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Retirement or Death of a partner Test - 48

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Retirement or Death of a partner Test - 48
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  • Question 1
    1 / -0
    When the Joint Life Insurance Policy premium is treated as expenses,the amount reserved on death of the partner is transferred to _________. 
    Solution
    When Joint Life Policy premium is treated as an expense, then it is closed every year by transferring it to profit and loss A/c and the amount reserved on the death of the partner is transferred to partner's capital A/c.
    Following are the journal entries :
    1. On Payment of premium
                Joint Life Policy A/c               Dr. 
                         To Bank A/c 
    2. On charging to profit and loss A/c
                Profit and Loss A/c                Dr.      
                          To Joint life Policy insurance premium A/c 
    3. On maturity/ Death of a policy
                Insurance company / Bank A/c   Dr.
                           To Partner's capital A/c (individually)
  • Question 2
    1 / -0
    Mr.X is admitted into a partnership firm for 1/4th share of profit. The total capital of the old partners stood at Rs. 45,000 after carrying adjustment of goodwill, revaluation of assets and liabilities and transfer of reserves and surplus. If X pays Rs.15,000 as his share of goodwill to the existing partner privately, what would be accounting treatment? 
    Solution

    When the incoming partner brings his share of goodwill in cash, the existing partners share it in the sacrificing ratio. However, when the amount of goodwill is paid privately by the new partner to old partners privately in cash, no entry is passed in the books of the firm.

  • Question 3
    1 / -0
    A and B, who are partners, share profits in the ratio of 7:3. C is admitted as a new partner. A surrenders 1/7 of his share and B surrenders 1/3 of his share in favour of C. The new profit sharing ratio will be _______.
    Solution
    Old ratio (A and B) = 7 : 3
    Sacrificing ratio = Old ratio * surrender ratio
    A's sacrificing ratio = (7/10) * (1/7) = 1/10
    B's sacrificing ratio = (3/10) * (1/3) = 1/10
    New ratio = Old ratio - sacrificing ratio 
    A's new share = (7/10) - (1/10) = (6/10)
    B's new share = (3/10) - (1/10) = (2/10)
    C's share = (1/10) + (1/10) = (2/10)
    therefore, new profit sharing ratio = 6 : 2 : 2
  • Question 4
    1 / -0
    Increase in liability at the time of retirement of partner is _______.
    Solution

    Revaluation account is an account prepared for revaluation of assets and reassessment of liabilities. It may be prepared at the admission, retirement or dissolution of a partnership firm.

    In this account decrease in assets and increase in liability is debited and increase in asset and decrease in liability is credited. Difference between the two sides show profit and loss. Profit and loss on revaluation is distributed among existing partners.

  • Question 5
    1 / -0
    P, Q and R as are in partnership, Q dies on $$15th$$ June, which of the following statement is true?
    Solution
    The correct statement is B i.e., Q's estate is not liable for any acts of the firm done after 15th june.
    Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.
  • Question 6
    1 / -0
    A and B are two partners sharing profit and loss equally. Their capital A/c stood at Rs.30,000 and Rs.25,000 respectively on 31st March, 2013. On 1st April C is admitted for 1/3rd share of profit for which he brings Rs.12,000 as his share of goodwill. On the date of his admission, stock was appreciated by Rs.11,000 and provisions for bad debts also increased by Rs.2,000. Old partners decided that C's capital should be in accordance with his share of profit and capital of old partners. What amount C should brings as his share of capital in the firm?
    Solution
    • A and B are partners sharing profit & losses in a firm with capitals Rs 30000 & Rs 25000 respectively.
    On 1st Apr C is admitted for 1/3rd share of profit.
    • New Profit sharing ratio = 1 - 1/3 = 2/3
     A. 2/3 * 1/2 = 2/6   ;  B 2/3 * 1/2 = 2/6    ;    C   1/3 * 2/2 = 2/6
     1 : 1 : 1.
    Profit on Revaluation = 11000 - 2000 = 9000 ( 4500 Each)
    Capitals Of Existing Partner (A) = 30000 + 4500 + 6000(goodwill)
                                                        = 40500
                                                   (B) = 25000 + 4500+ 6000 = 35500
                                                   (C) = (A + B) 76000 * 3/2 = 114000 
                                                       114000 * 1 / 3 = Rs 38000

  • Question 7
    1 / -0
    On the death of a partner, his executor is paid the share of profits of the died partner for the relevant period. This payment is recorded in Profit & Loss _______ A/c
    Solution
    A P&L suspense account is used to record some fictitious profits for the purpose of settlement of share of profits to a deceased partner. Later, such errors are identified and rectified and accordingly adjusted in the books of accounts so that the balance of the P&L suspense a/c is zero.
    In case of a death of a partner, share of deceased partner in the profit or losses of the firm (till the death of his/her death) is paid through profit and loss suspense account. At the time of the death of the partner, profit and loss account will not be debit or credit because, it is not possible for the firm to alter the books during the year, thus on the date of a death of a partner profit and loss account is debited or credited.
  • Question 8
    1 / -0
    In which of the following events public notice is not required?
    Solution
    Public notice is required to be given at the time of retirement of a partner otherwise retiring partner may not be discharged from his liability towards third party.
    There are some cases when public notice is not required:
    1. On death of a partner - the estate of a deceased partner or the legal representatives of a deceased partner cannot be held liable for any act of the firm, performed or done after his death, even if partnership business is carried on by the surviving partners in the old name of the firm. death of any partner itself is a notice.
    2. Insolvency of a partner - When a partner is declared as insolvent, his liability is terminated after his insolvency. When a person ceases to be a partner, from the date of in solvency, he and his estate is no longer held to be liable for any act of the partnership firm done after his insolvency whether the notice of his insolvency has been given or not.
    3. Dormant or sleeping partner - As dormant partner does not take any part in the conduct or management of the firm and his existence as a partner is not reflected by the name of the firm, he is not known to the person concerned retires from a firm, no public notice is necessary to terminate his liability.
  • Question 9
    1 / -0
    A and B are two partners sharing profit and loss equally. Their capital A/c stood at Rs.30,000 and Rs.25,000 respectively on 31st March, 2013. On 1st April C is admitted for 1/3rd share of profit for which he brings Rs.12,000 as his share of goodwill. On the date of his admission, stock was appreciated by Rs.11,000 and provisions for bad debts also increased by Rs.2,000. Old partners decided that C's capital should be in accordance with his share of profit and capital of old partners. What amount be the total capital of the firm after admission of C?
  • Question 10
    1 / -0
    X and Y are two partners in  firm having share capital of Rs.10,000 and Rs.15,000 respectively. Z is admitted for 1/3 share of profit for which he is to bring Rs.15,000 for his share of capital. What is the goodwill of the firm?
    Solution
    When the value of the goodwill of the firm is not specifically given, the value of goodwill has to be inferred as follows:
    Goodwill = (Incoming partner's capital * Reciprocal of share of incoming partner) - Total capital after taking into consideration the capital brought in by incoming partner.
    Goodwill = [Rs. 15000 * (3/1)] - Rs. (10000 + 15000 + 15000)
    Goodwill = Rs. 45000 - Rs. 40000
    Goodwill = Rs. 5000
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