Retirement or Death of a Partner Test - 3

Deceased partner’s account can be settled by paying off to his executor:

•Full amount immediately

•In installment with interest

The main purpose of calculating gaining ratio at the time of retirement of a partner is to adjust his amount of goodwill. After calculating his share of goodwill, gainer partners will be debited and outgoing partner will be credited.

In the absence of any information regarding interest on loan to the partner, it should be paid @ 6% per annum.

At the time of retirement or death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner. This is true in normal condition, if after retirement, remaining partners changes their ratio then there are chances that some partners has to suffer loss.so gain and sacrifice both ratio is to be calculated.

Gaining Ratio is calculated at the time of retirement or death of partner. It is the excess of new ratio over old ratio of old partners except retire or dead partner.

Gaining Ratio = New Ratio - Old Ratio

Ratio of A and B will be 5:3 (after adjusting the old share and acquired share).

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.

Goodwill given in the old balance sheet will be written off by all the partners (including retiring partner) at the time of retirement of a partner. Goodwill will be written off in the old ratio of all the partners.

As it is fictitious assets so we write it on debit side of partners capital account and reduce partners capital with that effect. So asset goddiwll gone and liabilities capital reduce. debit =credit.

If any partner sacrificing instead of gaining at the time of retirement or death, in such a case that partner’s capital account should be credited for the adjustment of goodwill amount.

At the time of retirement or death of a partner, gain ratio of remaining partners is calculated as follows:

New Ratio – Old Ratio = Gain Ratio

Goodwill earned by the firm is the effort of all the partners. When a partner retires from the firm, he should get his share of goodwill other than his capital amount (adjusted).