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Chapter # 12 Partnership – Admission

Principles of Accounting – B.Com Part – I

Sameer Hussain

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Partnership – Admission

Chapter # 12

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Sameer Hussain

WHAT THE EXAMINER USUALLY ASK?

Computation of Admission of new partner by: o Purchase Method. o Bonus Method – Bonus to old partners. o Bonus Method – Bonus to new partner. o Goodwill Method – Goodwill to old partners. o Goodwill Method – Goodwill to new partner. o Sufficient Cash Method. o Total Capital Method. o Revaluation of assets.

General Journal entries for admission. Balance Sheet after admission.


Chapter # 12

Sameer Hussain Page 177

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Chapter # 12

PARTNERSHIP – ADMISSION ADMISSION OF A PARTNER

Admission of a partner means that a new person wants to join the partnership. A new partner can admit in the partnership by the following ways:

By purchasing interest of old partners. By making investment.

Admission by purchase method

In this case the new partner purchases the interest of old partner or partners by paying cash to them from his private sources which is not recorded in the partnership.

Entry to Record Admission of New Partner by Purchase Method: Old partners’ capital DR. (with the share purchases by new partner) New partner’s capital CR. (with the shares purchased of old partners) (To record the admission of new partner) ----------------------------------------------------------------------------------------------------------------------

Admission

Purchase Method

Bonus Method

Bonus to Old Partners -More than

Capital

Capital is increased by

new partner's invetsment

Bonus to New Partner - Less than Capital

Capital is increased by

new partner's investment

Goodwill Method

Goodwill to Old Partners -

More than Capital

Capital is to be credited with

entire amount of his/her

invetsment

Goodwill to New Partner -

Less than Capital

Old partners are not ready to reduce their

capitals


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Sameer Hussain

ILLUSTRATION # 1: (Admission by Purchasing Interest of Old Partners)

1992 Regular & Private (Case – a) – BIEK Akhtar and Hafeez are partners in a firm sharing profit s and losses in the ratio of 3:2. The balance sheet of the firm on December 31, 1991 was as under: Total assets 255,000 A/c payable 55,000 Akhtar Capital 120,000 Hafeez Capital 80,000 255,000 255,000

On January 1, 1992 Kashif is admitted as a partner. REQUIRED Give entries in the General Journal for admission of Kashif. Show computation. Case (i): Kashif is to purchase 1/4 interest from Akhtar and 1/4 from Hafeez and pay to

them privately Rs.60,000 and Rs.30,000 respectively.

SOLUTION # 1: Computation: Akhtar = 120,000 x 1/4 = 30,000 Hafeez = 80,000 x 1/4 = 20,000 ________ Kashif Capital = 50,000 ________

________ PARTNERSHIP

GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Akhtar Capital 30,000 Hafeez Capital 20,000 Kashif Capital 50,000 (To record the admission of Kashif)

Admission by investment

In this case new partner makes investment in the partnership. When the new partner makes investment, bonus or goodwill arises in the partnership.

Bonus method

Old partners’ capital XXX Add: New partner’s investment XXX Total capital of firm XXX

For xx interest new partner’s capital (total capital x new partner’s ratio) XXX Less: New partner’s investment (XXX) Bonus to old/new partner (XXX)/XXX

Note: Negative value shows the bonus goes to old partners and positive value shows the bonus goes to new partner.

Entry to Record Admission of New Partner by Bonus Method: When bonus goes to new partner:

Cash/other assets DR. (with investment amount) Old partners’ capital DR. (with the amount of bonus goes to new partner) New partner’s capital CR. (with the capital amount) (To record the admission of new partner) ----------------------------------------------------------------------------------------------------------------------


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When bonus goes to old partners: Cash/other assets DR. (with investment amount) Old partners’ capital CR. (with amount of bonus goes to old partners) New partner’s capital CR. (with the capital amount) (To record the admission of new partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 2: (Admission by Bonus Method – Bonus to Old Partners)

1993 Regular & Private (Case – b) – BIEK A and B, partners, with capital balances of Rs.60,000 and Rs.40,000, respectively, sharing profits and losses in the ratio of 2:1, agree to admit C as a partner. REQUIRED Give General Journal entries to record the admission of C. (Show also necessary computations.) Case (ii): C invests Rs.68,000 cash for 1/3 interest. (The total capital of the firm is to be

increased only by the amount of C’s investment).

