Reconstitution of a Partnership Firm - Retirement of a Partner

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Questions:

Generic 3

5 x 3 = 15

State the ratio in which the retiring partner's share of goodwill is debited to remaining partners.

Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

Arjun, Bhim and Nakul are partners sharing profits and Losses in the ratio of 14:5:6 respectively. Bhim retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits for the last 3 years are Rs.50,000, Rs.55,000 and Rs.60,000 respectively. The normal profits for the similar firm are Rs.30,000. Goodwill already in the books of the firm at Rs.75,000. The profit for the first year after Bhim's retirement was Rs.1,00,000. Give the necessary Journal Entries to adjust Goodwill and distribute profits showing your workings clearly.

Ram, Laxman and Bharat are partners sharing profits in the ratio of 3:2:1. Goodwill is appearing in the books at a value of Rs.1,80,000. Laxman retires and at the time of his retirement, goodwill is valued at Rs.2,52,000. Ram and Bharat decided to share future profits in the ratio of 2:1. The profits for the first year after Laxman's retirement amount to Rs.1,20,000. Give the necessary Journal Entries to record goodwill and to distribute the profits. Show your calculations clearly.

A, B and C were partners sharing profits in the ratio of 6:4:5. Their capitals were A Rs.1,00,000, B-Rs.80,000 and C-Rs.60,000. On 1st April 2009, B retired from the firm and the new profit sharing ratio between A and C was decided as 11:4. On B's retirement the goodwill of the firm was valued at Rs.1,80,000. Showing your calculations clearly, pass necessary journal entry for the treatment of goodwill on B's retirement.

Generic 6

1 x 6 = 6

Sandeep, Praveen and Tara are partners sharing profits in the ratio of 3:2:1. On 1st April, 2012 Sandeep gave a notice to retire from the firm. Praveen and Tara after all adjustments showed a balance of Rs.64,000 and Rs.1,00,000 respectively. The total amount to be paid to Sandeep was Rs.1,23,000. This amount was to be paid by Praveen and Tara in such a way Pass necessary Journal entires for the above transations in the books of the firm. Show your working clearly.

1 Marks

3 x 1 = 3

Why heirs of a retiring/deceased partner are entitled to a share of goodwill of the firm ?

State any two deductions that may have to be made from the amount payable to the legal representative of a deceased partner.

What is the need for treatement of goodwill on the death of a partner ?

Generic 8

2 x 8 = 16

10.

H, I and J were partners in a firm with profit sharing ratio of 1/2, 1/3 and 1/6 respectively.The balance sheet of the firm at 31st March, 2015 was as follows

**Balance Sheet as at 31st March, 2018**
Liabilities		AMt(Rs)	Assets		Amt(Rs)
Sundry Creditors		42,000	Goodwill		12,000
Workmen Compensation Reserve		24,000	Cash at Bank		11,500
Employees' Provident Fund		12,000	Debtors	80,000
Investment Fluctuation reserve		12,000	(-)Provision for Doubtful Debts Stock	(4,000)	76,000
Capital A/cs			Stock		75,300
H	1,36,000		Investment(Market value Rs.35,200)		30,000
I	64,000		Patents		20,000
J	42,000	2,42,000	Machinery		1,00,000
			Advertisement Expenditure A/c		7,200
		3,32,000			3,32,000

J retired on 1st April, 2015 on the following terms.
(i) Goodwill of the firm was valued at Rs.60,000.
(ii) Value of patents was to be reduced by 20% and that of machinery to 90%
(iii) Provision for doubtful debt was to be raised to 6%
(iv) Liability on account of provident fund was only Rs.6,000
(v) Liability for workmen compensation to the extent of Rs.12,000 is to be created
(vi) J took over the investment at market value.
(viii) Amount due to J is to be settled on the following basis
50% on retirement, 50% of the balance within one year and the balance by a bill of exchange at 3 months.
You are required to show entires for the treatment of goodwill, revaluation account, partners' capital accounts sheet of H and I after J's retirement.

11.

Give the journal entry to distribute workmen compensation reserve of Rs.70,000 at the time of retirement of Neeti when there is claim Rs.25,000 against it.The firm has three partners Raveena, Neeti and Rajat.

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Answers Key:

Generic 3

5 x 3 = 15

Retiring partner's share of goodwill is debited to remaining partners in the gaining ratio

When an existing partner of a firm decides to retire from the firm, the remaining partner(s) will gain in future profits. The remaining partner who gains by acquiring an additional right to share future profits must compensate the outing partner who sacrifices by foregoing his right to share future profits.The amount compensation must be equal to the proportionate value of firm's goodwill.

