Q1: Test your Understanding - I 1. (a), 2 (a), 3. (b).

Verification of Answers for Test your Understanding - I 1. Question 1: A and B are partners (3:1). C is admitted for 1/4 share. Remaining share = 3/4. A's new share = 3/4 3/4 = 9/16. B's new share = 1/4 3/4 = 3/16. C's share = 1/4 = 4/16. New ratio is 9:3:4. Answer (a) is correct. 2. Question 2: X…

Q2: Test your Understanding - II 1. (c), 2. (b), 3. (c), 4. (b), 5. (b).

Verification of Answers for Test your Understanding - II 1. Question 1: General reserve appearing in the old balance sheet is transferred to old partners' capital account. Answer (c) is correct. 2. Question 2: Ashish admitted for 1/4 share. Asha gifts 1/8. Nisha contributes the remaining (1/4 -…

Reconstitution of a Partnership Firm – Admission of a Partner Class 12 Accountancy Part 1 NCERT Solutions

Q1Checklist to Check your Understanding

Test your Understanding - I (a), 2 (a), 3. (b).

Solution

Verification of Answers for Test your Understanding - I

Question 1: A and B are partners (3:1). C is admitted for 1/4 share. Remaining share = 3/4. A's new share = 3/4 * 3/4 = 9/16. B's new share = 1/4 * 3/4 = 3/16. C's share = 1/4 = 4/16. New ratio is 9:3:4. Answer (a) is correct.
Question 2: X and Y are partners (3:2). Z admitted for 1/5 share, acquiring 3/20 from X and 1/20 from Y. X's new share = 3/5 - 3/20 = 9/20. Y's new share = 2/5 - 1/20 = 7/20. Z's share = 1/5 = 4/20. New ratio is 9:7:4. Answer (a) is correct.
Question 3: A and B are partners (3:1). C is admitted for 1/4 share. When nothing is specified, old partners sacrifice in their old profit sharing ratio. Answer (b) 3:1 is correct.

Q2Checklist to Check your Understanding

Test your Understanding - II (c), 2. (b), 3. (c), 4. (b), 5. (b).

Solution

Verification of Answers for Test your Understanding - II

Question 1: General reserve appearing in the old balance sheet is transferred to old partners' capital account. Answer (c) is correct.
Question 2: Ashish admitted for 1/4 share. Asha gifts 1/8. Nisha contributes the remaining (1/4 - 1/8) = 1/8. Sacrificing ratio is 1:1. Ashish's share of goodwill = 1/4 of 40,000 = 10,000. This is credited to Asha and Nisha in 1:1 ratio, i.e., Rs. 5,000 each. Answer (b) is correct.
Question 3: If D is admitted as a new partner, the old partnership agreement ends and a new one is formed. This is called reconstitution of the partnership. Answer (c) is correct.
Question 4: On admission, an increase in the value of an asset is debited to the respective Assets account. The journal entry is Asset A/c Dr. To Revaluation A/c. Answer (b) is correct.
Question 5: Undistributed profits are transferred to the capital accounts of old partners in their old profit sharing ratio. The provided answer key says (b) old partners in new profit sharing ratio, which is incorrect. The correct answer should be (a) old partners in old profit sharing ratio. The textbook content consistently states that accumulated profits are distributed in the old ratio. There appears to be an error in the provided answer key for this question.

Q1Do It Yourself

A firm's profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and Rs. 6,00,000. Calculate value of firm's goodwill on the basis of four years' purchase of the average profits for the last three years.

Solution

1. Calculate Total Profits: Total Profits = Rs. 5,00,000 + Rs. 4,00,000 + Rs. 6,00,000 = Rs. 15,00,000

2. Calculate Average Profits: Average Profits = Total Profits / Number of Years Average Profits = Rs. 15,00,000 / 3 = Rs. 5,00,000

3. Calculate Goodwill: Goodwill = Average Profits × Number of Years' Purchase Goodwill = Rs. 5,00,000 × 4 = Rs. 20,00,000

The value of the firm's goodwill is Rs. 20,00,000.

Q2Do It Yourself

A firm's profits during 2013, 2014, 2015 and 2016 were Rs. 16,000; Rs. 20,000; Rs. 24,000 and Rs. 32,000 respectively. The firm has capital investment of Rs. 1,00,000. A fair rate of return on investment is 18% p.a. Compute goodwill based on three years' purchase of the average super profits for the last four years.

Solution

1. Calculate Average Profits: Total Profits = Rs. 16,000 + Rs. 20,000 + Rs. 24,000 + Rs. 32,000 = Rs. 92,000 Average Profits = Total Profits / Number of Years Average Profits = Rs. 92,000 / 4 = Rs. 23,000

2. Calculate Normal Profits: Normal Profits = Capital Investment × Fair Rate of Return Normal Profits = Rs. 1,00,000 × 18% = Rs. 18,000

3. Calculate Super Profits: Super Profits = Average Profits - Normal Profits Super Profits = Rs. 23,000 - Rs. 18,000 = Rs. 5,000

4. Calculate Goodwill: Goodwill = Super Profits × Number of Years' Purchase Goodwill = Rs. 5,000 × 3 = Rs. 15,000

The value of goodwill is Rs. 15,000.

Q3Do It Yourself

Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be different if it is computed by capitalisation of average profits? Confirm your answer by numerical verification.

Solution

Part 1: Goodwill by Capitalisation of Super Profits Method

From the previous question, we have:

Super Profits = Rs. 5,000
Normal Rate of Return = 18%

Goodwill = Super Profits × (100 / Normal Rate of Return) Goodwill = Rs. 5,000 × (100 / 18) = Rs. 27,777.78 (approx.)

The value of goodwill by capitalisation of super profits method is Rs. 27,778.

Part 2: Goodwill by Capitalisation of Average Profits Method

From the previous question, we have:

Average Profits = Rs. 23,000
Capital Investment (Net Assets) = Rs. 1,00,000
Normal Rate of Return = 18%

Step 1: Calculate Capitalised Value of Average Profits Capitalised Value = Average Profits × (100 / Normal Rate of Return) Capitalised Value = Rs. 23,000 × (100 / 18) = Rs. 1,27,777.78 (approx.)

Step 2: Calculate Goodwill Goodwill = Capitalised Value of Average Profits - Net Assets Goodwill = Rs. 1,27,778 - Rs. 1,00,000 = Rs. 27,778

Conclusion: No, the amount of goodwill will not be different. As confirmed by the numerical verification, both the capitalisation of super profits method and the capitalisation of average profits method yield the same value of goodwill (Rs. 27,778).

Q4Do It Yourself

Giri and Shanta are partners in a firm sharing profits equally. They admit Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as goodwill for 1/5th share of profits in the firm. What shall be journal entries if:

(a)

no goodwill appears in the books of the firm.

(b)

goodwill appears in the books of the firm at Rs. 40,000.

Solution

Old profit sharing ratio of Giri and Shanta = 1:1. Sacrificing ratio will also be 1:1 as nothing else is specified. Kachroo's share of goodwill = Rs. 20,000. This will be shared by Giri and Shanta equally, i.e., Rs. 10,000 each.

(a) If no goodwill appears in the books of the firm:

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	Bank A/c Dr.
To Premium for Goodwill A/c
(Amount of goodwill brought by Kachroo)		20,000
			20,000
	Premium for Goodwill A/c Dr.
To Giri's Capital A/c
To Shanta's Capital A/c
(Goodwill distributed among sacrificing partners in their sacrificing ratio of 1:1)		20,000
			10,000
			10,000

(b) If goodwill appears in the books of the firm at Rs. 40,000:

First, the existing goodwill must be written off in the old partners' old profit sharing ratio (1:1).

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For writing off existing goodwill)
	Giri's Capital A/c Dr.
Shanta's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 1:1)		20,000
20,000
			40,000
	(For goodwill brought by new partner)
	Bank A/c Dr.
To Premium for Goodwill A/c
(Amount of goodwill brought by Kachroo)		20,000
			20,000
	Premium for Goodwill A/c Dr.
To Giri's Capital A/c
To Shanta's Capital A/c
(Goodwill distributed among sacrificing partners in their sacrificing ratio of 1:1)		20,000
			10,000
			10,000

Q1Long Answer Questions

Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

Solution

Yes, it is highly advisable that assets and liabilities must be revalued at the time of admission of a partner.

Reasons for Revaluation:

True Financial Position: Revaluation ensures that the firm's Balance Sheet reflects the true and fair value of its assets and liabilities on the date of reconstitution. The book values, recorded at historical cost, may not represent the current market worth.
Fairness to All Partners: It is crucial for ensuring fairness to both the old partners and the incoming partner.
- For Old Partners: Any increase in the value of assets or decrease in liabilities is a gain that occurred before the new partner's admission. This gain rightfully belongs to the old partners and should be credited to their capital accounts.
- For the Incoming Partner: The new partner should not benefit from past appreciation in asset values or suffer from past depreciation for which they were not responsible. By revaluing assets and liabilities, the capital contributed by the new partner is based on the current worth of the business.

Treatment in the Books of Account:

The revaluation process is carried out through a temporary account called the 'Revaluation Account' or 'Profit and Loss Adjustment Account'. The treatment is as follows:

Recording Changes:
- An increase in the value of an asset or a decrease in the value of a liability is a gain, so the Revaluation Account is credited.
  - Journal Entry: Asset A/c Dr. / Liability A/c Dr. To Revaluation A/c
- A decrease in the value of an asset or an increase in the value of a liability is a loss, so the Revaluation Account is debited.
  - Journal Entry: Revaluation A/c Dr. To Asset A/c / To Liability A/c
- Unrecorded assets are a gain (credited to Revaluation A/c) and unrecorded liabilities are a loss (debited to Revaluation A/c).
Transfer of Profit or Loss:
- After recording all changes, the Revaluation Account is balanced.
- If the credit side is greater than the debit side, there is a 'Gain (or Profit) on Revaluation'. This gain is transferred to the old partners' capital accounts in their old profit sharing ratio.
  - Journal Entry: Revaluation A/c Dr. To Old Partners' Capital A/cs
- If the debit side is greater than the credit side, there is a 'Loss on Revaluation'. This loss is transferred to the old partners' capital accounts in their old profit sharing ratio.
  - Journal Entry: Old Partners' Capital A/cs Dr. To Revaluation A/c

Finally, the new Balance Sheet of the reconstituted firm shows the assets and liabilities at their revised (revalued) figures.

Q2Long Answer Questions

What is goodwill? What factors affect goodwill?

Solution

Goodwill is an intangible asset that represents the value of a firm's reputation, good name, and business connections, which enables it to earn higher profits than the normal profits earned by other firms in the same industry. In simple terms, it is the present value of a firm's anticipated excess earnings (super profits).

Goodwill arises from various favorable attributes that a business possesses, which attract customers and lead to sustained profitability. It is the advantage that a well-established business develops over a period of time.

Factors Affecting the Value of Goodwill:

The main factors that influence the value of a firm's goodwill are as follows:

Nature of Business: A firm engaged in producing high-demand or high-value-added products, or one with stable demand, tends to earn more profits and thus has higher goodwill.
Location: A business that is centrally located or situated in an area with high customer traffic (a prime location) will attract more customers, leading to higher sales and profits, which increases the value of its goodwill.
Efficiency of Management: A firm with experienced, capable, and efficient management will have high productivity and cost efficiency. This results in higher profits and, consequently, a higher value of goodwill.
Market Situation: If a firm operates in a monopolistic market or faces limited competition, it can command higher prices and earn high profits, which contributes to a higher value of goodwill.
Special Advantages: Certain firms enjoy special advantages that are not available to their competitors. These may include import licenses, patents, trademarks, long-term contracts for the supply of materials at low rates, well-known collaborators, or an assured supply of electricity. These advantages enhance the firm's earning capacity and the value of its goodwill.
Time Factor: A business that has been established for a long time is likely to have a more extensive and loyal customer base compared to a new business, which generally results in higher goodwill.

