CHAPTER 6
PARTNERSHIP ACCOUNTS –V
ONE WORD TO ONE SENTENCE QUESTIONS
Q.1. What do
you understand by retirement of a partner?
Ans. Retirement
of a partner refers to the voluntary withdrawal of a partner from a partnership
firm. It involves the cessation of the partner's involvement in the operations
and management of the partnership and the redistribution of the partner's share
of assets, liabilities, and profits among the remaining partners or the
reconstitution of the partnership. Retirement can occur due to various reasons,
such as reaching retirement age, health issues, personal reasons, or the desire
to pursue other opportunities.
Q.2. What is
gaining ratio?
Ans. Gaining
ratio refers to the ratio in which the remaining partners in a partnership
share the profits or losses of a retiring or deceased partner. It is the ratio
in which the remaining partners' share of profits or losses increases as a
result of the partner's exit. The gaining ratio is calculated based on the new
profit sharing ratio after the retirement or death of a partner. It determines
how the additional share of profits or losses will be divided among the
remaining partners.
Q.3. Under what
circumstances a partner retires from the firm?
Ans. A partner may retire from a firm under the following circumstances:
1. Upon
reaching retirement age as per partnership agreement
2. Due to
poor health or incapacitation
3. Pursuing
other business or personal interests
4. Dispute
or disagreement among partners
5. Death of
a partner
Q.4. Give the
formula for calculating gaining ratio?
Ans. The formula for calculating the gaining ratio is:
Gaining
Ratio = New Profit Sharing Ratio - Old Profit Sharing Ratio
Here, the
New Profit Sharing Ratio refers to the revised ratio in which the remaining
partners will share profits after the retirement or exit of a partner, and the
Old Profit Sharing Ratio represents the previous profit sharing ratio among the
partners. Subtracting the old ratio from the new ratio gives us the gaining
ratio, which determines the additional share of profits or losses that the
remaining partners will receive as a result of the partner's exit.
Q.5. The amount
due to the retiring partner, if not paid in cash, is transferred to which
account?
Ans. The
amount due to the retiring partner, if not paid in cash, is transferred to the
Retiring Partner's Capital Account.
Q.6. Is a
retiring partner liable for firm’ s act before his retirement?
Ans. a
retiring partner is not liable for the firm's acts or obligations that arise
after their retirement. Once a partner retires from a partnership, they are
generally relieved of any future liability for the partnership's actions or
debts. However, it is important to review the terms of the partnership
agreement and consult with legal advisors to understand the specific
liabilities and obligations associated with retirement in each individual case.
Q.7. Is a
retiring partner liable for firm’s act after his retirement?
Ans. a
retiring partner is generally not liable for the firm's acts or obligations
that arise after their retirement. Once a partner retires from a partnership,
their liability for the partnership's actions or debts usually ends. However,
it is important to consider the terms of the partnership agreement and consult
with legal advisors to understand the specific liabilities and obligations
associated with retirement in each individual case.
Q.8. State the
ratio in which the partners at the time of retirement of a partner share all
the accumulated profits and losses?
Ans. At the
time of retirement of a partner, the partners usually share all the accumulated
profits and losses in their existing profit sharing ratio.
Q.9. State the
ratio is which the partners share profits share or loss from revaluation of
assets and liabilities?
Ans. The
partners share profits or losses from the revaluation of assets and liabilities
in their existing profit sharing ratio.
Q.10. How
goodwill is recorded at the time of retirement/death of a partner?
Ans. At the
time of retirement or death of a partner, the goodwill is typically recorded by
comparing the total value of the firm with the sum of the individual assets and
liabilities. The excess of the total value over the sum of individual assets
and liabilities represents the value of goodwill. This goodwill is then
recorded in the books of the partnership as an asset. It is important to note
that the specific treatment of goodwill may vary depending on the partnership
agreement and accounting practices followed by the firm.
Q.11. If it is
not possible to prepare the profit and account of the firm at the time of the
death of a partner, how are the profits to the date of death ascertained?
Ans. If it
is not possible to prepare the profit and loss account of the firm at the time
of the death of a partner, the profits up to the date of death are usually
ascertained based on the agreed-upon terms in the partnership agreement. This
could involve using the previous year's profit sharing ratio, estimated
profits, or any other predetermined method specified in the agreement. In such
cases, the profits to the date of death are determined based on a reasonable
and mutually agreed approach between the remaining partners and the legal
representatives of the deceased partner.
Q.12. Give two
circumstances in which the gaining ratio may be applied?
Ans. The gaining ratio may be applied in the following two circumstances:
Admission of a new partner: When a new partner is admitted to an existing
partnership, the gaining ratio determines the distribution of profits or losses
among the existing partners and the new partner. It reflects the change in
profit sharing ratios and determines how the new partner's share will be
allocated among the existing partners.
Retirement or death of a partner: When a partner retires or passes away, the
gaining ratio is used to calculate the distribution of profits or losses
between the remaining partners. It determines the adjustment in profit sharing
ratios and reflects the change in the partnership's financial structure after
the departure of the partner.
Q.13. At what
rate, the interest is allowed to a retired/deceased partner, on the amount left
with the firm as per section 37 of the indian partnership Act?
Ans. As per
Section 37 of the Indian Partnership Act, the interest rate allowed to a
retired or deceased partner on the amount left with the firm is typically 6%
per annum. However, it is important to note that the specific interest rate may
vary depending on the partnership agreement or any mutually agreed terms
between the partners.
Q.14. A,B and C
are partners sharing profit and losses in 3:2:1. B dies on 31st
march, 2010 profit earned dung the year 2010 assuming that books are closed on
31st December each year?
