Sharad Narain Gaur’s The Commerece House 9305278262

Mall Avenue and Gomtinagar

Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Admission of a
Partner
Problems you will come across while solving admission questions

Accounting Treatment of Accumulated Profits, Reserve and Losses.

i) Reserves, Accumulated Profit /Loss and miscellaneous expenditure existing at the time of
admission belong to the old partner and must be distributed in old partners’ in old ratio.

ii) When these items are transferred to Capital Account (written off from books)
JOURNAL ENTRIES
S. No. Particulars Dr. (Rs.) Cr. (Rs.)
General Reserve A/c Dr.
Profit and loss A/c ( Profit ) Dr.
Investment Fluctuation Reserve A/c * Dr.
Workmen Compensation Reserve A/c ** Dr.
Other Reserve and funds Dr.
To All Partners Capital A/c (Old Ratio)
( Being Reserves, funds and surplus transferred to cap A/c)
All Partners Capital A/c (Old Ratio) Dr.
To Profit and Loss A/c (Dr. Balance)
To Deferred Revenue Expenses ( Special adv) A/c
(Written off accumulated losses)

iii) Investment fluctuation reserve should be distributed among the partner after adjusting the
loss caused by the decline in the book value of assets.

For example, if the investment fluctuation fund is Rs 6,000 and Book value of Investment is Rs
5,000 but its market value is Rs 4,000. Here, first of all, decline in the value of investment, Rs
2,000 will be adjusted against the investment fluctuation reserve and the balancing amount will
be distributed in old partners in old ratio.

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 Sharad Narain Gaur’s The Commerece House 9305278262
Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Treatment of Workmen Compensation Reserve

i)Workmen compensation reserve should be distributed after adjusting the
compensation claimed by workmen.

For example, if the workmen compensation reserve is Rs 6,000 and works are claiming a
damage of Rs 2,000. Here, first of all, claim of Rs 2,000 will be met out of the workmen
compensation reserve and the remaining amount will be distributed in old partners in old ratio.

If workmen compensation fund or investment fluctuation fund is given but it is not to be

distributed or it is to be adjusted .Following journal entry will be passed .

Case A : If claim against the workmen compensation fund is less than the fund or loss from fall
in the value of investment is less than the investment fluctuation fund and there is some
remaining fund .
Gaining partner’s capital account Dr
To Sacrificing partner’s capital account

Case B : If claim against the workmen compensation fund is more than the fund or loss from fall
in the value of investment is more than the investment fluctuation fund and funds fall short .
Sacrificing partner’s capital account Dr
To Gaining partner’s capital account

Illustration in support of the above points

i)A and B are partners sharing profits and losses in the ratio of 3 : 1. C is admitted as a new
partner for 1/3th share which he acquires equally A and B. An extract of their Balance
Sheet on this date is given below:
Liabilities Rs. Assets Rs.
Workmen Compensation 60,000
Reserve

Partners agreed that the book value of any item appearing in the Balance Sheet is not to
be altered and any adjustment on the admission of C is to be made by passing a single
entry. Show the accounting treatment under the following alternative cases:

Case 1. If there is no other information.

Case 2. If a Claim for Workmen Compensation is estimated at Rs. 15,000.
Case 3. If a Claim for Workmen Compensation is estimated at Rs. 60,000.
Case 4. If a Claim for Workmen Compensation is estimated at Rs. 90,000.

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

JOURNAL
Date Particulars L.F Dr. (Rs.) Cr.(Rs.)
Case C’s Capital A/c (60,000x1/3) Dr. 20,000
1 To A’s Capital A/c 10,000
To B’s Capital A/c 10,000
(Adjustment for workmen Compensation reserve in
sacrificing ratio which is equal )
Case C’s Capital A/c Dr. 15,000
2 To A’s Capital A/c 7,500
To B’s Capital A/c (11,250 X 1/3) 7,500
(Adjustment for Workmen Compensation reserve of
Rs. 60,000 less claim Rs. 15,000 in equal
sacrificing ratio)
Case No Entry
3
Case A’s Capital A/c Dr. 5,000
4 B’s capital A/c Dr. 5,000
To C’s Capital A/c 10,000
(Adjustment for Workmen Compensation Claim of
Rs. 90,000 less reserve Rs. 60,000 in equal
sacrificing ratio)

ii) A and B are partners sharing profit and losses in the ratio 3:1 admit C as new partner
for ¼ shares which he acquires equally from A and B . An extract of their Balance Sheet as
at that date is:
BALANCE SHEET as at………….
Liabilities Rs. Assets Rs.
Investment Fluctuation 60,000 Investments (at Cost) 2,00,000
Reserve

Partners agreed that book value of any item of Balance Sheet is not to be altered and any
adjustment is to be made by passing an adjustment entry. Show the accounting treatment
under the following alternative cases:
Case 1. If the market value of investment remains the same .
Case 2 If the market value of investments is Rs. 1,50,000
Case 3 If the market value of investments is Rs. 1,30,000
Case 5 If the market value of investments is Rs. 2,40,000

Answer-
JOURNAL
Date Particulars L.F Dr. (Rs.) Cr.(Rs.)
Case 1 C’s Capital A/c Dr. 15,000
To A’s Capital A/c 7,500
To B’s Capital A/c 7,500
( Being investment fluctuation fund adjusted )

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Case 2 C,s Capital A/c Dr 2,500

To A,s Capital A/c 1,250
To B,s Capital A/c 1,250
( Being Investment fluctuation fund adjusted after
setting off the loss of Rs 50,000)
Case 3 A’s Capital A/c Dr. 1,250
B’s Capital A/c Dr. 1,250
To C’s Capital A/c 2,500
(Being investment fluctuation fund – loss
resulting from the fall in the value of investment
adjusted )
Case 4 C’s Capital A/c Dr. 25,000
To A’s Capital A/c 12,500
To B’s Capital A/c 12,500
(Being investment fluctuation reserve of Rs.
60,000 plus Rs. 40,000for increase in the value of
investments adjusted )

Treatment of Reserve and Surplus ( Profit), if is not be distributed or disturbed or

should remain as it is in the Balance Sheet .
It is a common practice to distribute the reserve and surplus among the old partners in the old
ratios because these reserves and surplus belong to old partners. When it is decided not to
distribute it in old partners . It causes loss to the old partners and gain to the new partner . So
gaining partner is supposed to compensate the sacrificing partners in the ratio in which they
are sacrificing .
For better understanding . Go through this case :
A and B are partner sharing profit and losses equally . New partner C is admitted for 1/3rd
share . At the time of admission Reserve and Surplus existing in the books Rs 30,000. It is
common practice to distribute this Reserve and Surplus between A and B in old profit sharing
ratio , which is equal in this case . It means A and B would have got Rs 15,000 each. But if it is
decided not to distribute the Reserve and Surplus , it will cause loss to A and B because after
admission C will have a stake over it equivalent to his share , which is 1/3rd in this case or Rs
10,000, on the other hand A and B will be at loss equivalent to share which is gained by C . So It
is required that C should compensate A and B equal to the amount which he has gained in
Reserve and Surplus by passing adjusting entry .
Adjusting entry :

Gaining Partners’ Capital A/c Dr ( Proportion in which he/she gains )

To Sacrificing Partners’ Capital A/c ( Proportion in which he / she sacrifices )

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

If item is a negative item or debit item like Loss, miscellaneous expenditure and goodwill given in the
assets side of Balance sheet .

Goodwill, Miscellaneous Expenditure and Profit and Loss ( Loss ) given in the assets side are regarded
as negative items. They are normally debited to partner’s Capital Account before admission. But if it is
decided at the time of admission that these items will remain undisturbed or they will not be debited to
partner’s capital A/c. It will cause loss to the admitted partner and gain to the existing partner. So new
partner should be compensated by old partners in the sacrificing ratio.
For better understanding go through this case:
A and B are partners sharing profit and losses equally. New partner C is admitted for 1/3rd share.
Goodwill and Miscellaneous existing in the books are amounting to Rs 30,000. Had this been written off
at the time off admission, A and B’s Capital Accounts would have been debited by Rs 15,000 each. But
it is decided that they will remain undisturbed. It means after admission C will have a stake over these
negative items equivalent to Rs 10,000 and A and B will have a lesser share in the future. So it is gain
of A and B at the cost of new partner C. So A and B should compensate C by passing adjusting entry.

Sacrificing partners’ Capital A/c Dr ( Proportion in which he/ she sacrifices )

To Gaining Partners’ Capital A/c ( Proportion in which he/ she gains )

Apply yourself and practice

i) A and B were partners in a firm sharing profits and losses in the ratio of 5 : 3. Their Balance
Sheet as at 31st March, 2017 was as follows:
Liabilities Rs. Assets Rs.
Capitals: Land and Building 3,50,000
A 2,00,000 Investments 1,00,000
B 1,00,000 3,00,000 (Market Value Rs. 90,000)
Workmen Compensation Reserve 25,000 Current Assets 1,40,000
Contingency Reserve 75,000 Advertisement Suspense A/c 30,000
Employee’s Provident Fund 60,000 (Differed Revenue Expenditure)
Investment Fluctuation Reserve 60,000
Creditors 1,00,000
6,20,000 6,20,000

They admit C into partnership on 1st April, 2017 and the new profit sharing ratio is agreed at 7 : 5 : 4. It is
estimated that claim on account of Workmen’s Compensation is estimated at Rs. 40,000.
Partners do not want to alter the values given in the Balance Sheet but prefer to record the effect of change
in profit sharing ratio by an adjustment entry. You are required to give the necessary journal entry.

Answer-
(i) Adjustment to be made for:
Rs.

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 Sharad Narain Gaur’s The Commerece House 9305278262
Mall Avenue and Gomtinagar
Date Particulars
Ex Hod Army Public L.F Gomtinagar
School, Ex visiting faculty Loreto Convent and CMS Dr.(Rs.) Cr.(Rs.)
C’s Capital A/c Dr. 80,000
To A’s Capital A/c 60,000
To B’s Capital A/c 20,000
(Adjustment of Reserves and Losses in sacrificing
Ratio))

Contingency Reserve 75,000

Investment Fluctuation Reserve
(Rs. 60,000 less Rs. 10,000 for fall in the value of investments) 50,000
1,25,000
Less: Claim for Workmen Compensation
(Rs. 40,000 less Workmen Compensation Reserve Rs. 25,000) 15,000
1,10,000
Less: Advertisement Suspense Account 30,000
80,000
(ii) Sacrificing Ratio

A: − = =
B: − = =
Thus, Sacrificing = 3 : 1
Adjusting Entry

ii) Laxman, Mohan and Naresh are three partners sharing profits and losses in the ratio of 2 :
2 : 1. Mohan retires and the new ratio between Laxman and Naresh is agreed at 3 : 1.
Following balances appeared in their books on the date of retirement :
Rs.
Profit and Loss Balance (Dr.) 80,000
General Reserve 2,00,000
Advertisement Suspense Account 30,000
On this date Goodwill of the firm is valued at Rs. 60,000
Continuing partners decided to record the effect of retirement without affecting the book
value of above items. You are required to give the necessary journal entry.

Answer-
Calculation of Net Effect of Accumulated Profit/ Losses: Rs.
General Reserve 2,00,000
Less: Profit & Loss A/c Dr. Balance 80,000
Advertisement Suspense Account 30,000 1,10,000
Net Accumulated Profit 90,000
Add: Value of Goodwill 60,000
1,50,000

Gaining Ratio = New Ratio – Old Ratio

Laxman = − = =

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Naresh = − = =
Adjustment Entry:

Date Particulars L.F Dr.(Rs.) Cr.(Rs.)

Laxman’s Capital A/c (60,000 X 7/8) Dr. 52,500

Naresh’s Capital A/c (60,000 X 1/8) Dr. 7,500
To Mohan’s Capital A/c(1,50,000 X 2/5) 60,000
(Adjustment of Mohan’s share of accumulated
profit and goodwill into the accounts of
continuing partners in their gaining ratio)

Treatment of Employees provident fund , Employees gratuity fund , Employees

pension fund , Employees profit sharing fund , Employees saving bank account
and Machinery Replacement Fund.

I ) Employees provident fund , Employees gratuity fund , Employees pension fund , Employees
profit sharing fund , Employees saving bank account are statutory obligations , hence it is
not distributed among the partners.

ii) Machinery Replacement fund is in the nature of accumulated depreciation created to

replace the machinery in the future. Hence it is not distributed among the partners.

Alert
These fund represent outside liabilities and Provision and will be treated like any other
outside liabilities and provision . Don’t distribute them in old partners .

Revaluation of Assets and Liabilities

i) At the time of admission of a partner, value of assets and liabilities are revalued so that
the profit or loss resulting there from up to the date of admission can be ascertained and
adjusted in the old partners’ capital a/c in their old ratio.
ii) Profit or loss resulting there from belongs to the old partners and must be distributed
among them.
Revaluation A/c

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Particulars Rs. Particulars Rs.

To Decrease in assets A/c By Increase in assets A/c
To Increase in liabilities A/c By Decrease in Liabilities A/c
To Unrecorded Liabilities . By Unrecorded Assets A/c

To Profit on Revaluation A/c ( Old partners To Loss on Revaluation A/c ( Old

in old ratio) partners in old ratio)

Problems covering new profit sharing ratio and

sacrificing ratio

Problem1. – (when new partner acquires his share from all partners in their old ratio).
A and B are partners in a firm sharing profits and losses in the ratio 3 :2. They admitted C into the
partnership and decided to give him1/5 share of the future profits. Find the new ratio of the
partners.
Solution.
Let us assume that firm’s share of profit is 1
New partner will get 1/5 share , so the firm left for A and B is 1- 1/5 = 4/5
Now this share will be shared by A and B in their old profit sharing ratio.
A = 4/5 x 3/5 = 12/25
B = 4/5 x 2/5 = 8/25
Now New profit sharing ratios will
A = 12/25
B = 8/25
C = 1/5 or 5/25 That is 12 : 8 : 5

Problem 2. - (when new partner acquires his share from all partners in agreed share)
L and M are partners in a firm sharing profit and losses in the ratio of 3:2. They admit N on 2/5
share, which he take 1/5 from L and 1/5 from M. calculate new profit sharing ratio.
Solution.
As sacrifice share of old partners are given the question itself, hence there is no need to calculate it.
Calculation of New Profit Sharing Ratio:
New share = old share – Sacrifice share
L’s new share = - = =
M’s new share = - = =
N’s new share = + =
∶ ∶
New ratio among L, M and N = : : = = 2:1:2
Problem 3. – ( when new partner acquires his share from all partners in certain ratio ).

