2nd Puc Accountancy Chapter 3 Reconstitution Of A Partnership Firm – Admission Of A Partner Part -1 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ – 3 ನೋಟ್ಸ್

ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಪಾಠ – 3 ನೋಟ್ಸ್ 2nd Puc Accountancy Chapter 3 Reconstitution Of A Partnership Firm Admission Of A Partner Notes Question Answer Mcq Pdf Download 2024 Chapter 3 Accountancy Class 12 Solutions Class 12 Accountancy Chapter 3 Practical Questions Accountancy Class 12 Chapter 3 Pdf 12th Accountancy 3rd Chapter Solutions Reconstitution Of A Partnership Firm – Admission Of A Partner Numerical Questions Reconstitution Of Partnership Firm – Admission Of A Partner Class 12 Notes

2nd Puc Accountancy Chapter 3

2nd Puc Accountancy Chapter 3

Multiple Choice Questions 

Q1. When the new partner pays for goodwill in cash, the amount should be debited in the firm’s book to _____.

(a) Cash account

(b) Capital account of a new partner

(c) Goodwill account

(d) None of the above

Answer: (a) Cash account

Q2. At the time of admission of a new partner, undistributed profits appearing in the balance sheet of the old firm is transferred to the capital account of _____.

(a) Old partners in new profit-sharing ratio

(b) All the partners in the new profit-sharing ratio

(c) Old partners in the old profit-sharing ratio

(d) None of the above

Answer: (c) Old partners in the old profit-sharing ratio

Q3. A general reserve treated at the time of admission of a new partner, it is transferred to ______.

(a) Old Partner’s capital account

(b) Profit and loss adjustment account

(c) Realisation account

(d) Revaluation account

Answer: (a) Old Partner’s capital account

Q4. On reconstitution of a partnership firm, recording of an unrecorded liability will result in ______.

(a) Loss to the existing partners

(b) Neither gain nor loss to the existing partners

(c) Gain to the existing partners

(d) None of the above

Answer: (a) Loss to the existing partners

Q5. The balance of the revaluation account is transferred to the old partner’s capital accounts in their _____.

(a) New profit-sharing ratio

(b) Equal ratio

(c) Old profit-sharing ratio

(d) None of the above

Answer: (c) Old profit-sharing ratio

Q6. Recording of an unrecorded asset on the reconstitution of a partnership firm will be ______.

(a) A loss to the existing partners

(b) Neither a gain nor a loss to the existing partners

(c) A gain to the existing partners

(d) None of the above

Answer: (c) A gain to the existing partners

Q7. What is the formula to calculate the gaining ratio?

(a) Old Ratio – sacrificing ratio

(b) New Ratio – sacrificing ratio

(c) Old Ratio – new ratio

(d) New Ratio – old ratio

Answer: (d) New Ratio – old ratio

Q8. At the time of an admission of a new partner, the general reserve that is appearing in the old balance sheet is transferred to _____.

(a) New partners’ capital accounts

(b) Old partner’s capital accounts

(c) All partner’s capital accounts

(d) None of the above

Answer: (b) Old partner’s capital accounts

Q9. The increase in the value of assets on reconstitution of the partnership firm results in ______.

(a) A loss to the existing partners

(b) Neither a gain nor a loss to the existing partners

(c) A gain to the existing partners

(d) None of the above

Answer: (c) A gain to the existing partners

Q10. Under the capitalisation method, goodwill is calculated by _____.

(a) Super profit x number of years’ purchase

(b) Total of the discounted value of expected future benefits

(c) Super profit – (r) expected rate of return

(d) Average profit x number of years’ purchase

Answer: (c) Super profit – (r) expected rate of return

Short Question Answer

Q1. Why is there a need for the revaluation of Liabilities and Assets on the admission of a partner?

A: When a new partner gets admitted to the firm, there is a need to revalue the Liabilities and Assets of the firm for determining the true value on that day. Revaluation is helpful as the value of Liabilities and Assets may increase or decrease and as such their values in the old balance sheet may be not justified, also some assets or liabilities may not be recorded at all. Hence, for recording the changes in market value for the Liabilities and Assets, a revaluation account needed to be prepared and the associated profits or losses need to be distributed between the existing partners of the firm.

Q2. If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with the existing amount of goodwill?

