G1 6.2 Partnership - Reconstitution

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.
2.
3.
4.
5.
Calculation of new profit and loss ratio

Distribution of accumulated profit and loss
Calculation of goodwill and accounting treatment of goodwill
Revaluation of assets and liabilities
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.
2.
3.
4.
Old ratio: the ratio prior to the change of ratio

New ratio: the ratio calculated after the change
Sacrificing ratio: old ratio new ratio
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
Let the total share be
Balance after Cs share for A and B Total share Cs share
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
Calculations Answer
1
1-
: :
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:
Financial Accounting
6.2.1
Particulars
Formula
Let the total share be
Balance after Cs share for A and B Total share Cs share
Calculations Answer
1
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
=6:6:9
=2:2:3
=12/42: 12/42: 18/42
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

3. Simply gets
th
th
share to T in the ratio of 2: 3.
share of profit.
Answer: Calculation of new profit sharing ratio

(i)
T Purchased 1/10th Share From R

R
Old ratio
Less
Partnership Accounting
th
from R
Nil
6.2.2
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
Old ratio
-/(+)
Sacrifice / (gets)
New Ratio
28:17:5
[iii] Simply get 1/10th share of profit

Let total share =1
Remaining share
Rs Share
1 (1/10)
= 9/103/5
= 9/10
= 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.
6.2.3
Goodwill Nature Goodwill is an Intangible Asset and not a Fictitious Asset.

Need for valuation of Goodwill - In case of
1.
2.
3.
4.
5.
Change in Profit Sharing Ratio,

Admission of new partner,
Retirement and/or death of partner,
Sale of firm and
Amalgamation of firm
Reason
Valuation
1 Location
Treatment
1 Simple Average Method
1 Non-cash method
[if profit does not show

trend]
2 Size
3 Patent
Revaluation Method
2 Weight Average Method
Memorandum
Method
[if profit shows trend]

4 Technical
how
Know-
Revaluation
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
5 Annuity Method
4 Pay privately no entry

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
30,000
2008-09
8,000
16,000
2007-08
6,000
6,000
Total
24,000
52,000
Average Profit
8,000
8,667
16,000
17,334
Years of Purchase
Goodwill
Question 10: Calculation of Goodwill: [Super Profit Method, Capitalisation Method and
Annuity Method]: Calculate goodwill under three years purchase of super profit method and
6.2.4
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
1,500
Actual Profit [AP]

AP NP
Super Profit [SP]
1,500 1,000
500
1,500
Goodwill = 3 SP
Capitalisation Method
5,000
Goodwill
OR
Goodwill
CE
- 10,000
5,000
Annuity Method [Super Profit]

SP Annuity Factor 500 2.486
Goodwill
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
10,000
0.909
9090
10,000
0.826
8260
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
1. Revaluation
2.
Mem. 3. Premium Method
Revaluation
II. Cash Method

Premium Method
6.2.5
the GW
GW A/c
Dr. Adjustment of GW of New Partners Share
Dr. GW A/c
To
Old
Partners
Capital A/c
Gaining Partners Dr. Cash A/c

Capital A/c
To
Old
Partners
Capital A/c
[Full GW is Shared in Old Ratio]
To
Sacrificing
Partner Capital
A/c
All Partners Dr.

Capital A/c
the GW
Not Applicable
To
Sacrificing
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
Current Liabilities
20,000 Current Assets
-100,000
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
To As Capital A/c
15,000
To Bs Capital A/c
10,000
2) Cash A/c
To Cs Capital
Dr 25,0000
Dr
40,000
40,000
6.2.6
Balance Sheet
Assets
Liabilities
Capital A [70+15]
85,000 Goodwill
Capital B [60+10]
70,000 Fixed Asset
Capital C
Current Liabilities
20,000
25,000
100,000
90,000
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
Capital C [40-5]
Current Liabilities
20,000
190,000
---100,000
90,000
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.
6.2.7
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

Balance Sheet
Liabilities
Assets
Capital A [70-3]
73,000 Goodwill [25-25]
Capital B [60-2]
62,000 Fixed Asset
Capital C [40-5]
Current Liabilities
20,000
190,000
---100,000
90,000
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
Cs Capital A/c
Dr 5,000
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
Or
(Goodwill adjusted without raising it)

2) Cash A/c
Dr 40,000
To Cs Capital
Cash A/c
40,000
Dr 45,000
To Cs Capital
45,000

Balance Sheet
Liabilities
Assets
Capital A
73,000 Goodwill
Capital B
62,000 Fixed Asset
Capital C
Current Liabilities
20,000
195,000
---100,000
95,000
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
6.2.8
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:
Journal Entries
1) Non-cash premium method
C Capital A/c
3) Memorandum revaluation method
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
Goodwill A/c
Dr 60,000
A Capital A/c
Dr 20,000
B Capital A/c
Dr 20,000
Dr 20,000
To A Capital A/c
36,000
C Capital A/c
To B Capital A/c
24,000
To Goodwill A/c
60,000
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
Alternatively
A
Raise GW using [old ratio]
5,714
4,286
----
Cancelling GW [new ratio]
2,500
5000
2,500
3,214
(714)
(2,500)
6.2.9
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
To Premium for Goodwill A/c
3)
8,000
A Capital A/c
Dr
2,000
B Capital A/c
Dr
6,000
To Cash A/c
Premium for Goodwill A/c
Dr
8,000
Cash A/c
To A Capital A/c
2,000
To B Capital A/c
6,000
1+2
2)
8,000
Dr
8,000
To As Capital A/c
2,000
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
1) Cash A/c
For non cash portion of 15,000

Dr 15,000
To Premium for Goodwill
3)
15,000
C Capital A/c Dr 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 1/4 th 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
6.2.10
Balance after Cs Share
Total share
Cs share
Balance
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
5/9
15/36
4/9
12/36
I. Cash portion of goodwill
ii. Memorandum revaluation method
i. Cash Premium Method
Good Will A/c
Cash A/c
To As Capital
27,778
To Bs Capital
22,222
Dr
10000
To As Capital
5556
To Bs Capital
4444
Dr
50,000
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
To Goodwill
Dr 50,000
To As Capital
27,778
To Bs Capital
22,222
50,000
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
Good Will A/c
Dr 45,000
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
Bs Capital
Dr
25,000
Dr 7,000
6.2.11
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
General Reserve
P/L, General Reserve, Reserve Fund
Multi
Specific Reserve
Provision for DD, Investment Fluctuation Reserve, Workmen

Compensation,
Specific
Capital Reserve
Share forfeiture, Capital Reserve, Profit Prior to Incorporation, Limited

CRR
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
6.2.12
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
Creditors
40,000
1,30,000
10,000
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
6.2.13
Partners Capital Accounts