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

X and Y are partners in a firm sharing profit and losses in the ratio of 3:2. Z is admitted as partners
in the firm for 1/5 share in profits . Z acquires his share from X and Y in the ratio of 1:2. Calculate
the new profit sharing ratio of the partners.
Solution .
Calculation of Sacrifice Share:
X’s sacrifice = of =
Y’s sacrifice = of =
Calculation of New Profit Sharing Ratio:
New share = old share – Sacrifice share
X’s new share = –( × )= =
Y’s new share = –( × = =
Z’s new share = + = or
∶ ∶
New ratio among X, Y and Z = : : = = 8: 4: 3
Problem 4. – (when new partner acquires his share from all partners as a fraction of their share)
A and B are partners in a firm sharing profit and losses in the ratio of 3:2. A surrenders 1/3 of his
share, whereas B surrenders 1/2 of his share in favour of C, a new partner. Calculate the new profit
sharing ratio.
Solution.
Calculation of sacrifice Share:
A’s sacrifice 1/3 of his share i.e., of = or
B’s sacrifice 1/2 of his share i.e., of = or
Calculation of New profit Sharing Ratio:
New share = old share – Sacrifice share
A’s new share = - =
B’s new share = - =
C’s new share = + =
: ∶
New ratio among A, b and C = : : = = 2:1:2
Problem 5.- (when new partner does not acquire his share from all partners)
A, B and C are partners sharing profit in the ratio of 2:2:1. They admit D for 1/5th share. C would
retain his original share. Calculate new ratio of all partners.
Solution.
Calculation of Sacrifice Share:
A’s sacrifice = ( × )=
B’s sacrifice =( × )=
C’s sacrifice = = 0
Calculation of New Profit Sharing Ratio:
New share = old share – Sacrifice share

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

A’s new share = - = =

B’s new share = - = =
C’s new share = –0=
D’s new share = + = =
New ratio among A, B, C and D
: : :
: : ∶ = = 3:3:2:2

Problem 6. - (when more than one partners admitted simultaneously)

X and Y are the partners sharing profits in the ratio of 3:2. They admit A and B as new partners. X
sacrificed 1/3rd of his share in favour of A and Y surrendered 1/2th of his share in favour of B.
Calculate the new profit sharing ratio of X, Y, A and B.
Solution:
Calculation of Sacrifice share:
X surrenders 1/3rd of his share in favour of A = of = or
Y surrenders 1/2th of his share in favour of B = of = or
Calculation of New Profit Sharing Ratio:
New share = old share – Sacrifice share
X’s new share = - =
Y’s new share = - = =
P’s share =

Q’s share =
New ratio among X, Y, P and Q
: : :
: : : = = 2:1:1:1

Problem 7. – (when new ratio and old ratio are given):

X and Y were partners in a firm sharing profit in 3:2 ratios. They admitted Z as new partner. The new
profit sharing ratio agreed upon are 3 : 2 :1. Calculate the sacrifice ratios.
Solution.
Sacrifice ratio = old ratio – New ratio
X’s sacrifice = - = =
Y’s sacrifice = : = =
Sacrifice ratio between X and Y : = 3:2

Problem 8.- (when new ratio of old partners is given)

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

A and B are partners in a firm sharing profit in the ratio of 3:2. They admit C as a new partner for
1/5th share in profits. It is decided that A and B will share profits and losses in future in the ratio of
2:1. Calculate their ratio of sacrifice.
Solution.
Calculation of New Profit Sharing Ratio
Let us assume firm’s profit = 1
C’s share =
Remaining share = 1- =
This 4/5th share is to be shared by A and B in the ratio of 2:1.
A’s new share = of =
B’s new share = of =
Thus new profit sharing ratio of Ajay, Anil and Arun will be:
: :
: : = = 8:4:3
Calculation of Sacrificing Ratio:
Sacrificing ratio= Old ratio – New ratio
A’s sacrifice = - = =
B’s sacrifice = - = =
Thus Sacrificing Ratio between A and B 1:2
Q.9 A and B were partners sharing profit and losses in the ratio 3:2, they admitted C as a third
partner . It is decided that mutual ratio between B and C will be the same as the ratio between A an
B . Calculate new profit sharing ratio.

Ans. 9 Calculation of New Profit Sharing ratio:

Ratio Between A and B = 3 : 2
Ratio Between B and C = 3:2
9:6: 4

Q.10 A , B and C were partners sharing profits in the 3:2:1 , they admitted D as a fourth partner for
1/7 share . C has declined to make any sacrifice . Calculate the new profit sharing ratios.
Ans. 10 Calculation of New Profit Sharing Ratio:
New Ratio = old Ratio – Sacrifice Ratio
A’s new share = –( × )= =
B’s new share = –( × )= =
C’s new share = –0=
New Profit Sharing Ratio = : : ∶ = 87 : 58 : 35 : 30

Q11 When new partner does not acquire his share from all partners.
A, B and C are partners sharing profit in the ratio of 3:2:1. They admit D for 1/6th share, which he
acquires from A and B in the ratio of 3 : 2. C would retain his original share. Calculate new ratio of
all partners.

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Ans.11
Calculation of New Profit Sharing Ratio:
New share = old share – Sacrifice share
A’s new share = –( × )= =
B’s new share = - × )= =
C’s new share = –0=
New Profit Sharing Ratio = : : ∶ = 12 : 8 : 5 : 5

Check yourself

Q.1. A, B and C are partner sharing and losses in the ratio of 4:3:2 D is admired for 1/ 3 rd share in
future profits. What is the sacrificing ratio?
Ans. New ratio 8:6:4:9 and Sacrificing Ratio 4:3:2
Q.2. A, B C and D are on partnership sharing profit and losses in the ratio of 36:24:20:20:
respectively ‘E’ Joined the firm for 20% share, A, B C and D would in future share profits among
these selves as 3/10, 4/10,2/10,1/10. Calculate the new profit sharing ration after E’s admission.
Ans. New Ratio 6:8:4:2:5
Q.3. A and B are partners. They admit C for 1/4th share in future the ratio between A and B would
be 2: find out the new ratio and sacrificing ratio.
Ans. New Ratio 2:1:1: and Sacrificing Ratio.
Q.4. K, L and M are partner sharing profits in the ratio of 3:2:1. They admit N for 1/6th share M
would retain his original share fine out the new ratio.
Ans. New Ratio 12:8:5:5
Q.5. A and B are partners sharing profits in the ratio of 3:2, they admit C for 3/7th share of profit
which he acquires 2/7th form B. Find out the new ratio.
Ans. New Ratio 11:9:15
Q.6. Anita and Tina are partners sharing profits as 9:5. They agree to admit Chetan their manager
into partnership. Who is to get 1/8 share in the profits. He acquires this share as 1/12th form Anita
and 1/24th from Tina. Calculate new profit sharing ratio.
Ans. New Ratio 94:53:21
Q.7. P and Q are partners sharing profits and losses in the ratio of 4:3. They admit R as partners
for a 1/7th share in profit which he acquired equally from and Q Calculate new profit sharing ratio of
the Partners.
Ans. 7:5:2

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Q.8. R and S are partners sharing profits in the ratio of 5:3 T Joins the firm as a new partner. R
gives of his share and S gives 2/5 of his share to the new partner find out the new ratio.
Ans. New Ratio 75:36:49
Q.9. A and B are partners sharing profits in the ratio of 3:2 A surrenders 1/6th of his share and B
surrenders 1/4th of his share in favor of C a new partner. What is the new ratio and sacrificing
ratio?
Ans. New Ratio 5:3:2 and Sacrificing Ratio 1:1
Q.10. A and B are two partner sharing profits in the ratio of 3:2. They admitted X and Y as a new
partners A surrendered 1/3rd of his share in favor of X and B surrendered 1/4th of his share in favor
of Y Calculate the new profit sharing ratio of A, B, X and Y.
Ans. New Ratio 8:6:4:2
Q.11. C and D are partners in a firm sharing profits in 2:1 ratio. They admit ‘E’ as new partner for
1/5th share in the profits which he acquires from C and D in 1:2 ratio. Calculate the new profit
sharing ratio of C, D and E.
Ans. New Ratio 3:1:1
Q.12. Suraj and Chand two partners sharing profits in the ratio of 3:2. They admit Tara into
partnership as a partner as a partner from 1st April 1995 Suraj gives 1/3rd of his share while Chand
give 1/10th from his share Calculate new profit sharing ration and sacrificing ratio.
Ans. New Ratio 4:3:3 and Sacrificing Ratio 2:1
Q.13. X and Y share profits and losses in the ratio of 5:3 Z is admitted for 3:10th share of profits half
of which was gifted by X and remaining share was taken by Z equally from X and Y Calculate new
profit sharing ratio.
Ans. New Ratio 4:3:3

Goodwill and its treatment

i) New partner acquires the right to share the future profit of the firm and for that he brings in his
share of goodwill. When a new partner is admitted, he gets his share of profit from old partners for
which he is supposed to be compensated; this compensation should be equal to the proportionate
amount of firm’s goodwill.

ii) In pursuance of Accounting Standard 26, only those assets, for which consideration has been
paid in money and money’s worth, should be recorded in the books of accounts. Goodwill is a self
generated assets and does not carry any cost, therefore, it should not be recorded in the books of
accounts.

iii) If goodwill is purchased or acquired from someone, then only it should be shown in the books of
accounts.

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iv)In case of admission goodwill should not be recorded in the books of accounts because no
consideration in money or money’s worth is paid for it .It is a self generated goodwill or inherent
goodwill.

v) Gaining Partners Share of Goodwill = Firm’s Goodwill x Gaining Share in Ratio.

Sacrificing Partner’s Share of Goodwill = Firm’s Goodwill x Sacrificing Share in Ratio.

Read it very carefully to get better understanding

 So far the goodwill is concerned , a partner who sacrifices his / her share for new partner
will get goodwill in the same proportion and the partner who will get the share will have to
compensate the new partner in the proportion in which is gaining .
 When a new partner is admitted he/she gets share of profit from the existing partner , so
he/ she is supposed to compensate the partner/ partner’s for sacrificing his share .
 In simple terms sacrificing his/ her share is equivalent to selling his share and gaining
share from the existing partner while admission is equivalent to purchasing share . So
purchaser is supposed to pay for the share he/ she purchased from the seller/ sellers.

JOURNAL
S. No. Particulars L/F Dr. Cr. (Rs.)
(Rs.)
(i) Gaining Partners’ Capital A/c Dr. xxx
To Sacrificing Partners’ Capital A/c Xxx
(Adjustment of Goodwill at the time of change in Ratio)

Accounting treatment for goodwill:

Situation 1: When premium for goodwill is paid privately by the new partner to the
sacrificing partners --
No entry will be passed.

Situation 2: When a new partner brings his share of goodwill be cash or in kind.
Cash/ Kind A/c Dr
To Premium for goodwill A/c
Situation 3 When the new partner fails to bring his share of goodwill in cash:
In this case, goodwill be adjusted and the following journal entry will be passed
Gaining Partner’s Current A/c Dr
To Sacrificing Partner’s Capital A/C (In the case fluctuating capitals)
Or
To Sacrificing partner’s Current A/c (In case of fixed capitals)

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Situation 4: When the new partner brings in only a portion of the required amount of
premium for goodwill:
Entry for bring cash/ bank as a part payment of goodwill .
Cash/ Bank A/c Dr
To Premium for goodwill A/c

Entry for transferring the amount that is brought in by new partner into respective
capital or Current A/c and adjusting entry for the amount that new fails to bring
Premium for goodwill A/c Dr
Gaining Partner’s Current A/c Dr
To Sacrificing Partner’s Capital A/c (In case fluctuating capitals)
Or
To Sacrificing Partner’s Current A/c (In case of fixed capitals)

Some other points related to Goodwill:

If goodwill already appears in the books , it should be written off in pursuance of

Accounting standard 26 .
i) Following journal entry will be passed :
Old partners’ Capital / Current A/c Dr
To Goodwill A/c
Goodwill should be written off in old partners’ in old ratios.

ii) Sometimes , the sacrificing partners’ decide to withdraw goodwill from the firm.
Following journal entry is passed :
Sacrificing Partners’ Capital A/c Dr
To Cash/ Bank A/c

iii) If the new partner is not in a position to bring the required amount of cash/ bank
for goodwill and firm gives him a loan so as to enable him to compensate the
sacrificing partners’.
Following journal entries will be passéd:

Loan to new partner A/c Dr

To Premium for goodwill A/c

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Premium for Goodwill A/c Dr

To Sacrificing partner’s Capital A/c (In case of fluctuating capitals)
Or
To Sacrificing partner’s Current A/c ( In the case of fixed capitals )

Accounting Treatment for goodwill

Q.1 A and B are partners’ sharing profit and losses in the ratio of 3:2. They admit C as a new
partner for 1/5th share in profit. The goodwill is valued at Rs. 50,000. C brings in the
necessary amount of premium. Pass the necessary journal entries in the books of the firm on
the assumption that no goodwill account is raised and the premium brought by C is retained
in business.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 10,000
To Premium for goodwill A/c 10,000
(Being share of goodwill brought in by new partner C)
10,000
Premium for goodwill A/c Dr 6,000
To A’s Capital A/c 4,000
To B’s Capital A/c
(Being C’s share of goodwill credited in sacrificing partner’s
capital a/c in their sacrificing ratio i.e., 3:2)

Notes:
(1) In the absence of a new ratio or sacrificing ratio, old ratio will be taken as sacrificing
ratio i.e., 3:2
(2) C’s share of goodwill = 50,000 x = Rs. 10,000
Problem 2. (All partners sacrifice)
A and B are partners sharing profit and losses in the ratio of 3:2. They admit C into the
partnership for 1/4th share in profits. C brings Rs. 3, 00,000 as capital and Rs. 1, 00,000 as
goodwill. New profit sharing ratio of the partners shall be 3:3:2. Pass necessary journal
entries.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 4,00,000
To Premium for goodwill A/c 1,00,000
To C’s Capital A/c 3,00,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

(Being the amount of goodwill and capital brought in

by new partners C)
1,00,000
90,000
10,000
Premium for goodwill A/c Dr
To A’s Capital A/c
To B’s Capital A/c
(Being the amount of goodwill distributed between A
and B in their sacrificing ratio i.e., 9:1)

Problem 3.(Sacrifice ratio is given)

A and B are partners sharing profit and losses in the ratio of 7:3. C is admitted as a
new partner for 3/7th share which he acquires 2/7th from A and 1/7th from B. C brings
in Rs. 40,000 as capital and RS. 15,000 as his share of goodwill. No goodwill appears
in books. Pass the necessary journal entries in the books of the firm.
Solution.

