NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 3 Reconstitution of a Partnership Firm: Retirement/Death of a Partner
Reconstitution of a Partnership Firm: Retirement/Death of a Partner explains how a firm settles the outgoing partnerโs claim.
These NCERT Solutions help students solve Chapter 3 questions on gaining ratio, goodwill, revaluation, reserves and loan accounts.
A partnerโs retirement or death does not always close the firm. It usually changes the agreement between the remaining partners. Chapter 3 explains how the outgoing partnerโs final claim is calculated through capital balance, goodwill, reserves, revaluation profit or loss, drawings, interest, and profit up to the retirement or death date. NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 3 help students prepare gaining ratio workings, journal entries, Revaluation Account, Partnerโs Capital Accounts, retiring partnerโs Loan Account and deceased partnerโs Executorโs Account for 2026-27 exam practice.
Key Takeaways
- Retirement/death: The old partnership agreement ends, but the firm may continue.
- Gaining ratio: Remaining partners compensate the outgoing partner in their gaining ratio.
- Goodwill: Retiring or deceased partner receives share of goodwill.
- Settlement: Amount due may be paid immediately or transferred to Loan/Executorโs Account.
NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 3 Structure 2026-27
| Textbook Section | Main Focus | What Students Practise |
| Short Answer Questions | Retirement, death, gaining ratio and goodwill | Concept answers |
| Long Answer Questions | Revaluation, reserves, settlement and executor account | Explanation-based answers |
| Numerical Questions | Capital accounts, loan accounts, revaluation and balance sheet | Working notes and accounts |
Short Answer Questions
These short answers cover the core accounting points in retirement and death of a partner. NCERT Solutions for Class 12 Accountancy Partnership Accounts Chapter 3 Retirement Death of a Partner should always connect the answer with the outgoing partnerโs final claim.
Q1. What is meant by retirement of a partner?
Answer: Retirement of a partner means withdrawal of a partner from the firm.
The remaining partners may continue the business under a new agreement. The firm is reconstituted because profit sharing and partner rights change.
The retiring partnerโs final amount is calculated after goodwill, revaluation, reserves, losses and other adjustments.
Q2. What is meant by death of a partner?
Answer: Death of a partner means the partnerโs relationship with the firm ends due to death.
The firm may continue if remaining partners agree. The deceased partnerโs legal representatives receive the amount due.
The claim is transferred to the deceased partnerโs Executorโs Account.
Q3. What is new profit sharing ratio on retirement or death of a partner?
Answer: New profit sharing ratio is the ratio in which remaining partners share future profits.
It is calculated after removing the retiring or deceased partnerโs share.
If nothing is stated, remaining partners usually continue in their old ratio.
Q4. What is gaining ratio?
Answer: Gaining ratio is the ratio in which continuing partners acquire the outgoing partnerโs share.
Formula:
Gaining Share = New Share - Old Share
It is used for goodwill adjustment on retirement or death.
Q5. Why is gaining ratio calculated?
Answer: Gaining ratio is calculated because continuing partners gain future profit share.
They must compensate the retiring or deceased partner for his or her share of goodwill.
Goodwill compensation is debited to gaining partners in gaining ratio.
Q6. How is goodwill treated when a partner retires?
Answer: Retiring partner is credited with his share of goodwill.
Gaining partners are debited in their gaining ratio.
Entry:
Gaining Partnersโ Capital A/c Dr.
To Retiring Partnerโs Capital A/c
Q7. How is existing goodwill treated on retirement of a partner?
Answer: Existing goodwill is written off among all partners in their old profit sharing ratio.
Entry:
All Partnersโ Capital A/c Dr.
To Goodwill A/c
After this, retiring partnerโs share of current goodwill is adjusted through gaining partners.
Q8. What is hidden goodwill on retirement of a partner?
Answer: Hidden goodwill is goodwill inferred from the settlement amount.
It arises when a retiring partner is paid more than the adjusted balance of his capital account.
Excess payment is treated as the outgoing partnerโs share of goodwill.
Q9. Why is Revaluation Account prepared on retirement or death?
Answer: Revaluation Account is prepared to record changes in assets and liabilities.
The profit or loss on revaluation belongs to all existing partners, including the outgoing partner.
It is shared in old profit sharing ratio.
Q10. What happens to accumulated profits on retirement of a partner?
Answer: Accumulated profits are transferred to all partnersโ capital accounts.
They are distributed in old profit sharing ratio because they were earned before retirement or death.
Entry:
Reserve A/c Dr.
To All Partnersโ Capital A/c
Q11. What happens to accumulated losses on retirement of a partner?
Answer: Accumulated losses are transferred to all partnersโ capital accounts.
They are shared in old profit sharing ratio.
Entry:
All Partnersโ Capital A/c Dr.
To Profit and Loss A/c
Q12. How is the retiring partnerโs amount settled?
Answer: The retiring partnerโs amount may be paid immediately or transferred to loan account.
If paid immediately:
Retiring Partnerโs Capital A/c Dr.
To Bank A/c
If transferred to loan:
Retiring Partnerโs Capital A/c Dr.
To Retiring Partnerโs Loan A/c
Q13. What is retiring partnerโs loan account?
Answer: Retiring Partnerโs Loan Account is opened when the firm cannot pay the full amount immediately.
The unpaid amount due to the retiring partner is treated as a loan.
Interest may be paid as per agreement.
Q14. How is deceased partnerโs share of profit calculated up to death?
Answer: It may be calculated on time basis or sales basis.
On time basis:
Previous Yearโs Profit ร Period up to Death / 12 ร Deceased Partnerโs Share
Entry:
Profit and Loss Suspense A/c Dr.
To Deceased Partnerโs Capital A/c
Q15. What is Executorโs Account?
Answer: Executorโs Account records the amount payable to the legal representatives of a deceased partner.
After all adjustments, the deceased partnerโs capital balance is transferred to Executorโs Account.
Payment is then made to the executor.
Long Answer Questions
The long-answer section in Class 12 Accountancy Partnership Accounts Chapter 3 needs formulas, entries and clear reasoning. Use ratio workings before journal entries.
Q1. Explain the accounting treatment required on retirement or death of a partner.
Answer: Retirement or death of a partner requires settlement of the outgoing partnerโs claim.
The firm continues, but the old partnership agreement ends. A new agreement is formed among the remaining partners.
The following adjustments are made:
- New profit sharing ratio is calculated.
- Gaining ratio is calculated.
- Goodwill is adjusted.
- Assets and liabilities are revalued.
- Unrecorded assets and liabilities are recorded.
- Accumulated profits and losses are transferred.
- Profit or loss up to retirement/death is calculated.
- Capital balances are adjusted.
- Amount due is paid or transferred to Loan/Executorโs Account.
The outgoing partner is credited with capital balance, current account credit balance, goodwill, reserves, revaluation profit and profit up to date.
The outgoing partner is debited with current account debit balance, drawings, accumulated losses, revaluation loss and interest on drawings.
Q2. Distinguish between gaining ratio and sacrificing ratio.
| Basis | Gaining Ratio | Sacrificing Ratio |
| Meaning | Ratio in which partners gain profit share | Ratio in which partners give up profit share |
| Used in | Retirement/death of a partner | Admission of a partner |
| Formula | New Share - Old Share | Old Share - New Share |
| Compensation | Gaining partners compensate outgoing partner | Incoming partner compensates sacrificing partners |
| Effect | Remaining partners gain | Existing partners sacrifice |
Q3. Explain the treatment of goodwill on retirement or death of a partner.
Answer: The retiring or deceased partner is entitled to share of goodwill.
Goodwill has been built by all partners before retirement or death. So, the outgoing partner must be compensated.
When Goodwill Does Not Appear in Books
Only the outgoing partnerโs share of goodwill is adjusted.
Entry:
Gaining Partnersโ Capital A/c Dr.
To Retiring/Deceased Partnerโs Capital A/c
When Goodwill Appears in Books
Existing goodwill is first written off in old ratio.
Entry:
All Partnersโ Capital A/c Dr.
To Goodwill A/c
Then outgoing partnerโs share of current goodwill is adjusted.
Entry:
Gaining Partnersโ Capital A/c Dr.
To Retiring/Deceased Partnerโs Capital A/c
When a Continuing Partner Sacrifices
Sometimes one continuing partner may sacrifice while another gains.
In that case, gaining partner compensates both the retiring partner and the sacrificing continuing partner.
Q4. Explain Revaluation Account on retirement or death of a partner.
Answer: Revaluation Account records changes in asset and liability values.
It is prepared because the outgoing partner should receive the share of gain or bear the share of loss up to the date of retirement/death.
Items Credited to Revaluation Account
- Increase in assets
- Decrease in liabilities
- Unrecorded assets
Items Debited to Revaluation Account
- Decrease in assets
- Increase in liabilities
- Unrecorded liabilities
If Revaluation Account has credit balance, it shows profit.
If it has debit balance, it shows loss.
The profit or loss is transferred to all partners in old profit sharing ratio.
Q5. How is the amount due to retiring partner ascertained?
Answer: The amount due to retiring partner is calculated through the retiring partnerโs capital account.
Items credited:
- Opening capital balance
- Current account credit balance
- Share of goodwill
- Share of reserves
- Share of revaluation profit
- Share of profit up to retirement
- Interest on capital
- Salary or commission due
Items debited:
- Current account debit balance
- Drawings
- Interest on drawings
- Share of accumulated losses
- Share of revaluation loss
- Share of loss up to retirement
- Goodwill written off, if applicable
The final credit balance is payable to the retiring partner.
Q6. Explain disposal of amount due to retiring partner.
Answer: The outgoing partnerโs amount is settled as per partnership deed.
