Unit 3: Reconstitution of a Partnership Firm – Retirement/Death of a Partner · NCERT · Class 12 · Accountancy · Part 1

Q11Written answer

The Balance Sheet of Rajesh, Pramod and Nishant, who were sharing profits in proportion to their capitals, stood as on March 31, 2015:

Books of Rajesh, Pramod and Nishant Balance Sheet as on March 31, 2015
Liabilities		Amount ₹	Assets		Amount ₹
Bills Payable		6,250	Factory Building		12,000
Sundry Creditors		10,000	Debtors	10,500
Reserve Fund		2,750	Less: Reserve	500	10,000
Capital Accounts:			Bills Receivable		7,000
Rajesh	20,000		Stock		15,500
Pramod	15,000		Plant and Machinery		11,500
Nishant	15,000	50,000	Bank Balance		13,000
		69,000			69,000

Pramod retired on the date of the Balance Sheet, and the following adjustments were made:

a) Stock was valued at 10% less than the book value.

b) Factory buildings were appreciated by 12%.

c) Reserve for doubtful debts be created up to 5%.

d) Reserve for legal charges to be made at ₹ 265.

e) The goodwill of the firm be fixed at ₹ 10,000.

f) The capital of the new firm be fixed at ₹ 30,000. The continuing partners decide to keep their capital in the new profit-sharing ratio of 3:2.

Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance from Pramod’s Capital account to his loan account.

Show solutionHide solution

Worked solution

Journal
Date	Particulars		L.F.	Amount ₹	Amount ₹
2015
Mar. 31	Revaluation A/c	Dr.		1,840
	To Stock A/c				1,550
	To Reserve for Doubtful Debts A/c				25
	To Reserve for Legal Charges A/c				265
	(Assets and Liabilities are revalued)

Mar. 31	Factory Building A/c	Dr.		1,440
	To Revaluation A/c				1,440
	(Factory Building appreciated)

Mar. 31	Rajesh’s Capital A/c	Dr.		160
	Pramod’s Capital A/c	Dr.		120
	Nishant’s Capital A/c	Dr.		120
	To Revaluation A/c				400
	(Loss on Revaluation adjusted to Partners’ Capital Account)

Mar. 31	Rajesh’s Capital A/c	Dr.		2,000
	Nishant’s Capital A/c	Dr.		1,000
	To Pramod Capital’s A/c				3,000
	(Pramod’s share of goodwill adjusted to Rajesh’s and Nishant’s Capital Account in their gaining ratio)

Mar. 31	Reserve Fund A/c	Dr.		2,750
	To Rajesh’s Capital A/c				1,100
	To Pramod’s Capital A/c				825
	To Nishant’s Capital A/c				825
	(Reserve Fund distributed all the partners)

Mar. 31	Pramod’s Capital A/c	Dr.		18,705
	To Pramod’s Loan A/c				18,705
	(Pramod’s Capital was transferred to his Loan Account)

Mar. 31	Rajesh’s Capital A/c	Dr.		940
	Nishant’s Capital A/c	Dr.		2,705
	To Rajesh’s Current A/c				940
	To Nishant’s Current A/c				2,705
	(Excess in Capital Account is transferred to Current Account)

Parters’ Capital Account
Dr.				Cr.
Particulars	Rajesh	Pramod	Nishant		Particulars	Rajesh	Pramod	Nishant
Revaluation (Loss)	160	120	120		Balance b/d	20,000	15,000	15,000
Pramod’s Capital A/c	2,000		1,000		Reserve Fund	1,100	825	825
Pramod’s Loan A/c		18,705			Rajesh’s Capital A/c		2,000
Rajesh’s Current A/c	940				Nishant’s Capital A/c		1,000
Nishant’s Current A/c			2,705
Balance c/d	18,000		12,000
	21,100	18,825	15,825			21,100	18,825	15,825

Balance Sheet as on March 31, 2015
Liabilities		Amount ₹	Assets		Amount ₹
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Current Account:			Stock	15,500
Rajesh	940		Less: 10% Depreciation	(1,550)	13,950
Nishant	2,705	3,645
Capital Account:			Factory Building	12,000	13,440
Rajesh	18,000		Add: 12% Appreciation	1,440
Nishant	12,000	30,000	Bank Balance		13,000
		68,865			68,865

Working Notes:

1) Pramod’s share of goodwill = Total goodwill of the firm × Retiring partner’s share =
Chp 4-35

2) Gaining Ratio = New Ratio − Old Ratio

Chp 4-36

Chp 4-37

Gaining Ratio between Rajesh and Nishant = 2:1

NOTE: In the above solution, in order to adjust the capital of remaining partners in the new firm according to their new profit-sharing ratio, the surplus or the deficit of the Capital Account is transferred to their Current Account. But, in order to match the answer with that given in the book, the surplus or the deficit amount of the Partners’ Capital Account will either be withdrawn or brought in by the old partners. This treatment will be shown in the Partners’ Capital itself, and no need to transfer the surplus or deficit capital balance to their Current Accounts. The following Journal entry is passed for recording the withdrawal of surplus capital by the partners.

