Question

Case 5.

Faheem, Fahad and Faris are partners sharing profits in the ratio of 2:1:1. Faheem decided to retire from the firm at that time the balances in their capital accounts stood at OMR 50,000, OMR 40,000 and OMR 30,000 respectively. It was decided that the amount payable to Faheem will be brought by Fahad and Faris in such a way as to make their capitals proportionate to their profit sharing ratio. After Faheem’s retirement, the new profit sharing ratio between Fahad and Faris will be 2:1.

You are required to;

1. Calculate the amount to be brought by Fahad and Faris and record necessary journal entries for the same.
2. Also record necessary entry for the payment to be made to Faheem after Faheem’s retirement.

Answer 1

At the time of Faheem's reitrment, Faheem will be paid OMR 50,000.

Existing partners Fahad and Faris will bring additional OMR 50,000 to paid off Faheem.

After, Faheem's retirement new profit sharing ratio of Fahad and Faris will be 2:1

So, they would bring additional capital of OMR 50,000 to make their closing capital as per their new profit sharing ratio 2:1.

Before, Faheem's retirement total capital of Fahad and Faris = OMR 40,000 + OMR 30,000 = OMR 70,000

after, bringing additional capital of OMR 50,000 their total capital [ Fahad and Faris ] = OMR 70,000 + OMR 50,000 = OMR 120,000

Adjusted closing capital of Fahad = OMR 120,000 X 2/3 = OMR 80,000

Adjusted closing capital of Faris = OMR 120,000 X 1/3 = OMR 40,000

So, Fahad will bring = OMR 80,000 - OMR 40,000 = OMR 40,000

Faris will bring = OMR 40,000 - OMR 30,000 = OMR 10,000

1)

Journal entry

Account titles and description	Debit(OMR)	Credit(OMR)
Cash	50,000
Fahad's capital		40,000
Faris's capital		10,000
[ Additional capital brought in by existing partners ]

2)

Journal entry

Account titles and description	Debit(OMR)	Credit(OMR)
Faheem's capital	50,000
Cash		50,000
[Final payment made towards Faheem for his retirement ]