12th | Retirement of a Partner | Question No.  41 To 45 | Ts Grewal Solution 2022-2023

Date	Particulars		L.F.	Dr. `	Cr. `
	B’s capital a/c	Dr.		4,050
	To Revaluation a/c				4,050
	(Being unrecorded furniture taken over by partner B)
	Revaluation a/c	Dr.		9,000
	To unrecorded liabilities a/c				9,000
	(Being remaining unrecorded Liabilities  paid by partner)
	B’s capital a/c	Dr.		1,650
	To Revaluation a/c				1,650
	(Being loss on revaluation debited to B’s capital)
	B’s capital a/c	Dr.		1,74,300
	To Bank a/c				1,74,300
	(Being final amount paid to B’s capital on his retirement by bank draft)
	Total			1,89,000	1,89,000

 

X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st April, 2009, Y retires from the firm. X and Z agree that the capital of the new firm shall be fixed at  ` 2,10,000 in the profit-sharing ratio. The Capital Accounts of X and Z after all adjustments on the date of retirement showed balance of  ` 1,45,000 and  ` 63,000 respectively. State the amount of actual cash to be brought in or to be paid to the partners.

 

Answer:

Old Ratio (X, Y, and Z) = 3 : 2 : 1

Y retires from the firm.  

∴New Ratio (X and Z) = 3 : 1 

Total capital of the New Firm = ` 2,10,000

X‘s new capital = 2,10,000×3/4=1,57,500

Z‘s new capital = 2,10,000×1/4=52,500

 

Ascertainment of Actual Cash to be brought in or to be paid to the partners

 

Particulars	X	Z
New Capital	1,57,500	52,500
Existing Capital	1,45,000	63,000
Cash Paid/Brought in	(12,500) (Brought in)	10,500 (Paid)

 

BALANCE SHEET OF LISA, MONIKA and NISHA as at 31st March, 2019
Liabilities		`	Assets	`
Trade Creditors		1,60,000	Land and Building	10,00,000
Bills Payable		2,44,000	Machinery	12,00,000
Employees' Provident Fund		76,000	Stock	10,00,000
Capitals:			Sundry Debtors	4,00,000
Lisa 14,00,000	14,00,000		Bank	40,000
Monika	3,60,000	31,60,000
Nisha
		36,40,000		36,40,000

On 31st March, 2019, Monika retired from the firm and the remaining partners decided to carry on the business. It was agreed that:

(I) Land and building be appreciated by `2,40,000 and machinery be depreciated by 10%

(ii) 50% of the stock was taken over by the retiring partner at book value.

(iii) Provision for doubtful debts was to be made at 5% on debtors

(iv) Goodwill of the firm be valued at `3,00,000 and Monika's share of goodwill be adjusted in the accounts of Lisa and Nisha.

(v) The total capital of the new firm be fixed at `27,00,000 which will be in the proportion of the new profit Sharing ratio of Lisa and Nisha. For this purpose, Current Accounts of the partners were to be opened.

Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm on Monika's retirement. (CBSE 2019)

 

Answer:

Revaluation Account
Dr.						Cr.
Particulars		( `)	Particulars		( `)
To provision for doubtful debts		20,000	By land and building		2,40,000
To Machinery a/c		1,20,000
To capital a/c Lisa’s =1,00,000×2/5=40,000 Monika’s =1,00,000×2/5=40,000 Nisha’s =1,00,000×1/5=20,000 (In old ratio)		1,00,000
		2,40,000			2,40,000

 

Partners’ Capital Accounts
Dr.										Cr.
Particulars		Lisa	Monika	Nisha		Particulars			Lisa					Monika		Nisha
To Monika’s capital a/c To stock To Monika’s loan a/c To balance c/d		80,000     13,60,000	5,00,000 10,60,000	40,000     3,40,000		By Balance b/d By Lisa’s capital a/c By Nisha’s capital a/c By revaluation a/c			14,00,000     40,000					14,00,000 80,000 40,000 40,000		3,60,000     20,000
		14,40,000	15,60,000	3,80,000					14,40,000					15,60,000		3,80,000
To balance c/d		18,00,000		9,00,000		By Balance b/d By current a/c			13,60,000 4,40,000							3,40,000  5,60,000
		18,00,000		9,00,000					18,00,000							9,00,000

 