Ans. Since
the books are closed on December 31st each year, the profit earned during the
year 2010 will be allocated based on the profit sharing ratio of A, B, and C
before B's death.
Given that
the profit sharing ratio is 3:2:1, the profit earned during the year will be
distributed as follows:
A's share =
(3/6) * Profit for the year 2010
B's share =
(2/6) * Profit for the year 2010 (until March 31st, 2010)
C's share =
(1/6) * Profit for the year 2010
The portion
of the profit earned from January 1st, 2010, to March 31st, 2010, will be
allocated to B's account.
Q.15. X,Y and Z
are partners sharing profits and losses in proportion to ½ 1/3 1/6 .Y retired and new profit sharing
ratio between x and Z is 3:2 and loss on
revaluation of assets and liabilities is 24,000. Show how this loss will
divided among partners?
Ans. To
determine how the loss on revaluation of assets and liabilities will be divided
among partners, we need to calculate the gaining ratio between X and Z.
The old
profit sharing ratio between X, Y, and Z is 1/2 : 1/3 : 1/6, which can be
simplified to 3/6 : 2/6 : 1/6.
The new
profit sharing ratio between X and Z is given as 3:2.
To find the gaining
ratio between X and Z, we subtract the old ratio from the new ratio:
Gaining
ratio = New ratio - Old ratio
= 3/5 - 3/6
: 2/5 - 2/6
= 1/30 :
1/30
= 1:1
Since the
gaining ratio is 1:1, the loss on revaluation of assets and liabilities of
24,000 will be divided equally between X and Z.
Each
partner (X and Z) will bear a loss of 12,000 (24,000 / 2) as per the new profit
sharing ratio of 3:2.
Q.16. A,B and C
are partners sharing profits ½ 1/3 1/6 B dies. What will be the gaining ratio
between A and C?
Ans. When B
dies, the new profit sharing ratio will be between A and C. To determine the
gaining ratio between A and C, we subtract the old ratio (before B's death)
from the new ratio.
The old
profit sharing ratio between A, B, and C is 1/2 : 1/3 : 1/6, which can be
simplified to 3/6 : 2/6 : 1/6.
The new
profit sharing ratio between A and C will be based on their proportionate
shares after B's death. Since B's share will be transferred to A and C, the new
ratio will be:
A's share =
A's share + B's share = 1/2 + 1/3 = 3/6 + 2/6 = 5/6
C's share =
C's share = 1/6
Therefore,
the new profit sharing ratio between A and C will be 5/6 : 1/6.
The gaining
ratio between A and C will be:
Gaining
ratio = New ratio - Old ratio
= 5/6 - 3/6
: 1/6 - 1/6
= 2/6 : 0/6
= 2:0
The gaining
ratio between A and C will be 2:0, indicating that A will gain the entire share
previously held by B.
Q.17. At the
time of death of a partner X, good will of the firm was valued at rs.90,000.
How much partners Y and Z will pay X’ s executor on account of good will?
Ans. To
determine the amount that partners Y and Z will pay to X's executor on account
of goodwill, we need to calculate the value of X's share of goodwill.
Given that
the goodwill of the firm was valued at Rs. 90,000 at the time of X's death, and
assuming that the profit sharing ratio between X, Y, and Z is not mentioned, we
cannot determine the exact amount partners Y and Z will pay to X's executor.
The goodwill amount needs to be apportioned based on the profit sharing ratio
among the partners.
If the
profit sharing ratio is mentioned, we can calculate X's share of goodwill by
multiplying the goodwill value by X's share in the profit sharing ratio. The
amount partners Y and Z will pay to X's executor would be based on the agreed
terms in the partnership agreement or as negotiated among the partners.
Without the
profit sharing ratio or any other relevant information, it is not possible to
determine the specific amount partners Y and Z will pay to X's executor on
account of goodwill.
VERY SHORT ANSWR TYPE QUESTIONS
Q.1. What do
you understand by Retirement of a partner?
Ans. Retirement
of a partner refers to the cessation of the partnership between the partner and
the firm. It occurs when a partner decides to leave the partnership or when a
partner dies or becomes incapacitated. In such cases, the partnership is
dissolved or reconstituted, and the departing partner's share of the
partnership assets and liabilities is settled according to the partnership
agreement or the legal provisions. The process of retirement involves various
accounting and legal procedures, such as the valuation of the retiring
partner's share, the adjustment of the remaining partners' capital accounts,
and the settlement of the retiring partner's outstanding dues and liabilities.
Q.2. How a
partner can retire from the firm?
Ans. A
partner can retire from a firm by following certain procedures as per the
partnership agreement or legal requirements. The steps involved in the
retirement of a partner typically include:
Review the Partnership Agreement: The first step is to review the partnership
agreement to understand the provisions related to retirement. The agreement may
specify the conditions, notice period, and procedures for retirement.
Give Notice: The retiring partner must provide a written
notice to the other partners, indicating their intention to retire from the
firm. The notice period will depend on the partnership agreement or applicable
laws.
Valuation of Partner's Interest: The retiring partner's interest in the
partnership needs to be evaluated, which includes determining the value of
their capital, share in profits or losses, and any other entitlements as per
the agreement.
Settlement of Accounts: The retiring partner's capital account is
settled by paying out their share of the partnership assets, including cash,
inventory, and other investments. The partner's share in profits or losses up
until the retirement date is also calculated and settled.
Inform Stakeholders: The retirement of a partner should be
communicated to important stakeholders, such as clients, suppliers, and
regulatory authorities, to ensure a smooth transition and continuity of
business operations.
