Financial Accounting – III 6431

Unit - 3
RETIREMENT OF A PARTNER

Problem No. 1: A, B and C are partners in a business sharing profits and losses in the ratio of
2:2:1. Their Balance sheet as on 31st December, 2010 is given below:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Accounts: Plant and Machinery 19,500
A 16,000 Stock 16,000
B 12,000 Debtors 15,000
C 10,000 38,000 Cash at Bank 6,000
Profit and Loss A/c 7,000 Cash in Hand 1,000
Creditors 12,500
57,500 57,500

‘B’ retires on 1st January, 2011on the following terms:

i) The goodwill of the firm is to be valued at Rs. 15,000.

ii) Plant and Machinery is to be depreciated by 4%.
iii) Stock is to be appreciated by 10%.
iv) Bad debts reserve is to raised against Debtors at 5% and a Discount Reserve is to be
raised against creditors at 2%.

Pass Journal Entries and Prepare Revaluation Account and Capital Accounts of Partners.

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 Financial Accounting – III 6431

Answer to Problem No. 1:

Journal Entries
Date Particulars L.F Debit Credit (Rs)
(Rs)
2011 Revaluation A/c Dr. 1,530
January 1 4 780
To Plant and Machinery A/c (19500 x ) 750
100
5
“ Reserve for Bad Debts A/c (15000 x )
100
(For decrease in the value of Machinery & creation of
“ RBD) 1,600
----------------------------------------------------------- 250
10
Stock A/c (16000 x ) Dr. 1,850
100
Reserve for Discount on Creditors A/c Dr.
2
(12500 x )
100
“ To Revaluation A/c 320
(For increase in the value of Stock and creation of Reserve 128
for Discount on Creditors) 128
----------------------------------------------------------- 64
Revaluation A/c Dr.
2
To A’s Capital A/c [320 x ]
5
2
“ B’s Capital A/c [320x ]
5
1
“ C’s Capital A/c [320x ]
5
(For the transfer of profit on revaluation to the Capital A/cs
of partners in the ratio of 2:2:1)
2011 Profit and Loss A/c Dr. 7,000
January 1 2 2,800
To A’s Capital A/c [7,000 x ] 2,800
5
1,400
2
“ B’s Capital A/c [7,000 x ]
5
1
“ “ C’s Capital A/c [7,000 x ]
5
(For the transfer of P&L A/c credit balance to the Capital 15,000
A/cs of partners in the ratio of 2:2:1) 6,000
----------------------------------------------------------- 6,000
Goodwill A/c Dr. 3,000
2
To A’s Capital A/c [15,000 x ]
“ 5
2
“ B’s Capital A/c[15,000 x ]
5
1 10,000
“ C’s Capital A/c[15,000 x ] 5,000
5 15,000
(For the Goodwill created and credited to the Capital A/cs
“ of partners in the ratio of 2:2:1)
---------------------------------------------------------

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 Financial Accounting – III 6431

2
A’s Capital A/c [15,000 x ] Dr. 20,928
3
20,928
1
C’s Capital A/c [15,000 x ] Dr.
3
To Goodwill A/c
(For writing off of the Goodwill created by debiting to the
Capital A/cs of continuing partners in the ratio of 2:1)
----------------------------------------------------------
B’s Capital A/c Dr.
To B’s Loan A/c
(For the transfer of the amount payable to the retiring
partner to his loan a/c)
Total 61,628 61,628

Dr. Revaluation Account Cr.

Particulars Rs. Rs. Particulars Rs. Rs.
To Plant and Machinery A/c 780 By Stock A/c 1,600
4 750 10
(19500 x ) (16000 x )
100 100
To Reserve for Bad Debts A/c
5 By Reserve for Discount 250
(15000 x ) on Creditors A/c
100
2
128 (12500 x )
To Partners’ Capitals A/cs: 100
128
2
A[320 x ] 64 320
5
2
B[320 x ]
5
1
C[320 x ]
5
(Profit on Revaluation
transferred to the Capital
Accounts of all Partners
in the ratio of 2:2:1)
1,850 1,850

Dr. Partners’ Capital Accounts Cr.

Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Goodwill A/c 10,000 ---- 5,000 By Balance b/d 16,000 12,000 10,000
(Written off
in 2:1) By Revaluation 128 128 64
2 A/c (Profit)
[15,000 x ]
3
1 By P & L A/c 2,800 2,800 1,400
[15,000 x ]
3 ---- 20,928 -----

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 Financial Accounting – III 6431

To B’s Loan A/c 2

A [7,000 x ]
(Transferred) 5
14,928 ----- 9,464 2 6,000 6,000 3,000
B [7,000 x ]
5
To Balance c/d 1
C [7,000 x ]
5
By Goodwill A/c
(Created and
credited in
2:2:1)
24,928 20,928 14,464 2 24,928 20,928 14,464
A [15,000 x ]
5
2
B [15,000 x ]
5
1
C [15,000 x ]
5

Problem No. 2: Shobha, Dharitri and Navya were partners sharing profits and losses in the
ratio of 3:2:1. Their Balance sheet on 31-03-2002 stood as given below:

Liabilities Rs. Rs. Assets Rs. Rs.

Bills Payable 31,000 Bank 15,000
Reserve Fund 15,000 Debtors 16,000
Capitals: Less: Reserve 1,000 15,000
Shobha 40,000 Stock 20,000
Dharitri 36,000 Furniture 20,000
Navya 28,000 Building 80,000
1,50,000 1,50,000

‘Navya’ retired on the above date and following adjustments are necessary for the purpose:
i) The goodwill of the firm is to be taken at Rs. 21,000/- which however need not be shown in
the books.
ii) Stock and Furniture to be reduced by 15%.
iii) Reserve for doubtful debts to be increased to Rs.3,000/-.
iv) The value of Building to be raised to Rs.1,00,000/-.

Prepare necessary ledger accounts and the balance sheet of the continuing partners.

Answer to Problem No. 2:

Dr. Revaluation Account Cr.

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 Financial Accounting – III 6431

Particulars Rs. Rs. Particulars Rs. Rs.

15 3,000 By Building A/c 20,000
To Stock A/c (20000 x
100 (1,00,000 – 80,000)
) 3,000
15 2,000
“ Furniture A/c(20000 x )
100
“ Reserve for Bad Debts A/c
(3,000 – 1,000) 6,000
“ Partners’ Capitals A/cs:
3 4,000
Shobha [12,000 x ]
6
2,000
2 12,000
Dharitri [12,000 x ]
6
1
Navya [12,000 x
6
]

20,000 20,000

Dr. Partners’ Capital Accounts Cr.

Particulars Shobha Dharitri Navya Particulars Shobha Dharitri Navya
Rs. Rs. Rs. Rs. Rs. Rs.
To Goodwill A/c 12,600 8,400 ----- By Balance b/d 40,000 36,000 28,000
(Written off
in 3:2) By Revaluation 6,000 4,000 2,000
3 A/c (Profit)
Shobha (21000 x )
5 3
Shobha [12,000 x ]
2 6
Dharitri (21000 x ) ---- ----- 36,000
5 2
Dharitri [12,000 x ]
6
To Navya’s Loan 1
Navya [12,000 x ] 7,500 5,000 2,500
A/c 6
(Transferred)
51,400 43,600 ---- By Reserve Fund A/c
3
To Balance c/d Shobha [15,000 x ]
6 10,500 7,000 3,500
2
Dharitri [15,000 x ]
6
1
Navya [15,000 x ]
6
64,000 52,000 36,000 64,000 52,000 36,000

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By Goodwill A/c
3
Shobha (21000 x )
6
2
Dharitri (21000 x )
6
1
Navya (21000 x )
6

Dr. Goodwill Account Cr.

