Admission of Partner, Retirement of Partner, Death of Partner

Table of contents

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Admission of Partner

According to Section 4 of the Indian Partnership Act, 1932, the term ‘partnership’ refers to ‘the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.’ The persons who have entered into partnership agreement with each other are referred to as Partners, and they are collectively referred to as the Partnership Firm.

Sometimes for the requirement of additional capital, technical support or to improve managerial efficiency, a continuing partnership firm, in consensus with all the partners, decides to admit a new partner in their business.

Section 31(1) of the Indian Partnership Act, 1932 provides that a person can be admitted as a new partner only with the consent of all the existing partners, unless otherwise agreed upon.

This is a form of reconstruction of partnership, as because whenever a new partner is admitted to a firm, the partnership between/among the existing partners comes to an end which begins a new partnership.

Usually the following accounting adjustments are required at the time of such admission:

1.  Computation of New Profit-Sharing Ratio
2. Revaluation of Assets and Liabilities
3. Distribution of Reserves, Accumulated Profits and Losses
4.  Adjustment for Goodwill
5.  Adjustments regarding Capital Contribution of new partner and the Capitals of the existing partners
6. Adjustment for Life Policy.

Computation of New Profit-Sharing Ratio:

In the event of admission of a partner, the existing partners usually sacrifice a share of their future profit, which the new partner becomes entitled to.

The ratio in which each of the existing partners sacrifice their share of profit on the event of admission of a new partner is referred to as Sacrificing Ratio [which is basically, (Old Ratio – New Ratio)].

The new profit-sharing ratio may be agreed upon by the partners, or the mutual profit-sharing ratio among the existing partners may remain unchanged after giving away the share of the new partner.

Revaluation of Assets and Liabilities:

In order to unveil any ‘secret profit’ or ‘secret loss’ existing in the books of accounts, the revaluation of Assets and Liabilities are done at the time of Admission (or any other form of Reconstruction), so that they reflect their fair values. A firm earns profit as a result of increase in the value of assets and/or decrease in the value of liabilities.

Similarly loss suffered by an entity when there is decrease in assets and/or increase in liabilities. The effect of such revaluations are given by opening a Revaluation Account through the following journals: 

Particulars		Journal Entry
Assets	Upward revaluation:	Asset A/c
		To Revaluation A/c
	Downward revaluation:	Revaluation A/c
		To Asset A/c
	Recording of unrecorded asset	Asset A/c
		To Revaluation A/c
Liabilities	Upward revaluation:	Revaluation A/c
		To Liability A/c
	Downward revaluation:	Liability A/c
		To Revaluation A/c
	Recording of unrecorded asset	Revaluation A/c
		To Liability A/c
Revaluation Expenses	Paid by the firm	Revaluation A/c
		To Bank A/c
	Paid by the partner	Revaluation A/c
		To Partner’s Capital A/c

A firm may decide to give the effect of such revaluations without incorporating the changes in the Balance Sheet values of those assets and liabilities. In that case, they have to open one Memorandum Revaluation Account. The preparation of Memorandum Revaluation Account involves the following:

(i) Record increase/decrease in the value of assets and liabilities as discussed.

(ii) Share the profit or loss on Revaluation amongst the old partners in their old profit sharing Ratio.

(iii) Reverse the increase/decrease in the value of assets and liabilities.

(iv) After reversal, calculate profit or loss.

(v) Share the profit/loss, after reversal amongst all the partners (including the new partner) in their new profit sharing ratio.

Memorandum Revaluation Account

Particulars	(₹)	Particulars	(₹)
To Assets (Decrease)	x x	By  Assets (Increase)	x x
To, Liabilities A/c (Increase)	x x	By, Libilities A/c (Decrease)	x x
To, Partners Capital A/c Share of Revaluation Profit)		By,  Partners Capital A/c (Share of Revaluation loss) [Old Partners in their Old profit sharing ratio]	x x
[Old Partners in old Profit sharing Ratio]	x x
	xxx		xxx
To, Reversal of Items b/d	x x	By,  Revarsal of Items b/d	x x
To, Partners’ Capital A/c (Revaluation Profit amount all partners in new profit sharing Ratio)	x x	By,  Partners’ Capital A/c (Revaluation loss amought all partners in their new Profit sharing (Ratio)	x x
	xxx		xxx

Distribution of Reserves, Accumulated Profits and Losses:

Reserves and accumulated profits or losses refer to the profits/losses that had been earned in preceding accounting periods but not yet distributed to the existing partners. For reserves and accumulated profits, partners’ capital accounts are credited and for accumulated losses partners’ capital accounts are debited in the old profit sharing ratio. The accounting entries are as follows:

In case of Reserves/ Accumulated Profits
Under Fluctuating Capital Method	Under Fixed Capital Method
Reserves A/c	Reserves A/c
Profit and Loss A/c	Profit and Loss A/c
To Partners’ Capital A/c (Among old partners in old p.s.r.)	To Partners’ Current A/c (Among old partners in old p.s.r.)
In case of Accumulated Loss
Under Fluctuating Capital Method	Under Fixed Capital Method
Partners’ Capital A/c	Partners’ Current A/c
To Profit and Loss A/c (Among old partners in old p.s.r.)	To Profit and Loss A/c (Among old partners in old p.s.r.)

When the incoming partners brings in his share of Premium for goodwill then it is to be shared among the existing partners in the Sacrificing Ratio.

•  Journal Entry
  

  Bank A/c

  To, Sacrificing Partners’ Capital A/c

  In case the incoming partner fails to bring in the Premium for Goodwill, it is to be checked whether the 
  failure on the part of the incoming partner is a ‘temporary failure’ or a ‘permanent failure’.
  
  
• Temporary Failure: In such a case, accounting is done involving ‘New Partner’s Loan A/c’, as follows:
  

  New Partner’s Loan A/c

  To, Sacrificing Partners’ Capital A/c

• Permanent Failure: This adjustment can be given effect to in two alternative ways:
  • Involving Goodwill Account; or
  • Without involving Goodwill Account/ Capital Adjustment.

Involving Goodwill Account In this case, the Goodwill account is first raised to its full value by giving due credit to the old partners, and subsequently written-off among all the partners (including the new partner) as follows:

1. Raising of Goodwill

Goodwill A/c

To, Existing/ Old Partners’ Capital A/c  [in the old p.s.r.]

To Partners’ Capital A/c (Among old partners in old p.s.r.)

2. Writing-off the Raised Goodwill

All Partners’ Capital A/c

To, Goodwill A/c [in new p.s.r.]

Without involving Goodwill Account/ Capital Adjustment

In this case, the accounting entries to be passed will involve the Partners’ Capital Accounts, as follows:

New Partner’s Capital A/c

To, Sacrificing Partners’ Capital A/c

When the incoming partner fails to bring in his share of Premium for goodwill, it is adjusted through the Partners’ Capital Accounts. 

