Retirement / Death of a Partner

Q.1. What is meant by retirement of a partner?

Ans.Retirement of a  partner is one of the modes of reconstituting the firm under which the existing partnership deed comes an end and in its place a new one among the remaining partners comes into existence.

Q.2. What is meant by Gaining ratio on retirement of a partner?

Ans.Gaining ratio is the ratio in which the retiring partner share is acquired by continuing partners it is computed by deducing old from the new ratio.

Q.3. What treatment is made of accumulated profits and losses on the retirement of a partner?

Ans. Accumulated profits are credited to the capital accounts of old partners in their old ratio and accumulated losses are debits to their capital accounts in old ratio.

Q.4. For which share of goodwill a partner is entitled at the time of the time of his retirement?

Ans. Retiring partner is entitled to goodwill accounting to his share of profits in the firm.

Q.5. How goodwill is recorded on the retirement or death of a partner?

Ans. Remaining partner capital account Dr. (in gaming ratio)

        To Retiring or Deceased partner capital Account (with his share of 

   goodwill)

Q.6. Name the account which is opened to credit the share of profit of the deceased partner till the time of his death to his capital account.

Ans. Profits and loss suspense account.

Q.7. At what rate interest is payable on the amount remaining unpaid to the executor of the deceased partner?

Ans. 6% p.a. 

Q.8. State Any Two Items Of Deduction That May Have To Be Made From The Amount Payable To A Retiring Partner.

Ans.The following deductions are entered on the debit side of retiring partners capital account:

1. His share of loss on revaluation of assets and reassessment of liabilities 

2. His Share Of Existing Goodwill Written Off. 

Q.9. What  is the basis of calculation of deceased partner share of profit from the date of last balance sheet to the date of his death?

Ans. (i) On the basis of time : i.e. on the basis of last year profit or average profit of past few years or (ii) on the basis of sales.

Q.10. Name two items which are credited to the capital account of a partner upon his death. 

Ans. (i) His share of life policy (ii) His share of undistributed profits or reserves 

Q.11. What journal entry will be recorded for deceased partner share in profit from the closure of last balance sheet till the date of his death?

Ans. Profit and loss suspense account Dr. 

          To Deceased partner capital account

Q.12. What journal entry will be recorded for writing off the goodwill already existing in balance sheet at the time of retirement of a partner?

Ans. All partner capital A/cs (including retiring) Dr. (in old ratio)

Q.13. State two basis for determination of profits from the date of last balance sheet to the date of death/retirement.

Ans. (i) On time basis (ii) On sales basis.

Q.14. Why is gaming ratio calculated?

Ans. Gaining ratio is required because the continuing partners will pay the amount of goodwill to the retiring partner in their gaining ratio.

Q.15. Give any one distinction between sacrificing ratio and gaining ratio.

Ans.

Basis of Difference

Sacrificing Ratio

It is the ratio in which the old partners surrender a part of their share in favour of new partner.

Gaining Ratio

It is the ratio in which the remaining partners acquire the outgoing (retired or deceased) partner share.

Q.16. Why are liabilities revalued at the time of retirement of a partner?

Ans. Assets and liabilities are revalued because the profit or loss due to their revaluation is divided between all partners (including the retiring partner) in their old profit sharing ratio.

Q.17. Why are retiring or deceased partners entitled to a share of goodwill of the firm?

Ans., since the retiring or deceased partner will not be sharing future profits goodwill is given to compensate him for the same.

Q.18. Can a retiring partner or legal representatives of a deceased partner claim a share in the subsequent profits of the firm.

Or

What will happen if retired or deceased partner dues are not settled immediately?

Ans. If amount due to a retiring partner or legal or representatives of a  deceased partner is not paid in full they have the choice to get either of the following:

1. Interest @6% per annum on the balance amount

Or

2. Share in subsequent profit of the firm in proportion to the balance amount.

Q.19. On the retirement of a partner how is the profit sharing ratio of remaining partners decided?

Ans. Profit sharing ratio of remaining partners is decided accounting to the mutual agreement among the remaining partners.

Q.20. At the time of retirement of a apartner state the condition when there is no need to compute the gaining ratio.

