Issues in Partnership Accounts: Basic Concepts

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14

Issues in Partnership Accounts

BASIC CONCEPTS
¾ Partnership is defined as the relationship between persons who have agreed to share the
profit or loss of a business carried on by all or any of them acting for all.
¾ Two methods of accounting
• Fixed capital method
• Fluctuating capital method.
¾ Goodwill is the value of reputation of a firm in respect of profits expected in future over
and above the normal rate of profits.
¾ Necessity for valuation of goodwill in a firm arises in the following cases:
• When the profit sharing ratio amongst the partners is changed;
• When a new partner is admitted;
• When a partner retires or dies, and
• When the business is dissolved or sold.
¾ Methods for valuation of goodwill:
(1) Average profit basis :
Total Pr ofit
Average Profit =
Number of years
Goodwill = Average Profit x No. of Years’ purchased
The profits taken into consideration are adjusted with abnormal losses, abnormal
gains, errors, return on non-trade investments and errors.
(2) Super profit basis :
Calculate Capital Employed
Assets …….
Less: Liability …….

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14.2 Accounting

Capital Employed …....


ƒ Find the normal Rate of Return (NRR)
ƒ Find Normal Profit = Capital Employed x Normal rate of Return
ƒ Find Average Actual Profit
ƒ Find Super Profit = Average Actual Profit - Normal Profit
ƒ Find Goodwill = Super Profit x Number of Years Purchased
(3) Annuity basis :
Goodwill=Super Profit X Annuity Number
(4) Capitalization basis :
Super Pr ofit
Goodwill =
Normal Rate of Re turn

Question 1
A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The
Balance Sheet of the firm, as at 31st March, 2010 was as under:

Liabilities ` Assets `
Capital Accounts: Fixed Assets 1,00,000
A 48,000 Current Assets:
B 64,000 Stock 30,000
C 48,000 1,60,000 Debtors 60,000
Reserve 20,000 Cash and Bank 30,000 1,20,000
Creditors 40,000
2,20,000 2,20,000
The firm had taken a Joint Life Policy for ` 1,00,000; the premium periodically paid was
charged to Profit and Loss Account. Partner C died on 30th September, 2010. It was agreed
between the surviving partners and the legal representatives of C that:
(i) Goodwill of the firm will be taken at ` 60,000.
(ii) Fixed Assets will be written down by ` 20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on
31st March, 2010.

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Issues In Partnership Accounts 14.3

Policy money was received and the legal heirs were paid off. The profits for the year ended
31st March, 2011, after charging depreciation of ` 10,000 (depreciation upto 30th September
was agreed to be ` 6,000) were ` 48,000.
Partners’ Drawings Accounts showed balances as under :
A ` 18,000 (drawn evenly over the year)
B ` 24,000 (drawn evenly over the year)
C (up-to-date of death) ` 20,000
On the basis of the above figures, please indicate the entitlement of the legal heirs of C,
assuming that they had not been paid anything other then the share in the Joint Life Policy.
Answer
Computation of entitlement of legal heirs of C
(1) Profits for the half year ended 31st March, 2011
`
Profits for the year ended 31st March, 2011 (after depreciation) 48,000
Add : Depreciation 10,000
Profits before depreciation 58,000
Profits for the first half (assumed: evenly spread) 29,000
Less : Depreciation for the first half (6,000)
Profits for the first half year (after depreciation) 23,000
Profits for the second half (i.e., 1st October, 2010 to 31st March, 2011) 29,000
Less : Depreciation for the second half (4,000)
Profits for the second half year (after depreciation) 25,000
(2) Capital Accounts of Partners as on 30th September, 2010
A B C A B C
` ` ` ` ` `
To Fixed Assets By Balance b/d 48,000 64,000 48,000
(loss on By Reserve 6,000 8,000 6,000
revaluation) 6,000 8,000 6,000 By Goodwill 18,000 24,000 18,000
To Drawings 9,000 12,000 20,000 By P & L Appro-
To C Executor’s A/c 52,000 priation A/c
To Balance c/d 57,000 76,000 – (Interest on
` 48,000 @ 25%
for 6 months) — — 6,000
72,000 96,000 78,000 72,000 96,000 78,000

© The Institute of Chartered Accountants of India


14.4 Accounting

(3) Application of Section 37 of the Partnership Act


Legal heirs of C have not been paid anything other than the share in joint life policy. The
amount due to the deceased partner carries interest at the mutually agreed upon rate. In
the absence of any agreement, the representatives of the deceased partner can receive
at their option interest at the rate of 6% per annum or the share of profit earned for the
amount due to the deceased partner.
Thus, the representatives of C can opt for
Either,
(i) Interest on ` 52,000 for 6 months @ 6% p.a. = ` 1,560
Or
(ii) Profit earned out of unsettled capital (in the second half year ended 31st March,
2011)
52,000
` 25,000 × = ` 7,027 (approx.)
57,000 + 76,000 + 52,000
In the above case, it would be rational to assume that the legal heirs would opt for
` 7,027.
(4) Amount due to legal heirs of C `
Balance in C’s Executor’s account 52,000
Amount of profit earned out of unsettled capital [calculated in (3)] 7,027
Amount due 59,027
Question 2
A, B and C were partners, sharing Profits and Losses in the ratio of 5 : 3 : 2 respectively. On
31st March, 2011 their Balance Sheet stood as follows :
Liabilities Rs. Assets Rs.
A’s capital 7,79,000 Plant and Machinery 13,62,000
B’s capital 7,07,800 Furniture and Fittings 2,36,000
C’s capital 6,86,200 Stock 7,02,000
Creditors 4,91,000 Debtors 1,91,000
Cash at Bank 1,73,000
26,64,000 26,64,000
On 31 July, 2011 A died. According to partnership deed, on the death of a partner, the capital
st

account of the deceased partner was to be credited with:

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Issues In Partnership Accounts 14.5

(i) his share of profit for the relevant part of the year of death calculated on the basis of
profit earned during the immediately preceding accounting year, and
(ii) his share of goodwill
Goodwill was to be valued at two years’ purchase of the average profits of immediately
preceding three accounting years. The profits, as per books of account were as follows:
`
For accounting year ended 31st March, 2009 3,29,000
For accounting year ended 31st March, 2010 3,46,000
For accounting year ended 31st March, 2011 3,78,000
However, while going through the books of account on A’s death, it came to light that
` 30,000 worth of wages were spent on installation of a new machinery, but the same was not
capitalized; the machinery was put into operation on 1st October, 2010. Depreciation was
provided on the machinery @ 20% per annum.
On 1st October, 2011, A’s son D was admitted into partnership with immediate effect on the
following terms:
(a) D would get one-fourth share in the profit of the firm, while the relative profit sharing
ratio between B and C would remain unchanged.
(b) The final balance of A’s capital account would be credited to D’s capital account
(c) An adjustment would be made in the Capital Accounts for D’s share of goodwill. The
basis of valuation of firm’s goodwill would be the same as was adopted at the time of the
death of his father.
On 31st March, 2012, the Profit and Loss Account of the firm showed that the firm had earned
a profit of ` 4,16,000 for the year. The respective drawings accounts showed that while B and
C had withdrawn ` 60,000 each during the year, D’s drawings totalled ` 30,000. The Drawings
Accounts are closed at the end of the year by transfer to respective capital accounts.
You are required to:
(i) Prepare a statement showing distribution of profits for the accounting year ended
31st March, 2012; and
(ii) Pass journal entries for all the transactions relating to death of the partner. D’s
admission into partnership, and at the end of the year relating to transfer of Drawings
Accounts and distribution of profit for the year.

