NCERT Solutions Class 12 Accountancy Chapter 4 Reconstitution of a Partnership Firm Retirement Death of a Partner

Do It Yourself

Question 1. Anita, Jaya and Nisha are partners sharing profits and losses in the ratio of 1:1:1 Jaya retires from the firm. Anita and Nisha decided to share the profit in future in the ratio 4 :3. Calculate the gaining ratio.
Answer: The old profit sharing ratio of Anita, Jaya, and Nisha is 1 : 1 : 1. After Jaya's retirement, the remaining partners Anita and Nisha decide to share future profits in the ratio of 4 : 3.
The gaining share of continuing partners is determined by subtracting their old share from their new share:
\( \text{Anita's Gain} = \text{New Share} - \text{Old Share} = \frac{4}{7} - \frac{1}{3} = \frac{12 - 7}{21} = \frac{5}{21} \)
\( \text{Nisha's Gain} = \text{New Share} - \text{Old Share} = \frac{3}{7} - \frac{1}{3} = \frac{9 - 7}{21} = \frac{2}{21} \)
Therefore, the gaining ratio of Anita and Nisha is 5 : 2.
In simple words: The partners gain the retiring partner's share in a 5 : 2 ratio, which is calculated by subtracting their old shares from their new shares.
Exam Tip: Gaining ratio is calculated as New Ratio minus Old Ratio. Remember to find a common denominator before subtracting the fractions.

Question 2. Azad, Vijay and Amit are partners sharing profits and losses in the proportion of 1/4,1/8,10/16 and Calculate the new profit sharing ratio between continuing partners if (a) Azad retires; (b) Vijay retires; (c) Amit retires.
Answer: First, we write the old profit sharing proportions with a common denominator of 16:
\( \text{Azad's Share} = \frac{1}{4} = \frac{4}{16} \)
\( \text{Vijay's Share} = \frac{1}{8} = \frac{2}{16} \)
\( \text{Amit's Share} = \frac{10}{16} \)
This gives a simplified old profit sharing ratio of 4 : 2 : 10, which reduces to 2 : 1 : 5.
In the absence of any other details, the continuing partners will share future profits in their relative old proportions:
(a) If Azad retires, the new profit sharing ratio between Vijay and Amit is 1 : 5.
(b) If Vijay retires, the new profit sharing ratio between Azad and Amit is 2 : 5.
(c) If Amit retires, the new profit sharing ratio between Azad and Vijay is 2 : 1.
In simple words: First make the denominators equal to find the base ratio of 2 : 1 : 5. When a partner leaves and no details are given, just drop their share to find the remaining partners' new ratio.
Exam Tip: Do not forget to simplify the ratio to its lowest terms before writing down the final answers.

Question 3. Calculate the gaining ratio in each of the above situations.
Answer: We calculate the gaining ratio for each scenario from Question 2 using the formula: \( \text{Gaining Ratio} = \text{New Share} - \text{Old Share} \).
(a) If Azad retires (New Ratio between Vijay and Amit = 1 : 5):
\( \text{Vijay's Gain} = \frac{1}{6} - \frac{2}{16} = \frac{1}{6} - \frac{1}{8} = \frac{4 - 3}{24} = \frac{1}{24} \)
\( \text{Amit's Gain} = \frac{5}{6} - \frac{10}{16} = \frac{5}{6} - \frac{5}{8} = \frac{20 - 15}{24} = \frac{5}{24} \)
Gaining Ratio = 1 : 5
(b) If Vijay retires (New Ratio between Azad and Amit = 2 : 5):
\( \text{Azad's Gain} = \frac{2}{7} - \frac{4}{16} = \frac{2}{7} - \frac{1}{4} = \frac{8 - 7}{28} = \frac{1}{28} = \frac{2}{56} \)
\( \text{Amit's Gain} = \frac{5}{7} - \frac{10}{16} = \frac{5}{7} - \frac{5}{8} = \frac{40 - 35}{56} = \frac{5}{56} \)
Gaining Ratio = 2 : 5
(c) If Amit retires (New Ratio between Azad and Vijay = 2 : 1):
\( \text{Azad's Gain} = \frac{2}{3} - \frac{4}{16} = \frac{2}{3} - \frac{1}{4} = \frac{8 - 3}{12} = \frac{5}{12} = \frac{10}{24} \)
\( \text{Vijay's Gain} = \frac{1}{3} - \frac{2}{16} = \frac{1}{3} - \frac{1}{8} = \frac{8 - 3}{24} = \frac{5}{24} \)
Gaining Ratio = 10 : 5 = 2 : 1
In simple words: When no specific acquisition details are mentioned, the gaining ratio of the remaining partners is identical to their relative new profit-sharing ratio.
Exam Tip: If no information is given about who acquires the retiring partner's share, the gaining ratio of the continuing partners is always their existing ratio.

Question 4. Anu, Prabha and Milli are partners. Anu retires. Calculate the future profit sharing ratio of continuing partners and gaining ratio if they agree to acquire her share : (a) in the ratio of 5:3; (b) equally.
Answer: Since no old ratio is given, we assume that Anu, Prabha, and Milli share profits equally in the ratio of 1 : 1 : 1. Anu's retiring share is \( \frac{1}{3} \).
(a) If Prabha and Milli acquire her share in the ratio of 5 : 3:
\( \text{Share acquired by Prabha} = \frac{1}{3} \times \frac{5}{8} = \frac{5}{24} \)
\( \text{Share acquired by Milli} = \frac{1}{3} \times \frac{3}{8} = \frac{3}{24} \)
\( \text{Prabha's New Share} = \text{Old Share} + \text{Acquired Share} = \frac{1}{3} + \frac{5}{24} = \frac{8 + 5}{24} = \frac{13}{24} \)
\( \text{Milli's New Share} = \text{Old Share} + \text{Acquired Share} = \frac{1}{3} + \frac{3}{24} = \frac{8 + 3}{24} = \frac{11}{24} \)
Thus, the new profit sharing ratio is 13 : 11, and the gaining ratio is 5 : 3.
(b) If they acquire her share equally:
\( \text{Share acquired by Prabha} = \frac{1}{3} \times \frac{1}{2} = \frac{1}{6} \)
\( \text{Share acquired by Milli} = \frac{1}{3} \times \frac{1}{2} = \frac{1}{6} \)
\( \text{Prabha's New Share} = \frac{1}{3} + \frac{1}{6} = \frac{2 + 1}{6} = \frac{3}{6} = \frac{1}{2} \)
\( \text{Milli's New Share} = \frac{1}{3} + \frac{1}{6} = \frac{2 + 1}{6} = \frac{3}{6} = \frac{1}{2} \)
Thus, the new profit sharing ratio is 1 : 1, and the gaining ratio is 1 : 1.
In simple words: Find the fraction of the retiring partner's share that each continuing partner gets, and add it to their original equal shares to get the new ratio.
Exam Tip: If the partners acquire the retiree's share in a particular ratio, that acquisition ratio automatically becomes their gaining ratio.

Question 5. Rahul, Robin and Rajesh are partners sharing profits in the ratio of 3 : 2 : 1. Calculate the new profit sharing ratio of the remaining partners if (i) Rahul retires; (ii) Robin retires; (iii) Rajesh retires.
Answer: Since no details of acquisition are given, we find the new profit sharing ratio of the continuing partners by dropping the retiring partner's share from the old ratio of 3 : 2 : 1:
(i) If Rahul retires, the continuing partners are Robin and Rajesh. Their new profit sharing ratio is 2 : 1.
(ii) If Robin retires, the continuing partners are Rahul and Rajesh. Their new profit sharing ratio is 3 : 1.
(iii) If Rajesh retires, the continuing partners are Rahul and Robin. Their new profit sharing ratio is 3 : 2.
In simple words: When a partner leaves and no details are specified, simply strike out their share to get the new ratio for the remaining partners.
Exam Tip: The gaining ratio in all these three scenarios is identical to the continuing partners' new profit sharing ratio.