There are different methods of valuation of goodwill. They are discussed as under: 

Sr. No	Name of the Method	Description of the method	Other Consideration
1.	Average Profits  Methods	Under this method	i. If profits are fluctuating, simple average is taken. If profits show an increasing trend, weights may be used. If  profits  constantly decrease, the lowest of the profits after adjustments may be considered.  ii. Exceptional Income or Expense of any particular year, should better be adjusted against the profit of that year.  iii. More weightage is usually given to later years.
		Value of Goodwill = Agreed Number of Years (Purchase) × Average Maintainable Profits
		Average Maintainable/Profit
		Average Annual Profits [Simple average or may be weighted average considering the trend of profits]
		Less: “Exceptional/Casual Income
		Add: Abnormal Loss
		Add: Capital Expenditure wrongly charged against profits
		Less: Provision for Taxation (As may be required)
		Adjusted Maintainable Profits
		(“Adjustments for undercharged or overcharged Depreciation or under or over valuation of stocks to be made, if required)
2.	Super Profits Method	Super Profit = Future maintainable profits – Normal Return on Capital Employed	i. Calculation of Average capital Employed cannot be made if current years’ profits are not separately given. ii. Trading Profits exclude any non trading income like Interest on Non- trading investments.  iii. Adjustments against profits including provision for managerial remuneration, should be made.  iv. If there is any change in the value of any fixed asset on revaluation, that does not affect  Annual Trading Profit. But adjustment for over charged or undercharged depreciation may be required to adjust the profits.  v. If there is any decrease in the value of any Current Asset like bad debts or reduction of stock and that has not been adjusted, the adjustment should be  made for finding out correct Trading Profit of the current year.  vi. For calculating capital employed, proposed dividend need not be deducted.  [Please see valuation of shares’]
		Goodwill = Super Profit × No. of years Steps to be followed
		Steps (a) Calculation of Capital employed OR Average Capital Employed
		Sundry Assets
		Excluding:
		i. Goodwill But including Goodwill at Cost Paid for
		ii. Non-trading assets and
		iii. Fictitious Assets
		Less: (i) Current Liabilities & Provisions
		(ii) Contingent & Probable Liabilities
		(Trading) Capital Employed
		Less: ½ of Current years trading profits after taxation (if the profits remain undistributed)
		Average Capital Employed
		Step(b) Average Annual Adjusted Profits(Maintainable)
		Step(c) Calculate Normal Return on Capital Employed or Average Capital Employed
		[Say at 10% or 12%, etc. — as may be given or assumed]
		Step(d) Deduct Normal Return (c) from Average Maintainable Profits (b).
		The difference is called Annual Super Profit
		Step(e) Goodwill = Annual Super Profit × No of Years for which the Super Profit can be maintained.  [Usually expressed as...years purchase of super profit]
3.	Capitalization of Profits Methods (A)Profits	Under the method follow these steps	Here also the profits should be adjusted considering necessary adjustments for managerial remunerations, change of depreciation, etc
		a. Calculate Annual Maintainable Profit as shown above.
		b. Calculate normal Capital Employed capitalizing the above profit by applying the normal rate of return.
		Normal Capital Employed =  Maintainable  Profit/ Normal Rate of Return * 100
		c. Calculate actual Capital Employed
		d. Goodwill = Normal Capital Employed – Actual capital Employed.
	(B)Capitalization of Super Profits	a. Calculate Super profit as said under Method 2.
		b. Goodwill =  Super Profit/Normal Rate of Return * 100
4.	Annuity Method	It is a derivative of super profit concept. If super profit is expected to be earned uniformly over a number of years, Goodwill is computed with the help of Annuity Table.	Here also similar principles as said before should be followed for calculating  — Capital Employed or Average Capital Employed, Annual Average Profits and  Annual Super Profits.
		Calculate Super Profit as discussed before
		Goodwill    =    Annual    Super    ProfitxPresent    Value    of     Annuity of ₹ 1.

Adjustments regarding capital contribution of new partner and the capitals of the existing partners

At the time of admission the incoming partner is required to bring capital into the firm, the amount of which is mutually agreed upon by the partners. The capital introduced by the new partner may be either in cash or in the form of any other assets. Necessary adjustments regarding revaluation profit/loss, distribution of reserves, adjustment for goodwill etc. are effected in the books of the firm and thus, the adjusted capital account balances are found out which are shown in the Balance Sheet after admission of the new partner. The partners may decide to maintain the closing balances of their capital accounts in a pre-determined ratio.

Adjustment for Life Policy:

Joint Life Insurance Policy is a common Life insurance policy which covers the lives of all the partners of the firm and the premium of which is borne by the firm. The Surrender Value of the Joint Life Policy as on the date of admission is to be considered for the accounting purpose. The Maturity Value is irrelevant in these cases.

Illustration 1

A and B are currently partners in a firm sharing Profit/Loss in the ratio of 4 : 3. A new partner C is admitted and after his admission new profit sharing ratio between A, B and C becomes 5: 3 : 2. What will be the sacrifice ratio of A and B after admission of C?

Solution:

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Illustration 2

X, Y and Z are partners in the ratio of 3 : 2:1. W is admitted with 1/16 th share in future profits. Z would retains his original shares. Find out the new profit sharing ratios of the partners.

Solution:

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 Illustration 3

S and N are partners sharing Profit /(Loss) in the ratio of 5:3. They admit J into partnership for 3/10th in the Profit /(Loss) in which J acquired 1/4th share from S and 1/10th share from N respectively.

Calculate the new profit and loss sharing ratios of the partners.

Solution:

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 Illustration 4

X and Y are partners sharing profit/loss in the ratio of 5:4. They admit Z into partnership for 1/5 th the share in the profits which is given 2/15th  by X and 1/15th by Y. Z brings ₹ 1,50,000 as his capital and ₹ 60,000 as premium.

Goodwill account appears in the books at ₹ 1,65,000; Give necessary journal entries in the books of the firm at the time of Z’s admission and find out the new profit sharing ratio. 

Solution:

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 Illustration 5

X & Y share profit & loss in the ratio of 5:3. They admit Z with 1/5th share of profits. He pays ₹ 80,000 as capital but does not contribute anything towards goodwill which is valued at ₹ 60,000. The capitals of the Partners are fixed. All adjustments are to be made through partners’ current accounts. Their Balance Sheet as on March 31, 2022 is as follows:

Balance Sheet as on 31.03.2022

Liabilities	(₹ )	(₹ )	Assets	(₹ )	(₹ )
Capital:			Plant and Machinery		50,000
X	80,000		Investments		31,000
Y	60,000	1,40,000	Sundry Debtors		60,000
Current account:			Stock and Trade		90,000
X	5,000		Bank		30,000
Y	6,000	11,000
General Reserve		60,000
Sundry Creditors		50,000
		2,61,000			2,61,000

Additional Information:

(i) Plant and Machinery is valued at ₹ 46,000 and stock at ₹ 96,000.

(ii) One Creditor for ₹ 6,000 is dead and nothing is likely to be paid on this account.