A: The goodwill that exists in the firms before the arrival of a new partner must be written off between the existing partners in the ratio of their profit sharing as previously decided. The following journal entry needs to be passed.

Old Partner’s Capital A/c

Dr.

To Goodwill A/c

(Being goodwill written off in the old ratio between existing partners) 

Q3. On what occasions sacrificing ratio is used?

A: Sacrificing ratio needs to be used in these occasions:

1. When it is mutually decided by the partners of the firm to change the profit-sharing ratio among the partners.

2. A new partner is introduced in the firm and accordingly the sum contributed by the new partner is distributed as goodwill based on the sacrificing ratio of existing partners.

Q4. Identify various matters that need adjustments at the time of admission of a new partner.

A: The following matters need adjustment when adding a new partner

1. Capital Adjustment among partners

2. Revised calculation of profit sharing ratio

3. Evaluating and adjusting the goodwill of partners who are sacrificing their share

4. Accumulated profits, reserves, and losses should be distributed to old partners as per the old ratio that was agreed upon.

5. Revaluation of the Lia

Q5. Why is it necessary to ascertain a new profit-sharing ratio even for old partners when a new partner is admitted?

A: At the time of admission of a new partner, the existing partners sacrifice their present profit-sharing ratio to make way for a share in profit sharing to the new partner which results in reducing their profit. Therefore it is essential to determine the new profit-sharing ratio for old partners on the occasion of adding a new partner as it creates a more justified share of profit.

Q6. What is sacrificing ratio? Why is it calculated?

A: The portion of the profit-sharing ratio that is sacrificed by current partners when a new partner joins the firm is called as sacrificing ratio. It is calculated as the difference between old profit-sharing ratio and the new profit-sharing ratio.

Sacrificing ratio = Old profit sharing ratio – New profit sharing ratio

It is compulsory to determine this ratio as the new partner has to reimburse the existing partner for making the sacrifice of profit. It is paid to them as goodwill.

Karnataka 2nd PUC Accountancy Chapter 3 Reconstruction of a Partnership Firm – Admission of a Partner Notes

Long Question And Practical Problems With Solutions

Q1. What is goodwill? What are the factors that affect goodwill?

A: Goodwill refers to the intangible asset that represents the firms value and reputation and the brand name that it carries in the market. Goodwill is earned by a firm from the work it does which helps earn people trust by meeting all customer demands both in quality and quantity. Having a positive goodwill is very much helpful for a firm to earn extraordinary profits in comparison to its competitors. It also ensures profits that keep coming in the future and helps in retaining old customers.

Factors affecting firms’ goodwill are:

1. Product Quality: A firm which is constantly delivering the best product for its customers will have a greater goodwill.

2. Location: A central location makes it easy to reach and attracts more footfalls which leads to higher sales and more goodwill.

3. Management: Cost efficiency and higher productivity can be achieved by having an efficient management in place, also it ensures quality products at less price which increases goodwill.

4. Market Structure: A firm will enjoy more benefits of goodwill if the market is monopolistic in nature and there are no substitutes, it will add more goodwill to the firm.

5. Other Advantages: A firm that is getting benefits such as continuous supply of fuel, power and raw materials and uses it to produce quality goods enjoys a higher goodwill.

Q2. Do you advise that Liabilities and Assets 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?

It is logical to revalue Liabilities and Assets when a new partner gets admitted in the firm, as it is helpful in determining the true value of them on that day. Revaluation is helpful as the value of Liabilities and Assets may increase or decrease and as such their values in existing balance sheet may be not justified, also some assets or liabilities may not be recorded at all. Hence, for recording the changes in market value for the Liabilities and Assets, a revaluation account is needed to be prepared and the associated profits or losses needs to be distributed between the existing partners of firm.

Following journal entries are added to the account on the date a new partner is admitted in a firm.

i. When asset value increases:

Assets A/c Dr.

