NCERT Solutions for Class 12 Accountancy Accountancy Part I Chapter 2: Reconstitution of a Partnership Firm – Admission of a Partner

Chapter at a glance

Questions for Practice – Short Answer Questions

Question SA – Q1

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

Answer

1. New profit-sharing ratio of all partners.
2. Sacrificing ratio of the old partners.
3. Valuation and treatment of goodwill.
4. Revaluation of assets and reassessment of liabilities.
5. Distribution of accumulated profits, reserves and losses.
6. Adjustment of partners’ capitals (if they are to be in the new ratio).

New ratio, sacrificing ratio, goodwill, revaluation of assets and liabilities, accumulated profits/reserves/losses and adjustment of capitals.

Question SA – Q2

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

Answer

The new partner acquires his share of profit from the old partners, so the old partners’ shares go down. Their new shares have to be worked out so that future profits and losses can be divided correctly, and so that the sacrificing ratio (old share – new share) can be found for sharing the new partner’s goodwill premium.

Because the old partners give up part of their shares, their new shares must be known to divide future profits and to find the sacrificing ratio.

Question SA – Q3

What is sacrificing ratio? Why is it calculated?

Answer

Sacrificing ratio is the ratio in which the old partners give up (sacrifice) their share of profit in favour of the new partner. Sacrificing ratio = Old ratio – New ratio (for each old partner).

It is calculated to compensate the old partners for their sacrifice: the new partner’s share of goodwill (premium) is credited to the old partners in this ratio.

Sacrificing ratio = old share – new share; it is used to divide the new partner’s goodwill premium among the old partners.

Question SA – Q4

On what occasions sacrificing ratio is used?

Answer

1. To distribute the premium for goodwill brought in by the new partner.
2. To adjust goodwill when the new partner does not bring premium in cash (his capital/current account is debited and sacrificing partners are credited).
3. On a change in profit-sharing ratio among existing partners, to adjust goodwill between the sacrificing and gaining partners.

On admission (for goodwill brought or not brought in cash) and on a change in the profit-sharing ratio of existing partners.

Question SA – Q5

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?

Answer

The existing goodwill is written off among the old partners in their old profit-sharing ratio:

Old Partners’ Capital A/cs Dr (old ratio) To Goodwill A/c

The cash brought in by the new partner for goodwill is then credited to the old partners in the sacrificing ratio.

Existing goodwill is written off by debiting old partners’ capitals in the old ratio; the premium brought is shared in the sacrificing ratio.

Question SA – Q6

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

Answer

Assets and liabilities in the books are shown at book values, which may differ from their current values. Any increase or decrease in value up to the date of admission belongs to the old partners. Revaluation makes sure that this gain or loss is credited or debited to the old partners in the old ratio, so the new partner neither gains nor loses from changes that happened before he joined.

So that gains or losses in value up to the date of admission go only to the old partners and the new partner is not affected by them.

Questions for Practice – Long Answer Questions

Question LA – Q1

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?

Answer

Yes. The values of assets (e.g. land, building, stock) and liabilities change with time. The profit or loss on revaluation relates to the period before admission, so it belongs to the old partners. Without revaluation the new partner would share in a gain he did not earn, or bear a loss he did not cause.

Treatment – a Revaluation Account (Profit and Loss Adjustment Account) is opened:

Assets and liabilities then appear in the new balance sheet at their revised values.

Yes – revaluation gives the old partners the gain or loss that arose before admission; it is recorded through a Revaluation Account and the balance is transferred to old partners’ capitals in the old ratio.

Question LA – Q2

What is goodwill? What factors affect goodwill?

Answer

Goodwill is the value of the reputation of a business which enables it to earn more profits than the normal profits of similar businesses. It is an intangible asset.

Factors affecting goodwill

1. Nature of business – stable demand, low competition.
2. Location – a central, easily reachable place attracts more customers.
3. Efficiency of management – better control, lower costs, higher profits.
4. Market situation – monopoly or limited competition.
5. Special advantages – import licences, patents, trademarks, long-term contracts, cheap supply of power or raw material.
6. Quality of products and after-sale service.
7. Business connections and favourable contracts.
8. Age of the business and its reputation.

