Chapter-4 Reconstitution of a Partnership Firm

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 1

     

    Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on December 31, 2002 was as follows:

     

    Books of Nithya, Sathya and Mithya

     

    Balance Sheet at December 31, 2002

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Creditors

    14,000

    Investments

    10,000

    Reserve Fund

    6,000

    Goodwill

    5,000

    Capitals:

     

    Premises

    20,000

    Nithya

    30,000

     

    Patents

    6,000

    Sathya

    30,000

     

    Machinery

    30,000

    Mithya

    20,000

    80,000

    Stock

    13,000

     

     

    Debtors

    8,000

     

     

    Bank

    8,000

     

    1,00,000

     

    1,00,000

     

     

     

     
               

     

    Mithya dies on May 1, 2002. The agreement between the executors of Mithya and the partners stated that:

    (a) Goodwill of the firm be valued at  times the average profits of last four years. The profits of four years were : in 1998, Rs 13,000; in 1999, Rs 12,000; in 2000, Rs 16,000; and in 2001, Rs 15,000.

    (b) The patents are to be valued at Rs 8,000, Machinery at Rs 25,000 and Premises at Rs 25,000.

    (c) The share of profit of Mithya should be calculated on the basis of the profit of 2002.

    (d) Rs 4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

    Record the necessary journal entries to give effect to the above and write the executor's account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on May 1, 2002 after giving effect to the adjustments.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 2

    Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2003 stood as follows:

     

    Books of Arti, Bharti and Seema

     

    Balance Sheet as on March 31, 2003

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Bills Payable

    12,000

    Buildings

    21,000

    Creditors

    14,000

    Cash in Hand

    12,000

    General Reserve

    12,000

    Bank

    13,700

    Capitals:

     

    Debtors

    12,000

    Arti 20,000

     

    Bills Receivable

    4,300

    Bharti

    12,000

     

    Stock

    1,750

    Seema

    8,000

    40,000

    Investment

    13,250

     

    78,000

     

    78,000

     

     

     

     
               

     

    Bharti died on June 12, 2003 and according to the deed of the said partnership, her executors are entitled to be paid as under:

    (a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.

    (b) Her proportionate share of reserve fund.

    (c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs 1,00,000. The rate of profit during past three years had been 10% on sales.

    (d) Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were:

    2001 - Rs 8,200

    2002 - Rs 9,000

    2003 - Rs 9,800

    The investments were sold for Rs 16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 3

    Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2002.

                                            

    Books of Jain, Gupta and Malik

    Balance Sheet as on March 31, 2002

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Sundry Creditors

    19,800

    Land and Building

    26,000

    Telephone Bills Outstanding

    300

    Bonds

    14,370

    Accounts Payable

    8,950

    Cash

    5,500

    Accumulated Profits

    16,750

    Bills Receivable

    23,450

     

     

    Sundry Debtors

    26,700

    Capitals :

     

    Stock

    18,100

    Jain

    40,000

     

    Office Furniture

    18,250

    Gupta

    60,000

     

    Plants and Machinery

    20,230

    Malik

    20,000

    1,20,000

    Computers

    13,200

     

    1,65,800

     

    1,65,800

     

     

     

     
               

     

    The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2002 and his share in the business is to be calculated as per the following terms of revaluation of assets and liabilities : Stock, Rs 20,000; Office furniture, Rs 14,250; Plant and Machinery Rs 23,530; Land and Building Rs 20,000.

    A provision of Rs 1,700 to be created for doubtful debts. The goodwill of the firm is valued at Rs 9,000.

    The continuing partners agreed to pay Rs 16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as loan.

    Prepare Revaluation account, capital accounts, and Balance Sheet of the reconstituted firm.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 4

    The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2007:

     

    Books of Rajesh, Pramod and Nishant

     

    Balance Sheet as on March 31, 2007

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Bills Payable

    6,250

    Factory Building

    12,000

    Sundry Creditors

    10,000

    Debtors

    10,500

     

    Reserve Fund

    2,750

    Less: Reserve

    500

    10,000

    Capital Accounts:

     

    Bills Receivable

    7,000

    Rajesh

    20,000

     

    Stock

    15,500

    Pramod

    15,000

     

    Plant and Machinery

    11,500

    Nishant

    15,000

    50,000

    Bank Balance

    13,000

     

    69,000

     

    69,000

     

     

     

     
                 

     

    Pramod retired on the date of Balance Sheet and the following adjustments were made:

    a) Stock was valued at 10% less than the book value.

    b) Factory buildings were appreciated by 12%.

    c) Reserve for doubtful debts be created up to 5%.

    d) Reserve for legal charges to be made at Rs 265.

    e) The goodwill of the firm be fixed at Rs 10,000.

    f) The capital of the new firm be fixed at Rs 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.

    Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance inPramod's Capital account to his loan account.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 5

     

    Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2 , 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2007 was as follows:

    Books of Suri, Narang and Bajaj

    Balance Sheet as on April 1, 2007

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Bills Payable

    12,000

    Freehold Premises

    40,000

    Sundry Creditors

    18,000

    Machinery

    30,000

    Reserves

    12,000

    Furniture

    12,000

    Capital Accounts:

     

    Stock

    22,000

    Narang

    30,000

     

    Sundry Debtors

    20,000

     

    Suri

    30,000*

     

    Less: Reserve

    1,000

    19,000

    Bajaj

    28,000

    88,000

    for Bad Debt

     

     

     

     

    Cash

    7,000

     

    1,30,000

     

    1,30,000

     

     

     

     
                 

    Bajaj retires from the business and the partners agree to the following:

    a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.

    b) Machinery and furniture are to be depreciated by 10% and 7% respectively.

    c) Bad Debts reserve is to be increased to Rs 1,500.

    d) Goodwill is valued at Rs 21,000 on Bajaj's retirement.

    e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.

    Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

    *In the given Question Suri's Capital is Rs 30,000 instead of Rs 20,000.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 6

    Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2007.

     

    Books of Prateek, Rockey and Kushal

     

     

    Balance Sheet as on March 31, 2007

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Sundry Creditors

    16,000

    Bills Receivable

    16,000

    General Reserve

    16,000

    Furniture

    22,600

    Capital Accounts:

     

    Stock

    20,400

    Prateek

    30,000

     

    Sundry Debtors

    22,000

    Rockey

    20,000

     

    Cash at Bank

    18,000

    Kushal

    20,000

    70,000

    Cash in Hand

    3,000

     

    1,02,000

     

    1,02,000

     

     

     

     
               

     

    Rockey died on June 30, 2007. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

    a) Amount standing to the credit of the Partner's Capital account.

    b) Interest on capital at 5% per annum.

    c) Share of goodwill on the basis of twice the average of the past three years' profit and

    d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year's profit.

    Profits for the year ending on March 31, 2005, March 31, 2006 and March 31, 2007 were Rs 12,000, Rs 16,000 and Rs 14,000 respectively. Profits were shared in the ratio of capitals.

    Pass the necessary journal entries and draw up Rockey's capital account to be rendered to his executor.

     

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 7

    Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2007 was as follows:

     

    Books of Puneet, Pankaj and Pammy

     

     

    Balance Sheet as on March 31, 2007

     

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Sundry Creditors

    1,00,000

    Cash at Bank

    20,000

    Capital Accounts:

     

    Stock

    30,000

    Puneet

    60,000

     

    Sundry Debtors

    80,000

    Pankaj

    1,00,000

     

    Investments

    70,000

    Pammy

    40,000

    2,00,000

    Furniture

    35,000

    Reserve

     

    50,000

    Buildings

    1,15,000

     

    3,50,000

     

    3,50,000

     

     

     

     
               

     

    Mr. Pammy died on September 30, 2007. The partnership deed provided the following:

    (i)

    The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year's profit.

    (ii)

    He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years' purchase of average of last 4 years' profit. The profits for the last four financial years are given below: for 2003-04; Rs 80,000; for 2004-05, Rs 50,000; for 2005-06, Rs 40,000; for 2006-07, Rs 30,000.

    The drawings of the deceased partner up to the date of death amounted to Rs 10,000. Interest on capital is to be allowed at 12% per annum.

    Surviving partners agreed that Rs 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance.

    Show Mr. Pammy's Capital account, his Executor's account till the settlement of the amount due.