To Revaluation A/c

(For increase in asset value) 

ii) When asset value decreases:

Revaluation A/c	Dr.
To Asset A/c
(For Decrease in asset value)

iii) When Liabilities increase:

Revaluation A/c	Dr.
To Liabilities A/c
(For increase in liabilities value)

iv) When liabilities decrease:

Liability A/c	Dr.
To Revaluation A/c
(For decrease in liabilities value)

v) To record assets that are unrecorded:

Unrecorded Assets A/c	Dr.
To Revaluation A/c
(Recording unrecorded assets)

vi) To record liabilities that are unrecorded :

Revaluation A/c	Dr.
To Unrecorded Liabilities A/c
(To record unrecorded liabilities)

vii) Transferring credit balance of Revaluation account:

Revaluation	Dr.
To Old Partner’s Capital A/c
(Transfer of profit earned from Revaluation to Old Partners as per existing profit sharing ratio)

vii) Transferring debit balance of Revaluation account:

Old Partner’s Capital A/c	Dr.
To Revaluation A/c
(Transfer of loss on revaluation to Old Partners as per existing profit sharing ratio)

Q3. 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.

When a new partner is admitted to the firm, the capital of all partners must be determined using new profit-sharing ratio. In such cases new capital of each partner is determined and is dependent on the following instances:

1. New partner’s capital is given

2. Firm’s total capital is given

1) New partner’s capital is given

It involves the following steps

1. Calculation of total capital of firm based on the new partners’ capital

2. Divide total capital of the firm by individual share of partner’s profits to determine each partner’s new capital

3. After posting adjustments determine each partner’s capital balance

4. The capital determined previously is written in Partners Capital account on the credit side

5. Calculation of surplus or deficit. If new capital is more than the old share, then it needs to be contributed by old partners and is termed deficit and if new capital is less than old capital, it is called surplus and the difference is paid to old partners.

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

A & B are partners in business who share profits and losses equally. They agree to admit C for 
share in profit. C brings ₹ 1, 00,000 as capital. A and B have old capital of ₹ 80,000 and ₹ 60,000 respectively, at the time admission of C.

Step 3:

	A	B
New Capital	100,000	100,000
Less: Existing Capital	(80,000)	(60,000)
Withdrawal (deposit)	(20,000)	(40,000)

So both A and B need to pay 20,000 and 40,000 more as share for their new capital.

2) When new firms’ total capital is known:

When new partner’s capital is not mentioned, then new capital is determined based on the total capital of the firm on a proportionate basis. The amount that is determined has to be brought in by the new partner as capital. Following steps are taken to determine the new partners’ capital:

1. Finding the total old capital of the existing partners after performing all adjustments.

2. Finding total capital of the new firm by multiplying old capital of existing partners with the reciprocal of old partners total share.

3). The new capital of each partner is determined on the basis of total capital calculated which is multiplying new profit ratio with the total capital, individually for all partners. Here is an example to help understand the concept.

Ram and Shyam are partners in a firm sharing profit and loss equally. They agree to admit Anil for 1/3^rd share in profit and decided to share future profit and loss equally. X’s capital is ₹ 1, 00,000 and Y’s capital is ₹ 50,000. Z brings sufficient capital for his share in profit. 

1. Old Capital= ₹ 1, 00,000 + 50,000 = 1, 50,000

2. Calculation of total capital

3. New Partners Capital

Q4. Explain various methods of valuation of goodwill.

There are four different methods of goodwill valuation:

1. Average Profit Method: In this method, the calculation of goodwill is done based on the average profits of the past years. It can be calculated as

Goodwill = Average Profit × No. of Years Purchase

Here, the number of years of purchase signifies the years till which the firm expects profits to generate in the same way as current period

Following steps are involved in this method

1. Determine total profit of past years

2. Add all losses which are abnormal in nature such as theft, fire etc.

3. Add all normal income, if not done previously

4. Deduct all incomes that are not obtained from business, and all such abnormal incomes for e.g winning a lottery

5. Deduct all normal expenses, if not deducted previously

6. Calculate the average profit, by dividing total profit determined in the previous step

7. Multiply the average profit hence obtained to the number of year’s purchases in order to determine goodwill.

Example:

Last 5 years profits are 3,00,000,  9,00,000,   (6,00,000),  15,00,000,  24,00,000.

Goodwill calculated as:

Goodwill = 9, 00,000 × 4 = 36, 00,000

2. Weight Average Method: In this method, weights are allocated to each year’s profit with the highest weight given to recent year’s profit and lower weights marked for past years profits. The product of the profits and weights are added and divided by the total weight to determine weighted average profits. It is a modified version of Average Profit Method. The following formulae is used.