Question 6. Puja, Priya, Pratistha are partners sharing profits and losses in the ratio of 5 : 3 : 2. Priya retires. Her share is taken by Priya and Pratistha in the ratio of 2 : 1. Calculate the new profit sharing ratio.
Answer: Due to a typo in the question stating Priya retires while her share is taken by Priya and Pratistha, we assume Puja retires and her share of \( \frac{5}{10} \) is acquired by Priya and Pratistha in the ratio of 2 : 1.
\( \text{Share acquired by Priya} = \frac{5}{10} \times \frac{2}{3} = \frac{10}{30} \)
\( \text{Share acquired by Pratistha} = \frac{5}{10} \times \frac{1}{3} = \frac{5}{30} \)
\( \text{Priya's New Share} = \text{Old Share} + \text{Acquired Share} = \frac{3}{10} + \frac{10}{30} = \frac{9 + 10}{30} = \frac{19}{30} \)
\( \text{Pratistha's New Share} = \text{Old Share} + \text{Acquired Share} = \frac{2}{10} + \frac{5}{30} = \frac{6 + 5}{30} = \frac{11}{30} \)
Therefore, the new profit sharing ratio of Priya and Pratistha is 19 : 11.
In simple words: Puja's share is divided in a 2 : 1 ratio. We add these gained portions to Priya's and Pratistha's old shares to calculate their new ratio of 19 : 11.
Exam Tip: If there is a logical error in the exam paper, state your assumption clearly at the top of your answer sheet and complete the calculation based on that assumption.

Question 7. Ashok, Anil and Ajay are partners sharing profits and losses in the ratio of 1/2, 3/10 and 1/5. . Anil retires from the firm. Ashok and Ajay decide to share future profits and losses in the ratio of 3 : 2. Calculate the gaining ratio.
Answer: First, we write the old profit sharing proportions using a common denominator:
\( \text{Ashok} : \text{Anil} : \text{Ajay} = \frac{1}{2} : \frac{3}{10} : \frac{1}{5} = \frac{5}{10} : \frac{3}{10} : \frac{2}{10} = 5 : 3 : 2 \)
Anil retires, and the new profit sharing ratio between Ashok and Ajay is 3 : 2 (or \( \frac{3}{5} : \frac{2}{5} \)).
Now, we calculate the gaining ratio using the formula: \( \text{Gaining Ratio} = \text{New Share} - \text{Old Share} \):
\( \text{Ashok's Gain} = \frac{3}{5} - \frac{5}{10} = \frac{6 - 5}{10} = \frac{1}{10} \)
\( \text{Ajay's Gain} = \frac{2}{5} - \frac{2}{10} = \frac{4 - 2}{10} = \frac{2}{10} \)
Thus, the gaining ratio of Ashok and Ajay is 1 : 2.
In simple words: By making denominators equal, we find the old ratio was 5 : 3 : 2. Subtracting their old shares from their new shares shows that Ashok and Ajay gain in a 1 : 2 ratio.
Exam Tip: Always make the denominators equal for both the old and new shares before performing calculations for the gaining ratio.

Test Your Understanding I

Question 1. Abhishek, Rajat and Vivek are partners sharing profits in the ratio of 5:3:2. If Vivek retires, the New Profit Sharing Ratio between Abhishek and Rajat will be-
(a) 3:2
(b) 5:3
(c) 5:2
(d) None of the options
Answer: (b) 5:3
In simple words: Since Vivek retires and no new agreement is specified, we simply remove his share of 2, leaving Abhishek and Rajat with their old relative ratio of 5 : 3.
Exam Tip: In basic retirement cases, the relative profit-sharing ratio between the continuing partners remains unchanged.

Question 2. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1. The new profit sharing ratio after Satish’s retirement is 3:2. The gaining ratio is
(a) 3 : 2
(b) 2 : 1
(c) 1 : 1
(d) 2 : 2
Answer: (c) 1 : 1
In simple words: Subtracting their old shares from their new shares shows that Rajender and Tejpal both gained an equal share of 1/5, giving them a gaining ratio of 1 : 1.
Exam Tip: Gaining ratio is calculated as New Share minus Old Share. Double-check your subtraction and simplify the resulting ratio.

Question 3. Anand, Bahadur and Chander are partners. Sharing Profit equally on Chander’s retirement, his share is acquired by Anand and Bahadur in the ratio of 3 : 2. The new profit sharing ratio between Anand and Bahadur will be
(a) 8 : 7
(b) 4 : 5
(c) 3 : 2
(d) 2:3
Answer: (a) 8 : 7
In simple words: Chander's 1/3 share is divided in a 3 : 2 ratio, giving 3/15 to Anand and 2/15 to Bahadur. Adding these to their original 1/3 shares gives a new ratio of 8 : 7.
Exam Tip: First calculate the share gained from the retiring partner, and then add this gained share to the old share to find the new share of each continuing partner.

Question 4. In the absence of any information regarding the acquisition of share in profit of the retiring/deceased partner by the remaining partners, it is assumed that they acquire his/her share
(a) old profit sharing ratio
(b) new profit sharing ratio
(c) equal ratio
(d) None of the options
Answer: (a) old profit sharing ratio
In simple words: When the problem is silent about how the continuing partners take over the retiree's share, we assume they acquire it in their original profit-sharing ratio.
Exam Tip: Understanding this fundamental assumption helps solve more complex ratio adjustment problems efficiently.

Test Your Understanding II

Question 1. On retirement/death of a partner, the retiring/deceased partner’s capital account will be credited with
(a) his/her share of goodwill
(b) goodwill of the firm
(c) shares of goodwill of remaining partners
(d) None of the options
Answer: (a) his/her share of goodwill
In simple words: At the time of retirement or death, the leaving partner is only entitled to receive their specific portion of the firm's total goodwill in their capital account.
Exam Tip: The entry for adjusting goodwill on retirement is: Gaining Partners' Capital A/c Dr. (in gaining ratio) to Retiring Partner's Capital A/c (with their share of goodwill).

Question 2. Gobind, Hari and Pratap are partners. On retirement of Gobind, the goodwill already appears in the Balance Sheet at Rs. 24,000. The goodwill will be written off
(a) by debiting all partners’ capital accounts in their old profit sharing ratio
(b) by debiting remaining partners’ capital accounts in their new profit sharing ratio
(c) by debiting retiring partners’ capital accounts from his share of goodwill
(d) None of the options
Answer: (a) by debiting all partners’ capital accounts in their old profit sharing ratio
In simple words: Existing goodwill in the books must be completely written off by debiting all the partners (including the retiring partner) in their original profit-sharing ratio.
Exam Tip: Remember the distinction: existing goodwill is written off among all partners in their old ratio, whereas newly valued goodwill is adjusted only among continuing partners in their gaining ratio.

Question 3. Chaman, Raman and Suman are partners sharing profits in the ratio of 5:3:2. Raman retires, the new profit sharing ratio between Chaman and Suman will be 1:1. The goodwill of the firm is valued at Rs. 1 ,00,000 Raman’s share of goodwill will be adjusted
(a) by debiting Chaman’s Capital account and Suman’s Capital Account with Rs 15,000 each.
(b) By debiting Chaman’s Capital account and Suman’s Capital Account with Rs. 21,429 and 8,571 respectively.
(c) By debiting only Suman’s Capital Account with Rs. 30,000.
(d) By debiting Raman’s Capital account with Rs. 30,000.
Answer: (c) By debiting only Suman’s Capital Account with Rs. 30,000.
In simple words: Calculating the gains shows that Chaman's share remains 5/10 (no change), while only Suman gains from 2/10 to 5/10. Therefore, only Suman compensates Raman for his Rs. 30,000 share of goodwill.
Exam Tip: If a partner's gain is zero or negative after retirement, they will not be debited for any share of the goodwill of the retiring partner.

