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RETIREMENT OF A PARTNER:
We have discussed the accountancy problems that arise on admission of a new partner.
In this character, we shall look at the problems that arise on retirement or death of a partner which are;
(a) Treatment of Goodwill
(b) Revaluation of Assets and liabilities
a) Treatment of Goodwill
on the retirement or death of a partner, his share of Goodwill will have to be valued in according with the terms of the partnership Deed, and in the absence of such provision in the Deed, by mutual agreement or understanding among the partner. Then one of the following courses may be adopted to give to the distribution in the Books of Accounts.
- Goodwill raised in the Books:
Entries are
Debit Goodwill Account,
Credit: are all partners’ (including retiring) Capital Accounts in their profit sharing proportions.
ii) Goodwill raised in the Books but immediately written off Entries are;
Debit Goodwill Account
Credit All partners’ (including retiring) capital Access in their profit sharing proposition.
Debit Remaining partner’ (In new profit sharing proportion)
Credit: Goodwill Account.
iii). Only Goodwill share of the retiring partner is brought into books. The entry is,
Debit Goodwill Account
Credit Retiring partner (with his share)
It is advisable to write – off the goodwill to the remaining partners in the ratios in which they gain on the retirement.
It may be noted carefully that if Goodwill Account already exists in the books, entries for raising Goodwill should be made only for difference.
Illustration; Mukosa, Mosoke and Ochieng are partners sharing profit in the proportion of and respectively. Mosoke retires and the Goodwill is valued at Tshs 21,600/=. No Goodwill Account appears in the books of the firm. Assuming that Mukasa and Ochieng share future profit in the ratio of 5:3, pass entries for Goodwill if (a) Goodwill is raised in the books (b)Goodwill is raised and written – off (c)Goodwill share of the retiring partner only is brought into the books.
1968 | Particular | Debit | Credit |
CASE A | Goodwill account raised | ||
Goodwill A/c | 21600 | ||
To Mukasa capital A/c(4/9) | 9600 | ||
To Musoke’s capital A/c(3/9) | 7200 | ||
To Ochieng’s A/c (2/9) | 4800 | ||
(value of Goodwill raised | |||
on Musoke’s retirement | |||
CASE B | Goodwill Account raised but w.off | ||
I) Goodwill A/c | 21600 | ||
To Mukasa’s capital A/c (4/9) | 9600 | ||
To Musoke’s capital A/c(3/9) | 7200 | ||
To ochieng’s capital A/c (2/9) | 4800 | ||
value of Goodwill raised on | |||
Musoke’s retirement | |||
II) Mukasa’s capital A/c (5/8) | 13500 | ||
Ochieng’s capital A/c(3/8) | 8100 | ||
To Goodwill A/c | 21600 | ||
C Goodwill written off to | |||
remaining partners in their | |||
new profit sharing ratio | |||
CASE C | Only Musoke’s share of | ||
Goodwill | |||
7200 | |||
To Musoke’s capital account | 7200 | ||
C Musoke’s share (3/9) of | |||
Goodwill will be paid. | |||
II) Mukasa’s capital A/c(13/24) | 3900 | ||
Ochieng’s capital A/c(11/24) | 3300 | ||
Musoke’s capitl A/c | 7200 |
REVALUATION OF ASSETS AND LIABILITIES
After ascertaining the share of good will payable to the retiring partner. The next problem that arises in the revolution of assets and liabilities for the purpose of ascertaining the fair amount due to the out-going partner in respect of his share of firm’s assets.
Even if the partnership deed is silent on this point Assets and liabilities should normally be valued. The partner can, of course, agree not to revolve the assets and liabilities either on retirement or death or on both but such provision in the Deed is, that the balance of his capital Account represents his true interest in the partnership. Apart from the question of Goodwill which has already been dealt with some of the assets may have appreciated in value without any adjustment having been made in the books, whilst others may have been insufficiently depreciated or completely written-off.
A Revolution Account for profit and loss Adjustment (is prepared to which all differences in value are debited or credited as the case may be and the resultant balance is transferred to all the partners including retiring) in the old profit sharing ratios. The Assets and liabilities appear in the books of the new firm at the changed values.
But if it’s desired that Assets and liabilities should continue to appear in the books at the old values. A memorandum Revolution Account is prepared. It’s balance will be transferred to all the
partner in the profit sharing ratio’s, and then the same account will be put on the reverse side and transferred to the remaining partners in the new profit sharing ratio.
partner in the profit sharing ratio’s, and then the same account will be put on the reverse side and transferred to the remaining partners in the new profit sharing ratio.
