NCERT Solutions for Class 12 Accountancy

Partnership Accounts Chapter 2

Reconstitution of a Partnership Firm - Admission of a Partner

Short answers numerical questions long answers : Solutions of Questions on Page

Number : 167
Q1 :

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

Answer :

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

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

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

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

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

5. Adjustment of capital of the partners.

Q2 :

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

Answer :

A : B

Old Ratio 3 : 2
 OR

C admits for share of new profit in new firm.

Let new firm profit = 1

Remaining share of A and B in the new firm = 1 - C's share

=1-

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

Q3 :
Do you advise that assets and liabilities must be revalued at the time of admission of a
partner? If so, why? Also describe how is this treated in the book of account?

Answer :

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

Accounting Entries in the Books of Accounts:

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

i) For increase in value of assets:

Assets A/c Dr.

To Revaluation A/c
(Increase in the value of assets)

ii) For decrease in value of assets:

Revaluation A/c Dr.

To Asset A/c
(Decrease in the value of assets)

iii) For increase in liabilities:

 Revaluation A/c Dr.
To Liabilities
(Increase in the value of liabilities)

iv) For decrease in liabilities:

Liability A/c Dr.

To Revaluation A/c
(Decrease in the value of liabilities)

v) For recording of unrecorded assets:

Unrecorded Assets A/c Dr.

To Revaluation A/c
(Recording of unrecorded assets)

vi) For recording of unrecorded liabilities:

Revaluation A/c Dr.

To Unrecorded Liabilities A/c
(Recording of unrecorded liabilities)

vii) For transfer of credit balance of Revaluation Account:

Revaluation Dr.
To Old Partner's Capital A/c
(Profit on revaluation is transferred to the Old Partner's
Capital Account in their old profit sharing ratio)
Or,

vii) For transfer of debit balance of Revaluation Account:

Old Partner's Capital A/c Dr.

To Revaluation A/c
(Loss on revaluation is transferred to the Old Partner's
Capital Account in their old profit sharing ratio)

Q4 :

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

Answer :

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

Q5 :

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

Answer :
D admits for share in the new firm

Let new firm profit = 1

Remaining share of A, B and C in new firm = 1 - D's share

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

Q6 :

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

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

Characteristics of Goodwill

The following are the characteristics of goodwill.

1) It is an intangible asset.

2) It is not a fictitious asset.

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

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

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

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

Factors Affecting Goodwill

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

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

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

3) Management: Efficient management leads to cost efficiency and increases productivity. If a

firm's management is efficient, then superior quality products can be produced at lower cost
.These can be sold at lesser price. Superior quality at lower price enables a firm to earn higher
goodwill.

4) Market Structure: If a firm is operating in a monopoly market with no close substitutes, then
there will be more goodwill of the firm.
5) Economies of Scale: If a firm enjoys special advantages like, continuous supply of power, fuel
and raw materials at a low price and produces quality product at a large scale, then the firm
enjoys higher value of goodwill.

Q7 :

What is sacrificing ratio? Why is it calculated?

Answer :

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

Sacrificing Ratio = Old Ratio - New Ratio

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

Q8 :

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

Answer :

Z admits for share in the new firm.

X and Y each sacrifice =

New Ratio = Old Ratio - Sacrificing Ratio

Q9 :

Explain various methods of valuation of goodwill.

Answer :

The following are the various methods of valuation of goodwill.

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

Goodwill = Average Profit x No. of Years Purchase

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

Steps to Calculate Goodwill by Average Profit Method:

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

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

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

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

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

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

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

Example:

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

Calculate goodwill on the basis of 4 years purchase

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

Steps to Calculate Goodwill by Weight Average Method:

Step 1: Assign highest weights to the recent year's profit and lower weights to the past year's
profits, like 4,3,2,1.
Step 2: Multiply the weights with its corresponding year's profits.

Step 3: Calculate the total of the products

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

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

For example:

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

Calculate goodwill on the basis of 4 years purchase

Profit/Loss Product
Weights
Rs Rs
1,00,000 1 1,00,000 x 1 = 1,00,000
3,00,000 2 3,00,000 x 2 = 6,00,000
(2,00,000) 3 (2,00,000) x 3 = (6,00,000)
5,00,000 4 5,00,000 x 4 = 20,00,000
8,00,000 5 8,00,000 x 5 = 40,00,000
Total 15 Rs 61,00,000

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

Steps to Calculate Goodwill by Super Profit Method:

Step 1: Calculate Average Profit

Step 2: Calculate Average Capital Employed as:

Step 3: Calculate Normal Profit by the formula:

Step 4: Calculate Super Normal Profit by the formula:

Super Normal Profit = Average Profit - Normal Profit

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

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

a) By capitalisation of Average Profit.

b) By capitalisation of Super Profit.

a) Capitalisation of Average Profit

Step 1: Calculate Average Profit

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

Step 3: Ascertain Actual Capital Employed

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

Goodwill = Capitalised Average Profit - Actual Capital Employed

b) Capitalisation of Super Profit

Step 1: Calculate the Capital Employed

Step 2: Calculate Normal Profit by the following formula:

Step 3: Calculate Average Profit.

