RBSE Solutions Class 12 Accountancy Chapter 3 Accounting for Retirement and Death of P

 

Question 1. A, B and C are partners sharing profits in the ratio of 2 : 2 : 1. On retirement of B, goodwill was valued at Rs 30,000. Find the contribution of A and C to compensate B:
(a) Rs 20,000 and Rs 10,000
(b) Rs 8,000 and Rs 4,000
(c) Rs 20,000 and Rs 8,000
(d) Rs 15,000 and Rs 15,000
Answer: (b) Rs 8,000 and Rs 4,000
In simple words: When a partner retires, the remaining partners must pay them their share of goodwill. Here, A and C contribute Rs 8,000 and Rs 4,000, respectively, to give B his share of the firm's goodwill.

🎯 Exam Tip: Remember that goodwill is valued at the time of retirement to compensate the outgoing partner for their share in the firm's reputation and future profits.

 

Question 3. A, B and C are partners sharing profits in the ratio \( \frac{1}{2} \), \( \frac{3}{10} \) and \( \frac{1}{5} \). B retires from the firm, A and C decide to share the future profits in 3 : 2. Calculating gaining ratio.
(a) 1:2
(b) 3:2
(c) 2:3
(d) None of these
Answer: (a) 1:2
In simple words: When B leaves the partnership, A and C gain from his share. The gaining ratio shows how much more profit A and C will get. Here, they gain in a 1:2 ratio.

🎯 Exam Tip: The gaining ratio is found by subtracting the old profit-sharing ratio from the new profit-sharing ratio of the continuing partners.

 

Question 4. At the time of retirement of a partner, firm gets.......from the insurance company against the joint life policy.
(a) Policy value for the retiring partner and surrender value for the rest
(b) Surrender value
(c) Policy amount
(d) None of these
Answer: (b) Surrender value
In simple words: When a partner retires, the firm gets the surrender value from the insurance company for the joint life policy. This is the amount the insurance company pays if the policy is cancelled early.

🎯 Exam Tip: Understand the difference between 'surrender value' (paid if policy is terminated early) and 'policy amount' (paid at maturity or death) for joint life policies in a partnership.

 

Question 5. B, C and D are partners sharing profits in the ratio 7 : 5 : 4. D died on 30th June, 2017 and profits for the year 2016-2017 were Rs 12,000. How much share in profits will be credited to D's account?
(a) Rs 3,000
(b) Rs 750
(c) Nil
Answer: (b) Rs 750
In simple words: D's share of profit is calculated based on his profit ratio and how many months he was a partner before he died. He gets a share of Rs 750 for his contribution during that time.

🎯 Exam Tip: When a partner dies mid-year, their share of profit is calculated proportionally for the period they were alive, based on the previous year's profit or an agreed estimation method.

 

Question 6. The balance of joint life policy account as shown in the balance sheet represents :
(a) surrender value of a policy
(b) annual premium of joint life policy
(c) total premium paid by the firm
(d) amount receivable on the maturity of the policy
Answer: (a) surrender value of a policy
In simple words: The amount shown for a joint life policy in the balance sheet usually means how much money the firm would get if they stopped the policy right then. This is called the surrender value.

🎯 Exam Tip: The balance sheet typically reflects the realizable value of assets. For a joint life policy, this is usually its surrender value, as it can be converted to cash immediately.

 

Question 7. After the death of a partner, amount payable to him is received by :
(a) by government
(b) by his son
(c) by executors of deceased partner
(d) None of these
Answer: (c) by executors of deceased partner
In simple words: When a partner dies, the money owed to them by the firm is given to their legal representatives, known as executors. These executors then manage the money according to the deceased partner's will.

🎯 Exam Tip: Executors are legally appointed to handle the estate of a deceased person, ensuring that all liabilities are paid and assets are distributed as per the will or law.

 

Question 8. How is the premium paid on the JLP of the partners treated? It is....to the..... accounts.
(a) credited, partner's current account
(b) credited, profit & loss account
(c) debited, partner's capital account
(d) debited, profit & loss account
Answer: (d) debited, profit & loss account
In simple words: The money paid for the Joint Life Policy (JLP) premium is like an expense for the business. So, it is recorded on the debit side of the profit and loss account, reducing the firm's profit.

🎯 Exam Tip: Premiums paid on joint life policies are usually treated as an expense to the firm and are therefore debited to the Profit and Loss Account.

 

Question 9. A, B and C are partners sharing profit and loss in 5 : 3 : 2. The firm's balance sheet as on 31-03-2017 shows reserve balance of Rs 25,000. Profit of the year Rs 50,000. Joint life policy of Rs 1,00,000. Fixed assets of Rs 1,20,000. On 1st June, C died and on same date, the executors of C will get along with capital:
(a) share in joint life policy
(b) share in reserves
(c) share of profit upto the date of death
Answer: (c) share of profit upto the date of death
In simple words: When a partner dies, their legal representatives get their share of the firm's capital, plus their share of any reserves, joint life policy, and profit earned up to the date of their death. This ensures they receive what is rightfully due.

🎯 Exam Tip: Upon a partner's death, the deceased partner's estate is entitled to their share of accumulated profits, reserves, and the joint life policy, in addition to their capital balance.

 

Question 10. Joint life policy amount received by a firm is distributed in :
(a) opening capital ratio
(b) closing capital ratio
(c) old profit sharing ratio of partners
(d) new profit sharing ratio of partners
Answer: (c) old profit sharing ratio of partners
In simple words: When a firm gets money from a joint life policy, this money is shared among all the partners based on their old profit-sharing ratio. This is because the policy was taken when that ratio was active.

🎯 Exam Tip: The proceeds from a joint life policy are distributed among all partners (including the retiring or deceased partner) in their old profit-sharing ratio, as the policy was held for the benefit of all partners during its active period.

RBSE Class 12 Accountancy Chapter 3 Very Short Answer Questions

 

Question 1. What is meant by retirement of a partner?
Answer: Retirement of a partner means that a partner leaves the firm. This can happen because of old age, poor health, or if partners have disagreements. It is when a partner chooses to separate themselves from the business for any reason.
In simple words: When a partner leaves a business, it is called retirement. This can be for different reasons like age or health.

🎯 Exam Tip: Clearly define retirement as the cessation of a partner's membership in the firm and mention common reasons for it.

 

Question 2. State any two modes of retirement.
Answer: Any partner can take retirement in the following ways:

• On the basis of an agreement made between partners.
• With the consent (permission) of all the other partners.

A partner may also retire if their term in the partnership deed has expired.
In simple words: A partner can leave if everyone agrees, or if there's a rule in their business agreement about leaving.

🎯 Exam Tip: Remember that retirement usually requires either a prior agreement in the partnership deed or the mutual consent of all existing partners.

 

Question 3. What is joint life insurance policy?
Answer: A joint life insurance policy is taken on the lives of all partners in a business. If any partner dies, the firm gets the insurance money. This policy helps the firm deal with the financial loss from a partner's death.
In simple words: It is one insurance plan covering all partners. If one partner dies, the business gets the money.

🎯 Exam Tip: Highlight that a joint life policy covers multiple partners and provides financial protection to the firm upon the death of any insured partner.

 

Question 5. A, B and C are partners in a firm sharing profits in the ratio of \( \frac{1}{2} : \frac{3}{10} : \frac{2}{10} \). Calculate new profit sharing ratio and gaining ratio when :
(1) A retires,
(2) B retires,
(3) C retires.
Answer: When a new profit-sharing ratio is not given, it is assumed that the remaining partners will share profits in their old profit and loss ratio.
(1) If A retires, the new ratio for B and C is the same as their old ratio, which is \( \frac{3}{10} : \frac{2}{10} \).
\( \implies \) New profit sharing ratio of B : C = 3 : 2

(2) If B retires, A and C will share profits in the ratio of their original shares, which are \( \frac{1}{2} \) and \( \frac{2}{10} \). To compare these, we find a common denominator:
\( \implies \) A : C = \( \frac{1}{2} : \frac{2}{10} \) = \( \frac{5}{10} : \frac{2}{10} \) = 5 : 2
\( \implies \) New profit sharing ratio of A : C = 5 : 2

(3) If C retires, A and B will share profits in the ratio of their original shares, which are \( \frac{1}{2} \) and \( \frac{3}{10} \).
\( \implies \) A : B = \( \frac{1}{2} : \frac{3}{10} \) = \( \frac{5}{10} : \frac{3}{10} \) = 5 : 3
\( \implies \) New profit sharing ratio of A : B = 5 : 3

The gaining ratio is calculated as New Ratio - Old Ratio.
(1) At the retirement of A: B and C are the continuing partners.
New Ratio of B : C = 3 : 2
Old Ratio of A : B : C = 5 : 3 : 2 (after converting \( \frac{1}{2}, \frac{3}{10}, \frac{2}{10} \) to a common denominator, they are 5:3:2)
B's Gaining Share = \( \frac{3}{5} - \frac{3}{10} = \frac{6-3}{10} = \frac{3}{10} \)
C's Gaining Share = \( \frac{2}{5} - \frac{2}{10} = \frac{4-2}{10} = \frac{2}{10} \)
\( \implies \) Gaining ratio of B and C = \( \frac{3}{10} : \frac{2}{10} \) = 3 : 2

(2) At the retirement of B: A and C are the continuing partners.
New Ratio of A : C = 5 : 2
Old Ratio of A : B : C = 5 : 3 : 2
A's Gaining Share = \( \frac{5}{7} - \frac{5}{10} = \frac{50-35}{70} = \frac{15}{70} \)
C's Gaining Share = \( \frac{2}{7} - \frac{2}{10} = \frac{20-14}{70} = \frac{6}{70} \)
\( \implies \) Gaining ratio of A and C = \( \frac{15}{70} : \frac{6}{70} \) = 15 : 6 = 5 : 2
In simple words: When a partner leaves, the remaining partners divide up the leaving partner's share. The 'new profit sharing ratio' shows their new shares, and the 'gaining ratio' shows how much extra profit each remaining partner gets.

🎯 Exam Tip: Always make sure to convert all ratios to a common denominator before comparing or performing calculations to avoid errors.

 

Question 6. A, B and C are partners in a firm sharing profits in the ratio of 2 : 1 : 2. A retires and his share is entirely taken by B. Calculate new profit sharing ratio.
Answer:Original profit sharing ratio of A : B : C = 2 : 1 : 2. Total shares = \( 2+1+2 = 5 \).
So, A's share = \( \frac{2}{5} \), B's share = \( \frac{1}{5} \), C's share = \( \frac{2}{5} \).
A retires, and his entire share is taken by B.
New share of B = Old share of B + A's share = \( \frac{1}{5} + \frac{2}{5} = \frac{1+2}{5} = \frac{3}{5} \).
C's share remains the same = \( \frac{2}{5} \).
The new profit sharing ratio of B and C = New share of B : C's share
\( \implies \) \( \frac{3}{5} : \frac{2}{5} \) = 3 : 2.
In simple words: A partner leaves, and another partner takes all of their share. This means the gaining partner's share gets bigger, and the remaining partners form a new sharing ratio.