Journal

Rs. Rs.
Bank A/c Dr. 55,000
To C’s Capital A/c 40,000
To Premium for goodwill A/c 15,000
(Being the amount of goodwill and capital brought in by
new partners C)
15,000
Premium for goodwill A/c Dr
10,000
To A’s Capital A/c
5,000
To B’s Capital A/c
(Being C’s share of goodwill credited in sacrificing partner’s
capital a/c in their sacrificing ratio i.e., 2:1)

Problem 4. (Sacrificing ratio is to be calculated)

A and B are partners in a firm sharing profit and losses in the ratio of 3:2. A new partner C is
admitted. A surrenders 1/5th of his share and B 2/5th of his share in favour of C. For purpose
of C’s admission, goodwill of the firm is valued at Rs. 75,000 and C brings his share of
goodwill in cash which is retained in the firm’s books . Journalize the above transactions.

Solution.
Journal

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Rs. Rs.
Bank A/c Dr. 21,000
To Premium for goodwill A/c 21,000
(Being share of goodwill brought in by new partner C)
21,000
Premium for goodwill A/c Dr. 9,000
To A’s Capital A/c 12,000
To B’s Capital A/c
(Being C’s share of goodwill distributed between the
sacrificing partner in their sacrificing ratio i.e., 3:4)

Problem 5. (Premium is withdrawn by the sacrificing partners)

Shivangi and Subhika are partners in a firm sharing profit and losses in the ratio of 3:2.
Pragya is admitted into partnership for 1/5th share in profits. She brings in Rs. 30,000 as his
share of goodwill premium. The new profit sharing ratio between Shivangi, Subhika and
Pragya is 11:9:5. No goodwill account appears in the books. Show how the amount of
premium brought in by Pragya will be shared by Shivangi and Subhika and pass journal
entries assuming that the amount of goodwill is withdrawn fully by the old partners.
Solution.
Journal
Rs. Rs.
(i) Bank A/c Dr. 30,000
To Premium for goodwill A/c 30,000
(Being the amount of goodwill brought in by new partners
Thomas)
(ii) 30,000
Premium for goodwill, A/c Dr.
24,000
To Shaving’s Capital A/c
6,000
To Shubhika’s Capital A/c
(Being Pragya’s share of goodwill credited to sacrificing
partner’s capital a/c in their sacrificing ratio i.e. 4:1)
(iii) 24,000
Shaving’s Capital A/c Dr. 6,000
Subhika’s Capital A/c Dr. 30,000
To Bank A/c
(Being the whole amount of goodwill withdrawn by
partners concerned)

Problem 6. (Only one partner sacrifices)

A and B are the partners in a firm. Their profit sharing ratio is 5:3. They admit C into
partnership for 1/4th share. As between them A and B decide to share profits equally in
future. C brings in Rs. 20,000 as his capital and Rs. 10,000 as premium. Calculate the
sacrificing ratio and pass necessary journal entries on the assumption that the amount of
premium brought in by C is retained in business.
Solution.
Calculation of Sacrificing Ratio:

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Calculation of new profit sharing ratio:

Let us assume profit of firm = 1 (unit)
C’s share =

Remaining share = 1- =
This th share is to be shared by A and B in the ratio of 1:1. Therefore

A’s new share = of =

B’s new share = of =
New profit sharing ratio of A, B and C will be:
: :
: : = = 3:3:2
Sacrificing ratio = Old ratio- New ratio
A= - = or

B= - = 0 (No sacrifice)

Journal
Rs. Rs.
Bank A/c Dr. 30,000
To C’s Capital A/c 20,000
To Premium for goodwill A/c 10,000
(Being the amount of goodwill and capital brought in by
new partners C)
10,000
Premium for goodwill A/c Dr
10,000
To A’s Capital A/c
(Being C’s share of goodwill credited in sacrificing partner’s
capital a/c)

Problem 7. (Old goodwill to be written off)

A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into
partnership for 1/5th share. C brings Rs. 30,000 as capital and Rs. 10,000 as goodwill. At the
of time admission of C, goodwill appears in the balance sheet of A and B at Rs. 3,000. New
profit sharing ratio of the partners shall be 5:3:2. Pass necessary entries.
Solution.
Journal
Rs. Rs.
Bank A/c 40,000
To C’s Capital A/c Dr. 30,000
To Premium for goodwill A/c 10,000
(Being the amount of capital and goodwill brought in by
new partner C)

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Premium for goodwill A/c Dr 10,000 5,000

To A’s Capital A/c 5,000
To B’s Capital A/c
(Being amount of goodwill transferred to sacrificing
partner’s capital account in their sacrificing ratio i.e., 1:1)

A’s Capital A/c Dr. 1,800

B’s Capital A/c Dr. 1,200 3,000
To Goodwill A/c
(Being existing goodwill written off between old partners in
their old ratio i.e., 3:2)

Problem 8. (Partners’ current accounts)

A and B were partners in a firm sharing profit in the ratio of 4:3. They admitted C as a new
partner. The new profit sharing ratio between A, B and C will be 3:2:2. C brought Rs. 3,
00,000 for his share of goodwill premium. Pass the necessary journal entries for the
treatment of goodwill assuming that partners’ capitals are fixed.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 3,00,000
To Premium for goodwill A/c 3,00,000
(Being the amount of goodwill brought in by new partner)
Premium for goodwill A/c Dr. 3,00,000
To A’s Capital A/c 1,50,000
To B’s Current A/c 1,50,000
(Being the amount of goodwill distributed between
sacrificing partners in their sacrificing ratio i.e., 1:1)

Problem 9. (Premium brought in kind)

Anubhav and Babita are partners in a firm sharing profit in the ratio of 3:2. On April 1, 2003
they admit Deepak as a new partner for 3/13 share in the profits. Deepak contributed the
following assets towards his capital and for his share of goodwill: land Rs, 90,000, machinery
Rs. 70,000, stock Rs. 60,000 and debtors Rs. 40,000. On the date of admission of Deepak,
the goodwill of the firm was valued at Rs. 5, 20,000. Record necessary journal entries in the
books of firm.
Solution.
Journal
Rs. Rs.
Land A/c Dr. 90,000
Machinery A/c Dr. 70,000
Stock A/c Dr. 60,000
Debtors A/c Dr. 40,000
To Premium for goodwill A/c (5,20,000 x 3/13) 1,20,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

To Deepak’s Capital A/c (Balancing Figure) 1,40,000

(Being the amount of goodwill and capital brought in kind
by new partner)
1,20,000
72,000
Premium for goodwill A/c Dr 48,000
To Anubhav’s Capital A/c
To Babita’s Current A/c
(Being Deepak’s share goodwill credited to sacrificing
partners in their sacrificing ratio i.e., 3:2)

Problem 10. (Goodwill premium not brought in cash)

A and B are partners sharing profits in the ratio of 3:2. They admit C into partnership for
1/4th share. C is unable to bring his share of goodwill in cash. C brought Rs.3,00,000 for his
capital but could not bring any amount of goodwill. The goodwill of the firm is valued at Rs. 2,
10, 000. Give journal entries on C’s admission.
Solution.
Journal

Rs. Rs.
Bank A/c Dr. 3,00,000
To C’s Capital A/c 3,00,000
(Being the amount of capital brought in by new partners C)
C’s Current A/c Dr. 52,500
To A’s Capital A/c 31,500
To B’s Capital A/c 21,000
(Being C’s share of goodwill transferred to sacrificing
partners capital a/c in their sacrificing ratio i.e., 3:2)

Problem 11. (Goodwill premium not brought in cash)

Anirudh and Bhim are partners sharing profit in the ratio 7:5. Vishal is admitted with 2/9
share of profit. New profit sharing ratio will be 4:3:2. Vishal brings Rs. 5, 00,000 as his capital
but he is not able to bring in cash his share of goodwill of Rs. 1, 80,000. Pass journal entries.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 5,00,000
To Vishal’s Capital A/c 5,00,000
(Being the amount of capital brought in cash by new
partner)
1,80,000
Vishal’s Current A/c Dr.
1,12,500
To Anurudh’s Capital A/c
67,500
To Bhim’s Capital A/c
(For Vishal’s share of goodwill transferred to sacrificing

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

partners in their sacrificing ratio i.e., 5:3)

Problem 12. (Existing goodwill to be written off)

George and Henry are partners sharing profit and losses in the ratio of 3:2. They decided to
admit David as a new partner and to share future profit and losses equally. David brings in Rs.
50,000 as his capital. Goodwill of the firm is valued at Rs. 60,000.
Pass the necessary journal entries:
When no goodwill appears in books.
When goodwill appears at Rs. 50,000 in books.
Solution.
When goodwill does not appear in the books:
Journal

Rs. Rs.
Bank A/c Dr. 50,000
To David’s Capital A/c 50,000
(Being the amount of capital brought in cash by new
partner)
20,000
David’s Current A/c Dr.
16,000
To George’s Capital A/c
4,000
To Henry’s Capital A/c
(Being David’s share of goodwill credited to sacrificing
partners’ capital a/c in their sacrificing ratio i.e. 4:1)

(b)When goodwill appears in books

Journal
Rs. Rs.
George’s Capital A/c Dr. 30,000
Henry’s Capital A/c Dr. 20,000
To Goodwill A/c 50,000
(Being existing goodwill written off between old partners in
their old ratio i.e., 3:2)
50,000
Bank A/c Dr.
50,000
To David’s Capital A/c
(Being the amount of capital brought in cash by new
partners)
20,000
David’s Current A/c Dr. 16,000
To George’s Capital A/c
To Henry’s Capital A/c 4,000
(Being David’s share of goodwill credited to sacrificing
partners’ capital a/c in their sacrificing ratio i.e.)

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Problem 13. (Only part of goodwill premium is brought in cash)A and B sharing profit in the
ratio of 2:1, admit C for ¼ shares in profits. C pays Rs. 20,000 for capital and Rs 3,000 out of
his share of Rs. 4,200 for goodwill. The new profit sharing ratio between A, B and C will be
5:3:2. Give journal entries in connection with C’s admission.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 23,000
To C’s Capital A/c 20,000
To Premium for goodwill A/c 3,000
(Being the amount of capital brought in by new partners)
3,000
Premium A/c Dr.
1,200
C’s Current A/c Dr.
3,500
To A’s Capital A/c
700
To B’s Capital A/c
(Being C’s share of goodwill transferred to sacrificing
partners capital a/c in their sacrificing ratio i.e., 5:1)

Problem14. (Premium partly brought in cash)

Sheetal and Raman share profit equally. They admit Chinki into partnership. Chinki pays only
Rs. 1,000 for premium out of his share of premium of Rs. 1,800 for 1/4th share of profit.
Goodwill Account appears in the books at Rs. 6,000. All partners have decided that goodwill
should not appear in the books of the new firm. Journalize.
Solution.
Journal
Rs. Rs.
Bank A/c Dr. 1,000
To Premium for goodwill A/c 1,000
(Being amount of goodwill brought in cash by new partner)
Premium for goodwill A/c Dr 1,000
Chinki’s Current A/c Dr. 800
To Sheetal’s Capital A/c 900
To Raman’s Capital a/c 900
(for Chinki’s share of goodwill transferred to sacrificing
partners in their sacrificing ratio i.e., 1:1)
Sheetal’s Capital A/c Dr. 3,000
Raman’s Capital A/c Dr. 3,000
To Goodwill A/c 6,000
(Being existing goodwill written between old partners off in
their old ratio i.e. equal )

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Problem :15 A and B are in partnership sharing profits and losses in the ratio of 3 : 1. They
admit C for one third share of the profits. C brings Rs. 60,000 in cash for his share of
goodwill. As between themselves, A and B agree to share future profits and losses equally.
40% of Goodwill credited to him is withdrawn. Draft Journal entries showing the appropriation
of the premium money.

Solution: Journal
Date Particulars L.F Dr.(Rs.) Cr.(Rs.)
Cash A/c Dr. 60,000
To Premium for Goodwill A/c 60,000
(Being the amount brought in by D towards
goodwill)
Premium for Goodwill A/c Dr. 60,000
To A’s Capital A/c 60,000
(Being the goodwill credited to sacrificing partner)
B’s Capital A/c Dr. 15,000
To A’s Capital A/c 15,000
(Being A is compensated by B to the extent sacrifice
made by A in favour of B
A’s Capital Dr. 30,000
To Cash A/c 30,000
(Being 40% of goodwill given to A is withdrawn by
him)

Tutorial notes
Goodwill of the firm = Rs. 60,000X3/1 = Rs. 1,80,000
Sacrificing Ratio
Let Total Share = 1, Remaining Share = 1-1/3 = 2/3
A’s New Share = 2/3X1/2= 1/3, B’s New Share = 2/3X1/2 = 1/3
A’s Sacrifice = 3/4 -1/3 = 5/12, B’s Gain = 1/4 – 1/3 = (1/12)
Here , though B is an old partner but he is gaining . B is gaining at the cost of A’s
sacrifice , so B will have to compensate to the extent of his gain in the profit sharing ratio.
1,80,000 x 1/12 = 15,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Advanced Question
Problem 16 X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2. They
admit Z as a new partner for 1/5th share. As between themselves, X and Y decide to share
future profits & losses in the ratio of 13 : 7. The goodwill of the firm is valued at Rs. 25,000.
Goodwill already appears in the books at Rs. 20,000. Z brings in 60% of his share of firm’s
goodwill and Rs. 1,00,000 as his capital in cash. The amount of goodwill is withdrawn by the
concerned partners to the extent of 30% of what is credited to them. The profits for the first
year of new partnership amount to Rs. 1,00,000.
Required: Give the necessary journal entries to adjust goodwill and to distribute profit.

