NCERT Solution for Class 12 Accountancy Chapter 3 Reconstitution of a Partnership Firm – Admission of a Partner

Last Updated: August 25, 2024Categories: NCERT Solutions

Reconstitution Of A Partnership Firm Admission Of A Partner

NCERT Solutions for Class 12 Accountancy Part 1 Chapter 3 Reconstitution of a Partnership Firm Admission of a Partner is an extremely crucial chapter for students for their upcoming board examinations. Students struggling with the questions of the exercise given in the textbook must not worry anymore.

You can access the free solved NCERT Solutions for Class 12 Accountancy Part 1 Chapter 3 Reconstitution of a Partnership Firm Admission of a Partner here provided by SimplyAcad. Our subject experts have prepared the solutions to support students having problems with solving the tricky problem of the chapter. Students can use these solutions as a guide to strengthen their basics and solve complex questions. The solutions contain all the required data, journal entries and balance sheet in a structured manner for better clarity.

Access NCERT Solutions for Class 12 Accountancy Part 1 Chapter 3 Reconstitution of a Partnership Firm Admission of a Partner

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

Ans: The various matters that are required to be adjusted during the time of the admission of the new partner are :

  • Profit sharing ratio – During the time of the admission of the new partner, the calculation of the new profit sharing ratio has to be made.
  • The revaluation of the assets and liabilities is made to ascertain the value of the current time of the assets and the liabilities.
  • The valuation of the Goodwill is made and is further adjusted between the old sacrificing partners.
  • The accumulated profits, reserves, and losses are distributed in the old Profit Sharing Ratio among the old partners.
  • Capital of all the partners is adjusted

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

Ans: It is necessary to ascertain the new profit sharing ratio even for the old partners when the new partner is admitted to the firm because, with the admission of the new partner in the firm, the new profit sharing ratios are introduced as the new partner gains the profit sharing ratio from the old partners of the firm. Thus the old partners sacrifice their share of profit to benefit the new partner and hence there is a reduction of the share of the profit of the old partners which makes it necessary for the partners to determine the new profit sharing ratio post-admission.

3. What is sacrificing ratio? Why is it calculated?

Ans: The sacrificing ratio is referred to as the ratio of the profit or loss sharing among the partners which is calculated during the time of the admission of the new partner. On account of the admission of the new partner, old partners have to sacrifice their profit or loss sharing ratio in the favour of the new partner. This ratio is referred to as the sacrificing ratio. In other words, the ratio in which the old partners have decided to sacrifice their existing ratios of profit or loss to benefit the admission of the new partner is known as the sacrificing ratio.

4. On what occasions sacrificing ratio is used?

Ans: The calculation of the sacrificing ratio is made during the time of the admission of the new partner and it is referred to as the difference between the old and the new share of the profit of the existing partners of the firm. The profit sharing ratio of the partners is calculated between the old partners and the new partners. Thus the sacrificing ratio is used when the old partners decide to change the profit-sharing ratio. The second case is when new partners bring goodwill with them; it is transferred among the old partners sacrificing the ratio of the old partners.

5. 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 the existing amount of goodwill?

Ans: Goodwill is an intangible asset of the organisation and hence is considered to be the most important item of a business. There are various methods for the valuation of goodwill and many ways of treating them in the book of accounts. The goodwill has to be written off among the old partners in their Profit Sharing Ratio in cases when the value of goodwill already exists in the books. The journal entry will be the Old partner’s capital account to the Goodwill account.

6. Why there is need for the revaluation of assets and liabilities on the admission

of a partner?

Ans: Revaluation of assets and liabilities is done to ascertain the increment or the decrement in the value of assets and liabilities for some time before the admission to get and maintain fair dealings. Such adjustments result in either an increase in the book values of assets and liabilities or a decrease in the book value of assets and liabilities. These adjustments are done with the help of a new account called a revaluation account. This is done because the value of assets and liabilities may have been increased or decreased and the corresponding figures in the old balance sheet may have been understated or overstated. The profit or loss derived from this account is distributed among the partners.

7. 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.

Ans: Any organisation should reevaluate the amount of the assets and liabilities of the organisation during the time of the admission of the new partner in the organisation. The admission of the new partner in the organisation reconstitutes the partnership of the organisation and hence the organisation should evaluate the value of the assets and the liabilities of the organisation to pertain to the true value of the business. With the admission of the new partner in the organisation if the value of the assets of the organisation increases, the amount of the capital of the existing partner increases and in the case of a decrease in the value of the assets of the organisation, there will be a decline to the value of the capital of the existing partners. Thus the revaluation account is prepared to determine the profits or losses which arise with such reconstitution of the partnership.

  • The revaluation is treated in the books of account as follows: Increase in the value of the asset: The asset is debited and the revaluation account is credited.
  • Decrease in the value of the asset: The asset is credited and the revaluation account is debited.
  • Increase in the value of liabilities: Liabilities are credited and the revaluation account is debited
  • Decrease in the value of liabilities: Liabilities are debited and the revaluation account is credited.
  • Recording unrecorded liabilities: The revaluation account is debited and unrecorded liabilities are credited.
  • For transferring credit balance i.e. profit on revaluation: the Revaluation Account is debited and the old partners’ capital account is credited (old PSR)
  • For transferring debit balance i.e. loss on revaluation: The old partners’ capital account is debited and the Revaluation Account is credited (old PSR)

8. What is goodwill? What factors affect goodwill?

Ans: Goodwill is a real intangible asset that is the result of the efforts of all the partners to bring name, reputation, and fame to the business. It garners the attention of the customers and the audience and thus creates value for the organisation as it raises the earning capacity of any organisation. The factors which affect the value of goodwill are as follows:

  • Time: The amount and the period since which the business is in the market impacts and influences the goodwill of the organisation. Thus, the old business will have considerably more value compared to the business that is new in the market.
  • Location: The location of any business is responsible for enhancing the value of the goodwill of the organisation. Thus in cases when the business is located in a favourable position, it will have a favourable goodwill amount.
  • Risks Involved: The more the risk is involved in any business the lesser will be the amount of the goodwill of the organisation.
  • Monopolistic Nature of Business: Monopoly renders the assurance of profits and thus it brings a tremendous amount of goodwill to the business.
  • Nature of Goods: The nature of the goods that the organisation deals with brings stability to the business. Hence the more stable business will create a good value for goodwill compared to the business that has less stable goods.
  • Efficient Business: The goodwill of any organisation depends upon the efficiency of the management of the organisation. Thus in the cases when any business has efficient management practices in the organisation.
  • Personal and Impersonal Factors: The value of the goodwill for any business organisation increases as more and more importance to the impersonal factors is given and it thus decreases as more and more importance to the personal factors is given.