If existing partners withdraw their excess capital,

Journal entry will be as follows:

Rajesh’s Capital A/c	Dr.	940
Nishant’s Capital A/c	Dr.	2,705
To Bank A/c			3,645
(Surplus Capital withdrawn)

Balance Sheet as on March 31, 2015
Liabilities		Amount ₹	Assets		Amount ₹
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Capital:			Stock	15,500
Rajesh	18,000		Less: 10% Depreciation	(1,550)	13,950
Nishant	12,000	30,000
			Factory Building	12,000
			Add: 12% Appreciation	1,440	13,440
			Bank Balance		9,355
		65,220			65,220

Q12Written answer

Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2016.

Books of Jain, Gupta and Malik Balance Sheet as on March 31, 2016
Liabilities		Amount ₹	Assets	Amount ₹
Sundry Creditors		19,800	Land and Building	26,000
Telephone Bills Outstanding		300	Bonds	14,370
Accounts Payable		8,950	Cash	5,500
Accumulated Profits		16,750	Bills Receivable	23,450
			Sundry Debtors	26,700
Capitals :			Stock	18,100
Jain	40,000		Office Furniture	18,250
Gupta	60,000		Plants and Machinery	20,230
Malik	20,000	1,20,000	Computers	13,200
		1,65,800		1,65,800

The partners have been sharing profits in the ratio of 5:3:2. Malik decided to retire from the business on April 1, 2016, and his share in the business is to be calculated as per the following terms of revaluation of liabilities and assets: Stock, ₹ 20,000; Office furniture, ₹ 14,250; Plant and Machinery, ₹ 23,530; Land and Building, ₹ 20,000.

A provision of ₹ 1,700 is to be created for doubtful debts. The goodwill of the firm is valued at ₹ 9,000.

The continuing partners agreed to pay ₹ 16,500 as cash on the retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as a loan.

Prepare the Revaluation Account, Capital Account, and Balance Sheet of the reconstituted firm.

Show solutionHide solution

Worked solution

In the books of Jain and Gupta Revaluation Account
Dr.		Cr.
Particulars	Amount ₹		Particulars		Amount ₹
Office Furniture	4,000		Stock		1,900
Land and Building	6,000		Plant and Machinery		3,300
Provision for Doubtful Debts	1,700		Loss transferred to
			Jain’s Capital A/c	3,250
			Gupta’s Capital A/c	1,950
			Malik’s Capital A/c	1,300	6,500
	11,700				11,700

Partners’ Capital Account
Dr.				Cr.
Particulars	Jain	Gupta	Malik		Particulars	Jain	Gupta	Malik
Revaluation (Loss)	3,250	1,950	1,300		Balance b/d	40,000	60,000	20,000
Malik’s Capital	1,125	675			Accumulated Profits	8,375	5,025	3,350
Cash			16,500		Jain’s Capital A/c			1,125
Malik’s Loan			7,350		Gupta’s Capital A/c			675
Balance c/d	53,900	69,000			Cash	9,900	6,600
	58,275	71,625	25,150			58,275	71,625	25,150

Balance Sheet
Liabilities		Amount ₹	Assets		Amount ₹
Sundry Creditors		19,800	Stock (18,100 + 1,900)		20,000
Telephone Bills Outstanding		300	Bonds		14,370
Accounts Payable		8,950	Cash		5,500
Malik’s Loan		7,350	Bills Receivable		23,450
			Sundry Debtors	26,700
Partners’ Capital:			Less: Provision for Bad Debts	1,700	25,000
Jain	53,900		Land and Building (26,000 – 6,000)		20,000
Gupta	69,000	1,22,900	Office Furniture (18,250 – 4,000)		14,250
			Plant and Machinery (20,230 + 3,300)		23,530
			Computers		13,200
		1,59,300			1,59,300

Working Note:

1) Malik’s share of goodwill = Total Goodwill × Retiring Partner Share =
Chp 4-38

2) Gaining Ratio = New Ratio – Old Ratio

Chp 4-39

Chp 4-40

Gaining Ratio between Jain and Gupta = 10:6 or 5:3

Q13Written answer

Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2016, stood as follows:

Books of Arti, Bharti and Seema Balance Sheet as on March 31, 2016
Liabilities		Amount ₹	Assets	Amount ₹
Bills Payable		12,000	Buildings	21,000
Creditors		14,000	Cash in Hand	12,000
General Reserve		12,000	Bank	13,700
Capitals:			Debtors	12,000
Arti 20,000			Bills Receivable	4,300
Bharti	12,000		Stock	1,750
Seema	8,000	40,000	Investment	13,250
		78,000		78,000

Bharti died on June 12, 2016, and according to the deed of the said partnership, her executors are entitled to be paid as under:

(a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.

