G1 6.2 Partnership - Reconstitution
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Transcript of G1 6.2 Partnership - Reconstitution
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Financial Accounting 6.2.1
6. PARTNERSHIP ACCOUNTING
Question: What is Reconstitution of Firm?
Answer: Reconstitution of firm means any change in agreement between the partners that takes place
during Change in Profit Sharing Ratio, Admission of new partner, Retirement and death of partner,
Sale of firm and Amalgamation of firm
Question: What are adjustments required for reconstitution of firm?
Answer:
1. Calculation of new profit and loss ratio
2. Distribution of accumulated profit and loss
3. Calculation of goodwill and accounting treatment of goodwill
4. Revaluation of assets and liabilities
5. Adjustment in capital balance
[CMA INTER D05, 3 Marks]
Question: Write short notes on Change in the profit sharing ratio
Answer: Change in profit sharing ratio occurs in the following situations
1. On admission of new partner
2. On retirement of existing partner
3. On change of scope of partner
Formula:
1. Old ratio: the ratio prior to the change of ratio
2. New ratio: the ratio calculated after the change
3. Sacrificing ratio: old ratio new ratio
4. Gaining ratio: new ratio old ratio
Calculations regarding new profit and loss ratio
Question 3: Type 1: A and B share profit and loss in 4:3. C is joined for 1/8th share. Calculate the
new profit and loss ratio
Answer:
Particulars Formula Calculations Answer
Let the total share be 1
Balance after Cs share for A and B Total share Cs share 1 -
As share in the balance Balance after Cs share As share
Bs share in the balance Balance after Cs share Bs share
New ratio of A, B and C
:
:
4:3:1
Question 4: Type 2: A and B share P/L in 4:3 C is joined for 1/8th share. After Cs admission A and
B share profit and loss in the ratio of 3:4. Calculate the new profit and loss ratio
Answer:
-
Partnership Accounting 6.2.2
Particulars Formula Calculations Answer
Let the total share be 1
Balance after Cs share for A and B Total share Cs share 1 -
As share in the balance Balance after Cs share As share
Bs share in the balance Balance after Cs share Bs share
New ratio of A, B and C
:
:
3:4:1
Question 5: Type 3: A and B share profit and loss in the ratio of 4:3. C is admitted as new partner. A
sacrifices 1/2 of his share for C, and B sacrifices 1/3 of his share for C. Calculate new profit and loss
ratio.
Answer: As sacrificing ratio = 4/7 x 1/2 = 4/14
Bs sacrificing ratio = 3/7 x 1/3 = 3/21
As new ratio [old ratio sacrificing ratio] = 4/7 4/14 = 8-4/14 = 4/14
Bs new ratio [old ratio sacrificing ratio] = 3/7 3/21 = 9-3/21 = 6/21
New ratio A, B and C = 4/14 : 6/21 : [4/14 + 3/21] = 4/14 : 6/21 : 12+6/42
= 4/14:6/21:18/42 = 4/14 3/3 : 6/21 2/2 : 18/42 =12/42: 12/42: 18/42
= 6 : 6 : 9 = 2 : 2 : 3
Question 6: Type 4: A and B share profit and loss in the ratio of 4:3. C is admitted for 3/7th share. C
gets 2/3 of his share from A and 1/3 of his share from B. Calculate new profit and loss ratio
A sacrifices 2/3rd
of Cs share = 3/7 2/3 = 6/21
B sacrifices 1/3rd
of Cs share = 3/7 1/3 = 3/21
As ratio after sacrificing = 4/7 6/21 = 12 6/21 = 6/21
Bs ratio after sacrificing = 3/7 3/21 = 9 3/21 =6/21
New ratio = 6/21 : 6/21 : 3/7 = 2 : 2 : 3
[CMA INTER J04, 6 Marks]
Question 7: R & S are in partnership sharing profit and losses at the ratio 3: 2. They take T as a new
partner. Calculate the new profit sharing ratio if:
1. T purchases
th share from R.
2. R & S agree to sacrifice
th share to T in the ratio of 2: 3.
3. Simply gets
th share of profit.
Answer: Calculation of new profit sharing ratio
(i) T Purchased 1/10th Share From R
R S T
Old ratio
Less
th from R
Nil
-
Financial Accounting 6.2.3
New Ratio
New Ratio of R, S & T
:
[ii] R & S agree to sacrifice 1/10th share to T in the ratio of 2:3
Rs sacrifice
Ss Sacrifice
R S T
Old ratio
-/(+) Sacrifice / (gets)
New Ratio 28:17:5
[iii] Simply get 1/10th share of profit
Let total share =1
Remaining share 1 (1/10) = 9/10
Rs Share = 9/103/5 = 27/50
= 9/10 2/5 = 18/50
New Ratio
[CMA RTP D11]
Question 8: W and X are equal partners. They admit Y and Z as partners with 1/5 and 1/6 share
respectively. What is the profit sharing ratio of all the partners?
Answer: Let total profits or losses of the firm be 1
Shares of W and Z is 1/5 and 1/6 respectively.
Balance remaining: 1 (1/5 + 1/6) = 1 11/30 = 19/30
19/30 to be shared equally by W and X as 9.5/30 : 9.5/30
New Profit sharing ratio will be W : X : Y : Z
[9.5/30 2/2] : [9.5/30 2/2] : [1/5 12/12] : [1/6 10/10]
Thus new profit sharing ratio of all the partners will be 19 : 19 : 12 : 10.
[CMA INTER D03, J04, J05 & J06, 4 Marks, 4 Marks, 3 Marks & 4 Marks]
Question: Write short notes on Goodwill
Goodwill is the value of reputation of firm in respect of profits expected in future over and above
normal profits earned by firm belonging to same industry.
-
Partnership Accounting 6.2.4
Goodwill Nature Goodwill is an Intangible Asset and not a Fictitious Asset.
Need for valuation of Goodwill - In case of
1. Change in Profit Sharing Ratio, 2. Admission of new partner, 3. Retirement and/or death of partner, 4. Sale of firm and 5. Amalgamation of firm
Reason Valuation Treatment
1 Location 1 Simple Average Method
[if profit does not show
trend]
1 Non-cash method
2 Size Revaluation Method
3 Patent 2 Weight Average Method
[if profit shows trend]
Memorandum Revaluation
Method
4 Technical Know-
how
Premium Method
5 Management 3 Super Profit Method 2 Cash Method: Premium Method
6 Market Situation 4 Capitalization Method 3 Cash and non-cash method
7 5 Annuity Method 4 Pay privately no entry
[CMA INTER D09, 3 Marks]
Question: Write short notes on Memorandum revaluation account;
Question 9: Calculation of Goodwill: [Simple Average Method and Weighted Average Method]:
Calculate goodwill under 2 years purchase of 3 years simple average profit method and weighted
average profit method from the profits for 2009-10, 2008-09 and 2007-08 are 10,000, 8,000 and
6,000 respectively.
Answer:
i. Simple Average ii. Weighted Average Method
Year Profit Weight Weighted Profit
2009-10 10,000 3 30,000
2008-09 8,000 2 16,000
2007-08 6,000 1 6,000
Total 24,000 6 52,000
Average Profit 8,000 8,667
Years of Purchase 2 2
Goodwill 16,000 17,334
Question 10: Calculation of Goodwill: [Super Profit Method, Capitalisation Method and
Annuity Method]: Calculate goodwill under three years purchase of super profit method and
-
Financial Accounting 6.2.5
capitalization method from the details given. Capital employed 10,000, Normal Rate of Return 10%
and Actual Profit 1,500.
Annuity factor [AF] for 1 invested every year will fetch 2.486 in the end of third year
Particulars Formula Calculation
Purchase of Super Profit Method
Capital Employed [CE] 10,000
Normal Rate of Return [NRR] 10%
Normal Profit [NP] CE NRR 10,00010% 1,000
Actual Profit [AP] 1,500
Super Profit [SP] AP NP 1,500 1,000 500
Goodwill = 3 SP 1,500
Capitalisation Method
Goodwill
5,000
OR
Goodwill
CE
- 10,000 5,000
Annuity Method [Super Profit]
Goodwill SP Annuity Factor 500 2.486 1243
Question 11: Calculation of Goodwill: [Annuity Method]
Question: Calculate Goodwill under annuity method from the given information: Future maintainable
profit [FMP] of 10000 p.a. is expected for the 3 years. The expected NRR is 10%. Annuity factor
[AF] for 1 invested every year will fetch 2.486 in the end of third year
Answer:
Year FMP 10% PVF PV
1 10,000 0.909 9090
2 10,000 0.826 8260
3 10,000 0.751 7510
Goodwill 2.486 24860
Or
GW = FMP AF 10000 x 2.486 24860
Note: Future maintainable profit [FMP]: is the profit calculated based on past years adjusted
profit and loss and subject to future applicability. FMP is always considered for calculating goodwill
not just the book profit.
Treatment of Goodwill
I. Non Cash Method II. Cash Method
1. Revaluation 2. Mem.
Revaluation
3. Premium Method Premium Method
-
Partnership Accounting 6.2.6
t
he
GW
GW A/c Dr. GW A/c Dr. Adjustment of GW of New Partners Share
To Old
Partners
Capital A/c
To Old
Partners
Capital A/c
Gaining Partners
Capital A/c
Dr. Cash A/c Dr.
[Full GW is Shared in Old Ratio] To Sacrificing
Partners Capital
A/c
To Sacrificing
Partner Capital
A/c
t
he
GW
Not Applicable All Partners
Capital A/c
Dr.
To GW A/c
[Full GW is Shared
in New Ratio]
Calculation of Hidden Goodwill
A Incoming Partners Capital / His share of profit
B Capitals of Old Partners + Incoming Partners Capital
C Hidden Goodwill (A-B)
Question 12: Revaluation Method [no goodwill in B/S]: Show the journal entry to adjust the
goodwill on admission of the new partner C. The existing partners A and B share profit and loss in the
ratio of 3 : 2 and C is admitted for 1/5th share of profit. The balance sheet of the firm is given below
Balance Sheet
Liabilities Assets
Capital A 70,000 Goodwill --
Capital B 60,000 Fixed Asset 100,000
Current Liabilities 20,000 Current Assets 50,000
150,000 150,000
Goodwill of the firm valued at 25,000. C is not able to bring cash for his share of goodwill but cash
brought in for capital is 40, 000
Answer:
Premium for Goodwill = Goodwill New Partners share
1) Good Will A/c Dr 25,0000
To As Capital A/c 15,000
To Bs Capital A/c 10,000
2) Cash A/c Dr 40,000
To Cs Capital 40,000
-
Financial Accounting 6.2.7
Balance Sheet
Liabilities Assets
Capital A [70+15] 85,000 Goodwill 25,000
Capital B [60+10] 70,000 Fixed Asset 100,000
Capital C 40,000 Current Assets 90,000
Current Liabilities 20,000
215,000 215,000
Question 13: Memorandum revaluation [no goodwill in B/S]: Keep the above illustration as it is,
except that the partners decided to write off goodwill from the books.