Execution of Retirement Agreement: A retirement agreement may be
drafted and signed by all partners, outlining the terms and conditions of the
retirement, the settlement of accounts, and any ongoing obligations or
restrictions.
It is
important to note that the specific procedures for retirement may vary
depending on the partnership agreement, local laws, and the individual
circumstances of the firm. It is advisable to consult with legal and accounting
professionals for guidance during the retirement process.
Q.3. What is
gaining ratio? How is it calculated?
Ans. The
gaining ratio refers to the new profit sharing ratio between the remaining
partners of a firm when there is a change in the partnership, such as admission
of a new partner, retirement of a partner, or dissolution of a partnership. It
determines the proportion in which the future profits and losses of the firm
will be distributed among the partners.
The gaining
ratio is calculated by comparing the new profit sharing ratio with the old
profit sharing ratio. The formula to calculate the gaining ratio is:
Gaining
Ratio = New Share - Old Share
Here's an
example to illustrate the calculation of the gaining ratio:
Let's
assume there are three partners in a firm: A, B, and C. Their old profit
sharing ratio is 3:2:1, respectively. B decides to retire, and the new profit
sharing ratio between A and C is agreed to be 2:1.
To calculate
the gaining ratio, we subtract the old share from the new share:
Gaining
Ratio of A = A's New Share - A's Old Share = 2/3 - 3/6 = 1/6
Gaining
Ratio of C = C's New Share - C's Old Share = 1/3 - 1/6 = 1/6
Therefore,
the gaining ratio between A and C is 1:1, or 1/6 for both partners.
The gaining
ratio helps determine the reallocation of profits and losses among the
remaining partners based on the change in their profit sharing arrangement.
Q.4. What
adjustments are required to be made at the time of retirement of a partner?
Ans. Several adjustments need to be made at the time of retirement of a
partner. Here are some common adjustments:
Calculation of the retiring partner's
share: The retiring partner's share of the
profits or losses needs to be calculated based on the agreed-upon terms in the
partnership agreement.
Adjustment of the retiring partner's
capital account: The retiring
partner's capital account needs to be closed by transferring their capital
balance, including their share of profits or losses, to their loan account or
current account.
Treatment of accumulated profits or
losses: Accumulated
profits or losses need to be distributed among the remaining partners in the agreed-upon
profit sharing ratio.
Treatment of goodwill: If the firm has goodwill, it needs to be valued
and accounted for. The retiring partner may be entitled to a share of the
goodwill, which is usually paid by the remaining partners.
Adjustment of the remaining partners'
capital accounts: The remaining
partners' capital accounts need to be adjusted to reflect the change in the
partnership. This involves transferring the retiring partner's capital balance
to the remaining partners' capital accounts in the profit sharing ratio.
Adjustment of loan or current
accounts:
If the retiring partner
has any outstanding loans or advances with the firm, those amounts need to be
settled and adjusted in their final settlement.
These
adjustments ensure a fair distribution of profits, losses, and capital among the
remaining partners after the retirement of a partner. It helps maintain the
financial stability and continuity of the partnership.
Q.5. Explain in
detail various adjustments carried out at the time of death of a partner?
Ans. At the time of the death of a partner, several adjustments need to be
made to properly account for the partner's share in the firm. These adjustments
include the following:
Calculation of the deceased partner's
share: The deceased partner's share of the
profits or losses needs to be calculated based on the agreed-upon terms in the
partnership agreement or as per the legal provisions.
Adjustment of the deceased partner's
capital account: The
deceased partner's capital account needs to be closed by transferring their
capital balance, including their share of profits or losses, to their
executor's account or to the account of the deceased partner's legal
representatives.
Treatment of accumulated profits or
losses: Accumulated profits or losses need
to be distributed among the surviving partners in the agreed-upon profit
sharing ratio.
Treatment of goodwill: If the firm has goodwill, it needs to be valued
and accounted for. The deceased partner may be entitled to a share of the
goodwill, which is usually paid to their executor or legal representatives.
Adjustment of the surviving partners'
capital accounts: The surviving
partners' capital accounts need to be adjusted to reflect the change in the
partnership. This involves transferring the deceased partner's capital balance
to the surviving partners' capital accounts in the profit sharing ratio.
Adjustment of loan or current
accounts: If the
deceased partner has any outstanding loans or advances with the firm, those
amounts need to be settled and adjusted in their final settlement.
Settlement of the deceased partner's
share: The deceased partner's share in the
firm, including their capital balance, accumulated profits, and any other
entitlements, needs to be settled with their executor or legal representatives.
These
adjustments ensure that the deceased partner's share is properly accounted for,
and the financial affairs of the partnership are appropriately adjusted to
accommodate the change in partnership due to the partner's death. It ensures a
fair distribution of profits, losses, and capital among the surviving partners
and the estate of the deceased partner.
Q.6. how will
you calculate the ‘’Share of profit’’ payable to the deceased partner?
Ans. To calculate the share of profit payable to the deceased partner, the
following steps can be followed:
Determine
the profit-sharing ratio: The profit-sharing ratio specifies how the profits
are divided among the partners. It is usually defined in the partnership
agreement or based on the agreed-upon terms. For example, if the profit-sharing
ratio is 3:2:1 for partners A, B, and C, respectively, it means that A will
receive 3/6th of the profit, B will receive 2/6th, and C will receive 1/6th.
Calculate the total profit: Determine the total profit earned by the
partnership during the relevant period. This can be obtained from the income
statement or profit and loss account of the partnership.
Calculate the share of profit for the
deceased partner: Multiply the
total profit by the deceased partner's profit-sharing ratio. This will give you
the specific amount or share of the profit that is payable to the deceased
partner.