The following steps are involved:

1. Assign highest weightage to recent year’s profit and lowest weightage to past years profits.

2. Multiply weights with the profits corresponding to each year

3. Determine product total

4. Divide the product total with total of weightage to find Weighted Average Profit

5. Multiply the weighted average profit with number of years purchase

For example:

Last 5 years profits are ₹ 3,00,000,   ₹ 9,00,000,   ₹ (6,00,000),   ₹ 15,00,000,   ₹ 24,00,000.

Goodwill calculated as:      

Profit/Loss₹	Weights	Product₹
3,00,000	1	3,00,000 × 1 = 3,00,000
9,00,000	2	9,00,000 × 2 = 18,00,000
(6,00,000)	3	(6,00,000) × 3 = (18,00,000)
15,00,000	4	15,00,000 × 4  = 60,00,000
24,00,000	5	24,00,000× 5  = 1,20,00,000
Total	15	₹ 1,83,00,000

3. Super Profit Method:  In this method, goodwill is determined on excess profit earned by a firm as compared to profit earned by rivals in the same industry. The excess profit earned over normal profit is called as Super Normal Profit

Following steps are involved:

1. Calculate the average profit

2. Calculating average capital engaged

3. Calculating normal profit

4. Calculation of Super Normal Profit using the formulae: Super Normal Profit = Average Profit – Normal Profit

5. Multiply super normal profit with number of years purchase to determine goodwill.

4. Capitalisation Method: Goodwill is determined by two ways as follows:

a) By Average Profit capitalisation. b) By Super Profit capitalisation.

 a) By Average Profit capitalisation

Following steps are involved:

1. Average profit is calculated

2. Calculating average profits capitalised value using the formulae

3. Determine Actual Capital Employed

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

Goodwill = Capitalised Average Profit – Actual Capital Employed

b) By Super Profit capitalisation.

Following steps are involved:

1. Capital Employed for calculation

2. Calculation of Normal profit

3. Calculation of average profit

4. Calculating Super Normal Profit:

Super Normal Profit = Average Profit – Normal Profit

Step 5: Goodwill calculation by the following formula: 

Q5. Explain various methods for the treatment of goodwill on the admission of a new partner?

Goodwill is treated in the following ways on introduction of a new partner:

1. Premium Method

2. Revaluation Method

When a new partner pays the share of goodwill in the form of cash, it is called as premium method. There can be two scenarios:

1. New partners pays directly to old partners

2. Partner brings goodwill in form of cash and it is retained in the business.

The corresponding entries are:

(i) When goodwill brought in cash by new partner

Cash/Bank A/c Dr.

To Premium for Goodwill A/c

(Amount of goodwill brought in by new partner)

(ii)When goodwill is retained by business:

Premium for Goodwill A/c Dr

To Sacrificing Partners’ Capital A/c

(Goodwill brought by new partner distributed among old partners as per the sharing ratio)

Revaluation Method: Situations when new partner is unable to bring goodwill in form of cash

New Partner’s Capital A/c Dr. (Goodwill amount not brought by new partner)

To Old Partners’ Capital A/c

(Goodwill of new partner distributed to old partners as per their sharing ratio)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed. 

Q6. Explain how will you deal with goodwill when a new partner is not in a position to bring his share of goodwill in cash.

The situation in which a new partner is unable to bring his share of goodwill in cash, the goodwill account gets adjusted through Old Partners account. New partners’ capital account is debited with the share of goodwill and the same gets credited to Old Partner’s account.

New Partner’s Capital A/c	Dr.
To Old Partners’ Capital A/c
(New Partner account debited)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed. 

Q7. How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?

A new partner is not entitled to bear the losses or enjoy the profits of a previous business. Hence, when a new partner is added to the firm, the accumulated profits or losses, reserves needs to be distributed to current partners (partners of old firm) in their profit sharing ratio.

Treatment of accumulated losses, profits and reserve

Profit and Loss A/C Dr.

General Reserve A/C Dr.

Contingency Reserve A/C Dr.

When losses accumulate over a period.

For Profits and losses

Deferred Advertising expense Dr.

(Losses accumulated shared to old partners as per sharing ratio

Q8. A and B were partners in the firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with a 1/6 share in the profits. Calculate the new profit-sharing ratio.

The solution is as follows:

Q9. A, B, and C were partners in firm sharing profits in a 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit-sharing ratio.

