NCERT Solutions for Class 12 Accountancy Chapter 3 Reconstitution of a Partnership Firm – Admission of a Partner
Short Answer Type Questions
1. Identify various matters that need adjustments at the time of admission of a new partner.
Ans. The following are the various items that are needed to be adjusted at the time of admission of a new partner.
(i) Profit Sharing Ratio: Calculation of new profit sharing ratio.
(ii) Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.
(iii) Revaluation of Assets and Liabilities: Assets and liabilities are revalued for ascertaining the current value of the assets and liabilities of the partnership firm.
(iv) Adjustment of capital of the partners in the profit sharing ratio.
(v) Accumulated profits, losses and reserves are to be distributed among the old partners in their old ratio.
2. Why is it necessary to ascertain new profit sharing ratio even for old partners when a new partner is
admitted?
Ans. When new partner/s is/are admitted, then the old partners in the partnership firm sacrifice their share of profit in favour of the new partner/s. This results in the reduction of the share of profit of the old partners, Therefore, it is necessary to ascertain the new profit sharing ratio even for the old partners in the event of admission of new partner/s.
3. What is sacrificing ratio? Why is it calculated?
Ans. Sacrificing ratio refers to the ratio in which the old partners of a partnership firm sacrifice their share of profit in favour of the new partner/s. It is calculated as a difference of the old ratio and the new ratio of the old partners.
Sacrificing Ratio = Old Ratio − New Ratio
It is very essential to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit.
4. On what occasions sacrificing ratio is used?
Ans. The following are the different situations when sacrificing ratio is used:
(i) When the existing partners of a partnership firm agree to change their share of profit among themselves.
(ii) When a new partner is admitted in the partnership firm and the amount of the goodwill brought by him/her is credited among the old partners in sacrificing ratio of the old partners.
5. If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?
Ans. If goodwill already appears in the books of old firm (before the admission of new partner), then this will 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)
6. Why is there need for the revaluation of assets and liabilities on the admission of a partner?
Ans. At the time of admission of a new partner, it becomes very necessary to revalue the assets and liabilities of a partnership firm to ascertain its current 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 all the necessary changes in the 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 in their old profit sharing ratio.
Long Answer Type Questions
1. Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?
Ans. Yes, it is advisable to revalue the assets and liabilities at the time of admission of a new partner for ascertaining the current 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 on the increase or decrease are distributed among the old partners of the firm in old profit sharing ratio.
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 Rev aluation A/c
(Decrease in the value of liabilities)
(v) For recording of unrecorded assets:
Unrecorded Assets A/c Dr.
To Rev aluation 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
(viii) 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)
2. What is goodwill? What are the factors that effect goodwill?
Ans. 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.
Characteristics of Goodwill: The following are the characteristics of goodwill:
(i) It is an intangible asset.
(ii) Ascertaining the exact value of goodwill is difficult.
(iii) The future as well as the present earning capacity of a business in enhanced.
(iv) It helps in earning supernormal profits against the normal profits.
(v) 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.
(i) Best Quality Products: If a company produces product of the best quality and in large scale, then automatically the company earns more goodwill.
(ii) Location: If a business is located at easily attainable and appropriate place, then more number of consumers will be attracted again and again which will lead to enhance in sales and, therefore, the firm will earn higher goodwill.
(iii) Management: Coherent 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 lower price. Superior quality at lower price enables a firm to earn higher goodwill.
(iv) Market Structure: If a firm is operating in a monopoly market with no close substitutes, then there will be more goodwill of the firm.
(v) 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.
3. Explain various methods of valuation of goodwill.
Ans. The following are the various methods of valuation of goodwill.
(i) Average Profit Method: Under this method, goodwill is calculated on the average basis of the profits of past few years. The formula for calculating goodwill is:
Goodwill = Average Profit × No. of Years Purchase
$$Average Profit= \frac{Total Profit of Past Given Years}{Number of Years}$$
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 nonbusiness 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
$$Average=\frac{1,00,000+3,00,000+5,00,000+8,00,0002,00,000}{5}\\=\frac{15,00,000}{5}=₹3,00,000$$
Goodwill = 3,00,000 × 4 years = ₹12,00,000.
(ii) Weight Average Method: It is the 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:
$$Weighted\space Average\space Profit =\frac{Total\space of\space Proudcts\space of\space Profits}{Total\space of\space Weights}$$
Goodwill = Weighted Average Profit × Number of Years Purchase
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 associating year’s profits.
Step 3: Calculate the total of the products.
Step 4: Divide the total of the product by the total of the weights 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 ₹1,00,000, ₹3,00,000, ₹(2,00,000), ₹5,00,000, ₹8,00,000.
Calculate goodwill on the basis of 4 years purchase.
Profit/Loss (₹)  Weights  Product (₹) 
1,00,000  1  1,00,000 × 1 = 1,00,000 
3,00,000  2  3,00,000 × 2 = 6,00,000 
(2,00,000)  3  (2,00,000) × 3 = (6,00,000) 
5,00,000  4  5,00,000 × 4 = 20,00,000 
8,00,000  5  8,00,000 × 5 = 40,00,000 
Total  15  ₹61,00,000 
$$Weighted\space Average\space Profit =\frac{61,00,000}{15}=₹4,06,666.67$$
Goodwill = 4,06,666.67 × 4 = ₹16,26,668
(iii) Super Profit Method: Under this method, goodwill is valued on the basis of excess profit earned by a firm over the industry. The excess profit over the normal profit is termed as Super Normal Profit.
Steps to Calculate Goodwill by Super Profit Method:
Step 1: Calculation Average Profit
Step 2: Calculate Capital Employed as
Capital Employed = Capital of partners + long term loans
Step 3: Calculate Normal Profit by the formula:
$$Normal\space Profit = Average\space Capital\space employed ×\frac{Normal\space Rate\space Return}{100}$$
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.
(iv) 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:
$$Capitalised\space value\space of\space Average\space Profit = Average Profit ×\frac{100}{Normal\space Rate\space of\space Return}$$
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:
$$Normal\space Profit = Average\space Capital\space employed\space ×\frac{Normal\space Rate\space of\space Return}{100}$$
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:
$$Goodwill = Super\space Profit ×\frac{100}{Normal\space Rate\space Return}$$
4. If it is agreed that the capital of all the partners be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.
Ans. 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:
(i) When the capital of the new partner is given
(ii) When the total capital of the firm is given.
(i) When the capital of the new partner is given:
In this situation, the calculation of the new capital of all the partners includes 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 other side, 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.
P and Q are partners sharing profit and loss equally. They agree to admit R for
$$\frac {1}{3}rd$$
13rdshare in profit. R brings ₹50,000 as capital. The old capitals of P and Q are ₹60,000 and ₹40,000 respectively, at the time admission of R.
Step 1: The total capital of the new form on the basis of
$$R = 50,000 ×\frac{1}{3}= ₹50,000$$
Step 2:
$$P\space new\space capital = 1,50,000 ×\frac{1}{3}= ₹50,000\\Q\space share\space in\space new\space form = 1,50,000 ×\frac{1}{3}= ₹50,000$$
Step 3:
P  R  
New Capital  50,000  50,000 
Less: Existing Capital  (60,000)  (40,000) 
Withdrawl (deposit)  10,000  (10,000) 
(ii) When the total capital of the new form is given: When the capital of new partner is not mentioned then his/her capital is calculated 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 calculated the proportionate capital of the new partner, the following steps are to be followed:
Step 1: Calculate the total old capital of the old partners (after making all adjustments).
Step 2: Calculate 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,
Total Capital of New Firm = Total Capital of the Old Partners
× Reciprocal of the Combined New Share of the Old Partners
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.
