NCERT Solution for Class 12 Accountancy Chapter 4 - Reconstitution of a Partnership Firm - Retirement/Death of a Partner

*According to the CBSE Syllabus 2023-24, this chapter has been renumbered as Chapter 3.

NCERT Solutions are extremely helpful for students while preparing for the CBSE Class 12 Accountancy examinations. This study material owns a deep knowledge, and the NCERT solutions collated by the subject-matter experts are not distinct.

NCERT Solution for Class 12 Accountancy Chapter 4 – Reconstitution of a Partnership Firm – Retirement/Death of a Partner furnishes us with all-inclusive data on all the concepts in the textbook. As the students would have learnt the basic fundamentals about the subject of Accountancy in Class 11, the Class 12 NCERT Solutions is a continual part of it, which explains the concepts in an extensive way.

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Access NCERT Solutions for Class 12 Accountancy Chapter 4 – Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Short Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 4

1. What are the different ways in which a partner can retire from the firm?

Here are the different ways in which a partner can retire from the firm:

i. For a partner to retire, consent from the firm’s co-partners is required. A partner can retire if all partners agree with the decision to retire.

ii. A partner can express his desire to retire by issuing a notice to the firm in case there is a written agreement.

iii. A partner can retire by giving a written notice to all other partners in their absence.

2. Write the various matters that need adjustments at the time of retirement of partner/partners.

At the time of retirement of partner/partners, the following matters need adjustment:

i. Determining the new gaining ratio of the partners who are remaining in the firm.

ii. Determine the new ratio of the firm’s remaining partners.

iii. Determine the goodwill of the firm and ensure its proper accounting treatment.

iv. Revaluating liabilities and assets of the new firm.

v. Distributing among all the partners the accumulated profits and losses, along with reserves.

vi. Retiring partner’s settlement.

vii. Revised calculation of capital accounts of remaining partners and their new and updated profit-sharing ratio.

viii. Joint life policy treatment.

3. Distinguish between sacrificing ratio and gaining ratio.

4. Why do a firm revaluate assets and reassess its liabilities on retirement or on the event of the death of a partner?

As a partner retires or is taken away by death, it becomes critical to determine the liabilities and assets’ value on the current date to get a fair idea about its true worth. Revaluation becomes essential as liabilities and assets may increase or decrease in value as time passes. It may also happen that certain liabilities and assets had remained unrecorded the last time books were updated. As a partner retires/death happens, it may have a positive/negative impact on the value of the firm’s liabilities and assets. Therefore, it is a good idea to revaluate the value so that the true profit/loss can be determined and it can be shared among partners as per sharing ratio as determined at the time of setting up the partnership.

5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

A firm earns goodwill through the efforts of its partners and is regarded as one of the most important intangible assets. After a partner retires or is dead, the good work that was done by that partner should be acknowledged, and hence proper compensation should be provided to the partner in the form of a part of the goodwill of the firm.

Long Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 4

1. Explain the modes of payment to a retiring partner.

The modes of payment to a retiring partner are listed below:

i. When the amount due to the retiring partner is paid back in a lump sum amount on the day of retirement, journal entries are as mentioned below:

ii. The amount to be paid to the retiring partner can be paid in instalments to the loan account, which helps the partner earn interest on the loan.

iii. Part payment: When the retiring partner needs to be paid some amount in cash and some as equal instalments, then a certain sum of money is paid on the day of retirement, and the rest of the sum is paid on a monthly basis to the partner’s loan account. The following entries show this type of transaction:

Retiring Partner’s Capital A/c (total due amount payable to partner) Dr.

To Retiring Partner’s Loan A/c (amount transferred to loan account)

To Cash A/c (part payment in the form of cash)

(Part payment to retiring partner in cash as well as transfer to loan account)

2. How will you compute the amount payable to a deceased partner?

To determine the amount payable to the deceased partner, the legal executor is entitled to calculate it. It is arrived at posting these items in debit and credit side respectively.

Items to be posted on the debit side are as follows:

i. Credit balance of deceased partner’s capital account.

ii. Profit share of the partner till their death

iii. Share of goodwill of the partner.

iv. Any gain on revaluation of liabilities and assets

v. Any salary or commission earned till the date of demise.

vi. Share in accumulated reserves and profit account

vii. Any interest earned on capital

viii. Share in a life insurance policy

Items to be posted on the credit side are as follows:

i. Deceased partner’s debit balance from the capital account.

ii. Total drawings done till the death of a partner

iii. Interest charged on drawings, if any, till the day of death.

iv. Reduction in profit share or loss up to the date of death.

v. Share of accumulated loss for the partner and firm

A legal executor balances excess credit over the debit side of a deceased partner.

