Samacheer Kalvi Class 12 Accountancy Solutions Chapter 6 Retirement and Death of a Partner

12th Accountancy Guide Retirement and Death of a Partner Text Book Back Questions and Answers

I Multiple Choice Questions

Choose the Correct Answer

 

Question 1. A partner retires from the partnership firm on 30th June. He is liable for all the acts of the firm up to the
(a) End of the current accounting period
(b) End of the previous accounting period
(c) Date of his retirement
(d) Date of his final settlement
Answer: (c) Date of his retirement
In simple words: A partner is responsible for all actions taken by the business only up to the day they officially leave. After that date, they are no longer liable.

🎯 Exam Tip: Remember that liability ends on the exact date of retirement, not at the end of the accounting period or any other later date.

 

Question 2. On the retirement of a partner from a partnership firm, accumulated profits and losses are distributed to the partners on the basis of
(a) New profit sharing ratio
(b) Old profit sharing ratio
(c) Gaming ratio
(d) Sacrificing ratio
Answer: (b) Old profit sharing ratio
In simple words: When a partner retires, any profits or losses built up over time are shared among all partners using the ratio they had before anyone left the firm.

🎯 Exam Tip: Always use the old profit sharing ratio for distributing accumulated profits and losses at retirement, as these were earned during the period when all partners were together.

 

Question 3. On the retirement of a partner, general reserve will be transferred to the
(a) Capital account of all the partners
(b) Revaluation account
(c) Capital account of the continuing partners
(d) Memorandum revaluation account
Answer: (a) Capital account of all the partners
In simple words: A general reserve, which is a saved amount of money, is moved into the capital accounts of every partner, including the one who is retiring, based on their old profit share.

🎯 Exam Tip: General reserves belong to all partners at the time they were accumulated, so they must be distributed to all partners (retiring and continuing) in their old profit sharing ratio.

 

Question 4. On revaluation, the increase in liabilities leads to
(a) Gain
(b) Loss
(c) Profit
(d) None of these
Answer: (b) Loss
In simple words: When the value of liabilities goes up during revaluation, it means the business owes more money. This increased debt is considered a loss for the firm.

🎯 Exam Tip: Remember that an increase in a liability is always a loss for the business, while a decrease in a liability is a gain.

 

Question 5. At the time of retirement of a partner, determination of gaining ratio is required
(a) To transfer revaluation profit or loss
(b) To distribute accumulated profits and losses.
(c) To adjust goodwill
(d) None of these
Answer: (c) To adjust goodwill
In simple words: The gaining ratio is calculated to figure out how much the remaining partners will benefit from the retiring partner's share of goodwill, and how they should compensate the retiring partner.

🎯 Exam Tip: The gaining ratio is primarily used to adjust goodwill, as the continuing partners gain the share of profits that the retiring partner previously held.

 

Question 6. The final amount due to a retiring partner is not paid immediately, it is transferred to
(a) BankA/c
(b) Retiring partners capital A/c
(c) Retiring partner s loan A/c
(d) Other partner s capital A/c
Answer: (c) Retiring partner s loan A/c
In simple words: If the money owed to a partner leaving the firm is not paid right away, it is moved to a special loan account for that partner, meaning the firm still owes them that money.

🎯 Exam Tip: When payment is deferred, the amount due to the retiring partner becomes a liability for the firm and is recorded in their loan account, which will be paid later.

 

Question 7. 'A' was a partner in a partnership firm. He died on 31st March 2019. The final amount due to him is Rs. 24,000 which is not paid immediately. It will be transferred to
(a) As capital account
(b) A's loan account
(c) As Executors account
(d) As Executors loan account
Answer: (d) As Executors loan account
In simple words: When a partner dies and the money owed to them isn't paid immediately, it is transferred to a loan account belonging to their executors, who are the legal representatives managing their estate.

🎯 Exam Tip: In case of a deceased partner, the amount not immediately paid is transferred to the 'Executors Loan Account' to acknowledge the firm's liability to the legal heirs.

 

Question 8. A, B and C are partners sharing profits in the ratio of 2:2:1. On retirement of B, goodwill of the firm was valued as Rs. 30,000. Find the contribution of A and C to compensate B:
(a) 20,000 and 10,000
(b) Rs. 8,000 and 4,000
(c) Rs. 10,000 and 20,000
(d) Rs. 15,000 and Rs. 15,000
Answer: (b) Rs. 8,000 and 4,000
Hint:

\( \therefore \) Retire partner share will be compensate of 'A' and 'Copartners'
'A' Goodwill value \( = 30,000 \times \frac{2}{5} = Rs. 12,000 \)
'B' Goodwill Value \( = 30,000 \times \frac{2}{5} = Rs. 12,000 \)
'C' Goodwill Value \( = 30,000 \times \frac{1}{5} = Rs. 6,000 \)
Now Compensate A& C
'B' Share good will \( = 12,000 \times \frac{2}{3} = Rs. 8,000 \)
\( 12,000 \times \frac{1}{3} = Rs. 4,000 \)
In simple words: Since partner B is retiring, A and C will share B's goodwill. First, B's total goodwill share is Rs. 12,000. Then, this Rs. 12,000 is distributed to A and C in their gaining ratio (which is 2:1 from the original 2:1 for A and C after B leaves), making A pay Rs. 8,000 and C pay Rs. 4,000.

🎯 Exam Tip: When a partner retires, the continuing partners compensate the retiring partner for their share of goodwill in their gaining ratio, not the old profit sharing ratio.

 

Question 9. A, B and C are partners sharing profits in the ratio of 4:2:3. C retires. The new profit sharing ratio between A and B will be
(a) 4:3
(b) 3:4
(c) 2:1
(d) 1:2
Answer: (c) 2:1
Hint:
Old Partners ABC
Old ratio
Now 'C' retires
New ratio \( = \frac{4}{6} : \frac{2}{6} \) or \( \frac{2}{3} : \frac{1}{3} \)
In simple words: When partner C retires from the firm, their share of the profit (which is 3) is removed from the total. The remaining shares of A and B (4 and 2) then form their new profit-sharing ratio, which simplifies to 2:1.

🎯 Exam Tip: If a partner retires and no specific agreement is made about how the continuing partners will take up the retiring partner's share, the old ratio of the continuing partners becomes the new ratio.

 

Question 10. X, Y and Z were partners sharing profits and losses equally. X died on 1st April 2019. Find out the share of X in the profit of 2019 based on the profit of 2018 which showed Rs. 36,000.
(a) Rs. 1,000
(b) Rs. 3,000
(c) Rs. 12,000
(d) Rs. 36,000
Answer: (c) Rs. 12,000
Hint:
Partner's X: Y: Z
Sharing ratio = equally \( = \frac{1}{3} : \frac{1}{3} : \frac{1}{3} \)
Profit \( = Rs. 36,000 \)
Share of 'X'
\( 36,000 \times \frac{1}{3} = Rs. 12,000 \)
In simple words: Since partners X, Y, and Z shared profits equally, each partner gets one-third of the profit. So, if the total profit was Rs. 36,000, X's share is one-third of that amount, which is Rs. 12,000.

🎯 Exam Tip: When partners share profits equally, divide the total profit by the number of partners to find each individual's share.

 

II Very Short Answer Questions

 

Question 1. What is meant by the retirement of a partner?
Answer: When a partner chooses to leave a partnership firm, this action is known as retirement. Partners might retire for various reasons, such as illness, old age, or if there is a disagreement with the other partners. This is a common event in partnership business.
In simple words: Retirement of a partner means a partner leaves the business. This can happen due to sickness, age, or disagreements.

🎯 Exam Tip: Clearly define "retirement of a partner" and mention common reasons like age, health, or mutual consent to score full marks.

 

Question 2. What is the gaining ratio?
Answer: The gaining ratio shows how much additional share of profit the remaining partners get when another partner retires. This extra share comes from the retiring partner's portion and can be taken up by all or some of the continuing partners. It represents the proportion of profit gained by those who stay in the partnership.
In simple words: The gaining ratio tells us how much more profit each remaining partner gets after one partner leaves the firm.

🎯 Exam Tip: Define gaining ratio as the proportion in which continuing partners acquire the share of profit from the retiring partner.

 

Question 3. What is the purpose of calculating the gaining ratio?
Answer: The main reason for calculating the gaining ratio is to determine how the continuing partners will pay the retiring partner their share of goodwill. This ratio ensures that the partners who benefit from the retiring partner's share compensate them fairly. It is crucial for a smooth transition in the partnership.
In simple words: We calculate the gaining ratio to see how the remaining partners will pay the partner who is leaving their share of goodwill.

🎯 Exam Tip: Emphasize that the primary purpose of the gaining ratio is for the adjustment and distribution of goodwill to the retiring partner.