9. Explain various methods of valuation of goodwill.

Ans: The various methods for the valuation of the goodwill are as follows:

(i) Simple profit method: Under the simple profit method, goodwill is expressed to be the purchase of a certain number of years of profit based on the average of a given period. This method involves the following two steps:-

  1. Calculation of the average profit by taking into consideration the profit of the previous three or four years.
  2. Multiplying the average profit by the calculation of the above (a) by the number of years purchase of profits Average profit = Total profits for all the years/number of years.

(ii) Weighted average method: As per the weighted average method of goodwill the profit of the recent year is represented by the highest weights and the profits of the previous year get the lowest weights. The profit of each year gains some weight. Further, the products of the profits and the weights are added which are divided by the total weights to calculate the Weighted Average Profits. The formula for calculating goodwill by this method is:

Weighted average profit = Total product of profits / Total weights

Goodwill is calculated by multiplying the weighted average profit and number of years of purchase.

(i) Super Profit Method: The super profit method is calculated by making the difference between the average profit which is earned by the business and its normal profit. Calculating the value of the goodwill of the organisation is dependent upon the normal rate of return; the estimated future of the profit or the average profit of the previous few years and the value of the capital employed. Super profit = Average profit – normal profit.

To calculate the super profit, the following steps have to be followed:

  1. Ascertain or calculate the capital employed or average capital employed.
  2. Calculate the normal profit of the organisation.
  3. Calculate the actual maintainable profit of the organisation.
  4. Calculate the difference between the actual maintainable profit and normal profit.
  5. The value of the goodwill is calculated by multiplying the super profit and years of purchase.

 

(ii) Capitalisation method: Under the capitalisation method, instead of ordinary profit the super profit is taken into consideration. This super profit is considered to be the difference between the normal and the average profit. Thus the value of goodwill = Super profit/ Normal rate of returns*100

(iii) Sliding scale valuation method: The distribution of the profit in this method is related to the super profits which varies from year to year. Thus to find the value of the goodwill the super profit of each of the years is multiplied by the corresponding year and the total of the sum profit of each year is taken into account.

10. 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.

Ans: During the time of the admission of any new partner, it is sometimes decided that the capital of all the partners of the organisation must be made in proportion to the new incoming partner.

The calculation of the new capital of each partner is reliant upon the below-given conditions

  1. When the capital of the new partner is given
  2. When the total capital of the firm is given

1) When the capital of the new partner is given: In this case, the firm’s capital is made based on the capital which is brought by the new partner of the organisation. Thus the total capital of the firm is divided by the individual new profit shares to determine the new capital of each of the partners. Adjustments, if any, are posted in the partners’ capital account. The new capital calculated is written as balance c/d on the credit side of the old partner’s capital account. If new capital exceeds the old capital, it is the deficit, it is to be brought in by the old partners and if new capital is less than old capital, it is surplus. The difference is returned to old partners.

2) When the total capital of the firm is given: In this case the old capital of the old partners is calculated after making the adjustments. The total of the capital of the old partners is multiplied by the reciprocal of the total share of the old partners. The total Capital of the new firm is multiplied by the new profit sharing ratio individually for all the partners (including the new partner).

 

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

Ans: In the cases when the new partner is not in the position to bring his share of goodwill in cash, the adjustment of the goodwill account is made through the capital account of the old partners. Thus, the new partner’s account, current or capital is debited and the account of the old partners is credited in their sacrificing ratio. The journal entry for the same will be:-

New partners’ capital A/c To old partners’ capital (sacrifice ratio)

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

Ans: The various methods for the valuation of the goodwill are as follows:

  • Premium Method: This method is adopted in the cases when the newly admitted partner brings along with him/herself the cash which is equal to the amount of the goodwill. There are three manners of using this method :

(i) When the amount of premium is paid privately which hence does not require the need of passing the journal entry.

(ii) When the premium is retained by the organisation, two journal entries are passed in the books of accounts. Firstly the cash should be debited and the capital accounts of the new partner and secondly new partners’ capital accounts should be debited and old partners’ capital accounts should be credited in sacrificing ratio.

(iii) When the amount of the premium is withdrawn by the old partners of the organisation.

  • Revaluation method: In the revaluation method the new partner does not bring along with him/herself the share of the cash for the goodwill and hence the old partners will raise the value of the goodwill in the books. Thus the goodwill account will be debited by crediting the Capital account of the old partners in their profit or loss sharing ratio. The new value of the goodwill will appear on the balance sheet of the organisation.
  • Memorandum method: Under this method, goodwill is firstly raised after which it is written off among all partners (including the new one) in a new profit sharing ratio. The journal entry for the same will require the capital accounts of all partners to be debited and the goodwill account to be credited.

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

Ans: Since the new partner is not liable for any past accumulated profit and losses in the firm, they are all divided among old partners in their old profit sharing ratio.

Accounting treatment for accumulated profits and losses and reserves on the admission of a new partner:

i) Distributing accumulated profits and reserves Profit and loss A/c General reserve A/c Reserve Fund A/c Workmen’s compensation Fund A/c Contingency reserve A/c

To old partners’ capital account (in old PSR)

ii)Distributing accumulated losses Old Partners capital account Dr ( in Old PSR) To Profit and loss (debit balance) To deferred advertisement expenses To preliminary expenses

14. 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.

