Purchase of Retiring Partner’s Share by Remaining Partners

Purchase of Retiring Partner’s Share by Remaining Partners

The retiring partner’s share may be purchased by the remaining partners in an agreed ratio. In such a case, retiring partner’s capital account is closed by transfer to the remaining partners’ capital accounts in the ratio in which they agree to purchase his share. When the remaining partners purchase the retiring partner’s share, the retiring partner has to look to the remaining partners’ in individual capacities for the satisfaction of his claim; the new firm as such will not be responsible.

Note: In the examination, if the question states that the remaining partners purchase the retiring partner’s share but does not specify the proportion in which they purchase his share, the candidate should assume that it is done in the relative profit sharing ratio between the remaining partners; and if the new profit sharing ratio is given, the purchase should be taken to be in the ratio of gain.

Illustration :

On 31st March, 2013 the following was the balance sheet of A, B and C who were equal partners:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	89,400	Cash in hand	1,800
General Reserves	1,50,000	Cash at Bank	39,700
A’s Capital Account	2,40,000	Investments	50,000
B’s Capital Account	1,90,000	Debtors 2,10,000
C’s Capital Account	1,75,000	Less: Provision for Bad debts 2,200	2,07,800
		tock	3,70,100
	________	Furniture and Fittings	1,75,000
	8,44,400		8,44,400

On that date, A decided to retire due to ill health and the following adjustments were agreed upon by the partners:

– Investments be appreciated by Rs.15,000

– Provision for bad debts be brought upto 5% of debtors.
– Furniture be depreciated by 10%
– Stock be depreciated by Rs. 7,200

A was paid the amount due to him by means of cheque, the bank agreed to allow the necessary overdraft. Pass journal entries to record the above mentioned transactions and show the balance sheet of the firm immediately after A’s retirement.

*Solution:* JOURNAL ENTRIES
Particulars	Dr. R)	Cr. (Z)
General Reserve Dr.	1,50,000
To A’s Capital Account		50,000
To B’s Capital Account		50,000
To C’s Capital Account		50,000
(Transfer to general reserve to capital accounts)
Investments Dr.	15,000
To Revaluation Account		15,000
(Increase in the value of investments)
Revaluation Account Dr.	33,000
To Provision for Bad Debts		8,300
To Furniture		17,500
To Stock		7,200
(Various adjustments as agreed upon by partners)
A’s Capital Account Dr.	6,000
B’s Capital Account Dr.	6,000
C’s Capital Account Dr.	6,000
To Revaluation Account		18,000
(Transfer of loss on revaluation to partners’ capital account)
A’s Capital Account Dr.	2,84,000
To Bank		2,84,000
(Payment of the amount due to A on his retirement)

Balance Sheet of B and C as on 1st April, 2013

*Liabilities*	*Rs.*	*Assets*	*Rs.*
Bank Overdraft	2,44,300	Cash in Hand	1,800
Sundry Creditors	89,400	Investment Z	65,000
B’s Capital Account	2,34,000	Debtors 2,10,000
C’s Capital Account	2,19,000	Less:
		Provision for Bad
		Debts 10,500	1,99,500
		Stock	3,62,900
		Furniture and Fittings	1 57 500
	7 86 700		7 86 700

Alternative Method:

If the values of assets and liabilities were not being changed, the following would have been the journal entries:

JOURNAL ENTRIES

Particulars	Dr. (Rs.)	Cr. (Rs.)
General Reserve Dr.	1,50,000
To A’s Capital Account		50,000
To B’s Capital Account		50,000
To C’s Capital Account		50,000
(Transfer of general reserve to capital accounts)
A’s Capital Account Dr.	6,000
B’s Capital Account Dr.	6,000
C’s Capital Account Dr.	6,000
To Memorandum Revaluation Account		18,000
(Transfer of loss on revaluation to all the partners’ capital accounts)
A’s Capital Account Dr.	2,84,000
To Bank		2,84,000
(Payment to A on his retirement)
Memorandum Revaluation Account Dr.	18,000
To B’s Capital Account		9,000
To C’s Capital Account		9,000
(Transfer to memorandum revaluation account to remaining partners’ capital accounts in new profit sharing ratio)

Balance Sheet of B and C as on 1st April, 2013

*Liabilities*	*Rs.*	*Assets*	Rs.
Bank Overdraft	2,44,300	Cash in Hand	1,800
Sundry Creditors	89,400	Investments Rs.	50,000
B’s Capital Account	2,43,000	Debtors 2,10,000
C’s Capital Account	2,28,000	Less: Provision for
		Bad Debts 2,200	2,07,800
		Stock	3,70,100
		Furniture and Fittings	1 75 000
	8, 04, 700		8 ,04 ,700

Illustration :

Following is the balance sheet of A, B and C who share profits and losses in the ratio of 7: 5: 3 respectively.