P and Q are partners in a firm sharing profit and loss equity. They agree to admit R for
$$\frac{1}{3}rd$$
in profit and decided to share future profit and loss equally P capital is ₹2,00,000 and Q capital is ₹1,50,000, R 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 = ₹2,00,000 + ₹1,50,000 = ₹3,50,000
Step 2: Calculation of Total Capital of New Firm
Total Capital of New Firm = Total Capital of the Old Partners
× Reciprocal of the Combined New Share of the Old Partners
$$Total\space Capital\space of\space New\space Firm = 3,50,000 ×\frac{3}{2}= ₹5,25,000$$
Step 3: Calculation of New Capital of Each partner
$$P (New) Capital = 5,25,000 ×\frac{1}{3}= ₹1,75,000\\Q (New) Capital = 5,25,000 ×\frac{1}{3}= ₹1,75,000\\R\space Capital = 5,25,000 ×\frac{1}{3}= ₹1,75,000$$
5. Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.?
Ans. 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’ Current Account. New Partner’s 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: 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.
6. Explain various methods for the treatment of goodwill on the admission of a new partner?
Ans. The methods for the treatment of goodwill on the admission of a new partner are given below:
(i) Premium Method
(ii) 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, this goodwill is 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’ Current A/c Dr.
To Goodwill A/c
(Goodwill written off among the old partners in their old profit sharing ratio)
(i) 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.
1. 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.
2. 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 of 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 Current 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 Current 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)
(ii) Revaluation Method: When the new partner is not able to bring goodwill in cash at all.
New Partner’s Current A/c Dr. (With the whole amount of goodwill that is not brought in by the new partner)
To Old Partners’ Current A/c
(Goodwill amount of the new partner distributed among the old partners in their sacrificing ratio)
NOTE: 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.
7. How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?
Ans. 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 working of the old partners and consequently, the old partners are liable to suffer 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)
8. At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been done? Show with the help of an imaginary balance sheet.
Ans. After revaluation 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.
X and Y shares profit and loss equally.
Balance Sheet of A and B as on April 01, 2011  
Liabilities  Amount(₹)  Assets  Amount(₹) 
Sundry Creditors  1,00,000  Cash in Hand  8,000 
Capital Accounts  Cash at Bank  8,000  
X 75,000  Debtors  40,000  
Y 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 Z is admitted for 1/3rd share and brings ₹1,00,000 as capital.
2. The value of stock is increased by ₹7,000.
3. A provision of ₹2,000 has been created against Debtors.
4. Furniture revalued at ₹35,000.
5. A machinery costing ₹50,000 purchased is not recorded in books.
6. Rent outstanding ₹2,000.
Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet.
Dr.  Revaluation Account  Cr.  
Particular  Amount(₹)  Particular  Amount(₹) 
Rent Outstanding A/c  2,000  Stock  7,000 
Provision for Debtors  2,000  Machinery  50,000 
Furniture  3,000  
Profit transferred  
X Capital A/c 25,000  
Y Capital A/c 25,000  50,000  
57,000  57,000 
X’s Capital Account  
date  Particulars  J.F.  Amount (₹)  Particulars  J.F.  Amount (₹) 
Balance c/d  1,00,000  Balance b/d  75,000  
Revaluation A/c  25,000  
1,00,000  1,00,000 
Dr.  Y’s Capital Account  Cr.  
Date  Particular  J.F.  Amount (₹)  Particulars  J.F.  Amount (₹) 
Balance c/d  1,00,000  Balance b/d  75,000  
Revaluation A/c  25,000  
1,00,000  1,00,000 
Dr.  Z’s Capital Account  Cr.  
Date  Particular  J.F.  Amount (₹)  Particulars  J.F.  Amount (₹) 
Balance c/d  1,00,000  Cash A/c  1,00,000  
1,00,000  1,00,000 
Dr.  Cash Account  Cr.  
Date  Particular  J.F.  Amount (₹)  Particulars  J.F.  Amount (₹) 
Balance c/d  8,000  Balance b/d  1,08,000  
C’s Capital A/c  1,00,000  
1,08,000  1,08,000 
Balance Sheet of X, Y and Z as at April  
Liabilities  Amount(₹)  Assets  Amount(₹) 
Sundry Creditors  1,00,000  Cash in Hand  1,08,000 
Rent Outstanding  2,000  Cash at Bank  28,000 
Debtors 40,000  
Less : Provision 2,000  38,000  
Capital Account  
A 1,00,000  Stock  43,000  
B 1,00,000  Furniture  35,000  
C 1,00,000  3,00,000  Plant and Machinery  1,50,000 
4,02,000  4,02,000 
Numerical Questions
1. A and B were partners in a firm sharing profits and losses in the ratio of 3 : 2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?
Ans. A : B
Old Ratio 3 : 2
OR
$$\frac{3}{5}:\frac{2}{5}$$
$$C\space admits\space for \frac{1}{6}$$
share of new profit in new firm.
Net profit of the firm = 1
Remaining share of A and B in the new firm = 1 – C’s share
$$=1\frac{1}{6}\\=\frac{5}{6}$$
New Ratio = Old Ratio × Remaining Share of A and B
$$A=\frac{3}{5}×\frac{5}{6}\\=\frac{15}{30}\\B=\frac{2}{5}×\frac{5}{6}\\=\frac{10}{30}$$
A : B : C
$$New\space Ratio =\frac{15}{30}:\frac{10}{30}:\frac{1}{6}$$
$$=\frac{15:10:5}{30}$$
= 15 : 10 : 5
= 3 : 2 : 1.
2. A, B, C were partners in a firm sharing profits in 3 : 2 : 1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?
Ans. A : B : C
Old Ratio = 3 : 2 : 1
$$=\frac{3}{6}:\frac{2}{6}:\frac{1}{6}$$
$$D\space admits\space for\frac{10}{100}$$
share in the new firm
Net profit of the firm = 1
Remaining share of A, B and C in new firm = 1 – D’s share
$$=1\frac{10}{100}\\=\frac{90}{100}\\=\frac{9}{10}$$
New Ratio = Old Ratio × Remaining Share of old partners
$$A=\frac{3}{6}×\frac{9}{10}\\=\frac{27}{60}\\B=\frac{2}{6}×\frac{9}{10}=\frac{18}{60}\\C=\frac{1}{6}×\frac{9}{10}=\frac{9}{60}$$
A : B : C : D
$$New\space Ratio =\frac{27}{60}:\frac{18}{60}:\frac{9}{60}:\frac{1}{10}=\frac{27:18:9:6}{60}$$
= 9 : 6 : 3 : 2.
3. X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/8 share which he acquired equally for X and Y. Calculate new profit sharing ratio?
Ans.
X : Y
Old Ratio = 5 : 3
$$=\frac{5}{8}:\frac{3}{8}$$
$$Z\space admits\space for\frac{1}{10}share\\X\space &\space Y\space each\space sacrifice =\frac{1}{10}×\frac{1}{2}=\frac{1}{20}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$X=\frac{5}{8}\frac{1}{20}=\frac{252}{40}=\frac{23}{40}\\Y=\frac{3}{8}\frac{1}{20}=\frac{152}{40}=\frac{13}{40}\\Z=\frac{1}{10}×\frac{4}{4}=\frac{4}{40}$$
New Ratio = 23 : 13 : 4
X : Y : Z
4. A, B and C are partners sharing profits in 2 : 2 : 1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio?
Ans. A : B : C
Old Ratio = 2 : 2 : 1
$$=\frac{2}{5}:\frac{2}{5}:\frac{1}{5}\\D\space admits\space for\frac{1}{8}$$
share in new firm, which he takes from A.
Here only A will sacrifice.
New Ratio = Old Ratio – Sacrificing Ratio
$$A=\frac{2}{5}\frac{1}{8}\\=\frac{165}{40}\\=\frac{11}{40}$$
A : B : C : D
$$New\space Ratio=\frac{11}{40}:\frac{2}{5}:\frac{1}{5}:\frac{1}{8}=\frac{11:16:8:5}{40}$$
= 11 : 16 : 8 : 5.
5. P and Q are partners sharing profits in 2 : 1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1 : 2 ratio. Calculate new profit sharing ratio?