© The Institute of Chartered Accountants of India


14.6 Accounting

Answer
(i) Statement showing distribution of profits for the accounting year ended 31st March,
2012

` `
Net profit for the year ended 31.03.2012 4,16,000
A’s share
(Profit distributed to deceased partner A & his executor)
(a) Profit for 4 months (1.4.2011 – 31.7.2011) (W.N.1) 67,500
(b) Application of Sec. 37 (1.8.2011 – 30.9.2011) (W.N.5) 28,021 95,521
B’s share
(a) Profit for 4 months (1.4.2011 – 31.7.2011) (W.N.3) 42,700
(b) Profit for 2 months (1.8.2011 – 30.9.2011) (W.N.6) 24,787
(c) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 93,600 1,61,087
C’s share
(a) Profit for 4 months (1.4.2011 – 31.7.2011) (W.N.3) 28,467
(b) Profit for 2 months (1.8.2011 – 30.9.2011) (W.N.6) 16,525
(c) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 62,400 1,07,392
D’s share
(a) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 52,000 52,000
4,16,000
(ii) Journal Entries

Year Dr. Cr.


2011 ` `
July 31 Machinery A/c Dr. 27,000
To A’s Capital A/c 13,500
To B’s Capital A/c 8,100
To C’s Capital A/c 5,400
(Wages spent on installation of new machinery
capitalised and credited to partners’ capital accounts
after providing depreciation for six months ended 31st
March, 2011)

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.7

Profit and Loss Suspense A/c Dr. 67,500


To A’s Capital A/c 67,500
(A’s share of profit for four months as calculated in
W. N. 1 credited to his capital account)
Goodwill A/c Dr. 7,20,000
To A’s Capital A/c 3,60,000
To B’s Capital A/c 2,16,000
To C’s Capital A/c 1,44,000
(Goodwill raised in the books and credited to partners
in the old profit sharing ratio 5 : 3 : 2)
A’s Capital A/c Dr. 12,20,000
To A’s Executor’s A/c 12,20,000
(Balance due to A transferred to his executor’s
account)
Profit & Loss Suspense A/c Dr. 28,021
To A’s Executor’s A/c 28,021
(Profit earned out of the unsettled capital credited to
A’s executor’s account as per W. N. 5)
Oct. 1 A’s Executor’s A/c Dr. 12,48,021
To D’s Capital A/c 12,48,021
(Final balance of A’s executor’s account transferred
to D’s capital account)
B’s Capital A/c Dr. 3,24,000
C’s Capital A/c Dr. 2,16,000
D’s Capital A/c Dr. 1,80,000
To Goodwill 7,20,000
(Goodwill written off and debited to partners in the
new profit sharing ratio 9 : 6 : 5)
March B’s Capital A/c Dr. 60,000
31 C’s Capital A/c Dr. 60,000
D’s Capital A/c Dr. 30,000
To B’s Drawings A/c 60,000
To C’s Drawings A/c 60,000
To D’s Drawings A/c 30,000
(Drawings debited to partners’ capital accounts)

© The Institute of Chartered Accountants of India


14.8 Accounting

March Profit and Loss Appropriation A/c Dr. 4,16,000


31
To Profit and loss suspense A/c
(` 67,500 + ` 28,021) 95,521
To B’s Capital A/c 1,61,087
To C’s Capital A/c 1,07,392
To D’s Capital A/c 52,000
(Division of profits as shown in statement of
distribution of profits and balance of profit & loss
suspense account transferred to profit and loss
appropriation account)

Working Notes:
(1) Computation of A’s share in profit for the period 1.4.2011 – 31.7.2011
A’s share in profit for the period of 1st April, 2011 to 31st July, 2011 is to be calculated on
the basis of profit earned during the immediately previous accounting year i.e. year
ended on 31st March, 2011
`
Profit for the year ended 31st March, 2011 3,78,000
Add : Capital expenditure of wages spent on installation
of new machinery, treated as revenue expenditure 30,000
4,08,000
Less : Depreciation on ` 30,000 (being the value of machinery @ 20%
p.a. for 6 months) (3,000)
Correct profit for the year ended 31 March, 2011
st 4,05,000
4
Profit for 4 months on the basis of last year’s profit = ` 4,05,000 × = 1,35,000
12
5
A’s share in profit = 1,35,000 × = 67,500
10
(2) Valuation of Goodwill `
Profit for the year ended 31st March, 2009 3,29,000
Profit for the year ended 31st March, 2010 3,46,000
Profit for the year ended 31st March, 2011 4,05,000
Total Profit 10,80,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.9

10,80,000
Average Profit =` = ` 3,60,000
3
Goodwill (two years’ purchase) = ` 3,60,000 × 2 = ` 7,20,000
(3) Distribution of profit for 4 months ended 31st July, 2011
`
4
Net Profit (` 4,16,000 × ) 1,38,667
12
A’s share (W. N. 1) 67,500
3
B’s share (` 71,167 × ) 42,700
5
2
C’s share (` 71,167 × ) 28,467
5
(4) Partners’ Capital Accounts as on 31st July, 2011
A B C A B C
` ` ` ` ` `
To Drawings 20,000 20,000 By Balance b/d 7,79,000 7,07,800 6,86,200
To A’s Executor’s A/c 12,20,000 9,54,600 8,44,067 By Plant & Machinery 13,500 8,100 5,400
To Balance c/d – – By Goodwill 3,60,000 2,16,000 1,44,000
By Share in
Profit (W. N. 3) 67,500 42,700 28,467
12,20,000 9,74,600 8,64,067 12,20,000 9,74,600 8,64,067

(5) Application of section 37 of the Partnership Act


Either
6 2
(i) Interest of ` 12,20,000 × × = ` 12,200
100 12
Or
(ii) Profit earned out of unsettled capital
` 4,16,000 × 2 × ` 12,20,000
= ` 28,021 (approx.)
12 ` (12,20,000 + 9,54,600 + 8,44,067)

In the absence of specific agreement amongst partners on the above subject matter, the
representatives of the deceased partner can receive at their option, interest at the rate of
6% p.a. or share of profit earned for the amount due to the deceased partner.
In the above case, it would be rational to assume that A’s representatives would opt for
` 28,021.

