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NCERT Class 12 Accountancy Chapter 3 Reconstitution of a Partnership Firm – Retirement/Death of a Partner
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Reconstitution of a Partnership Firm – Retirement/Death of a Partner
Chapter: 3
PART – I |
1. What are the different ways in which a partner can retire from the firm?
Ans: (i) With the consent of all the partners.
(ii) Sale of Partnership Interest.
(iii) Retirement Through Written Notice.
(iv) Mutual Agreement and Dissolution.
(v) The partner may retire due to old age.
2. Write the various matters that need adjustments at the time of retirement of a partners.
Ans: Similar to admission, the various accounting aspects involved in the retirement or death of a partner are as follows:
(i) Ascertainment of new profit sharing ratio and gaining ratio.
(ii) Treatment of goodwill.
(iii) Revaluation of assets and liabilities.
(iv) Adjustment in respect of unrecorded assets and liabilities.
(v) Distribution of accumulated profits and losses.
(vi) Ascertainment of share of profit or loss up to the date of retirement/death.
(vii) Adjustment of capital, if required.
(viii) Settlement of the amounts due to retired/deceased partner.
3. Distinguish between sacrificing ratio and gaining tab.
Ans:
Basis | Sacrificing ratio | Gaining tab |
Definition | The Sacrificing Ratio is calculated by finding the difference between the old ratio and the new ratio of the existing partners. | The partners whose share in the profits has increased due to a change in the profit sharing ratio are called Gaining Partners and the ratio in which they gained is called the Gaining Ratio. |
Effects on partner’s share of profit | The effect of the sacrificing partner is that it minimises the profit-sharing of already existing partners. | it maximises the overall profit of the existing partners. |
Future Profit Sharing | The sacrificing ratio does not affect the future profit-sharing ratio among the existing partners. | The gaining ratio may lead to a change in the future profit-sharing ratio among the remaining partners. |
4. Why do firm revaluate assets and reassers their liabilities on retirement or on the event of death of a partner.
Ans: At the time of retirement or death of a partner there may be some assets which may not have been shown at their current values. Similarly, there may be certain liabilities which have been shown at a value different from the obligation to be met by the firm. Not only that, there may be some unrecorded assets and liabilities which need to be brought into books. As learnt in case of admission of a partner, a Revaluation Account is prepared in order to ascertain net gain (loss) on revaluation of assets and/or liabilities and bringing unrecorded items into firm’s books and the same is transferred to the capital account of all partners including retiring/deceased partners in their old profit sharing ratio.
5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm.
Ans: Heirs of deceased partners are entitled to share of goodwill of the firm 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 their share to their heirs by the remaining partners.
Long Answer Questions |
1. Explain the modes of payment to a retiring partner.
Ans: The outgoing partner’s account is settled as per the terms of partnership deed i.e., in lump sum immediately or in various instalments with or without interest as agreed or partly in cash immediately and partly in instalment at the agreed intervals. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his/her money (i.e., based on capital ratio). Hence, the total amount due to the retiring partner which is ascertained after all adjustments have been made is to be paid immediately to the retiring partner. In case the firm is not in a position to make the payment immediately, the amount due is transferred to the retiring Partner’s Loan Account, and as and when the amount is paid it is debited to his account.
2. How will you compute the amount payable to a deceased partner?
Ans: Hence, in case of a partner, his claim shall also include his share of profit or loss, interest on capital, interest on drawings (if any) from the date of the last Balance Sheet to the date of his death of these, the main problem relates to the calculation of profit for the intervening period (i.e., the period from date of the last balance sheet and the date of the partner’s death. Since, it is considered cumbersome to close the books and prepare a final account, for the period, the deceased partner’s share of profit may be calculated on the basis of last year’s profit (or average of past few years) or on the basis of sales.
3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
Ans: As stated earlier, the accounting treatment in the event of death of a partner is similar to that in case of retirement of a partner, and that in case of death of a partner his claim is transferred to his executors and settled in the same manner as that of the retired partner. However, there is one major difference that, while the retirement normally takes place at the end of an accounting period, the death of a partner may occur any time. Hence, in case of a partner, his claim shall also include his share of profit or loss, interest on capital, interest on drawings (if any) from the date of the last Balance Sheet to the date of his death of these, the main problem relates to the calculation of profit for the intervening period (i.e., the period from date of the last balance sheet and the date of the partner’s death. Since, it is considered cumbersome to close the books and prepare a final account, for the period, the deceased partner’s share of profit may be calculated on the basis of last year’s profit (or average of past few years) or on the basis of sales.
4. Discuss the various methods of computing the share in profits in the event of death of a partner.
Ans: (i) Time Basis Method: In this method profit upto the date of the death of the partner is calculated on the basis of time passed till the death of the partner from the beginning of the year on the bases of the last year’s/years’ profit or average profit of last few years.
(ii) Sales Basis Method: Under this method, it considers the profit as well as the total sales of the last year. Hence, we estimate the profit up to the date of death of the partner on the basis of the sales of the last year.
(iii) Average Profit Method: In this method, average past profit is divided into two portions, i.e., before the death and after the death on the basis of ratio of turnover to the date of death average turnover and then deceased partner share is calculated and credited to his capital account.