Ans: When revaluation is done, the balance sheet of the reconstituted firm reflects new revised values. A and B are partners sharing profits in the ratio of 3:2, the balance sheet as of 31st March 2017:

Balance Sheet

Liabilities Amount Assets Amount
Creditors Outstanding liabilities Capital:-

A 19000

B 14000

 28500

3000

33000

 Cash Stock

Prepaid insurance Debtors

8400

Less: provision 400

Machinery

Buildings Furniture

 1000

14000

500

8000

18000

14000

9000
Total 64500 Total 64500

 

C is admitted as a new partner introducing a capital of Rs 16000. The new profit sharing ratio is 5:3:2. Following revaluations are made:-

  • Stock to depreciate @5%
  • Provision for doubtful debts is to be Rs500
  • Furniture to depreciate @10%
  • The building is valued at Rs.19000

Solution:

Revaluation Account

Particulars Amount Particulars Amount
To stock

To provision for doubtful debts To Furniture To profit transferred to partners capital account

A 1980

B 1320

 700

100

900

3300

 By building 5000
Total 5000 Total 5000

 

Revaluation Account

Liabilities   Amount Assets   Amount
Creditors 28500 Cash 17000
Outstanding liabilities 3000 Stock Less : 14000 13300
Capital:- A 19000 depreciation 700 500
Add: profit On revaluation 1980 20980 Prepaid 8400 7900
insurance 500
Debtors 18000
14000 Less 19000
B 15320 : provision 9000
Add: profit on revaluation 1320 16000
Machinery
Buildings
Furniture
C
Total 83800 Total 83800

 

15. 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?

Ans: A: B

Old Ratio 3: 2 Or

3/5 : 2/5

C admits for 1/6 share of net profit in the new firm.

Let new firm profit = 1

Remaining share of A and B in the new firm = 1 – C’s share = 1 – 1/6 = 5/6

New ratio = Old ratio x Remaining share of A and B

A = 3/5 x 5/6 = 3/6

B = 2/5 x 5/6 = 2/6

A: B: C

New ratio = 3/6 : 2/6 : 1/6 = 3:2:1

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

Ans: A: B: C

Old Ratio 3: 2: 1 Or

3/6 : 2/6 : 1/6

D admits for 10/100 shares of new profit in the new firm.

Let new firm profit = 1

The remaining share of A, B, and C in the new firm = 1 – D’s share = 1 – 10/100 = 90/100 = 9/10

New ratio = Old ratio x Remaining share of A, B and C

A = 3/6 x 9/10 = 27/60 = 9/20

B = 2/6 x 9/10 = 18/60 = 6/20

C = 1/6 x 9/10 = 9/60 = 3/20

A: B: C : D

New ratio = 9/20: 6/20: 3/20: 1/10 (or 2/20) = 9 : 6 : 3 : 2

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

Ans: Old ratio = X : Y = 5 : 3 = 5/8 : 3/8

Z admits for 1/10 share of the new firm

X and Y each sacrifice = 1/10 x 1/2 = 1/20

New ratio = Old ratio – Sacrificing ratio

X = 5/8 – 1/20 = (25 – 2)/40 = 23/40

Y = 3/8 – 1/20 = (15 – 2)/40 = 13/40

New ratio = X : Y : Z = 23/40 : 13/40 : 1/10 (or 4/40) = 23 : 13 : 4

18. 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?

Ans: Old ratio = A : B : C = 2 : 2 : 1 = 2/5 : 2/5 : 1/5

D admits for 1/8 share in new firm which he takes from A

New ratio = Old ratio – Sacrificing ratio

A = 2/5 – 1/8 = (16-5)/40 = 11/40

New ratio = A : B : C : D = 11/40 : 2/5 (or 16/40) : 1/5 (or 8/40) : 1/8 (or 5/40) = 11 : 16 : 8 : 5

19. 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?

Ans: Old ratio = P : Q = 2 : 1 = 2/3 : 1/3

R admits to 1/5 share in the new firm which he takes 1/3

from P and 2/3 from Q

P’s sacrifice = 1/5 x 1/3 = 1/15

Q’s sacrifice = 1/5 x 2/3 = 2/15

New ratio = Old ratio – Sacrificing ratio

P = 2/3 – 1/15 = (10 – 1)/15 = 9/15 = 3/5

Q = 1/3 – 2/15 = (5 – 2)/15 = 3/15 = 1/5

New ratio = P : Q : R = 3/5 : 1/5 : 1/5 = 3 : 1 : 1

20. 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?

Ans: Old ratio = A : B : C = 3 : 2 : 2 = 3/7 : 2/7 : 2/7

D admits to 1/5 share in the new firm which he takes 1/5 in the ratio 2 : 2: 1 from A, B, and C.

A’s sacrifice = 1/5 x 2/5 = 2/25

B’s sacrifice = 1/5 x 2/5 = 2/25

C’s sacrifice = 1/5 x 1/5 = 1/25

New ratio = Old ratio – Sacrificing ratio

A = 3/7 – 2/25 = 61/175

B = 2/7 – 2/25 = 36/175

C = 2/7 – 1/25 = 43/175

New ratio = A: B: C : D = 61/175: 36/175: 43/175: 1/5 = 61: 36: 43: 35

21. 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?

Ans: Old ratio = A : B = 3 : 2 = 3/5 : 2/5

C admits for 3/7 share in the new firm

A’s sacrifice = 2/7

B’s sacrifice = 1/7

New ratio = Old ratio – Sacrificing ratio

A = 3/5 – 2/7 = 11/35

B = 2/5 – 1/7 = 9/35

New ratio = A : B : C = 11/35 : 9/35 : 3/7 = 11 : 9 : 15

22. 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?

Ans: Old ratio = A : B : C = 3 : 3 : 2 = 3/8 : 3/8 : 2/8

D admits for 4/7 share of profit in new firm

New ratio = Old ratio – Sacrificing ratio

A = 3/8 – 2/7 = 5/56

B = 3/8 – 1/7 = 13/56

C = 2/8 – 1/7 = 6/56

New ratio = A : B : C : D = 5/56 : 13/56 : 6/56 : 4/7 = 5 : 13 : 6 : 32

23. 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?

