The correct answer is option 4- A-IV, B-I, C-II, D-III.
| LIST 1 |
LIST 2 |
| A) Retiring partner is paid cash in full |
IV) Retiring Partners’ Capital A/c Dr.
To Cash/Bank A/c |
B) Retiring partner's whole amount
is treated as loan |
I) Retiring Partners’ Capital A/c Dr.
To Retiring Partners’ Loan A/c |
C) Retiring partner is partly paid in cash
and remaining amount treated as loan |
II) Retiring Partners’ Capital A/c Dr.
To Cash/Bank A/c
To Retiring Partners’ Loan A/c |
| D) Accumulated loss share of retiring partner |
III) Retiring Partners’ Capital A/c Dr.
To Accumulated loss A/c |
*Upon the retirement of a partner, the settlement of the outgoing partner's account follows the terms specified in the partnership deed. The options for payment include:
Lump Sum Payment: The retiring partner may receive the entire amount due in a single lump sum payment immediately, as per the agreed terms.
Loan Arrangement: If there is no specific agreement regarding the payment terms, Section 37 of the Indian Partnership Act, 1932 comes into effect. Under this section, the outgoing partner has the option to choose one of the following methods of settlement:
a. Option 1: The retiring partner can receive interest at 6% per annum on the amount due, calculated until the date of payment.
b. Option 2: Alternatively, the retiring partner can choose to receive their share of profits earned with their money, based on the capital ratio.
Once all adjustments, such as the retiring partner's share of goodwill, accumulated profits, losses, revaluation gains/losses, and any other relevant factors, have been made, the total amount due to the retiring partner is ascertained. If the firm is capable of making the full payment immediately, the amount is paid to the retiring partner without delay. However, if the firm is unable to make the full payment immediately, the amount due is transferred to the retiring partner's Loan Account. As and when the firm is capable of making payments, the amounts are debited from the Loan Account and credited to the retiring partner's account accordingly. This ensures that the retiring partner eventually receives the full amount owed to them over time as per the agreed terms.
The journal entries recorded for the various scenarios are as follows:
1) When the retiring partner is paid cash in full:
Retiring Partners’ Capital A/c Dr.
To Cash/Bank A/c
2) When the retiring partner's entire amount is treated as a loan:
Retiring Partners’ Capital A/c Dr.
To Retiring Partners’ Loan A/c
3) When the retiring partner is partly paid in cash, and the remaining amount is treated as a loan:
Retiring Partners’ Capital A/c Dr. (Total Amount due)
To Cash/Bank A/c (Amount Paid)
To Retiring Partners’ Loan A/c (Amount of Loan)
* If there are accumulated losses on the retirement or death of a partner then it will be distributed between all partners in their old ratio. In case of loss partner's account are debited whereas in case of profit partner's account are credited. |