3. Explain the treatment of goodwill at the time of retirement or in the event of the death of a partner?

Goodwill is subjected to treatment on the following two conditions:

i. When goodwill is present in the books of the firm.

ii. When goodwill is not present in the books of the firm

i. When goodwill is present in books

The first step is to write off the goodwill if it is present in the books and must be distributed among the partners in the firm in the agreed profit-sharing ratio. The journal entry will be like the following:

All Partners’ Capital A/c Dr.

To Goodwill A/c

(Goodwill written off among partners)

The next step will be adjusting goodwill using the partners’ capital account with the share of goodwill of the deceased or retired partner

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c (partners’ capital account debited and retiring/deceased partners account credited)

ii. When goodwill is not present in the books of the firm

As goodwill is not present in the books of the firm, it gets adjusted from the partners’ capital account along with the deceased/retired partners’ share. The following entry is passed:

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c

(Partners’ capital account debited and retiring/deceased partners account credited)

4. Discuss the various methods of computing the share in profits in the event of the death of a partner.

In the unlikely event of the death of a partner during the year, the executor is entitled to a profit-sharing up to the date of the death of the partner. Profit sharing can be calculated by two methods:

i. On the time basis: In this method, profit earned till the date of the partner’s death is considered for calculation on the basis of last year/year’s profit or average profit earned in the last few years. It is assumed that profit will remain constant throughout the year, and the deceased partner will be eligible for a profit share, which is proportionate till the date of the partner’s death.

Share of Deceased Partner in Profit =

ii. On the sale basis: The calculation of profit is based on last year’s sales as per this method, and also, it is assumed that the net profit of the current year is similar to last year’s profits.

Share of Deceased Partner’s Profit =
× Sales counted from the beginning of the current year up to the date of death × Share of the deceased partner

Numerical Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 4

1. Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires, and the goodwill of the firm is valued at ₹ 1,80,000. Aparna and Sonia decided to share the future in the ratio of 3:2. Pass necessary Journal entries.

Working Notes:

i. Manisha’s share in goodwill:

Total goodwill of the firm × Retiring partner’s share =

ii. Gaining Ratio = New Ratio − Old Ratio

Aparna Gaining share

Gaining Ratio between Aparna and Sonia = 3: 7

iii. Aparna’s share in the goodwill

Sonia’s share in the goodwill

2. Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of ₹ 60,000. Sangeeta retires, and goodwill is valued at ₹ 90,000. Saroj and Shanti decided to share future profits equally. Record necessary Journal entries.

Working Notes:

i. Sangeeta’s share of goodwill

Total goodwill of the firm × Retiring partner’s share

ii. Gaining Ratio = New Ratio – Old Ratio

Saroj’s Gaining Share 

Shanti’s Gaining Share 

3. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2017, Naman retires.

The various liabilities and assets of the firm on the date were as follows:

Cash ₹ 10,000, Building ₹ 1,00,000, Plant and Machinery ₹ 40,000, Stock ₹ 20,000, Debtors ₹ 20,000 and Investments ₹ 30,000.

The following was agreed upon between the partners on Naman’s retirement:

Record the necessary journal entries to the above effect and prepare the Revaluation Account.

4. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following:

General Reserve – ₹ 36,000

Profit and Loss Account (Dr.) – ₹ 15,000.

Pass the necessary journal entries to the above effect.

5. Digvijay, Brijesh and Parakaram were partners in a firm, sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2017, was as follows:

Brijesh retired on March 31, 2017, on the following terms:

(i)    Goodwill of the firm was valued at ₹ 70,000 and was not to appear in the books.

(ii)   Bad debts amounting to ₹ 2,000 were to be written off.

(iii)  Patents were considered valueless.

Prepare the Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

Note: As the sufficient balance is not available to pay the amount due to Brijesh, the balance of his Capital Account is transferred to his Loan Account.

Working Note:

1. Brijesh’s Share of Goodwill

Total goodwill of the firm × Retiring partner’s share

2. Gaining Ratio = New Ratio – Old Ratio

Digvijay’s Share

Parakaram’s Share

Gaining ratio between Digvijay and Parakaram = 4:2 or 2:1

6. Radha, Sheela and Meena were in partnership, sharing profits and losses in the proportion of 3:2:1. On April 1, 2017, Sheela retired from the firm. On that date, their Balance Sheet was as follows:

The terms were:

a) Goodwill of the firm was valued at ₹ 13,500.

b) Expenses owing to be brought down to ₹ 3,750.

c) Machinery and Loose Tools are to be valued at 10% less than their book value.

d) Factory premises are to be revalued at ₹ 24,300.

Prepare:

i. Revaluation account

ii. Partner’s capital accounts 

iii. Balance sheet of the firm after the retirement of Sheela.