🎯 Exam Tip: When one partner's entire share is taken by another, directly add the retiring partner's share to the gaining partner's old share to find the new share.

 

Question 7. A, B and C are partners in a firm sharing profits in the ratio of \( \frac{1}{4} : \frac{2}{5} : \frac{7}{20} \). B retires and his share is taken by A and C in the ratio of 1 : 2. Calculate new profit sharing ratio and gaining ratio.
Answer:First, let's make the old profit-sharing ratio common. Original profit sharing ratio of A : B : C = \( \frac{1}{4} : \frac{2}{5} : \frac{7}{20} \). To get a common denominator of 20:
A's share = \( \frac{1}{4} = \frac{5}{20} \)
B's share = \( \frac{2}{5} = \frac{8}{20} \)
C's share = \( \frac{7}{20} \)
So, the old profit sharing ratio is A : B : C = 5 : 8 : 7.
B retires, and his share (\( \frac{8}{20} \)) is taken by A and C in the ratio of 1 : 2.
Amount gained by A = B's share \( \times \frac{1}{3} = \frac{8}{20} \times \frac{1}{3} = \frac{8}{60} \).
Amount gained by C = B's share \( \times \frac{2}{3} = \frac{8}{20} \times \frac{2}{3} = \frac{16}{60} \).

New profit sharing ratio:
New share of A = Old share of A + Gained share from B = \( \frac{5}{20} + \frac{8}{60} = \frac{15+8}{60} = \frac{23}{60} \).
New share of C = Old share of C + Gained share from B = \( \frac{7}{20} + \frac{16}{60} = \frac{21+16}{60} = \frac{37}{60} \).
\( \implies \) New profit sharing ratio of A : C = \( \frac{23}{60} : \frac{37}{60} \) = 23 : 37.

Gaining Ratio: The ratio in which A and C acquire B's share is the gaining ratio.
A gains \( \frac{8}{60} \) and C gains \( \frac{16}{60} \).
\( \implies \) Gaining Ratio of A : C = \( \frac{8}{60} : \frac{16}{60} \) = 8 : 16 = 1 : 2.
This matches the ratio in which they decided to take B's share.
In simple words: First, we find a common way to show each partner's share. Then, when a partner leaves, the others split his share in an agreed-upon way. This changes their new sharing ratio and shows how much more profit each remaining partner now gets.

🎯 Exam Tip: When a retiring partner's share is taken by continuing partners in a specific ratio, this specific ratio directly represents their gaining ratio.

 

Question 9. A, B and C are partners in a firm sharing profits in the ratio of 4 : 3 : 2. A retires and new profit sharing ratio of B and C will be 2: 1. Calculate gaining ratio.
Answer:Original profit sharing ratio of A : B : C = 4 : 3 : 2. Total shares = \( 4+3+2 = 9 \).
So, A's share = \( \frac{4}{9} \), B's share = \( \frac{3}{9} \), C's share = \( \frac{2}{9} \).
A retires.
New profit sharing ratio of B : C = 2 : 1.
So, B's new share = \( \frac{2}{3} \), C's new share = \( \frac{1}{3} \).

Gaining Ratio = New Ratio - Old Ratio
B's Gaining Share = New share of B - Old share of B = \( \frac{2}{3} - \frac{3}{9} = \frac{6-3}{9} = \frac{3}{9} \).
C's Gaining Share = New share of C - Old share of C = \( \frac{1}{3} - \frac{2}{9} = \frac{3-2}{9} = \frac{1}{9} \).
\( \implies \) Gaining ratio of B : C = \( \frac{3}{9} : \frac{1}{9} \) = 3 : 1.
In simple words: When one partner retires, the others get a bigger slice of the profit pie. The gaining ratio shows how much each remaining partner's share has grown.

🎯 Exam Tip: Always convert the new and old ratios to a common denominator before subtracting to find the gaining share for each partner.

 

Question 10. A, B and C are partners in a firm sharing profits in the ratio of 3 : 4 : 1. A retires, he surrender \( \frac{2}{3} \)rd of his share in favor of B and remaining in favor of C. Calculate new profit sharing ratio and gaining ratio.
Answer:Original profit sharing ratio of A : B : C = 3 : 4 : 1. Total shares = \( 3+4+1 = 8 \).
So, A's share = \( \frac{3}{8} \), B's share = \( \frac{4}{8} \), C's share = \( \frac{1}{8} \).
A retires. He surrenders \( \frac{2}{3} \) of his share to B and the remaining \( \frac{1}{3} \) to C.
Share surrendered by A to B = A's share \( \times \frac{2}{3} = \frac{3}{8} \times \frac{2}{3} = \frac{6}{24} = \frac{1}{4} \).
Share surrendered by A to C = A's share \( \times \frac{1}{3} = \frac{3}{8} \times \frac{1}{3} = \frac{3}{24} = \frac{1}{8} \).

New profit sharing ratio:
New share of B = Old share of B + Gained share from A = \( \frac{4}{8} + \frac{1}{4} = \frac{4+2}{8} = \frac{6}{8} \).
New share of C = Old share of C + Gained share from A = \( \frac{1}{8} + \frac{1}{8} = \frac{2}{8} \).
\( \implies \) New profit sharing ratio of B : C = \( \frac{6}{8} : \frac{2}{8} \) = 6 : 2 = 3 : 1.

Gaining Ratio:
B's gaining share = \( \frac{1}{4} \)
C's gaining share = \( \frac{1}{8} \)
\( \implies \) Gaining ratio of B : C = \( \frac{1}{4} : \frac{1}{8} \) = \( \frac{2}{8} : \frac{1}{8} \) = 2 : 1.
In simple words: When one partner gives up their share, and it's split between the other partners, we calculate how much each remaining partner gets. This gives us their new total share and shows how much they each gained.

🎯 Exam Tip: Be careful when a partner surrenders a *portion* of their share; ensure you calculate the actual amounts gained by others before determining the new ratios.

RBSE Class 12 Accountancy Chapter 3 Short Answer Questions

 

Question 1. When final payment of retiring partner is out settled at the time of retirement, write right of partners under Section 37 of Indian Partnership Act, 1932.
Answer: Under Section 37 of the Indian Partnership Act, 1932, if the remaining partners continue the business without paying the retiring partner their final settlement amount, the retiring partner has two options:

• They can choose to receive interest at 6% per annum on the unpaid amount until it is fully paid, or
• They can opt to receive a share in the profits earned during that period, in proportion to their capital, whichever benefit is greater for them.

This rule protects the financial interests of a retiring partner when their dues are not settled immediately.
In simple words: If a partner leaves but doesn't get all their money right away, the law says they can either get 6% interest on the unpaid amount, or a share of the profits made during that time, whichever is better for them.

🎯 Exam Tip: Remember to state both options clearly and mention the 6% interest rate as per Section 37 of the Indian Partnership Act, 1932.

 

Question 2. What do you mean by gaining ratio? How is it calculated?
Answer: The gaining ratio is the ratio in which the continuing partners acquire the share of profit from the retiring or deceased partner. This happens because when a partner leaves, their share of profit is taken over by the remaining partners, increasing their individual shares. The gaining ratio is calculated by subtracting the old profit-sharing ratio of the continuing partners from their new profit-sharing ratio.
Formula: Gaining Ratio = New Ratio - Old Ratio
In simple words: The gaining ratio shows how much extra profit shares the remaining partners get when one partner leaves. You find it by subtracting their old share from their new share.

🎯 Exam Tip: Clearly define the gaining ratio and state its formula. Emphasize that it applies only to continuing partners.

 

Question 3. Distinguish between sacrificing ratio and gaining ratio of partners?
Answer: Here is the difference between sacrificing ratio and gaining ratio:

A common purpose for both ratios is to fairly adjust goodwill when there is a change in partnership.
In simple words: Sacrifice ratio is when old partners give up some profit for a new partner joining. Gaining ratio is when remaining partners get more profit when someone leaves. Both are about how profits change when partners change.

🎯 Exam Tip: When distinguishing between these ratios, focus on their timing (admission vs. retirement/death) and their purpose (compensating old partners vs. compensating outgoing partners for goodwill).

 

Question 4. A, B and C are partners in a firm sharing profits in the ratio of 2 : 3 : 4. C retires and the goodwill of the firm is valued at Rs 45,000. Goodwill appeared in the books at Rs 27,000. Pass necessary journal entries for treatment of goodwill.
Answer:Original profit sharing ratio of A : B : C = 2 : 3 : 4. Total shares = \( 2+3+4 = 9 \).
So, A's share = \( \frac{2}{9} \), B's share = \( \frac{3}{9} \), C's share = \( \frac{4}{9} \).
C retires. The new profit sharing ratio between A and B is not given, so it's assumed to be their old ratio, which is 2:3.
Gaining Ratio of A : B = 2 : 3.

Goodwill of the firm = Rs 45,000.
C's share of goodwill = Firm's goodwill \( \times \) C's share = Rs \( 45,000 \times \frac{4}{9} \) = Rs 20,000.
Existing goodwill in the books = Rs 27,000. This must be written off.

**Journal Entries for Goodwill Treatment:**
1. **For writing off existing goodwill:**
A's Capital A/c Dr. (Rs \( 27,000 \times \frac{2}{9} \)) = Rs 6,000
B's Capital A/c Dr. (Rs \( 27,000 \times \frac{3}{9} \)) = Rs 9,000
C's Capital A/c Dr. (Rs \( 27,000 \times \frac{4}{9} \)) = Rs 12,000
    To Goodwill A/c = Rs 27,000
(Being existing goodwill written off among all partners in their old profit sharing ratio)

2. **For adjusting retiring partner's share of goodwill:**
A's Capital A/c Dr. (Rs \( 20,000 \times \frac{2}{5} \)) = Rs 8,000
B's Capital A/c Dr. (Rs \( 20,000 \times \frac{3}{5} \)) = Rs 12,000
    To C's Capital A/c = Rs 20,000
(Being C's share of goodwill adjusted through A's and B's capital accounts in their gaining ratio)
In simple words: When a partner leaves, first, any existing goodwill in the books is removed from all partners' accounts. Then, the retiring partner's share of the firm's new goodwill is paid to them by the remaining partners, based on how much extra profit each remaining partner will now get.

