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Settlement of Amount due to a Retiring Partner when Full Amount is Paid

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When a partner retires from the firm, the firm is reconstituted. The firm continues its business with a change in the profit-sharing ratio. The account of the retiring partner is settled by either paying immediately the amount due to him/her or transferring the due amount to his/her loan account. If the amount due to the retiring partner is transferred to his/her loan account, the retiring partner is entitled to either 6% p.a. interest or a share in profit earned by using the amount due to him, if the partnership is silent. The retiring partner can choose any of the options.

Settlement of the amount due to the retiring partner is done by preparing the capital account of the retiring partner. The following accounts are being considered while preparing the Retiring partner’s capital account:

  1. Balance of the Capital/ Current account of the retiring partner.
  2.  Share in the goodwill of the firm.
  3. Share in accumulated Profit and Loss and Undistributed Reserves.
  4. Share in profit or loss after revaluation of assets and assessment of liabilities.
  5. Share in profit till the date of retirement.
  6. Salary, if paid.
  7. Interest to be paid on Capital.
  8. Interest charged on drawing.

Accounting Treatment:

Case 1: When the amount due to the retiring partner is paid in lump sum:

 

Illustration: 

Ram, Satyam, and Karan are partners in the firm sharing profit and loss in the firm in the ratio of 5:3:2. On 31st March 2022, the Balance Sheet of the firm was as follows:

 

Satyam retires on 1st April 2022 and the remaining partners agreed on the following terms for his retirement:

a) Ram and Karan decided to share their future profit and loss in the ratio of 6:4.

b) Goodwill of the firm to be valued at ₹64,000. Satyam’s share is to be adjusted in the accounts of Ram and Karan.

c) Land and Building and Stock to be appreciated by 5%.

d) Provision for Debts to be created @ 10% on Debtors and ₹7,800 creditors will not be claimed.

e) Satyam’s retirement amount was paid in a lump sum.

Prepare the Revaluation Account, Partner’s Capital Accounts, and Balance Sheet of Ram and Karan after Satyam’s retirement.

Solution:

 

 

 

Working Notes:

1. Calculation of Gaining Ratio:

 

2. Calculation of Satyam’s share in Goodwill:

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm

Satyam’s Share of Goodwill = ₹64,000 x 3/10

= ₹19,200

Case 2: When the retiring partner’s amount due is transferred to Loan A/c:

A. When the amount due to the retiring partner is transferred to his/her Loan A/c:

 

B. When interest is made due:

 

C. When Installment is paid(along with interest):

 

Illustration:  

G, H, and K are partners in the firm sharing profit and loss in the firm in the ratio of 2:1:1. On 31st March 2022, the Balance Sheet of the firm was as follows:

 

K retires on 1st April 2022, and the remaining partners agreed on the following terms for his retirement:

a) G and H decided to share their future profit and loss equally.

b) Goodwill of the firm to be valued at a two-year purchase of the average profit of the past four years:

The profits for the years ended 31st March 2019 were ₹15,000, 31st March 2020 were (₹6,000), and 31st March 2021 were ₹9,000. K’s share is to be adjusted in the accounts of G and H.

c) All Debtors were good.

d) Assets were revalued, and Liabilities were reassessed as:

Building ₹1,80,000, Stock ₹8,500. An Unrecorded Asset(Computer) of ₹8,000 is to be recorded.

e) That a warranty claim of ₹4,000 is to be recorded.

f) Provision for Investment Fluctuation Reserve to the extent of ₹1,200 is to be created. 

g) K’s retiring amount due was paid as ₹20,000 immediately at the time of retirement, and the balance was to be transferred to his loan account.

Prepare the Revaluation Account, Partner’s Capital Accounts, and Balance Sheet of G and H after K’s retirement.

Solution:

 

 

 

Workings:

1. Calculation of Gaining Ratio:

 

2. Calculation of Satyam’s share in Goodwill:

Average Profit of last four years =  \frac{15,000-6,000+9,000+12,000}{4}

= ₹7,500

Goodwill = Average profit x 2 years purchase

= ₹15,000

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm

K’s Share of Goodwill = 15,000\times\frac{1}{4}

= ₹3,750

3. Calculation of Cash Balance:

Cash at bank balance = Cash at Bank –  Cash paid to K

= ₹27,000 – ₹20,000

Cash at bank balance =₹7,000



Last Updated : 05 Apr, 2023
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