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Page No 217:

Question 1:

What are the different ways in which a partner can retire from the firm?

Answer:

The following are the different ways in which a partner can retire from a firm.

i. With the consent of all other partners: A partner must take the consent of all the co-partners of the firm before his/her retirement. Thereafter, the partner can retire from the firm if and only if all the partners agree on the decision of his/her retirement.

ii) With an express agreement by all the partners: In case of written agreement among the partners a partner may retire from the firm by expressing his/her intention of leaving the firm though a notice to the other partners of the firm.

iii) By giving a written notice: If partnership among the partners is at will then a partner may retire by giving notice in writing to all the other partners informing them about his/her intention to retire.

Page No 217:

Question 2:

Write the various matters that need adjustments at the time of retirement of partner/partners.

Answer:

The following are the various matters that need to be adjusted at the time of retirement of partners/partner.

1. Calculation of new gaining ratio of all the remaining partners of the firm.

2. Calculation of new ratio of the remaining partners of the firm.

3. Calculation of goodwill of the new firm and its accounting treatment.

4. Revaluation of assets and liabilities of the new firm.

5. Distribution of accumulated profits and losses and reserves among all the partners (including the retiring partner).

6. Treatment of Joint Life Policy

7. Settlement of the amount due to the retiring partner

8. Adjustment of capital accounts of the remaining partners in their new profit sharing ratio.

Page No 217:

Question 3:

Distinguish between sacrificing ratio and gaining ratio.

Answer:

Basis of Difference

Sacrificing ratio

Gaining Ratio

1. Meaning

It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner

It is the ratio in which continuing partner acquires the share of profit from outgoing partner/partner

2. Calculation

Sacrificing Ratio = Old Ratio – New Ratio

Gaining Ratio = New Ratio – Old Ratio

3. Time

It is calculated at the time of admission of new partners/partner.

It is calculated at the time of retirement/death of old partners/partner.

4. Objective

It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner.

It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.

5. Effect

It reduces the profit share of the existing partners.

It increases the profit share of the remaining partners.

 



Page No 218:

Question 4:

Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?

Answer:

At the time of retirement or death of a partner, it becomes inevitable to revalue the assets and liabilities of the firm for ascertaining their true and fair values. The revaluation is necessary as the value of assets and liabilities may increase or decrease with the passage of time. Further, it may be possible that there are certain assets and liabilities that remained unrecorded in the books of accounts. The retiring or the deceased partner may be benefited or may bear loss due to change in the values of assets and liabilities. Therefore, the revaluation of the assets and liabilities is necessary in order to ascertain the true profit or loss that is to be divided among all the partners in their old profit sharing ratio.

Page No 218:

Question 5:

Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

Answer:

Goodwill is an intangible asset of a firm that is earned by the efforts of all the partners of the firm. After the retirement or death of a partner, the fruits of the past performance and reputation will be shared only by the remaining partners. Thus the remaining partners should compensate the retiring or the deceased partner by entitling him/her a share of firm's goodwill.

Page No 218:

Question 1:

Explain the modes of payment to a retiring partner.

Answer:

The following are the modes of payment to a retiring partner.

 

1. If the amount due to the retiring partner is to be paid in lump sum on the day of his/her retirement then the following Journal entry need to be passed.

 

Retiring Partner's Capital A/c

Dr.

 

To Cash/Bank A/c

 

(Retiring partner paid in cash)

 

 

2) If the amount due to the retiring partner is to be paid in installments then the balancing figure of his/her capital account is transferred to his/her loan account. In this case, the retiring partner receives equal installments along with the interest on the amount outstanding. The following necessary Journal entry is to be passed.

 

Retiring Partner's Capital A/c

Dr.

 

To Retiring Partner's Loan A/c

 

(Retiring partner capital account transferred to the

retiring partner's loan account @ -------- % p.a.).

 

 

3) If the amount due to the retiring partner is to be paid partly in cash and partly in equal  installments then a certain amount is paid in cash to the retiring partner on the date of the retirement and the rest amount due to him/her is transferred to his/her loan account. The following necessary Journal entry is to be passed.

 

Retiring Partner's Capital A/c (with the total amount due to the retiring partner)

Dr.

 

To Retiring Partner's Loan A/c (with the amount transferred to the partner's loan account)

 

 

To Cash A/c (with the amount paid in cash immediately on the date of the retirement)

 

(Retiring partner partly paid in cash and balance transferred to the partner's loan account)

 

 

 

Page No 218:

Question 2:

How will you compute the amount payable to a deceased partner?

Answer:

The legal executer of the deceased partner is entitled for the balancing figure of the deceased partner's capital account. The balancing figure of the deceased partner's capital account is derived after posting the below mentioned items in Step 1 and Step 2.

 

Step 1: The following items are posted in the debit side of the deceased partner's capital account.

 

a) Credit balance of the deceased partner's capital account and/or current account.

b) Deceased partner’s share of profit up to the date of his/her death.

c) Deceased partner’s share of goodwill.

d) Deceased partner’s share in accumulated reserves and profit account.

e) Deceased partner’s share in gain on revaluation of assets and liabilities.

f) Deceased partner’s share of Joint Life Policy.

g) Interest on capital, if any, up to the date of the death.

h) Salary or commission, if any, up to the date of the death.