Dr
Cr
Particulars
To
Date
- By
Cash A/c
5,400
3,600
Balance b/d
Premium
Goodwill
54,000 36,000 18,000
48,000 32,000
Reserve A/c
(premium
withdrawn)
To Balance c/d
Particulars
for
6,000
4,000
5,400
3,600
Cash A/c
59,400 39,600 18,000
- 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
To
Particulars
- By Balance b/d
Premium
Goodwill
To Balance c/d
Cash A/c
45,000 30,000 15,000

61,200 40,800 15,000
48,000 32,000
Reserve A/c
Cash A/c (Bal. 16,200 10,800
figure)
for
6,000
4,000
7,200
4,800
- 15,000
61,200 40,800 15,000
6.2.14
Balance Sheet (after Rs admission) as at 1st April, 2011
Liabilities
Assets
Gs Capita
45,000
Other assets
Ss Capital
30,000
Cash
Rs Capital
15,000
1,20,000
10,000
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:
Liabilities
Creditors
Capital Accounts:
Rain
Storm
Balance Sheet
Assets
35,000 Cash
Debtors
40,000
(-) Provision for doubtful debts
20,000 60,000 Stock
Machinery
Land & Building
95,000
4,000
22,000
2000 20,000
18,000
20,000
33,000
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
1 Land and Building A/c
To Revaluation A/c
Dr
Dr
Cr
9,000
9,000
6.2.15
(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.

To Liability for Damages A/c
1,000
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
To Storm Capital A/c
(Being revaluation profit transferred to partners capital a/c)
4 Cash A/c
To Premium for Goodwill A/c (WN2)
Dr
1,020
680
20,000
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)
To Rain Capital A/c
Dr
5,000
3,000
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
Dust Current A/c
Dr
To Dust Capital A/c
3,120
2,200
3,120
2,200
(Being deficit capital of Storm and Dusts transferred to currents a/c)

Balance Sheet of the New firm as on 1st January, 2001
Liabilities
Assets
Land and Building [33+9]

42,000
Capital Accounts:
Rain
38,700
Machinery [20-5]
15,000
Storm
25,800
Stock
18,000
Dust
17,200
81,700 Debtors
22,000
(-): Prov. for doubtful debts 3,000
19,000
Current A/c
[2+1]
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
6.2.16
R S D
3
Old ratio
New ratio
Combined new ratio
2
3
(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
To Current 5,320
a/c
(bal)
Rain
Storm
----
----
Dust
Particulars
By Bal. b/d
Balance (WN 38,700 25,800 17,200

4)
44,020 25,800 17,200
Bank A/c.
Premium
for
Goodwill
Revaluation A/c
Current a/c (Bal)
Rain
Storm
Dust
40,000 20,000
---3,000
---
---- 15,000
2,000
----
1,020
680
------- 3,120 2,200
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
1,700
(Rain 1,020; Storm 680
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
th
On the above date, Manisha is admitted for 2/5 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.
6.2.17
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
31,250
Machinery A/c
15,000
(Ranu- 20,833; Mili 10,417
32,750
32,750
Partners Capital A/c
Particulars Ranu
Mili Manisha
Particulars
To Goodwill
12,000 6,000
12,000 By Balance b/d
Balance c/d 65,833 42,417
38,000
Revaluation A/c
General Reserve
Goodwill (Nt 3)
Bank A/c
77,833 48,417
50,000
Ranu
30,000
20,833
7,000
20,000
---77,833
Mili Manisha
24,500
---10,417
---3,500
---10,000
------50,000
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
7,500
(-) Provision for
3,000
17,000
(7,000+500)
Doubtful Debt
Investment Provision
2,500
Bills Receivable
12,500
(2,000 + 500)
Workmen Comp Fund
750
Joint Life Policy
12,000
(6,000-5,250)
Accrued Income
500
Bank (10+50)
60,000
1,57,000
1,57,000
6.2.18
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
Capital Accounts
A
B
Reserve fund
Sundry creditors
Bills payable
10,00,000
5,00,000
9,00,000
4,00,000
Assets
Plant and machinery
Building
Sundry debtors
Stock
Cash
1,00,000
29,00,000
12,00,000
9,00,000
3,00,000
4,00,000
1,00,000
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 1/4 th 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:
Particulars
To Stock
Memorandum Revaluation A/c
Particulars
40,000 By Building
1,80,000
6.2.19
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
To
Particulars
Revaluation
Loss
Reserve
Fund
A (W.N.3)
B (W.N.3)
Balance
W.N2
c/d

C
Particulars
A
7,500
B
3,750
4,50,000
2,25,000
2,25,000
17,500
8,750
11,70,000
5,85,000
5,85,000
16,27,500
8,13,750
8,40,000
Reserve
Fund
C (W.N.3)
Revaluation
Profit
Cash (Bal)
A
10,00,000
B
5,00,000
6,00,000
3,00,000
17,500
10,000
8,750
5,000
8,40,000
16,27,500
8,13,750
8,40,000
Balance Sheet of newly reconstituted firm as on 31.12.2006

Liabilities
Capital Accounts
A
B
C
Reserve Fund
Sundry Creditors
Bills Payable
11,70,000
5,85,000
5,85,000
9,00,000
4,00,000
1,00,000
37,40,000
Assets
Plant & Machinery

12,00,000
Building
9,00,000
Sundry Debtors
3,00,000
Stock
4,00,000
Cash (1,00,000 + 8,40,000) 9,40,000
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
6.2.20
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
A
B
C
Effect
Goodwill as Goodwill as
per old ratio per new ratio
70,000
52,500 + 17,500
35,000
26,250 + 8,750
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:
Balance Sheet
Liabilities
Sundry Creditors.
Assets
1,00,000 Land and Buildings 2,00,000
Capital A/cs.
Machinery
3,00,000
2,00,000
Stock
1,00,000
3,00,000
Sundry Debtors
1,00,000
2,00,000 7,00,000 Cash and Bank
1,00,000
8,00,000
8,00,000
On 31 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:
st
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.
6.2.21
4.
5.
6.
7.
Provision for bad debts is to be made at 5%.