Balance Sheet of A, B and C as on 31st March, 2013

Liabilities `	Rs.	Assets `	Rs.
Sundry Creditors	15,400	Furniture and Fittings	12,000
Capital Accounts:		Sundry Debtors	16,000
A	40,000	Stock	44,000
B	25,000	Cash at Bank	18,400
C	10,000		_______
	90,400		90,400

On 31st March, 2013 C retires on the condition that he be immediately paid the amount due to him after making adjustment for goodwill which is valued at Rs.22,500. A and B agree to share profits and losses in the ratio of 8:7 respectively in future.

Show journal entries and balance sheet in each of the following cases:

(a) Goodwill Account is raised only with C’s share of goodwill.

(b) No Goodwill account is raised but adjustments are made in the capital accounts with retiring partner’s share of goodwill.

Solution:

Case (i)

Journal Entries

PARTICULARS	Dr. (Rs.)	Cr. (Rs.)
Goodwill Account Dr.	4,500
To C’s Capital Account		4,500
(Credit given to C for his share of goodwill)

C’s Capital Account Dr.	14,500
To Bank		14,500
(Payment to C)

A’s Capital Account Dr.	1,500
B’s Capital Account Dr.	3,000
To Goodwill Account		4,500
(Transfer of Goodwill Account to the remaining partners in the ratio of gain which turns out to be 1:2)*

*The ratio of gain in this case has been calculated as under:
A’s old share = 7
15
A’s new shares = 8
15

Balance Sheet of A and B as on 1st April, 2013

*Liabilities*	*Rs.*	*Assets*	*Rs.*
Sundry Creditors	15,400	Furniture and Fittings	12,000
A’s Capital Account	38,500	Sundry Debtors	16,000
B’s Capital Account	22,000	Stock	44,000
		Cash at Bank	3,900
	75,900		75,900

Case (ii)

Journal Entries

PARTICULARS	Dr. (Rs.)	Cr. (Rs.)
A’s Capital Account Dr.	1,500
B’s Capital Account Dr.	3,000
To C’s Capital Account		4,500
(Retiring partner being credited with his share of goodwill which is debited to remaining partners in the ratio of gain 1:2)

C’s Capital Account Dr.	14,500
To Bank		14,500
(Payment to C)

Balance Sheet will be the same as in cases (i).

Case (iii)

Journal Entries

PARTICULARS	Dr. (Rs.)	Cr. (Rs.)
C’s Capital Account Dr.	10,000
To Bank		10,000
(Payment to C)

Balance Sheet of A and B as on 1st April, 2013

Liabilities ` `	Rs.	Assets	Rs.
Sundry Creditors	15,400	Furniture and Fittings	12,000
A’s Capital Account	40,000	Sundry Debtors	16,000
B’s Capital Account	25,000	Stock	44,000
	______	Cash at Bank	8,400
	80,400		80,400

Illustration :
The balance sheet of Anil, Bashin and Chaman who were sharing profits in proportion to their capitals stood as follows on 31st March, 2013.

Liabilities ` `	Rs.	Assets	Rs.
Sundry Creditors	69,000	Cash in Bank	55,000
General Reserve	1,80,000	Sundry Debtors 50,000
Capital Accounts:		Less : Provision for Bad Debts 1,000	49,000
Anil	2,00,000	Stock	2,60,000
Bashin	1,50,000	Plant and Machinery	1,35,000
Chaman	1,00,000	Land and Buildings	2,00,000

6,99,000

Bashin retired on the above date and the following was agreed upon:
– That the provision for bad debts be brought upto 5% on debtors.

– That land and buildings be appreciated by 25%.

– That a provision of ` 350 be made in respect of outstanding legal charges.

– That the goodwill of the entire firm be fixed at Rs.1,08,000 and Bashin’s share of it be adjusted into the accounts of Anil and Chaman who are going to share future profits in the ratio of 5:3 respectively.