SOLUTION # 2:

Computation (Bonus Method): Old partners’ capital (60,000 + 40,000) 100,000 Add: C’s investment 68,000 Total capital of firm 168,000

For 1/3 C’s capital (168,000 x 1/3) 56,000 Less: Cr’s investment (68,000) Bonus to old partners 12,000


GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Cash 68,000 A Capital (12,000 x 2/3) 8,000 B Capital (12,000 x 1/3) 4,000 C Capital 56,000 (To record the investment of C)

ILLUSTRATION # 3: (Admission by Bonus Method – Bonus to New Partner)

2002 Private (Case – b) – BIEK Nazia and Shazia are partners with capitals Rs.120,000/- and Rs.80,000/- respectively. They share profits and losses in their capital ratio. They admit Razia as a new partner. REQUIRED Pass entries in general journal to record admission of Razia and show necessary computations.

(i) Razia invests Rs.50,000/- cash for a 1/4 interest in the capital and total capital of the new firm is to be increased only by the amount of Razia’s investment.

SOLUTION # 3:

Computation: (Bonus Method): Old partners’ capital (120,000 + 80,000) 200,000 Add: Razia’s investment 50,000 Total capital of firm 250,000

For 1/4 interest Razia’s capital (250,000 x 1/4) 62,500 Less: Razia’s investment (50,000) Bonus to Razia 12,500


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Sameer Hussain

________ PARTNERSHIP GENERAL JOURNAL

Date Particulars P/R Debit Credit 1 Cash 50,000 Nazia Capital (12,500 x 3/5) 7,500 Shazia Capital (12,500 x 2/5) 5,000 Razia Capital 62,500 (To record the admission of Razia)

goodwill method

check:

New partner’s investment XXX Multiply by opposite interest of new partner X/X Total capital of firm XXX Less: Old partners’ capital XXX Less: New partner’s investment (XXX) (XXX)/XXX

Note: Negative amount shows the goodwill goes to new partner and positive amount shows the goodwill goes to old partners. If goodwill goes to new partner, computation will be started with old partners’ capital. And if goodwill goes to old partners, computation will be started with new partner’s investment.

Goodwill to old partners

For xx interest, new partner’s investment XXX

Total capital of firm (new partner’s investment x opposite interest of new partner) XXX

For xx interest old partners’ capital (total capital x old partners’ interest) XXX Less: Old partners’ capital before admission (XXX) Goodwill to old partners XXX

Entry to Record Admission of New Partner by Goodwill Method: Goodwill goes to old partners:

Cash /other assets DR. (with investment amount) New partner’s capital CR. (with investment amount) (To record the admission of new partner) ---------------------------------------------------------------------------------------------------------------------- Goodwill DR. (with the amount of total goodwill) Old partners’ capital CR. (with their ratio) (To record the distribution of goodwill) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 4: (Admission by Goodwill Method – Goodwill to Old Partners)

2002 Private (Case – d) – BIEK Nazia and Shazia are partners with capitals Rs.120,000/- and Rs.80,000/- respectively. They share profits and losses in their capital ratio. They admit Razia as a new partner. REQUIRED Pass entries in general journal to record admission of Razia and show necessary computations.

(i) Razia invests cash Rs.50,000/- for a 1/6 interest in the firm. Her capital account is to be credited with the entire amount of her investment.