For
example, let's say the total profit earned by the partnership is $100,000 and
the profit-sharing ratio is 3:2:1 for partners A, B, and C, respectively. If
partner B is the deceased partner, you would calculate their share as follows:
Deceased
partner's share = Total profit x Deceased partner's profit-sharing ratio
Deceased
partner's share = $100,000 x (2/6) = $33,333.33
Therefore,
the share of profit payable to the deceased partner (partner B) would be
$33,333.33.
It is
important to note that the above calculation is based on the assumption that
the profit is being allocated based on the profit-sharing ratio. The specific
terms and provisions regarding the deceased partner's share of profit may vary
depending on the partnership agreement or legal requirements.
Q.7. What is
joint life policy? What is its objectives?
Ans. A joint
life policy is a type of life insurance policy that covers the lives of two or
more individuals, typically business partners or spouses. It provides a death
benefit that is paid out upon the death of one of the insured individuals. The
policy remains in effect until the death of the last surviving insured person.
The main
objectives of a joint life policy are as follows:
Business continuity: In the case of business partners,
a joint life policy helps ensure the continuity of the business in the event of
the death of one partner. The death benefit can be used to buy out the deceased
partner's share of the business or provide funds for the surviving partner(s)
to continue operating the business.
Financial protection: A joint life policy provides
financial protection to the insured individuals and their beneficiaries. If one
of the insured persons dies, the policy pays out a death benefit, which can be
used to cover funeral expenses, replace lost income, pay off debts, or meet
other financial obligations.
Estate planning: Joint life policies can also be used as part of
estate planning strategies. The death benefit can be used to provide liquidity
for estate taxes or to ensure that heirs are adequately provided for.
Cost-effectiveness: Joint life policies are often more
cost-effective compared to individual life insurance policies for each insured
person. Premiums for joint life policies are typically lower than the combined premiums
for separate policies.
Overall,
the objective of a joint life policy is to provide financial protection and
security for the insured individuals and their beneficiaries in the event of
death. It helps address the risks associated with the loss of a business
partner or a spouse and ensures the continuity of businesses and financial
stability for the surviving individuals.
Q.8. What is
surrender value?
Ans. Surrender
value refers to the amount of money that an insurance policyholder is entitled
to receive from the insurance company if they choose to terminate or surrender
their insurance policy before its maturity or designated term. It is the cash
value that the policyholder will receive upon surrendering the policy.
The
surrender value is calculated based on several factors, including the length of
time the policy has been in force, the total premiums paid, and any applicable
fees or charges deducted by the insurance company. The surrender value is
typically less than the total premiums paid, especially in the early years of
the policy, due to various charges and deductions.
The
surrender value serves as a way for policyholders to exit their insurance
policy and receive a portion of the accumulated cash value. However,
surrendering a policy before its maturity means forfeiting the protection and
benefits provided by the policy. It is important for policyholders to carefully
consider the financial implications and alternatives before deciding to
surrender an insurance policy.
It's worth
noting that surrender value may vary depending on the type of insurance policy,
such as life insurance, endowment policies, or investment-linked policies.
Policyholders should refer to the terms and conditions of their specific policy
to understand the surrender value provisions and any applicable surrender
charges or penalties.
Q.9. What are
the items to be credited in the account of a retiring partner? Discuss.
Ans. When a
partner retires from a partnership, there are several items that need to be
credited to their account. The specific items and their treatment may vary
based on the partnership agreement and accounting practices followed by the
firm. However, generally, the following items are credited to the account of a
retiring partner:
Share of Accumulated Profits/Losses: The retiring partner is entitled to their share
of accumulated profits or losses up to the date of retirement. The amount is
credited to their account and transferred from the partnership's profit and
loss appropriation account.
Share of Reserves and Surplus: Any reserves or surplus
accumulated by the partnership are distributed among the partners, including
the retiring partner. The retiring partner's share is credited to their
account.
Capital Balance: The retiring partner's capital balance is
credited to their account. This includes their original capital contribution
plus any additional capital introduced during their tenure in the partnership.
Share of Goodwill: If the partnership has goodwill, the retiring
partner is entitled to their share of the goodwill value. The amount is
credited to their account as a realization of their interest in the
partnership's goodwill.
Interest on Capital: If the partnership agreement specifies the
payment of interest on capital, any outstanding interest up to the date of
retirement is credited to the retiring partner's account.
Loan Repayments: If the retiring partner had any loans or
advances to the partnership, the repayment amount is credited to their account.
It's
important to note that the above items may be subject to adjustments and
calculations based on the terms of the partnership agreement and any applicable
legal provisions. The specific treatment of each item should be determined in
consultation with an accountant or financial advisor to ensure compliance with
relevant regulations and agreements.
Q.10. What is
joint life policy reserve account?
Ans. Joint
Life Policy Reserve Account is a type of reserve account that is created by a
partnership firm when it holds a joint life insurance policy on the lives of
its partners. This account is maintained to provide for the payment of the
premium on the joint life policy and to accumulate funds to cover the future
benefits or claims that may arise under the policy.
The purpose
of creating a Joint Life Policy Reserve Account is to ensure that the
partnership has sufficient funds to meet the premium payments and to provide
financial protection in the event of the death or critical illness of one or
more partners. By setting aside a portion of the partnership's profits into
this reserve account, the firm can ensure the continuity of the joint life
policy and mitigate the financial impact of any unforeseen events.
The reserve
account is typically credited with an amount equal to the premium paid for the
joint life policy. The premium payment is debited to the partnership's profit
and loss account. Over time, as the reserve account accumulates, it provides a
source of funds for future premium payments and potential claims.
