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Page No 167:

Question 1:

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

Answer:

The following are the various items that need to be adjusted at the time of admission of a new partner.

1. Profit Sharing Ratio: Calculation of new profit sharing ratio.

2. Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.

3. Revaluation of Assets and Liabilities: Assets and liabilities are revalued to ascertain the current value of the assets and liabilities of the partnership firm. Moreover, the profit or loss due to the revaluation need to be distributed among the old partners.

4. Accumulated profits, losses and reserves are distributed among the old partners in their old ratio.

5. Adjustment of capital of the partners.

Page No 167:

Question 2:

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

Answer:

When new partner/s is/are admitted, then the old partners in the partnership firm need to sacrifice their share of profit in favour of the new partner/s. This reduces the share of profit of the old partners ,hence, it is necessary to ascertain the new profit sharing ratio even for the old partners in the event of admission of new partner/s.

Page No 167:

Question 3:

What is sacrificing ratio? Why is it calculated?

Answer:

Sacrificing ratio refers to the ratio in which the old partners of a partnership firm surrender their share of profit in favour of the new partner/s. It is calculated as a difference between the old ratio and the new ratio of the old partners.

Sacrificing Ratio = Old Ratio − New Ratio

It is very important to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit. The new partner compensates the old partners by making payment to them in the form of goodwill that is transferred among the old partners in their sacrificing ratio.

Page No 167:

Question 4:

On what occasions sacrificing ratio is used?

Answer:

The following are the different situations when sacrificing ratio is used.

1. When the existing partners of a partnership firm agree to change the share of profit among themselves.

2. When a new partner is admitted in the partnership firm and the amount of the goodwill brought by him/her is transferred among the old partners in sacrificing ratio of the old partners.

Page No 167:

Question 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 existing amount of goodwill?

Answer:

If goodwill already appears in the books of old firm (before the admission of new partner), then this should be written off among the old partners in their old profit sharing ratio. The following Journal entry is passed.

 

Old Partner’s Capital A/c

Dr.

To Goodwill A/c

 

(Goodwill written off in old ratio among the old partners)

 

 

 

Page No 167:

Question 6:

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

Answer:

At the time of admission of a new partner, it becomes very necessary to revalue the assets and liabilities of a partnership firm for ascertaining its true and fair values. This is done because the value of assets and liabilities may have increased or decreased and consequently their corresponding figures in the old balance sheet may either be understated or overstated. Moreover, it may also be possible that some of the assets and liabilities are left unrecorded. Thus, in order to record the increase and decrease in the market value of the assets and liabilities, Revaluation Account is prepared and any profits or losses associated with this increase or decrease are distributed among the old partners of the firm.

Page No 167:

Question 1:

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, it is advisable to revalue the assets and liabilities at the time of admission of a new partner for ascertaining the true and fair value of the assets and liabilities. This is done because the value of assets and liabilities may have increased or decreased and consequently their corresponding figures in the old balance sheet may either be understated or overstated. Moreover, it may also be possible that some of the assets and liabilities are left unrecorded. Thus, in order to record the increase and decrease in the market value of the assets and liabilities, Revaluation Account is prepared and any profits or losses associated with this increase or decrease are distributed among the old partners of the firm.

 

Accounting Entries in the Books of Accounts:

 

The following Journal entries are recorded in the Revaluation Account on the date of admission of a new partner.

 

i) For increase in value of assets:

Assets A/c

Dr.

 

To Revaluation A/c

 

(Increase in the value of assets)

 

 

ii) For decrease in value of assets:

Revaluation A/c

Dr.

 

To Asset A/c

 

(Decrease in the value of assets)

 

 

iii) For increase in liabilities:

Revaluation A/c

Dr.

 

To Liabilities

 

(Increase in the value of liabilities)

 

 

iv) For decrease in liabilities:

Liability A/c

Dr.

 

To Revaluation A/c

 

(Decrease in the value of liabilities)

 

 

v) For recording of unrecorded assets:

Unrecorded Assets A/c

Dr.

 

To Revaluation A/c

 

(Recording of unrecorded assets)

 

 

vi) For recording of unrecorded liabilities:

Revaluation A/c

Dr.

 

To Unrecorded Liabilities A/c

 

(Recording of unrecorded liabilities)

 

 

 

vii) For transfer of credit balance of Revaluation Account:

Revaluation

Dr.

 

To Old Partner’s Capital A/c

 

(Profit on revaluation is transferred to the Old Partner’s Capital Account in their old profit sharing ratio)

 

 

Or,

 

vii) For transfer of debit balance of Revaluation Account:

Old Partner’s Capital A/c

Dr.

 

To Revaluation A/c

 

(Loss on revaluation is transferred to the Old Partner’s Capital Account in their old profit sharing ratio)

 

 

 

Page No 167:

Question 2:

What is goodwill? What are the factors that effect goodwill?

Answer:

Goodwill is an intangible asset of a firm. It is the value of a firm’s reputation and its good brand name in the market. A firm earns goodwill by its hard work and thereby winning the blind trust and faith of the customers by fulfilling their demands in both qualitative and quantitative aspects. A positive goodwill helps a firm to earn supernormal profits compared to its competitors that earns normal profits (as their goodwill is zero). In other words, goodwill ensures greater future profits as there will be greater number of satisfied customers in the future. As in the words of Lord Eldon, “Goodwill is nothing more than the probability, that the old customers will resort to the old place.”

Characteristics of Goodwill

The following are the characteristics of goodwill.

1) It is an intangible asset.

2) It is not a fictitious asset.

3) It is difficult to ascertain the exact value of goodwill.

4) It enhances the future as well as the present earning capacity of a business.

5) It helps in earning supernormal profits against the normal profits.

6) It assists the business to enjoy its upper hand over its counterparts.

Factors Affecting Goodwill

The following are the important factors that affect the goodwill of a firm.

1) Quality Products: If a company produces product of the best quality and in large scale, then automatically the company earns more goodwill.

2) Location: If a business islocated at easily reachable and convenient place, then more number of consumers will be attracted again and again which will lead to increase in sales and, therefore, the firm will earn higher goodwill.