Question 4. On retirement/death of a partner, the remaining partner(s) who have gained due to change in profit sharing ratio should compensate the
(a) retiring partners only.
(b) Remaining partners (who have sacrificed) as well as retiring partners.
(c) Remaining partners only (who have sacrificed).
(d) None of the options
Answer: (b) Remaining partners (who have sacrificed) as well as partners
In simple words: Any partner whose profit share increases must compensate all partners who lose profit shares, which includes the retiring partner and any continuing partner who sacrificed.
Exam Tip: Goodwill compensation is fundamentally about gaining partners paying sacrificing partners in their respective gaining and sacrificing ratios.

Do It Yourself II

Question 1. Vijay, Ajay and Mohan are friends. They passed B (Hons) from Delhi University in June, 2013. They decided to business of computer hardware. On 1st of August, 2013, they introduced the capital of Rs. 50,000, Rs.30, 000 and Rs. 20,000 respectively and started the business in partnership at Delhi. The profit sharing ratio decided between there was 4:2:1. The business was running successfully. But on 1st February, 2019, due to certain unavoidable circumstances and family circumstances, Ajay decided to settle in Pune and decided to retire from the partnership on 31st March, 2020; with the consent of partners, Ajay retires as on 31st March, 2020, the position of assets and liabilities are as follows

On the date of retirement, the following adjustments were to be made
(1) Firm’s goodwill was valued at Rs. 1,48,000.
(2) Assets and Liabilities are to be valued as under; Stock Rs. 72,000; Land and Buildings Rs. 1,35,600; Debtors Rs. 63,000; Machinery Rs.1,50,000; Creditors Rs. 84,000.
(3) Vijay to bring Rs. 1, 20,000 and Mohan Rs. 30,000 as additional capital.
(4) Ajay was to be paid Rs. 97,200 in cash and the balance of his Capital Account to be transferred to his Loan Account Work out the amount
Answer:

Working Notes:
1. Calculation of Ajay's share of goodwill:
Total Goodwill of the firm = Rs. 1,48,000
Ajay's Share of Goodwill = \( 1,48,000 \times \frac{2}{7} = \text{Rs. } 42,286 \)
2. Determination of Gaining Ratio:
\( \text{Gaining Ratio} = \text{New Ratio} - \text{Old Ratio} \)
Vijay's Gaining Share = \( \frac{4}{5} - \frac{4}{7} = \frac{28 - 20}{35} = \frac{8}{35} \)
Mohan's Gaining Share = \( \frac{1}{5} - \frac{1}{7} = \frac{7 - 5}{35} = \frac{2}{35} \)
Thus, Gaining Ratio = 8 : 2 = 4 : 1.
3. Division of Ajay's goodwill share between continuing partners:
Vijay's Contribution = \( 42,286 \times \frac{4}{5} = \text{Rs. } 33,829 \)
Mohan's Contribution = \( 42,286 \times \frac{1}{5} = \text{Rs. } 8,457 \)
In simple words: First, existing goodwill and revaluation loss are adjusted in the partners' capital accounts in their old 4 : 2 : 1 ratio. Ajay's new goodwill share of Rs. 42,286 is compensated by Vijay (Rs. 33,829) and Mohan (Rs. 8,457) in their 4 : 1 gaining ratio. Finally, Ajay's account is cleared by paying Rs. 97,200 in cash and transferring the remaining Rs. 58,686 to his loan account.
Exam Tip: Always make sure to debit the old goodwill appearing in the Balance Sheet to all partners' capital accounts in their old profit sharing ratio before adjusting the new goodwill valuation.

Do It Yourself III

Question 1. The Balance Sheet of A, B and C who were sharing the profits in proportion to their capitals stood as on March 31, 2007.

B retired on the date of Balance Sheet and the following adjustments were to be made
(a) Stock was depreciated by 10%.
(b) Factory building was appreciated by 12%.
(c) Provision for doubtful debts to be created up to 5%.
(d) Provision for legal charges to be made at Rs. 265.
(e) The goodwill of the firm to be fixed at Rs. 10,000.
(f) The capital of the new firm to be fixed at Rs. 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.
Work out the final balances in capital accounts of the firm and the amount to bh brought in and/or withdrawn by A and C to make their capitals proportionate to then new profit sharing ratio.
Answer:

Working Notes:
1. Determination of Profit Sharing Ratio:
The partners share profits in proportion to their capitals (Rs. 20,000 : Rs. 15,000 : Rs. 15,000), which gives an old ratio of 4 : 3 : 3. After B's retirement, the agreed new ratio between A and C is 3 : 2.
2. Determination of Gaining Ratio:
\( \text{Gaining Ratio} = \text{New Share} - \text{Old Share} \)
A's Gaining Share = \( \frac{3}{5} - \frac{4}{10} = \frac{6 - 4}{10} = \frac{2}{10} \)
C's Gaining Share = \( \frac{2}{5} - \frac{3}{10} = \frac{4 - 3}{10} = \frac{1}{10} \)
Gaining Ratio of A and C = 2 : 1.
3. Goodwill Valuation and Adjustment:
Total Goodwill of the Firm = Rs. 10,000
B's Share of Goodwill = \( 10,000 \times \frac{3}{10} = \text{Rs. } 3,000 \)
This is compensated by A and C in their gaining ratio (2 : 1):
A's Contribution = \( 3,000 \times \frac{2}{3} = \text{Rs. } 2,000 \)
C's Contribution = \( 3,000 \times \frac{1}{3} = \text{Rs. } 1,000 \)
4. Capital Adjustment of the New Firm:
Total Capital of the New Firm is fixed at Rs. 30,000.
New Capital of A = \( 30,000 \times \frac{3}{5} = \text{Rs. } 18,000 \)
New Capital of C = \( 30,000 \times \frac{2}{5} = \text{Rs. } 12,000 \)
After adjustments, A's balance stands at Rs. 18,940, so A withdraws Rs. 940 (18,940 - 18,000). C's balance stands at Rs. 14,705, so C withdraws Rs. 2,705 (14,705 - 12,000).
In simple words: B's share of goodwill is Rs. 3,000, which A and C pay in their 2 : 1 gaining ratio. The net revaluation loss is Rs. 400. Continuing capitals are fixed at Rs. 18,000 and Rs. 12,000, and both partners withdraw cash to align their balances.
Exam Tip: When capitals are adjusted through cash, first balance the capital accounts using the fixed new capital as 'Balance c/d', and then find the cash to be brought in or withdrawn as the balancing figure.

Question 2. R, S and M were carrying on business in partnership sharing profits in the ratio of 3 : 2 : 1 respectively. On March 31, 2011, Balance Sheet of the firm stood as follows

Shyam retired on the above mentioned date on the following terms
(a) Buildings to be appreciated by Rs. 8,800.
(b) Provision for doubtful debts to be made @ 5% on debtors.
(c) Goodwill of the firm to be valued at Rs. 9,000.
(d) Rs. 5,000 to be paid to S immediately and the balance due to him to be treated as a loan carrying interest @ 6% per annum.
Prepare the balance sheet of the reconstituted firm.
Answer:

Working Notes:
1. Determination of Gaining Ratio:
Since no specific details are provided, the gaining ratio of R and M is the same as their relative profit sharing ratio of 3 : 1.
2. Determination of S's Share of Goodwill:
Total Goodwill of the Firm = Rs. 9,000
S's Share of Goodwill = \( 9,000 \times \frac{2}{6} = \text{Rs. } 3,000 \)
This is contributed by R and M in their gaining ratio of 3 : 1:
R's Contribution = \( 3,000 \times \frac{3}{4} = \text{Rs. } 2,250 \)
M's Contribution = \( 3,000 \times \frac{1}{4} = \text{Rs. } 750 \)
In simple words: The revaluation of assets produces a net profit of Rs. 8,450, shared in the 3 : 2 : 1 ratio. S's capital balance becomes Rs. 13,317 after adding revaluation profit and Rs. 3,000 for goodwill. S is paid Rs. 5,000 in cash, and the remaining Rs. 8,317 is kept as a loan.
Exam Tip: Do not forget to adjust the bank balance in the final Balance Sheet by subtracting the cash paid immediately to the retiring partner.