© The Institute of Chartered Accountants of India


14.10 Accounting

(6) Distribution of profit for 2 months ended 31st Oct, 2011


`
2
Net profit (` 4,16,000 × ) 69,333
12
A’s executor’s share (W. N. 5) 28,021
3
B’s share (` 41,312 × ) 24,787
5
2
C’s share (` 41,312 × ) 16,525
5

(7) A’s Executor’s Account


` `
To D’s Capital A/c 12,48,021 By A’s capital A/c 12,20,000
By Share in profit (W. N. 6) 28,021
12,48,021 12,48,021

(8) Partner’s Capital Accounts (1st August, 2011 to 30th Sept., 2011)

Dr. B C B C
` ` ` `
To Drawings 10,000 10,000 By Balance b/d 9,54,600 8,44,067
To Balance c/d 9,69,387 8,50,592 By P & L A/c 24,787 16,525
9,79,387 8,60,592 9,79,387 8,60,592

(9) Computation of new profit sharing ratio between B, C & D


D is admitted for ¼ share
B’s new ratio = 3/4 × 3/5 = 9/20
C’s new ratio = 3/4 × 2/5 = 6/20
D’s new ratio = 5/20
New profit sharing ratio =9:6:5

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.11

(10) Distribution of profit for 6 months ended 31st March, 2012


`
6
Net profit (` 4,16,000 × ) 2,08,000
12
9
B’s share (` 2,08,000 × ) 93,600
20
6
C’s share (` 2,08,000 × ) 62,400
20
5
D’s share (` 2,08,000 × ) 52,000
20
(11) Partner’s Capital Accounts as on 31st March, 2012
B C D B C D
` ` ` ` ` `
To Goodwill 3,24,000 2,16,000 1,80,000 By Balance b/d 9,69,387 8,50,592

To Drawings 30,000 30,000 30,000 By A’s Executor’s A/c 12,48,021

To Balance c/d 7,08,987 6,66,992 10,90,021 By Share of profit

(W. N. 10) 93,600 62,400 52,000

10,62,987 9,12,992 13,00,021 10,62,987 9,12,992 13,00,021

Notes:
1. It is assumed that profit was earned uniformly throughout the year. Although notional
profit was calculated for the first four months, it is to be transferred from the current
year’s profit (as calculated in working note 3). The question requires that A’s share of
profit for this period is to be calculated on the basis of profit earned during year ended
31st March. 2011. The balance amount after calculating his share has been credited to B
and C in ratio 3 : 2.
2. It is assumed that drawings were made evenly throughout the year. However, single
entry has been given at year end in the main solution relating to transfer of drawings and
distribution of profit but the Partners’ capital accounts shown in the working notes include
the entries of drawings and distribution of profit of respective dates within the year.

© The Institute of Chartered Accountants of India


14.12 Accounting

Question 3
M/s Neptune & Co.’s Balance Sheet as at 31st March, 2011:
Liabilities ` Assets `
Bank overdraft (State Bank) 54,000 Cash at Bank of India 800
Sundry Creditors 1,56,000 Sundry Debtors 2,80,000
Capital Accounts : Stock 1,00,000
Mr. A Motor Cars cost as per last B/S 1,60,000
Balance as per last B/S 4,02,000 Less : Depreciation till date (54,000) 1,06,000
Add : Profits for the year 95,400 Machinery :
4,97,400 Cost as per last B/S 3,00,000
Less : Drawings (40,000) 4,57,400 Less : Depreciation till date (1,40,000) 1,60,000
Mr. B Land and Building 2,40,000
Balance as per last B/s 2,00,000
Add : Profit for the year 95,400
2,95,400
Less : Drawings (76,000) 2,19,400
8,86,800 8,86,800

You have examined the foregoing Draft of the Balance Sheet and have ascertained that the
following adjustments are required to be carried out :
(i) Land and Buildings are shown at cost less ` 60,000 being the proceeds of the sale
during the year of premises costing ` 70,000.
(ii) Machinery having a net book value of ` 4,300 had been scrapped during the year. The
original cost was ` 12,300.
(iii) ` 2,000 paid for the License fee for the year ending 30th September, 2011 had been
written off.
(iv) Debts amounting to ` 10,420 were considered to be bad and further debts amounting to
` 5,400 were considered doubtful and required 100% provision. Provision for doubtful
debts had previously been made for ` 10,000.
(v) An item in the Inventory was valued at ` 37,400, but had a realisable value of
` 26,000 only. Scrap Material having a value of ` 6,600 had been omitted from the stock
valuation.
(vi) The cashier had misappropriated ` 700.

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.13

(vii) The cash-book for the year ending 31st March, 2011 included payments amounting to
` 6,924, the cheques having been made out, but not dispatched to suppliers until April 2011.
(viii) Interest is to be allowed on the Partners’ opening Capital Account balances less
drawings during the year at 9%.
You are required to prepare:
(a) Profit & Loss Adjustment Account for the year.
(b) Capital Accounts of the Partners.
Answer
(a) M/s Neptune & Co.
Profit and Loss Adjustment Account
for the year ended 31st March, 2011

` `
To Land & Building (Loss on sale 10,000 By Partner’s Capital Accounts :
To Machinery (Loss on scrapping) 4,300 Mr. A 95,400
To Provision for Doubtful Debts 5,820 Mr. B 95,400 1,90,800
(Working note)
To Stock Adjustment (Fall in the 11,400 By Prepaid expenses (License 1,000
Market value) fee)
To Cash (Misappropriated) 700 By Stock Adjustment (items 6,600
To Interest on Capital omitted)
Mr. A 32,580
Mr. B 11,160 43,740
To Profit transferred to Capital
Accounts:
Mr. A 61,220
Mr. B 61,220 1,22,440
1,98,400 1,98,400
(b) Partners’ Capital Accounts
As on 31st March, 2011
Mr. A Mr. B Mr. A Mr. B
31.3.2011 ` ` 31.3.2010 ` `
To Drawings 40,000 76,000 By Balance b/d 4,02,000 2,00,000
To Profit & Loss 31.3.2011
Adjustment Account 95,400 95,400 By Profit & Loss A/c 95,400 95,400

© The Institute of Chartered Accountants of India


14.14 Accounting

To Balance c/d 4,55,800 1,96,380 By Profit & Loss


Adjustment A/c:
Interest on capital 32,580 11,160
Profit for the year 61,220 61,220
5,91,200 3,67,780 5,91,200 3,67,780

Working Notes:
(1) Provision for doubtful debts charged to profit and loss adjustment account
Provision for Doubtful Debts Accounts

` `
To Bad Debts 10,420 By Balance b/d 10,000
To Balance c/d (required) 5,400 By Profit & Loss Adjustment A/c
(bal.fig.) 5,820
15,820 15,820
(2) Interest on Capitals
Mr. A ` 3,62,000 × 9% p.a. = ` 32,580
Mr. B ` 1,24,000 × 9% p.a. = ` 11,160
Note : Misappropriation by cashier may be debited to cashier also. In that case, ` 700 will
not be debited to Profit and Loss Adjustment Account and profit transferred to
partners will be ` 1,23,140.
Question 4
Manish, Jatin and Paresh were partners sharing Profits/ Losses in the ratio of Manish 40
percent, Jatin 35 percent, and Paresh 25 percent. The draft Balance Sheet of the partnership
as on 31st December, 2011 was as follows :
` `
Sundry Creditors 30,000 Cash on hand and at Bank 67,000
Bills payable 8,000 Stock 42,000
Loan from Jatin 30,000 Sundry Debtors 34,000
Current Accounts : Less : Provision for
Manish 12,000 Doubtful Debts (6,000) 28,000
Jatin 8,000 Plant and Machinery
Paresh 6,000 26,000 (at cost) 80,000
Capital Accounts : Less : Depreciation (28,000) 52,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.15