 

Step 2: The following items are posted in the credit side of the deceased partner's capital account.

 

a) Debit balance of the deceased partner's capital account and/or current account.

b) Amount withdrawn in the form of drawings up to the date of death of the partner.

c) Interest on drawings, if any, up to the date of the death.

d) Deceased partner’s share in loss on revaluation of assets and liabilities.

e) Deceased partner’s share of loss up to the date of the death.

f) Deceased partner’s share in the accumulated losses of the firm.

 

The legal executor is entitled for the balancing figure that is the excess of the credit side over the debit side of the deceased partner's capital account.

 

Deceased Partner's Capital Account

Dr.

 

 

 

 

 

 

Cr.

Date

Particulars

J.F.

Amount

Rs

Date

Particulars

J.F.

Amount

Rs

 

Revaluation A/c (Loss)

 

 

 

Balance b/d

 

 

 

Profit and Loss Suspense A/c

(Share of loss up to the date of the death)

 

 

 

Profit and Loss Suspense A/c

(Share of profit up to the date of the death)

 

 

 

 

 

 

 

Goodwill

 

 

 

Accumulated Losses A/c

 

 

 

Reserves and Profits

 

 

 

Goodwill A/c (Written off)

 

 

 

Revaluation A/c (gain)

 

 

 

Partner Executor's A/c

 

 

 

Joint Life Policy A/c

 

 

 

(Balancing Figure)

 

 

 

Interest on Capital A/c

 

 

 

 

 

 

 

Salary A/c

 

 

 

 

 

 

 

Commission A/c

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page No 218:

Question 3:

Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

Answer:

At the time of retirement or at the event of death of a partner, the goodwill is adjusted among the partners in gaining ratio with the share of goodwill of the retiring or the deceased partner. As per Para 16 of Accounting Standard 10, it is mandatory to record goodwill in the books only when consideration in money or money’s worth has been paid for it.

In case of retirement and death of a partner, goodwill account cannot be raised. There are namely two probable situations on which the treatment of goodwill rests.

 

1. If goodwill already appears in the books of the firm.

2. If no goodwill appears in the books of the firm.

 

Situation 1: If goodwill already appears in the books of the firm.

 

Step 1: Write off the existing goodwill

If goodwill already appears in the old balance sheet of the firm (if mentioned in the question), then first of all, this goodwill should be written off and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. The following Journal entry is passed to write off the old/existing goodwill.

 

All Partners' Capital A/c

Dr.

 

To Goodwill A/c

 

(Goodwill written of among all the partners in their

old ratio)

 

 

Step 2: Adjusting goodwill through partner's capital account.

After writing off the old goodwill, the goodwill need to be adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.

 

Remaining Partner's Capital A/c

Dr.

 

To Retiring/Deceased Partner's Capital A/c

 

(Gaining Partner's Capital A/c is debited in their

gaining share and retiring/deceased partner's capital

account in credited for their share of goodwill)

 

 

Situation 2: If no goodwill appears in the books of the firm.

As no goodwill appears in the books of the firm, so the goodwill is adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed. 

 

Remaining Partner's Capital A/c

Dr.

 

To Retiring/Deceased Partner's Capital A/c

 

(Gaining partner's capital account is debited in their gaining

share and retiring/deceased partner's capital account in

credited for their share of goodwill)

 

 

 

Page No 218:

Question 4:

Discuss the various methods of computing the share in profits in the event of death of a partner.

Answer:

In case of death of a partner during the year, his/her executer is entitled for share of profit up to the date of death of the partner.

The share of profit can be calculated by one of the two methods.

1) On time basis: Under this method, profit up to the date of the death of the partner is calculated on the basis of the last year's/years' profit or average profit of last few years. In this approach, it is assumed that the profit will be uniform throughout the current year. The deceased partner will be entitled for the share of the profit proportionately up to the date of his/her death.

Share of Deceased Partner in Profit =

Example- A, B and C are equal partners. The profit of the firm for the years 2008, 2009 and 2010 are Rs 10,00,000, Rs 7,00,000 and Rs 13,00,000 respectively. C dies on April 30, 2011. The share of C in the firm's profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31.

In this case, C's share in the profits will be calculated for four months, i.e. from January 01, 2011 to April 30, 2011.

2) On the sale basis: Under this method, profit is calculated on the basis of last year's sale. In this situation, it is assumed that the net profit margin of the current year's sale is similar to that of the last year's.

Share of Deceased Partner's Profit =×Sales from the beginning of the current year up to the date of death × Share of deceased partner

Example- X Y and Z are equal partners. The last year's sales and profit were Rs 25,00,000 and Rs 2,50,000. Z died on the April 30, 2011. Sales of the current year till the date of Z's death amounts to Rs 12,00,000. Firm closes its books on December 31 every year.

Page No 218:

Question 1:

Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.

Answer:

 

 Books of Aparna, and Sonia

 

Journal

 

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

Aparna’s Capitals A/c

Dr.