Ans: Old ratio = Radha : Rukmani = 3 : 2 = 3/5 : 2/5

Radha surrendered in favour of Gopi = 1/3 of her share

Rukmani surrendered in favour of Gopi = 1/4 of her share

Sacrificing ratio = Old ratio x Surender’s ratio

Radha = 3/5 x 1/3 = 1/5

Rukmani = 2/5 x 1/4 = 1/10

New ratio = Old ratio – Sacrificing ratio

Radha = 3/5 – 1/5 = 2/5

Rukmani = 2/5 – 1/10 = 3/10

Gopi’s share = Radha sacrificing ratio + Rukmani sacrificing ratio = 1/5 + 1/10 = 3/10

New ratio = Radha : Rukmani : Gopi = 2/5 (or 4/10) : 3/10 : 3/10 = 4 : 3 : 3

24. 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?

Ans: Old ratio = Singh : Gupta : Khan = 3 : 2 : 3 = 3/8 : 2/8 : 3/8

Singh surrender = 1/3 of his share

Gupta surrender = 1/4 of his share

Khan surrender = 1/5 of his share

Sacrificing ratio = Old ratio x Surrender ratio

Singh = 3/8 x 1/3 = 3/24

Gupta = 2/8 x 1/4 = 2/32

Khan = 3/8 x 1/5 = 3/40

New ratio = Old ratio – Sacrificing ratio

Singh = 3/8 – 3/24 = 6/24

Gupta = 2/8 – 2/32 = 6/32

Khan = 3/8 – 3/40 = 12/40

Jain share = Sacrificing ratio of other partners = 3/24 + 2/32 + 3/40 = 21/80

New ratio = Singh : Gupta : Khan : Jain = 6/24 : 6/32 : 12/40 : 21/80 = 20 : 15 : 24 : 21

25. 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?

Ans: Old ratio = Sandeep : Navdeep = 5 : 3 = 5/8 : 3/8

New ratio = Sandeep : Navdeep : C = 4 : 2 : 1 = 4/7 : 2/7 : 1/7

Sacrificing ratio = Old ratio – New ratio

Sandeep = 5/8 – 4/7 = 3/56

Navdeep = 3/8 – 2/7 = 5/56

Sacrificing ratio = Sandeep : Navdeep = 3/56 : 5/56 = 3 : 5

26. 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?

Ans: Old ratio = Rao : Swami = 3 : 2

Ravi admits to 1/8 share of profit in the new firm

Let the new firm profit = 1

Combined share of Rao and Swami in new firm = 1 – Ravi’s share = 1 – 1/8 = 7/8

New ratio = Combined share x Proportion in the combined share

Rao = 7/8 x 4/7 = 28/56

Swami = 7/8 x 3/7 = 21/56

New ratio = Rao : Swami : Ravi = 28/56 : 21/56 : 1/8 = 4 : 3 : 1

Sacrificing ratio = Old ratio – New ratio

Rao = 3/5 – 4/8 = 4/40

Swami = 2/5 – 3/8 = 1/40

Sacrificing ratio = Rao : Swami = 4/40 : 1/40 = 4 : 1

27. 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

Ans: Average profit = Sum of given years profit/Number

of given years

Year Profit
2013 40000
2014 50000
2015 60000
2016 50000
2017 60000
The sum of 5 years of profit 260000

 

Average profit = 260000/5 = 52000

Goodwill = Average profit x Number of year’s purchases =

52000 x 4 = 208000

28. 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.

Ans: Capital employed = 200000

Actual profit = 48000

Normal rate of return = 15%

Normal profit = Capital employed x (Normal rate of return/100) = 200000 x 5/100 = 30000

Super profit = Actual profit – Normal profit = 48000 = 30000 = 18000

Goodwill = Super profit x Number of years purchase = 18000 x 3 = Rs.54000

29. 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%?

Ans: Average actual profit = Sum of given years profit/Number of given years

Year Profit
2015 40000
2014 50000
2013 55000
2012 70000
2011 85000
The sum of 5 years of profit 300000

 

Average actual profit = 300000/5 = 60000

Normal profit = Capital employed x (Normal rate of return/100) = 500000 x 10/100 = 50000

Average super profit = Average actual profit – Normal profit = 60000 – 50000 = 10000

Goodwill = Average super profit x Number of years purchase = 10000 x 3 = Rs.30000

30. 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%?

Ans: Rajan’s capital = 300000

Rajni’s capital = 200000

Total capital employed = 500000

Normal rate of return = 20%

Capitalised value = Actual profit x 100/Normal rate of return = 150000 x 100/20 = 750000

Goodwill = Capitalised value – Capital employed = 750000 – 500000 = 250000

31. 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%?

Ans: Capital employed = Assets – External Liabilities = 100000 – 180000 = 820000

Capitalised value = Actual profit x 100/Normal rate of return = 100000 x 100/10 = 1000000

Goodwill = Capitalised value – Capital employed = 1000000 – 820000 = Rs.180000

32. 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.

Ans:

Journal Entries

S.No. Particulars L.F. Debit

Amount Rs.

 Credit

Amount Rs.
Case (a) Cash A/c Dr 24000
To Ghosh’s Capital A/c 20000
To Premium of Goodwill

A/c (Capital and goodwill of

his share brought by Ghosh)

 4000
Premium of Goodwill A/c Dr 4000
To Verma’s Capital A/c 2500
To Sharma’s Capital A/c

(Goodwill brought by

Ghosh credited to old partners in sacrificing ratio)

 1500
Case (b) Cash A/c Dr 24000
To Ghosh’s Capital A/c 20000
To Premium of Goodwill

A/c (Capital and goodwill of his share brought by Ghosh for 1/5 share of profit)

 4000
Premium of Goodwill A/c Dr 4000
To Verma’s Capital A/c 2500
To Sharma’s Capital A/c

(Goodwill brought by

Ghosh credited to old partners in sacrificing ratio)

 1500
Verma’s Capital A/c Dr 2500
Sharma’s Capital A/c Dr 1500
To Cash A/c

(Amount of premium of

goodwill withdrawn by old partners)

 4000
Case (c) Cash A/c Dr 24000
To Ghosh’s Capital A/c 20000
To Premium of Goodwill

A/c (Capital and goodwill of

his share brought by Ghosh for 1/5 share of profit)

 4000
Premium of Goodwill A/c Dr 4000
To Verma’s Capital A/c 2500
To Sharma’s Capital A/c

(Goodwill brought by

Ghosh credited old partners for sacrificing

ratio)

 1500
Verma’s Capital A/c Dr 1250
Sharma’s Capital A/c Dr 750
To Cash A/c (Half of the amount of

the premium of goodwill withdrawn by the old

partners)

 2000
Case (d) No entry (Goodwill was not bought

into firm)

 

33. 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?