Old credit balances of Sundry Creditors 20,000 is to be written-off.
Joint Life Policy of the partners surrendered and cash obtained 80,000.
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
To Machinery A/c
tock A/c
Particulars
60,000 By Land and Buildings A/c
60,000
25,000
Sundry Creditors A/c
20,000
Partners Capital
10,000
Provision for bad debts A/c
5,000
(Answer: 2,857; B: 4,286 and C: 2,857)

90,000
90,000

Particulars
2,857
4,286
A
---Capital(GW)
Bank (50% ) 1,30,000
10,000
To Revaluation
A Loan A/c
1,30,000
Balance
(required)
30,000
-------
---- 3,50,000 3,50,000

2,62,857 3,64,286 3,82,857
Particulars
2,00,000 3,00,000 2,00,000
J.L.P A/c
22,857
34,286
22,857
B Capital
(GW)
C Capital
(GW)
Bank (Bal)
10,000
----
----
30,000
----
----
----
30,000 1,60,000
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
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
6.2.22
Liabilities
Partners capital A/cs
B
C
As Loan A/c
Sundry Creditors
Balance sheet of M/s. B and C as on 1st April, 1995
Assets
Land and Buildings

2,60,000
3,50,000
Machinery
2,40,000
3,50,000 7,00,000 Closing Stock
75,000
1,30,000 Sundry Debtors
1,00,000
80,000 Less: Provision for Bad
5,000
95,000
Debts
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.
6.2.23
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
To Provision for doubtful debts

1,110 By
Depreciation (Plant & Machinery) 5,854
Liabilities for bills discounted
501
7,465
Particulars
Partners Capital A/c (Loss)

A
2,986
B
2,986
C
1,493
7,465
Capital A/c
C
Particulars
Particulars
A
B
To Revaluation A/c 2,986 2,986
(loss)
Cs Capital A/c 11,401 11,401
( GW)
Cash A/c
- 17,710
Cs Loan A/c
- 17,710
Balance c/d
P/L Adjustment
A/c
As Capital A/c
Bs Capital A/c
(GW)
Cash A/c
A
B
C
33,600 25,200 12,000
4,222
-
4,222
2,111
- 11,401
- 11,401
32,290 23,890
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
A
32,290 Less: Depreciation
B
23,890 Furniture and Fittings
Cs Loan a/c
17,710 Stock in Trade
15% Mortgage Loan
16,600 Sundry Debtors
Liabilities
for
bills
501 Less: Provision
discounted
58,540
5,854
22,200
1,110
52,686
4,800
22,800
21,090
6.2.24
Creditors
12,000 Interest on Loan prepaid

Cash in hand
Cash at Bank
1,02,991
415
1,000
200
1,02,991
Working Notes:
Sundry Debtors
Opening Debtors as on 31.3.1993 21,600
Add Rent received from Mr. X
600
Adjusted Debtors
22,200
Calculation of Goodwill
2
Profit
Year
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
Goodwill = AP 5
114,010
1/5 Retiring Partners Share of GW
22,802
Calculation of balance of Plant and Machinery

Opening Plant and Machinery
3
Add
Machinery Purchased
Add
Installation charge
49,000
10,000
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
Ram
1,00,000 Cash in Bank
Rahim
1,50,000 Sundry Debtors
20,000
1,00,000
5,00,000
6.2.25
Robert
General Reserve
Sundry Creditors
Loan from Richard
2,00,000 Stock in Trade

2,00,000 Plant & Machinery
8,00,000 Land & Building
2,00,000
16,50,000
2,00,000
3,00,000
5,30,000
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 reconstit uted firm.
Answer:
Dr
To
Revaluation
A/c
Roberts
Loan1
Bank
Balance c/d
Ram
10,000
Robert
6,000
4,000
200,000
245,000
255,000
237,000
243,000
58,000
262,000
55,000
36,667
18,333
Goodwill
Bal. c/d
Rahim
Partners Capital a/c

Richard
By
190,000
200,333
245,000
237,000
195,167
213,500
Balance
b/d
General
reserve
Goodwill2
Balance
b/d
Loan A/c
transfer
Bank
Ram
Rahim
Robert
Cr.
Richard
100,000
150,000
200,000
100,000
60,000
40,000
55,000
33,000
22,000
255,000
243,000
262,000
245,000
237,000
200,000
245,000
237,000
13,500
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
6.2.26
Ram
Rahim
Richard
Sundry Creditors
Loan from Robert
1,90,000
2,00,333
1,95,167
8,00,000
2,00,000
15,85,500
Plant and Machinery

Stock
Debtors
Cash at Bank (W.N. 3)
Cash in hand
2,70,000
1,90,000
4,50,000
55,500
20,000
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
60,000
55,000
165,000
Average Profit = 165,000/3

Number of years of purchase
Goodwill 55,000 2
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 1 st
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
6.2.27
Answer:
Year Premium
Cumulative
Current
Loss of
Surrender Value
Value
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
31.12.2000
ii.
5,000
Profit and Loss a/c
5,000
To Joint Life Policy a/c

01.01.2001
i.
5,000
Dr
5,000
To cash a/c
31.12.2001
ii.
5,000
Profit and Loss a/c
5,000

01.01.2002
i.
5,000
Dr
5,000
To cash a/c
31.12.2002
ii.
5,000
Profit and Loss a/c
5,000

01.01.2003
i.
5,000
Dr
5,000
To Cash
31.03.2003
ii.
5,000
Cash a/c
100,000

31.03.2003
iii.
100,000
Dr
95,000
To Xs Capital a/c
38,000
To Ys Capital a/c
38,000
To Zs Capital a/c
19,000

Date
Debit
01.01.00 To Cash
01.01.01 To Cash
Date
Credit
5,000 31.12.00 By Profit & Loss A/c
5,000
5,000
5,000
5,000
5,000
5,000
6.2.28
01.01.02 To Cash
01.01.03 To Cash
5,000
5,000
5,000
5,000 31.03.03 By Cash
1,00,000
X, Y & Zs Capital a/c 95,000
31.03.03
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.
Dr
5,000
To Cash
31.12.00
ii.
5,000
Profit and Loss a/c
5,000

01.01.01
i.
5,000
Dr
5,000
To cash a/c
31.12.01
ii.
5,000
Profit and Loss a/c
4,000

01.01.02
i.
4,000
Dr
5,000
To cash a/c
31.12.02
ii.
5,000
Profit and Loss a/c
3,500

01.01.03
i.
3,500
Dr
5,000
To Cash
31.12.03
ii.
5,000
Cash a/c
100,000

31.12.03
iii.
100,000
Dr
92,500
To Xs Capital a/c
37,000
To Ys Capital a/c
37,000
To Zs Capital a/c
18,500

Date
Debit
01.01.00 To Cash
01.01.01 To Cash
Date
Credit
5,000
5,000
5,000
4,000
Balance c/d
1,000
5,000
5,000
01.01.02 To Balance b/d
3,500
01.01.02
5,000
2,500
Cash
Balance c/d
6.2.29
6,000
6,000
2,500 31.03.03 By Cash
01.01.03
Cash
5,000
31.03.03
X, Y & Zs Capital a/c 92,500
1,00,000
95,000
Liabilities
1,00,000
Balance Sheet 2000 01
Assets
2001 02
2002 03
Nil
1,000
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.
Dr
5,000
To Cash
Profit and Loss a/c
5,000
Dr
5,000
To JLP Reserve a/c

JLP Reserve a/c
5,000
Dr
5,000
5000
Year 2001
ii.
5,000
Dr
5,000
To Cash
Profit and Loss a/c
5,000
Dr
5,000
To JLP Reserve a/c

JLP Reserve a/c
5,000
Dr
4,000
4,000
Year 2002
iii.
Dr
5,000
To Cash
Profit and Loss a/c
5,000
Dr
5,000
To JLP Reserve a/c

JLP Reserve a/c
5,000
Dr
3,500
3,500
Year 2003
iv.

