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Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Action PlanNotesQuestionsMock-Test
Study Action Plan (Sorted by Difficulty)
Adjustment of Partners' Capitals
Accuracy: 55%
Total Attempted11
Total Correct6
Total Incorrect5
Difficulty Level:
Medium
Death of a Partner
Accuracy: 62%
Total Attempted21
Total Correct13
Total Incorrect8
Difficulty Level:
Medium
Adjustment of Accumulated Profits and Losses
Accuracy: 69%
Total Attempted16
Total Correct11
Total Incorrect5
Difficulty Level:
Medium
Accounting Treatment of Goodwill
Accuracy: 70%
Total Attempted23
Total Correct16
Total Incorrect7
Difficulty Level:
Medium
Reconstitution of Partnership - Retirement/Death
Accuracy: 74%
Total Attempted27
Total Correct20
Total Incorrect7
Difficulty Level:
Medium
New Profit Sharing and Gaining Ratios
Accuracy: 75%
Total Attempted4
Total Correct3
Total Incorrect1
Difficulty Level:
Low
Settlement of Retiring Partner's Dues
Accuracy: 79%
Total Attempted19
Total Correct15
Total Incorrect4
Difficulty Level:
Low
Revaluation of Assets and Liabilities
Accuracy: 89%
Total Attempted18
Total Correct16
Total Incorrect2
Difficulty Level:
Low

Learning Objectives

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Learning Objectives

  • Calculate new profit sharing ratio and gaining ratio of the remaining partners after the retirement/death of a partner.
  • Describe the accounting treatment of goodwill in the event of retirement/death of a partner.
  • Make the necessary entries in respect of unrecorded assets and liabilities.
  • Make necessary adjustments for accumulated profits or losses.
  • Compute the new profit sharing's ratio among the remaining partners and explain the mode of its settlement.
  • Prepare the retiring partner's loan account, if required.
  • Prepare the deceased partner's executor's account in the case of death of a partner and the balance sheet of a reconstituted firm.

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Revision Notes & Summary

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Retirement/Death of a Partner

Terms Introduced in the Chapter

  • Retirement of a Partner
  • Executors of Deceased Partner
  • Death of a Partner
  • Executor's Account
  • Gaining Ratio

Summary

  1. New Profit Sharing Ratio:
    • The ratio in which the remaining partners will share future profits after the retirement or death of any partner.
    • New Share = Old Share + Acquired Share from the Outgoing partner
  2. Gaining Ratio:
    • The ratio in which the continuing partners have acquired the share from the retiring or deceased partner.
  3. Treatment of Goodwill:
    • Gaining partner(s) compensate the sacrificing partner to the extent of their gain for the respective share of goodwill.
    • If goodwill appears in the books, it will be written off by debiting all partners' capital accounts in their old profit sharing ratio.
  4. Revaluation of Assets and Liabilities:
    • At the time of retirement/death, some assets may not be shown at their current values, and certain liabilities may be shown at a different value from the obligation to be met by the firm.
    • Unrecorded assets and liabilities must be recorded.
  5. Accumulated Profits or Losses:
    • Reserves (Accumulated profits) or losses belong to all partners and should be transferred to the capital accounts of all partners.
  6. Payment to Retiring/Deceased Partner:
    • May be paid in one lump sum or installments with interest.
  7. Capital Contributions:
    • Remaining partners may decide to keep their capital contributions in their profit sharing ratio.

Learning Objectives

  • Calculate new profit sharing ratio and gaining ratio of the remaining partners after the retirement/death of a partner.
  • Describe the accounting treatment of goodwill in the event of retirement/death of a partner.
  • Make necessary entries in respect of unrecorded assets and liabilities.
  • Make necessary adjustments for accumulated profits or losses.
  • Ascertain the retiring/deceased partner's claim against the firm and explain the mode of its settlement.
  • Prepare the retiring partner's loan account, if required.
  • Prepare the deceased partner's executor's account in the case of death of a partner and the balance sheet of a reconstituted firm.
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Practice Test – MCQs, True/False

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Multiple Choice Questions

A.

Shyam's capital account is debited by Rs. 15,750 and Ram's by Rs. 12,250.

B.

Shyam's capital account is debited by Rs. 12,250 and Ram's by Rs. 15,750.

C.

Shyam's capital account is debited by Rs. 28,000 and Ram's by Rs. 28,000.

D.

Shyam's capital account is debited by Rs. 14,000 and Ram's by Rs. 14,000.
Correct Answer: A

Solution:

Gagan's share of goodwill is adjusted in the gaining ratio of 9:7, so Shyam's capital account is debited by Rs. 15,750 and Ram's by Rs. 12,250.

Chapter Concept:

Adjustment of Partners' Capitals

A.

They are written off against the retiring partner's capital account only.

B.

They are distributed among all partners in the old profit sharing ratio.

C.

They are ignored and not accounted for.

D.

They are distributed in the new profit sharing ratio.
Correct Answer: B

Solution:

Accumulated losses are distributed among all partners in their old profit sharing ratio.

Chapter Concept:

Adjustment of Accumulated Profits and Losses

A.

2:1

B.

3:2

C.

1:1

D.

5:3
Correct Answer: C

Solution:

X and Y decide to share profits equally, hence the gaining ratio is 1:1.

Chapter Concept:

New Profit Sharing and Gaining Ratios

A.

Transfer the amount due to the retiring partner's loan account.

B.

Pay the amount in cash immediately.

C.

Ignore the payment until the firm has sufficient funds.

D.

Adjust the amount against the remaining partners' capital accounts.
Correct Answer: A

Solution:

If the firm cannot pay the amount due immediately, it is transferred to the retiring partner's loan account and paid as and when possible.

Chapter Concept:

Death of a Partner

A.