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SOLUTION # 4:

Computation: (Goodwill to Old Partners): (Sentence “Her capital account is to be credited with the entire amount of her investment” shows goodwill old partners). For 1/6 interest, Razia’s investment 50,000

Therefore total capital of firm (50,000 x 6/1) 300,000

For 5/6 interest, old partners’ capital (300,000 x 5/6) 250,000 Less: Old partners’ capital before admission (120,000 + 80,000) (200,000) Goodwill to old partners 50,000

________ PARTNERSHIP GENERAL JOURNAL

Date Particulars P/R Debit Credit 1 Cash 50,000 Razia Capital 50,000 (To record the admission of Razia) 2 Goodwill 50,000 Nazia Capital (50,000 x 3/5) 30,000 Shazia Capital (50,000 x 2/5) 20,000 (To record the distribution of goodwill)

Goodwill to new partner

For xx interest, old partners’ capital XXX

Total capital of firm (old partners’ capital x opposite interest of old partners) XXX

For xx interest new partner’s capital (total capital x new partner’s interest) XXX Less: New partner’s investment (XXX) Goodwill to new partner XXX

Entry to Record Admission of New Partner by Goodwill Method: Goodwill goes to new partner:

Cash /other assets DR. (with investment amount) Goodwill DR. (with total goodwill amount) New partner’s capital CR. (with capital amount) (To record the admission of new partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 5: (Admission by Goodwill Method – Goodwill to New Partner)

1999 Regular & Private (Case – c) – BIEK Adeel and Raees are partners with capital balance of Rs,60,000 and Rs.40,000 respectively. They share profit and loss in the ratio of 3:2. They agree to admit Azim as a partner. REQUIRED Give the necessary journal entries in proper form and prepare balance sheet. Case III: Azim invests Rs.20,000 cash for 1/5 interest. Old partners are not ready to

reduce their capitals.


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Sameer Hussain

SOLUTION # 5:

Computation: (Goodwill Method): (Sentence “Old partners are not ready to reduce their capitals” represents goodwill goes to new Azim). For 4/5 interest, old partners’ capital (60,000 + 40,000) 100,000


For 1/5 interest Azim’s capital (125,000 x 1/5) 25,000 Less: Azim’s investment (20,000) Goodwill to Azim 5,000


GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Cash 20,000 Goodwill 5,000 Azim Capital 25,000 (To record the admission of Azim)

________ PARTNERSHIP BALANCE SHEET

ASSETS EQUITIES Cash 20,000 Owner’s Equity: Other assets 100,000 Adeel Capital 60,000 Goodwill 5,000 Raees Capital 40,000 Azim Capital 25,000 Total owner’s equity 125,000 Total assets 125,000 Total equities 125,000

Sufficient cash

In this case new partner’s investment is equal to his/her capital. For xx interest, old partners’ capital XXX

Total capital of firm (old partners’ capital x opposite interest of old partners) XXX

For xx interest new partner’s capital (total capital x new partner’s interest) XXX

Entry to Record Admission of New Partner by Sufficient Cash: Cash/other assets DR. (with investment amount) New partner’s capital CR. (with capital amount) (To record the admission of new partner) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 6: (Admission by Sufficient Cash)

1993 Regular & Private (Case – a) – BIEK A and B, partners, with capital balances of Rs.60,000 and Rs.40,000, respectively, sharing profits and losses in the ratio of 2:1, agree to admit C as a partner. REQUIRED Give General Journal entries to record the admission of C. (Show also necessary computations.) Case (i): C invests sufficient cash to acquire 1/3 interest in the total capital and profits of

the firm


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SOLUTION # 6:

Computation: For 2/3 interest, old partners’ capital (60,000 + 40,000) 100,000


For 1/3 interest C’s capital (150,000 x 1/3) 50,000


GENERAL JOURNAL Date Particulars P/R Debit Credit 1 Cash 50,000 C Capital 50,000 (To record the investment of C)

ILLUSTRATION # 7: (Admission when Total Capital is Given)

2009 Regular & Private – BIEK Iqbal and Fayyaz were partners, sharing profit and loss in the ratio of their capitals. The following is the balance sheet of the firm on December 31, 2008:

Assets Equities Cash 125,000 Accrued expense 125,000 Merchandise inventory 75,000 Capital Iqbal 150,000 Accounts receivable 50,000 Capital Fayyaz 225,000 Machinery 250,000 500,000 500,000 On January 1, 2009 they decided to admit Rahat as a new partner. Rahat invests merchandise of Rs.15,000 and machinery of Rs.100,000 for his 1/5th interest in the total capital of the firm Rs.500,000. REQUIRED

(i) Prepare journal entries to record admission of Rahat. (Computation is compulsory). (ii) Prepare balance sheet of the firm after admission of the new partner.

