3.

4 Double Entry Book Keeping (Section A)—ISC XII

Years Ended 31st March, 2014 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018
Profits (`) 15,390 16,130 20,415 23,535 28,780

You are required to determine the amount to be paid by C to each partner on both the
occasions and their ultimate Profit-sharing Ratio.
Solution:
On 1st Occasion (1st April, 2016):
C buys 5/17th share of A, i.e., 17/33 × 5/17 = 5/33 and 4/16th share of B, i.e., 16/33 × 4/16 = 4/33.

` 15,390 + ` 16,130 + ` 20,415

Goodwill = × 2 = ` 34,623
3
C will pay ` 5,246 to A (i.e., ` 34,623 × 5/33 for acquiring 5/33rd share) and ` 4,197 to B
(i.e., ` 34,623 × 4/33 for acquiring 4/33rd share).

New Profit-sharing Ratio: A(17/33 – 5/33 = 12/33); B(16/33 – 4/33 = 12/33); C(5/33 + 4/33
= 9/33) or 12/33: 12/33: 9/33 or 4 : 4 : 3.

On 2nd Occasion (1st April, 2018):

C purchases 1/12th of remaining shares of A and B which is 12/33 (each). Therefore,
C purchases 12/33 × 1/12 = 1/33rd share (each). New Profit-sharing Ratio will be
A(12/33 – 1/33 = 11/33); B(12/33 – 1/33 = 11/33); C(9/33 + 1/33 + 1/33 = 11/33) or 11/33 :
11/33 : 11/33 or 1 : 1 : 1.
Ultimate Profit-Sharing Ratio will be equal.

` 20,415 + ` 23,535 + ` 28,780

Goodwill = × 2 = ` 48,487.
3
On 2nd occasion, C will pay ` 1,469 each (i.e., ` 48,487 × 1/33) to A and B (for acquiring
1/33rd share from each of them).
Illustration 2 (Calculation of Investment to be made to become a Partner).
A commenced his business with a capital of ` 5,00,000 on 1st April, 2013. During 5 years
ended 31st March, 2018, the results of his business were:

Year Ended `  

31st March, 2014 Loss 10,000
31st March, 2015 Profit 26,000
31st March, 2016 Profit 34,000
31st March, 2017 Profit 40,000
31st March, 2018 Profit 50,000

During this period, he withdrew ` 80,000 for his personal use. On 1st April, 2018, he
admitted B into partnership on the following terms:
Admission of a Partner 3.5

(i) Goodwill is to be valued at 3 times the average profits of the last 5 years.
(ii) B will have 1/2 share in future profits.
(iii) He will bring his share of goodwill in cash.
(iv) He will bring capital in cash equal to that of A after his admission.

Calculate amount to be brought in by B and pass entries to record the transactions pertaining
to admission.

Solution:

(i) Calculation of Share of Goodwill to be brought in by B:

`
(a) Total profits for 5 years (– ` 10,000 + ` 26,000 + ` 34,000 + ` 40,000 + ` 50,000) 1,40,000
(b) Average profits (` 1,40,000/5) 28,000
(c) Amount of Goodwill (` 28,000 × 3) 84,000
(d ) Share of Goodwill to be brought in by B (` 84,000/2) 42,000

(ii) Calculation of A’s Capital as on 31st March, 2018:

(a) Capital as on 1st April, 2013 5,00,000
(b) Add: Net profit for 5 years 1,40,000
6,40,000
(c) Less: Drawings 80,000
5,60,000
(iii) Calculation of amount to be invested by B:
A’s Capital after B’s admission = ` 5,60,000 + Amount of goodwill to be brought in
= ` 5,60,000 + ` 42,000 = ` 6,02,000
Therefore, B will have to bring ` 6,02,000 as Capital and ` 42,000 as share of Goodwill.
Total amount to be brought in by B = ` 6,02,000 + ` 42,000 = ` 6,44,000.

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

2018
April 1 Cash A/c ...Dr. 6,44,000
To B’s Capital A/c 6,02,000
To Premium for Goodwill A/c 42,000
(Being the amount brought in by B )
April 1 Premium for Goodwill A/c ...Dr. 42,000
To A’s Capital A/c 42,000
(Being the amount of goodwill credited to A’s Capital Account)
3.6 Double Entry Book Keeping (Section A)—ISC XII

Illustration 3.
A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1 respectively.
D is admitted as a new partner on 31st March, 2018 for an equal share and is to pay
` 50,000 as Capital. Following is the Balance Sheet on the date of admission:
BALANCE SHEET
Liabilities ` Assets `
Capital A/cs: Land and Building 50,000
A 60,000 Plant and Machinery 40,000
B 60,000 Furniture 30,000
C 40,000 Stock 20,000
Creditors 30,000 Debtors 30,000
Bills Payable 10,000 Bills Receivable 20,000
Bank 10,000
2,00,000 2,00,000

Following are the required adjustments on D’s admission:

(i) Out of the Creditors, a sum of ` 10,000 is due to D which will be transferred to his capital.
(ii) Advertisement Expenses of ` 1,200 is to be carried forward to next accounting period.
(iii) Expenses debited in the Profit and Loss Account includes a sum of ` 2,000 paid for
B’s personal expenses.
(iv) A Bill of Exchange of ` 4,000, which was previously discounted with the banker, was
dishonoured on 31st March, 2018 but no entry has been passed for that.
(v) Provision for Doubtful Debts @ 5% is to be created against Debtors.
(vi) Expenses on revaluation amounting to ` 2,100 is paid by A.
Prepare necessary Ledger Accounts and Balance Sheet after D’s admission.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Provision for Doubtful Debts A/c 1,700 By Prepaid Advertisement Expenses A/c 1,200
(5/100 × ` 34,000) By B’s Capital A/c (B’s Drawings) 2,000
To A’s Capital A/c (Revaluation Expenses) 2,100 By Loss on Revaluation transferred to
Capital A/cs:
A (` 600 × 3/6) 300
B (` 600 × 2/6) 200
C (` 600 × 1/6) 100 600
3,800 3,800

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A B C Particulars A B C
` ` ` ` ` `
To Revaluation A/c (Loss) 300 200 100 By Balance b/d 60,000 60,000 40,000
To Revaluation A/c ... 2,000 ... By Revaluation A/c 2,100 ... ...
(Drawings) (Revaluation Expenses)
To Balance c/d 61,800 57,800 39,900
62,100 60,000 40,000 62,100 60,000 40,000
Admission of a Partner 3.7

Dr. D ’S CAPITAL ACCOUNT Cr.

Particulars
` Particulars `
To Balance c/d 50,000 By Bank A/c 40,000
By Creditors A/c 10,000
50,000 50,000

Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `
To Balance b/d 10,000 By Debtors A/c (B/R Dishonoured) 4,000
To D ’s Capital A/c 40,000 By Balance c/d 46,000
50,000 50,000

BALANCE SHEET AFTER D’S ADMISSION

as at 31st March, 2018
Liabilities
` Assets `
Capital A/cs: Land and Building 50,000
A 61,800 Plant and Machinery 40,000
B 57,800 Furniture 30,000
C 39,900 Stock 20,000
D 50,000 2,09,500 Debtors 30,000
Creditors (` 30,000 – ` 10,000) 20,000 Add: B/R Dishonoured 4,000
Bills Payable 10,000 34,000
Less: Provision for Doubtful Debts 1,700 32,300
Bills Receivable 20,000
Bank 46,000
Prepaid Advertisement Expenses 1,200
2,39,500 2,39,500

Illustration 4.
A and B are partners in a firm. The net profit of the firm is divided
as follows: 1/2 to A, 1/3 to B and 1/6 carried to Reserve. They admit C as a partner for
1/5th share in the firm on 1st April, 2018 on which date, the Balance Sheet of the firm
was as follows:

Liabilities
` Assets `
Capital A/cs: Building 5,00,000
A 5,00,000 Plant and Machinery 3,00,000
B 4,00,000 9,00,000 Stock 1,80,000
Reserve 1,00,000 Debtors 2,20,000
Creditors 2,00,000 Bank 50,000
Outstanding Expenses 50,000
12,50,000 12,50,000
3.8 Double Entry Book Keeping (Section A)—ISC XII

Following are the required adjustments on C ’s admission:

(i) C brings in ` 2,00,000 as his Capital and ` 50,000 as his share of Goodwill.
(ii) Stock is undervalued by 10%.
(iii) Creditors include a liability of ` 40,000, which has been decided by the court at
` 32,000.
(iv) In regard to the Debtors, the following debts proved bad or doubtful:
` 20,000 due from X—bad to the full extent.
` 40,000 due from Y—insolvent, estate was expected to pay only 50%.
You are required to prepare Revaluation Account, Partners’ Capital Accounts and Balance
Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Bad Debts A/c (X ) 20,000 By Stock A/c 20,000
To Provision for Doubtful Debts A/c (Y) 20,000 (` 2,00,000 (WN 1) – ` 1,80,000)
(` 40,000 × 50/100) By Creditors A/c 8,000
(` 40,000 – ` 32,000)
By Loss on Revaluation transferred to:
A’s Capital A/c 7,200
B’s Capital A/c 4,800 12,000
40,000 40,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A B C Particulars A B C
` ` ` ` ` `
To Revaluation A/c (Loss) 7,200 4,800 ... By Balance b/d 5,00,000 4,00,000 ...
To Balance c/d 5,82,800 4,55,200 2,00,000 By Reserve A/c 60,000 40,000 ...
By Bank A/c ... ... 2,00,000
By Premium for
Goodwill A/c 30,000 20,000 ...
5,90,000 4,60,000 2,00,000 5,90,000 4,60,000 2,00,000

BALANCE SHEET as at 1st April, 2018

Liabilities
` Assets `
Capital A/cs: Building 5,00,000
A 5,82,800 Plant and Machinery 3,00,000
B 4,55,200 Stock 2,00,000
C 2,00,000 12,38,000 Debtors 2,20,000
Creditors (` 2,00,000 – ` 8,000) 1,92,000 Less: Bad Debts (X) 20,000
Outstanding Expenses 50,000 2,00,000
Less: Provision for
Doubtful Debts (Y) 20,000 1,80,000
Bank (` 50,000 + ` 50,000 + ` 2,00,000) 3,00,000
14,80,000 14,80,000
Admission of a Partner 3.9

Working Notes:
1. Original value of stock = ` 1,80,000 × 100/90 = ` 2,00,000.
2. Profit-sharing ratio between A and B = 1/2 : 1/3 = 3 : 2.
Illustration 5.
X and Y were trading in partnership sharing profits and losses in the ratio of 7 : 5. On 1st
April, 2017, they admitted Z into partnership on the following terms:
Z was to have 1/6th share, 1/8th from X and 1/24th from Y paying ` 2,00,000 for that share
towards premium for goodwill. Z also brought ` 2,50,000 as his Capital into the firm. It
was further agreed that Machinery should be reduced by 10% and that Investments should
be reduced to their market value of ` 80,000.
The Balance Sheet of the old firm as at 31st March, 2017 was as follows:
Liabilities
`  Assets `
Creditors 1,60,000 Machinery 2,00,000
Capital A/cs: Furniture 40,000
X 2,50,000 Investments (At Cost) 1,20,000
Y 2,50,000 5,00,000 Stock 1,00,000
Debtors 60,000
Cash at Bank 1,40,000
6,60,000 6,60,000

Interest on Drawings is to be ignored but Interest on Capital is to be allowed at

5% p.a. The profits of the new firm for the year ended 31st March, 2018 amounted to
` 5,24,500 before allowing interest on capitals. Drawings of the partners during the year
were: X—` 1,63,250; Y—` 1,38,750 and Z—` 32,500.
You are required to show Partners’ Capital Accounts and prepare Balance Sheet as at
31st March, 2016.
Solution:
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Date Particulars X Y Z Date Particulars X Y Z
` ` ` ` ` `
2017 2017
Apr. 1 To Revaluation A/c 35,000 25,000 ... Apr. 1 By Balance b/d 2,50,000 2,50,000 ...
—Loss (WN 2) Apr. 1 By Premium for
Apr. 1 To Balance c/d 3,65,000 2,75,000 2,50,000 Goodwill A/c 1,50,000 50,000 ...
(WN 3) (WN 1)
Apr. 1 By Bank A/c ... ... 2,50,000
4,00,000 3,00,000 2,50,000 4,00,000 3,00,000 2,50,000
2018 2017
Mar. 31 To Drawings A/c 1,63,250 1,38,750 32,500 Apr. 1 By Balance b/d 3,65,000 2,75,000 2,50,000
Mar. 31 To Balance c/d 4,40,000 3,30,000 3,10,000 2018
Mar. 31 By Interest on
Capital A/cs 18,250 13,750 12,500
Mar. 31 By P and L App. A/c 2,20,000 1,80,000 80,000
(Profit)
6,03,250 4,68,750 3,42,500 6,03,250 4,68,750 3,42,500
3.10 Double Entry Book Keeping (Section A)—ISC XII

BALANCE SHEET
as at 31st March, 2018
Liabilities
` Assets `

Capital A/cs: X 4,40,000 Machinery (` 2,00,000 – ` 20,000) 1,80,000

Y 3,30,000 Furniture 40,000
Z 3,10,000 10,80,000 Investments (` 1,20,000 – ` 40,000) 80,000
Creditors 1,60,000 Stock 1,00,000
Debtors 60,000
Cash at Bank (WN 5) 7,80,000
12,40,000 12,40,000

Working Notes:
1. Goodwill should be distributed as per sacrificing ratio, i.e., 1/8 : 1/24 or 3 : 1.
X’s share = ` 2,00,000 × 3/4 = ` 1,50,000; Y’s share = ` 2,00,000 × 1/4 = ` 50,000.

2. Dr. REVALUATION ACCOUNT Cr.

Particulars
` Particulars `
To Machinery A/c 20,000 By Loss transferred to:
To Investments A/c 40,000 X’s Capital A/c (7/12) 35,000
Y ’s Capital A/c (5/12) 25,000 60,000

60,000 60,000

3. Since there is interest on capital, it is better to carry forward this balance of Capital Account and thereafter
interest on capital should be allowed.

4. New Profit-sharing Ratio

X’s New Share = 7/12 – 1/8 = 11/24, Y’s New Share = 5/12 – 1/24 = 9/24.
Hence New Profit Sharing Ratio of X, Y and Z = 11/24 : 9/24 : 1/6 = 11 : 9 : 4.