Manish 90,000 Premises (at cost) 75,000


Jatin 50,000
Paresh 30,000 1,70,000
2,64,000 2,64,000

Jatin retired on 31st December, 2011. Manish and Paresh continued in partnership sharing
Profits/ Losses in the ratio of Manish 60 percent and Paresh 40 percent. 50 percent of Jatin’s
Loan was repaid on 1.1.2012 and it was agreed that of the amount then remaining due to him
a sum of ` 80,000 should remain as loan to partnership and the balance to be carried forward
as ordinary trading liability. The following adjustments were agreed to be made to the above
mentioned Balance Sheet:
(i) ` 10,000 should be written off from the premises.
(ii) Plant and Machinery was revalued at ` 58,000.
(iii) Provision for doubtful debts to be increased by ` 1,200
(iv) ` 5,000 due to creditors for expenses had been omitted from the books of account.
(v) ` 4,000 to be written off on stocks.
(vi) Provide ` 1,200 for professional charges in connection with revaluation.
As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be
valued at an amount equal to one year’s purchase of the average profits of the preceding
three years on the date of retirement. Before determining the said average profits a notional
amount of ` 80,000 should be charged for remuneration to partners. The necessary profits
before charging such remuneration were:
Year ending 30.12.2009 ` 1,44,000
Year ending 31.12.2010 ` 1,68,000
Year ending 31.12.2011 ` 1,88,200 (As per draft accounts)
It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2011
be recomputed after charging the loss on revaluation in respect of premises and stock, the
unprovided expenses (except professional expenses) and increase in the provision for
doubtful debts. The continuing partners decided to eliminate goodwill account from their
books.
You are required to prepare:
(i) Revaluation Account:
(ii) Capital Accounts (merging current accounts therein):
(iii) Jatin’s Accounts showing balance due to him; and
(iv) Balance Sheet of Manish and Paresh as at 1st January, 2012.

© The Institute of Chartered Accountants of India


14.16 Accounting

Answer

(i) Revaluation Account


` `
To Premises 10,000 By Plant and Machinery 6,000
To Provision for Doubtful Debts 1,200 By Loss on revaluation transferred
To Outstanding Expenses 5,000 to Capital Accounts:
To Stocks 4,000 Manish (40%) 6,160
To Provision for Professional Charges 1,200 Jatin (35%) 5,390
Paresh (25%) 3,850 15,400
21,400 21,400

(ii) Capital Accounts of Partners


Manish Jatin Paresh Manish Jatin Paresh
` ` ` ` ` `
To Revaluation A/c (loss) 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000
To Goodwill (written off in 48,000 – 32,000 By Current A/c 12,000 8,000 6,000
new Profit sharing ratio)
To Personal A/c (Balance 80,610 By Goodwill 32,000 28,000 20,000
transferred) – (old profit sharing)
To Balance c/d 79,840 20,150
1,34,000 86,000 56,000 1,34,000 86,000 56,000
(iii) Jatin’s Personal Account
` `
To Bank Account 15,000 By Capital Accounts 80,610
(50% of old loan) (Balance transferred)
ToLoan Account 80,000 By Loan Account 30,000
(transferred) (old loan)
To Balance c/d 15,610
1,10,610 1,10,610

(iv) Balance Sheet of Manish and Paresh


as on 1st January, 2012
Liabilities ` Assets `
Capital Accounts Fixed Assets
Manish 79,840 Plant and Machinery 86,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.17

Paresh 20,150 99,990 Less: Depreciation (28,000) 58,000


Jatin’s Loan A/c 80,000 Premises 75,000
Current Liabilities Less: Written off (10,000) 65,000
and Provisions Current Assets
Bills Payable 8,000 Cash in hand & at Bank
Sundry Creditors 35,000 (67,000–15,000) 52,000
(30,000+5,000) Sundry Debtors 34,000
Jatin’s dues 15,610 Less: Provision for
Provision for doubtful debts (7,200) 26,800
Professional charges 1,200 59,810 Stock in trade 38,000

2,39,800 2,39,800

Working Notes :
(1) Profit for the Year ending 31st December, 2011 `
As per draft accounts 1,88,200
Less: Premises written off 10,000
Provision for Doubtful debts 1,200
Outstanding Expenses 5,000
Stock 4,000 (20,200)
1,68,000
(2) Valuation of Goodwill
Profit for the year ending 31st Dec.2011 (adjusted) 1,68,000
Profit for the year ending 31st Dec. 2010 1,68,000
Profit for the year ending 31st Dec. 2009 1,44,000
4,80,000
Average Profits before partners’ salaries 1,60,000
Less: Partners’ Salaries (notional) (80,000)
Super Profit and Goodwill (one year’s purchase) 80,000
Question 5
Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was
decided that Robert would retire on 31.3.2011 and in his place Richard would be admitted as a
partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.

© The Institute of Chartered Accountants of India


14.18 Accounting

Balance Sheet of Ram, Rahim and Robert as at 31.3.2011:


Liabilities ` Assets `
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(a) Plant & Machinery to be depreciated by ` 30,000.
(b) Land and Building to be valued at ` 6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3
years. The relevant figures are:
Year ended 31.3.2008 − Profit ` 50,000
Year ended 31.3.2009 − Profit ` 60,000
Year ended 31.3.2010 − Profit ` 55,000
(g) Out of the amount due to Robert ` 2,00,000 would be retained as loan by the firm and
the balance will be settled immediately.
(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm.

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.19

Answer
Partners’ Capital Accounts

Dr. Cr.

Ram Rahim Robert Richard Ram Rahim Robert Richard

` ` ` ` ` ` ` `
To Revaluation 10,000 6,000 4,000 − By Balance 1,00,000 1,50,000 2,00,000 −
A/c (W.N.1) b/d
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 −
Robert A/c reserve
To Bank 58,000 By Goodwill 55,000 33,000 22,000 −
(W.N. 2)
To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______

2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 −

To Goodwill∗ 55,000 36,667 − 18,333 By Balance 2,45,000 2,37,000 − −


b/d
By Loan A/c − − − 2,00,000
− transfer
To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500

2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500

Balance Sheet as at 31.3.2011


after the admission of Richard
Liabilities ` Assets `
Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500


As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when some
consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of retirement of
Robert is to be written off in new ratio among remaining partners including new partner – Richard.