It may be paid in cash, transferred to loan account or settled partly in cash and partly as loan.
Full Payment
Retiring Partnerโs Capital A/c Dr.
To Bank A/c
Full Amount Treated as Loan
Retiring Partnerโs Capital A/c Dr.
To Retiring Partnerโs Loan A/c
Partly Paid, Partly Loan
Retiring Partnerโs Capital A/c Dr.
To Bank A/c
To Retiring Partnerโs Loan A/c
If no agreement exists, Section 37 of the Indian Partnership Act, 1932 applies.
The outgoing partner may receive interest at 6% per annum or share of profit earned with his money.
Q7. How is deceased partnerโs amount settled?
Answer: The deceased partnerโs amount is transferred to Executorโs Account.
First, the deceased partnerโs capital account is adjusted for goodwill, reserves, revaluation, drawings, interest and profit up to death.
Then the balance is transferred.
Entry:
Deceased Partnerโs Capital A/c Dr.
To Deceased Partnerโs Executorโs A/c
Payment to executor:
Executorโs A/c Dr.
To Bank A/c
If the amount is paid in instalments, interest may be provided as per agreement.
Q8. Explain capital adjustment of continuing partners after retirement.
Answer: Continuing partners may decide to adjust their capitals in the new profit sharing ratio.
First, all adjustments are completed.
Then the total capital of the new firm is determined.
If total capital is given, it is divided in the new ratio.
If total capital is not given, the adjusted capitals of continuing partners are added.
That total is then divided in the new ratio.
If a partnerโs capital is more than required, excess is withdrawn.
If a partnerโs capital is less than required, cash is brought in.
Entries:
For excess withdrawn:
Partnerโs Capital A/c Dr.
To Bank A/c
For shortage brought in:
Bank A/c Dr.
To Partnerโs Capital A/c
Numerical Questions: Solved Formats and Working Notes
Retirement of a partner class 12 accountancy numericals need a fixed order. Calculate ratios first, then goodwill, revaluation, reserves, capital balance and settlement.
Q1. Calculate new profit sharing ratio when one partner retires.
Question Type: A, B and C share profits in 3:2:1. B retires.
Working:
When no information is given, remaining partners share future profits in their old ratio.
Aโs old share = 3/6
Cโs old share = 1/6
New ratio of A and C = 3:1
Final Answer:
New profit sharing ratio = 3:1
Q2. Calculate new ratio when retiring partnerโs share is acquired in a given ratio.
Question Type: Naveen, Suresh and Tarun share profits in 5:3:2. Suresh retires. His share is acquired by Naveen and Tarun in 2:1.
Working:
Sureshโs share = 3/10
Naveen acquires = 2/3 ร 3/10
Naveen acquires = 2/10
Tarun acquires = 1/3 ร 3/10
Tarun acquires = 1/10
Naveenโs new share = 5/10 + 2/10
Naveenโs new share = 7/10
Tarunโs new share = 2/10 + 1/10
Tarunโs new share = 3/10
Final Answer:
New profit sharing ratio = 7:3
Q3. Calculate gaining ratio from old and new ratio.
Question Type: Amit, Dinesh and Gagan share profits in 5:3:2. Dinesh retires. Amit and Gagan share future profits in 3:2.
Working:
Amitโs old share = 5/10
Amitโs new share = 3/5 = 6/10
Amitโs gain = 6/10 - 5/10
Amitโs gain = 1/10
Gaganโs old share = 2/10
Gaganโs new share = 2/5 = 4/10
Gaganโs gain = 4/10 - 2/10
Gaganโs gain = 2/10
Final Answer:
Gaining ratio = 1:2
Q4. Adjust goodwill when goodwill does not appear in books.
Question Type: A, B and C share profits in 3:2:1. B retires. Goodwill is Rs. 60,000. A and C continue in 3:1.
Working:
Bโs share = 2/6
Bโs share of goodwill = 60,000 ร 2/6
Bโs share of goodwill = Rs. 20,000
Gaining ratio of A and C = 3:1
Aโs compensation = 20,000 ร 3/4
Aโs compensation = Rs. 15,000
Cโs compensation = 20,000 ร 1/4
Cโs compensation = Rs. 5,000
Journal Entry:
Aโs Capital A/c Dr. 15,000
Cโs Capital A/c Dr. 5,000
To Bโs Capital A/c 20,000
Final Answer:
B is credited with Rs. 20,000 as goodwill.
Q5. Write off existing goodwill and adjust current goodwill.
Question Type: Hanny, Pammy and Sunny share profits in 3:2:1. Goodwill appears at Rs. 60,000. Pammy retires. Current goodwill is Rs. 84,000. Hanny and Sunny share future profits in 2:1.
Step 1: Write off existing goodwill
Hannyโs Capital A/c Dr. 30,000
Pammyโs Capital A/c Dr. 20,000
Sunnyโs Capital A/c Dr. 10,000
To Goodwill A/c 60,000
Step 2: Calculate Pammyโs share of current goodwill
Pammyโs share = 2/6
Pammyโs goodwill = 84,000 ร 2/6
Pammyโs goodwill = Rs. 28,000
Step 3: Calculate gaining ratio
Hannyโs old share = 3/6
Hannyโs new share = 2/3 = 4/6
Hannyโs gain = 1/6
Sunnyโs old share = 1/6
Sunnyโs new share = 1/3 = 2/6
Sunnyโs gain = 1/6
Gaining ratio = 1:1
Step 4: Goodwill adjustment entry
Hannyโs Capital A/c Dr. 14,000
Sunnyโs Capital A/c Dr. 14,000
To Pammyโs Capital A/c 28,000
Final Answer:
Pammy receives Rs. 28,000 for current goodwill.
Q6. Record revaluation on retirement.
Question Type: Machinery decreases by Rs. 10,000. Patents increase by Rs. 10,000. Buildings increase by Rs. 25,000. Old ratio is 5:3:2.
Revaluation Account Treatment:
Debit side:
Machinery = Rs. 10,000
Credit side:
Patents = Rs. 10,000
Buildings = Rs. 25,000
Profit on revaluation = 35,000 - 10,000
Profit = Rs. 25,000
Profit shared in 5:3:2:
Partner A = 25,000 ร 5/10 = Rs. 12,500
Partner B = 25,000 ร 3/10 = Rs. 7,500
Partner C = 25,000 ร 2/10 = Rs. 5,000
Journal Entry for Profit:
Revaluation A/c Dr. 25,000
To Aโs Capital A/c 12,500
To Bโs Capital A/c 7,500
To Cโs Capital A/c 5,000
Q7. Transfer accumulated reserve on retirement.
Question Type: General Reserve is Rs. 90,000. Partners share profits in 3:2:1. One partner retires.
Working:
Aโs share = 90,000 ร 3/6 = Rs. 45,000
Bโs share = 90,000 ร 2/6 = Rs. 30,000
Cโs share = 90,000 ร 1/6 = Rs. 15,000
Journal Entry:
General Reserve A/c Dr. 90,000
To Aโs Capital A/c 45,000
To Bโs Capital A/c 30,000
To Cโs Capital A/c 15,000
Rule:
Reserve is shared by all old partners in old profit sharing ratio.
Q8. Calculate retiring partnerโs share of profit up to retirement.
Question Type: Previous yearโs profit is Rs. 1,00,000. Partner retires after 3 months. His share is 1/10.
Working:
Profit up to retirement = 1,00,000 ร 3/12
Profit up to retirement = Rs. 25,000
Retiring partnerโs share = 25,000 ร 1/10
Retiring partnerโs share = Rs. 2,500
Journal Entry:
Profit and Loss Suspense A/c Dr. 2,500
To Retiring Partnerโs Capital A/c 2,500
Final Answer:
Retiring partner is credited with Rs. 2,500.
Q9. Transfer retiring partnerโs amount to loan account.
Question Type: Amount due to retiring partner is Rs. 60,000 and it is not paid immediately.
Journal Entry:
Retiring Partnerโs Capital A/c Dr. 60,000
To Retiring Partnerโs Loan A/c 60,000
Final Answer:
Rs. 60,000 is shown as loan liability until paid.
Q10. Record settlement partly in cash and partly as loan.
Question Type: Amount due to retiring partner is Rs. 1,00,000. Rs. 40,000 is paid immediately. Balance is treated as loan.
Journal Entry:
Retiring Partnerโs Capital A/c Dr. 1,00,000
To Bank A/c 40,000
To Retiring Partnerโs Loan A/c 60,000
Final Answer:
Rs. 60,000 remains payable as loan.
Q11. Prepare deceased partnerโs executor transfer entry.
Question Type: Deceased partnerโs adjusted capital balance is Rs. 1,50,000.
Journal Entry:
Deceased Partnerโs Capital A/c Dr. 1,50,000
To Deceased Partnerโs Executorโs A/c 1,50,000
Final Answer:
Rs. 1,50,000 is payable to the deceased partnerโs executor.
Partnership Accounts Chapter 3 NCERT Solutions: Journal Entry Bank
These entries help students revise Reconstitution of Partnership Firm Retirement Death of a Partner Class 12 questions and answers quickly.
| Situation | Journal Entry |
| Goodwill adjustment | Gaining Partnersโ Capital A/c Dr. To Retiring Partnerโs Capital A/c |
| Existing goodwill written off | All Partnersโ Capital A/c Dr. To Goodwill A/c |
| Increase in asset | Asset A/c Dr. To Revaluation A/c |
| Decrease in asset | Revaluation A/c Dr. To Asset A/c |
| Increase in liability | Revaluation A/c Dr. To Liability A/c |
| Decrease in liability | Liability A/c Dr. To Revaluation A/c |
| Revaluation profit | Revaluation A/c Dr. To All Partnersโ Capital A/c |
| Revaluation loss | All Partnersโ Capital A/c Dr. To Revaluation A/c |
| Reserve transferred | Reserve A/c Dr. To All Partnersโ Capital A/c |
| Accumulated loss transferred | All Partnersโ Capital A/c Dr. To Profit and Loss A/c |
| Profit up to retirement/death | Profit and Loss Suspense A/c Dr. To Outgoing Partnerโs Capital A/c |
| Amount transferred to loan | Retiring Partnerโs Capital A/c Dr. To Retiring Partnerโs Loan A/c |
| Amount transferred to executor | Deceased Partnerโs Capital A/c Dr. To Executorโs A/c |
Retirement of a Partner Class 12 Accountancy: Working Order
Retirement of a partner class 12 accountancy questions become easier when students follow one clean order. The balance sheet should be prepared only after all adjustments are complete.
