12th | Retirement of a Partner | Question No.  31 To 35 | Ts Grewal Solution 2022-2023

X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. Their Balance Sheet as at 31st March, 2022 was:

Liabilities		( `)	Assets	( `)
Creditors		49,000	Cash	8,000
Reserve		18,500	Debtors	19,000
Capital A/cs:   X	82,000		Stock	42,000
Y	60,000		Building	2,07,000
Z	75,500	2,17,500	Patents	9,000
		2,85,000		2,85,000

Y retired on 1st April, 2022 on the following terms:
(a) Goodwill of the firm was valued at  ` 70,000 and was not to appear in the books.
(b) Bad Debts amounted to  ` 2,000 were to be written off.
(c) Patents were considered as valueless.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of X and Z after Y’s retirement.

 

Revaluation Account
Dr.						Cr.
Particulars		( `)	Particulars		( `)
Bad Debts		2,000	Loss transferred to:
Patents		9,000	X’s Capital A/c	4,400
			Y’s Capital A/c	4,400
			Z’s Capital A/c	2,200	11,000
		11,000			11,000

Partners’ Capital Accounts
Dr.								Cr.
Particulars		X	Y	Z	Particulars	X	Y	Z
Revaluation A/c (Loss)		4,400	4,400	2,200	Balance b/d	82,000	60,000	75,500
Y’s Capital A/c (Goodwill)		18,667	–	9,333	Reserve (Old Ratio)	7,400	7,400	3,700
Y’s Loan A/c		–	91,000	–	X’s Capital A/c  (Goodwill)	–	18,667	–
Balance c/d		66,333	–	67,667	Z’s Capital A/c (Goodwill)	–	9,333	–
		89,400	95,400	79,200		89,400	95,400	79,200

Balance Sheet as on March 31, 2022 (after Y’s Retirement)
Liabilities		( `)	Assets	( `)
Creditors		49,000	Cash	8,000
Y’s Loan		91,000	Debtors (19000-2000)	17,000
Capital A/cs:			Stock	42,000
X	66,333		Building	2,07,000
Z	67,667	1,34,000
		2,74,000		2,74,000

Working Notes:

WN 1 Calculation of Gaining Ratio

Old Ratio (X, Y and Z) = 2 : 2 : 1

Y retires from the firm.

∴Gaining Ratio = 2 : 1

WN 2 Adjustment of Goodwill

Goodwill of the firm = ` 70,000

Y’s Share of Goodwill = 70,000×2/5=28,000

This share of goodwill is to be distributed between X and Z in their gaining ratio (i.e. 2 : 1).

X‘s share= 28,000×2/3=18,667

Z‘s share= 28,000×1/3=9,333

	Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2022 April 1	X’s Capital A/c	Dr.		18,667
	Z’s Capital A/c	Dr.		9,333
	To Y’s Capital A/c				28,000
	(Adjustment of goodwill made on Y’s retirement)

Kanika, Disha and Kabir were partners sharing profits in the ratio of 2 : 1 : 1. On 31st March, 2016, their Balance Sheet was as under:

Liabilities		( `)	Assets	( `)
Trade creditors		53,000	Bank	60,000
Employees’ Provident Fund		47,000	Debtors	60,000
Kanika’s Capital		2,00,000	Stock	1,00,000
Disha’s Capital		1,00,000	Fixed assets	2,40,000
Kabir’s Capital		80,000	Profit and Loss A/c	20,000
		4,80,000		4,80,000

Kanika retired on 1st April, 2016. For this purpose, the following adjustments were agreed upon:
(a) Goodwill of the firm was valued at 2 years’ purchase of average profits of three completed years preceding the date of retirement. The profits for the year:
      2013-14 were  ` 1,00,000 and for 2014-15 were  ` 1,30,000.
(b) Fixed Assets were to be increased to  ` 3,00,000.
(c) Stock was to be valued at 120%.
(d) The amount payable to Kanika was transferred to her Loan Account.
 Prepare Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the reconstituted firm.  

