IPCC: Paper 1 Accounting Chapter 14

CA. Shakuntala Chhangani

The Institute of Chartered Accountants of India

Recording Date: March 11, 2013

1

1 This lecture has been delivered by faculty members to supplement the Study

Material, Practice Manual and other content

2 The views expressed in this lecture are of the Faculty Member.

3 The content of this video lecture has not been specifically discussed by the Council

of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its committees

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The e-Lectures, PPT, Podcasts and Video lectures on ICAI

Cloud Campus aim to supplement the Study Material,

Practice Manual and Supplementary Study Material

The lecture recordings are made according to the syllabus and laws existing/ applicable as on

the date of recording.

Due to changes in law, there is likely to be some time gap

between these changes and the recording of updated lectures.

Hence, students are advised to refer to the Study Material

including Supplementary Study Material, if any, and other

relevant legislation for latest provisions/ amendments required for forthcoming

examination.

This e-Lecture was Recorded on: March 11, 2013

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Retirement / Death of a Partner

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1. Revaluation of assets and liabilities 2. Distribution of accumulated profits and reserves as

well as losses and deferred expenses 3. Calculation of new Profit Sharing Ratio (PSR) and

Gain Ratio (GR) 4. Goodwill Adjustment 5. Final settlement with retired partner or legal heirs of

deceased partner 6. Proportionate Capital Adjustment

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The adjustment is same as that of admission

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The adjustment is same is that of admission

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Hints for solving question : 1. If the question gives old PRS and one partner

retires, then : New PSR of continuing partners = Their old PSR GR = Old PSR of continuing partners

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Example 1 : A, B and C were partners sharing profits in the ratio

of 3:2:1. B retires. Find new PSR and GR.

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A B C New PSR = 3 : 2 : 1

GR = 3 : 1

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2. If the question gives old PSR and also the ratio (i.e. GR) in which retiring partners share is acquired by the continuing partners, then :

Steps : a) Share Acquired = Share of retiring partner X GR b) New PSR = Old PSR + Share Acquired GR = Given in the question

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Example 2 : A, B and C were partners sharing profits in the ratio

of 3:2:1. B retires. Bs share was acquired by A and C in the ratio of 2:1. Find new PSR and GR.

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Share Acquired = Retiring partners share X GR A = 2/6 X 2/3 = 4/18 B = 2/6 X 1/3 = 2/18

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3. If the question gives old PSR and also share of retiring partner acquired by the continuing partners, then :

Steps : a) New PSR = Old PSR + Share Acquired b) GR = Ratio of share acquired by continuing

partners

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Example 3 : A, B and C were partners sharing profits in the ratio

of 3:2:1. B retires. Bs share was acquired by A as 4/18 and C in the ratio of 2/18. Find new PSR and GR.

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Share acquired = A = 4/18 C = 2/18 New PRS = Old PRS + Share acquired A = 3/6 + 4/18 = 9 + 4 18 = 13/18 C = 1/6 + 2/18 = 3 + 2 18 = 5/18 GR = 4/18 : 2/18 i.e. 2:1

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4. If the question gives old PSR as well as new PSR, then check if

a) If the old PSR of continuing partners is same as their new PSR then

GR = Old PSR b) Else GR = New PSR Old PSR

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Example 4: A, B and C were partners sharing profits and losses

in the ratio of 3:2:1. B retires and A and C decide to share future profits in 3 : 1. Calculate Gain Ratio.

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A B C Old PSR 3 2 1 New PSR 3 1 GR 3 1

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Example 5: A, B and C were partners sharing profits and losses

in the ratio of 3:2:1. B retires and A and C decide to share future profits in 2 : 1. Calculate Gain Ratio.

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A B C Old PSR 3 2 1 New PSR 2 1 GR = New PSR Old PSR A = 2/3 - 3/6 = 4 3 6 = 1/6 B = 1/3 - 1/6 = 2 -1 6 = 1/6 GR = 1/6 : 1/6 i.e 1:1

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Goodwill appears in the books of accounts : a) Book value of goodwill < market value of goodwill Difference = Raised Entry : Goodwill A/c Dr. XX To Partners Capital A/c XX (Old PSR)

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b) Book value of goodwill > market value of goodwill Difference = Written off Entry : Partners Capital A/c Dr. XX To Goodwill A/c XX (Old PSR)

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c) Book value of goodwill = market value of goodwill No further adjustment is required

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Goodwill does not appear in the books of accounts : In this case, Goodwill account is raised. Goodwill

can be raised as under : a) Retiring partners share of goodwill is raised OR a) Total goodwill is raised

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a) Retiring partners share of goodwill is raised

1. Continuing Partners Capital A/c Dr. XX To Goodwill A/c XX (GR) 2. Goodwill A/c Dr. XX To Retiring Partners Capital A/c XX

or

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Net Entry : Continuing Partners Capital A/c Dr. XX To Retiring Partners Capital A/c XX (GR)

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Example 1: A, B and C were partners sharing profits in the ratio

of 3:2:1. B retires and Bs share was acquired by A and C in the ratio of 3:2. Goodwill of the firm was Rs. 6,00,000 at the time of Bs retirement. Show goodwill adjustment.