 

18,000

 

 

Sonia’s Capital A/c

Dr.

 

42,000

 

 

To Manisha’s Capital A/c

 

 

 

60,000

 

(Manisha’s share of goodwill adjusted to Aparna’s and

Sonia’s Capital Account in their gaining ratio )

 

 

 

 

Working Notes:

1. Manisha’s share in goodwill:

Total goodwill of the firm × Retiring Partner’s Share =

2. Gaining Ratio = New Ratio − Old Ratio

Aparna Gaining share

Gaining Ratio between Aparna and Sonia = 3 : 7

3. Aparna’s share in goodwill

Sonia’s share in goodwill

Page No 218:

Question 2:

Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of Rs 60,000. Sangeeta retires and goodwill is valued at Rs 90,000. Saroj and Shanti decided to share future profits equally. Record necessary Journal entries.

Answer:

 

 

 Books of Saroj and Shanti

 

Journal

 

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

Sangeeta’s Capital A/c

Dr.

 

12,000

 

 

Saroj’s Capital A/c

Dr.

 

18,000

 

 

Shanti’s Capital A/c

Dr.

 

30,000

 

 

To Goodwill A/c

 

 

60,000

 

(Goodwill written off)

 

 

 

 

 

 

 

 

 

Saroj’s Capital A/c

Dr.

 

18,000

 

 

To Sangeeta’s Capital A/c

 

 

 

18,000

 

(Sangeeta’s share of goodwill adjusted to Saroj’s Capital

Account in her gaining ratio)

 

 

 

 

 

 

 

 

 

Working Notes:

 

1. Sangeeta’s share of goodwill.

Total goodwill of the firm ´ Retiring Partner’s share

 

2. Gaining Ratio = New Ratio – Old Ratio

Saroj’s Gaining Share

Shanti’s Gaining Share

 

 

Page No 218:

Question 3:

Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2017, Naman retires.

The various assets and liabilities of the firm on the date were as follows:

Cash Rs 10,000, Building Rs 1,00,000, Plant and Machinery Rs 40,000, Stock Rs 20,000, Debtors Rs 20,000 and Investments Rs 30,000.

The following was agreed upon between the partners on Naman’s retirement:

(i)

Building to be appreciated by 20%.

(ii)

Plant and Machinery to be depreciated by 10%.

(iii)

A provision of 5% on debtors to be created for bad and doubtful debts.

(iv)

Stock was to be valued at Rs 18,000 and Investment at Rs 35,000.

Record the necessary journal entries to the above effect and prepare the Revaluation Account.

Answer:

 

 

 Books of Himanshu and Gagan

 

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

Building A/c

Dr.

 

20,000

 

 

Investment A/c

Dr.

 

5,000

 

 

To Revaluation A/c

Dr.

 

 

25,000

 

(Value of Building and Investment increased at the time

of Naman's retirement)

 

 

 

 

 

 

 

 

 

Revaluation A/c

Dr.

 

7,000

 

 

To Plant and Machinery A/c

 

 

 

4,000

 

To Provision for Bad and Doubt Debts A/c

 

 

1,000

 

To Stock A/c

 

 

 

2,000

 

(Assets revalued and Provision for Bad and Doubtful Debts

made at the time of Naman's retirement)

 

 

 

 

 

 

 

 

 

 

Revaluation A/c

Dr.

 

18,000

 

 

To Himanshu’s Capital A/c

 

 

 

9,000

 

To Gagan’s Capital A/c

 

 

 

6,000

 

To Naman’s Capital A/c

 

 

 

3,000

 

(Profit on revaluation transferred to all Partners’ Capital

Accounts in their old profit sharing ratio)

 

 

 

 

 

 

 

 

             

 

Revaluation Account

 

Dr.

 

Cr.

 

Particular

Amount

Rs

Particular

Amount

Rs

Plant and Machinery

4,000

Building

20,000

Stock

2,000

Investment

5,000

Provision for Bad and Doubtful Debts

1,000

 

 

Profit transferred to Capital Account:

 

 

 

Himanshu

9,000

 

 

 

Gagan

6,000

 

 

 

Naman

3,000

18,000

 

 

 

 

25,000

 

25,000

 

 

 

 

 

             

 

 

Page No 218:

Question 4:

Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserves Rs 36,000 and Profit and Loss Account (Dr.) Rs 15,000.

Pass the necessary journal entries to the above effect.

Answer:

 

 

 Books of Naresh and Bishwajeet

 

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

General Reserve A/c

Dr.

 

36,000

 

 

To Naresh’s Capital A/c

 

 

 

12,000

 

To Raj Kumar’s Capital A/c

 

 

 

12,000

 

To Bishwajeet’s Capital A/c

 

 

 

12,000

 

(General Reserve distributed among old partner in old ratio)

 

 

 

 

 

 

 

 

 

 

 

Naresh’s Capital A/c

Dr.

 

5,000

 

 

Raj Kumar’s Capital A/c

Dr.

 

5,000

 

 

Bishwajeet’s Capital A/c

Dr.