     

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 8

     

    Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:

    Books of Pankaj, Naresh and Saurabh

     

    Balance Sheet as on March 31, 2007

     

    Liabilities

    Amount Rs

    Assets

    Amount Rs

    General Reserve

    12,000

    Bank

    7,600

    Sundry Creditors

    15,000

    Debtors

    6,000

     

    Bills Payable

    12,000

    Less: Provision for Doubtful Debt

    (400)

    5,600

    Outstanding Salary

    2,200

     

     

    Provision for Legal Damages

    6,000

    Stock

    9,000

    Capitals:

     

    Furniture

    41,000

    Pankaj

    46,000

     

    Premises

    80,000

    Naresh

    30,000

     

     

     

    Saurabh

    20,000

    96,000

     

     

     

    1,43,200

     

    1,43,200

     

     

     

     
                 

    Additional Information

    (i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for Rs 1,200 and furniture to be brought up to Rs 45,000*.

    (The amount of Rs 450 that is being given in the book for furniture is a mistake, as it should be Rs 45,000)

    (ii) Goodwill of the firm be valued at Rs 42,000.

    (iii) Rs 26,000 from Naresh's Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.

    (iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.

    Give the necessary ledger accounts and balance sheet of the firm after Naresh's retirement.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 9

    Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2007, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Trade Creditors

     

    3,000

    Cash-in-Hand

    1,500

    Bills Payable

     

    4,500

    Cash at Bank

    7,500

    Expenses Owing

     

    4,500

    Debtors

    15,000

    General Reserve

     

    13,500

    Stock

    12,000

    Capitals:

     

     

    Factory Premises

    22,500

    Radha

    15,000

     

    Machinery

    8,000

    Sheela

    15,000

     

    Losse Tools

    4,000

    Meena

    15,000

    45,000

     

     

     

     

    70,500

     

    70,500

     

     

     

     

     

     

    The terms were:

    a) Goodwill of the firm was valued at Rs 13,000.

    b) Expenses owing to be brought down to Rs 3,750.

    c) Machinery and Loose Tools are to be valued at 10% less than their book value.

    d) Factory premises are to be revalued at Rs 24,300.

    Prepare:

    1. Revaluation account

    2. Partner's capital accounts and

    3. Balance sheet of the firm after retirement of Sheela.

     

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 10

    Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2007 was as follows:

     

    Liabilities

    Amount

    Rs

    Assets

    Amount

    Rs

    Creditors

    49,000

    Cash

    8,000

    Reserves

    18,500

    Debtors

    19,000

    Digvijay's Capital

    82,000

    Stock

    42,000

    Brijesh's Capital

    60,000

    Buildings

    2,07,000

    Parakaram's Capital

    75,500

    Patents

    9,000

     

    2,85,000

     

    2,85,000

     

     

     

     

     

    Brijesh retired on March 31, 2007 on the following terms:

    (i)    Goodwill of the firm was valued at Rs 70,000 and was not to appear in the books.

    (ii)   Bad debts amounting to Rs 2,000 were to be written off.

    (iii)  Patents were considered as valueless.

    Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh's retirement.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 11

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

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 12


    Discuss the various methods of computing the share in profits in the event of death of a partner.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 13

     

    Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserves Rs 36,000 and Profit and Loss Account (Dr.) Rs 15,000.

    Pass the necessary journal entries to the above effect.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 14

     

    Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 15

     

    Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 16

    Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2007, Naman retires.

    The various assets and liabilities of the firm on the date were as follows:

    Cash Rs 10,000, Building Rs 1,00,000, Plant and Machinery Rs 40,000, Stock Rs 20,000, Debtors Rs 20,000 and Investments Rs 30,000.

    The following was agreed upon between the partners on Naman's retirement:

    (i)

    Building to be appreciated by 20%.

    (ii)

    Plant and Machinery to be depreciated by 10%.

    (iii)

    A provision of 5% on debtors to be created for bed and doubtful debts.

    (iv)

    Stock was to be valued at Rs 18,000 and Investment at Rs 35,000.

    Record the necessary journal entries to the above effect and prepare the Revaluation Account.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 17

     

    How will you compute the amount payable to a deceased partner?

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 18


    Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of Rs 60,000. Sangeeta retires and goodwill is valued at Rs 90,000. Saroj and Shanti decided to share future profits equally. Record necessary Journal entries.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 19


    Explain the modes of payment to a retiring partner.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 20

    Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 21

     

    Distinguish between sacrificing ratio and gaining ratio.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 22

     

    Write the various matters that need adjustments at the time of retirement of partner/partners.

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  • Chapter-4 Reconstitution of a Partnership Firm Assignments 23

    What are the different ways in which a partner can retire from the firm?

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