Recording Date: March 11, 2013

IPCC: Paper 1 Accounting Chapter 14

CA. Shakuntala Chhangani

The Institute of Chartered Accountants of India

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This lecture has been delivered by faculty members to supplement the Study
Material, Practice Manual and other content

The views expressed in this lecture are of the Faculty Member.

The content of this video lecture has not been specifically discussed by the Council
of the Institute or any of its Committees and the views expressed herein may not be
taken to necessarily represent the views of the Council or any of its committees

This e-Lecture was Recorded on:

March 11, 2013

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examination.

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Retirement / Death of a Partner

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1.
2.
3.
4.
5.
6.

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Revaluation of assets and liabilities

Distribution of accumulated profits and reserves as
well as losses and deferred expenses
Calculation of new Profit Sharing Ratio (PSR) and
Gain Ratio (GR)
Goodwill Adjustment
Final settlement with retired partner or legal heirs of
deceased partner
Proportionate Capital Adjustment
5

The adjustment is same as that of admission

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The adjustment is same is that of admission

Hints for solving question :

1. If the question gives old PRS and one partner
retires, then :
New PSR of continuing partners = Their old PSR
GR
= Old PSR of continuing partners

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Example 1 :
A, B and C were partners sharing profits in the ratio
of 3:2:1. B retires. Find new PSR and GR.

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New PSR

A
3

GR

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B
2
:

C
1
1

10

2.

a)
b)

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If the question gives old PSR and also the ratio

(i.e. GR) in which retiring partners share is
acquired by the continuing partners, then :
Steps :
Share Acquired = Share of retiring partner X GR
New PSR = Old PSR + Share Acquired
GR = Given in the question

11

Example 2 :
A, B and C were partners sharing profits in the ratio
of 3:2:1. B retires. Bs share was acquired by A and
C in the ratio of 2:1. Find new PSR and GR.

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Share Acquired =
A
=
=
B
=
=

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Retiring partners share X GR

2/6 X 2/3
4/18
2/6 X 1/3
2/18

13

3.

a)
b)

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If the question gives old PSR and also share of

retiring partner acquired by the continuing
partners, then :
Steps :
New PSR = Old PSR + Share Acquired
GR = Ratio of share acquired by continuing
partners

14

Example 3 :
A, B and C were partners sharing profits in the ratio
of 3:2:1. B retires. Bs share was acquired by A as
4/18 and C in the ratio of 2/18. Find new PSR and
GR.

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Share acquired
A
C
New PRS
A

GR

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=
=
=
=
=
=
=
=
=
=
=

4/18
2/18
Old PRS + Share acquired
3/6 + 4/18
9+4
18
13/18
1/6 + 2/18
3+2
18
5/18
4/18 : 2/18
i.e. 2:1

16

4.
a)

b)

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If the question gives old PSR as well as new PSR,

then check if
If the old PSR of continuing partners is same as
their new PSR then
GR = Old PSR
Else GR = New PSR Old PSR

17

Example 4:
A, B and C were partners sharing profits and losses
in the ratio of 3:2:1. B retires and A and C decide to
share future profits in 3 : 1. Calculate Gain Ratio.

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Old PSR
New PSR
GR

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A
3
3
3

B
2

C
1
1
1

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Example 5:
A, B and C were partners sharing profits and losses
in the ratio of 3:2:1. B retires and A and C decide to
share future profits in 2 : 1. Calculate Gain Ratio.

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A
Old PSR
New PSR
GR
=
A
=
=

GR

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=
=
=
=
=

3
2
New PSR Old PSR
2/3 3/6
43
6
1/6
1/3 - 1/6
2 -1
6
1/6
1/6 : 1/6
i.e 1:1

1
1

21


a)

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Goodwill appears in the books of accounts :

Book value of goodwill < market value of goodwill
Difference = Raised
Entry :
Goodwill A/c
Dr. XX
To Partners Capital A/c
XX
(Old PSR)

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b)

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Book value of goodwill > market value of goodwill

Difference = Written off
Entry :
Partners Capital A/c
Dr. XX
To Goodwill A/c
XX
(Old PSR)

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c)

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Book value of goodwill = market value of goodwill

No further adjustment is required

24

Goodwill does not appear in the books of accounts :

In this case, Goodwill account is raised. Goodwill
can be raised as under :
a) Retiring partners share of goodwill is raised
OR
a) Total goodwill is raised

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a)

1.

2.

