<h5 id="31-ascertaining-the-amount-due-to-retiring-deceased-partner">3.1 Ascertaining the Amount Due to Retiring/ Deceased Partner</h5> <ul> <li>The sum due to a retiring/deceased partner includes:</li> </ul> <ol> <li>Credit balance of his capital account.</li> <li>Credit balance of his current account.</li> <li>His share of goodwill.</li> <li>His share of accumulated profits (reserves).</li> <li>His share in the gain of revaluation of assets and liabilities.</li> <li>His share of profits up to the date of retirement/death.</li> <li>Interest on his capital, if involved, up to the date of retirement/death.</li> <li>Salary/commission, if any, due to him up to the date of retirement/death.</li> </ol> <ul> <li>Deductions may include:</li> </ul> <ol> <li>Debit balance of his current account.</li> <li>His share of goodwill to be written off.</li> <li>His share of accumulated losses.</li> <li>His share of loss on revaluation of assets and liabilities.</li> <li>His share of loss up to the date of retirement/death.</li> <li>His drawings up to the date of retirement/death.</li> <li>Interest on drawings, if involved, up to the date of retirement/death.</li> </ol> <ul> <li>Accounting aspects involved on retirement or death of a partner:</li> </ul> <ol> <li>Ascertainment of new profit sharing ratio and gaining ratio.</li> <li>Treatment of goodwill.</li> <li>Revaluation of assets and liabilities.</li> <li>Adjustment in respect of unrecorded assets and liabilities.</li> <li>Distribution of accumulated profits and losses.</li> <li>Ascertainment of share of profit or loss up to the date of retirement/death.</li> <li>Adjustment of capital, if required.</li> <li>Settlement of the amounts due to retired/deceased partner.</li> </ol> <p>======</p> <h5 id="32-new-profit-sharing-ratio">3.2 New Profit Sharing Ratio</h5> <ul> <li>The new profit sharing ratio determines how future profits will be distributed among remaining partners after the retirement or death of a partner.</li> <li>In situation (a), continuing partners typically acquire the share of the retiring/deceased partner in the old profit sharing ratio, maintaining the same ratio for future profits.</li> <li>In situation (b), partners may acquire the share of the retiring/deceased partner in a different proportion, requiring calculation of the new profit sharing ratio. This can be done using the formula: New share of Continuing Partner = Old Share + Acquired share from the Outgoing Partner.</li> <li>Gaining Ratio is used to calculate the new share of each partner when they acquire the share of the outgoing partner in a different proportion.</li> <li>In situation (c), partners can agree on a specified new profit sharing ratio, which will then be used for future profit distribution.</li> </ul> <p>======</p> <h5 id="33-gaining-ratio">3.3 Gaining Ratio</h5> <ul> <li>The text provides problems related to adjusting profit sharing ratios when partners retire or when the remaining partners decide to share profits in a different ratio.</li> <li>In problem 1, the new profit sharing ratio and gaining ratio are calculated when Lakshya, Manoj, and Naresh adjust their shares after Kumar’s retirement.</li> <li>In problem 4(a), the future profit sharing ratio and gaining ratio are determined when Anu retires and her share is acquired by Anu and Prabha in the ratio of 5:3.</li> <li>In problem 5(i), the new profit sharing ratio is found when Rahul retires and his share is distributed among the remaining partners.</li> <li>In problem 7, the gaining ratio is calculated when Ashok, Anil, and Ajay adjust their shares after Anil’s retirement, with Ashok and Ajay sharing future profits and losses in the ratio of 3:2.</li> </ul> <p>======</p> <h5 id="34-treatment-of-goodwill">3.4 Treatment of Goodwill</h5> <ul> <li>Goodwill is an intangible asset that is recognized when a business has capabilities or qualities that are likely to generate future economic benefits.</li> <li>At the time of retirement/death of a partner, goodwill is valued as per agreement among the partners.</li> <li>The retiring/deceased partner is compensated for his share of goodwill by the continuing partners in their gaining ratio.</li> <li>The accounting treatment for goodwill depends on whether or not it already appears in the books of the firm.</li> <li>If goodwill is already appearing in the books, the retiring/deceased partner’s share of goodwill is deducted from his capital account. If not, goodwill is valued and credited to all partners’ capital accounts including the retiring/deceased partner’s capital account.