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

Super Normal Profit = Average Profit - Normal Profit

Step 5: Calculate goodwill by the following formula:

Q10 :

On what occasions sacrificing ratio is used?

Answer :

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

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

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

Q11 :

If it is agreed that the capital of all the partners be proportionate to the new profit sharing
ratio, how will you work out the new capital of each partner? Give examples and state how
necessary adjustments will be made.

Answer :

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

1) When the capital of the new partner is given

2) When the total capital of the firm is given.

1) When the capital of the new partner is given

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

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

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

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

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

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

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

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

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

Step 2: A's new capital =

B's share in new firm =

Step 3:

A B
New Capital 50,000 50,000
Less: Existing Capital (60,000) (40,000)
Withdrawal (deposit) 10,000 (10,000)
2) When the total capital of the new firm is given:

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

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

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

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

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

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

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

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

Step 2: Calculation of Total Capital of New Firm

Step 3: Calculation of New Capital of Each Partner

Q12 :

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

Answer :

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

Old Partner's Capital A/c Dr.

To Goodwill A/c
(Goodwill written off in old ratio among the old partners)

Q13 :

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

Answer :

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

New Partner's Capital A/c Dr.

To Old Partners' Capital A/c
(New partner capital account is debited with his/her share

of goodwill and sacrificing Partners' Capital Account are

credited in their sacrificing ratio)

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

Q14 :

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

Answer :

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

Q15 :
Explain various methods for the treatment of goodwill on the admission of a new partner?

Answer :

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

1. Premium Method

2. Revaluation Method

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

Old Partners' Capital A/c Dr.

To Goodwill A/c
(Goodwill written off among the old partners in their old
profit sharing ratio)

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

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

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

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

Accounting Entries

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

Cash/Bank A/c Dr.

To Premium for Goodwill A/c
(Amount of goodwill brought in by the new partner)

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

Premium for Goodwill A/c Dr

To Sacrificing Partners' Capital A/c
 (Goodwill brought in by the new partner is distributed among the
old partners in their sacrificing ratio)

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

Sacrificing Partner's Capital A/c Dr.

To Cash A/c
(Amount of goodwill withdrawn by the old partners)

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

a) For bringing goodwill in cash

Cash A/c Dr.

To Premium for Goodwill A/c
(Amount of goodwill brought in cash by the new partner)

b) For transferring of goodwill to the old partners

Goodwill A/c Dr. (With the amount of goodwill brought in by the

new partner)
New Partner's Capital A/c Dr. (With the amount of goodwill not brought in by
the new partner)
To Sacrificing Partners' Capital
A/c
(Goodwill amount of the new partner
distributed among the old partners in their
sacrificing ratio)

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

New Partner's Capital A/c Dr. (With the whole amount of goodwill that is not brought in
the new partner)
To Old Partners' Capital A/c
(Goodwill amount of the new partner distributed
among the old partners in their sacrificing ratio)

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

Q16 :
How will you deal with the accumulated profit and losses and reserves on the admission of a
new partner?

Answer :

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

Accounting Treatment of Accumulated Profits and Losses

i) For distributing accumulated profits and reserves

Profit and Loss A/c Dr.

General Reserve A/c Dr.
Reserve Fund A/c Dr.
Workmen's Compensation Fund A/c Dr.
Contingency Reserve A/c Dr.
To Old Partners' Capital A/c
(Undistributed profits and reserves are distributed
among old partners in their old profit sharing ratio)

ii) For distributing accumulated losses

Old Partners' Capital A/c Dr.

To Profit and Loss (Debit balance) A/c
To Deferred Advertisement Expenses A/c
To Preliminary Expenses A/c
(Undistributed losses are distributed among old

partners in their old profit sharing ratio)

Q17 :

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

Answer :

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

A and B shares profit and loss equally.

