Tag: accounting treatment in case of retirement of a partner

Questions Related to accounting treatment in case of retirement of a partner

Choose the correct answers from the alternatives given.
For firms acts after retirement, a retiring partner ________. 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. is not liable to third party even if no public notice is given of his retirement

  2. is not liable to third party who deals with the firm without knowing. that he was a partner even if no public notice is given of his retirement

  3. continues to be liable to every third party (whether or not having knowledge that he was a partner) if no public notice in give

  4. none of these

Show answer
Correct Option: B
Explanation:

Liability of a retired partner - A retired partner is held liable to the debts of his firm and for all the acts of the firm done before and upto the date of his retirement. However, a retiring partner may be discharged from his liabilty to any third party for the acts of his firm done before his retirement by entering into agreement with such third party and partners of the reconstituted firm. Such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of retirement. Thus a third party should recognise the reconstituted firm as its debtor in order to free the retiring partner from his liability.

If a partner retires without giving necessary public notice, he continues to be liable as a partner by holding out. Of course, if a dormant partner retires without giving any public notice, he cannot be held liable as a partner by holding out. A retired partner is not liable to third party who deals with the firm without knowing that he was a partner even if no public notice is given of his retrement.

Choose the correct answers from the alternatives given.
Unless otherwise agreed, a retiring partner can _______. 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. carry on competing business

  2. use the firms name

  3. represent himself as carrying on firms business

  4. solicit the old customers

Show answer
Correct Option: A
Explanation:
Rights of an outgoing partner to carry on competing business - An outgoing partner may carry on a business competing with that of the firm and he may advertise such business. But subject to contract to the contrary may not
1. Use the firm name,
2. Represents himself as carrying on the business of the firm,
3 Solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

At the time of death of partner following entries can be made:

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Transfer all balance from capital account of partner to loan account.

  2. Pay cash immediately from his capital account.

  3. Transfer all balance from capital account to partners executor's accounts.

  4. Both (B) & (C).

Show answer
Correct Option: C
Explanation:

At the death of a partner, all of the assets and liabilities have to be revalued and the resultant profit or loss has to be transferred to capital accounts of all partners including the deceased partner. Goodwill is raised and the joint life policy, if any, is taken into consideration. Lastly, final amount due to the deceased partner is determined and it should be credited to his Executor's Account.

A, B & C Care the partners sharing profits and losses in the ratio $2:1:1$. Firm has a joint life policy of $Rs.1,20,000$ and in the balance sheet it is appearing at the surrender value i. e. $Rs.20,000$. On the the death of A, how this JLP will be shared among the partners? 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $50,000 : 25,000 : 25,000$

  2. $60,000 :30,000 : 30,000$

  3. $40,000 :35,000 :25,000$

  4. Whole of $Rs.1,20,000$ will be paid to A

Show answer
Correct Option: A
Explanation:

If Joint Life Policy appears in the Balance Sheet at surrender value, then the firm will gain on the death of a partner and partners will get

 policy amount - Surrender value i.e., in their profit sharing ratio
Rs. 120000 - Rs. 20000 = Rs. 100000
Distribution of JLP among the partners is : 
A = 100000 * (2/4) = 50000
B = 100000 * (1/4) = 25000
C = 100000 * (1/4) = 25000

X & Y are partners sharing profit in the ratio of 3:2. Z was admitted on the following terms:New profit sharing ratio will be 5:3:2 Machinery would be depreciated by $8\%$ (book value Rs. 1,80,000)Building would be appreciated by $15\%$ (book value Rs. 1,50,000)To create provision for bad debts $5\%$ on Debtors of Rs.25,000 Unrecorded debtors of Rs.1,250 would be brought into books Creditors amounting to Rs.2,750 died and need not to pay anything. Find the distribution of profit/loss on revalution between X & Y.    

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Profit 3,210 & 2,140

  2. Profit 6,510 & 4,340

  3. Profit 1,710 & 1,140

  4. Profit 1,140 & 1,710

Show answer
Correct Option: B

The executors of the deceased partner are entitled to a share of profit earned by the firm from the date of last balance sheet and to the date of death. Which of the entry will be passed for this purpose?
(Name of the deceased partner was Mr. X) 

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Profit & Loss Suspense A / C Dr.