🎯 Exam Tip: Always remember to write off existing goodwill first using the old profit-sharing ratio, and then adjust the retiring partner's share of new goodwill through the gaining partners' capital accounts in their gaining ratio.

 

Question 5. A, B and C are partners in a firm sharing profits in the ratio of 5 : 3 : 2. B retires and the goodwill of the firm is valued at Rs 21,000. Pass necessary journal entries for treatment of goodwill.
Answer:Original profit sharing ratio of A : B : C = 5 : 3 : 2. Total shares = \( 5+3+2 = 10 \).
So, A's share = \( \frac{5}{10} \), B's share = \( \frac{3}{10} \), C's share = \( \frac{2}{10} \).
B retires. New profit sharing ratio between A and C is not given, so it's assumed to be their old ratio, which is 5:2.
Gaining Ratio of A : C = 5 : 2.

Goodwill of the firm = Rs 21,000.
B's share of goodwill = Firm's goodwill \( \times \) B's share = Rs \( 21,000 \times \frac{3}{10} \) = Rs 6,300.

**Journal Entry for adjusting retiring partner's share of goodwill:**
A's Capital A/c Dr. (Rs \( 6,300 \times \frac{5}{7} \)) = Rs 4,500
C's Capital A/c Dr. (Rs \( 6,300 \times \frac{2}{7} \)) = Rs 1,800
    To B's Capital A/c = Rs 6,300
(Being B's share of goodwill adjusted through A's and C's capital accounts in their gaining ratio)
In simple words: When a partner leaves, their part of the firm's goodwill is paid to them by the partners who stay. The remaining partners pay this amount based on how much extra profit they will now earn.

🎯 Exam Tip: If no new profit-sharing ratio is specified, assume that the remaining partners continue to share profits in their old ratio, which then becomes their gaining ratio.

 

Question 6. A, B and C are partners in a firm sharing profits in the ratio of 1 : 2 : 3. B retires and balance of his capital account after making all adjustment stands at Rs 1,00,000. A and C agreed to pay him Rs 1,30,000 in full settlement of his account. Pass necessary journal entries for treatment of goodwill, if the new profit sharing ratio of A and C is 1 : 3.
Answer:Original profit sharing ratio of A : B : C = 1 : 2 : 3. Total shares = \( 1+2+3 = 6 \).
So, A's share = \( \frac{1}{6} \), B's share = \( \frac{2}{6} \), C's share = \( \frac{3}{6} \).
B retires.
Balance in B's capital account after adjustments = Rs 1,00,000.
Amount agreed to be paid to B = Rs 1,30,000.
Hidden Goodwill for B = Amount paid - Balance in Capital A/c = Rs \( 1,30,000 - 1,00,000 \) = Rs 30,000.

New profit sharing ratio of A : C = 1 : 3.
So, A's new share = \( \frac{1}{4} \), C's new share = \( \frac{3}{4} \).

Gaining Ratio = New Ratio - Old Ratio
A's Gaining Share = New share of A - Old share of A = \( \frac{1}{4} - \frac{1}{6} = \frac{3-2}{12} = \frac{1}{12} \).
C's Gaining Share = New share of C - Old share of C = \( \frac{3}{4} - \frac{3}{6} = \frac{9-6}{12} = \frac{3}{12} \).
\( \implies \) Gaining ratio of A : C = \( \frac{1}{12} : \frac{3}{12} \) = 1 : 3.

**Journal Entry for adjusting B's share of goodwill:**
A's Capital A/c Dr. (Rs \( 30,000 \times \frac{1}{4} \)) = Rs 7,500
C's Capital A/c Dr. (Rs \( 30,000 \times \frac{3}{4} \)) = Rs 22,500
    To B's Capital A/c = Rs 30,000
(Being B's share of goodwill adjusted to A's and C's capital accounts in their gaining ratio 1:3)
In simple words: When a partner gets more money than their capital balance when they leave, that extra amount is their share of goodwill. The remaining partners pay this goodwill based on how much their profit shares will increase.

🎯 Exam Tip: When the actual payment to a retiring partner exceeds their adjusted capital, the excess amount is considered hidden goodwill, which needs to be adjusted in the gaining ratio.

 

Question 7. A, B and C are partners in a firm. A retires on 1st January, 2015. On the date of retirement, Rs 80,000 is due to him in all. It is agreed to pay him this amount in installments every year at the end of the year. Prepare A's Loan account in the following cases
(i) Four yearly installments plus interest @ 10% p.a.
(ii) Three installments of Rs 25,000 including interest @ 10% p.a. on the outstanding balance and the balance including interest in the fourth year.
Answer:(i) A's Loan Account (Four yearly installments plus interest @ 10% p.a.)
Total amount due to A = Rs 80,000.
Number of installments = 4.
Principal amount per installment = Rs \( \frac{80,000}{4} \) = Rs 20,000.

(ii) A's Loan Account (Three installments of Rs 25,000 including interest @ 10% p.a. and balance with interest in fourth year)
Total amount due to A = Rs 80,000.
Principal for the first three installments will be Rs 25,000 minus interest on the outstanding balance. The remaining balance with interest will be paid in the fourth year.

A loan account tracks how much is owed to the retiring partner and how it is paid off over time, including interest.
In simple words: When a partner retires and gets paid in parts, their loan account shows how much is still owed each year. It also shows the interest added and the payments made until the full amount is settled.

🎯 Exam Tip: When preparing a loan account with installments, remember to calculate interest on the *outstanding balance* at the beginning of each period, and ensure the closing balance is carried forward correctly.

 

Question 8. A, B and C are partners in a firm whose books are closed on March 31st each year. A died on 30-06-2017 and according to the agreement, the share of profits of a deceased partner upto date of death is to be calculated on the basis of average profits for the last five years. The net profits/loss for the last 5 years have been : Rs 14,000, Rs 18,000, Rs 22,000, Rs (10,000) Loss, Rs 16,000 respectively. Calculate A's share of the profit upto the date of death and pass necessary journal entry.
Answer:Original profit sharing ratio of A, B and C is not given, so it is assumed to be equal, i.e., 1 : 1 : 1. Total shares = \( 1+1+1 = 3 \). A's share = \( \frac{1}{3} \).
A died on 30-06-2017. Books are closed on March 31st.
Period from 01-04-2017 to 30-06-2017 = 3 months.

**Calculation of Average Profit:**
Total profit for the last 5 years = Rs \( 14,000 + 18,000 + 22,000 - 10,000 + 16,000 \) = Rs 60,000.
Average profit = \( \frac{60,000}{5} \) = Rs 12,000.

**Profit for 3 months (from April 1 to June 30, 2017):**
Profit for 3 months = Average profit \( \times \frac{3}{12} \) = Rs \( 12,000 \times \frac{3}{12} \) = Rs 3,000.

**A's share of profit up to date of death:**
A's share of profit = Firm's profit for 3 months \( \times \) A's share = Rs \( 3,000 \times \frac{1}{3} \) = Rs 1,000.

**Journal Entry:**
Profit and Loss Suspense A/c Dr. = Rs 1,000
    To A's Capital A/c = Rs 1,000
(Being A's share of profit up to the date of death transferred to his capital account)
In simple words: When a partner dies during the year, we calculate their share of profit for the months they were alive. This is often done using the average profits from previous years. Then, this amount is added to their capital account.

🎯 Exam Tip: For profit calculation up to the date of death, always remember to annualize the profit (if using prior year's total) and then calculate for the specific period the partner was alive.

 

Question 9. X, Y and Z are partners sharing profits in the ratio 3 : 2 : 1. X died on 10-04-2017. The sales and profit for 2016 were Rs 2,00,000 and Rs 20,000 respectively, sales from 01-01-2017 to 10-04-2017 was Rs 1,20,000. Find the share of X's profit.
Answer:Original profit sharing ratio of X : Y : Z = 3 : 2 : 1. Total shares = \( 3+2+1 = 6 \). X's share = \( \frac{3}{6} = \frac{1}{2} \).
X died on 10-04-2017.

**Calculation of profit on the basis of sales:**
Profit ratio for the year 2016 = \( \frac{\text{Profit}}{\text{Sales}} \times 100 = \frac{20,000}{2,00,000} \times 100 \) = 10%.

Sales from 01-01-2017 to 10-04-2017 = Rs 1,20,000.
Estimated profit for this period = Sales for the period \( \times \) Profit ratio = Rs \( 1,20,000 \times 10\% \) = Rs 12,000.

**X's share of profit:**
X's share of profit = Estimated profit \( \times \) X's share = Rs \( 12,000 \times \frac{1}{2} \) = Rs 6,000.
In simple words: When a partner dies, their profit share until death can be calculated based on sales. We find what percentage of sales was profit last year and apply it to sales up to the partner's death to estimate the profit.

🎯 Exam Tip: When profit is to be calculated on the basis of sales, always determine the profit percentage from the previous period's sales and apply it to the sales made up to the date of the partner's death.

RBSE Class 12 Accountancy Chapter 3 Essay Type Questions

 

Question 1. How is partner's share determined on the retirement or death? Explain.
Answer: When a partner retires or dies during an accounting year, the amount payable to them (or their legal heir) needs to be determined. This involves several adjustments to their capital account to reflect their share up to that specific date. The following adjustments are usually made:

1. **Drawings and Interest Thereon:** Any money or goods taken by the partner from the firm (drawings) and any interest charged on these drawings from the last balance sheet date until their retirement or death are debited (subtracted) from their capital or current account.

2. **Life Insurance Policy:** If the firm has joint or separate life insurance policies for the partners, the retiring or deceased partner's share of the policy amount is calculated. This share is then credited (added) to their capital or current account.

3. **Share in Firm's Profit or Loss:** The partner's share of profit (or loss) from the date of the last balance sheet until their retirement or death needs to be calculated. This can be done by two methods:

• **(i) On Time Basis:** This method calculates the proportionate profit or loss based on the profit of the immediately preceding year or the average profit of the last few years. The calculated amount is then credited (for profit) or debited (for loss) to their capital or current account.
• **(ii) On Turnover Basis:** This method involves finding the percentage of profit to turnover (sales) from the previous year. This same percentage is then applied to the turnover (sales) from the last balance sheet date until the partner's retirement or death to estimate the profit. The deceased or retired partner's share is then calculated based on their profit-sharing ratio and adjusted in their capital account. For example, if the turnover for a specific period was Rs 80,000, and the profit percentage was 10%, then the estimated profit would be Rs 8,000.

4. **Share in Goodwill:** The retiring or deceased partner is entitled to their share of goodwill because it was earned through the efforts of all partners. This share is calculated according to the rules in the partnership agreement. The gaining partners compensate the outgoing partner for their share of goodwill by debiting their capital accounts in the gaining ratio and crediting the retiring partner's capital account. Existing goodwill (if any) is usually written off before this adjustment.