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Bs share of Goodwill = 6,00,000 x 2/6 = Rs. 2,00,000 Accounting entries : (1) Ac Capital A/c Dr. 1,20,000 Cs Capital A/c Dr. 80,000 To Goodwill A/c 2,00,000 (2) Goodwill A/c Dr. 2,00,000 To Bs capital A/c 2,00,000 29 ICAI, 2013

OR As Capital A/c Dr. 1,20,000 Cs Capital A/c Dr. 80,000 To Bs Capital A/c 2,00,000

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b) Total goodwill is raised 1. Goodwill raised in old PSR : Goodwill A/c Dr. XX To old Partners Capital A/c XX 2. Goodwill written off in new PSR : Continuing Partners Capital A/c Dr. XX To Goodwill A/c XX

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JLP can be taken jointly or severally. JLP is the asset of the firm in which all the partners

have a share JLP can be accounted for under three methods

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JLP treated as an expense : (1) Premium paid : JLP Premium A/c Dr. XX To Cash / Bank A/c XX (2) JLP Premium transferred to P/L A/c at the year end : Profit and Loss A/c Dr. XX To JLP Premium A/c XX

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(3) At the time of receipt of JPL amount : A/c (a) Amount received : Bank A/c Dr. XX To JLP A/c XX (b) Balance in JLP A/c transferred to Partners capital A/c : JLP A/c Dr. XX To Partners Capital A/c XX

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Example 1 : A, B and C were partners sharing profits in the ratio of

3:2:1. They took a Joint life policy on the combined life of all the partners for Rs. 1,00,000 on 1.4.2009. Annual premium on the policy was Rs. 10,000. B died on 1.4.2011. Show the accounting treatment in the books of the firm assuming that the policy was treated as an expense in the books of the firm.

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Journal Entries :

Date Particulars Debit (Rs.) Credit (Rs.) 1.4.2009 JLP Premium A/c Dr. 10,000

To Bank A/c 10000 31.3.2010 Profit and Loss A/c Dr. 10,000

To JLP Premium A/c 10,000 1.4.2010 JLP Premium A/c Dr. 10,000

To Bank A/c 10000 31.3.2011 Profit and Loss A/c Dr. 10,000

To JLP Premium A/c 10,000 1.4.2011 Bank A/c Dr. 1,00,000

To JLP A/c 1,00,000 1.4.2011 JLP A/c Dr. 1,00,000

To As Capital A/c 50,000 To Bs Capital A/c 33,333 To Cs Capital A/c 16,667

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JLP Treated as an asset : (1) Premium paid : JLP A/c Dr. XX To Cash / Bank A/c XX (2) Difference between the book value and surrender

value of JLP written off to P/L A/c at the year end : Profit and Loss A/c Dr. XX To JLP A/c XX

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(3) At the time of receipt of JPL amount : (a) Amount received : Bank A/c Dr. XX To JLP A/c XX (b) Balance in JLP A/c transferred to Partners

capital A/c : JLP A/c Dr. XX To Partners Capital A/c XX

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Example 2 : A, B and C were partners sharing profits in the ratio of

3:2:1. They took a Joint life policy on the combined life of all the partners for Rs. 1,00,000 on 1.4.2009. Annual premium on the policy was Rs. 10,000. B died on 1.4.2011. Show the accounting treatment in the books of the firm assuming that the policy was treated as an asset in the books of the firm. The surrender value of the policy was Rs. 3,000 on 31.3.2010 and Rs. 8,000 on 31.3.2011.

