12th | Retirement of a Partner | Question No.  46 To 50 | Ts Grewal Solution 2022-2023

Amit, Balan and Chander were partners in a firm sharing profits in the proportion of 1/2, 1/3 and 1/6 respectively. Chander retired on 1st April, 2014. The Balance Sheet of the firm on the date of Chander's retirement was as follows:
 

Liabilities		( `)	Assets		( `)
Sundry Creditors		12,600	Bank		4,100
Provident Fund		3,000	Debtors	30,000
General Reserve		9,000	Less: Provision	1,000	29,000
Capital A/cs:
Amit	40,000		Stock		25,000
Balan	36,500		Investments		10,000
Chander	20,000	96,500	Patents		5,000
			Machinery		48,000
		1,21,100			1,21,100

 
It was agreed that:
(i)  Goodwill will  be valued at  ` 27,000.
(ii) Depreciation of 10% was to be provided on Machinery.
(iii) Patents were to be reduced by 20%. 
(iv) Liability on account of Provident Fund was estimated at  ` 2,400.
(v) Chander took over Investments for  ` 15,800.
(vi) Amit and Balan decided to adjust their capitals in proportion of their profit-sharing ratio by opening Current Accounts.
Prepare Revaluation Account and Partners' Capital Accounts on Chander's retirement. 

 

Revaluation Account
Dr.						Cr.
Particulars			`	Particulars	`
Machinery			4,800	Investments A/c	5,800
Patents			1,000	Provident Fund A/c	600
Profit transferred to:
Amit’s Capital A/c		300
Balan’s Capital A/c		200
Chander’s Capital A/c		100	600
			6,400		6,400

 

Partners’ Capital Account
Dr.				Cr.
Particulars	Amit	Balan	Chander	Particulars	Amit	Balan	Chander
Investments A/c			15,800	Balance b/d	40,000	36,500	20,000
Chander’s Capital A/c	2,700	1,800		Revaluation A/c (Profit)	300	200	100
Loan A/c			10,300	General Reserve	4,500	3,000	1,500
Current A/c		5,900		Amit’s Capital A/c			2,700
Balance c/d	48,000	32,000		Balan’s Capital A/c			1,800
				Current A/c	5,900
	50,700	39,700	26,100		50,700	39,700	26,100

 

Working Notes:

WN1: Adjustment of Goodwill

Chander’s share of Goodwill =27,000 ×1/6=4,500

Amit wil pay=4,500×3/5=2,700

Balan wil pay=4,500×2/5=1,800

 

WN2 Adjustment of Capital
Adjusted Old Capital of Amit=44,800 (40,000+4,500+300)-2,700=` 42,100

Adjusted Old Capital of Balan=39,700 (36,500+3,000+200)-1,800=` 37,900

Total Adjusted Capital=42,100+37,900=` 80,000

New Profit Sharing Ratio=3:2

Amit's New Capital=80,000×3/5=` 48,000

Balan's New Capital=80,000×2/5=` 32,000

Note: Since, here no information is given regarding the share acquired by Amit and Balan, therefore, their gaining ratio is same as their new profit sharing ratio i.e. 3 : 2.

  

N, S and B are partners in a firm sharing profits and losses in the proportion of 1/2 : 1/6 : 1/3 respectively. The Balance Sheet of the firm as at On 31st March, 2017,was as follow:
 

BALANCE SHEET OF N,S AND B as at 31st march, 2017
Liabilities		( `)	Assets		( `)
Bills Payable		12,000	Freehold Premises		40,000
Sundry Creditors		18,000	Machinery		30,000
General Reserve		12,000	Furniture		12,000
Capital A/cs:			Stock		22,000
N	30,000		Sundry Debtors	20,000
S	30,000		Less: Provision for Doubtful Debts	1,000	19,000
B	28,000	88,000	Cash		7,000
		1,30,000			1,30,000

 
B retired from the business on the above date and the partners agree to the following:
(a) Freehold Premises and Stock are to be appreciated by 20% and 15% respectively.
(b) Machinery and Furniture are to be reduced by 10% and 7% respectively.
(c) Provision for Doubtful Debts is to be increased to ` 1,500.
(d) Goodwill of the firm is valued at ` 21,000 on B's retirement.
(e) Continuing partners to adjust their capitals in their new profit-sharing ratio after retirement of B. Surplus/deficit, if any, in their Capital Accounts will be adjusted through Current Accounts.
Prepare necessary Ledger Accounts and draw the Balance Sheet of the reconstituted firm.

