a a ment of a Partner LEARNING OBJECTIVES yt Chapter would enable students to. understand: arog of Reterent of Partner a ew Profit Sharing Ratio of the Remaining or Continuing Partners after Retirement of a Partner 5.2 «airing Ratio ofthe Remaining or Continuing Partners 55 3 piference between Sacrificing Ratio and Gaining Ratio 59 | a valuation and Accounting of Goodwill on Retirement. ofa Partner 59 4g pasing and Writing off Goodwill 5.15 4 fevauation of Assets and Reassessment of Liabilities on Retiement ofa Fartner 5g {adjustment of Reserves, Accumulated (Undistributed) Profits and Losses on Retirement ofa Partner 5.21 4 petenination of Amount Due to Retiring Partner 5.25 4 Methods of Payment of Amount Due to Retiring Partner a “i |g adjustment of Capitals of the Remaining oF Continuing Partners in Oy New Profit-Sharing Ratio 4 1D Retirement of Partner during the year on RETIREMENT OF A PARTNER Meaning feizement ofa partner means reconstitution of the firm under which old partnership agreement comes to an end and new partnership agreement among the remaining or continuing partners, ‘comes into existence. The firm, however, continues. Apartner may retire from the firm: (i) ifthere is an agreement to that effect; or (i) ifthe agreement does not exist then if all the partners agree to retirement of a partner; or (i) ifthe Partnership is at Will, by giving a notice (written) to the remaining partners of his decision to retire. Inshor,, retirement of a partner means a partner ceasing to be a partner in the firm. Lability of a Retiring Partner ability forthe Acts before Retirement Meliing partner remains liable for all the acts of the firm up to the date of his retirement wever, a retiring partner may be discharged from his liability by an agreement between self, third Party and the continuing partners. [Section 32(2)]5.2 Double Entry Book Keeping—CBSE Xil Liability for the Acts after Retirement A retiring partner also continues to be liable to third parties for the acts his retirement is given. OF the 6 his retirement until a public notice o! tm, w Rights of a Retiring Partner ms Fat 1. To get his share in the goodwill of the firm. Mop! 2. To receive his capital along with share in accumulated profits and other ; Adjustments Required on Retirement ofa Partner my “ } sidered and resolved on retirement of a partner. Following matters are con: ining Ratio, ic, change 1. Determining New Profit-sharing Ratio and Gs ratio. . Valuation and Accounting of Goodwill Revaluation of Assets and Reassessment of Liabilities Reserves and Undistrbuted Profits (Accumulated Profits)/Losses. . Determination of amount due to Retiring Partni . Payment to the Retiring Partner. 7. Adjustment of Capitals (if'so decided by the partners). 1D Prof ‘ey er. Naueon 1, CHANGE IN THE PROFIT: RT aU Asa result of retirement of a partner, profit-sharing ratio among, the remaining or cong partners may o may not change. However, their combined share increases, Aiter rege of the partner, new profit-sharing ratio of the remaining of continuing partners a gaining ratio is determined. New Profit-Sharing Ratio New profit-sharing ratio on retirement of a partner is the ratio in which the remainin partners will share future profits and losses. New profit share of each remaining or continuing partner is his old prot share in th im plus the profit share taken by that partner from the retiring partner. Tt may be expressed s New Profit Share = Old Profit Share + Profit Share taken (Acquired){rom the retired puter New Profit-sharing Ratio, upon retirement, may have to be determined when 1. new profit-sharing ratio is not given; and 2, remaining partners take profit share of the retiring partner in the ratio that i from their present profit-sharing ratio. Case 1. Whena partner retires and the new profit-sharing ratio among the remaining partners is not given. When a partner retires and new profit-sharing ratio among the remaining part" given, it is presumed that the remaining partners will continue to share prot's and in their old profit-sharing ratio. It means they take the profit share of the retiring i g ratio. Fo partner in their profit-sharing example, Amar, Raman and Pawan are partners sharing profits in aici of 3322-455 retires, Since new profit-sharing ratio is not gi Harein bestia oa given, Raman and Pawan will take @m () (b) @ 9s differet rs is loss amar'sP™Chapter 5. Retirement of Partner 5-3 sharing Ratio of Remaining Pa irtners), jjand Dilip were partners, sharing profits in the ratio of 1/2, 2/3 and 1/10. Find fit sharin ratio of the remaining partners if: (a) Sachin retires, (b) Kapil retires, on may ee iP tic Ney Di = ‘ 25, fF i. jt and Reta are partners sharing profits in the ratio of 5: 4: 1. Find new profit- oe eo of the remaining partners if: (a) Jiten retires, (b) Sahil retires, and (c) Reta retires: * pont find the ratio in simple figure by taking L.C.M. The ratio 1/2 : 2/5 : 1/10 can be Morated as 524: 1 (taking 10 as L.CM) sharing calculate New Profit-sharing Ratio of the remaining partners by striking out the ge hare of the outgoing partner. Thus, (a) if Sachin retires, New Profit-sharing, Ratio between Kapil and Dilip is4:1 ie, 4/5: 1/5. (©) if Kapil retires, New Profit-sharing Ratio between Sachin and Dilip is 5 : 1, ie, 5/6 : 16. (© if Dilip retires, New Profit-sharing Ratio between Sachin and Kapil is 5 = 4, ie, 5/9: 4/9. ntinuing Festsharing Ratio between Jiten, Sahil and Reeta is 5: 4:1, tirement New Profit-sharing Ratio between Sahil and Reeta is 4: 1, i.