 

Question 4. What Is the journal entry to be passed to transfer the amount due to the deceased partner to the executor of the deceased partner?
Answer: To transfer the amount due to the deceased partner to the executor or legal representative of the deceased partner, the following journal entry is passed:

In simple words: When a partner dies, their capital account is debited (reduced), and the amount they are owed is credited (added) to their executor's account. This shows that the business now owes the money to the deceased partner's legal representative.

🎯 Exam Tip: Clearly remember that the amount due to a deceased partner is transferred to their 'Executor's Account' as a liability for the firm.

 

III Short Answer Questions

 

Question 1. List out the adjustments made at the time of retirement.
Answer: The following adjustments are necessary at the time of retirement of a partner:

• Distribution of accumulated profits, reserves, and losses
• Revaluation of assets and liabilities
• Determination of new profit sharing ratio and gaining ratio
• Adjustment for goodwill
• Adjustment for current year's profit or loss up to the date of retirement
• Settlement of the amount due to the retiring partner

These adjustments ensure that the retiring partner receives their fair share of the business's value.
In simple words: When a partner retires, the business needs to share old profits/losses, revalue assets, figure out new profit ratios, adjust for goodwill, calculate current year's profit/loss, and finally pay the retiring partner what they are owed.

🎯 Exam Tip: Listing these adjustments comprehensively demonstrates a full understanding of partner retirement accounting principles.

 

Question 2. Distinguish between sacrificing ratio and gaining ratio.
Answer: The sacrificing ratio and gaining ratio help partners adjust their shares during changes in the partnership.

In simple words: The sacrificing ratio shows how much old partners give up when a new partner joins, while the gaining ratio shows how much remaining partners get when a partner leaves. Both are used to adjust goodwill during these changes.

🎯 Exam Tip: Clearly differentiate between the two ratios based on their purpose (admission vs. retirement) and their calculation formulas.

 

Question 3. What are the ways in which the final amount to an outgoing partner can be settled?
Answer: The amount owed to a partner who is leaving the firm can be settled in several ways, ensuring a fair exit from the partnership. Here are the common methods:
1. Paying the entire amount due immediately in cash.
2. Transfer the entire amount due to the loan account of the partner.
3. Paying part of the amount immediately in cash and transferring the balance to the loan account of the partner.
Each method allows the firm flexibility in managing its finances while fulfilling its obligation to the outgoing partner.
In simple words: A partner leaving the business can be paid in full cash right away, or the money can be put into a loan account for them to be paid later. Sometimes, a part is paid in cash, and the rest goes into a loan account.

🎯 Exam Tip: List these three methods clearly and understand when each might be used, based on the firm's cash position and agreements.

 

IV Exercise

 

Distribution of Accumulated Profits, Reserves, and Losses

 

Question 1. Dheena, Surya, and Jankai are partners sharing profits and losses in the ratio of 5:3:2. on 31.3.2018, Dheena retired. On the date of retirement, the books of the firm showed a reserve fund of Rs. 50,000. The pass journal entry to transfer the reserve fund.
Answer: The journal entry to transfer the reserve fund to the partners' capital accounts is shown below:

Reserves fund: Dheena: Rs. 25,000 (Cr); Surya: Rs. 15,000 (Cr.); Janaki: Rs. 10,000 (Cr.). The reserve fund is split among partners based on their profit-sharing ratio (5:3:2), which totals 10 parts. Dheena gets 5/10, Surya 3/10, and Janaki 2/10 of the Rs. 50,000.
In simple words: The reserve fund of Rs. 50,000 is shared among Dheena, Surya, and Janaki according to their 5:3:2 profit ratio. Dheena gets Rs. 25,000, Surya gets Rs. 15,000, and Janaki gets Rs. 10,000.

🎯 Exam Tip: Always distribute general reserves to all partners (including retiring ones) in their old profit sharing ratio before processing other retirement adjustments.

 

Question 2. Rosi, Rathi, and Rani are partners of firms sharing profits and losses equally. Rathi retired from the partnership on 1.1.2018. On the date, their balance sheet showed an accumulated loss of Rs. 45,000 on the asset side of the balance sheet. Give the journal entry to distribute the accumulated loss.
Answer: The journal entry to distribute the accumulated loss among the partners is as follows:

Rosi: Rs. 15,000 (Dr.); Rathi: Rs. 15,000 (Dr.); Rani: Rs. 15,000 (Dr.). Since Rosi, Rathi, and Rani share profits and losses equally, the total accumulated loss of Rs. 45,000 is divided into three equal parts. Each partner's capital account is debited by Rs. 15,000, reducing their capital for their share of the loss.
In simple words: The total loss of Rs. 45,000 is split equally among Rosi, Rathi, and Rani. So, each partner's capital account is reduced by Rs. 15,000.

🎯 Exam Tip: Accumulated losses are treated similarly to accumulated profits; they are distributed to all partners (including the retiring one) in their old profit sharing ratio, resulting in a debit to their capital accounts.

 

Question 3. Akash, Mukesh, and Sanjay are partners in firm sharing profits and losses in the ratio of 3:2:1. Their balance sheet as on 31st March 2017 is as follows: Pass journal entry to transfer the accumulated profit and prepare the capital account of the partners

Solution: The journal entry to transfer accumulated profits and reserves, and the resulting capital accounts are shown below. Sharing profits in the ratio of 3:2:1 means the total parts are 6.
Akash capital: Rs. 67,000 (Cr.); Mugesh Capital: Rs. 78,000 (Cr.); Sanjay's Capital: Rs. 39,000 (Cr.). These balances reflect the initial capital plus their share of accumulated profits and reserves. The balances are carried forward to the next accounting period.
In simple words: After sharing the profits and reserves, Akash's capital is Rs. 67,000, Mugesh's is Rs. 78,000, and Sanjay's is Rs. 39,000.

🎯 Exam Tip: Remember to distribute all accumulated profits, reserves, and funds (like Workmen Compensation Fund) to partners in their profit-sharing ratio before closing the capital accounts.

 

Question 4. Roja, Neeia 'and Kanaga are partners, sharing profit and losses in the ratio of 4:3:3. On 1st April 2017, Roja retires and on retirement, the following adjustments are agreed upon.
(i) Increase the value of the Building by Rs. 30,000.
(ii) Depreciate stock by Rs. 5,000, and furniture by 12,000.
(iii) Provide for an outstanding liability of Rs. 1,000.
Pass journal entries and prepare revaluation account.
Answer: The journal entries and the revaluation account reflecting the adjustments upon Roja's retirement are as follows:

Revaluation profit: Rs. 12,000. When assets like building increase in value or assets like stock and furniture decrease, and a new liability arises, these changes are recorded in the revaluation account. The final profit from revaluation is then distributed to all partners based on their profit-sharing ratio (4:3:3).
In simple words: The journal entries show changes in asset values (building up, stock and furniture down) and a new liability. The revaluation account calculates a profit of Rs. 12,000, which is shared among Roja, Neela, and Kanaga based on their profit ratio.

🎯 Exam Tip: Remember to debit the Revaluation Account for losses (decrease in assets, increase in liabilities) and credit it for gains (increase in assets, decrease in liabilities). Any net profit or loss from revaluation is distributed among all partners in their old profit-sharing ratio.

 

Question 5. Vinoth, Karthi, and Pranav are partners sharing profits and losses in the ratio of 2:2:1. Pranav retires from the partnership on 1st April 2018. The following adjustments are to be made.
(i) increase the value of the land building by 18,000.
(ii) Reduce the value of machinery by Rs. 15,000.
(iii) A provision would also be made for outstanding expenses for Rs. 8,000.
Give journal entries and prepare a revaluation account.
Answer: The journal entries and the revaluation account reflecting the adjustments upon Pranav's retirement are provided below:

In simple words: The journal entries record an increase in building value (gain) and decreases in machinery value and an increase in outstanding expenses (losses). The Revaluation Account shows a net loss of Rs. 5,000, which is distributed to Vinoth, Karthi, and Pranav in their 2:2:1 profit-sharing ratio.

🎯 Exam Tip: When preparing the revaluation account, ensure that all gains (e.g., increase in asset value) are credited and all losses (e.g., decrease in asset value, increase in liabilities) are debited. The resulting profit or loss is shared by all partners in their old profit-sharing ratio.

 

Question 6. Chandru, Vishal, and Ramanan are partners in firms sharing profits and losses equally. Their balance sheet as of 31st March 2018 is as follows. Ramanan retired on 31st March 2019 subject to the following conditions:
(i) Machinery is valued at Rs. 1,50,000
(ii) Value of furniture brought down by Rs. 10,000
(iii) Provision for doubtful debts should be increased to Rs. 5,000.,
(iv) investment of Rs. 30,000 not recorded in the books is to be recorded now.
Pass necessary journal entries and prepare revaluation account and capital account of partners.
Solution:

In simple words: This question requires creating journal entries and preparing revaluation and capital accounts based on the given balance sheet and revaluation conditions. The full solution details are not provided within the scope of this document.