3) Management: Efficient management leads to cost efficiency and increases productivity. If a firm’s management is efficient, then superior quality products can be produced at lower cost .These can be sold at lesser price. Superior quality at lower price enables a firm to earn higher goodwill.

4) Market Structure: If a firm is operating in a monopoly market with no close substitutes, then there will be more goodwill of the firm.

5) Economies of Scale: If a firm enjoys special advantages like, continuous supply of power, fuel and raw materials at a low price and produces quality product at a large scale, then the firm enjoys higher value of goodwill.

Page No 167:

Question 3:

Explain various methods of valuation of goodwill.

Answer:

The following are the various methods of valuation of goodwill.

1. Average Profit Method: Under this method, goodwill is calculated on the average basis of the profits of past few years. The formula for calculating goodwill is:

   Goodwill = Average Profit × No. of Years Purchase

Number of Years Purchase implies number of years for which the firm expects to earn the same amount of profits.

Steps to Calculate Goodwill by Average Profit Method:

Step 1: Ascertain the total profit of past given years.

Step 2: Add all abnormal losses like, loss by fire, theft etc.

Step 3: Add all normal income, if not added previously.

Step 4: Less all non-business incomes and all abnormal gains and incomes like, speculation, lottery etc.

Step 5: Less all normal expenses, if not deducted previously.

Step 6: Calculate Average Profit, by dividing the total profit ascertained in Step 5 by number of years.

Step 7: Multiply the Average Profit to the Number of Year’s Purchases to calculate the value of goodwill.

Example:

The profits for last 5 years are 1,00,000,   3,00,000,   (2,00,000),   5,00,000,   8,00,000.

Calculate goodwill on the basis of 4 years purchase

2. Weight Average Method: It is modified version of the Average Profit Method. Under this method, the weights are assigned for each year’s profit. Highest weights are assigned to the recent year’s profit and lower weights are assigned to the past year’s profits. The products of the profits and the weights are added and divided by the total weights to calculate Weighted Average Profits. The formula for calculating goodwill by this method is:

Steps to Calculate Goodwill by Weight Average Method:

Step 1: Assign highest weights to the recent year’s profit and lower weights to the past year’s profits, like 4,3,2,1.

Step 2: Multiply the weights with its corresponding year’s profits.

Step 3: Calculate the total of the products

Step 4: Divide the total of the product by the total of the eights in order to calculate Weighted Average Profit.

Step 5: Multiply the Weighted Average Profit by the number of years purchase.

For example:

The profits for the last 5 years are Rs 1,00,000,   Rs 3,00,000,   Rs (2,00,000),   Rs 5,00,000,   Rs 8,00,000.

Calculate goodwill on the basis of 4 years purchase                     

Profit/Loss

Rs

Weights

Product

Rs

1,00,000

1

1,00,000 × 1 = 1,00,000

3,00,000

2

3,00,000 × 2 = 6,00,000

(2,00,000)

3

(2,00,000) × 3 = (6,00,000)

5,00,000

4

5,00,000 × 4  = 20,00,000

8,00,000

5

8,00,000× 5  = 40,00,000

Total

15

Rs 61,00,000

3. Super Profit Method: Under this method, goodwill is calculated on the basis of excess profit earned by a firm over the normal profit earned by its counterparts in the same industry. The excess profit over the normal profit is termed as Super Normal Profit.

Steps to Calculate Goodwill by Super Profit Method:

Step 1: Calculate Average Profit

Step 2: Calculate Average Capital Employed as:

Step 3: Calculate Normal Profit by the formula:

Step 4:  Calculate Super Normal Profit by the formula:

Super Normal Profit = Average Profit – Normal Profit

Step 5:  Multiply the Super Normal Profit by the Number of Years Purchase to calculate goodwill.

4. Capitalisation Method: Under this method, goodwill is calculated by the following two methods :

a) By capitalisation of Average Profit.

b) By capitalisation of Super Profit.

 

a) Capitalisation of Average Profit

Step 1: Calculate Average Profit

Step 2: Calculate Capitalised value of Average Profit by the following formula:

Step 3:  Ascertain Actual Capital Employed

Step 4:  Deduct Actual Capital Employed from Capitalised Average Profit to calculate goodwill.

Goodwill = Capitalised Average Profit – Actual Capital Employed

b) Capitalisation of Super Profit

Step 1: Calculate the Capital Employed

Step 2: Calculate Normal Profit by the following formula:

Step 3: Calculate Average Profit.

Step 4: Calculate Super Normal Profit by the following formula:

Super Normal Profit = Average Profit – Normal Profit

Step 5: Calculate goodwill by the following formula: 

Page No 167:

Question 4:

If it is agreed that the capital of all the partners 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:

When a new partner is admitted, sometimes it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio. The calculation of the new capital of each partner depends on the following situations:

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 situation, the calculation of the new capital of all the partners involves the following steps:

Step 1: The total capital of the new firm is calculated on the basis of new partner’s capital.

Step 2: The new capital of each partner is calculated by dividing the total capital of the firm by their individual new profit share.

Step 3: After posting all adjustments and items in the Partners’ Capital Account, calculate credit minus debit side of the old Partners’ Capital Account.

Step 4: The new capital ascertained in the Step 2 is written as ‘Balance c/d’ on the credit side of the Partner’s Capital Account.

Step 5: If the amount ascertained in Step 2 (New capital) exceeds the capital amount ascertained in Step 3 (Old Capital), then it is termed as ‘Deficit’ and the difference amount is to be brought in by the old partners. On the contrast, if the amount ascertained in the Step 2 (New Capital) is lesser than the capital amount ascertained in the Step 3 (old Capital), then it is termed as ‘Surplus’ and the difference amount is returned to the old partners.

Let us understand the above steps with the help of an example.

A and B are partners sharing profit and loss equally. They agree to admit C for share in profit. C brings Rs 50,000 as capital. The old capitals of A and B are Rs 60,000 and Rs 40,000 respectively, at the time admission of C.