Ans:

Journal Entries

Date Particulars L.F. Debit

Amount Rs.

 Credit

Amount Rs.
 

Cash A/c Dr

  

35000

 
To C’s Capital A/c   30000
To Premium of Goodwill

A/c (Capital and goodwill

share brought by C)

    

5000
Premium of Goodwill A/c Dr  

5000

  
To A’s Capital A/c   2000
To B’s Capital A/c

(Goodwill brought by C

credited to A & B in 2:3 sacrificing ratio)

   3000
   
A’s Capital A/c Dr 2000  
B’s Capital A/c Dr 3000  
To Cash A/c

(Amount of premium of

goodwill withdrawn by old partners)

   5000

 

Sacrificing ratio = Old ratio – New ratio A = 3/5 – 2/4 = 2/20

B = 2/5 – 1/4 = 3/20

Sacrificing ratio = A : B = 2/20 : 3/20 = 2 : 3

Goodwill of the firm = 20000

C’s share of goodwill = 20000 x 1/4 = 5000

A will receive = 5000 x 2/5 = 2000

B will receive = 5000 x 3/5 = 3000

34. 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?

Hint:Existinggoodwillwritten−offinoldprofitsharingratio

𝐻𝑖𝑛𝑡:𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙𝑤𝑟𝑖𝑡𝑡𝑒𝑛−𝑜𝑓𝑓𝑖𝑛𝑜𝑙𝑑𝑝𝑟𝑜𝑓𝑖𝑡𝑠ℎ𝑎𝑟𝑖𝑛𝑔𝑟𝑎𝑡𝑖𝑜

Ans:

Journal Entries

Date Particulars L.F. Debit Amount

Rs.

 Credit Amount

Rs.
Arti’s Capital A/c Dr 3000
Bharti’s Capital A/c Dr 2000
To Goodwill A/c (Goodwill written off) 5000
Cash A/c Dr 60000
To Sarthi’s Capital A/c 50000
To Premium of Goodwill

A/c (Amount of capital and share of goodwill bought by Sarthi)

 10000
Premium of Goodwill A/c Dr 10000
To Arti’s Capital A/c 4000
To Bharti’s Capital A/c

(Premium of goodwill

credited to Arti’s and Bharti’s capital account)

 6000

 

Old ratio = Arti : Bharti = 3 : 2

Sarthi admitted for ¼ share in new firm

New ratio = Arti : Bharti : Sarthi = 2 : 1 : 1

Sacrificing ratio = Old ratio – New ratio

Arti = 3/5 – 2/4 = 2/20

Bharti = 2/5 – 1/4 = 3/20

Arti will receive = 10000 x 2/5 = 4000

Bharti will receive = 10000 x 3/5 = 6000

35. 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?

Ans:

Journal Entries

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
Cash A/c Dr 27000
To Z’s Capital A/c 20000
To Premium of Goodwill

A/c (Amount of capital and

share of goodwill bought by Z)

 7000
Premium of Goodwill A/c Dr 7000
To X’s Capital A/c 4000
To Y’s Capital A/c

(Premium of goodwill

credited to old partners in sacrificing ratio)

Goodwill Rs.40000 cannot be raised. According to AS – 10, Goodwill can

be shown in the book if money and

money values are paid for it. Here no money or

money value has been paid for goodwill)

 3000

 

36. 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?

Ans:

Journal Entries

Date Particulars L.F. Debit Amount

Rs.

 Credit Amount

Rs.
Cash A/c Dr 60000
To Christopher’s Capital

A/c

 50000
To Premium of Goodwill

A/c (Amount of capital and

share of goodwill bought by Christopher)

 10000
Premium of Goodwill A/c Dr 10000
Christoher’s Capital A/c

Dr

 5000
To Aditya’s Capital A/c 6000
To Balam’s Capital A/c

(Christopher’s Premium

of goodwill credited

to old partners in

sacrificing ratio)

 9000

 

Sacrificing ratio = Old ratio – New ratio

Aditya = 3/5 – 2/4 = 2/20

Balam = 2/5 – 1/4 = 3/20

Sacrificing ratio = 2/20 : 3/20 = 2 : 3

37. 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.

Ans: Old ratio = Amar : Samar = 3 : 1

Kanwar admitted for 1/4 share of profit

Journal Entries

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
Kanwar’s Capital A/c Dr 20000
To Amar’s Capital A/c 15000
To Samar’s Capital A/c

(Kanwar’s share of goodwill

charged from his capital account by Amar

and Samar in their sacrificing ratio)

 5000

 

New firms goodwill = Rs.80000

Kanwar’ share of goodwill = 80000 x 1/4 = 20000

Kanwar’s goodwill will be taken by Amar and Samar in their sacrificing ratio here.

The sacrificing ratio will be equal to the old ratio because the new and sacrificing ratio is not given.

If the sacrificing ratio and new ratio are not given, it is assumed that old partners sacrificed in their old ratio.

38. 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.

Ans:

Year Profit
2013 50000
2014 60000
2015 90000
2016 70000
The sum of 4 years of profit 270000

 

Average profit = 270000/4 = 67500

Goodwill = Average profit x No. of years purchase = 67500

x = 202500

Ram Lal entered into the firm for 1/4 share of profit

Ram Lal’s share of goodwill = 202500 x 1/4 = 50625

Here, the sacrificing ratio of Mohan Lal and Sohan Lal will be equal to the old ratio because the new and sacrificing ratio is not given.