Q3Long Answer Questions

Explain various methods of valuation of goodwill.

Solution

Since goodwill is an intangible asset, its valuation is subjective and difficult. The following are the important methods advocated for the valuation of goodwill:

1. Average Profits Method Under this method, goodwill is calculated by multiplying the average profits of the past few years by an agreed number of 'years' purchase'. The assumption is that a new business would not earn profits for the first few years, so a buyer pays for the average profits they expect to receive for those initial years.

Simple Average Profits: Goodwill = Average Profits × No. of Years' Purchase
Weighted Average Profits: This is used when there is a clear increasing or decreasing trend in profits. More weight is given to the profits of recent years. Goodwill = Weighted Average Profits × No. of Years' Purchase

2. Super Profits Method This method values goodwill based on the excess profits (super profits) that a firm earns over the normal profits earned by similar firms in the industry. The rationale is that a buyer's real benefit is not the total profit but the profit earned above the normal return on capital employed.

Steps:
1. Calculate Average Profit.
2. Calculate Normal Profit = Capital Employed × (Normal Rate of Return / 100).
3. Calculate Super Profit = Average Profit - Normal Profit.
4. Calculate Goodwill = Super Profit × No. of Years' Purchase.

3. Capitalisation Method Under this method, goodwill is calculated by capitalizing either the average profits or the super profits.

(a) Capitalisation of Average Profits: This method determines the total capital needed to earn the average profits at the normal rate of return and compares it with the actual capital employed.

Steps:
1. Calculate the Capitalised Value of Average Profits = Average Profits × (100 / Normal Rate of Return).
2. Ascertain the actual Capital Employed (Net Assets) = Total Assets (excluding goodwill) - Outside Liabilities.
3. Calculate Goodwill = Capitalised Value of Average Profits - Capital Employed.

(b) Capitalisation of Super Profits: This method directly calculates the capital needed to generate the super profits.

Steps:
1. Calculate Super Profit (as in the Super Profits Method).
2. Calculate Goodwill = Super Profits × (100 / Normal Rate of Return). This method gives the same result as the Capitalisation of Average Profits method.

Q4Long Answer Questions

If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

Solution

When it is agreed that the capitals of all partners should be proportionate to their new profit sharing ratio, the new capital of each partner is worked out based on a pre-determined base. The adjustment can be done in two ways:

Case 1: When the New Partner's Capital is the Base

In this case, the capital brought in by the new partner for his share of profit is used to determine the total capital of the new firm. The capitals of the old partners are then adjusted accordingly.

Steps to work out new capital:
1. Calculate the total capital of the new firm based on the new partner's contribution: Total Capital = New Partner's Capital × Reciprocal of his Profit Share
2. Calculate the new required capital for each partner based on the new profit sharing ratio: Partner's New Capital = Total Capital × Partner's New Profit Share
Example: A and B are partners. C is admitted for a 1/4 share and brings in Rs. 50,000 as capital. The new ratio is 2:1:1.
1. Total Capital of the firm = Rs. 50,000 × (4/1) = Rs. 2,00,000.
2. A's New Capital = Rs. 2,00,000 × (2/4) = Rs. 1,00,000.
3. B's New Capital = Rs. 2,00,000 × (1/4) = Rs. 50,000.
4. C's Capital = Rs. 2,00,000 × (1/4) = Rs. 50,000.

Case 2: When the Total Capital of the New Firm is Specified

Sometimes, the partners may agree on a specific amount for the total capital of the new firm.

Steps to work out new capital:
1. The total agreed capital is given.
2. Calculate the new required capital for each partner (including the new one): Partner's New Capital = Total Agreed Capital × Partner's New Profit Share
Example: A, B, and C agree that the total capital of the new firm will be Rs. 2,40,000. The new ratio is 2:1:1.
1. A's New Capital = Rs. 2,40,000 × (2/4) = Rs. 1,20,000.
2. B's New Capital = Rs. 2,40,000 × (1/4) = Rs. 60,000.
3. C's New Capital = Rs. 2,40,000 × (1/4) = Rs. 60,000.

Making Necessary Adjustments:

After calculating the required capital for each partner, it is compared with their existing capital balance (after all adjustments for goodwill, revaluation, reserves, etc.).

If a partner's existing capital is more than the required capital, the partner has a surplus. The excess amount is withdrawn by the partner in cash or transferred to their current account.
- Journal Entry (for withdrawal): Partner's Capital A/c Dr. To Cash/Bank A/c
If a partner's existing capital is less than the required capital, the partner has a deficit. The partner has to bring in the shortfall in cash or the amount is transferred from their current account.
- Journal Entry (for bringing cash): Cash/Bank A/c Dr. To Partner's Capital A/c

Q5Long Answer Questions

Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.

Solution

When a new partner is not in a position to bring his share of goodwill (also called premium for goodwill) in cash, the adjustment for goodwill is made through the partners' capital or current accounts. As per Accounting Standard 26, goodwill cannot be raised in the books unless it is purchased. Therefore, the adjustment is made without opening a Goodwill Account.

The accounting treatment is as follows:

Debit the New Partner's Current Account: The new partner's share of goodwill, which he has failed to bring in cash, is debited to his Current Account. Using the current account ensures that his fixed capital contribution remains intact.
Credit the Sacrificing Partners' Capital Accounts: The same amount is credited to the capital accounts of the old (sacrificing) partners in their sacrificing ratio. This entry compensates the old partners for the share of future profits they have surrendered.

The Journal Entry is:

New Partner's Current A/c Dr. (with his share of goodwill) To Sacrificing Partner A's Capital A/c (in sacrificing ratio) To Sacrificing Partner B's Capital A/c (in sacrificing ratio) (Being the adjustment for goodwill made on new partner's admission)

Treatment of Partial Payment: If the new partner brings only a part of his share of goodwill in cash, the treatment is a combination of two methods:

The amount brought in cash is distributed among sacrificing partners via the 'Premium for Goodwill Account'.
The unpaid amount of goodwill is adjusted by debiting the new partner's current account and crediting the sacrificing partners' capital accounts.

Example Journal Entry (Partial Payment):

Bank A/c Dr. (Amount brought in cash) New Partner's Current A/c Dr. (Unpaid amount) To Sacrificing Partners' Capital A/cs (Total share of goodwill in sacrificing ratio)

Q6Long Answer Questions

Explain various methods for the treatment of goodwill on the admission of a new partner?

Solution

The treatment of goodwill on the admission of a new partner depends on the situation. The primary objective is to compensate the sacrificing partners for the share of future profits they surrender. The main methods are as follows:

1. When Goodwill is Paid Privately If the new partner pays his share of goodwill directly to the old partners outside the business (privately), no journal entry is recorded in the books of the firm. It is a personal transaction among the partners.

2. When the New Partner Brings Goodwill in Cash This is the most common method. The amount brought in is called 'Premium for Goodwill'.

Step 1: Record the cash brought in. Bank A/c Dr. To Premium for Goodwill A/c
Step 2: Distribute the premium to sacrificing partners. Premium for Goodwill A/c Dr. To Sacrificing Partners' Capital A/cs (in their sacrificing ratio)
Step 3 (Optional): If partners withdraw the goodwill amount. Sacrificing Partners' Capital A/cs Dr. To Bank A/c

3. When the New Partner Does Not Bring Goodwill in Cash If the new partner is unable to bring his share of goodwill in cash, the adjustment is made through current accounts to avoid reducing his capital.

The journal entry is: New Partner's Current A/c Dr. (with his share of goodwill) To Sacrificing Partners' Capital A/cs (in their sacrificing ratio)

4. When Goodwill Already Exists in the Books If a Goodwill Account already appears in the balance sheet at the time of admission, it must be written off immediately by debiting the old partners' capital accounts in their old profit sharing ratio.

The journal entry is: Old Partners' Capital A/cs Dr. (in old profit sharing ratio) To Goodwill A/c After this, the treatment for the new partner's share of goodwill is done as per situations 2 or 3 mentioned above.

5. Hidden Goodwill Sometimes, the value of goodwill is not explicitly stated. It is inferred from the new partner's capital contribution and his profit share. The total capital of the firm is calculated based on the new partner's capital, and this is compared with the actual combined capital of all partners. The difference is treated as the firm's goodwill. The new partner's share is then calculated and adjusted as per situation 3.

Q7Long Answer Questions

How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?

Solution

Accumulated profits, losses, and reserves are the results of past operations of the firm before the new partner's admission. Therefore, they belong exclusively to the old partners and must be distributed among them or written off from their capital accounts before the new partner joins. The incoming partner has no claim on past profits and is not liable for past losses.

Treatment of Accumulated Profits and Reserves:

Accumulated profits usually exist in the form of General Reserve, Reserve Fund, or a credit balance in the Profit and Loss Account. These represent undistributed profits.

Action: These amounts are transferred to the credit of the old partners' capital accounts in their old profit sharing ratio.
Journal Entry: General Reserve A/c Dr. Reserve Fund A/c Dr. Profit and Loss A/c Dr. (credit balance) To Old Partner A's Capital A/c To Old Partner B's Capital A/c (Being reserves and accumulated profits transferred to old partners' capital accounts in their old profit sharing ratio)

Treatment of Accumulated Losses:

Accumulated losses may appear on the asset side of the Balance Sheet, such as a debit balance in the Profit and Loss Account or Deferred Revenue Expenditure (e.g., Advertisement Suspense Account).

Action: These amounts are written off by transferring them to the debit of the old partners' capital accounts in their old profit sharing ratio.
Journal Entry: Old Partner A's Capital A/c Dr. Old Partner B's Capital A/c Dr. To Profit and Loss A/c (debit balance) To Deferred Revenue Expenditure A/c (Being accumulated losses written off from old partners' capital accounts in their old profit sharing ratio)

This treatment ensures that the new partner's capital is not affected by profits or losses that occurred before their admission.

Q8Long Answer Questions

At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.

Solution

After revaluation has been done, the assets and liabilities appear at their revised or revalued figures in the new Balance Sheet of the reconstituted firm. The purpose of revaluation is to show the true and fair value of assets and liabilities on the date of admission, and this new Balance Sheet must reflect these current values.

Let us illustrate this with an imaginary Balance Sheet.

Imaginary Balance Sheet (Before Revaluation)

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	30,000	Cash	10,000
Capital: A	50,000	Debtors	20,000
Capital: B	40,000	Stock	25,000
		Buildings	65,000
Total	1,20,000	Total	1,20,000

Revaluation Adjustments on C's Admission:

Stock is to be reduced by 10%.
A provision for doubtful debts of 5% is to be created on debtors.
Buildings are to be appreciated by 20%.
An unrecorded creditor of Rs. 2,000 was found.

Calculation of Revised Values:

Stock: Rs. 25,000 - (10% of 25,000) = Rs. 22,500
Debtors: Rs. 20,000 - (5% of 20,000) = Rs. 19,000
Buildings: Rs. 65,000 + (20% of 65,000) = Rs. 78,000
Creditors: Rs. 30,000 + Rs. 2,000 (unrecorded) = Rs. 32,000

New Balance Sheet (After Revaluation) (Assuming C brings Rs. 20,000 as capital and revaluation profit is adjusted to A & B's capitals)

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	32,000	Cash	30,000
Capital: A	54,750	Debtors	20,000
Capital: B	44,750	Less: Provision	(1,000) 19,000
Capital: C	20,000	Stock	22,500
		Buildings	78,000
Total	1,51,500	Total	1,51,500

As shown, the assets (Debtors, Stock, Buildings) and liabilities (Creditors) now appear at their new, revalued figures in the Balance Sheet of the reconstituted firm.

Q1Numerical Questions

A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?