Goodwill is the value of a firm’s reputation that lets it earn above-normal profits; it depends on nature of business, location, management, market situation, special advantages, quality and connections.

Question LA – Q3

Explain various methods of valuation of goodwill.

Answer

1. Average profit method Goodwill = Average profit × Number of years’ purchase. A weighted average may be used when profits show a trend (more weight to recent years).
2. Super profit method
   • Normal profit = Capital employed × Normal rate of return ÷ 100.
   • Super profit = Average actual profit – Normal profit.
   • Goodwill = Super profit × Number of years’ purchase.

3. Capitalisation method

• Capitalisation of average profits: Capitalised value = Average profit × 100 ÷ Normal rate; Goodwill = Capitalised value – Actual capital employed (assets – outside liabilities).
  • Capitalisation of super profits: Goodwill = Super profit × 100 ÷ Normal rate.

Average profit method, super profit method and capitalisation method (of average profits or of super profits).

Question LA – Q4

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.

Answer

Steps

1. Find the adjusted capitals of the old partners (after goodwill, revaluation, reserves, etc.).
2. Total capital of the new firm = New partner’s capital ÷ his share of profit.
3. Required capital of each old partner = Total capital × his new share.
4. Compare with his adjusted capital: a surplus is withdrawn (or credited to current account); a deficit is brought in (or debited to current account).

Example: A and B share 3 : 2; C joins for 1/5 and brings ₹ 40,000. New ratio 12 : 8 : 5 (A 12/25, B 8/25, C 5/25). Adjusted capitals: A ₹ 1,00,000; B ₹ 50,000.

Entries: A’s Capital A/c Dr 4,000 → To Cash A/c (A withdraws); Cash A/c Dr 14,000 → To B’s Capital A/c (B brings in). If cash is not to move: A’s Capital A/c Dr → To A’s Current A/c; B’s Current A/c Dr → To B’s Capital A/c.

Total capital = new partner’s capital ÷ his share; each old partner’s capital = total × new share; surplus is withdrawn and deficit brought in (or adjusted through current accounts).

Question LA – Q5

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

Answer

The new partner’s share of goodwill is debited to his Capital (or Current) Account and credited to the old partners in their sacrificing ratio:

New Partner’s Capital/Current A/c Dr To Sacrificing Partners’ Capital A/cs (sacrificing ratio)

No Goodwill Account is raised (AS-26 does not allow recording of non-purchased goodwill). Any goodwill already in the books is first written off among the old partners in the old ratio. If he brings only part of the premium, the cash part is credited through Premium for Goodwill A/c and the balance is debited to his capital/current account.

Debit the new partner’s capital/current account with his share of goodwill and credit the sacrificing partners in the sacrificing ratio, without opening a goodwill account.

Question LA – Q6

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

Answer

1. Premium method – goodwill brought in cash

• Cash A/c Dr → To Premium for Goodwill A/c.
  • Premium for Goodwill A/c Dr → To Old Partners’ Capital A/cs (sacrificing ratio).
  • If old partners withdraw it: Old Partners’ Capital A/cs Dr → To Cash A/c.

2. Premium paid privately – no entry in the firm’s books.
3. Premium not brought in cash – New Partner’s Capital/Current A/c Dr → To Sacrificing Partners’ Capital A/cs.
4. Part of premium brought – the cash part is treated as in (1); the remainder as in (3).
5. Existing goodwill in the books is written off in the old ratio: Old Partners’ Capital A/cs Dr → To Goodwill A/c.
6. Hidden goodwill – when the new partner’s capital exceeds his proportionate share of the net worth, the difference is his share of goodwill and is treated as in (1) or (3).

Premium method (cash brought and shared in sacrificing ratio), private payment, adjustment through capital accounts when not brought, writing off existing goodwill, and calculation of hidden goodwill.

Question LA – Q7

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

Answer

Accumulated profits and reserves have been earned by the old partners, so they are distributed among them in the old ratio:

General Reserve A/c / Profit and Loss A/c (Cr balance) / Workmen Compensation Reserve (excess) Dr To Old Partners’ Capital A/cs (old ratio)

Accumulated losses (debit balance of P&L A/c, deferred revenue expenditure such as advertisement suspense) are written off:

Old Partners’ Capital A/cs Dr (old ratio) To Profit and Loss A/c / Advertisement Suspense A/c

Reserves and accumulated profits are credited, and accumulated losses debited, to the old partners’ capitals in the old ratio.