(AI 2017 C)

 

Revaluation Account
Dr.	Cr.
Particulars			`	Particulars	`
Revaluation Profit				Fixed Assets	60,000
Kanika’s Capital		40,000		Stock	20,000
Disha’s Capital		20,000
Kabir’s Capital		20,000	80,000
			80,000		80,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Kanika	Disha	Kabir	Particulars		Kanika	Disha	Kabir
Profit & Loss A/c	10,000	5,000	5,000	Balance b/d		2,00,000	1,00,000	80,000
Kanika’s Capital A/c		35,000	35,000	Disha’s Capital A/c		35,000
Kanika’s Loan A/c	3,00,000			Kabir’s Capital A/c		35,000
Balance c/d		80,000	60,000	Revaluation		40,000	20,000	20,000
	3,10,000	1,20,000	1,00,000			3,10,000	1,20,000	1,00,000

Balance Sheet as on March 31, 2016
Liabilities		( `)	Assets	( `)
Employees’ Provident Fund		47,000	Bank	60,000
Trade Creditors		53,000	Sundry Debtors	60,000
Kanika’s Loan A/c		3,00,000	Stock	1,20,000
Capitals			Fixed Assets	3,00,000
Disha	80,000
Kabir	60,000	1,40,000
		5,40,000		5,40,000

Working Notes:
WN1: Calculation of Goodwill

Goodwill=Average Profits×Number of Years’ Purchase

Average Profits=Total ProfitsNumber of Years=1,00,000+1,30,000−20,000/3=2,10,000/3=` 70,000

Goodwill=70,000×2=` 1,40,000

Kanika’s share=1,40,000×2/4=70,000 (to be borne by gaining partners in gaining ratio)

Note: Since no information is given about the share of gain, it is assumed that the old partners are gaining in their old profit sharing ratio.

N, S and G were partners in a firm sharing profits and losses in the ratio of 2 : 3 : 5. On 31st March, 2016 their Balance Sheet was as under:

Liabilities		( `)	Assets		( `)
Creditors		1,65,000	Cash		1,20,000
General Reserve		90,000	Debtors	1,35,000
Capitals:			Less: Provision	15,000	1,20,000
N	2,25,000		Stock		1,50,000
S	3,75,000		Machinery		4,50,000
G	4,50,000	10,50,000	Patents		90,000
			Building		3,00,000
			Profit and Loss Account		75,000
		13,05,000			13,05,000

G retired on the above date and it was agreed that:
(a) Debtors of  ` 6,000 will be written off as bad debts and a provision of 5% on debtors for bad and doubtful debts will be maintained.
(b) Patents will be completely written off and stock, machinery and building will be depreciated by 5%. 
(c) An unrecorded creditor of  ` 30,000 will be taken into account. 
(d) N and S will share the future profits in 2 : 3 ratio.
(e) Goodwill of the firm on G’s retirement was valued at  ` 90,000.
Pass necessary Journal entries for the above transactions in the books of the firm on G’s retirement. (Foreign 2017)

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
	General Reserve A/c	Dr.		90,000
	To N’s Capital A/c				18,000
	To S’s Capital A/c				27,000
	To G’s Capital A/c				45,000
	(Balance in reserve distributed among all partners in old ratio)
	N’s Capital A/c	Dr.		15,000
	S’s Capital A/c	Dr.		22,500
	G’s Capital A/c	Dr.		37,500
	To Profit & Loss A/c				75,000
	(Debit balance P&L A/c written off among all partners in old ratio)
	N’s Capital A/c	Dr.		18,000
	S’s Capital A/c	Dr.		27,000
	To G’s Capital A/c				45,000
	(Goodwill adjusted in gaining ratio)
	Revaluation A/c	Dr.		1,65,000
	To Patent A/c				90,000
	To Stock A/c				7,500
	To Machinery  A/c				22,500
	To Building A/c				15,000
	To Creditors A/c				30,000
	(Decrease in assets and increase in liabilities debited to Revaluation A/c)
	Provision for Doubtful Debts A/c	Dr.		2,550
	To Revaluation A/c				2,550
	(Excess provision written back)
	N’s Capital A/c	Dr.		32,490
	S’s Capital A/c	Dr.		48,735
	G’s Capital A/c	Dr.		81,225
	To Revaluation A/c				1,62,450
	(Loss on revaluation debited to partners’ capital accounts in old ratio)
	G’s Capital A/c	Dr.		4,21,275
	To G’s Loan A/c				4,21,275
	(Amount due to G transferred to his loan A/c)