Do it Yourself IV

Question 1. On December 31, 2007, the Balance Sheet of Pinki, Qureshi and Rakesh showed as under:

The partnership deed provides that the profit be shared in the ratio of 2:1:1 and that in the event of death of a partner, his executors be entitled to be paid out
(a) The capital of his credit at the date of last Balance Sheet.
(b) His proportion of reserves at the date of last Balance Sheet.
(c) His proportion of profits to the date of death based on the average profits of the last three completed years, plus 10%.
(d) By way of goodwill, his proportion of the total profits for the three preceding years. The net profit for the last three years were
Rs.
2005 16,000
2006 16,000
2007 15,400
Rakesh died on April 1, 2007. He had withdrawn Rs. 5,000 to the date of his death. The investment were sold at par and R’s Executors were paid off. Prepare Rakesh’s Capital Account that of his executors.
Answer:

Working Notes:
1. Calculation of profit up to the date of death:
Average Profit of previous three years = \( \frac{\text{Rs. 16,000} + \text{Rs. 16,000} + \text{Rs. 15,400}}{3} = \frac{\text{Rs. 47,400}}{3} = \text{Rs. 15,800} \)
Average Profit with 10% addition = \( \text{Rs. 15,800} + (10\% \text{ of Rs. 15,800}) = \text{Rs. 15,800} + \text{Rs. 1,580} = \text{Rs. 17,380} \)
Rakesh's Share of Profit up to his death (3 months, from January 1, 2007 to April 1, 2007):
\( \text{Rakesh's share} = \text{Rs. 17,380} \times \frac{1}{4} \times \frac{3}{12} = \text{Rs. 1,086.25} \) (rounded to Rs. 1,086)

2. Calculation of Goodwill:
Goodwill share is computed as his proportion of the three years' total profits.
Total profits of the last 3 years = \( \text{Rs. 16,000} + \text{Rs. 16,000} + \text{Rs. 15,400} = \text{Rs. 47,400} \)
Rakesh's Share of Goodwill = \( \text{Rs. 47,400} \times \frac{1}{4} = \text{Rs. 11,850} \)
This goodwill is adjusted in the gaining ratio of the remaining partners, Pinki and Qureshi (2:1):
- Pinki's contribution = \( \text{Rs. 11,850} \times \frac{2}{3} = \text{Rs. 7,900} \)
- Qureshi's contribution = \( \text{Rs. 11,850} \times \frac{1}{3} = \text{Rs. 3,950} \)

In simple words: When a partner passes away, their capital account is adjusted with their share of reserve fund, accumulated profits, and goodwill. These adjustments help determine the total dues to be paid to their executor, after deducting any personal drawings.
Exam Tip: Pay attention to the date of death to determine the exact number of months for which the profit share must be calculated. Double-check that goodwill is distributed in the gaining ratio among the continuing partners.

Short Answer Type Questions

Question 1. What are the different ways in which a partner can retire from the firm?
Answer: There are three primary methods through which a partner can choose to leave a partnership firm. These methods include:
(i) By Mutual Agreement: Since a partnership is built on mutual agreement, a partner can leave if every member of the firm consents to their departure.
(ii) In Accordance with the Partnership Deed: If the agreement contains a specific clause about leaving, a partner can retire by serving a notice of intent to the other members, as detailed in the deed.
(iii) By Serving a Written Notice: If the partnership has been established at will, any partner can retire simply by sending a written notice of their decision to all other partners.
In simple words: A partner can leave a business if all other partners agree, if the business agreement has a rule for it, or by giving a written notice to everyone.
Exam Tip: Clearly list and define all three modes - mutual agreement, express provision in the deed, and written notice (for partnership at will) - using clear headings to get full marks.

Question 2. Write the various matters that need adjustments at the time of retirement of partners.
Answer: When a partner retires from a firm, several essential accounting adjustments must be carried out. These include:
(i) Revaluation of assets and reassessment of liabilities.
(ii) Valuation of goodwill and its appropriate accounting treatment.
(iii) Determining the new profit-sharing ratio for the continuing partners.
(iv) Working out the gaining ratio of the remaining partners.
(v) Sharing accumulated reserves, profits, and losses among all partners, including the one who is retiring.
(vi) Accounting treatment of Joint Life Policy.
(vii) Settling the final balance due to the retiring partner.
(viii) Adjusting capital accounts of the remaining partners to reflect their new profit-sharing ratio.
In simple words: When a partner leaves a business, the firm needs to recalculate profit shares, revalue its assets, distribute saved profits or losses, update goodwill, and settle the final payment.
Exam Tip: Memorize this list of eight adjustments as they form the step-by-step process required to solve comprehensive numeric problems on retirement.

Question 3. Distinguish between sacrificing ratio and gaining ratio.
Answer: The differences between sacrificing ratio and gaining ratio are detailed below:

In simple words: Sacrificing ratio is the share old partners give up when someone new joins. Gaining ratio is the extra share remaining partners get when someone leaves.
Exam Tip: Remember the basic formula distinction: Sacrificing is Old minus New, while Gaining is New minus Old. Mentioning the respective occasions of their calculations (admission vs. retirement/death) is critical for scoring full marks.

Question 4. Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?
Answer: When a partner leaves the firm or passes away, revaluing assets and reassessing liabilities is crucial to find their actual current values. Over time, the values of these assets and liabilities naturally change. Additionally, some items might not have been recorded in the accounting books. Any gain or loss arising from these adjustments belongs to all existing partners. Thus, revaluation ensures that the correct profit or loss is calculated and shared among all partners (including the outgoing or deceased partner) in their old profit-sharing ratio.
In simple words: Revaluing assets and liabilities ensures that any increase or decrease in their values is calculated and shared fairly among all partners before one of them leaves.
Exam Tip: Be sure to emphasize that the profit or loss from revaluation is shared among all partners (including the outgoing one) using their old profit-sharing ratio.

Question 5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm?
Answer: Goodwill represents an intangible asset built through the collective dedication and hard work of all the partners. When a partner leaves or passes away, the benefits of this established reputation and past performance will be enjoyed solely by the continuing partners. Because of this, the remaining partners must compensate the retiring or deceased partner by giving them their proportional share of the firm's goodwill.
In simple words: Goodwill is the reputation built by the hard work of all partners. When a partner leaves, the others must pay them for their share of this reputation.
Exam Tip: Make sure to state that the continuing partners must compensate the outgoing partner for their share of goodwill in their gaining ratio.

Long Answer Type Questions

Question 1. Explain the modes of payment to a retiring partner.
Answer: A firm can settle the amount due to a retiring partner in three different ways:

(i) Lump Sum Settlement: The entire balance outstanding in the retiring partner's capital account is paid off in a single transaction as a final settlement.

(ii) Transfer to Loan Account: Sometimes, the firm cannot pay the entire amount immediately. In such situations, the remaining balance is transferred to the partner's loan account, and it is paid in installments over time along with interest.

(iii) Partial Cash and Partial Loan: Under this method, a portion of the due amount is paid immediately in cash, while the remaining balance is treated as a loan to be settled in installments with interest.

In simple words: A retiring partner can be paid the entire amount at once in cash, have the balance converted into a loan to be paid back in installments with interest, or receive a mix of both cash and loan.
Exam Tip: Always write complete journal entries with proper narratives when explaining payment modes. Remember that if no specific instruction is provided in a problem, the balance is transferred to the partner's loan account.

Question 2. How will you compute the amount payable to a deceased partner?
Answer: Upon the death of a partner, their legal representative (executor) becomes entitled to receive the total outstanding dues. The exact amount due is determined by preparing the deceased partner’s capital account. This account is credited with items that increase their balance and debited with items that decrease it. The final balancing figure represents the amount payable to the executor.
 