(iii) The Capital accounts are to be proportionately adjusted on the basis of Z’s capital and his share of profit, through Current accounts

(iv) Partners decide to maintain the General Reserve in the books of the firm.

Prepare Revaluation Account, Capital and Current Accounts, Bank Account and Balance Sheet of the new firm.

Solution:  

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 Illustration 6

The Balance Sheet of a firm as on 31.3.2022 was

Liabilities	( ₹ )	Assets	( ₹ )
Capital: Sun	50,000	Property	35,000
Moon	41,000	Motor car	7,500
Loan (Sun)	5,000	Furniture	1,000
General Reserve	5,000	Debtors	25,000
Sundry Creditors	15,000	Stock	45,000
Outstanding Expenses	1,500	Cash	4,000
	1,17,500		1,17,500

The profit sharing ratio between Sun & Moon was 3 : 2. They decided to admit Pluto as a new partner from 1st April, 2022 on the following terms & conditions:

(1) Property & Motor Car to be revalued at ₹ 45,000 & ₹ 6,500 respectively and 5% provision to be created on debtors.

(2) Pluto should pay premium for goodwill to be valued at 2 years’ purchase of last three years average profits. Such amount of premium was to be credited to old partners loan accounts.

(3) Pluto should pay ₹ 37,500 as capital.

(4) The new profit sharing ratio should be 2: 1: 1.

(5) Last three years’ profit were ₹ 5,000, ₹ 6,000 and ₹ 7,500.

The last three years’ books of accounts, on verification, disclosed the following discrepancies:

2019-20 : Bad debts previously written of recovered ₹ 400, credited to Debtors Account, Closing Stock under valued by ₹ 1,250. 

2020-21 : Furniture purchased ₹ 300 debited to Purchases Account,

Depreciation was provided @ 10% on reducing balance method but Closing Stock was overvalued by ₹ 2,000. 

2021-22 : A purchase invoice of ₹ 1,000 was omitted from the books and Closing Stock was undervalued by  ₹ 1,000.

Pass the journal entries at the time of admission of Pluto and prepare the Balance Sheet just after his admission. 

Solution:

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 Illustration 7

P and Q are partners sharing profits and losses in the ratio of 5:4. On 1st April, 2021 they admitted their Manager R into partnership for 1/5 th the share of the profits. As Manager, R was receiving a salary of ₹ 60,000 per year and a commission of 5 percent on the net profit after charging such salary and commission. It is, however, agreed that any excess over his former remuneration to which R becomes entitled as a partner is to be borne by Q.The profits of the firm for the year ended 31st March, 2022 amounted to ₹ 4,27,500. You are required to show the division of profits among the partners.

Solution:

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Illustration 8

A and B were partners of a firm sharing profits and losses in the ratio 2:1. The Balance Sheet of the firm as at 31st March, 2022 was as under: 

Liabilities	(₹)	Assets	(₹)
Capital Accounts:		Plant and Machinery	5,00,000
A	8,00,000	Building	9,00,000
B	4,00,000	Sundry Debtors	2,50,000
Reserves	5,25,000	Stock	3,00,000
Sundry Creditors	2,75,000	Cash	1,50,000
Bills Payable	1,00,000
	21,00,000		21,00,000

They agreed to admit P and Q into the partnership on the following terms:

(i) The firm’s goodwill to be valued at 2 years’ purchase of the weighted average of the profits’ of the last 3 years. The relevant figures are:

   Year ended 31.03.2019 - Profit 37,000

   Year ended 31.03.2021 - Profit 40,000

   Year ended 31.03.2022 - Profit 45,000

(ii) The value of the stock and Plant & Machinery were to be reduced by 10%. 

(iii) Building was to be valued at ₹ 10,11,000.

(iv) There was an unrecorded liability of ₹ 10,000.

(v) A, B, P & Q agreed to share profits and losses in the ratio 3 : 2 :1:1.

(vi) The value of reserve, the values of liabilities and the values of assets other than cash were not to be altered.

(vii) P and Q were to bring capitals equal to their shares of Profit considering B’s capital as base after all adjustments.

You are required to prepare:

(1) Memorandum Revaluation Account,

(2) Partner’s Capital Accounts and

(3) The Balance Sheet of the newly constructed firm. 

Solution:

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Retirement of Partner

PARTNERSHIP ACCOUNTS: RETIREMENT

Partners form a partnership business. But sometimes a partner may decide to discontinue from the firm for different reasons. Normally the retirement takes place by consent of all the partners and/or by other mode of communication by the intended partner to all other partners.

As per Section 32 of the Indian Partnership Act, 1932 a partner may retire:

● With the consent of all the existing partners; or
● In accordance with an express agreement by the partners; or
● By giving a written notice to all other partners of his intention to retire in case of ‘Partnership at Will’.

Like admission, retirement of a partner is another mode of reconstitution of partnership firm.

After retirement of a partner, the other partners may continue the business.  For paying off the retiring partner(s), some specific adjustments are required to be done in the books of the firm. These are discussed as follows:

● Calculation of new profit sharing ratio and gaining ratio,
● Distribution of reserves and accumulated profits and losses,
● Revaluation of assets and liabilities,
● Adjustment for goodwill,
● Adjustment for Joint Life Policy (JLP),
● Settlement of final balance of the retiring partner,
● Adjustment of existing partners’ capital accounts.

Calculation of New Profit Sharing Ratio and Gaining Ratio

As a consequence of retirement, the share of profit of the retiring partner gets distributed to the continuing partners which results in again in the share of the continuing partners. The ratio in which the continuing partners will share future profits and losses is known as the New Profit Sharing Ratio.

The ratio in which the continuing partners acquire the share of profit forgone by the retiring partner is referred to as Gaining Ratio. It is calculated by taking the difference between the old profit sharing ratio and the new profit sharing ratio.

Distribution of Reserves and Accumulated Profits and Losses

The balance of reserves or profit and loss account are distributed among all the partners (including the retiring partner), in their Old Profit Sharing Ratio in the event of Retirement.

Revaluation of Assets and liabilities

The logic for revaluation of Assets and liabilities at the time of retirement of a partner is same as that at the time of admission of a new partner. In case of retirement, the revaluation profit or loss is distributed among all the partners in the Old Profit Sharing Ratio.

Adjustment for Goodwill

The goodwill of the existing partnership firm had been created and developed by all the existing partners (including the retiring partner). That is why the continuing partners are required to compensate the retiring partner in their Gaining Ratio and the necessary adjustments for Goodwill is required to be made. Gaining ratio is the ratio of the gain or increase in the profit share that is made by the continuing partners on the retirement of an outgoing partner. It is calculated by taking the difference between the old profit sharing ratio and new profit sharing ratio. The accounting treatment of goodwill in the event of retirement of a partner is as under:

Writing-off the value of Goodwill A/c (if any) appearing in the pre-retirement Balance Sheet of the firm:

All Partners’ Capital A/c    (in old p. s. r.)