Important Hints, Any reserve or accumulated profit appearing in the books should be transferred to all partners in their old profit sharing ratios. Alternatively only the retiring partner may be credited with his share and the remaining reserve side and transferred to the remaining reserve side and transferred to the remaining reserve may continue to appear in the books and the reduced figure.
Payment to the retiring partner.
When the accounting formalities are over, the final balance standing to the credit of a retiring partner’s capital Account in paid either in cash (if cash position permit) or transferred to his loan account until it paid off. In the modern business world, some other method s are also evolved for payment of the amount such as÷
(i) Policy of survivorship assurance.
(ii) Annuity method.
(iii) Installment method
Example 1.
The balance sheet of A and B partnership, who are sharing profits and losses in the ratio 2:1 between A and B respectively as on 31st Dec 1984.
BALANCE SHEET AS AT 31ST DEC 1984
capital A | 100,000.00 | Fixed Assets | |
B | 50,000.00 | plant & machinery | 90,000.00 |
furniture and fittings | 20,000.00 | ||
current a/c A | 75,000.00 | vehicles | 50,000.00 |
B | (5,000.00) | ||
Long-term liabilities | 40,000.00 | ||
current liabilities | 20,000.00 | ||
280,000.00 | 280,000.00 |
On 1st January 1985 they decided to admit (into Partnership on the following terms;
(i) “C” to bring in Tshs.75, 000 in cash for his capital.
(ii) Profit sharing ratio to be 3:2:1 as for A, B and C respectively
(iii) Goodwill to be revalued at shs12, 000/= but is not be maintained in the books “C” is to pay for his share of goodwill
(iv) Plant and Machinery Furniture and Fittings and Vehicle to be revalued at Shs120, 000, 15,000 and 70,000 respectively.
(iv) 5% of stock is absolute. 10% of Debtors to written off
(v) Current liabilities amounting to Tshs 500/= was overlooked
(vi) Long term liabilities to forge Tshs.2000/=
(vii) A and B are to pay Tshs 8,000/= in respect of the revaluation costs
Required;
show the following: – 1. Revaluation account 2.Bank account.
DR REVALUATION ACCOUNT CR
furniture & fittings | 5,000.00 | plant & machinery | |
stocks | 4,000.00 | vehicles | 20,000.00 |
provision for bad debts | 3,000.00 | long term liabilities | 2,000.00 |
revaluation costs | current liabilities | 5,000.00 | |
A – 5333 | |||
8,000.00 | |||
To partners current A/c | |||
A – 24,667 | |||
B-12,333 | 37,000.00 | ||
57,000.00 |
DR PARTNER’S CURRENT ACCOUNT CR
Details | A | B | C | Details | A | B | C |
Balance b/d | – | 5000 | – | Balance b/d | – | – | |
revaluation costs | 5333 | 2667 | |||||
balance c/d | 105,000 | 10,000 | – | revaluation(profit) | 24667 | 12,333 | – |
105,000 | 15,000 | – | 105,000 | 15,000 | |||
A, B & C BALANCE SHEET AS AT DATE
Capital A/c A – 102,000 | Assets | ||
B – 50,000 | furniture &fittings | 15,000 | |
C – 73,000 | 225,000 | plant &machinery | 120,000 |
vehicles | 70,000 | ||
CURRENT A/C | Current Assets | ||
A – 105,000 | stock | 76,000 | |
B – 10,000 | 115,000 | bank | 85,000 |
Long-term liabilities | 38,000 | debtors 30,000 | |
current liabilities | 15,000 | less; provision .for BD 3000 | 27,000 |
, | |||
393,000 | 393,000 |
BALANCE SHEET AS AT 1ST JAN 1998
Capital S; 23750 | Fixed Assets | ||
D; 12,380 | Freehold premises | 90,000.00 | |
J; 10,000 | 45,950.00 | Motor cars | 4,000.00 |
office equipment | 2,500.00 | ||
CURRENT LIABILITIES | Current Assets | ||
Creditors | 4,800.00 | stock | 3,750.00 |
Unrecorded liabilities | 500.00 | Debtors | 2,500.00 |
cash at bank | 11,500.00 | ||
51,250.00 | 51,250.00 |
