CHAPTER -03

RECONSTITUTION OF A PARTNERSHIP FIRM

RETIREMENT / DEATH OF A PARTNER
PART - A
One Mark Questions:

I] Multiple Choice Questions:

1] Abhishek, Rajat and Vivek are partners sharing profits in the ratio of
5:3:2. If Vivek retires, the New Profit Sharing Ratio between Abhishek and
Rajat will be–
a] 3:2 b] 5:3 c] 5:2 d] 1:1

2] The old profit sharing ratio among Rajendra, Satish and Tejpal were
2:2:1. The New Profit Sharing Ratio after Satish’s retirement is 3:2. The
gaining ratio is;
a] 3:2 b] 2:1 c] 1:1 d] 2:2

3] Anand, Bahadur and Chander are partners sharing profits equally. On

Chander’s retirement, his share is acquired by Anand and Bahadur in the
ratio of 3:2. The New Profit Sharing Ratio between Anand and Bahadur will
be:
a] 8:7 b] 4:5 c] 3:2 d] 2:3

4] In the absence of any information regarding the acquisition of share in

the profit of the retiring/deceased partner by the remaining partners, it is
assumed that they will acquire his/her share in:
a] Old Profit Sharing Ratio b] New Profit Sharing Ratio
c] Equal Ratio d] gain ratio

5] On retirement/death of a partner, the remaining partner(s) who have

gained due to change in profit sharing ratio should compensate the
a] retiring partners only.
b] remaining partners (who have sacrificed) as well as retiring partners.
c] remaining partners only (who have sacrificed).
d] Remaining partners who have gained

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6] Amount due to deceased partner is settled in the following manner;
a] Immediate full payment
b] Transferred to Loan Account
c] Partly paid in cash and the balance transferred to Loan A/c
d] All of the above.

7] Deceased partner’s share of profit in the accrued profit may be calculated

on the basis of
a] Last year’s profit b] average profit of past few years
c] Sales d] All the above

8] Items to be considered while calculating the amount payable to the

deceased partner is:
a] His share of capital b] His share of reserve
c] His share of accrued profit d] All the above

9] Accrued profit is ascertained on the following ways__________

a] Average profit b] Previous year’s profit
c] On sales d] All of the above.

10] Amount payable to the Executors of the deceased partner is transferred

to:
a] Executors loan account.
b] Executors account.
c] Remaining partners’ capital accounts.
d] deceased partner’s capital account.

II. Fill in the blanks:

1] Old ratio is used to distribute accumulated profits and losses at the time
of retirement of a partner.
2] Profit or loss on revaluation is shared among the partners in old ratio on
retirement of a partner.
3] New ratio – Old ratio = Gaining Ratio
4] Accumulated losses are transferred to the Capital Accounts of the
partners at the time of retirement in their old ratio.
5] General reserve is to be transferred to all partners' capital accounts at the
time of retirement of a partner.

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6] In the absence of any instruction, Retiring Partner’s Capital A/c is closed
by transferring its balance to Loan A/c
7] Adjusted capital ratio is used for adjustment of continuing partner’s
capitals.
8] X, Y and Z are the partners sharing profits and losses in the ratio of 3:2:1.
If Y retires, the new ratio of X and Z will be 3:1.
9] Share gained is calculated by deducting old share from the New Share.
10] The ratio in which the remaining partners share future profits after
retirement is called new ratio.
11] The balance in the retiring partner’s loan A/c is shown on the liability
side of the B/S till the last instalment is paid.
12] The amount paid to the Retiring Partner in excess of what is due to him
is called premium goodwill.
13] In the absence of any agreement as the disposal of amount due to
retiring partner, Sec. 37 of the Indian Partnership Act, 1932 is applicable.
14] Executors account is generally prepared at the time of death of a
partner.
15] Accounting treatment at the time of retirement and death is similar.
16] The period from date of the last B/S and the date of the partner’s death
is called interim period.
17] Profit and Loss Suspense account is debited for the transfer of share of
accrued profit of a deceased partner.
18] Amount payable to the Executors of the deceased partner is transferred
to Executor’s account.

III. One Marks Questions

1] What do you mean by retirement of a partner?

→ Retirement of a partner means when a partner voluntarily leaves the firm
and ceases to be a partner.

2] Give the formula for calculating Gain Ratio.

→ Gain Ratio = New Ratio – Old Ratio

3] Why the Gain Ratio is required on retirement of a partner?

→ It is used to distribute goodwill and adjustments for the share of the
retiring partner.

4] Why the New Ratio is required on retirement of a partner?

→ To share future profits/losses among remaining partners.

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5] Give the formula for calculation of new profit sharing ratio on retirement
of a partner.
→ New Ratio = Old Ratio + Share Gained from Retiring Partner

6] What do you mean by hidden goodwill?

→ Hidden goodwill is the goodwill not recorded in books but inferred from
the settlement made to the retiring/deceased partner.

7] When do you prepare executors account?

→ At the time of the death of a partner.

8] How do you close the executor’s account?

→ By paying the amount due or transferring it to Executor’s Loan Account.

9] Who is an ‘Executor’?
→ An executor is a legal representative of the deceased partner.

