fittings	75,000
Chiranjit’s Capital A/c	40,000	Investments	20,000
Abhijit’s Current A/c	8,000	Stock in trade	32,000
Biswajit’s Current A/c	2,500	Sundry Debtors	25,000
Reserve	30,000	Bills Receivable	11,000
Bills Payable	17,000	Cash at Bank	18,500
Sundry Creditors	20,000	Cash in Hand	11,000
		Chiranjit’s Current A/c	5,000
	3,17,500		3,17,500

 

The following decisions were taken by the surviving partners:

i.      Goodwill is to be valued at Rs 30,000;

ii.     A provision for bad debts is to be created at 5% on debtors;

iii.    While plant and machinery are to be depreciated by 10%, furniture is to be appreciated by 5%;

iv.   Revised value of stock in trade will be Rs 26,500;

v.    The fixed capital method is to be converted into the fluctuating capital method by transferring the current account balances to the respective partners’ capital accounts.

 

Prepare a Revaluation Account, Capital Accounts of the three partners showing the necessary adjustments at Chiranjit’s death, and Chiranjit’s Executor’s Account. Chiranjit’s Executor was paid off in two half-yearly equal instalments plus interest @ 10% p.a. on the unpaid balance, the first instalment being paid on 31^st August, 2019.

 

Solution:

In the books of the firm

Revaluation A/c

Particulars	Rs	Particulars	Rs
To Provision for bad debts	1,250	By Furniture and fittings	3,750
To Plant and machinery	12,000	By Partners’ Capital A/cs:
To Stock in trade	5,500	Abhijit    (3/6)               7,500
		Biswajit  (2/6)               5,000
		Chiranjit (1/6)               2,500	15,000
	18,750		18,750

 

Partners’ Capital A/cs

Particulars	Abhijit	Biswajit	Chiranjit	Particulars	Abhijit	Biswajit	Chiranjit
Chiranjit	3,000	2,000		Balance b/d	1,20,000	80,000	40,000
Revaluation	7,500	5,000	2,500	Reserve	15,000	10,000	5,000
Current A/c			5,000	Abhijit			3,000
Chiranjit’s Executor’s A/c			42,500	Biswajit			2,000
Balance c/d	1,32,500	85,500		Current A/cs	8,000	2,500
	1,43,000	92,500	50,000		1,43,000	92,500	50,000

 

Chiranjit’s Executor’s Account

Date	Particulars	Rs	Date	Particulars	Rs
31.08.19	Bank             (21,250 + 2,125)	23,375	01.03.19	Chiranjit’s Capital A/c	42,500
31.08.19	Balance c/d	21,250	31.08.19	Interest (6 months)	2,125
		44,625			44,625
28.02.20	Bank             (21,250 + 1,063)	22,313	01.09.19	Balance b/d	21,250
			28.02.20	Interest (6 months)	1,063
		22,313			22,313

 

Working notes:

1.    Computation of gaining ratio:

Abhijit’s gain	= 3/5 – 3/6 = 1/10 = 3/30
Biswajit’s gain	= 2/5 – 2/6 = 1/15 = 2/30
∴ Gaining ratio	Abhijit: Biswajit = 3: 2

 

2.    Chiranjit’s share of goodwill = Rs 30,000 × ¹/₆ = Rs 5,000

 

3.    Chiranjit’s share of goodwill has been credited to his capital account and debited to Abhijit’s Capital and Biswajit’s Capital in their gaining ratio 3: 2.

Illustration: 7

P, Q and R, sharing profits and losses equally, had been trading for many years. R decided to retire on 31.03.2022 on which date Balance Sheet of the firm was as follows:

 

Liabilities	Rs	Assets	Rs
Capital Accounts:		Cash	36,000
P	1,20,000	Debtors	74,000
Q	85,000	Stock	60,000
R	75,000	Plant and Machinery	1,20,000
Creditors	85,000	Land and Building	75,000
	3,65,000		3,65,000

 

Value of goodwill was agreed at Rs 93,000. Land and Building was revalued at Rs 1, 05,600, Plant and Machinery was revalued at Rs 1, 00,500 and it was agreed to provide 6% in respect of debtors.

 

Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet as at 01.04.2022.

 

Solution:

In the Books of the Firm

Revaluation A/c

Particulars	Rs	Particulars	Rs
To Plant and Machinery	19,500	By Land and Building	30,600
To Provision for bad debt	4,440
To Partners’ Capital A/cs:
P               2,220
Q               2,220
R               2,220	6,660
	30,600		30,600

 

Partners’ Capital Accounts

Particulars	P	Q	R	Particulars	P	Q	R
R’s Capital	15,500	15,500		Balance b/d	1,20,000	85,000	75,000
R’s Loan A/c			1,08,220	Revaluation	2,220	2,220	2,220
Balance c/d	1,06,720	71,720		P’s Capital			15,500
				Q’s Capital			15,500
	1,22,220	87,220	1,08,220		1,22,220	87,220	1,08,220

 

