Chapter 5 - Reconstitution Of Partnership (Death Of Partner) Book Keeping Accountancy Solutions for Class 12 Commerce Accountancy

Objective Questions :
Answer in one Sentence :
What is gaining ratio or benefit ratio?

ANSWER:

Gaining ratio is the ratio in which the continuing partners acquire the deceased partner’s share. It is calculated on the eve of retirement or death of a partner for adjusting the retiring or deceased partner’s share of goodwill. The formula for calculation of gaining ratio is as follows:
Gaining Ratio = New Ratio – Old Ratio

How is gaining ratio calculated?

ANSWER:

Gaining ratio is calculated as the difference between the new ratio and old ratio. The formula for calculation of gaining ratio is as follows:
Gaining Ratio = New Ratio – Old Ratio

When is gaining ratio required to be calculated?

ANSWER:

Gaining ratio needs to be calculated at the time of retirement or death of a partner for adjusting the retiring (or deceased) partner’s share of goodwill.

How would you treat general reserve on death of a partner?

ANSWER:

The amount of general reserve is transferred to the capital accounts of all the partners in their profit sharing ratio. This is done to give the deceased partner’s nominee the required amount of share in profits of the firm. So, All Partners’ Capital Accounts are credited with their respective shares.

How much amount due to the deceased partner is calculated?

ANSWER:

The heir of the deceased partner is entitled to receive the amount standing to the credit of Deceased Partner’s Capital Account, his share in goodwill, share in profits, revaluation of assets and liabilities, interest on capital etc. Moreover, amounts, such as share in accumulated losses, drawings, interest on such drawings etc. are debited. After making all the above adjustments, the amount standing in his/her capital account is transferred to a new account opened in the name of his/her executor.

How is amount due to deceased partner settled?

ANSWER:

Payment to the deceased partner’s executor is made as stated in the partnership deed. The executor may be paid in full, i.e. in one instalment or in more than one instalment.  In case the payment is made in instalments, the executor is entitled to interest @ 6% p.a. unless otherwise agreed, till the amount due to him/her is not paid.

How is the share of the deceased partner in accrued profit calculated?

ANSWER:

The share of a deceased partner in a firm’s profit can be calculated in two ways, i.e. on the basis of time or sales. Based on time, the profits are assumed to have arisen uniformly over the year and the deceased partner’s share is calculated according to the number of months he/she was alive during the year. In case sales are used as a base, we need sales for the year and sales up to the date of death and accordingly, the rate of profit to sales can be calculated.

How is a debit balance of profit and loss account dealt with on death of a partner?

ANSWER:

Debit balance of Profit & Loss Account represents accumulated losses. So, it is transferred to the debit side of All Partners’ Capital Accounts in their old profit sharing ratio.

Give a word / term / phrase which can substitute each of the following statements :

The account which shows revaluation of assets and liabilities.

ANSWER:

Revaluation or Profit and Loss Adjustment Account

Explanation: The account which shows revaluation of assets and liabilities is called Revaluation or Profit and Loss Adjustment Account. This account records the revised values of assets and liabilities, so that the deceased partner’s heir can be paid his share of profits that the firm has earned till the date of his death.

Excess of credit side over debit side of revaluation account.

ANSWER:

Profit on revaluation

Explanation: Excess of credit side over debit side of Revaluation Account is regarded as  profit on revaluation. This profit is transferred to All Partners’ Capital Accounts in their old profit-sharing ratio (including the deceased partner).

The method under which payment is made to retiring partner in instalment.

ANSWER:

Instalment method

Explanation: Under instalment method, the payment to a retiring partner is made in instalments. In this method, the payment is not made in one instalment (lump sum); rather, the amount due is paid off in instalments. Moreover, the executor is entitled to interest @ 6% p.a. (unless agreed otherwise) on outstanding amount till it remains unpaid.

Excess of proportionate at capital over actual capital.

ANSWER:

Deficit capital

Explanation: Excess of proportionate capital over actual capital represents deficit capital. This implies that the existing capital of the partners is less than what the capital should be on proportionate basis. The amount of deficit capital must be brought in by the old partners or it is to be transferred to their current accounts.

The account to which deceased partners capital balance is transferred.

ANSWER:

Deceased Partner’s Executors’ Loan Account

Explanation: The account to which deceased partner’s capital balance is transferred is known as Deceased Partner’s Executors’ Loan Account. The amount due is transferred to this account because actually, the payment is required to be made to the heirs of the deceased partner. The payment may be made in full, i.e. in one instalment or in more than one instalment.

The partner who died.

ANSWER:

Deceased partner

Explanation: The partner who died is a deceased partner, whose legal heirs are entitled to the amount due and the rights which the deceased partner had.

A person who represents the deceased partner.

ANSWER:

Legal heir or executor

Explanation: The person who represents the deceased partner is his legal heir or executor. This person is entitled to receive the amount due to the deceased partner.

Select the most appropriate answer from the alternatives given below :

Gaining ratio is calculated on ___________.
a) admission of a partner
b) retirement of a partner
c) death of a partner
d) retirement or death of a partner

ANSWER:

Gaining ratio is calculated on retirement or death of a partner.

Explanation: The gaining ratio is calculated for adjusting the retiring or deceased partner’s share of goodwill. The remaining partners compensate the outgoing partner (retiring or deceased as the case may be) by payment of premium for goodwill in the ratio in which they gain.