In simple words: When a partner dies, we prepare their capital account to calculate the net amount owed to their legal heir. We add their capital, profits, and interest, and subtract drawings or losses.
Exam Tip: Clearly label the balancing figure as "To Partner's Executor's A/c" in the deceased partner's capital account. This is a common point where students mistakenly write "To Balance c/d" or "To Cash/Bank."

Question 3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.
Answer: When a partner retires or dies, their share of goodwill must be adjusted through the capital accounts of the continuing partners in their gaining ratio. Rather than opening a new goodwill account, we treat it based on two potential scenarios:

Scenario 1: If Goodwill is Already Recorded in the Books
- Step 1: Write off existing goodwill: Any existing goodwill shown in the books is written off immediately by debiting all partners' capital accounts in their old profit-sharing ratio.

- Step 2: Adjusting the retiring/deceased partner's share: Next, the departing partner's share of the current value of goodwill is credited to their capital account, while the continuing partners' capital accounts are debited in their gaining ratio.

Scenario 2: If No Goodwill Appears in the Books
When goodwill is not recorded in the ledger, we simply adjust the outgoing partner's share of goodwill directly through the capital accounts. We debit the continuing partners in their gaining ratio and credit the retiring or deceased partner.

In simple words: Any existing goodwill on the books must first be written off among all partners in their old ratio. The new goodwill is then adjusted by debiting the remaining partners in their gaining ratio and crediting the outgoing partner.
Exam Tip: Remember that old goodwill is written off using the old profit-sharing ratio, but new goodwill is adjusted among the continuing partners using the gaining ratio.

Question 4. Discuss the various methods of computing the share in profits in the event of death of a partner.
Answer: Calculating the share of profit for a deceased partner differs from a retirement because death is unpredictable, whereas retirement is planned. To estimate the profit earned by the deceased partner from the last balance sheet date up to their death, we use one of two methods:

(i) Time-Based Method
In this approach, we estimate the profit for the current period based on the profits of the previous year or the average of the last few years, assuming that profit accrues evenly over time.
The formula is:
\[ \text{Deceased Partner's Profit Share} = \text{Previous Year or Average Profit} \times \frac{\text{Months till death}}{12} \times \text{Deceased Partner's Profit Share Ratio} \]

Example: A, B, C, and D share profits equally. The firm's profits for 2009, 2010, and 2011 were Rs. 5,00,000, Rs. 7,00,000, and Rs. 9,00,000 respectively. C passes away on June 30, 2012. C's share of profit is calculated based on the three-year average profit. The books are closed annually on December 31.
Since C died on June 30, 2012, they worked for 6 months (from January 1, 2012).
\[ \text{Average Profit} = \frac{\text{Rs. 5,00,000} + \text{Rs. 7,00,000} + \text{Rs. 9,00,000}}{3} = \text{Rs. 7,00,000} \]
\[ \text{C's Share of Profit} = \text{Rs. 7,00,000} \times \frac{6}{12} \times \frac{1}{4} = \text{Rs. 87,500} \]

(ii) Sales-Based Method
This method calculates the profit up to the date of death based on the sales achieved during that period. It assumes that the profit margin (profit-to-sales ratio) remains the same as in the preceding year.
The formula is:
\[ \text{Deceased Partner's Profit Share} = \frac{\text{Previous Year's Profit}}{\text{Previous Year's Sales}} \times \text{Sales up to date of death} \times \text{Deceased Partner's Share} \]

Example: A, B, and C share profits equally. In the previous year, the sales were Rs. 40,00,000 and the profit was Rs. 4,00,000. C passes away in June 2012. Sales achieved up to C's death are Rs. 15,00,000. The accounting year ends on December 31.
\[ \text{C's Share of Profit} = \frac{\text{Rs. 4,00,000}}{\text{Rs. 40,00,000}} \times \text{Rs. 15,00,000} \times \frac{1}{3} = \text{Rs. 50,000} \]
In simple words: Since a partner can pass away mid-year, we estimate their profit share up to their death using either the time passed (based on past profits) or the sales made during that period.
Exam Tip: Be careful not to apply a time ratio (like months/12) when using the sales-based method, because the sales figure provided already covers the exact duration of the partner's survival during that year.

Numerical Questions

Question 1. Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3 : 2 :1. Manisha retires and goodwill of the firm is valued at Rs. 1,80,000. Aparna and Sonia decided to share future profits in the ratio of 3 : 2. Pass necessary journal entries.
Answer: The journal entry to adjust Manisha's share of goodwill is as follows:

Working Notes:
1. Determination of Manisha's share of goodwill:
\[ \text{Manisha's share of goodwill} = \text{Rs. 1,80,000} \times \frac{2}{6} = \text{Rs. 60,000} \]

2. Calculation of Gaining Ratio (New Ratio - Old Ratio):
\[ \text{Aparna's Gain} = \frac{3}{5} - \frac{3}{6} = \frac{18 - 15}{30} = \frac{3}{30} \]
\[ \text{Sonia's Gain} = \frac{2}{5} - \frac{1}{6} = \frac{12 - 5}{30} = \frac{7}{30} \]
Thus, the gaining ratio of Aparna and Sonia is 3:7.

3. Contribution of goodwill by the remaining partners:
\[ \text{Aparna's contribution} = \text{Rs. 60,000} \times \frac{3}{10} = \text{Rs. 18,000} \]
\[ \text{Sonia's contribution} = \text{Rs. 60,000} \times \frac{7}{10} = \text{Rs. 42,000} \]
In simple words: Upon Manisha's retirement, her share of goodwill of Rs. 60,000 is credited to her account. This amount is debited from Aparna and Sonia's capital accounts in their gaining ratio of 3:7.
Exam Tip: Gaining ratio must always be calculated when a partner retires. Remember to debit the gaining partners' capital accounts and credit the retiring partner's capital account.

Question 2. Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2 : 3 : 5. Goodwill is appearing in the books at a value of Rs. 60,000. Sangeeta retires and goodwill is valued at Rs. 90,000. Saroj and Shanti decided to share future profits equally. Record necessary journal entries.
Answer: The necessary journal entries are as follows:

Working Notes:
1. Writing off the existing goodwill of Rs. 60,000 in the old profit-sharing ratio (2:3:5):
- Sangeeta's share = \( \text{Rs. 60,000} \times \frac{2}{10} = \text{Rs. 12,000} \)
- Saroj's share = \( \text{Rs. 60,000} \times \frac{3}{10} = \text{Rs. 18,000} \)
- Shanti's share = \( \text{Rs. 60,000} \times \frac{5}{10} = \text{Rs. 30,000} \)

2. Valuation of Sangeeta's share of the newly valued goodwill:
\[ \text{Sangeeta's share} = \text{Rs. 90,000} \times \frac{2}{10} = \text{Rs. 18,000} \]

3. Computing the Gaining Ratio of continuing partners (New Ratio - Old Ratio):
- Saroj's Gain = \( \frac{1}{2} - \frac{3}{10} = \frac{5 - 3}{10} = \frac{2}{10} \)
- Shanti's Gain = \( \frac{1}{2} - \frac{5}{10} = \frac{5 - 5}{10} = 0 \)
Since Shanti has gained nothing, Saroj is the sole gaining partner and will bear the entire Rs. 18,000.
In simple words: The old goodwill of Rs. 60,000 is written off in the old ratio. For the new goodwill, since only Saroj gained more share after Sangeeta left, she pays Sangeeta's entire goodwill share of Rs. 18,000.
Exam Tip: Remember to calculate the individual gains of both continuing partners. If one partner's gain is zero, only the partner who gained will compensate the retiring partner for goodwill.