SOLUTION # 7:

Computation: For 1/5 interest, Rahat capital (500,000 x 1/5) 100,000 Less: Rahat’s investment (15,000 + 100,000) (115,000) Bonus to Old Partners 15,000 For 4/5 interest, old partners’ capital (500,000 x 4/5) 400,000 Less: Old partners’ capital before admission of Rahat (150,000 + 225,000)

(375,000)

(25,000) Goodwill to Old Partners 10,000

_______ PARTNERSHIP GENERAL JOURNAL

Date Particulars P/R Debit Credit 1 Machinery 100,000 Merchandise 15,000 Iqbal Capital (15,000 x 2/5) 6,000 Fayyaz Capital (15,000 x 3/5) 9,000 Rahat Capital 100,000 (To record the admission of Rahat)


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Sameer Hussain

Date Particulars P/R Debit Credit 2 Goodwill 10,000 Iqbal Capital (10,000 x 2/5) 4,000 Fayyaz Capital (10,000 x 3/5) 6,000 (To record the distribution of goodwill)

revaluation

New partner can admit into the partnership after the revaluation of assets of the business. It means that before the admission of new partner, all the assets will be revalued to get the fair value of business. In that case a revaluation account is created to settle the increase or decrease in the value of assets and then it is transferred to the old partners’ capital.


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Practice questions

Question # 1: 2001 Regular & Private – UOK A and B are partners with capitals Rs.50,000 each, and share profit or loss equally. They admit C as a new partner. Pass entries in general journal to record C’s admission under each of the following independent assumptions showing necessary computations.

(a) C purchases one-half (1/2) of each old partner’s capital paying each Rs.35,000 cash. (b) C invests Rs.50,000 for a 1/4th interest in capital. C is given credit for the entire amount

of his investment. (c) C invests Rs.50,000 for a 1/2 interest in capital. Total capital is to be increased only by

C’s investment. (d) C invests Rs.20,000 for a 1/4th interest in capital, and the total capital is to be

Rs.130,000. Question # 2: 2002 Regular & Private – UOK Ahmed and Khalil are partners sharing profits and losses in the ratio of 3:2 respectively. Their balance sheet on May 31, 2002 shows their capital as under: Ahmed, Capital……………………………………….Rs.60,000. Khalil, Capital………………………………………….Rs.40,000. Mr. Nadir is admitted to the above partnership under the following separate assumptions.

(1) Mr. Nadir invests Rs.10,000 cash & merchandise inventory costing Rs.40,000 for a 1/3 interest.

(2) Mr. Nadir invests Rs.100,000 cash for a 1/4 interest (Use goodwill method only). (3) Mr. Nadir invests sufficient cash to have 1/2 interest. (4) Mr. Nadir purchases 1/3 interest of Mr. Ahmed and 1/4 interest of Mr. Khalil paying

Rs.50,000 to Mr. Ahmed and Rs.20,000 to Mr. Khalil. REQUIRED Give the necessary journal entries ender each of the above assumptions. Show necessary computations. Question # 3: 2005 Regular – UOK Lalani & Mohsin are partners with capital balance of Rs.270,000 and Rs.180,000 respectively, shared profit and losses in the ratio of 3:2. They admit Ashraf as a partner. REQUIRED Entries to record the admission of Ashraf in each of the following situations separately:

(i) Ashraf invests Rs.70,000 cash for 1/4 interest. Record goodwill. (ii) Ashraf purchased 1/3 interest of Lalani for Rs.140,000 cash. (iii) Ashraf invests Rs.200,000 for 1/4 interest and the total capital of the firm to be

Rs.650,000. Question # 4: 2006 Private – UOK A and B are partners with capital investments of Rs.48,000 and Rs.32,000 respectively. They share profit and loss in their capital ratio. They admit C as a new partner. Prepare necessary journal entries to record C’s admission under each of the following separate cases and present balance sheet after admission in case (3) and (4) only.

