Partner Retirement: Asset Revaluation & Adjustments
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Questions and Answers

What is the primary reason for revaluing assets and reassessing liabilities when a partner retires from a firm?

  • To accurately reflect the current financial position of the firm before the change in partnership structure. (correct)
  • To minimize the firm's overall profit.
  • To simplify the accounting process.
  • To comply with taxation laws.

How is the retiring partner's share of goodwill typically adjusted when they leave the firm?

  • It is paid in cash directly to the retiring partner, reducing the firm's cash balance.
  • It is transferred to a suspense account until the end of the fiscal year.
  • It is adjusted against the capital accounts of the continuing partners in their gaining ratio. (correct)
  • It is distributed equally among all partners, including the retiring one.

In the given scenario, what is the purpose of transferring a portion of the amount due to Aruna to her loan account?

  • To postpone a portion of the payment, allowing the firm to manage its cash flow. (correct)
  • To reduce Aruna's tax liability.
  • To increase the capital of the remaining partners.
  • To immediately settle Aruna's financial claims completely.

If the new firm's total capital is to remain the same as before Aruna's retirement and is adjusted according to the new profit-sharing ratio, what does this indicate about the remaining partners' contributions?

<p>The partners' capital accounts will be adjusted to reflect their new profit-sharing ratio, potentially requiring them to bring in or withdraw capital. (D)</p> Signup and view all the answers

How does the creation of a provision for doubtful debts affect the balance sheet?

<p>It decreases the value of sundry debtors and total assets. (C)</p> Signup and view all the answers

A firm's machinery is depreciated by 20% upon a partner's retirement. Which account is debited and which is credited to reflect this depreciation?

<p>Debit Revaluation Account, Credit Machinery Account (A)</p> Signup and view all the answers

In the given scenario, if the claim on account of Workmen's Compensation was estimated at Rs 8,000, how would this adjustment affect the Workmen’s Compensation Fund of Rs 15,000?

<p>Rs 8,000 would be used to cover the claim, and the remaining Rs 7,000 would be distributed among the partners. (D)</p> Signup and view all the answers

How does an increase in the value of Land and Building impact the Revaluation Account and partners' Capital Accounts?

<p>It results in a credit to the Revaluation Account and a credit to the partners' Capital Accounts. (A)</p> Signup and view all the answers

In the scenario where Y retires, and a provision for doubtful debts is increased to 10% of debtors, what is the impact on the revaluation account?

<p>Revaluation account will be debited by Rs 700. (A)</p> Signup and view all the answers

Goodwill is valued at Rs 36,000. X and Z share profits in the ratio of 3:1. What adjustment is needed in their capital accounts due to goodwill?

<p>X's capital decreases by Rs 27,000 ,and Z's capital decreases by Rs 9,000. (C)</p> Signup and view all the answers

An outstanding legal claim of Rs 2,500 included in sundry creditors will not arise. How does this affect the revaluation account and the partners' capital accounts?

<p>Revaluation account is credited by Rs 2,500, increasing the partners' capital accounts. (B)</p> Signup and view all the answers

The new firm's total capital is decided to be Rs 1,20,000, shared between X and Z in a 3:1 ratio. If their existing capitals (after all adjustments except this one) are Rs 90,000 and Rs 30,000 respectively, what further adjustments are required?

<p>X needs to withdraw Rs 10,000, and Z needs to bring in Rs 10,000. (A)</p> Signup and view all the answers

How would the immediate payment of Rs 9,000 to Y and the transfer of the balance to his loan account affect the accounting equation of the newly formed firm?

<p>Assets decrease, liabilities increase (Y's Loan Account), and owner's equity remains unchanged. (A)</p> Signup and view all the answers

What is the purpose of preparing a revaluation account when a partner retires?

<p>To adjust the values of assets and liabilities to their current market values. (B)</p> Signup and view all the answers

X, Y, and Z share profits and losses in the ratio of 4:3:2. Y retires. The capitals of X, Y, and Z after adjustments are Rs 65,800, Rs 57,225, and Rs 33,800 respectively. The reconstituted firm's capital is readjusted with X and Z in their future profit-sharing ratio of 4:2. What is the total capital of the new firm?

<p>Rs 99,600 (B)</p> Signup and view all the answers

X, Y, and Z share profits and losses in the ratio of 4:3:2. Following Y's retirement, the total capital of the new firm is readjusted as Rs 99,600 between X and Z in their new ratio (4:2). What amount should be paid or brought in by X?

<p>Rs 16,400 is to be brought in by X. (C)</p> Signup and view all the answers

In the provided scenario, what is the primary reason X and Y adjust their capital accounts to reflect their new profit-sharing ratio upon Z's retirement?