 

5,000

 

 

To Profit and Loss A/c

 

 

 

15,000

 

(Debit balance of Profit and Loss Account written off)

 

 

 

 

 

 

 

 

 

 



Page No 219:

Question 5:

 

Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2017 was as follows:

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Creditors

49,000

Cash

8,000

Reserves

18,500

Debtors

19,000

Digvijay’s Capital

82,000

Stock

42,000

Brijesh’s Capital

60,000

Buildings

2,07,000

Parakaram’s Capital

75,500

Patents

9,000

 

2,85,000

 

2,85,000

 

 

 

 

 

Brijesh retired on March 31, 2017 on the following terms:

(i)    Goodwill of the firm was valued at Rs 70,000 and was not to appear in the books.

(ii)   Bad debts amounting to Rs 2,000 were to be written off.

(iii)  Patents were considered as valueless.

Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

 

 

Answer:

 

 

 Books of Digvijay and Parakaram

 

Revaluation Account

 

Dr.

 

Cr.

 

Particular

Amount

Rs

Particular

Amount

Rs

Bad Debts

2,000

 

 

Patents

9,000

Loss transferred to Capital Account:

 

 

 

Digvijay

4,400

 

 

Brijesh

4,400

 

 

Parakaram

2,200

 

 

 

 

 

11,000

 

11,000

 

 

 

 

             

 

Partners’ Capital Account

 

Dr.

 

Cr.

 

Particularss

Digvijay

Brijesh

Parakaram

Particularss

Digvijay

Brijesh

Parakaram

Brijesh’s Capital A/c

18,667

 

9,333

Balance b/d

82,000

60,000

75,500

Revaluation (Loss)

4,400

4,400

2,200

Digvijay’s Capital A/c

 

18,667

 

Brijesh’s Loan

 

91,000

 

Parakaram’s Capital A/c

 

9,333

 

Balance c/d

66,333

 

67,667

Reserves

7,400

7,400

3,700

 

89,400

95,400

79,200

 

89,400

95,400

79,200

 

 

 

 

 

 

 

 

                     

 

Balance Sheet as on March 31, 2017 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Creditors

49,000

Cash

8,000

Brijesh’s Loan

91,000

Debtors

19,000

 

 

 

Less: Bad Debts

2,000

17,000

Digvijay’s Capital A/c

66,333

Stock

42,000

Parakaram’s Capital A/c

67,667

Buildings

2,07,000

 

2,74,000

 

2,74,000

 

 

 

 

           

 

Note: As sufficient balance is not available to pay the amount due to Brijesh, the balance of his Capital Account transferred to his Loan Account.

 

Working Note:

 

1. Brijesh’s Share of Goodwill

Total goodwill of the firm ´ Retiring Partner’s Share

 

2. Gaining Ratio = New Ratio – Old Ratio

 

Digvijay’s Share

 

Parakaram’s Share

 

Gaining ratio between Digvijay and Parakaram = 4 : 2 or 2 : 1

 

 

Page No 219:

Question 6:

 

Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2017, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Trade Creditors

 

3,000

Cash-in-Hand

1,500

Bills Payable

 

4,500

Cash at Bank

7,500

Expenses Owing

 

4,500

Debtors

15,000

General Reserve

 

13,500

Stock

12,000

Capitals:

 

 

Factory Premises

22,500

Radha

15,000

 

Machinery

8,000

Sheela

15,000

 

Losse Tools

4,000

Meena

15,000

45,000

 

 

 

 

70,500

 

70,500

 

 

 

 

 

 

The terms were:

a) Goodwill of the firm was valued at Rs 13,500.

b) Expenses owing to be brought down to Rs 3,750.

c) Machinery and Loose Tools are to be valued at 10% less than their book value.

d) Factory premises are to be revalued at Rs 24,300.

Prepare:

1. Revaluation account

2. Partner’s capital accounts and

3. Balance sheet of the firm after retirement of Sheela.

 

 

Answer:

 

Books of Radha and Meena

 

Revaluation Account

 

Dr.

Cr.

 

Particulars

Amount

Rs

Particulars

Amount

Rs

Machinery

800

Expenses Owing

750

Loose Tools

400

Factory Premises

1,800

Profit transferred to Capital Account:

 

 

 

Meena

675

 

 

 

Radha

450

 

 

 

Sheela

225

1,350

 

 

 

2,550

 

2,550

 

 

 

 

           

  

Parters’ Capital Account

 

Dr.

Cr.

 

Particulars

Radha

Sheela

Meena

Particulars

Radha

Sheela

Meena

Sheela’s Capital A/c

3,375

 

1,125

Balance b/d

15,000

15,000

15,000

Sheela’s Loan A/c

 

24,450

 

General Reserve

6,750

4,500

2,250

Balance c/d

19,050

 

16,350

Revaluation (Profit)

675

450

225

 

 

 

 

Radha’s Capital A/c

 

3,375

 

 

 

 

 

Meena’s Capital A/c

 

1,125

 

 

22,425

24,450

17,475

 

22,425

24,450

17,475

 

 

 

 

 

 

 

 

                   

 

Balance Sheet as on April 01, 2017

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Trade Creditors

 

3,000

Cash in Hand

1,500

Bills Payable

 