¢., 4/5 : 1/5. fg ifiten retires, ee (9 Gah retires, New Profit-sharing Ratio between Jiten and Reeta is 5:1, he, 9/6 : 1/6. (9 ifReeta retires, New Profit-sharing Ratio between Jiten and Sahil is 5: 4, ie, 5/9 : 4/9. ntinuing [otherwise, retiring partner’s profit share is taken by the remaining or continuing partners in their ‘ratio. It means that the profit-sharing ratio between the remaining or continuing partners will he firm ssed as, x partner {tie When the remaining partners take profit share of the retiring partner in an agreed ratio. Teremaining partners may decide to take profit share of the retiring partner in an agreed ifferent ff ain Insuch cases, profit share taken by each partner is added to his existing profit share and : ¥ profit-sharing ratio is determined, i.e., New Profit Share of a Partner aining Profit Share + Profit Share taken (acquired) from Retired Partner. Ts given) first profit share taken by each remaining partner is determined and added to his : Itgives new profit share of each remaining partner and ratio of these shares is the new profit- ‘remaining or continuing partners. 0. For ‘Amar 2 (Remaining Partners take agreed Profit Share of the Retiring Partner). profit Care sharing profits and losses in the ratio of 5 : 3: 2. B retired. His profit share is Aand Cin the ratio of 2 : 1. Determine the new profit-sharing ratio. S85 pq 385.4 Doutie Erery Rook Keepeng— CBSE OH Solution Caljuletom of New Prof sharing Ratio Bs share on the profite 10th On his retirement, his profit share js take tao of 21 Thug nby 4, Profit share taken by A from B's profit share * 3/10 * 2/3 = 2/19 4. New profit share = Old profit share ¢ Profit share taken from g . ¥ Profit share taken by C from B’s share * 4/10 * 1/3 = 1/10 «New profit share = Old profit share + Profit share taken from B «215 a ea, Thus New Profit-sharing Ratio of A and C = 7/10: IM0=7: 3. Wheeteation 9 (ProAt share ofthe Retiring Partner is taker by Only One Partner) 4. Band C are partners sharing profits in the ratio of 2:2: 1. Bretited and his , hi by € Calculate new profit-sharing ratio of A and C. ares Solution: Calculation of New Profit-sharing Ratio: Profit share taken by C from B's share = 25 (C's New profit share = Old profit share + Profit share taken from B = 1/5 +2/5=3/5 A’s New profit share = 2/5 (unchanged) Thus, New Profit-sharing Ratio of A and C = 2/5:3/5=2:3. Uustration 4. A. B and C are in partnership sharing profits and losses as 1/2, 3/10 and 1/5 respec retires and his share i taken by A and Cin the ratio of 2 : 1. Thereafter, Dis admite x 14th share of profit, half of which was given by A and the remaining share was taken equi trom A and C. Calculate profit-sharing ratio after D's admission. —_ BRABSTE ee Solution: A c (i) Existing profit share 12 15 (x) Profit share acquired from B 3/10 x 2/3 = 2/10 3/10 « 1/3= 1/10 (us) New profit share (i + ii) 1/2+2/10=7/10 1/5 + 1/10= 3/10 liv) Profit share given by A to D= 1/4 « 1/2= 1/8 {s) Remaining profit share taken by D from A and C each = 1/2 « 1/8 = 1/16 71 1 $6-10-5_41 New profit share of A's Z=st=c a 2-19 a at Oe ae ee eet D6. ae Wine 80 3.1 u-5 19 New profit share of C# =~ — = —— = — i C016 wo 8 Thus, New Profit-sharing Ratio of A, C and D =Gana = 7119 =30 is taken ctively. tted for equally ratio. | Chapter 5 - Retirement of a Partner 5.5 ie, the use the pati the ratio in which the partners take the profit share of retiring partner Fae ‘ ir profit share increases in the firm. Gaining ratio is determined bec! oe partners compensate the retiring partner by paying goodwill. pt GaininB Ratio of ei jqulated under the following three situations: oe fmation is not given OF Agreement does not exist. info Eb es. nen profit-sharing ratio is given. Be sie partner's profit share is ta Wend ratio- » ww discuss © 0" we og. when | cas f an agreement, ype oo" een Foto! in th 5( and C were partners sharing profits in the ratio of 3:2: (b) B retires or (c) C retires. he ratio of 1/2, 1/3 and 1/6, Z retired. Find the gaining ratio ken by the remaining, or continuing partners in ach of the above situation in detail. information is Not Given or When Agreement Does Not Exist it is assumed that after retirement of a partner, remaining ofits in the same ratio in which they shared profits before rs gain profit share of the outgoing, e OF continue to share pr’ ‘ihe partner. Thus, in effect, remaining partne sjrold profit-sharing ratio. In this situation, profit-sharing ratio is their gaining ratio. New Profit-sharing Ratio and Gaining Ratio). 