Solution

1. Determine the remaining share for old partners: Let the total profit of the firm be 1. C's share = 1/6 Remaining share for A and B = 1 - 1/6 = 5/6

2. Distribute the remaining share between A and B in their old ratio (3:2): A's new share = (3/5) of the remaining share = (3/5) × (5/6) = 15/30 = 1/2

B's new share = (2/5) of the remaining share = (2/5) × (5/6) = 10/30 = 1/3

3. Combine the shares to find the new ratio: New ratio of A : B : C = 1/2 : 1/3 : 1/6 To get a common denominator (6), we multiply: = (1/2)×(3/3) : (1/3)×(2/2) : 1/6 = 3/6 : 2/6 : 1/6

The new profit sharing ratio of A, B, and C is 3:2:1.

Q2Numerical Questions

A,B,C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?

Solution

1. Determine the remaining share for old partners: Let the total profit of the firm be 1. D's share = 10% = 10/100 = 1/10 Remaining share for A, B, and C = 1 - 1/10 = 9/10

2. Distribute the remaining share among A, B, and C in their old ratio (3:2:1): A's new share = (3/6) of the remaining share = (3/6) × (9/10) = 27/60

B's new share = (2/6) of the remaining share = (2/6) × (9/10) = 18/60

C's new share = (1/6) of the remaining share = (1/6) × (9/10) = 9/60

3. Combine the shares to find the new ratio: D's share = 1/10 = 6/60 New ratio of A : B : C : D = 27/60 : 18/60 : 9/60 : 6/60 = 27 : 18 : 9 : 6

Dividing by the common factor 3, we get: = 9 : 6 : 3 : 2

The new profit sharing ratio of A, B, C, and D is 9:6:3:2.

Q3Numerical Questions

X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally for X and Y. Calculate new profit sharing ratio?

Solution

1. Calculate the share sacrificed by X and Y: Z's total share = 1/10 Z acquires his share equally from X and Y, so each sacrifices: Sacrifice by X = (1/2) of (1/10) = 1/20 Sacrifice by Y = (1/2) of (1/10) = 1/20

2. Calculate the new shares of X and Y: Old share of X = 5/8 Old share of Y = 3/8

X's new share = Old share - Sacrificed share = 5/8 - 1/20 = (25 - 2) / 40 = 23/40

Y's new share = Old share - Sacrificed share = 3/8 - 1/20 = (15 - 2) / 40 = 13/40

3. Combine the shares to find the new ratio: Z's share = 1/10 = 4/40 New ratio of X : Y : Z = 23/40 : 13/40 : 4/40

The new profit sharing ratio of X, Y, and Z is 23:13:4.

Q4Numerical Questions

A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio?

Solution

1. Identify the sacrifice made: D's share = 1/8 This entire share is acquired from A. So, A is the only sacrificing partner. Sacrifice by A = 1/8 Sacrifice by B = 0 Sacrifice by C = 0

2. Calculate the new shares of the partners: Old share of A = 2/5 Old share of B = 2/5 Old share of C = 1/5

A's new share = Old share - Sacrificed share = 2/5 - 1/8 = (16 - 5) / 40 = 11/40

B's new share = 2/5 (remains unchanged)

C's new share = 1/5 (remains unchanged)

D's share = 1/8

3. Combine the shares to find the new ratio: New ratio of A : B : C : D = 11/40 : 2/5 : 1/5 : 1/8 To get a common denominator (40), we convert the shares: = 11/40 : 16/40 : 8/40 : 5/40

The new profit sharing ratio of A, B, C, and D is 11:16:8:5.

Q5Numerical Questions

P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio?

Solution

1. Calculate the share sacrificed by P and Q: R's total share = 1/5 R acquires this share from P and Q in the ratio 1:2.

Sacrifice by P = (1/3) of R's share = (1/3) × (1/5) = 1/15

Sacrifice by Q = (2/3) of R's share = (2/3) × (1/5) = 2/15

2. Calculate the new shares of P and Q: Old share of P = 2/3 Old share of Q = 1/3

P's new share = Old share - Sacrificed share = 2/3 - 1/15 = (10 - 1) / 15 = 9/15

Q's new share = Old share - Sacrificed share = 1/3 - 2/15 = (5 - 2) / 15 = 3/15

3. Combine the shares to find the new ratio: R's share = 1/5 = 3/15 New ratio of P : Q : R = 9/15 : 3/15 : 3/15 = 9 : 3 : 3

Dividing by the common factor 3, we get: = 3 : 1 : 1

The new profit sharing ratio of P, Q, and R is 3:1:1.

Q6Numerical Questions

A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio respectively. Calculate new profit sharing ratio?

Solution

1. Calculate the share sacrificed by A, B, and C: D's total share = 1/5 D acquires this share from A, B, and C in the ratio 2:2:1.

Sacrifice by A = (2/5) of D's share = (2/5) × (1/5) = 2/25

Sacrifice by B = (2/5) of D's share = (2/5) × (1/5) = 2/25

Sacrifice by C = (1/5) of D's share = (1/5) × (1/5) = 1/25

2. Calculate the new shares of A, B, and C: Old share of A = 3/7 Old share of B = 2/7 Old share of C = 2/7

A's new share = Old share - Sacrificed share = 3/7 - 2/25 = (75 - 14) / 175 = 61/175

B's new share = Old share - Sacrificed share = 2/7 - 2/25 = (50 - 14) / 175 = 36/175

C's new share = Old share - Sacrificed share = 2/7 - 1/25 = (50 - 7) / 175 = 43/175

3. Combine the shares to find the new ratio: D's share = 1/5 = 35/175 New ratio of A : B : C : D = 61/175 : 36/175 : 43/175 : 35/175

The new profit sharing ratio of A, B, C, and D is 61:36:43:35.

Q7Numerical Questions

A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio?

Solution

1. Identify the sacrifice made by A and B: The amount of sacrifice is directly given: Sacrifice by A = 2/7 Sacrifice by B = 1/7 (Check: 2/7 + 1/7 = 3/7, which is C's share)

2. Calculate the new shares of A and B: Old share of A = 3/5 Old share of B = 2/5

A's new share = Old share - Sacrificed share = 3/5 - 2/7 = (21 - 10) / 35 = 11/35

B's new share = Old share - Sacrificed share = 2/5 - 1/7 = (14 - 5) / 35 = 9/35

3. Combine the shares to find the new ratio: C's share = 3/7 = 15/35 New ratio of A : B : C = 11/35 : 9/35 : 15/35

The new profit sharing ratio of A, B, and C is 11:9:15.

Q8Numerical Questions

A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B and 1/7 from C. Calculate new profit sharing ratio?

Solution

1. Identify the sacrifice made by A, B, and C: The amount of sacrifice is directly given: Sacrifice by A = 2/7 Sacrifice by B = 1/7 Sacrifice by C = 1/7 (Check: 2/7 + 1/7 + 1/7 = 4/7, which is D's share)

2. Calculate the new shares of A, B, and C: Old share of A = 3/8 Old share of B = 3/8 Old share of C = 2/8

A's new share = Old share - Sacrificed share = 3/8 - 2/7 = (21 - 16) / 56 = 5/56

B's new share = Old share - Sacrificed share = 3/8 - 1/7 = (21 - 8) / 56 = 13/56

C's new share = Old share - Sacrificed share = 2/8 - 1/7 = (14 - 8) / 56 = 6/56

3. Combine the shares to find the new ratio: D's share = 4/7 = 32/56 New ratio of A : B : C : D = 5/56 : 13/56 : 6/56 : 32/56

The new profit sharing ratio of A, B, C, and D is 5:13:6:32.

Q9Numerical Questions

Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate new profit sharing ratio?

Solution

1. Calculate the share sacrificed by Radha and Rukmani: Old share of Radha = 3/5 Old share of Rukmani = 2/5

Share sacrificed by Radha = 1/3 of her share = (1/3) × (3/5) = 3/15 = 1/5

Share sacrificed by Rukmani = 1/4 of her share = (1/4) × (2/5) = 2/20 = 1/10

2. Calculate Gopi's total share: Gopi's share = Share sacrificed by Radha + Share sacrificed by Rukmani = 1/5 + 1/10 = 2/10 + 1/10 = 3/10

3. Calculate the new shares of Radha and Rukmani: Radha's new share = Old share - Sacrificed share = 3/5 - 1/5 = 2/5

Rukmani's new share = Old share - Sacrificed share = 2/5 - 1/10 = 4/10 - 1/10 = 3/10

4. Combine the shares to find the new ratio: New ratio of Radha : Rukmani : Gopi = 2/5 : 3/10 : 3/10 To get a common denominator (10): = 4/10 : 3/10 : 3/10

The new profit sharing ratio of Radha, Rukmani, and Gopi is 4:3:3.

Q10Numerical Questions

Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favour of Jain: Gupta surrendered 1/4 of his share in favour of Jain and Khan surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio?

Solution

1. Calculate the share sacrificed by Singh, Gupta, and Khan: Old share of Singh = 3/8 Old share of Gupta = 2/8 Old share of Khan = 3/8

Share sacrificed by Singh = 1/3 of his share = (1/3) × (3/8) = 3/24 = 1/8

Share sacrificed by Gupta = 1/4 of his share = (1/4) × (2/8) = 2/32 = 1/16

Share sacrificed by Khan = 1/5 of his share = (1/5) × (3/8) = 3/40

2. Calculate Jain's total share: Jain's share = Sum of sacrifices = 1/8 + 1/16 + 3/40 Common denominator is 80. = 10/80 + 5/80 + 6/80 = 21/80

3. Calculate the new shares of the old partners: Singh's new share = Old share - Sacrificed share = 3/8 - 1/8 = 2/8 = 20/80

Gupta's new share = Old share - Sacrificed share = 2/8 - 1/16 = 4/16 - 1/16 = 3/16 = 15/80

Khan's new share = Old share - Sacrificed share = 3/8 - 3/40 = 15/40 - 3/40 = 12/40 = 24/80

4. Combine the shares to find the new ratio: New ratio of Singh : Gupta : Khan : Jain = 20/80 : 15/80 : 24/80 : 21/80

The new profit sharing ratio is 20:15:24:21.

Q11Numerical Questions

Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio?

Solution

The sacrificing ratio is calculated by the formula: Sacrificing Ratio = Old Share - New Share

1. Identify Old and New Shares: Old Ratio (Sandeep : Navdeep) = 5:3

Sandeep's Old Share = 5/8
Navdeep's Old Share = 3/8

New Ratio (Sandeep : Navdeep : C) = 4:2:1

Sandeep's New Share = 4/7
Navdeep's New Share = 2/7

2. Calculate the sacrifice for each old partner: Sandeep's Sacrifice = Old Share - New Share = 5/8 - 4/7 = (35 - 32) / 56 = 3/56

Navdeep's Sacrifice = Old Share - New Share = 3/8 - 2/7 = (21 - 16) / 56 = 5/56

3. Determine the Sacrificing Ratio: The sacrificing ratio of Sandeep : Navdeep is 3/56 : 5/56

The sacrificing ratio is 3:5.

Q12Numerical Questions

Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio and sacrificing ratio?

Solution

Part 1: Calculation of New Profit Sharing Ratio

Determine the remaining share for old partners: Let the total profit be 1. Ravi's share = 1/8 Remaining share for Rao and Swami = 1 - 1/8 = 7/8
Distribute the remaining share between Rao and Swami in their new agreed ratio (4:3): Rao's new share = (4/7) of the remaining share = (4/7) × (7/8) = 28/56 = 1/2

Swami's new share = (3/7) of the remaining share = (3/7) × (7/8) = 21/56 = 3/8
Combine all shares: New ratio of Rao : Swami : Ravi = 1/2 : 3/8 : 1/8 To get a common denominator (8): = 4/8 : 3/8 : 1/8 The new profit sharing ratio is 4:3:1.

Part 2: Calculation of Sacrificing Ratio

Sacrificing Ratio = Old Share - New Share

Rao's Sacrifice: Old Share = 3/5 New Share = 4/8 Sacrifice = 3/5 - 4/8 = (24 - 20) / 40 = 4/40
Swami's Sacrifice: Old Share = 2/5 New Share = 3/8 Sacrifice = 2/5 - 3/8 = (16 - 15) / 40 = 1/40
Sacrificing Ratio: The ratio of sacrifice between Rao and Swami is 4/40 : 1/40. The sacrificing ratio is 4:1.