5. **Share in Gain/Loss Arising out of Revaluation of Assets and Liabilities:** At the time of retirement or death, assets and liabilities are revalued. Any profit or loss from this revaluation is calculated and credited (for profit) or debited (for loss) to the capital/current accounts of all partners, including the retiring or deceased partner, in their old profit-sharing ratio.

6. **Share in Reserves and Undistributed Profit:** The retiring or deceased partner is also entitled to their share of any accumulated reserves, undistributed profits, or losses appearing in the balance sheet. These are credited (for profits/reserves) or debited (for losses) to their capital/current account in their old profit-sharing ratio. Employees' Provident Fund is a liability and is not distributed.

These adjustments ensure that the retiring or deceased partner receives their fair share of the firm's value up to the date of their departure, reflecting all financial changes.

**Journal Entries for Goodwill Treatment (Example from Page 13):**
This section described journal entries. Here's how to represent them textually:

**Journal Entry when a partner (A) dies and policy money is received:**
1. **To record policy amount due:**
Insurance Company A/c Dr. = Rs 30,000 (A's policy)
    To Life Insurance Policy A/c = Rs 30,000
(Being policy amount due for A)

2. **To record policy amount received:**
Bank A/c Dr. = Rs 30,000
    To Insurance Company A/c = Rs 30,000
(Being policy amount received from insurance company)

3. **To distribute the Life Insurance Policy amount:**
Life Insurance Policy A/c Dr. = Rs 39,000 (This combines policy of A + surrender value of B & C)
    To A's Capital A/c = Rs 13,000
    To B's Capital A/c = Rs 13,000
    To C's Capital A/c = Rs 13,000
(Being policy value distributed among partners)
In simple words: When a partner leaves or dies, we need to figure out how much money they are owed. This includes their capital, their share of any profits or losses up to that day, their part of the firm's value (goodwill), and any revaluation gains or losses. All these amounts are added or subtracted from their capital account.

🎯 Exam Tip: When explaining how a partner's share is determined, make sure to cover all key adjustments like goodwill, revaluation, undistributed profits/losses, and interest on drawings, as these are critical components.

 

Question 2. What problems do arise on retirement or death of a partner and how are they settled?
Answer: When a partner retires or passes away, several accounting issues need to be resolved. These include:

1. Calculating the new profit sharing ratio and the gaining ratio for the partners who remain.
2. Handling the accounting for goodwill.
3. Treating the revaluation of assets and liabilities.
4. Accounting for reserves, accumulated profits, and losses.
5. Making the payment to the retiring partner or the deceased partner's legal heir.
6. Adjusting the capital of the remaining partners to match their new profit sharing ratio.

Let's look at some of these in more detail:

1. Calculation of New Profit Sharing Ratio and Gaining Ratio:
When a partner leaves, the remaining partners usually gain a share of profits. The gaining ratio shows how much profit share each remaining partner takes from the outgoing partner. This ratio is calculated as: New Ratio - Old Ratio.

• If the new profit sharing ratio is not given, it's assumed that the remaining partners will continue to share profits in their existing old profit and loss ratio.
• If remaining partners purchase the share of the retiring partner, the new ratio is found by adding this bought-out share to their old profit sharing ratio.

2. Accounting Treatment of Goodwill:
A retiring or deceased partner has a right to their share of goodwill because it was earned by the efforts of all partners in the past. To compensate the outgoing partner fairly, their share of goodwill is adjusted through the capital accounts of the remaining partners. This is done based on an agreement between the partners.

As per Accounting Standard 26, goodwill can only be recorded in the books if money or money's worth has been paid for it. Therefore, only purchased goodwill is recorded; self-generated goodwill is not. The adjustment is made by debiting the continuing partners' capital accounts in their gaining ratio and crediting the retiring/deceased partner's capital account with their share of goodwill. Here's a common journal entry:

Continuing Partners' Capital A/c Dr. (in gaining ratio)
To Retiring/Deceased Partners' Capital A/c
(Being retiring/deceased partner's share of goodwill adjusted to continuing partners in gaining ratio)

If goodwill already exists in the books, it should be transferred to all partners' capital accounts in their old profit sharing ratio. Also, if a firm agrees to pay a lump sum to a retiring partner that is more than their capital and share in reserves, the extra amount is treated as their share of hidden goodwill.

3. Revaluation of Assets and Liabilities:
When a partner retires, assets and liabilities are revalued. A revaluation account is prepared, similar to when a new partner joins. Any profit or loss from revaluation is divided among all partners, including the retiring partner, in their old profit-sharing ratio. This is different from a new admission where the new partner doesn't share in past revaluation profits or losses.

If there is a profit on revaluation, the entry is:
Revaluation A/c Dr.
To All Partners' Capital A/c (in old profit sharing ratio)
(Being distribution of profit on revaluation)

If there is a loss on revaluation, the entry is:
All Partners' Capital A/c Dr. (in old profit sharing ratio)
To Revaluation A/c
(Being distribution of loss on revaluation)

Sometimes, revalued values are not recorded in the books (Memorandum Revaluation Method). In such cases, profit or loss is first divided among old partners and then a reverse entry is passed to divide the same amount among remaining partners in their new profit-sharing ratio.

4. Accounting Treatment of Reserves and Accumulated Profits/Losses:
Any reserves or accumulated profits/losses existing at the time of retirement belong to all partners. They are distributed to all partners' capital accounts in their old profit-sharing ratio. For distributing reserves and accumulated profits, the entry is:

General Reserve A/c Dr.
Profit & Loss A/c Dr.
Investment Fluctuation Reserve A/c Dr.
Workmen Compensation Reserve A/c Dr.
To All Partners' Capital A/c (in old profit sharing ratio)
(Being reserve and accumulated profit transferred to partners' capital account in old profit sharing ratio)

For distributing accumulated losses, the entry is:
All Partners' Capital A/c Dr.
To Profit and Loss A/c
To Advertisement Expenses A/c (Deferred Revenue Expenditure A/c)
(Being loss distributed)

Note: Employees' Provident Fund is a liability of the firm and is not distributed among partners.

5. Life Insurance Policy:
If the firm has taken joint or separate life insurance policies on the partners' lives, the retiring or deceased partner's share in the policy amount is calculated and credited to their capital/current account.

Individual or Separate Life Policy:
When a partner dies, the sum insured from their policy is received. For other partners, their policies' surrender value is considered. If the firm pays the premiums, it is responsible for them.

Entries for premiums:

(i) For Payment of Premium:
Insurance Premium A/c Dr.
To Cash/Bank A/c
(Being insurance premium paid)

(ii) For Premium Transferred to Profit & Loss Account Every Year:
Profit and Loss A/c Dr.
To Insurance Premium A/c
(Being premium transferred to Profit & Loss account)

(iii) For Amount of Policy Due on Death of Partner:
Insurance Company A/c Dr.
To Life Policy of Deceased Partner's A/c
(Being policy amount due)

(iv) For Amount of Policy Received:
Bank A/c Dr.
To Life Policy of Deceased Partner's A/c
(Being policy amount received)

(v) On Distribution of Deceased Partner and Policy Money of Surrender Value of Surviving Partners:
Life Policy of Deceased Partner A/c Dr.
Life Policies of Other Partners A/c Dr.
To All Partners' Capital A/c
(Being policy distributed to all partners)

Joint Life Insurance Policy (JLIP):
If a joint life insurance policy is taken, accounting can be done in three ways:

Method 1: Treating Premium as Trade Expenses:
(a) For Payment of Premium:
Insurance Premium A/c Dr.
To Cash/Bank A/c
(Insurance Premium Paid)

(b) For Premium Transferred to P&L Account:
Profit and Loss A/c Dr.
To Insurance Premium A/c
(Premium Transferred to P&L account)

(c) For Amount of Policy Due on Death of Partners:
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Policy amount due)

(d) For Amount Received of Policy:
Bank A/c Dr.
To Insurance Company A/c
(Policy Amount Received)

(e) For Distribution of Amount of Policy:
Joint Life Policy A/c Dr.
To All Partners' Capital A/c
(For amount distributed)

Method 2: Treating Premium as an Asset (Joint Life Policy Account):
In this method, the Joint Life Policy account is maintained at its surrender value. The excess of premium paid over surrender value is transferred to the Profit and Loss Account.

(a) On Payment of Premium:
Joint Life Policy A/c Dr.
To Bank A/c
(Being insurance premium paid)

(b) On Write Off the Amount (excess premium):
Profit and Loss A/c Dr.
To Joint Life Policy A/c
(Being premium transferred to P&L account)

(c) On Receiving the Amount of Policy:
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Policy amount due)

(d) On Receipt of Sum Insured:
Bank A/c Dr.
To Insurance Company A/c
(Being policy amount received)

(e) On Distribution of Amount of Policy:
Joint Life Policy A/c Dr.
To All Partners' Capital A/c
(Being policy amount distributed)

Method 3: Treating Premium as an Investment and Reserve is Created:
Here, premium payment is treated as an investment, and a reserve is created each year. The amount equal to the surrender value is transferred to the Joint Life Policy Reserve account.

(a) To Paid Premium Every Year:
Joint Life Policy A/c Dr.
To Bank A/c
(Being joint life policy premium paid)

(b) To Create Joint Life Policy Reserve:
Profit and Loss Appropriation A/c Dr.
To Joint Life Policy Reserve A/c
(Being joint life policy reserve created)

(c) To Difference in Balance of Reserve Account and Insurance Account:
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c
(Being difference charged to reserve account)

(d) To due Insurance Amount:
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Being policy amount received)

(e) To Received Insurance Amount:
Bank A/c Dr.
To Insurance Company A/c
(Policy amount received)

(f) To Close Joint Life Insurance Policy Reserve Account:
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c
(Being balance of reserve account transferred to JLIP account)

(g) To Divide Insurance Policy Amount in All Partners:
Joint Life Policy A/c Dr.
To Partner's Capital A/c
(Being policy amount distributed)

6. Adjustment of Capital:
After a partner retires, the remaining partners might adjust their capital. They often decide on the total capital of the new firm and then adjust their individual capital accounts to be in proportion to the new profit-sharing ratio. If a partner's capital is more than required, they withdraw the excess cash; if it's less, they bring in more cash. This helps ensure the firm's financial structure aligns with the new partnership arrangement. The firm's total capital may stay the same, or it might be adjusted based on the new profit-sharing ratio of the continuing partners.

In simple words: When a partner retires or dies, the firm needs to fix many things like how profits are shared, how goodwill is valued, and how assets and debts are re-calculated. They also need to pay the outgoing partner or their family. The remaining partners might even change their own capital amounts to fit the new business structure.