The solution is as follows:

D admits for 
 share in the new firm

Let new firm profit = 1

Remaining share of A, B and C in new firm = 1 − D’s share

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

Q10. X and Y are partners sharing profits in a 5:3 ratio admitted Z for 1/10 share which he acquired equally for X and Y. Calculate the new profit-sharing ratio.

The solution is as follows:

Q11. A, B, and C are partners sharing profits in the 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate the new profit-sharing ratio.

The solution for this question is as follows:

Q12. P and Q are partners sharing profits in a 2:1 ratio. They admitted R into the partnership giving him 1/5 share which he acquired from P and Q in a 1:2 ratio. Calculate the new profit-sharing ratio.

The solution for this question is as follows:

Q13. A, B, and C are partners sharing profits in a 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B, and C in a 2:2:1 ratio respectively. Calculate the new profit-sharing ratio.

The solution for this question is as follows:

New Ratio = Old Ratio − Sacrificing Ratio

Q14. A and B were partners in the firm sharing profits in the 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate the new profit-sharing ratio.

The solution for this question is as follows:

New Ratio = Old Ratio − Sacrificing Ratio

Q15. A, B, and C were partners in firm sharing profits in the 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 the new profit-sharing ratio.

The solution for this question is as follows:

New Ratio = Old Ratio − Sacrificing Ratio

Q16. Radha and Rukmani are partners in the firm sharing profits in the 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favor of Gopi and Rukmani surrendered 1/4 of her share in favor of Gopi. Calculate the new profit-sharing ratio.

Q17. Singh, Gupta, and Khan are partners in firm sharing profits in the 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favor of Jain: Gupta surrendered 1/4 of his share in favor of Jain and Khan surrendered 1/5 in favour of Jain. Calculate the new profit-sharing ratio.

The solution for this question is as follows:

Q18. Sandeep and Navdeep are partners in the firm sharing profits in the 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.

The solution for this question is as follows

Sacrificing Ratio = Old Ratio − New Ratio

Q19. Rao and Swami are partners in the firm sharing profits and losses in a 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit-sharing ratio between Rao and Swami is 4:3. Calculate the new profit-sharing ratio and sacrificing ratio.

The solution for this question is as follows

New Ratio = Combined Share of Rao and Swami × Proportion of Rao and Swami in the combined share

4:3:1

Sacrificing Ratio = Old Ratio − New Ratio

Q20. 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:

	₹
2013	40,000
2014	50,000
2015	60,000
2016	50,000
2017	60,000

Year	Profit
2013	40,000
2014	50,000
2015	60,000
2016	50,000
2017	60,000
Sum of 5 years profit	2,60,000

Average Profit =  = 52,000

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

Q21. Capital employed in a business is ₹. 2, 00,000. The normal rate of return on capital employed is 15%. During the year 2015, the firm earned a profit of ₹. 48,000. Calculate goodwill on the basis of 3 years’ purchase of super profit.

The solution for this question is as follows

Q22. The books of Ram and Bharat showed that the capital employed on 31.12.2016 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%.

The solution for this question is as follows:

Year	Profit
2015	40,000
2014	50,000
2013	55,000
2012	70,000
2011	85,000
Sum of 5 years profit	3,00,000

Average Super Profit = Average Actual Profit – Normal Profit

= 60,000 – 50,000

= ₹ 10,000

Goodwill = Average Super Profit × Number of year purchase

= 10,000 × 3

= ₹ 30,000

Q23. 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 assuming that the normal rate of return is 20%.

The solution for this question is as follows

Rajan’s Capital	3,00,000
Rajni’s Capital	2,00,000
Total Capital Employed	5,00,000

Normal Rate of Return = 20%

Alternative Method

Normal Profit = Capital Employed × 

= 5,00,000 ×

= ₹ 1,00,000

Super profit = Actual Profit − Normal Profit

= 1, 50,000 − 1, 00,000

= ₹ 50,000

Goodwill = Super Profit × 

= 50,000 ×

= ₹ 2, 50,000

Q24. A business has earned average profits of ₹. 1, 00,000 during the last few years. Find out the value of goodwill by capitalization 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%.

The solution for this question is as follows

Capital Employed = Assets − External Liabilities

= 10, 00,000 − 1, 80,000

= Rs 8, 20,000

Normal Profit = Capital Employed × 

= Rs 82,000

Super Profit = Actual Profit − Normal Profit

= 1, 00,000 − 82,000

= Rs 18,000

Goodwill = Super Profit × 

= Rs 1, 80,000

Alternative Method

Q25. 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.