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Retiring partners share of goodwill is raised

Continuing Partners Capital A/c Dr. XX
To Goodwill A/c
(GR)
Goodwill A/c
Dr. XX
To Retiring Partners Capital A/c
or

XX

XX

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Net Entry :
Continuing Partners Capital A/c Dr.
To Retiring Partners Capital A/c
(GR)

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XX

XX

27

Example 1:
A, B and C were partners sharing profits in the ratio
of 3:2:1. B retires and Bs share was acquired by A
and C in the ratio of 3:2. Goodwill of the firm was
Rs. 6,00,000 at the time of Bs retirement. Show
goodwill adjustment.

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Bs share of Goodwill
Accounting entries :
(1) Ac Capital A/c
Cs Capital A/c
To Goodwill A/c
(2) Goodwill A/c
To Bs capital A/c
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= 6,00,000 x 2/6
= Rs. 2,00,000
Dr. 1,20,000
Dr. 80,000
Dr. 2,00,000

2,00,000
2,00,000
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OR
As Capital A/c
Cs Capital A/c
To Bs Capital A/c

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Dr.
Dr.

1,20,000
80,000
2,00,000

30

b)
1.

2.

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Total goodwill is raised

Goodwill raised in old PSR :
Goodwill A/c
To old Partners Capital A/c

Dr.

XX

Goodwill written off in new PSR :

Continuing Partners Capital A/c Dr.
To Goodwill A/c

XX

XX

XX
31

JLP can be taken jointly or severally.

JLP is the asset of the firm in which all the partners
have a share
JLP can be accounted for under three methods

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32

JLP treated as an expense :

(1) Premium paid :
JLP Premium A/c
Dr.
XX
To Cash / Bank A/c
XX
(2) JLP Premium transferred to P/L A/c at the year end :
Profit and Loss A/c Dr.
XX
To JLP Premium A/c
XX

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(3) At the time of receipt of JPL amount :

A/c
(a) Amount received :
Bank A/c
Dr.
XX
To JLP A/c
XX
(b) Balance in JLP A/c transferred to Partners capital A/c :
JLP A/c
Dr.
XX
To Partners Capital A/c
XX

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Example 1 :
A, B and C were partners sharing profits in the ratio of
3:2:1. They took a Joint life policy on the combined life of
all the partners for Rs. 1,00,000 on 1.4.2009. Annual
premium on the policy was Rs. 10,000. B died on 1.4.2011.
Show the accounting treatment in the books of the firm
assuming that the policy was treated as an expense in the
books of the firm.

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Journal Entries :

Date

Particulars

1.4.2009

JLP Premium A/c

Debit (Rs.)
Dr.

10,000

To Bank A/c
31.3.2010

Profit and Loss A/c

10000
Dr.

10,000

To JLP Premium A/c

1.4.2010

JLP Premium A/c

10,000
Dr.

10,000

To Bank A/c
31.3.2011

Profit and Loss A/c

10000
Dr.

10,000

To JLP Premium A/c

1.4.2011

Bank A/c

10,000
Dr.

1,00,000

To JLP A/c
1.4.2011

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JLP A/c

Credit (Rs.)

1,00,000
Dr.

1,00,000

To As Capital A/c

50,000

To Bs Capital A/c

33,333

To Cs Capital A/c

16,667
36

JLP Treated as an asset :

(1) Premium paid :
JLP A/c
Dr. XX
To Cash / Bank A/c
XX
(2) Difference between the book value and surrender
value of JLP written off to P/L A/c at the year end :
Profit and Loss A/c
Dr. XX
To JLP A/c
XX

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(3) At the time of receipt of JPL amount :

(a) Amount received :
Bank A/c
Dr. XX
To JLP A/c
XX
(b) Balance in JLP A/c transferred to Partners
capital A/c :
JLP A/c
Dr. XX
To Partners Capital A/c
XX
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Example 2 :
A, B and C were partners sharing profits in the ratio of
3:2:1. They took a Joint life policy on the combined life of
all the partners for Rs. 1,00,000 on 1.4.2009. Annual
premium on the policy was Rs. 10,000. B died on 1.4.2011.
Show the accounting treatment in the books of the firm
assuming that the policy was treated as an asset in the
books of the firm. The surrender value of the policy was Rs.
3,000 on 31.3.2010 and Rs. 8,000 on 31.3.2011.

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Journal Entries
Date

Particulars

1.4.2009

JLP A/c

Debit (Rs.)
Dr.

10,000

To Bank A/c
31.3.2010

Profit and Loss A/c

10,000
Dr.

7,000

To JLP A/c
1.4.2010

JLP A/c

7,000
Dr.