Q13Numerical Questions

Compute the value of goodwill on the basis of four years' purchase of the average profits based on the last five years? The profits for the last five years were as follows: Rs. 2015 40,000 2016 50,000 2017 60,000 2018 50,000 2019 60,000

Solution

1. Calculate Total Profits of the last five years: Total Profits = Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 50,000 + Rs. 60,000 Total Profits = Rs. 2,60,000

2. Calculate Average Profits: Average Profits = Total Profits / Number of Years Average Profits = Rs. 2,60,000 / 5 = Rs. 52,000

3. Calculate Goodwill: Goodwill = Average Profits × Number of Years' Purchase Goodwill = Rs. 52,000 × 4 = Rs. 2,08,000

The value of goodwill is Rs. 2,08,000.

Q14Numerical Questions

Firm's Capital in a business is Rs. 2,00,000. The normal rate of return on firm's capital is 15%. During the year 2015 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?

Solution

1. Calculate Normal Profit: Normal Profit = Firm's Capital × Normal Rate of Return Normal Profit = Rs. 2,00,000 × 15/100 = Rs. 30,000

2. Calculate Super Profit: Super Profit = Actual Profit - Normal Profit Super Profit = Rs. 48,000 - Rs. 30,000 = Rs. 18,000

3. Calculate Goodwill: Goodwill = Super Profit × Number of Years' Purchase Goodwill = Rs. 18,000 × 3 = Rs. 54,000

The value of goodwill is Rs. 54,000.

Q15Numerical Questions

The books of Ram and Bharat showed that the firm's capital on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

Solution

1. Calculate Average Profits: Total Profits = Rs. 40,000 + Rs. 50,000 + Rs. 55,000 + Rs. 70,000 + Rs. 85,000 Total Profits = Rs. 3,00,000

Average Profits = Total Profits / Number of Years Average Profits = Rs. 3,00,000 / 5 = Rs. 60,000

2. Calculate Normal Profit: Normal Profit = Firm's Capital × Normal Rate of Return Normal Profit = Rs. 5,00,000 × 10/100 = Rs. 50,000

3. Calculate Super Profit: Super Profit = Average Profit - Normal Profit Super Profit = Rs. 60,000 - Rs. 50,000 = Rs. 10,000

4. Calculate Goodwill: Goodwill = Super Profit × Number of Years' Purchase Goodwill = Rs. 10,000 × 3 = Rs. 30,000

The value of goodwill is Rs. 30,000.

Q16Numerical Questions

Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%?

Solution

This will be solved using the Capitalisation of Average Profits Method.

1. Identify Average Profits and Capital Employed: Average Profit (Profit for the year) = Rs. 1,50,000 Capital Employed = Rajan's Capital + Rajani's Capital = Rs. 3,00,000 + Rs. 2,00,000 = Rs. 5,00,000

2. Calculate the Capitalised Value of the Business: Capitalised Value = Average Profits × (100 / Normal Rate of Return) Capitalised Value = Rs. 1,50,000 × (100 / 20) = Rs. 1,50,000 × 5 = Rs. 7,50,000

3. Calculate Goodwill: Goodwill = Capitalised Value of Business - Capital Employed (Net Assets) Goodwill = Rs. 7,50,000 - Rs. 5,00,000 = Rs. 2,50,000

The value of goodwill is Rs. 2,50,000.

Q17Numerical Questions

A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

Solution

This will be solved using the Capitalisation of Average Profits Method.

1. Calculate Capital Employed (Net Assets): Capital Employed = Total Assets - External Liabilities Capital Employed = Rs. 10,00,000 - Rs. 1,80,000 = Rs. 8,20,000

2. Calculate the Capitalised Value of the Business: Capitalised Value = Average Profits × (100 / Normal Rate of Return) Capitalised Value = Rs. 1,00,000 × (100 / 10) = Rs. 10,00,000

3. Calculate Goodwill: Goodwill = Capitalised Value of Business - Capital Employed Goodwill = Rs. 10,00,000 - Rs. 8,20,000 = Rs. 1,80,000

The value of goodwill is Rs. 1,80,000.

Q18Numerical Questions

Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill premium. Give the necessary journal entries: a) When the amount of goodwill is retained in the business. b) When the amount of goodwill is fully withdrawn. c) When 50% of the amount of goodwill is withdrawn. d) When goodwill is paid privately.

Solution

Old Ratio (Verma : Sharma) = 5:3. Since the sacrifice is not specified, it is assumed to be in the old ratio, i.e., 5:3. Goodwill premium brought by Ghosh = Rs. 4,000.

Verma's share of goodwill = (5/8) × 4,000 = Rs. 2,500
Sharma's share of goodwill = (3/8) × 4,000 = Rs. 1,500

a) When the amount of goodwill is retained in the business.

Date	Particulars	L.F.	Credit (Rs.)
	Bank A/c Dr.
To Ghosh's Capital A/c
To Premium for Goodwill A/c
(Capital and goodwill brought by Ghosh)		24,000
			20,000
			4,000
	Premium for Goodwill A/c Dr.
To Verma's Capital A/c
To Sharma's Capital A/c
(Goodwill distributed in sacrificing ratio 5:3)		4,000
			2,500
			1,500

b) When the amount of goodwill is fully withdrawn.

(The first two entries are the same as in part a)

Date	Particulars	L.F.	Credit (Rs.)
	Verma's Capital A/c Dr.
Sharma's Capital A/c Dr.
To Bank A/c
(Goodwill amount withdrawn by old partners)		2,500
1,500
			4,000

c) When 50% of the amount of goodwill is withdrawn.

(The first two entries are the same as in part a)

Date	Particulars	L.F.	Credit (Rs.)
	Verma's Capital A/c Dr. (50% of 2,500)
Sharma's Capital A/c Dr. (50% of 1,500)
To Bank A/c
(50% of goodwill withdrawn by old partners)		1,250
750
			2,000

d) When goodwill is paid privately.

When the amount of goodwill is paid privately by the new partner to the old partners, it is a transaction outside the business. Therefore, no journal entry is recorded in the books of the firm for the goodwill premium. Only the entry for capital brought in will be passed:

Date	Particulars	L.F.	Credit (Rs.)
	Bank A/c Dr.
To Ghosh's Capital A/c
(Capital brought in by Ghosh)		20,000
			20,000

Q19Numerical Questions

A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs, 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?

Solution

1. Calculate Sacrificing Ratio: Sacrificing Ratio = Old Share - New Share

A's Sacrifice = (3/5) - (2/4) = (12 - 10) / 20 = 2/20
B's Sacrifice = (2/5) - (1/4) = (8 - 5) / 20 = 3/20 Sacrificing Ratio of A : B = 2:3

2. Calculate C's Share of Goodwill: C's share of goodwill = (1/4) of Firm's Goodwill = (1/4) × Rs. 20,000 = Rs. 5,000

3. Distribute Goodwill:

A's share = (2/5) × 5,000 = Rs. 2,000
B's share = (3/5) × 5,000 = Rs. 3,000

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For capital and goodwill brought in)
	Bank A/c Dr.
To C's Capital A/c
To Premium for Goodwill A/c
(Amount of capital and goodwill brought by C)		35,000
			30,000
			5,000
	(For distribution of goodwill)
	Premium for Goodwill A/c Dr.
To A's Capital A/c
To B's Capital A/c
(Goodwill distributed in sacrificing ratio 2:3)		5,000
			2,000
			3,000
	(For withdrawal of goodwill)
	A's Capital A/c Dr.
B's Capital A/c Dr.
To Bank A/c
(Goodwill amount withdrawn by A and B)		2,000
3,000
			5,000

Q20Numerical Questions

Arti and Bharti are partners in a firm sharing profits in 3:2 ratio, They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings Rs. 50,000 for his capital and Rs. 10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at Rs. 5,000. the new profit sharing ratio between Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in the books of the new firm?

Solution

1. Calculate Sacrificing Ratio: Sacrificing Ratio = Old Share - New Share

Arti's Sacrifice = (3/5) - (2/4) = (12 - 10) / 20 = 2/20
Bharti's Sacrifice = (2/5) - (1/4) = (8 - 5) / 20 = 3/20 Sacrificing Ratio of Arti : Bharti = 2:3

2. Distribute Goodwill Premium: Sarthi's premium = Rs. 10,000

Arti's share = (2/5) × 10,000 = Rs. 4,000
Bharti's share = (3/5) × 10,000 = Rs. 6,000

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For writing off existing goodwill)
	Arti's Capital A/c Dr.
Bharti's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 3:2)		3,000
2,000
			5,000
	(For capital and goodwill brought in)
	Bank A/c Dr.
To Sarthi's Capital A/c
To Premium for Goodwill A/c
(Amount of capital and goodwill brought by Sarthi)		60,000
			50,000
			10,000
	(For distribution of goodwill premium)
	Premium for Goodwill A/c Dr.
To Arti's Capital A/c
To Bharti's Capital A/c
(Goodwill distributed in sacrificing ratio 2:3)		10,000
			4,000
			6,000

Q21Numerical Questions

X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z?

Solution

Working Note: Sacrificing Ratio Since it is not specified how Z acquires his share, it is assumed that the old partners sacrifice in their old profit sharing ratio, which is 4:3.

X's share of goodwill = (4/7) × 7,000 = Rs. 4,000
Y's share of goodwill = (3/7) × 7,000 = Rs. 3,000

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For writing off existing goodwill)
	X's Capital A/c Dr.
Y's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 4:3)		22,857
17,143
			40,000
	(For capital and goodwill brought in by Z)
	Bank A/c Dr.
To Z's Capital A/c
To Premium for Goodwill A/c
(Amount of capital and goodwill brought by Z)		27,000
			20,000
			7,000
	(For distribution of goodwill premium)
	Premium for Goodwill A/c Dr.
To X's Capital A/c
To Y's Capital A/c
(Goodwill distributed in sacrificing ratio 4:3)		7,000
			4,000
			3,000

Q22Numerical Questions

Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for 1/4 share in the profits. The new profit sharing ratio agreed was 2:1:1. Christopher brought Rs. 50,000 for his capital. His share of goodwill was agreed to at Rs. 15,000. Christopher could bring only Rs. 10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm?

Solution

1. Calculate Sacrificing Ratio: Sacrificing Ratio = Old Share - New Share

Aditya's Sacrifice = (3/5) - (2/4) = (12 - 10) / 20 = 2/20
Balan's Sacrifice = (2/5) - (1/4) = (8 - 5) / 20 = 3/20 Sacrificing Ratio of Aditya : Balan = 2:3

2. Distribute Goodwill: Total goodwill share of Christopher = Rs. 15,000.

Amount credited to Aditya = (2/5) × 15,000 = Rs. 6,000
Amount credited to Balan = (3/5) × 15,000 = Rs. 9,000

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For capital and partial goodwill brought in)
	Bank A/c Dr.
To Christopher's Capital A/c
To Premium for Goodwill A/c
(Capital and goodwill brought in cash by Christopher)		60,000
			50,000
			10,000
	(For adjustment of total goodwill)
	Premium for Goodwill A/c Dr. (amount brought in)
Christopher's Current A/c Dr. (amount not brought in)
To Aditya's Capital A/c
To Balan's Capital A/c
(Goodwill credited to sacrificing partners in 2:3 ratio)		10,000
5,000
			6,000
			9,000

Q23Numerical Questions

Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of goodwill premium in cash. The Goodwill of the firm was valued at Rs. 80,000 on Kanwar's admission. Record necessary journal entry for goodwill on Kanwar's admission.

Solution

1. Calculate Kanwar's Share of Goodwill: Kanwar's share of goodwill = (1/4) of Firm's Goodwill = (1/4) × Rs. 80,000 = Rs. 20,000

2. Determine Sacrificing Ratio: Since it is not specified how Kanwar acquires his share, the old partners (Amar and Samar) will sacrifice in their old profit sharing ratio, which is 3:1.