The balance
in the Joint Life Policy Reserve Account represents the accumulated funds
available to meet the obligations under the joint life policy. This reserve ensures
that the partnership can continue to maintain the policy and provides financial
security for the partners and their beneficiaries in the event of unexpected
circumstances.
It's
important for a partnership to regularly review and monitor the Joint Life
Policy Reserve Account to ensure that it remains adequately funded and can
fulfill its intended purpose. Adjustments may be made based on changes in the
premium amount, policy coverage, or partnership structure to ensure the ongoing
adequacy of the reserve.
Q.11. How will
you deal with the amount due to an outgoing partner in case it is not paid
immediately?
Ans. If the
amount due to an outgoing partner is not paid immediately, it is typically
transferred to a separate account known as the "Outgoing Partner's Loan
Account" or "Partner's Capital Account" in the books of the
partnership. This account represents the outstanding amount owed to the
outgoing partner.
The entry to
record the amount due to the outgoing partner is as follows:
Outgoing
Partner's Loan Account (or Partner's Capital Account) Dr.
To
Partner's Capital Account (or Cash or Bank Account)
The above
entry debits the Outgoing Partner's Loan Account and credits the Partner's
Capital Account (or Cash or Bank Account) with the same amount, reflecting the
outstanding liability of the partnership towards the outgoing partner.
Subsequently,
the partnership may decide to repay the amount due to the outgoing partner in
installments over a specified period of time. In such cases, regular payments are
made from the partnership to the outgoing partner to settle the outstanding
balance. These payments can be recorded through journal entries, reducing the
balance of the Outgoing Partner's Loan Account until the full amount is repaid.
It's
important for the partnership to maintain proper documentation and records of
the outstanding amount due to the outgoing partner, as well as any agreed-upon
repayment terms. This ensures transparency and clarity regarding the financial
obligations between the partnership and the outgoing partner.
Q.12. Alpha,
beta and gamma are partners in 7:5:6 ratio. Find out the new profit sharing
ratio?
Ans. To
find the new profit sharing ratio, we need to know the proportion in which the
partners will share the profits after any changes or adjustments have been
made.
Let's
assume that there is a change in the profit sharing ratio among the partners
Alpha, Beta, and Gamma. The new profit sharing ratio can be calculated by
considering the given ratio and any adjustments made.
Given:
Alpha's
share = 7
Beta's
share = 5
Gamma's
share = 6
To
calculate the new profit sharing ratio, we need to find the total of the
existing shares and then calculate the proportionate share of each partner.
Total
shares = Alpha's share + Beta's share + Gamma's share
= 7 + 5 + 6
= 18
New profit
sharing ratio:
Alpha's
share = (Alpha's share / Total shares) * 100%
= (7 / 18)
* 100%
= 38.89%
Beta's
share = (Beta's share / Total shares) * 100%
= (5 / 18)
* 100%
= 27.78%
Gamma's
share = (Gamma's share / Total shares) * 100%
= (6 / 18)
* 100%
= 33.33%
Therefore,
the new profit sharing ratio for Alpha, Beta, and Gamma will be approximately
38.89%, 27.78%, and 33.33%, respectively.
SHORT ANSWER TYPE QUESTIONS
Q.1. What is
revaluation account? Why it is prepared?
Ans. A
revaluation account is a nominal account used in accounting to record the
adjustments made to the values of assets, liabilities, or capital during a
revaluation process. It is prepared when there is a change in the value of
assets and liabilities of a partnership firm.
The
revaluation account is prepared to adjust the carrying values of the assets and
liabilities to their fair or market values. This is done to reflect the current
worth of the assets and liabilities accurately and to ensure that the financial
statements provide a true and fair view of the firm's financial position.
The reasons
for preparing a revaluation account may include changes in market conditions,
changes in the partnership agreement, admission or retirement of partners, or
the need to rectify errors in the previously recorded values of assets and
liabilities.
The
revaluation account records the increases or decreases in the values of assets
and liabilities. Any gain or loss resulting from the revaluation is also
recorded in the revaluation account. The balances in the revaluation account
are then transferred to the capital accounts of the partners based on their
profit sharing ratio.
In summary,
a revaluation account is prepared to adjust the values of assets and
liabilities to their current market values and to account for any gains or
losses resulting from the revaluation. It helps ensure that the financial
statements accurately reflect the true value of the partnership's assets and
liabilities.
Q.2. What is
memorandum revaluation account? Why it is prepared?
Ans. A
memorandum revaluation account is a temporary account used to record
adjustments made to the values of assets and liabilities during a revaluation
process. It is prepared to calculate the gain or loss arising from the revaluation
of assets and liabilities but does not affect the capital accounts of the
partners.
The
memorandum revaluation account is prepared when there is a need to determine
the gain or loss resulting from the revaluation, but the partners agree that
the gain or loss will not be distributed among them. Instead, it is retained in
the firm as a reserve or used for specific purposes as decided by the partners.
The purpose
of preparing a memorandum revaluation account is to provide information about
the revaluation gain or loss without affecting the individual capital accounts
of the partners. It allows the partners to have a clear understanding of the
impact of the revaluation on the firm's financial position and to make informed
decisions regarding the utilization of the revaluation gain or loss.
The
memorandum revaluation account typically consists of two sides: the credit side
represents the increase in the value of assets and the decrease in the value of
liabilities, while the debit side represents the decrease in the value of
assets and the increase in the value of liabilities. The balance in the
memorandum revaluation account represents the net gain or loss from the
revaluation.