10,000

To Bank A/c
31.3.2011

Profit and Loss A/c

10,000
Dr.

5,000

To JLP A/c
1.4.2011

Bank A/c

5,000
Dr.

1,00,000

To JLP A/c
1.4.2011

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JLP A/c

Credit (Rs.)

1,00,000
Dr.

92,000

To As Capital A/c

46,000

To Bs Capital A/c

30,667

To Cs Capital A/c

15,333
40

Dr.

Joint Life Policy Account

Date
1.4.09

Rs.
To Bank A/c

Cr.

Date

10,000 31.3.10
31.3.10

Rs.
By P & L A/c

7,000

By Balance c/f

3,000

10,000
1.4.10

To Balance b/f

1.4.10

To Bank A/c

3,000 31.3.11
10,000 31.3.11

10,000
By P & L A/c

5,000

By Balance c/f

8,000

13,000
1.4.11

To Balance b/f

1.4.11

To Capital A/c:
A

46,000

30,667

15,333

8,000 1.4.11

By Bank A/c

1,00,000

92,000
1,00,000

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13,000

1,00,000
41

JLP Treated as an asset and JLP Reserve is

created :
(1) Premium paid :
JLP A/c
Dr. XX
To Cash / Bank A/c
XX
(2) JLP Reserve is created at the year end :
Profit and Loss Appropriation A/c Dr. XX
To JLP Reserve A/c
XX

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(3) Difference between the book value and surrender

value of JLP written off to JLP Reserve A/c at the
year end :
JLP Reserve A/c
Dr. XX
To JLP A/c
XX
(4) At the time of receipt of JPL amount :
(a) Amount received :
Bank A/c
Dr. XX
To JLP A/c
XX
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(b) JLP Reserve transferred to JLP A/c :

JLP Reserve A/c
Dr. XX
To JLP A/c
XX
(c) Balance in JLP A/c transferred to Partners
capital A/c :
JLP A/c
Dr. XX
To Partners Capital A/c
XX
*Balance in JLP A/c may, alternatively, be transferred
to Revaluation A/c also.
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Example 3 :
A, B and C were partners sharing profits in the ratio of
3:2:1. They took a Joint life policy on the combined life of
all the partners for Rs. 1,00,000 on 1.4.2009. Annual
premium on the policy was Rs. 10,000. B died on 1.4.2011.
Show the accounting treatment in the books of the firm
assuming that the policy was treated as an asset along with
JLP Reserve in the books of the firm. The surrender value
of the policy was Rs. 3,000 on 31.3.2010 and Rs. 8,000 on
31.3.2011.

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45

Journal Entries
Date

Particulars

1.4.2009

JLP A/c

Debit (Rs.)
Dr.

10,000

To Bank A/c
31.3.10

10,000

Profit and Loss Appropriation A/c Dr.

10,000

To JLP Reserve A/c

31.3.2010

JLP Reserve A/c

10,000
Dr.

7,000

To JLP A/c
1.4.2010

JLP A/c

7,000
Dr.

10,000

To Bank A/c
31.3.11

10,000

Profit and Loss Appropriation A/c Dr.

10,000

To JLP Reserve A/c

31.3.2011

JLP Reserve A/c

To JLP A/c

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Credit (Rs.)

10,000
Dr.

5,000
5,000

46

1.4.2011

Bank A/c

Dr.

1,00,000

To JLP A/c
1.4.2011

JLP Reserve A/c

1,00,000
Dr.

8,000

To JLP A/c
1.4.2011

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JLP A/c

8,000
Dr.

1,00,000

To As Capital A/c

46,000

To Bs Capital A/c

30,667

To Cs Capital A/c

15,333

47

Dr.

Joint Life Policy Account

Date

1.4.09

Rs.

To Bank A/c

Date

10,000 31.3.10
31.3.10

To Balance b/f

1.4.10

To Bank A/c

7,000

By Balance c/f

3,000
10,000

3,000 31.3.11
10,000 31.3.11

By JLP Reserve A/c

5,000

By Balance c/f

8,000

13,000

13,000

1.4.11

To Balance b/f

8,000 1.4.11

1.4.11

To Capital A/c:

1.4.11

50,000

33,333

16,667

By Bank A/c

1,00,000

By JLP
Reserve A/c

8,000

1,00,000
1,08,000

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Rs.

By JLP Reserve A/c

10,000
1.4.10

Cr.

1,08,000
48

Dr.

Joint Life Policy Reserve Account

Date

Particulars

Rs.