3. Calculate Amount Credited to Sacrificing Partners:

Amount credited to Amar = (3/4) × 20,000 = Rs. 15,000
Amount credited to Samar = (1/4) × 20,000 = Rs. 5,000

Journal Entry

Since Kanwar could not bring goodwill in cash, his current account will be debited.

Date	Particulars	L.F.	Credit (Rs.)
	Kanwar's Current A/c Dr.
To Amar's Capital A/c
To Samar's Capital A/c
(Adjustment for Kanwar's share of goodwill, credited to old partners in their sacrificing ratio of 3:1)		20,000
			15,000
			5,000

Q24Numerical Questions

Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were Rs. 50,000 for 2013, Rs. 60,000 for 2014, Rs. 90,000 for 2015 and Rs. 70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal's admission when: a) Goodwill already appears in the books at Rs. 2,02,500. b) Goodwill appears in the books at Rs. 2,500. c) Goodwill appears in the books at Rs. 2,05,000.

Solution

Working Notes:

1. Valuation of New Goodwill:

Total Profits = 50,000 + 60,000 + 90,000 + 70,000 = Rs. 2,70,000
Average Profit = 2,70,000 / 4 = Rs. 67,500
Goodwill = Average Profit × 3 years' purchase = 67,500 × 3 = Rs. 2,02,500

2. Ram Lal's Share of Goodwill:

Ram Lal's Share = 1/4 of Goodwill = 1/4 × 2,02,500 = Rs. 50,625

3. Sacrificing Ratio:

The sacrificing ratio of Mohan Lal and Sohan Lal is their old ratio, 3:2.

4. Goodwill Adjustment for Ram Lal:

Debit Ram Lal's Current A/c with Rs. 50,625.
Credit Mohan Lal's Capital A/c = (3/5) × 50,625 = Rs. 30,375
Credit Sohan Lal's Capital A/c = (2/5) × 50,625 = Rs. 20,250

a) Goodwill already appears at Rs. 2,02,500

Date	Particulars	L.F.	Credit (Rs.)
2013	(For writing off existing goodwill)
Jan 1	Mohan Lal's Capital A/c Dr.
Sohan Lal's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 3:2)		1,21,500
81,000
			2,02,500
	(For new goodwill adjustment)
Jan 1	Ram Lal's Current A/c Dr.
To Mohan Lal's Capital A/c
To Sohan Lal's Capital A/c
(Goodwill adjustment for Ram Lal's share)		50,625
			30,375
			20,250

b) Goodwill appears at Rs. 2,500

Date	Particulars	L.F.	Credit (Rs.)
2013	(For writing off existing goodwill)
Jan 1	Mohan Lal's Capital A/c Dr.
Sohan Lal's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 3:2)		1,500
1,000
			2,500
	(For new goodwill adjustment - Same as above)
Jan 1	Ram Lal's Current A/c Dr.
To Mohan Lal's Capital A/c
To Sohan Lal's Capital A/c
(Goodwill adjustment for Ram Lal's share)		50,625
			30,375
			20,250

c) Goodwill appears at Rs. 2,05,000

Date	Particulars	L.F.	Credit (Rs.)
2013	(For writing off existing goodwill)
Jan 1	Mohan Lal's Capital A/c Dr.
Sohan Lal's Capital A/c Dr.
To Goodwill A/c
(Existing goodwill written off in old ratio 3:2)		1,23,000
82,000
			2,05,000
	(For new goodwill adjustment - Same as above)
Jan 1	Ram Lal's Current A/c Dr.
To Mohan Lal's Capital A/c
To Sohan Lal's Capital A/c
(Goodwill adjustment for Ram Lal's share)		50,625
			30,375
			20,250

Q25Numerical Questions

Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio between Rajesh, Mukesh and Hari is 4:3:2. On Hari's admission goodwill of the firm is valued at Rs. 36,000. Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh and Hari decided not to show goodwill in their balance sheet. Record necessary journal entries for the treatment of goodwill on Hari's admission.

Solution

1. Calculate Gaining and Sacrificing Ratio:

Old Ratio (Rajesh : Mukesh) = 1:1
New Ratio (Rajesh : Mukesh : Hari) = 4:3:2
Rajesh's Sacrifice: Old Share - New Share = 1/2 - 4/9 = (9 - 8) / 18 = 1/18 (Sacrifice)
Mukesh's Sacrifice: Old Share - New Share = 1/2 - 3/9 = (9 - 6) / 18 = 3/18 (Sacrifice)
Hari's Gain: New Share = 2/9 = 4/18 (Gain) (Check: Total Sacrifice = 1/18 + 3/18 = 4/18 = Hari's Gain)
Sacrificing Ratio (Rajesh : Mukesh) = 1:3

2. Calculate Hari's Share of Goodwill:

Hari's Share of Goodwill = Firm's Goodwill × Hari's Share = Rs. 36,000 × (2/9) = Rs. 8,000

3. Distribute Goodwill among Sacrificing Partners:

Amount credited to Rajesh = (1/4) × 8,000 = Rs. 2,000
Amount credited to Mukesh = (3/4) × 8,000 = Rs. 6,000

Journal Entry

Since Hari is unable to bring cash for goodwill and it is decided not to show goodwill in the books, the adjustment will be made through the current account.

Date	Particulars	L.F.	Credit (Rs.)
	Hari's Current A/c Dr.
To Rajesh's Capital A/c
To Mukesh's Capital A/c
(Adjustment for Hari's share of goodwill, credited to sacrificing partners in 1:3 ratio)		8,000
			2,000
			6,000

Q26Numerical Questions

Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this share of goodwill Rs. 45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account. Pass the necessary journal entry for the treatment of goodwill?

Solution

1. Calculate Gaining and Sacrificing Ratio:

Old Ratio (Amar : Akbar) = 1:1
New Ratio (Amar : Akbar : Anthony) = 4:3:2
Amar's Sacrifice: Old Share - New Share = 1/2 - 4/9 = (9 - 8) / 18 = 1/18 (Sacrifice)
Akbar's Sacrifice: Old Share - New Share = 1/2 - 3/9 = (9 - 6) / 18 = 3/18 (Sacrifice)
Anthony's Gain: New Share = 2/9 = 4/18 (Gain) (Check: Total Sacrifice = 1/18 + 3/18 = 4/18 = Anthony's Gain)
Sacrificing Ratio (Amar : Akbar) = 1:3

2. Identify Anthony's Share of Goodwill:

Anthony's share of goodwill is given as Rs. 45,000.

3. Distribute Goodwill among Sacrificing Partners:

Amount credited to Amar = (1/4) × 45,000 = Rs. 11,250
Amount credited to Akbar = (3/4) × 45,000 = Rs. 33,750

Journal Entry

Since Anthony could not bring cash for goodwill, the adjustment is made through his current account.

Date	Particulars	L.F.	Credit (Rs.)
	Anthony's Current A/c Dr.
To Amar's Capital A/c
To Akbar's Capital A/c
(Adjustment for Anthony's share of goodwill, credited to sacrificing partners in 1:3 ratio)		45,000
			11,250
			33,750

Q27Numerical Questions

Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. Balance Sheet of A and B as at March 31, 2016
Liabilites Amount (Rs.) Assets Amount (Rs.)
Bills Payable 10,000 Cash in Hand 10,000
Creditors 58,000 Cash at Bank 40,000
Outstanding Expenses 2,000 Sundry Debtors 60,000
Capitals: Stock 40,000
A 1,80,000 Plant 1,00,000
B 1,50,000 Buildings 1,50,000
3,30,000
4,00,000 4,00,000
C is admitted as a partner on the date of the balance sheet on the following terms:

(i)

C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for 1/4 share in the profits.

(ii)

Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%.

(iii)

Stock is found over valued by Rs. 4,000.

(iv)

A provision for bad and doubtful debts is to be created at 5% of debtors.

(v)

Creditors were unrecorded to the extent of Rs. 1,000. Pass the necessary journal entries, prepare the revaluation account and partners' capital accounts, and show the Balance Sheet after the admission of C.

Solution

1. Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2016	(For capital and goodwill brought by C)
Dec 31	Bank A/c Dr.
To C's Capital A/c
To Premium for Goodwill A/c		1,60,000
			1,00,000
			60,000
	(For distribution of goodwill in sacrificing ratio 2:1)
Dec 31	Premium for Goodwill A/c Dr.
To A's Capital A/c
To B's Capital A/c		60,000
			40,000
			20,000
	(For revaluation of assets and liabilities)
Dec 31	Plant A/c Dr.
Buildings A/c Dr.
To Revaluation A/c		20,000
15,000
			35,000
Dec 31	Revaluation A/c Dr.
To Stock A/c
To Provision for Doubtful Debts A/c
To Creditors A/c		8,000
			4,000
			3,000
			1,000
	(For transfer of revaluation profit)
Dec 31	Revaluation A/c Dr. (35,000 - 8,000)
To A's Capital A/c
To B's Capital A/c		27,000
			18,000
			9,000

2. Revaluation Account

Dr. Cr.

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Stock A/c	4,000	By Plant A/c	20,000
To Provision for Doubtful Debts	3,000	By Buildings A/c	15,000
To Creditors A/c	1,000
To Profit transferred to:
A's Capital A/c	18,000
B's Capital A/c	9,000
	27,000
Total	35,000	Total	35,000

3. Partners' Capital Accounts

Dr. Cr.

Particulars	A (Rs.)	B (Rs.)	C (Rs.)	Particulars	A (Rs.)	B (Rs.)	C (Rs.)
To Balance c/d	2,38,000	1,79,000	1,00,000	By Balance b/d	1,80,000	1,50,000	-
				By Bank A/c	-	-	1,00,000
				By Premium for Goodwill	40,000	20,000	-
				By Revaluation A/c (Profit)	18,000	9,000	-
Total	2,38,000	1,79,000	1,00,000	Total	2,38,000	1,79,000	1,00,000

4. Balance Sheet of the New Firm as at 31.12.2016

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Bills Payable	10,000	Cash in Hand	10,000
Creditors (58,000+1,000)	59,000	Cash at Bank (40,000+1,60,000)	2,00,000
Outstanding Expenses	2,000	Sundry Debtors	60,000
Capitals:		Less: Provision	(3,000) 57,000
A	2,38,000	Stock (40,000-4,000)	36,000
B	1,79,000	Plant	1,20,000
C	1,00,000	Buildings (1,50,000+15,000)	1,65,000
	5,17,000
Total	5,88,000	Total	5,88,000

Q28Numerical Questions

Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. In April 2017 they admitted Om as a new partner. On the date of Om's admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000 in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of these items on Om's admission. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.

Solution

The General Reserve and the credit balance in the Profit and Loss Account are accumulated profits that belong to the old partners. They must be distributed to the old partners (Leela and Meeta) in their old profit sharing ratio (5:3) before Om's admission.

Calculations:

Total accumulated profits = General Reserve + P&L A/c (Cr.) = Rs. 16,000 + Rs. 24,000 = Rs. 40,000

Leela's share = (5/8) × 40,000 = Rs. 25,000
Meeta's share = (3/8) × 40,000 = Rs. 15,000

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2017	(For distribution of General Reserve)
April	General Reserve A/c Dr.
To Leela's Capital A/c
To Meeta's Capital A/c
(General Reserve transferred to old partners' capital accounts in 5:3 ratio)		16,000
			10,000
			6,000
	(For distribution of Profit and Loss A/c balance)
April	Profit and Loss A/c Dr.
To Leela's Capital A/c
To Meeta's Capital A/c
(P&L A/c credit balance transferred to old partners' capital accounts in 5:3 ratio)		24,000
			15,000
			9,000

Alternatively, a single combined entry can be passed:

Date	Particulars	L.F.	Credit (Rs.)
2017	General Reserve A/c Dr.
Profit and Loss A/c Dr.
To Leela's Capital A/c
To Meeta's Capital A/c
(Accumulated profits transferred to old partners' capital accounts in old ratio 5:3)		16,000
24,000
			25,000
			15,000

Q29Numerical Questions

Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2017 they admitted Ranjan as a partner. On Ranjan's admission the profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000. Record necessary journal entry for the treatment of the same.

