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Difficulty: Very hardRetirement and Death of a Partner

Zainab, Tariq, and Usman are in a partnership sharing profits and losses in the ratio 5:3:25:3:2 respectively. Tariq decides to retire from the firm on December 31, 2025. On this date, Tariq's Capital Account shows a credit balance of ₦120,000\text{₦}120,000, while his Current Account has a debit balance of ₦15,000\text{₦}15,000.

Additional adjustments agreed upon retirement are:
1. Land and Buildings (book value ₦200,000\text{₦}200,000) are revalued upward by 20%20\%.
2. Motor Vehicles (book value ₦80,000\text{₦}80,000) are revalued downward by 15%15\%.
3. Goodwill is valued at ₦60,000\text{₦}60,000, and Tariq's share is to be credited to his account without maintaining a Goodwill Account in the books.
4. The General Reserve standing at ₦50,000\text{₦}50,000 is to be shared among the partners in their profit-sharing ratio.

What is the net total amount payable to Tariq upon his retirement?

  1. ₦146,400\text{₦}146,400Answer
  2. B
    ₦161,400\text{₦}161,400
  3. C
    ₦176,400\text{₦}176,400
  4. D
    ₦150,000\text{₦}150,000

Answer

The net total amount payable to Tariq upon his retirement is ₦146,400\text{₦}146,400.
The net amount payable to the retiring partner is computed by taking the opening capital balance (Credit ₦120,000\text{₦}120,000), adding his share of revaluation profit (₦8,400\text{₦}8,400), goodwill (₦18,000\text{₦}18,000), and general reserve (₦15,000\text{₦}15,000), and deducting his debit current account balance (₦15,000\text{₦}15,000), yielding ₦146,400\text{₦}146,400.

Step-by-Step Solution

1
Calculate net profit on revaluation of assets
Appreciation on Land & Buildings = 20%×₦200,000=+₦40,00020\% \times \text{₦}200,000 = +\text{₦}40,000.
Depreciation on Motor Vehicles = 15%×₦80,000=−₦12,00015\% \times \text{₦}80,000 = -\text{₦}12,000.
Net Revaluation Profit = ₦40,000−₦12,000=₦28,000\text{₦}40,000 - \text{₦}12,000 = \text{₦}28,000.
Revaluation gain or loss must consider all asset value changes before determining the net profit to distribute.
2
Determine Tariq's share of Revaluation Profit, Goodwill, and General Reserve
Profit sharing ratio = 5:3:25:3:2 (Tariq's share = 310\frac{3}{10}).
- Tariq's share of Revaluation Profit = 310×₦28,000=₦8,400\frac{3}{10} \times \text{₦}28,000 = \text{₦}8,400.
- Tariq's share of Goodwill = 310×₦60,000=₦18,000\frac{3}{10} \times \text{₦}60,000 = \text{₦}18,000.
- Tariq's share of General Reserve = 310×₦50,000=₦15,000\frac{3}{10} \times \text{₦}50,000 = \text{₦}15,000.
Accumulated reserves, unrecorded goodwill share, and revaluation profits belong to partners in their old profit-sharing ratio.
3
Compute total credits due to Tariq
Capital Account Balance (Credit) = ₦120,000\text{₦}120,000.
Total Credits = ₦120,000+₦8,400+₦18,000+₦15,000=₦161,400\text{₦}120,000 + \text{₦}8,400 + \text{₦}18,000 + \text{₦}15,000 = \text{₦}161,400.
Summing all credit balances and entitlement shares gives the gross claim.
4
Deduct Current Account Debit Balance to determine net settlement figure
Net Settlement = ₦161,400−₦15,000=₦146,400\text{₦}161,400 - \text{₦}15,000 = \text{₦}146,400.
A debit balance in a partner's current account represents indebtedness to the firm and must be deducted from the total capital entitlement.

Key Concept

Partnership Retirement Settlement
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Topics

Retirement and Death of a Partner

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