Step 1: The total capital of the new firm on the basis of C =

Step 2: A’s new capital =

B’s share in new firm =

Step 3:

 

A

B

New Capital

50,000

50,000

Less: Existing Capital

(60,000)

(40,000)

Withdrawal (deposit)

10,000

(10,000)

 

2) When the total capital of the new firm is given:

When the capital of new partner is not mentioned then his/her capital is ascertained on the proportionate basis of total capital of the firm. The amount ascertained is to be brought in by the new partner in the form of his/her portion of capital. In order to ascertain the proportionate capital of the new partner, the following steps are to be followed.

Step 1: Ascertain the total old capital of the old partners (after making all adjustments)

Step 2: Ascertain the total capital of the new firm by multiplying the total of old capitals of the old partners (ascertained in the Step 1) with reciprocal of total share of old partners. That is,

Step 3: Calculate New Capital of each partner on the basis of Total Capital ascertained in Step 2. That is, multiplying the Total Capital by the new profit sharing ratio individually for all the partners (including the new partner). 

Let us understand the above steps with the help of an example.

X and Y are partners in a firm sharing profit and loss equally. They agree to admit Z for share in profit and decided to share future profit and loss equally. X’s capital is Rs 2,00,000 and Y’s capital is Rs 1,50,000. Z brings sufficient capital for his share in profit. 

Step 1: Calculation of Total Capital of Old Partners (after all adjustments)

The total capital of the old partners = Rs 2,00,000 + Rs 1,50,000 = Rs 3,50,000

Step 2: Calculation of Total Capital of New Firm

Step 3: Calculation of New Capital of Each Partner

Page No 167:

Question 5:

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

Answer:

When the new partner is not in a position to bring his share of goodwill in cash, then goodwill account is adjusted through the old Partners’ Capital Account. New Partner’s Capital Account or Current Account is debited with his/her share of goodwill and the partners who sacrifice their share in favour of the new partner are credited in their sacrificing ratio. The following Journal entry is passed in the books of accounts.

 

New Partner’s Capital A/c

Dr.

 

To Old Partners’ Capital A/c

 

(New partner capital account is debited with his/her share

of goodwill and sacrificing Partners’ Capital Account are

credited in their sacrificing ratio)

 

 

NOTE: As per the Para 16 of Accounting Standard 10, goodwill is recorded in the books only when some consideration in money or money’s worth has been paid for it. This practice is mandatory to follow. In the case of admission, retirement, death or change in profit sharing ratio among existing partners, Goodwill Account cannot be raised as no consideration is paid for it.

 

 

Page No 167:

Question 6:

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

Answer:

The methods for the treatment of goodwill on the admission of a new partner are given below.

1. Premium Method

2. Revaluation Method

It should be noted that before following any of the below mentioned methods of goodwill, if goodwill already appears in the old books (old Balance Sheet) of the firm, then first of all, this goodwill should be written off among all the old partners in their old profit sharing ratio. The following Journal entry is passed to distribute the goodwill.

Old Partners’ Capital A/c

Dr.

 

To Goodwill A/c

 

(Goodwill written off among the old partners in their old profit sharing ratio)

 1. Premium Method- This method is used when a new partner pays his/her share of goodwill in cash. The following are the different situations under this method.

i) When the new partner privately pays his/her share of goodwill to the old partners.

In this case, there is no need to pass any Journal entry in the books of accounts as the goodwill is privately paid.

ii) When the new partner brings his/her share of goodwill in cash and the goodwill is retained in the business.

Accounting Entries

a)      For premium or goodwill brought in cash by the new partner

Cash/Bank A/c

Dr.

 

To Premium for Goodwill A/c

 

(Amount of goodwill brought in by the new partner)

b) For transferring of new partner’s goodwill among the old partners, i.e. if goodwill is retained in the business.

Premium for Goodwill A/c

Dr

 

To Sacrificing Partners’ Capital A/c

 

(Goodwill brought in by the new partner is distributed among the old partners in their sacrificing ratio)

c)  If the new partner’s share of goodwill is withdrawn by the old partner, then

Sacrificing Partner’s Capital A/c

Dr.

 

To Cash A/c

 

(Amount of goodwill withdrawn by the old partners)

iii) If the new partner partly brings his/her share of goodwill

a)      For bringing goodwill in cash

Cash A/c

Dr.

 

To Premium for Goodwill A/c

 

(Amount of goodwill brought in cash by the new partner)

b) For transferring of goodwill to the old partners

Goodwill A/c

Dr.

(With the amount of goodwill brought in by the new partner)

New Partner’s Capital A/c

Dr.

(With the amount of goodwill not brought in by the new partner)

 

To Sacrificing Partners’ Capital A/c

 

 

(Goodwill amount of the new partner distributed among the old partners in their sacrificing ratio)

2. Revaluation Method- When the new partner is not able to bring goodwill in cash at all.

New Partner’s Capital A/c

Dr.

(With the whole amount of goodwill that is not brought in by the new partner)

 

To Old Partners’ Capital A/c

 

 

(Goodwill amount of the new partner distributed among the old partners in their sacrificing ratio)

NOTE: As per the Para 16 of Accounting Standard 10, goodwill is recorded in the books only when some consideration in money or money’s worth has been paid for it. This practice is mandatory to follow. In  case of admission, retirement, death or change in profit sharing ratio among existing partners, Goodwill Account cannot be raised as no consideration is paid for it.

Page No 167:

Question 7:

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

Answer:

When a new partner is admitted in a partnership firm, then all past accumulated profits or losses and reserves are distributed among all the old partners in their old profit sharing ratio. This is because these profits and losses are attributable to the hard work and labours of the old partners and consequently, the old partners are liable to bear past losses or profits, if any. The new partner is not entitled for a share in these profits as he/she did not contribute anything for the past performance of the business.

 

Accounting Treatment of Accumulated Profits and Losses

 

i) For distributing accumulated profits and reserves

 

Profit and Loss A/c

Dr.

General Reserve A/c

Dr.

Reserve Fund A/c

Dr.

Workmen’s Compensation Fund A/c

Dr.

Contingency Reserve A/c

Dr.

 

To Old Partners’ Capital A/c

 

(Undistributed profits and reserves are distributed among old partners in their old profit sharing ratio)

 

 

ii) For distributing accumulated losses

 

Old Partners’ Capital A/c

Dr.