To, Goodwill A/c (existing book value)

The Capital Accounts of the partners are required to be adjusted:

Gaining Partners’ Capital A/c      (in Gaining Ratio)

To, Outgoing Partner’s A/c (with his share of goodwill)

Adjustment for Joint Life Policy (JLP)\

Joint Life Insurance Policy is a common Life insurance policy which covers the lives of all the partners of the firm and the premium of which is borne by the firm. The Surrender Value of the Joint Life Policy as on the date of reconstitution (i.e. Admission, Retirement, Change in Profit Sharing Ratio) is to be considered for the accounting purpose. The Maturity Value is irrelevant in these cases.

Settlement of Final Balance of the Retiring Partner:

After considering all the points discussed above, the amount due to the retiring partner is ascertained and to be settled in a mode as decided by the firm according to the terms of the partnership deed; or in the absence of such deed it is to be mutually decided by the partners.

The amount due to the retiring partner can either be discharged immediately after his retirement by paying off the whole amount using the business funds (i.e. Cash or Bank), or, if the firm is having paucity of liquid funds, then the retiring partner is paid in a certain number of instalments. In such case, the firm opens a Loan Account in the name of the retiring partner. Right of retiring partner under Section 37 of the Indian Partnership Act,1932: The retiring partner has the option of claiming higher of the following amounts:

(a) Share in Profits: The retiring partner’s profit share is determined since the date of retirement which is to be calculated in the ratio of the present adjusted capitals or

(b) Interest @ 6% per annum: Such interest is calculated on the amount due to the retiring partner from the  firm for the period starting from the date of retirement up to the date of settlement.

 Illustration 9

P, Q and R sharing profits and losses equally, had been trading for many years. R decided to retire on 31.3.2022 on which date Balance Sheet of the firm is as follows.

Liabilities	(₹)	Assets	(₹)
Capital accounts:		Cash	36,000
P	1,20,000	Debtors	74,000
Q	85,000	Stock	60,000
R	75,000	Plant and Machinery	1,20,000
Creditors	85,000	Land and Building	75,000
	3,65,000		3,65,000

Value of goodwill was agreed as ₹93,000. Land and building increased in value, it being agreed at ₹1,05,600, plant and machinery was revalued at ₹1,00,500 and it was agreed to provide 6% in respect of debtors. Prepare Revaluation Account, Capital Accounts and Balance Sheet. 

Solution:

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 Illustration 10

A, B & C were in partnership sharing profits in the proportions of 5:4:3. The balance sheet of the firm as on 31st March, 20X2 was as under:

Liabilities	(₹)	Assets	(₹)
Capital accounts:		Goodwill	40,000
A	1,35,930	Fixtures	8,200
B	95,120	Inventories	1,57,300
C	61,170	Trade receivables	93,500
Trade payables	41,690	Cash	34,910
	3,33,910		3,33,910

A had been suffering from ill-health and gave notice that he wished to retire. An agreement was, therefore, entered into as on 31st March, 20X2, the terms of which were as follows:

(i) The profit and loss account for the year ended 31st March, 20X2 which showed a net profit of ₹48,000 was to be re-opened. B was to be credited with ₹4,000 as bonus, in consideration of the extra work which had devolved upon him during the year. The profit sharing was to be revised from 1st April, 20X1, as 3:4:4.

(ii) Goodwill was appearing in the Balance Sheet on 31st March, 20X2 as it was purchased goodwill. It was decided by the partner to write off this goodwill. Presently goodwill was to be valued at two years’ purchase of the average profits of the preceding five years. The fixtures were to be valued by an independent valuer. A provision of 2% was to be made for doubtful debts and the remaining assets were to be taken at their book values.

(iii) The valuations arising out of the above agreement were goodwill ₹56,800 and fixtures ₹10,980.

(iv) B and C agreed, as between themselves, to continue the business, sharing profits in the ratio of 3:2 and decided to eliminate goodwill from the balance sheet, to retain the fixtures on the books at the revised value, and to increase the provision for doubtful debts to 6%.

Required:

Submit the journal entries necessary to give effect to the above arrangements and to draw up the capital account of the partners after carrying out all adjusting entries as stated above.

Solution:

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 Illustration 11

Compass, Cone and Circle are in partnership sharing profits and losses in the ratio of 3 : 2 : 1. The Balance Sheet of the firm as on 31st December, 20X1 was as follows:

Liabilities	₹	₹	Assets	₹	₹
Capital accounts :			Machinery (at Cost)	50,000
Compass	40,000		Less : Provision for Dep.	8,000	42,000
Cone	60,000		Furniture		1,000
Circle	20,000	1,20,000	Sundry Debtors	80,000
Reserve		30,000	Less : Prov. for Doubtful Debts	3,000	77,000
Sundry Creditors		60,000	Stocks		50,000
			Cash at Bank		40,000
		2,10,000			2,10,000

On 31st March, 20X2 Conre retired and Compass an Circle continued in partnership, sharing profits and losses in the ratio of 3 : 2. It was agreed that adjustments were to be made in the Balance Sheet as on 31st March, 20X2, in respect of the following :

(a) The Machinery was to be revalued at ₹ 45,000; (b) The Stock was to be reduced by 2%; (c) The Furniture was to be reduced to ₹ 600; (d) The Provision for Doubtful Debts would be ₹ 4,000; (e) A provision of ₹ 300 was to be made for Outstanding Expenses.

The Partnership agreement provided that on the retirement of a partner, goodwill was to be valued at ₹ 24,000 and Cone’s share of the same was to be adjusted into the accounts of Compass and Circle. The profit up to the date of retirement was estimated at ₹ 18,000.

Cone was to be paid off in full, Compass and Circle were to bring such an amount in cash so as to make their capital in proportion to the new profit sharing ratio. Subject to the condition that a cash balance of ₹ 20,000 was to be maintained as working capital.

Pass the necessary journal entire to give effect to the above arrangements and prepare the partners’ Capital Accounts on 31st March, 20X2.

Solution:

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 Illustration 12

The Balance Sheet of A, B and C who are sharing profits in proportion to their capital stood as follows on March 31st 2022:

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Accounts:			Land and Buildings		50,000
A	40,000		Plant and Machinery		17,000
B	30,000		Stock		16,000
C	20,000	90,000	Debtors	10,000
		13,800	Less: Provision	200	9,800
			Cash at Bank		11,000
		1,03,800			1,03,800

B retired on the above date and the following was agreed upon:

(i) The stock be depreciated by 6%.

(ii) That the provision for doubtful debts be brought up to 5% on Debtors.

(iii) That the Land and Buildings be appreciated by 20%.

(iv) That a provision for ₹ 1,540 be made in respect of outstanding legal charges.

(v) That the Goodwill of the entire firm be fixed at ₹ 21,600 and B’s share of it be adjusted into the accounts of A and C who are going to share future profits in the ratio of 5: 3.

(vi) That the assets and liabilities (except Cash at Bank) were to appear in the Balance Sheet at their old figures.

(vii) That the entire capital of the firm as newly constituted by fixed at ₹ 56,000 between A and C in the proportion of 5: 3 (actual cash to be brought in as paid off, as the case may be).