Question 3. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3 : 2 :1 On March 31, 2007, Naman retires. The various assets and liabilities of the firm on the date were as follows Cash Rs.10,000, Building Rs. 1,00,000, Plant and Machinery Rs. 40,000, Stock Rs. 20,000, Debtors Rs. 20,000 and Investments Rs. 30,000. The following was agreed upon between the partners on Naman’s retirement (i) Building to be appreciated by 20%. (ii) Plant and Machinery to be depreciated by 10%. (iii) A provision of 5% on debtors to be created for bad and doubtful debts. (iv) Stock was to be valued at Rs. 18,000 and Investment at Rs. 35,000. Record the necessary journal entries to the above effect and prepare the revaluation account.
Answer: The journal entries and Revaluation Account are shown below:

In simple words: Revaluation of assets shows a net profit of Rs. 18,000. This profit is distributed among Himanshu, Gagan, and Naman in their old ratio of 3:2:1.
Exam Tip: Be sure to distinguish between "depreciated by" (decrease the value by that amount) and "valued at" (the new balance sheet value, so the revaluation amount is the difference between the old and new values).

Question 4. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following : General Reserves Rs.36,000 and Profit and Loss Account (Dr) Rs. 15,000. Pass the necessary journal entries to the above effect.
Answer: The necessary journal entries are as follows:

In simple words: Since the partners share profits equally, the General Reserve of Rs. 36,000 is distributed to add Rs. 12,000 to each partner's capital. The Profit and Loss debit balance (loss) of Rs. 15,000 is written off by deducting Rs. 5,000 from each partner's capital.
Exam Tip: Be sure to note that "Profit and Loss Account (Dr)" refers to a debit balance, which is a loss. Always debit the partners' capital accounts and credit the Profit and Loss Account when writing off such accumulated losses.

Question 5. Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2 : 2 : 1 Their Balance Sheet as on March 31, 2007 was as follows

Brijesh retired on March 31, 2007 on the following terms:
(i) Goodwill of the firm was valued at Rs. 70,000 and was not to appear in the books.
(ii) Bad debts amounting to Rs. 2,000 were to be written off.
(iii) Patents were considered as valueless.
Prepare revaluation account, partners’ capital accounts and the balance sheet of Digvijay and Parakaram after Brijesh’s retirement.
Answer:

Working Notes:
1. Valuation of Brijesh's share of goodwill:
\[ \text{Brijesh's share of goodwill} = \text{Rs. 70,000} \times \frac{2}{5} = \text{Rs. 28,000} \]

2. Calculation of Gaining Ratio of continuing partners (New Ratio - Old Ratio):
\[ \text{Digvijay's Gain} = \frac{2}{3} - \frac{2}{5} = \frac{10 - 6}{15} = \frac{4}{15} \]
\[ \text{Parakaram's Gain} = \frac{1}{3} - \frac{1}{5} = \frac{5 - 3}{15} = \frac{2}{15} \]
Thus, the gaining ratio of Digvijay and Parakaram is 4:2, which is simplified to 2:1.

3. Goodwill adjustment contribution:
- Digvijay's contribution = \( \text{Rs. 28,000} \times \frac{2}{3} = \text{Rs. 18,667} \)
- Parakaram's contribution = \( \text{Rs. 28,000} \times \frac{1}{3} = \text{Rs. 9,333} \)
In simple words: Revaluing the assets results in a total loss of Rs. 11,000, which is distributed in their old ratio of 2:2:1. Brijesh's final capital balance of Rs. 91,000 is transferred to his loan account, and his goodwill share of Rs. 28,000 is contributed by Digvijay and Parakaram in their gaining ratio of 2:1.
Exam Tip: If no payment details are specified for the retiring partner, transfer their final capital balance to their loan account. Ensure the gaining ratio is used to allocate the retiring partner's goodwill.

Question 6. Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2007, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

The terms were
(a) Goodwill of the Firm was valued at Rs. 13,000.
(b) Expenses owing to be brought down to Rs. 3,750.
(c) Machinery and Loose Tools are to be valued at 10% less than their book value.
(d) Factory premises are to be revalued at Rs. 24,300.
Prepare
1. Revaluation account
2. Partners’ capital accounts
3. Balance sheet of the firm after retirement of Sheela
Answer:
1. Revaluation Account

2. Partners’ Capital Account

3. Balance Sheet as on April 1, 2007 (New Firm)

Working Notes:
- Note 1: The General Reserve of Rs. 13,500 is distributed among the original partners in their established profit-sharing proportion of 3:2:1.
- Note 2: Calculating Sheela's proportion of the total goodwill:
\( \text{Sheela's Share of Goodwill} = \text{Rs. 13,000} \times \frac{2}{6} = \text{Rs. 4,333} \)
- Note 3: Gaining ratio for the surviving partners:
\( \text{Radha's Gaining Share} = \frac{3}{4} - \frac{3}{6} = \frac{9 - 6}{12} = \frac{3}{12} \)
\( \text{Meena's Gaining Share} = \frac{1}{4} - \frac{1}{6} = \frac{3 - 2}{12} = \frac{1}{12} \)
Therefore, the gaining ratio between Radha and Meena is 3:1.
- Note 4: Apportionment of the retiring partner's goodwill among continuing partners:
Radha's contribution: \( \text{Rs. 4,333} \times \frac{3}{4} = \text{Rs. 3,250} \)
Meena's contribution: \( \text{Rs. 4,333} \times \frac{1}{4} = \text{Rs. 1,083} \)

In simple words: When a partner leaves, we revalue the firm's assets and liabilities, and the remaining partners buy out the retiring partner's share of goodwill. Sheela's total balance is transferred to her loan account because she is not paid in cash immediately.
Exam Tip: Make sure to write off the General Reserve among all original partners in their old profit-sharing ratio before calculating the final amount due to the retiring partner.

Question 7. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3 : 2 : 1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:

Additional Information
(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for Rs. 1,200 and furniture to be brought up to Rs. 45,000.
(ii) Goodwill of the firm be valued at Rs. 42,000.
(iii) Rs. 26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.
(iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5 : 1.
Give the necessary ledger accounts the balance sheet of the firm after Naresh’s retirement.
Answer:
Revaluation Account

Partners' Capital Account

Bank Account

Balance Sheet as on March 31, 2007 (New Firm)

Working Notes:
- Note 1: General reserve is distributed among all partners in their old profit-sharing ratio (3:2:1).
- Note 2: Naresh's share of goodwill = \( \text{Rs. 42,000} \times \frac{2}{6} = \text{Rs. 14,000} \).
- Note 3: Gaining Ratio:
\( \text{Pankaj's Gain} = \frac{5}{6} - \frac{3}{6} = \frac{2}{6} \)
\( \text{Saurabh's Gain} = \frac{1}{6} - \frac{1}{6} = 0 \)
Since only Pankaj gains from Naresh's retirement, the entire amount of Naresh's goodwill is contributed by Pankaj.

In simple words: Since Naresh retired, we adjusted the assets and liabilities, settled his goodwill share, and paid him partly via bank and partly by loan. Pankaj bore the entire goodwill cost because only he gained from Naresh's departure.
Exam Tip: In questions where only one continuing partner gains, the entire goodwill compensation of the retiring partner must be debited to that gaining partner's capital account.