The solution for this question is as follows

Journal Entries

S.No.	Particulars	L.F	Debit Amount ₹	Credit Amount ₹
Case (a)	Cash A/c Dr. To Ghosh’s Capital A/c To Premium for Goodwill A/c (Capital and Goodwill his share brought by Ghosh)		24,000	20,000 4,000
	Premium for Godwill A/c Dr. To Verma’s Capital A/c To Sharma’s Capital A/c (Goodwill brought by Ghosh credited to Old Partners in Sacrificing ratio)		4,000	2,500 1,500
Case (b)	Cash A/c Dr. To Ghosh Capital A/c To Premium for Goodwill A/c (Capital and Goodwill brought by Ghosh for (1/5)share of profit)		24,000	20,000 4,000
	Premium for Godwill A/c Dr. To Verma’s Capital A/c To Sharma’s Capital A/c (Goodwill brought by Ghosh credited to Old Partners in Sacrificing ratio)		4,000	2,500 1,500
	Verma’s Capital A/c Dr. Sharma’s Capital A/c Dr. To Cash A/c (Amount of Premium for Goodwill withdrawn by Old Partners)		2,500 1,500	4,000
Case (c)	Cash A/c Dr. To Ghosh’s Capital A/c To Premium for Goodwill A/c (Capital and Goodwill brought by Ghosh for (1/5)share of profit)		24,000	20,000 4,000
	Premium for Godwill A/c Dr. To Verma’s Capital A/c To Sharma’s Capital A/c (Premium for Goodwill credited to Old Partner’sCaptial Account in sacrificing ratio)		4,000	2,500 1,500
	Verma’s Capital A/c Dr. Sharma’s Capital A/c Dr. To Cash A/c (Half of the amount of premium for goodwill  withdrawn by Old partners)		1,250 750	2,000
Case (d)	No entry: Goodwill was not brought into firm

Q26. A and B are partners in the 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.

The solution to this question is as follows

Journal Entries

Date	Particulars	L.F	Debit Amount ₹	Credit Amount ₹
	Cash A/c Dr		35,000
	To C’s Capital A/c			30,000
	To Premium for Goodwill A/c			5,000
	(Amount of Capital and Share of Goodwill brought by C)
	Premium for Goodwill A/c Dr		5,000
	To A’s Capital A/c			2,000
	To B’s Capital A/c (C’s Share of Goodwill credited to A and B in 2:3,Sacrificing Ratio)			3,000
	A’s Capital A/c Dr		2,000
	B’s Capital A/c Dr		3,000
	To Cash A/c			5,000
	(Share of Goodwill withdrawn by Old  Partners)

 Sacrificing Ratio = Old Ratio − New Ratio

Goodwill of the firm = Rs 20,000

C’s share of Goodwill = 

A will receive 

Or

B will receive 

Or 

Q27. Arti and Bharti are partners in the firm sharing profits in a 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.

 The solution for this question is as follows

Journal Entries

Date	Particulars	L.F	Debit Amount ₹	Credit Amount ₹
	Arti’s Capital A/c Dr.		3,000
	Bharti’s Capital A/c Dr.		2,000
	To Goodwill A/c			5,000
	(Goodwill written off)
	Cash A/c Dr.		60,000
	To Sarthi’s Capital A/c			50,000
	To Premium for Goodwill A/c			10,000
	(Amount of capital and share of goodwill brought by Sarthi)
	Premium for Goodwill A/c Dr.		10,000
	To Arti’s Capital A/c			4,000
	To Bharti’s Capital A/c			6,000
	(Premium for Goodwill credited Arti’s Capital Account)

Sarthi admitted for 
 share in new firm.

Sacrificing Ratio = Old Ratio − New Ratio

Arti will receive 

Bharti will receive 

Q28. 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.