 

To Profit and Loss (Debit balance) A/c

 

 

To Deferred Advertisement Expenses A/c

 

 

To Preliminary Expenses A/c

 

(Undistributed losses are distributed among old

partners in their old profit sharing ratio)

 

 

 

Page No 167:

Question 8:

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

Answer:

After revaluation has been done, the assets and liabilities appear at their current market values in the Balance Sheet of the reconstituted firm. This can be better explained with the help of the below explained example.

 

A and B shares profit and loss equally.

 

Balance Sheet of A and B as on April 01, 2011

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

1,00,000

Cash in Hand

8,000

Capital Accounts

 

Cash at Bank

28,000

A 75,000

 

Debtors

40,000

B 75,000

1,50,000

Stock

36,000

 

 

 

 

Furniture

38,000

 

 

 

Plant and Machinery

1,00,000

 

2,50,000

 

2,50,000

 

 

 

 

               

 

1) On that date C is admitted for 1/3rd share and brings 1,00,000 as capital.

2) The value of stock is increased by Rs 7,000.

3) A provision of Rs 2,000 has been created against Debtors.

4) Furniture revalued at Rs 35,000.

5) A machinery costing Rs 50,000 purchased is not recorded in books.

6) Rent outstanding Rs 2,000.

Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet.

 

Sol:

                                                                                                                                                  

Revaluation Account

Dr.

 

 

Cr.

Particular

Amount

Rs

Particular

Amount

Rs

Rent Outstanding A/c

2,000

Stock

7,000

Provision for Debtors 2,000 Machinery 50,000
Furniture 35,000    

Profit transferred:

 

 

 

 

A’s Capital A/c

25,000

 

 

 

 

B’s Capital A/c

25,000

50,000

 

 

 

57,000

 

57,000

 

 

 

 

                                                                                                                                                

A’s Capital Account

Dr.

 

 

 

 

 

Cr.

Date

Particular

J.F.

Amount

Rs

Date

Particular

J.F.

Amount

Rs

 

Balance c/d

 

1,00,000

 

Balance b/d

 

75,000

 

 

 

 

 

Revaluation A/c

 

25,000

 

 

 

1,00,000

 

 

 

1,00,000

 

 

 

 

 

 

 

 

 

B’s Capital Account

Dr.

 

 

 

 

 

 

Cr.

Date

Particular

J.F.

Amount

Rs

Date

Particular

J.F.

Amount

Rs

 

Balance c/d

 

1,00,000

 

Balance b/d

 

75,000

 

 

 

 

 

Revaluation A/c

 

25,000

 

 

 

 

1,00,000

 

 

 

1,00,000

 

 

 

 

 

 

 

 

 

C’s Capital Account

Dr.

 

 

 

 

 

 

Cr.

Date

Particular

J.F.

Amount

Rs

Date

Particular

J.F.

Amount

Rs

 

Balance c/d

 

1,00,000

 

Cash A/c

 

1,00,000

 

 

 

 

 

 

 

 

 

 

 

 

1,00,000

 

 

 

1,00,000

 

 

 

 

 

 

 

 

 

Cash Account

Dr.

 

 

 

 

 

 

Cr.

Date

Particular

J.F.

Amount

Rs

Date

Particular

J.F.

Amount

Rs

 

Balance b/d

 

8,000

 

Balance c/d

 

1,08,000

 

C’s Capital A/c

 

1,00,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,08,000

 

 

 

1,08,000

 

 

 

 

 

 

 

 

 

Balance Sheet of A, B & C as at April

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

1,00,000

Cash in hand

1,08,000

Rent Outstanding

2,000

Cash at Bank

28,000

 

 

Debtors

40,000

 

 

 

Less: Provision

2,000

38,000

Capital Account

 

 

 

A

1,00,000

 

Stock

43,000

B

1,00,000

 

Furniture

35,000

C

1,00,000

3,00,000

Plant and Machinery

1,50,000

 

 

 

 

 

4,02,000

 

4,02,000

 

 

 

 

 

 

Page No 167:

Question 1:

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:

A

:

B

Old Ratio

3

:

2

OR

:

C admits for share of new profit in new firm.

Let new firm profit = 1

Remaining share of A and B in the new firm = 1 − C’s share

= 1 −

=

New Ratio = Old Ratio × Remaining Share of A and B

Page No 167:

Question 2:

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:

D admits for share in the new firm

Let new firm profit = 1

Remaining share of A, B and C in new firm = 1 − D’s share

New Ratio = Old Ratio × Remaining Share of A, B and C in new firm

Page No 167:

Question 3:

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:

Z admits for share in the new firm.

X and Y each sacrifice =

New Ratio = Old Ratio − Sacrificing Ratio



Page No 168:

Question 4:

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:

D admits for share in new firm, which he takes from A.

Here only A will sacrifice.

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 5:

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:

R admits for share in the new firm which he takes from from P and from Q.

P’s sacrifice = R’s share ×

Q’s sacrifice = R’s share ×

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 6:

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:

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

A’s sacrifice = D’s share ×

B’s sacrifice = D’s share ×

C’s sacrifice = D’s share ×

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 7:

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:

C admitted for share in the new firm

A’s sacrifice =

B’s sacrifice

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 8:

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:

D admitted for share of profit in new firm.

D’s share = A’s sacrifice + B’s Sacrifice + C’s sacrifice

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 9:

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 surrendered in favour of Gopi = of his share

Rukmani surrendered in favour of Gopi = of his share

Sacrificing Ratio = Old Ratio × Surrender Ratio

Radha =

Rukmani =

New Ratio = Old Ratio − Sacrificing Ratio

Radha =

Rukmani =

Gopi’s Share = Radha’s Sacrificing Ratio + Rukmani’s Sacrificing Ratio

Page No 168:

Question 10:

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:

Singh Surrender of his share

Gupta Surrender of his share

Khan Surrender of his share

Sacrificing Ratio = Old Ratio × Surrender Ratio

Singh’s

Gupta’s

Khan’s

New Ratio = Old Ratio − Sacrificing Ratio

Page No 168:

Question 11:

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:

Sacrificing Ratio = Old Ratio − New Ratio

Note: As solution sacrificing ratio is 3:5,. However answer given the book is different.