Working Notes:

Working Notes:

1) Sheela’s share of goodwill

Total goodwill of the firm × Retiring partner’s share =13,500 × 2/6 = 4,500

2) Gaining Ratio = New Ratio − Old Ratio

Radha’s Share

Meena’s Shares

Gaining Ratio between Radha and Meena = 6:2 or 3:1

7. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness. On that date, the Balance Sheet of the firm was as follows:

Additional Information

(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for ₹ 1,200 and furniture to be brought up to ₹ 45,000.

(ii) Goodwill of the firm is valued at ₹ 42,000.

(iii) ₹ 26,000 from Naresh’s Capital account be transferred to his loan account, and the balance is paid through the bank; if required, the necessary loan may be obtained from the bank.

(iv) New profit-sharing ratio of Pankaj and Saurabh is decided to be 5:1.

Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.

8. Puneet, Pankaj and Pammy are partners in a business, sharing profits and losses in the ratio of 2:2:1, respectively. Their balance sheet as on March 31, 2017, was as follows:

Mr Pammy died on September 30, 2017. The partnership deed provided the following:

Working Notes:

1) Pammy’s Share of Profit

Previous Year’s Profit × Proportionate Period × Share of Deceased Partner

2) Pammy’s Share of Goodwill

Goodwill of the firm = Average Profit × Numbers of Year’s Purchase

Average Profit 

Goodwill of the Firm = 50,000 ´ 3 = ₹ 1,50,000

3) Gaining Ratio = New Ratio – Old Ratio

Puneet’s Share

Pankaj’s Share

Gaining Ratio between Puneet and Pankaj = 2:2 or 1:1

4) Interest on Capital for 6 months, i.e. from April 1, 2007, to September 30, 2007

Amount of Capital × Rate of Interest × Period

5) Interest Amount

The firm closes its books every year on March 31, while instalments to Pammy’s Executor are paid on September 30 every year.

Amount outstanding on 30 September = 75,400 – 15,400 = ₹ 60,000

9. Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2017.

Rockey died on June 30, 2017. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

a) Amount standing to the credit of the Partner’s Capital account.

b) Interest on capital at 5% per annum.

c) Share of goodwill on the basis of twice the average of the past three years’ profit.

d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.

Profits for the year ending on March 31, 2015, March 31, 2016, and March 31, 2017, were ₹ 12,000, ₹ 16,000 and ₹ 14,000, respectively. Profits were shared in the ratio of capital.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

Working Notes:

1. Rockey’s Share of Profit = Previous Year’s Profit × Proportionate Period × Share of Deceased Partner

=

2. Rockey’s Share of Goodwill

Goodwill of a firm = Average profit × Numbers of Year’s Purchase

Goodwill of a firm = 14,000 × 2 = ₹ 28,000

3. Gaining Ratio = New Ratio − Old Ratio

Gaining Ratio between Prateek and Kushal = 9:4 or 3:2

4. Interest on Capital for 3 months, i.e. from April 1, 2017, to June 30, 2017

Amount of × Rate of Interest × Period

10. Narang, Suri and Bajaj are partners in a firm, sharing profits and losses in the proportion of 1/2, 1/6 and 1/3, respectively. The Balance Sheet on April 1, 2015, was as follows:

Bajaj retires from the business, and the partners agree to the following:

a) Freehold premises and stock are to be appreciated by 20% and 15%, respectively.

b) Machinery and furniture are to be depreciated by 10% and 7%, respectively.

c) Bad Debts reserve is to be increased to ₹ 1,500.

d) Goodwill is valued at ₹ 21,000 on Bajaj’s retirement.

e) The continuing partners have decided to adjust their capital in their new profit-sharing ratio after the retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.

Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

Working Notes:

1. Bajaj Share in Goodwill = Total Goodwill of the firm x Retiring partner’s share =

2. Gaining Ratio = New Ratio – Old Ratio

Gaining Ratio between Narang and Suri = 3:1

3. Calculation of New Capitals of the existing partners.

Based on the new profit-sharing ratio of 3:1

NOTE:

i. In the given question, Suri’s Capital is ₹ 30,000 instead of ₹ 20,000.

ii. Due to an insufficient balance in Bajaj’s Capital Account, the amount due to Bajaj is transferred to his Loan Account.

11. The Balance Sheet of Rajesh, Pramod and Nishant, who were sharing profits in proportion to their capitals, stood as on March 31, 2015:

Pramod retired on the date of the Balance Sheet, and the following adjustments were made:

a) Stock was valued at 10% less than the book value.

b) Factory buildings were appreciated by 12%.

c) Reserve for doubtful debts be created up to 5%.

d) Reserve for legal charges to be made at ₹ 265.

e) The goodwill of the firm be fixed at ₹ 10,000.

f) The capital of the new firm be fixed at ₹ 30,000. The continuing partners decide to keep their capital in the new profit-sharing ratio of 3:2.

Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance from Pramod’s Capital account to his loan account.