Ans. P : Q
Old Ratio = 2 : 1
$$=\frac{2}{3}:\frac{1}{3}\\R\space admits\space for\frac{1}{5}$$
share in the new firm which he takes from
$$\frac{1}{3}$$
from P and
$$\frac{2}{3} from\space Q$$
$$P’s\space sacrifice = R’s\space share ×\frac{1}{3}\\=\frac{1}{5}×\frac{1}{3}=\frac{1}{15}\\Q’s\space sacrifice = R’s\space share ×\frac{2}{3}\\=\frac{1}{5}×\frac{2}{3}=\frac{2}{15}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$P=\frac{2}{3}\frac{1}{15}\\=\frac{101}{15}=\frac{9}{15}\\Q=\frac{1}{3}\frac{2}{15}\\=\frac{52}{15}=\frac{3}{15}$$
P : Q : R
$$New\space Ratio =\frac{9}{15}:\frac{3}{15}:\frac{1}{5}\\=\frac{9:3:3}{15}$$
= 3 : 1 : 1.
6. A, B and C are partners sharing profits in 3 : 2 : 2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2 : 2 : 1 ratio respectively. Calculate new profit sharing ratio?
Ans. A : B : C
Old Ratio = 3 : 2 : 2
$$=\frac{3}{7}:\frac{2}{7}:\frac{2}{7}$$
$$D\space admits\space for\frac{1}{5}$$
share in the new firm which he takes
$$\frac{1}{5}$$
in the ratio 2 : 2 : 1 from A, B and C.
$$A’s\space sacrfice = D’s\space share ×\frac{2}{5}\\=\frac{1}{5}×\frac{2}{5}=\frac{2}{25}\\B’s\space sacrifice = D’s\space share ×\frac{2}{5}\\=\frac{1}{5}×\frac{2}{5}=\frac{2}{25}\\C’s\space sacrifice = D’s\space share ×\frac{1}{5}\\=\frac{1}{5}×\frac{1}{5}=\frac{1}{25}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$A=\frac{3}{7}\frac{2}{25}\\=\frac{7514}{175}=\frac{61}{175}\\B=\frac{2}{7}\frac{2}{25}\\=\frac{5014}{175}=\frac{36}{175}\\C=\frac{2}{7}\frac{1}{25}\\=\frac{507}{175}=\frac{43}{175}$$
7. A and B were partners in a firm sharing profits in 3 : 2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio?
A : B
Old Ratio = 3 : 2
$$=\frac{3}{5}:\frac{2}{5}$$
$$C\space admitted\space for\frac{3}{7}$$
share in the new firm
$$A's\space sacrifice=\frac{2}{7}\\B’s sacrifice=\frac{1}{7}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$A=\frac{3}{5}\frac{2}{7}=\frac{2110}{35}\\=\frac{11}{35}\\B=\frac{2}{5}\frac{1}{7}=\frac{145}{35}\\=\frac{9}{35}$$
A : B : C
$$New\space Ratio =\frac{11}{35}:\frac{9}{35}:\frac{3}{7}\\=\frac{11:9:15}{35}$$
= 11 : 9 : 15.
8. A, B and C were partners in a firm sharing profits in 3 : 3 : 2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7 from A 1/7 from B and 1/7 from C. Calculate new profit sharing ratio?
Ans. A : B : C
Old Ratio = 3 : 3 : 2
$$=\frac{3}{8}:\frac{2}{8}:\frac{2}{8}$$
$$D\space admitted\space for\frac{4}{7}$$
share of profit in new firm.
D’s share = A’s sacrifice + B’s Sacrifice + C’s sacrifice
$$\frac{4}{7}=\frac{2}{7}+\frac{1}{7}+\frac{1}{7}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$A=\frac{3}{8}\frac{2}{7}\\=\frac{2116}{56}=\frac{5}{56}\\B=\frac{3}{8}\frac{2}{7}\\=\frac{218}{56}=\frac{6}{56}\\c=\frac{2}{8}\frac{1}{7}\\=\frac{148}{56}=\frac{6}{56}$$
A : B : C : D
$$New\space Ratio =\frac{5}{56}:\frac{13}{56}:\frac{6}{56}:\frac{4}{7}\\=\frac{5:13:6:32}{56}$$
= 5 : 13 : 6 : 32.
9. Radha and Rukmani are partners in a firm sharing profits in 3 : 2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate new profit sharing ratio?
Ans. Radha : Rukmani
Old Ratio = 3 : 2
$$=\frac{3}{5}:\frac{2}{5}$$
Radha surrendered in favour of Gop
$$=\frac{1}{3}$$
of his share
Rukmani surrendered in favour of Gopi
$$=\frac{1}{4}$$
of his share
Sacrificing Ratio = Old Ratio × Surrender Ratio
$$Radha =\frac{3}{5}×\frac{1}{3}=\frac{1}{5}\\Rukmani =\frac{2}{5}×\frac{1}{4}=\frac{1}{10}$$
New Ratio = Old Ratio – Sacrificing Ratio
$$Radha =\frac{3}{5}\frac{1}{5}=\frac{2}{5}\\Rukmani =\frac{2}{5}\frac{1}{10}=\frac{41}{10}=\frac{3}{10}$$
Gopi’s Share = Radha’s Sacrificing Ratio + Rukmani’s Sacrificing Ratio
$$=\frac{1}{5}+\frac{1}{10}=\frac{2+1}{10}\\=\frac{3}{10}$$
Radha : Rukmani : Gopi
$$New\space Ratio =\frac{2}{5}:\frac{3}{10}:\frac{3}{10}\\=\frac{4:3:3}{10}$$
= 4 : 3 : 3.
10. Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favour of Jain: Gupta surrendered 1/4 of his share in favour of Jain and Khan surrendered 1/5 of his share in favour of Jain. Calculate new profit sharing ratio?
Ans. Old profit sharing ratio of Singh, Gupta and Khan = 3 : 2 : 3. Singh’s sacrifice
$$=\frac{1}{3}×\frac{3}{8}=\frac{1}{8}$$
$$Gupta’s\space sacrifice =\frac{1}{4}×\frac{2}{8}=\frac{1}{16}\\Khan’s\space sacrifice =\frac{1}{5}×\frac{3}{8}=\frac{3}{40}\\Singh’s\space new\space share =\frac{3}{8}\frac{1}{8}=\frac{2}{8}\\Gupta’s\space new\space share =\frac{2}{8}\frac{1}{16}=\frac{3}{16}\\Khan’s\space share =\frac{3}{8}\frac{3}{40}=\frac{12}{40}$$
$$Jain’s\space share =\frac{1}{8}+\frac{1}{16}+\frac{3}{40}=\frac{21}{80}$$
Hence, new share = Singh : Gupta : Khan : Jain,
$$=\frac{2}{8}:\frac{3}{16}:\frac{12}{40}:\frac{21}{80}\\=\frac{20:15:24:21}{80}$$
= 20 : 15 : 24 : 21
11. Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio?
Ans. Sacrifice ratio = Old ratio – New ratio
New profit sharing ratio of Sandeep : Navdeep : C = 4 : 2 : 1
Old profit sharing ratio of Sandeep : Navdeep = 5 : 3
$$Sacrifice\space of\space Sandeep =\frac{5}{7}\frac{4}{7}=\frac{3532}{56}=\frac{3}{56}\\Sacrifice\space of\space Navdeep =\frac{3}{7}\frac{2}{7}=\frac{2116}{56}=\frac{5}{56}\\Hence, Sacrificing\space ratio =\frac{3}{56}:\frac{5}{56}=3:5$$
12. Rao and Swami are partners in a firm sharing profits and losses in the ratio 3:2. They admit Ravi as a new partner for 1/8 share in the profits. The new profit sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio and sacrificing ratio?