PROFIT AND LOSS APPROPRIATION ACCOUNT

5. Dr. for the year ended 31st March, 2018 Cr.
Particulars
` Particulars `
To Interest on Capital A/cs: By Profit and Loss A/c 5,24,500
X 18,250 —Net Profit
Y 13,750
Z 12,500 44,500
To Share of Profit trfd. to Capital A/cs:
X (` 4,80,000 × 11/24) 2,20,000
Y (` 4,80,000 × 9/24) 1,80,000
Z (` 4,80,000 × 4/24) 80,000 4,80,000
5,24,500 5,24,500
Admission of a Partner 3.11

6. Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `
To Balance b/d 1,40,000 By Drawings A/cs:
To Premium for Goodwill A/c 2,00,000 X 1,63,250
To Z’s Capital A/c 2,50,000 Y 1,38,750
To Profit and Loss A/c (i.e., Increase in Cash)  5,24,500 Z 32,500 3,34,500
By Balance c/d 7,80,000
11,14,500 11,14,500

Illustration 6.
X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2. They admit
Z as a partner for 1/5th share. Z acquires his share from X and Y in the ratio of 2 : 3.
Goodwill of the firm has been valued at ` 50,000. Z issued cheques from his account of
` 10,000 in favor of ‘X’ and ‘Y’ as his share of goodwill. What Journal entry in the books
of the firm is to be passed?
Solution: No Journal entry will be passed in the books of the firm since Z has paid his
share of goodwill to X and Y privately, outside the firm.
Illustration 7.
Pass Journal entry to distribute Workmen Compensation Reserve of ` 50,000 at the time
of admission of Z, when there is no claim against it. The firm has two partners X and Y.
Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Workmen Compensation Reserve A/c ...Dr. 50,000
To X’s Capital A/c 25,000
To Y’s Capital A/c 25,000
(Being Workmen Compensation Reserve transferred to partners in their
old profit-sharing ratio)

Illustration 8.
Give Journal entry to distribute ‘Workmen Compensation Reserve’ of ` 80,000 at the time of
admission of Z, when there is claim of ` 60,000 against it. The firm has two partners X and Y.
Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Workmen Compensation Reserve A/c ...Dr. 80,000
To Workmen Compensation Claim A/c 60,000
To X’s Capital A/c 10,000
To Y’s Capital A/c 10,000
(Being the workmen compensation claim accepted and surplus WCR
transferred to partners in their old profit-sharing ratio)
Notes: After adjusting Workmen Compensation Claim against the Workmen Compensation Reserve, the
balance amount of ` 20,000 (i.e., ` 80,000 – ` 60,000) is distributed between X and Y in their old
profit-sharing ratio.
3.12 Double Entry Book Keeping (Section A)—ISC XII

Illustration 9.
Give Journal entry to distribute ‘Investment Fluctuation Reserve’ of ` 40,000 at the time of
admission of Z, when investment (market value ` 1,90,000) appears in the Balance Sheet
at ` 2,00,000. The firm has two partners X and Y.
Solution:
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Investment Fluctuation Reserve A/c ...Dr. 40,000
To Investment A/c 10,000
To X’s Capital A/c 15,000
To Y’s Capital A/c 15,000
(Being the value of investment brought down to market value and surplus
IFR transferred to old partners in their old profit-sharing ratio)

Note: In the given case, the market value of investment is ` 1,90,000 and the book value is ` 2,00,000.
So, the fall in the value of ` 10,000 will be met through Investment Fluctuation Reserve and balance of
` 30,000 will be distributed between the old partners in their old profit-sharing ratio, i.e., equally.

Illustration 10.
Usha and Asha are partners in a firm sharing profits in the ratio of 3 : 2. Their Balance
Sheet as at 31st March, 2019 was as follows:
Liabilities
` Assets `
Creditors 27,000 Cash 24,000
General Reserve 18,000 Debtors 48,000
Bills Payable 5,000 Less: Provision for Doubtful Debts 4,800 43,200
Capital A/cs: Stock 30,000
Usha 40,000 Patents 7,400
Asha 35,000 75,000 Building 20,400
1,25,000 1,25,000

Neelam is admitted into the partnership giving her 1/5th share in the profits. Neelam
is to bring in ` 30,000 as her Capital and her share of Goodwill in cash subject to the
following terms:
(i) Goodwill of the firm to be valued at ` 50,000.
(ii) Stock to be reduced by 10% and Provision for Doubtful Debts be reduced by ` 2,400.
(iii) Patents are valueless.
(iv) There was a claim against the firm for damages amounted to ` 2,000. The claim has now
been accepted.
(v) The partners have decided that General Reserve is to appear in the books of new firm at
its original value.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the
new firm.
Admission of a Partner 3.13

Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Stock A/c 3,000 By Provision for Doubtful Debts A/c 2,400
To Patents A/c 7,400 By Loss on Revaluation transferred to:
To Claim for Damages A/c 2,000 Usha’s Capital A/c 6,000
Asha’s Capital A/c 4,000 10,000
12,400 12,400

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Usha Asha Neelam Particulars Usha Asha Neelam
` ` ` ` ` `
To Revaluation A/c (Loss) 6,000 4,000 ... By Balance b/d 40,000 35,000 ...
To Usha’s Capital A/c ... ... 2,160 By Neelam’s Capital A/c 2,160 1,440 ...
To Asha’s Capital A/c ... ... 1,440 By Cash A/c ... ... 30,000
To Balance c/d 42,160 36,440 26,400 By Premium for Goodwill A/c 6,000 4,000 ...
48,160 40,440 30,000 48,160 40,440 30,000

BALANCE SHEET OF NEW FIRM as at 31st March, 2019

Liabilities ` Assets `
Creditors 27,000 Cash (` 24,000 + ` 40,000) 64,000
Claim for Damages 2,000 Debtors 48,000
Bills Payable 5,000 Less: Provision for Doubtful Debts 2,400 45,600
General Reserve 18,000 Stock (` 30,000 – ` 3,000) 27,000
Capital A/cs: Building 20,400
Usha 42,160
Asha 36,440
Neelam 26,400 1,05,000
1,57,000 1,57,000

Notes:
1. Neelam’s Share of Goodwill = ` 50,000 × 1/5 = ` 10,000, credited to Usha and Asha in their sacrificing
ratio, i.e., 3 : 2.
2. For Adjustment of General Reserve:
Dr. Neelam’s Capital A/c: ` 3,600 (i.e., ` 18,000 × 1/5);
Cr. Usha’s Capital A/c: ` 2,160 (i.e., ` 3,600 × 3/5); and Asha’s Capital A/c: ` 1,440 (i.e., ` 3,600 × 2/5).
Illustration 11.
Rose and Daisy carried on a business in partnership sharing profits and losses in the ratio
of 3 : 1. Their Balance Sheet as at 31st March, 2019 was as under:
Liabilities
` Assets `
Capital A/cs: Land and Building 62,500
Rose 75,000 Furniture 2,500
Daisy 40,000 1,15,000 Debtors 41,250
General Reserve 10,000 Less: Provision for Doubtful Debts 1,250 40,000
Creditors 93,750 Bills Receivable 7,500
Stock 50,000
Cash at Bank 56,250
2,18,750 2,18,750
3.14 Double Entry Book Keeping (Section A)—ISC XII

Lily was admitted as a partner on 1st April, 2019 on the following terms:
(i) She was to bring in ` 35,000 as her Capital for 1/5th share in the profits.
(ii) Goodwill of the firm was valued at ` 1,00,000. Lily was to bring half of her share of
Goodwill in cash.
(iii) Stock and Furniture were to be reduced in value by 10% and the Provision for Doubtful
Debts was to be brought up to 10% of the Debtors.
(iv) The value of Land and Building was appreciated by 25%.
(v) Creditors include an amount of ` 5,000 received as commission from Pinky. The
necessary adjustment is required to be made.
You are required to prepare necessary accounts and Balance Sheet of the newly constituted
firm. (ISC 1995, Modified)

Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Stock A/c 5,000 By Land and Building A/c 15,625
To Furniture A/c 250 (25% of ` 62,500)
To Provision for Doubtful Debts A/c 2,875 By Creditors A/c 5,000
(` 4,125 – ` 1,250)
To Gain (Profit) on Revaluation:
  Rose (3/4) 9,375
  Daisy (1/4) 3,125 12,500
20,625 20,625