Answer-
JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
(i) X’s Capital A/c(Rs. 20,000 X 3/5) Dr. 12,000
Y’s Capital A/c (Rs. 20,000 X 2/5) Dr. 8,000
To Goodwill A/c 20,000
(Being the existing goodwill written off in the old ratio, i.e.
3 : 2)
(ii) Cash A/c (Rs. 1,00,000 + 60% of Rs. 5,000) Dr. 1,03,000
To Z’s Capital A/c 1,00,000
To Premium for Goodwill A/c 3,000
(Being the amount brought in by Z for his share of goodwill
and capital)
(iii) Premium for Goodwill A/c Dr. 3,000
Z’s Current A/c Dr. 2,000
To X’s Capital A/c 2,000
To Y’s Capital A/c 3,000
(Being the share of Z in goodwill credited to sacrificing
partners in their sacrificing ratio, i.e. 2 : 3)
(iv) X’s Capital A/c(Rs. 2,000 X 30/100) Dr. 600
Y’s Capital A/c (Rs. 3,000 X 30/100) Dr. 900
To Cash A/c(Rs. 5,000 X 30/100) 1,500
(Being 30% of the amount of goodwill credited to X & Y
withdrawn by them)
(v) Profit & Loss A/c Dr. 1,00,000
To X’s Capital A/c(Rs. 1,00,000 X 13/25) 52,000
To Y’s Capital A/c (Rs. 1,00,000 X 7/25) 28,000
To Z’s Capital A/c ( Rs. 1,00,000 X 5/25) 20,000
(Being the profit credited to all partners in their new profit
sharing ratio)

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Tutorial notes

Calculate of New Profit Sharing Ratio and Sacrificing

Ratio
Let Total Share = 1
Z’s Share = 1/5
Remaining Share = 1 – 1/5 = 4/5

X’s New Share = × =

Y’s New Share = × =

New Ratio of X, Y and Z = ; ; = 13 : 7 : 5

X’s Sacrifice = − =

Ys Sacrifice = − =

Master questions for full dress rehearsal

Problem 17 X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2.
They admit Z as a partner for ¼th share. Z acquires his share from X and Y in the ratio of 2 : 1.
The goodwill of the firm has been valued at Rs. 24,000. Goodwill already appears at Rs.
15,000. Pass the necessary journal entries under each of the following alternative cases.
Case(a) If Z brings his requisites share of firm’s goodwill in cash.
Case(b) If Z is unable to bring his requisite share of firm’s goodwill in cash.
Case (c) If Z brings only 60% of his requisite share of firm’s goodwill in cash.

Answer –
JOURNAL
Date Particulars L.F. Amount(Dr.) Amount(Dr.)
(i) Case(a)
X’s Capital A/c Dr. 9,000
Y’s Capital A/c Dr. 6,000
To Goodwill A/c 15,000
(Being the existing value of goodwill written off)
(ii) Cash A/c Dr. 6,000
To Premium of Goodwill A/c (Rs. 24,000X1/4) 6,000
(Being the amount of goodwill brought in by Z)
(iii) Premium of Goodwill A/c Dr. 6,000

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To X’s Capital A/c 4,000

To Y’s Capital A/c 2,000
(Being the share of Z in goodwill credited to X and Y
in their sacrificing ratio i.e. 2 : 1)
(i) Case(b)
X’s Capital A/c Dr. 9,000
Y’s Capital A/c Dr. 6,000
To Goodwill A/c 15,000
(Being the existing value of goodwill written off)
(ii) Z’s Current A/c Dr. 6,000
To X’s Capital A/c 4,000
To Y’s Capital A/c 2,000
(Being the share of Z in goodwill credited to X and Y
in their sacrificing ratio i.e. 2 : 1)
(i) Case(c)
X’s Capital A/c Dr. 9,000
Y’s Capital A/c Dr. 6,000
To Goodwill A/c 15,000
(Being the existing value of goodwill brought in by Z)
(ii) Cash A/c Dr. 3,600
To Premium of Goodwill A/c 3,600
(Being 60% of the share of goodwill brought in by Z)
(iii) Premium of Goodwill A/c Dr. 3,600
Z’s Current A/c Dr. 2,400
To X’s Capital A/c 4,000
To Y’s Capital A/c 2,000
(Being the share of Z in goodwill credited to X and Y
in their sacrificing ratio i.e. 2 : 1)

Problem 18 A and B are in partnership sharing profits and losses in the ratio of 3 : 1. They admit C
for one third share of the profits. As between themselves, A and B agree to share future profits and
losses equally.
Pass the necessary journal entries in each of the following alternative cases:
Case(a) If C brings in Rs. 15,000 in cash towards his share of firm’s goodwill.
Case(b) If C brings in Rs. 5,000 in cash & machinery worth Rs. 10,000 towards his share of firm’s
goodwill.
Case(c) If C unable to bring his share (Rs. 15,000) of firm’s goodwill in cash.
Case(d) If C brings in Rs. 9,000 out his share of Rs. 15,000 for goodwill in cash.

Answer –
(A) JOURNAL

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Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)

Cash A/c Dr. 15,000
To Premium for Goodwill A/c 15,000
(Being the amount brought in by C towards goodwill)
Premium for Goodwill A/c Dr. 15,000
To A’s Capital A/c 15,000
(Being the goodwill credited to sacrificing partner)
B’s Capital A/c (Rs. 45,000X1/12) Dr. 3,750
To A’s Capital A/c 3,750
(Being the adjustment made on account of change in
profit sharing ratio. B losses 1/12th of profit and
hence B compensates A for this loss in share of profit
thus, 1/12th of Rs. 45,000, Rs. 3,750)
(Firm’s goodwill Rs. 15,000X3/1 = Rs. 45,000)

Tutorial notes

Calculation of sacrificing Ratio

Let the Total Share be = 1, C’s Share = 1/3
Remaining Share = 1- 1/3 = 2/3
A’s New Share = 1/2X2/3 = 2/6, B’s Share = 1/2X2/3 = 2/6
Calculation of Sacrificing Ratio
Share Sacrificed (Gained) = Old Share – New Share
A’s Sacrifice = ¾ - 1/3 = 5/12, B’s Gain = ¼ - 1/3 = 1/12
(B) JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
Cash A/c Dr. 5,000
Machinery 10,000
To Premium for Goodwill A/c 15,000
(Being the amount brought in by C towards goodwill)
Premium for Goodwill A/c Dr. 15,000
To A’s Capital A/c 15,000
(Being the goodwill credited to sacrificing partner)
B’s Capital A/c (Rs. 45,000X1/12) Dr. 3,750
To A’s Capital A/c 3,750
(Being the adjustment made on account of change in

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profit sharing ratio. B losses 1/12th of profit and

hence B compensates A for this loss in share of profit
thus, 1/12th of Rs. 45,000, Rs. 3,750)
(Firm’s goodwill Rs. 15,000X3/1 = Rs. 45,000)

(C) JOURNAL
C’s Current A/c Dr. 15,000
To A’s Capital A/c 15,000
(Being the goodwill credited to sacrificing partner)
B’s Capital A/c (Rs. 45,000X1/12) Dr. 3,750
To A’s Capital A/c 3,750
(Being the adjustment made on account of change in
profit sharing ratio. B losses 1/12th of profit and
hence B compensates A for this loss in share of profit
thus, 1/12th of Rs. 45,000, Rs. 3,750)
(Firm’s goodwill Rs. 15,000X3/1 = Rs. 45,000)

(D) JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
Cash A/c Dr. 9,000
To Premium for Goodwill A/c 9,000
(Being the amount brought in by C towards goodwill)
Premium for Goodwill A/c Dr. 9,000
C’s Capital A/c Dr. 6,000
To A’s Capital A/c 15,000
(Being the goodwill credited to sacrificing partner)
B’s Capital A/c (Rs. 45,000X1/12) Dr. 3,750
To A’s Capital A/c 3,750
(Being the adjustment made on account of change in
profit sharing ratio. B losses 1/12th of profit and
hence B compensates A for this loss in share of profit
thus, 1/12th of Rs. 45,000, Rs. 3,750)
(Firm’s goodwill Rs. 15,000X3/1 = Rs. 45,000)

What is hidden goodwill and how is it calculated ? ( ISC

2004)

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When the value of goodwill is not given at the time of admission on partner , but it is to be
inferred by deducting the adjusted capital of all the partners from the capital of the entire firm
taking the capital of new partner as a basis .Following steps are to be taken to calculate the
hidden goodwill.
a) Find out the capital of the entire firm taking the capital of the new partner as a basis.
b) Sum the capital of all the partners if capital is fixed only capital will be taken for this
purpose , on the other hand if the capital is fluctuating capital will be calculated as
follows :Capitals of all the partners + Reserves and surplus + Profit on revaluation –
Goodwill given in the assets side –loss of the business – loss on revaluation .
c) Total capital of firm calculated from step A less Total capital calculated from step B =
Hidden goodwill .

Problem 19 A and B are partners with capitals of Rs. 5,000 each. They admit C as a partner
with 1/4th share in the profits of the firm. C brings Rs. 8,000. The Profit and Loss Account
showed a credit balance of Rs. 4,000 as on date of admission of C. Give the necessary journal
entries on C’s admission with regards to Capital & Goodwill.

Answer –
JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
Bank A/c Dr. 8,000
To C’s Capital A/c 8,000
(Being the amount brought in by C)
C’s Current A/c (Rs. 10,000X1/4) Dr. 2,500
To A’s Capital A/c 1,250
To B’s Capital A/c 1,250
(Being the share of C in the hidden goodwill adjusted
through capital accounts by crediting sacrificing
partners in their sacrificing ratio)

Tutorial notes

CALCULATION OF HIDDEN GOODWILL

Particulars Rs.
A. Net Worth (including goodwill) of new firm on the basis of Capital brought in by
Incoming Partner(Rs.8,000 x4/1) 32,000
B. Less: Net Worth (excluding goodwill) of new firm (Adjusted old Capitals of old 22,000
partners + Incoming Partner’s Capital) Rs 18,000 ( Capital of all the partners ) + Rs
4,000 ( Profit )
C. Value of Goodwill[A-B] 10,000

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New partner is supposed to bring Rs 10,000 x ¼ = 2,500 for his share of goodwill, but nothing is given in
the question in this regard , so we should adjust his share of goodwill.
Problem 20 A and B who share the profits & losses in the ratio of 3 : 2 are partners with Capitals of
Rs. 30,000 and Rs. 20,000. On date of C’s admission, P & L A/c(Cr.), balance Rs. 6,000. Reserves
Rs. 55,000, Advertisement Expenditure(Deferred Revenue) Rs. 1,000.
They admit C as a partner with 1/5th share in the profits of the firm, C brings Rs.40,000, Give the
necessary journal entries on C’s admission with regard to capital and goodwill.

Answer –
JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)s
Bank A/c Dr. 40,000
To C’s Capital A/c 40,000
(Being the amount brought in by C)
C’s Current A/c(Rs. 50,000X1/5) Dr. 10,000
To A’s Capital A/c (Rs. 10,000X3/5) 6,000
To B’s Capital A/c (Rs. 10,000X 2/5) 4,000
(Being the share of C in the hidden goodwill adjusted
through capital accounts by crediting sacrificing
partners in their sacrificing ratio)

Tutorial notes

CALCULATION OF HIDDEN GOODWILL

Particulars Rs.
A. Net Worth (including goodwill) of new firm on the basis of Capital brought in by
Incoming Partner(Rs. 40,000X5/1) 2,00,000
B. Less: Net Worth (excluding goodwill) of new firm (Adjusted old Capitals of old 1,50,000
partners + Incoming Partner’s Capital) [Rs. 30,000 + Rs. 20,000 + Rs. 55,000 + Rs.
6,000 – Rs. 1,000) + Rs. 40,000]
C. Value of Goodwill[A-B] 50,000

Test your self

Q.1 A and B are partners sharing profits in the ratio of 3:2 C is admitted paying a premium of Rs.
2, for 1/4th share of profits. Shares of A and B remaining as before. No. Goodwill account appears in
the books

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Q.2. A and B are partners sharing profits in the ratio of 3:2 C is admitted paying a premium of Rs.
2:4 for 1/4th share of profits which he acquires 1/6th from A and 1/12th from B.No goodwill appears
in the books.

Q 3. A and B are partner sharing profits in the ratio of 3:2 Goodwill appears in the books at Rs.
3,000 C admitted into partnership on payment of Rs. 2,000 for 1/4th share. A and B between
themselves sharing future profit and losses equally.

Q.4. A B and C are partners sharing profits in the ratio of 3:2:1. The goodwill does not appear in
the books but it is worth Rs. 3000. The partners will share profits in future equally.

Q.5. A and B are partners sharing profits in the ratio of 3:1 respectively. Goodwill appears in the
books at Rs. 1,000 C is admitted into the partnership on a payment of Rs. 2,000 as goodwill for 2/5th
share. His share of goodwill was calculated at Rs. 2,400.

Q.6. A and B are partners sharing profits and losses in the ratio of 2:1 respectively. They admit C
for 2:7 share. The actual value of goodwill, however on the date of admission is Rs. 14,000. C
contributes the following assets towards payment of the capital and goodwill. Cash Rs. 1,000; Sundry
Debtors Rs. 5000. Stock Rs. 6,000 and good will Rs. 6,000.