Mohan Lal will get = Ramlal’s share of goodwill x 3/5 = 50625 x 3/5 = 30375

Sohan Lal will get = Ramlal’s share of goodwill x 1/5 = 50625 x 1/5 = 20250

Journal Entries

S.No. Particulars L.F Debit Amount Rs. Credit Amount Rs.
Case (a) Mohan Lal’s Capital A/c Dr 121500 202500
Sohan Lal’s Capital A/c Dr 81000
To Goodwill A/c

(Goodwill appeared in the old firm written off) account and distributed

between Mohan Lal and Sohan Lal in sacrificing ratio)
Case (b) Mohan Lal’s Capital A/c Dr 1500
Sohan Lal’s Capital A/c Dr 1000
To Goodwill A/c

(Goodwill already appeared

in the books of firms written off in old ratio)

 2500
Ramlal’s Capital A/c Dr 50625
To Mohan Lal’s Capital A/c 30375
To Sohan Lal’s Capital A/c

(Ramlal’s share of goodwill

charged from his account and distributed

between Mohan Lal and Sohan Lal in sacrificing ratio)

 20250
Case (c) Mohan Lal’s Capital A/c Dr 123000
Sohan Lal’s Capital A/c Dr 82000
To Goodwill A/c (Goodwill already appeared

in the books of firms written off in old ratio)

 205000
Ramlal’s Capital A/c Dr 50625
To Mohan Lal’s Capital A/c 30375
To Sohan Lal’s Capital A/c (Ramlal’s share of goodwill

charged from his account and distributed

between Mohan Lal and Sohan Lal in sacrificing

ratio)

 20250

 

39. 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.

Ans:

Journal Entries

Date Particulars L.F. Debit Amount

Rs.

 Credit Amount

Rs.
Hari’s Capital A/c Dr 8000
To Rajesh’s Capital A/c 2000
To Mukesh’s Capital A/c

(adjustment of Hari’s

share of goodwill)

 6000

 

Working Notes:

1. Goodwill of the firm = 36000

Hari’s share in goodwill = Goodwill of firm x admitted

partner share = 36000 x 2/9 = 8000

2. Sacrificing ratio = Old ratio – New ratio

Rajesh = 1/2 – 4/9 = 1/18

Mukesh = 1/2 – 3/9 = 3/18

Sacrificing ratio between Rajesh and Mukesh = 1 : 3

40. 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?

Ans:

Journal Entries

Date Particulars L.F. Debit Amount

Rs.

 Credit Amount

Rs.
Anthony’s Capital A/c Dr 8000
To Amar’s Capital A/c 2000
To Akbar’s Capital A/c

(Adjustment of Anthony’s

share of goodwill)

 6000

 

Working Notes:

1. Sacrificing ratio = Old ratio – New ratio

Amar = 1/2 – 4/9 = 1/18

Akbar = 1/2 – 3/9 = 3/18

Sacrificing ratio between Amar and Akbar = 1 : 3

41. 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 on December 31, 2016

Liabilities Amount (Rs) Assets Amount (Rs)
Bills Payable 10,000 Cash in Hand 10,000
Creditors 58,000 Cash at Bank 40,000
Outstanding 2,000 Sundry Debtors 60,000
Expenses 3,30,000

Stock

40,000
Capitals: Plant 1,00,000
A 1,80,000 Buildings 1,50,000
B 1,50,000
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.

Ans:

Journal Entries

Date Particulars L.F Debit Amount Rs. Credit Amount Rs.
2006 To C’s Capital A/c 100000
To Premium for Goodwill

A/c

(Capital and premium for

goodwill brought by c for 1/4th share)

 60000
The premium for Goodwill A/c Dr 60000
To A’s Capital A/c 40000
To B’s Capital A/c

(Premium for Goodwill

brought by C transferred to the old partner’s capital

account in their sacrificing ratio 3: 1)

 20000
Plant A/c Dr 20000
Building A/c Dr 15000
To Revaluation A/c

(Value of assets increased)

 35000
Revaluation A/c Dr 8000
To Stock A/c 4000
To Provision for Doubtful

Debts A/c

 3000
To Creditors A/c

(Unrecorded assets and liabilities revalued)

 1000
Revaluation A/c Dr 27000
To A’s Capital A/c 18000
To B’s Capital A/c

(Profit on revaluation

transferred to old partner capital account)

 9000

 

Revaluation A/c
Particular Amount Particular Amount
Stock 4000 Plant 20000
provision for Doubtful Debts 3000 Building 15000
Creditors (Unrecorded) 1000
Profit trf to:
A’s Capital A/c 18000
B’s Capital A/c 9000 27000
35000 35000

 

Partner’s Capital A/c
Particular A B C Particular A B C
Balance c/d 238000 179000 100000 Balance b/d 180000 150000
Revaluation 18000 9000
238000 179000 100000 238000 179000 100000

 

Balance Sheet as on Dec 31, 2006
Particular Amount Particular Amount
Bills Payable 10000 Cash in hand 10000
Creditors 59000 Cash at bank 200000
O/s Expenses 2000 Sundry Debtors 60000
Capital: (-) Prov for Bad Debts 3000 57000
A 238000 Stock 36000
B 179000 Plant 120000
C 100000 517000 Building 165000
588000 588000

 

Working Notes:

Sacrificing ratio = Old ratio – New ratio

A = 2/3 – 2/4 = 2/12

B = 1/3 – 1/4 = 1/12

Sacrificing ratio between A and B = 2 : 1

42. . 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.

Ans:

Journal Entries

Date Particulars L.F Debit

Amount Rs.

 Credit

Amount Rs.
2007

Jan-01

 General Reserve A/c Dr 16000
Profit and Loss A/c Dr 24000
To Leela’s Capital A/c 25000
To Meeta’s Capital A/c

(General reserve and

balance in P/L credited to old partners capital account

in their old ratio i.e. 5 : 3)

 15000

 

43. 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.

Ans:

Journal Entries

Date Particulars L.F Debit Amount Rs. Credit Amount Rs.
2007 Jan-01 Amit’s Capital A/c Dr 30000 40000
Viney’s Capital A/c Dr 10000
To Profit and Loss A/c

(Debit balance in profit and

loss account written off)

 

44. 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 on December 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.