Ans.
$$Ravi’s\space share =\frac{1}{8}\\Combined\space share\space of\space Rao\space and\space swami =1\frac{1}{8}=\frac{7}{8}$$
New ratio between Rao and Swami = 4 : 3
$$Rao’s\space new\space share =\frac{7}{8}×\frac{4}{7}=\frac{1}{2}\\Swami’s\space new\space share =\frac{7}{8}×\frac{3}{7}=\frac{3}{8}$$
New profit sharing ratio of Rao : Sw
ami : Ravi
$$=\frac{1}{2}:\frac{3}{8}:\frac{1}{8}\\=\frac{4:3:1}{8}$$
= 4 : 3 : 1
$$Rao’s\space sacrifice =\frac{3}{5}\frac{4}{8}=\frac{2420}{40}=\frac{4}{40}\\Swami’s\space sacrifice =\frac{2}{5}\frac{3}{8}=\frac{1615}{40}=\frac{1}{40}$$
Sacrificing ratio of Rao and Swami = 4 : 1
13. Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows:
Year  Amount (₹) 
2015  40,000 
2016  50,000 
2017  60,000 
2018  50,000 
2019  60,000 
Ans. Goodwill = Average profit × Number of purchase years Average profit of last 5 years
$$=\frac{40,000+50,000+60,000+50,000+60,000}{5}$$
= ₹52,000
Goodwill = 52,000 × 4 = ₹2,08,000
14. Capital employed in a business is ₹2,00,000. The normal rate of return on capital employed is 15%. During the year 2002 the firm earned a profit of ₹48,000. Calculate goodwill on the basis of 3 years purchase of super profit?
Ans. Super profit = Actual profit – Normal profit
Goodwill = Super profit × Number of purchase years
$$Normal\space profit = 2,00,000 ×\frac{15}{100}$$
= ₹30,000
Super profit = 48,000 – 30,000
= ₹18,000 × 3
= ₹54,000.
15. The books of Ram and Bharat showed that the capital employed on 31122016 was ₹5,00,000 and the profits for the last 5 years : 2015 ₹40,000; 2014 ₹50,000; 2013 ₹55,000; 2012 ₹70,000 and 2011 ₹85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?
Ans.
$$Normal\space profit = 5,00,000 ×\frac{10}{100}=₹ 50,000.$$
Average profit of last 5 years
$$=\frac{40,000+50,000+55,000+70,000+85,000}{5}$$
Actual profit = ₹60,000
Super profit = Actual profit – Normal profit
Super profit = 60,000 – 50,000 = ₹ 10,000
Goodwill = Super profit × Number of year purchase
Goodwill = 10,000 × 3 = ₹30,000
16. Rajan and Rajani are partners in a firm. Their capitals were Rajan ` 3,00,000; Rajani ₹ 2,00,000. During the year 2015 the firm earned a profit of ₹ 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%?
Ans. Capital employed = Rajan’s capital + Rajani’s capital
= 3,00,000 + 2,00,000 = ₹ 5,00,000
$$Capitalised\space value = Actual\space profit ×\frac{100}{Normal\space Rate\space of\space Return}\\=1,50,000×\frac{100}{20}$$
= 7,50,000
Goodwill = Capitalised value – Capital employed
= 7,50,000 – 5,00,000
= 2,50,000
17. A business has earned average profits of ₹ 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 ₹ 10,00,000 and its external liabilities
are ₹ 1,80,000. The normal rate of return is 10%?
Ans. Capital employed = Assets – External liabilities = 10,00,000 – ₹1,80,000 = 8,20,000
Estimated capital required to earn average profit
$$= 1,00,000 ×\frac{100}{10}= ₹10,00,000$$
Goodwill = Estimated capital – Actual capital (Capital employed)
= 10,00,000 – 8,20,000 = ₹1,80,000.
18. Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in ₹20,000 as capital and ₹4,000 as his share of goodwill premium. Give the necessary journal entries:
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
(d) When goodwill is paid privately?
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(a)(i)  Cash A/c Dr.  24,000  
To Ghosh’s Capital A/c  20,000  
To Premium for Goodwill
A/c (Being capital ₹20,000 and goodwill ₹4,000 brought by Ghosh) 
4,000  
(ii)  Premium for Goodwill A/c Dr.  4,000  
To Verma’s Capital A/c  2,500  
To Sharma’s Capital A/c (Being Premium distributed among old partners in sharing ratio) 
1,500  
(b) (i)  Cash A/c Dr.  24,000  
To Ghosh’s Capital A/c  20,000  
To Premium for Goodwill A/c (Being capital ₹20,000 and goodwill ₹4,000 brought by Ghosh) 
4,000  
(ii)  Premium for Goodwill A/c Dr.  4,000  
To Verma’s Capital A/c  2,500  
To Sharma’s Capital
A/c (Being premium distributed among old partners in sharing ratio) 
1,500  
(iii)  Verma’s Capital A/c Dr.  2,500  
Sharma’s Capital A/c Dr.  1,500  
To
Cash A/c (Being share of goodwill withdrawn in full) 
4,000  
(c) (i)  Cash A/c Dr.  24,000  
To Ghosh’s Capital A/c  20,000  
To Premium for Goodwill A/c (Being capital ₹20,000 and goodwill ₹4,000 brought by Ghosh) 
4,000  
(ii)  Premium for Goodwill A/c Dr.  4,000  
To Verma’s Capital A/c  2,500  
To Sharma’s Capital A/c
(Being Premium distributed among old partners in sharing ratio) 
1,500  
(iii)  Verma’s Capital A/c Dr.  1,250  
Sharma’s Capital A/c Dr.  750  
To Cash A/c (Being 50% of goodwill with drawn)  2,000  
(d) (i)  Cash A/c Dr.  20,000  
To Ghosh’s Capital A/c (Being capital ₹ 20,000 paid in cash by Ghosh) 
20,000  
(ii)  Note: No entry, treatment or effect will be shown for goodwill paid privately. 
19. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in ₹ 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at ₹ 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(i)  Cash A/c Dr.  35,000  
To C’s Capital A/c  30,000  
To Premium for Goodwill
A/c (Being C admitted and paid capital ₹30,000 and premium ₹5,000 for ¼ share) 
5,000  
(ii)  Premium for Goodwill A/c Dr.  5,000  
To A’s Capital A/c  2,000  
To B’s Capital A/c (Being premium distributed among old partners in sacrificing ratio 2 : 3) 
3,000  
(iii)  A’s Capital A/c Dr.  2,000  
B’s Capital A/c Dr.  3,000  
To Cash A/c (Being share of goodwill withdrawn in cash)  5,000 
Working Note:
Sacrificing ratio= Old Ratio – New Ratio
$$A\space will\space sacrifice =\frac{3}{5}\frac{2}{4}=\frac{1210}{20}=\frac{2}{20}\\B\space will\space sacrifice =\frac{2}{5}\frac{1}{4}=\frac{85}{20}=\frac{3}{20}$$
∴ Sacrificing ratio = 2 : 3
20. Arti and Bharti are partners in a firm sharing profits in 3:2 ratio, They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings ₹50,000 for his capital and ₹10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at ₹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?
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(i)  Arti’s Capital A/c Dr.  3,000  
Bharti’s Capital A/c Dr.  2,000  
To Goodwill (Being goodwill written off among old partners in old ratio) 
5,000  
(ii)  Cash A/c Dr.  60,000  
To Sarthi’s Capital A/c  50,000  
To Premium for goodwill A/c (Being capital ₹ 50,000 and premium goodwill ₹ 10,000 paid by Sarthi) 
10,000  
(iii)  Premium for goodwill A/c Dr.  10,000  
To Arti’s Capital A/c  4,000  
To Bharti’s Capital A/c (Being premium distributed among old partners in sacrificing ratio) 
6,000 
Working Note:
Sacrifing ratio = Old Ratio – New Ratio
$$Arti\space will\space sacrifice =\frac{3}{5}\frac{1210}{20}=\frac{2}{20}\\Bharti\space will\space sacrifice =\frac{2}{5}\frac{1}{4}=\frac{85}{20}=\frac{3}{20}$$
Sacrificing Ratio = 2 : 3
21. X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought ₹20,000 for his capital and ₹7,000 for his 1/8 share of goodwill. Goodwill alredy appears in the books at ₹40,000. Show necessary journal entries in the books of X, Y and Z?
