Admission of a Partner

  • Admission leads to Reconstitution of Firm as the existing agreement comes to an end and a new agreement comes into effect. A new partner may be admitted for increasing the capital, augmenting managerial skills, etc.
  • Rights of new partner are right to share assets of the firm and to share future profits. On admission of a partner the adjustments are required for profit sharing ratio, goodwill, revaluation of assets and liabilities, reserves, accumulated profits/losses and capital.
  • On the admission of a new partner, he acquires his share of profit from the old partners. This reduces the old partner's share of profits, hence the calculation of new profit sharing ratio become necessary.
  • An incoming partner may acquire his share from the old partners in the old profit sharing ratio, in a particular ratio or in a surrendered ratio.
  • If new partner brings premium for goodwill, such premium should be distributed among the existing partners. If new partner is unable to bring premium for goodwill, his share of goodwill is adjusted through Partners’ Current Accounts or Capital Accounts.
  • There are different cases when premium (goodwill) is paid privately, when premium is brought in cash by the new partner, when the new partner is unable to bring his share or when premium partly brought in cash by the new partner.
  • Sometimes, the value of the goodwill of the firm is not specifically given. In that case, its value has to be inferred on the basis of capitals of the partners.
  • Revaluation (nominal account) is the valuation of assets and liabilities at the time of admission of a partner.
  • New partner does not suffer because of reduction in the value of assets, nor should he be benefitted by increase in the value of assets Net effect of revaluation of assets and liabilities is either profit or loss, which is transferred to old partner’s capital account in old ratio.
  • Reserve funds and accumulated profits/losses should be transferred to the old partners’ capital accounts in their old ratio.
  • Accounting treatment of Reserves and Accumulated Profits/Losses when old partners do not want to distribute them.
  • The capitals of old partners may be adjusted by taking new partner’s capital as base, the new partner may be required to contribute the proportionate capital considering old partners’ capitals as base or capital of the new firm is given in the question and capital of all the partners is to be according to profit sharing ratio.

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  • Q1

    On 1st April, 2019, A, B and C sharing profits in the ratio of 3:2:1 admit D for 1/6th share in profits. They maintain their accounts on fixed capital system. On this date their Balance Sheet disclosed the following items:

    General Reserve

    1,20,000

    Profits & Loss (Cr. Balance)

    60,000

    Goodwill of the firm is valued at ₹ 90,000. However, D is unable to bring his share of goodwill in Cash.

    Partners do not want to distribute the general reserve and profit but prefer to record the change in the profit sharing ratio by passing and adjustment entry. You are required to give the adjusting entry.

    Marks:3
    Answer:

    Adjustment to be made for:

    INR

    General Reserve

    1,20,000

    Profits & Loss

    60,000

    Goodwill

    90,000

    2,70,000

    Since new profit sharing ratios are not given, old profit sharing ratio will be considered as sacrificing ratio.

    View Answer
  • Q2

    Samira and Aisha are partners and share profits in the ratio of ¾ and ¼ respectively. Their Balance Sheet on 31st March. 2019 was as follows:

    Liabilities

    INR

    Assets

    INR

    Sundry Creditors

    4,00,000

    Bank

    1,70,000

    Reserve for Contingencies

    40,000

    Bills Receivable

    30,000

    Workman Compensation Fund

    20,000

    Sundry Debtors

    1,00,000

    Samira

    3,00,000

    Stock

    2,00,000

    Aisha

    1,60,000

    4,60,000

    Furniture & Fixtures

    1,00,000

    Land & Buildings

    2,00,000

    Profit & Loss A/c

    1,20,000

    9,20,000

    9,20,000

    On the same date, Maria was admitted into partnership for 1/5th share on the following terms:

    a) Maria was to bring the necessary amount for her share of capital.

    b) Maria was required to bring in INR 1,20,000 for her share of goodwill, but she could bring in only INR 80,000 in cash.

    c) Stock and fixtures are to be reduced by 10%

    d) The value of land and buildings having appreciated should be brought up to INR 3,10,000.

    Prepare the Revaluation Account, the Partner’s Capital A/c and the Balance Sheet.

    Marks:8
    Answer:

    REVALUATION ACCOUNT

    PARTICULARS

    INR

    PARTICULARS

    INR

    To Stock

    20,000

    By Land and

    To Furniture and

    Buildings

    1,10,000

    Fixtures

    10,000

    To Profit transferred

    Samira

    60,000

    Aisha

    20,000

    80,000

    1,10,000

    1,10,000

    Partners’ Capital A/c

    Particulars

    Samira

    Aisha

    Maria

    Particulars

    Samira

    Aisha

    Maria

    To Profit and

    By Balance b/d

    3,00,000

    1,60,000

    Loss A/c

    90,000

    30,000

    By Reserves for

    To Balance c/d

    4,05,000

    1,95,000

    1,50,000

    Contingencies

    30,000

    10,000

    By Workmen

    Compensation

    Fund

    15,000

    5,000

    By Revaluation

    A/c

    60,000

    20,000

    By Premium A/c

    60,000

    20,000

    By Maria’s

    Current A/c

    30,000

    10,000

    By Bank A/c

    1,50,000

    4,95,000

    2,25,000

    1,50,000

    4,95,000

    2,25,000

    1,50,000

    Balance Sheet

    Liabilities

    INR

    Assets

    INR

    Sundry Creditors

    4,00,000

    Bank

    4,00,000

    Capital:

    Bills Receivable

    30,000

    Samira

    4,05,000

    Debtors

    1,00,000

    Maria

    1,95,000

    Stock

    1,80,000

    Aisha

    1,50,000

    7,50,000

    Furniture and

    Fixtures

    90,000

    Land and Buildings

    3,10,000

    Maria’s Current A/c

    40,000

    11,50,000

    11,50,000

    W.N.:

    1. Total Capital of Samira and Aisha = 4,05,000 + 1,95,000 = INR 6,00,000

    Total Capital of New Firm = 6,00,000 x 5/4 = INR 7,50,000

    Maria’s Capital = 7,50,000 x 1/5 = INR 1,50,000

    View Answer
  • Q3

    Ramesh and Suresh are two partners deviding profits in the ratio of 2:1. Prithvi is admitted to the partnership. He paid ₹50,000 for Capital and for goodwill he was to bring in is ₹15,000. He is not in a position to bring in cash for goodwill. Journalise the transaction.

    Marks:3
    Answer:

    S.N.

    Particulars

    L.F.

    Dr.

    Cr.

    1.

    Cash A/c

    Dr.

    50,000

    To Prithvi’s Capital A/c

    50,000

    (Cash brought in for capital)

    2.

    Prithvi’s Current A/c

    Dr.

    15,000

    To Ramesh’s Capital A/c

    10,000

    To Suresh’s Capital A/c

    5,000

    (For adjustment of goodwill)

    View Answer
  • Q4

    X and Y are partners in a firm sharing profits in the ratio of 4:3. On 1st April, 2019, they admitted Z as a new partner. Z brought in 1, 00,000 for his capital and 21,000 for 1/3rd share of goodwill/ premium. On Z’s admission, goodwill appears in the books of the firm at 28,000. Pass necessary journal entries on Z’s admission.

    Marks:4
    Answer:

    Books of X, Y and Z

    Date

    Particulars

    Dr. (₹)

    Cr. (₹)

    April 1 ’19

    X’s Capital A/c……………..Dr

    16,000

    Y’s Capital A/c………………Dr

    12,000

    To Goodwill A/c

    28,000

    (Being goodwill written off prior to Z’s admission)

    April 1 ’19

    Bank A/c…………………………Dr

    1,21,000

    To Z’s Capital A/c

    1,00,000

    To Premium (Goodwill) A/c

    21,000

    (Being Z brought cash for his capital and his share of goodwill)

    April 1 ’19

    Premium (Goodwill) A/c……Dr

    21,000

    To X’s Capital A/c

    12,000

    To Y’s Capital A/c

    9,000

    (Being premium brought by Z transferred to the capital accounts of X and Y in their sacrificing ratio, i.e., 4:3)

    View Answer
  • Q5

    Roy and Sam are in partnership sharing profits and losses in the ratio of 5:3 . Harry is admitted as a partner for 1/5th share which he takes 1/10th from Roy and 1/10th from Sam. Calculate new profit sharing ratio of the partners.

    Marks:4
    Answer:

    OldprofitsharingratioofRoyandSam=5:3 Harryacquireshisshare 1 5 thsharewhichhetakes 1 10 thfromSam. Histotalsharecomesto= 2 10 or 1 5 Roy'sshareaftergiving 1 10 thtoHarry = 5 8 - 1 10 = 25-4 40 = 21 40 Sam'sshareaftergiving 1 10 thtoHarry = 3 8 - 1 10 = 15-4 40 = 11 40 TherespectivesharesofRoy,SamandHarryare, = 21 40 , 11 40 , 8 40 =21:11:8 MathType@MTEF@5@5@+=feaaguart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLnhiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=xfr=xb9adbaqaaeaacaGaaiaabeqaamaabaabaaGceaqabeaacaqGpbGaaeiBaiaabsgacaaMc8UaaeiCaiaabkhacaqGVbGaaeOzaiaabMgacaqG0bGaaGPaVlaabohacaqGObGaaeyyaiaabkhacaqGPbGaaeOBaiaabEgacaaMc8UaaeOCaiaabggacaqG0bGaaeyAaiaab+gacaaMc8Uaae4BaiaabAgacaaMc8UaaeOuaiaab+gacaqG5bGaaGPaVlaabggacaqGUbGaaeizaiaaykW7caqGtbGaaeyyaiaab2gacaaMc8UaaeypaiaaykW7caqG1aGaaGPaVlaabQdacaaMc8Uaae4maaqaaiaabIeacaqGHbGaaeOCaiaabkhacaqG5bGaaGPaVlaabggacaqGJbGaaeyCaiaabwhacaqGPbGaaeOCaiaabwgacaqGZbGaaGPaVlaabIgacaqGPbGaae4CaiaaykW7caqGZbGaaeiAaiaabggacaqGYbGaaeyzaiaaykW7daWcaaqaaiaabgdaaeaacaqG1aaaaiaabshacaqGObGaaGPaVlaabohacaqGObGaaeyyaiaabkhacaqGLbGaaGPaVlaabEhacaqGObGaaeyAaiaabogacaqGObGaaGPaVlaabIgacaqGLbGaaGPaVlaabshacaqGHbGaae4AaiaabwgacaqGZbaabaWaaSaaaeaacaqGXaaabaGaaeymaiaabcdaaaGaaGPaVlaabshacaqGObGaaGPaVlaabAgacaqGYbGaae4Baiaab2gacaaMc8Uaae4uaiaabggacaqGTbGaaeOlaiaaykW7aeaacaqGibGaaeyAaiaabohacaaMc8UaaeiDaiaab+gacaqG0bGaaeyyaiaabYgacaaMc8Uaae4CaiaabIgacaqGHbGaaeOCaiaabwgacaaMc8Uaae4yaiaab+gacaqGTbGaaeyzaiaabohacaaMc8UaaeiDaiaab+gacaaMc8UaaeypaiaaykW7daWcaaqaaiaabkdaaeaacaqGXaGaaeimaaaacaaMc8Uaae4BaiaabkhacaaMc8+aaSaaaeaacaqGXaaabaGaaeynaaaaaeaacaqGsbGaae4BaiaabMhacaqGNaGaae4CaiaaykW7caqGZbGaaeiAaiaabggacaqGYbGaaeyzaiaaykW7caqGHbGaaeOzaiaabshacaqGLbGaaeOCaiaaykW7caqGNbGaaeyAaiaabAhacaqGPbGaaeOBaiaabEgacaaMc8+aaSaaaeaacaqGXaaabaGaaeymaiaabcdaaaGaaeiDaiaabIgacaaMc8UaaeiDaiaab+gacaaMc8UaaeisaiaabggacaqGYbGaaeOCaiaabMhaaeaacaqG9aGaaGPaVpaalaaabaGaaeynaaqaaiaabIdaaaGaaGPaVlaab2cacaaMc8+aaSaaaeaacaqGXaaabaGaaeymaiaabcdaaaGaaGPaVlaab2dacaaMc8+aaSaaaeaacaqGYaGaaeynaiaaykW7caqGTaGaaGPaVlaabsdaaeaacaqG0aGaaeimaaaacaaMc8UaaeypaiaaykW7daWcaaqaaiaabkdacaqGXaaabaGaaeinaiaabcdaaaaabaGaae4uaiaabggacaqGTbGaae4jaiaabohacaaMc8Uaae4CaiaabIgacaqGHbGaaeOCaiaabwgacaaMc8UaaeyyaiaabAgacaqG0bGaaeyzaiaabkhacaaMc8Uaae4zaiaabMgacaqG2bGaaeyAaiaab6gacaqGNbGaaGPaVpaalaaabaGaaeymaaqaaiaabgdacaqGWaaaaiaabshacaqGObGaaGPaVlaabshacaqGVbGaaGPaVlaabIeacaqGHbGaaeOCaiaabkhacaqG5bGaaGPaVdqaaiaab2dacaaMc8+aaSaaaeaacaqGZaaabaGaaeioaaaacaaMc8UaaeylaiaaykW7daWcaaqaaiaabgdaaeaacaqGXaGaaeimaaaacaaMc8UaaeypaiaaykW7daWcaaqaaiaabgdacaqG1aGaaGPaVlaab2cacaaMc8UaaeinaaqaaiaabsdacaqGWaaaaiaaykW7caqG9aGaaGPaVpaalaaabaGaaeymaiaabgdaaeaacaqG0aGaaeimaaaaaeaacaqGubGaaeiAaiaabwgacaaMc8UaaeOCaiaabwgacaqGZbGaaeiCaiaabwgacaqGJbGaaeiDaiaabMgacaqG2bGaaeyzaiaaykW7caqGZbGaaeiAaiaabggacaqGYbGaaeyzaiaabohacaaMc8Uaae4BaiaabAgacaaMc8UaaeOuaiaab+gacaqG5bGaaeilaiaaykW7caqGtbGaaeyyaiaab2gacaaMc8Uaaeyyaiaab6gacaqGKbGaaGPaVlaabIeacaqGHbGaaeOCaiaabkhacaqG5bGaaGPaVlaabggacaqGYbGaaeyzaiaabYcaaeaacaqG9aGaaGPaVpaalaaabaGaaeOmaiaabgdaaeaacaqG0aGaaeimaaaacaaMc8UaaeilaiaaykW7daWcaaqaaiaabgdacaqGXaaabaGaaeinaiaabcdaaaGaaGPaVlaabYcacaaMc8+aaSaaaeaacaqG4aaabaGaaeinaiaabcdaaaGaaGPaVlaab2dacaaMc8UaaeOmaiaabgdacaaMc8UaaeOoaiaaykW7caqGXaGaaeymaiaaykW7caqG6aGaaGPaVlaabIdaaaaa@A940@

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