<p>To ensure their capitals are proportionate to their future profit-sharing arrangement, maintaining financial stability and fairness. (D)</p> Signup and view all the answers

How does the treatment of 'unexpired insurance premium' impact the firm's financial statements when Z retires?

<p>It is recognized as an asset, increasing the firm’s total assets and reflecting a future benefit. (D)</p> Signup and view all the answers

What is the correct journal entry to write off the provision for doubtful debts?

<p><code>Debit Provision for Doubtful Debts A/c, Credit Revaluation A/c</code> (D)</p> Signup and view all the answers

Why is goodwill valued at the time of Z's retirement, and how is Z compensated for it?

<p>Goodwill is valued to fairly compensate the retiring partner for their contribution to the firm's reputation, with the remaining partners compensating Z in their gaining ratio. (A)</p> Signup and view all the answers

What is the effect of reducing the value of Land and Buildings by 10% on the firm's accounting equation?

<p>Assets decrease and owner's equity decreases, maintaining the balance. (C)</p> Signup and view all the answers

How does the new profit-sharing ratio between Y and Z (2:3) affect the accounting treatment of accumulated profits/losses (Profit and Loss A/c) in the provided Balance Sheet?

<p>The accumulated profits/losses are distributed among all partners, including X, in their old profit-sharing ratio. (B)</p> Signup and view all the answers

If Z receives ₹9,300 immediately and the remaining loan balance is to be paid in three equal installments with 10% interest per annum, how is the interest expense treated each year?

<p>The interest expense decreases each year as the outstanding loan balance reduces. (C)</p> Signup and view all the answers

Considering both scenarios (Z's retirement and X's retirement), what is a key difference in the accounting treatment between a decrease in the provision for doubtful debts and a reduction in the value of land and buildings?

<p>A decrease in provision for doubtful debts increases owner's equity via revaluation, while a reduction in land value decreases both assets and owner's equity. (B)</p> Signup and view all the answers

Flashcards

Workmen's Compensation Fund

A fund to compensate employees for injuries or disabilities suffered during employment.

Revaluation Account

An account used to record profits or losses arising from the revaluation of assets and liabilities when a partner retires.

Provision for Doubtful Debts

Money set aside to cover potential losses from customers not paying their debts.

Goodwill

The worth of the firm's reputation, brand, and customer relationships.

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Goodwill Adjustment

Adjusting partners' capital accounts to reflect the goodwill when a partner retires.

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Future Profit-Sharing Ratio

The ratio in which the remaining partners will share profits after a partner retires.

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Capital Readjustment

Determining how much cash each partner needs to contribute or withdraw to align with the agreed capital structure.

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Transfer to Loan Account

Converting the remaining balance due to a retiring partner into a liability to be paid over time.

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Partner's Loan Account

The unpaid portion of money owed to a retiring partner. Often paid over time.

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Balance Sheet

Financial statement showing a company's assets, liabilities, and equity at a specific point in time.

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Bad Debts

Debts that are uncollectible and written off as a loss.

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General reserve

Reserve created from past profits for general purposes, not assigned to any specific liability, contingency, or commitment.

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Sundry Creditors

Individuals or entities to whom a business owes money for goods or services received.

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Book value

The original cost of an asset minus accumulated depreciation.

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Unexpired insurance

Prepaid expenses represent future expenses that have been paid in advance

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Employees Provident Fund

Funds set aside by a company to provide benefits to employees upon retirement.

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Profit and Loss Account Balance

This account represents accumulated profits or losses of a company that haven't been distributed to owners.

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Study Notes

  • Questions relate to Day 13 topic of partnership retirement

Question 1 - Comprehensive Questions

  • X, Y, and Z share profits based on their capital contributions.
  • A balance sheet exists as of March 31, 2018 including liabilities for Sundry Creditors (Rs 16,600), Workmen's Compensation Fund (Rs 9,000), General Reserve (Rs 6,000), and Capital for X (Rs 90,000), Y (Rs 60,000), and Z (Rs 30,000).
  • Assets listed are Cash (Rs 15,000), Debtors (Rs 21,000 less Provision of Rs 1,400), Stock (Rs 19,000), Machinery (Rs 58,000), and Building (Rs 1,00,000).
  • Y retires due to ill health, requiring several adjustments for calculating the amount due.
  • Provision for Doubtful Debts is increased to 10% of Debtors.
  • The firm's goodwill is valued at Rs 36,000; X and Z will adjust their capital accounts and share future profits in a 3:1 ratio.
  • Sundry Creditors include Rs 2,500 for a legal claim that is no longer valid.
  • The new firm's total capital is Rs 1,20,000, shared by X and Z in their profit-sharing ratio; cash adjustments are made accordingly.
  • Y receives Rs 9,000 immediately, with the remaining balance transferred to a Loan Account.
  • The revaluation profit is X 900, Y 600, and Z 300.
  • Partner's capital accounts are: X - 90,000, Z - 30,000.