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(i)  Cash A/c Dr.  27,000  
To Z’s Capital A/c  20,000  
To Premium for Goodwill
A/c (Being ₹20,000 capital and ₹7,000 premium for goodwill paid by Z in cash for 1/8 share) 
7,000  
(ii)  Premium for Goodwill A/c Dr.  7,000  
To X’s Capital A/c  4,000  
To Y’s Capital A/c (Being premium for goodwill distributed in sacrificing ratio) 
3,000 
Note : In case new partner does not give his full share of goodwill in cash, the balance will be adjusted from his capital account.
22. Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for 1/4 share in the profits. The new profit sharing ratio agreed was 2:1:1. Christopher brought ₹50,000 for his capital. His share of goodwill was agreed to at ₹15,000. Christopher could bring only ₹10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm?
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(i)  Cash A/c Dr.  60,000  
To Christopher’s Capital A/c  50,000  
To Premium for Goodwill
A/c (Being cash ₹50,000 capital and ₹10,000 as premium for goodwill paid by Christopher) 
10,000  
(ii)  Premium for Goodwill A/c Dr.  10,000  
Christopher’’s Capital A/c Dr.  5,000  6,000  
To Aditya’s Capital A/c  6,000  
To Balan’s Capital A/c (Being premium for goodwill ₹10,000 and remaining ₹5,000 unpaid adjusted from new partner’s capital and distributed in sacrificing ratio) 
9,000 
Working Note:
Sacrificing ratio = Old Ratio – New Ratio
$$Aditya\space will\space sacrifice =\frac{3}{5}\frac{2}{4}=\frac{1210}{20}=\frac{2}{20}\\Balan\space will\space sacrifice =\frac{2}{5}\frac{1}{4}=\frac{85}{20}=\frac{3}{20}$$
∴ Sacrificing Ratio = 2 : 3
Note : In case new partner does not give his full share of goodwill in cash, the balance will be adjusted from his capital account.
23. Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of goodwill premium in cash. The Goodwill of the firm was valued at ₹ 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on Kanwar’s admission.
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(i)  Kanwar’s Current A/c Dr.  20,000  
To Amar’s Capital A/c  15,000  
To Samar
’s Capital A/c (Being ¼ share of goodwill of Kanwar not paid in cash adjusted from his current and distributed in sacrificing ratio among old partners) 
5,000 
Working Note : Goodwill for firm = ₹ 80,000
Kanwar’s profit share ratio =
$$\frac{1}{4}$$
Kanwar’s sharing of goodwill =
$$80,000×\frac{1}{4}= ₹ 20,000.$$
24. Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were ₹50,000 for 2013, ₹60,000 for 2014, ₹90,000 for 2015 and ₹70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal’s admission when:
(a) Goodwill already appears in the books at ₹2,02,500.
(b) Goodwill appears in the books at ₹2,500.
(c) Goodwill appears in the books at ₹2,05,000.
Ans.  Journal Entries  
Date  Particulars  L.F.  Amount(₹)(Dr.)  Amount(₹)(Cr.)  
(a) (i)  Mohan Lal’s Capital A/c Dr.  1,21,500  
Sohan Lal’s Capital A/c Dr.  81,000  
To Goodwill A/c (Being existing goodwill written off among old partners in old ratio) 
2,02,500  
(ii)  Ram Lal’s Capital A/c Dr.  50,625  
To Mohan Lal’s Capital A/c  30,375  
To Sohan Lal’s Capital A/c (Being Ram Lal’s shares of goodwill charged from his a account and distributed between in Mohan Lal and Sohan Lal in sacrificing ratio) 
20,250  
(b) (i)  Mohan Lal’s Capital A/c Dr.  1,500  
Sohan Lal’s Capital A/c Dr.  1,000  
To Goodwill A/c (Being existing goodwill written off among old partners in their old ratio) 
2,500  
(ii)  Ram Lal’s Capital A/c Dr.  50,625  
To Mohan Lal’s Capital A/c  30,375  
To Sohan Lal’s Capital
A/c (Being share of goodwill of new partner not paid in cash adjusted from his capital and distributed among old partners in sacrificing ratio) 
20,250  
(c) (i)  Mohan Lal’s Capital A/c Dr.  1,23,000  
Sohan Lal’s Capital A/c Dr.  82,000  
To
Goodwill A/c (Being existing goodwill written off among old partners in old profit sharing ratio) 
2,05,000  
(ii)  Ram Lal’s Capital A/c Dr.  50,625  
To Mohan Lal’s Capital A/c  30,375  
To Sohan Lal’s Capital A/c (Being share of goodwill of new partner not paid in cash adjusted from his capital and distributed among old partners in sacrificing ratio) 
20,250 
Working Note:
$$Average\space profit =\frac{50,000+60,000+90,000+70,000}{4}=\frac{2,70,000}{4}=₹67,500$$
Goodwill of firm = 67,500 × 3 = ₹ 2,02,500
Share of new partner =
$$2,02,500×\frac{1}{4}=₹50,625$$
25. Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio between Rajesh, Mukesh and Hari is 4 : 3 : 2. On Hari’s admission goodwill of the firm is valued at ₹36,000. Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh and Hari decided not to show goodwill in their balance sheet. Record necessary journal entries for the treatment of goodwill on Hari’s admission.
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹)(Dr.)  Amount (₹)(Cr.)  
(i)  Hari’s Current A/c  Dr.  8,000  
To Rajesh Capital A/c  2,000  
To Mukesh Capital A/c  6,000  
(Being $$\frac{2}{9}$$ share of goodwill of new partner adjusted from his capital and distributed among old partners in their sacrificing ratio) 
Working Note:
Goodwill of firm = 36,000
$$\text{Hari’s share of profit =}\frac{2}{9}\\\text{Hari’s share of goodwill = 36,000}×\frac{2}{9}=8,000$$
Sacrificing ratio = Old ratio – New ratio
$$\text{Rajesh}=\frac{1}{2}\frac{4}{9}=\frac{918}{18}=\frac{1}{18}\\\text{Mukesh}=\frac{1}{2}\frac{3}{9}=\frac{96}{18}=\frac{3}{18}$$
Sacrifice ratio of Rajesh and Mukesh = 1 : 3
26. Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this share of goodwill ₹45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account. Pass the necessary journal entry for the treatment of goodwill?
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.) 
Amount (₹) (Cr.) 

Anthony’s Current A/c  Dr.  45,000  
To Amar’s Capital A/c  11,250  
To Akbar’s Capital A/c  33,750  
Anthony’s Current A/c  Dr.  45,000  
To Amar’s Capital A/c  11,250  
To Akbar’s Capital A/c  33,750  
(Being Anthony’s share of goodwill not paid in cash adjusted among old partners in their sacrificing ratio) 
Note: Sacrificing ratio = Old ratio – New ratio
27. Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1.
Ans.
Balance Sheet of A and B
as on December 31, 2016
Liabilities  Amount (₹)  Assets  Amount (₹)  
Bills Payable  10,000  Cash in Hand  10,000  
Creditors  58,000  Cash at Bank  40,000  
Outstanding Expenses  2,000  Sundry Debtors  60,000  
Capitals  2,000  40,000  
A  1,80,000  Plant  1,00,000  
B  1,50,000  3,30,000  Building  1,50,000 
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 ₹1,00,000 as his capital and ₹60,000 as his share of goodwill for ¼ share in the profits.
(ii) Plant is to be appreciated to ₹1,20,000 and the value of buildings is to be appreciated by 10%.
(iii) Stock is found over valued by ₹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 ₹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.
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹)(Cr.)  
(i)  Revaluation A/c  Dr.  8,000  
To Stock A/c  4,000  
To Provision for Doubtful Debts A/c  3,000  
To Creditor’s A/c  1,000  
(Being decrease in stock provision for doubtful debts created and creditors increased)  
(ii)  Plant A/c  Dr.  20,000  
Buildin’s A/c  Dr.  15,000  
To Revaluation A/c  35,000  
(Being plant and building increased in value)  
(iii)  Revaluation A/c  Dr.  27,000  
(iii)  Revaluation A/c  Dr.  27,000  
To A’s Capital A/c  18,000  
To B’s Capital A/c  9,000  
(Being gain on revaluation distributed among old partners in old ratio)  
(iv)  Cash A/c  Dr.  1,60,000  
To C’s Capital A/c  1,00,000  
To Premium for good will A/c  60,000  
(Being new partner paid capital and his share of goodwill in cash)  
(v)  Premium for Goodwill A/c  Dr.  60,000  
To A’s Capital A/c  40,000  
To B’s Capital A/c  20,000  
(Being premium distributed among old partners is sacrificing ratio) 
Dr.
