The retiring partner must be compensated by the remaining partners by the amount of his share of goodwill by passing the following journal entry:

Remaining Partner's Capital A/c (In gaining ratio)                             Dr.

To Retiring Partner's Capital A/c

Existing goodwill, however, must be written off to all the partners’ capital accounts (including retiring partner) in the old profit-sharing ratio.

All partners’ capital (including retiring partner) A/c (in old ratio)     Dr.

To Goodwill A/c

Treatment of Goodwill on Retirement

Hidden Goodwill on Retirement:

There can be case of hidden goodwill in case of retirement also.

If the payment agreed to be made to the retiring partner is in excess of the claim calculated due to him after all the adjustments relating to Reserves, Revaluation etc., that excess is his share of Hidden Goodwill.

Retiring Partner's Share of Hidden Goodwill = Payment Agreed for Retiring Partner - Claim after all the adjustments

This Share of Retiring Partner in Hidden Goodwill should be adjusted through Capital/Current Accounts of the Gaining Partners in Gaining Ratio, by passing the following Journal Entry:

Gaining Partners' Capital/Current A/cs    Dr. (Shared in Gaining Ratio)

To Retiring Partner's Capital A/c      (Retiring Partner's Share of Hidden Goodwill)

Practice Questions for

Hidden Goodwill in case of Retirement of Partner:

Question 1:

A, B and C are partners sharing profits in 3:2:1. B retires and his capital account after making adjustments for reserves and profit on revaluation exists at ₹70,000. A and C have agreed to pay him ₹1,00,000 in full settlement of his claim. Pass journal entry for treatment of goodwill.

Answer with hints:

(a) B’s share of Hidden Goodwill: ₹30,000

(b) Gaining Ratio: 3:1

(c) A’s Capital A/c     Dr. ₹22,500

C’s Capital A/c     Dr.   ₹7,500

To B’s Capital A/c     ₹30,000

Question 2:

X, Y and Z are partners sharing profits in the ratio of 3:1:2. Z retires and his capital, after making adjustments for reserves and gain (profit) on revaluation is ₹2,80,000. X and Y agreed to pay him ₹3,50,000 in full settlement of his claim. Pass necessary Journal entry for the treatment of goodwill if new profit-sharing ratio is decided at 1:1.

Answer with hints:

(a) Z’s share of Hidden Goodwill: ₹70,000

(b) Gaining Ratio: Only Y gains 1/3 share.

(c) Y’s Capital A/c     Dr.   ₹70,000

To Z’s Capital A/c    ₹70,000

Question 3:

A, B and C were partners sharing profits and losses equally. On 1st April, 2024, A retired and amount due to him on account of share of reserves and revaluation profit was 11,00,000. B and C agreed to pay him ₹12,50,000 on retirement. B and C decide to share future profits and losses in the ratio of 3:2. Pass the necessary Journal entries on A's retirement.

Answer with hints:

(a) A’s share of Hidden Goodwill: ₹1,50,000

(b) Gaining Ratio: 4:1

(c) B’s Capital A/c     Dr.   ₹1,20,000

C’s Capital A/c     Dr.      ₹30,000

To A’s Capital A/c    ₹1,50,000

Question 4:

P, Q and R, are partners sharing profits in the ratio of 4:3:2. Q retires and his capital after making adjustments for reserves and gain (profit) on revaluation stands at ₹89,200. P and R agreed to pay him ₹1,00,000 in full settlement of his claim. Record necessary Journal entry for adjustment of goodwill the new profit-sharing ratio is decided at 5:3.

Answer with hints:

(a) Q’s share of Hidden Goodwill: ₹10,800

(b) Gaining Ratio: 13:11

(c) P’s Capital A/c     Dr.   ₹5,850

R’s Capital A/c     Dr.      ₹4,950

To Q’s Capital A/c    ₹10,800

Class 12 Accountancy MCQs Retirement of Partner

Payment to Retiring Partner

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All these MCQs are from Retirement of Partner chapter for practice purposes to prepare for final Exam. DO these questions after preparing the chapter thoroughly. Not your time for speed and accuracy.