– That the entire capital of the new firm be fixed at Rs.4,80,000 and the capital accounts of the partners be made in their new profit sharing ratio; actual cash to be brought in or paid off as the need be. Pass journal entries, show profit and loss adjustment account and capital accounts and prepare balance sheet of Anil and Chaman.

Solution:

Journal Entries

Particulars	Rs.	Rs.
General Reserve Dr.	1,80,000
To Anil’s Capital Account		80,000
To Bashin’s Capital Account		60,000
To Chaman’s Capital Account		40,000
(Transfer of general reserve to capital accounts)

Profit and Loss Adjustment Account Dr.	5,000
To Provision for Bad Debts		1,500
To Outstanding Legal Expenses		3,500
(Increase in provision for bad debts and record of outstanding legal expenses)

Land and Building Dr.	50,000
To Profit and Loss Adjustment Account		50,000
(Appreciation in the value of land and buildings)

Profit and Loss Adjustment Account Dr.	45,000
To Anil’s Capital Account		20,000
To Bashin’s Capital Account		15,000
To Chaman’s Capital Account		10,000
(Transfer of profit on revaluation)

Anil’s Capital Account Dr.	19,500
Chaman’s Capital Account Dr.	16,500
To Bashin’s Capital Account		36,000
(Bashin’s share of goodwill debited to Anil and Chaman in ratio of gain which is 13:11 respectively)

Bashin’s Capital Account Dr.	2,61,000
To Bashin’s Loan Account		2,61,000
(Transfer of Bashin’s Capital Account to his Loan Account)

Bank Dr.	66,000
To Anil’s Capital Account		19,500
To Chaman’s Capital Account		46,500
(Cash brought in by Anil and Chaman)

Dr. Profit and Loss Adjustment Account Cr.

Particulars	Rs.	Particulars	Rs.
To Provision for Bad Debts A/c	1,500	By Land and Buildings	50,000
To Outstanding Legal Expenses A/c	3,500
To Anil’s Capital A/c (4/9 profit)	20,000
To Bashin’s Capital A/c (3/9 profit)	15,000
To Chaman’s Capital A/c (2/9 profit)	10,000		________
	50,000		50,000

Dr. Capital Accounts Cr.

Particulars	Anil (Rs.)	Bashin (Rs.)	Chaman (Rs.)	Particulars	Anil (Rs.)	Bashin (Rs.)	Chaman (Rs.)
To Bashin’s Capital A/c	19,500		16,500	By Balance b/fd	2,00,000	1,50,000	1,00,000
To Bashin’s Loan A/c		2,61,000		By General Reserve	80,000	60,000	40,000
To Balance c/d	3,00,000		1,80,000	By P & L Adjustment A/c	20,000	15,000	10,000
				By Anil’s Capital	–	19,500	–
				By Chaman’s Capital	–	16,500	–
				By Bank	_19,500		46,500
	3,19,500	2,61,000	1,96,500		3,19,500	2,61,000	1,96,500
				By Balance b/d	31,950	26,100	1,96,500

Balances Sheet of Anil and Chaman
as on 1st April, 2013

Liabilities ` ` `	Rs.	Assets	Rs.
Sundry Creditors	69,000	Cash in Bank	1,21,000
Outstanding Legal Expenses	3,500	Sundry Debtors 50,000
Bashin’s Loan Account	2,61,000	Less: Provision for Bad Debts 2,500	47,500
Capital Accounts: `
Anil 3,00,000		Stock	2,60,000
Chaman 1,80,000	4,80,000	Plant and Machinery	1,35,000
	_________	Land and Buildings	2,50,000
	8,13,500		8,13,500

Working Notes:

Illustration :
On 31st March, 2013 the balance sheet of M/s. Ashok, Basu, and Chauhan, who were sharing profits and losses in proportion to their capitals, stood as follows:

Liabilities ` ` `	Rs.	Assets	Rs.
Capital Accounts:		Land and Buildings	2,00,000
Ashok 3,00,000		Machinery	2,00,000
Basu 2,00,000		Closing Stock	1,00,000
Chauhan 1,00,000	6,00,000	Sundry Debtors	2,00,000
Sundry Creditors	2,00,000	Cash and Bank Balances	1,00,000
	8,00,000		8,00,000

On 31st March, 2013, Ashok desired to retire from the firm and the remaining partners decided to carry on. They agreed on the following terms and conditions:

(i) Land and buildings be appreciated by 30%
(ii) Machinery be depreciated by 20%
(iii) Closing stock to be valued at ` 80,000.
(iv) Provision for bad debts be made at 5%.
(v) Old credit balances of sundry creditors amounting to Rs10,000 be written back.
(vi) Joint Life Policy of the partners be surrendered. Cash received was ` 60,000.
(vii) Goodwill of the entire firm be valued at ` 1,80,000 and Ashok’s share of the goodwill be adjusted in the
accounts Basu and Chauhan who would share the future profits equally.
(viii) The total capital of the firm was to be the same as before retirement. Individual capitals of
partners were to be in their profit sharing ratio.

