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Reconstitution Of A Partnership Firm - Retirement Or Death Of A Partner

Question
CBSEENAC12000090

Arjun, Bhim and Nakul are partners sharing profits & losses in the ratio of 14:5:6 respectively.
Bhim retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits for the last 3 years are Rs 50,000, Rs 55,000 & Rs 60,000 respectively. The normal profits for the similar firm are Rs 30,000. Goodwill already appears in the books of the firm at Rs 75,000.
The profit for the first year after Bhim's retirement was Rs 1,00,000. Give the necessary Journal Entries to adjust Goodwill and distribute profits showing your workings.

Solution

                                     Journal Entries

Date

Particulars

LF

Debit ( Rs)

Credit (Rs)

 

Arjun’s  capital a/c          Dr

Bhim’s capital a/c            Dr

Nakul’s capital a/c           Dr

                To Goodwill a/c

(being decrease in the value of goodwill adjusted to the partners capital in their old profit sharing ratio)

 

14,000

5,000

6,000

 

 

 

 

1,00,000

 

 

 

25,000

 

 

 

 

76,000

24,000

 

Profit and loss appropriation a/c Dr

                To Arjun’s capital a/c

                To Nakul’s capital a/c

(Being new profit shared between remaining partners in their new profit sharing ratio)

 

 

Old profit sharing ratio =14:5:6
Computation of Goodwill:
Average profit =(50000+55000+60000)/3=55000/-
Normal profit = 30000
Super profit =25000
Good will = super profit *2 years purchase= 25000*2=50000/-
Good will already in the book= 75000
Difference in present and book value of goodwill to be adjusted=75000-50000=25000
Good will to be debited in old profit sharing ratio 14:5:6

Arjun 25000*14/25=14000
Bhim 25000* 5/25=5000
Nakul 25000*6/25=6000
Computation of new profit sharing ratio:
Arjun’s new share =14/25+5/25 =19/25
Nakuls new share= 6/25
New profit sharing ratio= 19:6
Appropriation of new profit
Arjun: (100000*19)/25=76,000
Nakul: (100000*6)/25=24,000

Some More Questions From Reconstitution of a Partnership Firm - Retirement or Death of a Partner Chapter

On the retirement of Hari from the firm of 'Hari, Ram and Sharma' the balance-sheet showed a debit balance of Rs 12,000 in the profit and loss account. For calculating the amount payable to Hari this balance will be transferred
(a) to the credit of the capital accounts of Hari, Ram and Sharma equally
(b) to the debit of the capital accounts of Hari, Ram and Sharma equally
(c) to the debit of the capital accounts of Ram and Sharma equally
(d) to the credit of the capital accounts of Ram and Sharma equally

Kumar, Verma and Naresh were partners in a firm sharing profit & loss in the ratio of 3: 2: 2. On 23rd January, 2015 Verma died. Verma's share of profit till the date of his death was calculated at Rs 2,350.
Pass necessary journal entry for the same in the books of the firm.

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

Virad, Vishad and Roma were partners in a firm sharing profits in the ratio of 5:3:2 respectively. On March 31, 2013, their Balance Sheet was as under:



Virad died on October 1, 2013. It was agreed between his executors and the remaining partner's that:

(a) Goodwill of the firm be valued at 2 1/2 years purchase of average profits for the last three years. The average profits were Rs 1,50,000.
(b) Interest on capital be provided at 10% p.a.
(c) Profit for the year 2013-14 be taken as having accrued at the same rate as that of the previous year which was Rs 1,50,000. Prepare Virad's Capital Account to be presented to his Executors as on October 1, 2013.

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.

Give the journal entry to distribute Workman Compensation Reserve of Rs. 60,000 at the time of retirement of Sajjan, when there is not claim against it. The firm has three partners Rajat, Sajjan and Kavita.

For which share of Goodwill a partner is entitled at the time of his retirement?

Arjun, Bhim and Nakul are partners sharing profits & losses in the ratio of 14:5:6 respectively.
Bhim retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits for the last 3 years are Rs 50,000, Rs 55,000 & Rs 60,000 respectively. The normal profits for the similar firm are Rs 30,000. Goodwill already appears in the books of the firm at Rs 75,000.
The profit for the first year after Bhim's retirement was Rs 1,00,000. Give the necessary Journal Entries to adjust Goodwill and distribute profits showing your workings.

M, N and O were partners in a firm sharing profits and losses equally. Their Balance Sheet on 31-12-2009 was as follows:

Liabilities

Amount(Rs)

Assets

Amount(Rs)

 

Capital:              M 70,000

                         N 70,000

                         O 70,000

 

General Reserve

Creditors

 

 

 

2,10,000

 

30,000

20,000

 

Plant and Machinery

Stock

Sundry Debtors

Cash at Bank

Cash in Hand

 

60,000

30,000

95,000

40,000

35,000

 

2,60,000

 

2,60,000

 

N died on 14th March, 2010. According to the Partnership Deed, executors of the deceased partner are entitled to:

(i) Balance of partner's capital account.
(ii) Interest on Capital @ 5% p.a.
(iii) Share of goodwill calculated on the basis of twice the average of past three year's profits and
(iv) Share of profits from the closure of the last accounting year till the date of death on the basis of twice the average of three completed year's profits before death.
Profits for 2007, 2008 and 2009 were Rs. 80,000, Rs. 90,000, Rs. 1,00,000 respectively. Show the working for deceased partner's share of goodwill and profits till the date of his death. Pass the necessary journal entries and prepare N's Capital Account to be rendered to his executors.