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Rose Daisy Lily Particulars Rose Daisy Lily
` ` ` ` ` `
To Balance c/d 1,06,875 50,625 35,000 By Balance b/d 75,000 40,000 ...
By General Reserve A/c 7,500 2,500 ...
By Bank A/c ... ... 35,000
By Premium for Goodwill A/c 7,500 2,500 ...
(WN 1)
By Lily’s Current A/c (WN 2) 7,500 2,500 ...
By Revaluation A/c (Gain) 9,375 3,125 ...
1,06,875 50,625 35,000 1,06,875 50,625 35,000

Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `
To Balance b/d 56,250 By Balance c/d
1,01,250
To Lily’s Capital A/c 35,000
To Premium for Goodwill A/c 10,000
1,01,250 1,01,250
Admission of a Partner 3.15

BALANCE SHEET as at 1st April, 2019

Liabilities
` Assets `
Capital A/cs: Land and Building 78,125
Rose 1,06,875 Furniture 2,250
Daisy 50,625 Debtors 41,250
Lily 35,000 1,92,500 Less: Provision for Doubtful Debts 4,125 37,125
Creditors 88,750 Stock 45,000
Bills Receivable 7,500
Cash at Bank 1,01,250
Lily’s Current A/c 10,000
2,81,250 2,81,250

Working Notes:
1. Goodwill brought in part by Lily in cash (` 10,000) has been distributed between Rose and Daisy in their
sacrificing ratio of 3 : 1.
2. Goodwill not brought in cash out of her share ` 10,000 (i.e., ` 1,00,000 × 1/5 × 1/2). It has been adjusted
through Lily’s Current Account.

Illustration 12.
A and B are partners in a firm sharing profits in 2 : 1 ratio. They admitted C for 1/4th
share in profits. C was to bring ` 30,000 as capital and capitals of A and B were to be
adjusted in the profit-sharing ratio on the basis of C’s Capital. The Balance Sheet of A
and B as at 31st March, 2018 (before C’s admission) was:
Liabilities
` Assets `
Sundry Creditors 20,000 Cash 2,000
Bills Payable 19,000 Sundry Debtors 50,000
General Reserve 6,000 Stock 10,000
Workmen Compensation Reserve 24,000 Machinery 25,000
Capital A/cs: Building 40,000
A 50,000 Goodwill 15,000
B 32,000 82,000 Advertisement Expenditure 9,000
1,51,000 1,51,000

Other terms of agreement were:

(i) C will bring ` 12,000 for his share of goodwill.
(ii) Building was valued at ` 45,000 and Machinery at ` 23,000.
(iii) A Provision of Doubtful Debts was created @ 6% on Sundry Debtors.
(iv) Capital Accounts of A and B were adjusted by opening Current Accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of A, B and C.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Machinery A/c 2,000 By Building A/c 5,000
To Provision for Doubtful Debts A/c 3,000
5,000 5,000
3.16 Double Entry Book Keeping (Section A)—ISC XII

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A B C Particulars A B C
` ` ` ` ` `
To Goodwill A/c 10,000 5,000 ... By Balance b/d 50,000 32,000 ...
To Advertisement By General Reserve A/c 4,000 2,000 ...
Expenditure A/c 6,000 3,000 ... By Workmen Compensation
To A’s Current A/c (Bal. Fig.) 2,000 8,000 ... Reserve A/c 16,000 8,000 ...
To Balance c/d 60,000 30,000 30,000 By Bank A/c ... ... 30,000
By Premium for Goodwill A/c 8,000 4,000 ...
78,000 46,000 30,000 78,000 46,000 30,000

BALANCE SHEET OF A, B AND C as at 31st March, 2018

Liabilities
` Assets `
Sundry Creditors 20,000 Cash (` 2,000 + ` 30,000 + ` 12,000) 44,000
Bills Payable 19,000 Sundry Debtors 50,000
Current A/cs: Less: Provision for Doubtful Debts 3,000 47,000
A 2,000 Stock 10,000
B 8,000 10,000 Machinery 23,000
Capital A/cs: Building 45,000
A 60,000
B 30,000
C 30,000 1,20,000
1,69,000 1,69,000

Working Notes:
1. Calculation of New Profit-Sharing Ratio:
C joins the firm for 1/4th share of profits. Therefore, 3/4 (i.e.,1 – 1/4) will be shared by A and B in the ratio of
2 : 1. Thus,
A’s share = 3/4 × 2/3 = 6/12; B’s share = 3/4 × 1/3 = 3/12;
C’s share of profit = 1/4,
Therefore, New Profit-sharing Ratio of A, B and C = 6/12 : 3/12 : 1/4 or 6 : 3 : 3 or 2 : 1 : 1.
2. Adjustment of Capital:
Total capital of the firm on the basis of C’s capital = ` 30,000 × 4/1 = ` 1,20,000
A’s Capital = ` 1,20,000 × 6/12 = ` 60,000
B’s Capital = ` 1,20,000 × 3/12 = ` 30,000
C’s Capital = ` 1,20,000 × 3/12 = ` 30,000.
Illustration 13.
Angad and Vivek are partners in a firm sharing profits and losses in the ratio of 3 : 2.
Their Balance Sheet as at 1st January, 2005 stood as follows:
BALANCE SHEET as at 1st January, 2005
Liabilities
` Assets `

Creditors 15,000 Cash 2,000

General Reserve 10,000 Debtors 18,000
Capital A/cs: Stock 20,000
Angad 30,000 Furniture 10,000
Vivek 25,000 55,000 Plant 30,000
80,000 80,000

Gopal is admitted as a partner on the above date on the following terms:

(i) He will pay ` 10,000 towards Goodwill for 1/4th share in profits.
Admission of a Partner 3.17

(ii) The assets are to be revalued as under:

Plant ` 32,000; Stock ` 18,000.
(iii) A Provision for Bad Debts at 5% on Debtors has to be created.
(iv) A sum of ` 1,400 included in Creditors is not to be paid. There is an unrecorded liability
for ` 5,000 which is to be recorded in the books.
(v) Gopal is to bring in ` 20,000 as capital. The capitals of other partners are to be adjusted
in new profit-sharing ratio. For this purpose Current Accounts are to be opened.
Prepare:
(a) the Capital Accounts of Angad, Vivek and Gopal.
(b) the Balance Sheet of the new firm. (ISC 2007 )
Solution:
Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Angad Vivek Gopal Particulars Angad Vivek Gopal
` ` ` ` ` `
To Revaluation A/c 2,700 1,800 ... By Balance b/d 30,000 25,000 ...
(Loss) (WN 1) By General
To Angad’s Current A/c 3,300 ... ... Reserve A/c 6,000 4,000 ...
(Bal. Fig.—Transfer) By Cash A/c ... ... 20,000
To Vivek’s Current A/c ... 7,200 ... By Premium for
(Bal. Fig.— Transfer) Goodwill A/c 6,000 4,000 ...
To Balance c/d 36,000 24,000 20,000
(WN 3)
42,000 33,000 20,000 42,000 33,000 20,000

BALANCE SHEET OF THE NEW FIRM as at 1st January, 2005

Liabilities
` Assets `

Creditors (` 15,000 – ` 1,400) 13,600 Debtors 18,000

Unrecorded Liability 5,000 Less: Provision for Bad Debts 900 17,100
Current A/cs: Stock (` 20,000 – ` 2,000) 18,000
Angad 3,300 Furniture 10,000
Vivek 7,200 10,500 Plant (` 30,000 + ` 2,000) 32,000
Capital A/cs: Cash 32,000
Angad 36,000
Vivek 24,000
Gopal 20,000 80,000
1,09,100 1,09,100

Working Notes:
1. Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `
To Stock A/c 2,000 By Plant A/c 2,000
To Provision for Bad Debts A/c 900 By Creditors A/c 1,400
To Unrecorded Liability A/c 5,000 By Loss on Revaluation transferred to:
Angad’s Capital A/c (` 4,500 × 3/5) 2,700
Vivek’s Capital A/c (` 4,500 × 2/5) 1,800
7,900 7,900
3.18 Double Entry Book Keeping (Section A)—ISC XII

2. Calculation of New Profit-sharing Ratio:

1 3
Gopal is coming for 1/4th share. The remaining 1 − th = th share will be divided between Angad and
4 4
Vivek in the ratio of 3 : 2. Therefore, the new profit-sharing ratio will be:
Angad’s Share of Profit = 3/5 of 3/4 = 9/20.
Vivek’s Share of Profit = 2/5 of 3/4 = 6/20.
Gopal’s Share of Profit = 1/4 = 5/20.
New Profit-sharing Ratio = 9/20 : 6/20 : 5/20 or 9 : 6 : 5.

