Retirement or Death of a partner Test - 6

The method in which the profits up to the date of death for the current year are calculated on the basis of current year's sales up to the date of death by using the formula is called sale basis method or profit on turnover.

The Formula to calculate profit from starting or year to date of death will be:-    Last year profit/Last year sale * Current year sale till date of death

 or Current year sale * % of profit margin over last year

or as provided by the question.

Sometimes amount due to the retiring partner is paid in installment with interest. For this purpose his loan account should be prepared separately and the amount due to him should be transferred to that account for the settlement.

Following journal entry will recorded for the amount transferred to retiring partner’s loan account:
Retiring Partner’s capital A/c Dr.
To Retiring partner’s loan A/c

If the retiring partner not be paid fully immediately on retirement, in such a case his remaining amount will be shown in the balance sheet liabilities side by his loan account.

Partner’s capital account will be debited in case of loss on revaluation and in other cases his account will be credited i.e.
•Profit on Revaluation
•General Reserve

Loan of the retiring partner is disposed off according to the pre decided terms and conditions among the partners. In such cases interest is credited to the Loan A/c on the basis of the amount outstanding at the beginning of each year and the amount paid is debited to loan A/c.

Journal Entry 

For Interest: Interest A/c Dr.

To Partner's Loan A/c.

For Payment: Partner's Loan A/c. Dr.

To Cash/Bank A/c

When new profit sharing ratio of the continuing partners differ from their old ratio, in such a case outgoing partner’s share of profits will be adjusted through capital account of gaining partner.The Entry will be as follows:-

Capital Account of gaining Partner A/c Dr. 

To Capital Account of Retiring Partne A/c

(This entry will be in the gaining Ratio)

The above entry mentioned in the question, will be made when existing book value of Goodwill is written off by all the old partners in their old profit sharing ratio.This Goodwill can be taken from the books/Balance sheet

The following journal entry is to be recorded at the time of retirement of Q:

Q’s share of goodwill = 18,000 x 3/9 = Rs. 6,000

It is to be passed in gaining ratio which is to be 4:2 in P and R.

R will bring Rs.12,000 i.e.
Amount payable to Y = Rs. 30,000
Total Capital of new firm = 23,000 + 30,000 + 17,000 = Rs. 70,000

As they are distributing capital equal so,
New capital of R and S will be = Rs.35,000 each
R will bring = 35,000 – 23,000 = Rs.12,000