In summary,
the memorandum revaluation account is prepared to calculate and disclose the
gain or loss resulting from the revaluation of assets and liabilities. It
serves as an informational account that does not directly impact the capital
accounts of the partners, allowing for separate consideration and
decision-making regarding the treatment of the revaluation gain or loss.
Q.3. What is
gaining ratio? How it is calculated?
Ans. The
gaining ratio refers to the ratio in which the remaining partners in a
partnership firm acquire the share of profits or losses from the outgoing or
retiring partner. It is calculated to determine the new distribution of profits
or losses among the existing partners after the retirement or withdrawal of a
partner.
The gaining
ratio is calculated using the following formula:
Gaining
Ratio = New Profit Sharing Ratio - Old Profit Sharing Ratio
The
"New Profit Sharing Ratio" represents the revised profit sharing
ratio among the remaining partners after the retirement of the partner. The
"Old Profit Sharing Ratio" represents the profit sharing ratio that
existed before the retirement.
By
subtracting the old profit sharing ratio from the new profit sharing ratio, we
can determine the gaining ratio, which represents the additional share of
profits or losses acquired by the remaining partners due to the retirement of
the partner.
It is
important to calculate the gaining ratio accurately to ensure a fair and
equitable distribution of profits or losses among the partners based on their
revised profit sharing arrangements.
Q.3. What is
gaining ratio? How it is calculated?
Ans. The
gaining ratio refers to the ratio in which the remaining partners in a
partnership firm acquire the share of profits or losses from the outgoing or
retiring partner. It is calculated to determine the new distribution of profits
or losses among the existing partners after the retirement or withdrawal of a
partner.
The gaining
ratio is calculated using the following formula:
Gaining
Ratio = New Profit Sharing Ratio - Old Profit Sharing Ratio
The
"New Profit Sharing Ratio" represents the revised profit sharing
ratio among the remaining partners after the retirement of the partner. The
"Old Profit Sharing Ratio" represents the profit sharing ratio that
existed before the retirement.
By
subtracting the old profit sharing ratio from the new profit sharing ratio, we
can determine the gaining ratio, which represents the additional share of
profits or losses acquired by the remaining partners due to the retirement of
the partner.
It is
important to calculate the gaining ratio accurately to ensure a fair and
equitable distribution of profits or losses among the partners based on their
revised profit sharing arrangements.
Q.4. How will
you compute the amount payable to a deceased partner?
Ans. The amount payable to a deceased partner can be computed using the
following steps:
Determine the deceased partner's
share of the accumulated profits or losses: Calculate the deceased partner's share of
profits or losses up to the date of their death. This can be done by allocating
profits or losses based on the profit sharing ratio.
Calculate the deceased partner's
share in the firm's net assets: Determine the deceased partner's share in the firm's net assets, which
includes the value of assets, liabilities, and capital balances. This can be
done by taking the deceased partner's capital balance and their share of the
accumulated profits or losses.
Consider the deceased partner's
entitlement as per the partnership agreement: Review the partnership agreement to determine
if there are any specific provisions regarding the amount payable to the
deceased partner or their legal representative. This may include factors such
as the inclusion of goodwill, interest on capital, or any other agreed-upon
terms.
Consider the method of settlement: Determine whether the amount payable to the
deceased partner will be settled in cash or through the transfer of assets. The
method of settlement may depend on the partnership agreement or legal
requirements.
Adjust for any additional factors: Consider any additional factors that may impact
the amount payable to the deceased partner, such as life insurance policies,
joint life policies, or any other agreements or arrangements.
It is
advisable to consult with legal and accounting professionals to ensure accurate
calculation and proper compliance with relevant laws and regulations.
Q.5. What
adjustments are required to be made at the time of retirement of a partner?
Ans. At the time of retirement of a partner, the following adjustments need to
be made:
Adjustment for the retiring partner's
share of capital: The retiring
partner's capital account needs to be closed by transferring their share of
capital to the remaining partners' capital accounts in their profit sharing
ratio.
Adjustment for the retiring partner's
share of accumulated profits or losses: The retiring partner's share of accumulated profits
or losses needs to be transferred to the remaining partners' capital accounts
in their profit sharing ratio.
Adjustment for goodwill: If there is goodwill in the firm and the
retiring partner is entitled to a share of it, the retiring partner's share of
goodwill needs to be transferred to the remaining partners' capital accounts in
their profit sharing ratio.
Adjustment for revaluation of assets
and liabilities: If there is a
revaluation of assets and liabilities at the time of retirement, any gains or
losses resulting from the revaluation need to be adjusted in the partners'
capital accounts in their profit sharing ratio.
Adjustment for any outstanding
liabilities: Any
outstanding liabilities of the retiring partner need to be settled. This may
involve transferring the liability to the remaining partners or making a
separate payment to the retiring partner.
Adjustment for any retirement
benefits:
If there are any
retirement benefits or settlements agreed upon in the partnership agreement,
such as a lump sum payment or annuity, these need to be accounted for and
adjusted in the partners' capital accounts.
These
adjustments ensure that the retiring partner's capital, profits or losses, and
any entitlements are appropriately distributed among the remaining partners,
reflecting the changes in the partnership structure after the retirement.
Q.6.
Distinguish between sacrificing ratio and gaining ratio?
Ans. Sacrificing
ratio and gaining ratio are two important concepts in partnership accounting
that determine the redistribution of profits or losses among partners due to
changes in the profit sharing ratio. Here are the main differences between
sacrificing ratio and gaining ratio:
Sacrificing
Ratio:
Definition: Sacrificing ratio refers to the proportionate
reduction in the existing partners' share of profits to accommodate the new
partner or adjust the profit sharing ratio among existing partners.