Gaining ratio is the ratio in which ________________.
a) the old partner gains on admission of a new partner
b) the goodwill of a new partner on admission is credited to old partners
c) the continuing partner’s benefits on retirement or death of a partner
d) none of the above

ANSWER:

Gaining ratio is the ratio in which the continuing partners benefit on retirement or death of a partner.

Explanation: On the eve of retirement or death, the remaining (continuing) partners acquire the outgoing (retiring or deceased as the case may be) partner’s share. The ratio in which the continuing partners acquire (gain) the outgoing partner’s share is termed as gaining ratio.

Share of profit of a deceased partner till the date of death is _________________.
a) debited to P/L Adjustment A/c
b) credited to P/L Adjustment A/c
c) debited to P/L Suspense A/c
d) credited to P/L Suspense A/c

ANSWER:

Share of profit of a deceased partner till the date of death is debited to P/L Suspense A/c.

Explanation: The executor of a deceased partner, apart from the other things, is also entitled to a share in profits till the date of his death. Also, it is not possible for any firm to close its books of accounts at any time (during an accounting period). Therefore, in case of death, profits are calculated either on the basis of time or on the basis of sales or turnover. The amount of profit or loss so ascertained is dispensed to the deceased partner through the Profit and Loss Suspense Account.

An amount received from the Insurance Company against the joint life policy is __________.
a) debited to deceased partner
b) credited to deceased partner
c) credited to continuing partners capital A/c
d) credited to all partners capital A/c in their profit sharing ratio.

ANSWER:

An amount received from the Insurance Company against the joint life policy is credited to all partners’ capital A/c in their profit sharing ratio.

Explanation: Joint life policy is an insurance policy purchased by a firm on the joint lives of all the partners. In this manner, it is an asset of the firm. So, every partner, including the deceased partner, has as much right on it as the other (continuing) partners. Therefore, on the death of any one partner, the amount received from the insurance company against the joint life policy is credited to All Partners’ Capital Accounts in their old profit sharing ratio.

M.N.S. are partners in a firm having joint life policy of Rs 10,00,000 on which premium has been paid by a firm. M dies and his legal representatives want the whole amount of the policy where as N & S want to distribute the amount among all the partners.
a) M’s representatives and correct
b) N & S are correct
c) All are wrong
d) Insurance company will decide

ANSWER:

N & S are correct

Explanation: Joint life policy is an insurance policy taken by the firm on the joint lives of all the partners; so, it is an asset of the firm. Therefore, every partner, including the deceased partner, has as much right on it as the other partners. Also, in this case, the premium expense is paid by the firm. Hence, N and S are correct and the amount received from the policy must be distributed amongst all the partners in their old profit sharing ratio.

State whether the following statements are true or false :

Retiring partner is entitled to his share of goodwill.

ANSWER:

True

Explanation: The remaining/continuing partners need to compensate the outgoing (retiring/deceased) partner. This is because after the retirement/death of a partner, the fruits of the collective past performances and reputation will be shared only by the continuing partners. Hence, the remaining partners compensate the retiring or deceased partner by entitling him/her to a share of the firm's goodwill.

Retiring partner is not entitled to his share of general reserve.

ANSWER:

False

Explanation: The retiring partner is very much entitled to his respective share in all the accumulated profits and reserves (including general reserve). Such reserves include profits which were earned by them during the previous years when the retiring partner was a partner in the firm.

The capital account of a retiring partner always shows a debit balance.

ANSWER:

False

Explanation: The capital account of a retiring partner may show a debit balance sometimes if the amount to be paid to him is less than the amount withdrawn by him from the firm. However, it is not necessary that the capital account of a retiring partner will always show a debit balance.

An amount due to a deceased partner is transferred to his executor’s loan A/c.

ANSWER:

True

Explanation: The amount due to a deceased partner is paid to his/her legal heirs. So, the amount due is transferred to his/her Executors’ Loan A/c.

If goodwill is written off retiring partner’s capital account is debited.

ANSWER:

True

Explanation: The old goodwill already existing in the books of a firm (as reflected in the Old Balance Sheet prior to retirement) is written off by debiting All Partners’ Capital Accounts (including retiring partner) in their old profit sharing ratio and by crediting the Goodwill A/c.

Death of a partner is like a compulsory retirement

ANSWER:

True

Explanation: Unlike retirement that can be planned, death may occur on any day. In case of death of a partner, all those adjustments that are generally made at the time of retirement are to be performed at the time of death compulsorily. Therefore, it is correct to say that the death of a partner is like compulsory retirement.

Total amount due to deceased partner is paid in cash to executor immediately after his death.

ANSWER:

False

Explanation: There are two methods that can be adopted for making the payment to the executor, i.e. lump-sum method or instalment method. In the lump-sum method, the payment is made in full, i.e. in one single instalment, whereas in instalment method, payment is made in more than one instalment. So, it is not compulsory to make payment immediately in cash, unless otherwise agreed. Hence, the statement is incorrect.

On the death of a partner, his share in the goodwill is divided equally among continuing partners.

ANSWER:

False

Explanation: On the death of a partner, share in goodwill is not divided equally among the continuing  partners; rather, it is shared in the gaining ratio.

Deceased Partner’s share in profit up to the date of his death will be debited to his capital A/c.

ANSWER:

False

Explanation: The deceased partner’s share in profit up to the date of his death will be credited to his capital account, as the amount is required to be paid to him. Thereafter, this amount is transferred to his Executors’ Loan Account.

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