Settlement
of the amount due to the retiring partner
The amount due to the
retiring partner from the partnership firm is the balance of his capital
account after making adjustments for goodwill, accumulated profits and losses,
profit or loss on revaluation, remuneration due, etc. The settlement is to be
done in the manner prescribed in the partnership deed. The amount due to the
retiring partner may be settled in one of the following ways:
i.
Paying the entire amount due immediately in cash
ii.
Transfer the entire amount due, to the loan account of the partner
iii.
Paying part of the amount immediately in cash and transferring the
balance to the loan account of the partner
The journal entries to
be made are as follows:
Retiring partner’s loan
account will appear on the liabilities side of the balance sheet prepared after
retirement till it is completely settled.
Illustration 15
Kavitha, Kumudha and
Lalitha are partners sharing profits and losses in the ratio of 5:3:3
respectively. Kumudha retires from the firm on 31st December, 2018. On the date
of retirement, her capital account shows a credit balance of ₹ 2,00,000. Pass journal
entries if:
i.
The amount due is paid off immediately by cheque.
ii.
The amount due is not paid immediately.
iii.
70,000 is paid immediately by cheque.
Solution
Illustration 16
Mani, Rama and Devan are
partners in a firm sharing profits and losses in the ratio of 4:3:3.
Their balance sheet as
on 31st March, 2019 is as follows:
Solution
Mani retired from the partnership
firm on 31.03.2019 subject to the following adjustments:
i.
Stock
to be depreciated by ₹ 5,000
ii.
Provision
for doubtful debts to be created for ₹ 1,000.
iii.
Buildings
to be appreciated by ₹ 16,000
iv.
The
final amount due to Mani is not paid immediately
Prepare revaluation account and
capital account of partners after retirement.
Comprehensive problems
Illustration 17
Charles, Muthu and Sekar
are partners, sharing profits in the ratio of 3:4:2. Their balance sheet as on
31st December, 2018 is as under:
On 1.1.2019, Charles
retired from the partnership firm on the following arrangements.
(i) Stock to be
appreciated by 10%
(ii) Furniture to be
depreciated by 5%
(iii) To provide ₹ 1,000 for bad debts
(iv) There is an
outstanding repairs of ₹
11,000 not yet recorded
(v) The final
amount due to Charles was paid by cheque
Prepare revaluation
account, partners’ capital account and the balance sheet of the firm after
retirement.
Solution
Illustration 18
Raghu, Ravi and Ramesh
are partners in a firm sharing profits and losses in the ratio of 2:3:1.
Their balance sheet as
on 31st March, 2019 was as follows:
Ramesh retires on
31.3.2019 subject to the following conditions:
i.
Goodwill of the firm is valued at ₹ 24,000
ii.
Machinery to be depreciated by 10%
iii.
Buildings to be appreciated by 20%
iv.
Stock to be appreciated by ₹
2,000
v.
Provision for bad debts to be raised by ₹ 1,000
vi.
Final amount due to Ramesh is not paid immediately
Prepare the necessary
ledger accounts and show the balance sheet of the firm after retirement.
Solution
Tutorial note
1. As new profit sharing
ratio and proportion of gain is not given, it is assumed that the continuing
partners gain in their old profit sharing ratio of 2:3.
2. Ramesh share of
goodwill = 24, 000 ×
1/6 = ₹ 4,000
Goodwill of Ramesh to be
borne by
Raghu: 4,000 × 2/5 = ₹ 1,600
Ravi : 4,000 × 3/5
= ₹ 2,400
Illustration 19
Muthu, Murali and Manoj
are partners in a firm and sharing profits and losses in the ratio 3:1:2. Their
balance sheet as on 31st December, 2018 is given below:
Manoj retires on 31st
December, 2018 subject to the following conditions:
(i) Muthu and Murali
will share profits and losses in the ratio of 3:2
(ii) Assets are to be
revalued as follows:
Machinery ₹ 43,000, stock ₹ 27,000, debtors ₹ 28,000.
(iii) Goodwill of the
firm is valued at ₹
30,000
(iv) The final amount
due to Manoj is not paid immediately
Prepare necessary ledger
accounts and the balance sheet immediately after the retirement of Manoj.
Solution
Note:
(i) Computation of gaining ratio
Share gained = New share – old share
Therefore, the gaining ratio of
Muthu and Murali is 3:7
(ii) Adjustment for goodwill
Goodwill of the firm = ₹ 30,000
Share of goodwill to Manoj = 30,000
× 2/6 = ₹ 10,000
It is to be adjusted in the capital
accounts of Muthu and Murali in the gaining ratio of 3:7
That is,
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