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

Amount Amount

Liabilities Rs Assets Rs
Sundry Creditors 1,00,000 Cash in Hand 8,000
Capital Accounts Cash at Bank 28,000
A 75,000 Debtors 40,000
B 75,000 1,50,000 Stock 36,000
Furniture 38,000
Plant and Machinery 1,00,000
2,50,000 2,50,000

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

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

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

4) Furniture revalued at Rs 35,000.

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

6) Rent outstanding Rs 2,000.

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

Sol:

Revaluation Account
Dr. Cr.
Amount Amount

Particular Rs Particular Rs
Rent Outstanding A/c 2,000
Profit transferred:
A's Capital A/c 25,000
B's Capital A/c 25,000 50,000
50,000 50,000

A's Capital Account

Dr. Cr.
Amount Amount

Date Particular J.F. Rs Date Particular J.F. Rs

Balance c/d 1,00,000 Balance b/d 75,000
Revaluation A/c 25,000
1,00,000 1,00,000

B's Capital Account

Dr. Cr.
 Amount Amount

Date Particular J.F. Rs Date Particular J.F. Rs

Balance c/d 1,00,000 Balance b/d 75,000
Revaluation A/c 25,000
1,00,000 1,00,000

C's Capital Account

Dr. Cr.
Amount Amount

Date Particular J.F. Rs Date Particular J.F. Rs

Balance c/d 1,00,000 Cash A/c 1,00,000

1,00,000 1,00,000

Cash Account
Dr.

Numerical questions : Solutions of Questions on Page Number : 168

Q1 :

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

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

Here only A will sacrifice.

New Ratio = Old Ratio - Sacrificing Ratio

Q2 :

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

Answer :

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

P's sacrifice = R's share ×

Q's sacrifice = R's share ×

New Ratio = Old Ratio - Sacrificing Ratio

Q3 :

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

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

A's sacrifice = D's share ×

B's sacrifice = D's share ×

C's sacrifice = D's share ×

New Ratio = Old Ratio - Sacrificing Ratio

Q4 :

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

Answer :

C admitted for share in the new firm

A's sacrifice =

B's sacrifice

New Ratio = Old Ratio - Sacrificing Ratio

Q5 :

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

Answer :

D admitted for share of profit in new firm.

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

New Ratio = Old Ratio - Sacrificing Ratio

Q6 :

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

Answer :

Radha surrendered in favour of Gopi = of his share

Rukmani surrendered in favour of Gopi = of his share

Sacrificing Ratio = Old Ratio × Surrender Ratio

Radha =

Rukmani =

New Ratio = Old Ratio - Sacrificing Ratio

Radha =

Rukmani =

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

Q7 :

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

Answer :
Singh Surrender of his share

Gupta Surrender of his share

Khan Surrender of his share

Sacrificing Ratio = Old Ratio × Surrender Ratio

Singh's

Gupta's

Khan's

New Ratio = Old Ratio - Sacrificing Ratio

Q8 :

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

Answer :

Sacrificing Ratio = Old Ratio - New Ratio

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

Q9 :

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

Answer :

Ravi admits for share of profit in the new firm.

Let the New Firm Profit = 1

Combined share of Rao and Swami in the new firm

= 1 - Ravi's share of profit

=1-

New Ratio = Combined Share of Rao and Swami × Proportion of Rao and Swami in the
combined share
4:3:1

Sacrificing Ratio = Old Ratio - New Ratio

Q10 :

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
2002 40,000
 2003 50,000
2004 60,000
2005 50,000
2006 60,000

Answer :

Average Profit =

Year Profit
2002 40,000
2003 50,000
2004 60,000
2005 50,000
2006 60,000
Sum of 5 years profit 2,60,000

Average Profit = = 52,000

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

Q11 :

Capital employed in a business is Rs. 2,00,000. The normal rate of return on capital
employed is 15%. During the year 2002 the firm earned a profit of Rs. 48,000. Calculate
goodwill on the basis of 3 years purchase of super profit?
Answer :

Capital Employed = Rs 2,00,000

Actual Profit = 48,000

Normal Rate of Return = 15%

Normal Profit = Capital Employed ×

= Rs 30,000

Super profit = Actual Profit - Normal Profit

= 48,000 - 30,000

= Rs 18,000

Goodwill = Super Profit × Number of Years Purchase

= 18,000 × 3

= Rs 54,000

Q12 :

The books of Ram and Bharat showed that the capital employed on 31.12.2002 was Rs.
5,00,000 and the profits for the last 5 years : 2002 Rs. 40,000; 2003 Rs. 50,000; 2004 Rs.
55,000; 2005 Rs. 70,000 and 2006 Rs. 85,000. Calculate the value of goodwill on the basis of
3 years purchase of the average super profits of the last 5 years assuming that the normal
rate of return is 10%?