Question 8. Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2 : 2 : 1 respectively. Their balance sheet as on March 31, 2007 was as follows:

Mr. Pammy died on September 30, 2007. The partnership deed provided the following:
(i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit.
(ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are given below:
for 2003-04; Rs. 80,000; for 2004-05, Rs. 50,000; for 2005-06, Rs. 40,000; for 2006-07, Rs. 30,000.
The drawings of the deceased partner up to the date of death amounted to Rs. 10,000. Interest on capital is to be allowed at 12% per annum.
Surviving partners agreed that Rs. 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance.
Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due
Answer:
Mr. Pammy’s Capital Account

Mr. Pammy’s Executor’s Account

Working Notes:
- Note 1: Calculating Pammy's share of profits up to death (based on last year's profit of Rs. 30,000):
\( \text{Share of Profit} = \text{Rs. 30,000} \times \frac{6}{12} \times \frac{1}{5} = \text{Rs. 3,000} \)
- Note 2: Goodwill Calculation:
Average Profit of 4 years = \( \frac{80,000 + 50,000 + 40,000 + 30,000}{4} = \text{Rs. 50,000} \)
Value of Goodwill = \( 50,000 \times 3 = \text{Rs. 1,50,000} \)
Pammy's Share of Goodwill = \( 1,50,000 \times \frac{1}{5} = \text{Rs. 30,000} \)
- Note 3: Since there is no change specified in the remaining partners' profit-sharing ratio, their gaining ratio is their old profit ratio (2:2 or 1:1). Each partner contributes half of Pammy's goodwill (Rs. 15,000 each).
- Note 4: Interest on capital is calculated for 6 months (April 1 to Sept 30) at 12% p.a. on Rs. 40,000 = Rs. 2,400.
- Note 5: Calculation of Outstanding Instalments & Interest:
Total due to Executors = Rs. 75,400.
Immediate cash paid = Rs. 15,400.
Balance Outstanding = Rs. 60,000 (to be split into 4 yearly payments of Rs. 15,000 each).
Interest is computed on a semi-annual basis as the books are closed on March 31, while payments occur on September 30.

In simple words: When Pammy passed away, his capital account was credited with his share of reserves, interest, goodwill, and profits up to his death. His final balance went to his executor, to be paid in installments with interest over time.
Exam Tip: Ensure interest is calculated on the outstanding balance of the executor's account at the end of each period, and remember to split the interest calculations when the accounting year-end differs from the installment date.

Question 9. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2007.

Rocky died on June 30, 2007. Under the terms of the partnership deed, the executors of a deceased partner were entitled to
(a) Amount standing to the credit of the Partner’s capital account.
(b) Interest on capital at 5% per annum.
(c) Share of goodwill on the basis of twice the average of the past three years’ profit.
(d) 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.
Profits for the year ending on March 31, 2005, March 31, 2006 and March 31, 2007 were Rs. 12,000, Rs. 16,000 and Rs. 14,000 respectively. Profits were shared in the ratio of capitals.
Pass the necessary journal entries and draw up Rocky’s capital account to be rendered to his executor.
Answer:
Journal Entries

Rockey’s Capital Account

Working Notes:
- Note 1: Profit-sharing ratio is based on the capital ratio:
Prateek : Rockey : Kushal = 30,000 : 20,000 : 20,000 = 3:2:2.
- Note 2: Goodwill Calculation:
Average profit of last 3 years = \( \frac{12,000 + 16,000 + 14,000}{3} = \text{Rs. 14,000} \)
Firm's Goodwill = \( 14,000 \times 2 = \text{Rs. 28,000} \)
Rockey’s Share of Goodwill = \( 28,000 \times \frac{2}{7} = \text{Rs. 8,000} \)
- Note 3: Calculation of Profit Share (April 1 to June 30, 2007 = 3 months, based on previous year's profit of Rs. 14,000):
\( \text{Share of Profit} = \text{Rs. 14,000} \times \frac{3}{12} \times \frac{2}{7} = \text{Rs. 1,000} \)
- Note 4: Goodwill Adjustment in Gaining Ratio (3:2):
Prateek’s Contribution = \( 8,000 \times \frac{3}{5} = \text{Rs. 4,800} \)
Kushal’s Contribution = \( 8,000 \times \frac{2}{5} = \text{Rs. 3,200} \)
- Note 5: Calculation of Interest on Capital (for 3 months):
\( \text{Interest} = \text{Rs. 20,000} \times \frac{5}{100} \times \frac{3}{12} = \text{Rs. 250} \).

In simple words: When Rocky died, his share of goodwill, general reserve, and interest on capital was calculated up to his date of death and credited to his account, which was then transferred to his executor.
Exam Tip: Remember that the profit-sharing ratio is based on capital balances if not explicitly stated otherwise. Calculate interest on capital only for the months the partner was alive during that financial year.

Question 10. Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2007 was as follows:

Bajaj retires from the business and the partners agree to the following:
(a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.
(b) Machinery and furniture are to be depreciated by 10% and 7% respectively.
(c) Bad Debts reserve is to be increased to Rs. 1,500.
(d) Goodwill is valued at Rs. 21,000 on Bajaj’s retirement.
(e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.
Answer:
Revaluation Account

Partners' Capital Account

Balance Sheet as on April 1, 2007

Working Notes:
- Note 1: Old profit-sharing ratio of Narang, Suri, and Bajaj is:
\( \frac{1}{2} : \frac{1}{6} : \frac{1}{3} = \frac{3}{6} : \frac{1}{6} : \frac{2}{6} = 3:1:2 \).
- Note 2: Calculating Bajaj's share of goodwill:
\( \text{Bajaj's Share} = \text{Rs. 21,000} \times \frac{2}{6} = \text{Rs. 7,000} \).
- Note 3: Since there is no other info on profit-sharing, the gaining ratio of Narang and Suri is their old ratio: 3:1.
- Note 4: Goodwill contribution:
Narang's contribution = \( 7,000 \times \frac{3}{4} = \text{Rs. 5,250} \)
Suri's contribution = \( 7,000 \times \frac{1}{4} = \text{Rs. 1,750} \)
- Note 5: Calculation of Adjusted Capitals before ratio alignment:
Narang = Rs. 34,230
Suri = Rs. 31,410
Total Capital of the new firm = Rs. 34,230 + Rs. 31,410 = Rs. 65,640.
- Note 6: Division of New Capital in the new profit-sharing ratio (3:1):
Narang's New Capital = \( 65,640 \times \frac{3}{4} = \text{Rs. 49,230} \)
Suri's New Capital = \( 65,640 \times \frac{1}{4} = \text{Rs. 16,410} \)
Narang has a deficit of Rs. 15,000 (adjusted by debiting Current Account), while Suri has a surplus of Rs. 15,000 (adjusted by crediting Current Account).

In simple words: Bajaj's retirement required updating asset values and distributing goodwill. The remaining partners then re-aligned their capital accounts according to their new profit-sharing ratio, using current accounts to settle the differences.
Exam Tip: When capitals of the continuing partners are to be adjusted in their new profit-sharing ratio, first calculate the total capital of the new firm after all adjustments, then divide it in the new ratio.

Question 11. The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2007:

Pramod retired on the date of Balance Sheet and the following adjustments were made:
(a) Stock was valued at 10% less than the book value.
(b) Factory buildings were appreciated by 12%.
(c) Reserve for doubtful debts be created up to 5%.
(d) Reserve for legal charges to be made at Rs. 265.
(e) The goodwill of the firm be fixed at Rs. 10,000.
(f) The capital of the new firm be fixed at Rs. 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3 : 2.
Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod's capital account to his loan account.
Answer:

Balance Sheet of the Reconstituted Firm as on March 31, 2007 (Case 1: When adjustments are made through Current Accounts)

Journal Entries (Case 1)

Balance Sheet of the Reconstituted Firm as on March 31, 2007 (Case 2: When excess capital is withdrawn in cash)

Journal Entry for Withdrawal of Excess Capital (Case 2)

Working Notes:
1. Capital ratio calculation: The capital of Rajesh, Pramod, and Nishant is Rs. 20,000, Rs. 15,000, and Rs. 15,000 respectively. This translates to an old profit sharing ratio of 4:3:3.
2. Retiring partner's goodwill: The total valuation of firm's goodwill is Rs. 10,000. Pramod's share of goodwill is: \( 10,000 \times \frac{3}{10} = \text{Rs. } 3,000 \).
3. Gaining ratio of continuing partners:
Rajesh's gain = New share - Old share = \( \frac{3}{5} - \frac{4}{10} = \frac{6-4}{10} = \frac{2}{10} \)
Nishant's gain = New share - Old share = \( \frac{2}{5} - \frac{3}{10} = \frac{4-3}{10} = \frac{1}{10} \)
Hence, the gaining ratio is 2:1.
Goodwill share contribution:
Rajesh's contribution = \( 3,000 \times \frac{2}{3} = \text{Rs. } 2,000 \)
Nishant's contribution = \( 3,000 \times \frac{1}{3} = \text{Rs. } 1,000 \).
4. Reconstituted Capitals: The total capital of the newly constituted firm is fixed at Rs. 30,000. Divided in their new ratio (3:2):
Rajesh's capital = \( 30,000 \times \frac{3}{5} = \text{Rs. } 18,000 \)
Nishant's capital = \( 30,000 \times \frac{2}{5} = \text{Rs. } 12,000 \).