Solution

A debit balance in the Profit and Loss Account represents an accumulated loss. This loss belongs to the old partners and must be written off by debiting their capital accounts in their old profit sharing ratio (3:1) before the admission of the new partner.

Calculations: Total accumulated loss = Rs. 40,000

Share of loss debited to Amit's Capital = (3/4) × 40,000 = Rs. 30,000
Share of loss debited to Viney's Capital = (1/4) × 40,000 = Rs. 10,000

Journal Entry

Date	Particulars	L.F.	Credit (Rs.)
2017	Amit's Capital A/c Dr.
Viney's Capital A/c Dr.
To Profit and Loss A/c
(Debit balance of P&L A/c written off by debiting old partners' capital accounts in their old ratio 3:1)		30,000
10,000
Jan 1			40,000

Q30Numerical Questions

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows: Balance Sheet of A and B as at March 31, 2016 | Liabilities | Amount (Rs.) | Assets | Amount (Rs.) | | :--- | :--- | :--- | :--- | | Sundry creditors | 41,500 | Cash at Bank | 26,500 | | Reserve fund | 4,000 | Bills Receivable | 3,000 | | Capital Accounts | | Debtors | 16,000 | | A | 30,000 | Stock | 20,000 | | B | 16,000 | Fixtures | 1,000 | | | | Land & Building | 25,000 | | | 91,500 | | 91,500 | On April 1, 2017, C was admitted into partnership on the following terms:

(a)

That C pays Rs. 10,000 as his capital.

(b)

That C pays Rs. 5,000 for goodwill. Half of this sum is to be withdrawn by A and B.

(c)

That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be created on Sundry Debtors and Bills Receivable.

(d)

That the value of land and buildings be appreciated by 20%.

(e) There being a claim against the firm for damages, a liability to the extent of Rs. 1,000 should be created.

(f) An item of Rs. 650 included in sundry creditors is not likely to be claimed and hence should be written back.

Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.

Solution

1. Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2017	(For Capital and Goodwill)
Apr 1	Bank A/c Dr.
To C's Capital A/c
To Premium for Goodwill A/c		15,000
			10,000
			5,000
	(Distribution of Goodwill in sacrificing ratio 3:1)
Apr 1	Premium for Goodwill A/c Dr.
To A's Capital A/c (3/4 of 5000)
To B's Capital A/c (1/4 of 5000)		5,000
			3,750
			1,250
	(Withdrawal of Goodwill)
Apr 1	A's Capital A/c Dr.
B's Capital A/c Dr.
To Bank A/c		1,875
625
			2,500
	(Distribution of Reserve Fund in old ratio 3:1)
Apr 1	Reserve Fund A/c Dr.
To A's Capital A/c
To B's Capital A/c		4,000
			3,000
			1,000
	(Revaluation Entries)
Apr 1	Revaluation A/c Dr.
To Stock A/c (10% of 20,000)
To Fixtures A/c (10% of 1,000)
To Provision for DD on Debtors (5% of 16,000)
To Provision for DD on B/R (5% of 3,000)
To Claim for Damages A/c		4,050
			2,000
			100
			800
			150
			1,000
Apr 1	Land & Building A/c Dr. (20% of 25,000)
Sundry Creditors A/c Dr.
To Revaluation A/c		5,000
650
			5,650
	(Transfer of Revaluation Profit in old ratio 3:1)
Apr 1	Revaluation A/c Dr. (5,650 - 4,050)
To A's Capital A/c
To B's Capital A/c		1,600
			1,200
			400

2. Partners' Capital Accounts

Dr. Cr.

Particulars	A (Rs.)	B (Rs.)	C (Rs.)	Particulars	A (Rs.)	B (Rs.)	C (Rs.)
To Bank (GW)	1,875	625	-	By Balance b/d	30,000	16,000	-
To Balance c/d	36,075	18,025	10,000	By Bank A/c	-	-	10,000
				By Premium for GW	3,750	1,250	-
				By Reserve Fund	3,000	1,000	-
				By Revaluation (Profit)	1,200	400	-
Total	37,950	18,650	10,000	Total	37,950	18,650	10,000

3. Balance Sheet of the New Firm as at April 1, 2017

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Sundry Creditors (41,500-650)	40,850	Cash at Bank (26,500+15,000-2,500)	39,000
Claim for Damages	1,000	Bills Receivable	3,000
Capitals:		Less: Provision	(150) 2,850
A	36,075	Debtors	16,000
B	18,025	Less: Provision	(800) 15,200
C	10,000	Stock (20,000-2,000)	18,000
	64,100	Fixtures (1,000-100)	900
		Land & Building (25,000+5,000)	30,000
Total	1,05,950	Total	1,05,950

Q31Numerical Questions

A and B are partners sharing profits and losses in the ratio of 3:1. On Ist April. 2017 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings Rs. 20,000 as for his 1/4 share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is agreed that partner's capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio?

Solution

1. Calculation of New Profit Sharing Ratio:

C's Share = 1/4
Remaining Share = 1 - 1/4 = 3/4
A's New Share = (3/4) of (3/4) = 9/16
B's New Share = (1/4) of (3/4) = 3/16
New Ratio (A:B:C) = 9/16 : 3/16 : 4/16 = 9:3:4

2. Calculation of Total Capital and New Capitals of A and B:

C's Capital for 1/4 (or 4/16) share = Rs. 20,000
Total Capital of the Firm = Rs. 20,000 × 4 = Rs. 80,000
A's Required Capital = (9/16) × 80,000 = Rs. 45,000
B's Required Capital = (3/16) × 80,000 = Rs. 15,000

3. Calculation of Cash to be Brought in or Withdrawn:

Partner	Required Capital (Rs.)	Existing Capital (Rs.)	Difference (Surplus / Deficit)
A	45,000	50,000	(5,000) Surplus - To be withdrawn
B	15,000	12,000	3,000 Deficit - To be brought in

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2017	(For surplus capital withdrawn by A)
Apr 1	A's Capital A/c Dr.
To Cash/Bank A/c
(Excess capital withdrawn by A to make it proportionate to profit sharing ratio)		5,000
			5,000
	(For deficit capital brought in by B)
Apr 1	Cash/Bank A/c Dr.
To B's Capital A/c
(Deficit in capital brought in by B to make it proportionate to profit sharing ratio)		3,000
			3,000

Q32Numerical Questions

Pinky, Qumar and Roopa partners in a firm sharing profits and losses in the ratio of 3:2:1. S is admitted as a new partner for 1/4 share in the profits of the firm, whichs he gets 1/8 from Pinky, and 1/16 each from Qmar and Roopa. The total capital of the new firm after Seema's admission will be Rs. 2,40,000. Seema is required to bring in cash equal to 1/4 of the total capital of the new firm. The capitals of the old partners also have to be adjusted in proportion of their profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all adjustments in respect of goodwill and revaluation of assets and liabilities have been made are Pinky Rs. 80,000, Qumar Rs. 30,000 and Roopa Rs. 20,000. Calculate the capitals of all the partners and record the necessary journal entries for doing adjustments in respect of capitals according to the agreement between the partners?

Solution

1. Calculation of New Profit Sharing Ratio:

Old Shares: Pinky = 3/6, Qumar = 2/6, Roopa = 1/6
Sacrifices: Pinky = 1/8, Qumar = 1/16, Roopa = 1/16
Pinky's New Share = 3/6 - 1/8 = (12-3)/24 = 9/24
Qumar's New Share = 2/6 - 1/16 = (16-3)/48 = 13/48
Roopa's New Share = 1/6 - 1/16 = (8-3)/48 = 5/48
Seema's (S) Share = 1/4 = 12/48
New Ratio (P:Q:R:S) = (18/48) : (13/48) : (5/48) : (12/48) = 18:13:5:12

2. Calculation of Required Capitals: Total Capital = Rs. 2,40,000

Pinky's Capital = (18/48) × 2,40,000 = Rs. 90,000
Qumar's Capital = (13/48) × 2,40,000 = Rs. 65,000
Roopa's Capital = (5/48) × 2,40,000 = Rs. 25,000
Seema's Capital = (12/48) × 2,40,000 = Rs. 60,000

3. Calculation of Cash to be Brought in or Withdrawn:

Partner	Required Capital (Rs.)	Existing Capital (Rs.)	Difference (Surplus / Deficit)
Pinky	90,000	80,000	10,000 Deficit - To be brought in
Qumar	65,000	30,000	35,000 Deficit - To be brought in
Roopa	25,000	20,000	5,000 Deficit - To be brought in
Seema	60,000	0	60,000 Deficit - To be brought in

Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
	(For capital brought in by Seema)
	Cash/Bank A/c Dr.
To Seema's Capital A/c		60,000
			60,000
	(For adjustment of old partners' capitals)
	Cash/Bank A/c Dr.
To Pinky's Capital A/c
To Qumar's Capital A/c
To Roopa's Capital A/c
(Deficit in capitals brought in by old partners)		50,000
			10,000
			35,000
			5,000

Q33Numerical Questions

The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of 6/14:5/14:3/14 respectively.
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital Accounts: Land and Buildings 24,000
Arun 19,000 Furniture 3,500
Bablu 16,000 Stock 14,000
Chetan 8,000 Debtors 12,600
Creditors 9,000 Cash 900
Bills Payable 3,000
55,000 55,000
They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms: a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful debts: (e) that the value of land and buildings having appreciated be brought upto Rs. 31,000 ;(f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak's Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be. Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Capital Accounts:		Land and Buildings	24,000
Arun	19,000	Furniture	3,500
Bablu	16,000	Stock	14,000
Chetan	8,000	Debtors	12,600
Creditors	9,000	Cash	900
Bills Payable	3,000
	55,000		55,000

Solution

1. Revaluation Account (Profit and Loss Adjustment Account)

Dr. Cr.

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Furniture A/c (12% of 3,500)	420	By Land and Buildings A/c	7,000
To Stock A/c (10% of 14,000)	1,400
To Reserve for DD (5% of 12,600)	630
To Profit transferred to:
Arun's Capital (6/14)	1,950
Bablu's Capital (5/14)	1,625
Chetan's Capital (3/14)	975
	4,550
Total	7,000	Total	7,000

2. Partners' Capital Accounts

Dr. Cr.

Particulars	Arun	Bablu	Chetan	Deepak	Particulars	Arun	Bablu	Chetan	Deepak
To Cash A/c (paid)	-	2,025	-	-	By Balance b/d	19,000	16,000	8,000	-
To Balance c/d	22,750	17,500	10,500	7,000	By Cash A/c	-	-	525	7,000
					By Premium for GW	1,800	1,500	900	-
					By Revaluation A/c	1,950	1,625	975	-
Total	22,750	19,525	10,500	7,000	Total	22,750	19,125	10,375	7,000

Working Notes for Capital Adjustment:

Deepak's capital for 1/8 share = Rs. 7,000. Total capital = 7,000 x 8 = Rs. 56,000.
Remaining share = 1 - 1/8 = 7/8. Old partners share this in 6:5:3.
New Ratio: Arun = 6/14 of 7/8 = 42/112; Bablu = 5/14 of 7/8 = 35/112; Chetan = 3/14 of 7/8 = 21/112; Deepak = 1/8 = 14/112. Ratio = 42:35:21:14 = 6:5:3:2.
Required Capitals: Arun = 6/16 of 56,000 = 21,000; Bablu = 5/16 of 56,000 = 17,500; Chetan = 3/16 of 56,000 = 10,500.
Adjusted Capitals before cash adjustment: Arun=22,750 (Surplus 1,750); Bablu=19,125 (Surplus 1,625); Chetan=9,875 (Deficit 625). Correction: There seems to be a calculation error in the textbook's solution logic as presented. Re-calculating as per the text's method for clarity. Let's re-verify the text's logic. Final capitals should be Arun: 21,000, Bablu: 17,500, Chetan: 10,500. Let's create the capital account based on these final figures.