Answer :

Average Actual Profit =

 Year Profit
2002 40,000
2003 50,000
2004 55,000
2005 70,000
2006 85,000
Sum of 5 years profit 3,00,000

Average Actual Profit = = Rs 60,000

Normal Profit = Capital Employed ×

= Rs 50,000

Average Super Profit = Average Actual Profit – Normal Profit

= 60,000 – 50,000

= Rs 10,000

Goodwill = Average Super Profit × Number of year purchase

= 10,000 × 3

= Rs 30,000
Q13 :

Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani
Rs. 2,00,000. During the year 2002 the firm earned a profit of Rs. 1,50,000. Calculate the
value of goodwill of the firm assuming that the normal rate of return is 20%?

Answer :

Rajan's Capital 3,00,000

Rajni's Capital 2,00,000

Total Capital Employed 5,00,000

Normal Rate of Return = 20%

Capitalised Valued = Actual Profit ×

= 1,50,000 ×

= Rs 7,50,000

Goodwill = Capitalised Value - Capital Employed

= 7,50,000 - 5,00,000

= Rs 2,50,000

Alternative Method

Normal Profit = Capital Employed ×

= 5,00,000 ×

= Rs 1,00,000
Super profit = Actual Profit - Normal Profit

= 1,50,000 - 1,00,000

= Rs 50,000

Goodwill = Super Profit ×

= 50,000 ×

= Rs 2,50,000

Q14 :

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

Answer :

Capital Employed = Assets - External Liabilities

= 10,00,000 - 1,80,000

= Rs 8,20,000

Normal Profit = Capital Employed ×

= Rs 82,000

Super Profit = Actual Profit - Normal Profit

= 1,00,000 - 82,000

= Rs 18,000
Goodwill = Super Profit ×

= Rs 1,80,000

Alternative Method

Capitalised Value = Actual Profit ×

Capitalised value

= Rs 1,00,000

Goodwill = Capitalised Value - Capital Employed

= 10,00,000 - 8,20,000

= Rs 1,80,000

Q15 :

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

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

b) When the amount of goodwill is fully withdrawn.

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

d) When goodwill is paid privately.

Answer :
 Journal Entries
Debit Credit
Amount Amount
S.No. Particulars L.F. Rs Rs
Case (a)
Cash A/c Dr. 24,000
To Ghosh's Capital A/c 20,000
To Premium for Goodwill A/c 4,000
(Capital and Goodwill his share brought

by Ghosh)

Premium for Godwill A/c Dr. 4,000

To Verma's Capital A/c 2,500
To Sharma's Capital A/c 1,500
(Goodwill brought by Ghosh credited to Old Partners

in Sacrificing ratio)

Case (b) Cash A/c Dr. 24,000

To Ghosh Capital A/c 20,000
To Premium for Goodwill A/c 4,000
(Capital and Goodwill brought by Ghosh for (1/5)

share of profit)

Premium for Goodwill A/c Dr. 4,000

To Verma's Capital A/c 2,500
To Sharma's Capital A/c 1,500
(Goodwill brought by Ghosh credited

in Old Partner in Sacrificing Ratio)

Verma's Capital A/c Dr. 2,500

Sharma's Capital A/c Dr. 1,500
To Cash A/c 1,000

Q16 :
A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to
admit C into partnership with 1/4 share in profits. C will bring in Rs. 30,000 for capital and
the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs,
20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill.
Give necessary journal entries?

Answer :

Journal Entries
Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs

Cash A/c Dr. 35,000

To C's Capital A/c 30,000
To Premium for Goodwill A/c 5,000
(Amount of Capital and Share of Goodwill brought by C)

Premium for Goodwill A/c Dr. 5,000

To A's Capital A/c 2,000
To B's Capital A/c 3,000
(C's Share of Goodwill credited to A and B in 2:3,

Sacrificing Ratio)

A's Capital A/c Dr. 2,000

B's Capital A/c Dr. 3,000
To Cash A/c 5,000
(Share of Goodwill withdrawn by Old Partners)

Sacrificing Ratio = Old Ratio - New Ratio

Goodwill of the firm = Rs 20,000

C's share of Goodwill =

A will receive

Or

B will receive

Or

Q17 :

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

Journal Entries

Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs

Arti's Capital A/c Dr. 3,000

Bharti's Capital A/c Dr. 2,000
To Goodwill A/c 5,000
(Goodwill written off)

Cash A/c Dr. 60,000

To Sarthi's Capital A/c 50,000
To Premium for Goodwill A/c 10,000
(Amount of capital and share of goodwill brought by Sarthi)

Premium for Goodwill A/c Dr. 10,000

To Arti's Capital A/c 4,000
To Bharti's Capital A/c 6,000
(Premium for Goodwill credited Arti's Capital Account)

Sarthi admitted for share in new firm.