 

Revaluation Account
Dr.					Cr.
Particulars			( `)	Particulars	( `)
Machinery (30,000 × 10%) Furniture (12,000 × 7%)			3,000 840	Freehold Premises (40,000 × 20%)	8,000
Provision for Doubtful Debts			1,500	Stock (22,000 × 15%)	3,300
Profit transferred to:
N’s Capital A/c		2,980
S’s Capital A/c		993
B’s Capital A/c		1,987	6,960
			11,300		11,300

 

Partner’s Capital Accounts
Dr.							Cr.
Particulars	N	S	B	Particulars	N	S	B
B’s Capital A/c	5,250	1,750	-	Balance b/d	30,000	30,000	28,000
B’s Loan A/c	-	-	40,987	General Reserve	6,000	2,000	4,000
Balance c/d	33,730	31,243	40,987	N’s Capital A/c (Goodwill)	-	-	5,250
				B’s Capital A/c (Goodwill)	-	-	1,750
				Revaluation A/c (Profit)	2,980	993	1,987
	38,980	32,993	40,987		38,980	32,993	40,987
Y’s Current A/c	-	7,500	-	Balance b/d	33,730	31,243	-
Balance c/d	48,730	16,243	-	X’s Current A/c	15,000	-	-
	48,730	31,243	-		48,730	31,243	-

 

Balance Sheet as on 1st April, 2017
Liabilities		( `)	Assets		( `)
Bills Payable		12,000	Freehold Premises (40,000 + 8,000)		48,000
Sundry Creditors		18,000	Machinery (30,000 – 3,000)		27,000
B’s Loan		40,987	Furniture (12,000 – 840)		11,160
Capital A/cs:			Stock (22,000 + 3,300)		25,300
N	48,730		Sundry Debtors	20,000
S	16,243	64,973	Less: Provision for Doubtful Debts	(2,500)	18,500
S’s Current A/c		15,000	Cash		7,000
			N’s Current A/c		15,000
		1,50,960			1,50,960

Working Notes: 

WN 1 Calculation of Profit Sharing Ratio
Old Ratio (N, S and B) = 3 : 1 : 2
B retires from the firm.
∴ New Ratio (N and S) = 3 : 1 and
Gaining Ratio = 3 : 1

WN 2 Adjustment of Goodwill
Goodwill of the firm = ` 21,000
B’s Share of Goodwill = = 21,000×2/6=7,000

 

This share of goodwill is to be distributed between N and S in their gaining ratio (i.e. 3 : 1).
N‘s share= 7,000×3/4=5,250

S‘s share= 7,000×1/4=1,750

 

Condition for goodwill treatment; gaining partner to retiring partner

N’s capital a/c	Dr.	5,250	-
S’s Capital a/c	Dr.	1,750	-
To B’s Capital a/c		-	7,000

 

WN 3 Adjustment of Partners’ Capital after B’s Retirement
Combined Capital of N and S after all adjustments = 33,730 + 31243 = `. 64,973

New Ratio = 3 : 1

N‘s new capital = 64,973×3/4=48,730

S‘s new capital = 64,973×1/4=16,243

 

BALANCE SHEET as at 31st March, 2015
Liabilities		`	Assets	`
Trade Creditors		1,60,000	Land and Building	10,00,000
Bank Overdraft		44,000	Machinery	5,00,000
Long-term Debts		4,00,000	Furniture	7,00,000
Employees' Provident Fund		76,000	Investments	2,00,000
Capitals:			Closing Stock	8,00,000
Leena	12,50,000
Madan	8,00,000		Sundry Debtors	4,00,000
Naresh	10,50,000	31,00,000	Bank	80,000
			Deferred Advertisement Expenditure	1,00,000
		37,80,000		37,80,000

On 31st March, 2015, Madan retired from the firm and the remaining partners decided to carry on the

business. It was decided to revalue assets and liabilities as under:

(i) Land and Building be appreciated by `2,40,000 and Machinery be depreciated by 10%.

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

(iii) An old customer Mohit whose account was written off as bad debt had promised to pay `7,000 in settlement of his full debt of `10,000.

(iv) Provision for Doubtful Debts was to be made at 5% on debtors.

(v) Closing Stock will be valued at market price which is `1,00,000 less than the book value.

(vi) Goodwill of the firm be valued at `5,60,000 and Madan's share of goodwill be adjusted in the accounts of Leena and Naresh. Leena and Naresh decided to share future profits and losses in the ratio of 3:2.

(vii) The total capital of the new firm will be `32,00,000 which will be in the proportion of the profit sharing ratio of Leena and Naresh.