Revaluation Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹)  
To Stock  4,000  
To Provision for Doubtful Debts  3,000  By Plant  20,000  
To Creditors/Unrecorded  1,000  By Building  15,000  
To Profit on Revaluation  
To A’s Capital  18,000  
To B’s Capital  9,000  27,000  
35,000  35,000 
Dr.
Partners’ Capital Account
Cr.
Particulars  A  B  C  Particulars  A  B  C 
By Balance b/d  1,80,000  1,50,000  
By Gain in  18,000  9,000  
Revaluation  
By Cash  1,00,000  
To Balance c/d  2,38,000  1,79,000  1,00,000  By Premium  40,000  20,000  
for goodwill  
2,38,000  1,79,000  1,00,000  2,38,000  1,79,000  1,00,000 
Balance Sheet
Liabilities  Amount (₹)  Assets  Amount (₹)  
Bills Payable  10,000  Cash in Hand  10,000  
Creditors  58,000  Cash at Bank  2,00,000  
(+) Unrecorded Creditors  1,000  59,000  Sundry Debtors  60,000  
Outstanding Expenses  2,000  (–) Provision for  
Capital  Doubtful Debts  (3,000)  57,000  
A  2,38,000  Stock  40,000  
B  1,79,000  (–) Depreciation  (4,000)  36,000  
C  1,00,000  5,17,000  Plant  1,00,000  
5,17,000  Plant  1,00,000  
(+) Appreciation  20,000  1,20,000  
Building  1,50,000  
(+) Appreciation  15,000  1,65,000  
5,88,000  5,88,000 
28. Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. On 1^{st} April. 2017 they admitted Om as a new partner. On the date of Om’s admission the balance sheet of Leela and Meeta showed a balance of ₹16,000 in general reserve and ₹24,000 (Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of these items on Om’s admission. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹)(Dr.)  Amount (₹)(Cr.)  
(i)  General Reserve A/c  Dr.  16,000  
To Leela’s Capital A/c  10,000  
To Meeta’s Capital A/c  6,000  
(Being general reserve written off among old partners in old profit sharing ratio)  
(ii)  Profit and Loss A/c  Dr.  24,000  
To Leela’s Capital A/c  15,000  
To Meeta’s Capital A/c  9,000  
(Being profit and loss account credit balance written off among old partners in old profit sharing ratio) 
Note: One single compound entry can be passed in place of above two entries.
29. Amit and Vinay are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2017 they admitted Ranjan as a partner. On Ranjan’s admission the profit and loss account of Amit and Vinay showed a debit balance of ₹40,000. Record necessary journal entry for the treatment of the same.
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹)(Dr.)  Amount (₹)(Cr.)  
(i)  Amit’s Capital A/c  Dr.  30,000  
Vinay’s Capital A/c  Dr.  10,000  
To Profit and Loss A/c  40,000  
(Being debit balance of profit and loss account transferred to capital account of old partners) 
30. A and B share profits in the proportions of 3 : 1. Their Balance Sheet on March 31, 2016 was as follows.
Ans.
Balance Sheet of A and B
as on March 31, 2016
Liabilities  Amount (₹)  Assets  Amount (₹) 
Sundry Creditors  41,500  Cash in Bank  26,500 
Reserve Fund  4,000  Bills Receivable  3,000 
Reserve Fund  Debtors  16,000  
Capital Accounts  Stock  20,000  
A  30,000  Fixtures  1,000 
B  16,000  Land and Building  25,000 
91,500  91,500 
On April 1, 2016, C was admitted into partnership on the following terms:
(i) That C pays ₹10,000 as his capital.
(ii) That C pays ₹5,000 for goodwill. Half of this sum is to be withdrawn by A and B.
(iii) That stock and fixtures be reduced by 10% and provision for doubtful debts be created at 5% on Sundry Debtors and Bills Receivable.
(iv) That the value of land and building be appreciated by 20%.
(v) There being a claim against the firm for damages, a liability to the extent of 1,000 should be created.
(vi) An item of ₹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.
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  Reserve Fund A/c  Dr.  4,000  
To A’s Capital A/c  3,000  
To B’s Capital A/c  1,000  
(Being transfer of reserve fund to old partners in their old ratio)  
(ii)  Revaluation A/c  Dr.  4,050  
To Stock A/c  2,000  
To Fixture A/c  100  
To Provision for Doubtful Debts A/c  800  
To Liability for Damages A/c  1,000  
To Bills Receivable A/c  150  
(Being reduction of assets and provisions and liability adjusted)  
(iii)  Land and Building A/c  Dr.  5,000  
Sundry Creditor A/c  Dr.  650  
To Revaluation A/c  5,650  
(Being increase in value of land and building and creditors adjusted)  
(iv)  Revaluation A/c  Dr.  1,600  
To A’s Capital A/c  1,200  
To B’s Capital A/c  400  
(Being profit on revaluation credited to old partners in old ratio)  
(v)  Bank A/c  Dr.  15,000  
To C’s Capital A/c  
To Premium for Goodwill A/c  10,000  
(Being capital ₹10,000 and goodwill ₹5,000 paid in cash by new partner)  5,000  
(vi)  Premium for Goodwill A/c  Dr.  5,000  
To A’s Capital A/c  3,750  
To B’s Capital A/c  1,250  
(Being goodwill distributed among old partners in their sacrificing ratio)  
(vii)  A’s Capital A/c  Dr.  1,875  
B’s Capital A/c  Dr.  625  
To Bank A/c  2,500  
(Being half the amount of goodwill withdrawn in cash) 
Dr.
Revaluation Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹)  
To Stock  2,000  By Land and Building  5,000  
To Fixture  100  By Sundry Creditors  650  
To Provision for Doubtful Debts  800  
To Provision on Bills Receivable  150  
To Liability for Damage  1,000  
To Profit on Revaluation Account  
Transferred to  
A’s Capital  1,200  
B’s Capital  400  1,600  
5,650  5,650 
Balance Sheet of A, B and C
Liabilities  Amount (₹)  Assets  Amount (₹)  
Sundry Creditors  40,850  Cash at Bank  39,000  
Liability for Damage  1,000  Bills Receivable  3,000  
Capital Accounts  (–) Provision  (150)  2,850  
A  36,075  Debtors  16,000  
B  18,025  (–) Provision  (800)  15,200  
C  10,000  64,100  Stock  18,000  
Fixtures  900  
Land and Building  30,000  
1,05,950  1,05,950 
Working Note:
Dr.
Cash at Bank Account
Cr.
Liabilities  Amount (₹)  Assets  Amount (₹) 
To Balance b/d  26,500  By A’s Capital  1,875 
To C’s Capital  10,000  By B’s Capital  625 
To Premium for Goodwill  5,000  By Balance c/d  39,000 
41,500  41,500 
Note : Write off’s and revaluation is to be done before entry of admission otherwise new partner becomes entitled for share in such items.
31. A and B are partners sharing profits and losses in the ratio of 3:1. On 1 April, 2017 they admitted C as a new partner for ¼ share in the profits of the firm. C brings ₹20,000 as for his ¼ 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 ₹50,000 for A and ₹12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio?