Step 1: Calculate New Profit Sharing Ratio
Find how remaining partners will share future profits.
If no information is given, use their old ratio among themselves.
Step 2: Calculate Gaining Ratio
Use the formula:
Gain = New Share - Old Share
Goodwill is adjusted in this ratio.
Step 3: Write Off Existing Goodwill
If goodwill appears in the balance sheet, write it off among all old partners.
Use the old profit sharing ratio.
Step 4: Adjust Current Goodwill
Credit the retiring or deceased partner with share of goodwill.
Debit gaining partners in gaining ratio.
Step 5: Prepare Revaluation Account
Record changes in assets and liabilities.
Transfer profit or loss to all partners in old ratio.
Step 6: Transfer Reserves and Losses
Accumulated profits and losses belong to old partners.
Transfer them before settling the outgoing partner.
Step 7: Calculate Profit up to Retirement or Death
Use time basis or sales basis as given in the question.
Credit the outgoing partnerโs share.
Step 8: Settle the Amount Due
Pay in cash or transfer the balance to Loan/Executorโs Account.
Show unpaid balance as liability in the new balance sheet.
Death of a Partner Class 12 Accountancy: Extra Points
Death of a partner class 12 accountancy questions need one extra step. The amount is paid to legal representatives, not directly to the partner.
Profit up to Date of Death
The deceased partner may be given profit up to the date of death.
This may be based on last yearโs profit, average profit or sales.
Interest on Capital and Drawings
Interest is calculated up to the date of death.
Capital interest is credited, while drawings interest is debited.
Executorโs Account
The final amount is transferred to Executorโs Account.
This account is settled according to the partnership deed.
Balance Sheet Treatment
Unpaid executor balance appears on the liabilities side.
It remains there until payment is made.
Useful Links for Class 12 Accountancy
| Section | Useful Links |
| NCERT Solutions | NCERT Solutions for Class 12 Accountancy |
| Syllabus | CBSE Class 12 Accountancy Syllabus |
| Sample Papers | CBSE Sample Papers for Class 12 Accountancy |
| Class 12 Commerce NCERT Solutions | NCERT Solutions Class 12 Commerce |
Q.1 Identify various matters that need adjustments at the time of admission of a new partner.
Ans. Following are the problems that may arise at the time of admission of a partner:
- New profit sharing ratio.
- Sacrificing ratio.
- Valuation and adjustment of goodwill.
- Revaluation of assets and reassessment of liabilities.
- Distribution of accumulated profits or losses and reserves.
- Adjustment of partnersโ capital.
Q.2 Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?
Ans. When a new partner is admitted, he acquires his share in profits from the old partners and thus reduces the old partners share in profit. Hence the problem of determining the new profit sharing ratio simply involves the determination of old partnersโ new share in the profits of the reconstituted firm.
Q.3 What is sacrificing ratio? Why is it calculated?
Ans. Sacrificing ratio is the ratio in which the old partners have surrendered a part of their profit sharing ratio in favour of the incoming partner. This ratio is calculated as given below:
Sacrifice = Old Share โ New Share
This ratio is calculated to facilitate the sharing of premium brought in by the new partner. This premium is shared by the old partners is sacrificing ratio.
Q.4 On what occasions sacrificing ratio is used?
Ans. Following are the occasions sacrificing ratio is used:
- For disturbing amount of goodwill among old partners.
- For calculating new profit sharing ratio.
Q.5If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?
Ans. The existing amount of goodwill will be written off by debiting old partner capital accounts in old ratio and creating goodwill /Premium account as shown below:
| Date | Particulars | L.F. | Dr. โน | Cr. โน | |
| Old Partnerโs Capital A/c | Dr. | ||||
| To Goodwill A/c | |||||
| (Existing goodwill written off by transferring it to old partners capitals in old ratio) | |||||
Q.6 Why there is need for the revaluation of assets and liabilities on the admission of a partner?
Ans. Assets and liabilities should be revalued so that these are shown at the proper value and the resulting profit or loss on such revaluation is transferred to old partners in old ratio. Further the new partner acquires a right to share the assets of the partnership firm. So also they should be shown in the Balance Sheet as the present value and any gain or loss because of revaluation should belong to the old partners.
Q.7 Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, Why? Also describe how is this treated in the book of account?
Ans. Assets and Liabilities should be revalued so that these are shown at the proper value and the resulting profit or loss on such revaluation is transferred to old partners in the old ratio. At times there may also be some unrecorded assets and liabilities of the firm. These also have to be brought into the books of the firm. Further the new partner acquires a right to share the assets of the partnership firm. So also assets and liabilities should be shown in the Balance Sheet at the present value and any gain or loss because of revaluation should not borne by the new partner.
Revaluation account is a nominal account. Revaluation account is credited with the increase in value of each asset and decrease in liabilities because it is a gain. It is debited with the decrease in value of each asset and increase in liabilities because it is a loss. Similarly, unrecorded assets are credited and unrecorded liabilities are debited to the revaluation account. If revaluation account finally shows credit balance, then it indicates profit and if revaluation account shows debit balance, then it indicates loss.
Q.8 What is goodwill? What factors affect goodwill?
Ans. Goodwill is the money value of reputation of a firm in respect of the profits expected in future over and above the normal profits.
The factors that affect the value of goodwill:
Nature of Business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill.
Favourable location: If the business is centrally located or is at a place having customer traffic, the goodwill will have high than those businesses which are not so located.
Efficiency of management: If the management of a firm is more efficient and reputed, the value of goodwill in such business will be more as compared to be business whose management is not efficient.
Time Factor: The business which is running for the last several years on profitable lines will have more goodwill than a business which has been established only recently.
Patent: If the firm has its own patent, highly in demand than its value of goodwill will be high.
Capital Requirements: If a business requires more capital than its value of goodwill will be less as compared to a business where the capital requirement is less.
Q.9 Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash?
Ans. If new partner does not bring his share of goodwill in cash, new partnerโs Capital or Current account is debited for his share of goodwill and the sacrificing partnersโ capital accounts are credited in their sacrificing ratio.
Following journal entry will be:
| Dt. | Particulars | L.F. | Dr. โน | Cr. โน | |
| New partnerโs Capital/ Current A/c | Dr. | ||||
| To Sacrificing partnerโs Capital/Current A/c | |||||
For example, M and N who share profits in the ratio of 3:2 had capitals of โน2,00,000 and โน1,50,000 respectively. They agreed to admit P into partnership from 1st April, 2013 on the following terms in return for 1/3rd share in future profits:
That P should bring in โน2,00,000 as capital.
That as P is unable to bring in his share of goodwill in cash, goodwill of the firm is valued at โน1,50,000.
Here,
Necessary journal entries in the books of the firm are
| Dt.
2013 |
Particulars | L.F. | Dr. โน | Cr. โน | |
| Apr 1 | Bank A/c | Dr. | 2,00,000 | ||
| To Pโs Capital | 2,00,000 | ||||
| (Being the amount of capital brought in by P in the firm) | |||||
| Apr 1 | Pโs Capital
(โน1,50,000 x 1/3) |
Dr. | 50,000 | ||
| To Mโs Capital | 30,000 | ||||
| To Nโs Capital | 20,000 | ||||
| (Being the capital accounts of M and N credited in their sacrificing ratio, i.e, 3:2 for Pโs share of goodwill on his admission) | |||||
Q.10 Explain various methods for the treatment of goodwill on the admission of a new partner?
Ans. Goodwill can be treated in two ways:
- By Premium Method and By Revaluation Method.
Premium Method:
This method is used when new partner brings his share of goodwill in cash, which is shared by the old partners in sacrificing ratio. There may be different situations when this method may be used, shown below:
Situation 1: When goodwill is paid privately.
In this situation goodwill is not recorded in the books of accounts. i.e., no journal entry is passed.
Situation 2: When goodwill is brought in cash by the new partner and retained in the business. Following are the journal entries required to record the fact.
| On bringing Goodwill in Cash | |||||
| Dt. | Particulars | L.F. | Dr. โน | Cr. โน | |
| Cash/Bank A/c | Dr. | ||||
| To Premium for goodwill A/c | |||||
| (Goodwill brought in cash by the new partner) | |||||
| For sharing premium for goodwill by sacrificing partners | |||||
| Premium for goodwill A/c | Dr. | ||||
| To Partnersโ Capital/Current a/c | |||||
| (Individually) | |||||
| (Goodwill credited to sacrificing partners in sacrificing ratio) | |||||
| For withdrawal of the amount of premium | |||||
| Partners Capital/Current | Dr. | ||||
| To Cash/Bank A/c | |||||
| (old partners individually) | |||||
| (Amount of goodwill withdrawn by the partners) | |||||
Revaluation Method:
This method is followed, when the new partner is unable to bring his share of goodwill in cash. The following journal entries are passed.
| New Partnerโs Capital A/c | Dr. | ||
| To old partnersโ Capital A/c | |||
| (individually) | |||
| (New partnerโs share of goodwill distributed among old partners in sacrificing ratio) | |||
Q.11 How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?
