Partnership Accounts (Retirement of a Partner)

Transcription

1 Partnership Accounts (Retirement of a Partner) CPT Section A Fundamentals of Accountancy Chapter 8 Unit 4 Prof. Deepak Jaggi

2 Learning Objectives (1) Understand the role of retiring partner in the obligations of the firm. (2) Logic of treatment of Reserves and Debit Balances in case of retirement of partner. (3) Techniques of arriving at the various Ratio s. (4) Understand the Goodwill adjustment. (5) To Lay a solid foundation of accounting treatment in case of retirement of partner.

3 PARTNERSHIP ACCOUNTS (Retirement of a Partner) A partner who retires from the existing partnership firm is known as a retiring partner A partner who retires will be called as outgoing partner

4 Conti.. (Retirement of a Partner) A partner may retire from the business due to one or more of the following reasons: Old age or Health problems of the partner Better Opportunity Difference of opinion among partners

5 Accounting Treatment Not Same Similar to Admission of Partner Information given 1. Balance Sheet of Old Firm 2. Adjustments To Prepare 1. Revaluation A/c 2. Partner s Capital A/c 3. Cash /Bank A/c 4. Balance Sheet of a new Firm

6 Difference between Admission and Retirement of a Partner Admission 1) 2 Old Partners & 3 New Partners 2) Old Ratio, New Ratio, Sacrifice Ratio Retirement 1) 3 Old Partners & 2 New Partners 2) Old Ratio, New Ratio, Gain Ratio (Benefit Ratio) 3) C = Incoming Partner 3) C = Outgoing Partner 4) 2 Cases of Goodwill 4) 1 Case of Goodwill 5) Incoming Partner brings money 5) Outgoing Partner takes money

7 Goodwill Adjustment Goodwill is raised (Old Ratio) Goodwill A/c.. Dr. To Old Partner s Capital A/c GO (Old) Goodwill is written off (New Ratio) New Partner s Capital A/c.. Dr. To Goodwill A/c NG(New) Cont.

8 Goodwill Conti.. Net Effect of the above 2 entries In Gain Ratio New Partner s Capital A/c.. Dr. To Retiring Partner s Capital A/c NR (Gain)

9 Ratios Old Ratio = Old Partners New Ratio = New Partners Gain / Benefit Ratio = New Partners

10 Old Ratio Given Otherwise Equal among Old Partners

11 New Ratio Given Otherwise Just Remove the share of Outgoing Partner

12 Gain Ratio Same as Old Ratio if Old Ratio and New Ratio of New Partners is same Otherwise Formulae Gain Received = New Ratio Old Ratio

13 Example of Ratios - Question Deepika, Ranbir, Aditya are Old Partners - Ratio 3:2:1. Aditya retires D R A 3/6 2/6 1/6 OR 3:2:1 3/5 2/5 x NR=3:2 GR=3:2

14 Time Gap Partner retires in between the year Gap between last Balance Sheet and Date of Retirement. Retiring Partner is entitled for share in profits for this Time Gap Entry P&L Suspense A/c. Dr. To Retiring Partner s Capital A/c

15 Settlement of Retiring Partner s Capital A/c Credit Side Debit Side Amount is Payable to Retiring Partner Either Transfer to Cash / Bank A/c or Retiring Partner s Loan A/c Question is Silent - Transfer it to his Loan A/c

16 2,62,000 Practical Problem Kareena Kapoor, Karishma Kapoor and Deepika were partners sharing profits in the ratio of 4:3:3:- Liabilities Balance Sheet as on 31 st December, 1996 Assets Sundry Creditors 38,000 Cash at Bank 6,000 Bills Payable 10,000 Debtors 32,000 Reserve Fund 25,000 Less: R.D.D. 2,000 30,000 Stock 50,000 Capital Accounts Motor Van 16,000 Kareena Karishma 80,000 60,000 Plant and Machinery Factory Building 70,000 90,000 Deepika 49,000

17 Problem no.1 Conti.. Karishma retired on that date on the following terms:- 1. The Goodwill of the firm to be valued at 30,000 and Karishma s share in it should be raised. 2. Plant to be depreciated by 10% and Motor van y 12.5%. Stock to be appreciated by 10% and Building by 20%. 3. One workman Shahrukh was injured and compensation of 6,000 payable to him is to be recorded in the firm s book. 4. Provision for doubtful debts is no longer necessary. 5. Both the partners decided that Goodwill should not appear in the books of accounts of the firm. The amount payable to Karishma shall be kept as Loan. Prepare: Capital Accounts of the Partners. Profit and Loss Adjustment Account, Balance Sheet of Kareena and Deepika.

18 Solution Revaluation Account Particulars Amt. Amt. Particulars Amt. Amt. To Plant A/c To Motor Van A/c To Compensation Payable A/c To Partners Capital A/c. Kareena Karishma Deepika 4,000 3,000 3,000 7,000 By Stock A/c 5,000 2,000 By Building A/c 18,000 By R.D.D. A/c 2,000 6,000 10,000 25,000 25,000

19 Solution Conti.. Partners Capital Account Particulars Kareena Karishma Deepika Particulars Kareena Karishma Deepika To Karishma s A/c 5,143-3,857 By Balance b/d 80,000 60,000 49,000 By Reserve Fund 10,000 7,500 7,500 To Karishma s Loan 79,500 By Revaluation A/c 4,000 3,000 3,000 A/c To Balance c/d 88,857-55,643 By Kareena A/c By Deepika A/c - - 5,143 3, ,000 79,500 59,500 94,000 79,500 59,500 Cont.