Date

31.3.10

To JLP A/c

7,000 31.3.10

31.3.10

To Balance c/f

3,000

Particulars
By P & L App.
A/c

10,000
To JLP A/c

5,000 1.4.10

By Balance b/f

31.3.11

To Balance c/f

8,000 31.3.11

By P & L App.
A/c

13,000
To JLP A/c

8,000 1.4.11
8,000

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Rs.
10,000
10,000

31.3.11

1.4.11

Cr.

3,000
10,000
13,000

By Balance b/f

8,000
8,000

49

Final distribution amongst the partners :

1) JLP treated as an expense :

Amount received

2)

JLP treated as an asset :

Book value of JLP Amount received

3)

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JLP treated as an asset and JLP reserve is created

(Book value of JLP Amount received) + JLP Reserve

50

When joint life policy does not appear in the books

and one of the partners retires and it should not be
shown into the books:
Continuing partners capital A/c Dr. XX
To Retiring Partners Capital A/c
XX

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Balance in his Capital Account PLUS

Balance in his Current Account PLUS
His share of profit upto the date of his retirement or
death
His share of Reserves and undistributed
profits/losses
His share in Revaluation profit or loss
Interest on capital, salary etc. only if mentioned in
partnership deed

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A separate account called Profit and Loss

Suspense A/c
It appears on the Assets side of the balance sheet
prepared immediately after the retirement of a
partner.
Profit and Loss Suspense A/c is closed by
transferring it to Profit and Loss A/c at the year end
The continuing partners are entitled to remaining
profits according to their mutual understanding.

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Section 37 is applicable when the deceased

partners dues are not settled immediately.
In the absence of an agreement, the retired partner
or the legal heirs of deceased partners legal heirs
are entitled to choose any one of the following :
(a) 6% p.a. simple interest on the outstanding
balance from the date of retirement /death to the
date of settlement or closing date

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(b) Profit from date of retirement

or death till the date of
Settlement or closing date

x outstanding balance of retired /

deceased partner
.
Total Capital employed including
outstanding balance as above

Important Note :
If the outstanding balance of retired / deceased partner includes his
share of goodwill, interest on capital, remuneration, share in JLP etc.,
other partners capital account shall also include the same only for
the purpose of above calculation.

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Ram, Shyam and Ravan were partners sharing profits in the ratio of
3:2:1. Their capital balances as on 31.3.2012 were Rs. 4,00,000, Rs
3,50,000 and Rs. 5,00,000 respectively. On this date General
Reserve balance was Rs. 1,20,000. Ram died on 1.7.2012. Goodwill
of the firm was valued at Rs. 7,20,000. Revaluation loss as on
1.7.2012 was Rs. 2,40,000. Amount due to Rams legal heirs was
settled on 1.10.2012. The firm had taken a Joint life policy for Rs.
4,50,000. The firm made a profit of Rs. 3,00,000 during the year
ended on 31.3.2013. You are required to calculated the profit to be
given to Rams legal heirs.

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Dr.

Capital Account
Ram

To revaluation loss A/c

120000

To Rams legal heirs A/c

962500

To balance b/f

Shyam
80000

725000

Kamal
40000

687500

Ram
By bal. b/f

805000

Shyam

Kamal

400000

350000

500000

By general Res.

60000

40000

20000

By goodwill A/c

360000

240000

120000

BY JLP A/c

225000

150000

75000

37500

25000

12500

1082500

805000

727500

By net profit
(3 months)
1082500

Cr.

727500

Profit for 3 months from1.4.2012 to 1.7.2012

:
Profit for the year

Rs. 3,00,000

Profit from 1.4.2012 to 1.7.2012

Rs. 3,00,000 x 3/12

Rs. 75,000

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a)

b)

Applicability of section 37 :
Rams legal heirs can choose any one of the following :
6% per annum simple interest on Rs. 9,62,500 from 1.7.2012 to
1.10.2012
i.e. 9,62,500 x 6% x 3/12
=
Rs. 14,438
Share of profit i.e
(3,00,000 x 3/12) X .
9,62,500
.
(9,62,500 + 7,25,000 + 6,87,500)
= 75,000 x 9,62,500
=
Rs. 30,395
23,75,000
Rs. 30,395 being the higher amount will be chosen by the legal
heirs of Ram

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Amount of final settlement :

Outstanding balance of Ram as per
Capital Account
Rs. 9,62,500
(+) Share of profit as per section 37 Rs. 30,395
Total outstanding amount
Rs. 9,92,895

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Same as that of admission of Partner :

Proportionate capital calculated in new PSR of
continuing partners following instructions given in
the question

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