Reconstitution of a Partnership Firm 1

02 Retirement/Death of a Partner

Multiple Choice Questions

1. (a) Contingency reserve, profit and loss account (credit) balance are credited but deferred revenue expenditure account is
debited to capital accounts of existing partners in old profit sharing ratio at the time of retirement of old partner.
2. (c) Incease in liability is debited to revaluation account as it is a loss for the firm.
3. (c) Workmen compensation reserve to the extent of liability i.e. ` 24,000 is credited to workmen compensation claim
account and the balance is credited to partners’ capital accounts.
4. (c) (ii), (i), (iv), (iii)
5. (c) Remaining partners compensated to retiring partner for the proportion they acquired from B. A and C compensate for
` 3,500 and ` 2,100 respectively to B. So, their gaining ratio will be, 3,500 : 2,100 = 5:3
Short Answer (SA) Type Questions
1. JOURNAL
Date Particulars LF Amt (Dr) Amt (Cr)
2018
Mar 31 Contingency Reserve A/c Dr 30,000
Workmen’s Compensation Reserve A/c Dr 40,000
To A’s Capital A/c (70,000 × 2/5) 28,000
To B’s Capital A/c (70,000 × 2/5) 28,000
To C’s Capital A/c (70,000 × 1/5) 14,000
(Being the contingency reserve and workmen’s compensation reserve
transferred to capital accounts on B’s retirement)
A’s Capital A/c (80,000 × 2/5) Dr 32,000
B’s Capital A/c (80,000 × 2/5) Dr 32,000
C’s Capital A/c (80,000 × 1/5) Dr 16,000
To Advertisement Suspense A/c 50,000
To Loss in Business A/c 30,000
(Being the amount of advertisement suspense account and loss in
business account transferred to capital accounts on B’s retirement)

2. JOURNAL
Date Particulars LF Amt (Dr) Amt (Cr)
2019
May 1 Modi’s Capital A/c Dr 20,000
Shah’s Capital A/c Dr 60,000
To Dharma’s Capital A/c 80,000
(Being goodwill written-off in gaining ratio, i.e. 1 : 3)

Calculation of New Share

Modi Shah Dharma
Old ratio Þ 1 : 2 : 2
1 2 2
Modi’s gain share = ´ =
4 5 20
3 2 6
Shah’s gain share = ´ =
4 5 20
1 2 4+ 2 6 2 6 8 + 6 14
Modi’s new share = Old share + Gain share = + = = ; Shah’s new share = + = =
5 20 20 20 5 20 20 20
New profit sharing ratio of Modi : Shah = 6 : 14 or 3 : 7
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Working Note
2
Dharma’s share of goodwill = 2, 00, 000 ´ = ` 80,000 to be contributed by Modi and Shah in their gaining ratio i.e. 1 : 3.
5
1 3
Modi gains = 80, 000 ´ = ` 20,000; Shah gains = 80, 000 ´ = ` 60,000
4 4
3. JOURNAL

Date Particulars LF Amt (Dr) Amt (Cr)

2018
Mar 14 A’s Capital A/c Dr 12,000
C’s Capital A/c Dr 33,000
To B’s Capital A/c 45,000
(Being B’s share of goodwill credited to B and debited to A and
C in their gaining ratio of 4 : 11)
Profit and Loss Suspense A/c Dr 3,300
To B’s Capital A/c 3,300
(Being B’s share of profits to the date of death adjusted)
Working Notes
1. Calculation of Gaining Ratio
3 4 24 - 20 4 2 1 16 - 5 11
A’s gain = - = = ; C’s gain = - = =
5 8 40 40 5 8 40 40
4 11
Gaining ratio of A and C = : = 4 : 11
40 40
2. Calculation of B’s Share of Goodwill
Total profits = 1, 20, 000 + 60, 000 - 20, 000 + 80, 000 = ` 2, 40, 000
3
B’s share of profits credited during 4 years = 2, 40, 000 ´ = ` 90, 000
8
1
B’s share of goodwill = 90, 000 ´ = ` 45, 000
2
3. Calculation of B’s Share of Profits
æ 60, 000 - 20, 000 + 80, 000 ö
Average profits = ç ÷ + 10% = 40, 000 + 10% of 40,000 = ` 44,000
è 3 ø
73 3
B’s share of profits = 44, 000 ´ ´ = ` 3, 300
365 8
4. JOURNAL

Date Particulars LF Amt (Dr) Amt (Cr)