4,500

Cash at Bank

7,500

Expenses Owing

 

3,750

Debtors

15,000

Sheela’s Loan

 

24,450

Stock

12,000

 

 

 

Factory Premises

24,300

Capitals:

 

 

Machinery

8,000

 

Radha

19,050

 

Less: 10%

(800)

7,200

Meena

16,350

35,400

Loose Tools

4,000

 

 

 

 

Less: 10%

(400)

3,600

 

 

71,100

 

71,100

 

 

 

 

 

             

Working Notes:

1) Sheela’s share of goodwill

Total goodwill of the firm × Retiring Partner’s share =13,500×26=4,500

2) Gaining Ratio = New Ratio − Old Ratio

Radha’s Share

Meena’s Shares

Gaining Ratio between Radha and Meena = 6 : 2 or 3 : 1



Page No 220:

Question 7:

Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:

Books of Pankaj, Naresh and Saurabh

 

Balance Sheet as on March 31, 2017

 

Liabilities

Amount Rs

Assets

Amount Rs

General Reserve

12,000

Bank

7,600

Sundry Creditors

15,000

Debtors

6,000

 

Bills Payable

12,000

Less: Provision for Doubtful Debt

400

5,600

Outstanding Salary

2,200

 

 

Provision for Legal Damages

6,000

Stock

9,000

Capitals:

 

Furniture

41,000

Pankaj

46,000

 

Premises

80,000

Naresh

30,000

 

 

 

Saurabh

20,000

96,000

 

 

 

1,43,200

 

1,43,200

 

 

 

 

             

Additional Information

(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for Rs 1,200 and furniture to be brought up to Rs 45,000.

(ii) Goodwill of the firm be valued at Rs 42,000.

(iii) Rs 26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.

(iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.

Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.

Answer:

Revaluation Account

 

Dr.

Cr.

 

Particulars

Amount

Rs

Particulars

Amount

Rs

Stock

900

Premises

16,000

Provision for Legal Damages

1,200

Provision for Doubtful Debts

100

Profit transferred to Capital:

 

Furniture

4,000

Pankaj

9,000

 

 

 

Naresh

6,000

 

 

 

Saurabh

3,000

18,000

 

 

 

20,100

 

20,100

 

 

 

 

             

 

Parters’ Capital Accounts

 

Dr.

Cr.

 

Particulars

Pankaj

Naresh

Saurabh

Particulars

Pankaj

Naresh

Saurabh

Naresh’s Capital A/c

14,000

 

 

Balance b/d

46,000

30,000

20,000

Naresh’s Loan A/c

 

26,000

 

General Reserve

6,000

4,000

2,000

Bank

 

28,000

 

Revaluation (Profit)

9,000

6,000

3,000

Balance c/d

47,000

 

25,000

Pankaj’s Capital A/c

 

14,000

 

 

61,000

54,000

25,000

 

61,000

54,000

25,000

 

 

 

 

 

 

 

 

                   

 

Bank Account

 

Dr.

Cr.

 

Particulars

Amount

Rs

Particulars

Amount

Rs

Balance b/d

7,600

Naresh’s Capital A/c

28,000

Bank Loan (Balancing Figure)

20,400

 

 

 

 

 

 

 

28,000

 

28,000

 

 

 

 

         

 

Balance Sheet as on March 31, 2017

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

15,000

Debtors

6,000

 

Bills Payable

12,000

Less: Provision for Doubtful Debts

300

5,700

Bank Loan/overdraft

20,400

Stock

8,100

Outstanding Salaries

2,200

Furniture

45,000

Provision for Legal Damages

7,200

Premises

96,000

Naresh’s Loan

26,000

 

 

Capitals:

 

 

 

Pankaj

47,000

 

 

 

Saurabh

25,000

72,000

 

 

 

1,54,800

 

1,54,800

 

 

 

 

             

 

 



Page No 221:

Question 8:

 

Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2017 was as follows:

 

Books of Puneet, Pankaj and Pammy

 

 

Balance Sheet as on March 31, 2017

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

1,00,000

Cash at Bank

20,000

Capital Accounts:

 

Stock

30,000

Puneet

60,000

 

Sundry Debtors

80,000

Pankaj

1,00,000

 

Investments

70,000

Pammy

40,000

2,00,000

Furniture

35,000

Reserve

 

50,000

Buildings

1,15,000

 

3,50,000

 

3,50,000

 

 

 

 

           

 

Mr. Pammy died on September 30, 2017. The partnership deed provided the following:

(i)

The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit.

(ii)

He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are given below: for 2013–14; Rs 80,000; for 2014–15, Rs 50,000; for 2015–16, Rs 40,000; for 2016–17, Rs 30,000.

The drawings of the deceased partner up to the date of death amounted to Rs 10,000. Interest on capital is to be allowed at 12% per annum.

Surviving partners agreed that Rs 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance.

Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due.

 

 

Answer:

 

 

Pammy’s Capital Account

 

 

Dr.

Cr.