Balance Sheet as on April 01, 2019 after Monika’s retirement
Liabilities		( `)	Assets		( `)
Trade creditors Bills payables Employees provident fund Capital a/c Lisa= 18,00,000 Nisha= 9,00,000		1,60,000 2,44,000 76,000     27,00,000	Land and building Machinery Stock Sundry debtors     4,00,000 Less; Provision           20,000 for Doubtful debts Bank Lisa’s current a/c Nisha’s current a/c		12,40,000 10,80,000 5,00,000   3,80,000   40,000 4,40,000 5,60,000
Monika’s loan		10.,60,000
		42,40,000			42,40,000

Working notes;

WN -1

Calculation of gaining and sacrificing ratio

	Lisa		Monika		Nisha
Old ratio =	2	:	2	:	1
New ratio =	2		:		1

Gaining ratio = New ratio – Old ratio

Lisa’s gain = 2/3-2/5=10-6/15=4/15

Nisha’s gain = 1/3-1/5=5-3/15=2/15

Gaining ratio of Lisa and Nisha = 4:2=2:1

 

WN-2 Treatment of goodwill;

Firm’s goodwill =3,00,000

Monika will be compensated = 1,20,000×2/5=1,20,000

Lisa will compensate =1,20,000×2/3 = 80,000

Nisha will compensate =1,20,000×1/3 = 40,000

Condition for goodwill remaining partner to retiring partner

 

WN -3

Lisa’s capital = 27,00,000×2/3=18,00,000

Nisha’s capital = 27,00,000×1/3=9,00,000

 

Liabilities		`	Assets		`
Creditors		10,800	Cash at Bank		13,000
Bills Payable		5,000	Debtors	10,000
Capital A/cs:			Less: Provision for Doubtful Debts	200	9,800
A	45,000		Stock		9,000
B	15,000		Machinery		24,000
C	30,000	90,000	Freehold Premises		50,000
		1,05,800			1,05,800

B retired on 1st April, 2022 and following adjustments were agreed to determine the amount payable to B:

(a) Out of the amount of insurance premium debited to Profit and Loss Account, `1,000 be carried forward as prepaid Insurance.

(b) Freehold Premises be appreciated by 10%.

(c) Provision for Doubtful Debts is brought up to 5% on Debtors.

(d) Machinery be reduced by 5%.

(e) Liability for Workmen Compensation to the extent of `1,500 would be created.

(f) Goodwill of the firm be fixed at `18,000 and B's share of the same be adjusted into the Capital Accounts of A and C, who will share future profits in the ratio of 3/4th and 1/4th.

(g)Total capital of the firm as newly constituted be fixed at `60,000 between A and C in the proportion of 3/4th and 1/4th after passing entries in their accounts for adjustments, i.e., actual cash to be paid or to be brought in by continuing partners as the case may be.

(h) B be paid `5,000 in cash and the balance be transferred to his Loan Account.

Prepare Capital Accounts of Partners and the Balance Sheet of the firm of A and C.

 

Answer:

Revaluation a/c Dr.                                                                                                                                                Cr.
Particulars	`	Particulars	`
To provision for doubtful debts	300	By unexpired insurance	1,000
To Machinery	1,200	By freehold premises	5,000
To workers’ compensation liabilities	1,500
To capital a/c -profit transferred to :
A=3,000×3/6=1,500
B=3,000×2/6=1,000
C=3,000×1/6=500	3,000
	6,000		6,000

 

 

Partners’ Capital Accounts
Dr.									Cr.
Particulars		A	B	C	Particulars	A	B	C
To B’s capital a/c		4,500		1,500	By Balance b/d	45,000	30,000	15,000
To cash a/c			5,000		By A’s capital		4,500
To B’s loan a/c			32,000		By C’s Capital		1,500
To balance c/d		42,000		14,000	By Revaluation a/c	1,500	1,000	500
		46,500	37,000	15,500		46,500	37,000	15,500
To balance c/d		45,000		15,000	By Balance b/d	42,000		14,000
					By Bank a/c	3,000		1,000
		45,000		15,000		45,000		15,000

 

 

Balance Sheet as on April 01, 2022 after Z’s retirement
Liabilities		( `)	Assets		( `)
Creditors		10,800	Cash at bank		12,000
Bills payables		5,000	Debtors                      10,000
Workers’ Compensation liabilities		1,5000	Less; prov. For D.D.      500		9,500
Capital a/c
A	45,000
C	15,000	60,000	Stock		9,000
B’s loan		32,000	Unexpired insurance		1,000
			Machinery		22,800
			Freehold premises		55,000
		1,,09,300			1,,09,300

Working notes;