Question LA – Q8

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.

Answer

After revaluation, assets and liabilities appear at their revised (revalued) figures.

Imaginary data: X and Y (3 : 2) admit Z. Building ₹ 50,000 revalued to ₹ 60,000; stock ₹ 20,000 reduced by 10 %; provision 5 % on debtors ₹ 20,000; creditors ₹ 15,000 unchanged. Revaluation gain = 10,000 – 2,000 – 1,000 = ₹ 7,000 (X 4,200; Y 2,800). Old capitals: X ₹ 50,000, Y ₹ 25,000 (assets ₹ 90,000 = creditors ₹ 15,000 + capitals ₹ 75,000). Z brings ₹ 30,000 capital in cash.

Balance Sheet after admission

After revaluation, assets and liabilities appear at their revised values (e.g. building ₹ 60,000, stock ₹ 18,000, debtors net ₹ 19,000), with the gain added to the old partners’ capitals.

Questions for Practice – Numerical Questions

Question Num – Q1

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?

Answer

Remaining share for A and B = 1 – 1/6 = 5/6, divided 3 : 2. A = 5/6 × 3/5 = 3/6; B = 5/6 × 2/5 = 2/6; C = 1/6.

New ratio A : B : C = 3 : 2 : 1.

Question Num – Q2

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?

Answer

Remaining 90/100 divided 3 : 2 : 1 → A 45/100, B 30/100, C 15/100; D 10/100.

New ratio A : B : C : D = 9 : 6 : 3 : 2.

Question Num – Q3

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?

Answer

Each gives 1/20. X = 5/8 – 1/20 = 25/40 – 2/40 = 23/40; Y = 3/8 – 1/20 = 15/40 – 2/40 = 13/40; Z = 4/40.

New ratio X : Y : Z = 23 : 13 : 4.

Question Num – Q4

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?

Answer

A = 2/5 – 1/8 = 16/40 – 5/40 = 11/40; B = 16/40; C = 8/40; D = 5/40.

New ratio A : B : C : D = 11 : 16 : 8 : 5.

Question Num – Q5

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?

Answer

P gives 1/5 × 1/3 = 1/15; Q gives 1/5 × 2/3 = 2/15. P = 2/3 – 1/15 = 9/15; Q = 1/3 – 2/15 = 3/15; R = 3/15.

New ratio P : Q : R = 9 : 3 : 3 = 3 : 1 : 1.

Question Num – Q6

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?

Answer

Sacrifices: A = 1/5 × 2/5 = 2/25; B = 2/25; C = 1/25. A = 3/7 – 2/25 = (75 – 14)/175 = 61/175; B = 2/7 – 2/25 = (50 – 14)/175 = 36/175; C = 2/7 – 1/25 = (50 – 7)/175 = 43/175; D = 35/175.

New ratio A : B : C : D = 61 : 36 : 43 : 35.

Question Num – Q7

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?

Answer

A = 3/5 – 2/7 = (21 – 10)/35 = 11/35; B = 2/5 – 1/7 = (14 – 5)/35 = 9/35; C = 3/7 = 15/35.

New ratio A : B : C = 11 : 9 : 15.

Question Num – Q8

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?

Answer

A = 3/8 – 2/7 = (21 – 16)/56 = 5/56; B = 3/8 – 1/7 = (21 – 8)/56 = 13/56; C = 2/8 – 1/7 = (14 – 8)/56 = 6/56; D = 4/7 = 32/56.

New ratio A : B : C : D = 5 : 13 : 6 : 32.

Question Num – Q9

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?

Answer

Radha gives 3/5 × 1/3 = 1/5, keeps 2/5 = 4/10. Rukmani gives 2/5 × 1/4 = 1/10, keeps 3/10. Gopi = 1/5 + 1/10 = 3/10.

New ratio Radha : Rukmani : Gopi = 4 : 3 : 3.

Question Num – Q10

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?

