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Retirement of a Partner 4.7
Illustration 5.

A, B and C are in partnership sharing profits and losses in the ratio of 3 : 2 : 1. Their
Balance Sheet as at 31st March, 2017 stood as follows:

Liabilities ` Assets `
Capital A/cs: Machinery at cost 50,000
A 40,000 Less: Provision for Depreciation 8,000 42,000
B 60,000 Furniture 1,000
C 20,000 1,20,000 Sundry Debtors 80,000
Reserve 30,000 Less: Provision for Doubtful Debts 3,000 77,000
Sundry Creditors 60,000 Stock 50,000
Cash at Bank 40,000
2,10,000 2,10,000

On 30th June, 2017, B retired and A and C continued in partnership, sharing profits and
losses in the ratio of 3 : 2. They agreed to the following adjustments in the books of
account to decide B’s Share:
(i) Machinery to be revalued at ` 45,000.

(ii) Stock to be reduced by ` 1,000.
(iii) Furniture to be reduced to 60%.
(iv) Provision for Doubtful Debts to be maintained at 5%.
(v) Provision of ` 300 to be made for Outstanding Expenses.

(vi) Goodwill of the firm to be valued at ` 24,000 and B’s share of the same was to be
adjusted into the accounts of A and C.

(vii) The profits up to the date of retirement from the date of last Balance Sheet was estimated
at ` 18,000. All the partners are to be credited with their respective share of profit earned
till the date of retirement of B.
(viii) B was to be paid off in full. A and C were to bring sufficient amount so as to make their
capitals in proportion to the new profit-sharing ratio, subject to the condition that a
cash balance of ` 20,000 was to be maintained as working capital. Before making this
adjustment the cash balance was ` 58,000 on 30th June, 2017.
Pass necessary Journal entries to give effect to the above arrangements and prepare Partners’
Capital Accounts as on 30th June, 2017.

Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2017 A’s Capital A/c ...Dr. 2,400
June 30 C’s Capital A/c ...Dr. 5,600
To B’s Capital A/c 8,000
(Being B’s share of goodwill adjusted in the Capital Accounts of A and C
in the gaining ratio of 3 : 7) (WN 1 and 2)