Q.7. A and B are partners with capitals of Rs. 26,000 and Rs. 22,000 respectively. They admit C as
a partner with 1/4th share in the profits of the firm C brings Rs. 26,000 as his share of capital Give
Journal entry to record goodwill on C’s admission.

Q.22. X and Y are partners sharing profits in the ratio of 5:4.They admits Z in the firm for 1/3rd
profit which she takes 2/9th from X and 1/9th form Y and bring Rs. 1,500 as premium. Pass the
necessary Journal entries on Z’s admission.
Q.8. A and B are partners sharing profits in the ratio of 3:2. They admit C into partnership for
1/4th share C is unable to bring his share of goodwill in cash. The goodwill of the firm is valued at Rs.
21,000 Give journal entry for the treatment of goodwill on C’s admission.

Q.9. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into
partnership for 1/5th share C brings Rs. 30,000 as capital and Rs. 10,000 as goodwill. At the time of
admission of C, goodwill appears in the balance sheet of A and B at Rs. 3,000. New profit sharing of
the partners shall be 5:3:2 Pass necessary entries.

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Q.10. A and B partners sharing profits in ratio of 3:2. They admit C as a new partner. C pays a
premium of Rs. 1,000 for 1/4th share of profits. The new ratio is 3:3:2 Goodwill account appears in
the books at Rs. 1,000. Give the necessary journal entries.

Gaur’s Mantra for Solving problems of

admission of a partner.
Baby Steps
Step- 1. Prepare Revaluation A/c to ascertain the profit or loss on revaluation. And
transfer resulting profit and loss on revaluation in the capital account accordingly.
Step -2 Calculate Goodwill if it is not given and calculate new and sacrificing profit
sharing ratio.
Step -3 Now look at the Liabilities side and put capital balances accordingly in the
capital A/c and Reserve and Surplus should be distributed in old partners in old ratio
unless otherwise is stated in the question. Please never distribute Provident fund,
gratuity fund , staff welfare fund and machinery replacement fund as they are not the
part of Reserve and surplus . They are long term provisions .
Step -4 Now look at the Assets side and Goodwill, Misc Expenditure/ Special
Advertisement and Profit and Loss A/c ( Loss ) should be written off in old partners in
old ratios in the debit side of capital account .
Step -5 If question says that the above items given in Step3 and 4 are not to be
distributed or they should remain as it is . you should pass adjusting entry for that
above explained above .
Step -6 If a partner has taken over any asset it should be debited to his/ her capital
account in order to adjustment it against capital account . On the other hand , if a
partner has assumed any liability , it should be credited to his capital A/c in order to
increase his/ her capital .
Step -7. Now make treatment for capital and amount of goodwill he/she brought in
the firm or fails to bring ( Goodwill) as explained above .
Step -8 Now balance the capital A/c and brought it forward .
Step -9 If question asks to adjust the capital on the basis of new partner or on some
other basis , adjust the capital accordingly and transfer the balance between brought
forward capital balances and adjusted capital as the per the instruction given in the
question .

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8 to 12 Marks questions
Q.1 Given Below in the Balance Sheet of Krishna and Suresh,Who are partners in a firm sharing
profits in the ratio of 3: 2
Liabilities Rs Assets Rs.
Creditors 15,000 Plant and machinery 30,000
Reserves 5,000 Patents
5,000
Capital A/cs: Furniture
Krishna 30,000 Stock 3,000
Suresh 20,000 50,000 Debtors 16,000
Cash
15,000
1,000
70,000 70,000

On that date, Mohan is admitted as a partner for 1/5th share on the following terms:
He is to contribute Rs. 14,000 as his share of capital which includes his share of premium for goodwill.
Goodwill is valued at two years’ purchase of the average profits of the last four years, which were Rs.
10,000, Rs. 9,000, Rs. 8,000 and Rs. 13,000 respectively.
Plant to be written down to Rs. 25,000 and Patents written up by Rs. 8,000.
Rs 10,000 paid for license fee for the year ending 30th sep , 2011 had been written off in the profit and loss
account .
Prepare the Revaluation Account, Partners’ Capital Account and the Balance Sheet of the firm to give effect
to the above arrangements.
Solution.
Dr. REVALUAITON ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Plant A/c 5,000 By Patents A/c 8,000
To Profit transferred to By prepaid license fees 5,000
Krishna’s
Capital A/c 4,800
Suresh’s
Capital A/c 3,200 8,000
13,000 13,000

Dr. PARTNERS’ CAPITAL A/C Cr.

Particulars Krishna Suresh Mohan Particulars Krishna Suresh Mohan
Amt. Amt. Amt. Amt. Amt. Amt.
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

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To Balance c/d 40,200 26,800 10,000 By Balance b/d 30,000 20,000 ---
By Cash A/c --- --- 10,000
By Reserve 3,000 2,000 ---
By Premium for ---
goodwillA/c 2,400 1,600 ---
By Revaluation 4,800 3,200 ---
A/c

40,200 26,800 10,000 40,200 26,800 10,000

BALANCE SHEET (AFTER ADMISSION)

as at…………..
Liabilities Rs. Assets Rs.
Creditors 15,000 Cash 15,000
Capital A/c Debtors 15,000
Krishna 40,200 Stock 16,000
Suresh 26,800 Furniture 3,000
Mohan 10,000 77,000 Patents 13,000
Plant and Machinery 25,000
Prepaid license fees 5,000
92,000 92,000

Tutorial notes :

i) Goodwill be to be calculated by average profit method :

Formula = Average profit x Purchasing years = Goodwill
Firm’s Goodwill = Rs . 10 ,000  Rs .9,000  Rs .8,000  Rs .13,000  2
4
Mohan’s Share of Goodwill = Rs. 20,000 x 1/5 = Rs. 4,000

ii) Goodwill is always distributed in sacrificing partners in sacrificing ratios . In the absence of
any agreement it is assumed that old partners are sacrificing partners are sacrificing in the
old ratios . Therefore , in this case old ratios will the sacrificing ratios .

Q.2. A, B and C were in partnership sharing profit in the equal proportions .Their Balance
sheet as at 31st March, 2016 was as under :
Liabilities Rs Assets Rs

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Sundry creditors 50,000 Goodwill 12,000

Bills Payable 20,000 Advertisement suspense 12,000
Provident fund 10,000 Plant and Machinery 5,00,000
Workmen compensation fund 12,000 Furniture and fixture 2,20,000
Capital Accounts : Inventory 12,000
A 3,00,000
B 2,20,000
C 1,20,000 6,40,000
Current Accounts :
A 12,000
B 8,000
C 4,000 24,000

7,56,000 7,56,000
st
On 1 April ,2016 ,D was introduced as a partner ,bringing in Rs 1,00,000 in cash as his capital and a
further Rs 15,000 for his share of goodwill .He was to take 1/4th share of profits . Claim against the
workmen compensation fund amounted to Rs 3,000
Make the necessary journal entries to record the above transactions and prepare the opening Balance sheet of
the new firm .
SOLUTION :

JOURNAL
Date Particulars Dr.(Rs) Cr. (Rs)
L.F
2004 A’s Current A/c Dr. 4,000
Feb. 1 B’s Current A/c Dr. 4,000
C ‘s Current A/c Dr. 4,000
To Goodwill A/c 12,000
(Being Goodwill written off in the ratio 1:1:1)
4,000
A’s Current A/c Dr
4,000
B’s Current A/c Dr
4,000
C’s Current A/c Dr
12,000
To Advertisement Suspense A/c
( Being advertisement suspense written off in
1:1:1)
Bank A/c Dr. 1,15,000
To D’s capital A/c 1,00,000
To Premium for goodwill A/c 15,000
( Being the amount of capital and premium for
goodwill introduced by D)

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Premium for goodwill A/c Dr

To A’s Current A/c 15,000
To B’s Current A/c 5,000
To C’s Current A/c 5,000
(Being Premium for the goodwill transferred to A’s 5,000
and B’s Current Accounts in their sacrificing ratio i.e.
1:1:1)
Workmen compensation fund Dr.
12,000
To claim against the workmen compensation fund
3,000
To A’s Current A/c
3,000
To B’s Current A/c
3,000
To C’s Current A/c
3,000
(Being workmen compensation fund Credited to
Current A/c in Old Ratio after adjusting the claim)

PARTNER’S CURRENT ACCOUNTS

Particulars A B C Particulars A B C

To GoodwillA/c 4,000 4,000 4,000 By Bal. b/d 12,000 8,000 4,000

ToAdvertisement 4,000 4,000 4,000 By Premium for Goodwill
suspense A/c 5,000 5,000 5,000
To Bal. c/d 12,000 8,000 4,000 By Workmen
compensation fund 3,000 3,000 3,000

20,000 16,000 12,000 20,000 16,000 12,000

BALANCE SHEET
as at 1st Feb.2004
Liabilities Rs Assets Rs

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Sundry creditors 50,000 Plant and Machinery 5,00,000

Bills Payable 20,000 Furniture and fixture 2,20,000
Provident fund 10,000 Inventory 12,000
Claim aginst the workmen Bank 1,15,000
compensation fund 3,000
Capital Accounts :
A 3,00,000
B 2,20,000
C 1,20,000
D 1,00,000
Current Accounts :
A 12,000
B 8,000
C 4,000

8,47,000 8,47,000

Tutorial notes :

1) Advertisement suspense is a fictitious assets and will be written off in old partners in old ratios.
2) In pursuance of Accounting standard 26, which says only those assets for which something has
been paid in money and money’s worth should be recorded in the books of accounts , goodwill is a
self generated assets and should be written off .
3) Provident fund is a long term provision and provisions are not distributed among the partners ,
only

Q.3.A, B, C are partner sharing profits and losses in the ratio of 2 : 2 : 1 respectively.
Their Balance Sheet as on 31st March 2003 is as given below :
BALANCE SHEET as on 31st March 2003

Liabilities Rs. Assets Rs.

Sundry Creditors 52,000 Land and Building 1,00,000
O/s Liabilities 6,000 Furniture 26,000
General Reserve 26000 Stock 47,000
Provident Fund 4,400 Sundry Debtors 22,000
Capital : Goodwill 5000
A 48000 Cash 4,400
B 48000
C

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2,04,400 2,04,400

The partner decided to admit Mr. D as a partner with effect from 1st April 2003, on the following
terms :
(i) Mr. D will bring Rs. 20,000 as capital and Rs. 10,000 as his share of goodwill.
(ii) Mr. D could bring only Rs. 2,500 as goodwill in cash.
(iii) The value of stock should be increased by Rs. 10,000. The furniture should be depreciated by 10%
and value of land and building should be enhanced by 20%.
(iv) Provision for bad and doubtful debts should be made at 10% of the debtors.
(v) The outstanding liability includes Rs. 2,000 due to Mr. R which has been paid by Mr. A privately.
Necessary
entry is to be passed to reimburse Mr. A before admitting the new partner.
(vi) The new profits sharing ratio for A, B, C, D is 5 : 5 : 3 : 2.
(vii) Creditors include Rs. 5,000 received as commission from Mr. X.

Give necessary journal entries to incorporate the above changes. Also prepare capital accounts of
partners and balance sheet of the new firm. ( ISC 2004 )

Answer-3
Revaluation A/c

Particular Rs. Particular Rs.

To Furniture 2,600 By Stock 10,000
To Provision for doubtful debts 2,200 By Land & Building 20,000
To Partners Capital A/c By Creditor 5,000
A 12,080
B 12,080
C 6,040
30,200

35,000 35,000

Particular A B C D Particular A B C D
To Goodwill 2,000 2,000 1,000 By Balance b/d 48,000 48,000 20,000
By Bank 20,000
ByGeneralReserve 10,400 10,400 5,200
ByRevaluationA/c 12,080 12,080 6,040
By Outstanding 2,000
Liability A/c -
By Premium for 1,250 1,250
To Balance 75,480 73,480 30,240 20,000 goodwill
c/d By D’s Current A/c 3,750 3,750

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Total 77,480 75,480 31,240 20,000 Total 77,480 75,480 31,240 20,000

Tutorial notes :

Calculation of sacrificing ratio= Old Ratio- New Ratio

Old Ratio New Ratio
A 2/5 5/15 = 6-5/15 = 1/15(sacrfice)
B 2/5 5/15 = 6-5/15 = 1/15(sacrifice)
C 1/5 3/15 = No Change
D - 2/15 = 2/15(gain)
So above calculation shows clearly that A & B sacrifice in the ratio of 1:1 in favaur of C.
C’ s capital A/c will be credited for amount of goodwill.

Balance Sheet
As on 1st April, 2003
Liabilities Rs. Assets Rs.
Capital- Cash 26,900
A 75,480 Sundry Debtors 22,000
B 73,480 Less: Provision Bad debts 2,200 19,800
C 30,240 Stock in trade 57,000
D 20,000 1,99,200 Furniture 23,400
Land & Building 1,20,000
Employees Provident fund A/c D,s Current A/c 7,500
Outstanding Liability 4,400
Creditor 4,000
47,000

2,54,600 2,54,600

Home assignment 1
On 31st December, 2004, the Balance Sheet of A and B, who are partners in a firm sharing profits in
the ratio of 3:2
Liabilities Rs. Assets Rs.
Capital A/c Plant and Machinery 10,000
A 10,000 Land and Building 8,000
B 8,000 Debtors 12,000
General Reserve 15,000 Less: Provision for
Workmen’s Compensation Fund 5,000 Doubtful Debts 1,000 11,000
Creditors 12,000 Stock 12,000
Cash 9,000

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50,000 50,000

They agreed to admit C into partnership for 1/5th share of its profits on the following terms:
Provision for Doubtful Debts would be increased by Rs. 2,000.
The value of Land and Building would be increased to Rs. 18,000.
The value of Stock would be increased by Rs. 4,000.
The liability against Workmen’s Compensation Fund is determined at Rs. 2,000.
C brought in as his share of goodwill Rs. 10,000 in cash.
C would bring further cash as would make his capital equal to 20% of the total capital of the new firm,
after the above revaluation and adjustments are carried out.
Prepare the Revaluation Account, Partners’ Capital Account and the Balance Sheet of the firm after C’s
admission.
(Delhi I 2005 C)

Home assignment 2
A and B are partners in a firm sharing profits in the ratio of 3:2. Their Balance Sheet as at 31st
December, 2004 Stood as:
Liabilities Rs. Assets Rs.
Creditors A/c Machinery 33,000
A 35,000 Furniture 15,000
B 30,000 65,000 Investments 20,000
General Reserve 10,000 Stock 23,000
Bank Loan 9,000 Debtors 19,000
Creditors 36,000 Less: Provision for 17,000
Doubtful Debts 2,000 12,000
Cash
1,20,000 1,20,000

On that date, they admitted C into partnership for 1/4th share in the profit on the following terms:
C brings capital proportionate to his share. He brings Rs. 7,000 in cash as his share of goodwill.
Debtors are all good.
Depreciate Stock by 5% and Furniture by 10%.
An outstanding bill for repairs Rs. 1,000 will be brought in the books.
Half of the Investments were to be taken over by A and B in their profit-sharing ratio at book value.
Bank loan is paid off.
Partners agreed to share future profits in the ratio of 3:3:2.
Prepare the Revaluation Account, Partners’ Capital Account and the Balance Sheet after admission of C
into the partnership.
(AI 2005 C)

Q.4 On 31st March 2010 the balance sheet of W and R who shared profit in 3:2 ratio was as
follows:

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Liabilities Rs Assets Rs.

