Chapter # 7a4accounting.weebly.com/uploads/7/1/2/8/7128209/chapter_7.pdf · Sameer Hussain (b) Make entries in the General Journal of the firm to record the retirement of Asif under

Chapter # 7 Partnership – Retirement

Principles of Accounting – XII

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Partnership – Retirement

Chapter # 7

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Sameer Hussain

WHAT THE EXAMINER USUALLY ASK?

Computation of Retirement of a partner by: o Sell Method. o Bonus Method. o Goodwill Method. o Revaluation of assets.

General Journal entries for retirement. Balance Sheet after retirement. Multiple Choice Questions (MCQs).


Chapter # 7

Sameer Hussain Page 113


Chapter # 7

PARTNERSHIP – RETIREMENT retirement OF A PARTNER

When a partner leaves the partnership and other partners continue the partnership, it is said to be retirement of a partner.

Retirement by sell method

In this situation, the retiring partner sells his capital interest to remaining partners by taking some cash from remaining partners which they paid to him/her from their private sources and which is not recorded in the books.

Entry to Record Retirement of a Partner by Sell Method: Retiring partner’s capital DR. (with capital amount) Remaining partners’ capital CR. (with their ratio) (To record the retirement of a partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 1: (Retirement by Selling Interest to Remaining Partners)

2003 Regular (Case – a) – BIEK Kazim, Qasim and Ali are equal partners with capital balances of Rs.30,000; Rs.50,000 and Rs.40,000 respectively. Ali retires from the firm. The remaining partners continue the business. REQUIRED Give entries in General Journal to record the retirement of Ali:-

(i) Ali sold entire interest to Kazim for Rs.5,000 cash.

Retirement

Sell Method Goodwill Method

More than Capital

Bonus Method

More than Capital

Less than Capital


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Sameer Hussain

SOLUTION # 1:

________ PARTNERSHIP GENERAL JOURNAL

Date Particulars P/R Debit Credit 1 Ali Capital 40,000 Kazim Capital 40,000 (To record the retirement of Ali)

Retirement by goodwill method

If the retiring partner gets the amount more than his/her capital, it is treated as goodwill goes to retiring partner and then total goodwill of firm is calculated.

Goodwill method

Capital of retiring partner XXX Less: Amount paid to retiring partner (XXX) Excess amount paid to retiring partner XXX

Total goodwill of firm (Excess amount x opposite ratio of retiring partner) XXX

Entry to Record Retirement of a Partner by Goodwill Method: Goodwill DR. (with the total goodwill amount) Remaining partners’ capital CR. (with their ratio) Retiring partner’s capital CR. (with his/her ratio) (To record the distribution of goodwill) ----------------------------------------------------------------------------------------------------------------------Retiring partner’s capital DR. (with capital after distribution of goodwill) Cash CR. (with amount paid to retiring partner) (To record the retirement of a partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 2: (Retirement by Goodwill Method)

2003 Regular (Case – c) – BIEK Kazim, Qasim and Ali are equal partners with capital balances of Rs.30,000; Rs.50,000 and Rs.40,000 respectively. Ali retires from the firm. The remaining partners continue the business. REQUIRED Give entries in General Journal to record the retirement of Ali:-

(i) Paid Rs.50,000 to Ali. Assume that the increase in the value of assets is to be recorded as goodwill. (Show the computation of the firm’s goodwill).

SOLUTION # 2:

Computation: Ali Capital 40,000 Less: Amount paid to Ali (50,000) Excess amount paid to Ali or Goodwill to Ali 10,000

Total goodwill of firm (10,000 x 3/1) 30,000


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________ PARTNERSHIP GENERAL JOURNAL

Date Particulars P/R Debit Credit 1 Goodwill 30,000 Kazim Capital (30,000 x 1/3) 10,000 Qasim Capital (30,000 x 1/3) 10,000 Ali Capital (30,000 x 1/3) 10,000 (To record the distribution of goodwill) 2 Ali Capital (40,000 + 10,000) 50,000 Cash 50,000 (To record the retirement of Ali)

Retirement by bonus method

When retiring partner gets less than his capital amount, it is treated as bonus and also when retiring partner gets more than capital amount it is also treated as bonus.

Bonus method

Capital of retiring partner XXX Less: Amount paid to retiring partner (XXX) Bonus to retiring partner/remaining partners (XXX)/XXX

Note: Negative amount shows the bonus goes to new partner and positive amount shows the bonus goes to old partners.