Question 2

  • X, Y, and Z share profits and losses in a 4:3:2 ratio.
  • Y retires on April 1, 2022 when the capitals of X, Y, and Z after adjustments are Rs 65,800; Rs 57,225 and Rs 33,800 respectively.
  • A reconstituted firm readjusts capital through cash adjustments to align with the future profit-sharing ratio of X and Z.
  • The amount to be invested/paid = X 600, Y (600).

Question 3

  • Aruna, Karuna and Varuna share profits and losses in proportion to their capitals and a balance sheet exists as of March 31st, 2009.
  • Liabilities include Capital for Aruna (Rs 2,00,000) and Karuna (Rs 3,00,000) and Varuna (Rs 2,00,000).
  • General Reserve is Rs 35,000, Workmen’s Compensation Fund is Rs 15,000 and Sundry Creditors are Rs 50,000.
  • Assets include Land and Building (Rs 2,00,000), Closing Stock (Rs 1,00,000), Machinery (Rs 3,00,000), Sundry Debtors (Rs 1,10,000 less Provision of Rs 10,000) and Cash at Bank (Rs 1,00,000).
  • Aruna retires on March 31st, 2009 and the remaining partners continue the firm.
  • Land and Building appreciate by 30% and Machinery depreciates by 20%.
  • Bad Debts were recorded at Rs 17,000.
  • Workmen's Compensation claim is estimated at Rs 8,000.
  • Firm goodwill is valued at Rs 1,40,000 and Aruna's share is adjusted against Karuna and Varuna's capital accounts, who will share future profits in a 4:3 ratio.
  • Total firm capital remains the same after Aruna's retirement and is in the new profit-sharing ratio between the continuing partners.
  • Aruna receives Rs 50,000 in cash, with the remaining balance transferred to a Loan Account.
  • Loss from reevaluation shows: Aruna 2000, Karuna 3000, Varuna 2000.
  • Capital account balances are: Karuna is 4,00,000 and Varuna is 3,00,000; and total balance sheet is 9,58,000.

Question 4

  • X, Y, and Z share profits in a 3:2:1 ratio.
  • The balance sheet as of April 1st, 2015 lists liabilities such as Provision for Doubtful Debts (Rs 1,300), Sundry Creditors (Rs 15,000), and Capitals for X (Rs 78,750), Y (Rs 70,000), and Z (Rs 61,250).
  • Assets include Cash at Bank (Rs 10,000), Debtors (Rs 16,000), Stock (Rs 20,300), Machinery (Rs 60,000), and Land and Building (Rs 1,20,000).
  • Z retires, and X and Y agree to a new profit-sharing ratio of 5:4.
  • Land and Buildings are reduced by 10%. An insurance premium of Rs 5,000 is carried forward.
  • There is no need for a provision for doubtful debts.
  • Firm goodwill is valued at Rs 54,000.
  • X and Y adjust their capitals to align with their new profit sharing ratio.

Question 5

  • X, Y, and Z share profits in a 5:3:2 ratio as of March 31, 2018.
  • Liabilities include Creditors (Rs 50,000), Employees Provident Fund (Rs 10,000), and Profit and Loss A/c (Rs 85,000).
  • Capital accounts are X (Rs 40,000), Y (Rs 62,000), and Z (Rs 33,000).
  • Assets include Cash at Bank (Rs 40,000), Sundry Debtors (Rs 1,00,000), Stock (Rs 80,000), and Fixed Assets (Rs 60,000).
  • X retires on March 31, 2018, with Y and Z sharing future profits in a 2:3 ratio.
  • Firm goodwill is valued at Rs 80,000.
  • Fixed Assets are reduced to Rs 57,500. A 5% provision for doubtful debts is made.
  • A creditor claim of Rs 10,000 is settled for Rs 8,000.
  • X is compensated by Y and Z in proportion to their profit-sharing ratio, with Rs 15,000 left in the bank account.
  • Loss breakdown is X; 2,750, Y; 1,650, Z; 1,100.
  • Capital account totals are X- 1,19,750, Y- 77,850, Z- 16,900.

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When a partner retires, assets and liabilities are revalued to reflect their current worth. The retiring partner's share of goodwill is adjusted upon departure. Adjustments ensure a fair settlement and accurate reflection of the firm's financial status.

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