© The Institute of Chartered Accountants of India


14.20 Accounting

Working Notes:
(1) Revaluation Account
` `
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
______ Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2008 50,000
Profit for the year ended 31.3.2009 60,000
Profit for the year ended 31.3.2010 55,000
1,65,000
1,65,000
Average profit = = ` 55,000
3
Goodwill = ` 55,000 × 2 years = ` 1,10,000.
(3) Bank Account
` `
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500

Question 6
The following was the Balance Sheet of ‘A’ and ‘B’, who were sharing profits and losses in the
ratio of 2:1 on 31.12.2011:
Liabilities ` Assets `
Capital Accounts Plant and machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry debtors 3,00,000
Reserve fund 9,00,000 Stock 4,00,000
Sundry creditors 4,00,000 Cash 1,00,000
Bills payable 1,00,000
29,00,000 29,00,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.21

They agreed to admit ‘C’ into the partnership on the following terms:
(i) The goodwill of the firm was fixed at ` 1,05,000.
(ii) That the value of stock and plant and machinery were to be reduced by 10%.
(iii) That a provision of 5% was to be created for doubtful debts.
(iv) That the building account was to be appreciated by 20%.
(v) There was an unrecorded liability of ` 10,000.
(vi) Investments worth ` 20,000 (Not mentioned in the Balance Sheet) were taken into
account.
(vii) That the value of reserve fund, the values of liabilities and the values of assets other than
cash are not to be altered.
(viii) ‘C’ was to be given one-fourth share in the profit and was to bring capital equal to his
share of profit after all adjustments.
Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance
Sheet of the newly reconstituted firm.
Answer
Memorandum Revaluation Account
` `
To Stock 40,000 By Building 1,80,000
To Plant & machinery 1,20,000 By Investments 20,000
To Provision for doubtful debts 15,000
To Unrecorded liability 10,000
To Profit transferred to
Partners’ Capital A/cs (in old
ratio)
A = 10,000
B = 5,000 15,000
2,00,000 2,00,000
To Building 1,80,000 By Stock 40,000
To Investments 20,000 By Plant & machinery 1,20,000
By Provision for doubtful debts 15,000
By Unrecorded liability 10,000
By Loss transferred to
Partners’ Capital A/cs (in
new ratio)
A = 7,500
B = 3,750
C = 3,750 15,000
2,00,000 2,00,000

© The Institute of Chartered Accountants of India


14.22 Accounting

Partners’ Capital Accounts


A B C A B C
To Loss on 7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -
Revaluation
To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve Fund 6,00,000 3,00,000 -
To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -
To B (W.N.3) - - 8,750 By Profit on 10,000 5,000
Revaluation
To Balance c/d By Cash (Bal. Fig.) 8,40,000
(Refer W.N.2) 11,70,000 5,85,000 5,85,000
16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2011


Liabilities ` Assets `
Capital Accounts Plant & Machinery 12,00,000
A 11,70,000 Building 9,00,000
B 5,85,000 Sundry Debtors 3,00,000
C 5,85,000 Stock 4,00,000
Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000
Sundry Creditors 4,00,000
Bills Payable 1,00,000
37,40,000 37,40,000
Working Notes:
1. Calculation of new profit and loss sharing ratio
C will get 1/4 th share in the new profit sharing ratio.
Therefore, remaining share will be 1-1/4 =3/4
Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2
Share of B will be 3/4 x 1/3 = 1/4
New ratio will be
A:B:C
1/2 : 1/4 : 1/4
2 : 1: 1

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.23

2. Calculation of closing capital of C


Closing capitals of A & B after all adjustments are:
A = ` 11,70,000
B = ` 5,85,000
Since B’s capital is less than A’s capital, therefore B’s capital is taken as base.
Hence, C’s closing capital should be Rs.5,85,000 i.e. at par with B (as per new profit and
loss sharing ratio)
3. Adjustment entry for goodwill ∗
Partners Goodwill as per old ratio Goodwill as per new ratio Effect
A 70,000 52,500 + 17,500 -
B 35,000 26,250 + 8,750 -
C - 26,250 - -26,250
1,05,000 1,05,000 26,250 26,250
Adjustment entry will be:
C’s Capital A/c Dr. 26,250
To A’s Capital A/c 17,500
To B’s Capital A/c 8,750
Question 7
P, Q, R are three doctors who are running a Polyclinic. Their capital on 31st March, 2009 was
` 1,00,000 each. They agreed to admit X, Y and Z as partners w.e.f. 1st April 2009. The
terms for sharing profits & losses were as follows:
(a) 70% of the visiting fee is to go to the specialist concerned.
(b) 50% of the chamber fee will be payable to the individual specialist.
(c) 40% of operation fee and fee for pathological reports, X-rays and ECG will accrue in
favour of the doctor concerned.
(d) Balance of profit or loss is shared equally.
(e) All the partners are entitled for 6% interest on capital employed.
They further agreed that:


As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded in the books only when some
consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of admission of C
is to be written off in new ratio among all partners including new partner, C.

© The Institute of Chartered Accountants of India


14.24 Accounting

(i) X, Y and Z brought in ` 20,000 each as goodwill. Goodwill is shared by the existing
partners equally.
(ii) X, Y and Z brought in ` 50,000 each as capital. Each of the original partners also
contributed ` 50,000 by way of capital.
The receipts for the year after admission of new partners were:
Name of Particulars Visiting Fees Chambers Fees Fees for reports,
doctors (`) (`) operation etc.
(`)
P General Physician 1,50,000 2,00,000 -
Q Gynecologist 25,000 1,75,000 1,00,000
R Cardiologist - 1,00,000 75,000
X Child Specialist 1,00,000 1,50,000 -
Y Pathologist - - 1,00,000
Z Radiologist - 40,000 2,00,000
Total 2,75,000 6,65,000 4,75,000
Expenses for the year were as follows:
Particulars `
Medicines, injections and other consumables 1,00,000
Printing and stationery 5,000
Telephone expenses 5,000
Rent 42,000
Power and light 10,000
Nurses salary 20,000
Attendants wages 20,000
Total 2,02,000
Depreciation:
X-Ray machines 15,000
ECG equipments 5,000
Furniture 5,000
Surgical equipments 5,000
Total Depreciation 30,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.25

You are requested to:


(i) Pass necessary journal entries on admission of partners.
(ii) Prepare the Profit and Loss Account of the polyclinic for the year ended
31st March, 2010.
(iii) Prepare capital accounts of all the partners at the end of the financial year 2009-10. Also
show the distribution of profit among partners.
Answer
(i) Journal Entries (on admission of partners)
Date Particulars Debit (`) Credit (`)
1st April, 2009 X’s capital A/c Dr. 20,000
Y’s capital A/c Dr. 20,000
Z’s capital A/c Dr. 20,000
To P’s capital A/c 20,000
To Q’s capital A/c 20,000
To R’s capital A/c 20,000
(Being goodwill adjusted through capital
accounts)
Bank A/c Dr. 2,10,000
To X’s capital A/c ( 20,000 + 50,000) 70,000
To Y’s capital A/c ( 20,000 + 50,000) 70,000
To Z’s capital A/c ( 20,000 + 50,000) 70,000
(Being goodwill and capital brought in by
new partners)
Bank A/c Dr. 1,50,000
To P’s capital A/c 50,000
To Q’s capital A/c 50,000
To R’s capital A/c 50,000
(Being capital brought in by existing
partners)