🎯 Exam Tip: Clearly list and explain each accounting problem for full marks, providing relevant journal entries where applicable. Remember to distinguish between the treatment of goodwill and revaluation profit/loss for retiring partners versus new partners.

 

Question 4. What are the different methods of making payment due to a retiring partner? Explain.
Answer: The amount owed to a retiring partner is paid according to the partnership agreement. There are typically three main methods used to make this payment:

1. Lump-Sum Payment System:
In this method, after all adjustments (like revaluation, goodwill, and reserves) are made, the total amount payable to the retiring partner is determined. If the firm has enough cash, this entire amount is paid in one go, either by cash or bank transfer. This is the simplest way to settle the account if the firm is financially strong. The journal entry for this payment is:

Retiring Partner's Capital A/c Dr.
To Cash/Bank A/c
(Being amount due to retiring partner paid)

2. Payment Partly in Cash and Partly by Transferring into Loan Account:
Sometimes, a firm might not have enough cash to pay the full amount in one go, or it might not be wise to withdraw a large sum. In such cases, a portion of the amount is paid immediately in cash, and the remaining balance is transferred to the retiring partner's loan account. This loan account will then be settled later, possibly with interest. The journal entry at the time of payment is:

Retiring Partner's Capital A/c Dr.
To Cash A/c
To Retiring Partner's Loan A/c
(Being retiring partner paid partly in cash and balance transferred to his loan account)

3. Payment by Installment:
This method is considered more practical for larger sums. The amount due to the retiring partner is transferred to their loan account and then paid off in fixed installments over a period. Interest is also paid on the outstanding balance of the loan, as agreed upon by the partners. The journal entries for this method are:

(i) On Transferring Amount Payable to Loan Account:
Retiring Partner's Capital A/c Dr.
To Retiring Partner's Loan A/c
(Being retiring partner's capital account balance transferred to his loan account)

(ii) On Interest Falling Due:
Interest A/c Dr.
To Retiring Partner's Loan A/c
(Being for interest due on his loan account)

(iii) On Payment of Installment:
Retiring Partner's Loan A/c Dr.
To Cash/Bank A/c
(Being installment paid)

4. Payment by Annuity:
Under this method, the retiring or deceased partner (or their executor) receives a fixed annual payment, known as an annuity, for a certain period or throughout their lifetime. The amount of the annuity is determined using annuity tables. The retiring partner's capital account balance is transferred to an annuity suspense account, which is credited with interest at an agreed rate each year. If the partner or executor passes away and there's a balance left in this account, it's distributed among the remaining partners in their profit-sharing ratio. If the interest rate isn't given, it's usually applied at 6% per annum. Any necessary amount to cover the annuity is transferred from the profit and loss account. Journal entries for this method include:

(i) On Transferring the Amount Payable to Annuity Account:
Retiring Partner's Capital A/c Dr.
To Annuity Suspense A/c
(Being balance of retiring partner's capital account transferred to annuity suspense account)

(ii) On Interest Falling Due Every Year on Annuity Account:
Interest A/c Dr.
To Annuity Suspense A/c
(Being interest due)

(iii) On Yearly Payment of Annuity:
Annuity Suspense A/c Dr.
To Bank/Cash A/c
(Being amount of annuity paid)

(iv) On Death of Retired Partner while there is Balance in Annuity Account:
Annuity Suspense A/c Dr.
To Remaining Partner's Capital A/c
(Being balance of annuity suspense account transferred to remaining partner's capital account)

(v) If the retired partner survives beyond the balance in annuity account, the firm continues annuity payments until their survival, with a closing entry at year-end:
Profit & Loss A/c Dr.
To Annuity Suspense A/c

In simple words: A retiring partner can be paid in a few ways: all at once if the firm has money, partly in cash and partly as a loan, in small payments over time with interest, or as a fixed yearly payment called an annuity. Each method has its own rules for accounting entries.

🎯 Exam Tip: Remember to clearly outline each payment method and provide the journal entries associated with it. Highlight the differences, such as interest implications or whether the payment is immediate or spread over time.

 

Question 1. X, Y and Z were partners in a firm, sharing profits in the ratio of \( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \) respectively. The balance sheet of the firm on 31st December, 2017 stood as follows:

Y retires from the firm on the above date subject to the following conditions:

(a) Goodwill of the firm be valued at Rs 9,000 and is not to be shown in the books of the firm.
(b) Machinery would be depreciated by 10% and motor vans by 15%.
(c) Stock would be appreciated by 20% and building by 10%.
(d) The provision for doubtful debts would be increased by Rs 975.
(e) Liability for workmen compensation to the extent of Rs 825 would be created.
It was agreed that X and Z would share profit in future in the ratio of 3 : 2 respectively.
You are required to prepare the Revaluation account, Capital account of partners and Balance Sheet of the firm after the retirement of Y.
Also solve if it is assumed that partners decided to show the assets and liabilities at their old book values.

Answer:

Calculation of Profit Sharing Ratios:
Old Profit Sharing Ratio of X, Y, Z is \( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \). To make the denominators common, we use 6:
\( \implies \) X: \( \frac{1 \times 3}{2 \times 3} = \frac{3}{6} \)
\( \implies \) Y: \( \frac{1 \times 2}{3 \times 2} = \frac{2}{6} \)
\( \implies \) Z: \( \frac{1}{6} \)
So, the old ratio is 3:2:1.

Y retires, and the new profit sharing ratio between X and Z is 3:2.

Revaluation Account:

Y's Capital Account:

Partner's Capital Account (X and Z):

Balance Sheet (as on 01-04-2016) (After Y's Retirement):

Working Note: Gain Ratio is calculated as follows:
New Ratio of X and Z = 3:2. Old Ratio of X and Z (ignoring Y for gaining ratio) = X: \( \frac{3}{5} \), Z: \( \frac{2}{5} \) (derived from old ratio 3:2:1).
Since Y's share is taken by X and Z in their new ratio, the gaining ratio is simply the new ratio, 3:2.
However, the solution provides a different calculation for gaining ratio. Let's follow the solution given.
The solution on page 30 shows: Old Profit Ratio (X,Y,Z) \( \frac{3}{6}, \frac{2}{6}, \frac{1}{6} \). New Profit Ratio (X,Z) \( \frac{3}{5}, \frac{2}{5} \).
Gain Ratio = New Ratio - Old Ratio
X's Gain Ratio = \( \frac{3}{5} - \frac{3}{6} = \frac{18 - 15}{30} = \frac{3}{30} \)
Z's Gain Ratio = \( \frac{2}{5} - \frac{1}{6} = \frac{12 - 5}{30} = \frac{7}{30} \)
So, Gaining Ratio of X and Z is 3:7.

Goodwill of the firm = Rs 9,000. Y's Share of Goodwill = \( \frac{2}{6} \) of Rs 9,000 = Rs 3,000.
This amount will be compensated by X and Z in their gaining ratio of 3:7.
X's contribution = \( \frac{3}{10} \) of Rs 3,000 = Rs 900.
Z's contribution = \( \frac{7}{10} \) of Rs 3,000 = Rs 2,100.

In simple words: When Y retired, we first updated the values of assets and liabilities to find a profit or loss. This profit was shared among all partners. Then, we adjusted the capital accounts, including Y's share of goodwill and reserves, before moving Y's final balance to a loan account. The remaining partners, X and Z, adjusted their capital accounts to reflect these changes and their new profit-sharing arrangement.

🎯 Exam Tip: Always calculate the new profit sharing ratio and gaining ratio correctly before distributing goodwill. Pay close attention to revaluation adjustments for each asset and liability.

 

Question 6. A, B and C are partners in a firm sharing profits in the ratio of 2 : 1 : 2. A retires and his share is entirely taken by B. Calculate new profit sharing ratio.
Answer: The old profit sharing ratio of A, B, and C is 2:1:2, meaning their shares are \( \frac{2}{5} \) for A, \( \frac{1}{5} \) for B, and \( \frac{2}{5} \) for C. When partner A retires, partner B takes over A's entire share.
So, B's new share becomes their old share plus A's share: \( \frac{1}{5} + \frac{2}{5} = \frac{3}{5} \).
Partner C's share remains unchanged at \( \frac{2}{5} \).
Therefore, the new profit sharing ratio between B and C is \( \frac{3}{5} : \frac{2}{5} \), which simplifies to 3:2.
In simple words: When A leaves the partnership, B takes all of A's share. So, B's portion of profits increases, while C's portion stays the same. The new way B and C share profits is 3 parts for B and 2 parts for C.

🎯 Exam Tip: Remember that when one partner retires and another takes their entire share, the remaining partner's share does not change unless specified.

 

Question 7. A, B and C are partners in a firm sharing profits in the in the ratio of 1/4 : 2/5 : 7/20. B retires and his share is taken by A and C in the ratio of 1 : 2. Calculate new profit sharing ratio and gaining ratio.
Answer: First, let's find a common denominator for the old profit sharing ratio of A, B, and C, which is \( \frac{1}{4} : \frac{2}{5} : \frac{7}{20} \). This becomes \( \frac{5}{20} : \frac{8}{20} : \frac{7}{20} \), or a ratio of 5:8:7. Partner B retires, and A and C take B's share of \( \frac{2}{5} \) in a 1:2 ratio.
So, A gains from B: \( \frac{2}{5} \times \frac{1}{3} = \frac{2}{15} \).
And C gains from B: \( \frac{2}{5} \times \frac{2}{3} = \frac{4}{15} \).
A's new share is their old share plus their gain: \( \frac{1}{4} + \frac{2}{15} = \frac{15+8}{60} = \frac{23}{60} \).
C's new share is their old share plus their gain: \( \frac{7}{20} + \frac{4}{15} = \frac{21+16}{60} = \frac{37}{60} \).
The new profit sharing ratio for A and C is \( \frac{23}{60} : \frac{37}{60} \), which simplifies to 23:37.
The gaining ratio for A and C is the ratio of their gains, which is \( \frac{2}{15} : \frac{4}{15} \), simplifying to 1:2.
In simple words: We first made everyone's profit shares easy to compare. When B left, A and C divided B's share among themselves. We added what A and C gained to their old shares to find the new sharing ratio. The gaining ratio shows exactly how much more profit each of them got from the leaving partner.

🎯 Exam Tip: Always convert all old profit sharing ratios to a common denominator first to avoid errors, especially when a partner's share is distributed.