1. Find the gaining ratio AB when: (a) A retires, gx Yand Z share profits in t nd new profit-sharing ratio of X and Y. ‘Solution: i) Sincenew profit-sharing ratio of the remaining partners isnot given, gain of the remaining ers is in their old profit-sharing ratio: partn P B {@) when A retires, gain of B and C is in 2: 1 ratio. (b) when B retires, gain of A and C is in 3: 1 ratio. 8 "© when C retires, gain of A and B is in 3 : 2 ratio. 1 Profit-sharing Ratio among X, Y and Z-is-1/2 : 1/3": 1/6, ie, 3:2: 1. New Profit-sharing Ratio of X and Y is not given. Thus, gain will be in the ratio of 3 : 2. New Profit-sharing Ratio of X and Y will be 3 : 2. 2. When New Profit-sharing Ratio is Given rofit-shari : ’ sharing ratio among the remaining partnersis given. 8 4 i of each continuing partner is determined by deducting his old profit share Profit share, i.e., a ‘ain of a Continuing Partner = New Profit Share — Old Profit Share ining ratio will be different.———— 5.6 Double Entry Book Keeping—CBSE xi Iilustration 6 (Gaining Ratio). ving profits in the ratio of 172,19 noha ha ind Jashan are partners S! , oe erie ee Ram and Jashan agree to share future profits in the BS Ma To og Calculate the gaining ratte: . ™ jution: am 7 ' 3/5 Jash,, 4) New Profit Share Fa > {u) Old Profit Share = 7 i -12= _ (un) Gain of a Partner [()) - (ii) 1No 28-ape pe 1:2. Thus, Gaining Ratio of Ram and Jashan = 75 ‘ 40 Tilustration 7. rofits in the ratio of 2/5, 2/5 and 1/5 respectively. Cy ie rin} A. Band C are partners sharing P Femi calculate the gaining rato ‘A and B agreed to share future pro! Solution: Gain of a Partn fits in the ratio o! er = New Profit Share - Old Profit Share 1 4 i 7g (being negative result, it is a sacrifice) crificed his 1/5th share and B has sacrificed his Thus, only A is the gaining partner. C has sa both B and C for their sacrifices. 1/15th share in favour of A. A will compensate 2 TPELEIE PAL SR % Iustration 8. X, Y and Z are partners sharing profits and losses in the ratio of 4:3: 2. Y retired an 1/9th of his profit share and the balance profit-share is taken by Z. Calaulate new profit-sharing ratio and the gaining ratio. id X takes Solution: Calculation of New Profit-sharing Ratio: xX z (a) Existing profit share 4/9 #® (b) Profit Share taken by X: 1/9 « 1/3 1/27 Profit Share taken by Z: 8/9 * 1/3 as New Profit Share of X and Z (a +b) Be New Profit-sharing Rati 4 Calculation of Gaining hele ee nema 1% Cainang, Katio of X and Z = 1/27 : 8/27 or 1:8, IMustration 9 (Gaining Ratio). Mitesh, Rakesh and Mukesh are partners a 3/10 and 1/5. Rakesh retired from the firm be Profits and losses in the ratio of 3 ; 2, Calg GEFs gn 140 he ratio df haring profits and losses in # z are ful nd Hitesh and Mukesh decided to § Gaining ratio.biti Bas 908 a one roe Z Illustration 11. Chapter 5- Retirement of a Partner 5.7 | CALCULATION OF GAINING RATIO | gaining Ratio Is calculated for the remaining or continuing partners. 4; When retiring partner’ profit share is taken by the remaining or continuing partners in an agreed ratio, Share of each remaining or continuing partner is calculated giving effect to the t, i., profit share taken from the retired partner's profit share. The profit share added to the existing (old) profit share of each remaining or continuing partner to mine his new profit share. New Profit Share = Old Profit Share + Gained Profit Share | ion 10. Manni and Amar were partners sharing profits and loses in the ratio of 4:3: 2. Amar arom the firm. Channi took 4/9th of Amar’s share and the balance was taken Py Manni. falelate new profit sharing ratio and gaining ratio. ‘Amar's profit share is 2/9. Channi took 4/9th of 2/9, i.e., 4/9 x 2/9 = 8/81. { t gemaining profit share, i, 2. z a was taken by Manni. therefore, Gaining Ratio of Channi and Manni iL New Profit shares of Channi and Manni will be: fomay 8 3648 3, 1027410 37, o> a sl 8 a all Hence, New Profit-sharing Ratio of Channi and Manni will be 44 : 37. s sharing profits in the ratio of 1/2 1/8 :/8 respectively. Divya, Vikas and Varun were partner: balance profit share by Vikas retired and 1/9th from his share was taken by Divya and the Varun, Calculate gaining ratio and new profit-sharing ratio. x Solution: Profit share taken by Divya= gi Profit share taken by Varun = 5 ~ = a Therefore, Gaining Ratio of Divya and Varun = = 8:1 } 2.1 Divya’s Ni Pelee ae ivya’s New Profit Share pio TaeS Pee print shares toe on New Profit Share = 555" 79 ~ 7°" 18 | 17 Hence, New Profit-sharing Ratio of Divya and Varun = 2 aaa?| 5.8 Double Entry Book Keeping—CBSE XIl Illustration 12 (Calculation of New Profit-sharing GLH ; Akash, Yogesh and Bhavesh were partners a a losses jn 4:3: 1. Yogesh retired and gaining ratio betw and Bhavesh ita = id £8, gly New Profit-sharing Ratio. aly, ‘ Solution: oni , Akash ireq 4 Gaining Ratio of Akash and Bhavesh = Bere muieatie east ecquired .