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Journal Entries Date Particulars Debit (Rs.) Credit (Rs.) 1.4.2009 JLP A/c Dr. 10,000

To Bank A/c 10,000 31.3.2010 Profit and Loss A/c Dr. 7,000

To JLP A/c 7,000 1.4.2010 JLP A/c Dr. 10,000

To Bank A/c 10,000 31.3.2011 Profit and Loss A/c Dr. 5,000

To JLP A/c 5,000 1.4.2011 Bank A/c Dr. 1,00,000

To JLP A/c 1,00,000 1.4.2011 JLP A/c Dr. 92,000

To As Capital A/c 46,000 To Bs Capital A/c 30,667 To Cs Capital A/c 15,333

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Dr. Joint Life Policy Account Cr. Date Rs. Date Rs. 1.4.09 To Bank A/c 10,000 31.3.10 By P & L A/c 7,000

31.3.10 By Balance c/f 3,000 10,000 10,000

1.4.10 To Balance b/f 3,000 31.3.11 By P & L A/c 5,000 1.4.10 To Bank A/c 10,000 31.3.11 By Balance c/f 8,000

13,000 13,000 1.4.11 To Balance b/f 8,000 1.4.11 By Bank A/c 1,00,000 1.4.11 To Capital A/c:

A 46,000 B 30,667 C 15,333 92,000

1,00,000 1,00,000

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JLP Treated as an asset and JLP Reserve is created :

(1) Premium paid : JLP A/c Dr. XX To Cash / Bank A/c XX (2) JLP Reserve is created at the year end : Profit and Loss Appropriation A/c Dr. XX To JLP Reserve A/c XX

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(3) Difference between the book value and surrender value of JLP written off to JLP Reserve A/c at the year end :

JLP Reserve A/c Dr. XX To JLP A/c XX (4) At the time of receipt of JPL amount : (a) Amount received : Bank A/c Dr. XX To JLP A/c XX

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(b) JLP Reserve transferred to JLP A/c : JLP Reserve A/c Dr. XX To JLP A/c XX (c) Balance in JLP A/c transferred to Partners

capital A/c : JLP A/c Dr. XX To Partners Capital A/c XX *Balance in JLP A/c may, alternatively, be transferred

to Revaluation A/c also. 44 ICAI, 2013

Example 3 : A, B and C were partners sharing profits in the ratio of

3:2:1. They took a Joint life policy on the combined life of all the partners for Rs. 1,00,000 on 1.4.2009. Annual premium on the policy was Rs. 10,000. B died on 1.4.2011. Show the accounting treatment in the books of the firm assuming that the policy was treated as an asset along with JLP Reserve in the books of the firm. The surrender value of the policy was Rs. 3,000 on 31.3.2010 and Rs. 8,000 on 31.3.2011.

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Journal Entries Date Particulars Debit (Rs.) Credit (Rs.) 1.4.2009 JLP A/c Dr. 10,000

To Bank A/c 10,000

31.3.10 Profit and Loss Appropriation A/c Dr. 10,000

To JLP Reserve A/c 10,000

31.3.2010 JLP Reserve A/c Dr. 7,000

To JLP A/c 7,000

1.4.2010 JLP A/c Dr. 10,000

To Bank A/c 10,000

31.3.11 Profit and Loss Appropriation A/c Dr. 10,000

To JLP Reserve A/c 10,000

31.3.2011 JLP Reserve A/c Dr. 5,000

To JLP A/c 5,000

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1.4.2011 Bank A/c Dr. 1,00,000 To JLP A/c 1,00,000

1.4.2011 JLP Reserve A/c Dr. 8,000

To JLP A/c 8,000

1.4.2011 JLP A/c Dr. 1,00,000

To As Capital A/c 46,000

To Bs Capital A/c 30,667

To Cs Capital A/c 15,333

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Dr. Joint Life Policy Account Cr. Date Rs. Date Rs. 1.4.09 To Bank A/c 10,000 31.3.10 By JLP Reserve A/c 7,000

31.3.10 By Balance c/f 3,000 10,000 10,000

1.4.10 To Balance b/f 3,000 31.3.11 By JLP Reserve A/c 5,000

1.4.10 To Bank A/c 10,000 31.3.11 By Balance c/f 8,000 13,000 13,000

1.4.11 To Balance b/f 8,000 1.4.11 By Bank A/c 1,00,000 1.4.11 To Capital A/c: 1.4.11 By JLP

A 50,000 Reserve A/c 8,000 B 33,333 C 16,667 1,00,000

1,08,000 1,08,000 48 ICAI, 2013

Dr. Joint Life Policy Reserve Account Cr. Date Particulars Rs. Date Particulars Rs.