Corrected Capital Accounts Table for Clarity:

Particulars	Arun	Bablu	Chetan	Particulars	Arun	Bablu	Chetan
To Cash A/c (paid off)	1,750	1,625	-	By Balance b/d	19,000	16,000	8,000
To Balance c/d (Required)	21,000	17,500	10,500	By Cash A/c (brought in)	-	-	625
				By Premium for GW	1,800	1,500	900
				By Revaluation A/c	1,950	1,625	975
Total	22,750	19,125	10,500	Total	22,750	19,125	10,500

3. Cash Account

Dr. Cr.

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Balance b/d	900	By Arun's Capital A/c	1,750
To Deepak's Capital A/c	7,000	By Bablu's Capital A/c	1,625
To Premium for Goodwill A/c	4,200	By Balance c/d	9,350
To Chetan's Capital A/c	625
Total	12,725	Total	12,725

4. Opening Balance Sheet of the New Firm

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	9,000	Cash	9,350
Bills Payable	3,000	Debtors	12,600
Capitals:		Less: Reserve	(630) 11,970
Arun	21,000	Stock	12,600
Bablu	17,500	Furniture	3,080
Chetan	10,500	Land and Buildings	31,000
Deepak	7,000
	56,000
Total	68,000	Total	68,000

Q34Numerical Questions

Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on March 31, 2016 (before Chintan's admission) was as follows: Balance Sheet of A and B as on 31.03.2016
Liabilities Amount (Rs.) Assets Amount (Rs.)
Creditors 8,000 Cash in hand 2,000
Bills payable 4,000 Cash at bank 10,000
General reserve 6,000 Sundry debtors 8,000
Capital accounts: Stock 10,000
Azad 50,000 Furniture 5,000
Babli 32,000 Machinery 25,000
82,000 Buildings 40,000
1,00,000 1,00,000
It was agreed that: i) Chintan will bring in Rs. 12,000 as his share of goodwill premium. ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000. iii) A provision for doubtful debts is to be created @ 6% on debtors. iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts. Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.

Solution

1. Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2016	(For Capital and Goodwill)
Mar 31	Cash/Bank A/c Dr.
To Chintan's Capital A/c
To Premium for Goodwill A/c		42,000
			30,000
			12,000
	(Distribution of Goodwill in sacrificing ratio 2:1)
Mar 31	Premium for Goodwill A/c Dr.
To Azad's Capital A/c
To Babli's Capital A/c		12,000
			8,000
			4,000
	(Distribution of General Reserve in old ratio 2:1)
Mar 31	General Reserve A/c Dr.
To Azad's Capital A/c
To Babli's Capital A/c		6,000
			4,000
			2,000
	(Revaluation Entries)
Mar 31	Buildings A/c Dr.
To Revaluation A/c		5,000
			5,000
Mar 31	Revaluation A/c Dr.
To Machinery A/c
To Provision for DD A/c (6% of 8,000)		2,480
			2,000
			480
	(Transfer of Revaluation Profit in old ratio 2:1)
Mar 31	Revaluation A/c Dr. (5,000 - 2,480)
To Azad's Capital A/c
To Babli's Capital A/c		2,520
			1,680
			840
	(Capital Adjustment through Current Accounts)
Mar 31	Azad's Capital A/c Dr.
To Azad's Current A/c		3,680
			3,680
Mar 31	Babli's Capital A/c Dr.
To Babli's Current A/c		8,840
			8,840

2. Ledger Accounts

Revaluation Account

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Machinery A/c	2,000	By Buildings A/c	5,000
To Provision for DD A/c	480
To Profit transferred to:
Azad's Capital	1,680
Babli's Capital	840
Total	5,000	Total	5,000

Partners' Capital Accounts

Particulars	Azad (Rs.)	Babli (Rs.)	Chintan(Rs.)	Particulars	Azad (Rs.)	Babli (Rs.)	Chintan(Rs.)
To Current A/c	3,680	8,840	-	By Balance b/d	50,000	32,000	-
To Balance c/d	60,000	30,000	30,000	By Bank A/c	-	-	30,000
				By Premium for GW	8,000	4,000	-
				By General Reserve	4,000	2,000	-
				By Revaluation A/c	1,680	840	-
Total	63,680	38,840	30,000	Total	63,680	38,840	30,000

Working Note for Capital Adjustment:

New Ratio: Remaining share = 3/4. Azad = 2/3 of 3/4 = 2/4. Babli = 1/3 of 3/4 = 1/4. Ratio = 2:1:1.
Chintan's capital for 1/4 share = 30,000. Total Capital = 30,000 x 4 = 1,20,000.
Required Capitals: Azad = 2/4 of 1,20,000 = 60,000. Babli = 1/4 of 1,20,000 = 30,000.
Existing Adjusted Capitals: Azad = 50000+8000+4000+1680 = 63,680 (Surplus 3,680). Babli = 32000+4000+2000+840 = 38,840 (Surplus 8,840).

3. Balance Sheet of the New Firm as at 31.03.2016

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	8,000	Cash in hand	2,000
Bills Payable	4,000	Cash at bank (10,000+42,000)	52,000
Partners' Current A/cs:		Sundry Debtors	8,000
Azad	3,680	Less: Provision	(480) 7,520
Babli	8,840	Stock	10,000
	12,520	Furniture	5,000
Capitals:		Machinery	23,000
Azad	60,000	Buildings	45,000
Babli	30,000
Chintan	30,000
	1,20,000
Total	1,44,520	Total	1,44,520

Q35Numerical Questions

Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on March 31, 2016 was as follows: Balance Sheet of A and B as on 1.03.2016
Liabilities Amount (Rs.) Assets Amount (Rs.)
Ashish Capital 80,000 Land & Building 35,000
Dutta's Capital 35,000 Plant 45,000
Creditors 15,000 Debtors 22,000
Bills Payable 10,000 Less : Provision 2,000 20,000
Stock 35,000
Cash 5,000
1,40,000 1,40,000
It was agreed that: i) The value of Land and Building be increased by Rs. 15,000. ii) The value of plant be increased by 10,000. iii) Goodwill of the firm be valued at Rs. 20,000. iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm. Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal's admission.

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Ashish Capital	80,000	Land & Building	35,000
Dutta's Capital	35,000	Plant	45,000
Creditors	15,000	Debtors	22,000
Bills Payable	10,000	Less : Provision	2,000 20,000
		Stock	35,000
		Cash	5,000
	1,40,000		1,40,000

Solution

1. Journal Entries

Date	Particulars	L.F.	Credit (Rs.)
2016	(Revaluation Entries)
Mar 31	Land & Building A/c Dr.
Plant A/c Dr.
To Revaluation A/c		15,000
10,000
			25,000
	(Transfer of Revaluation Profit in old ratio 3:2)
Mar 31	Revaluation A/c Dr.
To Ashish's Capital A/c
To Dutta's Capital A/c		25,000
			15,000
			10,000
	(Goodwill Adjustment - Vimal's share is 1/5 of 20,000 = 4,000)
Mar 31	Vimal's Current A/c Dr.
To Ashish's Capital A/c (3/5 of 4000)
To Dutta's Capital A/c (2/5 of 4000)		4,000
			2,400
			1,600
	(For Capital brought in by Vimal)
Mar 31	Cash/Bank A/c Dr.
To Vimal's Capital A/c		36,000
			36,000

Working Notes for Capital:

Ashish's Adjusted Capital = 80,000 (opening) + 15,000 (reval profit) + 2,400 (goodwill) = 97,400
Dutta's Adjusted Capital = 35,000 (opening) + 10,000 (reval profit) + 1,600 (goodwill) = 46,600
Combined Capital of Old Partners for 4/5 share = 97,400 + 46,600 = 1,44,000
Total Capital of New Firm = 1,44,000 × (5/4) = 1,80,000
Vimal's Capital (1/5 share) = 1,80,000 × (1/5) = Rs. 36,000

2. Partners' Capital Accounts

Dr. Cr.

Particulars	Ashish(Rs.)	Dutta(Rs.)	Vimal(Rs.)	Particulars	Ashish(Rs.)	Dutta(Rs.)	Vimal(Rs.)
To Balance c/d	97,400	46,600	36,000	By Balance b/d	80,000	35,000	-
				By Revaluation A/c	15,000	10,000	-
				By Vimal's Current A/c	2,400	1,600	-
				By Cash/Bank A/c	-	-	36,000
Total	97,400	46,600	36,000	Total	97,400	46,600	36,000

3. Balance Sheet of the New Firm as at 31.03.2016

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	15,000	Cash (5,000+36,000)	41,000
Bills Payable	10,000	Debtors	22,000
Capitals:		Less: Provision	2,000 20,000
Ashish	97,400	Stock	35,000
Dutta	46,600	Plant (45,000+10,000)	55,000
Vimal	36,000	Land & Building (35,000+15,000)	50,000
	1,80,000	Vimal's Current A/c	4,000
Total	2,05,000	Total	2,05,000

Q1Questions for Practice

Identify various matters that need adjustments at the time of admission of a new partner.

Solution

At the time of admission of a new partner, the following matters need adjustments in the books of the firm:

New Profit Sharing Ratio and Sacrificing Ratio: Calculation of the new ratio in which all partners (including the new one) will share future profits and the ratio in which old partners sacrifice their share of profits.
Valuation and Adjustment of Goodwill: A new partner compensates the old partners for the loss of their share in the firm's super-profits. This requires valuation of goodwill and its accounting treatment.
Revaluation of Assets and Reassessment of Liabilities: Assets and liabilities are revalued to their current market values to ensure that the incoming partner is not affected by past fluctuations in their values. The resulting profit or loss is shared by the old partners.
Distribution of Accumulated Profits, Reserves, and Losses: Undistributed profits (like General Reserve, Profit & Loss A/c credit balance) or losses existing in the books are transferred to the old partners' capital accounts in their old profit sharing ratio.
Adjustment of Partners' Capitals: If agreed upon, the capitals of all partners may be adjusted to be in proportion to their new profit sharing ratio.

Q2Questions for Practice

Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

Solution

It is necessary to ascertain the new profit sharing ratio for old partners when a new partner is admitted for the following reasons:

Change in Relative Shares: When a new partner is admitted, the old partners have to surrender a part of their share of profits in favour of the new partner. This changes the relative proportion in which the old partners will share the remaining profits. Their old ratio applied to the total profit of the firm, while their new share will apply to the remaining profit after giving the new partner's share. This results in a new ratio among the old partners themselves.
Basis for Future Profits: The new profit sharing ratio becomes the basis for distributing all future profits and losses of the firm among all partners, including the new one.
Calculation of Gaining Ratio: In future reconstitutions, such as the retirement or death of a partner, this new ratio will serve as the old ratio for calculating the gaining ratio of the remaining partners.

Q3Questions for Practice

What is sacrificing ratio? Why is it calculated?

Solution

Sacrificing Ratio is the ratio in which the old partners agree to sacrifice or surrender their share of profit in favour of the incoming partner. It is calculated as the difference between an old partner's old profit share and his new profit share.

Sacrificing Ratio = Old Profit Share - New Profit Share

It is calculated for one primary reason:

To Distribute the Premium for Goodwill: A new partner is required to bring an additional amount, known as 'premium for goodwill', to compensate the existing partners for the loss of their share in the future super-profits of the firm. This amount of premium is distributed among the old partners. The sacrificing ratio determines the proportion in which this premium for goodwill is shared by the sacrificing partners. The partner who sacrifices more gets a larger share of the goodwill amount.

Q4Questions for Practice

On what occasions sacrificing ratio is used?