— of Yogesh, eri ‘ share and Bhavesh acquired ; of Yogesh’s profit share. ea Profit share acquired by Akash = 5% ~ 24 Brom Profit share acquired by Bhavesh = §* 9 ~ 24 4 16 2 00 , 4 = Akash’s New Profit Share (Old Profit Share + Gain) = B24 ~ 24 3 8 1 oO 5 - ors, Bhavesh’s New Profit Share (Old Profit Share + Gain) = 3+ 54> 24° 3 peel Hence, New Profit-sharing Ratio of Akash and Bhavesh = 5 3 OF 2:1. includ Illustration 13. Tha Retirin ahim were partners sharing profits in the ratio of 7 : 5 : 3. Pranav eis Pranav, Karim and R. een Karim and Rahim will be same as wis and it was decided that profit-sharing ratio betw between Pranav and Karim. Calculate new profit-sharing ratio and gaining ratio Solution: Profit-sharing ratio between Pranav and Karim =7 : 5. Therefore, New Profit-sharing Ratio between Karim and Rahim will also be 7 : 5 Calculation of Gaining Ratio: Gain of a partner = New Profit Share — Old Profit Share Kari tel Gain ono em 25-12 _ 13 12415 60 mamco) 60: we pe. 15 ia Gaining Ratio = — :— Z iB a 1813. © Unless agreed otherwise, New Profit-sharing Ratic Profit-sharing Ratio. he\ Chapter: Retirement of a Partner 5.9 . igaferen between Sacrificing Ratio and Gaining Ratio Wis eebeats hich the old partners have | tisthe ration whichthe remaining partners rohit shares in favour ofthe | take the outgoing (retired or deceased) New oF incoming partner, partner's share, Wis calculated to determine the amount of | itis calculated to determine the amount compensation to be paid by the incoming | of compensation to be paid by each of the Partne'tothe sacrficingpartnersas premium | gaining pater to the outgoing partner as or goodwil or goodwil ‘premium for goodwill or goodwill. It is calculated at the time of admission of | It is calculated at the time of retirement or ‘new Partner and on change in the profit: | death of a partner and on change in the pana iato! profit-sharing ratio. is we Ratio = Old Proft-sharng Ratio | Gaining Ratio = New Profit-sharing Ratio i calculation ~New Proft sharing Ratio. = Old Profit-sharing Ratio y C7 : ee i eh Pye! : } Retiring partner is entitled to his share of goodwill at the time of retirement because goodwill l was earned by the firm at the time when he was a partner. Continuing/gaining partners ; or compensate the retiring partner by paying goodwill in their gaining ratio. Value of goodwill “'. _isdetermined as per the terms of the partnership agreement or as is agreed by all the partners, including the retiring partner. issn. The methods of valuation of Goodwill have been discussed in the chapter on Goodwill. Ray “Wk Retiring Partner's Share of Goodwill pi (alue of Firm’s Goodwill x Profit Share of Retiring Partner) AS-26, ‘INTANGIBLE ASSETS’ * Goodwillis recognised in the books of account when consideration in money or money's worth is paid for it. + Incase ofadmission/retirement/death ofa partner or change in profit-sharing ratio among partners, goodwill isnot recognised in the books of the firm because itis self-generated Gooduil, ie, consideration in money or ‘money's worth is not paid fort * Goodwill is adjusted through Capital Accounts of the partners. il abo bet At the time of retirement of a partner, Goodwill may or may not exist in the books of account ofthe firm. Accounting treatment of Goodwill will be carried out accordingly. 5:25 When Goodwill does not exist in the Books a Retiring Partner's Capital Account is credited with his share of current value of goodwill and ining Partners’ Capital Accounts are debited in their Gaining Ratio for compensating retiring, Partner. The Journal entry is: Gaining Partners’ Capital A/cs «Dt. _ [Individually in Gaining Ratio} To Retiring Partner's Capital A/c (Adjustment made for goodwill on retirement) radu is credited to Retiring Partner's Capital Account normally by this method. =.5.10 Double Entry Book Keeping—CBSE Xl Mustration 14 (When all the Remaining or Continuing Partners Gain), Surender, Ramesh, Naresh and Mohan are partners in a firm sharing 2:1:2:1. On the retirement of Naresh, goodwill was valued at® 72,000, ae ing Mohan decided to share future profits equally. Pass the adjustment entry fo, aa Ra ‘opening Goodwill Account. Show the workings. Pod vat Solution: POURED Ramesh’ Capital Alc Mohan’ Capital A/c To Nareshis Capital A/c Naresh is entitled to 2/6th share of goodwill, ie, € 72,000 x 2/6 = % 24,000. It will be debi Partners’ Capital Accounts in their gaining ratio. Gaining Ratio is calculated as follows; ited to th 1 Cnt Ny CALCULATION OF GAINING RATIO (GAIN OF A PARTNER = NEW PROFIT SHARE ~ OLD PROFIT Hage Gain Sacrifice) zis 0 scott 1/3-2/6 = Nil 13-1/6 = 1/6 (Gain) filustra fun, | 13-116 = 1/6 (Gain) a Ld tres Ramesh and Mohan have gained equally. Therefore, 24,000 wl be debited to Ramesh’ Copta Acaany, | fi 15 Mohan's Capital Account equally, ie, & 12,000 each. profits When Goodwill exists in the Books the sim Goodwill existing in the books of account is written off by debiting Capital Accounts ofa Partners, including retiring partnerin their old profit-sharing ratio) The Journal