Ans. There is no need to compute the gaining ratio when the continuing partners decide to share profits in the same ratio that existed among then prior to retirement.

Q.21. In which ratio do the remaining partners acquire the share of profits of the retiring partner?

Ans. Remaining partners acquire the share of profit of the retiring partner in gaming ratio.

Q.22. Ramesh wants to retire from the fir,. The profit on revolution on that date was Rs.12,000. Mohan and Rahul want to share this in their new profit sharing ratio 3: 2 Ramesh wants this shared equally. How is this profit to be shared?

Ans. Profit on Revaluation will be shared by three partners in their old profit sharing ratio.

Q.23. Jamuna,Ganga and Krishna are partners in a afirm. Krishna retired from the firm. After making adjustment for Reserves and Revaluation of assets and Liabilities, the balance in Krishna capital account was Rs. 1,20,000 Jamuna and Ganga paid Rs. 1,80,000 in full settlement to krishna . identify the item for which jamuna and ganga paid Rs. 60,000 more to krishna 

Ans. Her share of Goodwill

Q.26. A,B and C partners sharing profits in the ratio of ½ ¼ ¼ what will; be the new ratio on the retirement of B?

Ans.. 2 : 1

Q.27. X, Y and Z are partners sharing profits in the ratio of ½, ⅖ and 1/10 find the new ratio of remaining partners if Z retires.

Ans. Old ratio of X, Y and Z = ½ : ⅖: 1/10: or 5 : 4: 1

Hence if Z retires the new ratio between X and Y will be 5 :4 

Q.28. A,B and C are partners sharing profits in the ratio of ¼ : 3/10 : 1/10 . what will be the new ratio on the retirement of C?

Ans. 5 : 6

Q.29. A,B and C partners sharing profits in the ratio of 5 : 2 :1. If the new ratio on the retirement of C 5 : 2 what will be the gaining ratio?

Ans. 5 : 2 

Q.30. P,Q and R are partners profits in the ratio of 5 : 4: 3 : Q and P and R decide to share profits equally. What will be the gaining Ratio?

Ans. 1 : 3

Q.31. P, Q and R share profits in the ratio of 5 : 4 : 3  R retires and the new ratio is 5 : 3 if  R is Given Rs. 6,000 as goodwill what will be the journal entry?

Ans.P ‘s capital A/c Dr. 5,000

       Q,s capital A/c Dr. 1,000

           To R,s capital A/c 6,000

Q.32. Aba and Beena wee partners profits and losses in the ratio of 3 : 2 on april 1st 2013 they decided to admit chanda for 1/5th share in th profits they had a areseve of Rs. 25,000 which they wanted to show in their new balance sheet. Chanda agreed and the necessary adjustments were made in the books. On october 1st abha daughter fiza in their partnership who agreed to bring Rs.2,00,000 as capital calculate abha share in the reserved on the date of her death.

Ans. Abha;s share in reserve Rs, 12,000

  Working Note: New Ratio of Abha ,Beena and Chanda 12 : 8 : 5 :Hence Abha share in Raserve = Rs. 25,000 x 12/25 =Rs. 12,000

Q.33. Khushi, Surekha and Visa were partner sharing profits and losses in 3 : 2: 1. Khushi retired and on this day an unrecorded liability of Rs. 1,50,000 was found in the books khushi was of the opinion that since she has retired she should not be debited for her share of the liability surekha and vipasa convinced khushi that unrecorded liability has to be borne by all of them to which khushi agreed what argument must have been put forward by surekha and bipasha which convinced khushi?

Ans. Surekha and vipasa would have given the argument unrecorded liability belonged to the period when khushi was also a partner as such she should also bear the which loss according to her share.

Q.34. Rachit, Shekhar and Tarun were partners sharing sharing profits in the ratio of 2 : 3: 4. Shekhar retired on 1st April 2018 on which date the balance sheet of the firm showed the following position: 

Investments (Market Value Rs. 2,60,000) 3,00,000

Investment Fluctuation Reserve 1,30,000

Shekher was of the opinion that Rs,1,30,000 should be credited to the capital accounts of all the partners in their profit sharing ratio whereas rachit and tarun were of the opinion that Rs. 90,000 instead of Rs. 1,30,000 should be credited to the capital accounts of all the partners to shekhar ultimately agreed. Explain what argument must have been put forward by rachit and tarun that convinced shakher.