Working Notes:

WN1: Calculation of G’s Share of Goodwill

G’s share=Firm’s Goodwill×G’s Profit Share

G’s share=90,000×5/10=45,000 (to be borne by gaining partners in gaining ratio)

WN2: Calculation of Gaining Ratio
Gaining Ratio = New Ratio − Old Ratio
N’s gain=2/5−2/10=2/10

S’s gain=3/5−3/10=3/10Gaining Ratio=2:3

N’s share=45,000×2/5=18,000

S’s share=45,000×3/5=27,000

WN2: Calculation of Excess/Deficit Provision for Doubtful Debts

Required Provision @5%=1,35,000−6,000×5100=6,450

Existing Provision after writing bad-debts= 9,000

Excess Provision to be written back=2,550 9,000−6,450

WN3: Calculation of G’s Loan Balance
Amount due to G = Opening Capital + Credits – Debits

= 4,50,000 + (45,000 + 45,000) – (37,500 + 81,225)
= ` 4,21,275

 

Liabilities		`	Assets		`
Capital A/cs:			Building		5,00,000
Ashok	3,00,000		Plant and Machinery		4,00,000
Bhaskar	4,00,000		Furniture		1,00,000
Chaman	2,50,000	9,50,000	Stock		2,50,000
General Reserve		2,20,000	Debtors	1,80,000
Sundry Creditors		2,50,000	Less: Provision for Doubtful Debts	5,000	1,75,000
Loan Payable		1,50,000	Cash in Hand		85,000
			Advertisement Suspense Account		60,000
		15,70,000			15,70,000

Chaman retired on 1st April, 2022 subject to the following adjustments:

(a) Goodwill of the firm be valued at `2,40,000. Chaman’s share of goodwill be adjusted into the Capital Accounts of Ashok and Bhaskar who will share future profits in the ratio of 3:2.

(6) Plant and Machinery to be reduced by 10% and Furniture by 5%.

(c) Stock to be increased by 15% and Building by 10%.

(d) Provision for Doubtful Debts to be raised to `20,000.

Prepare Revaluation Account, Capital Account of Chaman and the Balance Sheet of the firm after Chaman’s retirement.

 

Profit and loss adjustment a/c
Dr.			Cr.
Particulars	`	Particulars	`
To  Plan and machinery To Furniture To Prov. for doubtful debts To capital a/c (profit transferred to) Ashok =27,500×2/6= 9,167 Bhaskar=27,500×3/6=13,750 Chaman =27,500×1/6=4,583	40,000 5,000 15,000         27,500	By stock By factory building	37,500 50,000
	87,500		87,500

1

Partners’ Capital Account
Dr.					Cr.
Particulars	Ashok	Bhaskar	Chaman	Particulars		Ashok	Bhaskar	Chaman
B’s Capital A/c	24,000			Balance b/d		3,00,000	4,00,000	2,50,000
C’s Capital A/c	40,000			A’s Capital A/c			24,000	40,000
Advertisement sus. a/c C’s loan a/c	20,000	30,000	10,000   3,21,250	Profit and loss adjustment a/c General reserve a/c		9,167   73,333	13,750   1,10,000	4,583   36,667
Balance c/d	2,98,500	5,17,750
	3,82,500	5,47,750	3,31,250			3,82,500	5,47,750	3,31,250