entry pus All Partners’ Capital A/cs Dr. [In Old Profit-sharing fat, To Goodwill A/c [With Existing Value of Gocdnl (Existing goodwill written off) Thereafter, retiring partner's share of goodwill is credited in his Capital Account by deity Gaining Partners’ Capital Accounts in their gaining ratio. The entry is: Gaining Partners’ Capital/Current® Alcs Dr, {in gaining To Retiring Partner’ Capital/Current® Alc [With his share of deh (Adjustment made for gooduil on retirement) “In case of Fixed Capitals, Note: Unless stated otherwise, Partners’ Capitals should be assumed to be fluctuating. {lustration 15 (When one of the Remaining Partners Gain and Goodwill Exists in the B00!) X,Y and Z are partners sharing Profits in the ratio of 2: 3 : 5. Goodwill exists in theit i at € 50,000, X retires and on the day bose yall 'y Of X's reti he 45,000. decided to share future profitsequally, BOOdWillis valued at % Pass necessary Journal entries,ined on retirement of X. Therefore, only Y's Capital Account is debited with & 9,000 and ns. 10* 2 ount is credited with & 9,000, portal Acc 1,000, van 16 (When all the Remaining Partners Gain and Goodwill Exists in the Books). phim and Nakul are partners sharing profits and losses in the ratio of 14:56. Bhim and gives 5/25th of his share to Arjun and remaining share to Nakul. Goodwill of the years’ purchase of super profits based on average profits of last 3 years. profits for the last 3 years are € 50,000, % 55,000 and 60,000 respectively. Normal profits for hesimilar firm are € 30,000. Goodwill already exists in the books of the firm at € 75,000. Profit for the first y* Give the necessary Journal entries to adjust Goodwill and distribute profit showing your workings. (CBSE 2012, Modified) is valued at 2 ear after Bhim’s retirement was % 1,00,000. JOURNAL Solution: ns Capital A (% 75,000 x 14/25) Bhin’s Capital A/c (% 75,000 x 5/25) | Nakut's Capital A/c (@ 75,000 x' 6/25) To Goodwill A/c (Baisting goodwill written off) ‘jun’ Capital Ac (10,000 x 15) ‘Nakuls Capital A/c (10,000 x 4/5) Jo Bhim’ Capital A/c (@ 50,000 x vs) {Bhimis share of goodwill adjusted in the Capital Accounts of Arjun and ing ratio, le, 1:4) To ‘Arjuns Capital A 100,000 x 3/5) 60,000 To Nakul's Capital A/c (8 1,00,000 x 2/5) 40,000 {Profit distributed among Arjun and Nakul in thelr yew profit-sharing te2-12 Double Entry Book Keeping —CBSE XI! Working Notes: 1. Calculation of New Profit-sharing Ratio: un (Old Proft Share ae Bae Ty 1 (i) Profit Share Surrendered by Bhim 25 *25(% 3) Pa aL 15 ii) New Profit Share (i+ ii) 25°25 25 15 10 Thus, New Profit-sharing Ratio of Aun and Nakul = 5555 = 15:100r3:2, Shares surrendered by Bhim to Arjun and Nakul are 1/25 and 4/25 respectively, Hence, Gaining Ratio of Arjun and Nakul would be 1: 4. 2. Calculation of Goodwill: " 5,000 + € 60,000 Average Profit a ee =755,000 Average Profit - Normal Profit = € 55,000 - & 30,000 = & 25,009 Super Profit x No. of Years’ Purchase = 25,000 x 2 = ® 50,009 Firm's Goodwill x Bhim's Profit Share = % 50,000 x 1/5 = 10,099, Super Profit = Goodwill = Bhim's Share of Goodwill = Ilustration 17 (New Profit-sharing Ratio). A. Band C are partners sharing profits in the ratio of 4: 3: 1. B retired, giving his gy ¢ profits to A and C for € 8,100; & 3,600 being paid by A and % 4,500 by C. Profit for the year B’s retirement was € 10,500. = You are required (i) to give necessary Journal entries to record the transfer of B’s share miu A and C; (ii) to calculate new profit-sharing ratio and distribute the profits between A anc | A® Aand C bring the necessary amount. 30 i Solution: (i) JOURNAL Particulars As Capital A/c C's Capital A/c To Bs Capital A/c (B's share of goodwill credited to him by debiting gaining partners in their gaining ratio of 4:5) Cash/Bank Alc Dr. To A's Capital A/c To C's Capital A/c {Amount brought by A and C to pay B on his retirement) B's Capital A/c Dr. To Cash/Bank A/c (Amount paid to B on his retirement for selling his share) Profit & Loss Appropriation A/c Dr. 10,500 To A’s Capital A/c To Cs Capital A/c (Amount of profit distributed after 8's retirement in th te St leir new profit: LE) Dr.) 3,600 4,500 8,100 8,100chapters: Retirement f Parte! 5.13 of New Profit-sharing Ratio: tio ; ot pee ere ea ake eee Hence, they WI between themselves in the same ratio, ie,,4:5. Their new profit shares will be: an oft stare 3FP ay Share = Old Profit Share + Gain A new isin profit share . 48 1/8 0) st tate of Bacquired Pees ames «5/9 = 5/24 Ci} wg oft share (a +) 4/8+ 16= 2/3 p+ 5/24 = 19 Es new Profi-sharing Ratio of A and C will be 2/3 : 1/3 or 2:1. pan in cash for acquiring B's proft sh i | “i ‘coring i" profit share and after that cash is given to 8 in consideration. 