🎯 Exam Tip: For comprehensive problems involving retirement, carefully analyze each adjustment (revaluation, unrecorded items, etc.) to pass correct journal entries and accurately update the revaluation and capital accounts.

 

Question 7. Kayal, Mala and Neela are partners sharing profits in the ratio of 2:2:1. Kayal retires and the new profit sharing ratio between Mala and Neela is 3:2. Calculate the gaining ratio.
Answer:
New Profit Sharing Ratio and Gaining Ratio
Gain Ratio = New Ratio – Old Ratio
Kayal –
Mala \( = \frac { 3 }{ 5 } - \frac { 2 }{ 5 } = \frac { 1 }{ 5 } \)
Neela \( = \frac { 2 }{ 5 } - \frac { 1 }{ 5 } = \frac { 1 }{ 5 } \)
Gaining Ratio \( = 1:1 \)
In simple words: First, find the difference between the new profit ratio and the old profit ratio for each remaining partner. This calculation will show the gaining ratio. In this case, both Mala and Neela gain equally.

🎯 Exam Tip: Remember that when a partner retires, the remaining partners usually gain a share of the retiring partner's profit. The gaining ratio shows how this gain is distributed among them.

 

Question 8. Sunil, Sumathi and Sundari are partners sharing profits in the ratio of 3:3:4. Sundari retires and her share is taken up entirely by Sunil. Calculate the new profit sharing ratio and gaining ratio.
Answer:
Old ratio = 3:3:4 (Sunil:Sumathi:Sundari)
New Ratio = Old ratio + Gaining ratio
GR of Sunil \( = \frac { 4 }{ 10 } \)
NR of Sunil \( = \frac { 3 }{ 10 } + \frac { 4 }{ 10 } = \frac { 7 }{ 10 } \)
NR of Sumathi \( = \frac { 3 }{ 10 } + 0 = \frac { 3 }{ 10 } \)
NR \( = 7:3 \)
Gaining ratio: 4:0
New ratio: 7:3
In simple words: To find the new ratio, add Sundari's share to Sunil's old share, as Sunil took all of it. Sumathi's share stays the same since she didn't gain anything. The gaining ratio shows only Sunil gaining.

🎯 Exam Tip: When one partner takes the entire share of a retiring partner, only that gaining partner's ratio changes, while the others remain constant in terms of their gaining share.

 

Question 9. Ramu, Somu and Gopu are partners sharing profits in the ratio of 3:5:7. Gopu retires and the share is purchased by Ramu and Somu in the ratio of 3:1. Find the new profit sharing ratio and gaining ratio.
Answer:
Gopu's share \( = \frac { 7 }{ 15 } \)
(taken by Ramu & Somu in 3:1 ratio)
Ramu \( = \frac { 7 }{ 15 } \times \frac { 3 }{ 4 } = \frac { 21 }{ 60 } \)
Somu \( = \frac { 7 }{ 15 } \times \frac { 1 }{ 4 } = \frac { 7 }{ 60 } \)
GR \( = 21:7 \) or \( 3:1 \)
NR = OR + GR
Ramu \( = \frac { 3 }{ 15 } + \frac { 21 }{ 60 } = \frac { 12+21 }{ 60 } = \frac { 33 }{ 60 } \)
Somu \( = \frac { 5 }{ 15 } + \frac { 7 }{ 60 } = \frac { 20+7 }{ 60 } = \frac { 27 }{ 60 } \)
NR \( = 33:27 \) or \( 11:9 \)
In simple words: First, calculate how much of Gopu's share each remaining partner (Ramu and Somu) gets, based on their agreement. This gives the gaining ratio. Then, add this gained share to each partner's old share to find their new profit sharing ratio.

🎯 Exam Tip: Always make sure to simplify the final ratios to their lowest terms for clear representation.

 

Question 10. Navin, Ravi and Kumar are partners sharing profits in the ratio of 1/2, 1/4 and 1/4 respectively. Kumar retires and his share is taken up by Navin and Ravi equally. Calculate the new profit sharing ratio and gaining ratio.
Answer:
Kumar's share of profit \( \frac { 1 }{ 4 } \) (gained equally by Navin / Ravi)
Gaining ratio
Navin \( = \frac { 1 }{ 4 } \times \frac { 1 }{ 2 } = \frac { 1 }{ 8 } \)
Ravi \( = \frac { 1 }{ 4 } \times \frac { 1 }{ 2 } = \frac { 1 }{ 8 } \)
GR \( = 1:1 \)
NR = OR + GR
Navin \( = \frac { 1 }{ 2 } + \frac { 1 }{ 8 } = \frac { 4+1 }{ 8 } = \frac { 5 }{ 8 } \)
Ravi \( = \frac { 1 }{ 4 } + \frac { 1 }{ 8 } = \frac { 2+1 }{ 8 } = \frac { 3 }{ 8 } \)
NR \( = 5:3 \)
New ratio: 5:3
Gaining ratio: 1:1
In simple words: Since Kumar's share is divided equally between Navin and Ravi, each gets half of Kumar's share. Add this gained amount to their old shares to find the new profit sharing ratio. The gaining ratio shows how much each partner gained.

🎯 Exam Tip: When shares are taken up 'equally', it means the retiring partner's share is divided into the exact same portions for the continuing partners.

 

Question 11. Mani, Gani and Soni are partners sharing the profits and losses in the ratio of 4:5:6. Mani retires from the firm. Calculate the new profit sharing ratio and gaining ratio.
Answer:
Mani: Gani: Soni \( \rightarrow 4:5:6 \)
[If nothing is mentioned about the new ratio, old ratio of the continuing partners is equal to their new ratio.]
Old ratio \( = 4:5:6 \)
New ratio \( = 5:6 \)
New share: Gani: Soni \( = \frac { 5 }{ 11 } : \frac { 6 }{ 11 } \)
Gaining ratio \( = \) New ratio - Old ratio
Gani \( = \frac { 5 }{ 11 } - \frac { 5 }{ 15 } = \frac { 75-55 }{ 165 } = \frac { 20 }{ 165 } \)
Soni \( = \frac { 6 }{ 11 } - \frac { 6 }{ 15 } = \frac { 90-66 }{ 165 } = \frac { 24 }{ 165 } \)
GR \( = 20:24 \) or \( 5:6 \)
New profit sharing ratio and gaining ratio is 5:6
In simple words: When a partner retires and no new ratio is given, the remaining partners continue to share profits in their old ratio. The gaining ratio is found by subtracting each partner's old share from their new share.

🎯 Exam Tip: If the problem does not specify how the retiring partner's share is distributed, it is assumed that the continuing partners acquire it in their existing profit-sharing ratio.

 

Question 12. Rajan, Suman and Jegan were partners in firm sharing profits and losses in the ratio of 4:3:2 Suman retired from partnership. The goodwill of the firm on the date of retirement was valued at Rs. 45,000. Pass necessary journal entries for goodwill on the assumption that the fluctuating capital method is followed.
Answer:
Suman's share of G/w \( = 45,000 \times \frac { 3 }{ 9 } = \) Rs. 15,000
Gaining ratio (in old ratio) \( = R:J = 4:2 \)
Rajan \( = \frac { 3 }{ 9 } \times \frac { 4 }{ 6 } = \frac { 12 }{ 54 } \)
Jegan \( = \frac { 3 }{ 9 } \times \frac { 2 }{ 6 } = \frac { 6 }{ 54 } \)
GR \( = 12:6 \) or \( 2:1 \)
Journal Entries:

Suman's share of goodwill: Rs. 15,000
Rajan's capital: Rs. 10,000(Dr)
Jegan's capital: Rs. 5,000(Dr)
In simple words: First, calculate the retiring partner Suman's share of goodwill. Then, figure out how the remaining partners, Rajan and Jegan, will compensate Suman based on their gaining ratio. Record these changes in their capital accounts using journal entries.

🎯 Exam Tip: Always adjust for goodwill in the gaining ratio when a partner retires, debiting the gaining partners' capital accounts and crediting the retiring partner's capital account.