The solution for this question is as follows:

Year	Profit
2013	50,000
2014	60,000
2015	90,000
2016	70,000
Sum of 4 years profit	2,70,000

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

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

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

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

Mohan Lal will get = Ram Lal’s Share of Goodwill × (3/5) = 50,625 × (3/5) = 10,125 × 3 = ₹ 30,375

Sohan Lal will = Ramlal Share of Goodwill × (1/5) = 50,625 × (1/5) ₌ ₹ 10,125 × 2 = ₹ 20,250

Case (a)

Journal Entries

Date	Particulars	L.F.	Debit Amount ₹	Credit Amount ₹
	Mohan Lal’s Capital A/c Dr.		1,21,500
	Sohan Lal’s Capital A/c Dr.		81,000
	To Goodwill A/c			2,02,500
	(Goodwill appeared in the old firm written off)
	Ramlal’s Capital A/c Dr.		50,625
	To Mohan Lal’s Capital A/c			30,375
	To Sohan Lal’s Capital A/c			20,250
	(Ram Lal’s Shares of Goodwill charged  from his accountant Distributed between  in Mohan Lal and Sohan Lal in sacrificing Ratio)

Case (b)

Journal Entries

Date	Particulars	L.F.	Debit Amount₹	Credit Amount ₹
	Mohan Lal’s Capital A/c Dr.		1,500
	Sohan Lal’s Capital A/c Dr.		1,000
	To Goodwill A/c			2,500
	(Goodwill already appeared in the books of firms written off in old ratio)
	Ramlal’s Capital A/c Dr	Dr.	50,625
	To Mohan Lal’s Capital A/c			30,375
	To Sohan Lal’s Capital A/c			20,250
	(Ram Lal’s Shares of Goodwill charged  from hiscapital by Mohan Lal and Sohan Lal in sacrificing ratio)

Case (c)

Journal Entries

Date	Particulars	L.F.	Debit Amount₹	Credit Amount ₹
	Mohan Lal’s Capital A/c Dr.	Dr.	1,23,000
	Sohan Lal’s Capital A/c Dr.	Dr.	82,000
	To Ram Lal’s Capital A/c			2,05,000
	(Goodwill already appeared in the books of firm written off in Old Ratio)
	Ramlal’s Capital A/c Dr.	Dr.	50,625	50,625
	To Mohan Lal’s Capital A/c			30,375
	To Sohan Lal’s Capital A/c			20,250
	(Ram Lal’s Shares of Goodwill charged  from his capital by Mohan Lal and Sohan Lal in sacrificing ratio)

Q29. 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 the goodwill premium in cash. Rajesh, Mukesh, and Hari decided not to show goodwill on their balance sheet. Record necessary journal entries for the treatment of goodwill on Hari’s admission.

The solution for this question is as follows:

Books of Rajesh, Mukesh and HariJournal 

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

Working Notes:

1) Goodwill of a firm = 36,000

Hari’s share in goodwill

= Goodwill of firm × admitting Partner Share

2) Sacrificing Ratio = Old Ratio − New Ratio

Sacrificing Ratio between Rajesh and Mukesh 1:3.

Q30. Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1.

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

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

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

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

The solution for this question is as follows

Books of A, B and CJournal 

Date	Particulars	L.F.	Amount₹	Amount₹
2016
Dec 31	Bank A/c Dr.		1,60,000
	To C’s Capital A/c			1,00,000
	To Premium for Goodwill A/c			60,000
	(Capital and premium for goodwill brought by C for 1/4 th share)
	Premium for Goodwill A/c Dr.	.	60,000
	To A’s Capital A/c			40,000
	To B’s Capital A/c			20,000
	(Premium for Goodwill brought by C transferred to old partners’ capital account in their sacrificing ratio, 3:1)
	Plant A/c Dr.		20,000
	Building A/c Dr.		15,000
	To Revaluation A/c			35,000
	(Value of assets increased)
	Revaluation A/c Dr.		8,000
	To Stock			4,000
	To Provision for Doubtful Debts A/c			3,000
	To Creditors A/c (Unrecorded)			1,000
	(Liabilities and Assets revalued)
	Revaluation A/c Dr.	Dr.	27,000
	To A’s Capital A/c			18,000
	To B’s Capital A/c			9,000
	(Profit on revaluation transferred to old partners’ capital account)

Revaluation Account 

Dr. Cr.

Particulars	Amount₹	Particulars	Amount₹
Stock	4,000	Plant	20,000
Provision for Doubtful Debts	3,000	Building	15,000
Creditors (Unrecorded)	1,000
Profit transferred to
A’s Capital 18,000
B’s Capital 9,000	27,000
	35,000		35,000

Partners’ Capital Account 

Dr. Cr.