Ans. New profit sharing ratio and total capital of firm will be calculated on basis of new partners share in profit and his capital.
$$\text{C's share =}\frac{1}{4}\\\text{Remaining share of A and B =}1\frac{1}{4}\\=\frac{3}{4}\\\text{A's new share =}\frac{3}{4}×\frac{3}{4}=\frac{9}{16}\\\text{B's new share =}\frac{3}{4}×\frac{1}{4}=\frac{3}{16}\\\text{C's new share =}\frac{1}{4}×\frac{4}{4}=\frac{4}{16}\\\text{Thus, new profit sharing ratio =}\\\frac{9}{16}:\frac{3}{16}:\frac{4}{16}= 9 : 3 : 4$$
C's capital = ₹ 20,000
$$\text{His share =}\frac{1}{4}\\\text{Hence, Total capital of firm =}\\20,000×\frac{4}{1}=₹80,000\\\text{and Capital of A =} 80,000×\frac{9}{16}=₹45,000\\B= 80,000×\frac{3}{16}=₹15,000\\\text{C}=80,000×\frac{4}{16}=₹20,000$$
A's capital after all adjustments = ₹50,000 (given in question)
A's capital required = ₹45,000
Therefore, he withdraws = ₹5,000
B's capital after all adjustment = ₹12,000
B's capital required = ₹15,000
Therefore,
he deposits = ₹3,000
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  A’s Capital A/c  Dr.  5,000  
To Cash A/c  5,000  
(Being excess capital amount withdrawn)  
(ii)  Cash A/c  Dr.  3,000  
To B’s Capital A/c  3,000  
(Being deficiency in capital amount deposited in cash) 
32. 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 $$\frac{1}{4}$$ share in the profits of the firm, which he gets $$\frac{1}{8}$$ from Pinky, and $$\frac{1}{16}$$ each from Qmar and Roopa. The total capital of the new firm after Seema’s admission will be ₹2,40,000.Seema is required to bring in cash equal to $$\frac{1}{4}$$ 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 ₹80,000, Qumar ₹30,000 and Roopa ₹20,000. Calculate the capitals of all the partners and record the necessary journal entries for doing adjustments in respect of capitals according to the agreement between the partners?
Ans. New profit sharing ratio of
$$\text{Pinky}=\frac{3}{6}\frac{1}{8}=\frac{123}{24}\\\frac{9}{24}×\frac{2}{2}=\frac{18}{48}\\\text{Qumar =}\frac{2}{6}\frac{1}{16}=\frac{163}{48}=\frac{13}{48}\\\text{Roopa}=\frac{1}{6}\frac{1}{16}=\frac{83}{48}=\frac{5}{48}\\\text{Hence, new ratio}=\frac{18}{48}:\frac{13}{48}:\frac{5}{48}:\frac{1}{4}\\\text{or}\space\frac{18}{48}:\frac{13}{48}:\frac{5}{48}:\frac{12}{48}$$
or 18 : 13 : 5 : 12
Capital = ₹2,40,000
Each partner ’s new capital
$$\text{Pinky = 2,40,000}×\frac{18}{48}=₹90,000\\\text{Qumar = 2,40,000}×\frac{13}{48}=₹65,000\\\text{Roopa = 2,40,000}×\frac{5}{48}=₹25,000\\\text{Seema = 2,40,000}×\frac{12}{48}=₹60,000$$
Adjustment in cash if any
Partner  Actual Capital After All Adjustments  New Capital Required  Difference Excess/Short 
Pinky  ₹80,000  ₹90,000  ₹10,000 short 
Qumar  ₹30,000  ₹65,000  ₹35,000 short 
Roopa  ₹20,000  ₹25,000  ₹5,000 short 
Seema  ₹60,000  ₹60,000 (his share) 
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  Cash A/c  Dr.  1,10,000  
To Pinki’s Capital A/c  10,000  
To Qumar ’s Capital A/c  35,000  
To Roopa’s Capital A/c  5,000  
To Seema’s Capital A/c  60,000  
(Being capital ₹60,000 paid by Seema and adjustment of deficiency paid by existing partners) 
Alternatively
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  Bank A/c  Dr.  60,000  
To Seema’s Capital A/c  60,000  
(Being Seema bring her share of capital for ¼ share of profit)  
(ii)  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  
(Being Amount brought by Pinky, Qumar and Roopa to make capital equal to their poportion) 
33. The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of $$\frac{\textbf{6}}{\textbf{14}}:\frac{\textbf{5}}{\textbf{14}}:\frac{\textbf{3}}{\textbf{14}}\space\textbf{respectively.}$$
Liabilities  Amount (₹)  Assets  Amount (₹)  
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 $$\frac{1}{8}$$ on the following terms:
(a) that Deepak should bring in ₹4,200 as goodwill and ₹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 ₹31,000 ;
(f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be.
Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.
Ans.
Dr.
Revaluation Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹)  
To Furniture  420  By Land and Building  7,000  
To Stock  1,400  
To Reserve for Bad Debt  630  
To Profit on Revaluation Transferred to  
Arun  1,950  
Bablu  1,625  
Chetan  975  4,550  
7,000  7,000 
Dr.
Partners’ Capital Account
Cr.
Particulars  Arun  Bablu  Chetan  Deepak  Particulars  Arun  Bablu  Chetan  Deepak 
To Bank (Balancing Figure) 
1,750  1,625  By Balance b/d  19,000  16,000  8,000  
To Balance c/d  21,000  17,500  10,500  7,000  By Bank  7,000  
By Goodwill  1,800  1,500  900  
By Profit on Revaluation  1,950  1,600  975  
By Bank (Balance Figure)  625  
22,750  19,125  10,500  7,000  22,750  19,125  10,500  7,000  
By Balance b/d  21,100  17,500  10,500  7,000 
Note : Firstly, calculate total capital of firm through Deepak’s capital and his share in profit. Then, calculate capital of each partner as per new profit sharing ratio. Finally, use this capital as balance c/d in capital account and close the accounts. The difference, if any, will be cash withdrawn or deposit by the partner.
Dr.
Cash Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹) 
To Balance b/d  900  By Arun’s Capital  1,750 
To Deepak’s Capital  7,000  By Bablu’s Capital  1,625 
To Goodwill  4,200  By Balance c/d  9,350 
To Chetan’s Capital  625  
12,725  12,725 
Balance Sheet
Liabilities  Amount (₹)  Assets  Amount (₹)  
Creditors  9,000  Land and Buildings  
Bills Payable  3,000  Furniture  3,080  
Capital Accounts  Stock  12,600  
Arun  21,000  Debtors  12,600  
Bablu  17,500  (–) Reserve  (630)  11,970  
Chetan  10,500  Cash in Hand  9,350  
Deepak  7,000  56,000  
68,000  68,000 
$$\text{Deepak’s share =}\frac{1}{8}\\\text{Remaining profit =}1\frac{1}{8}=\frac{7}{8}\\\text{Arun’s new share =}\frac{7}{8}×\frac{6}{14}=\frac{6}{16}\\\text{Bablu’s new share = }\frac{7}{8}×\frac{5}{14}=\frac{5}{16}\\\text{Chetan’s new share =}\frac{7}{8}×\frac{3}{14}=\frac{3}{16}\\\text{Deepak’s share =}\frac{1}{8}×\frac{2}{2}=\frac{2}{16}$$
∴ New profit sharing ratio = 6 : 5 : 3 : 2
$$\text{Total capital of the new firm}\\=7,000×\frac{8}{1}=₹56,000\\\text{Arun’s capital = 56,000}×\frac{6}{16}=₹21,000\\\text{Bablu’s capital = 56,000}×\frac{5}{16}=₹17,500\\\text{Chetan’s capital = 56,000}×\frac{3}{16}=₹10,500$$
Deepak’s capital = ₹7,000
34. 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 ¼ share in profits. Chintan will bring in `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 31 March, 2016. (before Chintan’s admission) was as follows:
Balance Sheet of A and B
as on 31, March, 2016
Liabilities  Amount (₹)  Assets  Amount (₹)  
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  Furniture  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 ₹12,000 as his share of goodwill premium.
(ii) Buildings were valued at ₹45,000 and Machinery at ₹23,000.
(iii) A provision for doubtful debts is to be created @ 6% on debtors.
(iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  General Reserve A/c  Dr.  6,000  
To Azad’s Capital A/c  4,000  
To Babli’s Capital A/c  2,000  
(Being general reserve distributed among old partners in old ratio)  
(ii)  Revaluation A/c  Dr.  2,480  
To Machinery A/c  2,000  
To Provision for Doubtful Debts A/c  480  
(Being decrease in value of machinery and provision created for doubtful debts)  
(iii)  Building A/c  Dr.  5,000  
To Revaluation A/c  5,000  
(Being increase in value of building adjusted)  
(iv)  Revaluation A/c  Dr.  2,520  
To Azad’s Capital A/c  1,680  
To Babli’s Capital A/c  840  
(Being profit on revaluation distributed among old partners)  
(v)  Cash A/c  Dr.  42,000  
To Chintan’s Capital A/c  30,000  
To Premium for Goodwill A/c  12,000  
(Being amount of capital and goodwill brought in by Chintan)  
(vi)  Premium for Goodwill A/c  Dr.  12,000  
To Azad’s Capital A/c  8,000  
To Babli’s Capital A/c  4,000  
(Being premium distributed among old partners in sacrificing ratio)  
(vii)  Azad’s Capital A/c  Dr.  3,680  
To Azad’s Current A/c  3,680  
(Being excess of capital transferred for partners current account)  
(viii)  Babli Capital A/c  Dr.  8,840  
To Babli’s Current A/c  8,840  
(Being excess of capital transferred to partners’ current account) 
Dr.
Revaluation Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹)  
To Machinery  2,000  By Buildings  5,000  
To Provision for Doubtful Debts  480  
To Transfer of Profit on Revaluation A/c  
Azad  1,680  
Babli  840  2,520  
5,000  5,000 
Dr.
Partners’ Capital Account
Cr.
Particulars  Azad  Babli  Chintan  Particulars  Azad  Babli  Chintan 
To Current A/c  3,680  8,840  –  By Balance b/d  50,000  32,000  
To Balance c/d  60,000  30,000  30,000  By General Reserve  4,000  2,000  
By Profit on Revaluation  1,680  840  
By Cash  30,000  
By Premium for goodwill  8,000  4,000  
63,680  38,840  30,000  63,680  38,840  30,000 
Balance Sheet
Liabilities  Amount (₹)  Assets  Amount (₹)  
Sundry Creditors  8,000  Cash in Hand  44,000  
Bills Payable  4,000  Cash at Bank  10,000  
Partners’s Current Account  Sundry Debtors  8,000  
Azad  3,680  (–) Provision for  7,520  
Babli  8,840  12,520  Doubtful Debts  (480)  
Capitals  Stock  10,000  
Azad  60,000  Furniture  5,000  
Babli  30,000  Machinery  23,000  
Capitals  Stock  10,000  
Azad  60,000  Furniture  5,000  
Babli  30,000  Machinery  23,000  
Chintan  30,000  1,20,000  Building  45,000  
1,44,520  1,44,520 
Note : Calculate new profit sharing ratio, Then, calculate full capital of firm on basis of new partners, capital and finally new capital of existing partners.
Capital of Chintan = 30,000
$$\text{His share =}\frac{1}{4}\\\text{Total capital of the firm = 30,000 ×}\frac{4}{1}=1,20,000$$
New profit sharing ratio
$$\text{Chintan’s share =}\frac{1}{4}\\\text{Remaining profit =}1\frac{1}{4}=\frac{3}{4}\\\text{Azad’s new share =}\frac{3}{4}×\frac{2}{3}=\frac{6}{12}\\\text{Babli’s new share =}\frac{3}{4}×\frac{1}{3}=\frac{3}{12}\\\text{Chintan’s share =}\frac{1}{4}×\frac{3}{3}=\frac{3}{12}\\\text{New profit sharing ratio =}\frac{6}{12}:\frac{3}{12}:\frac{3}{12}:2:1:1\\\text{or}\space\text{Azad’s capital = 1,20,000}×\frac{2}{4}=60,000\\\text{Babli’s capital = 1,20,000}×\frac{1}{4}=30,000\\\text{Chintan’s capital = 1,20,000}×\frac{1}{4}=30,000$$
35. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On April 01, 2016 they admitted Vimal for $$\frac{1}{5}$$ share in the profits. The Balance Sheet of Ashish and Dutta as on 31 March, 2016 was as follows:
Balance Sheet of A and B
as on 31 March, 2016
Liabilities  Amount (₹)  Assets  Amount (₹)  
Creditors  15,000  Land and Building  35,000  
Bills & Payable  10,000  Plant  45,000  
Ashish’s 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 ₹15,000.
(ii) The value of plant be increased by ₹10,000.
(iii) Goodwill of the firm be valued at ₹20,000.
(iv) Vimal to bring in capital to the extent of $$\frac{1}{5}\text{th}$$ of the total capital of the new firm.
Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission.
Ans.
Journal Entries
Date  Particulars  L.F.  Amount (₹) (Dr.)  Amount (₹) (Cr.)  
(i)  Land and Building A/c  Dr.  15,000  
Plant A/c  Dr.  10,000  
To Revaluation A/c  25,000  
(Being increased in the value of assets)  
(ii)  Revaluation A/c  Dr.  25,000  
To Ashish’s Capital A/c  15,000  
To Dutta’s Capital A/c  10,000  
(Being profit on revaluation transferred to old partner’s capital)  10,000  
(iii)  Cash A/c  Dr.  36,000  
To Vimal’s Capital A/c  36,000  
(Being capital brought by Vimal)  
(iv)  Vimal’s Current A/c  Dr.  4,000  
To Ashish’s Capital A/c  2,400  
To Dutta’s Capital A/c  1,600  
(Being Vimal’s share to goodwill adjusted through his current account) 
Note: Here, goodwill has been ajdusted through current account because Vimal has not brought his share of goodwill and he is to bring capital is proportion to total capital of the new firm after adjustment.
Dr.
Revaluation Account
Cr.
Particulars  Amount (₹)  Particulars  Amount (₹) 
To Ashish’s Capital  15,000  By Land and Building  15,000 
To Dutta’s Capital (Profit Transfer)  10,000  By Plant  10,000 
25,000  25,000 
Dr.
Partners’ Capital Account
Cr.
Particulars  Ashish  Dutta  Vimal  Particulars  Ashish  Dutta  Vimal 
To Balance c/d  97,400  46,600  36,000  By Balance b/d  80,000  35,000  
By Profit  15,000  10,000  
Transfer from Revaluation  15,000  10,000  
By Cash  36,000  
By Vimal’s  2,400  1,600  
Current A/c  
97,400  46,600  36,000  97,400  46,600  36,000 
Balance Sheet
Liabilities  Amount (₹)  Assets  Amount (₹)  
Creditors  15,000  Land and Building  50,000  
Bills Payable  10,000  Plant  55,000  
Capital Accounts:  Sundry Debtors  22,000  
Ashish  97,400  (–) Provision  (2,000)  20,000 
Dutta  46,600  Stock  35,000  
Vimal  36,000  Cash  41,000  
Vimal’s Current A/c  4,000  
2,05,000  2,05,000 
Calculation of new profit sharing ratio
$$\text{Vimal’s share =}\frac{1}{5}\\\text{Remaining share of the firm =}1\frac{1}{5}=\frac{4}{5}\\\text{Ashish’s share =}\frac{4}{5}×\frac{3}{5}=\frac{12}{25}\\\text{Dutta’s share =}\frac{4}{5}×\frac{2}{5}=\frac{8}{25}\\\text{Vimal’s share =}\frac{1}{5}×\frac{5}{5}=\frac{5}{25}$$
New profit sharing ratio = 12 : 8 : 5
Capital of new firm on the basis of old partners adjusted capital
Total adjusted capital of old partners
Ashish’s capital = 97,400
$$\text{Dutta’s capital =}\frac{46,600}{1,44,000}$$
Remaining share of Ashish and Dutta (old partners) in the new firm = $$=\frac{4}{5}$$
$$\text{Capital of the new firm = 1,44,000}×\frac{5}{4}=₹1,80,000\\\text{Vimal’s share in the capital of the new firm }\\{= 1,80,000 }×\frac{1}{5}=₹36,000$$
Note : Goodwill has been adjusted through current account because Vimal has not brought his share of goodwill.
Sacrificing ratio = Old ratio – New ratio