Ans. Rachit and Tarun must have given the argument that loss of Rs. 40,000 due to decline int the value of investments is related to the related to the when shekhar was also a partner Hence the loss must be adjusted against investment fluctuation REserve and the remaining reserves of s. 90,000 should be shared by all the partners in their old profit sharing ratio.

Q.35. P,Q,and R were partners in the ratio of 5 : 4 : 3 respectively . Their capitals were Rs. 50,000 Rs. 40,000 and Rs. 30,000 respectively state the ratio in which the goodwill of the firm amounting to Rs. 6,00,000 will be adjusted in the capital accounts of the remaining partners on the retirement of Q.

Ans. It will be retirement of hari from the firm of Hari ram and sharma in their profit sharing ratio i.e. equally.

Some More Questions

Q. 1. Does the retirement of a partner mean reconstitution of a firm?

Ans. Yes, on the retirement of a partner, the existing partnership comes to an end and the remaining partners enter into a fresh agreement. So, retirement means reconstitution of a firm.

Q. 2. How can a partner retire from a firm? (CBSE, Foreign 2009}

Ans. A partner may retire with the consent of all the other partners of the firm.

Q. 3. Define the Gaining Ratio.

{CBSE, Delhi 2008}

Ans. Gaining Ratio is the ratio in which the remaining partners acquire the share of the retiring or the deceased partner.

Q. 4. Why is a gaining ratio calculated?

{CBSE, Delhi 2009 (III)}

Ans. Gaining ratio is calculated to determine the amount of compensation to be paid by the continuing gaining partners to the outgoing partner for goodwill.

Q. 5. Give the formula for calculating 'gaining share' of a partner in a partnership firm.

{CBSE, Sample Paper 2009}

Ans. Gaining Share = New Share  –  Old Share.

Q. 6. A, T and R were partners in a firm sharing profits in the ratio of 5:6:7 respectively. Their capitals were Rs. 5,00,000; Rs. 6,00,000 and Rs. 7,00,000 respectively. State the ratio in which the goodwill of the firm amounting to Rs. 16,00,000 will be adjusted in the capital accounts of A and T in case of R's death.

{CBSE, Delhi Comptt. 2014}

Ans. R's share of goodwill of Rs. 6,22,222 (= 16,00,000 x 7/18) will be adjusted in the capital accounts of A and Tin their gaining ratio of 5:6.

Q. 7. At the time of retirement of a partner, state the condition when there is no need to compute the gaining ratio. 

{CBSE, All India Comptt. 2013}

Ans. When the continuing partners continue to share the profits in the same ratio that existed between them prior to retirement. In such a case, old ratio is equal to the gaining ratio.

Q. 8. On the retirement of a partner how is the profit – sharing ratio of the remaining partners decided?

{CBSE, All India Comptt. 2013}

Ans. It is decided as per the mutual agreement among the remaining partners.

Q. 9. A, B and C are partners sharing profits in the ratio of 3:2:1. B retires and the new profit – sharing ratio between A and C is 3:1. State the gaining ratio. 

Ans. Gaining Ratio = 3:1.

Q. 10. Give any one distinction between Sacrificing Ratio and Gaining Ratio. 

{CBSE, All India 2012}

Ans. Sacrificing Ratio is calculated at the time of admission of a new partner, whereas, Gaining Ratio is calculated at the time of retirement or death of a partner.

Q. 11. A, B and C are partners sharing profits in the ratio of 1/2:1/3:1/6. What will be the new ratio and gaining ratio on C's retirement? Ans. Old Ratio = 1/2:1/3:1/6 = 3:2:1. On C's retirement, new ratio as well as gaining ratio will be 3:2.

Q. 12. P, Q and R are partners sharing profits in the ratio of 5:3:2. R retires and his share is taken by P and Q equally. State the gaining ratio. 

Ans. Gaining Ratio =1:1.