Ans:

Journal Entries

Date Particulars L.F Debit Amount Rs. Credit Amount Rs.
2007 Jan-01 Bank A/c Dr 15000
To C’s Capital A/c 10000
To Premium for Goodwill

A/c

(Capital and premium for

goodwill brought by C for 1/5th share)

 5000
The premium for Goodwill A/c Dr 5000
To A’s Capital A/c 3750
To B’s Capital A/c

(Premium for Goodwill

brought by C transferred to old partner’s capital

account in their sacrificing ratio 3 : 1)

 1250
A’s Capital A/c 1875
B’s Capital A/c 625
To Bank A/c

(Half of amount withdrawn by old partners)

 2500
Revaluation A/c Dr 4050
To Stock A/c 2000
To Fixture A/c 100
To Provision for Doubtful

Debts on Debtor A/c

 800
To Provision for Doubtful

Debts on B/R A/c

 150
To Claim for Damages A/c

(Assets and liabilities are revalued)

 1000
Land and Building A/c Dr 5000
Sundry Creditors A/c Dr 650
To Revaluation A/c

(Assets and liabilities are revalued)

 5650
Revaluation A/c Dr 1600
To A’s Capital A/c 1200
To B’s Capital A/c

(Profit on revaluation

transferred to old partner’s capital account)

 400
Reserve Fund A/c Dr 4000
To A’s Capital A/c 3000
To B’s Capital A/c

(Reserve fund distributed among old partners)

 1000

 

Balance Sheet as on Jan 1, 2007
Particular Amount Particular Amount
Sundry Creditors 40850 Cash at bank 39000
Claim for Damages 1000 Bills Receivables 3000
Capital: (-) Prov. For B/R 150 2850
A 36075 Debtors 16000
B 18025 (-) Prov. 800 15200
C 10000 64100 Stock 18000
Fixtures 900
Land and Building 30000
105950 105950

 

Working Notes: 1.

Partner’s Capital A/c
Particular A B C Particular A B C
Bank 1875 625 Balance b/d 30000 16000
Revaluation 1200 400
Reserve Fund 3000 1000
37950 18650 10000 37950 18650 10000

 

Working Notes: 2

Bank A/c
Particular Amount Particular Amount
Balance b/d 26500 A’s Capital A/c 1875
C’s Capital A/c 10000 B’s Capital A/c 625
Premium for Goodwill 5000 Balance c/d 39000
41500 41500

3. Sacrificing ratio = Old ratio – New ratio

A = 3/4 – 3/5 = 3/20

B = 1/4 – 1/5 = 1/20

Sacrificing ratio of A & B = 3 : 1

45. A and B are partners sharing profits and losses in the ratio of 3:1. On I st 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?

Ans:

Journal Entries

Date Particulars L.F. Debit

Amount Rs.

 Credit

Amount Rs.
2007

Jan-01

 A’s Capital A/c Dr 5000
To Cash A/c

(Excess capital withdrawn

by A)

 5000
Cash A/c Dr 3000
To B’s Capital A/c

(Capital brought in by B to

make in proportion to the profit sharing)

 3000

 

Working Notes:

1. Calculation of new profit sharing ratio

C’s share = ¼

Remaining share = 1 – 1/4 = 3/4

A’s new share = 3/4 x 3/4 = 9/16

B’s new share = 1/4 x 3/4 = 3/16

C’s share = 1/4 x 4/4 = 4/16

New profit sharing ratio of A, B, and C = 9 : 3 : 4

2. New capital of A & B

C brings Rs.20000 for 1/4th share of profit in the new firm

Thus, the total capital of the firm based on C’s share =

20000 x 4/1 = 80000

A’s Capital = 9/16 x 80000 = 45000

Thus, A will withdraw = 50000 – 45000 = 5000

B’s Capital = 3/16 x 80000 = 15000

Thus, B will bring = 15000 – 12000 = 3000

46. Pinky, Qumar and Roopa are 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, with 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?

Ans:

Calculation of new profit sharing ratio = Old ratio –

Sacrificing ratio

Pinky = 3/6 – 1/8 = 9/24

Qumar = 2/6 – 1/16 = 13/48

Roopa = 1/6 – 1/16 = 5/48

New profit sharing ratio between pinky, Qumar, Roopa and

Seema = 9/24 : 13/48 : 5/48 : 1/4= 18 : 13 : 5 : 12

Required capital of all partners in the new firm

Pinky = 240000 x 18/48 = 90000

Qumar = 240000 x 13/48 = 65000

Roopa = 240000 x 5/48 = 25000

Seema = 240000 x 12/48 = 60000

Amount to be bought by each partner in the new firm

Pinky = 90000 – 80000 = 10000

Qumar = 65000 – 30000 = 25000

Roopa = 25000 – 20000 = 5000

Seema = 60000

Journal Entries

Date Particulars L.F Debit Amount

Rs.

 Credit Amount

Rs.
Bank A/c Dr 60000
(Seema bring her share of

capital for 1/4th share of profit)

 50000

60000
To Pinky’s Capital A/c 10000
To Qumar’s Capital A/c 35000
To Roopa’s Capital A/c

(Amount brought by Pinky,

Qumar and Roopa to make capital equal to their proportion)

 5000

 

47. 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)
Creditors   9,000 Land and Buildings 24,000
Bills Payable 3,000 Furniture 3,500
Capital

Accounts

     Stock 14,000
Arun 19,000   Debtors 12,600
Bablu 16,000 43,000 Cash 900
Chetan 8,000      
    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.

Ans:

Revaluation A/c
Particular Amount Particular Amount
Furniture 420 Land and Building 7000
Stock 1400
Reserve for Bad debts 630
Profit on Revaluation trf to:
Arun’s Capital A/c 1950
Bablu’s Capital A/c 1625
Chetan’s Capital A/c 975 4550
7000 7000

 

Cash A/c
Particular Amount Particular Amount
Balance b/d 900 Arun’s Capital A/c 1750
Chetan’s Capital A/c 625 Bablu’s Capital A/c 1625
Deepak’s Capital A/c 7000 Balance c/d 9350
Premium for Goodwill 4200
12725 12725

 

Balance Sheet
Particular Amount Particular Amount
Creditors 9000 Land and Building 31000
Bills Payable 3000 Furniture 3080
Capital: Stock 12600
Arun 21000 Debtors 12600
Bablu 17500 (-) Reserve 630 11970
Chetan 10500 Cash 9350
Deepak 7000 56000
68000 68000

 

Working Notes: 1.