Creditors 20,000 Cash 5,000
Profit and Loss A/c 15,000 Sundry Debtors 20,000
Capital A/cs 70,000 Loss: Provision 700 19,300
W 40,000 Stock 25,000
R 30,000 Plant & Machinery 35,000
Patents 20,700

1,05,000 1,05,000

On the date B was admitted as a partner on the following conditions:

(i) B will get 4/15th share of profits.
(ii) B had to bring Rs. 30,000 as his capital to which amount. Other partners’ capitals shall have to be
adjusted.
(iii) He would pay cash for his share of goodwill which would be based on 2½ years’ purchase of average
profits of past 4 years.
(iv) The assets would be revalued as under:
Sundry debtors at book value less 5% provision for bad debts. Stock at Rs. 20,000, Plant and Machinery
at Rs. 40,000.
(v) The profit of the firm for the years 2007, 2008 and 2009 were Rs. 20,000, Rs. 14,000, Rs. 17,000
respectively
Prepare the Revaluation Account, Partners’ Capital Account and the Balance Sheet of the new firm.
( CBSE 8 Marks )

Solutions:
Dr. Partners’ Capital A/c Cr.
Particulars W R B Particulars W R B

To Revaluation A/c(Loss) 180 120 - By Balance b/d 40,000 30,000 -

By Profit and Loss A/c 9,000 6,000
To Balance c/d 55,420 40,280 By Premium for 6,600 4,400 -
- Goodwill
-
55,600 40,400 55,600 40,400 -
To Cash A/c(Bal. Fig.) 5,920 7,280 By Balance b/d 55,420 40,280
To Balance c/d 49,500 33,000 30,000 By Cash 30,000

55,420 40,280 30,000 55,420 40,280 30,000

BALANCE SHEET
as at 31st March, 2010

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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Liabilities Rs. Assets Rs.

Creditors 20,000 Cash 32,800

Capital Accounts: Sundry Debtors 20,000
W 49,500 Less: Provision for
R 33,000 Bad debts 1,000 19,000
B 30,000 1,12,500 Stock 20,000
Plant and Machinery 40,000
Patents 20,700
1,32,500 1,32,500

Tutorial notes :

1. Average Profits =
.
.
Rs. 20,000 + Rs. 14,000 + Rs. 17,000 + Rs. 15,000
= Rs. 16,500
4
2. Value of Goodwill = Average Profit x No. of years Purchase
= Rs. 16,500x5/2= Rs. 41,250
3. B’s Shares in Goodwill = Rs. 41,250 x 4/15 = Rs. 11,000
4. Calculation of New Profit Sharing Ratio:

New Profit Share = Old Share of Partner – Sacrifice Share of Partner

New Share of W = -( × ) = =
New Share of R = -( × )= =
New Share of B =
New Profit Sharing Ratio = 33 : 22 : 20
Note: In the absence of any information or contrary agreement sacrificing share is old share.
5. Adjustment of Capital of Old Partners

Capital
X of X
new x Reciprocal of his X New profit=Adjusted
sharing
partner share Ratios
capital

X X =
Rs. 30,000 x 33 : 22 :20

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Capital of W = 1,12,500 x 33/75 = 49,500 ; Capital of R = 1,12,500 x 22/75 = 33,000;

Capital of B = 1,12,500 x 20/75 = 30,000

Q.5 S and T were partners in firm sharing profits in the ratio of 7:3. Their Balance Sheet as at 31st
March, 2010 was as follows:
Liabilities Rs. Assets Rs.
Creditors 40,000 Bank 36,000
Bank Overdraft 20,000 Debtors 46,000
General Reserve 10,000 Less: Provision 2,000 44.000
Capital A/cs: Stock 50,000
S 50,000 90,000 Machinery 30,000
T 40,000

1,60,000 1,60,000
On 1st April, 2010 they admitted R as a new partner for ¼ share in profits on the following terms:
i) R will bring Rs. 30,000 for this capital and Rs. 10,000 for goodwill premium.
ii) 20% of General Reserve will be transferred to provision for bad and doubtful debts.
iii) Stock and Machinery will be depreciated by 40%.
iv) Capital account of S and T will be adjusted on the basis of R’s capital, for this purpose actual cash will be
brought in or paid off to S and T as the case may be.
Prepare the Revaluation Account, Partners’ Capital Account and Balance Sheet of the firm.
(CBSE 8 Marks)

Solution.
Revaluation A/c

Particulars Rs. Particulars Rs.

To Stock 20,000 By Loss transferred to:
To Machinery 12,000 S’s Capital A/c 22,400
T’s Capital A/c 9,600 32,000

32,000 32,000

Dr. Partners’ Capital A/c Cr.

Particulars S T R Particulars S T R

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

To Revaluation A/c 22,400 9,600 By Balance b/d 50,000 40,000 -

By General Reserve 5,600 2,400 -
To Balance c/d 40,200 35,800 30,000 By Premium for
Goodwill 7,000 3,000
By Bank A/c 30,000

62,600 45,400 30,000 62,600 45,400 30,000

To Bank (Bal.) 8,800 By Balance b/d 40,200 35,800 30,000
To Balance C/d 63,000 27,000 30,000 By Bank A/c(Bal.) 22,800

63,000 35,800 30,000 63,000 35,800 30,000

BALANCE SHEET OF NEW FIRM

as on 1 st April 2010
Particulars Rs. Particulars Rs.
Creditors 40,000 Bank (WN 3) 90,000
Bank Overdraft 20,000 Debtors 46,000
Capital A/cs: Less: Provision
S 63,000 (Rs. 2,000 + Rs.2,000) 4,000 42,000
T 27,000 Stock 30,000
R 30,000 1,20,000 Machinery 18,000
1,80,000 1,80,000

Tutorial notes :

New profit-sharing ratio will be calculated as under:

Let us assume that Total is 1, and R is admitted for 1/4th share of profit
Remaining share of profit after giving 1/4th share in profit to R is ¾.
Remaining ¾ profit will be shared by S and T in their old profit-sharing ratio, i.e.,
3 7 21
S’s Share =  
4 10 40

3 3 9
T’s Share =  
4 10 40

New Profit-Sharing ratio of S, T and R = 21 /40 : 9/40 : 10/40 OR 21: 9: 10

In the absence of any contrary agreement , old partners will sacrifice in their respective profit
sharing ratio . So old profit sharing ratio and sacrificing ratio will be the same ..

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Calculation of adjusted capital

X X X =Adj
Capital of new Reciprocal of his New Profit
x x = Adjusted
partner share Sharing Ratio
ca capi Capital

x X X 21 : 9 :10
=Rs. 30,000

Capital of w= 63,000 ; Capital of R = 27,000; Capital of B = 30,000

i) In this question out of general reserve of Rs 10,000 ,20% will be transfer to provision for
bad debts and the remaining Rs 8,000 will be distributed in old partners in old ratios.

ii)Note carefully : Such provision will not be debited to revaluation A/c as it is not been
created out of profit of revaluation A/c . Secondly , such provision will be added to the
existing provision and will be shown in assets side of balance sheet as deduction against
debtors .

Home assignment 3
The Balance Sheet of Madan and Mohan who share profits and losses in the ratio of 3:2, as at 31st
March, 2010 was as follows: (Foreign 2011)

Liabilities Rs. Assets Rs.

Creditors 28,000 Cash at Bank 10,000
Workmen’s Compensation Fund 12,000 Debtors 65,000
General Reserve Less: Reserve for Doubtful
Capital A/cs: 20,000 Debts 5,000 60,000
Madan 60,000 Stock 30,000
Mohan 40,000 Investments 50,000
1,00,000 Patents 10,000
1,60,000 1,60,000

They decided to admit Gopal on 1st April, 2010 for 1/4th share on the following terms:

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Gopal shall bring Rs. 25,000 as his share of premium for goodwill.
That unaccounted accrued income of Rs. 500 be provided for..
The market value of investments was Rs. 45,000.
Bad Debts Recovered Rs. 800.
A claim of Rs. 2,000 on account of workmen’s compensation to be provided for.
Patents are undervalued by Rs. 5,000
Gopal to bring in capital equal to 1/4th of the total capital of the new firm after all adjustments.

Prepare the Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the
new firm.
( CBSE 8 Marks )
Home assignment 4
A and B were partners of a firm sharing profits in the ratio of 3:2. They admitted C as a new partner
for 1/6th share in the profits. C was to bring Rs. 40,000 as his capital and the capitals of A and B
were to be adjusted on the basis of C’s Capital having regard to profit-sharing ratio. The Balance
Sheet of A and B as at 31st March, 2006 was:
BALANCE SHEET
as at 31st December, 2004
Liabilities Rs. Assets Rs.
Creditors 36,000 Cash 10,000
Bills Payables 20,000 Debtors 34,000
Generals Reserve 24,000 Stock 24,000
Capitals A/c: Machinery 42,000
A 1,50,000 Building 2,00,000
B 80,000 2,30,000
3,10,000 3,10,000

The other terms of agreement on C’s admission were:

C will bring Rs. 12,000 for his share of goodwill.
Building will be valued at Rs. 1, 85,000 and Machinery at Rs. 40,000.
A Provision of 6% will be created on Debtors for Doubtful Debts.
Capital accounts of A and B will be adjusted by opening Current Accounts.
Prepare the Revaluation Account, Partners’ Capital Account s and the Balance Sheet of A,B and C.
(CBSE 8 Marks )Delhi 2007)
Q.6X and Y are partners in a firm sharing profits in 3:1 ratio. They admitted Z as a new partner for
1/4th share in the profits. Z was to bring Rs. 20,000 as his capital and the capitals of X and Y were
to be adjusted on the basis of Z’s Capital in the profit-sharing ratio. The Balance Sheet of X and Y
as at 31st March, 2006 was:

Balance Sheet
as at 31st March, 2006
Liabilities Rs. Assets Rs.
Creditors 18,000 Cash 5,000
Bills Payables 10,000 Debtors 17,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

General Reserve 12,000 Stock 12,000

Capitals A/c: Machinery 21,000
X 25,000 Building 20,000
Y 10,000 35,000
75,000 75,000

Other terms of agreement on Z’s admission were as follows:

Z will bring Rs. 6,000 for his share of goodwill.
Building will be valued at Rs. 25,000 and Machinery at Rs. 19,000.
A Provision at 5% on Debtors will be created for Doubtful Debts.
Capital Account of X and Y were adjusted by opening Current Accounts.
Prepare the Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of X, Y and Z.
(CBSE 8 Marks )

Solution.
Dr. REVALUAITON ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Machinery A/c 2,000 By Building 5,000
To Provision for Doubtful A/c 850
To Profit on Revaluation transferred to:
X’s Capital A/c (3/4) 1,613
Y’s Capital A/c (1/4) 537
5,000 5,000

Dr. PARTNERS’ CAPITAL A/C Cr.