1) Good Will A/c Dr 25,000
To As Capital A/c 15,000
To Bs Capital A/c 10,000
(Goodwill raised in the books)
2) As Capital A/c Dr 12,000
Bs Capital A/c Dr 8,000
Cs Capital A/c Dr 5,000
To Goodwill A/c 25,000
(Goodwill cancelled in the books)
3) Cash A/c Dr 40,000
To Cs Capital 40,000
(Capital introduced by Cs capital)
Balance Sheet
Liabilities Assets
Capital A [70+15-12] 73,000 Goodwill [25-25] ----
Capital B [60+10-8] 62,000 Fixed Asset 100,000
Capital C [40-5] 35,000 Current Assets 90,000
Current Liabilities 20,000
190,000 190,000
Question 14: Non-cash premium method [no goodwill in B/S]: Keep the above illustration as it is
except that the partners decided to adjust the goodwill without opening it.
-
Partnership Accounting 6.2.8
Answer:
1) Cs Capital A/c Dr 5,000
To As Capital A/c 3,000
To Bs Capital A/c 2,000
(Goodwill adjusted without raising it)
2) Cash A/c Dr 40,000
To Cs Capital 40,000
(Capital introduced by Cs capital)
Balance Sheet
Liabilities Assets
Capital A [70-3] 73,000 Goodwill [25-25] ----
Capital B [60-2] 62,000 Fixed Asset 100,000
Capital C [40-5] 35,000 Current Assets 90,000
Current Liabilities 20,000
190,000 190,000
Question 15: Cash premium method [no goodwill in B/S]: Keep the above illustration as it is
except that the new partner C can bring his share of goodwill also in cash apart from his capital.
1) Cash A/c Dr 5,000
Or
Cs Capital A/c Dr 5,000
To As Capital A/c 3,000 To As Capital A/c 3,000
To Bs Capital A/c 2,000 To Bs Capital A/c 2,000
(Goodwill adjusted without raising it)
2) Cash A/c Dr 40,000 Cash A/c Dr 45,000
To Cs Capital 40,000 To Cs Capital 45,000
(Capital introduced by Cs capital)
Balance Sheet
Liabilities Assets
Capital A 73,000 Goodwill ----
Capital B 62,000 Fixed Asset 100,000
Capital C 40,000 Current Assets 95,000
Current Liabilities 20,000
195,000 195,000
Note: If goodwill is given in the B/S, then it can be solved either the goodwill can be written off first
and then proceed as usual or adjustment entry to be passed to the difference only
-
Financial Accounting 6.2.9
Question 16: Treatment of Goodwill (non-cash) Revaluation Method, Memorandum
Revaluation Method and Premium Method: A & B are partners in a firm sharing profits and losses
in the ratio of 3:2. C joins the firm for 1/3rd
share, and is to pay 20,000 as premium for goodwill but
cannot pay anything. As between A and B, they decided to share profits & losses equally. Pass
required journal entry.
Answer:
Question 17: A and B share profit and loss in the ratio of 4:3. They admitted C into the firm and the
new profit and loss ratio is 1:2:1. The goodwill is valued at 10,000 and the new partner C failed to
bring cash for his share of goodwill. The partners decided to adjust goodwill account without opening
the goodwill account.
Answer:
Journal Entry Dr Cr Note
Bs Capital A/c Dr 714 (10,000 -2/28)
Cs Capital A/c Dr 2,500 (10,000 -7/28)
To As Capital 3,214 (10,000 9/28)
Goodwill account is adjusted without raising it under sacrificing ratio
Calculation of sacrificing ratio
Partners Old Ratio New Ratio Sacrificing Ratio
A
+ B
C 0
Alternatively
A B C
Raise GW using [old ratio] 5,714 4,286 ----
Cancelling GW [new ratio] 2,500 5000 2,500
3,214 (714) (2,500)
Journal Entries
1) Non-cash premium method 3) Memorandum revaluation method
C Capital A/c Dr 20,000 Goodwill A/c Dr 60,000
To A Capital A/c 16,000 To A Capital A/c 36,000
To B Capital A/c 4,000 To B Capital A/c 24,000
2) Revaluation method A Capital A/c Dr 20,000
Goodwill A/c Dr 60,000 B Capital A/c Dr 20,000
To A Capital A/c 36,000 C Capital A/c Dr 20,000
To B Capital A/c 24,000 To Goodwill A/c 60,000
-
Partnership Accounting 6.2.10
Question 18: Treatment of Goodwill (cash) Premium Received: A & B are equal partners. C is
coming as a new partner who pays 8,000 as premium for goodwill. The new profit sharing ratio
among A, B & C is 4:3:2. Pass necessary journal entries showing the appropriation of premium
money assuming that the premium for goodwill is immediately withdrawn by the old partners.
Answer:
Journal Entries
1) Cash A/c Dr 8,000 3) A Capital A/c Dr 2,000
To Premium for Goodwill A/c 8,000 B Capital A/c Dr 6,000
To Cash A/c 8,000
2) Premium for Goodwill A/c Dr 8,000
1+
2
Cash A/c Dr 8,000
To A Capital A/c 2,000 To As Capital A/c 2,000
To B Capital A/c 6,000 To B Capital A/c 6,000
Question 19: Treatment of Goodwill (cash and non-cash) Premium Paid Partly: A and B are
partners in a firm sharing profits & losses in the ratio of 3:2. C is coming for 1/3rd
share, is to pay
30,000 as premium for goodwill but pays only 15,000. As between A and B, they decided to share
profits & losses equally.
Answer:
Journal Entries Under Premium Method
For cash portion of 15,000 For non cash portion of 15,000
1) Cash A/c Dr 15,000 3) C Capital A/c Dr 15,000
To Premium for Goodwill 15,000 To A Capital 12,000
To B Capital 3,000
2) Premium for Goodwill A/c Dr 15,000
To A Capital A/c 12,000
To B Capital A/c 3,000
Note1: Revaluation or memorandum revaluation method can also be used for adjusting non-cash
portion of goodwill
Note2: Cash for premium can be withdrawn by partners fully or partly
Question 20: A and B share profit and loss in the ratio of 5:4. They admit C for 1/4th share. The
goodwill is valued at 90,000. C is able to bring cash for his capital and 10,000 for his share of
goodwill.
Working Note 1: Accounting Treatment
Cs share of goodwill 90000 1/4 22,500
Less Cash portion of goodwill 10,000 Cash premium method
Non cash portion 12,500 Any one of the non-cash method
Working Note 2: Calculation of new ratio and sacrificing ratio
Let total profit be 1
-
Financial Accounting 6.2.11
Balance after Cs Share Total share Cs share Balance
1
Balance share (a) Partners old share (b) Partners new share (a) (b)
As new share 5/9 15/36
Bs new share 4/9 12/36
Cs share 9/36
New share of A,B and C 15:12:9
Sacrificing Ratio (SR) Old ratio (OR) New ratio (NR) SR = OR NR
A 5/9 15/36 5
B 4/9 12/36 4
C -
I. Cash portion of goodwill ii. Memorandum revaluation method
i. Cash Premium Method Good Will A/c Dr 50,000
Cash A/c Dr 10000 To As Capital 27,778
To As Capital 5556 To Bs Capital 22,222
To Bs Capital 4444
As Capital Dr 20,833
II. Non-cash portion of goodwill Bs Capital Dr 16,667
i. Revaluation method Cs Capital Dr 12,500
Good Will A/c Dr 50,000 To Goodwill 50,000
To As Capital 27,778
To Bs Capital 22,222 iii. Non-cash premium method
Cs Capital Dr 12,500
To As Capital 6,944
To Bs Capital 5,556
Question 21: Treatment of goodwill when change in profit-sharing ratio: A and B share profit and
loss in the ratio of 3:2. They decided to share their future profit and loss in the ratio of 4:5. Goodwill
is valued at 45,000. Pass the journal entry/s to adjust the goodwill to show the impact of change in
profit and loss ratio.
i. Revaluation method ii. Memorandum revaluation method
Goodwill A/c Dr 45,000 Good Will A/c Dr 45,000
To As Capital 27,000 To As Capital 27,000
To Bs Capital 18,000 To Bs Capital 18,000
iii. Non-cash premium method As Capital Dr 20,000
Bs Capital Dr 7,000 Bs Capital Dr 25,000
-
Partnership Accounting 6.2.12
To As Capital 7,000 To Goodwill 45,000
Return of Premium to a partner on dissolution before expiry of term:
Conditions:
1. A partner was admitted in the partnership firm for a fixed term period,
2. Such partner had paid a premium for goodwill at the time of admission.
3. The partnership firm has dissolved.
Exceptions: The partner will not be entitled to any claim under any of the following conditions:
1. the firm is dissolved due to death of a partner
2. the dissolution is due to the misconduct of the partner claiming refund
3. dissolution is in pursuance of an agreement containing no provision for the return of the premium.
Amount of Refund: the amount to be repaid will be determined having regard to the terms upon
which the admission was made and to the length of the period agreed upon and the period that has
expired.
Liability of other partners: the amount of refund payable shall be borne by the other partners in their
p/l ratio.
Admission of a Partner: A person can be admitted as new partner only with the consent of all
existing partners and the a new partner acquires right to Share Assets of firm and right to Share Future
Profits of firm
Revaluation Account: is a Nominal Account and prepared to ascertain Profit / Loss on Revaluation
of Assets and Liabilities. Decrease in Value of Assets and Increase in Amount of Liabilities are
debited and Increase in Value of Assets and Decrease in Amount of Liabilities are credited. The
balance of this account transferred to old partners in old ratio.