To Cash
Dr
5,000
5,000
6.2.30
Cash a/c
Dr
100,000
7,500
To JLP Reserve
92,500
JLP Reserve a/c
Dr
95,000
To Partners Capital a/c
95,000

Date
Debit
01.01.00 To Cash
01.01.01 To Cash
Date
Credit
5,000 31.12.00 By JLP Reserve a/c
5,000
5,000
5,000
4,000
Balance c/d
1,000
5,000
5,000
4,000
01.01.02
5,000
2,500
Cash
Balance c/d
6,000
6,000
2,500 31.03.03 By Cash
01.01.03
Cash
5,000
31.03.03
JLP Reserve a/c
1,00,000
92,500
1,00,000
1,00,000
Joint Life Policy Reserve A/c

Date
Debit
01.01.00 To Joint Life Policy a/c

Balance c/d
Date
Credit
5,000 31.12.00 By Profit and Loss a/c
5,000
5,000
5,000
4,000 31.12.01 By Profit and Loss a/c
5,000
1,000
5,000
5,000
3,500 01.01.02 By Balance b/d
1,000
31.12.02
2,500 31.12.02
5,000
Balance c/d
Profit and Loss a/c
6,000
6,000
31.03.03 To Partners Capital a/c 95,000 01.01.02 By Balance b/d

31.12.02
95,000
2,500
Joint Life Policy a/c 92,500

95,000
6.2.31
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)]
6.2.32
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
Capital Accounts:
Assets
Fixed Assets
100,000
48,000
Current Assets
64,000
Stock
30,000
48,000 160,000
Debtors
60,000
Cash in hand
30,000 120,000
Reserves
20,000
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
6.2.33
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:
st
Profits for the year ended 31 March, 1999 (after depreciation)
48,000
10,000
Add Depreciation
Profits before depreciation
58,000
Period
01.04.98- 01.10.9830.09.98 31.03.99
Profit split for two half years (assumed: evenly spread)
29,000
29,000
6,000
4,000
Less Depreciation [I half 6,000 and II half 4,000]
Profits
23,000
Capital Accounts of partners as on 30th September, 1998:

Particulars
A
B
C
Particulars
A
To Fixed Assets
6,000 8,000 6,000 By Balance c/d
48,000
Drawings
9,000 12,000 20,000
Reserve*
6,000
Goodwill
18,000
Cs Executor
- 52,000
P/L
A/c
Appropriation*
Balance c/d
57,000 76,000
72,000 96,000 78,000
72,000
* (Interest on 48,000 @ 25% for 6 m)
25,000
B
C
64,000 48,000
8,000 6,000
24,000 18,000
- 6,000
96,000 78,000
(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
(ii)
Profit earned out of unsettled capital (in the second half year ended 3s1t march, 1999)
(Or)
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
Add Amount of profit earned out of unsettled capital [calculated in (3)]
Amount due
52,000
7,027
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.
6.2.34
(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.

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
Capital a/cs
Asha
Bipasha
Chitra
Reserves
Bs loan
Trade Creditors
Asset
Plant &machinery
80,000
50,000
furniture
10,000
40,000
Stock
40,000
30,000 1,20,000 Trade Debtors
52,000
30,000 Less; provision
(2,000)
50,000
20,000
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)
(ii)
(iii)
Interest on capital at 5%
Interest on Bs loan and
Transfer 20% of the divisible profit to the reserves after charging such reserve.
Answer:
Memorandum Revaluation A/c
Particulars
500 By Machiery
3,000
Reserves
10,000
Particulars
To Furniture
Provision for Debtors
Contingent Liability
Partners Capital A/C
Asha
8/20
9,800
Bipasha 7/20
8,575
Chitra
5/20
6,115 24,500
8,000
30,000
6.2.35
Machinery
38,000
8,000
Reserves
30,000
38,000
38,000
500
3,000
10,000
Furniture
Provision for Debtors
Contingent Liability
Partners capital A/C
Asha 5/10
12,250
Bipasha 4/10
9,800
Chitra 1/10
2,450 24,500
38,000
Net Effect
Cr
Dr
9,800 12,250 2,450 Dr
A
8,575 9,800 1,225 Dr
B
6,115 2,450 3,675 Cr
C
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
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
68,700
ADDITIONAL PROBLEMS
ADMISSION OF A PARTNER

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:
Fixed assets : Cost

Less : Accumulated depreciation
(In crores) (In crores)

60
40
20
6.2.36
Investments at cost in equity shares of :

A Ltd. (Market value 80 Cr.)
B Ltd. (Market value 70 Cr.)
30
25
Current Assets
Less : Current Liabilities
140
65
Financed by:
Loan from Zed Ltd. carrying interest at 15% p.a
Reserves
Current accounts of partners :
X Ltd.
Y Ltd.
Capital Accounts :
X Ltd.
Y Ltd.
55
75
150
40
30
3
2
40
35
75
150
On 1st December, 2001 they decided to admit Z Ltd. as a partner. The following terms were agreed
upon:
Zed Ltd.s loan is to be converted into fixed capital.

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.
(i)
(ii)
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.
6.2.37
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.
3.
4.
5.
6.
7.
8.
9.
Goodwill A/c
Dr.
To X A/c
To Y A/c
(Being Goodwill raised in old Ratio)
50
X A/c
Dr.
Y A/c
Dr.
Z A/c
Dr.
To Goodwill A/c
(Being Goodwill written off in new ratio)
25
15
10
Fixed Asset A/c

Dr.
To X A/c
To Y A/c
(Being Fixed Assets revaluation transferred to
Partners Capital A/c in old profit sharing ratio.
30
30
20
50
18
12
X A/c
Dr.
15
Y A/c
Dr.
9
Z A/c
Dr.
6
To Fixed Assets A/c
(Being Fixed Assets revaluation transferred in
new profit sharing ratio amount among all partners)
Reserve A/c
Dr.
To X A/c
To Y A/c
(Being Reserves distributed in old ratio)
30
X A/c
Dr.
Y A/c
Dr.
Z A/c
Dr.
To reserves Assets A/c
(Being Reserve debited in new ratio at 5:3:2)
15
9
6
X A/c
Dr.
To Investment A/c
To Realisation A/c
(Being investments in A Ltd. takeover by X Ltd.)
70
Y A/c
To Investment on B Ltd. A/c
To Realisation A/c
60
Dr.
30
18
12
30
30
40
25
35
6.2.38
(Being Investment Taken Over by Y Ltd.)