1 ous profit= 10,500 x 2/3 = & 7,000; Cs share of prof = 10,500 x 1/3 = 23,500. P eby? Continuing Partner or Partners along with Retiring Partner continuing partners also sacrifices a part of his profit share in the firm 0” x the sacrifice the ie sta pariner, his Capital Account i also credited for goodwill f wet stare and the Gaining Partners Capital Accounts are debited by passing the a entry: : rind partners Capital (or Current) A/cs Dr. [Who have gained] To Retiring Partner’ Capital Ale [with his Share of Goodil To sacrificing Partner's Capital (or Current) A/c {Who has sacrificed] | station 38 \ jae ‘Anup and Sushant were partners in a firm sharing profits in the ratio of 3h Sushant retired and the new profit-sharing ratio between Armaan and Anup was j,2.0n sushant’s retirement, goodwill of the firm was valued at % 30,000. Pass necessary foul entry for the treatment of goodwill on Sushant's retirement. solution: JOURNAL j Particulars ur] oe) | o@) Dt 10,000 ‘Anup capital Alc To Amaan’s Capital A/c 5,000 5,000 Jo Sushant’s Capital A/c ionby Anup to Sustant rhs sharin good ante Arn fetesxrice madeby ion sushant'etrenent WN) Yering Note: Calculation of Gaining Ratio: Gain of a Partner = New Profit Share - Old Beate ot man = 1-2-2222 aati 6 166) Gain Sacrifc Beat 22 rice) of ANUP = 5-6 6 5 (ain Profit Share soups the only gaining partner He will compensate both Sushant and Armaan, the sacrificing partner. Goodwill of the firm = % 30,000 of Sushant's Share of Goodwill = € 30,000 x 1/6 = will also compensate Armaan to the ‘extent of the sacri 75,000; ifice made by him, ie, ® 30,000 x 1/6 = & 5,000.OU ‘Book Keeping—CBSE xi Neo Profit-sharing Ratio based on Journal entry ofadjy, lent, «1g profits & losses in th tners sharing PY e rat 2 21,600. Following enki maa S Passe 5.14 Double Entry Iustration 19 (Calculation of Narayan are pal Manav, Nath and i will of the firm ™ retired and good adjustment of goodwill: is valued a Date ‘Manav's Capital A/C Narayan’s Capital Ac i To Naths Capital A/c (Nat's share of Goodwill adi Determine new profit-sharing ratio of Manav and Narayan. Solution: Manav Narayan 4 2 Old Profit Share 9 9 ee 3,0 Gain Share 9° 72 9°27 F “| 2 1 , “ Ni an's New Profit Share = —+— = Manav’s New Profit Share = 5 *7 ~ 72 aray’ coms New Profit-sharing Ratio of Manav and Nath= 45:27 or 5: 3 Hidden Goodwill settled by paying a lump sum amount y, sometimes, account of the retiring partner is amount paid in excess of amount due to him, é profits and gain (profit) or loss on revaluation of is his share of goodwill. For example, ‘Amit, Bikas and Charu are partners. Bikas retired a his Capital Account after making adjustments for reserves and profit on revaluation wa 2 1,28,000. Amit and Charu agreed to pay him 2 1,50,000 in settlement of his claim. It meas that % 22,000 (ie., 1,50,000 - 1,28,000) is paid to Bikas as goodwill. This is accounted in he pooks of account by debiting € 22,000 in Amit'sand Charu’s Capital Accounts in their gay ‘o and crediting Bikas’s Capital Account, e,, capital, share in reserves or undistrbyy assets and reassessment of liabilities ej rati Illustration 20. ‘Amal, Bikki and Chandu are partners sharing profits in the ratio of 1:2:3. Chandu reteset his capital, after making adjustments for reserves and gain (profit) on re ‘Amal and Bikki agreed to pay him % 2,50,000 in full settlement of his claii Journal entry for the treatment of goodwill if new profit-sharing ratio is decide valuation is® 2a m, Pass neces dat 1:3 Solution: z ‘Amount agreed to be paid in full settlement 2,50,000 Less: Chandu’s Capital afterall adjustments) 2,20,000 ee Chandu’ sh i u's Share of Goodwill (Hidden Goodwill) 30,000_ =Chapter 5 - Retirement of a Partner 5.15 JOURNAL ‘Amal’s Capital A/c pikk'’s Capital Ac Jo Chandu’s Capital A/c indu's share of goodwill adjusted to the Capital Accounts of Amal nd Bikkin thelr gaining ratio of 1:5) (WN) recase of Retirement of a partner, retiring partner's share of goodwill may be adjusted by dng and writing off goodwill as follows: s ety, @ Goodwill is Raised at its Full Value and Written Off: Goodwill Account is debited with the y X current value of goodwill; crediting Capital Accounts of all the partners, including retiring t artner in their old profit-sharing ratio. Goodwill Account so debited is written off by debiting Remaining Partners’ Capital Accounts, in their new profit-sharing ratio and crediting Goodwill Account with its current value, The Journal entries passed are: - ty Goodwill Ae Dr. {Current value of Goodwill tee 8 To AllPartners’Capital A/cs {in their Old profit-sharing ratio) 50 ty (Goodwill raised at its current value) Seas smal Continuing Partners’ Capital A/cs Dr. [In their New profit-sharing Ratio] Pattney, ly To Goodwill A/c | iy (Goodwill Account written off in new profit-sharing ratio) Proton mm Men Illustration 21. il. Ths amit, Amrit and Akhil were partners sharing profits in the ratio of 3 : 2:1. Akhil retired from i 20 ye firm on Ist April, 2023 on which date goodwill of the firm was valued at % 1,20,000. Pass Acoutily, the necessary Journal entries giving effect to goodwill on Akhil's retirement raising Goodwill atits current value. Solution: JOURNAL 1:2:3. Cue LR} O.