Entry to Record Retirement of a Partner by Bonus Method: Bonus to new partner (More than capital):

Retiring partner’s capital DR. (with his/her capital) Remaining partners’ capital DR. (with the distribution of bonus) Cash CR. (with the amount paid to retiring partner) (To record the retirement of a partner) ----------------------------------------------------------------------------------------------------------------------

Bonus to old partner (Less than capital): Retiring partner’s capital DR. (with his/her capital)

Remaining partners’ capital CR. (with the distribution of bonus) Cash CR. (with the amount paid to retiring partner) (To record the retirement of a partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 3: (Bonus Method – Bonus to Remaining Partners)

1995 Regular & Private – BIEK Khan, Shera and Ijaz are partners with capital balances of Rs.15,000; Rs.20,000 and Rs.25,000, sharing profits and losses in the ratio of 2:2:3 respectively. Khan decides to retire from the partnership. REQUIRED Give entries in General Journal of the firm to record Khan’s retirement, assuming that he is paid Rs.12,500 for his interest.


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SOLUTION # 3:

Computation: Khan Capital 15,000 Less: Amount paid to Khan (12,500) Bonus to Remaining Partners 2,500

________ PARTNERSHIP

GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Khan Capital 15,000 Shera Capital (2,500 x 2/5) 1,000 Ijaz Capital (2,500 x 3/5) 1,500 Cash 12,500 (To record the retirement of Khan)

ILLUSTRATION # 4: (Bonus Method – Bonus to Retiring Partner)

Khan, Shera and Ijaz are partners with capital balances of Rs.15,000; Rs.20,000 and Rs.25,000, sharing profits and losses in the ratio of 2:2:3 respectively. Khan decides to retire from the partnership. REQUIRED Give entries in General Journal of the firm to record Khan’s retirement, assuming that he is paid Rs.17,500 for his interest (Bonus Method).

SOLUTION # 4:

Computation: Khan Capital 15,000 Less: Amount paid to Khan (17,500) Bonus to Khan 2,500

________ PARTNERSHIP

GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Khan Capital 15,000 Shera Capital (2,500 x 2/5) 1,000 Ijaz Capital (2,500 x 3/5) 1,500 Cash 17,500 (To record the retirement of Khan)

revaluation

Before the retirement of the partner, the assets of the business may be revalued to get the fair value of the business and the capital of retiring partner. In this situation a revaluation account is to be created to settle the increase or decrease in the value of assets and then transfer it to the all partners’ capital account. At the time of retirement, the capital of retiring partner is considered after the adjustment of revaluation of the assets.


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ILLUSTRATION # 5: (Revaluation of Assets)

1995 Regular & Private – BIEK The following is the balance sheet of a partnership firm of Anwar, Nadir and Zulqurnain who share profit and loss in the ratio of their capitals as on December 31, 2008.

Assets Equities Cash 200,000 Accrued expense 250,000 Merchandise inventory 100,000 Capital Anwar 225,000 Building 400,000 Capital Nadir 150,000 Capital Zulqurnain 75,000 500,000 500,000 In the above date, Zulqurnain withdrew himself from the partnership firm. REQUIRED Record the retirement of Zulqurnain under the following two cases separately. Also prepare and revise balance sheet as mentioned in case 2. Case 2: Before his retirement merchandise inventory and building were revalued at Rs.125,000 and Rs.435,000 respectively. Then Zulqurnain receives a note of Rs.25,000, merchandise Rs.30,000 and sufficient cash in full settlement of his account.

SOLUTION # 5:

_______ PARTNERSHIP GENERAL JOURNAL

FOR THE PERIOD 31 DECEMBER 2008 Date Particulars P/R Debit Credit 1 Merchandise inventory 25,000 Revaluation 25,000 (To record the revaluation of merchandise) 2 Building 35,000 Revaluation 35,000 (To record the revaluation of building) 3 Revaluation (25,000 + 35,000) 60,000 Anwar Capital (60,000 x 3/6) 30,000 Nadir Capital (60,000 x 2/6) 20,000 Zulqurnain Capital (60,000 x 1/6) 10,000 (To record the distribution of gain on revaluation) 4 Zulqurnain Capital (75,000 + 10,000) 85,000 Notes payable 25,000 Merchandise inventory 30,000 Cash 30,000 (To record the retirement of Zulqurnain)


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Sameer Hussain

________ PARTNERSHIP BALANCE SHEET

AS ON 31 DECEMBER 2008 ASSETS EQUITIES

Current Assets: Liabilities: Cash 170,000 Accrued expenses 250,000 Merchandise 95,000 Notes payable 25,000 Total current assets 265,000 Total liabilities 275,000 Fixed Assets: Owner’s Equity: Building 435,000 Anwar Capital 255,000 Total fixed assets 435,000 Nadir Capital 170,000 Total owner’s equity 425,000 Total assets 700,000 Total equities 700,000