Page No 168:

Question 12:

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:

Ravi admits for share of profit in the new firm.

Let the New Firm Profit = 1

Combined share of Rao and Swami in the new firm

= 1 − Ravi’s share of profit

= 1 −

New Ratio = Combined Share of Rao and Swami × Proportion of Rao and Swami in the combined share

4:3:1

Sacrificing Ratio = Old Ratio − New Ratio

Page No 168:

Question 13:

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

2013

40,000

2014

50,000

2015

60,000

2016

50,000

2017

60,000

 

 

Answer:

 

Average Profit =

 

Year

Profit

2013

40,000

2014

50,000

2015

60,000

2016

50,000

2017

60,000

Sum of 5 years profit

2,60,000

 

Average Profit =  = 52,000

 

Goodwill = Average Profit × Number of Year’s Purchases = 52,000 × 4 = Rs 2,08,000

 



Page No 169:

Question 14:

Capital employed in a business is Rs. 2,00,000. The normal rate of return on capital employed 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?

Answer:

Capital Employed = Rs 2,00,000

Actual Profit = 48,000

Normal Rate of Return = 15%

Normal Profit = Capital Employed ×

= Rs 30,000

Super profit = Actual Profit − Normal Profit

= 48,000 − 30,000

= Rs 18,000

Goodwill = Super Profit × Number of Years Purchase

= 18,000 × 3

= Rs 54,000

Page No 169:

Question 15:

The books of Ram and Bharat showed that the capital employed 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%?

Answer:

 

Average Actual Profit =

 

Year

Profit

2015

40,000

2014

50,000

2013

55,000

2012

70,000

2011

85,000

Sum of 5 years profit

3,00,000

 

Average Actual Profit = = Rs 60,000

 

Normal Profit = Capital Employed ×

 

= Rs 50,000

 

Average Super Profit = Average Actual Profit – Normal Profit

= 60,000 – 50,000

= Rs 10,000

 

Goodwill = Average Super Profit × Number of year purchase

= 10,000 × 3

= Rs 30,000

 

 

Page No 169:

Question 16:

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 assuming that the normal rate of return is 20%?

Answer:

Rajan’s Capital

3,00,000

Rajni’s Capital

2,00,000

Total Capital Employed

5,00,000

Normal Rate of Return = 20%

Capitalised Valued = Actual Profit ×

= 1,50,000 ×

= Rs 7,50,000

Goodwill = Capitalised Value − Capital Employed

= 7,50,000 − 5,00,000

= Rs 2,50,000

Alternative Method

Normal Profit = Capital Employed ×

= 5,00,000 ×

= Rs 1,00,000

Super profit = Actual Profit − Normal Profit

= 1,50,000 − 1,00,000

= Rs 50,000

Goodwill = Super Profit ×

= 50,000 ×

= Rs 2,50,000

Page No 169:

Question 17:

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%?

Answer:

Capital Employed = Assets − External Liabilities

= 10,00,000 − 1,80,000

= Rs 8,20,000

Normal Profit = Capital Employed ×

= Rs 82,000

Super Profit = Actual Profit − Normal Profit

= 1,00,000 − 82,000

= Rs 18,000

Goodwill = Super Profit ×

= Rs 1,80,000

Alternative Method

Capitalised Value = Actual Profit ×

Capitalised value

= Rs 1,00,000

Goodwill = Capitalised Value − Capital Employed

= 10,00,000 − 8,20,000

= Rs 1,80,000

Page No 169:

Question 18:

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.

Answer:

 

Journal Entries

S.No.

 

Particulars

 

L.F.

Debit Amount Rs

Credit Amount Rs

Case (a)

 

   

 

 

 

 

Cash A/c

Dr.

 

24,000

 

 

 

To Ghosh's Capital A/c

 

 

 

20,000

 

 

To Premium for Goodwill A/c

 

 

 

4,000

 

(Capital and Goodwill his share brought

 by Ghosh)

 

 

 

 

 

 

   

 

 

 

 

Premium for Godwill A/c

Dr.

 

4,000

 

 

 

To Verma's Capital A/c

 

 

 

2,500

 

 

To Sharma's Capital A/c

 

 

 

1,500

 

(Goodwill brought by Ghosh credited to Old Partners

 in Sacrificing ratio)

 

 

 

 

 

   

 

 

 

Case (b)

Cash A/c

Dr.

 

24,000

 

 

 

To Ghosh Capital A/c

 

 

 

20,000

 

 

To Premium for Goodwill A/c

 

 

 

4,000

 

(Capital and Goodwill brought by Ghosh for (1/5)

share of profit)

 

 

 

 

 

 

   

 

 

 

 

Premium for Goodwill A/c

Dr.

 

4,000

 

 

 

To Verma's Capital A/c

 

 

 

2,500

 

 

To Sharma's Capital A/c

 

 

 

1,500

 

(Goodwill brought by Ghosh credited

 in Old  Partner in Sacrificing Ratio)

 

 

 

 

 

   

 

 

 

 

Verma's Capital A/c

Dr.

 

2,500

 

 

Sharma's Capital A/c

Dr.

 

1,500

 

 

 

To Cash A/c

 

 

 

4,000

 

(Amount of Premium for Goodwill withdrawn by

 Old Partners)

 

 

 

 

 

   

 

 

 

Case (c)

Cash A/c

Dr.

 

24,000

 

 

 

To Ghosh's Capital A/c

 

 

 

20,000

 

 

To Premium for Goodwill A/c

 

 

 

4,000

 

(Capital and Goodwill brought by Ghosh for (1/5)

share of profit)

 

 

 

 

 

 

   

 

 

 

 

Premium for Goodwill A/c

Dr.

 

4,000

 

 

 

To Verma's Capital A/c

 

 

 

2,500

 

 

To Sharma's Capital A/c

 

 

 

1,500

 

(Premium for Goodwill credited to Old Partner's

Captial Account in sacrificing ratio)

 

 

 

 

 

   

 

 

 

 

Verma's Capital A/c

Dr.