(ix) Amount due to Ashok was to be settled on the following basis:
50% on retirement and balance 50% within one year.

Prepare Revaluation Account, Capital Accounts of the Partners, Loan Account of Ashok, Cash Book and

Balance Sheet as on 1st April 2013 of M/s. Basu and Chauhan.

Solution:

Dr. Revaluation Account Cr.

	*Particulars*		*Rs.*		*Particulars*	*Rs.*
To	Machinery A/c		40,000	By	Land and Building	60,000
To	Closing Stock		20,000	By	Sundry Creditors	10,000
To	Provision for Bad			By	Bank A/c (Joint Life Policy)	60,000
	Debts A/c		10,000
To	Capital Accounts:
	Ashok	30,000
	Basu	20,000
	Chauhan	10,000	60,000
			1,3,0 000			1,30, 000

Dr. Capital Accounts Cr.

*Particulars*	*Basu* *RS.*	*Chauhan* *RS.*	*Particulars*	*Basu* *RS.*	*Chauhan* *RS.*
To Ashok			By Balance b/fd	2,00,000	1,00,000
Capital A/c
(Goodwill)	30,000	60,000	By Revaluation A/c	20,000	10,000
To Balance c/d	3,00,000	3,00,000	By Bank (Additional
	————–		capital)	1 10 000	2 50 000
	3 30 000	3 60 00		3 30 000	3 60 000
			By Balance b/d	3,00,000	3,00,000

Dr. Ashok’s Capital Account Cr.

*Particulars*	*Rs.*	*Particulars*	*Rs.*
To Bank	2,10,000	By Balance b/d	3,00,000
To Ashok’ Loan A/c	2,10,000	By Revaluation A/c	30,000
		By Basu’s Capital A/c
		(Goodwill)	30,000
		By Chauhan’s Capital A/c
		(Goodwill)	60,000
	4 20 000		4 20 000

Dr. Ashok’s Loan Account Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d

2,10,000

By Ashok’s Capital A/c

2, 10 ,000

By Balance b/d

2,10,000

Dr. Cash Book Cr.

*Particulars*	*Rs.*	*Particulars*	*Rs.*
To Balance b/fd	1,00,000	By A’s Capital A/c	2,10,000
To Revaluation A/c		By Balance c/d	3,10,000
(IL. Policy surrendered)	60,000
To Basu’s Capital A/c	1,10,000
To Chauhan’s Capital A/c	2 50 000		_________
	5 20 000		5 20 000
To Balance b/d	3,10,000

M/s. B and C
Balance Sheet as on 1.4.2013

*Liabilities*	*Rs.*	*Rs.*	*Assets*	*Rs.*	*Rs.*
Capital Accounts:			Land and Building		2,60,000
Basu	3,00,000		Machinery		1,60,000
Chauhan	3 00 000	6,00,000	Closing Stock		80,000
A’s Loan		2,10,000	Sundry Debtors	2,00,000
Sundry Creditors		1,90,000	*Less: Provisions*
			for Bad Debts	10,000	1,90,000
			Cash and Bank
			Balances		3 10 000
		10,00,000			10,00,000

Working Notes:

(1) Calculation of ratio of gain of remaining partners.

Ratio of gain = New ratio – Old ratio

Basu = 1/2 – 1/3 = 1/6
Chauhan = 1/2 – 1/3 = 2/6
Ratio of gain = 1:2.

(2) Goodwill borne by Basu and Chauhan:

Total goodwill of the firm = Rs.1,80,000
Ashok’s share = 1/2 x Rs.1,80,000 = Rs.90,000

Ashok’s share to be borne by Basu and Chauhan in their ratio of gain.
Basu = 1/3 x Rs. 90,000 = Rs.30,000
Chauhan = 2/3 x Rs. 90,000 = Rs. 60,000

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