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Practice questions

Question # 1: 1990 Regular & Private – BIEK Shakeel, Aqeel and Jameel are equal partners having capital balances of Rs.60,000, Rs.80,000 and Rs.100,000 respectively. Aqeel retires from the firm and assets of the firm were revalued. The revaluation of assets shows a gain of Rs.30,000 which is distributed among the partners. The remaining partners continue the business. REQUIRED

(a) Give entries in the General Journal to record the retirement of Aqeel under each of the following two cases separately:

Case (i) Shakeel and Jameel purchase Aqeel’s interest equally by paying him cash from their private sources.

Case (ii) Aqeel is paid Rs.30,000 in cash and is issued a 6 months note for the balance. (b) Prepare a Balance Sheet of the firm in each case separately.

Question # 2: 2001 Regular & Private – BIEK Waseem, Nadeem and Saleem are equal partners having capital balances of Rs.50,000; Rs.70,000 and Rs.90,000 respectively. Nadeem retires from the firm. The assets of the firm are revalued. The revaluation shows a gain of Rs.60,000 which is to be distributed among the partners. The remaining partners continue the business. REQUIRED Give entries in journal to record the retirement of Nadeem under each of the following cases separately: Case (i): Waseem and Saleem purchase Nameed’s interest equally by paying him cash

from their private source. Case (ii): Nadeem is paid Rs.40,000 cash & is issued a 6 month 10% note for the balance. Question # 3: 2007 Regular & Private – BIEK Mobin, Moeen and Mateen are equal partners with capital balances of Rs.60,000; Rs.100,000 and Rs.80,000 respectively. Mateen retires from the firm. The remaining continues the business. REQUIRED Give the entries in general journal to record the retirement of Mateen under each of the following cases separately:

(i) Mateen sold the entire interest to Mobin for Rs.10,000 cash. (ii) Mateen paid Rs.20,000 cash and issued a 3 months’ note for the balance. (iii) Paid Rs.100,000 to Mateen. Assume that the increase in the value of the assets is to be

recorded as goodwill. Question # 4: 1994 Regular & Private – BIEK The balance sheet of a partnership firm was as under:-

Adil, Abid & Asif Balance Sheet

As of December 31, 1992 Cash Rs.34,000 Capital: Other assets 90,000 Adil Rs.80,000 Abid 24,000 Asif 20,000 124,000 124,000

On January 1, 1993 Asif retires from the firm and is paid Rs.24,000 under Goodwill method. The partners shared profits and losses in the ratio of 3:1:1. REQUIRED

(a) Calculate the amount of goodwill of the firm and show its distribution among the partners through journal entry.


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(b) Make entries in the General Journal of the firm to record the retirement of Asif under each of the following assumptions:

(i) He is paid cash Rs.24,000. (ii) He is paid cash Rs.4,000 and for the balance a note is issued for six months.

Question # 5: 2005 Regular & Private – BIEK “A”, “B” and “C” are partners sharing profits and losses in the ratio of 5:3:2 respectively. Their capital balances are “A” Rs.260,000; “B” Rs.160,000 and “C” Rs.260,000. “A” retires from the firm on March 31 and is paid Rs.280,000 from partnership firm. REQUIRED

(i) Record journal entries to retire “A” from the firm. (ii) Give reason that might cause “A” to receive a bonus.

Question # 6: 2006 Regular & Private – BIEK X, Y and Z are partners with capitals of Rs.60,000; Rs.47,000 and Rs.25,000 respectively. They share profit and loss in the ratio of 40%, 35% and 25% respectively. X decided to retire and he is paid Rs.72,000 in cash. Y and Z are ready to reduce their capitals. REQUIRED Make entries in General Journal to record the retirement of X. (Entries without computation will not be accepted). Question # 7: 2009 Regular & Private – BIEK The following is the balance sheet of a partnership firm of Anwar, Nadir and Zulqurnain who share profit and loss in the ratio of their capitals as on December 31, 2008.

