Retiring Partner

Retiring Partner

Means that a structural change has occurred in the ownership of a partnership . Before the partner’s retirement date one business was in existence; after the retirement date ‘new’ partners emerge to start a ‘new’ business.

For example, Carrie, James and Maurice are in partnership. James retires on 30 April 20*9. Carrie, James and Maurice are the proprietors of the business until midnight on 30 April. One microsecond after midnight the proprietors of the business are Carrie and Maurice.

When a partner retires, the business is valued so that the departing partner can take his/her dues. This can sometimes cause a problem if the retiring partner has large capital and current account balances standing to his/her credit. To allow the partner to withdraw his/her balances as cash could cause severe liquidity problems for the business. To overcome this problem the new partnership might:
•    borrow sufficient funds to pay the retiring partner
•    transfer the balances to a loan account and repay the capital over a number of years
•    take in a new partner and use his/her capital injection to pay the retiring partner 

Worked example
Yolande, Zena and Albert are in partnership sharing profits and losses 3:3:2. Yolande retired on 31 May 20*9. At that date the partnership balance sheet showed:

                                 £       £
Non-current assets:          
Premises                             80 000
Fixtures                               12 000
Vehicles                               26 000
                                         118 000
Current assets:          
Inventory             9 000     
Trade receivables  13 000     
Cash and cash equivalents 1 750     
                                       23 750     
Less current liabilities:          
Trade payables          6 750     17 000
                                            135 000
Capital accounts:          
Yolande                              50 000
Zena                                  40 000
Albert                                40 000
                                             130 000
Current accounts:          
Yolande       1 500     
Zena            2 150     
Albert       1 350                 5 000
                                            135 000 

The partners have agreed the following asset values at close of business on 31 May 20*9:
                                                 £
Premises to be revalued at     150 000
Fixtures to be revalued at     7 000 

 

Yolande will retain the business car she has been using at an agreed value of £7500 (it has a book value of £9000).

The two remaining cars to be revalued at     14 000
Trade receivables are valued at                   12 500
Goodwill to be valued at                              80 000 

 

The partners have agreed that any balance remaining in Yolande’s capital account be transferred to a loan account initially. No goodwill account is to remain in the partnership books of account. Profits and losses will be shared equally in the new partnership.

Required :
i.    Yolande’s capital account showing the amount transferred to her loan account.
ii.    The partnership balance sheet as it would appear on 31 May 20*9 after Yolande’s retirement. 

Solution :
i)
     Capital account – Yolande     
Vehicle     7 500     Balance b/d     50 000
Loan a/c   96 500   Current a/c     1 500
                              Revaluation a/c     52 500
               104 000          104 000
ii)
Zena and Albert balance sheet at 31 May 20*9
(after Yolande’s retirement):
                                     £               £
Non-current assets:          
Premises at valuation                   150 000
Fixtures at valuation                       7 000
Vehicles at valuation                      14 000
                                                   171 000
Current assets:          
Inventory                   9 000     
Trade receivables     12 500     
Cash and cash equivalents  1 750     
                                       23 250     
Less current liabilities:          
Trade payables          6 750            16 500
                                                   187 500
Capital accounts:          
Zena                                        52 500
Albert                                      35 000
                                                   87 500
Current accounts:          
Zena                     2 150     
Albert                  1 350              3 500
Loan account – Yolande                  96 500
                                                   187 500

02/12/2020

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الأكاديمية العربية البريطانية للتعليم العالي في المملكة المتحدة بيت التعليم التخصصي المستمر المفتوح لكل أبناء الوطن العربي من المحيط إلى الخليج الراغبين بتطوير معارفهم العلمية وقدراتهم الوظيفية وفق أرقى معايير التعليم عن بعد في بريطانيا؛ وهي مؤسسة عمل خيري لا تهدف للربح، هدفها السامي الأوحد تقديم المعارف والعلوم الحديثة بطريقة ميسرة لكل ناطق بلسان الضاد.

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