3. Calculation of Proportionate Capital of Angad and Vivek on the basis of New Profit-sharing Ratio:

Capital of the New Partner (Gopal)

(i ) Total Capital of the New Firm =
ew Partner (Gopal)
Share of Profit of the Ne

` 20,000
= = ` 20,000 × 4/1 = ` 80,000.
1/4
(ii ) Angad’s Capital = ` 80,000 × 9/20 = ` 36,000
Vivek’s Capital = ` 80,000 × 6/20 = ` 24,000.

Illustration 14.
Following is the Balance Sheet as at 31st March, 2018 of A and B, who share profits and
losses in the ratio of 3 : 2:
Liabilities
` Assets `
Capital A/cs: Plant and Machinery 10,000
A 10,000 Land and Building 8,000
B 10,000 20,000 Debtors 12,000
General Reserve 15,000 Less: Provision for Doubtful Debts 1,000 11,000
Workmen’s Compensation Reserve 10,000 Stock 12,000
Creditors 10,000 Cash 9,000
Profit and Loss A/c 5,000
55,000 55,000

On 1st April, 2018, they agreed to admit C for 1/5th share of profits into partnership on
the following terms:
(i) Provision for Doubtful Debts would be increased by ` 2,000.
(ii) Value of Land and Building would be increased to ` 18,000.
(iii) Value of Stock would be increased by ` 4,000.
(iv) The liability against the Workmen’s Compensation Reserve is determined at ` 2,000.
(v) C brought in as his share of goodwill ` 10,000 in cash.
(vi) C would bring in further cash as would make his capital equal to 20% of the total
capital of the new firm after the above revaluation and adjustments are carried out.
Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the firm after
C’s admission.
Admission of a Partner 3.19

Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `

To Provision for Doubtful Debts A/c 2,000 By Land and Building A/c 10,000
To Gain (Profit) transferred to: By Stock A/c 4,000
A’s Capital A/c 7,200
B’s Capital A/c 4,800 12,000
14,000 14,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars A B C Particulars A B C
` ` ` ` ` `
To Profit and Loss A/c 3,000 2,000 ... By Balance b/d 10,000 10,000 ...
To Balance c/d 34,000 26,000 15,000 By Premium 6,000 4,000 ...
(Balancing Figure) for Goodwill A/c
By Revaluation A/c 7,200 4,800 ...
By General Reserve A/c 9,000 6,000 ...
By Workmen’s Compensa-
tion Reserve A/c 4,800 3,200 ...
By Cash A/c (WN) ... ... 15,000
37,000 28,000 15,000 37,000 28,000 15,000

BALANCE SHEET OF M/s A, B AND C

as at 1st April, 2018
Liabilities
` Assets `

Capital A/cs: Land and Building 18,000

A 34,000 Plant and Machinery 10,000
B 26,000 Debtors 12,000
C 15,000 75,000 Less: Provision for Doubtful Debts 3,000 9,000
Liability for Workmen’s Compensation 2,000 Stock 16,000
Creditors 10,000 Cash [` 9,000 + ` 25,000 (WN)] 34,000
87,000 87,000

Working Note:
Computation of C’s Capital: `
Capital of A after all adjustments 34,000
Capital of B after all adjustments 26,000
Combined capital of A and B for 4/5th share 60,000
∴ Total capital of new firm = ` 60,000 × 5/4
C’s share in capital = ` 60,000 × 5/4 × 1/5 = ` 15,000.
Total cash paid by C = Capital (` 15,000) + Share of goodwill (` 10,000)
= ` 25,000.
3.20 Double Entry Book Keeping (Section A)—ISC XII

Illustration 15.
Amit and Sumit are partners sharing profits and losses in the ratio of 3 : 2. Their Balance
Sheet as at 31st March, 2018 is given below:
Liabilities
` Assets `
Capital A/cs: Land and Building 3,20,000
Amit 1,76,000 Investments (Market Value ` 55,000) 50,000
Sumit 2,54,000 4,30,000 Debtors 3,00,000
Loan from Puneet 3,00,000 Less: Provision for Doubtful Debts 10,000 2,90,000
General Reserve 30,000 Stock 1,10,000
Employees’ Provident Fund 10,000 Cash at Bank 50,000
Creditors 50,000
8,20,000 8,20,000

They decided to admit Puneet as a new partner from 1st April, 2018 on the following terms:
(i) Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet.
(ii) Puneet’s Loan Account will be converted into his Capital.
(iii) The Goodwill of the firm is valued at ` 3,00,000. Puneet will bring his share of Goodwill
in cash and the same was immediately withdrawn by the partners.
(iv) Based on the valuation of an Architect, Land and Building was found undervalued by
` 1,00,000. Architect was paid ` 10,000 as his fee for Valuation Report.
(v) Stock was found overvalued by ` 50,000.
(vi) Provision for Doubtful Debts will be made equal to 5% of Debtors.
(vii) Investments are to be valued at their market price.
It was decided that the total capital of the firm after admission of new partner would
be ` 10,00,000. Capital Accounts of Partners will be readjusted on the basis of their
profit-sharing ratio and excess or deficiency will be adjusted in cash.
Prepare (i) Revaluation Account; (ii) Partners’ Capital Accounts; and (iii) Balance Sheet of the
firm after admission of new partner.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars ` Particulars `
To
Stock A/c 50,000 By Land and Building A/c 1,00,000
To
Provision for Doubtful Debts A/c 5,000 By Investments A/c 5,000
To
Bank A/c (Architect’s Fee) 10,000
To
Gain (Profit) on Revaluation t/f to:
Amit’s Capital A/c 24,000
Sumit’s Capital A/c 16,000 40,000
1,05,000 1,05,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet
` ` ` ` ` `
To Bank A/c 60,000 30,000 ... By Balance b/d 1,76,000 2,54,000 ...
To Balance c/d (WN 3) 4,00,000 3,00,000 3,00,000 By General Reserve A/c 18,000 12,000 ...
By Revaluation A/c (Gain) 24,000 16,000 ...
By Puneet’s Loan A/c ... ... 3,00,000
By Premium for
Goodwill (WN 2) 60,000 30,000 ...
By Bank A/c 1,82,000 18,000 ...
(Balancing Figure)
4,60,000 3,30,000 3,00,000 4,60,000 3,30,000 3,00,000
Admission of a Partner 3.21

BALANCE SHEET OF THE NEW FIRM as at 1st April, 2018

Liabilities
` Assets `
Creditors 50,000 Land and Building 4,20,000
Employees’ Provident Fund 10,000 Investments 55,000
Capital A/cs: Debtors 3,00,000
Amit 4,00,000 Less: Provision for Doubtful Debts 15,000 2,85,000
Sumit 3,00,000 Stock 60,000
Puneet 3,00,000 10,00,000 Cash at Bank (WN 4) 2,40,000
10,60,000 10,60,000