Show the Balance Sheet after B’s retirement.

Solution:

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Illustration  13

Gita and Mita are equal partners. Gita, by agreement, retires and Lata joins the firm on the basis of one-third share of profits on 01.04.20X1. The balances of the books as on 31st March 20X1 were:

Particulars	Dr.	Cr.
	₹	₹
Goodwill	10,000
Fixed Assets at Cost	1,20,000
Current Assets:
Stock	60,000
Debtors	40,000
Bank Balance	8,000
Creditors		20,000
Provision for Depreciation		12,000
Capital Accounts:
Gita		1,04,0000
Mita		1,02,000
	2,38,000	2,38,000

Goodwill and Fixed Assets valued at ₹ 30,000 and ₹ 1,40,000 respectively and it was agreed to be written up accordingly before admission of Lata as partner. Sufficient money is to be introduced so as to enable Gita to be paid off and leave ₹ 5,000 cash at Bank; Mita and Lata are to provide such sum as to make their Capitals proportionate to their share of profit. Assuming the agreement was carried out, show the journal entries required and prepare the Balance Sheet after admission of Lata.

All working should form part of your answer.

Solution:

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 Illustration 14

X, Y, & Z were equal partners. Their Balance Sheet as on 31.X1.X1 was as follows :

Liabilities	₹	₹	Assets	₹
Partners’ Capital			Land & Freehold Property	1,00,000
X	1,00,000		Plant & Machinery	2,00,000
Y	1,00,000		Furniture & Equipment	50,000
Z	2,00,000		Stock in-trade	1,00,000
Partner’s Current A/c :		4,00,000	Sundry Debtors	1,00,000
X	50,000		Balance with Bankers	1,50,000
Y	75,000
Z	25,000	1,50,000
Sundry Creditors		1,50,000
		7,00,000		7,00,000

On 1.1.X2 X retired and it was agreed that he should be paid all his dues in full on that date. For this purpose, goodwill was to be calculated on the basis of 3 years purchase of past 3 years profits which amounted to ₹ 1,00,000, ₹ 1,40,000 and ₹ 1,20,000 respectively.

In order to meet his obligation, a bank loan was arranged on 1.1.X2 for ₹ 2,00,000 pledging the fixed assets as security. Further, to compensate a loyal manager Q, it was agreed between Y and Z that Q should be admitted as a partner, who should bring in, over and above a capital of ₹ 1,00,000, his share of Goodwill in cash to serve as working capital.

Y and Z agreed to forego 1/3rd of their individual share of profits to Q.

Prepare the opening Balance Sheet of the firm as on 1.1.X2.

Solution:

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Illustration 15

X,Y and Z are partners sharing profits and losses in the proportion to 3:2:2, respectively. The Balance Sheet of the firm as on 01.01.20X2 was as follows:

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital Accounts;		Plant and Machinery	72,000
X: 1,00,000		Furniture	28,000
Y: 80,000		Stock	1,12,000
Z: 70,000	2,50,000	Sundry Debtors	96,000
Bank overdraft	20,000	Cash at Bank	18,000
Sundry Creditors	56,000
	3,26,000		3,26,000

X retired on 01.01.20X2 on which date R is admitted as new partner. For the purpose of adjusting the rights as between on partners’ goodwill to be valued at ₹ 84,000 and Sundry Debtors and Stock to be reduced by ₹ 16,000 and to ₹ 1,00,000 respectively. X is to receive ₹ 44,000 in cash on the date of retirement and the balance due to him is to remain as loan at 8% p.a. Repayment of loan to be made at the end of each year by annual installments representing 25% of the future profit before charging interest on loan.

R is to bring in ₹ 1,00,000 in cash as his capital on the date of admission. The new partners are to share profits and losses equally after paying the interest on X’s Loan.

The net profit for the year ended 31st December 20X2, is ₹ 64,000 before taking into account the installment payable to X.

You are required to show:

(a) Profit and Loss Appropriation Account for the year ended 31st December,20X2.

(b) Capital Accounts of the new partners; and

(c) X’s Loan Account as on 31st Dec, 20X2.

Solution:

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Illustration 16

P, Q and R were partners sharing Profits & Losses as 2 : 3 : 5. P retired on 31.3.X3 and X joined as a new partner on the same date, the new profit sharing ratio between Q, R and X being 2 : 3 : 1. The Balance Sheet of P, Q & R on 31.3.20X3 was as follows :

Sundry Creditors		50,000	Cash in hand	2,000
Loan from X		50,000	Cash at Bank	93,000
General Reserve		40,000	Sundry Debtors	30,000
Capitals :			Stock	20,000
P	10,000		Machinery	30,000
Q	15,000		Buildings	10,000
R	20,000	45,000
		1,85,000		1,85,000

X was admitted on the following terms :

(1) Machinery was to be depreciated by ₹ 3,000 (2) Buildings were revalued at ₹ 30,000 (3) Stock was to be written off by ₹ 5,000 (4) Provision of 5% was made against doubtful debts (5) General Reserve would be apportioned among the partners (6) The firm’s Goodwill was to be valued at two years purchase of the average profits of the last three years (7) The amount due to P was retained in the business as a loan but X’s Capital contribution should be 1/5th of the combined adjusted capitals of Q and R. His capital would be transferred from his Loan Account, (8) the Goodwill would be wiped off from the books after X’s admission. (9) Partners decided not to alter the book values of assets & liabilities after admission.

The profits/losses during the last 3 years had been 31.3.X1 ₹ 20,000 (Profit) 31.3.X2 ₹ 15,000 (loss) and 31.3.X3 ₹ 40,000 (Profit).

Show the necessary Accounts and Balance Sheet of the firm.

Solution:

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 Illustration 17

A, B and C are in partnership sharing Profits and Losses in the ratio 3:2:1 respectively. The Balance Sheet of the partnership firm as on 31st March, 2022 is as under: 

Capital & Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Accounts			Premises		1 80,000
A	1,70,000		Plant		74,000
B	1,30,000		Vehicles		30,000
C	70,000	3,70,000	Fixtures		4,000
Current Accounts			Current Account B		5,018
A	7,428		Stock		1,24,758
C	9,356	16,784	Debtors		69,960
Loan-C		56,000	Cash in hand		1,520
Creditors		38,072
Bank Overdraft		8,400
		4,89,256			4,89,256

C decides to retire from the business as on the above date and D is admitted as a partner on that date. The following matters agreed:

(i) Assets revalued as : Premises - ₹ 2,40,000, Plant- ₹ 70,000 Stock - ₹ 1,08,358.

(ii) A provision of ₹ 6,000 is created against debtors.

(iii) Goodwill is to be recorded in the books on the day C retires at ₹ 84,000. The partners in the new firm do not wish to maintain a Goodwill Account so that amount is to be written-off against the New Partners’ Capital Accounts.

(iv) A and B are to share profit in the same ratio as before, and D is to have the same share of profits as B.