Only Arjun gains 5/25, New Profit Sharing Ratio 19:6, Super Profit Rs.25,000, i.e., Rs.55,000 (Average Profit) Rs.30,000 (Normal Profit), Value of firm's Goodwill Rs.50,000, i.e., 25,000 (Super Profit) x 2(No.of years' purchase), Bhim's share of Goodwill Rs.10,000, i.e., Rs.50,000 x 2/25.
(i) Dr.Arun's Capital Rs.42,000, Bhim's Capital Rs.15,000 and Nakul's Capital Rs.18,000; Cr. Goodwill Rs.75,000
(ii) Dr.Arjun's Capital, Cr.Bhim's Capital by 10,000.
(iii) Dr.Profit and Loss Appropriation A/c Rs.1,00,000; Cr. Arjun's Capital Rs.76,000 and Nakul's Capital Rs.24,000

Gaining Ratio 1:1; Laxman's share of goodwill Rs.84,000 i.e., 2,52,000 x 2/6.
(i) Dr. Ram's Capital Rs.90,000, Laxman's Capital Rs.60,000 and Bharat's Capital Rs.30,000; Cr.Goodwill Rs.1,80,000.
(ii) Dr. Ram's Capital and Bharat's Capital Rs.42,000 each; Cr.Laxman's Capital Rs.84,000.
(iii) Dr. Profit and Loss Appropriation A/c Rs.1,20,000, Cr.Ram's Capital Rs.80,000 and Bharat's Capital Rs.40,000.

A's gain 5/15 and B's Sacrifice 4/15; Dr.A's Capital A/c Rs.60,000; Cr.B's Capital A/c Rs.48,000 and C's Capital Rs.12,000.

Generic 6

1 x 6 = 6

(i) Total capital of New Firm of Praveen and Tara Rs.2,87,000 (i.e., Rs.1,23,000+Rs.64,000+Rs.1,00,000) will be divided in the new ratio 2:3, i.e., 1,14,800 and Rs.1,72,200 respectively.

(ii) (a) Dr. Bank A/c Rs.1,23,000; Cr. Parveen's Capital A/c Rs.50,800, i.e., Rs.1,14,800-Rs.64,000 and Tara's Capital A/c Rs.72,200 i.e., Rs.1,72,200-Rs.1,00,000 (b) Dr. Sandeep's Capital A/c, Cr. Bank A/c by Rs.1,23,000.

[Hint: Gaining Ratio 3:2.]

1 Marks

3 x 1 = 3

()
The retiring partner/heirs of deceased partner are entitled to his share of goodwill because the goodwill earned by the firm is result of efforts of all the existing partners in the past. As they will not be sharing future profits, it will be fair to compensate them for the same.

()
(i) Share of accumulated losses
(ii) Drawings upto death etc.

()
Since the deceased partner will not be sharing profits, therefore, goodwill is given to compensate him for the same.

Generic 8

2 x 8 = 16

10.

Journal

Date	Particular		Amt(Dr)	Amt(Cr)
2015
Apr1	H's Capital A/c	Dr	6,00
	I's Capital A/c	Dr	4,000
	J's Capital A/c	Dr	2,000
	To Goodwill A/c			12,000
	(Being the existing goodwill written-off)
	H's Capital A/c	Dr	6,000
	I's Capital A/c	Dr	4,000
	To J's Capital A/c			10,000
	(Being J's share of goodwill credited to him by debiting gaining partners in their gaining ratio of 3:2)

Dr Revaluation Account Cr

Particular	Amt(Rs)	Particular		Amt(Rs)
To Patners A/c	4,000	By Investment A/c(Rs.35,200 - Rs.30,000)		5,200
To Machinery	10,000	By Employees's Provident Fund A/c		6,000
To Provision for Doubtful Debts A/c	800	By Loss on Revaluation Transferred to
		H's Capital A/c	1,800
		iI's Capital A/c	1,200
		J's Capital A/c	600	3600
	14,000			14,800

Dr Partners's Capital Account Cr

Particular	H(Rs)	J(Rs)	J(Rs)	Particular	H(Rs)	I(Rs)	J(Rs)
To Goodwill A/c	6,000	4,000	2,000	By Balance b/d	1,36,000	64,000	42,000
To J's Capital A/c	6,000	4,000	-	By Workmen Compensation
To Revaluation A/c (Loss)	1,800	1,200	600	Reserve A/c (WN 3)	6,000	4,000	2,000
To Advertisement				By Investment Fluctuation
Expenditure A/c	3,600	2,400	1,200	Reserve A/c (WN 4)	6,000	4,000	2,000
To Investment A/c	-	-	35,200	By H's Capital A/c	-	-	6,000
To Bank A/c (WN 2)	-	-	8,500	By I's Capital A/c	-	-	4,000
To J's Loan A/c (WN 2)	-	-	4,250
To Bills Payable A/c (WN 2)	-	-	4,250
To Balance c/d	1,30,600	60,400	-
	1,48,000	72,000	56,000		1,48,000	72,000	56,000

Balance Sheet
as at 1st April, 2015

Liabilities		Amt(Rs)	Assets		Amt (Rs)
sundry Creitors		42,000	Cash at Bank (Rs.11,500-Rs.8,500)		3,000
Workmen Compensation Reserve		12,000	Debtors	80,000
Employees' Provident Fund		6,000	(-) Provision for Doubtful Debts	(4,800)	75,200
Bills Payable		4,250	stock		75,300
J's Loan		4,250	Patents		16,000
Capital			Machinery		90,000
H	1,30,600
I	60,400	1,91,000
		2,59,500			2,59,500

11.

Journal

Particular	Amt(Dr)	Amt(Cr)
Workmen Compensation Reserve A/c Dr	70,000
To Liability for workmen compensation claim A/c capital A/c		25,000
To Ravena's Capital A/c		20,000
To Kavita's Capital A/c		20,000
(Being workmen compensation reserve distributed to old partners in old ratio)