10.
11.
Realisation A/c
Dr.
To X A/c
To Y A/c
(Being Profit on takeover of investments credited
to partners capital in old profit sharing ratio)
75
45
30
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
Before
Admission
Admission
60
60
I. Assets
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
140
140
Current Assets
Bank
60 135
65
Current Liability
65 155
150
Financed by :Loan from Z Ltd.
Owners fund
Reserves
Current A/c
X
Y
Capital A/c (W.N.1)
X
Y
Z
3
2
Nil
40
30
30
3
2
60
36 120
24
155
40
35
Nil
75
150
Working Note 1
Particulars
To Goodwill
Fixed Asset A/c
Reserve A/c
Investment A/c
Investment A/c
Balance c/d

X
Y
Z
Particulars
25 15 10 By Balance b/d
15
9 6
Zed loan A/c
15
9 6
Goodwill A/c
70
-- -Fixed Asset
-- 60 -Reserve A/c
60 36 24
Profit
X
40
-30
18
18
45
Y
Z
35 --- 40
20 -12 -12 -30 -6.2.39
Bank A/c
185 129 46
34 20 6
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
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.
6.2.40
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

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.
Assets
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
Liabilities
Capital Accounts
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.
ii.
iii.
iv.
Stock to be depreciated by 5%;

Provision for bad debts is to be raised to 500;
Furniture to be depreciated by 10%;
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
To Stock A/c
750 By Building A/c
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
Amount
6,350
6,350
6.2.41
Balance Sheet
Liabilities
Amount
Asset
Amount
Building
41,350
Capital A/c
A
52,500
Machinery
19,000
B
31,500
Furniture
4,500
C
21,000 1,05,000 Stock
14,250
Creditors
9,400
4,000 Less: Provision
500
8,900
Prepaid insurance
1,500
Cash (WN1)
48,000
1,37,500
1,37,500
Working Notes:
Capital
Reserve
Revaluation Profit
1 Total
2 Total Capital [using Cs capital base]
Goodwill of A and B [2 1]
Total Goodwill of the firm
A
B
C
29,000 15,000
6,000 4,000
3,000 2,000
38,000 21,000 21,000
Total
80,000
1,05,000
25,000
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

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
Capital : A
B
Reserve
Creditors
35,000
30,000
10,000
25,000
Assets
Land and Building
Plant and Machinery
Stock
Debtors
30,000
20,000
10,000
20,000
6.2.42
Less : PDD
Bank
Cash
1,000
1,00,000
19,000
11,000
10,000
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.
ii.
iii.
iv.
v.
The new profit sharing ratio among A, B and C will be equal.

The capitals of the partners should also be equal taking Cs capital as base.
The reserve of the new firm will be 15,000.
Provision for doubtful debts is to be created @ 10% of total debtors.
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
Amount
Asset
Land & Building
50,000
Plant & Machinery
50,000
Stock
50,000 1,50,000 Investment
25,000
(-) Provision
15,000
Sundry Debtors
(-) Prov. for Bad Debts
Bank (W.N.1)
Cash (10,000 + 15,000)
1,90,000
Liabilities
Capital
A
B
C
Creditors
Reserve
Partner Capital A/c

B
C
Particulars
5,000 5,000 By Balance b/d
400
1,000
Stock A/c
Particulars
A
To Reserve A/c
5,000
Prov. for Bad Debts
A/c (WN2)
Prov.
for 600
-2000
Investment (WN3)
Balance c/d
50,000 50,000 50,000
55,600 55,400 58,000
Amount
30,000
20,000
31,000
12,000
2,000
30,000
3,000
10,000
27,000
47,000
25,000
1,90,000
Investment
A/c
Cash A/c
Debtors A/c
Bank A/c
Reserve A/c
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
6.2.43
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.

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
To Prov. for Doubtful Debts A/c
25,000 By Building A/c
Advance
13,250
Sa
8,375
Re
8,375
16,750
55,000
Amount
55,000
55,000
6.2.44
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 for Bad Debts
25,000 2,25,000
Current Liabilities
2,95,000 Advance
1,32,500
Less: Provision
13,250 1,19,250
17,95,000
17,95,000
Working Notes 1:
Bank A/c
Particulars
Amount
Particulars
Amount
To Balance b/d
22,500 By Balance c/d 7,95,750
Gas Capital A/c 6,00,000
Sas Capital A/c
36,625
Res Capital A/c
36,625
Gas Capital A/c 1,00,000
7,95,750
7,95,750
Journal Entries
Particulars
1. Fixed Assets A/c
To Revaluation A/c
(Being Plant revalued)
L.F
Dr.
Dr.
55,000
55,000
2. Revaluation A/c
Dr.
To Provision for Doubtful Debts A/c
To Advance A/c
(Being 10% Provision for Doubtful Debts created and written
off 10% of the Advance)
38,250
3. Revaluation A/c
To Sas Capital A/c
To Res Capital A/c
(Being Revaluation Profit distributed equally)
Dr.
16,750
4. Goodwill A/c
Dr.
Cr.
25,000
13,250
8,375
8,375
6,00,000
6.2.45
To Sas Capital A/c

To Res Capital A/c
(Being Goodwill raised in old ratio)
3,00,000
3,00,000
5. Sas Capital A/c

Res Capital A/c
Gas Capital A/c
To Goodwill A/c
(Being Goodwill to be written off in new ratio)
Dr.
Dr.
Dr.
2,00,000
2,00,000
2,00,000
6,00,000
6. Bank A/c
Dr.
To Gas Capital A/c
(Being Cash brought by Ga as Goodwill & Capital and
adjustment his Capital to profit sharing ratio)
7,00,000
7. Bank A/c
Dr.
To Sas Capital A/c
To Res Capital A/c
(Being Cash brought by Sa and Re to adjust their Share of
Capital to Profit sharing ratio)
73,250
7,00,000
36,225
36,225

Question: Admission of partner: A, B and C are partners sharing profits and losses in the ratio of 3 :
2 : 1. D is admitted as a new partner of 31.12.2005 for an equal share and is to pay 25,000 as capital.
Following is the balance sheet on the date of admission. :
Liabilities
Capital:
A
B
C
Creditors
Bills Payable
30,000
30,000
20,000
15,000
5,000
Assets
Land and Building
Plant and Machinery
Furniture & Fixture
Stock
Debtors
Bills Receivable
Bank
1,00,000
Followings are required adjustments on Ds admission:
25,000
20,000
15,000
10,000
15,000
10,000
5,000
1,00,000
i. Out of the creditors, a sum of 5,000 is owing to D.