Solution

The sacrificing ratio is primarily used in the following two situations related to the reconstitution of a partnership firm:

Admission of a New Partner: This is the most common occasion. When a new partner is admitted, he acquires his share of profit from the old partners. The ratio in which the old partners forgo their shares is the sacrificing ratio. The premium for goodwill brought in by the new partner is distributed among the old partners in this ratio as compensation.
Change in Profit Sharing Ratio among Existing Partners: When existing partners decide to change their profit sharing ratio, some partners may gain a share of profit while others may lose (sacrifice) a share. In this case, the gaining partners must compensate the sacrificing partners for the share of profit they have acquired. The amount of compensation is usually based on the firm's goodwill and is adjusted through the partners' capital accounts based on the gaining and sacrificing ratios.

Q5Questions for Practice

If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

Solution

According to Accounting Standard 26 (AS-26) on 'Intangible Assets', internally generated goodwill should not be recognized as an asset. Therefore, if some goodwill already exists in the books of the firm at the time of a new partner's admission, it must be written off.

The procedure is as follows:

Write off Existing Goodwill: The existing goodwill appearing in the Balance Sheet is written off by debiting the capital accounts of the old partners in their old profit sharing ratio and crediting the Goodwill Account. The journal entry is: Old Partners' Capital A/cs Dr. (in old profit sharing ratio) To Goodwill A/c
Account for New Goodwill: The amount of premium for goodwill brought in by the new partner is then treated separately. It is credited to the sacrificing partners' capital accounts in their sacrificing ratio. The journal entries are: i. Bank A/c Dr. To Premium for Goodwill A/c ii. Premium for Goodwill A/c Dr. To Sacrificing Partners' Capital A/cs (in sacrificing ratio)

Q6Questions for Practice

Why there is need for the revaluation of assets and liabilities on the admission of a partner?

Solution

There is a need for the revaluation of assets and reassessment of liabilities on the admission of a new partner for the following reasons:

To Reflect True and Fair Value: Over time, the book values of assets and liabilities may differ significantly from their current market values. Revaluation is done to bring the assets and liabilities to their true and fair values in the books.
To Prevent Unfair Advantage/Disadvantage: If assets are undervalued or liabilities are overvalued at the time of admission, the new partner would gain an unfair advantage in the future, as these assets would later be sold or liabilities paid at a value different from the book value, and the new partner would share in that gain. Conversely, if assets are overvalued or liabilities are undervalued, the new partner would be at a disadvantage. Revaluation ensures that the new partner neither benefits nor suffers due to changes in the value of assets and liabilities that occurred before their admission.
To Adjust Old Partners' Capital: The profit or loss arising from revaluation belongs to the old partners as it relates to the period before the new partner's admission. This gain or loss is transferred to the old partners' capital accounts in their old profit sharing ratio, thus adjusting their capital to reflect the true financial position of the firm at the time of reconstitution.

Q1Test your Understanding - I

A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4 share in the future profits. The new profit sharing ratio will be:

(a)

A 9/16, B 3/16, C 4/16

(b)

A 8/16, B 4/16, C 4/16

(c)

A 10/16, B 2/16, C 4/16

(d)

A 8/16, B 9/16, C 10/16

Solution

The correct answer is (a) A 9/16, B 3/16, C 4/16.

Calculation:

Let the total share of the firm be 1.
C's share = 1/4
Remaining share for A and B = 1 - 1/4 = 3/4
This remaining share will be distributed between A and B in their old profit sharing ratio, which is 3:1.
- A's new share = (3/4) of (3/4) = 9/16
- B's new share = (1/4) of (3/4) = 3/16
C's share can be written as 4/16 to have a common denominator.

Therefore, the new profit sharing ratio of A, B, and C is 9:3:4.

Q2Test your Understanding - I

X and Y share profits in the ratio of 3:2. Z was admitted as a partner who sets 1/5 share. New profit sharing ratio, if Z acquires 3/20 from X and 1/20 from Y would be:

(a)

9:7:4

(b)

8:8:4

(c)

6:10:4

(d)

10:6:4

Solution

The correct answer is (a) 9:7:4.

Calculation:

Old ratio of X and Y = 3:2. So, X's old share = 3/5 and Y's old share = 2/5.
Z's share = 1/5. This is acquired as 3/20 from X and 1/20 from Y. (Note: 3/20 + 1/20 = 4/20 = 1/5, which is Z's share).
Calculate the new shares of the old partners by deducting their sacrifice.
- X's new share = X's old share - Share sacrificed = 3/5 - 3/20 = 12/20 - 3/20 = 9/20
- Y's new share = Y's old share - Share sacrificed = 2/5 - 1/20 = 8/20 - 1/20 = 7/20
Z's share = 1/5 = 4/20

Therefore, the new profit sharing ratio of X, Y, and Z is 9:7:4.

Q3Test your Understanding - I

A and B share profits and losses in the ratio of 3:1, C is admitted into partnership for 1/4 share. The sacrificing ratio of A and B is:

(a)

equal

(b)

3:1

(c)

2:1

(d)

3:2.

Solution

The correct answer is (b) 3:1.

Explanation: When a new partner is admitted and the question does not specify how the new partner acquires their share from the old partners, it is assumed that the old partners sacrifice their share in their old profit sharing ratio.

In this case, A and B's old profit sharing ratio is 3:1. Since no other information is given, they will sacrifice in the same ratio.

Verification:

C's share = 1/4
Remaining share = 1 - 1/4 = 3/4
A's new share = 3/4 of 3/4 = 9/16
B's new share = 1/4 of 3/4 = 3/16
Sacrifice = Old Share - New Share
- A's sacrifice = 3/4 - 9/16 = 12/16 - 9/16 = 3/16
- B's sacrifice = 1/4 - 3/16 = 4/16 - 3/16 = 1/16
Sacrificing ratio of A and B = 3/16 : 1/16 = 3:1.

Q1Test your Understanding - II

At the time of admission of a new partner, general reserve appearing in the old balance sheet is transferred to:

(a)

all partner's capital account

(b)

new partner's capital account

(c)

old partner's capital account

(d)

none of the above.

Solution

The correct answer is (c) old partner's capital account.

Explanation: The general reserve is an accumulated profit created out of the past profits of the firm. Since these profits were earned before the admission of the new partner, they belong exclusively to the old partners. Therefore, the general reserve is distributed among the old partners in their old profit sharing ratio.

Q2Test your Understanding - II

Asha and Nisha are partner's sharing profit in the ratio of 2:1. Asha's son Ashish was admitted for 1/4 share of which 1/8 was gifted by Asha to her son. The remaining was contributed by Nisha. Goodwill of the firm in valued at Rs. 40,000. How much of the goodwill will be credited to the old partner's capital account.

(a)

Rs. 2,500 each

(b)

Rs. 5,000 each

(c)

Rs. 20,000 each

(d)

None of the above.

Solution

The correct answer is (b) Rs. 5,000 each.

Explanation:

Calculate Sacrificing Ratio:
- Ashish's total share = 1/4
- Share gifted (sacrificed) by Asha = 1/8
- Share contributed (sacrificed) by Nisha = Total share of Ashish - Share from Asha = 1/4 - 1/8 = 1/8
- The sacrificing ratio between Asha and Nisha is 1/8 : 1/8, which is 1:1 (equal).
Calculate Ashish's Share of Goodwill:
- Total goodwill of the firm = Rs. 40,000
- Ashish's share of goodwill (premium) = 1/4 of Rs. 40,000 = Rs. 10,000
Distribute Goodwill among Sacrificing Partners:
- The premium for goodwill brought by the new partner is distributed among the old partners in their sacrificing ratio (1:1).
- Amount credited to Asha's Capital A/c = 1/2 of Rs. 10,000 = Rs. 5,000
- Amount credited to Nisha's Capital A/c = 1/2 of Rs. 10,000 = Rs. 5,000

Therefore, Rs. 5,000 will be credited to each of the old partners' capital accounts.

Q3Test your Understanding - II

A, B and C are partner's in a firm. If D is admitted as a new partner:

(a)

old firm is dissolved

(b)

old firm and old partnership is dissolved

(c)

old partnership is reconstituted

(d)

None of the above.

Solution

The correct answer is (c) old partnership is reconstituted.

Explanation: Admission of a new partner leads to a change in the existing partnership agreement. The old agreement comes to an end, and a new agreement comes into force to carry on the business. This process is called reconstitution of the partnership. The firm itself is not dissolved; it continues its business, but with a changed relationship among the partners.

Q4Test your Understanding - II

On the admission of a new partner increase in the value of assets is debited to:

(a)

Profit and Loss Adjustment account

(b)

Assets account

(c)

Old partner's capital account

(d)

None of the above.

Solution

The correct answer is (b) Assets account.

Explanation: When the value of an asset increases, the journal entry to record this change is:

Asset A/c Dr. (with the amount of increase) To Revaluation A/c

Therefore, the increase in the value of assets is debited to the respective Assets account. The Revaluation Account (also known as Profit and Loss Adjustment Account) is credited.

Q5Test your Understanding - II

At the time of admission of a partner, undistributed profits appearing in the balance sheet of the old firm is transferred to the capital account of:

(a)

old partners in old profit sharing ratio

(b)

old partners in new profit sharing ratio

(c)

all the partner in the new profit sharing ratio.

Solution

The correct answer is (a) old partners in old profit sharing ratio.

Explanation: Undistributed profits (like General Reserve or Profit and Loss Account credit balance) are the accumulated earnings of the firm from the period before the new partner's admission. As such, these profits belong to the old partners who were part of the firm when these profits were earned. They are, therefore, transferred to the capital accounts of the old partners in their old profit sharing ratio.

Reconstitution of a Partnership Firm – Admission of a PartnerClass 12 Accountancy Part 1 NCERT Solutions

Test your Understanding - I (a), 2 (a), 3. (b).

Solution

Test your Understanding - II (c), 2. (b), 3. (c), 4. (b), 5. (b).

Solution

A firm's profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and Rs. 6,00,000. Calculate value of firm's goodwill on the basis of four years' purchase of the average profits for the last three years.

Solution

Solution

Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be different if it is computed by capitalisation of average profits? Confirm your answer by numerical verification.

Solution

Giri and Shanta are partners in a firm sharing profits equally. They admit Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as goodwill for 1/5th share of profits in the firm. What shall be journal entries if:

Solution

Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

Solution

What is goodwill? What factors affect goodwill?

Solution

Explain various methods of valuation of goodwill.

Solution

If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

Solution

Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.

Solution

Explain various methods for the treatment of goodwill on the admission of a new partner?

Solution

How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?

Solution

At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.

Solution

A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?

Solution

A,B,C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?

Solution

X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally for X and Y. Calculate new profit sharing ratio?

Solution

A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio?

Solution

P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio?

Solution

A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio respectively. Calculate new profit sharing ratio?

Solution

A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio?

Solution

A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B and 1/7 from C. Calculate new profit sharing ratio?

Solution

Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate new profit sharing ratio?

Solution

Solution

Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio?

Solution

Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio and sacrificing ratio?

Solution

Compute the value of goodwill on the basis of four years' purchase of the average profits based on the last five years? The profits for the last five years were as follows: Rs. 2015 40,000 2016 50,000 2017 60,000 2018 50,000 2019 60,000

Solution

Firm's Capital in a business is Rs. 2,00,000. The normal rate of return on firm's capital is 15%. During the year 2015 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?

Solution

Solution

Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%?

Solution

A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

Solution

Solution

Solution

Solution

X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z?

Solution

Solution

Solution

Solution

Solution

Solution

C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for 1/4 share in the profits.

Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%.

Stock is found over valued by Rs. 4,000.

A provision for bad and doubtful debts is to be created at 5% of debtors.

Creditors were unrecorded to the extent of Rs. 1,000. Pass the necessary journal entries, prepare the revaluation account and partners' capital accounts, and show the Balance Sheet after the admission of C.

Solution

Solution

Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2017 they admitted Ranjan as a partner. On Ranjan's admission the profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000. Record necessary journal entry for the treatment of the same.

Solution

Solution