 

1,250

 

 

Sharma's Capital A/c

 

 

750

 

 

 

To Cash A/c

 

 

 

2,000

 

(Half of the amount of premium for goodwill  withdrawn by Old partners)

 

 

 

 

 

   

 

 

 

Case (d)

No entry: Goodwill was not brought in to firm

 

 

 

 

 

 

 

 

 

 

 

               

 

 

Page No 169:

Question 19:

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?

Answer:

Journal Entries

Date

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

 

 

 

 

 

 

Cash A/c

Dr.

 

35,000

 

 

To C's Capital A/c

 

30,000

 

To Premium for Goodwill A/c

 

5,000

 

(Amount of Capital and Share of Goodwill brought by C)

 

 

 

 

 

 

 

Premium for Goodwill A/c

Dr.

 

5,000

 

 

To A's Capital A/c

 

2,000

 

To B's Capital A/c

 

3,000

 

(C's Share of Goodwill credited to A and B in 2:3,

Sacrificing Ratio)

 

 

 

 

 

 

 

A's Capital A/c

Dr.

 

2,000

 

 

B's Capital A/c

Dr.

 

3,000

 

 

To Cash A/c

 

5,000

 

(Share of Goodwill withdrawn by Old  Partners)

 

 

 

 

 

 

 

 

 

 

 

Sacrificing Ratio = Old Ratio − New Ratio

Goodwill of the firm = Rs 20,000

C’s share of Goodwill =

A will receive

Or

B will receive

Or

Page No 169:

Question 20:

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?

Answer:

 

Journal Entries

Date

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

 

 

 

 

 

 

Arti's Capital A/c

Dr.

 

3,000

 

 

Bharti's Capital A/c

Dr.

 

2,000

 

 

To Goodwill A/c

 

5,000

 

(Goodwill written off)

 

 

 

 

 

 

Cash A/c

Dr.

 

60,000

 

 

To Sarthi's Capital A/c

 

50,000

 

To Premium for Goodwill A/c

 

10,000

 

(Amount of capital and share of goodwill brought by Sarthi)

 

 

 

 

 

 

 

Premium for Goodwill A/c

Dr.

 

10,000

 

 

To Arti's Capital A/c

 

4,000

To Bharti’s Capital A/c

6,000

 

(Premium for Goodwill credited Arti's Capital Account)

 

 

 

 

 

 

 

 

 

 

Sarthi admitted for share in new firm.

Sacrificing Ratio = Old Ratio − New Ratio

Arti will receive

Bharti will receive



Page No 170:

Question 21:

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. Subsequently X, Y and Z decided to show goodwill in their books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z?

Answer:

 

Journal Entries

Date

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

 

 

 

 

 

 

Cash A/c

Dr.

 

27,000

 

 

To Z's Capital A/c

 

20,000

 

To Premium for Goodwill A/c

 

7,000

 

(Amount of Capital and his share of Goodwill

 brought by Z)

 

 

 

 

 

 

 

Premium for Goodwill A/c

Dr.

 

7,000

 

 

To X's Capital A/c

 

4,000

 

To Y's Capital A/c

 

3,000

 

(Premium for Goodwill credit to Old Partners in Sacrificing Ratio)

 

 

 

 

 

 

 

Goodwill Rs 40,000 can not be raised. According to AS-10 Goodwill

can be shown in the book if money and money value is paid for it.

Here no money or money value has been paid for Goodwill.

 

 

 

 

 

 

 

 

 

 

 

Page No 170:

Question 22:

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?

Answer:

 

Journal Entries

Date

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

 

Cash A/c

Dr.

 

60,000

 

 

To Christopher's Capital A/c

 

50,000

 

To Premium for Goodwill A/c

 

10,000

 

(Amount of Capital and Premium for Goodwill brought by

Christopher)

 

 

 

 

 

 

 

Premium for Goodwill A/c

Dr.

 

10,000

 

 

Christopher's Capital A/c

Dr.

 

5,000

 

 

To Adiya's Capital A/c

 

6,000

 

To Balam's Capital A/c

 

9,000

 

(Goodwill Christopher's Share taken by Old Partner's in

Sacrificing Ratio)

 

 

 

 

 

 

 

 

Sacrificing Ratio = Old Ratio − New Ratio

Page No 170:

Question 23:

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.

Answer:

 

Amar

:

Samar

Old Ratio

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.

 

20,000

 

 

To Amar's Capital A/c

 

15,000

 

To Samar's Capital A/c

 

5,000

 

(Kanwar's share of goodwill charged from his capital account by

Amar and Kanwar in sacrificing ratio)

 

 

 

 

 

 

 

 

New Firm’s Goodwill = Rs 80,000

Kanwar’s Share of Goodwill = 80,000 × (1/4) = 20,000

 

Kanwar’s Goodwill will be taken by Amar and Samar in their sacrificing ratio here. Sacrificing Ratio will be equal to old ratio because new and sacrificing ratio is not given,

if sacrificing and new ratio is not given it is assumed that old partners sacrificed in their old ratio.

 

 

 

Page No 170:

Question 24:

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.

Answer:

 

 

Year

Profit

2013

50,000

2014

60,000

2015

90,000

2016

70,000

Sum of 4 years profit

2,70,000

 

 

Average Profit =  = Rs 67,500

 

 

Goodwill = Average Profit × No. of Years Purchases = 67,500 × 3 = 2,02,500

 

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

Ram Lal’s share of goodwill = 2,02, 500 × (1/4) = Rs 50,625

 

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

 

Mohan Lal will get = Ram Lal’s Share of Goodwill × (3/5) = 50,625 × (3/5) = 10,125 × 3 = Rs 30,375

 

Sohan Lal will = Ramlal Share of Goodwill × (1/5) = 50,625 × (1/5)  = Rs 10,125 × 2 = Rs 20,250

  

Case (a)

Journal Entries

Date

 

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

 

Mohan Lal's Capital A/c

Dr.

 

1,21,500

 

 

Sohan Lal's Capital A/c

Dr.

 

81,000

 

 

 

To Goodwill A/c

 

 

 

2,02,500

 

(Goodwill appeared in the old firm written off)

 

 

 

 

 

 

 

 

 

 

Ramlal's Capital A/c

Dr.