Write a short note on reserves
No Types of
Reserves
Examples Purpose
1 General Reserve P/L, General Reserve, Reserve Fund Multi
2 Specific Reserve Provision for DD, Investment Fluctuation Reserve, Workmen
Compensation,
Specific
3 Capital Reserve Share forfeiture, Capital Reserve, Profit Prior to Incorporation,
CRR
Limited
4 Secret Reserve Asset/Liabilities shown less/more than its book value [Prohibited]
Investment Fluctuation Reserve: surplus if any, after adjusting p/l on revaluation of investments to
reflect its market value, should be transferred to old partners in old ratio
Workmen Compensation Reserve: surplus if any, after adjusting any liability for workmen
compensation, should be transferred to old partners in old ratio
Distribution of Accumulated Profits, Reserves and Losses: transferred to old partners in the old
ratio
-
Financial Accounting 6.2.13
Machinery Replacement Fund: is in the nature of Accumulated Depreciation and not Accumulated
Profits and hence it is not transferred to partners.
Adjustment of Partners Capitals: either Adjusting the Capitals of Old Partners on the basis of
Capital of Incoming Partner or Calculating new Capital on the basis of combined of old partners
Retirement of a Partner: For firms acts after his retirement a retiring partner is not liable to third
party only if Public notice of his retirement is given by himself or by any other partner, [Sec.32(3)] or
Third party deals with firm without knowing that retiring partner was partner [Sec.32(4)]
[CMA RTP D11]
Question 22: The Balance Sheet of G and S, who share profits and losses in the ratio of 3 : 2, as on
31.3.2011 appears as below
liabilities Assets
Capital G 48,000 Other Assets 1,20,000
Capital S 32,000
Reserve 10,000 Cash 10,000
Creditors 40,000
1,30,000 1,30,000
They admit R as a partner on 1.4.2011. You are required to prepare Partners Capital Accounts and
the Balance Sheet of the new firm under each of the following cases. Assume partners withdrawn the
premium for Goodwill paid by R.
a. R is to contribute to the firm 27,000 for 1/6th share in the partnership.
b. R is to purchase 1/6th share in the partnership from the existing partners G and S in the ratio of 3 :
2, for 27,000.
Answer: Case a: R is admitted by investing additional capital in the partnership. In effect, both the
total assets and the total capital of the firm are increased by the amount of capital brought in by R.
Since R is given 1/6th share, G and S get 5/6th share in the partnership.
Following is the calculation of premium for goodwill brought in by R
Total capital of G and S for 5/6th share (48,000 + 32,000 + 10,000) 90,000
Total capital after the admission of R will be (90,000 / 5 6) 1,08,000
R is to bring in 1/6th of 1,08,000 18,000
Total amount brought in by R for capital and premium for goodwill 27,000
Therefore, premium for goodwill brought in by him (27,000 18,000) 9,000
-
Partnership Accounting 6.2.14
Partners Capital Accounts
Dr Cr
Particulars G S R Date Particulars G S R
To - By Balance b/d 48,000 32,000 -
Cash A/c 5,400 3,600 Reserve A/c 6,000 4,000
(premium
withdrawn)
Premium for
Goodwill
5,400 3,600
-
To Balance c/d 54,000 36,000 18,000 Cash A/c - - 18,000
59,400 39,600 18,000 59,400 39,600 18,000
Balance Sheet (after Rs admission) as at 1st April, 2011
Liabilities Assets
Gs Capita 54,000 Other assets 1,20,000
s Capital 36,000 Cash 28,000
Rs Capital 18,000 1,08,000 [10,000+27,000-9,000]
Creditors 40,000
1,48,000 1,48,000
Case b: R is admitted by purchasing of an interest from the old partners G and S. Since the capital
interest of the incoming partner R is obtained from the old partners G and S, neither the total assets
nor the total capital of the partnership firm is affected
Following is the calculation of premium for goodwill brought in by R
Total capital after Rs admission is same as before (48,000 + 32,000 + 10,000) 90,000
R is to bring in 1/6th of 90,000 15,000
Total amount brought in by R for capital and premium for goodwill 27,000
Therefore, premium for goodwill brought in by him (27,000 15,000) 12,000
Partners Capital Accounts
Dr Cr
Particulars G S R Particulars G S R
To - By Balance b/d 48,000 32,000 -
Reserve A/c 6,000 4,000
Cash A/c (Bal.
figure)
16,200 10,800 Premium for
Goodwill
7,200 4,800 -
To Balance c/d 45,000 30,000 15,000 Cash A/c - - 15,000
61,200 40,800 15,000 61,200 40,800 15,000
-
Financial Accounting 6.2.15
Balance Sheet (after Rs admission) as at 1st April, 2011
Liabilities Assets
Gs Capita 45,000 Other assets 1,20,000
Ss Capital 30,000 Cash 10,000
Rs Capital 15,000 90,000
Creditors 40,000
1,30,000 1,30,000
Note: total capital of the firm is same as before. Out of 90,000, R gets , 15,000. The balance of
capital of 75,000 is shared by G and S in the ratio of 3:2
Admission of Partner
Question 23: Rain and Storm are partners in a firm sharing profits and losses as 3:2 respectively.
Their Balance sheet on 31.12.2000 stands as under:
Balance Sheet
Liabilities Assets
Creditors 35,000 Cash 4,000
Capital Accounts: Debtors 22,000
Rain 40,000 (-) Provision for doubtful debts 2000 20,000
Storm 20,000 60,000 Stock 18,000
Machinery 20,000
Land & Building 33,000
95,000 95,000
On 1.1.2001, they agreed to take Dust as a partner on the following conditions:
1. Goodwill of the firm shall be valued at 23,750 and Dust shall pay his share of goodwill in cash.
2. Dust shall contribute 15,000 as his share of capital.
3. Land and Building shall be valued at 42,000. Machinery shall be depreciated by 5,000.
Provision for doubtful debts shall be raised to 3,000 and another provision shall be made for a
probable liability for damages amounting to 1,300.
4. Profit & loss sharing ratio shall be so adjusted that, between Rain & Storm the former ratio is
maintained, while between Storm & Dust there shall be the same ratio as between Rain & Storm.
5. The capital shall be adjusted (without disturbing the ultimate total capital) so as to correspond
with the new ratio, the excess or deficit being transferred to their respective current accounts.
Show the journal entries to give effect to the above arrangement and prepare the opening B/S of the
new firm
Answer:
Journal Entries Dr Cr
1 Land and Building A/c Dr 9,000
To Revaluation A/c 9,000
-
Partnership Accounting 6.2.16
Balance Sheet of the New firm as on 1st January, 2001
Liabilities Assets
Capital Accounts: Land and Building [33+9] 42,000
Rain 38,700 Machinery [20-5] 15,000
Storm 25,800 Stock 18,000
Dust 17,200 81,700 Debtors 22,000
Current A/c (-): Prov. for doubtful debts
[2+1]
3,000 19,000
Rain 5,320 Cash (4,000 + 20,000) 24,000
Creditors 35,000 Current A/c
Liability for Damages 1,300 Storm 3,120
Dust 2,200 5,320
1,23,320 1,23,320
Working Notes:
(1) Calculation of new profit sharing ratio and sacrificing ratio
(Being land and building appreciated)
2 Revaluation A/c Dr 7,300
To Machinery A/c 5,000
To Provision for Doubtful Debts A/c. 1,000
To Liability for Damages A/c 1,300
(Being machinery written down and provision for DD and damages created)
3 Revaluation A/c (9,000 7,300) Dr 1,700
To Rain Capital A/c 1,020
To Storm Capital A/c 680
(Being revaluation profit transferred to partners capital a/c)
4 Cash A/c Dr 20,000
To Premium for Goodwill A/c (WN2) 5,000
To Dust Capital A/c 15,000
(Being cash brought in for capital and premium by new partner)
5 Premium for Goodwill A/c (WN3) Dr 5,000
To Rain Capital A/c 3,000
To Storm Capital A/c 2,000
(Being premium for goodwill shared by old partners in sacrificing ratio)
6 Rain Capital A/c.(WN4 and 5) Dr 5,320
To Rain Current A/c 5,320
(Being excess capital of rain transferred to current a/c)
7 Strom Current A/c (WN4 and 5) Dr 3,120
Dust Current A/c Dr 2,200
To Storm Capital A/c 3,120
To Dust Capital A/c 2,200
(Being deficit capital of Storm and Dusts transferred to currents a/c)
-
Financial Accounting 6.2.17
R S D
Old ratio 3 2
New ratio 3 2
Combined new ratio 9 6 4
(2) Premium for goodwill brought in by Dust = 23,750 / 19 4 = 5,000.
(3) The partners old profit sharing ratio (3:2) is their sacrificing ratio.
(4) Total capital of the new firm = Opening capital + Capital and premium brought in by Dust +
Revaluation profit
=(60,000 + 15,000 +5,000 + 1,700) = 81,700
Rains share = 81,700 9/19 = 38,700
Storms share = 81,700 6/19 = 25,800
Dusts share = 81,700 4/19 = 17,200.
(5) Partners Capital A/c
Particulars Rain Storm Dust Particulars Rain Storm Dust
To Current a/c
(bal)
5,320 ---- ---- By Bal. b/d 40,000 20,000 ---
Bank A/c. ---- ---- 15,000
Balance (WN
4)
38,700 25,800 17,200 Premium for
Goodwill
3,000 2,000 ----
Revaluation A/c 1,020 680 ----
Current a/c (Bal) ---- 3,120 2,200
44,020 25,800 17,200 44,020 25,800 17,200
Working Note 6: Revaluation A/c
Debit Credit
To Decrease in plant and machinery 5,000 By Increase in land and building 9,000
Provision for bad debts A/c. 1,000
Liability for damages 1,300
Partners Capital A/cs Profit (Rain 1,020; Storm 680
1,700
9,000 9,000
Question 24: Ranu & Mili are partners in a firm sharing profits & losses in the ratio of 2:1
Balance sheet of the firm on 31.12.2002 was as follows:
Liabilities Assets
Creditors 7,000 Investments 25,000
Investment provision 2,000 Stock 15,000
General Reserve 10,500 Debtors 20,000
Workmen compensation Fund 6,000 Less: Provision for bad debts 2,500 17,500
Capital A/c: Ranu 30,000 Bills Receivable 12,500
Capital A/c: Mili 24,500 54,500 Bank 10,000
80,000 80,000
On the above date, Manisha is admitted for 2/5th share in the profits or losses of the firm. Following
adjustments were made at the time of admission:
a. Manisha is required to bring in 50,000 as capital.