Balance sheet of P and Q as at 01.04.2022

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital Accounts:			Fixed assets:
P’s Capital	1,06,720		Land and Building	75,000
Q’s Capital	71,720	1,78,440	Add: Appreciation	30,600	1,05,600
R’s Loan Account		1,08,220	Plant and Machinery	1,20,000
Creditors		85,000	Less: Depreciation	(19,500)	1,00,500
			Current assets:
			Stock		60,000
			Debtors	74,000
			Less: Provision for b/d	(4,440)	69,560
			Cash		36,000
		3,71,660			3,71,660

 

Working note:

R’s share of goodwill	Rs 93,000 × 1/3 = Rs 31,000
To be debited to P and Q in their gaining ratio 1: 1
P	Rs 31,000 × 1/2 = Rs 15,500
Q	Rs 31,000 × 1/2 = Rs 15,500

 

Note:

As per Para – 35 of AS – 26, “internally generated goodwill should not be recognised as an asset” and accordingly, should not be shown in the balance sheet of the firm.

Illustration: 8

The Balance Sheet of A, B and C who are sharing profits in proportion of their capitals stood as follows on 31.03.2022:

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital accounts:			Land and Buildings		50,000
A	40,000		Plant and Machinery		17,000
B	30,000		Stock		16,000
C	20,000	90,000	Debtors	10,000
Creditors		13,800	Less: Provision	(200)	9,800
			Cash at Bank		11,000
		1,03,800			1,03,800

 

B retired on the above date and the following was agreed upon:

           (i)        That the stock be depreciated by 6%.

          (ii)        That the provision for doubtful debts be brought up to 5% on Debtors.

         (iii)        That the Land and Buildings be appreciated by 20%.

         (iv)        That a provision for Rs 1,540 be made in respect of outstanding legal charges.

          (v)        That the Goodwill of the firm is to be fixed at Rs 21,600 and B’s share of it be adjusted into the accounts of A and C who are going to share future profits in the ratio of 5: 3.

         (vi)        That the assets and liabilities (except Cash at Bank) were to appear in the Balance Sheet at their old figures.

        (vii)        That the entire capital of the firm as newly constituted be fixed at Rs 56,000 between A and C in the proportion of 5: 3 (actual cash to be brought in or paid off, as the case may be).

 

Show the Balance Sheet after B’s retirement.

 

 

Solution:

In the books of the firm

Memorandum Revaluation Account

Particulars	Rs	Particulars	Rs
To Stock	960	By Land and Buildings	10,000
To Provision for doubtful debts	300
To Outstanding legal charges	1,540
To Partners’ Capital Accounts:
A (4/9)            3,200
B (3/9)            2,400
C (2/9)            1,600	7,200
	10,000		10,000
To Land and Buildings	10,000	By Stock	960
		By Provision for doubtful debts	300
		By Outstanding legal charges	1,540
		By Partners’ Capital Accounts:
		A (5/8)         4,500
		C (3/8)         2,700	7,200
	10,000		10,000

 

Partners’ Capital Accounts

Particulars	A	B	C	Particulars	A	B	C
B’s Capital	3,900		3,300	Balance b/d	40,000	30,000	20,000
Memo Rev A/c	4,500		2,700	A’S Capital		3,900
B’s Loan A/c		39,600		C’s Capital		3,300
Balance c/d	35,000		21,000	Memo Rev A/c	3,200	2,400	1,600
				Bank A/c (b/f)	200		5,400
	43,400	39,600	27,000		43,400	39,600	27,000

 

Balance sheet of A and C as at 31.03.2022

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital Accounts:			Fixed assets:
A’s Capital	35,000		Land and Buildings		50,000
C’s Capital	21,000	56,000	Plant and Machinery		17,000
B’s Loan Account		39,600	Current assets:
Creditors		13,800	Stock		16,000
			Debtors	10,000
			Less: Prov. for d/debts	(200)	9,800
			Cash at Bank (11,000 + 200 + 5,400)		16,600
		1,09,400			1,09,400

 

Working notes:

1.   Computation of gaining ratio:

A’s gain	= 5/8 – 4/9 = 13/72
C’s gain	= 3/8 – 2/9 = 11/72
∴ Gaining ratio	A: C = 13: 11

 

2.   B’s share of goodwill = Rs 21,600 × ³/₉ = Rs 7,200

 

3.  B’s share of goodwill has been credited to his capital account and debited to A’s   Capital and C’s Capital in their gaining ratio 13: 11.

 

      Journal Entry:

Particulars	LF	Debit (Rs)	Credit (Rs)
A’s Capital A/c            Dr		3,900
C’s Capital A/c            Dr		3,300
To B’s Capital A/c			7,200
(B’s share of goodwill credited to his capital account and debited to A’s Capital and C’s Capital in their gaining ratio 13: 11.)

 

4.   New capital balances of A and C:

A’s new capital	= Rs 56,000 × 5/8 = Rs 35,000
C’s new capital	= Rs 56,000 × 3/8 = Rs 21,000