NCERT Solutions for Class 12 Accountancy Chapter 2 Reconstitution of a Partnership Firm - Admission of a Partner

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

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

• Profit sharing ratio – During the time of the admission of the new partner, the calculation of the new profit sharing ratio has to be made.

• The revaluation of the assets and liabilities is made to ascertain the value of the current time of the assets and the liabilities.

• The valuation of the Goodwill is made and is further adjusted between the old sacrificing partners.

• The accumulated profits, reserves, and losses are distributed in the old Profit Sharing Ratio among the old partners.

• Capital of all the partners is adjusted

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

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

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

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

4. On what occasions sacrificing ratio is used?

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

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

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

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

of a partner?

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

7. Do you advise that assets and liabilities must be revalued at the time of

admission of a partner? If so, why? Also, describe how is this treated in the book

of account.

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

• The revaluation is treated in the books of account as follows: Increase in the value of the asset: The asset is debited and the revaluation account is credited.

• Decrease in the value of the asset: The asset is credited and the revaluation account is debited.

• Increase in the value of liabilities: Liabilities are credited and the revaluation account is debited

• Decrease in the value of liabilities: Liabilities are debited and the revaluation account is credited.

• Recording unrecorded liabilities: The revaluation account is debited and unrecorded liabilities are credited.

• For transferring credit balance i.e. profit on revaluation: the Revaluation Account is debited and the old partners’ capital account is credited (old PSR)

• For transferring debit balance i.e. loss on revaluation: The old partners’ capital account is debited and the Revaluation Account is credited (old PSR)

8. What is goodwill? What factors affect goodwill? 

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

• Time: The amount and the period since which the business is in the market impacts and influences the goodwill of the organisation. Thus, the old business will have considerably more value compared to the business that is new in the market.

• Location: The location of any business is responsible for enhancing the value of the goodwill of the organisation. Thus in cases when the business is located in a favourable position, it will have a favourable goodwill amount.

• Risks Involved: The more the risk is involved in any business the lesser will be the amount of the goodwill of the organisation.

• Monopolistic Nature of Business: Monopoly renders the assurance of profits and thus it brings a tremendous amount of goodwill to the business.

• Nature of Goods: The nature of the goods that the organisation deals with brings stability to the business. Hence the more stable business will create a good value for goodwill compared to the business that has less stable goods.

• Efficient Business: The goodwill of any organisation depends upon the efficiency of the management of the organisation. Thus in the cases when any business has efficient management practices in the organisation.

• Personal and Impersonal Factors: The value of the goodwill for any business organisation increases as more and more importance to the impersonal factors is given and it thus decreases as more and more importance to the personal factors is given.

9. Explain various methods of valuation of goodwill.

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

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

1. Calculation of the average profit by taking into consideration the profit of the previous three or four years.

2. Multiplying the average profit by the calculation of the above (a) by the number of years purchase of profits Average profit = Total profits for all the years/number of years.

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

Weighted average profit = Total product of profits / Total weights

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

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

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

1. Ascertain or calculate the capital employed or average capital employed.

2. Calculate the normal profit of the organisation.

3. Calculate the actual maintainable profit of the organisation.

4. Calculate the difference between the actual maintainable profit and normal profit.

5. The value of the goodwill is calculated by multiplying the super profit and years of purchase.

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

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

10.  If it is agreed that the capital of all the partners should be proportionate to the

new profit sharing ratio, how will you work out the new capital of each partner?

Give examples and state how necessary adjustments will be made.

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

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

1. When the capital of the new partner is given

2. When the total capital of the firm is given

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

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

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

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

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

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

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

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

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

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

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

• Revaluation method: In the revaluation method the new partner does not bring along with him/herself the share of the cash for the goodwill and hence the old partners will raise the value of the goodwill in the books. Thus the goodwill account will be debited by crediting the Capital account of the old partners in their profit or loss sharing ratio. The new value of the goodwill will appear on the balance sheet of the organisation.

• Memorandum method: Under this method, goodwill is firstly raised after which it is written off among all partners (including the new one) in a new profit sharing ratio. The journal entry for the same will require the capital accounts of all partners to be debited and the goodwill account to be credited.

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

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

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

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

To old partners' capital account (in old PSR)

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

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

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

Balance Sheet

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

• Stock to depreciate @5%

• Provision for doubtful debts is to be Rs500

• Furniture to depreciate @10%

• The building is valued at Rs.19000 

Solution:

Revaluation Account

Revaluation Account

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

Ans:          A: B

Old Ratio 3: 2 Or 

              3/5 : 2/5

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

Let new firm profit = 1

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

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

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

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

                          A: B: C

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

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

Ans:         A: B: C

Old Ratio 3: 2: 1 Or

              3/6 : 2/6 : 1/6

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

Let new firm profit = 1

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

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

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

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

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

A: B: C : D

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

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

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

Z admits for 1/10 share of the new firm

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

New ratio = Old ratio – Sacrificing ratio

X = 5/8 – 1/20 = (25 – 2)/40 = 23/40

Y = 3/8 – 1/20 = (15 – 2)/40 = 13/40

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

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

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

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

New ratio = Old ratio – Sacrificing ratio 

A = 2/5 – 1/8 = (16-5)/40 = 11/40

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

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

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

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

from P and 2/3 from Q

P’s sacrifice = 1/5 x 1/3 = 1/15

Q’s sacrifice = 1/5 x 2/3 = 2/15

New ratio = Old ratio – Sacrificing ratio

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

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

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

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

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

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

A’s sacrifice = 1/5 x 2/5 = 2/25

B’s sacrifice = 1/5 x 2/5 = 2/25

C’s sacrifice = 1/5 x 1/5 = 1/25

New ratio = Old ratio – Sacrificing ratio

A = 3/7 – 2/25 = 61/175

B = 2/7 – 2/25 = 36/175

C = 2/7 – 1/25 = 43/175

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

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

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

C admits for 3/7 share in the new firm

A’s sacrifice = 2/7

B’s sacrifice = 1/7

New ratio = Old ratio – Sacrificing ratio

A = 3/5 – 2/7 = 11/35

B = 2/5 – 1/7 = 9/35

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

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

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

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

New ratio = Old ratio – Sacrificing ratio

A = 3/8 – 2/7 = 5/56

B = 3/8 – 1/7 = 13/56

C = 2/8 – 1/7 = 6/56

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

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

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

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

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

Sacrificing ratio = Old ratio x Surender’s ratio

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

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

New ratio = Old ratio – Sacrificing ratio

Radha = 3/5 – 1/5 = 2/5

Rukmani = 2/5 – 1/10 = 3/10

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

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

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

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

Singh surrender = 1/3 of his share

Gupta surrender = 1/4 of his share

Khan surrender = 1/5 of his share

Sacrificing ratio = Old ratio x Surrender ratio

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

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

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

New ratio = Old ratio – Sacrificing ratio

Singh = 3/8 – 3/24 = 6/24

Gupta = 2/8 – 2/32 = 6/32

Khan = 3/8 – 3/40 = 12/40

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

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

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

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

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

Sacrificing ratio = Old ratio – New ratio

Sandeep = 5/8 – 4/7 = 3/56

Navdeep = 3/8 – 2/7 = 5/56

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

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

Ans:  Old ratio = Rao : Swami = 3 : 2

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

Let the new firm profit = 1

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

New ratio = Combined share x Proportion in the combined share

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

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

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

Sacrificing ratio = Old ratio – New ratio

Rao = 3/5 – 4/8 = 4/40

Swami = 2/5 – 3/8 = 1/40

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

27. Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows:

Rs:

2015 -  40,000

2016 -  50,000

2017 -  60,000

2018 -  50,000

2019 -  60,000

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

of given years

Average profit = 260000/5 = 52000

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

52000 x 4 = 208000

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

Ans: Capital employed = 200000

Actual profit = 48000

Normal rate of return = 15%

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

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

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

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

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

Average actual profit = 300000/5 = 60000

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

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

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

30. Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000;

Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs.

1,50,000. Calculate the value of goodwill of the firm by capitalisation method

assuming that the normal rate of return is 20%?

Ans:  Rajan’s capital = 300000

Rajni’s capital = 200000

Total capital employed = 500000

Normal rate of return = 20%

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

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

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

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

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

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

32. Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill premium. Give the necessary journal entries: 

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

b) When the amount of goodwill is fully withdrawn.

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

d) When goodwill is paid privately.

Ans:

Journal Entries

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

Ans:

Journal Entries

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

B = 2/5 – 1/4 = 3/20

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

Goodwill of the firm = 20000

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

A will receive = 5000 x 2/5 = 2000

B will receive = 5000 x 3/5 = 3000

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

Ans:

Journal Entries

Old ratio = Arti : Bharti = 3 : 2

Sarthi admitted for ¼ share in new firm

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

Sacrificing ratio = Old ratio – New ratio

Arti = 3/5 – 2/4 = 2/20

Bharti = 2/5 – 1/4 = 3/20

Arti will receive = 10000 x 2/5 = 4000

Bharti will receive = 10000 x 3/5 = 6000

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

Ans: 

Journal Entries

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

Ans: 

Journal Entries

Sacrificing ratio = Old ratio – New ratio

Aditya = 3/5 – 2/4 = 2/20

Balam = 2/5 – 1/4 = 3/20

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

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

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

Kanwar admitted for 1/4 share of profit

Journal Entries

New firms goodwill = Rs.80000

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

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

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

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

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

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

b) Goodwill appears in the books at Rs. 2,500. 

c) Goodwill appears in the books at Rs. 2,05,000.

Ans:

Average profit = 270000/4 = 67500

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

x = 202500

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

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

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

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

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

Journal Entries

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

Ans:

Journal Entries

Working Notes:

1. Goodwill of the firm = 36000

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

partner share = 36000 x 2/9 = 8000

2. Sacrificing ratio = Old ratio – New ratio

Rajesh = 1/2 – 4/9 = 1/18

Mukesh = 1/2 – 3/9 = 3/18

Sacrificing ratio between Rajesh and Mukesh = 1 : 3

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

Ans:

Journal Entries

Working Notes:

1. Sacrificing ratio = Old ratio – New ratio

Amar = 1/2 – 4/9 = 1/18

Akbar = 1/2 – 3/9 = 3/18

Sacrificing ratio between Amar and Akbar = 1 : 3

41. Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1.