Assets Equities Cash 200,000 Accrued expense 250,000 Merchandise inventory 100,000 Capital Anwar 225,000 Building 400,000 Capital Nadir 150,000 Capital Zulqurnain 75,000 500,000 500,000 In the above date, Zulqurnain withdrew himself from the partnership firm. REQUIRED Record the retirement of Zulqurnain under the following two cases separately. Also prepare and revise balance sheet as mentioned in case 2. Case 1: Zulqurnain, with the permission of the other partners gives his equity to his brother,

Arsalan who is accepted as a partner in the firm. Case 2: Before his retirement merchandise inventory and building were revalued at Rs.125,000

and Rs.435,000 respectively. Then Zulqurnain receives a note of Rs.25,000, merchandise Rs.30,000 and sufficient cash in full settlement of his account.

Question # 8: 2003 Private – BIEK Balance sheet data of the partnership firm of Naila, Huma and Shahida on dec. 31, 2002 were as follows:-

Debit Credit Cash 10,000 Allow. for depreciation – Furniture 12,000 Merchandise 42,000 Accounts payable 20,000 Furniture 30,000 Naila Capital 20,000 Huma Capital 20,000 Shahida Capital 10,000 On the above date Shahida withdrew from the partnership. Before her withdrawal merchandise and furniture were revalued at Rs.32,000 and Rs.13,000 respectively, and goodwill of the firm was recognized at Rs.25,000. Then Shahida received a six-month 12% note of Rs.5,000,


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merchandise worth Rs.5,000 and cash Rs.2,000 in settlement of her account. The partners share Profit / loss in their capital ratio. REQUIRED Prepare:

(i) General journal entries for the above. (ii) Balance sheet after retirement of Shahida.

Question # 9: 1997 Regular & Private – BIEK Faisal, Ghani and Habib were partners sharing profits and losses in the ratio of their capitals. The balance sheet of their firm stood as under on December 31, 1996:-

Assets Equities Cash 20,000 Accounts Payable 40,000 A/c receivable 30,000 Faisal Capital 50,000 Merchandise inventory 15,000 Ghani Capital 30,000 Land, building 75,000 Habib Capital 20,000 140,000 140,000 Habib retires on the above date and is paid the amount equal to the book value after making the following adjustments. (Available cash is paid to him and he is issued a note payable for the balance).

(i) Allowance for bad debts is to be maintained @ 10% of the accounts receivable. (ii) Land and building is to be depreciated by 20%. (iii) Goodwill of the firm is valued at Rs.60,000.

REQUIRED (a) Give the necessary entries in the General Journal of the firm to give effect to the above. (b) Prepare balance sheet of the firm after Habib’s retirement.

Question # 10: 2000 Regular & Private – BIEK Maqsood, Sharif and Salman are partners sharing profits and losses in the ratio of 3:1:1 and having capital balances of Rs.40,000; Rs.12,000; Rs.10,000 respectively. Salman retires from the firm. REQUIRED Give entries in General Journal to show the retirement of Salman under the following assumptions separately:

(a) Salman is paid Rs.12,000 from the firm’s resources. Goodwill of the firm is to be recorded as indicated by this payment.

(b) Salman is paid Rs.9,500 from the firm’s resources. Assets of the firm are to be revalued.


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Sameer Hussain

MULTIPLE CHOICE QUESTIONS (MCQS)

1) The partnership may come to an end due to the: a) Death of a partner b) Insolvency of a partner c) By giving notice d) All of the above 2) In case of retirement of a partner full goodwill is credited to the accounts of: a) All partners b) Only retiring partner c) Only remaining partners d) None of the above 3) Revaluation accounts is operated to find out gain or loss at the time of: a) Admission of a partner b) Retirement of a partner c) Death of a partner d) All of the above 4) Partners equity is affected by: a) Admission of a partner b) Retirement of a partner c) Death of a partner d) All of the above 5) If the remaining partner want to continue the business, after the retirement of a

partner, a new partnership agreement: a) Necessary b) Not necessary c) Optioned d) None of the above 6) The loss or gain on account of revaluation at the time of retirement of a partner is

shared by: a) Only remaining partners b) Only retiring partner c) All partners d) None of the above 7) All accumulated losses are transferred to the capital accounts of all partners in case

of retirement in: a) Capital ratio b) New profit sharing ratio c) Sacrifice ratio d) Old profit sharing ratio 8) Revaluation means: a) Assets are revalued b) Liabilities are revalued c) Equities are revalued d) Assets and liabilities are revalued 9) Revaluation loss of assets will be debited to: a) Liability account b) Asset account c) Partners’ capital account d) Cash account

Documents

Chapter # 7a4accounting.weebly.com/uploads/7/1/2/8/7128209/chapter_7.pdf · Sameer Hussain (b) Make entries in the General Journal of the firm to record the retirement of Asif under