Ans. Accumulated profits and losses and reserve on the admission of a new partner may exist because these might have not yet transferred to capital accounts of the partners. These belong to old partners and the new partner is not entitled to have any share in such accumulated profits/losses, reserve.
Hence these are distributed among old partner by transferring them to their capital accounts in old profit sharing ratio. Following are the journal entries for the same.
| For Distribution of reserve among the partners | ||||
| Dt. | L.F. | Dr. | Cr. | |
| Reserve A/c | Dr. | |||
| To Partnersโ Capital/Current a/c | ||||
| (Individually) | ||||
| (Amount of reserve distributed among old partners in the old ratio) | ||||
| For Distribution of credit balance in P& L among the partners | |||||
| Dt. | L.F. | Dr. | Cr. | ||
| P & L A/c | Dr. | ||||
| To Partnersโ Capital/Current a/c | |||||
| (Individually) | |||||
| (Amount of accumulated profits distributed among old partners in the old ratio) | |||||
| For debit balance in P& L | |||||
| Dt. | L.F. | Dr. | Cr. | ||
| Partnersโ Capital/Current a/c | Dr. | ||||
| To P & L A/c | |||||
| (Losses debited to old partners in the old ratio) | |||||
Let us understand it with the help of example; Sam and Dev are partners in a firm sharing profits in the ratio of 11:5 admit Stu as a new partner for ยผ share in the profits. On the date of admission there was a debit balance of โน80,000 in the profit and loss account.
The necessary journal entries for the treatment of Profit and Loss account balance on Stuโs admission:
| Dt. | Particulars | L.F. | Dr. โน | Cr. โน | |
| Samโs Capital | Dr. | 55,000 | |||
| Devโs Capital | Dr. | 25,000 | |||
| To Profit & Loss | 80,000 | ||||
| (Accumulated loss transferred to Sam and Div capital accounts on Stuโs admission) | |||||
Q.12 At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.
Ans. The assets and liabilities after revaluation will appear at new figures as in the given example:
A and G were carrying on business in partnership sharing profits in the ratio of 2:1. Their Balance Sheet as on March 31, 2018 stood as follows:
| Liabilities | โน | Assets | โน | |
| Capitals: | Cash in hand | 5,000 | ||
| A | 30,000 | Cash at Bank | 5,000 | |
| G | 36,000 | 66,000 | Sundry Debtors | 12,000 |
| Sundry Creditors | 10,000 | Stock | 8,000 | |
| Bills Payable | 3,600 | Plant & Machinery | 20,000 | |
| Rent Outstanding | 400 | Building | 30,000 | |
| 80,000 | 80,000 | |||
S is admitted as a partner on the date of the Balance sheet on the following terms:
- She will bring in โน20,000 as her capital and โน12,000 as her share of goodwill for ยผ share in profits.
- Plant is to be appreciated to โน24,000 and the value of building is to be appreciated by 10%.
- Stock is found over valued by โน800.
- A provision for doubtful debt is to maintain โน600.
- Creditors were unrecorded to the extent of โน200.
In this case the journal entries are:
| Dt. | Particulars | L.F. | Dr. โน | Cr. โน | ||||
| Cash A/c | Dr. | 32,000 | ||||||
| To Sโs Capital | 20,000 | |||||||
| To Premium | 12,000 | |||||||
| (Cash brought in by S for her capital and share of goodwill) | ||||||||
| Premium A/c | Dr. | 12,000 | ||||||
| To Premium A/c | 8,000 | |||||||
| To Aโs Capital | 4,000 | |||||||
| To Gโs Capital | ||||||||
| (Premium brought in by S transferred to A and G Capital in the sacrificing ratio) | ||||||||
| Revaluation A/c | Dr. | 1,400 | ||||||
| To Stock A/c | 800 | |||||||
| To Provision for bad & doubtful debts | 600 | |||||||
| (Stock depreciated and provision for bad and doubtful debts created on sundry debtors) | ||||||||
| Revaluation A/c | Dr. | 200 | ||||||
| To Creditors | 200 | |||||||
| (Increase in the value of creditors) | ||||||||
| Plant & Machinery A/c | Dr. | 4,000 | ||||||
| Building A/c | Dr. | 3,000 | ||||||
| To Revaluation A/c | 7,000 | |||||||
| (Increase in the value of assets on revaluaton) | ||||||||
| Revaluation A/c | Dr. | 5,400 | ||||||
| To Aโs Capital | 3,600 | |||||||
| To Gโs Capital | 1,800 | |||||||
| (Transfer of gain on revaluation to A and G Capital in old ratio) | ||||||||
| Revaluation Account | ||||
| Particulars | โน | Particulars | โน | |
| To Stock | 800 | By Plant & Machinery | 4,000 | |
| Provision for bad & doubtful debts | 600 | Building | 3,000 | |
| Creditors | 200 | |||
| Profit on Revaluation | ||||
| Trfd. To Capitals | ||||
| A | 3,600 | |||
| G | 1,800 | 5,400 | ||
| 7,000 | 7,000 | |||
| Partnerโs Capital A/c (โน in โ00โ (hundreds) | |||||||||||
| Dt. | Particulars | L.f. | A
โน |
G
โน |
S
โน |
Dt. | Particulars | L.f. | A
โน |
G
โน |
S
โน |
| To Bal. c/d | 416 | 418 | 200 | By Bal. b/d | 300 | 360 | |||||
| Cash | 200 | ||||||||||
| Premium | 80 | 40 | |||||||||
| Profit on Revaluation | 36 | 18 | |||||||||
| 416 | 418 | 200 | 416 | 418 | 200 | ||||||
| Bal. b/d | 416 | 418 | 200 | ||||||||
| Balance Sheet as at 31st March 2018 | |||||
| Liabilities | โน | Assets | โน | ||
| Capitals: | Cash in hand | 37,000 | |||
| A | 41,600 | Cash at Bank | 5,000 | ||
| G | 41,800 | Sundry Debtors | 12000 | ||
| S | 20,000 | 1,03,000 | Less: | ||
| Sundry Creditors | 10,200 | Provision | 600 | 11,400 | |
| Bills Payable | 3,600 | Stock | 7,200 | ||
| Rent Outstanding | 400 | Plant & Machinery | 24,000 | ||
| Building | 33,000 | ||||
| 1,17,600 | 1,17,600 | ||||
Q.13 Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3, They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in โน20,000 as capital and โน4,000 as his share of goodwill premium. Give the necessary journal entries:
1. When the amount of goodwill is retained in the business.
2. When the amount of goodwill is fully withdrawn.
3. When 50% of the amount of goodwill is withdrawn.
4. When goodwill is paid privately.
Ans. Case (a)
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i | Cash A/c | Dr. | 24,000 | ||
| To Ghoshโs Capital A/c | 20,000 | ||||
| To Premium for goodwill A/c | 4,000 | ||||
| (Being capital and goodwill brought by Ghosh) | |||||
| ii | Premium for goodwill A/c | Dr. | 4,000 | ||
| To Vermaโs Capital A/c | 2,500 | ||||
| To Sharmaโs Capital A/c | 1,500 | ||||
| (Being goodwill distributed in sacrificing ratio) | |||||
Case (b)
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i | Cash A/c | Dr. | 24,000 | |||
| To Ghoshโs Capital A/c | 20,000 | |||||
| To Premium for goodwill A/c | 4,000 | |||||
| (Being capital and goodwill brought by Ghosh) | ||||||
| ii | Premium for goodwill A/c | Dr. | 4,000 | |||
| To Vermaโs Capital A/c | 2,500 | |||||
| To Sharmaโs Capital A/c | 1,500 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
| iii | Vermaโs Capital A/c | Dr. | 2,500 | |||
| Sharmaโs Capital A/c | Dr. | 1,500 | ||||
| To Cash A/c | 4,000 | |||||
| (Being amount of goodwill withdrawn) | ||||||
Case (c)
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i | Cash A/c | Dr. | 24,000 | |||
| To Ghoshโs Capital A/c | 20,000 | |||||
| To Premium for goodwill A/c | 4,000 | |||||
| (Being capital and goodwill brought by Ghosh) | ||||||
| ii | Premium for goodwill A/c | Dr. | 4,000 | |||
| To Vermaโs Capital A/c | 2,500 | |||||
| To Sharmaโs Capital A/c | 1,500 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
| iii | Vermaโs Capital A/c | Dr. | 1,250 | |||
| Sharmaโs Capital A/c | Dr. | 750 | ||||
| To Cash A/c | 2,000 | |||||
| (Being half amount of goodwill withdrawn) | ||||||
Case (d)
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i | Cash A/c | Dr. | 20,000 | ||
| To Ghoshโs Capital A/c | 20,000 | ||||
| (Being capital brought by Ghosh) | |||||
No entry for goodwill will be passed in this case, as the amount of goodwill is paid outside the business i.e. privately.
Q.14 X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought โน20,000 for his capital and โน7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| 1 | Xโs Capital A/c | Dr. | 22,857 | |||
| Yโs Capital A/c | Dr. | 17,143 | ||||
| To Goodwill A/c | 40,000 | |||||
| (Being goodwill in the books of account written off in the old ratio) | ||||||
| 2 | Cash A/c | Dr. | 27,000 | |||
| To Zโs Capital A/c | 20,000 | |||||
| To Premium for goodwill A/c | 7,000 | |||||
| (Being capital and goodwill brought by Z) | ||||||
| 3 | Premium for goodwill A/c | Dr. | 7,000 | |||
| To Xโs Capital A/c | 4,000 | |||||
| To Yโs Capital A/c | 3,000 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
Q.15 Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for ยผ share of profits. Kanwar could not bring his share of goodwill premium in cash. The goodwill of the firm was valued at โน80,000 on Kanwarโs admission.