(b) Her proportionate share of the reserve fund.

(c) Her share of profits for the intervening period will be based on the sales during that period, which was calculated as ₹ 1,00,000. The rate of profit during the past three years had been 10% on sales.

(d) Goodwill, according to her share of profit, is to be calculated by taking twice the amount of the average profit of the last three years, less 20%. The profits of the previous years were:

2013 – ₹ 8,200

2014 – ₹ 9,000

2015 – ₹ 9,800

The investments were sold for ₹ 16,200, and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Show solutionHide solution

Worked solution

Books of Arti and Seema Journal
Date	Particulars		L.F.	Amount ₹	Amount ₹
2016
June 12	Interest on Capital A/c	Dr.		240
	General Reserve A/c	Dr.		4,000
	Profit and Loss (Suspense) A/c	Dr.		3,333
	To Bharti’s Capital A/c				7,573
	(Profit, interest and general reserve are credited to Bharti’s Capital account)

June 12	Arti’s Capital A/c	Dr.		3,600
	Seema’s Capital A/c	Dr.		1,200
	To Bharti’s Capital A/c				4,800
	(Bharti’s share of goodwill adjusted to Arti’s and Seema’s Capital Account in their gaining ratio, 3:1)

June 12	Bharti’s Capital A/c	Dr.		24,373
	To Bharti’s Executor’s A/c				24,373
	(Bharti’s capital account is transferred to her executor’s account)

June 12	Bank A/c	Dr.		16,200
	To Investment A/c				13,250
	To Profit on the Sale of Investment				2,950
	(Investment sold)

June 12	Bharti’s Executor A/c	Dr.		24,373
	To Bank A/c				24,373
	(Bharti Executor paid)

Bharti’s Capital Account
Dr.			Cr.
Date	Particulars	J.F.	Amount ₹	Date	Particulars	J.F.	Amount ₹
2016				2016
June 12	Bharti’s Executor’s A/c		24,373	Mar. 31	Balance b/d		12,000
				June 12	Interest on Capital		240
					Profit and Loss (Suspense)		3,333
					General Reserve		4,000
					Arti’s Capital A/c		3,600
					Seema’s Capital A/c		1,200
			24,373				24,373

Bharti’s Executor’s Account
Dr.				Cr.
Date	Particulars	J.F.	Amount ₹		Date	Particulars	J.F.	Amount ₹
2016					2016
June 12	Bank		24,373		June 12	Bharti’s Capital A/c		24,373

			24,373					24,373

Working Notes:

1. Bharti’s share of profit = Profit is 10% of sales

Sales during the last year for that period was ₹ 1, 00,000

If sales are ₹ 1,00,000, then the profit is ₹ 10,000

Chp 4-41

2. Bharti’s Share of Goodwill

Goodwill of the Firm = Average Profit × Number of Years Purchase

Chp 4-42

Or, 9,000 − 20% of 9,000 = 9,000 − 1,800 = ₹ 7,200

Goodwill of the Firm = 7,200 × 2 = ₹ 14,400

Chp 4-43

3. Gaining Ratio = New Ratio − Old Ratio

Chp 4-44

Chp 4-45

Gaining ratio between Arti and Seema = 3:1

4. Interest on Capital for 73 days, i.e. from April 1, 2016, to June 12, 2016

Interest on capital = Amount of Capital × Ratio of Interest × Period
Chp 4-46

Q14Written answer

Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2015, was as follows:

Books of Nithya, Sathya and Mithya Balance Sheet on March 31, 2015
Liabilities		Amount ₹	Assets	Amount ₹
Creditors		14,000	Investments	10,000
Reserve Fund		6,000	Goodwill	5,000
Capitals:			Premises	20,000
Nithya	30,000		Patents	6,000
Sathya	30,000		Machinery	30,000
Mithya	20,000	80,000	Stock	13,000
			Debtors	8,000
			Bank	8,000
		1,00,000		1,00,000

Mithya died on August 1, 2015. The agreement between the executors of Mithya and the partners stated that:

(a) Goodwill of the firm be valued at times the average profits of the last four years. The profits for four years were: in 2011-12, ₹ 13,000; in 2012-13, ₹ 12,000; in 2013-14, ₹ 16,000; and in 2014-15, ₹ 15,000.

(b) The patents are to be valued at ₹ 8,000, Machinery at ₹ 25,000 and Premises at ₹ 25,000.

(c) The share of profit of Mithya should be calculated on the basis of the profit of 2014-15.