(v) C is to take a car at its book value of ₹ 7,800 in part payment, and the balance of all he is owed by the firm in cash except ₹ 40,000 which he is willing to leave as a Loan Account.

(vi) The partners in the new firm are to start on an equal footing so far as Capital and Current Account are concerned. D is to contribute cash to bring his Capital and Current Account to the same amount as the original partner from the old firm who has the lower investment in the business. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

(vii) Revaluation profit or loss is to be adjusted in the Partners’ Current Account.

You are required to prepare Revaluation Account, Partners’ Capital Accounts, Partners’ Current Accounts, C’s

Loan Account, Bank Account and Balance Sheet of the newly constituted firm as at April 1, 2022.

Solution:

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Death of Partner

If a continuing partner dies, then it leads to reconstitution of partnership firm.

In the event of death of a partner, the other partners may decide to continue the business which requires certain adjustments to be made in the books of accounts of the existing partnership firm which are as follows:

• Calculation of new profit sharing ratio and gaining ratio,
• Distribution of reserves and accumulated profits and losses,
• Revaluation of assets and liabilities,
• Adjustment for goodwill,
• Adjustment for Joint Life Policy (JLP),
• Adjustment for interim period’s profit/loss,
• Settlement of final balance of the deceased partner to his Executor.

Calculation of new profit sharing ratio and Gaining Ratio:

As a consequence of death, the share of profit of the deceased partner gets distributed to the continuing partners which results in again in the share of the continuing partners. The ratio in which the continuing partners will share future profits and losses is known as the New Profit Sharing Ratio. The ratio in which the continuing partners acquire the share of profit forgone by the deceased partner is referred to as Gaining Ratio. It is calculated by taking the difference between the old profit sharing ratio and the new profit sharing ratio.

Distribution of Reserves and Accumulated Profits and Losses:

The balance of reserves or undistributed profit (as represented by balance of Profit & Loss Account) are distributed among all the partners (including the Executor of deceased partner) in their old profit sharing ratio in the event of death of a partner.

Revaluation of assets and liabilities:

The logic for revaluation of Assets and liabilities at the time of death of a partner is same as that at the time of admission of a new partner. In case of death, the revaluation profit or loss is distributed among all the partners (including the Executor of the deceased partner) in the Old Profit Sharing Ratio.

Adjustment for Goodwill:

The goodwill of the existing partnership firm had been created and developed by all the existing partners (including the deceased partner). So, the continuing partners are required to compensate the deceased partner in their Gaining Ratio and the necessary adjustment for Goodwill is required to be made...

Adjustment for Joint Life Policy (JLP):

The mode of accounting for Joint life policy depends upon the accounting policy of the firm. Either JLP is treated as an asset or as an expense in the books of the firm. Unlike Admission and Retirement, the Surrender Value has no role to play, only the maturity value of the Joint Life Policy is to be taken into consideration in the case of death of a partner.

Adjustment    for    interim    period’s    profit/loss: 

Unlike Admission and Retirement, the date of which are generally pre-planned, the death of a partner can take place anytime during the Accounting Period. In such case, the amount of profit or loss, starting from the opening date of the accounting period ending up to the date of death, is to be determined (which is called as the interim period’s profit or loss) and the share of the deceased partner in such Profit/Loss is to be duly accounted for. For this purpose, generally a temporary account is opened in the books of the firm called P/L Suspense A/c.

Normally two approaches are there to estimate the profit or loss for the interim period:

(i) On Time Basis: Here the average profit of last periods is considered, which is apportioned between the pre-death period and the post-death period.

(ii) On Sales Basis: Under this approach, the rate of profit on sales earned in the last year is computed and is applied to the interim period’s sales.

Settlement of final balance of the deceased partner to his Executor:

The amount payable to the representative of the deceased partner (commonly known as Executor) can be made either immediately or as deferred settlement. The accounting procedure involved is similar to that followed in case of retirement of a partner. The mode of payment depends on the agreement between the partners. It may be:

(i) Lump Sum Payment: If the firm has sufficient funds, the total amount payable on account of the deceased partner is transferred to his Representative’s Account (or Executor). Such Representative’s Account is debited and Bank Account is credited on payment of the dues.

(ii)  Instalment Payment/Loan Payment: The firm may not have enough funds to make prompt payment. In such a case, the total amount payable is transferred to a loan account in the name of the legal representative or executor. The loan is paid off gradually by installments after considering interest on unpaid balance. The word “Loan” may or may not be appended with the Account. But its gradual payment will definitely resemble the payment of loan.

 Illustration 18

A, B and C have been in business partnership for some years, Sharing Profit in the proportions of 4:3:3. The balances in the books of the firm as on 31st March, 2022 subject to final Adjustment, were as under:

	Dr. (₹)	Cr. (₹)
Capital Account - A		3,00000
Capital Account - B		1,50,000
Capital Account - C		1,80,000
Profit for the year before charging interest		3,12,000
Land and Buildings	2,40,000
Furniture and Fixtures	45,000
Stock	3,75,000
Debtors	60,000
Bank	1,20,000
Creditors		90,000
Partner’s Drawings - A	48,000
Partner’s Drawings - B	72,000
Partner’s Drawings - C	72,000
Total	10,32,000	10,32,000

C died on 30.09.2021. The Partnership deed provided that:

(1) Interest was to be credited on Capital accounts of partners at 10% P.A. on the balance at the beginning of the year.

(2) On the death of a Partner:

(i) Goodwill was to be valued at three years’ purchase of average Annual Profits of three years up to the date of death, after deducting interest on Capital Employed at 8% P;A. and a fair remuneration for each of the partners;

(ii) Fixed Assets were to be valued by an independent valuer and all other assets and liabilities to be taken at Book Value.

(3) Wherever necessary, profit or loss should be apportioned on a time basis.

(4) The amount due to the deceased partner’s Sole Heir was to receive interest @ 12% P.A. from the date of death until paid. 

It was ascertained that:

(a) Profits for three years, before charging partners’ interest were: 2018-19; ₹3,36,000, 2019-20 : ₹3,78,000 and 2020-21: ₹3,60,000 respectively.

(b) The independent valuation at the date of death revealed: Land and Buildings ₹3,00,000 and Furniture and Fixtures ₹30,000.

(c) A fair remuneration for each of the Partners would be ₹75,000 P.A. and that the Capital employed in business to be taken as ₹7,80,000 throughout. 

It was agreed among the Partners that:

(i) Goodwill was not to be shown as an asset of the firm as on 31.03.2022. Therefore, adjustment for goodwill was to be made in Capital Accounts.

(ii) A and B would share equally from the date of death of C.

(iii) Depreciation on revised value of assets would be ignored.

You are required to prepare:

(i) Revaluation Account

(ii) Partners’ Capital Accounts

(iii) Partners’ Current Accounts

(iv) C’s Heir Account

(v) Balance Sheet as on 31.03.2022.