 

Question 6. X, Y and Z were partners in a firm, sharing profits in the ratio of \( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \) respectively. The balance sheet of the firm on 31st December, 2017 stood as follows:

Y retires from the firm on the above date subject to the following conditions:
(a) Goodwill of the firm be valued at Rs 9,000 and is not to be shown in the books of the firm,
(b) Machinery would be depreciated by 10% and motor vans by 15%.
(c) Stock would be appreciated by 20% and building by 10%.
(d) The provision for doubtful debts would be increased by Rs 975.
(e) Liability for workmen compensation to the extent of Rs 825 would be created.
It was agreed that X and Z would share profit in future in the ratio of 3 : 2 respectively.
You are required to prepare the Revaluation account, Capital account of partners and Balance Sheet of the firm after the retirement of Y.
Also solve if it is assumed that partners decided to show the assets and liabilities at their old book values.
Answer:
To solve this problem, we will first determine the profit sharing ratios and then prepare the necessary accounts and the balance sheet under two methods.

1. Profit Sharing Ratios:
Old Profit Sharing Ratio (X:Y:Z): \( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \). Converting to a common denominator gives 3:2:1.
New Profit Sharing Ratio (X:Z): After Y's retirement, X and Z will share profits in the ratio 3:2.
Gaining Ratio (X:Z):
\( \text{X's Gain} = \text{New Share} - \text{Old Share} = \frac{3}{5} - \frac{3}{6} = \frac{18-15}{30} = \frac{3}{30} \).
\( \text{Z's Gain} = \text{New Share} - \text{Old Share} = \frac{2}{5} - \frac{1}{6} = \frac{12-5}{30} = \frac{7}{30} \).
Therefore, the Gaining Ratio for X and Z is 3:7.

2. Goodwill Adjustment:
Firm's Goodwill: Rs 9,000.
Y's Share of Goodwill: \( 9,000 \times \frac{2}{6} = \text{Rs } 3,000 \).
This share is adjusted through the capital accounts of X and Z in their gaining ratio (3:7).
X compensates Y: \( 3,000 \times \frac{3}{10} = \text{Rs } 900 \).
C compensates Y: \( 3,000 \times \frac{7}{10} = \text{Rs } 2,100 \).

3. Revaluation Account:
Calculated Revaluation Profit:
Debits (Losses): Machinery Depreciation (10% of Rs 17,500) = Rs 1,750; Motor Vans Depreciation (15% of Rs 4,000) = Rs 600; Increase in Provision for Doubtful Debts (from Rs 250 to Rs 975) = Rs 725 (assuming 975 is the increase, not total); Creation of Workmen's Compensation Liability = Rs 825.
Credits (Gains): Stock Appreciation (20% of Rs 12,500) = Rs 2,500; Building Appreciation (10% of Rs 22,500) = Rs 2,250.
Total Debits = \( 1,750 + 600 + 725 + 825 = 3,900 \). Total Credits = \( 2,500 + 2,250 = 4,750 \).
Revaluation Profit = \( 4,750 - 3,900 = 850 \).
*(Note: The problem's solution table for Revaluation Account on OCR page 31 shows a profit of Rs 600 being distributed. We will use the source's distributed profit figures to remain consistent.)*

Revaluation Account (as per source's distributed profit):

Distribution of Revaluation Profit: The profit of Rs 600 is distributed among X, Y, and Z in their old profit sharing ratio of 3:2:1.
X's share: \( 600 \times \frac{3}{6} = \text{Rs } 300 \).
Y's share: \( 600 \times \frac{2}{6} = \text{Rs } 200 \).
Z's share: \( 600 \times \frac{1}{6} = \text{Rs } 100 \).

4. Y's Capital Account:

5. Partner's Capital Account (X and Z):

6. Second Method: Memorandum Revaluation Account (Assets and Liabilities at Old Book Values):

7. Memorandum Balance Sheet:

In simple words: We first figured out how X and Z will share profits after Y leaves, and how they will pay Y for the firm's goodwill. Then, we updated all asset and debt values for revaluation and showed how this changes the partners' accounts. We also did a second calculation, pretending that asset values don't change on the main balance sheet, and created a special memorandum balance sheet for that.

🎯 Exam Tip: For complex retirement problems, clearly distinguish between regular revaluation (where asset values in the balance sheet change) and memorandum revaluation (where asset values are maintained at old figures, and adjustments are made via capital accounts).

 

Question 3. A and B are partners, sharing profits in the ratio of A \( \frac{1}{2} \), B \( \frac{1}{3} \) and transfer to reserve \( \frac{1}{6} \). Their balance sheet as at 31st March, 2017 was as follows :

B retires on 1st April, 2016. The terms were :
1. Goodwill is to be valued at Rs 50,000.
2. Value of patent is to be increased by Rs 3,000 but plant was found over valued by Rs 15,000.
3. Provision for doubtful debts should be 5% on debtors and provision for discount should also be made on debtors and creditors at 3%.
4. Out of insurance which was entirely debited to profit and loss account Rs 870 be carried forward as unexpired insurance.
5. Investments were revalued at Rs 16,000. Half of these investments were taken over by B.
6. There is a claim for workmen compensation to the extent of Rs 5,000. B was paid off in full.
Prepare Revaluation account, Capital accounts and the Balance Sheet of A.
Answer:
1. Profit Sharing Ratio:
Old Profit Sharing Ratio (A:B): \( \frac{1}{2} : \frac{1}{3} \). This simplifies to 3:2. (The "transfer to reserve \( \frac{1}{6} \)" part is not directly applied in profit distribution here based on common accounting practice).
Since B retires and A is the only remaining partner, A gains B's entire share. A's new share is 1 (or \( \frac{1}{1} \)). The gaining ratio is 1:0 for A.

2. Goodwill Adjustment:
Existing Goodwill (from Balance Sheet): Rs 15,000. This is written off in the old profit sharing ratio (3:2) between A and B.
A's share: \( 15,000 \times \frac{3}{5} = \text{Rs } 9,000 \).
B's share: \( 15,000 \times \frac{2}{5} = \text{Rs } 6,000 \).
New Firm's Goodwill: Rs 50,000.
B's Share of New Goodwill: \( 50,000 \times \frac{2}{5} = \text{Rs } 20,000 \).
A, the continuing partner, compensates B for this share. Journal entry: A's Capital A/c Dr. 20,000; To B's Capital A/c Cr. 20,000.

3. Revaluation Account:
We calculate revaluation profit/loss based on the conditions:
Debits (Losses/Increases in Liabilities):
Plant A/c (Overvalued by) = Rs 15,000.
Provision for Doubtful Debts A/c (Increase from Rs 400 to 5% of Rs 20,000 = Rs 1,000) = Rs 600.
Provision for Discount on Debtors A/c (3% of Rs 20,000) = Rs 600.
Investments A/c (Loss on revaluation from Rs 20,000 to Rs 16,000) = Rs 4,000.
Workmen's Compensation Claim A/c (New liability) = Rs 5,000.
Credits (Gains/Decreases in Liabilities):
Patents A/c (Increased by) = Rs 3,000.
Provision for Discount on Creditors A/c (3% of Rs 10,000) = Rs 300.
Unexpired Insurance A/c (To be carried forward) = Rs 870.
Total Debits = \( 15,000 + 600 + 600 + 4,000 + 5,000 = 25,200 \).
Total Credits = \( 3,000 + 300 + 870 = 4,170 \).
Revaluation Loss = \( 25,200 - 4,170 = 21,030 \).
This loss is distributed to A and B in their old profit sharing ratio of 3:2.
A's share of loss: \( 21,030 \times \frac{3}{5} = \text{Rs } 12,618 \).
B's share of loss: \( 21,030 \times \frac{2}{5} = \text{Rs } 8,412 \).
*(Note: The source's Capital Accounts show revaluation losses of Rs 12,600 for A and Rs 8,400 for B. We will use these figures for consistency with the provided solution tables.)*

Revaluation Account:

4. Partner's Capital Accounts:

*(Note: The amount of Rs 7,800 in B's Capital Account for Employee Provident Fund is from the source table. Normally, EPF is a liability and not distributed to partners.)*

5. Balance Sheet (as on 1st April, 2016):

In simple words: We first updated all asset and debt values and shared any profit or loss from this among the partners. Then, we adjusted for goodwill (the firm's good name) and updated each partner's personal account. Finally, we made a new company balance sheet after partner B left, showing the firm's overall financial health.

🎯 Exam Tip: When a problem provides both explicit conditions and solution tables, carefully reconcile them. If inconsistencies arise, prioritize providing the most complete and balanced set of accounts from the source, while making small notes about calculations if necessary, to fulfill the requirement of reproducing the worked solution faithfully.

 

Question 4. R, S and T were partners in a firm, sharing profits in 2 : 2 : 1 ratio. On 31-03-2016, their balance sheet was as follows:

S retired from the firm on 01-04-2016 and his share was ascertained on the revaluation of assets as follows : Stock Rs 40,000; furniture Rs 6,000; Plant and machinery Rs 18,000; building Rs 40,000; Rs 1,700 were to be provided for doubtful debts. The goodwill of the firm was valued at Rs 12,000. S was to be paid Rs 18,080 in cash on retirement and the balance in three equal yearly installments. Prepare Revaluation account, Partners' Capital account; S's Loan account and Balance Sheet on 01-04-2016.
Answer:
1. Profit Sharing Ratios:
Old Profit Sharing Ratio (R:S:T): 2:2:1. Total parts = 5.
New Profit Sharing Ratio (R:T): Since S retires and no new ratio is given for R and T, they will continue to share profits in their old ratio, which is 2:1.
Gaining Ratio (R:T): The gaining ratio for R and T will also be their old ratio, 2:1.

2. Goodwill Adjustment:
Firm's Goodwill: Rs 12,000.
S's Share of Goodwill: \( 12,000 \times \frac{2}{5} = \text{Rs } 4,800 \).
R and T compensate S in their gaining ratio (2:1):
R compensates: \( 4,800 \times \frac{2}{3} = \text{Rs } 3,200 \).
T compensates: \( 4,800 \times \frac{1}{3} = \text{Rs } 1,600 \).

3. Profit and Loss Account Distribution:
Profit and Loss A/c (Credit Balance from Balance Sheet): Rs 9,000. Distributed to R, S, T in 2:2:1.
R's share: \( 9,000 \times \frac{2}{5} = \text{Rs } 3,600 \).
S's share: \( 9,000 \times \frac{2}{5} = \text{Rs } 3,600 \).
T's share: \( 9,000 \times \frac{1}{5} = \text{Rs } 1,800 \).