31.3.10 To JLP A/c 7,000 31.3.10 By P & L App. A/c

10,000

31.3.10 To Balance c/f 3,000 10,000 10,000

31.3.11 To JLP A/c 5,000 1.4.10 By Balance b/f 3,000 31.3.11 To Balance c/f 8,000 31.3.11 By P & L App.

A/c

10,000 13,000 13,000

1.4.11 To JLP A/c 8,000 1.4.11 By Balance b/f 8,000 8,000 8,000

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Final distribution amongst the partners : 1) JLP treated as an expense :

Amount received 2) JLP treated as an asset :

Book value of JLP Amount received 3) JLP treated as an asset and JLP reserve is created (Book value of JLP Amount received) + JLP Reserve

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When joint life policy does not appear in the books and one of the partners retires and it should not be shown into the books:

Continuing partners capital A/c Dr. XX To Retiring Partners Capital A/c XX

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Balance in his Capital Account PLUS Balance in his Current Account PLUS His share of profit upto the date of his retirement or

death His share of Reserves and undistributed

profits/losses His share in Revaluation profit or loss Interest on capital, salary etc. only if mentioned in

partnership deed

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A separate account called Profit and Loss Suspense A/c

It appears on the Assets side of the balance sheet prepared immediately after the retirement of a partner.

Profit and Loss Suspense A/c is closed by transferring it to Profit and Loss A/c at the year end

The continuing partners are entitled to remaining profits according to their mutual understanding.

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Section 37 is applicable when the deceased partners dues are not settled immediately.

In the absence of an agreement, the retired partner or the legal heirs of deceased partners legal heirs are entitled to choose any one of the following :

(a) 6% p.a. simple interest on the outstanding balance from the date of retirement /death to the date of settlement or closing date

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(b) Profit from date of retirement x outstanding balance of retired / or death till the date of deceased partner .

Settlement or closing date Total Capital employed including outstanding balance as above

Important Note : If the outstanding balance of retired / deceased partner includes his

share of goodwill, interest on capital, remuneration, share in JLP etc., other partners capital account shall also include the same only for the purpose of above calculation.

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Ram, Shyam and Ravan were partners sharing profits in the ratio of 3:2:1. Their capital balances as on 31.3.2012 were Rs. 4,00,000, Rs 3,50,000 and Rs. 5,00,000 respectively. On this date General Reserve balance was Rs. 1,20,000. Ram died on 1.7.2012. Goodwill of the firm was valued at Rs. 7,20,000. Revaluation loss as on 1.7.2012 was Rs. 2,40,000. Amount due to Rams legal heirs was settled on 1.10.2012. The firm had taken a Joint life policy for Rs. 4,50,000. The firm made a profit of Rs. 3,00,000 during the year ended on 31.3.2013. You are required to calculated the profit to be given to Rams legal heirs.

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Ram Shyam Kamal Ram Shyam Kamal

To revaluation loss A/c 120000 80000 40000 By bal. b/f 400000 350000 500000

To Rams legal heirs A/c 962500 By general Res. 60000 40000 20000

To balance b/f 725000 687500 By goodwill A/c 360000 240000 120000

BY JLP A/c 225000 150000 75000

By net profit (3 months)

37500 25000 12500

1082500 805000 727500 1082500 805000 727500

Profit for 3 months from1.4.2012 to 1.7.2012 : Profit for the year Rs. 3,00,000 Profit from 1.4.2012 to 1.7.2012 Rs. 3,00,000 x 3/12

Rs. 75,000

Dr. Capital Account Cr.

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Applicability of section 37 : Rams legal heirs can choose any one of the following : a) 6% per annum simple interest on Rs. 9,62,500 from 1.7.2012 to

1.10.2012 i.e. 9,62,500 x 6% x 3/12 = Rs. 14,438 b) Share of profit i.e (3,00,000 x 3/12) X . 9,62,500 . (9,62,500 + 7,25,000 + 6,87,500) = 75,000 x 9,62,500 = Rs. 30,395 23,75,000 Rs. 30,395 being the higher amount will be chosen by the legal

heirs of Ram

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Amount of final settlement : Outstanding balance of Ram as per Capital Account Rs. 9,62,500 (+) Share of profit as per section 37 Rs. 30,395 Total outstanding amount Rs. 9,92,895

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Same as that of admission of Partner : Proportionate capital calculated in new PSR of

continuing partners following instructions given in the question

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Partnership AccountsPart 5 Retirement/Death of a PartnerDisclaimer StatementImportant NotesPartnershipsAdjustments Required :Distribution of accumulated profits and reserves as well as losses and deferred expenses :Revaluation of assets and liabilitiesCalculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Calculation of new PSR and Gain Ratio (GR)Goodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentGoodwill AdjustmentJoint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Joint Life Policy (JLP)Final Settlement of retired partners dues :Retirement /Death of a partner taking place during the accounting accounting yearApplicability of section 37Applicability of section 37Applicability of section 37Applicability of section 37Applicability of section 37Applicability of section 37Proportionate Capital AdjustmentThank You