© The Institute of Chartered Accountants of India


14.26 Accounting

(ii) Profit & Loss Account


for the year ended 31st March, 2010
Particulars (`) Particulars (`)
To Medicines, injections and 1,00,000 By Visiting fee 2,75,000
other consumables
To Printing and stationery 5,000 By Chamber fee 6,65,000
To Telephone expenses 5,000 By Fee for report, 4,75,000
operation etc.
To Rent 42,000
To Power and light 10,000
To Nurses salary 20,000
To Attendants wages 20,000
To Depreciation
X-ray machine 15,000
ECG equipment 5,000
Furniture 5,000
Surgical equipment 5,000 30,000
To Interest on capital (W.N.3) 39,600
To Net profit transferred to
partners’ capital accounts 11,43,400
14,15,000 14,15,000
(iii) Partners’ Capital Accounts
for the year ended 31st March, 2010
Debit side
Particulars P Q R X Y Z
` ` ` ` ` `
To P, Q & R A/cs - - - 20,000 20,000 20,000
(Goodwill)
To Balance c/d 4,56,600 3,96,600 3,31,600 2,69,400 1,64,400 2,24,400
4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.27

Credit side
Particulars P Q R X Y Z
` ` ` ` ` `
By Balance b/d 1,00,000 1,00,000 1,00,000 - - -
By X, Y & Z A/cs 20,000 20,000 20,000 - - -
(Goodwill)
By Bank 50,000 50,000 50,000 70,000 70,000 70,000
By Interest on 10,200 10,200 10,200 3,000 3,000 3,000
capital (W.N.3)
By Fee (share) 2,05,000 1,45,000 80,000 1,45,000 40,000 1,00,000
(W.N.1)
By Profit (share)
(W.N.2) 71,400 71,400 71,400 71,400 71,400 71,400
4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400
Working Notes:
1. Statement showing distribution of fee among partners
Partner Name Visiting fees Chamber fees Operations fees Total
(70%) (`.) (50%) (`) (40%) (`) (`)
P 1,05,000 1,00,000 - 2,05,000
Q 17,500 87,500 40,000 1,45,000
R - 50,000 30,000 80,000
X 70,000 75,000 - 1,45,000
Y - - 40,000 40,000
Z - 20,000 80,000 1,00,000
1,92,500 3,32,500 1,90,000 7,15,000
2. Statement showing distribution of profit among partners
`
Profits as per profit and loss account 11,43,400
Less: Fee payable to partners (7,15,000)
Profit to be divided equally among partners 4,28,400
Share of each partner in remaining profit = ` 4,28,400/6 = ` 71,400.

© The Institute of Chartered Accountants of India


14.28 Accounting

3. Interest on capital employed


P Q R X Y Z
` ` ` ` ` `
Opening balance 1,00,000 1,00,000 1,00,000 - - -
Add: Premium for goodwill
shared equally by old
partners 20,000 20,000 20,000 - - -
Add: Capital brought in
cash 50,000 50,000 50,000 50,000 50,000 50,000
1,70,000 1,70,000 1,70,000 50,000 50,000 50,000
Interest @ 6% 10,200 10,200 10,200 3,000 3,000 3,000

Total interest = ` 39,600.


Note: It is assumed that amount of premium for goodwill brought in by new partners
X, Y and Z has not been withdrawn by old partners P, Q and R and it is still kept in
the business.

Question 8
The Balance Sheet of Amitabh, Abhishek and Amrish as at 31.12.2008 stood as follows:
Liabilities Amount Assets Amount
` `
Capital: Land & Buildings 74,000
Amitabh 60,000 Investments 10,000
Abhishek 40,000 Goodwill 37,800
Amrish 40,000 1,40,000 Life Policy (at
surrender value):
Creditors 25,800 Amitabh 2,500
General Reserve 8,000 Abhishek 2,500
Investment Amrish 1,000
Fluctuation Reserve 2,400 Stock 20,000
Debtors 20,000
Less: Provision for
doubtful debts (1,600) 18,400
Cash & bank balance 10,000
1,76,200 1,76,200

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.29

Amrish died on 31 March, 2009, due to this reason the following adjustments were agreed
upon:
(i) Land and Buildings be appreciated by 50%.
(ii) Investment be valued at 6% less than the cost.
(iii) All debtors (except 20% which are considered as doubtful) were good.
(vi) Stock to be reduced to 94%.
(v) Goodwill to be valued at 1 year’s purchase of the average profits of the past five years.
(vi) Amrish’s share of profit to the date of death be calculated on the basis of average profits
of the three completed years immediately preceeding the year of death.
The profits of the last five years are as follows:
Year Rs.
2004 23,000
2005 28,000
2006 18,000
2007 16,000
2008 20,000
1,05,000
The life policies have been shown at their surrender values representing 10% of the sum
assured in each case. The annual premium of Rs.1,000 is payable every year on 1st August.
Give the necessary Journal Entries in the books of account and prepare the Balance Sheet of
the reconstituted firm.

Answer

Journal Entries
Particulars Amount Amount
1. Insurance Company’s A/c Dr. 10,000
To Life Policy A/c 10,000
(Being the policy on the life of Amrish matured on his death)
2. Life Policy A/c Dr. 9,000
To Amitabh’s Capital A/c 3,000
To Abhishek’s Capital A/c 3,000

© The Institute of Chartered Accountants of India


14.30 Accounting

To Amrish’s Capital A/c 3,000


(Being the transfer of balance in life policy account to all
partners’ capital accounts)
3. Amitabh’s Capital A/c Dr. 12,600
Abhishek’s Capital A/c Dr. 12,600
Amrish’s Capital A/c Dr. 12,600
To Goodwill A/c 37,800
(Being goodwill standing in the books written off fully)
4. Land & Buildings A/c Dr. 37,000
To Revaluation A/c 37,000
(Being an increase in the value of assets recorded)
5. Investment Fluctuation Reserve A/c Dr. 600
To Investment A/c 600
(Being reduction in the cost of investment adjusted through
Investment Fluctuation Reserve)
6. Revaluation A/c Dr. 3,600
To Stock A/c 1,200
To Provision for Doubtful Debts A/c 2,400
(Being the fall in value of assets recorded)
7. Amitabh’s Capital A/c Dr. 3,500
Abhishek’s Capital A/c Dr. 3,500
To Amrish’s Capital A/c 7,000
(Being the share of Amrish’s revalued goodwill adjusted
through capital accounts of the remaining partners)
8. Profit & Loss Suspense Account Dr. 1,500
To Amrish’s Capital A/c 1,500
(Being Amrish’s Share of profit to date of death credited to
his account)
9. Revaluation A/c Dr. 33,400
To Amitabh’s Capital A/c 11,133
To Abhishek’s Capital A/c 11,133

