Tag: accounting of sum payable to a partner on retirement or death

Questions Related to accounting of sum payable to a partner on retirement or death

In the event of death of partner, the amount of General Reserve is transferred to partner's capital Accounts in ______________ .

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. The new profit-sharing ratio.

  2. The old profit-sharing ratio.

  3. The capital ratio.

  4. None of these

Show answer
Correct Option: B
Explanation:

The amount of general reserve is transferred to the capital accounts of all the partners in their old 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.

For the intervening period in the books of account, ______________ A/c will be debited for deceased partner's share of profits.

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. profit and loss suspense

  2. deceased partners' capital

  3. deceased partners' current

  4. cash/bank

Show answer
Correct Option: B

If the firm has sufficient cash to pay off the amount due to the deceased partner, it can pay the amount immediately, this is known as ___________.

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Lump sum payment method

  2. Instalment payment method

  3. Annuity method

  4. None of these

Show answer
Correct Option: A
Explanation:

Business of a partnership firm may not come to an end due to the death of a partner. Other partners may shall continue to run the business of the firm. Readjustments takes place in case of death of a partner likewise the case of retirement of a partner. Whenever, a partner dies the continuing partners make gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to b paid to discharge the claim of deceased partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account. Revaluation of profit and reserves are transferred to capital or current accounts of partners. Lastly, final amount due to the retiring partner is determined and discharged.

There are two ways in which amount due to deceased partner is discharged:

1. Lump sum payment method - In this, if the firm has sufficient cash to pay off the amount due to the deceased partner, it pay the amount immediately, this is known as lump sum payment method.

2. Installment payment method - In this, if the firm  does not have sufficient cash to pay off the amount due to deceased partner, it pay the amount in installments, this is known as installment payment method.

On retirement of a partner which account is not prepared:

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Realisation Account

  2. Distribution Account

  3. Revaluation Account

  4. Adjustment Account

Show answer
Correct Option: A
Explanation:

On retirement of a partner following accounts are prepared:

1. Revaluation Account
2. Adjustment Account
3. Partners' Capital Account
Realisation account is prepared at the time of dissolution of partnership.
Distribution account is prepared in the company form of organisation to set out who gets what at the time of liquidation of a company.

In which of the following events public notice is not required?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Death of a partner.

  2. Insolvency of a partner.

  3. Retirement of a sleeping partner.

  4. All the the above.

Show answer
Correct Option: D
Explanation:
Public notice is required to be given at the time of retirement of a partner otherwise retiring partner may not be discharged from his liability towards third party.
There are some cases when public notice is not required:
1. On death of a partner - the estate of a deceased partner or the legal representatives of a deceased partner cannot be held liable for any act of the firm, performed or done after his death, even if partnership business is carried on by the surviving partners in the old name of the firm. death of any partner itself is a notice.
2. Insolvency of a partner - When a partner is declared as insolvent, his liability is terminated after his insolvency. When a person ceases to be a partner, from the date of in solvency, he and his estate is no longer held to be liable for any act of the partnership firm done after his insolvency whether the notice of his insolvency has been given or not.
3. Dormant or sleeping partner - As dormant partner does not take any part in the conduct or management of the firm and his existence as a partner is not reflected by the name of the firm, he is not known to the person concerned retires from a firm, no public notice is necessary to terminate his liability.

Select the false statement.

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. On death of a partner his position is taken over by his heirs immediately.

  2. Minor partner has no right to see secret books/records.

  3. In a trading firm a partner has implied authority to borrow money on the credit of the firm.

  4. A partner has no authority to enter partnership with other firm on behalf of the firm.

Show answer
Correct Option: A
Explanation:

Death of a partner dissolves the partnership and the rights of the representatives of the deceased partner would depend on the provisions of the partnership deed. Usually, the surviving partners carry on the business, purchasing the share of the deceased partner after determining the among due to him and then treating it as a loan to the firm. There are no special problems in death except that death may occur at any time of the year; this would mean that the executors of the deceased partner would be entitled to the deceased partner’s share of profits arising after the last closing up of accounts to the date of accounts death.

Death of a partner has the effect of _________.

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. dissolution of the firm

  2. continuance of the business of the firm

  3. his legal heir joining the firm

  4. shutting down the business for $15$ days

Show answer
Correct Option: B
Explanation:

Retirement or death of a partner also leads to reconstitution of a partnership firm. On the retirement or death of a partner, the existing partnership deed comes to an end and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions.

Business of a partnership firm may not come to an end due to the death of a partner. Other partners shall continue to run the business of the firm. For the purpose to run the business on partner's death the old deed will dissolve and the new deed will come into existence with new profit sharing ratio and other terms and conditions.

All of the following except one is the method of recording joint life policy ______________.

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. premium paid charged to revenue

  2. JLP Account maintained at the surrender value

  3. JLP Account maintained at the surrender value along with the Reserve

  4. Surrender value distributed among the partners in the profit sharing ratio

Show answer
Correct Option: D
Explanation:

The surrender value at the time of the death of a partner is distributed among the remaining partners and the legal representative of the deceased partner.

In the absence of a partnership deed, the allowable rate of interest on a partners loan account will be:

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $4$% p.a.

  2. $5$% p.a.

  3. $6$% p.a.

  4. $7.5$% p.a.

Show answer
Correct Option: C
Explanation:

It is not compulsory to have a partnership deed for a partnership firm. Hence if a firm is not having any written agreement or a partnership deed or if partnership deed is there but it is silent on certain issues the following provisions of the Indian Partnership Act 1932 will be applicable.

1. Profit sharing Ratio : Profits and losses would be shared equally among partners.

2. Interest on capital : No interest on capital would be allowed to partners. If there is an agreement to allow interest on capital it is to be allowed only in case of profits.

3. Interest on drawings: No interest on drawings would be charged from partners.

4. Salary: No salary or commission is to be allowed to partners.

5. Interest on Loan : If a partner has provided any Loan to the firm, he would be paid Interest at the rate 6% p.a. This interest on loan is a charge against profits i.e. it is to be allowed even if there are losses to the firm.

6. Admission of a new partner: A new Partner can be admitted only with the consent of all the existing partners.

7. Right to participate in the business: Each partner has a right to participate in the proceedings of the business.

8. Inspection of the accounts of the firm: Each partner has the right to inspect the accounts of the firm and can have a copy of the same.

Any of the above provisions can be changed by the partners after an agreement.

On the death of a partner, the amount of Join Life Policy is credited to the Capital Account of _____________.

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Only the deceased partner

  2. All partners including the deceased partner

  3. Remaining partners, in the new profit sharing ratio

  4. Remaining partners, in the old profit sharing ratio

Show answer
Correct Option: B