Solution:

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Illustration 19

A, B and C are partners in a firm sharing profits and losses as 3:2:1. Their Balance Sheet as on 31st March, 2021 was as follows:

(₹ in Lakh) 

Liabilities	(₹)	Assets	(₹)
Partners’ Capital A/c		Land and Building	210
A	145	Plant and Machinery	255
B	110	Stock	125
C	75	Debtors	95
General Reserve	165	Bills Receivable	25
Partners’ Loan:		Cash in Hand	3
A	30	Cash at Bank	37
B	20
Sundry Creditors	205
	750		750

B died on 1 August, 2021. His account is to be-settled under the following terms:

(i) Goodwill will be valued at 3 years purchase of last four accounting years average profit. Profits were :2017-2018 ₹135 Lakh, 2018-2019 ₹145 Lakh, 2019-2020 ₹131 Lakh and 2020-2021 ₹165 Lakh.

(ii) Land and Building will be valued at ₹ 250 Lakh and Plant and Machinery will be valued at ₹ 240 Lakh.

(iii) For the purpose of calculating B’s share in the profits of 01.04.2021 to 31.07.2021, the profits for the year 2020-2021 will be taken as base.

(iv) Interest on Partners’ Loan will be calculated @ 6% per annum.

(v) A sum of ₹50 Lakh to be paid immediately to B’s Executor and the balance to be paid on 1 December, 2021 together with interest @ 10% per annum.

You are required to pass necessary journal entries to record the above transactions and amount payable to B’s Executor’s Account. 

Solution:

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 Illustration 20

The following was the Balance Sheet of A, B and C who shared profits in the ratio of 1 : 2 : 2 as on 31st December, 20X5.

Sundry Creditors	10,000	Goodwill	15,000
Capital A/c :		Debtors	10,000
A:  10,000		Machinery	20,000
B :  20,000		Buildings	30,000
C : 20,000	50,000	Stock	10,000
General Reserve	5,000	Cash at Bank	5,000
Investment Fluctuation Fund	3,000	Investments	10,000
Bad Debts Reserve	2,000
Bank Loan	30,000
	1,00,000		1,00,000

C died on 31st March, 20X6. His account is to be settled under the following terms :

Goodwill is to be calculated at the rate of 2 years purchase on the basis of the average of 5 years profit or loss. Profit for January to March’ X6 is to be calculated proportionately on the average profit of 3 years. The profits were : 20X1 ₹ 3,000, 20X2 ₹ 7,000, 20X3 ₹ 10,000, 20X4 ₹ 14,000, 20X5 loss ₹ 12,000. During 20X5 a Moped costing ₹ 4,000 was purchased and debited to Travelling Expenses Account on which depreciation is to be calculated @ 25%. Other values agreed on assets are : Stock ₹ 12,000, Building ₹ 35,000, Machinery ₹ 25,000 and Investments ₹ 8,000. Debtors are considered good.

Prepare new Balance Sheet of the firm, necessary Journal entries and Ledger Accounts of the Partners.

Solution:

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Treatment of Joint Life Policy

In case of death of a partner of an existing partnership business, any amount due towards the deceased partner is required to be paid by the firm to his/ her legal representatives. This payment happens to be a burden for a firm because it has to be paid all of a sudden, and thus it may adversely affect the financial position of the firm. In order to overcome such a situation, a firm usually takes an insurance policy to cover the lives of the partners.

Such insurance policy can be taken either on the name of the partners - individually or jointly. The premium on such insurance is paid by the firm. This policy happens to be an asset of the firm on which all the partners have their proportionate stake. So, it should be adequately accounted for in case of change in constitution of a firm (i.e. Admission, Retirement, Change in profit sharing ratio etc.) and also in the event of death of a partner. The insurance policy matures on the death/ expiry of a partner, or on the expiry of the policy period, whichever occurs earlier. On the basis of the number of persons that have been covered under an insurance policy agreement, the life insurance policy taken by a firm may be classified into two types – Individual Life Insurance Policy and Joint Life Insurance Policy.

The life insurance policy that is taken by a partnership firm covering the lives of all its partners is referred to as Joint Life Policy. It is a single policy that covers the lives of all the partners of the firm. Such a policy matures in the event of the death of any one of the partners of the firm or on the date of maturity, whichever is earlier.

The accounting of joint life policy involves accounting on payment of the premium of such policy, accounting in the event of reconstitution of the firm (using the surrender value), and accounting in the event of death of a partner (using the maturity value). The maturity value and surrender value of joint life policy have a significant role in partnership accounting.

Maturity value (also known as Sum Assured) refers to the amount receivable by the firm from the insurance company in the event of the death of a partner or on the expiry of the policy period.

A firm may decide to terminate i.e. surrender an insurance policy before its date of maturity. In that case, the insurance company pays an amount to the insured and this amount is referred to as ‘Surrender Value’. This surrender value does not remain constant over the years. It gradually increases with time. It is considered to be its ‘fair value’ for the purpose of accounting.

There are two broad methods of JLP accounting:

Method A: JLP is not treated as an asset in the books of the firm
Method B: JLP is treated as an asset in the books of the firm

Method A: JLP is not treated as an asset in the books of the firm

Under this method, the insurance premium paid on the joint life policy is treated as an ‘expense’ of the firm and not as an asset. The insurance premium is debited to the Profit & Loss A/c and JLP A/c does not appear in the Balance Sheet. The surrender value of the JLP does not get reflected in the books.

On payment of insurance premium on joint life policy the following entries are passed as under

Joint Life Policy Premium A/c

To, Bank A/c

P/L A/c

To, Joint Life Policy Premium A/c

On change in  constitution of firm(i.e. Admission, Retirement, Change in profit sharing ratio etc.)

 The surrender value of the JLP is accounted for in any one of the following two ways:

• By raising and writing-off JLP Account; or
• By adjusting the capital accounts of the partners

Raising and writing-off JLP Account	Raising of JLP A/c
	JLP A/c
	To, Existing Partners’ Capital A/c (in old p.s.r.)
	Writing-off    JLP    A/c
	Continuing Partners’ Capital A/c
	To, JLP A/c (in new p.s.r.)
Adjusting the capital accounts of the partners	Gaining Partners’ Capital A/c
	To, Sacrificing Partners’ Capital A/c

On the event of death of a partner

The JLP taken by the firm matures, and the policy value is received by the firm and it gets distributed among all the existing partners in their old profit sharing ratio. It is accounted for as under:

On maturity of the JLP	JLP Receivable A/c
	To, Existing Partners’ Capital A/c (in old p.s.r.)
On receipt of maturity value	Bank A/c
	To, JLP Receivable A/c

Method B: JLP is treated as an  asset in the books of the firm

Under this method, the insurance premium paid on the joint life policy is treated as ‘investment in an asset’ of the firm. It is reflected in the Balance Sheet at its surrender value.