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.31

To Amrish’s Capital A/c 11,134•


(Being the transfer of profit on revaluation)
10. General Reserve A/c Dr. 8,000
Investment Fluctuation Reserve A/c (` 2,400 - ` 600) Dr. 1,800
To Amitabh’s Capital A/c 3,267
To Abhishek’s Capital A/c 3,267
To Amrish’s Capital A/c 3,266
(Being the transfer of accumulated profits to capital
accounts)
11. Amrish’s Capital A/c Dr. 53,300
To Amrish’s Executor’s A/c 53,300
(Being the transfer of Amrish’s Capital A/c to his Executor’s
A/c)
Balance Sheet
as at 31st March, 2009
Liabilities Amount Assets Amount
Amithabh’s Capital Account 61,300 Land & Building 1,11,000
Abhishek’s Capital Account 41,300 Life Policy: Amitabh 2,500
Amrish’s Executor’s Account 53,300 Abhishek 2,500 5,000
Sundry Creditors 25,800 Investments 9,400
Stock 18,800
Debtors 20,000
Less: Provisions (4,000) 16,000
Insurance Company 10,000
Cash & Bank Balance 10,000
Profit and loss Suspense A/c 1,500
1,81,700 1,81,700
Working Notes:

(i) Calculation of Amrish’s Share of Profit


Total profit for last three years ` 18,000 + ` 16,000 + ` 20,000= ` 54,000
Average profit 54,000/3 = ` 18,000
Profit for 3 months = 18,000 x 3/12 = ` 4,500


Rounded off.

© The Institute of Chartered Accountants of India


14.32 Accounting

Amrish’s share of Profit = 4,500 x 1/3 = ` 1,500


(ii) Calculation of Goodwill
Total profits for last five years ` 1,05,000
Average profit 1,05,000/5 = ` 21,000
Goodwill at one year’s purchase ` 21,000 x 1 =` 21,000

Question 9
A, B and C run a business sharing profits and losses in proportion of 2:2:1. On 1st January,
2008 their respective capitals were Rs.96,000, Rs.90,000 and Rs.84,000. On 30th June, 2008
the following was the position:
`
Creditors 30,000
Furniture 9,000
Book debts 1,80,000
Stock 90,000
Cash in hand and at bank 36,000
The drawings of the partners respectively were Rs.12,000, Rs.9,000 and Rs.6,000 during the
half-year. Each partner is entitled to an interest at the rate of 5% p.a. on capital. Interest on
drawings was calculated as Rs.600 for A, Rs.450 in case of B and Rs.300 in case of C.
You are required to prepare:
(i) A statement of affair as on 30th June, 2008.
(ii) Calculate the profits for the half-year ending on 30th June, 2008 and allocate the same
amongst the partners. Also calculate capital of each partner as on 30th June, 2008.

Answer
(i) Statement of Affairs of A, B & C
As on 30th June, 2008
Liabilities ` Assets `
Capital (Bal. Fig.) 2,85,000 Furniture 9,000
Creditors 30,000 Stock 90,000
Book debts 1,80,000
Cash in hand and at bank 36,000
3,15,000 3,15,000

© The Institute of Chartered Accountants of India


Issues In Partnership Accounts 14.33

(ii) Statement showing Profit and Loss of partners A, B and C for six months ending
on 30th June, 2008
Particulars `
Capital as on 30th June, 2008 2,85,000
Add: Drawings of A, B and C (` 12,000 + ` 9,000 ` 6,000) 27,000
Add: Interest on drawings of A, B and C (` 600 + ` 450 + ` 300) 1,350
3,13,350
Less: Interest on capital of A, B and C (` 2,400+` 2,250+` 2,100) (6,750)
3,06,600
Less: Capital as on 1st January, 2008 of A, B and C
(` 96,000 + ` 90,000 + ` 84,000) (2,70,000)
Net Profit 36,600
Statement showing allocation of profits and other adjustments in the capital
accounts of A, B and C
Particulars A (` ) B (` ) C (`.)
Capital as on 1st January, 2008 96,000 90,000 84,000
Add: Net profit in the ratio of 2:2:1 14,640 14,640 7,320
Add: Interest on capital @ 5% p.a. for 6
months 2,400 2,250 2,100
1,13,040 1,06,890 93,420
Less: Drawings (12,000) (9,000) (6,000)
Less: Interest on drawings (600) (450) (300)
Capital as on 30th June, 2008 1,00,440 97,440 87,120

Question 10
‘A’ and ‘B’ are partners sharing Profits and Losses in the ratio of 3:1. Their capitals were
` 3,00,000 and ` 2,00,000 respectively. As from 1st April, 2009, it was agreed to change the
profit sharing ratio to 3:2. According to the partnership deed, goodwill should be valued at two
years’ purchase of the average of three years’ profits. The profits of the previous three years
ending 31st March were:
2007-`.1,50,000; 2008-`2,00,000 and 2009-`2,50,000. Pass the necessary journal entry to
give effect to the above arrangement in the capital accounts of the partners.

© The Institute of Chartered Accountants of India


14.34 Accounting

Answer
Journal Entry

` `
B’s Capital A/c Dr. 60,000
To A’s Capital A/c 60,000
(Being the adjusting entry for goodwill, passed due to
change in profit and loss sharing ratio, through capital
accounts of partners)
Working Notes:
1. Calculation of Goodwill
`.
Profit for the year 2007 1,50,000
Profit for the year 2008 2,00,000
Profit for the year 2009 2,50,000
Total profit of 3 years 6,00,000
6,00,000
Average Profit = = ` 2,00,000
3
Goodwill = ` 2,00,000 × 2 = ` 4,00,000
2. Effect of change in Profit Sharing Ratio
Old ratio of A and B = 3 : 1
New ratio of A and B = 3 : 2
Gaining Ratio = New Ratio – Old Ratio
3 3 12 − 15 3 3
For A = - = = i.e. A loses by
5 4 20 20 20
2 1 8−5 3 3
For B = - = = i.e. B gains by
5 4 20 20 20
3. Amount of compensation payable by B to A
3
× ` 4,00,000 = ` 60,000
20

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Issues In Partnership Accounts 14.35

Question 11
Good, Better and Best are in partnership sharing profits and losses in the ratio 3:2:4. Their
capital account balances as on 31st March, 2012 are as follows:
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:
(1) ` 22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, ` 1,600
and ` 1,800 respectively.
(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are
charged interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net
profit before making any appropriation.
(5) Better is entitled to commission @ 15% of the net profit before charging Interest on
Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
` 1,750 at the end of every month and Best ` 1,250 at the middle of every month.
(7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission of
12% of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any of
the above adjustments was ` 2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year ended on
31st March, 2012

Answer
Profit and Loss Appropriation Account
Particulars ` Particulars `
To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000
To Salaries to partners By Interest on drawings (W.N.3) 2,410
Good 28,800 Good 1,040
Better 19,200 Better 770
Best 21,600 69,600 Best 600
To Interest on Capital