ii. Bills worth 8,000 were discounted with the bankers, out of which, a bill of 2,000 was
dishonoured on 31.12.2005 but no entry has been passed for that. Due dates of the other
discounted bills fall in January, 2006.
iii. Unexpired insurance premium 600.
iv. Expenses debited to the Profit and Loss Account includes a sum of 1,000 paid for Bs
personal life insurance policy.
v. A provision for bad debts @ 5% is to be created against Debtors.
vi. Expenses on revaluation amounting to 1,010 is paid by A.
vii. During 2005. Part of the furniture sold was 4,000 and the written down value on the date
of sale is 3,500, the proceeds was wrongly credited to the Sales Account.
You are required to prepare the Revaluation A/c and the Balance Sheet after Ds admission.
6.2.46
Answer:
Revaluation A/c
Particulars
Particulars
To Prov. for Bad Debts (17,000 x 5%)
850 By Insurance Premium A/c
600
Furniture A/c (Dep.)
500
Bs Capital A/c
1,420
Furniture A/c
2,500
Cs Capital A/c
710
(wrongly credited to sales A/c)
5,860
5,860
Particulars
T Revaluati
o on
Revaluati
on
Balance
b/d
A
--
B
1,000
2,130
1,420
28,88
0
27,58
0
31,01
0
30,00
0
Partner Capital A/c

D
Particulars
--- B Balance
y
b/d
710
-Cash A/c
19,29
0
20,00
0
25,00
0
25,00
0
A
30,00
0
--
B
30,00
0
--
C
20,00
0
--
Creditors
--
--
--
20,00
0
5,000
Revaluati
on
1,010
30,00
0
20,00
0
25,00
0
31,01
0
D
--
Balance Sheet of the firm as on 31.12.2005 (After Admission)

Liabilities
Amount
Asset
Amount
Capital A/c
Land & Building
25,000
A
28,880
Plant & Machinery
20,000
B
27,580
Furniture & Fixture (WN1)
11,000
C
19,290
Stock
10,000
D
25,000 1,00,750 Debtors
17,000
Creditors (15,000 5,000)
10,000 (-) Provision for Bad Debts
850
16,150
Bills Payable
5,000 Bills Receivable
10,000
Bank (WN2)
23,000
Unexpired Insurance
600
1,15,750
1,15,750
Working Note 1:
Furniture & Fixture A/c
Particulars Amount
Particulars
Amount
To Balance b/d
15,000 By Depreciation A/c
500
Loss on Sale P/L A/c
1,000
Bank A/c
2,500
Balance c/d (B/F)
11,000
15,000
15,000
Working Note 2:
Particulars
To Balance b/d
Bank A/c
Amount
Particulars
5,000 By Debtors A/c
Amount
2,000
6.2.47
Ds Capital A/c
20,000
25,000
Balance c/d (B/F)
23,000
25,000

Question: Admission of partner: The balance sheet of a firm as on 31.03.2007 was
Liabilities
Capital: Sun
Moon
Loan (Sun)
General Reserve
Sundry Creditors
50,000
41,000
5,000
5,000
15,000
1,500
1,17,500
Assets
Property
Motor Car
Furniture
Debtors
Stock
Cash
35,000
7,500
1,000
25,000
45,000
4,000
1,17,500
The profit sharing ratio between Sun & Moon was 3: 2. They decided to admit Pluto as a new partner
from 1st April, 2007 on the following terms & conditions:
Property & Motor Car to be revalued at 45,000 & 6,500 respectively and 5% provision to be
created on debtors.
Pluto should pay premium for goodwill to be valued at 2 years purchase of last three years average
profits. Such amount of premium was to be credited to old partners loan accounts.
Pluto should pay 37,500 as capital.
The new profit sharing ratio should be 2 : 1 : 1.
Last three years profits were 5,000, 6,000 and 7,500.
The last three years books of accounts, on verification, disclosed the following discrepancies:
2004 05 Bad debts previously written of recovered 400, credited to Debtors Account, Closing
Stock undervalued by 1,250.
2005 06 Furniture purchased 300 debited to Purchases Account, Depreciation was provided @
10% on reducing balance method but closing stock was overvalued by 2,000.
2006 07 A purchase invoice of 1,000 was omitted from the books and Closing Stock was
undervalued by 1,000.
Pass the journal entries at the time of admission of Pluto and prepare the balance sheet just after his
admission
Answer:
Revaluation A/c
Particulars
Particulars
To Motor Car
1,000 By Property
10,000
Provision for bad debts
1,250
Profit on Revaluation
Sun
4,650
Moon
3,100 7,750
10,000
10,000
6.2.48
Partner Capital A/c

Particulars
A
B
C
Particulars
A
B
C
To Balance c/d 57,650 46,100 37,500 By Balance b/d
50,000 41,000
-Cash A/c
--- 37,500
Profit on Reval.
4,650 3,100
-General Reserve 3,000 2,000
-57,650 46,100 37,500
57,650 46,100 37,500
Calculation of sacrificing / gaining ratio of sun & moon because of admission of Pluto
Old Ratio
Sun: Moon: Pluto
New Ratio
3:2:-
Sacrificing Ratio
= - =
Moons Sacrificing Ratio = - =
=
=
Rectification of Profits of Last 3 years.

Revaluation A/c
Particulars
2004-05 2005-06 2006-07
Profits
5,000
6,000
7,500
Bad debts recovered
+400
--Closing stock undervalued
+1,250
-1,250
-Furniture purchased debited to purchases A/c
+300
-Depreciation
-30
-Closing stock overvalued
-2,000
+2,000
Purchased not recorded
-1,000
Closing stock undervalued
+1,000
6,650
3,020
9,500
Calculation of premium to be paid by Pluto
= Average profit of 3 years:
6650 3020 9500

3
= 6,390
Goodwill = 6,390 2 = 12,780

Plutos share of goodwill = 12,780 1 = 3,195
4
Particulars
1. Property A/c
To Revaluation A/c
(Being Revaluation of property done at the time of admission of Pluto)
Dr.
Dr.
10,000
10,000
2. Revaluation A/c
Dr.
To Motor Car A/c
To Provision for bad debts A/c
(Being Revaluation done of motor car & Provision calculated on debtors
@ 5%)
2,250
3. Revaluation A/c
To Suns Capital A/c
7,750
Cr.
Dr.
1,000
1,250
4,650
6.2.49
To Moons Capital A/c

(Being profit on Revaluation distributed to partners capital A/c)
3,100
4. Cash A/c
To Plutos Capital A/c
(Cash brought in by Pluto as his share of capital)
Dr.
5. Cash A/c
To Plutos Capital A/c
(Being cash brought by Pluto for his share of goodwill)
Dr.
37,500
37,500
3,195
3,195
6. Plutos Capital A/c