 

Question 13. Balu, Chandru and Nirmal are partners in a firm sharing profits and losses in the ratio of 5:3:2 on 31st March 2018, Nirmal retires from the firm. On the date of Nirmal's retirement, goodwill appeared in the books of the firm at Rs. 60,000 By assuming fluctuating capital account, pass the necessary journal entry if the partners decide to
(a) Write off the entire amount of existing goodwill
(b) Write off half of the existing goodwill.
Answer:
(a) Write off the entire amount of G/W:

(b) Write off half of the existing goodwill.
G/W \( = 60,000 \times \frac { 1 }{ 2 } = \) Rs. 30,000

(a) Balu's capital: Rs. 30,000 (Dr.); Chandru's capital: Rs. 18,000 (Dr.)
Nirmala's capital: Rs. 12,000 (Dr.)
(b) Balu's capital: Rs. 15,000 (Dr.)
Chandru's capital: Rs. 9,000 (Dr.)
Nirmala's capital: Rs. 6,000 (Dr.)
In simple words: When goodwill already exists in the books and a partner retires, the partners decide how much to write off. If they write off the whole amount, each partner's capital account is debited according to their profit sharing ratio, and the goodwill account is credited. If they write off only half, the same process is followed for half the goodwill amount.

🎯 Exam Tip: Remember to distribute goodwill to all partners (including the retiring one) in their old profit-sharing ratio when it is written off from the books.

 

Question 14. Rani, Jaya and Rathi are partners sharing profits and losses in the ratio of 2:2:1. On 31.3.2018, Rathi retired from the partnership. Profit of the preceding years is as follows: 2014: Rs. 10,000; 2015; Rs. 20,000; 2016; Rs. 18,000 and 2017; Rs. 32,000 Find out the share of profit of Rathi for the year 2018 till the date of retirement if
(a) profit is to be distributed on the basis of the previous year's profit
(b) Profit is to be distributed on the basis of the average profit of the past 4 years.
Also pass necessary journal entries by assuming partners' capitals are fluctuating.
Answer:
(a) On the basis of previous year's profit
Profit of 2017 \( = \) Rs. 32,000
Date of retirement \( = 31.3.2018 \)
Share of profit of Rathi for 3 months \( = 32,000 \times \frac { 3 }{ 12 } \times \frac { 1 }{ 5 } = \) Rs. 1600

(b) Profit to be distributed on the basis of the average profit of the past 4 years.
Average profit \( = \frac { 10,000+20,000+18,000+32,000 }{ 4 } = \) 20,000
Share of profit of Rathi for 3 months \( = 20,000 \times \frac { 3 }{ 12 } \times \frac { 1 }{ 5 } = \) Rs. 1,000

(a) Rathi's share of profit: Rs. 1,600
(b) Rathi's share of profit: Rs. 1,000
In simple words: To calculate Rathi's share of profit until retirement, use either the previous year's profit or the average profit of the last four years. Multiply the chosen profit by her profit share and the number of months she was a partner in the current year. Record this profit by debiting the Profit & Loss Suspense Account and crediting Rathi's Capital Account.

🎯 Exam Tip: Remember to annualize the profit (divide by 12 months) and then multiply by the retiring partner's profit share for the period they were still a partner.

 

Question 15. Kavin, Madhan, and Ranjith are partners sharing profits and losses in the ratio of 4:3:3 respectively. Kavin retires from the firm on 31st December 2018. On the date of retirement, his capital account shows a credit balance of Rs. 1,50,000. Pass journal entries if:
(a) The amount due is paid off immediately.
(b) The amount due is not paid immediately.
(c) Rs. 1,00,000 is paid and the balance in the future.
Answer:

(a) Kavin's loan: Nil
(b) Kavin's loan: Rs. 1,50,000
(c) Kavin's loan: Rs. 50,000
In simple words: When a partner retires, the amount they are owed can be handled in a few ways. If paid right away, debit the partner's capital account and credit the bank. If not paid immediately, debit the partner's capital account and credit a loan account for that partner. If part is paid and part is held, split the amount between the bank and the loan account.

🎯 Exam Tip: Remember to close the retiring partner's capital account by transferring the due amount to either their bank account (if paid immediately) or their loan account (if not paid immediately or paid in installments).

 

Question 16. Manju, Charu and Lavanya are partners in firm sharing profits and losses in the ratio of 5:3:2. The balance sheet as of 31st March, 2018 was as follows:

Manju retired from the partnership firm on 31.3.2018 subject to the following adjustments:
(i) Stock to be depreciated by Rs. 10,000
(ii) Provision for doubtful debts to be created for Rs. 3,000
(iii) Buildings to be appreciated by Rs. 28,000.
Prepare revaluation account and capital accounts of partners after retirement.
Answer:

Revaluation profit: Rs. 15,000
Manju's loan account: Rs. 1,02,000 (Cr)
Capital account: Charu Rs. 89,000 (Cr)
Lavanya: Rs. 83,000 (Cr)
In simple words: When a partner retires, you first adjust asset and liability values to create a revaluation account. Profits or losses from revaluation are then shared among all partners in their profit-sharing ratio and added to their capital accounts. The retiring partner's capital balance, including these adjustments, is then transferred to their loan account.

🎯 Exam Tip: Ensure all revaluation adjustments are made before calculating the final amount due to the retiring partner, as these changes affect their capital balance.

 

Question 17. Kannan, Rahim, and John are partners in a firm sharing profits and losses in the ratio of 5:3:2. The balance sheet as of 31st December 2017 was as follows:

John retires on 1st January 2018, subject to the following conditions :
(i) To appreciate building by 10%
(ii) Stock to be depreciated by 5%
(iii) To provide Rs. 1,000 for bad debts
(iv) An unrecorded liability of Rs. 8,000 has been noticed.
(v) The retiring partner shall be paid immediately.
Prepare revaluation account, partner's capital account, and the balance sheet of the firm after retirement.
Answer:

Revaluation loss: Rs. 1,000
Capital Account: Kannan: Rs. 1,04,500
Rahim: Rs. 82,700
Amount paid to John: Rs. 41,800
Balance sheet total: Rs. 2,15,000
In simple words: When a partner retires, we need to adjust asset and liability values (revaluation account). Then, update each partner's capital account by sharing any revaluation gains or losses, and also adjust for profit & loss or reserve funds. The retiring partner's final amount is paid, and then a new balance sheet is prepared for the remaining partners.

🎯 Exam Tip: Always make sure to account for all adjustments (revaluation, P&L, reserves) in the partners' capital accounts before settling the retiring partner's dues. The balance sheet must balance after all transactions.

 

Question 18. Saran, Arun, and Karan are partners in firms sharing profits and losses in the ratio of 4:3:3. The balance sheet as of 31.12.2016 was as follows:

Karan retires on 1.1.2017, subject to the following conditions :
(i) Goodwill of the firm is valued at Rs. 21,000
(ii) Machinery to be appreciated by 10%
(iii) Building to be valued at Rs. 80,000
(iv) Provision for bad debts to be raised to Rs. 2,000
(v) Stock to be depreciated by Rs. 2,000
(vi) The final amount due to Karan is not paid immediately.
Prepare the necessary ledger accounts and show the balance sheet of the firm after retirement.
Answer:

Gaining ratio
Old ratio = 4:3:3
New ratio = 4:3
Gaining ratio = Saran = New ratio – old ratio
Saran \( = \frac { 4 }{ 7 } - \frac { 4 }{ 10 } = \frac { 40-28 }{ 70 } = \frac { 12 }{ 70 } \)
Arun \( = \frac { 3 }{ 7 } - \frac { 3 }{ 10 } = \frac { 30-21 }{ 70 } = \frac { 9 }{ 70 } \)
GR \( = 12:9 \) or \( 4:3 \)
Karan's share of G/W \( = 21,000 \times \frac { 3 }{ 10 } = \) Rs. 6,300
K's G/W In GR = Rs. 6,300
Saran's share \( = 6300 \times \frac { 8 }{ 10 } = \) Rs. 3,600
Arun's share \( = 6,300 \times \frac { 3 }{ 7 } = \) Rs. 2,700
Revaluation profit: Rs. 21,000
Capital A/c: Saran: Rs. 70,800
Arun: Rs. 58,100
Karan's loan Account: Rs. 57,100
Balance sheet total: Rs. 2,21,000
In simple words: When Karan retires, we need to adjust the value of assets and liabilities (revaluation account), distribute goodwill, and account for any general reserves. Each partner's capital account is updated with these changes. The amount due to Karan is then transferred to his loan account, as it's not paid immediately. Finally, a new balance sheet is prepared to reflect the changed partnership.

🎯 Exam Tip: Remember to calculate the sacrificing or gaining ratio to correctly distribute goodwill when a partner retires, ensuring the adjustment is made in the correct proportions.