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14.36 Accounting

Good 10,200
Better 6,600
Best 7,320 24,120
To Commission to partners
Good 18,000
Better 10,281 (W.N.4)
Best 22,500 50,781
To Partners’ Capital A/cs
(profit)
Good 20,223
Better 13,482
Best 26,964 60,669
2,27,410 2,27,410
Working Notes:
1. Profit and Loss Account
Particulars ` Particulars `
To Salary (Firm’s 24,000 By Profit 2,76,000
Accountant)
To Commission (Firm’s
Accountant) (W.N.2) 27,000
To Net Profit transferred to
P & L Appropriation A/c 2,25,000
2,76,000 2,76,000
2. Commission of Firm’s Accountant
Profit after salary of firm's accountant
= × 12%
(100+12 ) %

=
( 2,76,000 - 24,000 ) × 12% = ` 27,000
(100+12 ) %

3. Interest on Drawings
`
Good (at the beginning of every month) (` 2,000 x 6.5 x 8%) 1,040
Better (at the end of every month) (` 1,750 x 5.5 x 8%) 770
Best (at the middle of every month) (` 1,250 x 6 x 8%) 600
2,410

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Issues In Partnership Accounts 14.37

4. Commission of Better
Commission of Better = [Net profit for appropriation (excluding interest on drawings) - General
reserve – Interest on capital - Salaries to partners – Commission to Good and Best] x 15%
Commission to Better = ` [2,25,000 – 22,240 – 24,120 – 69,600– 18,000 – 22,500] x 15%
= ` 68,540 x 15% = ` 10,281

Question 12
X, Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On
31st March, 2012 Y retires and X and Z decide to share profits and losses in the ratio of 5:3.
Then immediately, W is admitted for 3/10th shares in profits, 2/3rd of which was given by X and
rest was taken by W from Z . Goodwill of the firm is valued at ` 2,16,000. W brings required
amount of goodwill.
Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W if
they do not want to raise goodwill in the books of accounts.

Answer
Journal Entries
Date Particulars L.F. Dr. (`) Cr.(`)
31.3.12 X’s capital A/c Dr. 39,000
Z’s capital A/c Dr. 33,000
To Y’s capital A/c (3/9 х ` 2,16,000) 72,000
(Being Y’s share of goodwill adjusted in the capital
accounts of gaining partners in their gaining ratio 13:11
– Refer Working Note.)
Cash A/c Dr. 64,800
To W’s capital A/c (3/10 х ` 2,16,000) 64,800
(Being the amount of goodwill brought in by W)
W’s capital A/c Dr. 64,800
To X’s capital A/c 43,200
To Z’s capital A/c 21,600
(Being the goodwill credited to sacrificing partners in
their sacrificing ratio 2:1)
Working Note:
Calculation of gaining ratio of X and Z
Gaining ratio = New ratio – Old ratio
For X = 5/8-4/9 = 13/72

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14.38 Accounting

Z = 3/8-2/9 = 11/72
Gaining ratio = 13:11

Question 13
A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and B
are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes ` 35,000 as
capital for 1/5th share of profits to be acquired equally from both A & B. The capital accounts of
old partners are to be adjusted on the basis of the proportion of C’s capital to his share in the
business. Calculate the amount of actual cash to be paid off or brought in by the old partners for
the purpose and pass the necessary journal entries.

Answer
Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each
Calculation of New Profit Sharing Ratio
A B
Existing ratio 3/5 2/5
Less: Share of profit transferred to C (1/10) (1/10)
New share 5/10 3/10
New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10
Calculation of Total Capital of the Reconstituted Firm
Capital brought in by C for 1/5th share = ` 35,000
Total Capital = ` 35,000 x (5/1) = ` 1,75,000
Calculation of Actual Cash to be paid or brought in by old partners
A B C
(`) (`) (`)
New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 52,500 35,000
Less: Adjusted old capital of A & B (80,000) (60,000) -
Cash brought in 7,500 35,000
Cash to be paid (7,500)
Journal Entries
Dr. Cr.
Particulars L.F. Amount Amount
` `
Cash A/c Dr. 7,500
To A’s Capital A/c 7,500
(Being the shortage of capital brought in cash by A)

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Issues In Partnership Accounts 14.39

B’s Capital A/c Dr. 7,500


To Cash A/c 7,500
(Being the excess capital withdrawn by B)
Note: Entries for cash brought in and paid off only, have been passed.

EXERCISES
1. X, Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that :
(a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his
remuneration, but before charging interest on capital and provision for taxation;
(b) Interest is to be provided on capital at 15% per annum;
(c) Balance profits after making provision for taxation, is to be shared in the ratio of 1 : 2 : 2 by the three
partners.
During the year ended 31st March, 2011 :
(i) the net profit before tax and before making any payment to partners amounted to ` 6,90,000;
(ii) interest on capitals at 15% per annum amounted to :
(iii) ` 60,000 for X; ` 1,50,000 for Y Ltd. and ` 1,80,000 for Z Ltd. The capitals have remained
unchanged during the year;
Provision for tax is to be at 40% of “total income” of the firm. The total income has been computed at
` 1,95,000.
You are asked by :

(a) the firm to pass closing entries in relation to the above;


(b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show the
investment in partnership account as it would appear in its ledger;

(c) Z Ltd. to show, how the above information will appear in its financial statements for the year;

(d) Shri X to show the working, if any, in relation to the above.


(Hints: Investment in partnership with Shri X and Z Ltd. ` 12,02,800)
2. Avinash, Basuda Ltd. and Chinmoy Ltd. were in partnership sharing profits and losses in the ratio of
9 : 4 : 2. Basuda Ltd. retired from the partnership on 31st March, 2011, when the firm’s balance sheet was
as under :
` in thousand
Sundry creditors 600 Cash and bank 284
Capital accounts : Sundry debtors 400
Avinash 2,700 Stock 800
Basuda Ltd. 1,200 Furniture 266
Chinmoy Ltd. 600 4,500 Plant 850
Land and building 2,500
5,100 5,100

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14.40 Accounting

Basuda Ltd.’s share in goodwill and capital was acquired by Avinash and Chinmoy Ltd. in the ratio of 1 : 3,
the continuing partners bringing in the necessary finance to pay off Basuda Ltd. The partnership deed
provides that on retirement or admission of a partner, the goodwill of the firm is to be valued at three times
the average annual profits of the firm for the four years ended on the date of retirement or admission. The
profits of the firm during the four years ended 31st March, 2011 in thousands of rupees were:
` in thousand
2007-2008 450
2008-2009 250
2009-2010 600
2010-2011 700
The deed further provided that goodwill account is not to appear in the books of accounts at all. The
continuing partners agreed that with effect from 1 st April, 2011, Ghanashyam, son of Avinash is to be
admitted as a partner with 25% share of profit.
Avinash gifts to Ghanashyam, by transfer from his capital account, an amount sufficient to cover up 12.5%
of capital and goodwill requirement. The balance 12.5% of capital and goodwill requirement is purchased by
Ghanashyam from Avinash and Chinmoy Ltd. in the ratio of 2 : 1.
The firm asks you to:
(i) Prepare a statement showing the continuing partners’ shares;
(ii) Pass journal entries including for bank transactions; and
(iii) Prepare the balance sheet of the firm after Ghanashyam’s admission
(Hints: New ratio 11:7:6; Total of Balance Sheet Rs.66,00,000)

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