Sacrificing Ratio = Old Ratio - New Ratio

Arti will receive

Bharti will receive

Q18 :

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

Answer :

Journal Entries

Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs

Cash A/c Dr. 27,000

To Z's Capital A/c 20,000
To Premium for Goodwill A/c 7,000
(Amount of Capital and his share of Goodwill

brought by Z)

Premium for Goodwill A/c Dr. 7,000

To X's Capital A/c 4,000
To Y's Capital A/c 3,000
(Premium for Goodwill credit to Old Partners in Sacrificing Ratio)
 Goodwill Rs 40,000 can not be raised. According to AS-10 Goodwill

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

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

Q19 :

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

Answer :

Journal Entries

Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs
Cash A/c Dr. 60,000
To Christopher's Capital A/c 50,000
To Premium for Goodwill A/c 10,000
(Amount of Capital and Premium for Goodwill brought by

Christopher)

Premium for Goodwill A/c Dr. 10,000

Christopher's Capital A/c Dr. 5,000
To Adiya's Capital A/c 6,000
 To Balam's Capital A/c 9,000
(Goodwill Christopher's Share taken by Old Partner's in

Sacrificing Ratio)

Sacrificing Ratio = Old Ratio - New Ratio

Q20 :

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

Answer :

Amar : Samar
Old Ratio 3 : 1

Kanwar admitted for 1/4 share of profit.

Journal Entries
 Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs

Kanwar's Capital A/c Dr. 20,000

To Amar's Capital A/c 15,000
To Samar's Capital A/c 5,000
(Kanwar's share of goodwill charged from his capital account by

Amar and Kanwar in sacrificing ratio)

New Firm's Goodwill = Rs 80,000

Kanwar's Share of Goodwill = 80,000 x (1/4) = 20,000

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

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

Q21 :

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 1.1.2003. 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 2003, Rs. 60,000 for 2004, Rs. 90,000 for 2005 and

Rs. 70,000 for 2006. Ram Lal did not bring his share of goodwill premium in cash. Record
the necessary journal entries in the books of the firm on Ram Lal's admission when:

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

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

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

Answer :

Year Profit
2003 50,000
2004 60,000
2005 90,000
2006 70,000
Sum of 4 years profit 2,70,000

Average Profit = = Rs 67,500

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

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

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

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

Mohan Lal will get = Ram Lal's Share of Goodwill × (3/5) = 50,625 × (3/5) = 10,125 × 3 = Rs
30,375
Sohan Lal will = Ramlal Share of Goodwill × (1/5) = 50,625 × (1/5) = Rs 10,125 × 2 = Rs
20,250

Case (a)

Journal Entries

Debit Credit
Date L.F. Amount Amount
Particulars Rs Rs
Mohan Lal's Capital A/c Dr. 1,21,500
Sohan Lal's Capital A/c Dr. 81,000
To Goodwill A/c 2,02,500
(Goodwill appeared in the old firm written off)

Ramlal's Capital A/c Dr. 50,625

To Mohan Lal's Capital A/c 30,375
To Sohan Lal's Capital A/c 20,250
(Ram Lal's Shares of Goodwill charged from his account

and Distrbuted between in Mohan Lal and Sohan Lal in

Sacrificing Ratio)

Case (b)

Journal Entries

Debit
Credit
Amount
Date Particulars L.F. Amount
Rs
Rs
Mohan Lal's Capital A/c Dr. 1,500
Sohan Lal's Capital A/c Dr. 1,000
Q22 :

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

Answer :

Books of Rajesh, Mukesh and Hari

Journal

Amount Amount
Date Particulars L.F.
Rs Rs
Hari's Capital A/c Dr. 8,000
To Rajesh's 2,000
Capital A/c
To Mukesh's 6,000
Capital A/c
(Adjustment of Hari's
share of goodwill)

Working Notes:

1) Goodwill of a firm = 36,000

Hari's share in goodwill

= Goodwill of firm × admitting Partner Share

2) Sacrificing Ratio = Old Ratio - New Ratio

Sacrificing Ratio between Rajesh and Mukesh 1:3.