 

Particulars

Amount

Rs

Particulars

Amount

Rs

Drawings

10,000

Balance b/d

40,000

Pammy Executor’s A/c

75,400

Profit and Loss (Suspense)

3,000

 

 

Puneet’s Capital A/c

15,000

 

 

Pankaj’s Capital A/c

15,000

 

 

Interest on Capital

2,400

 

 

Reserve

10,000

 

85,400

 

85,400

 

 

 

 

           

 

Pammy's Executor Account

 

Dr.

Cr.

 

Date

Particulars

J.F.

Amount

Rs

Date

Particulars

J.F.

Amount

Rs

2017-18

 

 

 

2017-18

 

 

 

Sep. 30

Bank

 

15,400

Sep. 30

Pammy’s Capital A/c

 

75,400

Mar. 31

Balance c/d

 

63,600

Mar. 31

Interest

 

3,600

 

 

 

79,000

 

 

 

79,000

 

 

 

 

 

 

 

 

2018-19

 

 

 

2018-19

 

 

 

Sep. 30

Bank

 

22,200

April 01

Balance b/d

 

63,600

 

(15,000+3,600+3,600)

 

 

Sep. 30

Interest

 

3,600

Mar. 31

Balance c/d

 

47,700

Mar. 31

Interest

 

2,700

 

 

 

69,900

 

 

 

69,900

 

 

 

 

 

 

 

 

2019-20

 

 

 

2019-20

 

 

 

Sep. 30

Bank

 

20,400

April 01

Balance b/d

 

47,700

Mar. 31

Balance c/d

 

31,800

Sep. 30

Interest

 

2,700

 

 

 

 

Mar. 31

Interest

 

1,800

 

 

 

52,200

 

 

 

52,200

 

 

 

 

 

 

 

 

2020-21

 

 

 

2020-21

 

 

 

Sep. 30

Bank

 

18,600

April 01

Balance b/d

 

31,800

 

(15,000+1,800+1,800)

 

 

Sep. 30

Interest

 

1,800

Mar. 31

Balance c/d

 

15,900

Mar. 31

Interest

 

900

 

 

 

34,500

 

 

 

34,500

 

 

 

 

 

 

 

 

2021-22

 

 

 

2021-22

 

 

 

Sep. 30

Bank

 

16,800

April 01

Balance b/d

 

15,900

 

(15,000+900+900)

 

 

Sep. 30

Interest

 

900

 

 

 

16,800

 

 

 

16,800

 

 

 

 

 

 

 

 

                   

 

Working Notes:

 

1) Pammy’s Share of Profit

Previous Year’s Profit ´ Proportionate Period ´ Share of Deceased Partner

 

2) Pammy’s Share of Goodwill

 

Goodwill of the firm = Average Profit ´ Numbers of Year’s Purchase

 

Average Profit

 

Goodwill of the firm = 50,000 ´ 3 = Rs 1,50,000

 

 

3) Gaining Ratio = New Ratio – Old Ratio

 

Puneet’s Share

 

Pankaj’s Share

 

Gaining Ratio between Puneet and Pankaj = 2 : 2 or 1 : 1

 

4) Interest on Capital for 6 months, i.e. from April 1, 2007 to September 30, 2007

 

Amount of Capital ´ Rate of Interest ´ Period

 

5) Interest Amount

The firm closes its books every year on March 31, while installments to Pammy's Executor are paid on September 30 every year.

Amount outstanding on 30 September = 75,400 – 15,400 = Rs 60,000

 

Calculation of Interest

 

Periods

Amount

Outstanding

Yearly Interest

For 6 Months

2017-18

60,000

2018-19

45,000

2019-20

30,000

2020-21

15,000

         

 

 

Page No 221:

Question 9:

 

Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2017.

 

Books of Prateek, Rockey and Kushal

 

 

Balance Sheet as on March 31, 2017

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

16,000

Bills Receivable

16,000

General Reserve

16,000

Furniture

22,600

Capital Accounts:

 

Stock

20,400

Prateek

30,000

 

Sundry Debtors

22,000

Rockey

20,000

 

Cash at Bank

18,000

Kushal

20,000

70,000

Cash in Hand

3,000

 

1,02,000

 

1,02,000

 

 

 

 

           

 

Rockey died on June 30, 2017. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

a) Amount standing to the credit of the Partner’s Capital account.

b) Interest on capital at 5% per annum.

c) Share of goodwill on the basis of twice the average of the past three years’ profit and

d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.

Profits for the year ending on March 31, 2015, March 31, 2016 and March 31, 2017 were Rs 12,000, Rs 16,000 and Rs 14,000 respectively. Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

 

 

Answer:

 

 Books of Prateek and Kushal

 

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2017

 

 

 

 

 

June 30

Interest on Capital A/c

Dr.

 

250

 

 

Profit and Loss (Suspense) A/c

Dr.

 

1,000

 

 

General Reserve A/c

Dr.

 

4,571

 

 

To Rockey’s Capital A/c

 

 

 

5,821

 

(Share of profit, interest on capital and share of General

Reserve credited to Rockey’s Capital Account)

 

 

 

 

 

 

 

 

 

 

June 30

Prateek’s Capital A/c

Dr.

 

4,800

 

 

Kushal’s Capital A/c

Dr.