 

50,625

 

 

 

To Mohan Lal's Capital A/c

 

 

30,375

 

 

To Sohan Lal's Capital A/c

 

 

20,250

 

(Ram Lal's Shares of Goodwill charged  from his account

and Distrbuted between  in Mohan Lal and Sohan Lal in

Sacrificing Ratio)

 

 

 

 

 

 

 

 

             

 

Case (b)

Journal Entries

Date

Particulars

L.F.

Debit Amount

Rs

Credit Amount Rs

 

Mohan Lal's Capital A/c

Dr.

 

1,500

 

 

Sohan Lal's Capital A/c

Dr.

 

1,000

 

 

 

To Goodwill A/c

 

 

 

2,500

 

(Goodwill already appeared in the books of firm

written off in old ratio)

 

   

 

 

 

   

 

Ramlal's Capital A/c

Dr.

 

50,625

 

 

To Mohan Lal's Capital A/c

 

 

30,375

 

To Sohan Lal's Capital A/c

 

 

20,250

 

(Ram Lal's Shares of Goodwill charged  from his

capital by Mohan Lal and Sohan Lal in sacrificing ratio)

 

 

 

 

 

 

 

 

             

 

Case (c)

Journal Entries

Date

 

Particulars

L.F.

Debit Amount

Rs

Credit Amount Rs

 

Mohan Lal's Capital A/c

Dr.

 

1,23,000

 

 

Sohan Lal's Capital A/c

Dr.

 

82,000

 

 

To Ram Lal’s Capital A/c

 

 

 

2,05,000

 

(Goodwill already appeared in the books of firm written off in Old Ratio)

 

 

   

 

 

 

   

 

Ramlal's Capital A/c

Dr.

 

50,625

 

 

To Mohan Lal's Capital A/c

 

 

30,375

 

To Sohan Lal's Capital A/c

 

 

20,250

 

(Ram Lal's Shares of Goodwill charged  from his capital

by Mohan Lal and Sohan Lal in sacrificing ratio)

 

 

 

 

 

 

 

 

 

Page No 170:

Question 25:

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.

Answer:

 

Books of Rajesh, Mukesh and Hari

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

Hari’s Capital A/c

Dr.

 

8,000

 

 

To Rajesh’s Capital A/c

 

 

 

2,000

 

To Mukesh’s Capital A/c

 

 

 

6,000

 

(Adjustment of Hari’s share of goodwill)

 

 

 

 

 

 

 

 

  

Working Notes:

1) Goodwill of a firm = 36,000

Hari’s share in goodwill

= Goodwill of firm × admitting Partner Share

2) Sacrificing Ratio = Old Ratio − New Ratio

Sacrificing Ratio between Rajesh and Mukesh 1:3.

Page No 170:

Question 26:

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?

Answer:

 

 

Books of Amar, Akbar and Anthony

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

 

Anthony’s Capital A/c

Dr.

 

45,000

 

 

To Amar’s Capital A/c

 

 

 

11,250

 

To Akbar’s Capital A/c

 

 

 

33,750

 

(Adjustment of Anthony’s share of goodwill between

Amar and Akbar in sacrificing ratio)

 

 

 

 

 

 

 

 

 

Working Notes:

1) Sacrificing Ratio = Old Ratio − New Ratio

Sacrificing Ratio between Amar and Akbar = 1:3.



Page No 171:

Question 27:

 

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

 

Liabilites

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

 

 

Stock

40,000

Capitals:

 

 

Plant

1,00,000

 

A

1,80,000

 

Buildings

1,50,000

 

B

1,50,000

3,30,000

 

 

 

 

 

4,00,000

 

4,00,000

 

 

 

 

 

 

 

C is admitted as a partner on the date of the balance sheet on the following terms:

 

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

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

(iii) Stock is found over valued by Rs 4,000.

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

(v) Creditors were unrecorded to the extent of Rs 1,000.

 

Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.

 

 

Answer:

  

Books of A, B and C

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2016

 

 

 

 

 

Dec 31

Bank A/c

Dr.

 

1,60,000

 

 

 

To C’s Capital A/c

 

 

 

1,00,000

 

 

To Premium for Goodwill A/c

 

 

 

60,000

 

(Capital and premium for goodwill brought by C for 1/4 th share)

 

 

 

 

 

 

 

 

 

 

 

Premium for Goodwill A/c

Dr.

 

60,000

 

 

 

To A’s Capital A/c

 

 

 

40,000

 

 

To B’s Capital A/c

 

 

 

20,000

 

(Premium for Goodwill brought by C transferred to old partners’ capital

account in their sacrificing ratio, 3:1)

 

 

 

 

 

 

 

 

 

 

 

 

Plant A/c

Dr.

 

20,000

 

 

Building A/c

Dr.

 

15,000

 

 

 

To Revaluation A/c

 

 

 

35,000

 

(Value of assets increased)

 

 

 

 

 

 

 

 

 

 

 

 

Revaluation A/c

Dr.

 

8,000

 

 

 

To Stock

 

 

 

4,000

 

 

To Provision for Doubtful Debts A/c

 

 

3,000

 

 

To Creditors A/c (Unrecorded)

 

 

 

1,000

 

(Assets and liabilities revalued)

 

 

 

 

 

 

 

 

 

 

 

 

Revaluation A/c

Dr.

 

27,000

 

 

 

To A’s Capital A/c

 

 

 

18,000

 

 

To B’s Capital A/c

 

 

 

9,000

 

(Profit on revaluation transferred to old partners capital account)

 

 

 

 

 

 

 

 

 

 

               

  

Revaluation Account

 

Dr.

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Stock

4,000

Plant

20,000

Provision for Doubtful Debts

3,000

Building

15,000

Creditors (Unrecorded)

1,000

 

 

Profit transferred to

 

 

 

 

A’s Capital

18,000

 

 

 

 

B’s Capital

9,000

27,000

 

 

 

35,000

 

35,000

 

 

 

 

             

 

Partners’ Capital Account 

Dr.

Cr.