Particulars Rs. Rs. Particulars Rs. Rs.
To Shobha’s Capital A/c 10,500 By Shobha’s Capital A/c 12,600
3 3
(21000 x ) (21000 x )
6 5
7,000 8,400
To Dharitri’s Capital A/c By Dharitri’s Capital A/c
2 2
(21000 x ) (21000 x )
6 3,500 5
To Navya’s Capital A/c
1
(21000 x )
6
21,000 21,000

M/s Shobha and Dharitri

Balance Sheet as on 31st March 2002
Liabilities Rs. Rs. Assets Rs. Rs.
Bills Payable 31,000 Bank 15,000
Navya’s Loan 36,000 Debtors 16,000
Less: Reserve 3,000 13,000
Capitals: Stock 20,000
Shobha 51,400 Less: Depreciation 3,000 17,000
Dharitri 43,600 Furniture 20,000
Less: Depreciation 3,000 17,000
Building 80,000
Add: Appreciation 20,000 1,00,000

1,62,000 1,62,000

Problem No. 3: Pramod, Rashmi and Divya were partners sharing profits and losses in the ratio
of 2:2:1. Their Balance sheet on 31-12-2002 appeared as under:

Liabilities Rs. Rs. Assets Rs. Rs.

Capitals: Goodwill 18,000
Pramod 40,000 Furniture 12,000
Rashmi 30,000 Stock 30,000
Divya 25,000 Debtors 18,000
Reserve Fund 12,000 Less: Reserve 1,000 17,000
Creditors 33,000 Cash at Bank 63,000
1,40,000 1,40,000

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 Financial Accounting – III 6431

On the above date, ‘Rashmi’ retired on the following terms:

a) That the goodwill of the firm is to be valued at average profit of last three years’ profits.
The profits for the last three years were: Rs.20,000, 24,000 and 22,000 respectively.
b) Furniture to be appreciated by 30% and Stock to be depreciated by 10%.
c) Reserve for bad and doubtful debts to be maintained at 10% of debtors.

Prepare necessary ledger accounts and the balance sheet of the continuing partners.

Answer to Problem No. 3:

Dr. Revaluation Account Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
10 3,000 By Goodwill A/c 4,000
To Stock A/c (30000 x )
100 (22,000 – 18,000)
“ Reserve for Bad Debts 800
A/c “ Furniture A/c 3,600
(1,800 – 1,000) 30
(12000 x )
“ Partners’ Capitals A/cs: 1,520 100
2
Pramod[3,800 x ] 1,520
5
2
Rashmi[3,800 x
5
] 760
3,800
1
Divya[3,800 x ]
5
(Profit on Revaluation
transferred to the Capital
Accounts of all Partners
in the ratio of 2:2:1)
7,600 7,600

Dr. Partners’ Capital Accounts Cr.

Particulars Promo Rashmi Divya Particulars Promo Rashmi Divya
d d
Rs. Rs. Rs. Rs. Rs. Rs.
By Balance b/d 40,000 30,000 25,000
“ Rashmi’s
Loan A/c “ Revaluation 1,520 1,520 760
(Balance ---- 36,320 ----- A/c (Profit)
transferred to 2
Pramod[3,800 x ]
Loan A/c) 5

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 Financial Accounting – III 6431

“ Balance c/d 46,320 --- 28,160 2

Rashmi[3,800 x ]
5
1
Divya[3,800 x ]
5 4,800 4,800 2,400

“ Reserve Fund A/c

2
Pramod[12,000 x
5
2
Rashmi[12,000 x
5
46,320 36,320 28,160 ] 46,320 36,320 28,160
1
Divya[12,000 x ]
5

M/s Pramod and Divya

Balance Sheet as on 31st December 2002
Liabilities Rs. Rs. Assets Rs. Rs.
Creditors 33,000 Goodwill 22,000
Rashmi’s Loan 36,320 Furniture 12,000
Add: Appreciation 3,600 15,600
Capitals: Stock 30,000
Pramod 46,320 Less: Depreciation 3,000 27,000
Divya 28,160 74,480 Debtors 18,000
Less: Reserve 1,800 16,200