(vii) Amount due to Madan was settled by accepting a Bill of Exchange in his favour payable after 4 months.

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

(AI 2016 C)

Revaluation Account
Dr.					Cr.
Particulars			( `)	Particulars	( `)
Machinery Provision for D.D. Capital – profit transferred to; Leena = 70,000×2/7=20,000 Madan = 70,000×2/7=20,000 Naresh = 70,000×3/7=30,000			50,000 1,00,000       70,000	Land and building	2,40,000
			2,40,000		2,40,000

 

Partner’s Capital Accounts
Dr.							Cr.
Particulars	Leena	Madan	Naresh	Particulars	Leena	Madan	Naresh
To Madan’s capital a/c To Naresh’s capital a/c To Def. Adv. exp. A/c	1,60,000 16,000 28,571	28,571	42,858	By Balance b/d By Leena’s capital a/c By Revaluation a/c	12,50,000   20,000	8,00,000 160,000 20,000	10,50,000 16,000 30,000
To Investment a/c		1,00,000
To bills payables a/c		8,51,429
To Balance C/d	10,65,429		10,53,142
	12,70,000	9,80,000	10,96,000		12,70,000	9,80,000	10,96,000
To Balance C/d	19,20,000		12,80,000	By Balance b/d By Cash a/c	10,65,429 8,54,571		10,53,142 2,26,858
	19,20,000		12,80,000		19,20,000		12,80,000

 

Balance Sheet as on 1st April, 2015
Liabilities		( `)	Assets		( `)
Trade creditors Bank overdraft Long-term Debts Employees provident fund		160,000 44,000 4,00,000 76,000	Land and building Machinery Furniture Investment Closing Stock		12,40,000 4,50,000 7,00,000 1,00,000 7,00,000
Capital Leena = 1920,000 Naresh= 12,80,000		32,00,000	Debtors                                  4,00,000 Less; prov. For D.D.                20,000 Cash (80,000+8,54,571+2,26,858)		3,80,000 11,61,429
Bills payables		8,51,429
		47,31,429			47,31,429

Working Notes: 

WN 1 Calculation of Profit Sharing Ratio

Old Ratio (Leena , Madan and Naresh) = 2 : 2 : 3
New Ratio (Leena and Naresh) = 3 : 2 and

Madan retires from the firm.

Gaining ratio= new ratio- old ratio

Leena’s = 3/5-2/7=21-10/35=11/35 (gain)
Naresh’s =2/5- 3/7=14-15/35= -1/35 (Sacrifice)

WN 2 Adjustment of Goodwill

Goodwill of the firm = ` 5,60,000

Madan will be compensated =5,60,000×2/7=1,60,000

Naresh will be compensated =5,60,000×1/35=16,000

Leena will compensate =5,60,000×11/35=1,76,000

 

Condition for goodwill treatment; gaining partner to retiring partner

Leena’s capital a/c            Dr.                176,000

   To Madan’s Capital a/c                                   1,60,000

   To Naresh’s Capital a/c                                      16,000

WN 3 Adjustment of Partners’ Capital after Madan’s Retirement

leena’s capital= 32,00,000×3/5=19,20,000

Naresh’s capital= 32,00,000×2/5=12,80,000

 

Following is the Balance Sheet of Kusum, Sneh and Usha as on 31st March, 2022, who have agreed to share profits and losses in proportion of their capitals:

Liabilities		`	Assets		`
Capital A/cs:			Land and Building		4,00,000
Kusum	4,00,000		Machinery		6,00,000
Sneh	6,00,000		Closing Stock		2,00,000
Usha	4,00,000	14,00,000	Sundry Debtors	2,20,000
Employees' Provident Fund		70,000	Less: Provision for Doubtful Debts	20,000
Workmen Compensation Reserve		30,000	Cash at Bank		2,00,000
Sundry Creditors		1,00,000			2,00,000
		16,00,000			16,00,000

On 1st April, 2022, Kusum retired from the firm and the remaining partners decided to carry on the business. It was agreed to revalue the assets and reassess the liabilities on that date, on the following basis:
(a) Land and Building be appreciated by 30%.
(b) Machinery be depreciated by 30%.
(c) There were Bad Debts of  ` 35,000.
(d) The claim against Workmen Compensation Reserve was estimated at  ` 15,000.
(e) Goodwill of the firm was valued at  ` 2,80,000 and Kusum's share of goodwill was adjusted against the Capital Accounts of the continuing partners Sneh and Usha who have decided to share future profits in the ratio of 3 : 4 respectively.
(f) Capital of the new firm in total will be the same as before the retirement of Kusum and will be in the new profit-sharing ratio of the continuing partners.
(g) Amount due to Kusum be settled by paying  ` 1,00,000 in cash and balance by transferring to her Loan Account which will be paid later on.
Prepare Revaluation Account, Capital Accounts of Partners and Balance Sheet of the new firm after Kusum's retirement.