Particulars X Y Z Particulars X Y Z
To Balance c/d 40,113 15,037 20,000 By balance b/d 25,000 10,000 --
By Revaluation 1,613 537 --
By General 9,000 3,000 --
Reserve -- -- 20,000
By Cash A/c 4,500 1,500 --
By Premium for
goodwill A/c

40,113 15,037 20,000 40,113 15,037 20,000

To Y’s Current A/c -- 37 -- By Balance b/d 40,113 15,037 20,000

To Balance c/d 45,000 15,000 20,000 By X’s Current A/c 4,887 -- --
45,000 15,037 20,000 45,000 15,037 20,000

Balance Sheet

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

as at 1st March, 2006

Liabilities Rs. Assets Rs.
Creditors 18,000 Cash (Rs. 5,000+6,000+20,000) 31,000
Bills Payable 10,000 Debtors 17,000
Capital A/cs: Less: Provision for Doubtful
X 45,000 Debts 850 16,150
Y 15,000 Stock 12,000
Z 20,000 80,000 Machinery 19,000
Y’s Current A/c 37 Building 25,000
X’s Current A/c 4,887
1,08,037 1,08,037

Tutorial notes :
Calculation of new profit sharing ratio
Z joins the firm for 1/4th share of profit.
Profit remaining after giving share to new partner is
1-1/4 =3/4
Now the remaining share will be shared by X and Y in the ratio of 3:1
So, X’s Share = 3/4 x 3/4 = 9/16 and
Y’s share = 3/4 x 1/4 = 3/16.
New profit-sharing ratio of X, Y and Z = 9/16: 3/16: 1/4 or 9: 3: 4 respectively

Calculation of adjusted capital

X X of new
Capital x Reciprocal of his X New
=Adjusted
Profit = Adj
Sharing Ratio Capital
partner share

x X X
= Rs. 20,000 9:3:4

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Capital of X = 45,000 ; Capital of Y = 15,000; Capital of Z = 20,000

i) In this question capital of the firm is to adjusted by opening current A/c , In this situation
what you are required to transfer the balance of capital A/c in the respective partner’s
current A./c and if the current A/c is in the credit side of partner’s capital A/c , it will have a
other effect on the assets side of the balance sheet and if the current A/c is in the debit side
of capital A/c other effect will be in the liabilities side of the balance sheet .

ii) Reminder : Whenever capital is to be adjusted on the basis of new partner , capital of
new partner will remain the same , in this question capital of new partner was Rs 20,000 and
after adjustment it will remain Rs 20,000

Q.7 Jain and Gupta were partners sharing profits in the ratio of 3: 2, Their, Balance Sheet as at
31st March, 2008 was:
Balance Sheet as on 31st March 2008
Liabilities Rs. Assets Rs.
Creditors 20,000 Cash 14,800
Bills Payables 3,000 Debtors 20,500
Bank Overdraft 17,000 Less: Provision for Bad Debts 20,200
Reserve 15,000 300 20,000
Jain’s Capital 70,000 Stock 70,000
Gupta’s Capital 60,000 Building 20,000
Motor Vehicles 40,000
Plant

1,85,000 1,85,000

They agreed to admit Mishra for 1/4th share from 1st April, 2008 subject to the following terms:
Mishra to bring in capital equal to 1/4th of the total capital of Jain and Gupta after all adjustment
including premium for goodwill.
Building to be appreciated by Rs. 14,000 and Stock to be depreciated by Rs. 6,000.
Provision for Bad Debts on Debtors to be raised to Rs. 1,000.
A Provision be made for Rs. 1,800 for outstanding legal charges.
Mishra’s share of goodwill/premium was calculated at Rs. 10,000 and he is bringing his share of goodwill
in cash .
Prepare the revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the new
firm on Mishra’s admission. (CBSE 8 Marks ) Foreign 2009)

Solutions.
Dr. Revaluation A/c Cr.
Particulars Rs. Particulars Rs.
To Stock A/c 6,000 By Building A/c 14,000
To Outstanding Legal charges A/c 1,800

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

To Provision for doubtful debts A/c 700

To Profit transferred to:
Jain’s Capital A/c 3,300
Gupta’s Capital A/c 2,200
14,000 14,000

Dr Partners capital A/c Cr.

Particulars Jain Gupta Mishra Particulars Jain Gupta Mishra
Amt. Amt. Amt. Amt. Amt. Amt.
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)
To Balance c/d 88,300 72,200 40,125 By Balance b/d 70,000 60,000 --
By Revaluation 3,300 2,200 --
By Reserve 9,000 6,000 --
By Premium for 6,000 4,000 --
goodwill A/c -- -- 40,125
By Cash A/c
88,000 72,200 40,125 88,300 72,200 40,125

BALANCE SHEET
as at 1st March, 2008
Liabilities Rs. Assets Rs.
Outstanding Legal Charges 1,800 Cash* 64,925
Creditors 20,000 Debtors 20,500
Bills Payables 3,000 Less: Provision for Bad Debts 1,000 19,500
Bank Overdraft 17,000 Stock 14,000
Jain’s Capital 88,300 Plant 40,000
Gupta’s Capital 72,200 Building 84,000
Mishra’s Capital 40,125 2,00,625 Motors Vehicles 20,000

2,42,425 2,42,425

Tutorial notes

i) In this question capital of new partner Mishra is 1/4th of total adjusted capital of Jain and
Gupta , which is calculated as follows

Calculation of New Partners Capital:

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Combined
X adjusted Capital of
Partners of jain and Gupta Partner , that is 1/4
which is Rs 88,300+ Rs 72,200=
Rs 1,60,500

Rs. 1,60,500
X =

Rs 40,125

2. Bank Balance*Rs. 14,800+Mishra’s Capital Rs. 40,125+Goodwill: Rs. 10,000=64,925

Home assignment 5
On 31st March, 2009, the Balance Sheet of Ram and Shyam, Who were sharing profits in the
ratio of 3 : 1 was as follows:
Liabilities Rs. Assets Rs.
Creditors 2,800 Cash at Bank 2,000
Employees’s Provident Debtors 6,500
Fund 1,200 Less Reserve for Bad Debts 500 6,000
General Reserve 2,000 Stock
Capital A/c: Investment 3,000
Ram 6,000 5,000
Shyam 4,000 10,000
16,000 16,000

They decided to admit Mohan 1st April, 2009 for 1/5th share on the following terms:
Mohan shall bring Rs. 6,000 as his share of premium.
That unaccounted accrued income of Rs. 100 be provided for.
The market value of investment was Rs. 4,500.
A debtors whose dues of Rs. 5,00 were written off as bad debts paid Rs. 400 in full settlement.
Mohan to bring capital to the extent of 1/5th of the capital of the new firm .Prepare the
Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the new firm.
(CBSE 8 Marks ) Foreign 2010 C)

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Home assignment 6
Ishu and Vishu are partners sharing profits in the ratio 3: 2. Their Balance Sheet as at 31st March,
2009 was as follows:
Liabilities Rs. Assets Rs.
Creditors 66,000 Cash at Bank 87,000
General Reserve 10,000 Debtors 42,000
Investment Less: Provision for
Fluctuation Fund 4,000 Doubtful Debts 7,000 35,000
Capital A/cs: Investments 21,000
Ishu 1,19,000 (Market Price Rs. 19,000)
Vishu 1,12,000 2,31,000 Building 98,000
Plant and Machinery 70,000
3,11,000 3,11,000
Nishu was admitted on that day for 1/6th share on the following terms:
Nishu will bring Rs. 56,000 as his share of capital.
Goodwill of the firm is valued at Rs. 84,000 and Nishu will bring his share of Goodwill in cash.
Plant and Machinery be appreciated by 20%.
All Debtors are good.
There is a liability of Rs. 9,800 included in Sundry Creditors that is not likely to arise.
Capital of Ishu and Vishu will be adjusted on the basis of Nishu’s Capital and any excess or deficiency will
be made by withdrawing or bringing in cash by the concerned partner.
Prepare the Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of the firm
after the above adjustments. (CBSE 8 Marks )

Q .8 Om, Ram and Shanti were partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st April,
2014 their Balance Sheet was as follows:
Liabilities Amount Assets Amount
Capital Accounts : Land & Building 3,64,000
Om 3,58,000 Plant and Machinery 2,95,000
Ram 3,00,000 Furniture 2,33,000
Shanti 2,62,000 9,20,000 Bills Receivables 38,000
General Reserve 48,000 Sundry Debtors 90,000
Creditors 1,60,000 Stock 1,11,000
Bills Payable 90,000 Bank 87,000

12,18,000 12,18,000

On the above date Hanuman was admitted on the following terms:

(i) He will bring Rs. 1,00,000 for his capital and will get 1/10th share in the profits.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

(ii) He will bring necessary cash for his share of goodwill premium.
The goodwill of the firm was valued at Rs. 3,00,000
(iii) A liability of Rs. 18,000 will be created against bills receivable discounted.
(iv) The value of stock and furniture will be reduced by 20%.
(v) The value of land and building will be increased by 10%.
(vi) Capital accounts of the partners will be adjusted on the basis of Hanuman’s capital in their profit
sharing ratio by opening current accounts.
Prepare Revaluation Account and Partner’s Capital Accounts. (CBSE 8 Marks )

Answer-
Revaluation A/c
Particulars Amount Particulars Amount
To Liabilities for bills Receivable By Land and Building 36,400
Discounted 18,000 By Loss transferred to Partner’s Capital
To Stock 22,200 Accounts:
To Furniture 46,600 Om 25,200
Ram 16,800
Shanti 8,400 50,400

86,800 86,800

Partner’s Capital A/c

Particulars Om Ram Shanti Particulars Om Ram Shanti
To 25,200 16,800 8,400
By Balance 3,58,000 3,00,000 2,62,000
Revaluation - 9,200 1,16,600
b/d
A/c 4,50,000 3,00,000 1,50,000
By General 24,000 16,000 8,000
To Current Reserve
A/cs By Premium 15,000 10,000 5,000
To Balance for Goodwill 78,200 - -
c/d A/c
By Current
4,75,200 3,26,000 2,75,000 4,75,200 3,26,000 2,75,000
A/c

HANUMAN’S CAPITAL ACCOUNT

Particulars Amount Particulars Amount
To Balance c/d 1,00,000 By Bank A/c 1,00,000

1,00,000 1,00,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Tutorial notes :

Calculation of adjusted capital

X ofXnew
Capital X X =Adj X New Profit = Adjusted
Reciprocal of his
Sharing Ratio capital
partner share

X X
= Rs. 1,00,000 9:6:3:2

Om’s Capital = Rs. 4,50,000; Ram’s Capital = Rs. 3,00,000; Shanti’s Capital = Rs.
1,50,000

Calculation of New Profit Sharing Ratio

Let us assume that total profit be = 1
1/9 is given to Hanuman and now the remaining share is 1- 1/9 = 9/10
That will be shared in old partners in old rati0

Om = × = , Ram = × = , Shanti = × = , hanuman =

9/20 : 9/30 : 9/60 :1/10 or 27 : 18 : 9 : 6

Home assignment 7

Atal and Madan were partners in a firm sharing profits in the ratio of 5 : 3. On 31-3-2011 they
admitted Mehra as new partner for 1/5th share in the profits. The new profit sharing ratio was 3 :
3 : 2. On Mehra’s admission the Balance Sheet of the firm was as follows:

Liabilities Amount Assets Amount

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Capitals: Land & Building 1,50,000

Atal : 1,50,000 Machinery 40,000
Madan : 90,000 2,40,000 Patents 5,000
Provision for bad debts 1,200 Stock 27,000
Creditors 20,000 Debtors 47,000
Workmen Compensation Fund 32,000 Bank 4,200
Profit & Loss Account 20,000

2,93,200 2,93,200

On Mehra’s admission it was agreed that

(a) Mehra will bring Rs. 40,000 as his capital and Rs. 16,000 for his share of goodwill premium,
Half of which was withdrawn by Alfa and Madan;
(b) A provision of 2.5% for bad and doubtful debts was to be created.
(c) Included in the sundry creditors was an item of Rs. 2,500 which was not to be paid;
(d) A provision was to be made for an outstanding bill for electricity of Rs. 3,000;
(e) A claim of Rs. 325 for damages against the firm was likely to be admitted. Provision for the same was to
be made.
After the above adjustments, the capitals of Atal and Madan were to be adjusted on the basis of
Mehra’s capital. Actual cash was to be brought in or to be paid off to Atal and Madan as the case
may be.
Prepare Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the new
firm.
( CBSE 8 Marks )
Home assignment 8
Sarthak and Vansh are partners sharing profits in the ratio of 2 : 1. Since both of them are specially
abled sometimes they find it difficult to run the business on their own, Mansi, a common friend ,
decides to help them. Therefore they admit her into partnership for 1/3rd share in profits. She brings
Rs. 60,000 for goodwill and proportionate capital. At the time of admission of Mansi, the Balance
Sheet of Sarthak and Vansh was as under:
Balance Sheet
Liabilities Amount Assets Amount
Capital Accounts: Plant 66,000
Sarthak 70,000 Furniture 30,000
Vansh 60,000 1,30,000 Investments 40,000
General Reserve 18,000 Stock 46,000
Bank Loan 18,000 Debtors 38,000
Creditors 72,000 Less: Provision for
Bad debts 4,000 34,000
Cash 22,000

2,38,000 2,38,000

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It was decided to
(i) Reduce the value of Stock by Rs. 10,000
(ii) Plant is to be valued at Rs. 80,000.
(iii) An amount of Rs. 3,000 included in Creditors was not payable.
(iv) Half of the Investments were taken over by Sarthak and remaining were valued at Rs. 25,000.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of reconstituted firm.
Identify the value being conveyed in the question.
(CBSE 8 Marks )

Q .9 Charu and Harsha were partners in a firm sharing profits in the ratio of 3 : 2. On 1-4-2014 their
Balance Sheet was as follows:

Balance sheet
Liabilities Amount Assets Amount
Creditors 17,000 Cash 6,000
General Reserve 4,000 Debtors 15,000
Workmen Compensation Fund 9,000 Investments 20,000
Investment Fluctuation Fund 11,000 Plant 14,000
Provision for bad debts 2,000 Land & Building 38,000
Capitals:
Charu 30,000
Harsha 20,000 50,000

93,000 93,000

On the above date Vaishali was admitted for ¼ share in the profits of the firm on the followings
terms:
(a) Vaishali will bring Rs. 20,000 for her capital and Rs. 4,000 for her share of goodwill premium .
(b) All debtors were considered good.
(c) The market value of investments was Rs. 15,000.
(d) There was a liability of Rs. 6,000 for workmen compensation.
(e) Capital accounts of Charu and Harsha are to be adjusted on the basis of Vaishali’s capital by opening
current accounts.
Prepare Revaluation Account and Partner’s Capital Accounts. ( CBSE 8 Marks )

Answer-
Revaluation A/c
Particulars Amount Particulars Amount
To Profit transferred to Partner’s By Provision for Bad Debts A/c 2,000
Capital A/c:
Charu 1,200
Harsha 800 2,000

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2,000 2,000

Partner’s Capital A/c

Particulars Charu Harsha Vaishali Particulars Charu Harsha Vaishali
- By Balance b/d 30,000 20,000 -
By General reserve 2,400 1,600 -
By Cash A/c - - 20,000
By Premium for
Goodwill A/c 2,400 1,600 -
By Revaluation A/c 1,200 800 -
By Workmen
Compensation Fund 1,800 1,200 -
By Investment
To Balance c/d 41,400 27,600 20,000 Fluctuation Fund 3,600 2,400 -

41,400 27,600 20,000

41,400 27,600 20,000 By Balance b/d 41,400 27,600 20,000
To Current A/cs 5,400 3,600
(Balancing Fig.)
To Balance c/d 36,000 24,000 20,000
(Note 1 & 2)
41,400 27,600 20,000 41,400 27,600 20,000

Tutorial notes :

1. Calculation of New Profit Sharing Ratio:

Let us assume that total share of the firm = 1, out of which 1/4th share is given to Vaishali
Now the remaining share which belongs to Charu and Harsha is 1 – ¼ = 3/4
There is no contrary agreement , so the remaining share will be distributed in old partners’ in
old ratio

Charu’s Share = 3/4X3/5 = 9/20;

Harsha’s Share = 3/4X2/5 = 6/20
New profit sharing ratio of Charu, Harsha and Vaishali = 9/20 : 6/20 : 1/4= 9 : 6 : 5

2. Calculation of Capital of Charu and Harsha on the basis of Vaishali’s Capital:

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

capital
Capital of new Reciprocal of his New Profit
X X = Adjusted
partner share Sharing Ratio Capital

Rs. 20,000 X X X X
= 9 : 6: 5

Charu ’s Capital = Rs. 36,000; Harsh’s Capital = Rs. 24,000; Vashali’s Capital = Rs.
20,000

3. Question says after the adjustment of capital A/c differencial amount is to be transferred to
Current A/c . Don,t open current a/c , the way it is opened when capital is fixed .