@ | CR) alii Hy e Goodwill A/c pc} | 1.20000 his dain To Amit’ Capital A/c 60,000 io i desi To Amrits Capital A/c 40,000 To Akhils Capital Ac 20,000 (Goodwill Account debited with current value of goodwill) t | Amits Capital Ac Or 72,000 ri Amri's Capital A/c Dr. 48,000 aa To Goodwill Alc 120,000 a (Goodwill Account written on new proft sharing ratio of continuing partners) 505.16 Double Entry Book Keeping—CBSE Xi! Illustration 22. Amar, Bharat and Charat were partners sharing profits endl Ist April, 2023, Bharat retired and goodwill of the firm was valued at z “oN Charat decide to share future profits and losses in the ratio of 3:1, 009, ntries if goodwill is raised atiits current value op Bha rf “a, Ant Pass the necessary Journal et JOURNAL To Amar’ Capital A/c To Bharat's Capital A/c To Charat's Capital A/c (Goodwil written off in new ratio iz, 3:1) (8) Gon is raised to he extent of living or deceased partners share ands writen oc Account is debited with the share of retiring or deceased partner in the curen a goodwill and crediting retiring or deceased Partner's Capital Acount,Goodvl cy debited is immediately written off by debiting Gaining Partners’ Capital Accounts in gaining ratio and crediting Goodwill Account with its current value. The Journal tig passed are: an Dr [Share of Retiring/Deceased pate, 00d Current value of onda To Retiring/Deceased Partner's Capital A/c (Goodwill raised with the share of retiring/deceased partner in current value of Goodwill) Gaining Partners'Capital A/cs Dr. {in their Gaining a To Goodwill A/c (Goodwill Account written off in gaining ratio) On retirement of a partner, if any existing partner (other than the retiring part also sacrifices his share, his Capital or Current Account will also be credited for his t2* of sacrifice, Mlustration 23. Karan, Charan and Raman were partners sharing profits in the ratio of 3: 2: 1. Raman wi from the firm on 1st April, 2023 on which date goodwill ofthe firm was valued at ¢ 1200" ‘| Pass the necessary Journal entries by raising Goodwill for retiring partner's shar®i* cue value of goodwill giving effect to it on Raman’s retirement.Chapter 5 Retirement of a Partner 5.17 JOURNAL wc yo. Raman’ Capital Ac il Account debited with | Raman's share in curent value of goodwill) Goodwill exists in the Books oil existing in the books of account is written off by debiting all the Partners’ Capital 1s including retiring/deceased partner in their old profit-sharing ratio. The Journal is: ‘Allpartners’ Capital (or Current) A/cs Dr. {In Old Profit-sharing Ratio} To Goodwill A/c [With Existing Value of Goodwill] {Gisting goodwill writen off) fration 24. ‘nia, Karan and Shilpa were partners in a firm sharing profits in the ratio of 5:3: 2. Goodwill ised in their books at % 60,000. Karan retired from the firm on Ist April, 2023 on which date jwill of the firm was valued at 2,40,000. New profit-sharing ratio decided among Alia aod shilpa was 2:3. Pe poste necessary Journal entries by raising goodwill for retiring pariner’s share in current Meg eof goodwill to adjust goodwill Solution: JOURNAL LF} O.® | &® Dr 30,000 Dr 18,000 _ | Shilpa’ Capital Ac Dr 12,000 | To Goodwill A/c | 60,000 Goodwill Ac % 24,000 x3/10) rc 72,000 To Karan's Capital Alc 72,000 raised to the extent of Karans share) 96,000 To Goodwill A/c 72,000 To Alia's Capital A/c 24,000 {Adjustment made for goodwill on Karan’ retirement) (WN)5.18 Double Entry Book Keeping—CBSE xi Working Notes: 1. Calculation of Gaining Ratio: Gain Sacrifice) ofa Partner = New Profit Share - Old Profit share eta x) Negative result indicates that Ali 5-10 (io ss 2 has sacriicey rt eee Se zetertia Sur yiat ; as Shapa is the only gaining partner, she will compensate not only the retiring partner, ra sacrificing partner (Alia). m1 %, : i de by her, Le., € 2,40, u “hy 2. Shilpa will compensate Alia to the extent of sacrifice made by 000 x 75 *8 240 Alias gain = 3. REVALUATION OF ASSETS AND REASSESSMENT OF LIABILITIES At the time of retirement of a partner, assets of the firm are revalued and liabilities ais with a purpose that the retiring partner does not benefit or lose because of the Silla. values. To give effect to the change in values, Revaluation Account is prepared in a ing, manner as is prepared at the time of change in profit-sharing ratio and admission of.» To recapitulate: « Increase in the value of assets, unrecorded assets, decrease in amount of liabilities ang, provisions written back are credited to Revaluation Account. Pte, « Decrease in value of assets, increase in amount of liabilities, liabilities provides unrecorded liabilities are debited to it. a * Gain (Profit) or loss from the revaluation is distributed among all the partners in thei gj profit-sharing ratio. Gain (Profit) on revaluation is credited to all Partners’ Capital Accsy (in case of Fluctuating Capitals) or Current Accounts (in case of Fixed Capitals) andifitraig in a loss, their Capital/Current Accounts are debited. After revaluation, assets and liabilities may or may not be shown at their revised (change values in