Q23 :

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

Answer :

Books of Amar, Akbar and Anthony

Journal

Amount Amount
Date Particulars L.F.
Rs Rs
Anthony's Capital A/c Dr. 45,000
To Amar's Capital A/c 11,250
To Akbar's Capital A/c 33,750
(Adjustment of Anthony's
share of goodwill between

Amar and Akbar in

sacrificing ratio)

Working Notes:
1) Sacrificing Ratio = Old Ratio - New Ratio

Sacrificing Ratio between Amar and Akbar = 1:3.

Q24 :

Given below is the Balance Sheet of A and B, who are carrying on partnership business on
31.12.2006. A and B share profits and losses in the ratio of 2:1.

Balance Sheet of A and B as on December 31, 2006

Amount Amount

Liabilites (Rs) Assets (Rs)

Bills Payable 10,000 Cash in Hand 10,000
Creditors 58,000 Cash at Bank 40,000
Outstanding 2,000 Sundry Debtors 60,000
Expenses Stock 40,000
Capitals: Plant 1,00,000
A 1,80,000 Buildings 1,50,000
B 1,50,000 3,30,000
4,00,000 4,00,000

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

(i) C will bring in Rs 1,00,000 as his capital and Rs 60,000 as his share of goodwill for 1/4
share in the profits.
(ii) Plant is to be appreciated to Rs 1,20,000 and the value of buildings is to be appreciated
by 10%.

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

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

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

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

Answer :

Books of A, B and C

Journal

Amount Amount

Date Particulars L.F. Rs Rs

2006
Dec Bank A/c Dr. 1,60,000
31
To C's 1,00,000
Capital A/c
To Premium 60,000
for Goodwill
A/c
(Capital and
premium for
goodwill brought
by C for 1/4 th
share)
Premium for Dr. 60,000
Goodwill
A/c
To A's 40,000
Capital A/c
To B's 20,000
Capital A/c
(Premium for
Goodwill
brought by C
transferred to
old partners'
capital

account in
their
sacrificing
ratio, 3:1)

Plant A/c Dr. 20,000

Building A/c Dr. 15,000
To 35,000
Revaluation
A/c
(Value of
assets
increased)

Revaluation Dr. 8,000

A/c
To Stock 4,000
To Provision for 3,000
Doubtful Debts
A/c
To Creditors 1,000
A/c
(Unrecorded)
(Assets and
liabilities
revalued)

Revaluation Dr. 27,000

A/c
To A's 18,000
Capital A/c
 To B's 9,000
Capital A/c
(Profit on
revaluation
transferred to
old partners
capital
account)

Revaluation Account

Dr. Cr.
Amount
Particulars
Rs

Q25 :

Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. On Is
Jan. 2007 they admitted Om as a new partner. On the date of Om's admission the balance
sheet of Leela and Meeta showed a balance of Rs 16,000 in general reserve and Rs 24,000
(Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of
these items on Om's admission. The new profit sharing ratio between Leela, Meeta and Om
was 5:3:2.

Answer :

Books of Leela, Meeta and Om

Journal

Amount Amount

Date Particulars L.F. Rs Rs

2007
 Jan General Reserve A/c Dr. 16,000
1
Profit and Loss A/c Dr. 24,000
To Leela's Capital A/c 25,000
To Meeta's Capital A/c 15,000
(General reserve and balance
in Profit and Loss credited to
old

partners' capital account in

their old ratio, 5:3)

Q26 :

Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2007
they admitted Ranjan as a partner. On Ranjan's admission the profit and loss account of
Amit and Viney showed a debit balance of Rs 40,000. Record necessary journal entry for
the treatment of the same.

Answer :

Books of Amit, Viney and Ranjan

Journal

Amount Amount

Date Particulars L.F. Rs Rs

2007
Jan Amit's Capital A/c Dr. 30,000
1
Viney's Capital A/c Dr. 10,000
To Profit and Loss 40,000
A/c
 (Debit Balance in
Profit and Loss
Account written
off)

Q27 :

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on Dec. 31,
2006 was as follows:

Balance Sheet of A and B as on December 31, 2006

Amount Amount

Liabilites (Rs) Assets (Rs)

Sundry creditors 41,500 Cash at Bank 26,500
Reserve fund 4,000 Bills Receivable 3,000
Capital Accounts Debtors 16,000
A 30,000 Stock 20,000
B 16,000 Fixtures 1,000
Land & Building 25,000
91,500 91,500

On Jan. 1,2007, C was admitted into partnership on the following terms:

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

(b) That C pays Rs 5,000 for goodwill. Half of this sum is to be withdrawn by A and B.
(c) That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be
created on Sundry Debtors and Bills Receivable.