The surrender value of the JLP on any date happens to be lower than the amount of the total amount of insurance premium paid on the JLP over the years. So, to maintain the JLP A/c at its surrender value, the difference between the amount of premium paid and the surrender value as on the date of preparation of the Balance Sheet is writtenoff.  For the purpose of ensuring that the JLP A/c is reflected at its surrender value, there are two recognised methods of accounting. They are discussed as under: 

Approach 1: Surrender Value Method

In this case one ledger account – Joint Life Policy Account (JLP A/c) is maintained. The insurance premium paid on the joint life policy is recorded in the JLP A/c as under:

JLP A/c

To, Bank A/c

Thereafter for ensuring that this JLP A/c is maintained at its ‘surrender value’, the excess of premium paid over the increase in surrender value is debited to the Profit & Loss A/c by passing the following entry:

P/L A/c

To, JLP A/c

 This ensures that JLP A/c appears in the Balance Sheet of the firm at its ‘Surrender value’.

Approach 2: Joint Life Policy Reserve Method

Under this method, two ledger accounts are maintained – Joint Life Policy Account (JLP A/c) and Joint Life Policy Reserve Account (JLP Reserve A/c).

In this case, the insurance premium paid on the joint life policy is treated as an investment in joint life policy. It is debited to the JLP A/c as under:

JLP A/c

To, Bank A/c

Moreover, the insurance premium paid on the joint life policy is considered as an ‘appropriation of profit’ and so it is provided through JLP Reserve A/c. In this case, an amount equal to the insurance premium is debited to the Profit & Loss appropriation A/c, as follows:

P/L Appropriation A/c

To,  JLP Reserve A/c

Both the JLP A/c and JLP Reserve A/c appear in the Balance Sheet of the firm in the Asset-side and Liabilities side respectively.

Further, for ensuring that JLP A/c and JLP Reserve A/c are maintained at its ‘surrender value’, the excess of premium paid over the increase in surrender value is adjusted between JLP A/c and JLP Reserve A/c by passing the following entry:

P/L Reserve A/c

To, JLP A/c

 The above entry ensures that both JLP A/c and JLP Reserve A/c appear in the Balance Sheet of the firm at the ‘Surrender value’.

On change in constitution of firm (i.e. Admission, Retirement, Change in profit sharing ratio)

Under the ‘Surrender Value Method’: JLP is considered as an asset and it already appears in the books of the firm at the surrender value. As such no further accounting treatment is required.

Under the ‘JLP Reserve Method’: both the JLP A/c and JLP Reserve A/c appear in the books of the firm at surrender value. 

Cases	Treatment
If the partners decide not to maintain the JLP Reserve A/c	JLP Reserve A/c is written-back and distributed among the existing partners’ in old P.S.R.: JLP Reserve A/c     To, Existing Partners’ Capital A/c (in old P.S.R.)
If the partners decide to keep on maintain	Adjustment is required to be made through Partners’ Capital A/c Gaining Partners’ Capital A/c     To, Sacrificing Partners’ Capital A/c

On the event of death of a partner

The JLP matures, and the maturity value of the policy is received by the firm. Thereafter it gets distributed among all the existing partners in their old p.s.r.

Transaction	Surrender Value Method	JLP Reserve Method
On death of partner i.e. maturity of the JLP	JLP Receivable A/c	JLP Receivable A/c
	To, JLP A/c (with Maturity Value)	To, JLP A/c (with Maturity Value)
On receipt of maturity value	Bank A/c	Bank A/c
	To, JLP Receivable A/c	To, JLP Receivable A/c
Closing of JLP Reserve A/c by transfer to JLP A/c	N.A	JLP Reserve A/c
		To, JLP A/c (with ‘last recorded Surrender Value’)
Closing of JLP A/c	JLP A/c	JLP A/c
	To, All Partners’ Capital A/c (with the difference between ‘last recorded surrender value’ and ‘maturity value’ in old P.S.R.)	To, All Partners’ Capital A/c (with the difference between ‘current year premium paid, if any’ and ‘maturity value’ in old P.S.R.)

 Illustration 21

Naresh, Rohit and Krishna are partners sharing profits and losses in the ratio of 2:2:1. On 1st January, 2019, they took out a joint life policy of ₹ 2,00,000. Annual premium of ₹ 10,000 was payable on 1st January each year. Last premium was paid on 15th January, 2022. Rohit died on 1st March, 2022, and policy money was received on 31st March, 2022. The surrender value of policy as on 31st March each year were as follows:

2019        :         Nil
2020        :         ₹ 2,000
2021        :         ₹ 5,000

Show Joint Life Policy accounts as on 3lst March each year assuming that:

(i) The premium is charged to profit and loss account every year.

(ii) The premium is debited to joint life policy account and the balance of the joint life policy account is adjusted every year to its surrender value. 

Solution:

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Exercise

Theoretical Questions:

Multiple Choice Questions

1. Sacrificing ratio is:
   a. New Profit sharing ratio - old profit sharing ratio. 
   b. Equal to old profit sharing ratio 
   c. Equal 
   d. Old profit sharing ratio - new profit sharing ratio.
   
   
2.  Which of the following is not an essential feature of a partnership firm? 
   a. Mutual agency.
   b.  Existence of business
   c. Association of two or more people.
   d.  Compulsory registration
   
   
3. Generally sacrifice ratio is concerned with the situation of:
   a. Admission of a new partner 
   b. Retirement of a partner 
   c. Dissolution of firm
   d. Conversion of firm into company
   
   
4. Which of the following account is mainly prepared at the time of dissolution of the firm?
   a. Revaluation A/c
   b. Goodwill A/c
   c. Realization A/c 
   d.Memorandum Revaluation A/c 

Answer:

1

d

2

d

3

d

4

d

Numerical Questions

Multple Choice Questions

1. X and Y are partners with the capital of  ₹ 50,000 and  ₹ 30,000 respectively. Interest Payable on Capital is 10% p.a. If the profits earned by the firm is  ₹  4,800, what will be the Interest on Capital for X and Y?
   a. ₹ 5,000 and  ₹  3,000
   b. ₹  3,000 and  ₹  1,800 
   c. No interest will be paid to the partners
   d. None of the above
   
   
2.  X and Y were partners sharing profit/losses as 3:2. They admit Z as a new partner, giving him 1/5th share of future profits. What should be the new profit sharing ratio?
   a. 12:8:5
   b. 3:2:1
   c. 8:12:5
   d. 5:8:12
   
   
3. B and D are partners, sharing profit or loss in the ratio 3 : 2. They admit K for 1/6th share of profits in the firms of which she takes 2/3rd from B and 1/3rd from D. What will be the new profit sharing ratio?
   a. 44: 31: 15
   b. 31: 44: 15
   c. 32: 41: 14
   d. 15: 31: 44
   
   
4. G and C are partners. They are entitled for 9% interest on their capital contributions. The firm allowed ₹ 54,000 towards interest on capital to partners. What will be the capital contribution of each partner if interest on Gunnu’s capital is ₹13,500 more than the interest on Chinu’s capital?
   a. ₹ 2,25,000
   b. ₹ 2,55,000
   c. ₹ 2,50,000
   d. ₹ 2,15,000
   
   

Answer: 

1

b

2

a

3

a

4

a