 

Question 19. Rajesh, Sathish and Mathan are partners sharing profits and losses in the ratio of 3:2:1. respectively. Their balance sheet as on 31.3.2017 is given below:

Mathan retires on 31st March, 2017 subject to the following conditions:
(i) Rajesh and Sathis will share profits and losses in the ratio of 3:2
(ii) Assets are to be revalued as follows;
Machinery Rs. 4,50,000, Stock Rs. 2,90,000, Debtors Rs. 1,52,000
(iii) Goodwill of the firm is valued at Rs. 1,20,000
prepare the necessary ledger accounts and the balance sheet immediately after the retirement of Mathan.
Answer:

Gaining ratio = New ratio - old ratio
Rajesh \( = \frac{3}{5} - \frac{3}{6} = \frac{18-15}{30} = \frac{3}{30} \)
Sathish \( = \frac{2}{5} - \frac{2}{6} = \frac{12-10}{30} = \frac{2}{30} \)
GR = 3:2
Mathan's share of G/w \( = 1,20,000 \times \frac{1}{6} = \text{Rs.}20,000 \)
In gaining ratio
Rajesh's share \( = 20,000 \times \frac{3}{5} = \text{Rs.}12,000 \)
Sathish's share \( = 12,000 \times \frac{2}{5} = \text{Rs.}8,000 \)

Revaluation Profit: Rs. 12,000; Mathan loan: A/c: Rs. 2,92,000 Rajesh's capital A/c: Rs. 4,54,000; Sathish capital A/c: Rs. 3,36,000 Balance sheet total Rs. 13,10,000.
In simple words: When a partner retires, we adjust the values of assets and liabilities. Profits or losses from these adjustments, along with goodwill and existing reserves, are shared among all partners according to their ratios. The retiring partner's share that is not paid immediately becomes a loan.

🎯 Exam Tip: Always verify that the total of the new balance sheet matches on both the asset and liability sides, as this confirms the accuracy of all your adjustments.

 

Question 20. Janani and Jamuna are partners sharing profits and losses in the ratio of 3:3:1. respectively. Janaki died on 31st December 2017. The final amount due to her showed a credit balance of Rs. 1,40,000. Pass Journal Entry if
(i) The amount due is paid off immediately.
(ii) The amount due is not paid immediately.
(iii) Rs. 75,000 is paid and the balance in the future.
Answer:

In simple words: When a partner dies, the money owed to their estate can be paid immediately, transferred to a loan account if not paid, or paid partly with the rest becoming a loan. Each scenario needs a specific accounting entry to record the transaction correctly.

🎯 Exam Tip: Remember to always specify the 'Executor's A/c' when dealing with a deceased partner's dues, as the amount is legally owed to their estate, not directly to the partner anymore.

 

Question 21. Varsha, Shanthi, and Madhuri are partners in a firm sharing profits in the ratio of 5:4:3. Their balance sheet as of 31st December 2017 is as under:

on 1st January 2018, Madhuri died and on her death, the following arrangements are made:
(i) Stock to be depreciated by Rs. 5,000
(ii) Premises is to be appreciated by 20%
(iii) To provide Rs. 4,000 for bad debts
(iv) The final amount due to Madhuri was not paid.
Prepare revaluation account, partners capital account, and the balance sheet of the firm after death.
Answer:

Revaluation Profit: Rs. 15,000; Varsha's capital A/c Rs. 1,01,250; Sathish capital A/c: Rs. 77,000 Madhuri's executors account Rs. 32,750; Balance sheet total: Rs. 2,43,000.
In simple words: When a partner dies, their capital account is adjusted for revaluation profits/losses, reserves, and profit/loss account balances. The remaining amount due to them is transferred to their executor's account. This process changes the capital balances of the continuing partners and updates the firm's balance sheet.

🎯 Exam Tip: Ensure all adjustments, including revaluation of assets and liabilities and distribution of reserves, are correctly posted to the capital accounts of all partners before calculating the final amount due to the deceased partner.

 

Question 22. Vijayan, Sudhan, and Suman are partners who share profits and losses; in the capital ratio. Their balance sheet as of 31st December 2018 is as follows:

Suman died on 31.3.2019. On the death of Suman, the following adjustments are made:
(i) Building is to be valued at Rs. 1,00,000
(ii) Stock to be depreciated by Rs. 5,000
(iii) Goodwill of the firm is valued at Rs. 36,000
(iv) Share of profit from the closing of the last financial year to the date of death on the basis of the average of the three completed year's profit before death. profit for 2016, 2017 and 2018 were Rs. 40,000, Rs. 50,000 and Rs. 30,000 respectively.
Prepare the necessary ledger accounts and the balance sheet immediately after the death of Suman.
Answer:

Suman share of G/w
Vijayan : Sudhan : Suman
Old ratio = 7:5:3
New ratio = 7:5
Gaining ratio New ratio - old ratio
Vijayan \( = \frac{7}{12} - \frac{7}{15} = \frac{35-28}{60} = \frac{7}{60} \)
Sudhan \( = \frac{5}{12} - \frac{5}{15} = \frac{25-20}{60} = \frac{5}{60} \)
GR = 7:5
Vijayan share of G/w \( = 7,200 \times \frac{7}{12} = \text{Rs.}4,200 \)
Sudhan share of G/w \( = 7,200 \times \frac{5}{12} = \text{Rs.}3,000 \)

Average Profit \( = \frac{40,000+50,000+30,000}{3} = \text{Rs.}40,000 \)
Suman share of Profit till the date of his retirement \( = 40,000 \times \frac{3}{12} \times \frac{3}{15} = \text{Rs.}2,000 \)

Revaluation Profit: Rs. 15,000; Vijayan's capital A/c: Rs. 81,200; Sudhan's capital A/c Rs. 58,000; Suman's Executor's A/c: Rs. 45,800 Balance sheet total: Rs. 2,02,000.
In simple words: When a partner passes away, the firm needs to adjust its accounts. This involves revaluing assets like buildings and stock, calculating the deceased partner's share of goodwill and current year's profit, and then creating a new balance sheet reflecting these changes and the remaining partners' new capital balances. The amount owed to the deceased partner is transferred to their executor's account.

🎯 Exam Tip: When a partner dies, remember to calculate their share of profit up to the date of death using either previous year's profit or average profit, and transfer it to their capital account before final settlement.

12th Accountancy Guide Retirement and Death of a Partner Additional Important Questions and Answers

I. Choose the best answer

 

Question 1. In the absence of any specific agreement, between the partners, partners loan to the firms will carry an interest at the rate of .......... %
(a) 5%
(b) 6%
(c) 4%
Answer: (b) 6%
In simple words: If partners do not agree on an interest rate for loans given to the firm, the law states that a 6% interest rate will be applied. This is a standard rule.

🎯 Exam Tip: Remember this statutory rate (6%) for partner loans to the firm, as it's a common point in partnership accounting problems when no specific agreement is mentioned.

 

Question 2. A,B & C shares profit as \( \frac{1}{2} \) to A, \( \frac{1}{3} \) to B, and \( \frac{1}{6} \) to C. If B retires, then the new profit sharing ratio
(a) 3:1
(b) 3:2
(c) 1:3
Answer: (a) 3:1
In simple words: When partner B leaves the firm, partners A and C will now share the profits in a 3:1 ratio. This means A gets three parts for every one part C gets.

🎯 Exam Tip: When a partner retires and no specific information is given on how the remaining partners acquire the retiring partner's share, assume the continuing partners retain their old ratio. Convert all ratios to a common denominator for easy comparison and calculation.

 

Question 3. At the time of retirement, the revaluation profits of the business will be shared by .......... partners.
(a) all the partners
(b) Continuing partners
(c) Old partners
Answer: (a) all the partners
In simple words: When a partner retires, any profits or losses from revaluing the company's assets and liabilities are shared by everyone who was a partner at that time, including the one leaving. This ensures a fair distribution based on their old profit-sharing ratio.

🎯 Exam Tip: Revaluation profit or loss is always distributed among all partners (including the retiring one) in their old profit-sharing ratio, as it relates to past periods.

 

Question 4. At the time of retirement, of partners, the existing partners stand to
(a) gain
(b) loss
(c) no change
Answer: (a) gain
In simple words: When a partner leaves, the remaining partners usually get a larger share of the profits. This means their individual profit share often increases, which is a gain for them.

🎯 Exam Tip: The retirement of a partner typically results in a 'gaining ratio' for the remaining partners, meaning their share of future profits increases.

 

Question 5. A,B & C are sharing profits in the ratio of \( \frac{2}{5}, \frac{2}{5}, \frac{1}{5} \). C retired from business and his share was purchased equally by A and B, Then new profit sharing ratio shall be
(a) A-\(\frac{1}{2}\) B-\(\frac{1}{2}\)
(b) A-\(\frac{3}{5}\) B-\(\frac{2}{5}\)
(c) A-\(\frac{3}{5}\) B-\(\frac{3}{5}\)
Answer: (b) A-\(\frac{3}{5}\) B-\(\frac{2}{5}\)
In simple words: When C leaves the partnership, partners A and B buy C's share equally. So, after C retires, A and B will share profits in the ratio of 3:2, meaning A gets three parts and B gets two parts.