 

3,200

 

 

To Rockey’s Capital A/c

 

 

 

8,000

 

(Rockey’s share of goodwill adjusted to Prateek’s and

Kushal’s Capital Account in their gaining ratio, 3:2)

 

 

 

 

 

 

 

 

June 30

Rockey’s Capital A/c

Dr.

 

33,821

 

 

To Rockey Executor’s A/c

 

 

 

33,821

 

(Balance of Rockey’s Capital Account transferred to his

Executor’s Account)

 

 

 

 

 

 

 

 

               

 

Rockey’s Capital Account

 

Dr.

Cr.

 

Date

Particulars

J.F.

Amount

Rs

Date

Particulars

J.F.

Amount

Rs

2017

 

 

 

2017

 

 

 

April 1

Rockey's Executor A/c

 

33,821

April 1

Balance b/d

 

20,000

 

 

 

 

 

Interest on Capital

 

250

 

 

 

 

 

Profit and Loss (Suspense) A/c

 

1,000

 

 

 

 

 

General Reserve

 

4,571

 

 

 

 

 

Prateek’s Capital

 

4,800

 

 

 

 

 

Kushal’s Capital

 

3,200

 

 

 

33,821

 

 

 

33,821

 

 

 

 

 

 

 

 

                   

 

 

 

Working Notes:

1. Rockey’s Share of Profit = Previous year’s profit × Proportionate Period × Share of Deceased Partner

=

2. Rockey’s Share of Goodwill

Goodwill of a firm = Average profit × Numbers of year’s Purchase

Goodwill of a firm = 14,000 × 2 = Rs 28,000

3. Gaining Ratio = New Ratio − Old Ratio

Gaining Ratio between Prateek and Kushal = 9:4 or 3:2

4. Interest on Capital for 3 months i.e. from April 1, 2017 to June 30, 2017

Amount of × Rate of Interest × Period



Page No 222:

Question 10:

 

Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2 , 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2015 was as follows:

 

Books of Suri, Narang and Bajaj

 

Balance Sheet as on April 1, 2015

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Bills Payable

12,000

Freehold Premises

40,000

Sundry Creditors

18,000

Machinery

30,000

Reserves

12,000

Furniture

12,000

Capital Accounts:

 

Stock

22,000

Narang

30,000

 

Sundry Debtors

20,000

 

Suri

20,000

 

Less: Reserve

1,000

19,000

Bajaj

28,000

88,000

for Bad Debt

 

 

 

 

Cash

7,000

 

1,30,000

 

1,30,000

 

 

 

 

             

 

Bajaj retires from the business 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 depreciated by 10% and 7% respectively.

c) Bad Debts reserve is to be increased to Rs 1,500.

d) Goodwill is valued at Rs 21,000 on Bajaj’s retirement.

e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. 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.

 

Answer:

 

Revaluation Account

 

Dr.

Cr.

 

Particulars

Amount

Rs

Particulars

Amount

Rs

Machinery

3,000

Freehold Properties

8,000

Furniture

840

Stock

3,300

Reserve for Bad debts

500

 

 

Capitals:

 

 

 

Narang

3,480

 

 

 

Suri

1,160

 

 

 

Bajaj

2,320

6,960

 

 

 

11,300

 

11,300

 

 

 

 

             

 

Partners’ Capital Account

 

Dr.

Cr.

 

Particulars

Narang

Suri

Bajaj

Particulars

Narang

Suri

Bajaj

Bajaj’s Capital A/c

5,250

1,750

 

Balance b/d

30,000

30,000

28,000

Bajaj's Loan

 

 

41,320

Reserves

6,000

2,000

4,000

 

 

 

 

Revaluation (Profit)

3,480

1,160

2,320

Balance c/d

34,230

31,410

 

Narang’s Capital A/c

 

 

5,250

 

 

 

 

Suri’s Capital A/c

 

 

1,750

 

39,480

33,160

41,320

 

39,480

33,160

41,320

 

 

 

 

 

 

 

 

Suri's Current A/c

 

15,000

 

Balance b/d

34,230

31,410

 

 

 

 

 

Narang's Current A/c

15,000

 

 

Balance c/d

49,230

16,410

 

 

 

 

 

 

49,230

31,410

 

 

49,230

31,410

 

 

 

 

 

 

 

 

 

                   

 

Balance Sheet as on April 01, 2015

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Bills Payable

12,000

Free hold Premises

48,000

Sundry Creditors

18,000

Machinery

 

27,000

Bajaj’s Loan

41,320

Furniture

 

11,160

Suri’s Current

15,000

Stock

25,300

Capital Account:

 

Sundry Debtors

20,000

 

Narang

49,230

 

Less: Reserve for Bad Debt

1,500

18,500

Suri

16,410

65,640

Cash

 

7,000

 

 

 

Narang’s Current Account

15,000

 

1,51,960

 

1,51,960

 

 

 

 

               

 

Working Notes:

 

1. Bajaj Share in Goodwill = Total Goodwill of the firm ´ Retiring Partner’s Share =

 

2. Gaining Ratio = New Ratio – Old Ratio

 

 

 

Gaining Ratio between Narang and Suri = 3:1

 

3. Calculation of New Capitals of the existing partners.

 

Balance in Narang’s Capital

=

34,230

Balance in Suri’s Capital

=

31,410

Total Capital of the New firm after revaluation of assets and

 

 

liabilities and adjustment of  Goodwill and Reserves

=

Rs 65,640

 

Based on new profit sharing ratio of 3:1

NOTE:

i. In the given Question Suri’s Capital is Rs 30,000 instead of Rs 20,000.

ii. Due to insufficient balance in Bajaj’s Capital Account, the amount due to Bajaj is transferred to his Loan Account.