Dr. 3,195
To Suns loan A/c
1,278
To Moons loan A/c
1,917
(Being plutos share of premium for goodwill credited to old partners capital a/c in their
sacrificing ratio)
Balance sheet (After Admission)
Liabilities
Amount
Assets
Amount
Capital: Sun
57,650 Property (35,000 + 10,000)
45,000
Capital: Moon
46,100 Motor Car (7,500 1,000)
6,500
Capital: Pluto
37,500 Furniture
1,000
Loan (Sun) (5000 + 1278)
6,278 Debtors (25,000 1,250)
23,750
Moon
1,917 Stock
45,000
Sundry Creditors
15,000 Cash (4,000 + 37,500 + 3,195)
44,695
1,65,945
1,65,945

Question: Admission of partner: X & Y share profit & loss in the ratio of 5: 3. They admit Z with
1/5th share of profits. He pays 80,000 as capital but does not contribute anything towards goodwill
which is valued at 60,000. The Capitals of the Partners are fixed. All adjustments are to be made
through partners current accounts. Their balance sheet as on March 31, 2010 is as follows:
Balance Sheet as on 31.03.10
Liabilities
Assets
Capital :
Plant and Machinery
50,000
X
80,000
Investments
31,000
Y
60,000 1,40,000 Sundry Debtors
60,000
Current Account :
Stock and Trade
90,000
X
5,000
Bank
30,000
Y
6,000
11,000
General Reserve
60,000
Sundry Creditors
50,000
2,61,000
2,61,000
Additional Information:
i. Plant and Machinery is valued at 46,000 and stock at 96,000.
6.2.50
ii. One Creditor for 6,000 is dead and nothing is likely to be paid on this account.
iii. The Capital accounts are to be proportionately adjusted on the basis of Zs capital and his
share of profit, through Current accounts.
iv. Partners decide to maintain the General Reserve in the books of the firm.
Prepare Revaluation account, Bank account, Capital and Current accounts and Balance Sheet of the
new firm.
Answer:
ADDITIONAL PROBLEMS
RETIREMENT OF A PARTNER
Question: Retirement of partner: Morning, Day and Night Carry on business in partnership sharing
the Profits and Losses in the proportion of 25%, 25% and 50% respectively. Their Balance Sheet as
on 31.03.2005 was as under:
Liabilities
Sundry Creditors
General Reserves
Capitals -Morning
24,00,000
Day
24,00,000
Night
Assets
1,20,000 Cash / Bank

1,00,000
75,00,000
Inventories
10,00,000
Fixed Assets W.D.V
4,00,000
Investments (At cost)
10,00,000
(Market value 15,00,000/-)
50,00,000
98,00,000
1,00,00,000
1,00,00,000
On 1st April, 2005, Morning and Day retired and Night continued the business. Night paid 36,00,000
to Morning and 36,00,000 to Day in full and final discharge of their claim in the partnership. This
amount was brought in Night for the purpose of payment to the retiring partners. None of the assets
and liabilities is to be revalued.
Passing accounting entries in relation to the above in the books of business Unit.
Prepare the Balance Sheet of the business Unit after the above transactions are recorded.
Answer: Journal Entries in the books of Business Unit
Particulars
Bank A/c
To Nights Capital A/c
(Being Capital Brought in by Night for payment to retiring partners)
Dr.
Dr. 72,00,000
72,00,000
Mornings Capital A/c

Days Capital A/c
To Bank A/c
(Being Capital paid off on retirement)
Dr. 36,00,000
Dr. 36,00,000
Nights Capital A/c

To Mornings Capital A/c
Dr. 24,00,000
Cr.
72,00,000
12,00,000
6.2.51
To Days Capital A/c

(Being purchase of Nights shares of Goodwill, unrecorded increase in
value of Assets and Reserves from Morning and Day on their
retirement)
12,00,000
Balance Sheet of Business unit

(After Retirement of Morning and Day)
Liabilities
Amount
Asset
Amount
Nights Capital A/c
98,00,000 Fixed Assets W.D.V
4,00,000
Reserves
80,000 Investment (At cost)
10,00,000
Sundry Creditors
1,20,000 (Market values 15,00,000)
Inventories
10,00,000
Sundry Debtors
75,00,000
Cash / Bank
1,00,000
1,00,00,000
1,00,00,000
Particulars
T
o
Bank
A/c
Mornin
g
Capital
A/c
Days
Mornin
g
36,00,00
0
Day

Night
Particulars
36,00,00
0
--- B
y
12,00,000
Balanc
e
Bank
A/c
Nights
Capital
A/c
Capital
A/c
Balance
c
Mornin
g
24,00,00
0
--
Day
Night
24,00,00
0
--
50,00,000
12,00,00
0
12,00,00
0
--
36,00,00
0
36,00,00
0
1,22,00,00
0
72,00,000
12,00,000
98,00,000
36,00,00
0
36,00,00
0
1,22,00,00
0
ADDITIONAL PROBLEMS
ADMISSION CUM RETIREMENT OF PARTNER
[CMA INTER J07, 5+5+2+2=14 Marks]
Question: Admission cum retirement: Pradip and Parimal are equal partners. Pradip, by agreement,
retires and Gopal joins the firm on the basis of one-third share of profits on 01.04.2007. The balances
of the books as on 31st March, 2007 were:
Goodwill
Fixed Assets at Cost
Current Assets :
Stock
Debtors
Bank Balance
Dr.
10,000
1,20,000
--60,000
40,000
8,000
Cr.
-------------
6.2.52
Creditors
Provision for Depreciation
Capital Accounts:
Pradip
Parimal
-----
20,000
12,000
--- 1,04,000
--- 1,02,000
2,38,000 2,38,000
Goodwill and Fixed Assets valued at 30,000 and 1,40,000 respectively and it was agreed to be
written up accordingly before admission of Gopal as partner. Sufficient money is to be introduced so
as to enable Pradip to be paid off and leave 5,000 Cash at Bank; Parimal and Gopal are to provide
such sum as to make their Capitals proportionate to their share of profits. Assuming the agreement
was carried out, show the Journal entries required and prepare the Balance Sheet after admission of
Gopal.
All working should form part of your answer.
Answer:
Balance Sheet of the firm As on (After Admission)
Liabilities
Amount
Asset
Amount
Capital A/cs (WN1)
Fixed Assets
1,20,000
Parimal
1,28,667
(-) Provision for Depn
12,000 1,08,000
Gopal
64,333 1,93,000 Current Assets
Creditors
20,000 Stock
60,000
Debtors
40,000
Bank Balance (W.N.2)
5,000
2,13,000
2,13,000
Working Note 1:
Particulars Pradeep Parimal Gopal
Particulars Pradeep Parimal Gopal
To Goodwill
-20,000 10,000 By Bal b/d
1,04,000 1,02,000
-Bank
1,14,000
--Goodwill
10,000
10,000
-Bal c/d
-- 1,28,667 64,333
Bank A/c
--- 74,333
Bank A/c
-36,667
-1,14,000 1,48,667 74,333
1,14,000 1,48,667 74,333
Working Note 2:
Bank A/c
Particulars
Amount
Particulars
Amount
To Balance b/d
8,000 By Pradip Capital A/c 1,14,000
Gopal Capital A/c
74,333
Balance c/d
5,000
Parimal Capital A/c
36,667
1,19,000
1,19,000
Journal Entries in the books of the Partnership Firm
Particulars
1. Goodwill A/c
To Pradips Capital A/c
To Parimal Capital A/c
(Being Goowill Realised)
Dr.
Dr.
20,000
Cr.
10,000
10,000
6.2.53
2. Parimal Capital A/c