(d) ₹ 4,200 should be paid immediately, and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also, prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2015, after giving effect to the adjustments.

Show solutionHide solution

Worked solution

Books of Nithya and Sathya Journal
Date	Particulars		L.F.	Amount ₹	Amount ₹
2015
Aug. 1	Nithya’s Capital A/c	Dr.		2,500
	Sathya’s Capital A/c	Dr.		1,500
	Mithya’s Capital A/c	Dr.		1,000
	To Goodwill A/c				5,000
	(Goodwill written off among all the partners)

Aug. 1	Patents A/c	Dr.		2,000
	Premises A/c	Dr.		5,000
	To Revaluation A/c				7,000
	(Increase in the value of patents and premises)

Aug. 1	Revaluation A/c	Dr.		5,000
	To Machinery A/c				5,000
	(Decrease in the value of machinery)

Aug. 1	Revaluation A/c	Dr.		2,000
	To Nithya’s Capital A/c				1,000
	To Sathya’s Capital A/c				600
	To Mithya’s Capital A/c				400
	(Profit on revaluation of liabilities and assets transferred to Partners’ Capital Account)

Aug. 1	Reserve Fund A/c	Dr.		6,000
	To Nithya’s Capital A/c				3,000
	To Sathya’s Capital A/c				1,800
	To Mithya’s Capital A/c				1,200
	(Reserve Fund transferred to Partners’ Capital Account)

Aug. 1	Nithya’s Capital A/c	Dr.		4,375
	Sathya’s Capital A/c	Dr.		2,625
	To Mithya’s Capital A/c				7,000
	(Mithya’s share of goodwill adjusted to Nithya’s and Sathya’s Capital Account in their gaining ratio, 5:3)

Aug. 1	Profit and Loss A/c (Suspense)	Dr.		1,000
	To Mithya’s Capital A/c				1,000
	(Profit till the date of death credited to Mithya’s Capital Account)

Aug. 1	Mithya’s Capital A/c	Dr.		28,600
	To Mithya Executors A/c				28,600
	(Mithya’s Capital Account transferred to her executor account)

Aug. 1	Mithya Executor’s A/c	Dr.		4,200
	To Cash A/c				4,200
	(Cash paid to Mithya’s executor)

Mithya Executor’s Account
Dr.				Cr.
Date	Particulars	J.F.	Amount ₹		Date	Particulars	J.F.	Amount ₹
2015					2015
Aug. 1 2016	Bank		4,200		Aug. 1 2016	Mithya’s Capital A/c		28,600
Jan. 31	Bank (6,100 + 1220)		7,320		Jan. 31	Interest (24,400×10100×612)(24,400×10100×612)		1,220
Mar. 31	Balance c/d		18,605		Mar. 31	Interest (18,300×10100×212)(18,300×10100×212)		305
			30,125					30,125

2016					2016
July 31 2017	Bank (6,100 + 305 + 610)		7,015		April 01 July 31 2017	Balance b/d Interest (18,300×10100×412)(18,300×10100×412)		18,605 610
Jan. 31	Bank (6,100 + 610)		6,710		Jan. 31	Interest (12,200×10100×612)(12,200×10100×612)		610
Mar. 31	Balance c/d		6202		Mar. 31	Interest (6,100×10100×212)(6,100×10100×212)		102

			19,927					19,927

2017					2017
July 31	Bank (6,100 + 102 + 203)		6,405		April 01	Balance b/d		6,202
					July 31	Interest (6,100×10100×412)(6,100×10100×412)		203
			6,405					6,405

Balance Sheet As on August 31, 2015
Liabilities		Amount ₹	Assets	Amount ₹
Creditors		14,000	Investments	10,000
Mithya’s Executor’s Loan A/c		24,400	Premises	25,000
Partners’ Capital A/c			Machinery	25,000
Nithya	27,125		Stock	13,000
Sathya	28,275	55,400	Debtors	8,000
			Patents	8,000
			Bank (8,000 – 4,200)	3,800
			Profit and Loss (Suspense)	1,000

		93,800		93,800

Working Notes:

1.

Partners’ Capital Accounts
Dr.				Cr.
Particulars	Nithya	Sathya	Mithya	Particulars	Nithya	Sathya	Mithya
Goodwill	2,500	1,500	1,000	Balance b/d	30,000	30,000	20,000
Mithya’s Capital A/c	4,375	2,625		Revaluation A/c	1,000	600	400
Mithya’s Executor’s A/c			28,600	Reserve Fund	3,000	1,800	1,200
Balance c/d	27,125	28,275		Profit and Loss A/c (Suspense)			1,000
				Nithya’s Capital A/c			4,375
				Sathya’s Capital A/c			2,625
	34,000	32,400	29,600		34,000	32,400	29,600