the Balance Sheet of the reconstituted firm. (a) When Assets and Liabilities are shown at their Revised Values The Journal entries are: Particulars Entry a Amount G@) For increase in the value of asset Asset A/c [Revised Value - Book Vee To Revaluation A/c (i) For decrease inthe value ofasset . _| Revaluation A/c [Book Value - Revised ae To Asset A/c Gt) For increase in amount of liabilities Revaluation A/c To Liabilities A/c (0) For decrease in amount of liabilities Liabilities A/c To Revaluation A/c (vj M there isa gain (profit) on revaluation, e,, | Revaluation A/c To All Partners’ Capital A/cs total of the credit side of the Revaluation Account 's more than that of the debit side. (vi) if there is a Joss on revaluation, Le, the | All Partners’ Capital A/cs total of the debit side of the Revaluation To Revaluati ‘Account is more than credit side, nSChapter. Retirement of a Partner 5-19 tion 4 i of Deepika, Jyotika and Alia shari 5 ry 003 was: ia sharing profits and losses in the ratio of 5:3: 2.45 a 15,000 | Cash at Bank Debtors 16000 Less:Provsionfor Doubtful Debts _ 800 Stock 25000] 195000 | Machinery Land and Building A retired from the firm on Ist April, 2023, Deepika and Alia decided to share future profits ; 4, Ms in the ratio of 3: 1. Following adjustments are agreed: “i 0 pebtors of & 1,100 be written off as it is no longer receivable. “i Gi) provision for Doubtful Debts be maintained at the existing rate. Ny ‘ i) stock be written down by % 1,055. | fy) Land and Building be increased by 11,000 and Machinery be reduced to % 34,000. \ j) sundey Creditors of€ 700 be writen back as no longer payable N (vp Aprovision of % 600 be made for repairs. N aii) An old computer completely written off was sold for € 2,000 as scrap. hy (i) Firm had to pay 5,000 to an employee injured in an accident. A \, a) An unrecorded machinery valued at ® 10,000 is to be recorded. Gg prepare the Revaluation Account. Solution: thin c REVALUATION ACCOUNT G. ve % | Particulars Ee z Debts Ac 1,100 -% 800) 300 | By Land and Building A/c 11,000 1055 | By Sundry Creditors A/c 700 1,000 | By Bank A/c (Sale of old computer) 2,000 sion for Repairs AIC 600 | By Machinery Alc 10,000 on for Doubtful Debts A/c 7,500 4500 3,000 al ro Hotes: 1. When part of debtors are bad and Provision for Doubtful Debs isto be made, frst Debtors are reduced by the amount of Bad Debts and thereafter Provision for Doubtful Debts is calculated e, on the Balance Debtors (ie, 5% on & 14,900). In this situation, excess of Bad Debts over Old Provision for Doubtful Debts (Le, & 1,100 ~ & 800 = & 300) is debited to Revaluation Account. In addition, Short Provision for Doubtful Debts is also debited to Revaluation Account. 2. Students should revisit the topic discussed in the chapters, ‘Change in Profit-sharing Ratio, and ‘Admission of a Partner’ for Journal Entries.3.20 Dronteie freey Rood Rempeng — CBSE (1 When Assets and Liabilities are not shown at their Revised (Cha Lain (Det) ot Loss on Revaluation of Assets and Reassessment oe D Vay thromeh Partsers Capital Accounts by passing an adjustment entry 4, Viabiti, Mey ; le Capal (oe Current) Accounts of gaining partners and crediting/doyq.P'ting, Capital Account in, Petites In thes rogand, following steps are taken: Bet \ Step 1 Calewlaty the Net Pect of Revaluation: (1) Increase in the value of Assets (1) Add Decrease in the amount of Liabilities : (i) Less: Decrease in the value of Assets (av) Lex: Increase in the amount of Lia Net Effect of Revaluation Step 2 Calculate Sacrificed/(Gained) Profit Share of Each Partner: (i) Old Profit Share ie (11) Net Profit Share (iii) Sacrificed/(Gained) Profit Share (i - if) Step 3: Calculate Proportionate Amount of Net Effect of Revaluation: For Gaining Partner = Gained Profit Share x Net Effect of Revaluation, For Retiring Partner = Sacrificed Profit Share x Net Effect of Revaluation, Step 4: Pass the following Journal Entry: For Gain (Profit) on Revaluation For Loss on Revaluation ‘Gasning Partners’ Capital (or Current) A/cs Dr. | Retiring Partner's Capital A/c PR a | a To Retiring Partner's Capital A/c, To Gaining Partners’ Capital (or Current) aies Example: Amit, Sumit and Jatin were sharing profits and losses in the ratio of 5: 3:7. hela retired and Amit and Sumit decided to continue the firm sharing profits and losses equ after Jatin’s retirement. They decided to record the effect of the following revaluations withoy affecting the book values of the assets and liabilities by passing an Adjustment Entry Book Values (%) Revised Values i Land and Building 5,00,000. 5,50,000 Plant and Machinery 2,50,000 2,40,000 Sundry Creditors 60,000 55,000 Outstanding Expenses 60,000 75,000 Pass necessary adjustment entry. Solution Step 1: Calculation of the Net Effect of Revaluation: (i) Increase in the value of Land and Building (ii) Decrease in amount of Sundry Creditors (441) Decrease in value of Plant and Machinery (iv) Increase in the amount of Outstanding Expenses Gain (Profit) on Revaluation