RECONSTITUTION OF PARTNERSHIP FIRM -- RETIREMENT / DEATH OF A PARTNER H.S. 2nd Year ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary PART-A UNIT -4




ACCOUNTANCY
A
UNIT -4

RECONSTITUTION OF PARTNERSHIP FIRM
RETIREMENT / DEATH OF A PARTNER


1. Why treatment of goodwill is necessary on retirement or death of a partner?
Ans: Goodwill is the reputation or fame of the business; it creates extra earning for the business. Goodwill is the result of hard working, dedication, devotion, skill etc., of the all partners. When a partner retires or dies he leaves behind the reputation of the business which was earned by his efforts also. After the retirement or death, the benefit of the goodwill is enjoyed by the remaining partners. Therefore, it becomes the lawful right of the outgoing partners to received compensates from the firm on his retirement or death. Therefore, treatment of goodwill becomes necessary on retirement or death of a partner.
   
2. Why revaluation of assets and liabilities is necessary on retirement or death of a partner?
Ans: Assets and liabilities shown on the balance sheet before retirement or death of a partner may not show the true value. With the passage of time the value of some assets and liabilities increases while the values of some others may decreases. On retirement or death, the partner would like that all the assets and liabilities of the firm are shown in the balance sheet at their genuine value. So, there is a need to revalue the assets and liabilities on retirement or death of a partner. This is mutually done by old partners and new partners.

3. How would you compute the amount due to a retiring partner?
Ans: The amount due to the retiring partner is paid off according to the agreement between the partners. Retiring partner’s total claim has to be first ascertained by preparing capital account of the retiring partner, before the final payment is made to him. A brief account of what is to be credited and debited to retiring partner account is given below:-
CREDIT:-
(i) Opening balance of capital and current account due to him.
(ii) Interest on capital.
(iii) Share in goodwill.
(iv) Share in revaluation profits.
(v) Share in accumulated profit and reserves.
(vi) Share in current year profits, if any i.e. from the closing of previous year account to the date of retirement.
(vii) Share in life policy surrender value.
(viii) Liabilities taken over by partner.   
       
DEBITS:-
(i) Opening balance of capital and current account due from him.
(ii) Interest on drawings.
(iii) Drawings.
(iv) Share in accumulated losses.
(v) Asset taken over by retiring partner.
(vi) Share in revaluation loss.
(vii) Share in current year losses, if any.
If the total of credit side is more than the debit side, the difference is the amount due to him and in case the total of debit side is more than the total of credit side, the difference is the sum due by him to the firm.

4. How would you compute the amount due to a deceased Partner’s Executor?
Ans: On the death of a partner, the legal heir or the executor of the deceased partner is entitled to get the claim as per the provisions of partnership deed. Like a retiring partner, the deceased partner’s legal heir is also entitled to get the following:
a. The amount standing to the credit of his account.
b. Share of goodwill.
c. Interest on capital, if provided in the partnership deed.
d. Share of profit or loss on revaluation of assets and liabilities.
e. Share of profit up to the date of his death.
f. Share of undistributed reserves, surplus and accumulated losses.
g. Share of joint life policy.
The following specimen of deceased partner’s capital will help to find out the amount due to the deceased partner.
The balancing figure in capital account is transferred to a loan account opened in the name of the executor of the deceased partner and the remaining partner will determine as to how the amount will be paid off. In the absence of any agreement it is provided by section 37 of Indian Partnership Act, the estate of a deceased partner has the option either to claim interest on the amount of his share in the property of the firm @ of 6% p.a. or to such a share of the subsequent profits as may be attributable to the use of his share of the property of the firm.

5. What is Joint Life Policy?
Ans: Joint life policy means a policy taken by the firm jointly for the life of all partners, premium on joint life policy is paid by the firm.

6. What is Surrender Value?
Ans: When a policy is discontinued or terminated the amount which is paid by the insurance company to the firm is called surrender value.

7. State the circumstance or situation when revaluation account is prepared?
Ans: (i) On admission of a partner
        (ii) On retirement of a partner
        (iii) On death of a partner

8. What are the causes of retirement of a partner from a partnership firm?
Ans: Following are the causes of retirement of a partner from a partnership firm:
a. A partner may retire from the firm for various reasons such as old age, bad health, strain relationship with other partners, financial compulsions or any other reason.
b. With the consent of all other partners.
c. In accordance with the express agreement made between the partners, and
d. If the partnership is at will, by giving a notice in writing to all other partners of his intention to retire.
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