</li> </ul> <p>======</p> <h5 id="341-when-goodwill-does-not-appear-in-the-books">3.4.1 When goodwill does not appear in the books</h5> <ul> <li>The text is about the retirement of a partner, Neeru, from a business and the compensation paid to the other partners, Shilpa and Deepa.</li> <li>The gaining ratio of Shilpa and Deepa is calculated, with Shilpa gaining $\frac{4}{10}$ and Deepa sacrificing $\frac{1}{10}$.</li> <li>The compensation to Neeru and Deepa is calculated as per their sacrifices, with Neeru receiving Rs. 36,000 and Deepa receiving Rs. 12,000.</li> <li>The new profit sharing ratio between Shilpa and Deepa is 2:3.</li> <li>The text also includes practice questions on the distribution of profits after a partner’s retirement.</li> </ul> <p>Note: I have not included the detailed calculations of the gaining ratio and compensation as per the instructions.</p> <p>======</p> <h5 id="342-hidden-goodwill">3.4.2 Hidden Goodwill</h5> <ul> <li>Hidden goodwill is the amount paid to a retiring or deceased partner, in excess of the balance in their capital account, which includes adjustments for accumulated profits, losses, and revaluation of assets and liabilities.</li> <li>This excess amount is considered as the partner’s share of goodwill, and it is debited to the capital accounts of the remaining partners and credited to the retiring/deceased partner’s capital account in their gaining ratio.</li> <li>In the example provided, P and Q agreed to pay R Rs. 75,000 in full settlement of his claim, where Rs. 60,000 is the balance in his capital account, and Rs. 15,000 is his share of goodwill.</li> <li>The given text includes a question on whether the retiring/deceased partner’s capital account will be credited with his/her share of goodwill, the correct answer is (a) his/her share of goodwill.</li> <li>Another question asks how the goodwill will be written-off on retirement of a partner, the correct answer is (a) by debiting all partners’ capital accounts in their old profit sharing ratio.</li> </ul> <p>======</p> <h5 id="35-adjustment-for-revaluation-of-assets-and-liabilities">3.5 Adjustment for Revaluation of Assets and Liabilities</h5> <ul> <li>At the time of a partner’s retirement or death, assets may not be shown at current values and there may be unrecorded assets/liabilities.</li> <li>A Revaluation Account is prepared to ascertain net gain/loss on revaluation and bring unrecorded items into the firm’s books.</li> <li>Assets are adjusted by debiting/crediting Assets A/c and Revaluation A/c, liabilities by debiting Revaluation A/c and crediting Liabilities A/c.</li> <li>Unrecorded assets/liabilities are brought into books by debiting/crediting Assets/Liability A/c and Revaluation A//c.</li> <li>Profit/loss on revaluation is transferred to partners’ capital A/c’s in their old profit sharing ratio.</li> <li>Journal entries and Revaluation Account are prepared as shown in the text’s illustration.</li> </ul> <p>======</p> <h5 id="36-adjustment-of-accumulated-profits-and-losses">3.6 Adjustment of Accumulated Profits and Losses</h5> <ul> <li>Accumulated profits or losses belong to all partners and should be transferred to the capital accounts of all partners in their old profit sharing ratio.</li> <li>Two journal entries are recorded for the purpose: (i) Reserves A/c or Profit and Loss A/c Dr. to All Partners’ Capital A/c’s (Individually);</li> </ul> <p>======</p> <h5 id="37-disposal-of-amount-due-to-retiring-partner">3.7 Disposal of Amount Due to Retiring Partner</h5> <ul> <li>The outgoing partner’s account can be settled as per the terms of the partnership deed, which could be a lump sum payment or in instalments with or without interest.</li> <li>In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive interest or a share of profits based on the capital ratio.</li> <li>The total amount due to the retiring partner is transferred to their Loan Account if the firm is not in a position to make the payment immediately.</li> <li>The necessary journal entries include: paying the retiring partner in cash, treating the whole amount as loan, or partly in cash and the remaining amount as loan.</li> <li>When the Loan account is settled by paying in instalments, entries are recorded for interest on the loan and for payment of the instalment.</li> </ul> <p>======</p> <h5 id="38-adjustment-of-partners-capitals">3.8 Adjustment of Partners’ Capitals</h5> <ul> <li>The Balance Sheet of Mohit, Neeraj, and Sohan as of March 31, 2017, is given. Neeraj decided to retire, and the following adjustments were made:</li> </ul> <ol> <li>Buildings appreciated by 20%.