 

 



Page No 223:

Question 11:

The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015:

 

Books of Rajesh, Pramod and Nishant

 

Balance Sheet as on March 31, 2015

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Bills Payable

6,250

Factory Building

12,000

Sundry Creditors

10,000

Debtors

10,500

 

Reserve Fund

2,750

Less: Reserve

500

10,000

Capital Accounts:

 

Bills Receivable

7,000

Rajesh

20,000

 

Stock

15,500

Pramod

15,000

 

Plant and Machinery

11,500

Nishant

15,000

50,000

Bank Balance

13,000

 

69,000

 

69,000

 

 

 

 

             

 

Pramod retired on the date of Balance Sheet and the following adjustments were made:

a) Stock was valued at 10% less than the book value.

b) Factory buildings were appreciated by 12%.

c) Reserve for doubtful debts be created up to 5%.

d) Reserve for legal charges to be made at Rs 265.

e) The goodwill of the firm be fixed at Rs 10,000.

f) The capital of the new firm be fixed at Rs 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.

Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

 

Answer:

 

 

Journal

 

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2015

 

 

 

 

 

Mar. 31

Revaluation A/c

Dr.

 

1,840

 

 

To Stock A/c

 

 

 

1,550

 

To Reserve for Doubtful Debts A/c

 

 

 

25

 

To Reserve for Legal Charges A/c

 

 

 

265

 

(Assets and Liabilities are revalued)

 

 

 

 

 

 

 

 

 

 

Mar. 31

Factory Building A/c

Dr.

 

1,440

 

 

To Revaluation A/c

 

 

 

1,440

 

( Factory Building appreciated)

 

 

 

 

 

 

 

 

Mar. 31

Rajesh’s Capital A/c

Dr.

 

160

 

 

Pramod’s Capital A/c

Dr.

 

120

 

 

Nishant’s Capital A/c

Dr.

 

120

 

 

To Revaluation A/c

 

 

 

400

 

(Loss on Revaluation adjusted to Partners’ Capital Account)

 

 

 

 

 

 

 

 

Mar. 31

Rajesh’s Capital A/c

Dr.

 

2,000

 

 

Nishant’s Capital A/c

Dr.

 

1,000

 

 

To Pramod Capital’s A/c

 

 

 

3,000

 

(Pramod’s share of goodwill adjusted to Rajesh’s and Nishant’s Capital Account in their gaining ratio)

 

 

 

 

 

 

 

 

 

 

Mar. 31

Reserve Fund A/c

Dr.

 

2,750

 

 

To Rajesh’s Capital A/c

 

 

 

1,100

 

To Pramod’s Capital A/c

 

 

 

825

 

To Nishant’s Capital A/c

 

 

 

825

 

(Reserve Fund distributed all the partners)

 

 

 

 

 

 

 

 

 

 

 

Mar. 31

Pramod’s Capital A/c

Dr.

 

18,705

 

 

To Pramod’s Loan A/c

 

 

 

18,705

 

(Pramod’s Capital transferred to his Loan Account)

 

 

 

 

 

 

 

 

 

 

Mar. 31

Rajesh’s Capital A/c

Dr.

 

940

 

 

Nishant’s Capital A/c

Dr.

 

2,705

 

 

To Rajesh’s Current A/c

 

 

 

940

 

To Nishant’s Current A/c

 

 

 

2,705

 

(Excess in Capital Account is transferred to Current Account)

 

 

 

 

 

 

 

 

               

 

Parters’ Capital Account

 

Dr.

Cr.

 

Particulars

Rajesh

Pramod

Nishant

Particulars

Rajesh

Pramod

Nishant

Revaluation (Loss)

160

120

120

Balance b/d

20,000

15,000

15,000

Pramod’s Capital A/c

2,000

 

1,000

Reserve Fund

1,100

825

825

Pramod’s Loan A/c

 

18,705

 

Rajesh’s Capital A/c

 

2,000

 

Rajesh's Current A/c

940

 

 

Nishant’s Capital A/c

 

1,000

 

Nishant's Current A/c

 

 

2,705

 

 

 

 

Balance c/d

18,000

 

12,000

 

 

 

 

 

21,100

18,825

15,825

 

21,100

18,825

15,825

 

 

 

 

 

 

 

 

                   

 

Balance Sheet as on March 31, 2015

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Bills Payable

6,250

Plant and Machinery

11,500

Sundry Creditors

10,000

Debtors

10,500

 

Reserve for Legal Charges

265

Less: Reserve

(525)

9,975

Pramod’s Loan

18,705