-
Partnership Accounting 6.2.18
b. Her goodwill was calculated at 12,000.
c. Ranu and Mili purchased a Machinery on hire purchase system for 15,000 of which only 500
are to be paid. Both machinery and unpaid liability did not appear in the Balance sheet.
d. There was a joint life policy on the lives of Ranu and Mili for 75,000. Surrender value of the
policy on the date of admission amounted to 12,000.
e. Accrued incomes not appearing in the books were 500.
f. Market value of investments is 22,500.
g. Claim on account of compensation is estimated at 750.
h. S, an old customer, whose account was written-off as bad, has promised to pay 1,750 in
settlement of the full claim.
i. Provision for bad debts is required at 3,000.
Prepare Revaluation A/c, Partners Capital A/c & Opening Balance Sheet after the admission of
Manisha in the books of the firm
Answer:
Revaluation A/c
Debit Credit
To Investment Provision A/c (Nt 1) 500 By Accrued income A/c 500
Prov. For bad debts A/c. 500 Workmen Comp. Fund A/c (Note 2) 5,250
Creditors A/c (hire purchase) 500 Joint Life Policy A/c 12,000
Partners Capital A/cs Profit (Ranu- 20,833; Mili 10,417
31,250 Machinery A/c 15,000
32,750 32,750
Partners Capital A/c
Particulars Ranu Mili Manisha Particulars Ranu Mili Manisha
To Goodwill 12,000 6,000 12,000 By Balance b/d 30,000 24,500 ----
Balance c/d 65,833 42,417 38,000 Revaluation A/c 20,833 10,417 ----
General Reserve 7,000 3,500 ----
Goodwill (Nt 3) 20,000 10,000 ----
Bank A/c ---- ---- 50,000
77,833 48,417 50,000 77,833 48,417 50,000
Balance Sheet of the Firm (after Manishas admission)
Liabilities Assets
Capital A/c Machinery 15,000
Ranu 65,833 Investment 25,000
Mili 42,417 Stock 15,000
Manisha 38,000 Debtors 20,000
Creditors + HP installment
(7,000+500)
7,500 (-) Provision for
Doubtful Debt
3,000 17,000
Investment Provision
(2,000 + 500) 2,500 Bills Receivable 12,500
Workmen Comp Fund
(6,000-5,250)
750 Joint Life Policy 12,000
Accrued Income 500
Bank (10+50) 60,000
1,57,000 1,57,000
-
Financial Accounting 6.2.19
Working Notes:
1. Since there is a fall in the market value of investments of 2,500, investment provision is
increased form 2,000 to 2,500.
2. Workmen compensation fund is nothing but retained profit. Therefore, it is credited to
Revaluation A/c. Alternatively, it could have been credited to partners Capital A/c in the old
profit sharing ratio.
3. Since Manisha is not paying the required amount of premium for goodwill. Therefore, 30,000
goodwill will be adjusted through the Capital Accounts of the partners.
4. There will be no entry for the promise made by S, Since it is an event and not a transaction.
Admission of Partner with Memorandum Revaluation Method
[CA INTER N07, 16 marks]
Question 25: Following was the B/S of A&B, who were sharing profit & loss in the ratio of 2:1 on
31.12.2006:
Balance Sheet
Liabilities Assets
Capital Accounts Plant and machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry debtors 3,00,000
Reserve fund 9,00,000 Stock 4,00,000
Sundry creditors 4,00,000 Cash 1,00,000
Bills payable 1,00,000
29,00,000 29,00,000
They agreed to admit C into the partnership on the following terms:
1. The goodwill of the firm was fixed at 105,000.
2. That the value of stock and plant and machinery were to be reduced by 10%.
3. That a provision of 5% was to be created for doubtful debts.
4. That the building account was to be appreciated by 20%.
5. There was an unrecorded liability of 10,000.
6. Investments worth 20,000 (Not mentioned in the B/S) were taken into account.
7. That the value of reserve fund, the values of liabilities & the values of assets other than cash
are not to be altered.
8. C was to be given 1/4th share in the profit and was to bring capital equal to his share of profit
after all adjustments.
Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance Sheet of
the newly reconstituted firm.
Answer:
Memorandum Revaluation A/c
Particulars Particulars
To Stock 40,000 By Building 1,80,000
-
Partnership Accounting 6.2.20
Plant & machinery 1,20,000 Investments 20,000
Provision for doubtful debts 15,000
Unrecorded liability 10,000
Partners Capital A/c (OR)
A 10,000
B 5,000 15,000
2,00,000 2,00,000
To Building 1,80,000 By Stock 40,000
Investments 20,000 Plant & machinery 1,20,000
Provision for doubtful debts 15,000
Unrecorded liability 10,000
Partners Capital A/c (NR)
A 7,500
B 3,750
C 3,750 15,000
2,00,000 2,00,000
Partners Capital A/c
Particulars A B C Particulars A B C
To Revaluation
Loss
7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -
Reserve
Fund
4,50,000 2,25,000 2,25,000 Reserve
Fund
6,00,000 3,00,000 -
A (W.N.3) - - 17,500 C (W.N.3) 17,500 8,750 -
B (W.N.3) - - 8,750 Revaluation
Profit
10,000 5,000
Balance c/d
W.N2
11,70,000 5,85,000 5,85,000 Cash (Bal) 8,40,000
16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000
Balance Sheet of newly reconstituted firm as on 31.12.2006
Liabilities Assets
Capital Accounts Plant & Machinery 12,00,000
A 11,70,000 Building 9,00,000
B 5,85,000 Sundry Debtors 3,00,000
C 5,85,000 Stock 4,00,000
Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000
Sundry Creditors 4,00,000
Bills Payable 1,00,000
37,40,000 37,40,000
Working Notes:
1. Calculation of new profit and loss sharing ratio
C will get 1/4 th share in the new profit sharing ratio.
Therefore, remaining share will be 1-1/4 =3/4,
Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2
Share of B will be 3/4 x 1/3 = 1/4
New ratio will be A : B : C - 1/2 : 1/4 : 1/4 - 2 : 1: 1
-
Financial Accounting 6.2.21
2. Calculation of closing capital of C
Closing capitals of A & B after all adjustments are: A-1170,000, B-5,85,000
Since Bs capital is less than As capital, therefore Bs capital is taken as base.
Hence, Cs closing capital should be 585,000 i.e. at par with B (new p&l ratio)
3. Adjustment entry for goodwill
Partners Goodwill as
per old ratio
Goodwill as
per new ratio
Effect
A 70,000 52,500 + 17,500 -
B 35,000 26,250 + 8,750 -
C - 26,250 - - 26,250
1,05,000 1,05,000 26,250 26,250
Adjustment entry:
Cs Capital A/c Dr. 26,250
To As Capital A/c 17,500
To Bs Capital A/c 8,750
Profit / (loss) on revaluation, accumulated profits / reserves / losses on retirement of a partner is
credited (debited) to all the partners in their old profit sharing ratio
Special point to be noted: Adjustment of the capitals of continuing partners
Payment to retiring partner: immediately paid on retirement or holding as loan to be repayable in
the later period.
Retirement of Partner
Question 26: On 31-3-1995, the Balance Sheet of M/s A, B and C sharing profits and losses in
proportion to their capitals, stood as follows:
On 31st March 1995, A desired to retire from the firm and the remaining partners decided to carry
on. It was agreed to revalue the assets and liabilities on that date on the following basis:
1. Land and Buildings be appreciated by 30%
2. Machinery is to be depreciated by 20%
3. Stock is to be valued at 75,000.
Balance Sheet
Liabilities Assets
Sundry Creditors. 1,00,000 Land and Buildings 2,00,000
Capital A/cs. Machinery 3,00,000
A 2,00,000 Stock 1,00,000
B 3,00,000 Sundry Debtors 1,00,000
C 2,00,000 7,00,000 Cash and Bank 1,00,000
8,00,000 8,00,000
-
Partnership Accounting 6.2.22
4. Provision for bad debts is to be made at 5%.
5. Old credit balances of Sundry Creditors 20,000 is to be written-off.
6. Joint Life Policy of the partners surrendered and cash obtained 80,000.
7. Goodwill of the entire firm be valued at 1,40,000 & As share of the Goodwill be adjusted in the
accounts of B & C who share the future profits equally. No Goodwill A/c being raised.
8. The capital of the firm is to be the same as before retirement. Individual capital be in their profit
sharing ratio.
9. Amount due to A is to be settled on the following basis: 50% on retirement and the balance
50% within one year.
Prepare Revaluation A/c, Capital A/c of partners, Cash & Bank A/c and Balance Sheet as on 1.4.1995
of M/s. B&C.
Answer: In the Books of M/s/ A, B and C
Revaluation A/c
Particulars Particulars
To Machinery A/c 60,000 By Land and Buildings A/c 60,000
tock A/c 25,000 Sundry Creditors A/c 20,000
Provision for bad debts A/c 5,000 Partners Capital 10,000
(Answer: 2,857; B: 4,286 and C: 2,857)
90,000 90,000
Partners Capital A/c
Particulars A B C Particulars A B C
To Revaluation 2,857 4,286 2,857 By Balance b/d 2,00,000 3,00,000 2,00,000
A
Capital(GW)
---- 10,000 30,000 J.L.P A/c 22,857 34,286 22,857
Bank (50% ) 1,30,000 ---- B Capital
(GW)
10,000 ---- ----
A Loan A/c 1,30,000 ---- C Capital
(GW)
30,000 ---- ----
Balance
(required)
---- 3,50,000 3,50,000 Bank (Bal) ---- 30,000 1,60,000
2,62,857 3,64,286 3,82,857 2,62,857 3,64,286 3,82,857
Nt: JLP can otherwise be credited to revaluation a/c
Cash and Bank A/c
To Balance b/d 1,00,000 By As Capital A/c 1,30,000
Joint Life Policy A/c 80,000 Balance c/d 2,40,000
Bs Capital A/c 30,000
Cs Capital A/c 1,60,000
3,70,000 3,70,000
-
Financial Accounting 6.2.23
Balance sheet of M/s. B and C as on 1st April, 1995
Liabilities Assets
Partners capital A/cs Land and Buildings 2,60,000
B 3,50,000 Machinery 2,40,000
C 3,50,000 7,00,000 Closing Stock 75,000
As Loan A/c 1,30,000 Sundry Debtors 1,00,000
Sundry Creditors 80,000 Less: Provision for Bad
Debts
5,000 95,000
Cash and Bank Balances 2,40,000
9,10,000 9,10,000
Calculation of Share of Goodwill
Right of Goodwill before retirement [Old Ratio] (2:3:2) 40,000 60,000 40,000
Right of Goodwill after retirement [New ratio] (1:1) ---- 70,000 70,000
Sacrifice (-)/Gain (+) (-)40,000 (+)10,000 (+)30,000
[CA INTER M94]
Question 27: Following is the B/S of A, B & C who were the partners as on 31.3.93.