Record necessary journal entry for goodwill on Kanwarโs admission.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i | Kanwarโs Capital A/c | Dr. | 20,000 | ||
| To Amarโs Capital A/c | 15,000 | ||||
| To Sarmarโs Capital A/c | 5,000 | ||||
| (Being goodwill distributed in sacrificing ratio) | |||||
Kanwarโs share of goodwill = โน80,000 x ยผ = โน20,000.
In this case old ratio itself will be considered as the sacrificing ratio.
Q.16 Give below is the Balance Sheet of A and B, who are carrying on partnership business on 31/12/2016. A and B share profits and losses in the ratio of 2:1.
| Balance Sheet of A and B as on 31st Dec, 2016 | ||||
| Liabilities | โน | Assets | โน | |
| Bills Payable | 10,000 | Cash in Hand | 10,000 | |
| Creditors | 58,000 | Cash at Bank | 40,000 | |
| Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 | |
| Capital: | Stock | 40,000 | ||
| A | 1,80,000 | Plant | 1,00,000 | |
| B | 1,50,000 | 3,30,000 | Buildings | 1,50,000 |
| 4,00,000 | 4,00,000 | |||
C is admitted as a partner on the balance sheet on the following terms:
1. C will bring in โน1,00,000 as his capital and โน60,000 as his share of goodwill for ยผ share in the profits.
2. Plant is to be appreciated to โน1,20,000 and the value of buildings is to be appreciated by 10%.
3. Stock is found, over valued by โน4,000.
4. A provision for bad and doubtful debts is to be created at 5% of debtors.
5. Creditors were unrecorded to the extent of โน1,000.
Pass the necessary journal entries, prepare the revaluation account and partners capital accounts and show the Balance Sheet after the admission of C.
Ans. Revaluation A/c
| Particulars | โน | Particulars | โน | |
| To Stock | 4,000 | By Plant | 20,000 | |
| To Sundry debtors | 3,000 | By Building | 15,000 | |
| To Creditors | 1,000 | |||
| To Profit t/f to | ||||
| capitals | ||||
| A | 18,000 | |||
| B | 9,000 | 27,000 | ||
| 35,000 | 35,000 | |||
Partnersโ Capital Accounts
| Particulars | โน A | โน B | Particulars | โน A | โน B | |
| To balance c/d | 2,38,000 | 1,79,000 | By balance b/d | 1,80,000 | 1,50,000 | |
| By revaluation | ||||||
| Profit | 18,000 | 9,000 | ||||
| By premium | 40,000 | 20,000 | ||||
| 2,38,000 | 1,79,000 | 2,38,000 | 1,79,000 | |||
Cโs Capital Account
| Particulars | โน | Particulars | โน | |
| To balance c/d | 1,00,000 | By cash a/c | 1,00,000 | |
| 1,00,000 | 1,00,000 | |||
Balance Sheet
as on 1st Jan 2017
| Liabilities | โน | Assets | โน | |
| Bills payable | 10,000 | Cash in hand | 10,000 | |
| Creditors | 59,000 | Cash at bank | 2,00,000 | |
| O/s expenses | 2,000 | S. debtors 60,000 | ||
| Capitals | (-) Provision 3,000 | 57,000 | ||
| A | 2,38,000 | Stock | 36,000 | |
| B | 1,79,000 | Plant | 1,20,000 | |
| C | 1,00,000 | 5,17,000 | Buildings | 1,65,000 |
| 5,88,000 | 5,88,000 | |||
Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | ||||||
| 2016 | Plant A/c | Dr. | 20,000 | |||||
| Dec | Building A/c | Dr. | 15,000 | |||||
| 31 | To Revaluation A/c | 35,000 | ||||||
| (Being increase in the value of plant and building) | ||||||||
| Revaluation A/c | Dr. | 8,000 | ||||||
| To stock | 4,000 | |||||||
| To s. debtors | 3,000 | |||||||
| To creditors | 1,000 | |||||||
| (Being decrease in the value of assets debited to revaluation) | ||||||||
| Revaluation A/c | Dr. | 27,000 | ||||||
| To Aโs Capital A/c | 18,000 | |||||||
| To Bโs Capital A/c | 9,000 | |||||||
| (Being profit on revaluation distributed among old partners) | ||||||||
| Cash A/c | Dr. | 1,60,000 | ||||||
| To Cโs Capital A/c | 1,00,000 | |||||||
| To Premium for goodwill A/c | 60,000 | |||||||
| (Being capital and goodwill brought by C) | ||||||||
| Premium for goodwill A/c | Dr. | 60,000 | ||||||
| To Aโs Capital A/c | 40,000 | |||||||
| To Bโs Capital A/c | 20,000 | |||||||
| (Being goodwill distributed in sacrificing ratio) | ||||||||
Q.17 Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. On 1st April, 2017 they admitted Om as a new partner. On the date of Omโs admission the balance sheet of Leela and Meeta showed a balance of โน16,000 in general reserve and โน24,000 (Cr) in Profit and Loss account. Record necessary journal entries for the treatment of these items on Omโs admission.
The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.
Ans. Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| 2017 | General reserve | Dr. | 16,000 | |||
| April | To Leelaโs Capital A/c | 10,000 | ||||
| 01 | To Meetaโs Capital A/c | 6,000 | ||||
| (Being general reserve distributed among old partners in old ratio) | ||||||
| Profit and loss A/c | Dr. | 24,000 | ||||
| To Leelaโs Capital A/c | 15,000 | |||||
| To Meetaโs Capital A/c | 9,000 | |||||
| (Being balance in P&L distributed among old partners in old ratio) | ||||||
Q.18 Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 01/01/2017 they admitted Ranjan as a partner. On Ranjanโs admission the profit and loss account of Amit and Viney showed a debit balance of โน40,000.
Record necessary journal entry for the treatment of the same.
Ans. Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | |||
| 2017 | Amitโs Capital A/c | Dr. | 30,000 | ||
| Jan 01 | Vinayโs Capital A/c | Dr. | 10,000 | ||
| To Profit and loss A/c | 40,000 | ||||
| (Being debit balance in P&L debited to old partners in old ratio) | |||||
Q.19 A and B share profits in the proportion of ยพ and ยผ. Their Balance Sheet on March. 31, 2016 was as follows:
| Balance Sheet of A and B as at March 31 2016 | |||
| Liabilities | โน | Assets | โน |
| Sundry Creditors | 41,500 | Cash at Bank | 26,500 |
| Reserve fund | 4,000 | Bills Receivable | 3,000 |
| Capital: | Debtors | 16,000 | |
| A | 30,000 | Stock | 20,000 |
| B | 16,000 | Fixtures | 1,000 |
| Land & Building | 25,000 | ||
| 91,500 | 91,500 | ||
On 1st January, 2017, C was admitted into partnership on the following terms:
- That C pays โน10,000 as his capital.
- That C pays โน5,000 for goodwill. Half of this sum is to be withdrawn by A and B.
- That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be created on Sundry Debtors and Bills Receivable.
- That the value of land and buildings be appreciated by 20%.
- There being a claim against the firm for damages, a liability to the extent of โน1,000 should be created.
- An item of โน650 included in sundry creditors is not likely to be claimed and hence should be written back.
Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.
Ans. Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| 2017 | Reserve fund | Dr. | 4,000 | |||
| Jan 01 | To Aโs Capital A/c | 3,000 | ||||
| To Bโs Capital A/c | 1,000 | |||||
| (Being reserve fund distributed among old partners in old ratio) | ||||||
| Land and building A/c | Dr. | 5,000 | ||||
| Sundry creditors A/c | Dr. | 650 | ||||
| To Revaluation A/c | 5,650 | |||||
| (Being increase in the value of building and decrease in creditors) | ||||||
| Revaluation A/c | Dr. | 4,050 | ||||
| To stock | 2,000 | |||||
| To s. debtors | 800 | |||||
| To fixtures | 100 | |||||
| To bills receivable | 150 | |||||
| To liability for damages | 1,000 | |||||
| (Being decrease in the value of assets and increase in liabilities) | ||||||
| Revaluation A/c | Dr. | 1,600 | ||||
| To Aโs Capital A/c | 1,200 | |||||
| To Bโs Capital A/c | 400 | |||||
| (Being profit on revaluation distributed among old partners) | ||||||
| Bank A/c | Dr. | 15,000 | ||||
| To Cโs Capital A/c | 10,000 | |||||
| To Premium for goodwill A/c | 5,000 | |||||
| (Being capital and goodwill brought by C) | ||||||
| Premium for goodwill A/c | Dr. | 5,000 | ||||
| To Aโs Capital A/c | 3,750 | |||||
| To Bโs Capital A/c | 1,250 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
| Aโs Capital A/c | Dr. | 1,875 | ||||
| Bโs Capital A/c | Dr. | 625 | ||||
| To Bank A/c | 2,500 | |||||
| (Being half the amount of goodwill withdrawn) | ||||||
Revaluation A/c
| Particulars | โน | Particulars | โน | |
| To stock | 2,000 | By Building | 5,000 | |
| To s. debtors | 800 | By s. creditors | 650 | |
| To fixtures | 100 | |||
| To bills receivable | 150 | |||
| To liab. damages | 1,000 | |||
| To profit t/f to | ||||
| capitals | ||||
| A | 1,200 | |||
| B | 400 | 1,600 | ||
| 5,650 | 5,650 | |||
Partnersโ Capital Accounts
| Particulars | โน A | โน B | Particulars | โน A | โน B | |
| To cash | 1,875 | 625 | By balance b/d | 30,000 | 16,000 | |
| To balance c/d | 36,075 | 18,025 | By revaluation | |||
| Profit | 1,200 | 400 | ||||
| By premium | 3,750 | 1,250 | ||||
| By res. fund | 3,000 | 1,000 | ||||
| 37,950 | 18,650 | 37,950 | 18,650 | |||
Cโs Capital Account
| Particulars | โน | Particulars | โน | |
| To Balance c/d | 10,000 | By Bank a/c | 10,000 | |
| 10,000 | 10,000 | |||
Balance Sheet
as on 1st Jan 2017
| Liabilities | โน | Assets | โน | ||
| S. Creditors | 40,850 | Cash at bank | 39,000 | ||
| Liability for | 1,000 | Bills receivable | 2,850 | ||
| damages | S. debtors 16,000 | ||||
| Capitals | (-) Provision | 800 | 15,200 | ||
| A | 36,075 | Stock | 18,000 | ||
| B | 18,025 | Fixtures | 900 | ||
| C | 10,000 | 64,100 | Land & buildings | 30,000 | |
| 1,05,950 | 1,05,950 | ||||
Q.20 The following was the balance sheet of Arun, Bablu and Chetan profits and losses in the ratio of 6/14:5/14:3/14 respectively.