Working Notes:
1. Calculation of Sacrificing Ratio and New Ratio:
Amit Sumit
(a) Their Old Share 3/5 2/5
(b) Their Sacrifice 1/5(i.e., 1/3 × 3/5) 1/10(i.e., 1/4 × 2/5)
(c) Their New Share (a – b) 2/5 or 4/10 3/10
∴ Sacrificing Ratio of Amit and Sumit = 1/5 : 1/10 = 2 : 1
Puneet’s Share = Sacrifice Share of Amit + Sacrifice Share of Sumit
= 1/5 + 1/10 = 3/10
Thus, New Profit-sharing Ratio of Amit, Sumit and Puneet = 4/10 : 3/10 : 3/10 = 4 : 3 : 3.
2. Puneet’s Share of Goodwill = ` 3,00,000 × 3/10 = ` 90,000, which is contributed by Amit and Sumit in
his sacrificing ratio, i.e., 2 : 1.
3. Capital of the Partners in New Firm:
Total Capital of the New Firm = ` 10,00,000
Thus, Amit’s Capital = 4/10 × ` 10,00,000 = ` 4,00,000;
Sumit’s Capital = 3/10 × ` 10,00,000 = ` 3,00,000;
Puneet’s Capital = 3/10 × ` 10,00,000 = ` 3,00,000.
4. Dr. BANK ACCOUNT Cr.
Particulars
` Particulars `
To Balance b/d 50,000 By Revaluation A/c (Architect’s Fee) 10,000
To Premium for Goodwill A/c 90,000 By Amit’s Capital A/c 60,000
To Amit’s Capital A/c 1,82,000 By Sumit’s Capital A/c 30,000
To Sumit’s Capital A/c 18,000 By Balance c/d 2,40,000
3,40,000 3,40,000

Illustration 16.
X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z as a
new partner from 1st April, 2018. They have decided to share future profits in the ratio
of 4 : 3 : 3. The Balance Sheet as at 31st March, 2018 is given below:
Liabilities
` Assets `
X’s Capital 4,40,000 Goodwill 85,000
Y’s Capital 6,35,000 Land and Building 1,50,000
Workmen Compensation Reserve 50,000 Investment (Market value ` 1,12,500) 1,25,000
Investment Fluctuation Reserve 25,000 Debtors 2,50,000
Employees’ Provident Fund 85,000 Less: Provision for Doubtful Debts 25,000 2,25,000
Z’s Loan 7,50,000 Stock 7,50,000
Bank Balance 6,25,000
Advertisement Suspense A/c 25,000
19,85,000 19,85,000
3.22 Double Entry Book Keeping (Section A)—ISC XII

Terms of Z’s admission are as follows:

(i) Z contributes proportionate capital and 60% of his share of goodwill by cheque.
(ii) Goodwill is to be valued at 2 years’ purchase of super profit of last three completed years.
Profits for the years ended 31st March were:
2016—` 12,00,000; 2017—` 23,25,000; 2018—` 34,50,000.
The normal profit is ` 13,25,000 with same amount of capital invested in similar industry.
(iii) Land and Building was found undervalued by ` 2,50,000.
(iv) Stock was found overvalued by ` 77,500.
(v) Provision for Doubtful Debts is to be made equal to 5% of the debtors.
(vi) Claim on account of Workmen Compensation is ` 25,000.
(vii) Workmen Compensation Reserve and Investment Fluctuation Reserve are to appear in
the books of the new firm after adjusting Workmen Compensation Claim and difference
between the book value and market value of investment. This adjustment is to be made
through Partners’ Current Accounts.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.

Particulars
` Particulars `

To Stock A/c 77,500 By Land and Building A/c 2,50,000

To Gain (Profit) on Revaluation By Provision for Doubtful Debts A/c:
transferred to: Existing 25,000
X’s Capital A/c 1,11,000 Less: Required (` 2,50,000 × 5/100) 12,500 12,500
Y’s Capital A/c 74,000 1,85,000
2,62,500 2,62,500

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars X Y Z Particulars X Y Z
` ` ` ` ` `
To Goodwill A/c 51,000 34,000 ... By Balance b/d 4,40,000 6,35,000 ...
To Advertisement By Bank A/c (WN 5) ... ... 7,50,000
Suspense A/c 15,000 10,000 ... By Premium for Goodwill A/c 2,40,000 1,20,000 ...
To Balance c/d 8,85,000 8,65,000 7,50,000 By Z’s Current A/c (WN 3) 1,60,000 80,000 ...
By Revaluation A/c (Profit) 1,11,000 74,000 ...
9,51,000 9,09,000 7,50,000 9,51,000 9,09,000 7,50,000

Dr. PARTNERS’ CURRENT ACCOUNTS Cr.

Particulars X Y Z Particulars X Y Z
` ` ` ` ` `
To X’s Capital A/c (WN 3) ... ... 1,60,000 By Z’s Current A/c (WN 4) 7,500 3,750 ...
To Y’s Capital A/c (WN 3) ... ... 80,000 By Balance c/d ... ... 2,51,250
To X’s Current A/c (WN 4) ... ... 7,500
To Y’s Current A/c (WN 4) ... ... 3,750
To Balance c/d 7,500 3,750 ...
7,500 3,750 2,51,250 7,500 3,750 2,51,250
Admission of a Partner 3.23

BALANCE SHEET OF THE NEW FIRM

as at 1st April, 2018
Liabilities
` Assets `
Employees’ Provident Fund 85,000 Land and Building 4,00,000
Workmen Compensation Claim 25,000 Investment 1,12,500
Workmen Compensation Reserve 25,000 Debtors 2,50,000
(` 50,000 – ` 25,000) Less: Provision for Doubtful Debts 12,500 2,37,500
Investment Fluctuation Reserve 12,500 Stock 6,72,500
Z’s Loan 7,50,000 Bank Balance 17,35,000
Current Accounts: Z’s Current Account 2,51,250
X 7,500
Y 3,750 11,250
Capital Accounts:
X 8,85,000
Y 8,65,000
Z 7,50,000 25,00,000
34,08,750 34,08,750

Working Notes:
1. Calculation of Sacrificing Ratio:
X Y
(a) Their Old Share 3/5 2/5
(b) Their New Share 4/10 3/10
(c) Share surrendered by old partner (a – b) 3/5 – 4/10 = 2/10 2/5 – 3/10 = 1/10
(d) Sacrificing Ratio of X and Y = 2/10 : 1/10 = 2 : 1.
2. Calculation of Z’s Share of Goodwill:
` 4,80,000 + ` 9,30,000 + ` 13,80,000
(a) Average Profit = = ` 23,25,000
3
(b) Normal Profit = ` 13,25,000
(c) Super Profit = ` 23,25,000 – ` 13,25,000 = ` 10,00,000
(d) Firm’s Goodwill = Super Profit × No. of years’ purchase = ` 10,00,000 × 2 = ` 20,00,000
(e) Z’s Share of Goodwill = ` 20,00,000 × 3/10 = ` 6,00,000.