Particulars	A	B	C	Particulars	A	B	C
Balance c/d	2,38,000	1,79,000	1,00,000	Balance b/d	1,80,000	1,50,000
				Bank			1,00,000
				Premium for Goodwill	40,000	20,000
				Revaluation	18,000	9,000
	2,38,000	1,79,000	1,00,000		2,38,000	1,79,000	1,00,000

Balance Sheet as on December 31, 2016 

Liabilities	Amount(₹)	Assets	Amount(₹)
Bills Payable	10,000	Cash in Hand	10,000
Creditors	59,000	Cash at Bank	2,00,000
Outstanding Expenses	2,000	Sundry Debtors 60,000
Capital:		Less: Provision for Doubtful Debt 3,000	57,000
A 2,38,000		Stock	36,000
B 1,79,000		Plant	1,20,000
C 1,00,000	5,17,000	Building	1,65,000
	5,88,000		5,88,000

Working Note:

1) Sacrificing ratio = Old Ratio − New Ratio

Sacrificing ratio between A and B = 2:1.

Q31. Leela and Meeta were partners in the firm sharing profits and losses in the ratio of 5:3. On Jan. 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 the 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.

The solution for this question is as follows

Books of Leela, Meeta and Om Journal 

Date	Particulars	L.F.	Amount₹	Amount₹
2017
Jan 1	General Reserve A/c Dr		16,000
	Profit and Loss A/c Dr		24,000
	To Leela’s Capital A/c			25,000
	To Meeta’s Capital A/c			15,000
	(General reserve and balance in Profit and Loss credited to old partners capital account in their old ratio, 5:3)

Q32. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on Jan. 01, 2016 was as follows:

Balance Sheet of A and B as on 1.1.2016

Liabilities	Amount₹	Assets	Amount₹
Creditors	15,000	Land & Building	35,000
Bills Payable	10,000	Plant	45,000
Ashish Capital	80,000	Debtors 22,000
Dutta’s Capital	35,000	Less: Provision 2,000	20,000
		Stock	35,000
		Cash	5,000
	1,40,000		1,40,000

It was agreed that:

i) The value of Land and Building be increased by ₹ 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 1/5th of the total capital of the new firm.

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

 The solution to this question is as follows

Books of Ashish, Dutta and VimalJournal 

Date	Particulars	L.F.	Amount₹	Amount₹
2016
Jan 1	Land and Building A/c Dr.		15,000
	Plant A/c Dr.		10,000
	To Revaluation A/c			25,000
	(Increased in the value of assets)
	Revaluation A/c Dr.		25,000
	To Ashish’s Capital A/c			15,000
	To Dutta’s Capital A/c			10,000
	(Profit on revaluation transferred to partners’ capital account)
	Cash A/c Dr.		36,000
	To Vimal Capital A/c			36,000
	(Capital brought by Vimal)
	Vimal’s Current A/c Dr.		4,000
	To Ashish’s Capital A/c			2,400
	To Dutta’s Capital A/c			1,600
	(Vimal’s share goodwill adjusted through his current account)

Balance Sheet as on January 01, 2016 

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

1) Working Note:

Partners’ Capital Account

Dr. Cr.

Particulars	Ashish	Dutta	Vimal	Particulars	Ashish	Dutta	Vimal
				Balance b/d	80,000	35,000
				Revaluation	15,000	10,000
Balance c/d	97,400	46,600	36,000	Cash			36,000
				Vimal Current	2,400	1,600
	97,400	46,600	36,000		97,400	46,600	36,000

2) Vimal Current Account

Dr. Cr.

Particulars	Amount₹	Particulars	Amount₹
Dutta’s Capital A/c	1,600	Balance c/d	4,000
	4,000		4,000

 3) Calculation of New Profit Sharing Ratio

4) Sacrificing Ratio = Old Ratio – New Ratio

Sacrificing Ratio between Ashish and Dutta is 3:2

Note: Here, Goodwill has been adjusted through current account because Vimal has not brought his share of goodwill and he is to bring capital in proportion to total capital of the new firm after adjustment.

5) Capital of new firm on the basis of old partners adjusted capital:

Total adjusted capital of old partners

Ashish’s Capital	=	97,400
Dutta’s Capital	=	46,600
		1,44,000

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