4. Revaluation Account:
Calculations for Revaluation Loss:
Stock: Old Rs 44,600, new Rs 40,000. Loss = Rs 4,600.
Furniture: Old Rs 7,000, new Rs 6,000. Loss = Rs 1,000.
Plant and Machinery: Old Rs 19,500, new Rs 18,000. Loss = Rs 1,500.
Building: Old Rs 48,000, new Rs 40,000. Loss = Rs 8,000.
Provision for Doubtful Debts: Rs 1,700 (new provision).
Total Revaluation Loss = \( 4,600 + 1,000 + 1,500 + 8,000 + 1,700 = 16,800 \).
This loss is distributed to R, S, T in their old ratio 2:2:1.
R's share: \( 16,800 \times \frac{2}{5} = \text{Rs } 6,720 \).
S's share: \( 16,800 \times \frac{2}{5} = \text{Rs } 6,720 \).
T's share: \( 16,800 \times \frac{1}{5} = \text{Rs } 3,360 \).

S's Capital Account:

Remaining Partner's Capital Account (R and T):

Balance Sheet (as on 01-04-2016):

In simple words: We calculated how partners share profits and goodwill. We identified all revaluation losses on assets and liabilities, and distributed them. We then updated S's capital account, paying a portion in cash and transferring the rest to a loan. Finally, we adjusted R's and T's capital accounts and created a new balance sheet reflecting all these changes.

🎯 Exam Tip: When a partner retires and is paid partly in cash and partly by transferring to a loan account, make sure to clearly record both parts in their capital account. Always remember to distribute old profits/losses before revaluation and goodwill adjustments.

 

Question 5. B retires and the following adjustment of the assets and liabilities have been agreed upon before the ascertainment of the amount payable by the firm to B :
(a) That the stock be depreciated by 6%.
(b) That the provision for doubtful debts be brought upto 5% on debtors,
(c) That the factory land and building be appreciated by 20%.
(d) That a provision of Rs 770 be made in respect of outstanding legal charges,
(e) That the goodwill of the entire firm be fixed as Rs 10,800 and B's share of the same be adjusted into the account of A and C who are going to share in future in the proportion of 5/8 : 3/8 (No goodwill account is to be raised).
(f) That the entire capital of the firm as newly constituted be fixed at Rs 28,000 between A and C in the proportion of 5/8 : 3/8 after passing entries in their account for adjustment (i.e., actual cash to be paid off or to be brought in by the continuing partners as the case may be).
Pass the necessary journal entries to give effect to the above arrangement and prepare the Balance Sheet of A and C after transferring the amount due to B to separate loan account in his name.

Answer:
1. Profit Sharing Ratios:
Old Profit Sharing Ratio (A:B:C): Based on capital, it is Rs 16,000 : Rs 12,000 : Rs 8,000, which simplifies to 4:3:2.
New Profit Sharing Ratio (A:C): 5:3 (given in condition e).
Gaining Ratio (A:C):
\( \text{A's Gain} = \text{New Share} - \text{Old Share} = \frac{5}{8} - \frac{4}{9} = \frac{45-32}{72} = \frac{13}{72} \).
\( \text{C's Gain} = \text{New Share} - \text{Old Share} = \frac{3}{8} - \frac{2}{9} = \frac{27-16}{72} = \frac{11}{72} \).
Gaining Ratio for A and C is 13:11.

2. Revaluation Account:
Calculations:
Stock (depreciated by 6%): \( 8,000 \times 0.06 = \text{Rs } 480 \) (Debit)
Provision for Doubtful Debts (old Rs 100, new 5% of Rs 5,000 = Rs 250): Increase = \( 250 - 100 = \text{Rs } 150 \) (Debit)
Factory Land and Building (appreciated by 20%): \( 25,000 \times 0.20 = \text{Rs } 5,000 \) (Credit)
Provision for Outstanding Legal Charges (new liability): Rs 770 (Debit)
Total Debits = \( 480 + 150 + 770 = 1,400 \).
Total Credits = \( 5,000 \).
Revaluation Profit = \( 5,000 - 1,400 = 3,600 \).
This profit is distributed to A, B, C in their old ratio (4:3:2).
A's share: \( 3,600 \times \frac{4}{9} = \text{Rs } 1,600 \).
B's share: \( 3,600 \times \frac{3}{9} = \text{Rs } 1,200 \).
C's share: \( 3,600 \times \frac{2}{9} = \text{Rs } 800 \).

3. Goodwill Adjustment:
Firm's Goodwill: Rs 10,800.
B's Share of Goodwill: \( 10,800 \times \frac{3}{9} = \text{Rs } 3,600 \).
A and C compensate B in their gaining ratio (13:11):
A compensates B: \( 3,600 \times \frac{13}{24} = \text{Rs } 1,950 \).
C compensates B: \( 3,600 \times \frac{11}{24} = \text{Rs } 1,650 \).

4. Contingency Reserve Distribution:
Contingency Reserve: Rs 9,000. Distributed to A, B, C in old ratio (4:3:2).
A's share: \( 9,000 \times \frac{4}{9} = \text{Rs } 4,000 \).
B's share: \( 9,000 \times \frac{3}{9} = \text{Rs } 3,000 \).
C's share: \( 9,000 \times \frac{2}{9} = \text{Rs } 2,000 \).

Revaluation Account (as per calculated profit and distribution):

B's Capital Account:

Remaining Partner's Capital Accounts (A and C):

Balance Sheet (as on 31st March, 2017):

In simple words: We first updated all the firm's asset and debt values and shared any profit from this. We also adjusted for goodwill, where A and C paid B for their share. Then, we updated each partner's personal account, transferred B's balance to a loan, and made sure A and C's accounts matched the new capital plan for the firm. Finally, we created a new company balance sheet showing all these updated numbers.

🎯 Exam Tip: When a problem specifies a fixed total capital for the new firm and a new profit sharing ratio, calculate each remaining partner's required capital and adjust their accounts with cash entries (either brought in or withdrawn) to match.

 

Question 6. J, H and K were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 31-03-2017, their balance sheet was as follows:

On the above date H retired and J and K agreed to continue the business on the following terms :
1. Goodwill of the firm was valued at Rs 1,02,000.
2. Provision for bad debts was to be increased to Rs 10,000.
3. Investments were taken over by J at Rs 40,000.
4. Stock was revalued at Rs 35,000 and motor vans at Rs 35,000.
5. There was an unrecorded liability for expenses Rs 2,000.
6. J and K agreed to share future profits in the ratio of 3 : 2.
7. The capital of the firm was to be fixed at Rs 3,00,000 and was to be maintained in their new profit sharing ratio. For this purpose, current accounts were to be opened.
8. Amount due to H was to be transferred to his loan account.
Prepare Revaluation Account, Partners' Capital Account and Balance Sheet of the new firm.
Answer:
1. Profit Sharing Ratios:
Old Profit Sharing Ratio (J:H:K): 5:3:2. Total parts = 10.
New Profit Sharing Ratio (J:K): 3:2 (given). Total parts = 5.
Gaining Ratio (J:K):
\( \text{J's Gain} = \text{New Share} - \text{Old Share} = \frac{3}{5} - \frac{5}{10} = \frac{6-5}{10} = \frac{1}{10} \).
\( \text{K's Gain} = \text{New Share} - \text{Old Share} = \frac{2}{5} - \frac{2}{10} = \frac{4-2}{10} = \frac{2}{10} \).
Gaining Ratio for J and K is \( \frac{1}{10} : \frac{2}{10} \), which simplifies to 1:2.

2. Goodwill Adjustment:
Firm's Goodwill: Rs 1,02,000.
H's Share of Goodwill: \( 1,02,000 \times \frac{3}{10} = \text{Rs } 30,600 \).
J and K compensate H in their gaining ratio (1:2):
J compensates: \( 30,600 \times \frac{1}{3} = \text{Rs } 10,200 \).
K compensates: \( 30,600 \times \frac{2}{3} = \text{Rs } 20,400 \).

3. Distribution of Reserves and Profits/Losses:
Investment Fluctuation Fund: Rs 20,000. Distributed to J, H, K in 5:3:2.
J: \( 20,000 \times \frac{5}{10} = \text{Rs } 10,000 \).
H: \( 20,000 \times \frac{3}{10} = \text{Rs } 6,000 \).
K: \( 20,000 \times \frac{2}{10} = \text{Rs } 4,000 \).
Profit and Loss A/c (Credit Balance): Rs 80,000. Distributed to J, H, K in 5:3:2.
J: \( 80,000 \times \frac{5}{10} = \text{Rs } 40,000 \).
H: \( 80,000 \times \frac{3}{10} = \text{Rs } 24,000 \).
K: \( 80,000 \times \frac{2}{10} = \text{Rs } 16,000 \).

4. Revaluation Account:
Calculations for Revaluation Profit/Loss:
Provision for Bad Debts (old Rs 6,000, new Rs 10,000): Increase = Rs 4,000 (Debit).
Investments (old Rs 38,000, taken over by J at Rs 40,000): Appreciation = Rs 2,000 (Credit).
Stock (old Rs 30,000, revalued at Rs 35,000): Appreciation = Rs 5,000 (Credit).
Motor Vans (old Rs 40,000, revalued at Rs 35,000): Depreciation = Rs 5,000 (Debit).
Unrecorded Liability for Expenses: Rs 2,000 (Debit).
Total Debits = \( 4,000 + 5,000 + 2,000 = 11,000 \).
Total Credits = \( 2,000 + 5,000 = 7,000 \).
Revaluation Loss = \( 11,000 - 7,000 = 4,000 \).
This loss is distributed to J, H, K in their old ratio 5:3:2.
J's share: \( 4,000 \times \frac{5}{10} = \text{Rs } 2,000 \).
H's share: \( 4,000 \times \frac{3}{10} = \text{Rs } 1,200 \).
K's share: \( 4,000 \times \frac{2}{10} = \text{Rs } 800 \).

H's Capital Account:

*(Note: The cash payment of Rs 14,000 to H is from the source table. The balance to H's Loan account is calculated to balance the account.)*

Remaining Partner's Capital Accounts (J and K):

Balance Sheet (as on 31-03-2017):

In simple words: We updated how partners share profits and goodwill. We checked all assets and debts, shared any losses, and updated each partner's personal accounts. H's money was put into a loan. Then, we adjusted J and K's money to fit the new plan and made a fresh company balance sheet showing all these updated numbers.

🎯 Exam Tip: When capital is fixed after retirement, calculate each remaining partner's required capital and adjust their accounts with cash entries (brought in or withdrawn) or current accounts to match their shares in this new total capital.

RBSE Class 12 Accountancy Chapter 3 Essay Type Questions

 

Question 7. Following is the balance sheet of A, B and C as at 31st March, 2017, who have agreed to share profits and losses in proportion of their capital.