(1) C invests Rs.40,000 cash receiving 1/3 interest. (2) C invests Rs.64,000 cash and office equipment worth Rs.40,000 receiving 1/2 interest in

the firm (Record Bonus). (3) C buys 1/3 interest of A & 1/2 interest of B, paying A Rs.28,800 & B Rs.19,200 directly. (4) C invests Rs.16,000 cash for 1/3 interest. (Record Goodwill).


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Sameer Hussain

Question # 5: 2007 Regular – UOK The following is the balance sheet of Mumtaz and Alam Partnership:-

BALANCE SHEET ASSETS EQUITIES

Cash 150,000 Mumtaz’s Capital 300,000 Other assets 350,000 Alam’s Capital 200,000 500,000 500,000 Mumtaz & Alam share profit & loss in the ratio of 3:2. They agree to admit Chohan as a partner. REQUIRED Give the necessary journal entries in each of the following cases separately:

(1) Chohan invests Rs.310,000 for 1/3 interest in the firm. (2) Chohan invests Rs.190,000 for 1/3 interest in the firm. The total capital of the firm after

admission will be Rs.720,000. Question # 6: 2008 Regular – UOK Following is the balance sheet on November 30, 2008 of the partnership firm of Talha & Tayyab who share profit & loss in the ratio of their capitals:

ASSETS EQUITIES Cash 50,000 Capital Talha 25,000 Other assets 75,000 Capital Tayyab 100,000 125,000 125,000 On this date they agree to admit Abdul Hadi as a partner. REQUIRED Give the required entries on the firm’s books to record the admission of Abdul Hadi & also prepare balance sheet after admission under each of the following assumptions separately:

(a) Abdul Hadi purchase 1/4th on each old partner’s capital. (b) The new partner invests Rs.75,000 for a 1/3rd interest, in the total capital of the firm of

Rs.210,000. (c) The new partner invests Rs.100,000 for a 1/4th interest in the firm. Record bonus.

Question # 7: 2010 Private – UOK Shahab and Usman are equal partners with capital of Rs.100,000 each. Jamal is admitted for 1/3rd interest. REQUIRED Make entries in General Journal in each of the following independent cases:

(a) Jamal invests cash Rs.160,000 in a total capital of Rs.360,000. (b) Jamal invests cash Rs.180,000 in a total capital of Rs.420,000. (c) Jamal invests cash Rs.60,000 in a total capital of Rs.270,000. (d) Jamal purchases 1/3rd interest of each of the old partners after recording goodwill of

Rs.100,000. Question # 8: 2011 Private – UOK Nuvaira and Khuba are partners with capital of Rs.26,000 and Rs.22,000 respectively. They admit Erma as partner with 1/4th share in the profit of the firm. Erma brings in Rs.26,000 as his share of capital. REQUIRED Give journal entry to record goodwill on Erma’s admission.


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Question # 9: 2004 Private – UOK Asghar and Zaheer are partners with capital balances of Rs.99,000 and Rs.54,000 respectively. They share profits and losses in the ratio of 3:2. REQUIRED Prepare the journal entries to record the admission of Razi to the partnership under each of the following independent cases:

(a) Razi paid to Zaheer Rs.30,000 for a one-half of Zaheer’s interest on admission. (b) Razi invested sufficient cash in the firm to acquire a one fourth interest in the capital of

new partnership. (c) Razi invested Rs.67,000 for a 1/5th interest in the capital. Goodwill not to be recorded. (d) Razi invested Rs.39,000 for a one-fourth interest. (Use goodwill method).

Question # 10: 2012 Regular – UOK The capital balances of Fahad and Fawad were Rs.190,000 and Rs.180,000 respectively as on March 31, 2012. On this date they decided to admit Hamadan as a new partner. REQUIRED Show the necessary entries in the General Journal of the firm to record admission of Hamadan under each of the following assumptions separately:

(i) Hamadan invests furniture Rs.45,000 and sufficient amount cash for a one – third interest in the business.

