Retirement 24-25

The Partnership Deed of Aman, Bharat and Chetan has a clause that any partner may retire from the firm on the following terms by giving six months' notice in writing. The retiring partner shall be paid:

(a) The amount standing to the credit of his Capital Account and Current Account.

(b) His share of profit to the date of retirement, calculated on the basis of the average profit of the three preceding completed years, if he retires in-between the year.

(c)His Share of Goodwill of the firm calculated on the basis of 1% times the average profit of the three preceding completed years.

(d) Assets shall be revalued and liabilities re-assessed. Retiring partner will get his share in the gain (profit and will bear loss, if any.

Chetan gave notice on 31st March, 2022 to retire with effect from 30th September, 2022. On that date, the balance of his capital was ` 1,60,000 and his Current Account (in debit)  ` 5,000. The profits for the three preceding completed years were: I- ` 45,000, II- ` 30,000 and III- ` 24,000.

Revaluation of assets and reassessment of liabilities resulted in neither gain (profit) nor loss.

What amount is due to Chetan in accordance with the partnership agreement?

CHETAN'S CURRENT ACCOUNT
Particulars	` (Dr.)	Particulars	` (Cr.)
To Balance bld	5,000	By Profit & Loss Suspense A/c	5,500
To Chetan's Capital A/c (Balancing Figure)	17,000	By Aman's Current A/c (Share of Goodwill)	8,250
		By Bharat's Current A/c (Share of Goodwill)	8,250
	22,000		22,000

Working Notes:

W.N. – 1 (Calculation of Share of Profit)

The profits for the three preceding completed years were: I- ` 45,000, II- ` 30,000 and III- ` 24,000.

 Average Profit= 45,000+30,000+24,000/3= 33,000

Share of Chetan’s Profit= 33,000×1×6/3×12=5,500

 

W.N. – 1 (Calculation of Share of Goodwill)

Average Profit= 45,000+30,000+24,000/3= 33,000

Firm’s Goodwill= 33,000×1.5=49,500

Chetan’s Share of Goodwill=49,500×1/3=16,500

 

Chetan will be compensated by Amar and Bharat in 1:1

Amar and Bharat = 16,500×1/2=8,250

 

Amit, Bunty and Charan are partners sharing profits and losses in the ratio of 2: 2:1. Charan retired on 30th June, 2024. The Balance Sheet of the firm on 31st March, 2024 was as follows:

Liabilities		`	Assets	`
Capital Accounts:			Building	10,00,000
Amit	6.00,000		Investments	1,25,000
Bunty	6,00,000		Stock	2,50,000
Charan	4,00,000	16,00,000	Debtors	4,00,000
employee’s' Compensation Reserve		1,00,000	Cash at Bank	2,00,000
General Reserve		3,00,000	Cash in Hand	1,25,000
Creditors		1,00,000
		21,00,000		21,00,000

It was agreed that amount payable to Charan will be determined by making following adjustments

(a) Building be valued at ` 12,00,000.

(b) Investment be valued at ` 1,00,000.

(c) Stock to be valued at ` 3,00,000.

(d) Goodwill of the firm be valued at 2 years' purchase of average profit of last 5 years.

(e) Charans share of profit up to the date of retirement be calculated on the basis of average profit of the preceding three years.

Profits of the preceding five years were as under:

Years	2018-19  (`)	2019-20   (`)	2020-21  (`)	2021-22   (`)	2022-23   (`)
Profit	2,00,000	2,35,000	3,00,000	2,75,000	3,25,000

Prepare: (i) Revaluation Account; (ii) Partners' Capital Accounts and (ii) Balance Sheet after Charan's retirement.

	Revaluation Account
Particulars			(`) Dr.	Particulars	(`) Cr.
Investment			25,000	Building	2,00,000
Gain transferred to:				Stock	50,000
Amit’s Capital A/c		90,000
Bunty’s Capital A/c		90,000
Charan ’s Capital A/c		45,000	2,25,000
			2,50,000		2,50,000

 

Dr.	Partners' Capital Accounts						Cr.
Particulars	Amit	Bunty	Charan	Particulars	Amit	Bunty	Charan
Charan ’s Capital A/c	53,400	53,400	-	Balance B/d	6,00,000	6,00,000	4,00,000
Charan ’s Loan A/c	-	-	6,46,800	Revaluation A/c	90,000	90,000	45,000
Balance  C/d	7,96,600	7,96,600	-	W.C.R. A/c	40,000	40,000	20,000
				G. R. A/c	1,20,000	1,20,000	60,000
				Amit’s Capital A/c	-	-	53,400
				Bunty’s Capital A/c	-	-	53,400
				P&L Suspense A/c			15,000
	8,50,000	8,50,000	6,46,800		8,50,000	8,50,000	6,46,800

 

Balance Sheet (after Charan's retirement)
Liabilities		`	Assets	`
Capital Accounts:			Building	12,00,000
Amit	7,96,600		Investments	1,00,000
Bunty	7,96,600	15,93,200	Stock	3,00,000
Charan ’s Loan		6,46,800	Debtors	4,00,000
Creditors		1,00,000	Cash at Bank	2,00,000
			Cash in Hand	1,25,000
			P&L Suspense A/c	15,000
		23,40,000		23,40,000

Working Notes:

W.N.- 1: Distribution of  employee’s' Compensation Reserve

A = 1,00,000×2/5=40,000

B = 1,00,000×2/5=40,000

C = 1,00,000×1/5=20,000

 

W.N.- 2: Distribution of General Reserve

A = 3,00,000×2/5 = 1,20,000

B = 3,00,000×2/5 = 1,20,000

C = 3,00,000×1/5 = 60,000

 

W.N.- 3: Valuation of goodwill

Average Profit = 2,00,000+2,35,000+3,00,000+2,75,000+3,25,000/5=2,67,000

Goodwill =2,67,000×2= 5,34,000

Chetan’s share of Goodwill= 5,34,000×1/5=1,06,800

Chetan will be compensated by Amit and Bunty in 2:2 or 1:1 as follow

Amount of compensation = 1,06,800×1/2=53,400

 

W.N.- 3: Calculation of Share of Profit till the date of retirement on the basis of past three year profits

Average Profit = 3,00,000 + 2,75,000 + 3,25,000/3=3,00,000

Profit share of Chetan = 3,00,000 ×1×6/5×12= 15,000