Working Notes:

1) Pramod’s share of goodwill = Total goodwill of the firm × Retiring partner’s share =

2) Gaining Ratio = New Ratio − Old Ratio

Gaining Ratio between Rajesh and Nishant = 2:1

NOTE: In the above solution, in order to adjust the capital of remaining partners in the new firm according to their new profit-sharing ratio, the surplus or the deficit of the Capital Account is transferred to their Current Account. But, in order to match the answer with that given in the book, the surplus or the deficit amount of the Partners’ Capital Account will either be withdrawn or brought in by the old partners. This treatment will be shown in the Partners’ Capital itself, and no need to transfer the surplus or deficit capital balance to their Current Accounts. The following Journal entry is passed for recording the withdrawal of surplus capital by the partners.

If existing partners withdraw their excess capital,

Journal entry will be as follows:

12. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2016.

The partners have been sharing profits in the ratio of 5:3:2. Malik decided to retire from the business on April 1, 2016, and his share in the business is to be calculated as per the following terms of revaluation of liabilities and assets: Stock, ₹ 20,000; Office furniture, ₹ 14,250; Plant and Machinery, ₹ 23,530; Land and Building, ₹ 20,000.

A provision of ₹ 1,700 is to be created for doubtful debts. The goodwill of the firm is valued at ₹ 9,000.

The continuing partners agreed to pay ₹ 16,500 as cash on the retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as a loan.

Prepare the Revaluation Account, Capital Account, and Balance Sheet of the reconstituted firm.

Working Note:

1) Malik’s share of goodwill = Total Goodwill × Retiring Partner Share =

2) Gaining Ratio = New Ratio – Old Ratio

Gaining Ratio between Jain and Gupta = 10:6 or 5:3

13. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2016, stood as follows:

Bharti died on June 12, 2016, and according to the deed of the said partnership, her executors are entitled to be paid as under:

(a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.

(b) Her proportionate share of the reserve fund.

(c) Her share of profits for the intervening period will be based on the sales during that period, which was calculated as ₹ 1,00,000. The rate of profit during the past three years had been 10% on sales.

(d) Goodwill, according to her share of profit, is to be calculated by taking twice the amount of the average profit of the last three years, less 20%. The profits of the previous years were:

2013 – ₹ 8,200

2014 – ₹ 9,000

2015 – ₹ 9,800

The investments were sold for ₹ 16,200, and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Working Notes:

1. Bharti’s share of profit = Profit is 10% of sales

Sales during the last year for that period was ₹ 1, 00,000

If sales are ₹ 1,00,000, then the profit is ₹ 10,000

2. Bharti’s Share of Goodwill

Goodwill of the Firm = Average Profit × Number of Years Purchase

Or, 9,000 − 20% of 9,000 = 9,000 − 1,800 = ₹ 7,200

Goodwill of the Firm = 7,200 × 2 = ₹ 14,400

3. Gaining Ratio = New Ratio − Old Ratio

Gaining ratio between Arti and Seema = 3:1

4. Interest on Capital for 73 days, i.e. from April 1, 2016, to June 12, 2016

Interest on capital = Amount of Capital × Ratio of Interest × Period

14. Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2015, was as follows:

Mithya died on August 1, 2015. The agreement between the executors of Mithya and the partners stated that:

(a) Goodwill of the firm be valued at  times the average profits of the last four years. The profits for four years were: in 2011-12, ₹ 13,000; in 2012-13, ₹ 12,000; in 2013-14, ₹ 16,000; and in 2014-15, ₹ 15,000.

(b) The patents are to be valued at ₹ 8,000, Machinery at ₹ 25,000 and Premises at ₹ 25,000.

(c) The share of profit of Mithya should be calculated on the basis of the profit of 2014-15.

(d) ₹ 4,200 should be paid immediately, and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also, prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2015, after giving effect to the adjustments.

Working Notes:

1.

2. Mithya’s Share of Profit:

Previous Year’s Profit × Proportionate Period × Share of Profit

3. Mithya’s Share of Goodwill

Goodwill of a firm = Average Profit × Number of Year’s Purchase

4. Gaining Ratio = New Ratio – Old Ratio

Gaining Ratio between Nithya and Sathya = 5:3

Concepts Covered in Class 12 Accountancy Chapter 4

• Ascertaining the amount due to a retiring or deceased partner
• New profit sharing ratio
• Gaining ratio
• Treatment of Goodwill
• Adjustment of the partner’s capital
• Death of a partner

Conclusion

NCERT Solutions for Class 12 Accountancy Chapter 4 provides a wide degree of illustrative examples, which assists the students in comprehending and learning quickly. The above-mentioned solutions are according to the Class 12 CBSE syllabus. For more solutions and study materials of NCERT solutions for Class 12 Accountancy, visit BYJU’S or download the App for more information.

Also, explore – 

NCERT Solutions for Class 12 Accountancy Part I