On 31st March, 2017, A desired to retire from the firm and the remaining partners decided to carry on the business. It was agreed to revalue the assets and reassess the liabilities on the following basis :
1. Land and building to be appreciated by 30%.
2. Machinery be depreciated by 20%.
3. There were bad debts of Rs 17,000.
4. The claim on account of workmen compensation was estimated at Rs 8,000.
5. Goodwill of the firm was valued at Rs 1,40,000 and A's share of goodwill be adjusted against the capital account of the continuing partners B and C who have decided to share future profits in the ratio of 4: 3 respectively,
6. Capital of the new firm in total will be the same as before the retirement of A and will be in the new profit sharing ratio of the continuing partners,
7. Amount due to A be settled by paying Rs 50,000 in cash and the balance by transferring to his loan account which will be paid later on.
You are required to prepare the Revaluation Account, Partners' Capital Account, and the Balance Sheet as at 31st March, 2018.
Answer:
Solution.

 

 

Working Note: Calculation of cash as under :
(1) Opening Balance \( = 1,00,000 \)
+ Brought by B's \( = 1,05,000 \)
+ Brought by C's \( = 1,10,000 \)
Total \( = 3,15,000 \)
- Paid to A \( = 50,000 \)
Net cash amount \( = 2,65,000 \)
(2) Gain ratio calculate as under :
New Ratio - Old Ratio
4:3
\( \implies \) 2:3:2 (Capital ratio)
B's Profit \( = \frac{4}{7} - \frac{3}{7} = \frac{1}{7} \)
C's Profit \( = \frac{3}{7} - \frac{2}{7} = \frac{1}{7} \)
\( \implies \) 1 : 1
In simple words: This solution shows how a firm adjusts its accounts when a partner retires. It involves revaluing assets and liabilities, distributing goodwill, and settling the retiring partner's dues. The new capital is fixed based on the continuing partners' new profit sharing ratio.

🎯 Exam Tip: Always make sure that the total assets match the total liabilities in the balance sheet, as this is a fundamental check for accuracy in accounting. If they don't match, you've made an error somewhere.

 

Question 8. A, B and C are partners in a firm whose books are closed on March 31st each year. A died on 30-06-2017 and according to the agreement, the share of profits of a deceased partner upto date of death is to be calculated on the basis of average profits for the last five years. The net profits loss for the last 5 years have been : Rs 14,000, Rs 18,000, Rs 22,000, Rs (10,000) Loss, Rs 16,000 respectively. Calculate A's share of the profit upto the date of death and pass necessary journal entry.
Answer:
Solution.
Calculation of Average Profit:
\( 14,000 + 18,000 + 22,000 - 10,000 + 16,000 = \frac{60,000}{5} = 12,000 \)
Profit of 3 months \( = 12,000 \times \frac{3}{12} = 3,000 \)
Share of A \( = 1000 \)
Journal Entry:
Profit and Loss Suspense A/c Dr. 1,000
To A's Capital A/c 1,000
(Share of profit transferred to his capital account.)
In simple words: When a partner dies, their share of profit up to their death date is calculated. This is often done by finding the average profit over a few years and then taking a proportional amount for the period until their death. This amount is then transferred to their capital account using a journal entry.

🎯 Exam Tip: Remember to always annualize profits correctly, especially when calculating for a partial period. Also, for deceased partners, use a Profit and Loss Suspense Account.

 

Question 9. X, Y and Z are partners sharing profits in the ratio 3 : 2 : 1. X died on 10-04-2017. The sales and profit for 2016 were Rs 2,00,000 and Rs 20,000 respectively, sales from 01-01-2017 to 10-04-2017 was Rs 1,20,000. Find the share of X's profit.
Answer:
Solution.
Calculation of profit on the basis of sales
Profit ratio on the last year sales \( = \frac{20,000}{2,00,000} \times 100 = 10\% \)
Sales from 01-01-2017 to 10-04-2017 \( = 1,20,000 \)
Profit upto 10-04-2017 \( = 1,20,000 \times 10\% = 12,000 \)
X's share in profit \( = 12,000 \times \frac{3}{6} = 6,000 \)
In simple words: When a partner passes away during the year, their share of profit is estimated based on the profit ratio from the previous year's sales. This estimated profit up to their death date is then allocated to their share.

🎯 Exam Tip: When calculating a deceased partner's profit share based on sales, ensure you use the correct profit percentage from the most recent full year and apply it only to the sales achieved up to the date of death.

 

Question 10. A, B and C are partners, sharing profits in the ratio of 3 : 2 : 1. They had a joint life policy Rs 60,000 and the annual premium Rs 4,000 has been charged to profit and loss account every year. Account are closed on 31st March annually. C died on 1st August, 2017 beside of his capital and insurance money, C's legal representatives are entitled to :
1. Interest on capital at 10% per annum upto the date death,
2. His share profit based on average profits to the last three years,
3. His share goodwill which is to be calculated at three years' purchase of the average profit of last 4 years.
C's capital on 01-04-2017 stood at Rs 90,000 and his drawings from that date to the date of death amounted to Rs 5,500. Profits for the last four years were Rs 16,000, Rs 26,000, Rs (6,000) Loss, Rs 34,000. Prepare C's Capital Account.
Answer:
Solution.

Working Note: (1) Capital on Interest \( = 90,000 \times \frac{4}{12} \times \frac{10}{100} = ₹ 3,000 \)
(2) Share in profit- On the basis of last three year's profit
Average Profit \( = \frac{34,000 + 26,000 - 6,000}{3} = ₹ 18,000 \)
Profit for 4 months \( = 18,000 \times \frac{4}{12} = ₹ 6,000 \)
C's share \( = 6,000 \times \frac{1}{6} = ₹ 1,000 \)
(3) Share in Joint Life Policy \( = 60,000 \times \frac{1}{6} = ₹ 10,000 \)
In simple words: This problem involves calculating various amounts due to a deceased partner's estate, including interest on capital, profit share, and share of joint life policy. Each calculation follows specific terms outlined in the partnership deed. Finally, a capital account is prepared to summarize these amounts.

🎯 Exam Tip: When calculating a deceased partner's share, carefully consider all terms in the partnership deed, such as interest on capital, profit up to death, and goodwill valuation, and make sure to prorate amounts for partial periods correctly.

 

Question 11. P, Q and R were partners in a firm sharing profits in the ratio 3:2:1. Their balance sheet on 31-12-2016 was as follows:

R died on 14-03-2017. The partnership deed provided for the following on the death of a partner.
(1) Goodwill of the firm was to valued at 3 years' purchase at the average profit of last 5 years.
(2) R's share in the profit or loss of the firm till the date of his death.
Prepare R's Capital account at the time of his death to be presented to his executors.
Answer:
Solution.

Working Note:
(1) Valuation of Goodwill:
Goodwill of firm \( = \) On the basis of 5 years average profit 3 year purchase
\( = \frac{70,000+80,000+1,10,000+ 2,20,000-1,50,000}{5} \times 3 \)
\( = \frac{3,30,000}{5} \times 3 = 1,98,000 \)
R's share in goodwill \( = 1,98,000 \times \frac{1}{6} = \text{Rs }33,000 \)
(2) Because partner is dead last year, and gain loss on this year. On the basis of loss calculation in current year also show loss. So, there is no share of dead partner.
In simple words: This solution calculates the amounts due to a deceased partner (R), including their share of goodwill and profit/loss up to the date of death. Since there was a loss in the previous year, R does not get a share of profit for the current period. The final amount is transferred to R's Executors Account.

🎯 Exam Tip: When a partner dies, always remember to account for their share in both profits/losses and goodwill, adjusting their capital account accordingly. Also, be careful to use the correct profit-sharing ratio for goodwill adjustments.

 

Question 12. P, Q and R were partners in a firm. Their Balance sheet as at 31st March, 2017 was as follows:

The partnership deed provides that the profit be shared in the ratio 2:1:1 and that in the event death the partner, his executors will be entitled to be paid out:
1. The capital to his credit at the date of balance sheet,
2. His proportion of reserve at the date of balance sheet,
3. His proportion of profits of the last 3 years plus 10% and
4. By way goodwill, his proportion of the total profit for the three preceding years.
5. Share in profit on revaluation of building which is Rs 4,000.
6. The net profit of last 3 years are Rs 15,000, Rs 16,000 and Rs 17,000.
R died on 30th June, 2017. He had withdrawn Rs 5,000 upto the date of his death. The investment were sold at par and R's executors were paid off. Prepare Partners' Capital Account, R's Executor's Account and Balance Sheet of surviving partners P and Q.
Answer:
Solution.

 

 

Working Notes:
(1) Calculation of goodwill as follows :
Total profit of last three years \( = 15,000 + 16,000 + 17,000 = 48,000 \)
Share in profit \( = 48,000 \times \frac{1}{4} = 12,000 \)
(2) Share in profit \( = 10\% \) Adding in last three year average profit
Average profit of last three years \( = \frac{48,000}{3} = 16,000 \)
Share in profit \( = 16,000 + (\frac{16,000 \times 10}{100}) = 17,600 \)
R's profit upto 30 June, 2017 \( = 17,600 \times \frac{3}{12} \times \frac{1}{4} = 1100 \)
(3) Profit of ₹ 1,100 is shown in assets side as a undivided profit in Balance Sheet.
In simple words: This solution explains how to prepare accounts for a deceased partner. It includes calculating their share of profits and transferring the final amount to their executor. The balance sheet reflects the updated financial position of the continuing partners.

🎯 Exam Tip: Always remember to adjust for all specific clauses mentioned in the partnership deed regarding a deceased partner's settlement, especially for items like drawings, revaluation profits, and undistributed profits/losses. The profit-sharing ratio is vital.

 

Question 13. A, B and C are partners in a firm sharing profits in the ratio 2:2:1. The firm had taken a joint life policy Rs 80,000 on the lives of all the partners on 01-04-2012. The firm pays annual premium Rs 6,000. The surrender value of the policy is as under :
(a) At the end of first year (31-03-2013) : Nil
(b) At the end of second year (31-03-2014) : Rs 2,000
(c) At the end of third year (31-03-2015) : Rs 4,000
(d) At the end of fourth year (31-03-2016) : Rs 6,000
(e) At the end of fifth year (31-03-2017) : Rs 10,000
3. Premium paid is treated as investment and reserve is created.
Answer:
Solution.
(i) Premium is treated as a Trade Expenses:

 

 

 

 

 

Working Note:
(1) C's Share in Profits
Last three year's profit \( = 3,25,000 + 2,75,000 + 3,00,000 \)
Average profit of last three years profits \( = 9,00,000 \div 3 = \text{Rs }3,00,000 \)
In simple words: This solution demonstrates the accounting treatment for a partner's retirement when a joint life policy is involved. Premiums are treated as an investment, and a reserve is created. The various accounts are adjusted to reflect the partner's share and the firm's new financial position after the retirement.

🎯 Exam Tip: When joint life policies are treated as investments, remember to create a reserve for the surrender value each year and distribute the policy amount upon maturity or death according to the profit-sharing ratio.