10] Which account is credited for the share of accrued profit of a deceased
partner?
→ Deceased Partner’s Capital Account

11] What is intervening period?

→ The time between the last Balance Sheet and the date of death of the
partner.

IV. True or False Statements

12] Profit or loss on revaluation is transferred to All Partners’ Capital

Accounts in case of retirement of a partner.
→ True

13] Accumulated profit is transferred to Continuing Partners Capital

Accounts.
→ False (It is transferred to all partners including retiring, in old ratio)

14] Adjustment of partners’ capitals of the remaining partners is to be made

in the New Ratio.
→ True

15] New Share = Old share + share sacrificed.

→ False (New Share = Old Share ± Gain/Sacrifice)

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16] Share gained is computed by deducting old share from the New Share.
→ True

17] Increase in the value of asset is debited to Revaluation Account.

→ False (It is credited to Revaluation A/c)

18] Sec 37 of the Indian Partnership Act, 1932 states that the outgoing
partner has an option to receive either interest @ 6% p.a. till the date of
payment or such share of profits which has been earned with his money.
→ True

19] Deceased partner’s claim is transferred to his Executor’s Account

→ True

20] Deceased partners’ share of profit for the intervening period may be
calculated on the basis of last year’s profit/ average profit of past few years or
on the basis of sales.
→ True

21] Deceased partner may be paid in one lump sum or instalments with
interest.
→ True

22] Retirement normally takes place at the end of an accounting period,

whereas death of a partner may occur at any time.
→ True

23] Amount payable to the Executors of the deceased partner is transferred

to executor’s loan account.
→ True

V. Two Marks Questions

1. Mention any two circumstances for retirement of a partner.

 Due to ill health or old age.

 When the partner wishes to start a new business.

2. What is Gain Ratio?

It is the ratio in which the continuing partners acquire the share of the
retiring partner.

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3. Two differences between Sacrificing Ratio and Gaining Ratio:

Basis Sacrificing Ratio Gaining Ratio

Time On admission of partner On retirement/death

Meaning Portion of profit sacrificed Portion of profit gained

4. Two purposes of calculating new profit sharing ratio:

 To distribute future profits among remaining partners.

 To compute gaining ratio for goodwill adjustment.

5. How do you close the Revaluation Account on retirement?

 Transfer profit to partners’ capital accounts in old ratio.

 Transfer loss to partners’ capital accounts in old ratio.

6. Two modes of disposal of amount due to Retiring Partner:

 Full payment in cash.

 Transfer to Retiring Partner’s Loan Account if not paid immediately.

7. Journal entry to close Retiring Partner’s Capital A/c (payment made

immediately):

Retiring Partner’s Capital A/c Dr.

To Cash/Bank A/c

8. Journal entry (amount transferred to Loan A/c):

Retiring Partner’s Capital A/c Dr.

To Retiring Partner’s Loan A/c

9. Journal entry to close Revaluation Account (Profit):

Revaluation A/c Dr.

To Partners’ Capital A/c (in old ratio)

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10. Journal entry to close Revaluation Account (Loss):

Partners’ Capital A/c Dr. (in old ratio)

To Revaluation A/c

11. Why revalue assets and liabilities on retirement?

To reflect true value of business and ensure fair settlement to the retiring
partner.

12. Why retiring partner is entitled to goodwill?

They contributed to the reputation of the firm; hence, deserve

compensation for their share in goodwill.

13. Journal entry for Deceased Partner’s Share of profits:

Profit & Loss Suspense A/c Dr.

To Deceased Partner’s Capital A/c

14. Meaning of accrued profit:

Profit earned between last balance sheet date and date of death/retirement
of the partner.

15. Two differences between Retirement and Death of a Partner:

Basis Retirement Death

Nature Voluntary Involuntary

Date Decided mutually Uncertain and sudden

16. Two ways of settlement of deceased partner’s claim:

 Full settlement in cash.

 Transfer to Executor’s Loan Account.

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17. Journal entry to close Deceased Partner’s Capital A/c:

Deceased Partner’s Capital A/c Dr.

To Executor’s A/c

18. Entry for transfer of accrued profit:

Profit & Loss Suspense A/c Dr.

To Executor’s A/c

19. Entry for immediate cash payment to executor:

Executor’s A/c Dr.

To Cash/Bank A/c

20. Closing Executor’s A/c (payment not made immediately):

Executor’s A/c Dr.

To Executor’s Loan A/c

21. Profit share of B (1 April 2024 to 30 June 2024):

 Profit for full year = ₹12,000

 B's share = 4/10 (from 5:4:1)
 3 months = 3/12 = 1/4 of the year
 B's share = ₹12,000 × 4/10 × 1/4 = ₹1,200

22. Entry: Retiring partner’s amount treated as loan:

Retiring Partner’s Capital, A/c Dr.

To Retiring Partner’s Loan A/c

23. Entry: Partly paid in cash and remaining as loan:

Retiring Partner’s Capital, A/c Dr.

To Cash/Bank A/c
To Retiring Partner’s Loan A/c

24. Hidden Goodwill:

 Capital of R = ₹60,000
 Paid = ₹75,000
 Hidden Goodwill = ₹75,000 – ₹60,000 = ₹15,000
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