Calculation: Sacrificing ratio is calculated by subtracting
the new profit sharing ratio from the existing profit sharing ratio.
Purpose: Sacrificing ratio is used to determine the
extent to which existing partners give up their share of profits to accommodate
changes in the partnership, such as admission of a new partner or change in
profit sharing ratios.
Effect on Partners' Capital: The amount sacrificed by the existing partners
is deducted from their individual capital accounts.
Impact on Profit Distribution: The sacrificing ratio determines how the redistributed
profits or losses resulting from the changes in the partnership structure are
allocated among the partners.
Gaining
Ratio:
Definition: Gaining ratio refers to the proportionate
increase in the share of profits for the remaining partners due to changes in
the profit sharing ratio.
Calculation: Gaining ratio is calculated by subtracting the
old profit sharing ratio from the new profit sharing ratio.
Purpose: Gaining ratio helps determine the increased
share of profits for the remaining partners as a result of changes in the
partnership structure.
Effect on Partners' Capital: The amount gained by the remaining partners is
added to their individual capital accounts.
Impact on Profit Distribution: The gaining ratio determines how
the redistributed profits or losses resulting from the changes in the
partnership structure are allocated among the partners.
In summary,
the sacrificing ratio determines the reduction in existing partners' share of
profits, while the gaining ratio determines the increase in the share of
profits for the remaining partners. Both ratios play a crucial role in
adjusting profit distribution in response to changes in the partnership's
profit sharing arrangement.
Q.7. Enumerate
the accounting problem at the time of retirement and death of a partner?
Ans. The
retirement or death of a partner in a partnership firm can give rise to various
accounting issues and challenges. Some of the common accounting problems that
may arise at the time of retirement or death of a partner include:
Valuation of Goodwill: The value of goodwill needs to be determined
and accounted for when a partner retires or dies. Goodwill represents the
reputation, customer base, and intangible assets of the partnership, and its
value may need to be calculated based on the agreed method or as per the
partnership agreement.
Distribution of Accumulated Profits
and Reserves: The accumulated
profits, reserves, and undistributed profits of the partnership need to be
distributed among the remaining partners or the legal representatives of the
deceased partner. The distribution is typically based on the agreed profit
sharing ratios or as per the terms of the partnership agreement.
Settlement of Capital Accounts: The retiring or deceased partner's capital
account needs to be settled, taking into consideration their share of capital,
share of profits or losses, drawings, and any adjustments for interest or
salary. The remaining partners may need to adjust their capital accounts accordingly.
Revaluation of Assets and
Liabilities: The retirement
or death of a partner may necessitate the revaluation of partnership assets and
liabilities to determine their fair market value. This revaluation helps in
adjusting the capital accounts and ensuring a fair distribution of assets and
liabilities among the remaining partners.
Adjustment for Unrealized Profits or
Losses: If there are any unrealized profits
or losses on partnership assets, such as investments or inventory, these need
to be accounted for and appropriately allocated among the partners.
Settlement of Outstanding
Liabilities: Any outstanding
liabilities of the partnership need to be settled, including loans, debts, or
obligations to third parties. The retiring or deceased partner's share of these
liabilities may need to be accounted for and paid off.
Change in Profit Sharing Ratio: If the retirement or death of a partner results
in a change in the profit sharing ratio among the remaining partners,
adjustments need to be made to reflect the new distribution of profits or
losses.
These
accounting problems require careful analysis, calculations, and adjustments to
ensure accurate and fair representation of the financial position of the
partnership after the retirement or death of a partner. Professional expertise
and adherence to accounting principles and partnership agreements are crucial
in handling these matters effectively.
Q.8. Explain
the treatment of good will at the time of retirement/death of a partner?
Ans. The
treatment of goodwill at the time of retirement or death of a partner in a
partnership firm depends on the partnership agreement and the prevailing
accounting practices. There are two possible scenarios for the treatment of
goodwill:
Goodwill is not recognized: In some cases, the partnership agreement may
not recognize goodwill as an asset of the firm. In such situations, the
retiring or deceased partner is not entitled to any share of goodwill. The
remaining partners continue the business without making any adjustment or payment
for goodwill.
Goodwill is recognized: If the partnership agreement
recognizes goodwill as an asset, it needs to be accounted for and treated
accordingly. The treatment of goodwill may vary depending on the circumstances:
a. Retirement of a partner: When a partner retires, the value of goodwill
is usually determined based on an agreed method or as per the partnership
agreement. The retiring partner is entitled to receive their share of the value
of goodwill. The amount payable to the retiring partner can be settled either
in cash or through adjustments in the remaining partners' capital accounts.
b. Death of a partner: In the event of the death of a partner, the
value of goodwill is also determined based on an agreed method or as per the
partnership agreement. The legal representative of the deceased partner, such
as their executor or administrator, is entitled to receive the deceased
partner's share of the value of goodwill. Similar to retirement, the payment
can be made in cash or through adjustments in the capital accounts of the
remaining partners.
It's
important to note that the treatment of goodwill may also involve revaluation
of assets and liabilities to determine the fair value of the partnership. The
revaluation may affect the capital accounts of the remaining partners and the
distribution of profits or losses.
It is
advisable to consult the partnership agreement and seek professional accounting
advice to ensure the appropriate treatment of goodwill at the time of
retirement or death of a partner.
Q.9. Explain
the applications of section 37 of the indian partnership act?
Ans. Section
37 of the Indian Partnership Act, 1932, provides guidelines regarding the
interest payable to partners on their capital and advances. The section has the
following applications:
Interest on Capital: According to Section 37, partners are entitled
to receive interest on their capital contributions to the partnership. The rate
of interest, if not specified in the partnership agreement, is usually
calculated at 6% per annum. This provision ensures that partners receive a
reasonable return on their invested capital.