Balance sheet as at 31.3.1993
Liabilities Assets
As Capital 33,600 Plant and Machinery 49,000
Bs Capital 25,200 Furniture and fittings 4,800
Cs Capital 12,000 Stock in Trade 22,800
Sundry creditors 12,000 Sundry debtors 21,600
15% Mortgage Loan 16,600 Cash on hand 1,000
Cash at bank 200
99,400 99,400
They share profits and losses in the ratio of 2:2:1 on 1st April, 1993, C retired from the firm and
claimed his share of secret reserve/profits arising out of the following.
a. During the year ended 31.3.1993 purchase of Machinery at a cost of 10,000 was charged to
purchase account, the erection charges of 600 being charged to machinery repairs account.
(Depreciation is to be charged at 10% p.a.)
b. 600 received from Mr. X on 31.3.93 towards rent of the property sublet was credited to his
personal accounts instead of to rent account so as to reduce his debit balance from 1,000 to 400
debit on 31.3.93.
c. Interest on mortgage loan was paid in advance up to 31.5.93 and the whole amount was charged
to interest account during the year ended 31.3.93.
d. After rectifying the above errors, it was mutually decided as under:
1. The goodwill of the firm is valued at 5 times the average profits of the last 3 years. Such profits
should be correct profits & not the book profits. The book profits for the last 3 financial year
were: 1990-91 18,380; 1991-92 32,000; 1992-93 ,7,471.
-
Partnership Accounting 6.2.24
2. Plant & Machinery to be depreciated by 10% and provision for bad doubtful debts to be made at
5% on sundry debtors.
3. The goodwill should not appear in the books.
4. There is a liability for 501 for bill discounted. This has to be accounted for.
5. C should be paid half of his dues in cash which shall be brought in by A and B in their profit
sharing proportion and the other half shall be left in the business as Cs loan fetching an interest
of 18% p.a.
Prepare Profit & Loss A/c, Revaluation A/c, Capital A/c of the partners and the Balance Sheet of
A & B after Cs retirements
Answer:
Profit and Loss Adjustment A/c
Particulars Particulars
To Partners Capital A/c (2:2:1) By Plants and Machinery A/c 9,540
A 4,222 Interest on Mortgage Loan 415
B 4,222 Sundry Debtors A/c (Rent) 600
C 2,111
10,555 10,555
`
Revaluation A/c
Particulars Particulars
To Provision for doubtful debts 1,110 By Partners Capital A/c (Loss)
Depreciation (Plant & Machinery) 5,854 A 2,986
Liabilities for bills discounted 501 B 2,986
C 1,493
7,465 7,465
Capital A/c
Particulars A B C Particulars A B C
To Revaluation A/c
(loss)
2,986 2,986 1,493 By Balance b/d 33,600 25,200 12,000
Cs Capital A/c ( GW)
11,401 11,401 - P/L Adjustment
A/c
4,222 4,222 2,111
Cash A/c - - 17,710 As Capital A/c - - 11,401
Cs Loan A/c - - 17,710 Bs Capital A/c (GW)
- - 11,401
Balance c/d 32,290 23,890 - Cash A/c 8,855 8,855 -
46,677 38,277 36,913 46,677 38,277 36,913
Cash paid 17,710 to C is out of the receipts from B and C [ 8,855 each]
Balance Sheet of M/s A and B as on 1.4.1993
Liabilities Assets
Capital A/c : Plant and Machinery 58,540
A 32,290 Less: Depreciation 5,854 52,686
B 23,890 Furniture and Fittings 4,800
Cs Loan a/c 17,710 Stock in Trade 22,800
15% Mortgage Loan 16,600 Sundry Debtors 22,200
Liabilities for bills
discounted
501 Less: Provision 1,110 21,090
-
Financial Accounting 6.2.25
Creditors 12,000 Interest on Loan prepaid 415
Cash in hand 1,000
Cash at Bank 200
1,02,991 1,02,991
Working Notes:
Sundry Debtors
1 Opening Debtors as on 31.3.1993 21,600
Add Rent received from Mr. X 600
Adjusted Debtors 22,200
Calculation of Goodwill
2 Year Profit
1990-91 18,380
1991-92 32,000
1992-93 [7,471+10,555] 18,026
Total Profit [TP] 68,406
Average Profit [AP] = TP/3 22,802
Number of years of purchase 5
Goodwill = AP 5 114,010
1/5 Retiring Partners Share of GW 22,802
Calculation of balance of Plant and Machinery
3 Opening Plant and Machinery 49,000
Add Machinery Purchased 10,000
Add Installation charge 600
Total 10,600
Less Depreciation 1,060 9,540
Closing Plant and Machinery 58,540
Question 28: Admission cum Retirement: Ram, Rahim and Robert are partners, sharing Profits and
Losses in the ratio of 5:3:2. It was decided that Robert would retire on 31.3.2005 and in his place
Richard would be admitted as a partner with new profit sharing ratio between Ram, Rahim and
Richard at 3 : 2 : 1.
Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:
Liabilities Assets
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
-
Partnership Accounting 6.2.26
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
a. Plant & Machinery to be depreciated by 30,000.
b. Land and Building to be valued at 6,00,000.
c. Stock to be valued at 95% of book value.
d. Provision for doubtful debts @ 10% to be provided on debtors.
e. General Reserve to be apportioned amongst Ram, Rahim and Robert.
f. The firms goodwill to be valued at 2 years purchase of the average profits of the last 3 years.
The relevant figures are:
1. Year ended 31.3.2002 Profit 50,000
2. Year ended 31.3.2003 Profit 60,000
3. Year ended 31.3.2004 Profit 55,000
g. Out of the amount due to Robert 2,00,000 would be retained as loan by the firm and the
balance will be settled immediately.
h. Richards capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare: (i) Capital accounts of the partners; and (ii) Balance Sheet of the reconstituted firm.
Answer:
Dr Partners Capital a/c Cr.
To Ram Rahim Robert Richard By Ram Rahim Robert Richard
Revaluation
A/c
10,000 6,000 4,000 Balance b/d
100,000 150,000 200,000
Roberts Loan
1
200,000 General
reserve
100,000 60,000 40,000
Bank 58,000 Goodwill2 55,000 33,000 22,000
Balance c/d 245,000 237,000
255,000 243,000 262,000 255,000 243,000 262,000
Goodwill 55,000 36,667 18,333 Balance b/d
245,000 237,000
Loan A/c
transfer 200,000
Bal. c/d 190,000 200,333 195,167 Bank 13,500
245,000 237,000 213,500 245,000 237,000 213,500
Assumptions:
1. Richards loan is considered as part of his capital
2. Memorandum revaluation method is followed for goodwill treatment. Hence it is raised and
cancelled.
Balance Sheet of Ram, Rahim and Robert as at 31.3.2005 after the admission of Richard
Liabilities Assets
Capital Accounts: Land and Building 6,00,000
-
Financial Accounting 6.2.27
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes: 1:Revaluation A/c
Particulars Particulars
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
Robert 4,000 20,000
90,000 90,000
WN2: Calculation of Goodwill:
Profit for the year ended 31.3.2002 50,000
Profit for the year ended 31.3.2003 60,000
Profit for the year ended 31.3.2004 55,000
165,000
Average Profit = 165,000/3 55,000
Number of years of purchase 2
Goodwill 55,000 2 110,000
WN3: Bank A/c
Particulars Particulars
To Balance b/d 1,00,000 By Roberts Capital A/c 58,000
Richards Capital A/c 13,500 Balance c/d 55,500
1,13,500 1,13,500
Joint Life Policy
Question 29: X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1. On 1st January
2000, they took out a joint life policy of 100,000. Annual premium of 5,000 was payable on 1st
January each year. Last premium was paid on 1.1.2003. Y died on 1.3.2003, and policy money was
received on 31st March, 2003.
The surrender values of policy as on 31st December of each year were as follows:
2000 Nil; 2001-1,000; 2002-2,500.
Show necessary accounts and Balance sheet as on 31st Dec, each year, assuming that:
1. premium is charged to profit and loss Account every year.
2. premium is debited to Joint Life Policy A/c and the balance of the Joint Life Policy A/c is
adjusted every year to its surrender Value.
3. premium is debited to JLP A/c & a sum equal to premium is debited to JLP Revenue
-
Partnership Accounting 6.2.28
Answer:
Year Premium Cumulative
Surrender Value
Current
Value
Loss of
Premium
2000 5,000 - - 5,000
2001 5,000 *1,000 1,000 4,000
2002 5,000 2,500 1,500 3,500
2003 5,000
Note: Sum assured of 100,000 is received on 1.3.2003 the date of death of one of the partners.