3. Journal Entries with respect to Goodwill: ` `

(i) Bank A/c ...Dr. 3,60,000

To Premium for Goodwill A/c 3,60,000
(ii) Premium for Goodwill A/c ...Dr. 3,60,000
To X’s Capital A/c 2,40,000
To Y’s Capital A/c 1,20,000
(iii) Z’s Current A/c (` 6,00,000 – ` 3,60,000)
...Dr. 2,40,000
To X’s Capital A/c 1,60,000
To Y’s Capital A/c 80,000

4. For Adjustment of Workmen Compensation Reserve and Investment Fluctuation Reserve: `

Workmen Compensation Reserve = ` 50,000 – ` 25,000 (Claim) 25,000
Investment Fluctuation Reserve = ` 25,000 – (` 1,25,000 – ` 1,12,500) 12,500
37,500
3.24 Double Entry Book Keeping (Section A)—ISC XII

Adjustment Journal Entry with respect to Workmen Compensation Reserve and Investment Fluctuation Reserve:
` `
Z’s Current A/c (` 37,500 × 3/10) 11,250
To X’s Current A/c (` 37,500 × 2/10) 7,500
To Y’s Current A/c (` 37,500 × 1/10) 3,750
5. Calculation of Z’s Capital: `
X’s Adjusted Capital 8,85,000
Y’s Adjusted Capital 8,65,000
X’s and Y’s Capital for 7/10th share 17,50,000
Thus, Z’s Capital for 3/10th share = ` 17,50,000 × 10/7 × 3/10 = ` 7,50,000.
6. Dr. BANK ACCOUNT Cr.
Particulars
` Particulars `

To Balance b/d 6,25,000 By Balance c/d

17,35,000
To Premium for Goodwill A/c 3,60,000
To Z’s Capital A/c 7,50,000
17,35,000 17,35,000

Master Question
Illustration 17.
Rohan, Sohan and Mohan are partners sharing Profits and Losses in the ratio of 5 : 4 : 1. Their
Balance Sheet as at 31st March, 2019 was as follows:

Liabilities
` Assets `

Sundry Creditors 2,50,000 Cash at Bank 4,20,000

Salaries Payable 60,000 Sundry Debtors 2,00,000
Outstanding Expenses 20,000 Less: Provision for Doubtful Debts 20,000 1,80,000
General Reserve 1,80,000 Stock 1,00,000
Workmen Compensation Reserve 2,00,000 Furniture 1,80,000
Investment Fluctuation Reserve 2,20,000 Computers 4,00,000
Capital A/cs: Car 4,00,000
Rohan 6,00,000 Advertisement Expenses 50,000
Sohan 3,00,000 Building 4,00,000
Mohan 3,00,000 12,00,000
21,30,000 21,30,000

Profit-sharing ratio w.e.f. 1st April, 2019 was decided to be equal. It was agreed among
the partners to carry out following adjustments:
(i) Stock to be reduced to ` 80,000.
(ii) All debtors are good.
(iii) Computers to be reduced by ` 40,000.
(iv) Out of the salaries payable ` 20,000 was not payable as the employee left without
notice.
Admission of a Partner 3.25

(v) Outstanding Expenses were not payable.

(vi) An unrecorded asset (Motor Cycle) valued at ` 20,000 to be accounted.
(vii) The average profit earned by the firm is ` 2,50,000 which includes overvaluation
of stock of ` 15,000 on an average basis. The capital invested in the business is
` 14,00,000 and the normal rate of return is 15%. Goodwill of the firm is valued on
the basis of 2 times the super profit.
(viii) Workmen Compensation claim is estimated at ` 1,00,000.
(ix) Total capital of the firm ` 12,00,000 was to be in profit-sharing ratio, excess capital
to be withdrawn and shortfall to be made good.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the new firm.
Solution:
Dr. REVALUATION ACCOUNT Cr.
Particulars
` Particulars `

To Stock A/c 20,000 By Provision for Doubtful Debts A/c 20,000

To Computers A/c 40,000 By Salaries Payable A/c 20,000
To Gain (Profit) transferred to: By Outstanding Expenses A/c 20,000
Rohan 10,000 By Motor Cycle 20,000
Sohan 8,000
Mohan 2,000 20,000
80,000 80,000

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Particulars Rohan Sohan Mohan Particulars Rohan Sohan Mohan
` ` ` ` ` `
To Advertisement Exp. A/c 25,000 20,000 5,000 By Balance b/d 6,00,000 3,00,000 3,00,000
To Rohan’s Capital A/c ... ... 8,334 By Revaluation 10,000 8,000 2,000
To Sohan’s Capital A/c ... ... 3,333 By General Reserve 90,000 72,000 18,000
To Bank A/c (Bal. Fig.) 4,43,334 91,333 ... By Workman Compensation
To Balance c/d 4,00,000 4,00,000 4,00,000 Reserve 50,000 40,000 10,000
By Investment Fluctuation
Reserve 1,10,000 88,000 22,000
By Mohan’s Capital A/c 8,334 3,333 ...
By Bank ... ... 64,667
8,68,334 5,11,333 4,16,667 8,68,334 5,11,333 4,16,667

BALANCE SHEET
as on ...
Liabilities
` Assets `
Bank Overdraft 50,000 Sundry Debtors 2,00,000
Salaries Payable 40,000 Stock 80,000
Creditors 2,50,000 Furniture 1,80,000
Workmen Compensation Claim 1,00,000 Computers 3,60,000
Capital A/cs: Car 4,00,000
Rohan 4,00,000 Motor Cycle 20,000
Sohan 4,00,000 Building 4,00,00
Mohan 4,00,000 12,00,000
16,40,000 16,40,000
3.26 Double Entry Book Keeping (Section A)—ISC XII

Working Notes:

1. Calculation of Goodwill of Firm:

Average Profit = ` 2,50,000
Overvaluation of Stock = ` 1,5000
Adjusted Average Profit = ` 2,50,000 – ` 15,000 (Note) = ` 2,35,000
Normal Profit = Capital Employed (Investment) × NRR

15
= ` 14,00,000 × = ` 2,10,000
100

Super Profit = Adjusted Average Profit – Normal Profit

= ` 2,35,000 – ` 2,10,000 = ` 25,000
Goodwill = Super Profit × 2
= ` 25,000 × 2 = ` 50,000.
2. Calculation of Sacrifice/Gain of each Partner:

Particulars Rohan Sohan Mohan

A. Old Share 5/10 4/10 1/10

B. New Share 1/3 1/3 1/3
C. Sacrifice/Gain (A – B) 5/10 – 1/3 4/10 – 1/3 1/10 – 1/3
= 5/30 (Sacrifice) 2/30 (Sacrifice) 7/30 (Gain)

Note: Overvaluation of stock increases the net profit. Hence it has been deducted to calculate adjusted
average profit.

3. Adjustment of Goodwill:
Mohan’s Capital A/c ...Dr. ` 11,667
To Rohan’s Capital A/c ` 8333
To Sohan’s Capital A/c ` 3,334

4. Total Capital of the Firm = ` 12,00,000

Capital of each partner in the new firm as per new PGR will be ` 4,00,000.

5.
Dr. BANK ACCOUNT Cr.

Particulars
` Particulars `

To Balance b/d 4,20,000 By Rohan’s Capital A/c 4,43,334

To Mohan’s Capital A/c 64,667 By Sohan’s Capital A/c 91,333
To Balance c/d 50,000
5,34,667 5,34,667
Admission of a Partner 3.27

Unsolved Questions
1. A and B are partners in a firm sharing Profits and Losses in the ratio of 17 : 16. They admit C as a partner on
1st April, 2016 on the basis of his buying 5/17th of A’s share and 4/16th of B’s share. On 1st April, 2018 they
permit C to purchase further 1/12th of their remaining shares. Goodwill is agreed to be valued at 2 years’
purchase of the average profits of 3 years immediately before any change. Profits for the 5 years ended
31st March, 2018 are:

Years Ended 31st March, 2014 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018
Profits (`) 61,560 64,520 81,660 94,140 1,15,120

You are required to determine the amount to be paid by C to each partner on both the occasions and their
ultimate Profit-sharing Ratio.
2. A and B are partners sharing profits in the ratio of 3 : 2. They admit C into the firm for 3/7th share in profits
which he takes 2/7th from A and 1/7th from B and brings ` 10,000 as premium out of his share of ` 16,000.
Pass Journal entries for the above.
3. On the admission of Rao, it was agreed that the goodwill of Murty and Shah should be valued at ` 30,000.
Rao is to get 1/4th share of profits. Previously Murty and Shah shared profits in the ratio of 3 : 2. Rao cannot
bring his share of Goodwill. Give Journal entries in the books of Murty and Shah when: (i) there is no Goodwill
Account; (ii) Goodwill appears at ` 10,000.