Interest on Advances: Section 37 also addresses the payment of
interest on any advances made by partners to the partnership. Partners who
provide additional funds to the partnership beyond their capital contributions
may be eligible for interest on those advances. The rate of interest on
advances is typically the same as the rate on capital, unless stated otherwise
in the partnership agreement.
Accrual of Interest: The interest on capital and advances under
Section 37 accrues from the date of the transaction until the date of
settlement. This means that partners are entitled to receive interest for the
duration their capital or advances remain in the partnership.
Calculation and Appropriation of
Interest:
The calculation and
appropriation of interest under Section 37 should be done in accordance with
the partnership agreement or as agreed upon by the partners. The interest
payable is typically charged to the profits of the partnership before the
distribution of profits among the partners.
Waiver of Interest: In certain cases, partners may agree to waive
the interest on their capital or advances, either partially or completely. This
waiver should be mutually agreed upon and documented in writing.
Section 37
of the Indian Partnership Act ensures fairness and transparency in the payment
of interest to partners for their capital and advances. It provides guidelines
for the calculation, accrual, and appropriation of interest, and allows
partners the flexibility to negotiate and modify the interest terms as per
their agreement.
Q.10. what is
joint life policy. Explain the purpose of taking joint life policy?
Ans. A
joint life policy is an insurance policy that covers the lives of two or more
individuals under a single policy. It provides a death benefit that is payable
upon the death of any one of the insured individuals. The purpose of taking a
joint life policy is to provide financial protection and security to the surviving
partners or beneficiaries in the event of the death of one of the insured
partners.
The main
objectives of taking a joint life policy are:
Protection of the Partnership: A joint life policy helps protect the financial
stability of a partnership by providing funds in the event of the death of one
of the partners. The death benefit received from the policy can be used to buy
out the deceased partner's share or compensate the partners for the loss of
their contribution to the partnership.
Continuity of Business Operations: The death of a partner can disrupt the
operations of a partnership, especially if the deceased partner played a
significant role in the business. By having a joint life policy, the surviving
partners can receive a lump sum amount from the policy proceeds to help cover
the financial impact of the loss and ensure the continuity of business
operations.
Financial Security for the Family: A joint life policy also provides financial
security to the family members or beneficiaries of the insured partners. In the
event of the death of a partner, the policy payout can help provide for the
financial needs of the deceased partner's dependents or beneficiaries, such as
paying off debts, covering living expenses, or funding educational expenses.
Buyout Arrangements: In some cases, a joint life policy is taken
with the specific purpose of funding a buyout arrangement. The policy proceeds
can be used to buy out the deceased partner's share from their heirs or estate,
allowing the surviving partners to maintain control and ownership of the
business.
Overall, a
joint life policy serves as a risk management tool for partnerships, ensuring
financial protection and continuity in the face of unexpected events like the
death of a partner. It provides peace of mind to the partners and their
families by offering financial security and stability in times of crisis.
Q.11. What is
individual life policies? What is their accounting treatment?
Ans. Individual
life policies, also known as personal life insurance policies, are insurance
policies that cover the life of an individual. Unlike joint life policies,
individual life policies are specific to one person and provide a death benefit
in the event of the insured individual's death.
The
accounting treatment for individual life policies in the context of a
partnership or business depends on the purpose and ownership of the policy.
Here are two scenarios:
Partnership-owned Policy: If the partnership owns the individual life
policy, it is recorded as an asset in the partnership's books. The policy's
cash surrender value (if any) is recorded as an asset, and the premiums paid
are treated as an expense of the partnership. The death benefit received upon
the insured individual's death is recorded as income in the partnership's
books.
Partner-owned Policy: If a partner in the partnership owns an
individual life policy, the policy is not recorded as an asset of the
partnership. Instead, it is considered the personal asset of the partner. The
premiums paid by the partner for the policy are not treated as a partnership
expense. In the event of the insured partner's death, the death benefit
received from the policy is not recorded as income in the partnership's books.
It's
important to note that the accounting treatment may vary based on the specific
circumstances and accounting practices followed by the partnership. It is
recommended to consult with a professional accountant or follow the relevant
accounting standards and regulations in your jurisdiction for accurate and compliant
accounting treatment of individual life policies.
Q.12. How will
you calculate the ‘’State of profit’’ payable for the decreased partner?
Ans. To calculate
the "share of profit" payable to the deceased partner, you need to
determine the deceased partner's share in the profits up to the date of their
death. Here's how you can calculate it:
Determine the accounting period: Determine the accounting period for which you
want to calculate the deceased partner's share of profit. This period will be
from the last profit and loss appropriation account (or the last financial
statement) until the date of the partner's death.
Calculate the profit for the
accounting period: Calculate the
profit earned by the partnership for the specified accounting period. This can
be done by subtracting the expenses from the revenues or by referring to the
profit and loss statement.
Determine the profit-sharing ratio: Determine the profit-sharing ratio of the
deceased partner before their death. This ratio is usually mentioned in the
partnership agreement or based on the agreed-upon profit-sharing arrangement.
Calculate the deceased partner's
share of profit: Multiply the
total profit for the accounting period by the deceased partner's profit-sharing
ratio. This will give you the deceased partner's share of profit.
It's
important to note that the calculation of the deceased partner's share of
profit may be subject to any specific provisions or agreements mentioned in the
partnership agreement or applicable laws. Consulting with a professional
accountant or legal advisor is recommended to ensure accurate and compliant
calculation.