Answer

New ratio Singh : Gupta : Khan : Jain = 20 : 15 : 24 : 21.

Question Num – Q11

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?

Answer

Sandeep = 5/8 – 4/7 = (35 – 32)/56 = 3/56; Navdeep = 3/8 – 2/7 = (21 – 16)/56 = 5/56.

Sacrificing ratio Sandeep : Navdeep = 3 : 5.

Question Num – Q12

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?

Answer

Remaining 7/8 in 4 : 3 → Rao 4/8, Swami 3/8, Ravi 1/8 → 4 : 3 : 1. Sacrifice: Rao = 3/5 – 4/8 = (24 – 20)/40 = 4/40; Swami = 2/5 – 3/8 = (16 – 15)/40 = 1/40.

New ratio 4 : 3 : 1; sacrificing ratio Rao : Swami = 4 : 1.

Question Num – Q13

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: 2015 ₹ 40,000; 2016 ₹ 50,000; 2017 ₹ 60,000; 2018 ₹ 50,000; 2019 ₹ 60,000.

Answer

Total profit = ₹ 2,60,000; average = 2,60,000 ÷ 5 = ₹ 52,000. Goodwill = 52,000 × 4 = ₹ 2,08,000.

Goodwill = ₹ 2,08,000.

Question Num – Q14

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

Answer

Normal profit = 2,00,000 × 15 % = ₹ 30,000. Super profit = 48,000 – 30,000 = ₹ 18,000. Goodwill = 18,000 × 3 = ₹ 54,000.

Goodwill = ₹ 54,000.

Question Num – Q15

The books of Ram and Bharat showed that the firm’s capital on 31.12.2016 was ₹ 5,00,000 and the profits for the last 5 years: 2015 ₹ 40,000; 2014 ₹ 50,000; 2013 ₹ 55,000; 2012 ₹ 70,000 and 2011 ₹ 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%?

Answer

Average profit = 3,00,000 ÷ 5 = ₹ 60,000. Normal profit = 5,00,000 × 10 % = ₹ 50,000. Super profit = ₹ 10,000. Goodwill = 10,000 × 3 = ₹ 30,000.

Goodwill = ₹ 30,000.

Question Num – Q16

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

Answer

Capitalised value = 1,50,000 × 100/20 = ₹ 7,50,000. Capital employed = ₹ 5,00,000. Goodwill = 7,50,000 – 5,00,000 = ₹ 2,50,000.

Goodwill = ₹ 2,50,000.

Question Num – Q17

A business has earned average profits of ₹ 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 ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%?

Answer

Capitalised value = 1,00,000 × 100/10 = ₹ 10,00,000. Net assets = 10,00,000 – 1,80,000 = ₹ 8,20,000. Goodwill = 10,00,000 – 8,20,000 = ₹ 1,80,000.

Goodwill = ₹ 1,80,000.

Question Num – Q18

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 ₹ 20,000 as capital and ₹ 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.

Answer

Sacrificing ratio = old ratio 5 : 3 (no new ratio given) → Verma ₹ 2,500, Sharma ₹ 1,500.

Premium ₹ 4,000 is credited to Verma ₹ 2,500 and Sharma ₹ 1,500; withdrawn fully (₹ 2,500/₹ 1,500) or half (₹ 1,250/₹ 750); if paid privately, only Ghosh’s capital ₹ 20,000 is recorded.

Question Num – Q19

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 ₹ 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at ₹ 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?

Answer

C’s premium = 20,000 × 1/4 = ₹ 5,000. Sacrifice: A = 3/5 – 2/4 = 2/20; B = 2/5 – 1/4 = 3/20 → 2 : 3 → A ₹ 2,000, B ₹ 3,000.

Premium ₹ 5,000 is shared A ₹ 2,000 and B ₹ 3,000 (sacrificing ratio 2 : 3) and withdrawn by them.

Question Num – Q20

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 ₹ 50,000 for his capital and ₹ 10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at ₹ 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: Existing goodwill written-off in old profit sharing ratio]

Answer

Sacrifice: Arti = 3/5 – 2/4 = 2/20; Bharti = 2/5 – 1/4 = 3/20 → 2 : 3 → Arti ₹ 4,000, Bharti ₹ 6,000.