Case I. Joint Life Policy
JLP Premium is treated as expenses and debited to profit and loss a/c and
receipt of the claim will be credited to partners capital account
01.01.2000 i. Joint Life Policy a/c Dr 5,000
To Cash 5,000
31.12.2000 ii. Profit and Loss a/c 5,000
To Joint Life Policy a/c 5,000
01.01.2001 i. Joint Life Policy a/c Dr 5,000
To cash a/c 5,000
31.12.2001 ii. Profit and Loss a/c 5,000
To Joint Life Policy a/c 5,000
01.01.2002 i. Joint Life Policy a/c Dr 5,000
To cash a/c 5,000
31.12.2002 ii. Profit and Loss a/c 5,000
To Joint Life Policy a/c 5,000
01.01.2003 i. Joint Life Policy a/c Dr 5,000
To Cash 5,000
31.03.2003 ii. Cash a/c 100,000
To Joint Life Policy a/c 100,000
31.03.2003 iii. Joint Life Policy a/c Dr 95,000
To Xs Capital a/c 38,000
To Ys Capital a/c 38,000
To Zs Capital a/c 19,000
Joint Life Policy A/c
Date Debit Date Credit
01.01.00 To Cash 5,000 31.12.00 By Profit & Loss A/c 5,000
5,000 5,000
01.01.01 To Cash 5,000 31.12.01 By Profit & Loss A/c 5,000
5,000 5,000
-
Financial Accounting 6.2.29
01.01.02 To Cash 5,000 31.12.02 By Profit & Loss A/c 5,000
5,000 5,000
01.01.03 To Cash 5,000 31.03.03 By Cash 1,00,000
31.03.03 X, Y & Zs Capital a/c 95,000
95,000 1,00,000
Note: Nothing will appear in balance sheet
Case II. Joint Life Policy:
JLP Premium is treated as asset up to its surrender value
01.01.00 i. Joint Life Policy a/c Dr 5,000
To Cash 5,000
31.12.00 ii. Profit and Loss a/c 5,000
To Joint Life Policy a/c 5,000
01.01.01 i. Joint Life Policy a/c Dr 5,000
To cash a/c 5,000
31.12.01 ii. Profit and Loss a/c 4,000
To Joint Life Policy a/c 4,000
01.01.02 i. Joint Life Policy a/c Dr 5,000
To cash a/c 5,000
31.12.02 ii. Profit and Loss a/c 3,500
To Joint Life Policy a/c 3,500
01.01.03 i. Joint Life Policy a/c Dr 5,000
To Cash 5,000
31.12.03 ii. Cash a/c 100,000
To Joint Life Policy a/c 100,000
31.12.03 iii. Joint Life Policy a/c Dr 92,500
To Xs Capital a/c 37,000
To Ys Capital a/c 37,000
To Zs Capital a/c 18,500
Joint Life Policy A/c
Date Debit Date Credit
01.01.00 To Cash 5,000 31.12.00 By Profit & Loss A/c 5,000
5,000 5,000
01.01.01 To Cash 5,000 31.12.01 By Profit & Loss A/c 4,000
Balance c/d 1,000
5,000 5,000
01.01.02 To Balance b/d 1,000 31.12.02 By Profit & Loss A/c 3,500
01.01.02 Cash 5,000 Balance c/d 2,500
-
Partnership Accounting 6.2.30
6,000 6,000
01.01.03 To Balance b/d 2,500 31.03.03 By Cash 1,00,000
01.01.03 Cash 5,000
31.03.03 X, Y & Zs Capital a/c 92,500
95,000 1,00,000
Balance Sheet 2000 01
Liabilities Assets
Joint Life Policy a/c Nil
2001 02
Joint Life Policy a/c 1,000
2002 03
Joint Life Policy a/c 2,500
Case III. Joint Life Policy
JLP Premium is treated as asset up to its surrender value
JLP Reserve a/c is created to adjust the loss on JLP
Year: 2000
i. Joint Life Policy a/c Dr 5,000
To Cash 5,000
Profit and Loss a/c Dr 5,000
To JLP Reserve a/c 5,000
JLP Reserve a/c Dr 5,000
To Joint Life Policy a/c 5000
Year 2001 5,000
ii. Joint Life Policy a/c Dr 5,000
To Cash 5,000
Profit and Loss a/c Dr 5,000
To JLP Reserve a/c 5,000
JLP Reserve a/c Dr 4,000
To Joint Life Policy a/c 4,000
Year 2002
iii. Joint Life Policy a/c Dr 5,000
To Cash 5,000
Profit and Loss a/c Dr 5,000
To JLP Reserve a/c 5,000
JLP Reserve a/c Dr 3,500
To Joint Life Policy a/c 3,500
Year 2003
iv. Joint Life Policy a/c Dr 5,000
To Cash 5,000
-
Financial Accounting 6.2.31
Cash a/c Dr 100,000
To Joint Life Policy a/c 7,500
To JLP Reserve 92,500
JLP Reserve a/c Dr 95,000
To Partners Capital a/c 95,000
Joint Life Policy A/c
Date Debit Date Credit
01.01.00 To Cash 5,000 31.12.00 By JLP Reserve a/c 5,000
5,000 5,000
01.01.01 To Cash 5,000 31.12.01 By JLP Reserve a/c 4,000
Balance c/d 1,000
5,000 5,000
01.01.02 To Balance b/d 1,000 31.12.02 By JLP Reserve a/c 4,000
01.01.02 Cash 5,000 Balance c/d 2,500
6,000 6,000
01.01.03 To Balance b/d 2,500 31.03.03 By Cash 1,00,000
01.01.03 Cash 5,000
31.03.03 JLP Reserve a/c 92,500
1,00,000 1,00,000
Joint Life Policy Reserve A/c
Date Debit Date Credit
01.01.00 To Joint Life Policy a/c 5,000 31.12.00 By Profit and Loss a/c 5,000
5,000 5,000
01.01.01 To Joint Life Policy a/c 4,000 31.12.01 By Profit and Loss a/c 5,000
Balance c/d 1,000
5,000 5,000
31.12.02 To Joint Life Policy a/c 3,500 01.01.02 By Balance b/d 1,000
31.12.02 Balance c/d 2,500 31.12.02 Profit and Loss a/c 5,000
6,000 6,000
31.03.03 To Partners Capital a/c 95,000 01.01.02 By Balance b/d 2,500
31.12.02 Joint Life Policy a/c 92,500
95,000 95,000
-
Partnership Accounting 6.2.32
Death of a Partner
Deceased partners share of profit: is calculated based on the previous year/s profit, proportionate
up to the date of death to the extent of his share. Journal entry:
P/L Suspense A/c Dr
To Deceased Partners Capital a/c
Some important provisions of the Indian Partnership Act, 1932
Right to Share Subsequent Profits: Every outgoing partner or Estate of deceased Partner has the
right to claim either interest @ 6% p.a. or his share of profit attributable to the use of his share of
firms property at his option, if the remaining partners carry on the business without any final
settlement (Sec.37)
[CMA RTP J11]
Discuss the applicability of Section 37 of the Partnership Act: In case of retirement, the retiring
partner or in case of death, the executor of the deceased partner, if the dues are not settled, then such
retired partner or the executor is entitled to the following:
Maximum of:
Interest @ 6% p.a. on the amount due to them [Or] The share of profit earned for the amount due to
the partner
Conditions:
(a) The surviving partners/continuing partners continue to carry on the business of the firm.
(b) The business is carried on without any final settlement of accounts between the continuing
partners and the outgoing partners or his estate.
(c) There is no contract to the contrary of the options contained in Section 37 i.e. share in the profits
or interest @ 6% p.a. on the unsettled capital.
Example: Unsettled capital of C 52,000 (Date of retirement: 30.9.08, financial year 2008-09). Net
Profit earned by the firm after Cs retirement 25,000. Capitals of A: 57,000 and B 76,000)
C is entitled to the maximum of the following:
(i) interest on unsettled capital = 52,000 6% 6 months = 1,560 [Or]
(ii) Profit earned out of unsettled capital = Profit x Retired or Deceased Partners unsettled
Dues /Total Capital of the firm (including the amount due to the retired or deceased partner)
= .(25,000 52,000 ) / (52,000 + 57,000 + 76,000) = 7,027.
Right to Carry on Competing Business: Unless otherwise agreed, every outgoing partner has a right
to carry on competing business and to advertise such business but he cannot: Use the firms name,
Represent the firm and Solicit the firms customer [Sec.36(1)]
-
Financial Accounting 6.2.33
Dissolution on Death: Unless otherwise agreed, a firm is dissolved on the death of a partner [Sec
42(c)]
No Liability of Estate of Deceased Partner to third parties for firms act after his death (Sec. 35)
No Public Notice is required on the death of partner
Special considerations for a retiring partner and the estate of a deceased partner in relation to
debts contracted by the partnership firm:
1. debts due on the date of retirement/death: the retiring partner and the estate of the deceased partner is liable for the whole of the debts due by the firm at the date of
retirement or death, to the extent of their share.
2. debts incurred after retirement: where the notice of retirement is not published in accordance with law, the retiring partner is liable for debts contracted after retirement.
3. deceased/ insolvent partner: the estate of a deceased or bankrupt partner will not be liable for debts contracted by the firm after the death or bankruptcy.
Question 30: A, B and C were partners of a firm sharing profits and losses in the ratio of 3:4:3.
Balance Sheet as at 31st March,1998
Liabilities Assets
Capital Accounts: Fixed Assets 100,000
A 48,000 Current Assets
B 64,000 Stock 30,000
C 48,000 160,000 Debtors 60,000
Reserves 20,000 Cash in hand 30,000 120,000
Sundry Creditors 40,000
220,000 220,000
The firm had taken a joint life policy for 100,000; the premium periodically paid was charged to
Profit and Loss Account. Partner C died on 30th September 1998. It was agreed between the surviving
partners and the legal representatives of C that:
1. Goodwill of the firm will be taken at 60,000
2. Fixed Assets will be written down by 20,000
3. In lieu of profits, C should be paid at the rate of 25% p.a. on his capital as on 31-3-98,
Policy money was received and the legal heirs were paid off. The profits for the year ended 31-3-99,
after charging depreciation of 10,000 (depreciation up to 30-Sep was agreed to be 6,000), were
48,000.
Partners Drawings Accounts showed balances as under:
1. As drawings - 18,000 (drawn evenly over the year)
2. Bs drawings - 24,000 (drawn evenly over the year)
3. Cs drawings - (up-to-date of death) 20,000
-
Partnership Accounting 6.2.34
On the basis of the above figures, please indicate the entitlement of the legal heirs of C, assuming that
they had not been paid anything other than the share in the Joint Life Policy.
Answer: Determination of entitlement of legal heirs of C
Profits for the half year ended 31st March, 1999:
Profits for the year ended 31st March, 1999 (after depreciation) 48,000
Add Depreciation 10,000
Profits before depreciation 58,000
Period 01.04.98-
30.09.98
01.10.98-
31.03.99
Profit split for two half years (assumed: evenly spread) 29,000 29,000
Less Depreciation [I half 6,000 and II half 4,000] 6,000 4,000
Profits 23,000 25,000
Capital Accounts of partners as on 30th
September, 1998:
Particulars A B C Particulars A B C
To Fixed Assets 6,000 8,000 6,000 By Balance c/d 48,000 64,000 48,000
Drawings 9,000 12,000 20,000 Reserve* 6,000 8,000 6,000
Goodwill 18,000 24,000 18,000
Cs Executor A/c
- - 52,000 P/L
Appropriation*
- - 6,000
Balance c/d 57,000 76,000 -
72,000 96,000 78,000 72,000 96,000 78,000
* (Interest on 48,000 @ 25% for 6 m)
(3) Application of Section 37 of the partnership Act: Legal heir of C has not been paid anything
other than the share in joint life policy. Amount due to the deceased partner carries interest at the
mutually agreed rate. If there is no agreement the representatives of the deceased partner can receive
at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to
the deceased partner.