🎯 Exam Tip: When a retiring partner's share is acquired by continuing partners in a specific ratio, always add the acquired share to each continuing partner's old share to find the new ratio.

 

Question 6. If the amount due to the outgoing partner is transferred to loan A/c then he is entitled to interest at .......... until it is paid out.
(a) 6%
(b) 5%
(c) 8%
Answer: (a) 6%
In simple words: If a partner retires and their money isn't paid right away but is put into a loan account, the firm must pay 6% interest on that money until it is fully paid. This protects the retired partner's investment.

🎯 Exam Tip: Remember that if an outgoing partner's capital is treated as a loan, the firm is liable to pay interest on it, typically at 6% per annum unless a different rate is explicitly agreed upon.

 

Question 7. At the time of retirement of a partner calculation of new profit, ratio is
(a) not necessary
(b) necessary
(c) optional
Answer: (b) necessary
In simple words: When a partner retires, it's important to figure out the new way the remaining partners will share profits. This is crucial because their individual shares will change, and it affects how future profits and losses are divided.

🎯 Exam Tip: Calculating the new profit-sharing ratio is essential upon a partner's retirement to correctly distribute future profits and losses among the continuing partners.

III Short Answer Questions

 

Question 1. What are the journal entries to be passed to transfer the accumulated profits, losses & reserves?
Answer:

In simple words: When accumulated profits, losses, or reserves exist, they must be distributed among all partners before any changes to the partnership structure. Profits and reserves are credited to the partners' capital accounts, while losses are debited. This ensures a clean slate and fair accounting before a partner retires or dies.

🎯 Exam Tip: Always distribute accumulated profits, losses, and reserves to all partners (including the retiring or deceased partner) in their old profit-sharing ratio before making any other adjustments.

 

Question 2. Write the format of Revaluation A/c.
Answer: A Revaluation Account is prepared to record increases or decreases in the value of assets and liabilities when there is a change in the partnership. If asset values increase or liability values decrease, it is a gain and shown on the credit side. If asset values decrease or liability values increase, it is a loss and shown on the debit side. The final balance (profit or loss) is transferred to the partners' capital accounts.
In simple words: The Revaluation Account is like a special account to show how much the value of a firm's things (assets) and debts (liabilities) has changed. Gains are put on one side, and losses on the other. The final money from this account is then shared by the partners.

🎯 Exam Tip: Clearly distinguish between increases/decreases in assets and liabilities: increases in assets and decreases in liabilities are credited to Revaluation A/c, while decreases in assets and increases in liabilities are debited.

 

Question 3. How will you adjust the share of profits loss of the retaining partner if he retires in between in an accounting year?
Answer: When a partner retires mid-year, their share of profit or loss up to their retirement date needs to be calculated. This is often estimated by looking at previous year's profits or based on sales turnover up to that date. Once determined, the profit or loss is credited or debited to the retiring partner's capital account. This calculation ensures fairness for the period they were still a partner.

In simple words: If a partner leaves in the middle of the year, we calculate their share of profit or loss for the time they worked. We can guess this amount based on past profits or current sales. This amount is then added to or taken from their capital account.

🎯 Exam Tip: When a partner retires mid-year, the profit/loss share up to the retirement date is provisionally calculated and routed through a 'Profit & Loss Suspense Account' to avoid finalizing the full year's accounts prematurely.

 

Question 4. What are the adjustments to be made on the death of a partner?
Answer: On the death of a partner, several adjustments must be made to properly settle their account. These include:
- Distributing any accumulated profits, reserves, and losses among all partners.
- Revaluing assets and liabilities to reflect their current market values.
- Determining the new profit-sharing ratio and gaining ratio for the continuing partners.
- Adjusting for goodwill, which may involve valuing the firm's reputation.
- Calculating the deceased partner's share of current year's profit or loss up to their death date.
- Finally, settling the total amount due to the deceased partner's estate or legal representative. This ensures a fair and accurate closure of the deceased partner's financial involvement with the firm.
In simple words: When a partner dies, the business needs to tidy up its books. This means sharing out old profits and losses, checking asset values again, figuring out new profit shares for the remaining partners, and dealing with goodwill. Also, the dead partner's share of profit up to their last day is calculated, and all money owed is given to their family.

🎯 Exam Tip: The key difference between retirement and death is that in death cases, the amount due is transferred to the 'Executor's Account' of the deceased partner, and the profit calculation for the current year is up to the date of death.

 

Question 5. What are the journal entries to be passed for settlement of the amount due to the deceased partner
Answer: To transfer the amount due to the deceased partner to the executor or legal representative of the deceased partner, the following journal entries are passed:

In simple words: When a partner dies, their capital account is closed by transferring the final amount to their executor's account. This executor's account can then be paid in cash, converted into a loan, or settled partly in cash with the rest as a loan. Each way of settling needs a specific entry in the firm's books.

🎯 Exam Tip: Clearly differentiate between the partner's capital account and the executor's account. The executor's account is a liability of the firm until the full amount due to the deceased partner is paid off.

IV Additional Problems:

 

Question 1. A, B, and C sharing profits in the ratio of 5:3:2. C retires. Find out the new profit sharing ratio and gaining ratio.
Answer:
Old ratio \( A:B:C = 5:3:2 \). The total share is \( 5+3+2 = 10 \).
C retires, so C's share is \( \frac{2}{10} \).
The new profit sharing ratio between A and B will be their old ratio, which is \( 5:3 \).
To find the gaining ratio, we use the formula: Gaining Ratio = New Ratio - Old Ratio.
For A: \( \text{Gain} = \frac{5}{8} - \frac{5}{10} = \frac{25 - 20}{40} = \frac{5}{40} \).
For B: \( \text{Gain} = \frac{3}{8} - \frac{3}{10} = \frac{15 - 12}{40} = \frac{3}{40} \).
So, the Gaining Ratio for A and B is \( 5:3 \). The new ratio and gaining ratio often align when a partner retires and no specific agreement is made on how their share is acquired. The partners continue with their previous ratio among themselves.
In simple words: When partner C leaves, partners A and B will continue to share profits in their original ratio of 5:3. This same ratio (5:3) also shows how much profit A and B have gained from C's retirement.

🎯 Exam Tip: When a partner retires and there's no special agreement on how their share is taken, the continuing partners' old profit ratio automatically becomes their new profit ratio and their gaining ratio.

 

Question 2. G, H, and I are partners sharing profits in the ratio of 5:3:2.1 taken up by G and H equally. Find out the new profit sharing ratio of G and H.
Answer:
Old ratio of partners G:H:I = 5:3:2. The total share is \( 5+3+2 = 10 \). (Assuming 5:3:2, correcting the typo "2.1")
I retires from the partnership. I's share of profit = \( \frac{2}{10} \).
I's share is taken up equally by G and H. This means both G and H gain an equal portion of I's share.
\( \text{G's gain} = \frac{1}{2} \text{ of I's share} = \frac{1}{2} \times \frac{2}{10} = \frac{1}{10} \).
\( \text{H's gain} = \frac{1}{2} \text{ of I's share} = \frac{1}{2} \times \frac{2}{10} = \frac{1}{10} \).
Now, we calculate the new shares for G and H:
\( \text{G's new share} = \text{G's old share} + \text{G's gain} = \frac{5}{10} + \frac{1}{10} = \frac{6}{10} \).
\( \text{H's new share} = \text{H's old share} + \text{H's gain} = \frac{3}{10} + \frac{1}{10} = \frac{4}{10} \).
The new profit sharing ratio between G and H is \( \frac{6}{10} : \frac{4}{10} \), which simplifies to \( 6:4 \) or \( 3:2 \).
In simple words: Partner I leaves, and partners G and H share I's portion equally. So, G and H each get an extra bit of the profit. After adding these extra bits to their old shares, their new way of splitting profits becomes 3 parts for G and 2 parts for H.

🎯 Exam Tip: Always make sure to calculate each remaining partner's gain separately before adding it to their old share to determine the new profit sharing ratio.

 

Question 3. J, K and L are partners sharing profits in the ratio of 5:3:2. retires and his share was taken up entirely by K. Find out the new profit sharing ratio and gaining ratio of continuing partners.
Answer:
Old ratio of partners J:K:L = 5:3:2. The total share is \( 5+3+2 = 10 \).
From the context that K takes up the share, it implies L retires. L's share of profit = \( \frac{2}{10} \).
L's share is taken up entirely by K. This means only K gains L's share.
\( \text{J's gain} = 0 \) (J does not take up any share).
\( \text{K's gain} = \text{L's share} = \frac{2}{10} \).
The gaining ratio for the continuing partners (J and K) is \( 0 : \frac{2}{10} \). If we simplify this for K, K's gain is \( \frac{1}{5} \).
Now, we calculate the new shares for J and K:
\( \text{J's new share} = \text{J's old share} + \text{J's gain} = \frac{5}{10} + 0 = \frac{5}{10} \).
\( \text{K's new share} = \text{K's old share} + \text{K's gain} = \frac{3}{10} + \frac{2}{10} = \frac{5}{10} \).
The new profit sharing ratio between J and K is \( \frac{5}{10} : \frac{5}{10} \), which simplifies to \( 5:5 \) or \( 1:1 \).
In simple words: Partner L leaves, and only partner K takes L's full share. Partner J does not get any extra share. So, K gains all of L's share. After this, J and K will share profits equally, as their new profit ratio becomes 1:1. K's gaining ratio is \( \frac{1}{5} \), and J's gaining ratio is zero.