Existing goodwill ₹ 5,000 is written off (Arti ₹ 3,000, Bharti ₹ 2,000); the premium ₹ 10,000 is credited Arti ₹ 4,000, Bharti ₹ 6,000.

Question Num – Q21

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 ₹ 20,000 for his capital and ₹ 7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at ₹ 40,000. Show necessary journal entries in the books of X, Y and Z?

Answer

Sacrificing ratio = old ratio 4 : 3. Existing goodwill written off 4 : 3: X = 40,000 × 4/7 = ₹ 22,857.14; Y = ₹ 17,142.86. Premium ₹ 7,000: X ₹ 4,000, Y ₹ 3,000.

Write off goodwill ₹ 40,000 (X ₹ 22,857.14, Y ₹ 17,142.86); premium ₹ 7,000 credited X ₹ 4,000 and Y ₹ 3,000.

Question Num – Q22

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 ₹ 50,000 for his capital. His share of goodwill was agreed to at ₹ 15,000. Christopher could bring only ₹ 10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm?

Answer

Sacrificing ratio: Aditya 3/5 – 2/4 = 2/20; Balan 2/5 – 1/4 = 3/20 → 2 : 3. Cash part ₹ 10,000 → Aditya ₹ 4,000, Balan ₹ 6,000; unpaid ₹ 5,000 → Aditya ₹ 2,000, Balan ₹ 3,000.

Aditya is credited ₹ 6,000 and Balan ₹ 9,000 in all (₹ 10,000 from premium, ₹ 5,000 debited to Christopher’s current account).

Question Num – Q23

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 ₹ 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on Kanwar’s admission.

Answer

Kanwar’s share = 80,000 × 1/4 = ₹ 20,000, credited in the sacrificing (old) ratio 3 : 1.

Kanwar’s Current A/c Dr ₹ 20,000; Amar’s Capital Cr ₹ 15,000, Samar’s Capital Cr ₹ 5,000.

Question Num – Q24

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 ₹ 50,000 for 2013, ₹ 60,000 for 2014, ₹ 90,000 for 2015 and ₹ 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 ₹ 2,02,500. b) Goodwill appears in the books at ₹ 2,500. c) Goodwill appears in the books at ₹ 2,05,000.

Answer

Average profit = 2,70,000 ÷ 4 = ₹ 67,500; goodwill = 67,500 × 3 = ₹ 2,02,500. Ram Lal’s share = 2,02,500 × 1/4 = ₹ 50,625 → Mohan ₹ 30,375, Sohan ₹ 20,250 (sacrificing = old ratio 3 : 2).

In every case the existing goodwill is first written off in the old ratio 3 : 2 (AS-26), and then Ram Lal’s share is adjusted.

Entry 2 (all cases)

Goodwill ₹ 2,02,500; existing goodwill written off in 3 : 2 in each case (₹ 2,02,500 / ₹ 2,500 / ₹ 2,05,000); Ram Lal’s share ₹ 50,625 debited to him and credited Mohan ₹ 30,375, Sohan ₹ 20,250.

Question Num – Q25

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 ₹ 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.

Answer

Hari’s share = 36,000 × 2/9 = ₹ 8,000. Sacrifice: Rajesh 1/2 – 4/9 = 1/18; Mukesh 1/2 – 3/9 = 3/18 → 1 : 3.

Hari’s Current A/c Dr ₹ 8,000; Rajesh Cr ₹ 2,000, Mukesh Cr ₹ 6,000 (sacrificing ratio 1 : 3).

Question Num – Q26

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 his share of goodwill ₹ 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?

Answer

Sacrifice: Amar 1/2 – 4/9 = 1/18; Akbar 1/2 – 3/9 = 3/18 → 1 : 3. Anthony’s share ₹ 45,000 → Amar ₹ 11,250, Akbar ₹ 33,750.

Anthony’s Current A/c Dr ₹ 45,000; Amar Cr ₹ 11,250, Akbar Cr ₹ 33,750.