Cash at Bank 63,000

1,25,640 1,25,640

Total Profit 20000+24000+22000 66000

Value of Goodwill = Average Profit = = = =
Number of Years 3 3
Rs.22,000

10
Reserve for bad and doubtful debts = x 18000 = Rs.1,800.
100

Problem No. 4: Naveen, Nuthan and Praveen were partners in a business sharing profits and
losses in the ratio of 4:3:1 respectively.

Balance sheet as on 31-12-2006

Liabilities Rs. Rs. Assets Rs. Rs.
Creditors 28,000 Cash at Bank 7,000

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General Reserve 4,000 Bills Receivable 9,000

Bills Payable 20,000 Debtors 20,000
Stock 30,000
Capitals: Machinery 24,000
Naveen 25,000 Furniture 10,000
Nuthan 15,000 Profit and Loss A/c 2,000
Praveen 10,000 50,000

1,02,000 1,02,000

Nuthan retired on the above date subject to the following terms:

a) Machinery be depreciated by 5%.

b) That stock be appreciated by 10%.
c) A bad debts reserve is to be created at 5% on debtors.
d) The goodwill of the firm is to be valued at Rs.8,000 and same should be shown in the
balance sheet of the continuing partners.
e) The total capital of the new firm be fixed at Rs.50,000 between Naveen and Praveen. The
new profit sharing ratio of the remaining partners was agreed at 3:2. The capital adjustments
are to be made in cash.

Prepare: Revaluation A/c, Partners’ Capital A/cs and Balance sheet of continuing partners.
Answer to Problem No. 4:
Dr. Revaluation Account Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Machinery A/c 1,200 By Stock A/c 3,000
5 10
(24000 x ) 1,000 (30000 x )
100 100
“ Reserve for Bad Debts A/c
5
(20000 x )
100
“ Partners’ Capitals A/cs:
400
4
Naveen[800 x ]
8 300 800
3
Nuthan[800 x ] 100
8
1
Praveen[800 x ]
8
(Profit on Revaluation
transferred to the Capital
Accounts of all Partners
in the ratio of 4:3:1)
3,000 3,000

Dr. Partners’ Capital Accounts Cr.

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Particulars Naveen Nuthan Praveen Particulars Naveen Nuthan Praveen

Rs. Rs. Rs. Rs. Rs. Rs.
To P & L A/c 1,000 750 250 By Balance b/d 25,000 15,000 10,000
(4:3:1)
4 “ Revaluation 400 300 100
Naveen[2,000 x ]
8 ---- 19,050 ----- A/c (Profit)
Nuth 4
Naveen[800 x ]
3 8
an[2,000 x ]
8 Nuth
P 3
an[800 x ]
1 400 ---- ---- 8
raveen [2,000 x ]
8 P
1
raveen [800 x ]
“ Nuthan’s 8 2,000 1,500 500
Loan A/c 30,000 --- 20,000
(Balance “ General
transferred to Reserve
Loan A/c)
4
Naveen[4,000 x ]
“ Bank A/c 8
Nuthan[4
(Excess
3
Capital paid) ,000 x ]
8
“ Balance c/d 4,000 3,000 1,000
1
Praveen[4,000 x ]
8

“ Goodwill A/c
4
Naveen[8,000 x
8
]
Nuthan[8,00
3
0x ] ---- ---- 8,650
8
31,400 19,800 20,250 31,400 19,800 20,250
1
Praveen[8,000 x ]
8

“ Bank A/c
(Additional
Capital
brought in)

3
Naveen’s Share of Capital in the new firm = x 50000 = Rs.30,000.
5

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 Financial Accounting – III 6431