🎯 Exam Tip: If one continuing partner takes the entire share of a retiring partner, only that partner gains, and their gain will be equal to the retiring partner's share.

 

Question 4. X,Y and Z are partners sharing profits in- the ratio of 5:3:2 Z retires and the ratio between X and Y is 3:2. Find out the gaining ratio
Answer:
Old ratio of partners X:Y:Z = 5:3:2. The total share is \( 5+3+2 = 10 \).
Z retires from the partnership. Z's share of profit = \( \frac{2}{10} \).
The new profit sharing ratio between X and Y is given as 3:2. The total of their new shares is \( 3+2 = 5 \).
So, X's new share = \( \frac{3}{5} \).
And Y's new share = \( \frac{2}{5} \).
To find the gaining ratio, we use the formula: Gaining Ratio = New Ratio - Old Ratio.
\( \text{X's old share} = \frac{5}{10} \).
\( \text{Y's old share} = \frac{3}{10} \).
For X: \( \text{Gain} = \frac{3}{5} - \frac{5}{10} = \frac{6 - 5}{10} = \frac{1}{10} \).
For Y: \( \text{Gain} = \frac{2}{5} - \frac{3}{10} = \frac{4 - 3}{10} = \frac{1}{10} \).
The gaining ratio for X and Y is \( \frac{1}{10} : \frac{1}{10} \), which simplifies to \( 1:1 \). This shows that X and Y gain equally from Z's retirement.
In simple words: Partner Z leaves the firm. Partners X and Y decide to share profits in a new ratio of 3:2. To find out who gained how much from Z leaving, we compare their new shares to their old shares. It turns out both X and Y gained an equal part, so their gaining ratio is 1:1.

🎯 Exam Tip: Always make sure to convert both the old and new ratios to a common denominator before subtracting to find the exact gain for each partner.

 

Question 5. Prabha, Kavitha and Meena were partners of a firm sharing profit and loss in the ratio of 3:2:1 Meena Wanted to retire. They decided to revalue the assets and liabilities of the firm as indicated below: To write down Machinery by Rs 10,000 and Stock by Rs. 4,000 To bring into books as unrecorded investments Rs. 5,000 To Write off Rs.3,000 from sundry creditors as it was no longer liable. Pass entries to give effect to the above adjustments. Show also Revaluation account.
Answer:
The partners Prabha, Kavitha, and Meena share profits in the ratio 3:2:1. Meena is retiring. We need to record changes in asset and liability values (revaluation) and then distribute any profit or loss from this revaluation among all partners in their old profit sharing ratio.
The value of Machinery decreased by Rs 10,000 and Stock by Rs 4,000. These are revaluation losses. Unrecorded investments of Rs 5,000 are now recorded, which is a revaluation gain. Sundry creditors decreased by Rs 3,000, which is also a revaluation gain.
Total losses on revaluation: Rs \( 10,000 + 4,000 = 14,000 \).
Total gains on revaluation: Rs \( 5,000 + 3,000 = 8,000 \).
Net Loss on Revaluation: Rs \( 14,000 - 8,000 = 6,000 \).
This loss will be shared by Prabha, Kavitha, and Meena in their old ratio of 3:2:1.
Prabha's share of loss = \( \frac{3}{6} \times 6,000 = 3,000 \).
Kavitha's share of loss = \( \frac{2}{6} \times 6,000 = 2,000 \).
Meena's share of loss = \( \frac{1}{6} \times 6,000 = 1,000 \).
Below are the journal entries and the Revaluation Account to reflect these adjustments.

In simple words: When Meena leaves, the firm checks the true value of its assets and liabilities. Some values go down (Machinery, Stock), causing a loss. Some values go up (Investments, Creditors), causing a gain. Overall, there's a small loss, which is then divided among all three partners according to how they used to share profits.

🎯 Exam Tip: Remember to debit the Revaluation Account for decreases in assets and increases in liabilities, and credit it for increases in assets and decreases in liabilities.

 

Question 6. Banumathi, Bharafhi and Shanthi are partners sharing, profits in the ratio of 5:3:2. On April 1, 2005 Shanthi decided to retire. On that date, there was a credit balance of Rs. 60,000 in their profit and loss account. Pass entry.
Answer:
Banumathi, Bharafhi, and Shanthi share profits in the ratio of 5:3:2. Shanthi is retiring. A credit balance in the Profit and Loss Account means the firm has accumulated profits. These profits must be distributed among all partners, including the retiring partner, in their old profit sharing ratio before the retirement takes effect.
The total profit to be distributed is Rs 60,000.
Banumathi's share = \( \frac{5}{10} \times 60,000 = \text{Rs } 30,000 \).
Bharafhi's share = \( \frac{3}{10} \times 60,000 = \text{Rs } 18,000 \).
Shanthi's share = \( \frac{2}{10} \times 60,000 = \text{Rs } 12,000 \).
This distribution increases each partner's capital account.
The journal entry to pass this distribution is as follows:

In simple words: Before partner Shanthi leaves, the firm gives out all its past profits (Rs 60,000) to everyone. Each partner gets their share based on how they always split profits, and this money is added to their own capital accounts.

🎯 Exam Tip: Always distribute accumulated profits (like a credit balance in P&L A/c or General Reserve) to all partners, including the retiring one, in their old profit sharing ratio.

 

Question 7. Thangamuthu, Anaimuthu and Vairamuthu are partners sharing profit and loss in the ratio of 3:3:2. Thangamuthu wanted to retire on 1st June 2005, the firms books showed a general reserve of Rs. 40,000. Pass entry.
Answer:
Thangamuthu, Anaimuthu, and Vairamuthu share profits in the ratio of 3:3:2. Thangamuthu is retiring. Any general reserve held by the firm must be distributed among all partners, including the retiring partner, in their old profit sharing ratio before the retirement.
The total general reserve to be distributed is Rs 40,000.
Thangamuthu's share = \( \frac{3}{8} \times 40,000 = \text{Rs } 15,000 \).
Anaimuthu's share = \( \frac{3}{8} \times 40,000 = \text{Rs } 15,000 \).
Vairamuthu's share = \( \frac{2}{8} \times 40,000 = \text{Rs } 10,000 \).
This distribution increases each partner's capital account.
The journal entry to pass this distribution is as follows:

In simple words: Before Thangamuthu leaves the firm, the company's savings (General Reserve) are shared among all partners based on their usual profit split. This money is added to each partner's individual account.

🎯 Exam Tip: General Reserve is an undistributed profit, so it's always credited to partners' capital accounts in their old profit-sharing ratio when a partner retires or on dissolution.

 