Question Num – Q27

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. Liabilities: Bills Payable 10,000; Creditors 58,000; Outstanding Expenses 2,000; Capitals A 1,80,000, B 1,50,000 (total 4,00,000). Assets: Cash in Hand 10,000; Cash at Bank 40,000; Sundry Debtors 60,000; Stock 40,000; Plant 1,00,000; Buildings 1,50,000 (total 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 ₹ 1,00,000 as his capital and ₹ 60,000 as his share of goodwill for 1/4 share in the profits. (ii) Plant is to be appreciated to ₹ 1,20,000 and the value of buildings is to be appreciated by 10%. (iii) Stock is found over valued by ₹ 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 ₹ 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.

Answer

Journal

Revaluation Account

Partners’ Capital Accounts

Balance Sheet after C’s admission

Gain on revaluation ₹ 27,000; capitals A ₹ 2,38,000, B ₹ 1,79,000, C ₹ 1,00,000; Balance Sheet total ₹ 5,88,000.

Question Num – Q28

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 ₹ 16,000 in general reserve and ₹ 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.

Answer

₹ 40,000 (reserve + profit) credited in the old ratio 5 : 3: Leela ₹ 25,000, Meeta ₹ 15,000.

Question Num – Q29

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 ₹ 40,000. Record necessary journal entry for the treatment of the same.

Answer

Accumulated loss ₹ 40,000 debited Amit ₹ 30,000 and Viney ₹ 10,000 (old ratio 3 : 1).

Question Num – Q30

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016: Liabilities – Sundry creditors 41,500; Reserve fund 4,000; Capitals A 30,000, B 16,000 (total 91,500). Assets – Cash at Bank 26,500; Bills Receivable 3,000; Debtors 16,000; Stock 20,000; Fixtures 1,000; Land & Building 25,000 (total 91,500). On April 1, 2017, C was admitted into partnership on the following terms: (a) That C pays ₹ 10,000 as his capital. (b) That C pays ₹ 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 ₹ 1,000 should be created. (f) An item of ₹ 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.

Answer

Journal

Capitals: A = 30,000 + 3,750 – 1,875 + 1,200 + 3,000 = ₹ 36,075; B = 16,000 + 1,250 – 625 + 400 + 1,000 = ₹ 18,025; C = ₹ 10,000.

Balance Sheet after C’s admission

Gain on revaluation ₹ 1,600; capitals A ₹ 36,075, B ₹ 18,025, C ₹ 10,000; Balance Sheet total ₹ 1,05,950.

Question Num – Q31

A and B are partners sharing profits and losses in the ratio of 3:1. On 1st April 2017 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings ₹ 20,000 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 ₹ 50,000 for A and ₹ 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?

Answer

Total capital = 20,000 × 4 = ₹ 80,000. New ratio: A 3/4 × 3/4 = 9/16, B 3/16, C 4/16. A = 80,000 × 9/16 = ₹ 45,000; B = 80,000 × 3/16 = ₹ 15,000. A withdraws 50,000 – 45,000 = ₹ 5,000; B brings 15,000 – 12,000 = ₹ 3,000.

New capitals A ₹ 45,000 and B ₹ 15,000; A withdraws ₹ 5,000 and B brings ₹ 3,000.

Question Num – Q32

Pinky, Qumar and Roopa are partners in a firm sharing profits and losses in the ratio of 3:2:1. Seema is admitted as a new partner for 1/4 share in the profits of the firm, which she gets 1/8 from Pinky, and 1/16 each from Qumar and Roopa. The total capital of the new firm after Seema’s admission will be ₹ 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 ₹ 80,000, Qumar ₹ 30,000 and Roopa ₹ 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?

Answer

New shares: Pinky 3/6 – 1/8 = 18/48; Qumar 2/6 – 1/16 = 13/48; Roopa 1/6 – 1/16 = 5/48; Seema 12/48.

New ratio 18 : 13 : 5 : 12; capitals Pinky ₹ 90,000, Qumar ₹ 65,000, Roopa ₹ 25,000, Seema ₹ 60,000; old partners bring ₹ 10,000, ₹ 35,000 and ₹ 5,000.