 

Revaluation Account
Dr.		Cr.
Particulars	( `)	Particulars		( `)
Machinery A/c	1,80,000	Land and Building A/c		1,20,000
Bad Debts A/c (35,000 – 20,000)	15,000	Loss on Revaluation transferred to:
		Kusum	21,429
		Sneh	32,142
		Usha	21,429	75,000
	1,95,000			1,95,000

 

Partners’ Capital Account
Dr.				Cr.
Particulars	Kusum	Sneh	Usha	Particulars	Kusum	Sneh	Usha
Revaluation A/c (Loss)	21,429	32,142	21,429	Balance b/d	4,00,000	6,00,000	4,00,000
Usha’s Capital A/c	–	–	80,000	Workmen Compensation Fund	4,286	6,428	4,286
Bank A/c	1,00,000	–	–	Usha’s Capital A/c	80,000	–	–
Kusum’s Loan A/c	3,62,857	–	–
Balance c/d	–	5,74,286	3,02,857
	4,84,286	6,06,428	4,04,286		4,84,286	6,06,428	4,04,286
Balance c/d	–	6,00,000	8,00,000	Balance b/d	–	5,74,286	3,02,857
				Bank A/c (WN3)	–	25,714	4,97,143
	–	6,00,000	8,00,000		–	6,00,000	8,00,000

 

Balance Sheet as at March 31, 2022
Liabilities		( `)	Assets	( `)
Creditors		1,00,000	Land & Building	5,20,000
Employee’s Provident Fund		70,000	Machinery (6,00,000 – 1,80,000)	4,20,000
Workmen’s Compensation Claim		15,000	Stock	2,00,000
Kusum’s Loan		3,62,857	Sundry Debtors (2,20,000 – 35,000)	1,85,000
Capital A/c :			Bank	6,22,857
Sneh	6,00,000
Usha	8,00,000	14,00,000
		19,47,857		19,47,857

 

Working Notes

 

WN 1 Calculation of Gaining Ratio 

Old Ratio (Kusum, Sneh and Usha) = 2:3:2

New Ratio (Sneh and Usha) = 3:4

Gaining Ratio = New Ratio – Old Ratio

Sneh‘s share= 3/7-3/7=nil

Usha‘s share= 4/7-2/7=2/7

WN2 Adjustment of Goodwill

Total Goodwill of the Firm = 2,80,000

Kusum’s Share of Goodwill = 2,80,000×2/7=80,000

It is to be adjusted by the Gaining partners i.e. only by Usha

 

WN3 Adjustment of Capital

Tatal capital of the firm before kusum’s retirement =14,00,000

New Ratio (Sneh and Usha) = 3:4

Sneha‘s new captial= 14,00,000×3/7=6,00,000

Usha‘s new capital= 14,00,000×4/7=8,00,000

 

Particulars	Sneh	Usha
New Capital Balance	6,00,000	8,00,000
Adjusted Old Capital Balance	5,74,286	3,02,857
Cash brought in by the Partner	25,714	4,97,143

 

WN4

Cash at Bank A/c
Dr.		Cr.
Particulars	( `)	Particulars	( `)
Balance b/d	2,00,000	Kusum’s Capital A/c	1,00,000
Sneh’s Capital A/c	25,714	Balance c/d	6,22,857
Usha’s Capital A/c	4,97,143
	7,22,857		7,22,857

 

Lal, Bal and Pal are partners sharing profits in the ratio of 5 : 3 : 7. Lal retired from the firm. Bal and Pal decided to share future profits in the ratio of 2 : 3. The adjusted Capital Accounts of Bal and Pal showed balance of ` 49,500 and ` 1,05,750 respectively. The total amount to be paid to X is  ` 1,35,750. This amount is to be paid by Bal and Pal in a manner that their capitals become proportionate to their new profit-sharing ratio. Calculate the amount to be brought in or to be paid to partners. 

 

New Capital = 49,500 + 1,05,750 + 1,35,750 = ` 2,91,000

Bal's New Capital=2,91,000×2/5=1,16,400

Pal's New Capital=2,91,000×3/5=1,74,600

Bal brings in ` 66,900 (1,16,400 – 49,500)

Pal brings in ` 68,850 (1,74,600 – 1,05,750)