| Liabilities | โน | Assets | โน | |
| Creditors | 9,000 | Land & Building | 24,000 | |
| Bills Payable | 3,000 | Furniture | 3,500 | |
| Capital | Stock | 14,000 | ||
| Arun | 19,000 | Debtors | 12,600 | |
| Bablu | 16,000 | Cash | 900 | |
| Chetan | 8,000 | 43,000 | ||
| 55,000 | 55,000 | |||
They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms:
a) that Deepak should bring in โน4,200 as goodwill and โน7,000 as his capital;
b) that furniture be depreciated by 12%;
c) that stock can be depreciated by 10%;
d) that a reserve of 5% be created for doubtful debts;
e) that the value of land and buildings having appreciated be brought up to โน31,000;
f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepakโs Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be.
Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance sheet of the new firm.
Ans. Revaluation A/c
| Particulars | โน | Particulars | โน | |
| To stock | 1,400 | By land | ||
| To res. for b/d | 630 | and building | 7,000 | |
| To furniture | 420 | |||
| To profit t/f to | ||||
| capitals | ||||
| Arun | 1,950 | |||
| Bablu | 1,625 | |||
| Chetan | 975 | 4,550 | ||
| 7,000 | 7,000 | |||
Partnersโ Capital Accounts
| Particulars | Arun | Bablu | Particulars | Arun | Bablu | |
| โน | โน | โน | โน | |||
| To cash | 1,750 | 1,625 | By balance b/d | 19,000 | 16,000 | |
| (Bal. figure) | By revaluation | |||||
| To balance c/d | 21,000 | 17,500 | Profit | 1,950 | 1,625 | |
| By premium | 1,800 | 1,500 | ||||
| 22,750 | 19,125 | 22,750 | 19,125 | |||
Partnersโ Capital Accounts
| Particulars | Chetan | Deepak | Particulars | Chetan | Deepak | |
| โน | โน | โน | โน | |||
| By bal. b/d | 8,000 | |||||
| To balance c/d | 10,500 | 7,000 | By cash | 7,000 | ||
| By revaluation | ||||||
| Profit | 975 | |||||
| By premium | 900 | |||||
| By cash (B.F.) | 625 | |||||
| 10,500 | 7,000 | 10,500 | 7,000 | |||
Cash A/c
| Particulars | โน | Particulars | โน |
| To balance b/d | 900 | By Arunโs cap. | 1,750 |
| To Deepakโs cap. | 7,000 | By Babluโs cap. | 1,625 |
| To Premium | 4,200 | By balance c/d | 9,350 |
| To Chetanโs cap. | 625 | ||
| 12,725 | 12,725 |
Balance Sheet
as on โฆ..
| Liabilities | โน | Assets | โน | |||
| Creditors | 9,000 | Cash in hand | 9,350 | |||
| Bills payable | 3,000 | Stock | 12,600 | |||
| Capitals | S. debtors 12,600 | |||||
| Arun | 21,000 | (-) Provision | 630 | 11,970 | ||
| Bablu | 17,500 | Furniture | 3,080 | |||
| Chetan | 10,500 | Land & buildings | 31,000 | |||
| Deepak | 7,000 | 56,000 | ||||
| 68,000 | 68,000 | |||||
Q.21 Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with ยผ share in profits. Chintan will bring in โน30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio.
The Balance Sheet of Azad and Babli as on December 31, 2016 (before Chintanโs admission) was as follows:
| Balance Sheet of A and B as on 31/12/2016 | ||||
| Liabilities | โน | Assets | โน | |
| Creditors | 8,000 | Cash in hand | 2,000 | |
| Bills payable | 4,000 | Cash at Bank | 10,000 | |
| General Reserve | 6,000 | Sundry Debtors | 8,000 | |
| Capital: | Stock | 10,000 | ||
| Azad | 50,000 | Furniture | 5,000 | |
| Babli | 32,000 | 82,000 | Machinery | 25,000 |
| Buildings | 40,000 | |||
| 1,00,000 | 1,00,000 | |||
It was agreed that:
- Chintan will bring in โน12,000 as his share of goodwill premium.
- Buildings were valued at โน45,000 and Machinery at โน23,000.
- A provision for doubtful debts is to be created @ 6% on debtors.
- The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
Record necessary journal entries, show necessary ledger account at prepare the Balance Sheet after admission.
Ans. Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | |||||
| 2016 | General reserve | Dr. | 6,000 | ||||
| 31 Dec. | To Azadโs Capital A/c | 4,000 | |||||
| To Babliโs Capital A/c | 2,000 | ||||||
| (Being general reserve distributed among old partners in old ratio) | |||||||
| Building A/c | Dr. | 5,000 | |||||
| To Revaluation A/c | 5,000 | ||||||
| (Being increase in the value of building) | |||||||
| Revaluation A/c | Dr. | 2,480 | |||||
| To machinery | 2,000 | ||||||
| To pro. for D/D | 480 | ||||||
| (Being decrease in the value of assets) | |||||||
| Revaluation A/c | Dr. | 2,520 | |||||
| To Azadโs Capital A/c | 1,680 | ||||||
| To Babliโs Capital A/c | 840 | ||||||
| (Being profit on revaluation distributed among old partners) | |||||||
| Bank A/c | Dr. | 42,000 | |||||
| To Chintanโs Capital A/c | 30,000 | ||||||
| To Premium for goodwill A/c | 12,000 | ||||||
| (Being capital and goodwill brought by Chintan) | |||||||
| Premium for goodwill A/c | Dr. | 12,000 | |||||
| To Azadโs Capital A/c | 8,000 | ||||||
| To Babliโs Capital A/c | 4,000 | ||||||
| (Being goodwill distributed in sacrificing ratio) | |||||||
| Azadโs Capital A/c | Dr. | 3,680 | |||||
| To Azadโs Current A/c | 3,680 | ||||||
| (Being excess of capital transferred to current account) | |||||||
| Babliโsโs Capital A/c | Dr. | 8,840 | |||||
| To Babliโs Current A/c | 8,840 | ||||||
| (Being excess of capital transferred to current account) | |||||||
Revaluation A/c
| Particulars | โน | Particulars | โน | |
| To machinery | 2,000 | By Building | 5,000 | |
| To provision for | ||||
| doubtful debts | 480 | |||
| To profit t/f to | ||||
| capitals | ||||
| Azad | 1,680 | |||
| Babli | 840 | 2,520 | ||
| 5,000 | 5,000 | |||
Partnersโ Capital Accounts
| Particulars | Azad | Babli | Particulars | Azad | Babli | |
| โน | โน | โน | โน | |||
| To current a/c | 3,680 | 8,840 | By balance b/d | 50,000 | 32,000 | |
| (Bal. figure) | By revaluation | |||||
| To balance c/d | 60,000 | 30,000 | Profit | 1,680 | 840 | |
| By premium | 8,000 | 4,000 | ||||
| By general res. | 4,000 | 2,000 | ||||
| 63,680 | 38,840 | 63,680 | 38,840 | |||
Chintanโs Capital Account
| Particulars | โน | Particulars | โน | |
| To balance c/d | 30,000 | By Bank a/c | 30,000 | |
| 30,000 | 30,000 | |||
Balance Sheet
as on 1st Jan 2017
| Liabilities | โน | Assets | โน | ||||
| Creditors | 8,000 | Cash at bank | 54,000 | ||||
| Bills payable | 4,000 | Stock | 10,000 | ||||
| Current Accounts | S. debtors | 8,000 | |||||
| Azad | 3,680 | (-) Provision | 840 | 7,520 | |||
| Babli | 8,840 | 12,520 | Furniture | 5,000 | |||
| Capitals | Building | 45,000 | |||||
| Azad | 60,000 | Machinery | 23,000 | ||||
| Babli | 30,000 | ||||||
| Chintan | 30,000 | 1,20,000 | |||||
| 1,44,520 | 1,44,520 | ||||||
Q.22 Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On April 01, 2016 they admitted Vimal for 1/5 share in the profits. The Balance Sheet Ashish and Dutta as on March 31, 2016 was as follows:
| Balance Sheet of A and B as on 31/03/2016 | ||||
| Liabilities | โน | Assets | โน | |
| Creditors | 15,000 | Land & Building | 35,000 | |
| Bills Payable | 10,000 | Plant | 45,000 | |
| Capital: | Debtors | 22,000 | ||
| Ashish | 80,000 | Less: | ||
| Dutta | 35,000 | Provision | 2,000 | 20,000 |
| Stock | 35,000 | |||
| Cash | 5,000 | |||
| 1,40,000 | 1,40,000 | |||
It was agreed that:
1. The value of Land & Building be increased by โน 15,000.
2. The value of plant be increased by โน 10,000.
3. Goodwill of the firm be valued at โน 20,000.
4. Vimal to bring in capital to the extent of 1/5th of the capital of the new firm.
Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimalโs admission.