Q. 13. State any two items of deduction that may have to be made from the amount payable to a retiring partner. 

{CBSE, Delhi Comptt. 2009}

Ans. (i) His share of loss on revaluation of assets and reassessment of liabilities;

(ii) His share of existing Goodwill written off.

Q. 14. Which share of Goodwill a partner is entitled to at the time of retirement? 

{CBSE, Delhi 2012}

Ans. According to his share of profit in a firm.

Q. 15. How would you deal with existing goodwill at the retirement of a partner?

Ans. Existing goodwill will be written off by debiting all partners' capital accounts in their old ratio and crediting the goodwill account.

Q. 16. Jamuna, Ganga and Krishna are partners in a firm. Krishna retired from the firm. After making adjustments for Reserves and Revaluation of Assets and Liabilities, the balance in Krishna's capital account was Rs. 1,20,000. Jamuna and Ganga paid Rs. 1,80,000 in full settlement to Krishna. Identify the item for which Jamuna and Ganga paid Rs. 60,000 more to Krishna. 

{CBSE, Delhi Comptt. 2013}

Ans. Jamuna and Ganga paid Rs. 60,000 more to Krishna for his share of Goodwill.

Q. 18. P, Q and R were partners in a firm sharing profits in the ratio of 5:4:3. Their capitals were Rs. 40,000; Rs. 50,000 and Rs. 1,00,000 respectively. State the ratio in which the goodwill of the firm amounting to Rs. 1,20,000 will be adjusted on the retirement of R. 

{CBSE, All India Comptt. 2010}

Ans. R's share of goodwill of Rs. 30,000 (= 1,20,000 x 3/12) will be contributed by P and Q in their gaining ratio of 5:4.

Q. 21. What is the treatment of accumulated profits at the time of retirement of a partner?

Ans. Accumulated profits are credited to the capital accounts of all the partners (including the retiring partner) in their old ratio.

Q. 22. A, B and C are partners in a firm. C wants to retire from the firm. There is general reserve of Rs. 60,000. C wants that it should be divided between all the partners, whereas, A and B object to it. What will be the correct treatment to adjust the amount of General Reserve?

Ans. General Reserve of Rs. 60,000 will be distributed between all the partners in their old ratio.

Q. 23. Ram, Mohan and Sohan were partners in a firm sharing profits in the ratio of 4;3:2. Mohan retired. His share was taken over equally by Ram and Sohan. In which ratio will the profit or loss on revaluation of assets and liabilities on the retirement of Mohan be transferred to the capital accounts of the partners. 

{CBSE, Delhi Comptt. 2010}

Ans. Old Ratio of all the partners (including the retiring partner).

Q. 24. Why does a firm revaluate its assets and reassess its liabilities on retirement or death of a partner?

{CBSE, Foreign 2014}

Ans. Assets are revalued and liabilities are reassessed to bring the same at actual present value and to adjust the profit or loss on revaluation in the capital accounts of all the partners in their old ratio.

Q. 25. What are the two approaches to estimate the deceased partner's share in profit upto his time of death? Ans. (i) On the basis of Time; (ii) On the basis of Sales.

Q. 26. Name the account which is opened to credit the share of profit of the deceased partner, till the time of his death to his Capital Account. 

{CBSE, Delhi 2013}

Ans. Profit and Loss Suspense Account.

Q. 27. At what rate is interest payable on the amount remaining unpaid to the executor of deceased partner? 

{CBSE, All India 2013}

Ans. Rate of interest is 6% p.a.

Q. 28. Give the Journal entry to record the share of profit of the deceased partner from the closure of the last Balance Sheet till the time of his death. Ans. Journal

Profit and Loss Suspense A/c

To Deceased Partner's Capital A/c (Being deceased partner's share of estimated profits till date of his death credited)

Dr.

Q. 29. Why heirs of a retiring / deceased partner are entitled to share of goodwill of the firm?

{CBSE, Delhi 2014}

Ans. The retiring partner / heirs of deceased partner are entitled to his share or goodwill because the goodwill earned by the firm is the result of the efforts of all the existing partners in the past. As they will not be sharing future profits, it will be fair to compensate them for the same.