Partner’s Capital A/c
Particular Arun Bablu Chetan Deepak Particular Arun Bablu Chetan Deepak
1750 1625 Balance b/d 19000 16000 8000
Bank Balance c/d 21000 17500 10500 7000 7000
Cash

Premium of Goodwill

 1800 1500 900
Revaluation Bank 1950 1625 975625
22750 19125 10500 7000 22750 19125 10500 7000

 

2. Calculation of new profit sharing ratio:

Deepak share = 1/8

Remaining share = 1 – 1/8 = 7/8

Arun share = 6/14 x 7/8 = 42/112

Bablu share = 5/14 x 7/8 = 35/112

Chetan share = 3/14 x 7/8 = 21/112

New ratio = 42/112 : 35/112 : 21/112 : 1/8 = 6 : 5 : 3 : 2

Calculation of capital in new firm

Deepak bring for 1/8th share = Rs.7000

Total capital = 7000 x 8/1 = 56000

Arun = 56000 x 6/16 = 21000

Bablu = 56000 x 5/16 = 17500

Chetan = 56000 x 3/16 = 10500

48. 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 82,000 Machinery 25,000
   

 

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.

Ans:

Journal Entries

Date Particulars L.F Debit

Amount Rs.

 Credit

Amount Rs.
2006 Dec-

31

 Bank A/c Dr 42000
To China’s Capital A/c 30000
To Premium of Goodwill

A/c

(Chintan brought capital and

premium of goodwill

for 1/4th share of profit)

 12000
Premium of Goodwill A/c Dr 12000
To Azad’s Capital A/c 8000
To Babli’s Capital A/c

(Goodwill brought by

Chintan transferred to old

partners capital account in their sacrificing ratio, 2:1)

 4000
General Reserve A/c Dr 6000
To Azad’s Capital A/c 4000
To Babli’s Capital A/c

(General reserve distributed between old partners)

 2000
Building A/c Dr 5000
To Revaluation A/c

(Increase in value of building adjusted)

 5000
Revaluation A/c Dr 2480
To Machinery A/c 2000
To Provision for Doubtful

Debts A/c

(Decrease in value of

machinery adjusted and prov.

for doubtful debt created)

 480
Revaluation A/c Dr 2520
To Azad’s Capital A/c 1680
To Babli’s Capital A/c

(Profit on revaluation

transferred to Azad and Babli’s capital account)

 840
Azad’s Capital A/c Dr 3680
To Azad’s Current A/c

(Excess of capital

transferred to current account)

 3680
Babli’s Capital A/c Dr 8840
To Babli’s Current A/c

(Excess of capital

transferred to current account)

 8840

 

Revaluation A/c
Particular Amount Particular Amount
Machinery 2000 Building 5000
Prov. For Doubtful Debts 480
Profit trf to:
Azad’s Capital A/c 1680
Babli’s Capital A/c 840 2520
5000 5000

 

Balance Sheet
Particular Amount Particular Amount
Creditors 8000 Cash in hand 2000
Bills Payable 4000 Cash at bank 52000
Current A/c: Sundry Debtor 8000
Azad 3680 (-) Provision 480 7520
Babli 8840 12520 Stock 10000
Capital A/c: Furniture 5000
Azad 60000 Machinery 23000
Babli 30000 Building 45000
Chintan 30000 120000
144520 144520

 

Working Notes:

1. Calculation of new profit sharing ratio

Chintan share = 1/4

Remaining share = 1 – 1/4 = 3/4

Azad = 2/3 x 3/4 = 6/12

Babli = 1/3 x 3/4 = 3/12

New ratio = 6/12 : 3/12 : 1/4 = 2 : 1 : 1

2. New capital of Azad and Babli

Chintan brings Rs.30000 for 1/4th share of profit

Total capital = 30000 x 4/1 = 120000

Azad’s capital = 120000 x 2/4 = 60000

Babli’s capital = 120000 x 1/4 = 30000

49. 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
Creditors 15,000 Land & Building 35,000
Bills Payable 10,000 Plant   45,000
Ashish Capital 80,000 Debtors 22,000  
Dutta’s Capital 35,000 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.

Ans:

Journal Entries

Date Particulars L.F Debit

Amount Rs.

 Credit

Amount Rs.
2007

Jan-01

 Land and Building A/c Dr 15000
Plant A/c Dr 10000
To Revaluation A/c

(Increase in value of assets)

 25000
Revaluation A/c Dr 25000
To Ashish’s Capital A/c 15000
To Dutta’s Capital A/c

(Profit on revaluation

transferred to partner’s capital account)

 10000
Cash A/c Dr 36000
To Vimal’s Capital A/c

(Capital brought by Vimal)

 36000
Vimal’s Current A/c Dr 4000
To Ashish’s Capital A/c 2400
To Dutta’s Capital A/c

(Vimal’s share of goodwill

adjusted through his current account)

 1600

 

Working Notes: 1.

Partner’s Capital A/c
Particular Ashish Dutta Vimal Particular Arun Bablu Chetan
Balance c/d 97400 46600 36000 Balance b/d 80000 35000
Revaluation 15000 10000
Cash 36000
Vimal’s

Current A/c

 2400 1600
97400 46600 36000 97400 46600 36000

 

Working Notes: 2.

Vimal’s Current A/c
Particular Amount Particular Amount
Ashish’s Capital A/c 2400 Balance c/d 4000
Dutta’s Capital A/c 1600
4000 4000

 

3. Calculation of new profit sharing ratio

Vimal’s share = 1/5

Remaining share = 1 – 1/5 = 4/5

Ashish’s share = 3/5 x 4/5 = 12/25

Dutta’s share = 2/5 x 4/5 = 8/25

New ratio = 12/25 : 8/25 : 1/5 = 12 : 8 : 5

4. Sacrificing ratio = Old ratio – New ratio

Ashish = 3/5 – 12/25 = 3/25

Dutta =2/5 – 8/25 = 2/25

Sacrificing ratio = 3: 2

5. Capital of new firm on basis of old partners adjusted

capital

Total adjusted capital of old partners = Ashish + Dutta =

97400 + 46600 = 144000

The remaining share of Ashish and Dutta = 4/5

Capital of new firm = 144000 x 5/4 = 180000

Vimal’s share in the new firm’s capital = 180000 x 1/5 = 36000

editor’s pick

latest video

news via inbox

Nulla turp dis cursus. Integer liberos  euismod pretium faucibua

Leave A Comment

you might also like