The compilation of these Retirement or Death of a Partner Notes makes students exam preparation simpler and organised.
Adjustment of Partners Capital and Death of a Partner
On the death of a partner, the partnership ceases to exist. But the firm may not cease to exist as the other remaining partners may decide to continue the business. In the case of the death of a partner, the treatment of various items is similar to that at the time of retirement of the partner. After making all the adjustments in the Partners Capital Account, the amount that is due to him is paid to his Legal Representative.
Adjustment of Partners Capital and Death of a Partner
At the time of the death of a partner, we credit the following amounts in the Deceased Partner’s Capital Account:
- Reserves or Undistributed profits
- Goodwill
- Profit on the Revaluation of assets and liabilities.
- Any loan is given by the partner
- The share of Joint Life Policy
- Share in subsequent Profits
- Interest on Capital
However, we need to debit the following amounts:
- Drawings by the deceased partner
- Interest on Drawings
- Loss of Revaluation of assets and liabilities.
- Share in subsequent Losses.
The legal representative of a deceased partner has a right to subsequent profits. He also has a right to choose whether he wants the share in the profit or the interest at the rate of 6 percent per annum.
There are the following two ways to ascertain the subsequent profit. It is the profit from the date of the last Balance Sheet until the date of death of the partner.
Methods to calculate the profit of a deceased partner
Time Basis
Under this method, we assume that the profits are earned evenly throughout the year. We estimate the profit on the basis of the profit of the last year.
Turnover or Sales Basis
Under this method, we consider the profit as well as the total sales of the last year. Hence, we estimate the profit up to the date of death of the partner on the basis of the sales of the last year.
After all these adjustments, the amount standing in the Deceased Partner’s Capital A/c is payable to his/her legal representative.
The Journal Entries are:
Example:
Question:
Tina, Govind, and Kamini are partners sharing profits in the ratio of 3:2:1. Kamini dies on 1.07.2018. The Balance Sheet and other information are as under:
Balance Sheet as at 31.03.2018
Tina and Govind agree to share future profits and losses equally. The value of Goodwill is ₹30000. The Goodwill is not to appear in books. The revaluation profit is ₹15000. The Joint Life Policy realizes ₹60000. The legal representative of Kamini opts for the share in subsequent profits. Kamini’s share in subsequent profits is ₹10000. Pass necessary journal entries. Also, prepare Partners Capital A/c.
Answer:
Journal Entries
Partner’s Capital A/c
Working notes:
Calculation of Gaining ratio:
Calculation of Goodwill to be adjusted = 30000 × 1/6 = 5000