Therefore, the representatives of C can Choose: - Either,
(i) Interest on 52,000 for 6 months @ 6% p.a. = 1,560 (Or)
(ii) Profit earned out of unsettled capital (in the second half year ended 3s1t march, 1999)
25,000 52,000/57,000 + 76,000 + 52,000 = 7,027 (approx)
In the above case, it would be clear that the legal heir of C would chose option of 7,027.
Amount due to legal heirs of C:
Balance in Cs Executors account 52,000
Add Amount of profit earned out of unsettled capital [calculated in (3)] 7,027
Amount due 59,027
Settlement of Accounts on Dissolution:
(a) Regarding Losses: Losses, including deficiencies of capital, shall be paid first out of profits,
next out of capital and lastly if necessary, by the partners individually in the proportions in which they
are entitled to share profits.
-
Financial Accounting 6.2.35
(b) Regarding Assets: The assets of the firm, including any sums contributed by the partners to
make up deficiencies of capital, shall be applied in the following manner and order in paying:
1. the debts of the firm to third parties;
2. each partner ratably what is due to him from the firm for advances as distinguished from capital ;
3. to each partner ratably what is due to him as capital; and
4. The residue shall be divided among the partners in the proportions in which they are entitled to share profits.
[CMA INTER D10, 10 Marks]
Question 31: Asha, Bhipasa and Chitra are partners in a partnership firm sharing profits and losses as
8:7:5. From 1.4.09 the partners decided to change their profit sharing ratio as 5:4:1 and for that
purpose the following adjustments were agreed upon. Balance Sheet of the firm as on 31.3.2009 was
as under.
Liabilities Asset
Capital a/cs Plant &machinery 80,000
Asha 50,000 furniture 10,000
Bipasha 40,000 Stock 40,000
Chitra 30,000 1,20,000 Trade Debtors 52,000
Reserves 30,000 Less; provision (2,000) 50,000
Bs loan 20,000
Trade Creditors 40,000
Bank 30,000
1,20,000 1,20,000
(i) Furniture and Machinery were to be depreciated and appreciated and appreciated by 5% and 10% respectively.
(ii) Provision for bad debts was to be increased by 3,000. (iii) P&L A/c of the firm for the year ended 31.3.10 showed a net profit of 68,700. (iv) A contingent liability of 10,000 was to be treated as actual liability.
The partners decided not to alter the book values of the assets, liabilities and reserves but recorded
the change by passing one single journal entry.
You are required:
a) To show a single journal entry adjusting the capitals of the partners as on 1-4-09, and b) To show the P&L A/C for the year ended 31.3.10 after considering the following adjustments:
(i) Interest on capital at 5% (ii) Interest on Bs loan and (iii) Transfer 20% of the divisible profit to the reserves after charging such reserve.
Answer:
Memorandum Revaluation A/c
Particulars Particulars To Furniture 500 By Machiery 8,000
Provision for Debtors 3,000 Reserves 30,000
Contingent Liability 10,000
Partners Capital A/C
Asha 8/20 9,800
Bipasha 7/20 8,575
Chitra 5/20 6,115 24,500
-
Partnership Accounting 6.2.36
38,000 38,000
Machinery 8,000 Furniture 500
Provision for Debtors 3,000
Contingent Liability 10,000
Reserves 30,000 Partners capital A/C
Asha 5/10 12,250
Bipasha 4/10 9,800
Chitra 1/10 2,450 24,500
38,000 38,000
Net Effect Cr Dr
A 9,800 12,250 2,450 Dr
B 8,575 9,800 1,225 Dr
C 6,115 2,450 3,675 Cr
Adjustment Entry
Ashas Capital A/c Dr 2,450
Bipashas Capital A/c Dr 1,225
To Chitras Capital A/c 3,675
Profit and loss A/C for the year ended 31.3.2010
Particulars Particulars To Interest on capital @5% By Balance b/d 68,700
Asha (50,000 2,450) 2,378 2,378
Bipasha (40,000 1,225) 1,938 1,938
Chitra (30,000 + 3,575) 1,684 1,684
Reserve (61,50020/120) 10,250
Partners Capital A/C:
Asha 5/10 25,625
Bipasha 4/10 20,500
Chitra 1/10 5,125 51,250
68,700 68,700
ADDITIONAL PROBLEMS
ADMISSION OF A PARTNER
[CMA INTER D01, 20 Marks]
Question: Admission of a partner where Ltd. companies are partners: On 30th November, 2001
the following was the balance sheet of XY & Co., a partnership firm where X Ltd. and Y Ltd. Were
partners sharing profits and losses in the ratio of 3:2 after payment of interest on fixed capitals at 12%
per annum:
(In crores)
(In crores)
Fixed assets : Cost 60
Less : Accumulated depreciation 40 20
-
Financial Accounting 6.2.37
Investments at cost in equity shares of :
A Ltd. (Market value 80 Cr.) 30
B Ltd. (Market value 70 Cr.) 25 55
Current Assets 140
Less : Current Liabilities 65 75
150
Financed by:
Loan from Zed Ltd. carrying interest at 15% p.a 40
Reserves 30
Current accounts of partners :
X Ltd. 3
Y Ltd. 2 5
Capital Accounts :
X Ltd. 40
Y Ltd. 35 75
150
On 1st December, 2001 they decided to admit Z Ltd. as a partner. The following terms were agreed
upon:
(i) Zed Ltd.s loan is to be converted into fixed capital.
(ii) The goodwill of the firm is considered to be worth 50 crores; however the necessary adjustment should be recorded through fixed capital accounts of the partners.
(iii) The fixed assets are considered to be worth 50 crores. However they are to continue to appear in the books at the present cost of 60 crores and the present accumulated provision for depreciation of 40 crores. The necessary adjustment is to done through fixed capital accounts.
(iv) There is no change in the valuations of current assets and current liabilities. (v) Reserves are to continue to appear at the balance sheet figures. However necessary
adjustment is to be through fixed capital accounts.
(vi) The investments in A Ltd. are to be taken over by X Ltd. as 70 crores. The investments in B Ltd. are to be taken over by Y Ltd. at 60 crores.
(vii) X Ltd., Y Ltd., and Z Ltd are to bring in such amounts as fixed capital as would enable
combined balance of 120 crores in the fixed capital accounts carried forward in revised profit sharing ratio.
(viii) Interest at 1% per month is to be calculated on the fixed capitals and credited to partners current accounts.
(ix) 10% of the annual profit (after considering interest on fixed capitals) is to be credited to reserves.
(x) The balance 90% of annual profit is to shared by X Ltd., Y Ltd. and Z Ltd. In the ratio of 5 : 3 : 2. The same is to be credited to current accounts.
(xi) Drawings of the partners during the year are to be within the upper ceiling of credit to current accounts. The same is to be credited to current accounts.
You are asked to pass necessary accounting entries through the journal of the firm on the morning of
December 1, 2001 and prepare the balance sheet before any other transaction takes place on
December 1, 2001. The balance sheet should also show the comparative position before admission of
Zed Ltd.
-
Partnership Accounting 6.2.38
Answer:
Journal Entries in the Books of XY & Co. Ltd. [ In crores]
Particulars L.F Dr. Cr.
1. Zed Ltd Loan A/c Dr. 40
To Zed Capital A/c 40
(Being transferred of Loan to Zed Capital)
2. Goodwill A/c Dr. 50
To X A/c 30
To Y A/c 20
(Being Goodwill raised in old Ratio)
3. X A/c Dr. 25
Y A/c Dr. 15
Z A/c Dr. 10
To Goodwill A/c 50
(Being Goodwill written off in new ratio)
4. Fixed Asset A/c Dr. 30
To X A/c 18
To Y A/c 12
(Being Fixed Assets revaluation transferred to Partners Capital A/c in old profit sharing ratio.
5. X A/c Dr. 15
Y A/c Dr. 9
Z A/c Dr. 6
To Fixed Assets A/c 30
(Being Fixed Assets revaluation transferred in
new profit sharing ratio amount among all partners)
6. Reserve A/c Dr. 30
To X A/c 18
To Y A/c 12
(Being Reserves distributed in old ratio)
7. X A/c Dr. 15
Y A/c Dr. 9
Z A/c Dr. 6
To reserves Assets A/c 30
(Being Reserve debited in new ratio at 5:3:2)
8. X A/c Dr. 70
To Investment A/c 30
To Realisation A/c 40
(Being investments in A Ltd. takeover by X Ltd.)
9. Y A/c Dr. 60
To Investment on B Ltd. A/c 25
To Realisation A/c 35
-
Financial Accounting 6.2.39
(Being Investment Taken Over by Y Ltd.)
10. Realisation A/c Dr. 75
To X A/c 45
To Y A/c 30
(Being Profit on takeover of investments credited
to partners capital in old profit sharing ratio)
11. Bank A/c Dr. 60
To X A/c 34
To Y A/c 20
To Z A/c 6
(Being fixed capital introduced by the three partners
in pursuance of clause of partnership deed dated Dec 1, 2001)
Balance Sheet
Particulars After
Admission
Before
Admission
I. Assets 60 60
Less : Accumulated Depreciation 40 20 40 20
Investment at Cost
A Ltd (M.V. 80 cr.) Nil Nil 30
B Ltd (M.V.70 cr.) Nil Nil 25 55
Current Assets 140 140
Bank 60 135 65
Current Liability 65 155 150
Financed by :- Nil 40
Loan from Z Ltd.
Owners fund 30 30
Reserves
Current A/c
X 3 5 3 5
Y 2 2
Capital A/c (W.N.1)
X 60 40
Y 36 120 35 75
Z 24 Nil
155 150
Working Note 1
Partners Capital A/c
Particulars X Y Z Particulars X Y Z
To Goodwill 25 15 10 By Balance b/d 40 35 --
Fixed Asset A/c 15 9 6 Zed loan A/c -- -- 40
Reserve A/c 15 9 6 Goodwill A/c 30 20 --
Investment A/c 70 -- -- Fixed Asset 18 12 --
Investment A/c -- 60 -- Reserve A/c 18 12 --
Balance c/d 60 36 24 Profit 45 30 --
-
Partnership Accounting 6.2.40
Bank A/c 34 20 6
185 129 46 185 129 46
[CMA INTER J03, 4+6+6=16 Marks]
Question: Admission of partner: The Balance Sheet of P & R, Partnership Firm, as at 31st March,
2003m is as follows:
Liabilities Assets
Capital Account : Goodwill 14,000
P 26,400 Land and Building 14,400
R 33,600 60,000 Furniture 2,200
Contingency Reserve 6,000 Stock 26,000
Sundry Creditors 9,000 Sundry Debtors 6,400
Cash at Bank 12,000
75,000 75,000
P & R share Profits and Losses as 1:2. They agree to admit S (who is also in business of his own) as a
third partner from 01.04.2003.