WN-1 Calculation of new and gaining ratio

Old ratio of A,B and C =45,0000:30,000:15,000=3:2:1

New ratio of A and C= 3:1

Gaining ratio= New ratio- Old ratio

A’s gain = ¾- 3/6 =18-12/24=6/24

C’s gain =1/4-1/6=6-4/24=2/24

Gaining ratio of A:C = 6:2=3:1

WN-2 treatment of Goodwill

Goodwill of the firm= 18,000

B will be compensated for 18,000×2/6=6,000

A will compensate =6,000×3/4=4,500

C will compensate =6,000×3/4=1,500

Condition for goodwill treatment: Remaining partner to retiring partner

WN-3 Capital adjustment

A’s capital = 60,000×3/4=45,000

C’s capital = 60,000×1/4=15,000

WN-4

Closing bank balance= 13,000-5,000+3,000+1,000=12,000

 

31st March, 2018 was as follows:

Liabilities		`	Assets		`
Sundry Creditors		16,600	Cash		15,000
Workmen's Compensation Fund		9,000	Debtors	21,000
General Reserve		6,000	Less: Provision for Doubtful Debts	(1,400)	19,600
Capitals:			Stock		19,000
X Y Z	90,000 60,000 30,000	1,80,000	Machinery Building		58,000 1,00,000
		2,11,600			2,11,600

On the above date, Y retired owing to ill health. The following adjustments were agreed upon for calculation of amount due to Y:

(a) Provision for Doubtful Debts to be increased to 10% of Debtors.

(b) Goodwill of the firm be valued at 36,000 and be adjusted into the Capital Accounts of X and Z, who will share profits in future in the ratio of 3 :1.

(c)Included in the value of Sundry Creditors was `2,500 for an outstanding legal claim, which will not arise.

(d) X and Z also decided that the total capital of the new firm will be `1,20,000 in their profit-sharing ratio. Actual cash to be brought in or to be paid off as the case may be.

(e) Y to be paid `9,000 immediately and balance to be transferred to his Loan Account.

Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new firm after Y's retirement.

(CBSE Sample Paper 2019)

 

Revaluation Account
Dr.						Cr.
Particulars		( `)	Particulars		( `)
To provision for doubtful debts		700	By sundry creditors		2,500
To capital a/c – Profit transferred;  X=1800×3/6=900
y=1800×2/6=600
Z=1800×1/6=300		1,800
		2,500			2,500

  

Partners’ Capital Accounts
Dr.								Cr.
Particulars		X	Y	Z	Particulars	X	Y		Z
To Y’s capital a/c		9,000	-	3,000	By Balance b/c	90,000	60,000		30,000
To Cash a/c		-	9,000	-	By X’s Capital a/c	-	9,000		-
To Y’s loan a/c		-	68,600	-	By Z’s Capital a/c	-	3,000		-
To  Balance C/d		89,400	-	29,800	By Workers’ compensation fund	4,500	3,000		1,500
					By General reserve	3,000	2,000		1,000
					By Revaluation a/c	900	600		300
		98,400	77,600	32,800		98,400	77,600		32,800
To  Balance C/d		90,000	-	30,000	By Balance b/d	89,400	-		29,800
					By Cash a/c	600	-		200
		90,000	-	30,000		90,000	-		30,000

 

 

Balance Sheet as on April 01, 2018 after Z’s retirement
Liabilities		( `)	Assets		( `)
Sundry creditors		14,100	Cash a/c (15,000-9000+600+200)		6,800
Capital a/c			Debtors                            21,000 Less; Prov. For D.D.        2,100		18,900
X= 90,000 Z= 30,000		1,20,000	Stock Machinery		19,000 58,000
Y’s loan a/c		68,600	Buildings		1,00,000
		2,02,700			2,02,700

Working notes;

WN-1 Calculation of new and gaining ratio

Old ratio of X,Y and Z =90,0000:60,000:30,000=3:2:1

New ratio of X and Z= 3:1

Gaining ratio= New ratio- Old ratio

X’s gain = ¾- 3/6 =18-12/24=6/24

Z’s gain =1/4-1/6=6-4/24=2/24

Gaining ratio of A:C = 6:2=3:1

WN-2 treatment of Goodwill

Goodwill of the firm= 36,000

Y will be compensated for 36,000×2/6=12,000

X will compensate =12,000×3/4=9,000

Z will compensate =12,000×1/4=3,000

 

Condition for goodwill treatment: Remaining partner to retiring partner

X’s capital     a/c	Dr.	9,000
Z’s capital     a/c	Dr.	3,000
To Y’s capital a/c			12,000

WN-3 Capital adjustment

X’s capital = 1,20,000×3/4=90,000

Z’s capital = 1,20,000×1/4=30,000