Question 8. Lalitha, Jothi and Kanaga were partners of a sharing profit and losses in the ratio of 3:2:3, Set out below was their balance sheet as on 31st March 2003. Lalitha retired from the partnership on 1st April 2004 on the following terms: Goodwill of the firm was to be valued at Rs.30,000 The assets are to be valued as under Stock Rs. 1,00,000; Furniture Rs.15,000; Plant and Machinery Rs.45,000; Building Rs.1,00,000. A provision for doubtful debts is created at Rs.4,250. Lalitha was to be paid off immediately. Show the journal entries, prepare a revaluation account, capital account, Bank account, and balance sheet of the reconstituted partnership.
Answer:
Lalitha, Jothi, and Kanaga are partners sharing profits in the ratio of 3:2:3. Lalitha retires on 1st April 2004. We need to adjust for goodwill, revalue assets and liabilities, distribute any existing P&L balances, settle Lalitha's dues, and then prepare the updated financial statements.
**1. Revaluation of Assets and Liabilities:** * **Losses (Debits to Revaluation A/c):** * Stock: From 1,11,500 (BS) to 1,00,000 (New Value) = Decrease of Rs 11,500. * Furniture: From 17,500 (BS) to 15,000 (New Value) = Decrease of Rs 2,500. * Plant & Machinery: From 48,750 (BS) to 45,000 (New Value) = Decrease of Rs 3,750. * Building: From 1,20,000 (BS) to 1,00,000 (New Value) = Decrease of Rs 20,000. * Provision for doubtful debts: Creation of Rs 4,250. * Total Revaluation Losses = \( 11,500 + 2,500 + 3,750 + 20,000 + 4,250 = \text{Rs } 42,000 \). * **Gains (Credits to Revaluation A/c):** None explicitly stated, so net revaluation will be a loss.
**2. Distribution of Revaluation Loss:** The net loss of Rs 42,000 is distributed among all partners (Lalitha, Jothi, Kanaga) in their old ratio (3:2:3). * Lalitha's share = \( \frac{3}{8} \times 42,000 = \text{Rs } 15,750 \). * Jothi's share = \( \frac{2}{8} \times 42,000 = \text{Rs } 10,500 \). * Kanaga's share = \( \frac{3}{8} \times 42,000 = \text{Rs } 15,750 \).
**3. Adjustment for Goodwill:** Firm's goodwill is valued at Rs 30,000. This is raised and credited to all partners in their old profit sharing ratio. * Lalitha's share = \( \frac{3}{8} \times 30,000 = \text{Rs } 11,250 \). * Jothi's share = \( \frac{2}{8} \times 30,000 = \text{Rs } 7,500 \). * Kanaga's share = \( \frac{3}{8} \times 30,000 = \text{Rs } 11,250 \).
**4. Distribution of Profit & Loss A/c (Profit):** The Balance Sheet shows P&L A/c on the Liabilities side (Credit balance) of Rs 22,000. This is a profit to be distributed. * Lalitha's share = \( \frac{3}{8} \times 22,000 = \text{Rs } 8,250 \). * Jothi's share = \( \frac{2}{8} \times 22,000 = \text{Rs } 5,500 \). * Kanaga's share = \( \frac{3}{8} \times 22,000 = \text{Rs } 8,250 \).
**5. Lalitha's Settlement:** Lalitha is paid immediately. Her final capital balance is calculated considering her initial capital, share of goodwill, revaluation loss, and P&L profit. * Lalitha's Capital: \( 2,00,000 (\text{initial}) + 11,250 (\text{goodwill}) + 8,250 (\text{P&L profit}) - 15,750 (\text{revaluation loss}) = \text{Rs } 2,03,750 \).
The detailed journal entries, Revaluation Account, Capital Accounts, Bank Account, and the new Balance Sheet are shown below.

In simple words: When Lalitha leaves the partnership, the firm first checks and updates the values of its assets (like stock and machinery) and debts (like bad debt provision). Any changes result in a loss, which is shared among all partners. Then, the value of the firm's 'goodwill' and any old profits are also shared. Lalitha's total due amount is calculated, and she is paid immediately from the bank. Finally, a new financial picture of the firm (balance sheet) is drawn up with only Jothi and Kanaga as partners.

🎯 Exam Tip: Always remember that goodwill, accumulated profits, and reserves are distributed to *all* partners (including the retiring one) in their old profit sharing ratio, while revaluation profit/loss is also distributed among all partners in their old ratio.

 

Question 9. A, B and C are partners sharing profits and losses in the ration of 5:3:2 respectively. Retries from the firm on 1st April 2005. After his retirement, his capital account shows a credit balance of Rs.1,35,000 after the necessary adjustment made. Give journal entries, if. the amount due is paid off immediately. When the amount due is not paid immediately. Rs. 45,000 is paid and the balance In the future.
Answer:
A, B, and C are partners with a profit-sharing ratio of 5:3:2. The question implies one partner retires, and the subsequent journal entries refer to "C's capital A/c". So, C is the retiring partner. After all necessary adjustments, the amount due to C is Rs 1,35,000. We need to show the journal entries for different settlement scenarios.
**Scenario (a): Amount due is paid off immediately.**
In this case, C's Capital Account is debited, and the Bank Account is credited, reflecting the cash payment.
**Scenario (b): Amount due is not paid immediately.**
If the amount is not paid at the time of retirement, it is transferred to C's Loan Account, which is a liability for the firm. C's Capital Account is debited, and C's Loan Account is credited.
**Scenario (c): Partial payment and balance transferred to loan.**
Here, a portion of the amount due (Rs 45,000) is paid immediately from the bank, and the remaining balance (Rs 90,000) is transferred to C's Loan Account.
The journal entries for each scenario are provided below.

In simple words: When partner C retires, the firm owes them Rs 1,35,000. There are three ways to handle this: (a) pay all the money right away from the bank, (b) promise to pay later by moving the amount to a loan account, or (c) pay some money now and move the rest to a loan account for later payment.

🎯 Exam Tip: When settling a retiring partner's dues, if the amount is not paid immediately, always transfer it to their Loan Account, which appears as a liability in the Balance Sheet.

 

Question 10. Pallavan, Pandian and Chozhan were carrying on partnership business sharing profits in the ratio of 3:2:1. On March 31, 2005, the balance sheet of the firm stood as follows: Chozhan retried on April 1, 2005 on the following terms: Building to be appreciated by Rs. 15,000 Provision for doubtful debts to be made at 6% on debtors Goodwill of the firm is valued at Rs. 18,000 Rs.50,000 to be paid to chozhan immediately and the balance transferred to his loan account. Prepare Revaluation Account, Capital Accounts, Bank Account and the Balance Sheet after Chozhan's retirement.
Answer:
Pallavan, Pandian, and Chozhan are partners sharing profits in the ratio of 3:2:1. Chozhan retires on April 1, 2005. We need to make several adjustments related to asset revaluation, goodwill, existing profit/loss, and finally, settle Chozhan's account.
**1. Revaluation of Assets and Liabilities:** * **Gains (Credits to Revaluation A/c):** Building appreciated by Rs 15,000. * **Losses (Debits to Revaluation A/c):** Provision for doubtful debts at 6% on debtors. Debtors are Rs 40,000, so provision is \( 6\% \text{ of } 40,000 = \text{Rs } 2,400 \). * Net Revaluation Profit = \( 15,000 - 2,400 = \text{Rs } 12,600 \).
**2. Distribution of Revaluation Profit:** The net profit of Rs 12,600 is distributed among all partners (Pallavan, Pandian, Chozhan) in their old ratio (3:2:1). * Pallavan's share = \( \frac{3}{6} \times 12,600 = \text{Rs } 6,300 \). * Pandian's share = \( \frac{2}{6} \times 12,600 = \text{Rs } 4,200 \). * Chozhan's share = \( \frac{1}{6} \times 12,600 = \text{Rs } 2,100 \).
**3. Adjustment for Goodwill:** Firm's goodwill is valued at Rs 18,000. This is raised and credited to all partners in their old profit sharing ratio. * Pallavan's share = \( \frac{3}{6} \times 18,000 = \text{Rs } 9,000 \). * Pandian's share = \( \frac{2}{6} \times 18,000 = \text{Rs } 6,000 \). * Chozhan's share = \( \frac{1}{6} \times 18,000 = \text{Rs } 3,000 \).
**4. Distribution of Profit & Loss A/c (Loss):** The Balance Sheet shows P&L A/c on the Assets side (Debit balance) of Rs 30,000. This is a loss to be distributed among all partners in their old ratio. * Pallavan's share = \( \frac{3}{6} \times 30,000 = \text{Rs } 15,000 \). * Pandian's share = \( \frac{2}{6} \times 30,000 = \text{Rs } 10,000 \). * Chozhan's share = \( \frac{1}{6} \times 30,000 = \text{Rs } 5,000 \).
**5. Chozhan's Settlement:** Chozhan is paid Rs 50,000 immediately, and the balance is transferred to his loan account. * Chozhan's Capital: \( 1,00,000 (\text{initial}) + 3,000 (\text{goodwill}) + 2,100 (\text{revaluation profit}) - 5,000 (\text{P&L loss}) = \text{Rs } 1,00,100 \). * Amount paid immediately = Rs 50,000. * Balance transferred to loan = \( 1,00,100 - 50,000 = \text{Rs } 50,100 \). (The solution's balance sheet for Chozhan's Loan A/c shows Rs 52,600. This implies there might be a minor unstated adjustment or calculation difference in the original source, but we follow the capital account calculation for consistency in this explanation.)
The detailed accounts and the new Balance Sheet are presented below.

In simple words: When Chozhan retires, the firm first updates the value of its assets and debts. This creates a small profit. Then, the value of the firm's goodwill and any past losses are shared among all partners. Chozhan's total final amount is figured out, Rs 50,000 is paid to him at once, and the rest is kept as a debt for the firm to pay later. Finally, all these changes are written down in special accounts and a new financial report (balance sheet) for the firm with just Pallavan and Pandian is prepared.

🎯 Exam Tip: When preparing the final Balance Sheet after retirement, remember to include the retiring partner's loan account under liabilities if the amount is not fully paid. Also, ensure the revalued assets and liabilities are shown.

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