Tag: accounting treatment in case of retirement of a partner

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

When the goodwill is raised at its full value and written off at retirement of a partner, the remaining partners share goodwill in _________.

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. old profit sharing ratio

  2. new profit sharing ratio

  3. gaining ratio

  4. sacrificing ratio

Show answer
Correct Option: C
Explanation:
The retiring partner is entitled to his/her share of goodwill at the time of retirement because the goodwill is the result of the efforts of all the partners
including the retiring one in the past. When a partner retires from the firm, the continuing partner will gain in future profits. The retiring partner is compensated for his/her share of goodwill by the continuing partners who gains in their gaining ratio.
Journal entry when goodwill adjustment entry need to be made through partner's capital accounts without raising goodwill in the book:
 Continuing partner's capital A/c          Dr.       (in gaining ratio)
               To  Retiring partner's capital A/c        (with his share of goodwill)

Balances of A, B & C sharing profits & losses in proportion to their capitals, stood as:
A = $Rs.2,00,000$
B = $Rs.3,00,000$
C = $Rs.2,00,000$
Joint Life Policy Reserve A/c $Rs.80,000$ and Joint Life Policy A/c is shown in the balance sheet $Rs.80,000$. 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 $Rs.80,000$. 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
Explanation:

Creation of Joint Life Policy Reserve Account - Under this method, premium paid is debited to policy account and credited to bank A/c. At the end of the year, amount equal to premium is transferred from profit and loss appropriation A/c to policy reserve A/c. After this, policy A/c is brought down to its surrender value by debiting the life policy reserve A/c with amount which exceeds the surrender value of policy. Thus, in this method, policy account appears on the assets side and policy reserve account appears on the liabilities side of the balance sheet until it is realised. Both these accounts appear in the balance sheet at the surrender value of policy. 

On death or retirement of a partner Joint Life Policy Reserve Account is transferred to Joint Life Policy Account and then the balance is transferred to Partner's Capital Account in old profit sharing ratio.

The balance of joint life policy account as shown in the balance sheet represent ___________.

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. the surrender value of a policy

  2. annual premium of JLP

  3. total premium paid by the firm

  4. amount receivable on the maturity of the policy

Show answer
Correct Option: A
Explanation:
This is the case when Joint Life Policy Reserve account is maintained. In this case insurance premium paid is debited to joint life policy account and credited to bank account. At the end of the year, the amount in excess of surrender value is treated as loss and is transferred to profit and loss account and the surrender value is shown in the balance sheet every year.

B, C, D are partners sharing profits in the ratio $7:5:4$. D died on $30$th June $2006$ and profits for the years $2005-2006$ was $Rs.12,000$. How many shares in profits for the period $1$st April $2006$ to $30$th June $2006$ will be credited to D's accounts?

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. $Rs.3,000$

  2. $Rs.750$

  3. $Rs.1570$

  4. $Rs 1,000$

Show answer
Correct Option: B
Explanation:

On death of partner,  representative of deceased partner is entitled to the partner's share of profit from the beginning of the year to the date of the death.

D's share of profit on 30th June, 2006 = Total profit till date * D's share
D's share of profit on 30th June, 2006 =  Rs. 12000 * (3/12) * (4/16)
D's share of profit on 30th June, 2006 = Rs. 750

 If the firm gets dissolved due to the retirement of one the partners then what amount of JLP will be credited in partner's capital 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. Maturity Value.

  2. Surrender Value.

  3. Policy Value.

  4. None of these.

Show answer
Correct Option: B
Explanation:
At the time of retirement of a partner, readjustments takes place. Whenever a partner retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to be paid to discharge the claims of retiring partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy is taken into account. Revaluation of profit and reserves are transferred to capital or current accounts of partners. Lastly, final amount due to the retiring partner is determined and discharged.