</li> <li>Provision for Bad debts increased to 15% on Debtors.</li> <li>Machinery depreciated by 20%.</li> <li>Goodwill valued at Rs. 72,000, adjusted through the capital accounts of remaining partners.</li> <li>The new firm’s capital fixed at Rs. 1,20,000.</li> </ol> <ul> <li>Prepare Revaluation Account, Capital Accounts of the partners, and the Balance Sheet after Neeraj’s retirement.</li> <li>The Balance Sheet of A, B, and C who share profits according to their capitals is given. B retired, and the following adjustments were made:</li> </ul> <ol> <li>Stock depreciated by 10%.</li> <li>Factory building appreciated by 12%.</li> <li>Provision for doubtful debts created up to 5%.</li> <li>Provision for legal charges made at Rs.265.</li> <li>Goodwill of the firm fixed at Rs.10,000.</li> <li>The capital of the new firm fixed at Rs.30,000. Continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.</li> </ol> <ul> <li>Work out the final balances in capital accounts of the firm, and the amounts to be brought in and/or withdrawn by A and C to make their capitals proportionate to the new profit sharing ratio.</li> <li>R, S, and M carry on business in partnership sharing profits in the ratio of 3:2:1. R retired, and the following terms were agreed upon:</li> </ul> <ol> <li>Buildings appreciated by Rs.8,800.</li> <li>Provision for doubtful debts made at 5% on debtors.</li> <li>Goodwill of the firm valued at Rs.9,000.</li> <li>Rs.5,000 paid to S immediately, and the balance due treated as a loan carrying interest at 6% p.a.</li> </ol> <ul> <li>Prepare the balance sheet of the reconstituted firm after Shyam’s retirement.</li> </ul> <p>======</p> <h5 id="39-death-of-a-partner">3.9 Death of a Partner</h5> <ul> <li>The accounting treatment for the death of a partner is similar to that of a retired partner, with the deceased partner’s claim being transferred to their executors.</li> <li>The main difference is that death can occur at any time, so the deceased partner’s share of profit or loss, interest on capital, and interest on drawings (if any) must be calculated from the date of the last balance sheet to the date of death.</li> <li>The deceased partner’s share of profit can be calculated on the basis of last year’s profit, average of past few years, or sales.</li> <li>The journal entry for transferring the deceased partner’s share of profit to their capital account is recorded as “Profit & Loss Suspense A/c Dr. To Deceased Partner’s Capital A/c”.</li> <li>Later, the Profit and Loss Suspense account is closed by transferring the account to Gaining Partners’ Capital Account in their gaining ratio.</li> </ul> <p>======</p> <h5 id="questions-for-practice">Questions for Practice</h5> <ul> <li>There are various ways in which a partner can retire from a firm, such as retirement during the existence of the firm, retirement due to the completion of a specific age or years of service, or retirement due to the desire to pursue other opportunities.</li> <li>At the time of a partner’s retirement, various matters need adjustments, such as the distribution of assets, the payment of retirement benefits, and the adjustment of the firm’s accounts.</li> <li>Sacrificing ratio refers to the ratio in which the remaining partners agree to sacrifice their share of profits to adjust for the increased share of the retiring partner. Gaining ratio, on the other hand, refers to the ratio in which the remaining partners stand to gain an increased share of profits as a result of a partner’s retirement.</li> <li>Firms revalue assets and reassess liabilities on retirement or on the event of a partner’s death to ensure that the firm’s financial position is accurately reflected in the firm’s books.</li> <li>A retiring/deceased partner is entitled to a share of goodwill because they have contributed to the firm’s success and reputation over the years.</li> </ul> <p>Note: The text did not include any equations or formulae.</p> <p>======</p> <h5 id="numerical-questions">Numerical Questions</h5> <ul> <li>In the first scenario, the journal entries for the retirement of a partner (Manisha) and the revaluation of goodwill are given. The goodwill is valued at Rs. 1,80,000 and Aparna and Sonia will share future profits in the ratio of 3:2.</li> <li>In the second scenario, Sangeeta retires and goodwill is revalued at Rs. 90,000. Saroj and Shanti decide to share future profits equally. The necessary journal entries for the retirement of a partner and the revaluation of goodwill are provided.