20 Solution Conti.. (After Retirement) Balance Sheet Liabilities Amt. Amt. Assets Amt. Amt. Partner s Capital A/c Kareena Deepika Compensation Payable Creditors Bills Payable Karishma s Loan 88,857 55,643 1,44,500 6,000 38,000 10,000 79,500 Machinery Motor Van Cash Stock Building Debtors 63,000 14,000 6,000 55,000 1,08,000 32,000 2,78,000 2,78,000

21 MCQ s

22 MCQ.1 Q.1. X, Y and Z are partners with profits sharing ratio 4:3:2. Y retires and Goodwill 10,800 shown in books of account. If X and Z shares profits new ratio in 5:3, then find the gain profit sharing ratio. a) 13:11 Ans. a) 13:11 b) 17 : 11 c) 31 : 11 d) 14 : 21

23 MCQ.2 Q.2. The Capitals of X, Y and Z are 1,00,000, 75,000 and 50,000, profits are shared in the ratio of 3:2:1. Y retires on the basis of firm purchased by other partners in the new ratio between X and Z is 3:1. Find the capital of X and Z. a) 1,50,000 and 1,00,000 b) 1,46,250 and 42,000 c) 1,56,250 and 68,750 d) 86,250 and 46,250 Ans. c) 1,56,250 and 68,750

24 MCQ.3 Q.3. Outgoing partner is compensated for parting with firm s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount a) Gaining Ratio b) Capital Ratio c) Sacrificing Ratio d) Profit Sharing Ratio Ans. a) Gaining Ratio

25 MCQ.4 Q.4. Claim of the retiring partner is payable in the following form a) Fully in cash b) Fully transferred to loan account to be paid later with some interest on it c) Partly in cash and partly as loan repayable later with agreed interest d) Any of the above method Ans. d) Any of the above method

26 MCQ.5 Q.5. X, Y and Z were partners in a firm sharing profits and losses in the ratio of 2:2:1 respectively with the capital balance of 50,000 for X and Y, for Z 25,000. Y declared to retire from the firm and balance in reserve on the date was 15,000. If goodwill of the firm was valued as 30,000 and profit on revaluation was 7,050, then what amount will be transferred to the loan account of Y. a) 70,820 b) 50,820 c) 25,820 d) 60,000 Ans. a) 70,820

27 MCQ.6 Q.6. Aman, Raman and Sunit are partners sharing profits and losses in the ratio of 5:4:3. Sunit retires and if Aman and Raman shares profits of Sunit in 4:3, then new profit sharing ratio will be : a) 4 : 3 b) 47 : 37 c) 5 : 4 d) 5 : 3 Ans. b) 47 : 37

28 MCQ.7 Q.7. X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1. X retired Goodwill of the firm is to be valued at 24,000 & Goodwill Account is to be raised which is not appearing in the balance sheet. What will be the treatment for goodwill? a) Credited to Revaluation Account at 24,000 b) Credited to partners capital account 24,000 in profit sharing ratio c) Only X s capital A/c Credited with 12,000 d) Only X s capital A/c credited with 24,000. Ans. b) Credited to partners capital account 24,000 in profit sharing ratio

29 MCQ.8 Q.8. X, Y and Z are partners sharing profits in the ratio 2:2:1. On retirement of Y, goodwill was valued as 30,000. Find the contribution of X and Z to compensate Y. a) 20,000 and 10,000 b) 8,000 and 4,000 c) They will not contribute anything. d) Only X s capital A/c credited with 24,000. Ans. b) 8,000 and 4,000

30 MCQ.9 Q.9. A, B and C are partners sharing profits and losses in he proportion of 1/2, 1/3 and 1/6. B retired and the new profit sharing ratio between A and C is 3 : 2 and the Reserve of 12,000 is divided amount the partners in the ratio: a) 2,000 : 4,000 : 6,000 b) 5,000 : 5,000 : 2,000 c) 4,000 : 6,000 : 2,000 d) 6,000 : 4,000 : 2,000 Ans. d) 6,000 : 4,000 : 2,000

31 MCQ.10 Q.10. Retiring or outgoing partner : a) To be liable for firm s liabilities. b) Not liable for any liabilities of the firm. c) Is liable for obligation incurred before his retirement. d) Is liable for obligations incurred with his consent only. Ans. c) Is liable for obligation incurred before his retirement

32 Lesson Summary Partner goes out Accounting Treatment similar to Admission but not same Gain Ratio / Benefit Ratio = New Ratio of New Partners, Otherwise Gain Received = New Ratio-Old Ratio Also Gain Received + Old Ratio = New Ratio For New Ratio, Just Remove, the share of Outgoing Partner Time Gap between Balance Sheet date and Date of Retirement - P & L Suspense A/c Dr. To Retiring Partner s Capital A/c Settlement = Cash or Loan, If Question Silent then Loan

33 Thank You