1. Peter, Kaef and Ralaph are partners sharing profits in the ratio of 8:5:3. Kaef retires. Peter takes 1/8 share from Kaef and Ralaph takes 3/16 share from Kaef.  What will be the new profit-sharing ratio?

a) 1:1

b) 10:6

c) 9:7

d) 5:3

2. Hema, Hena and Reena are partners sharing profits and losses in the ratio of 4:3:2. Hena retires and surrenders 1/9th of her share in favour of Hema and the remaining in favour of Reena. The new profit-sharing ratio will be:

a) 8:1

b) 14:13

c) 1:8

d) 13:14

3. If goodwill is already appearing in the books of accounts at the time of retirement, then it should be written off in :

a) Sacrificing Ratio

b) Old Profit-Sharing Ratio

c) New Profit-Sharing Ratio

d) Gaining Ratio

4. As per Section 37 of the Indian Partnership Act, 1932, interest @......is payable to the retiring partner if full or part of his dues remain unpaid:

a) 9% m.

b) 12% p.m.

c) 6% p.m.

d) None of the above

5. On retirement of a partner, debtors of ₹48,000 were shown in the Balance sheet. Out of this ₹6,000 became bad. One debtor became insolvent. 60% were recovered from him out of ₹20,000. Full amount is expected from the balance debtors. On account of this item loss in revaluation account will be:

a) ₹10,200

b) ₹14,000

c) ₹7,000

d) ₹4,000

6. On retirement of a partner, debtors of ₹72,000 were shown in the Balance sheet. Out of this ₹8,000 became bad. 70% were recovered from the balance debtors. On account of this item loss on revaluation account will be:

a) ₹4,000

b) ₹24,000

c) ₹27,200

d) None of these

7. As per section ………..of the Indian Partnership Act, a retiring partner becomes entitled to profits after retirement if his dues remain unpaid:

a) Section 73

b) Section 26

c) Section 4

d) Section 37

8. At the time of retirement, amount remaining in Investment Fluctuation Reserve after meeting the fall in value of Investment is:

a) Credited in Sacrificing Ratio

b) Credited in New Profit-Sharing Ratio

c) Credited in Old Profit-Sharing Ratio

d) Credited in Gaining Ratio

9. If at the time of retirement, there is some unrecorded asset, it will be………… to……….. Account.

a) Debited, Revaluation

b) Credited, Revaluation

c) Debited, Goodwill

d) Credited, Partners’ Capital

10. Keerat, Seerat and Teerth were partners sharing profits in the ratio 3:2:1. Keerat retired and his dues towards the firm including Capital balance, Accumulated profits and losses share, Revaluation Gain amounted to ₹5,80,000. Keerat was being paid ₹7,00,000 in full settlement. For giving that additional amount of ₹1,20,000, Seerat was debited for ₹40,000. Determine goodwill of the firm.

a) ₹1,20,000

b) ₹80,000

c) ₹2,40,000

d) ₹3,60,000

Class 12 Accountancy MCQs Retirement of Partner

11. An amount of ₹50,000 was payable to the retiring partner and it was brought in by the remaining partners in the ratio 3:2. What will be the effect on bank/cash balance in the reconstituted balance sheet?

a) Increase in Balance by ₹ 50,000

b) Decrease in Balance by ₹ 50,000

c) No Change in Cash Balance

d) Decrease in Balance by ₹ 1,00,000

12. Section 37 of the Partnership Act states that the outgoing partner is entitled to:

a) Proportionate share in profits

b) Interest on Loan dues @ 6% p.a

c) Immediate payment of dues

d) Either of (a) or (b)

13. Ranjeet Associates is having three partners named as Ranjeet, Lakhwinder and Surjeet. Their Capitals were ₹ 4,00,000; ₹ 2,40,000 and ₹ 1,60,000 respectively. Surjeet retired on March 31, 2024 and sold her share of profits by taking ₹ 30,000 from Ranjeet and ₹ 20,000 from Lakhwinder. The new ratio would be:

a) 1 : 1

b) 7 : 8

c) 3 : 2

d) 8 : 7

14. A, B and C are partners sharing profits and losses in the ratio 5:4:1. B retired on 31st March 2024 and her dues came out to be ₹ 7,20,000. Amount of ₹ 1,20,000 was paid immediately and balance was to be paid in three equal annual instalments together with interest @ 10% per annum. Determine the amount payable to B on 31st March 2027.

a) ₹ 2,00,000

b) ₹ 2,20,000

c) ₹ 2,40,000

d) ₹ 2,88,000

15. Amna, Beena and Seema were partners in a firm sharing profits in the ratio of 2: 2: 1. Seema retired. The balance in her capital account after adjustments regarding reserves, accumulated profits/loss and revaluation of assets and liabilities was ₹ 3,40,000. Seema was paid ₹ 4,00,000 including her share of goodwill. The Goodwill was valued at:

a) ₹ 60,000

b) ₹ 3,00,000

c) ₹ 1,00,000

d) ₹ 12,000

16. Titu, Mitu and Kitu are partners sharing profits in the ratio of 4:3:2. Mitu retired and his capital after making adjustment for reserves and profit on revaluation was determined to be ₹4,64,000. Titu and Kitu agreed to pay him ₹5,00,000 in settlement of his dues. For the excess amount given, Titu was debited by ₹19,500. Value of firm's goodwill will be:

a) ₹1,84,000

b) ₹1,06,000

c) ₹1,62,000

d) ₹1,08,000

17. Assertion: Retiring partner is entitled to his share of goodwill at the time of retirement.
Reason: goodwill earned by the firm is result of efforts of all existing partners in the past.