Ans. Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| 2016 | Land and building A/c | Dr. | 15,000 | |||
| Apr | Plant A/c | Dr. | 10,000 | |||
| 1 | To Revaluation A/c | 25,000 | ||||
| (Being increase in the value of building and plant) | ||||||
| ii | Revaluation A/c | Dr. | 25,000 | |||
| To Ashishโs Capital A/c | 15,000 | |||||
| To Duttaโs Capital A/c | 10,000 | |||||
| (Being profit on revaluation distributed among old partners) | ||||||
| iii | Cash A/c | Dr. | 36,000 | |||
| To Vimalโs Capital A/c | 36,000 | |||||
| (Being 1/5th capital brought by Vimal) | ||||||
| iv | Vimalโs Current A/c | Dr. | 4,000 | |||
| To Ashishโs Capital A/c | 2,400 | |||||
| To Duttaโs Capital A/c | 1,600 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
Balance Sheet (after admission)
| Liabilities | โน | Assets | โน | |||||
| Creditors | 15,000 | Cash | 41,000 | |||||
| Bills payable | 10,000 | Stock | 35,000 | |||||
| Capitals | S. Debrs. | 22,000 | ||||||
| Ashish | 97,400 | (-) Pro. | 2000 | 20,000 | ||||
| Dutta | 46,600 | Plant | 55,000 | |||||
| Vimal | 36,000 | 1,80,000 | Land & building | 50,000 | ||||
| Vimalโs current a/c | 4,000 | |||||||
| 2,05,000 | 2,05,000 | |||||||
Working Note:
Partnersโ Capital Accounts
| Particulars | Ashish โน | Dutta โน | Vimal โน | Particulars | Ashish โน | Dutta โน | Vimal โน |
| To Balance c/d | 97,400 | 46,600 | 36,000 | By Balanceb/d | 80,000 | 35,000 | |
| By Revaluation | 15,000 | 10,000 | |||||
| By Cash | 36,000 | ||||||
| By Vimal Current | 2,400 | 1,600 | |||||
| 97,400 | 46,600 | 36,000 | 97,400 | 46,600 | 36,000 |
Vimal Current Account
| Particulars | โน | Particulars | โน | |
| To Ashishโs Capital A/c | 2,400 | By Balance c/d | 4,000 | |
| To Duttaโs Capital A/c | 1,600 | |||
| 4,000 | 4,000 | |||
Total adjusted capital of old partners = โน97,400 + โน46,600 = โน 1,44,000
4/5th capital = โน1,44,000
Total capital = โน1,44,000 ร 5/4 = โน1,80,000
Vimalโs share = โน1,80,000 ร 1/5 = โน36,000
Q.23 If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.
Ans. Sometime, at the time of admission, the partners agree that their capitals should also be adjusted so as to be proportionate to their profit sharing ratio.
In such a situation, if the capital of the new partner is given, the same can be used as a base for calculating the new capitals of the old partners. The capitals thus ascertained should be compared with their old capitals after all adjustments relating to goodwill reserves and revaluation of assets and liabilities, etc. have been made and then the partner whose capital falls short, will bring in the necessary amount to cover the shortage and the partner who has a surplus, will withdraw the excess amount of capital.
Letโs take an example for better understanding:
P and Q are partners sharing profits in the ratio of 2:1. R is admitted into the firm for ยผ share of profits. R brings in โน20,000 in respect of his capital. The capitals of old partners P and Q, after all adjustments relating to goodwill, revaluation of assets and liabilities, etc are โน45,000 and โน15,000 respectively. It is agreed that partnerโs capitals should be according to the new profit sharing ratio.
Let us determine the new capitals of P and Q and record the necessary journal entries assuming that the partner whose capital falls short, brings in the amount of deficiency and the partner who has an excess, withdraws the excess amount.
Here,
Calculation of new profit sharing ratio. Assuming the new partner R acquires his share from P and Q in their old profit sharing ratio, i.e., 2:1.
Required capital of P and Q, Rโs Capital (who has ยผ share in profits) is โน20,000. Pโs new share is 2/4 which is double of Rโs share. Hence the capital will be โน40,000.
Alternatively based on Rโs Capital the total capital of the firm works out at โน80,000. Hence based on their share in profits, the capital of P and Q will be:
The capital of P and Q after all adjustments have been made, are โน45,000 and โน15,000 respectively. Hence P will withdraw โน5,000 (โน45,000 – โน40,000) from the firm where Q will contribute additional amount of โน5,000 (โน20,000 – โน15,000).
The journal entries will be:
| Dt. | Particulars | L.F. | Dr. โน | Cr. โน | ||
| Pโs Capital | Dr. | 5,000 | ||||
| To Cash | 5,000 | |||||
| (Excess capital withdrawn by P) | ||||||
| Cash A/c | Dr. | 5,000 | ||||
| To Qโs Capital | 5,000 | |||||
| (Deficiency made good by additional amount brought in by Q) | ||||||
Sometimes, the total capital of the firm may clearly specified and it is agreed that the capital of each partner should be proportionate to his share in profits. In such a situation each partnerโs capital (including the new partnerโs capital to be brought by him) is calculated on the basis of new capital.
Q.24 Explain various methods of valuation of goodwill.
Ans. The methods for valuing goodwill are:
- Average profit method.
- Super Profit method.
- Capitalisation method.
(1) Average Profit Method:
Goodwill under Average profit method can be calculated using Simple Average Profit Method or Weighted Average Profit Method.
Simple Average Profit Method: Under the Simple Average Profit Method, average profits earned by the business for the specified number of years are considered. Profits earned are totaled and average is determined. Average profit as calculated is multiplied by a number of yearโs purchase to arrive at the value of goodwill.
Calculate Average profit as follows:
Weighted Average method: Under this method, each yearโs profit is multiplied by the number of assigned weights and the value is ascertained. The products are added and divided by the total of weights to arrive at the average profit. The weighted average profit so arrived at are multiplied by the agreed โNumber of yearsโ โPurchaseโ to arrive at the value of goodwill.
Calculate Weighted Average profit as follows:
(2) Super Profit Method:
The excess of actual profit over the normal profit is called super profit. Goodwill under this method is calculated by multiplying the super profits with the agreed number of years purchase. Normal rate of return is considered while calculating the super profit. Average capital employed is taken into account while calculating the super profit.
(3) Capitalisation Method:
Under this method, Goodwill can be valued in two ways:
Capitalisation of Average Profit: Under this, goodwill is calculated by deducting capital employed (net assets as on the date of valuation) in the business from the capitalised value of average profit on the basis of normal rate of return.
Capitalised value of the business is ascertained as follows:
For calculating goodwill under this method, the steps are:
Calculate average normal profit earned.
Calculate capitalised value of the firm by using the above formula.
Net Assets = All assets (other than goodwill, fictitious assets and non-trade investments at their current values) โ outsiders liabilities.
Goodwill = Capitalised value โ Net assets.
Capitalisation of Super Profit: Under this method, goodwill is calculated by capitalisation of super profit.
Q.25 A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?
Ans.
Q.26 A, B, C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio.
Ans.ย
Q.27 X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally from X and Y. Calculate new profit sharing ratio.
Ans.
Q.28 A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio.
Ans.
Q.29 P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio.
Ans.
Q.30 A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio respectively. Calculate new profit sharing ratio.
Ans.
Q.31 A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio.
Ans.ย
Q.32 A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B and 1/7 from C. Calculate new profit sharing ratio.
Ans.
Q.33 Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour of Gopi and Rukmani surrendered ยผ of her share in favour of Gopi. Calculate new profit sharing ratio.
Ans.
Q.34 Singh, Gupta and khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favour of Jain; Gupta surrendered ยผ of his share in favour of Jain and Khan surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio.
Ans.
Q.35 Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio.
Ans.
Q.36 Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio and sacrificing ratio.
Ans.
Q.37 Compute the value of goodwill on the basis of four yearโs purchase of the average profits based on the last five years. The profits for the last five years were as follows:
| Year | โน |
| 2013 | 40,000 |
| 2014 | 50,000 |
| 2015 | 60,000 |
| 2016 | 50,000 |
| 2017 | 60,000 |
Ans.
Goodwill = Average profits x number of years purchase
= โน52,000 x 4 = โน2,08,000
Q.38 Firmโs Capital in a business is โน2,00,000. The normal rate of return on Firmโs capital is 15%. During the year 2015 the firm earned a profit of โน48,000. Calculate goodwill on the basis of 3 years purchase of super profit.
Ans.
Q.39 The books of Ram and Bharat showed that the Firmโs capital on 31/12/2016 was โน5,00,000 and the profits for the last 5 years: 2015 โน40,000; 2014 โน50,000; 2013 โน55,000; 2012 โน70,000 and 2011 โน85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%.
Ans.
Super profit = 60,000 โ 50,000 = โน10,000
Goodwill = โน10,000 ร 3 = โน30,000
Q.40 Rajan and Rajani are partners in a firm. Their capitals were Rajan โน3,00,000; Rajani โน2,00,000. During the year 2015 the firm earned a profit of โน1,50,000. Calculate the value of goodwill of the firm by capitalization method assuming that the normal rate of return is 20%.
Ans.
Q.41 A business has earned average profits of โน1,00,000 during the last few years , find out the value of goodwill by capitalization method, given that the assets of the business are โน10,00,000 and its external liabilities are โน1,80,000. The normal rate of return is 10%?