In simple words: When a partner retires, we first update the value of all assets and liabilities to find the gain or loss on revaluation, which is shared among all partners in their old ratio. We then adjust the capitals of the remaining partners to match their new profit-sharing ratio, transferring any excess or deficit to their current accounts or cash as decided.

Exam Tip: Pay close attention to whether the surplus or deficit in partners' capitals should be adjusted through their Current Accounts or Bank Account. Preparing both balance sheet versions can show a thorough understanding of both methods.

Question 12. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2002:

The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2002 and his share in the business is to be calculated as per the following terms of revaluation of assets and liabilities:
Stock, Rs. 20,000; Office furniture, Rs. 14,250; Plant and Machinery Rs. 23,530; Land and Building Rs. 20,000.
A provision of Rs. 1,700 to be created for doubtful debts. The goodwill of the firm is valued at Rs. 9,000.
The continuing partners agreed to pay Rs. 16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as loan.
Prepare Revaluation account, capital accounts, and Balance Sheet of the reconstituted firm.
Answer:

Balance Sheet of the Reconstituted Firm as on April 1, 2002

Working Notes:
1. Cash payment funding: The continuing partners (Jain and Gupta) contribute the cash payout of Rs. 16,500 in their agreed 3:2 ratio:
Jain's contribution = \( 16,500 \times \frac{3}{5} = \text{Rs. } 9,900 \)
Gupta's contribution = \( 16,500 \times \frac{2}{5} = \text{Rs. } 6,600 \).
2. Retiring partner's goodwill: The goodwill of the firm is Rs. 9,000. Malik's share of goodwill is: \( 9,000 \times \frac{2}{10} = \text{Rs. } 1,800 \). It is shared by Jain and Gupta in their gaining ratio (5:3):
Jain's share = \( 1,800 \times \frac{5}{8} = \text{Rs. } 1,125 \)
Gupta's share = \( 1,800 \times \frac{3}{8} = \text{Rs. } 675 \).

In simple words: Upon a partner's retirement, we adjust asset values and liabilities, sharing any resulting profit or loss in the original ratio. The retiring partner's share of goodwill is compensated by the remaining partners in their gaining ratio, and the retiring partner is paid cash or has their remaining balance transferred to a loan account.

Exam Tip: Make sure to calculate the cash contributions of the continuing partners correctly based on their agreed ratio (3:2 in this case) to fund the retiring partner's immediate cash payout.

Question 13. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2003 stood as follows:

Bharti died on June 12, 2003 and according to the deed of the said partnership, her executors are entitled to be paid as under:
(a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.
(b) Her proportionate share of reserve fund.
(c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs. 1,00,000. The rate of profit during past three years had been 10% on sales.
(d) Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were:
2001 - Rs. 8,200
2002 - Rs. 9,000
2003 - Rs. 9,800
The investments were sold for Rs. 16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.
Answer:

Journal Entries

Bharti's Capital Account

Bharti's Executor's Account

Working Notes:
1. Bharti's Profit Share:
Total sales till date of death = Rs. 1,00,000
Profit rate on sales = 10%
Estimated profit up to date of death = \( 1,00,000 \times \frac{10}{100} = \text{Rs. } 10,000 \)
Bharti's profit share = \( 10,000 \times \frac{2}{6} = \text{Rs. } 3,333 \).
2. Bharti's Goodwill Share:
Average profit of past three years = \( \frac{8,200 + 9,000 + 9,800}{3} = \text{Rs. } 9,000 \)
Average profit reduced by 20% = \( 9,000 - 1,800 = \text{Rs. } 7,200 \)
Value of firm's goodwill = \( 7,200 \times 2 = \text{Rs. } 14,400 \)
Bharti's share = \( 14,400 \times \frac{2}{6} = \text{Rs. } 4,800 \)
Gaining ratio of continuing partners (Arti and Seema) is 3:1:
Arti's contribution = \( 4,800 \times \frac{3}{4} = \text{Rs. } 3,600 \)
Seema's contribution = \( 4,800 \times \frac{1}{4} = \text{Rs. } 1,200 \).
3. Deceased Partner's Interest on Capital:
Bharti's capital = Rs. 12,000
Interest = \( 12,000 \times \frac{10}{100} \times \frac{73}{365} = \text{Rs. } 240 \) (for 73 days: 30 days of April + 31 days of May + 12 days of June).

In simple words: When a partner passes away during the financial year, their executors receive their capital balance, interest on capital up to the date of death, their share of accumulated reserves, and their share of profits and goodwill earned until that date.

Exam Tip: Double-check the calculation of days for interest on capital and profits. For a death on June 12, counting April (30 days), May (31 days), and June (12 days) gives exactly 73 days, which is exactly 1/5th of a year (73/365).

Question 14. Mithya dies on May 1, 2002. The agreement between the executors of Mithya and the partners stated that :
(a) Goodwill of the firm be valued at 2.1/2 times the average profits of last four years. The profits of four years were : in 1998, Rs.13,000; in 1999, Rs.12,000; in 2000, Rs.16,000; and in 2001, Rs.15,000.
(b) The patents are to be valued at Rs.8,000, Machinery at Rs.25,000 and Premises at Rs.25,000.
(c) The share of profit of Mithya should be calculated on the basis of the profit of 2002.
(d) Rs.4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.
Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on May 1, 2002 after giving effect to the adjustments
Answer:

Working Notes:

1. Calculation of Mithya's share of goodwill:

Average Profit = \( \frac{13,000 + 12,000 + 15,000 + 16,000}{4} = \text{Rs. } 14,000 \)

Goodwill of the Firm = \( 14,000 \times 2\frac{1}{2} = 14,000 \times 2.5 = \text{Rs. } 35,000 \)

Mithya's Share of Goodwill = \( 35,000 \times \frac{2}{10} = \text{Rs. } 7,000 \)

The continuing partners compensate the deceased partner for goodwill in their gaining ratio, which aligns with their existing profit ratio of 5:3.

Nithya's contribution = \( 7,000 \times \frac{5}{8} = \text{Rs. } 4,375 \)

Sathya's contribution = \( 7,000 \times \frac{3}{8} = \text{Rs. } 2,625 \)

2. Mithya's portion of general reserve: \( 6,000 \times \frac{2}{10} = \text{Rs. } 1,200 \)

3. Mithya's portion of existing goodwill: \( 5,000 \times \frac{2}{10} = \text{Rs. } 1,000 \)

4. Mithya's share of profits calculated using 2001 as the base:

Profit until death = Prior Year Profit \( \times \) Duration until death \( \times \) Deceased Partner Ratio
\( = 15,000 \times \frac{4}{12} \times \frac{2}{10} = \text{Rs. } 1,000 \)

5. Determining the Installment Values:
The net sum payable to Mithya's executor after the initial cash payout equals \( 28,600 - 4,200 = \text{Rs. } 24,400 \). Splitting this outstanding amount into four equal installments gives \( \frac{24,400}{4} = \text{Rs. } 6,100 \) per payment.

In simple words: When a partner passes away, the firm calculates their total outstanding capital, accumulated reserves, share of revaluation profit, and goodwill. After transferring this balance to their executor's account, any unpaid portion is cleared over time in installments along with interest.
Exam Tip: Pay close attention to calculating the interest for unequal periods in the executor's account, making sure to split the interest accurately across the financial year-end dates.