Class 12 Book Keeping and Accountancy Chapter 5: Reconstitution of Partnership (Death of Partner)

Key concepts: Reconstitution of Partnership (Death of Partner)

Death as compulsory retirement

A partner stops being a partner on death. The surviving partners may continue the firm if the partnership deed allows it, and the deceased partner's account is settled with his legal representative.

New profit sharing ratio

After death the surviving partners' shares increase because the deceased partner's share is taken over by them, so their ratio changes.

Gain (benefit) ratio

The ratio in which surviving partners benefit from the death. Gain ratio = New ratio - Old ratio. It is used to write off goodwill raised for the deceased partner's share.

Revaluation on death

Assets and liabilities are revalued and the profit or loss is shared in the old ratio, so the deceased partner's capital gets or bears his own share of it.

Amount due to the executor

Worked out from the balance of his capital, plus his share of reserve, goodwill, revaluation profit, salary, interest on capital and profit up to death, less drawings and interest on drawings.

Settlement of the amount due

The amount is moved to the Executor's Loan A/c and paid after legal formalities. The legal representative may claim 6% p.a. interest from the date of death to payment.

Share of profit up to date of death

Profit for the period from the last balance sheet to the date of death, based on last year's or average profit, is credited to the deceased through Profit and Loss Suspense A/c.

Deceased partner's share of goodwill

Goodwill = average profit x number of years' purchase. The deceased partner's share of it is credited to him and borne by surviving partners in the gain ratio.

Quick revision: important points

• Gain ratio = New ratio - Old ratio.
• Goodwill = Average profit x years' purchase; deceased's share = goodwill x his share.
• Profit up to death = profit x months from the year start / 12 x his share.
• Amount due goes to Executor's Loan A/c, shown on the liabilities side.
• Profit and Loss Suspense A/c (debit) is shown on the asset side until profit is ascertained.

Practice MCQs with answers

1. Why is the death of a partner called a compulsory retirement?

   1. The firm must close down immediately
   2. The partner must pay tax on his share
   3. The partner stops being a partner even though he did not choose to leave
   4. The deceased partner's share must be sold to an outsider
   Show answer

   Answer: C. The partner stops being a partner even though he did not choose to leave
   On death a partner ceases to be a partner without any decision to retire, so it is treated as a compulsory retirement.

2. After the death of a partner, the surviving partners can carry on the firm's business if

   1. The partnership deed makes a provision for it
   2. The Registrar of Firms gives permission
   3. The bank gives permission
   4. The deceased partner's family joins as partners
   Show answer

   Answer: A. The partnership deed makes a provision for it
   Continuation of the firm by surviving partners depends on a provision in the partnership deed.

3. At the choice of the legal representative, interest on the amount due to a deceased partner is paid from the date of death to the date of payment at

   1. 3% per annum
   2. 12% per annum
   3. 9% per annum
   4. 6% per annum
   Show answer

   Answer: D. 6% per annum
   The legal representative may claim interest at 6% per annum on the amount due.

4. An amount of Rs 50,000 is due to a deceased partner's executor and is paid 4 months after death. What interest at 6% p.a. is payable?

   1. Rs 3,000
   2. Rs 1,000
   3. Rs 4,000
   4. Rs 500
   Show answer

   Answer: B. Rs 1,000
   Interest = 50,000 x 6/100 x 4/12 = Rs 1,000.

5. Why does the profit sharing ratio of the surviving partners go up after a partner's death?

   1. The firm's total profit increases
   2. The deceased partner's capital is shared equally
   3. The share of the deceased partner is taken over by the surviving partners
   4. The executor becomes a partner
   Show answer

   Answer: C. The share of the deceased partner is taken over by the surviving partners
   The deceased partner's share is divided among the survivors, so each survivor's share becomes larger.

All Class 12 Book Keeping and Accountancy chapters

• Chapter 1: Introduction to Partnership and Partnership Final Accounts
• Chapter 2: Accounts of Not for Profit Concerns
• Chapter 3: Reconstitution of Partnership (Admission of Partner)
• Chapter 4: Reconstitution of Partnership (Retirement of Partner)
• Chapter 5: Reconstitution of Partnership (Death of Partner)
• Chapter 6: Dissolution of Partnership Firm
• Chapter 7: Bills of Exchange
• Chapter 8: Company Accounts - Issue of Shares
• Chapter 9: Analysis of Financial Statements
• Chapter 10: Computer in Accounting

Class 12 Book Keeping and Accountancy notes: all chapters