Particulars

A

B

C

Particulars

A

B

C

Balance c/d

2,38,000

1,79,000

1,00,000

Balance b/d

1,80,000

1,50,000

 

 

 

 

 

Bank

 

 

1,00,000

 

 

 

 

Premium for Goodwill

40,000

20,000

 

 

 

 

 

Revaluation

18,000

9,000

 

 

 

 

 

 

 

 

 

 

2,38,000

1,79,000

1,00,000

 

2,38,000

1,79,000

1,00,000

 

 

 

 

 

 

 

 

                 

  

Balance Sheet as on December 31, 2016

 

Liabilities

Amount

(Rs)

Assets

Amount

(Rs)

Bills Payable

10,000

Cash in Hand

 

10,000

Creditors

59,000

Cash at Bank

 

2,00,000

Outstanding Expenses

2,000

Sundry Debtors

60,000

 

Capital:

 

Less: Provision for Doubtful Debt

3,000

57,000

 

A

2,38,000

 

Stock

 

36,000

 

B

1,79,000

 

Plant

 

1,20,000

 

C

1,00,000

5,17,000

Building

 

1,65,000

 

5,88,000

 

 

5,88,000

 

 

 

 

 

               
               

 

Working Note:

1) Sacrificing ratio = Old Ratio − New Ratio

Sacrificing ratio between A and B = 2:1.

Page No 171:

Question 28:

Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. On Is Jan. 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.

Answer:

 

Books of Leela, Meeta and Om

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2017

 

 

 

 

 

Jan 1

General Reserve A/c

Dr.

 

16,000

 

 

Profit and Loss A/c

Dr.

 

24,000

 

 

 

To Leela’s Capital A/c

 

 

 

25,000

 

 

To Meeta’s Capital A/c

 

 

 

15,000

 

(General reserve and balance in Profit and Loss credited to old

partners’ capital account in their old ratio, 5:3)

 

 

 

 

 

 

 

 

 

 

Page No 171:

Question 29:

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.

Answer:

  

Books of Amit, Viney and Ranjan

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2017

 

 

 

 

 

Jan 1

Amit’s Capital A/c

Dr.

 

30,000

 

 

Viney’s Capital A/c

Dr.

 

10,000

 

 

 

To Profit and Loss A/c

 

 

 

40,000

 

(Debit Balance in Profit and Loss Account written off)

 

 

 

 

 

 

 

 

 

 

             

 

Page No 171:

Question 30:

 

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on Dec. 31, 2016 was as follows:

 

Balance Sheet of A and B as on December 31, 2016

 

Liabilites

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 Jan. 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.

 

 

Answer:

 

 

Books of A, B and C

Journal

 

Date

Particulars

L.F.

Amount

Rs

Amount

Rs

2017

 

 

 

 

 

Jan. 01

Bank A/c

Dr.

 

15,000

 

 

 

To C’s Capital A/c

 

 

 

10,000

 

 

To Premium for Goodwill A/c

 

 

 

5,000

 

(Capital and Premium for goodwill brought by C

for 1/5 th share)

 

 

 

 

 

 

 

 

 

 

Jan. 01

Premium for Goodwill A/c

 

 

5,000

 

 

 

To A’s Capital A/c

 

 

 

3,750

 

 

To B’s Capital A/c

 

 

 

1,250

 

(Amount of goodwill brought by C is transferred to old

partners’ capital account in their sacrificing ratio, 3:1)

 

 

 

 

 

 

 

 

 

 

 

Jan. 01

A’s Capital A/c

Dr.

 

1,875

 

 

B’s Capital A/c

Dr.

 

625

 

 

 

To Bank A/c

 

 

 

2,500

 

(Half of amount  withdrawn by old partners)

 

 

 

 

 

 

 

 

 

 

 

Jan. 01

Revaluation A/c

Dr.

 

4,050

 

 

 

To Stock A/c

 

 

 

2,000

 

 

To Fixture A/c

 

 

 

100

 

 

To Provision for doubtful Debts on Debtors A/c

 

 

 

800

 

 

To provision for doubtful Debts on Bills Receivable A/c

 

 

 

150

 

 

To Claim for Damages A/c

 

 

 

1,000

 

(Assets and liabilities are revalued)

 

 

 

 

 

 

 

 

 

 

 

Jan. 01

Land and Building A/c

Dr.

 

5,000

 

 

Sundry Creditors A/c

 

 

650

 

 

 

To Revaluation A/c

 

 

 

5,650

 

(Asset and liability are revalued)

 

 

 

 

 

 

 

 

 

 

 

Jan. 01

Revaluation A/c

Dr.

 

1,600

 

 

 

To A’s Capital A/c

 

 

 

1,200

 

 

To B’s Capital A/c

 

 

 

400

 

(Profit on Revaluation transferred to old partners’ capital)

 

 

 

 

 

 

 

 

 

 

 

Jan. 01

Reserve Fund A/c

Dr.

 

4,000

 

 

 

To A’s Capital A/c

 

 

 

3,000

 

 

To B’s Capital A/c

 

 

 

1,000

 

(Reserve Fund distributed among old partners)

 

 

 

 

 

               

  

Balance Sheet as on January 01, 2007

 

Liabilities

Amount

(Rs)

Assets

Amount

(Rs)

Sundry Creditors

 

40,850

Cash at Bank

39,000

Claim for Damages

 

1,000

Bills Receivable

3,000

 

 

A

36,075

 

Less: Provision

150

2,850

 

B

18,025

 

Debtors

16,000

 

 

C

10,000

64,100

Less: Provision

800

15,200

 

 

 

 

Stock

18,000

 

 

 

 

Fixtures

900

 

 

 

 

Land and Building

30,000

 

 

 

1,05,950

 

1,05,950

 

 

 

 

 

 

 

 Working Note:

 1)

Partners’ Capital Account

Dr.

Cr.

Particulars

A

B

C

Particulars

A

B

C

Bank

1,875

625

 

Balance b/d

30,000

16,000

 

Balance c/d

36,075

18,025

10,000

Bank

 

 

10,000

 

 

 

 

Premium for Goodwill

3,750

1,250

 

 

 

 

 

Revaluation

1,200

400

 

 

 

 

 

Reserve Fund

3,000

1,000

 

 

37,950

18,650

10,000

 

37,950

18,650

10,000