The Assets are revalued as under:
Goodwill 18,000, Land and Building 30,000, Furniture 6,000. S brings the following Assets into
Partnership Goodwill 6,000, Furniture 2,800, Stock 13,600.
Profits in the new firm are to be shared equally by the three Partners and the Capital Accounts are to
be so adjusted as to be equal.
Prepare Revaluation A/c, Partners Capital A/c and Balance Sheet after the admission of S.
Answer:
Revaluation A/c
Particulars Amount Particulars Amount
To Partner Capital A/c By Goodwill A/c 4,000
Ps Capital 7,800 Land & Building A/c 15,600
Rs Capital 15,600 23,400 Furniture A/c 3,800
23,400 23,400
Partner Capital A/c
Particulars P R S Particulars P R S
To Balance c/d 53,200 53,200 53,200 By Balance b/d 26,400 33,600 --
Contingency 2,000 4,000 --
Revaluation
Profit & Loss 7,800 15,600 --
Goodwill A/c -- -- 6,000
Furniture A/c -- -- 2,800
Stock A/c -- -- 13,600
Bank A/c 17,000 -- 30,800
53,200 53,200 53,200 53,200 53,200 53,200
Note: It is assumed that Rs Capital is taken as base to calculate remaining Partners Capital.
-
Financial Accounting 6.2.41
Balance Sheet
Liabilities Amount Asset Amount
Sundry Creditors 9,000 Goodwill 24,000
Partner Capital A/c Land & Buildings 30,000
P 53,200 Furniture 8,800
R 53,200 Stock 39,600
S 53,200 1,59,600 Sundry Debtors 6,400
Cash and Bank 59,800
1,68,600 1,68,600
[CMA INTER D04, 14 Marks]
Question: Admission of Partner with hidden goodwill: A and B are partners sharing profits and
losses in the ratio of 3: 2. Their Balance Sheet stood as under on 01.01.2003.
Liabilities Assets
Capital Accounts A 29,000 Buildings 35,000
B 15,000 Machinery 19,000
Reserve 10,000 Furniture 5,000
Creditors 28,500 Stock 15,000
Outstanding Expenses 4,000 Debtors 9,400
Less : Provision for Bad Debts 400 9,000
Prepaid Insurance 1,500
Cash 2,000
86,500 86,500
C is admitted as a new partner introducing a capital of 21,000. The capitals of the partners are to be
adjusted in the new profit sharing ratio, which is 5 : 3 : 2 taking Cs capital as base. C is to bring
premium for goodwill in cash. Goodwill amount is being calculated on the basis of Cs share in the
profits and capital contributed by him. Following revaluations are made:
i. Stock to be depreciated by 5%;
ii. Provision for bad debts is to be raised to 500; iii. Furniture to be depreciated by 10%;
iv. Buildings are revalued at 41,350. Prepare necessary Ledger Accounts and the Balance Sheet of the new firm.
Answer:
Revaluation A/c
Particulars Amount Particulars Amount
To Stock A/c 750 By Building A/c 6,350
Furniture A/c 500
Provision for Bad Debts A/c 100
Partner Capital A/c
A 3,000
B 2,000 5,000
6,350 6,350
-
Partnership Accounting 6.2.42
Balance Sheet
Liabilities Amount Asset Amount
Capital A/c Building 41,350
A 52,500 Machinery 19,000
B 31,500 Furniture 4,500
C 21,000 1,05,000 Stock 14,250
Creditors 28,500 Sundry Debtors 9,400
Outstanding Expenses 4,000 Less: Provision 500 8,900
Prepaid insurance 1,500
Cash (WN1) 48,000
1,37,500 1,37,500
Working Notes:
A B C Total
Capital 29,000 15,000 -
Reserve 6,000 4,000
Revaluation Profit 3,000 2,000
1 Total 38,000 21,000 21,000 80,000
2 Total Capital [using Cs capital base] 1,05,000
Goodwill of A and B [2 1] 25,000
Total Goodwill of the firm
Partner Capital A/c
Particulars A B C Particulars A B C
To Cash A/c -- -- 3,000 By Balance b/d 29,000 15,000 --
Cash A//c -- -- 2,000 Reserve A/c 6,000 4,000 --
Balance c/d 52,500 31,500 21,000 Revaluation A/c 3,000 2,000 --
Cash A/c -- -- 26,000
Cash A/c 14,500 10,500
52,500 31,500 26,000 52,500 31,500 26,000
Working Note 1;
Particulars Amount Particulars Amount
To Balance b/d 2,000 By As Capital A/c 3,000
As Capital A/c 14,500 Bs Capital A/c 2,000
Bs Capital A/c 10,500 Balance c/d (B/F) 48,000
Cs Capital A/c 26,000
53,000 53,000
[CMA INTER D05, 14 Marks]
Question: Admission of Partner: The following is the Balance Sheet of A and B, who share profits
and losses as 3 : 2 respectively, as at 31.12.2004:
Liabilities Assets
Capital : A 35,000 Land and Building 30,000
B 30,000 Plant and Machinery 20,000
Reserve 10,000 Stock 10,000
Creditors 25,000 Debtors 20,000
-
Financial Accounting 6.2.43
Less : PDD 1,000 19,000
Bank 11,000
Cash 10,000
1,00,000 1,00,000
On 01.01.2005, C joins the firm and brings in the following assets:
Stock 21,000; Investments 12,000; Cash 15,000; Debtors 10,000.
Following were agreed upon:
i. The new profit sharing ratio among A, B and C will be equal. ii. The capitals of the partners should also be equal taking Cs capital as base.
iii. The reserve of the new firm will be 15,000. iv. Provision for doubtful debts is to be created @ 10% of total debtors.
v. An investment provision of 2,000 is to be created. You are required to prepare the Balance Sheet of the new firm.
Answer:
Balance Sheet of the New Firm as on 31.12.2004
Liabilities Amount Asset Amount
Capital Land & Building 30,000
A 50,000 Plant & Machinery 20,000
B 50,000 Stock 31,000
C 50,000 1,50,000 Investment 12,000
Creditors 25,000 (-) Provision 2,000 10,000
Reserve 15,000 Sundry Debtors 30,000
(-) Prov. for Bad Debts 3,000 27,000
Bank (W.N.1) 47,000
Cash (10,000 + 15,000) 25,000
1,90,000 1,90,000
Partner Capital A/c
Particulars A B C Particulars A B C
To Reserve A/c 5,000 5,000 5,000 By Balance b/d
Prov. for Bad Debts
A/c (WN2)
400 1,000 Stock A/c
Prov. for
Investment (WN3)
600 -- 2000 Investment
A/c
Balance c/d 50,000 50,000 50,000 Cash A/c
Debtors A/c
Bank A/c
Reserve A/c
55,600 55,400 58,000 55,600 55,400 58,000
Working Note 1:
Bank A/c
Particulars Amount Particulars Amount
To Balance b/d 11,000 By Balance c/d 47,000
As Capital A/c 14,600
Bs Capital A/c 21,400
47,000 47,000
-
Partnership Accounting 6.2.44
Working Note 2: Debtors of A & B were 20,000. Provision for Doubtful Debts for is to be
maintained at 10%. Therefore for Doubtful Debtors for these Debtors will be 2,000. To create further
Provision of 1,000 Capital of A & B will debited in the ratio of 3 : 2 respectively. For the Debtors of
10,000 brought in by C, entire provision is to be created by debiting Cs Capital A/c.
Working Note 3: Investment provision is to be created by debiting Cs capital A/c only.
[CMA INTER J06, 14 Marks]
Question: Admission of Partner: Sa and Re were equal partners of M/s.Sabda Swara. Givern below
is the Balance Sheet of M/s.Sabda Swara as on 31.03.2006. On the same date GA was admitted as a
partner.
Balance Sheet as on 31.03.2006
Liabilities Amount Amount Capital
Sa 3,55,000
Re 3,55,000 7,10,000
Current Liabilities 2,95,000
10,05,000
Assets
Fixed assets 6,00,000
Bank 22,500
Sundry Debtors 2,50,000
Advance 1,32,500
10,05,000
Ga was admitted on the following terms:
1. Ga to bring 4,00,000/- towards capital and 2,00,000/- for 1/3 share of profit.
2. Partners to shares profit or loss equally.
3. Not to show Goodwill in the Books after admission.
4. To revalue Plant at 6,55,000/-
5. To provide 10% for Doubtful Debts.
6. To write 10% of the advances.
7. To show the assets at revalued rate in the Balance Sheet.
8. Each partner to have 5,00,000/- as balance in Capital A/c. The difference to be adjusted by
bringing the short fall or by withdrawing the excess.
Pass necessary Journal and prepare Revaluation A/c and Balance sheet after admission in the Books
of M/s. Sabda Sawara.
Answer:
Revaluation A/c
Particulars Amount Particulars Amount
To Prov. for Doubtful Debts A/c 25,000 By Building A/c 55,000
Advance 13,250
Partners Capital A/c
Sa 8,375
Re 8,375 16,750
55,000 55,000
-
Financial Accounting 6.2.45
Partner Capital A/c
Particulars Sa Re Ga Particulars Sa Re Ga
To Goodwill 2,00,000 2,00,000 2,00,000 By Balance b/d 3,55,000 3,55,000 --
Bank A/c -- -- 6,00,000
Revaluation 8,375 8,375 --
Bank A/c 36,625 36,625 1,00,000
Balance 5,00,000 5,00,000 5,00,000 Goodwill 3,00,000 3,00,000 --
7,00,000 7,00,000 7,00,000 7,00,000 7,00,000 7,00,000
Balance Sheet of M/s. Sabda Swara As on 31.03.2006
Liabilities Amount Asset Amount
Capital A/c Fixed Assets 6,55,000
Sa 5,00,000 Bank (W.N.1) 7,95,750
Re 5,00,000 Sundry Debtors 2,50,000
Ga 5,00,000 15,00,000 Less: Provision