Adjustments required on the death of a partner

Adjustments required on the death of a partner

When a partner dies, there is dissolution or reconstitution of partnership. The following adjustments are made on the death of a partner:

1.     Distribution of accumulated profits, reserves and losses

2.     Revaluation of assets and liabilities

3.     Determination of new profit sharing ratio and gaining ratio

4.     Adjustment for goodwill

5.     Adjustment for current year’s profit or loss upto the date of death

6.     Settlement of the amount due to the deceased partner

The adjustments to be done in the accounts incase of death of a partner is the same as in the case of retirement of a partner except settlement of the amount due to the deceased partner.

Incase of retirement, the amount due from the firm is paid to the partner himself. But, when a partner dies the amount due from the firm is paid to the executor or legal representative of the deceased partner. The following journal entries are passed for settlement of the amount due to the deceased partner:

(i) To transfer the amount due to the deceased partner to the executor or legal representative of the deceased partner.

(ii) For payment made

a.     When the amount due is paid in cash immediately

b.     When the amount due is not paid immediately in cash

c.      When the amount due is partly paid in cash immediately

Illustration: 20

Rathna, Baskar and Ibrahim are partners sharing profits and losses in the ratio of 2:3:4 respectively. Rathna died on 31st December, 2018. Final amount due to her showed a credit balance of ₹ 1,00,000. Pass journal entries if,

b.     The amount due is paid off immediately by cheque.

c.      The amount due is not paid immediately.

d.     60,000 is paid immediately by cheque.

Solution

Illustration: 21

Sundar, Vivek and Pandian are partners, sharing profits in the ratio of 3:2:1. Their balance sheet as on 31st December, 2018 is as under:

On 1.1.2019, Pandian died and on his death the following arrangements are made:

i.            Stock to be depreciated by 10%

ii.            Land is to be appreciated by ₹ 11,000

iii.            Reduce the value of debtors by ₹ 3,000

iv.            The final amount due to Pandian was not paid

Prepare revaluation account, partners’ capital account and the balance sheet of the firm after death.

Solution

Illustration 22

Ramesh, Ravi and Akash are partners who share profits and losses in their capital ratio. Their balance sheet as on 31.12.2017 is as follows:

Akash died on 31.3.2018. On the death of Akash, the following adjustments are made:

i.            Plant and machinery is to be valued at ₹ 54,000

ii.            Stock is to be depreciated by ₹ 1,000

iii.            Goodwill of the firm is valued at ₹ 24,000

iv.            Share of profit of Akash is to be calculated from the closing of the last financial year to the date of death on the basis of the average of the three completed years’ profit before death. Profit for 2015, 2016 and 2017 were ₹ 66,000, ₹ 60,000 and ₹ 66,000 respectively.

Prepare the necessary ledger accounts and the balance sheet immediately after the death of Akash.

Solution

Working notes:

(i) Profit sharing ratio

Profit sharing ratio        = Capital ratio = 30,000: 30,000: 20,000 that is, 3:3:2

Gaining ratio between Ramesh and Ravi = Old profit sharing ratio = 3:3 that is 1:1

(ii) Calculation of Akash’s share of current year’s profit

Current year’s profit upto the date of death = 64,000 × 3/12 = ₹ 16,000

Akash’s share of current year’s profit = 16,000 × 2/8 = ₹ 4,000

(iii) Akash’s share of goodwill = 24,000 × 2/8 = ₹ 6,000

It is to be borne by Ramesh and Ravi in the gaining ratio of 1:1