Retirement or Death of a partner Test

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Retirement or Death of a partner Test - 32

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Weekly Quiz Competition

Question 1
1 / -0

A and B are partners in the ratio of $$7 : 5$$. They admit C for $$1/5$$ share. What is the new profit sharing ratio?

A
$$7 : 5 : 3$$

B
$$7 : 5 : 1$$

C
$$2 : 2 : 1$$

D
$$3 : 2 : 1$$

Solution

Old ratio (A and B) = 7 : 5
C is admitted for 1/5 share
Let the combined share of profit for all partners after C's admission = 1
Combined share of X and Y after Z's admission = 1 - C's share
= 1 - (1/5)
= 4/5
New ratio = Old ratio * Combined share of A and B
A's new share = (7/12) * (4/5)
= 7/15
B's new share = (5/12) * (4/5)
= 5/15
C's share = 1/5
Therefore, new share of A, B and C = (7/15), (5/15) and (1/5)
= (7/15), (5/15) and (3/15)
= 7 : 5 : 3
Question 2
1 / -0

The executors of the deceased partner are entitled to a share of profit earned by the firm from the date of last balance sheet and to the date of death. Which of the entry will be passed for this purpose? (Name of the deceased partner was Mr.X)

A
Profit & Loss Suspense A/c Dr
To X A/c

B
X A/c Dr
To Profit & Loss A/c

C
X A/c Dr
To Memorandum Revaluation A/c

D
X A/c Dr
To Profit & Loss Suspense A/c

Solution

Payment on deceased partner's death:
On the death of a partner, the executor of the deceased partner is entitled to share of profit upto the date of death.
Journal entry for this is :
Profit & Loss Suspense A/c * Dr
To X A/c
* At the end of the year, the profit and loss suspense A/c will be transferred to profit and loss A/c.
Question 3
1 / -0

Which of the following factor generally contribute to the value of goodwill of a firm?

A
Efficiency of business.

B
Risk involved in the business.

C
Location of the business.

D
All of above.

Solution

Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. The implication of the term over and above is that there is always a certain normal rate of profits earned by similar firms in the same locality. The excess profit earned by a firm due to its location advantage, Efficiency of business, Risk involved in business, better customer service, possession of a unique patent right, personal reputation of the partner or for similar other reasons.
Question 4
1 / -0

Weighted average method of calculating goodwill should be followed when ___________.

A
Profits are uneven

B
Profits has increasing trend

C
Profits has decreasing trend

D
Either (B) or (C)

Solution

In case of the average method of calculating goodwill, profits of the past few years are averaged and adjusted for any expected change in future. For averaging the past profit, either simple average or weighted average may be employed depending upon the circumstances. If there exists clear increasing or decreasing trend of profits, it is better to give more weight to the profits of the recent years than those of earlier years. But, if there is no clear trend of profit, it is better to go by simple average.
Question 5
1 / -0

Which of the following factor generally contribute to the value of goodwill of a firm?

A
Quality of goods sold by the firm.

B
Reputation of the owners.

C
Risk involved in the business.

D
All of the above.

Solution

Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. The implication of the term over and above is that there is always a certain normal rate of profits earned by similar firms in the same locality. The excess profit earned by a firm due to its location advantage, Efficiency of business, Risk involved in business, better customer service, possession of a unique patent right, personal reputation of the partner or for similar other reasons.
Question 6
1 / -0

Under average profit basis goodwill is calculated by :

A
No. of years purchased multiplied with average profits

B
No. of years purchased multiplied with super profits

C
Summation of the discounted value of expected future benefits

D
Super profit divided with expected rate of return
Question 7
1 / -0

Which of the following asset is compulsory to revalue at the time of admission of a new partner?

A
Stock

B
Fixed Assets

C
Investment

D
Goodwill
Question 8
1 / -0

In which of the following case the need for the valuation of goodwill in a firm may arise?

A
Admission of new partner

B
While changing profit sharing ratio

C
Retirement or death of partner

D
All of above

Solution

There are various circumstances when it may be necessary to value goodwill. Some of the circumstances are:
(1) In the case of a partnership, when there is an admission, retirement, death or amalgamation, or a change in the profit sharing ratio take place, valuation of goodwill becomes necessary.
(2) In the case of a company, when two or more companies amalgamate, or one company absorbs another company, or one company wants to acquire controlling interest in another company or when the Government takes over the business, valuation of goodwill becomes necessary.
(3) In the case of a sole trader concern, goodwill is valued at the time of selling die business, to decide the purchase consideration.
(4) In the case of individuals, goodwill is valued for purpose of Estate Duty, Death Duty, etc. On the death of a person.
Therefore, D is the correct option.
Question 9
1 / -0

The correct entry for recording losses on revaluation would be:

A
Debit-Revaluation A/c, Credit-Partners Capital A/c's

B
Debit-Partners Current A/c's, Credit-Revaluation A/c

C
Debit-Partners Capital A/c's, Credit-Revaluation A/c

D
Debit-Revaluation A/c, Credit-Partners Current A/c's

Solution
Question 10
1 / -0

Gaining Ratio = _______ Minus _______ .

A
Old Ratio, New Ratio

B
Old Ratio, Capital Ratio

C
New Ratio, Old Ratio

D
None of above

Solution

New Ratio, Old Ratio
When a partner retires or dies his share of profit is taken over by the remaining partners. The ratio in which the continuing (remaining) partners have acquired the share from the outgoing partner is called as gaining ratio (or benefit ratio).

Formula: gaining ratio = new ratio – old ratio.

Purpose: gaining ratio is the most important ratio because the remaining partners will pay the amount of goodwill to the retiring partner in their gaining ratio.

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Re-Attempt Weekly Quiz Competition

Retirement or Death of a partner Test - 32

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Retirement or Death of a partner Test - 32

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Question 1

$$7 : 5 : 3$$

$$7 : 5 : 1$$

$$2 : 2 : 1$$

$$3 : 2 : 1$$

Solution

Question 2

Profit & Loss Suspense A/c Dr To X A/c

X A/c DrTo Profit & Loss A/c

X A/c DrTo Memorandum Revaluation A/c

X A/c DrTo Profit & Loss Suspense A/c

Solution

Question 3

Efficiency of business.

Risk involved in the business.

Location of the business.

All of above.

Solution

Question 4

Profits are uneven

Profits has increasing trend

Profits has decreasing trend

Either (B) or (C)

Solution

Question 5

Quality of goods sold by the firm.

Reputation of the owners.

Risk involved in the business.

All of the above.

Solution

Question 6

No. of years purchased multiplied with average profits

No. of years purchased multiplied with super profits

Summation of the discounted value of expected future benefits

Super profit divided with expected rate of return

Question 7

Stock

Fixed Assets

Investment

Goodwill

Question 8

Admission of new partner

While changing profit sharing ratio

Retirement or death of partner

All of above

Solution

Question 9

Debit-Revaluation A/c, Credit-Partners Capital A/c's

Debit-Partners Current A/c's, Credit-Revaluation A/c

Debit-Partners Capital A/c's, Credit-Revaluation A/c

Debit-Revaluation A/c, Credit-Partners Current A/c's

Solution

Question 10

Old Ratio, New Ratio

Old Ratio, Capital Ratio

New Ratio, Old Ratio

None of above

Solution

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Profit & Loss Suspense A/c Dr
To X A/c

X A/c Dr
To Profit & Loss A/c

X A/c Dr
To Memorandum Revaluation A/c

X A/c Dr
To Profit & Loss Suspense A/c