Ans.
Capital employed = Assets โ External liabilities
= โน10,00,000 โ โน1,80,000 = โน8,20,000
Estimated capital required to earn average profit โน1,00,000 @ normal return 10%.
Goodwill = Estimated capital โ Actual capital
= โน10,00,000 โ โน8,20,000 = โน1,80,000
Q.42 A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with ยผ share in profits. C will bring in โน30,000 for capital and the requisite amount of goodwill premium in cash.
The goodwill of the firm is valued at โน20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i | Cash A/c | Dr. | 35,000 | |||
| To Cโs Capital A/c | 30,000 | |||||
| To Premium for goodwill A/c | 5,000 | |||||
| (Being capital and goodwill brought by C) | ||||||
| ii | Premium for goodwill A/c | Dr. | 5,000 | |||
| To Aโs Capital A/c | 2,000 | |||||
| To Bโs Capital A/c | 3,000 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
| iii | Aโs Capital A/c | Dr. | 2,000 | |||
| Bโs Capital A/c | Dr. | 3,000 | ||||
| To Cash A/c | 5,000 | |||||
| (Being amount of goodwill withdrawn) | ||||||
Q.43 Arti and Bharti are partners in a firm sharing profits in 3:2 ratio. They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings โน50,000 for his capital and โน10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at โน5,000 the new profit sharing ratio between Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in the books of the new firm.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i | Artiโs Capital A/c | Dr. | 3,000 | ||
| Bhartiโs Capital A/c | Dr. | 2,000 | |||
| To Goodwill A/c | 5,000 | ||||
| (Being amount of goodwill written off) | |||||
| ii | Cash A/c | Dr. | 60,000 | ||
| To Sarthiโs Capital A/c | 50,000 | ||||
| To Premium for goodwill A/c | 10,000 | ||||
| (Being capital and goodwill brought by Sarthi) | |||||
| iii | Premium for goodwill A/c | Dr. | 10,000 | ||
| To Artiโs Capital A/c A/c | 4,000 | ||||
| To Bhartiโs Capital A/c | 6,000 | ||||
| (Being goodwill distributed in sacrificing ratio) | |||||
Q.44 Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for ยผ share in the profits. The new profit sharing ratio agreed was 2:1:1. Christopher brought โน50,000 for his capital. His share of goodwill was agreed to at โน15,000. Christopher could bring only โน10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i | Cash A/c | Dr. | 60,000 | |||
| To Christopherโs Capital A/c | 50,000 | |||||
| To Premium for goodwill A/c | 10,000 | |||||
| (Being capital and goodwill brought by Christopher) | ||||||
| ii | Premium for goodwill A/c | Dr. | 10,000 | |||
| Christopherโs Current A/c | Dr. | 5,000 | ||||
| To Adityaโs Capital A/c | 6,000 | |||||
| To Balanโs Capital A/c | 9,000 | |||||
| (Being goodwill distributed in sacrificing ratio) | ||||||
Q.45 Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 01/01/2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were โน50,000 for 2013; โน60,000 for 2014; โน90,000 for 2015; and โน70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash.
Record the necessary journal entries in the books of the firm on Ram Lalโs admission when:
a. Goodwill already appears in the books at โน2,02,500.
b. Goodwill appears in the books at โน2,500.
c. Goodwill appears in the books at โน2,05,000.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i. | Mohan Lalโs Capital A/c | Dr. | 1,21,500 | |||
| Sohan Lalโs Capital A/c | Dr. | 81,000 | ||||
| To Goodwill A/c | 2,02,500 | |||||
| (Being existing goodwill written off) | ||||||
| ii. | Ram Lalโs Current A/c | Dr. | 50,625 | |||
| To Mohan Lalโs Capital A/c | 30,375 | |||||
| To Sohan Lalโs Capital A/c | 20,250 | |||||
| (Being share of goodwill of new partner not paid in cash adjusted from his current account and distributed among sacrificing partners) | ||||||
Case (b)
| Particulars | Dr. (โน) | Cr. (โน) | ||||
| i. | Mohan Lalโs Capital A/c | Dr. | 1,500 | |||
| Sohan Lalโs Capital A/c | Dr. | 1,000 | ||||
| To Goodwill A/c | 2,500 | |||||
| (Being existing goodwill written off) | ||||||
| ii. | Ram Lalโs Current A/c | Dr. | 50,625 | |||
| To Mohan Lalโs Capital A/c | 30,375 | |||||
| To Sohan Lalโs Capital A/c | 20,250 | |||||
| (Being share of goodwill of new partner not paid in cash adjusted from his current account and distributed among sacrificing partners) | ||||||
Case (c)
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i. | Mohan Lalโs Capital A/c | Dr. | 1,23,000 | ||
| Sohan Lalโs Capital A/c | Dr. | 82,000 | |||
| To Goodwill A/c | 2,05,000 | ||||
| (Being existing goodwill written off) | |||||
| ii. | Ram Lalโs Current A/c | Dr. | 50,625 | ||
| To Mohan Lalโs Capital A/c | 30,375 | ||||
| To Sohan Lalโs Capital A/c | 20,250 | ||||
| (Being share of goodwill of new partner not paid in cash adjusted from his current account and distributed among sacrificing partners) | |||||
Q.46 Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio between Rajesh, Mukesh and Hari is 4:3:2. On Hariโs admission goodwill of the firm is valued at โน36,000. Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh and Hari decided not to show goodwill in their balance sheet.
Record necessary journal entries for the treatment of goodwill on Hariโs admission.
Ans. Books of Rajesh, Mukesh and Hari
Journal
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i. | Hariโs Current A/c | Dr. | 8,000 | ||
| To Rajeshโs Capital A/c | 2,000 | ||||
| To Mukeshโs Capital A/c | 6,000 | ||||
| (Being share of goodwill of new partner not paid in cash adjusted from his current account and distributed among sacrificing partners) | |||||
Q.47 Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this share of goodwill โน45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account.
Pass the necessary journal entry for the treatment of goodwill.
Ans.
| Particulars | Dr. (โน) | Cr. (โน) | |||
| i. | Anthonyโs Current A/c | Dr. | 45,000 | ||
| To Amarโs Capital A/c | 11,250 | ||||
| To Akbarโs Capital A/c | 33,750 | ||||
| (Being share of goodwill of new partner not paid in cash adjusted from his current account and distributed among sacrificing partners) | |||||
Working Notes:
Q.48 A and B are partners sharing profits and losses in the ratio of 3:1. On 1st January, 2017 they admitted C as a new partner for ยผ share in the profits of the firm.
C brings โน20,000 as for his ยผ share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revlauation of assets and liabilities etc. has been worked out at โน50,000 for A and โน12,000 for
B. It is agreed that partnerโs capitals will be according to new profit sharing ratio.
Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio.
Ans.
However, actual capitals of A and B are โน 50,000 and โน12,000 respectively. Hence A will withdraw โน 5,000 and B will introduce โน 3,000 to make up the required capital.
Journal Entries
| Particulars | Dr. (โน) | Cr. (โน) | |||
| 2017
Jan 01 |
Aโs Capital A/c | Dr. | 5,000 | ||
| To Bank A/c | 5,000 | ||||
| (Being amount withdrawn to make up for the required capital) | |||||
| ii | Bank A/c | Dr. | 3,000 | ||
| To Bโs Capital A/c | 3,000 | ||||
| (Being amount introduced to make up for the required capital) | |||||
Q.49 Pinky, Qumar and Roopa partners in a firm sharing profits and losses in the ratio of 3:2:1. S is admitted as a new partners for ยผ share in the profits of the firm, which he gets 1/8 from Pinky and 1/16 each from Qumar and Roopa.
The total capital of the new firm after Seemaโs admission will be โน2,40,000. Seema is required to bring in cash equal to ยผ of the total capital of the new firm. The capitals of the old partners also have to be adjusted in proportion of their profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all adjustments in respect of goodwill and revaluation of assets and liabilities have been made are Pinky โน 80,000, Qumar โน 30,000 and Roopa โน 20,000.
Calculate the capitals of all the partners and record the necessary journal entries for doing adjustments in respect of capitals according to the agreement between the partners.
Ans.
| Partner | Actual capital after all adjustments (โน) | New capital required (โน) | Difference
Excess/short (โน) |
| Pinky | 80,000 | 90,000 | 10,000 short |
| Qumar | 30,000 | 65,000 | 35,000 short |
| Roopa | 20,000 | 25,000 | 5,000 short |
| Seema | 60,000 | 60,000 share |
Journal Entry
| Particulars | Dr. (โน) | Cr. (โน) | |||
| Bank A/c | Dr. | 1,10,000 | |||
| To Pinkyโs Capital A/c | 10,000 | ||||
| To Qumarโs Capital A/c | 35,000 | ||||
| To Roopaโs Capital A/c | 5,000 | ||||
| To Seemaโs Capital A/c | 60,000 | ||||
| (Being amount introduced to make up for the required capital) | |||||
FAQs (Frequently Asked Questions)
Retirement of a partner means one partner leaves the firm while the remaining partners continue the business. The firm is reconstituted, and the retiring partnerโs final claim is settled.
Gaining ratio is found by subtracting each continuing partnerโs old share from the new share. The formula is: Gaining Share = New Share – Old Share.
Goodwill is calculated because the retiring partner has a right to the firmโs reputation value. Gaining partners compensate the retiring partner in their gaining ratio.
Revaluation Account records changes in asset and liability values. Profit or loss from revaluation is transferred to all partners in the old profit sharing ratio.
Executorโs Account records the amount payable to the deceased partnerโs legal representatives. The deceased partnerโs adjusted capital balance is transferred to this account.