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

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

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

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

Answer :

Books of A, B and C

Journal

Amount Amount

Date Particulars L.F. Rs Rs

2007
Jan. 01 Bank A/c Dr. 15,000
To C's Capital A/c 10,000
To Premium for Goodwill A/c 5,000
(Capital and Premium for goodwill brought by C

for 1/5 th share)

Jan. 01 Premium for Goodwill A/c 5,000

To A's Capital A/c 3,750
To B's Capital A/c 1,250
 (Amount of goodwill brought by C is transferred to old

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

Jan. 01 A's Capital A/c Dr. 1,875

B's Capital A/c Dr. 625
To Bank A/c 2,500
(Half of amount withdrawn by old partners)

Jan. 01 Revaluation A/c Dr. 4,050

To Stock A/c

Q28 :

A and B are partners sharing profits and losses in the ratio of 3:1. On Ist Jan. 2007 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?

Answer :

Books of A, B and C

Journal

Amount Amoun

Date Particulars L.F. Rs Rs

2007
Jan. 01 A's Capital A/c Dr. 5,000
To Cash A/c 5,000
(Excess capital withdrawn by A)

Cash A/c Dr. 3,000

To B's Capital A/c 3,000
(Capital brought in by B to make in proportion to the profit sharing)
1) Calculation of New Profit sharing Ratio

New Profit sharing ratio of A, B and C will be 9:3:4

2) New Capital of A and B.

C bring Rs 20,000 for 1/4th share of profit in the new firm.

Thus, total capital of firm on the basis of C's share=

Thus, B's will bring 15,000 - 12,000 = 3,000

Q29 :

Pinky, Qumar and Roopa 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, whichs he gets 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?

Answer :

1) Calculation of new profit sharing Ratio = Old Ratio - Sacrificing Ratio

New profit sharing ratio between Pinky, Qumar, Roopa and Seema

2) Required capital of all partners in the new firm

3) Amount to be brought by each partner

Pinky = 90,000 - 80,000 = 10,000

Qumar = 65,000 - 30,000 = 35,000

Roopa = 25,000 - 20,000 = 5,000

Seema = 2,40,000 =60,000

Books of Pinky, Qumar, Roopa and Seema

Journal

Amount Amount

Date Particularss L.F. Rs Rs

Bank A/c Dr. 60,000
To Seema Capital A/c 60,000
(Seema bring her share of Capital for 1/4 th share of profit)

Bank A/c Dr. 50,000

To Pinky's Capital A/c 10,000
To Qumar's Capital A/c 35,000
To Roopa's Capital A/c 5,000
(Amount brought by Pinky, Qumar and Roopa to make capital

equal to their proportion)

Q30 :

The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses

in the ratio of respectively.

Amount Amount

Liabilites (Rs) Assets (Rs)

Creditors 9,000 Land and Buildings 24,000
Bills Payable 3,000 Furniture 3,500
Capital Accounts Stock 14,000
Arun 19,000 Debtors 12,600
 Bablu 16,000 Cash 900
Chetan 8,000 43,000
55,000 55,000

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

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

(b) that furniture be depreciated by 12%;

(c) that stock be depreciated by 10% ;

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

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

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

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

Answer :

Books of Arun, Bablu, Chetan and Deepak

Profit and Loss Adjustment Account

(Revaluation Account)
Dr. Cr.
 Amount Amount

Particulars Rs Particulars Rs
Furniture 420 Land and Buildings 7,000
Stock 1,400
Reserve for Doubtful Debts 630
Profit on revaluation
Profit transferred to
Arun's Capital 1,950
Bablu's Capital 1,625
Chetan's Capital 975 4,550
7,000 7,000

Cash Account
Dr. Cr.
Amount Amount

Particulars Rs Particulars Rs
Balance b/d 900 Arun's Capital 1,750
Chetan's Capital 625 Bablu's Capital 1,625
Deepak's Capital 7,000 Balance c/d 9,350
Premium for Goodwill 4,200

12,725 12,725

Balance Sheet
Amount A

Liabilities (Rs) Assets

Creditors 9,000 Land and Buildings
Bills Payable 3,000 Furniture
Capital Account Stock
Arun 21,000 Debtor 12,600
Bablu 17,500 Less: Reserve for Doubtful Debt 630
Chetan 10,500 Cash
Deepak 7,000 56,000
68,000
Working Note:

1)

Partner's Capital Account

Dr. Cr.
Particulars Arun Bablu Chetan Deepak Particulars Arun Bablu

Q31 :

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 December 31, 2006 (before Chintan's admission)
was as follows:

Balance Sheet of A and B as on 31.12.2006

Amount Amount

Liabilites (Rs) Assets (Rs)

Creditors 8,000 Cash in hand 2,000
Bills payable 4,000 Cash at bank 10,000
General reserve 6,000 Sundry debtors 8,000
Capital accounts: Stock 10,000
Azad 50,000 Funiture 5,000
Babli 32,000 82,000 Machinery 25,000
Buildings 40,000
1,00,000 1,00,000

It was agreed that:

i) Chintan will bring in Rs 12,000 as his share of goodwill premium.

ii) Buildings were valued at Rs 45,000 and Machinery at Rs 23,000.

iii) A provision for doubtful debts is to be created @ 6% on debtors.

iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.

Record necessary journal entries, show necessary ledger accounts and prepare the Balance
Sheet after admission.

Answer :

Books of Azad, Babli and Chintan

Journal
Amount Amount

Date Particulars L.F. Rs Rs

2006
Dec 31 Bank A/c Dr. 42,000
To Chintan's Capital A/c 30,000
To Premium for Goodwill A/c 12,000
(Chintan brought Capital and Premium for Goodwill for 1/4

share of profit)

Premium for Goodwill A/c Dr. 12,000

To Azad's Capital A/c 8,000
To Babli's Capital A/c 4,000
(Goodwill brought by Chintan transferred to old partners

capital account in their sacrificing ratio, 2:1)

General Reserve A/c Dr. 6,000

To Azad's Capital A/c 4,000
To Babli's Capital A/c 2,000
(General reserve distributed between old partners)
 Building A/c Dr. 5,000
To Revaluation A/c 5,000
(Increase in value of Building adjusted)

Revaluation A/c Dr. 2,480

To Machinery A/c 2,000
To Provision for Doubtful Debt 480
(Decrease in value of machinery adjusted and Provision for

Doubtful Debt created)

Revaluation A/c Dr. 2,520

To Azad is Capital A/c 1,680
To Babli's Capital A/c 840
(Profit on revaluation transferred to Azad and Babli's Capital

Account)

Azad's Capital A/c Dr. 3,680

To Azad's Current A/c 3,680
(Excess of Capital transferred to current account)

Q32 :

Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2007 they
admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on
Jan. 01, 2007 was as follows:

Balance Sheet of A and B as on 1.1.2007

Amount Amount

Liabilites Rs Assets Rs
Creditors 15,000 Land & Building 35,000
Bills Payable 10,000 Plant 45,000
Ashish Capital 80,000 Debtors 22,000
Dutta's Capital 35,000 Less : Provision 2,000 20,000
Stock 35,000
Cash 5,000
1,40,000 1,40,000
It was agreed that:

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

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

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

iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm.

Record the necessary journal entries and prepare the Balance Sheet of the firm after
Vimal's admission.

Answer :

Books of Ashish, Dutta and Vimal

Journal

Amount Amount
Date Particularss L.F.
Rs Rs
2007
Jan 1 Land and Building A/c Dr. 15,000
Plant A/c Dr. 10,000
To Revaluation A/c 25,000
(Increased in the value of assets)

Revaluation A/c Dr. 25,000

To Ashish's Capital A/c 15,000
To Dutta's Capital A/c 10,000
(Profit on revaluation transferred to partners capital account)
 Cash A/c Dr. 36,000
To Vimal Capital A/c 36,000
(Capital brought by Vimal)

Vimal's Current A/c Dr. 4,000

To Ashish's Capital A/c 2,400
To Dutta's Capital A/c 1,600
(Vimal's share goodwill adjusted through his current account)

Balance Sheet as on January 01, 2007

Amount Amount

Liabilities Rs Assets Rs
Creditors 15,000 Land and Building 50,000
Bills Payable 10,000 Plant 55,000
Debtors 22,000
Ashish's Capital Account 97,400 Less: Provision 2,000 20,000
Dutta's Capital Account 46,600 Stock 35,000
Vimal's Capital Account 36,000 Cash 41,000
Vimal's Current Account 4,000
2,05,000 2,05,000

Working Note:

1)

Partners' Capital Account

Dr.
Particulars