	Balance Sheet
	as on April 01, 2022 (after C’s Retirement)
	Liabilities			Amount ( `)	Assets				Amount ( `)
	Sundry Creditors			2,50,000	Factory building				5,50,000
	Loan Payable			1,50,000	Plant and machinery				3,60,000
	C’s Loan			3,21,250	Furniture				95,000
					Stock				2,87,500
	Capital A/c				Debtors     1,80,000
	Ashok		2,98,500		Less; prov.           20,000				1,60,000
	Bhaskar		5,17,750	3,54,000	Cash				85,000
				15,37,500					15,37,500
Journal
Date		Particulars					L.F.	Debit  ( `)		Credit  ( `)
		Ashok’s Capital A/c				Dr.		64,000
		To Bhaskar’s Capital A/c								24,000
		To Chaman’s Capital A/c								40,000
		(Being goodwill adjusted for compensating bhaskar, Chaman)
		Profit and loss adjustment a/c				Dr.		60,000
		To Plant and machinery A/c								40,000
		To  Furniture A/c								5,000
		To Prov. for doubtful debts  A/c								15,000
		(Decrease in assets and increase in liabilities debited to Revaluation A/c)
		N’s Capital A/c				Dr.		18,000
		S’s Capital A/c				Dr.		27,000
		To G’s Capital A/c								45,000
		(Goodwill adjusted in gaining ratio)
		Stock A/c				Dr.		37,500
		Factory building  A/c				Dr.		50,000
		To P&L adjustment  A/c								87,500
		(Decrease in assets debited to Revaluation A/c)

Working notes;

Old ratio of Ashok : Bhaskar : chaman=1/3:1/2:1/6

=1/3×2/2:1/2×3/3=1/6

=2/6:3/6:1/6

=2:3:1

New ratio of Ashok and Bhaskar= 3:2

Gaining ratio= New ratio – old ratio

Ashok = 3/5-2/6=18-10/30=8/30

Bhaskar= 2/5-3/6=12-15/30= -3/30

Goodwill of firm= 2,40,000

Bhaskar will get =2,40,000×3/30=24,000

Chaman’s share of goodwill = 2,40,000×1/6=40,000

Ashok will give Bhaskar and  chaman 24,000, 40,000 respectively.

BALANCE SHEET OF CHINTAN, AYUSH AND SUDHA as at 31st March, 2019
Liabilities		`	Assets		`
Capitals:			Plant and Machinery		90,000
Chintan	90,000		Furniture		60,000
Ayush	60,000		Stock		30,000
Sudha	40,000	1,90,000	Debtors	60,000
Provident Fund		30,000	Less: Provision for Doubtful Debts	5,000	55,000
General Reserve		20,000	Cash at Bank		15,000
Creditors		10,000
		2,50,000			2,50,000

Chintan retired on the above date and it was agreed that:

(a) Debtors of `5,000 were to be written off as bad debts and a provision of 5% on debtors for bad and doubtful debts was to be created.

(b) Goodwill of the firm on Chintan’s retirement was valued at `1,00,000 and Chintan’s share of the same will be adjusted by debiting the Capital Accounts of Ayush and Sudha.

(c) Stock was revalued at `36,000.

(d) Furniture was undervalued by `9,000.

(e) Liability for Workmen’s Compensation of `2,000 was to be created.

(f) Chintan was to be paid `20,000 by cheque and the balance was to be transferred to his loan account.

Pass the necessary Journal entries in the books of the firm on Chintan’s retirement.

(CBSE 2020)

Date	Particulars		L.F.	Dr. (`)	Cr. (`)
	Stock A/c Furniture A/c Provision A/c   To Revolution  A/c (Being Decrease in the Value of Liabilities and increase in the value of Assets)	Dr. Dr. Dr.		6,000 9,000 2,250	17,250
	Revaluation A/c   To Bad debts A/c   To Liabilities for Worker compensation A/c (Being Decrease in the Value of Assets and increase in the value of Liabilities)	Dr.		7,000	5,000 2,000
	Revaluation A/c   To Chintan’s Capital A/c   To Ayush’s Capital A/c   To Sudha’s Capital A/c (being gain of revaluation Account transferred to Capital accounts)	Dr.		10,250	5,125 3,075 2,050
	General Reserve A/c   To Chintan’s Capital A/c   To Ayush’s Capital A/c   To Sudha’s Capital A/c (being gain of General Reserves transferred to Capital accounts)	Dr.		20,000	10,000 6,000 4,000
	Ayush’s Capital A/c Sudha’s Capital A/c   To Chintan’s Capital A/c (Being Retiring Partner compensated)	Dr. Dr.		30,000 20,000	50,000
	Chintan’s Capital A/c   To Bank A/c (Being Chintan was paid `20,000 through cheque)	Dr.		20,000	20,000
	Chintan’s Capital A/c   To  Chintan’s  Loan A/c (Being balance of Capital transferred to His loan Account)	Dr.		1,35,125	1,35,125