a) Assertion is true, reason is false.
b) Assertion is false, reason is true
c) Both Assertion and reason are true and reason is correct explanation of assertion.
d) Assertion and reason both are true but reason is not the correct explanation of assertion.

18. Red, Blue and Green are partners sharing profits and losses in the ratio of 5: 3 :2. Red retires, and goodwill is valued at ₹60,000. New profit-sharing ratio of Blue and Green will be equal. For the adjustment of goodwill, Blue and Green’s capital accounts will be debited by:

a) ₹ 18,000 and ₹12,000 respectively.

b) ₹12,000 and ₹18,000 respectively.

c) ₹20,000 and ₹10,000 respectively.

d) ₹10,000 and ₹20,000 respectively.

19. A, B and C are partners in a firm. B retires and his claim including his capital and his share of goodwill is ₹ 1,20,000. He is paid partly in cash and partly in kind. A machine valued at ₹ 60,000 unrecorded in the books of the firm and the balance in cash is given to him to settle his account. The amount of cash to be paid to B will be:

a) ₹ 80,000

b) ₹ 60,000

c) ₹ 40,000

d) ₹ 30,000

20. Assertion (A): The partners whose profit shares have increased as result of change in profit sharing ratio are known as gaining partners.

Reason(R): Gaining ratio = new ratio - old ratio

a) Both A and R are correct, and R is the correct explanation of A.

b) Both A and R are correct, but R is not the correct explanation of A.

c) A is correct but R is wrong

d) A is wrong but R is correct.

More questions will be added from time to time...

Class 12 Accountancy MCQs Retirement of Partner - Answers

1. d) 5:3
2. d) 13:14
3. b) Old Profit-Sharing Ratio
4. d) None of the above
5. b) ₹14,000
6. c) ₹27,200
7. d) Section 37
8. c) Credited in Old Profit-Sharing Ratio
9. b) Credited, Revaluation
10. c) ₹2,40,000
11. c) No Change in Cash Balance
12. d) Either of (a) or (b)
13. d) 8 : 7
14. b) ₹ 2,20,000
15. b) ₹ 3,00,000
16. d) ₹1,08,000
17. c) Both Assertion and reason are true and reason is correct explanation of assertion.
18. b) ₹12,000 and ₹18,000 respectively
19. b) ₹ 60,000
20. a) Both A and R are correct, and R is the correct explanation of A.

Class 12 Accountancy MCQs Admission of Partner

Learning Games and Activities in Accountancy – Class 12

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Following are the main adjustments required at the time of a partner from a partnership firm:

1. Change in the profit sharing ratio.
2. Accounting treatment of goodwill.
3. Revaluation of assets and liabilities.
4. Treatment of reserves and undistributed profits.
5. Payment of amount due to retiring partner.
6. Adjustment of capitals of the remaining partners.

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New Profit-sharing ratio = Old share of profits + share of profits acquired from the retiring partner (gain).

There can be following cases:

Case 1

Suppose A, B and C are partners sharing in the ratio 3:2:1 and,

(a) A retires

(b) B retires

(c) C retires

Solution:

Old Profit ratio = 3:2:1

(a) A retires: new profit sharing ratio is 2:1

(b) B retires: new profit sharing ratio is 3:1

(c) C retires: new profit sharing ratio is 3:2

Case 2

Suppose A, B and C are partners sharing profits in the ratio 3:2:1. A retires and B takes 2/6^th from A and C takes 1/6^th from A.

B's New Share = B's old share + B's gain (takes from A) = 2/6 + 2/6 = 4/6

C's New Share = C's old share + C's gain (takes from A) = 1/6 + 1/6 = 2/6

New ratio of B and C = 2:1

Case 3

Suppose A, B and C are partners sharing profits in the ratio 3:2:1. B retires and his share is acquired by A and C in the ratio 3:1. Calculate new ratio.