X’s Capital A/c Dr 30,000
Y’s Capital A/c Dr 18,000
Z’s Capital A/c Dr 12,000
To Goodwill A/c 60,000
(Being the existing goodwill written-off in the old ratio 5 : 3 : 2)
General Reserve A/c Dr 20,000
To X’s Capital A/c 10,000
To Y’s Capital A/c 6,000
To Z’s Capital A/c 4,000
(Being the amount of general reserve distributed among the
partners in old ratio 5 : 3 : 2)
Z’s Capital A/c Dr 96,000
To X’s Capital A/c 24,000
To Y’s Capital A/c 72,000
(Being the adjustment made for goodwill on Y’s retirement)
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Working Notes
Calculation of Gaining Ratio = New Ratio - Old Ratio
2 5 1 3 2 4
X= - = - (sacrifice) ; Z= - = (gain)
5 10 10 5 10 10
Long Answer (LA) Type Questions
1. Dr Revaluation Account Cr
Particulars Amt (`) Particulars Amt (`)
To Fixed Assets A/c 89,000 By Investments A/c 13,000
To Workmen’s Compensation Claim A/c 4,000 By Partner’s Capital A/c
Kavya 40,000
Manya 24,000
Navita 16,000 80,000
93,000 93,000

Dr Partners’ Capital Account Cr

Kavya Manya Navita Kavya Manya Navita
Particulars Particulars
(`) (`) (`) (`) (`) (`)
To Kavya’s Capital A/c — 18,000 12,000 By Balance b/d 6,00,000 5,00,000 4,00,000
To Revaluation A/c (Loss) 40,000 24,000 16,000 By General Reserve A/c 50,000 30,000 20,000
To Kavya’s Loan A/c 6,20,000 — — By Manya’s Capital A/c 18,000 — —
To Bank A/c 20,000 — — By Navita’s Capital A/c 12,000 — —
To Balance c/d — 4,88,000 3,92,000
6,80,000 5,30,000 4,20,000 6,80,000 5,30,000 4,20,000

Working Note
5
Kavya’s Share of Goodwill = 60, 000 ´ = ` 30, 000
10
2. Dr Revaluation Account Cr
Particulars Amt (`) Particulars Amt (`)
To Investments A/c 50,000 By Land and Building A/c 4,00,000
To Profit Transferred to Partners’ Capital A/cs By Stock A/c 1,00,000
Kavya 1,80,000
Navya 1,80,000
Heena 90,000 4,50,000
5,00,000 5,00,000

Dr Partners’ Capital Account Cr

Kavya Navya Heena Kavya Navya Heena
Particulars Particulars
(`) (`) (`) (`) (`) (`)
To Heena’s Capital A/c 1,06,800 1,06,800 — By Balance b/d 12,00,000 12,00,000 8,00,000
To Heena’s Loan A/c — — 12,93,600 By Kavya’s Capital A/c (WN 1) — — 1,06,800
To Balance c/d 15,93,200 15,93,200 — By Navya’s Capital A/c (WN 1) — — 1,06,800
By General Reserve A/c 3,20,000 3,20,000 1,60,000
By Revaluation A/c (Profit) 1,80,000 1,80,000 90,000
By Profit and Loss
Suspense A/c (WN 2) — — 30,000
17,00,000 17,00,000 12,93,600 17,00,000 17,00,000 12,93,600
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Balance Sheet
as at 31st March, 2018
Liabilities Amt (`) Assets Amt (`)
Capital Land and Building 24,00,000
Kavya 15,93,200 Investments 2,00,000
Navya 15,93,200 31,86,400 Stock 6,00,000
10% Heena’s Loan 12,93,600 Sundry Debtors 8,00,000
Sundry Creditors 2,00,000 Cash at Bank 4,50,000
Cash in Hand 2,00,000
Profit and Loss Suspense A/c 30,000
46,80,000 46,80,000

Working Notes
1. Calculation of Goodwill
4, 00, 000 + 4, 70, 000 + 6, 00, 000 + 5,50, 000 + 6,50, 000
Average profit = = ` 5, 34, 000
5
Goodwill = 2 years’ purchase of average profit = 2 ´ 5, 34, 000 = ` 10, 68, 000
1
Heena’s share of goodwill = 10, 68, 000 ´ = ` 2,13, 600
5
This amount will be adjusted through capital accounts of Kavya and Navya in their gaining ratio, i.e. equally.
2. Calculation of Heena’s Share of Profit
6, 00, 000 + 5,50, 000 + 6,50, 000
(i) Average profit (Based on last three years) = = ` 6, 00, 000
3
3
(ii) Profit (From 1st January, 2018 to 31st March, 2018) = 6, 00, 000 ´ = ` 1,50, 000
12
1
(iii) Heena’s share of profits = 1,50, 000 ´ = ` 30, 000
5