Dr.
Gopal Capital A/c
Dr.
To Goodwill A/c
(Being Goodwill written off in their new profit sharing ratio)
20,000
10,000
30,000
3. Pradip Capital A/c

To Bank A/c
(Being Cash paid to Pradig in final settlement)
Dr. 1,14,000
4. Bank A/c
To Gopal Capital A/c
To Parimal Capital A/c
(Being Cash brought by Partners for final settlement)
Dr. 1,11,000
1,14,000
74,333
36,667
ADDITIONAL PROBLEMS
DEATH OF A PARTNER
Question: Death of a partner: A, B and C were in partnership sharing profits and losses in the ratio
of 5:4:3 respectively. A died on 31.12.2001, on which date the balance sheet of the firm was as under:
Liabilities
Capital Accounts:
A
42,500
B
30,000
C
22,500
Current Accounts:
A
4,250
B
6,500
C
5,750
Loan: A
Creditors
Assets
Premises
Less : Prov. for dep.
Plant
95,000 Less : Prov. for dep.
Stock
Debtors
Less : Prov. for dep.
16,500 Bank
20,000
21,250
1,52,750
40,000
4,000
46,000
13,500
21,000
3,750
36,000
32,500
27,000
17,250
40,000
1,52,750
B and C decided to carry on the business sharing profits and losses in the ratio of 7:5 respectively.
The following adjustments were made on 31.12.2001.
a. Plant, Stock and debtors were valued at 34,500, 24,300 and 16,850 respectively.
b. Valuers charge of 700 was to be provided for.
c. Goodwill was to be valued as equal to 3 years purchase of super profits.
The required return was to be calculated as 25% on partners capital current and loan accounts, and
was to be set against weighted average profits of the last three years. Profits were: 2001 = 52,000;
2000 = 46,000; 1999 = 45,250.
Adjustments for goodwill were to be made in and out of the capital accounts.
6.2.54
25,000 was repaid to As executors on 01.01.2002, the balance owing to be a loan to the partnership.
Prepare necessary ledger accounts and the balance sheet on 01.01.2002.
Answer:
Particulars
Amount
Particulars
Amount
To Stock A/c
2,700 By Plant A/c
2,000
Debtors A/c
400
Partner Capital A/c
Prov. for Valuers Charges
700
A
750
B
600
C
450
Balance c/d
1,800
3,800
3,800
Valuation of Goodwill:
Calculate weighted average profit
Year Profit Weight Profit Weight
2001 52,000
3
1,56,000
2000 46,000
2
92,000
1999 45,250
1
45,250
6
2,93,250
Weighted average profit = 2,93,250/6= 48,875
Total of Partner Capital + Current Account + Loan Account = 95,000 + 16,500 + 20,000 = 1,31,500
Normal Return = 1,31,250 25% = 32,875
Super Profit = Weight Average Profit Normal Return = 48,875 32,875 = 16,000
Goodwill = Super Profit x 3 years purchase = 16,000 3 = 48,000/Partner Capital A/c
Particulars
A
B
C
Particulars
To Goodwill a/c
-- 28,000 20,000 By Balance b/d
Bank A/c
25,000
--Current A/c
Loan A/c
61,000
Goodwill A/c
Revaluation
750
600
450
Loan A/c
Balance c/d
-- 23,900 19,800
86,750 52,500 40,250
A
B
C
42,500 30,000 22,500
42,500 6,500 5,750
20,000 16,000 12,000
20,000
--86,750 52,500 40,250
Balance Sheet of the firm As on 01.01.2002

Capital A/c
Fixed Assets
B
23,900
(-) Prov. for dep
C
19,800
43,700 Plant
Creditors
21,250 (-) Prov. for dep
As Loan A/c
61,000 Stock
Prov. for Valuers Charges
700 Debtors
(-) Prov. for Bad debts
Bank
1,26,650
40,000
4,000
48,000
13,500
21,000
4,150
36,000
34,500
24,300
16,850
15,000
1,26,650
6.2.55

G1 6.2 Partnership - Reconstitution

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G1 6.2 Partnership - Reconstitution

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6.

Calculation of new profit and loss ratio

[CMA INTER D05, 3 Marks]

Old ratio: the ratio prior to the change of ratio

Balance after Cs share As share

Bs share in the balance

Balance after Cs share Bs share

New ratio of A, B and C

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

= 4/14 : 6/21 : 12+6/42

= 4/14 3/3 : 6/21 2/2 : 18/42

=12/42: 12/42: 18/42

2. R & S agree to sacrifice

share to T in the ratio of 2: 3.

Answer: Calculation of new profit sharing ratio

T Purchased 1/10th Share From R

[ii] R & S agree to sacrifice 1/10th share to T in the ratio of 2:3

[iii] Simply get 1/10th share of profit

= 9/10 2/5 = 18/50

Goodwill Nature Goodwill is an Intangible Asset and not a Fictitious Asset.

Change in Profit Sharing Ratio,

1 Simple Average Method

[if profit does not show

2 Weight Average Method

[if profit shows trend]

3 Super Profit Method

2 Cash Method: Premium Method

3 Cash and non-cash method

4 Pay privately no entry

[CMA INTER D09, 3 Marks]

Purchase of Super Profit Method

Normal Rate of Return [NRR]

Normal Profit [NP]

Actual Profit [AP]

Super Profit [SP]

Annuity Method [Super Profit]

Question 11: Calculation of Goodwill: [Annuity Method]

GW = FMP AF 10000 x 2.486 24860

II. Cash Method

Dr. Adjustment of GW of New Partners Share

Gaining Partners Dr. Cash A/c

[Full GW is Shared in Old Ratio]

All Partners Dr.

Capitals of Old Partners + Incoming Partners Capital

C Hidden Goodwill (A-B)

60,000 Fixed Asset

20,000 Current Assets

70,000 Fixed Asset

40,000 Current Assets

(Goodwill raised in the books)

(Goodwill cancelled in the books)

(Capital introduced by Cs capital)

73,000 Goodwill [25-25]

62,000 Fixed Asset

35,000 Current Assets

(Goodwill adjusted without raising it)

(Capital introduced by Cs capital)

73,000 Goodwill [25-25]

62,000 Fixed Asset