(ii) Hamadan invests cash Rs.200,000 and is to receive a one – half interest. Fahad and Fawad decided to retain their present capital balances.

(iii) Hamadan invests cash Rs.150,000 and is to receive a one – fourth interest. Total capital of the firm after his admission is to be Rs.600,000.

(iv) Hamadan purchased a one – third interest of Fahad for Rs.55,000 and a one – fourth interest of Fawad for Rs.50,000 cash.

Question # 11: 2012 Private – UOK Following balance sheet relate to the business of Mr. Shahani, Moin and Rasheed as on November 30, 2010:

AB & C Partnership Balance Sheet

As on November 30, 2010 Assets Equities

Cash 100,000 Accounts payable 68,000 Accounts receivable 70,000 Owner’s Equities: Allowance for bad debts (2,000) 68,000 Shahani Capital 80,000 Office supplies 15,000 Moin Capital 120,000 Furniture 150,000 Rasheed Capital 100,000 300,000 Accumulated depreciation (25,000) 125,000 Stock 60,000 Total assets 368,000 Total equities 368,000 They share profit and loss in the ratio of their capitals. On this date they decided to admit Mr. Sanaullah as a new partner under the following cases separately:

(a) If Sanaullah invests sufficient amount of cash to acquire 1/4th interest in the business. (b) If Sanaullah invests Rs.80,000 for 1/5th interest in the business. Old partners do not

agree to reduce their capitals. (c) If Sanaullah invests furniture Rs.50,000 and cash Rs.120,000 in the business and old

partners agree to give him a 1/5th interest in the business. The total capital of the firm after his admission Rs.470,000.

(d) If Sanaullah invests Rs.150,000 for 1/4th interest. The total capital of the firm after his admission Rs.500,000.


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Sameer Hussain

REQUIRED (i) Prepare journal entries to record the admission of Mr. Sanaullah. (ii) Prepare balance sheet of ABC & D Partnership just after the admission of Mr.

Sanaullah in case (a). Question # 12: 2006 Regular – UOK Arif and Mubeen are partners sharing profit and loss in the ratio of 1:3 respectively. The following is the balance sheet of their on January 1, 2006.

ASSETS EQUITIES Cash 60,000 A/c. payable 40,000 A/c. receivable 50,000 Accrued exp. 10,000 Merchandise inv. 70,000 Arif Capital 100,000 Supplies 30,000 Mubeen Capital 200,000 Equipment 40,000 Land 100,000 350,000 350,000

On January 1, 2006, the partners agree to admit Jawaid as a partner on the terms summarized below: Jawaid invests sufficient cash to acquire 1/3rd (one third) interest in the partnership after revaluation of following assets and liabilities:

(1) Accounts receivable is estimated to realize Rs.40,000. (2) Inventory is to be realized at its present replacement value of Rs.50,000. (3) Land is revalued of Rs.180,000. (4) Equipment is to be restated at a value of Rs.30,000. (5) Accrued expenses are Rs.6,000.

REQUIRED (a) Give entries in General Journal of the partnership to give effects to the above valuations

and to record Jawaid’s admission. (b) Prepare a classified Balance Sheet of the newly formed partnership (Show

computation). Question # 13: 2010 Regular – UOK The following are balance sheet data of Lalani & Mohsin Partnership on June 30, 2010: Cash 30,000 Lalani, Capital 120,000 Inventory 70,000 Mohsin, Capital 180,000 Land 200,000 300,000 300,000 On July 1, Sikander is admitted as a partner after revaluing inventory & land at Rs.50,000 and Rs.300,000 respectively, recognizing goodwill of Rs.50,000 and recording accrued taxes Rs.10,000. Sikander is to purchase 25% of Mohsin’s ownership interest for Rs.65,000 & to be contribute sufficient cash for acquiring 1/3 interest of the entire partnership equity. Lalani and Mohsin share profit/loss equally. REQUIRED Prepare:

(a) General journal entries. (b) Balance sheet after admission.

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