4. Following is the Balance Sheet of the firm, Ashirvad, owned by A, B and C who share profits and losses of
the business in the ratio of 3 : 2 : 1:

BALANCE SHEET
as at 31st March, 2018

Liabilities
` Assets `
Capital A/cs: Furniture 95,000
A 1,20,000 Business Premises 2,05,000
B 1,20,000 Stock-in-Trade 40,000
C 1,20,000 3,60,000 Debtors 28,000
Sundry Creditors 20,000 Cash at Bank 15,000
Outstanding Salaries and Wages 7,200 Cash in Hand 4,200
3,87,200 3,87,200

On 1st April, 2018, they admit D as a partner on the following conditions:

(i) D will bring ` 1,20,000 as his Capital and also ` 30,000 as Goodwill premium for a quarter of the
share in the future profit/loss of the firm.
(ii) The values of the fixed assets of the firm will be increased by 10% before the admission of D.
(iii) The future profits and losses of the firm will be shared equally by all the partners.
Show Journal entries, Revaluation Account, Partners’ Capital Accounts and the opening Balance Sheet
of the new firm to include the above-mentioned transactions assuming that the conditions were
duly satisfied.
3.28 Double Entry Book Keeping (Section A)—ISC XII

5. Jain and Gupta were partners in a firm sharing profits and losses in the ratio of 4 : 3. Following is the Balance
Sheet of the firm as at 31st March, 2018:
BALANCE SHEET OF JAIN AND GUPTA as at 31st March, 2018
Liabilities
` Assets `

Sundry Creditors 20,000 Cash 14,800

Bills Payable 3,000 Debtors 20,500
Bank Overdraft 17,000 Less: Provision for Doubtful Debts 300 20,200
Capital A/cs: Stock 20,000
Jain 70,000 Plant 40,000
Gupta 60,000 1,30,000 Building 75,000
1,70,000 1,70,000

They agreed to admit Mishra as partner with effect from 1st April, 2018 with 1/4th share in profits on the
following terms:
(i) Mishra will bring in Capital to the extent of 1/4th of the total capital of the new firm after all
adjustments have been made.
(ii) Building is to be appreciated by ` 14,000 and Plant to be depreciated by ` 7,000.
(iii) The Provision for Doubtful Debts on Debtors is to be raised to ` 1,000.
(iv) Mishra will bring ` 21,000 as his share of Goodwill.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the firm immediately after
Mishra’s admission.
6. A and B are partners in a firm sharing profits in the ratio of 5 : 3. Their Balance Sheet as at 31st March, 2018
is given below:
Liabilities
` Assets `
Capital A/cs: Goodwill 10,000
A 55,000 Land and Building 25,000
B 30,000 85,000 Pant and Machinery 35,000
Creditors 19,000 Stock 20,000
Bills Payable 8,000 Debtors 25,000
General Reserve 16,000 Investments 14,000
Provision for Doubtful Debts 1,500 Cash 2,400
Outstanding Salary 2,400 Prepaid Insurance 500
1,31,900 1,31,900

They agreed to admit C on 1st April, 2018 for 1/5th share of profit in future on the following terms:
(i) C brings in ` 5,200 as his share of Goodwill in cash and will bring in such an amount that his Capital
will be 1/5th of the total capital of the new firm.
(ii) Land and Building and Plant and Machinery were to be valued at ` 38,000 and ` 30,000 respectively.
(iii) The Provision for Doubtful Debts was to be maintained up to ` 1,000.
(iv) A Liability for ` 1,200 included in Sundry Creditors was not likely to arise.
(v) Investments of ` 10,000 were taken over by old partners in their profit-sharing ratio.
(vi) B is to withdraw ` 2,400 in cash.
(vii) An amount of ` 100 is outstanding for repairs.
Prepare Revaluation Account, Partners’ Capital Accounts, and Balance Sheet of the new firm.
Admission of a Partner 3.29

GUIDE TO ANSWERS

1. On Ist Occassion (1st April, 2016):

Amount to be paid by C—` 20,984 to A and ` 16,787 to B. New Profit-sharing Ratio—4 : 4 : 3.
On 2nd Occassion (1st April, 2018):

Amount to be paid by C—` 5,877 to A and B each; New Profit-sharing Ratio—1 : 1 : 1.
Valuation of Goodwill:
` 61, 560 + ` 64 , 520 + ` 81, 660
Average Profit = = ` 69 , 247
3
Goodwill at 2 Years’ Purchase of Average Profit = ` 69,247 × 2 = ` 1,38,494.
3
C’s Share in Goodwill = ` 1,38,494 × = ` 37,771.
11
2. (i) Dr. Bank A/c and Cr. Premium for Goodwill A/c by ` 10,000.
(ii) Dr. Premium for Goodwill A/c—` 10,000; Cr. A’s Capital A/c—` 6,667 and B’s Capital A/c—` 3,333.
(iii) Dr. C’s Current A/c—` 6,000; Cr. A’s Capital A/c—` 4,000 and B’s Capital A/c—` 2,000.
3. (i)   Dr. Rao’s Current A/c—` 7,500; Cr. Murty’s Capital A/c—` 4,500 and Shah’s Capital A/c—` 3,000.
(ii) (a) Dr. Murty’s Capital A/c—` 6,000 and Shah’s Capital A/c—` 4,000; Cr. Goodwill A/c—` 10,000.
(b) Dr. Rao’s Current A/c—` 7,500; Cr. Murty’s Capital A/c—` 4,500 and Shah’s Capital A/c—` 3,000.
4. Gain (Profit) on Revaluation—` 30,000; Capital Balances: A—` 1,65,000; B—` 1,40,000; C—` 1,15,000;
D—` 1,20,000; Total of Balance Sheet—` 5,67,200.
[Hint: Change in profit-sharing ratio will result in loss of 6/24th to A and 2/24th to B; gain of 2/24th to
C and 1/4th to D. Hence, the entry for adjustment of goodwill premium will be:
` `
C ’s Capital A/c ...Dr. 10,000
Premium for Goodwill A/c ...Dr. 30,000
To A’s Capital A/c 30,000
To B ’s Capital A/c 10,000.]
5. Gain (Profit) on Revaluation—` 6,300; Capital Accounts of Jain—` 85,600; Gupta—` 71,700 and Mishra—
` 52,433; Total of Balance Sheet—` 2,49,733.
[Hint: Calculation of Mishra’s Capital: Combined Capital of Jain and Gupta (after adjustments) for 3/4th
share = ` 85,600 + ` 71,700 = ` 1,57,300
New Firm’s Total Capital = ` 1,57,300 × 4/3
Mishra’s Capital for 1/4th share = ` 1,57,300 × 4/3 × 1/4 = ` 52,433.]
6. Gain (Profit) on Revaluation—` 9,600; Capital A/cs: A—` 61,750; B—` 31,650; C—` 23,350; Total of Balance
Sheet—` 1,46,050.
[Hint: Capitals of A and B after all adjustments are ` 61,750 and ` 31,650 respectively. Hence, the combined
capital of A and B is equal to ` 93,400 which is 4/5(1 – 1/5) of the capital of the firm.
Hence, C’s 1/5th share in the capital will be: ` 93,400 × 5/4 × 1/5 = ` 23,350.]