</li> <li>In the third scenario, Naman retires and the assets and liabilities are revalued. Building is appreciated by 20%, plant and machinery is depreciated by 10%, a provision of 5% is created for bad and doubtful debts, and stock is valued at Rs. 18,000 and investments at Rs. 35,000. The journal entries for the revaluation and the preparation of the revaluation account are given.</li> <li>In the fourth scenario, Raj Kumar retires and the journal entries for the retirement of a partner are provided. The balance sheet shows general reserves of Rs. 36,000 and a profit and loss account (Dr.) of Rs. 15,000.</li> <li>In the fifth scenario, Brijesh retires and goodwill is not to appear in the books. Bad debts of Rs. 2,000 are written off and patents are considered as valueless. The revaluation account, partners’ capital accounts, and the balance sheet of Digvijay and Parakaram after Brijesh’s retirement are given.</li> <li>In the sixth scenario, Sheela retires and the assets and liabilities are revalued. Machinery and loose tools are to be valued at 10% less than their book value and factory premises are to be revalued at Rs. 24,300. The revaluation account, partner’s capital accounts, and the balance sheet of the firm after the retirement of Sheela are provided.</li> <li>In the seventh scenario, Naresh retires and the assets are revalued. Premises are appreciated by 20%, stock is depreciated by 10%, and a provision for doubtful debts is made. Goodwill is valued at Rs. 42,000 and Naresh’s share of profit is calculated on the basis of last year’s profit. The ledger accounts and balance sheet of the firm after Naresh’s retirement are given.</li> <li>In the eighth scenario, Pammy dies and the executors of the deceased partner are entitled to the amount standing to the credit of the partner’s capital account, interest on capital, share of goodwill, and share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit. The capital account of Pammy, his executor’s account, and the balance sheet of the firm after Pammy’s death are provided.</li> <li>In the ninth scenario, Rockey dies and the executors of the deceased partner are entitled to the amount standing to the credit of the partner’s capital account, interest on capital, share of goodwill, and share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit. The journal entries and Rockey’s capital account are given.</li> <li>In the tenth scenario, Bajaj retires and the assets and liabilities are revalued. Freehold premises and stock are to be appreciated, machinery and furniture are to be reduced, and bad debts reserve is to be increased. Goodwill is valued at Rs. 21,000 and the continuing partners have decided to adjust their capitals in their new profit sharing ratio. The necessary ledger accounts and balance sheet of the reconstituted firm are provided.</li> <li>In the eleventh scenario, Pramod retires and the assets are revalued. Stock is to be reduced, factory buildings are appreciated, and provisions are made for doubtful debts and legal charges. Goodwill is fixed at Rs. 10,000 and the capital of the new firm is fixed at Rs. 30,000. The journal entries and balance sheet of the reconstituted firm are given.</li> <li>In the twelfth scenario, Malik retires and the assets and liabilities are revalued. Stock, office furniture, plant and machinery, and land and building are revalued and a provision for doubtful debts is created. Goodwill is valued at Rs. 9,000 and the continuing partners agree to pay Rs. 16,500 as cash on retirement of Malik. The revaluation account, capital accounts, and balance sheet of the reconstituted firm are provided.</li> <li>In the thirteenth scenario, Bharti dies and her executors are entitled to the capital to her credit at the time of her death and interest thereon, her proportionate share of reserve fund, her share of profits for the intervening period based on sales, and goodwill according to her share of profit. The necessary journal entries and the account of the executors of Bharti are given.</li> <li>In the fourteenth scenario, Mithya dies and the assets are revalued. Goodwill is valued at 2 1/2 times the average profits of last four years, patents are valued at Rs. 8,000, and machinery is valued at Rs. 25,000. The necessary journal entries, the executor’s account, and the balance sheet of Nithya and Sathya after Mithya’s death are provided.</li> </ul> <p>======</p>