Solution:

Share acquired by A = 2/6 × 3/4 = 6/24

Share acquired by C = 2/6 × 1/4 = 2/24

A's New Share =A's old share +A's gain = 3/6 + 6/24 = 18/24

C's New Share = C's old share + C's gain = 1/6+ 2/24 = 6/24

New ratio of A and C = 3:1

New Profit-Sharing Ratio on Retirement

Adjustments on Retirement of a Partner

Brief Lesson in Maths required for Accountancy

Treatment of Goodwill on Retirement of Partner

The post New Profit-Sharing Ratio on Retirement appeared first on Commerceatease - Website for 11th & 12th Commerce.

(i) Distribution of Accumulated Profits, Reserves and Specific Funds:

General reserve/ Reserve Fund/ Profit & Loss A/c                  Dr.

To All Partner's Capital A/c (including retiring/deceased partner in old ratio)

(ii) Distribution of specific funds:

Workman's Compensation Fund /Investment Fluctuation Fund / Contingency Reserve A/c          Dr.

To All Partner's Capital A/c (including retiring/deceased partner in old ratio)

Payment to Retiring Partner

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On retirement of a partner his capital is adjusted for goodwill, accumulated profits, revaluation of assets and liabilities etc. to determine the final amount to be paid, which may be treated in four ways mentioned here:

1. Lump sum payment of the amount (paid immediately)

Retiring Partner's Capital A/c                 Dr.

To Bank A/c

2. Transfer of amount due to his loan account

Retiring partner’s loan A/c carrying interest at an agreed rate (not less than) 6% p.a.is opened and shown in the Balance Sheet till it is finally paid off.

Retiring Partner's Capital A/c                  Dr.

To Retiring Partner's Loan A/c

3. Part payment of the claim

In this case the claim is partly paid in cash, and the remaining amount is transferred to retiring partner's loan A/c by passing the following journal entry:

Retiring Partner's Capital A/c                   Dr.

To Bank A/c (amount paid in cash)

To Retiring Partner's Loan A/c (amount transferred to his Loan A/c)

4. Payment of retiring partner's loan by annual installments

Loan account is prepared, and Installment of loan is calculated by adding the amount of interest.

Interest on Retiring Partner's A/c            Dr.

To Retiring Partner's Loan A/c

(For interest due at the end of the accounting year)

Retiring Partner's Loan A/c                      Dr.

To Bank A/c

(For installment paid including interest)

Capital Accounts of Partners on Retirement

Class 12 Accountancy MCQs Retirement of Partner

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Three cases regarding adjustment of capital accounts:

(a) When total capital of the new firm is given.

Following steps are to be taken in this case:

1. Calculate the proportionate capital of each of the remaining partners by multiplying the total capital of new firm with the share of the remaining partners.

2. Calculate actual capitals of partners after all adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

3. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

4. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

(b) When total capital of the new firm is not given:

Following steps are to be taken in this case:

1. Calculate total capital of new firm by taking the actual combined capitals of all the partners (including retiring partner) after all the adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

2. Calculate the proportionate capital of each of the remaining partners by multiplying the total capital of new firm with the share of the remaining partners.

3. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

4. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

Adjustment of Partners' Capitals on Retirement

(c) When retiring partner is to be paid through cash brought in by the continuing partners in such a way as to make their capitals proportionate to the new profit-sharing ratio:

Following steps are to be taken in this case:

1. Calculate actual capitals of remaining partners after all adjustments relating to goodwill, revaluation, accumulated profits/losses etc.

2.  Add to above combined capitals, the capital of retiring partner after all adjustments mentioned above.

3. From this amount, deduct the bank/cash balance appearing in the Balance Sheet of the firm.

4. Add the minimum cash/bank balance required and calculate the total capital of the new firm.

5. Calculate the proportionate capital of the remaining partners separately by multiplying the total capital with their new share.

6. Calculate the surplus or deficiency of actual capital over proportionate capital by comparing the capitals calculated in step 1 and step 2 above.

7. Adjust the surplus/deficiency through cash or partner’s current account as per the instruction given in the question otherwise to bring cash in case of deficiency and to return cash in case of surplus.

Capital Accounts of Partners on Retirement

Class 12 Accountancy MCQs Retirement of Partner

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Capital Accounts or Current Accounts (as the case may be)

                                                                        Cash/Bank account

Check your understanding

Accumulated Profits and Losses on Retirement and Death of Partner

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Precautions while preparing Balance sheet of the new firm after retirement of a partner

• Capitals of the remaining partners should be as per new profit-sharing ratio.
• All the Accumulated profits/losses should be shared in old profit-sharing ratio or as instructed in the question, so, should not be taken to the new balance sheet, if already distributed.
• All the assets/liabilities revalued should be shown at revised values in the new balance sheet, including cash/bank balance.
• Retiring partner’s loan account must be shown in the liabilities side of the balance sheet of the new firm.

Death of Partner

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