2
Praveen’s Share of Capital in the new firm = x 50000 = Rs.20,000.
5

M/s Naveen and Praveen

Balance Sheet as on 31st December 2006
Liabilities Rs. Rs. Assets Rs. Rs.
Creditors 28,000 Cash at Bank 7,000
Bills Payable 20,000 Add: Additional capital
Nuthan’s Loan 19,050 brought by Praveen 8,650
15,650
Capitals: Less: Excess Capital
Naveen 30,000 returned to Naveen 400 15,250
Praveen 20,000 50,000 Bills Receivable 9,000
Debtors 20,000
Less: RBD 1,000 19,000
Stock 30,000
Add: Appreciation 3,000 33,000
Machinery 24,000
Less: Depreciation 1,200 22,800
Furniture 10,000
Goodwill 8,000
1,17,050 1,17,050

Problem No.5 .Amar , Bharth, Chandu are partners in a firm sharing profits and losses in the
ratio of 4:3:2 Their balance sheet on 31.12.2018.
Balance sheet as on 31-12-2006
Liabilities Rs. Rs. Assets Rs. Rs.
Creditors 11,000 Land 25,000
Bills Payable 10,000 Machniery 10,000
Reserve Fund 9,000 Stock 9,000
Capital Accounts Debtors 21,000
Amar 20,000 Cash 3,000
Bharth 10,000
Chandu 8,000 38,000
68,000 68,000

Bharth retires on the above date. The following adjustments are to be made on her retirement.
a. Good Will of the firm was agreed at Rs. 18,000.
b. Machniery was depreciated by 10%.
c. Stock was to be valued at Rs. 7,000.
d. Bad debts to be written off Rs. 1,000.
e. Rent payable was Rs. 500.

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 Financial Accounting – III 6431

Prepare revaluation accout, partner’s capital accounts and the balance sheet of the continuing
partners.

Answer to Problem No. 5:

Dr. Revaluation Account Cr.

Particulars Rs. Rs. Particulars Rs. Rs.
10 1,000 By Partners Captial A/c
To Machinery A/c [10,000 x
100 [Loss Transferred]
] 2,000 4 2,000
Amar [4,500 x ]
To Stock A/c [9,000-7,000] 9
1,000
3 1,500
Bharth [4,500 x ] 1,000 4,500
To Bad debts A/c 500 9
2
To Rent Payable A/c Chandu [4,500 x ]
9
4,500 4,500

Dr. Partners’ Capital Accounts Cr.

Particulars Amar Bharth Chandu Particulars Amar Bharth Chandu

To Revaluation 2,000 1,500 1,000 By Balance b/d 20,000 10,000 8,000
A/c [Loss] [Capital]
4
Amar [4,500 x ]
9 By Reserve Fund 4,000 3,000 2,000
3 4
Bharth [4,500 x ] Amar [9,000 x ]
9 9
2 ---- 17,500 ----
3
Chandu [4,500 x Bharth [9,000 x ]
9 9
] 2
30,000 13,000 Chandu [9,000 x ]
To Bharani’s Loan 9
A/c 8,000 8,000 4,000

By Goodwill A/c
To Balance c/d 4
[b/f] Amar [18,000 x ]
9
3
Bharth [18,000 x ]
9
2
Chandu [18,000 x ]
9
32,000 19,000 14,000 32,000 19,000 14,000

M/s Amar and Chandru

Balance Sheet as on 31st December 2006
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 Financial Accounting – III 6431

Liabilities Rs. Rs. Assets Rs. Rs.

Creditors 11,000 Land 25,000
Bills Payable 10,000 Machniery 10,000
Rent Payable 500 Less: Depreciation 1,000
Bharth loan 17,500 Stock 9,000
Partners Capital Less: Depreciation 2,000
Amar 30,000 Debtors 21,000
Chandu 13,000 43,000 Less: Bad debts 1,000
Cash 3,000
Goodwill 18,000
82,000 82,000

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