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

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

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

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

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

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

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

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

Ans: 

Journal Entries

Working Notes:

Sacrificing ratio = Old ratio – New ratio

A = 2/3 – 2/4 = 2/12

B = 1/3 – 1/4 = 1/12

Sacrificing ratio between A and B = 2 : 1

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

Ans: 

Journal Entries

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

Ans:

Journal Entries

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

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

On April 1, 2017, C was admitted into partnership on the following terms: 

(a) That C pays Rs. 10,000 as his capital. 

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

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

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

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

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

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

Ans: 

Journal Entries

Working Notes: 1.

Working Notes: 2

3. Sacrificing ratio = Old ratio – New ratio

A = 3/4 – 3/5 = 3/20

B = 1/4 – 1/5 = 1/20

Sacrificing ratio of A & B = 3 : 1

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

Ans:

Journal Entries

Working Notes:

1. Calculation of new profit sharing ratio

C’s share = ¼

Remaining share = 1 – 1/4 = 3/4

A’s new share = 3/4 x 3/4 = 9/16

B’s new share = 1/4 x 3/4 = 3/16

C’s share = 1/4 x 4/4 = 4/16

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

2. New capital of A & B

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

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

20000 x 4/1 = 80000

A’s Capital = 9/16 x 80000 = 45000

Thus, A will withdraw = 50000 – 45000 = 5000

B’s Capital = 3/16 x 80000 = 15000

Thus, B will bring = 15000 – 12000 = 3000

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

Ans:

Calculation of new profit sharing ratio = Old ratio –

Sacrificing ratio

Pinky = 3/6 – 1/8 = 9/24

Qumar = 2/6 – 1/16 = 13/48

Roopa = 1/6 – 1/16 = 5/48

New profit sharing ratio between pinky, Qumar, Roopa and 

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

Required capital of all partners in the new firm

Pinky = 240000 x 18/48 = 90000

Qumar = 240000 x 13/48 = 65000

Roopa = 240000 x 5/48 = 25000

Seema = 240000 x 12/48 = 60000

Amount to be bought by each partner in the new firm

Pinky = 90000 – 80000 = 10000

Qumar = 65000 – 30000 = 25000

Roopa = 25000 – 20000 = 5000

Seema = 60000

Journal Entries

47. The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of $\frac{6}{14}$ $\frac{5}{14}$ $\frac{3}{14}$respectively.

They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms: 

a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000 as his Capital; 

(b) that furniture be depreciated by 12%;

(c) that stock be depreciated by 10% 

(d) that a Reserve of 5% be created for doubtful debts: 

(e) that the value of land and buildings having appreciated be brought upto Rs. 31,000;

(f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be. 

Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm. 

Ans: 

Working Notes: 1.

2. Calculation of new profit sharing ratio:

Deepak share = 1/8

Remaining share = 1 – 1/8 = 7/8

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

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

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

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

Calculation of capital in new firm

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

Total capital = 7000 x 8/1 = 56000

Arun = 56000 x 6/16 = 21000

Bablu = 56000 x 5/16 = 17500

Chetan = 56000 x 3/16 = 10500

48. Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on March 31, 2016 (before Chintan’s admission) was as follows:

Balance Sheet of A and B as on 31.03.2016

It was agreed that: i) Chintan will bring in Rs. 12,000 as his share of goodwill premium. ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000. iii) A provision for doubtful debts is to be created @ 6% on debtors. iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts. Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission. 

Ans:

Journal Entries

Working Notes:

1. Calculation of new profit sharing ratio

Chintan share = 1/4

Remaining share = 1 – 1/4 = 3/4

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

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

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

2. New capital of Azad and Babli

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

Total capital = 30000 x 4/1 = 120000

Azad’s capital = 120000 x 2/4 = 60000

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

49. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on March 31, 2016 was as follows:

Balance Sheet of A and B as on 1.03.2016

It was agreed that:

i) The value of Land and Building be increased by Rs. 15,000. 

ii) The value of plant be increased by 10,000.

iii) Goodwill of the firm be valued at Rs. 20,000. 

iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm. Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission. 

Ans:

Journal Entries

Working Notes: 1.

Working Notes: 2.

3. Calculation of new profit sharing ratio

Vimal’s share = 1/5

Remaining share = 1 – 1/5 = 4/5

Ashish’s share = 3/5 x 4/5 = 12/25

Dutta’s share = 2/5 x 4/5 = 8/25

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

4. Sacrificing ratio = Old ratio – New ratio

Ashish = 3/5 – 12/25 = 3/25

Dutta =2/5 – 8/25 = 2/25

Sacrificing ratio = 3: 2

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

capital

Total adjusted capital of old partners = Ashish + Dutta = 

97400 + 46600 = 144000

The remaining share of Ashish and Dutta = 4/5

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

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

Topics Covered In Class 12 Accountancy Chapter 2