Question Num – Q33

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 – Creditors 9,000; Bills Payable 3,000; Capitals Arun 19,000, Bablu 16,000, Chetan 8,000 (total 55,000). Assets – Land and Buildings 24,000; Furniture 3,500; Stock 14,000; Debtors 12,600; Cash 900 (total 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 ₹ 4,200 as goodwill and ₹ 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 ₹ 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.

Answer

Revaluation (P&L Adjustment) Account

Goodwill ₹ 4,200 shared 6 : 5 : 3 → Arun 1,800; Bablu 1,500; Chetan 900.

Capital adjustment – total capital = 7,000 × 8 = ₹ 56,000; old partners’ share 7/8 = ₹ 49,000 in 6 : 5 : 3.

Cash Account

Opening Balance Sheet of the new firm

Gain on revaluation ₹ 4,550; capitals Arun ₹ 21,000, Bablu ₹ 17,500, Chetan ₹ 10,500, Deepak ₹ 7,000; cash balance ₹ 9,350; Balance Sheet total ₹ 68,000.

Question Num – Q34

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 ₹ 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet as on March 31, 2016: Liabilities – Creditors 8,000; Bills payable 4,000; General reserve 6,000; Capitals Azad 50,000, Babli 32,000 (total 1,00,000). Assets – Cash in hand 2,000; Cash at bank 10,000; Sundry debtors 8,000; Stock 10,000; Furniture 5,000; Machinery 25,000; Buildings 40,000 (total 1,00,000). It was agreed that: i) Chintan will bring in ₹ 12,000 as his share of goodwill premium. ii) Buildings were valued at ₹ 45,000 and Machinery at ₹ 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.

Answer

New ratio: Azad 3/4 × 2/3 = 2/4, Babli 1/4, Chintan 1/4 (sacrifice in old ratio 2 : 1).

Journal

Revaluation Account

Partners’ Capital Accounts

(Total capital = 30,000 × 4 = ₹ 1,20,000; Azad 2/4 = ₹ 60,000, Babli 1/4 = ₹ 30,000.)

Balance Sheet after admission

Gain on revaluation ₹ 2,520; capitals Azad ₹ 60,000, Babli ₹ 30,000, Chintan ₹ 30,000; current accounts Azad ₹ 3,680 and Babli ₹ 8,840 (Cr); Balance Sheet total ₹ 1,44,520.

Question Num – Q35

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: Liabilities – Ashish’s Capital 80,000; Dutta’s Capital 35,000; Creditors 15,000; Bills Payable 10,000 (total 1,40,000). Assets – Land & Building 35,000; Plant 45,000; Debtors 22,000 less Provision 2,000 = 20,000; Stock 35,000; Cash 5,000 (total 1,40,000). It was agreed that: i) The value of Land and Building be increased by ₹ 15,000. ii) The value of plant be increased by ₹ 10,000. iii) Goodwill of the firm be valued at ₹ 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.

Answer

Vimal brings his share of goodwill (20,000 × 1/5 = ₹ 4,000) in cash, shared 3 : 2 (sacrifice in old ratio) – this matches the textbook answer total.

Revaluation gain ₹ 25,000 → Ashish ₹ 15,000, Dutta ₹ 10,000. Old partners’ capitals: Ashish 80,000 + 15,000 + 2,400 = ₹ 97,400; Dutta 35,000 + 10,000 + 1,600 = ₹ 46,600; total ₹ 1,44,000 = 4/5 of new capital. Total capital = 1,44,000 × 5/4 = ₹ 1,80,000; Vimal’s capital = ₹ 36,000.

Balance Sheet after Vimal’s admission

Gain on revaluation ₹ 25,000; capitals Ashish ₹ 97,400, Dutta ₹ 46,600, Vimal ₹ 36,000; Balance Sheet total ₹ 2,05,000.

Topic checklist

• ☒ New profit-sharing and sacrificing ratios (Num 1–12)
• ☒ Valuation of goodwill – average, super profit, capitalisation (Num 13–17)
• ☒ Treatment of goodwill – premium brought, withdrawn, not brought, existing goodwill (Num 18–26)
• ☒ Revaluation, reserves and accumulated profits/losses (Num 27–30, 33–35)
• ☒ Adjustment of capitals (Num 31–34)
• ☒ Theory – short and long answer questions

Total questions answered: 49 of 49