Same as the old profit sharing ratio

B.

New profit sharing ratio

C.

Equal ratio

D.

None of these
Correct Answer: A

Solution:

The gaining ratio is the same as the old profit sharing ratio when the remaining partners acquire the retiring partner's share in the old ratio.

Chapter Concept:

Death of a Partner

A.

Credit is given to the retiring partner for the share in goodwill by debiting the goodwill account to gaining partners' capital accounts in their gaining ratio.

B.

Goodwill is ignored and not adjusted in the accounts.

C.

Goodwill is written off against the general reserve.

D.

None of the above
Correct Answer: A

Solution:

When goodwill does not appear in the books, credit is given to the retiring partner for the share in goodwill by debiting the goodwill account to gaining partners' capital accounts in their gaining ratio.

Chapter Concept:

Reconstitution of Partnership - Retirement/Death

A.

It remains the same as the old profit sharing ratio.

B.

It is calculated based on the new agreed proportion.

C.

It is assumed to be equal among the remaining partners.

D.

It is calculated by dividing the retiring partner's share equally among the remaining partners.
Correct Answer: B

Solution:

When the continuing partners acquire the retiring partner's share in a proportion other than their old ratio, the new profit sharing ratio is calculated based on the new agreed proportion.

Chapter Concept:

Accounting Treatment of Goodwill

A.

Continuing Partner 1: Rs. 12,000; Continuing Partner 2: Rs. 8,000

B.

Continuing Partner 1: Rs. 8,000; Continuing Partner 2: Rs. 12,000

C.

Continuing Partner 1: Rs. 10,000; Continuing Partner 2: Rs. 10,000

D.

Continuing Partner 1: Rs. 15,000; Continuing Partner 2: Rs. 5,000
Correct Answer: A

Solution:

The compensation is divided according to the gaining ratio. Partner 1 pays Rs. 12,000 (3/5 of Rs. 20,000) and Partner 2 pays Rs. 8,000 (2/5 of Rs. 20,000).

Chapter Concept:

Revaluation of Assets and Liabilities

A.

By crediting the retiring partner's capital account and debiting the remaining partners' capital accounts in their gaining ratio.

B.

By debiting the retiring partner's capital account and crediting the remaining partners' capital accounts in their gaining ratio.

C.

By adjusting it against the profit and loss account.

D.

By distributing it equally among all partners.
Correct Answer: A

Solution:

When goodwill does not appear in the books, it is adjusted by crediting the retiring partner's capital account and debiting the remaining partners' capital accounts in their gaining ratio.

Chapter Concept:

Reconstitution of Partnership - Retirement/Death

A.

Mohit should bring in Rs. 2,000 and Sohan should withdraw Rs. 1,000.

B.

Mohit should withdraw Rs. 2,000 and Sohan should bring in Rs. 1,000.

C.

Mohit should withdraw Rs. 2,000 and Sohan should withdraw Rs. 1,000.

D.

Mohit should bring in Rs. 2,000 and Sohan should bring in Rs. 1,000.
Correct Answer: B

Solution:

Mohit's new capital should be Rs. 80,000 and Sohan's should be Rs. 40,000. Therefore, Mohit withdraws Rs. 2,000 and Sohan brings in Rs. 1,000 to adjust their capitals.

Chapter Concept:

Adjustment of Partners' Capitals

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True or False

Correct Answer: False

Solution:

The new profit sharing ratio among the remaining partners can differ from their old profit sharing ratio if they acquire the retiring partner's share in a different proportion.

Chapter Concept :

New Profit Sharing and Gaining Ratios

Correct Answer: True

Solution:

Revaluation of assets and liabilities is conducted to determine any changes in their values, which are then adjusted in the capital accounts of all partners, including the retiring or deceased partner, in their old profit sharing ratio.

Chapter Concept :

Revaluation of Assets and Liabilities

Correct Answer: True

Solution:

Upon the retirement of a partner, the remaining partners often adjust their capital contributions to align with the new profit sharing ratio, ensuring the firm's capital structure remains balanced.

Chapter Concept :

Adjustment of Partners' Capitals

Correct Answer: False

Solution:

Upon the retirement of a partner, the existing partnership deed comes to an end, and a new partnership deed is framed.

Chapter Concept :

Reconstitution of Partnership - Retirement/Death

Correct Answer: True

Solution:

When a partner retires, the retiring partner's share of goodwill is adjusted by debiting the continuing partners' capital accounts in their gaining ratio, as they benefit from the acquisition of the retiring partner's share of profit.

Chapter Concept :

Reconstitution of Partnership - Retirement/Death

Correct Answer: True

Solution:

The revaluation account is prepared to ascertain net gain or loss on revaluation of assets and liabilities, including bringing unrecorded items into the firm's books.

Chapter Concept :

Revaluation of Assets and Liabilities

Correct Answer: True

Solution:

During the reconstitution of a partnership firm, accumulated profits and losses are indeed distributed among partners in their old profit sharing ratio as part of the necessary adjustments.

Chapter Concept :

Adjustment of Accumulated Profits and Losses

Correct Answer: True

Solution:

The settlement of a retiring partner's dues can indeed include interest calculations as specified in the partnership deed or statutory provisions.

Chapter Concept :

Settlement of Retiring Partner's Dues

Correct Answer: False

Solution:

The total capital of the new firm may not always be specified. In some cases, the sum of balances in the capitals of continuing partners is treated as the total capital of the new firm, unless specified otherwise.

Chapter Concept :

Adjustment of Partners' Capitals

Correct Answer: False

Solution:

The calculation of the deceased partner's share of profit or loss is necessary regardless of when the death occurs, as it includes the period from the last balance sheet to the date of death.

Chapter Concept :

Death of a Partner

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