    To X A / C

  2. X A / C Dr.

    To Profit & Loss A / C

  3. X A / C Dr.

    To Memorandum Revaluation A / C

  4. X A / C Dr.

    To Profit & Loss Suspense A / C

Show answer
Correct Option: A

R, J & D are the partners sharing profits in the ratio $7:5:4$. D died on $30$th June, $2015$. It was decided to value the goodwill on the basis of $3$ year's purchase of last 5 years average profits. It the profits are $Rs.29,600$; $Rs.28,700$; $Rs.28,900$; $Rs.24,000$ & $Rs.26,800$. What will be D's share of goodwill?

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $Rs.20,700$

  2. $Rs.27,600$

  3. $Rs.82,800$

  4. $Rs.27,000$

Show answer
Correct Option: A
Explanation:

Old ratio (R, J and D) = 7 : 5 : 4

Calculation of goodwill :
1. Average profit = (29600 + 28700 + 28900 + 24000 + 26800) /5
                            = 138000/5
                            = 27600
2. Goodwill = Average profit * No. of year's purchase
                    = 27600 * 3
                    = 82800
D's share of goodwill = Total goodwill * D's share
                                    = 82800 * (4/16) 
                                    = 20700

If three partners A, B & C are sharing profits as $5:3:2$, then on the death of a partner A, how much B & C will pay to A's execute on account of goodwill if Goodwill is to be calculated from $2$ years purchase of the last three years average profits. Profits for three years are: $Rs.6,58,000$; $Rs. 6,92,000$ and $Rs.8,10,000$. 

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $Rs.4,32,000$ & $Rs.2,84,000$

  2. $Rs.4,88,000$ & $Rs.4,32,000$

  3. $Rs.7,20,000$ & $Rs.7,20,000$

  4. $Rs.4,32,000$ & $Rs.2,88,000$

Show answer
Correct Option: D
Explanation:

Profit sharing ratio of A, B and C is 5 : 3 : 2

A's share of goodwill = (5/10) * 1440000 = 720000           (working note)
Contribution for A's share of goodwill by:-
B = 720000 * (3/15) = 432000                                             (Note)
C = 720000 * (2/5) = 288000                                              (Note)
Working note:-
Calculation of goodwill :-
1. Average profit =  (658000 + 692000 + 810000) / 3
                            = 2160000/3 
                            = 720000
2. Goodwill = Average profit * No. of year's purchase
                    =  720000 * 2
                    = 1440000
Note : In the absence of information gaining ratio and new ratio will be same as old ratio.

Balance of A,B & C sharing profits & losses in proportion to their capitals, stood as :
A = 2,00,000
B = 3,00,000
C = 2,00,000
Joint Life Policy Reserve A/c 80,000 and Joint Life Policy A/c is shown in the balance sheet 80,000 A desired to retire from the firm and the remaining, partners decided to carry on in equal ratio, joint life policy of the partners surrendered and cash obtained 80,000 What will be the treatment for  joint Life Policy Reserve A/c?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Cash received credited to Revaluation A/c

  2. JLP Reserve balance credited to Partner's Capital A/c in old profit sharing ratio.

  3. JLP Reserve balance credited to Partner's Capital A/c in new profit sharing ratio.

  4. Cash received credited to Partners' Capital A/c in old profit sharing ratio.

Show answer
Correct Option: B

If a partner dies, then JLP will be reckoned at ________.

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. surrender value

  2. maturity value

  3. policy value

  4. none of these

Show answer
Correct Option: B
Explanation:
On the death of a partner, assets and liabilities are revalued and the resultant profit and loss has  to be transferred to the capital accounts of the partners including the deceased partner, value of goodwill is raised and the maturity value of joint life policy is taken into account. Revaluation profit and reserves are transferred to capital or current accounts of partners. After ascertaining the amount due to the deceased partner, it should be credited to his executor's account.