Q.10 Anil and Sunil are partners sharing profits and losses in the ratio of 3 :2 .They admit charan as
a new partner from 1st April ,2013 .Anil gives 1/3rd of his share while Sunil gives 1/4th of his share
to Charan .Their balance Sheet as on 31st March 2013 ,is given below : (Isc sample paper 12
marks)

Liabilities Rs Assets Rs
Anil’s Capital 32,600 Land and building 6,000
Sunil’s Capital 40,400 Investments
Workmen Compensation Fund 2,000 (Market value Rs 4,500) 5,000
Investment Fluctuation Fund 1,000 Debtors 30,000
Employee’s Provident Fund 1,000 Stock 10,000
Provision for doubtful Debts 1,000 Bank 27,000

78,000 78,000

Terms of Charan’s admissionare as follows :

Charan brings in 30,000 as his capital .His share of Goodwill was determined to be Rs 18,000 .He could
brings in only 60% of his share .
Land & Buildings was found to be undervalued by Rs 10,000 and Provision for doubtfuldebts is to be
made equal to 5 % of the debtors .
Stock was found to be overvalued by Rs 7,000
Capital accounts of the old partners to be re –adjusted in the new profit sharing arrangement on the
basis of charan’s capital ,any excess or dificeincy to be adjusted in cash .
You are required to :

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Pass journal Entries

Prepare Partner’s Capital Accounts
Balance Sheet of the new firm
Balance your workings clearly .

SOLUTION : ( ISC sample paper 12 Marks )

JOURNAL
Date Particulars L.F Dr.(Rs) Cr. (Rs)
2013 Investments fluctuation Fund A/c Dr. 1,000
April 1 To Investments A/c 500
To Anil’s Capital A/c 300
To Sunil’s capital A/c 200
(Being Investment fluctuation fund used to meet out
the reduction in the values of investment and the
remaining fund has been distributed in old partners’
in old ratios .
2,000
Workmen Compensation Fund A/c Dr.
1,200
To Anil’s Capital A/c
800
To Sunil’s capital A/c
April
(Being Workment compensation fund distributed in
old partners in old ratios )

April 1 10,000
Land & building A/c Dr. 10,000
To Revaluation A/c
(Being the value of land and building has increased )

April 1 Revaluation A/c Dr. 7,500

To Stock A/c 7,000
To Provision for doubtful Debts A/c 500
( Being value of stock decreased and provision for bad
debts is required to be created )
April 1
Revaluation A/c Dr. 2,500
To Anil’s capital A/c 1,500
To sunil’s capital A/c 1,000
(Being profit on revaluation distributed in old
April 1 partners’ in old ratios )
Bank A/c Dr. 40,800
To Charan’s Capital A/c 30,000
To Premium for goodwill A/c 10,800
(Being Capital and 60% of his share of goodwill
brought in by new partner )

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April 1 Premium for goodwill A/c Dr.

Charan’s Current A/c Dr. 10,800
To Anil’s Capital A/c 7,200
To Sunil’s Capital A/c 12,000
(Being goodwill distrubited in sacrificing partners’ in 6,000
sacrificing ratio)

April 1
Anil’s Capital A/c Dr.
7,600
Sunil’s Capital’s A/c Dr.
18,400
To Bank A/c
26,000
(Being Surplus Capital withdraw by Anil and Sunil )

Dr. PARTNERS CAPITAL ACCOUNT Cr.

Particulars Anil Sunil Charan Particulars Anil Sunil Charan
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

By Bal.b/d 32,600 40,400

BY Investment fluctuation
fund A/c 300 200
By Workmen
compensation fund A/c 1,200 800
By Revaluation A/c 1,500 1,000
By Bank A/c 30,000
By Premium for goodwill 7,200 3,600
To Bal .c/d 47,600 48,400 30,000 A/c 4,800 2,400
By Charan’s Current A/c

47,600 48,400 30,000 47,600 48,400 30,000

To Bank A/c 7,600 18,400 47,600 48,400 30,000

To Bal c/d 40,000 30,000 30,000 By Bal. b/d

47,600 48,400 30,000 47,600 48,400 30,000

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BALANCE SHEET as at 1 April ,2013

Liabilities Rs Assets Rs
Capital’s Accounts: Land and building 16,000
Anil 40,000 Investments
Sunil 30,000 (Market value) 4,500
Charan 30,000 1,00,000 Debtors 30,000
Employee’s Provident Fund 1,000 Stock 3,000
Provision for doubtful Debts 1,500 Bank ** 41,800
Charan’s Current A/c 7,200

1,02,500 1,02,500

: Tutorial notes :

Calculation of Sacrificing ratios :

Anil’s share is 3/5 and he is sacrificing 1/3rd of his share , so the share sacrified by him is

= × =

Sunil’s share is 2/5 and he is sacrificing 1/4th of his share , so the share sacrificied by him is

= × =

Sacrifice ratio = ∶ 2 :1

Calculation of New Ratios : Old Ratios – Sacrificing Ratios

Anil = - =

Sunil = - = =

Charan = + = =

Hence ,New ratio of Anil ,Sunil and Charan = ∶ ∶ ∶ ∶

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Capital of new = Adjusted

Reciprocal of his share New Profit
Capital X X Capital
partner
Sharing Ratio

X X
= Rs. 30,000 4:3:3

Anil ’s Capital = Rs. 40,000; Sunil’s Capital = Rs. 30,000; Charan’s Capital = Rs. 30,000

**Bank Balance : Rs 27,000+ Rs 40,000 – Rs 7,600- Rs 18,400)

Take care : When capital of the firm is adjusted taking the capital of the new partner as a base.
Capital of the new partner will remain the same .

Questions with some

complications
Q.11 A and B partners in a firm. Their balance sheet as on 31st December, 1993 was as follows :
Liabilities Rs. Assets Rs.
Provision for Doubtful Debts 4,000 Cash 10,000
Workmen Compensation Fund 5,600 Sundry Debtors 80,000
Outstanding Expenses 3,000 Stock 20,000
Creditors 30,000 Fixed Assets 38,600
Capitals : Profit & Loss A/c 4,000
A 50,000
B 60,000

1,52,600 1,52,600

C was taken into partnership as from 1-1-1994. C brought Rs. 40,000 as his capital but he is unable to
bring any amount for amount for goodwill. New profit sharing ratio is 3 : 2 : 1. Following terms were
agreed upon.
1. Claim on account of Workmen’s Compensation is Rs. 3,000.
2. To write off Bad Debts amounting to Rs. 6,000.

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3. Creditors are to be paid Rs. 2,000 more.

4. Rs. 2,000 be provided for an unforeseen liability.
5. Outstanding expenses be brought down to Rs. 1,200.
5. Goodwill is valued at 1 years’ purchase of the average profits of last three year, less Rs. 12,000. Profit
of 3 years of 3 years amounted to Rs. 12,000; Rs. 18,000 and Rs. 30,000.
6 Capital of the entire firm is to be adjusted taking C’s capital as a base by opening current account.
Prepare Journal entries, capital accounts and opening Balance Sheet. ( CBSE modified )

Answer-
Revaluation A/c

Particular Rs. Particular Rs.

To Debtors 2,000 By Outstanding Expenses 1,800
To Creditors 2,000 By Partners Capital A/c
To Unforeseen Liability 2,000 A - 2,100
B 2,100 4,200

6,000 6,000

Partners Capital A/c

Particular A B C Particular A B C
To Profit & Loss A/c 2,000 2,000 By Balance b/f 50,000 60,000 -
To Revaluation A/c 2,100 2,100 By Cash 40,000
By C’ Current A/c 3,000
By Workmen
To Balance c/d 47,200 60,200 40,000 Compensation Fund 1,300 1,300 -

Total 51,300 64,300 40,000 Total 51,300 64,300 40,000

To B’s Current A/c By Balance b/d 47,200 60,200 40,000
To C’ Current A/c By A’s Current A/c 72,800 19,800
To Balance c/d 1,20,000 80,000 40,000

Total 1,20,000 80,000 40,000 Total 1,20,000 80,000 40,000

Tutorial notes :

Calculation of Goodwill

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Formula = Average profit x purchasing years = Goodwill

Average profit of last 3 year’s= Rs 12,000+ Rs 18,000+Rs 30,000/3 =20,000
Goodwill of firm = 20,000 x1.5- 12,000 ( as instructed in the question ) = Rs 18,000

Goodwill of C = 18,000/6
Rs 3,000

Calculation of sacrificing ratio= Old Ratio- New Ratio

Old Ratio New Ratio
A 1/2 3/6 = No Change
B 1/2 2/6 = 1/6(sacrifice)
C - 1/6 = 1/6 (Gain)
So above calculation shows clearly that only B sacrifice 1/6th share in favour of C.

Adjustment of Capital according to profit sharing ratio

Capital
X of X new X X =Ad X Adjusted
Reciprocal of his New Profit
partner Capital
share Sharing Ratio

X X X X
= Rs. 40,000 3:2:1

Now the adjusted capital of all the partners are Rs

A’s Capital = 2,40,000 x 3/6 = Rs 1,20,000 B’s Capital = 2,40,000 x 2/6 = Rs

80,000C’s Capital = 2,40,000 x 1/6 = Rs 40,000

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Take care :
i) When capital of the firm is adjusted taking the capital of the new partner as a base. Capital of
the new partner will remain the same .
ii) Workmen compensation claim is to set off against the workmen compensation fund and the
remaining fund will be distributed in old partners in old ratio.
iii) Now claim will not be shown in Revaluation A/c and Plz don’t forget to show Claim against the
workmen compensation fund in the liabilities side of the Balance Sheet .

iii) Only B deserve goodwill as he is the only partner making sacrifice for C. As the sacrifice so the
goodwill is the basic concept .
iv) New partner fails to bring his share of goodwill in cash so goodwill is to be adjusted by debiting
C’s current account and crediting B’s Capital account .

Balance Sheet
As on 1st January, 1994
Liabilities Rs. Assets Rs.
Capital- Cash 50,000
A 1,20,00 Sundry Debtors 80,000
B 80,000 Less: Bad debts 6,000 74,000
C 40,000 2,40,000 Stock in trade 20,000
Fixed Assets 38,600
Claim against the workmen 3,000
compensation A’s Current A/c 72,800
Creditor 32,000 B’s Current A/c 19,800
Unforeseen liability 2,000 C’s Current A/c 3,000
Outstanding expenses 1,200

2,78,200 2,78,200

Home assignment 9
A and B are in partnership, sharing profits in proportion of 4/7 and 3/7 respectively. Their Balance
Sheet is as follows.
Liabilities Rs. Assets Rs.

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Creditors 19,000 Cash at Bank 10,000

Employees benevolent fund 9,600 Debtors 40,000
C’s Loan A/c 30,000 Less : Provision 1,800 38,200
Reserve for contingency 7,000 Inventory 60,400
Capital Accounts : Investments 10,000
A 50,000 Goodwill 5,000
B 40,000 Furniture and Fixture 25,000
Advertisement Suspense 7,000

1,55,600 1,55,600

C is admitted into partnership on the following terms :

(i) The new profit-sharing ratio will be 3:2:1 between A and B and respectively.
(ii) C’s Loan should be treated as his Capital.
(iii) C is not to bring goodwill in cash, Goodwill is valued on the basis of 2 year’ purchase of the average
profits of
the last three years.
(iv) Average Profits of the last three years are Rs. 6,000.
(v) Rs. 7,000 of Investments were to be taken over by A and B in their profit sharing ratios.
(vi) Inventory be reduced by 10%.
(vii) Provision for doubtful debts should be @ 5% on Debtors and a provision for discount @ 2% should
also be made on Debtors.
(viii) B is to withdraw Rs. 8,000 in cash.
(viiii) Capital of the firm is to be adjusted ,taking C’s Capital as a base, additional capital should be brought
in or Excess capital to be withdrawn by partner concerned. ( CBSE Modified )
Prepare necessary accounts and the Balance sheet.

Home assignment 10
Saurabh and Munish share profits in the ratio of 3:1. Their Balance Sheet as on 31st
December,1996,was as under :

Liabilities Rs. Assets Rs.

Outstanding Expenses 5,000 Cash 7,800
Sundry Creditors 36,000 Sundry Debtors 24,000
Capital Accounts : Less : Provision 800 23,200
Saurabh 68,000 Stock 5,000
Munish 31,000 Plant and Machinery 40,000
Funiture and Fitting 25,000
Land and Building 15,000
Goodwill 8,000
P&L A/c 16,000

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1,40,000 1,40,000

Sharad is admitted into partnership on the following terms :-

(i) plant and machinery depreciated by 50%, furniture and fitting is appreciated to Rs 26,000.
(ii) Land and building is appreciated by 20%
(iii) Provision for doubtful debts should remain at 5% on debtors.
(iv) The new profit sharing ratio will be 5:3:2.
(v) Sharad will pay Rs. 20,000 as capital and the capitals of old partners will be adjusted on the basis
of new partner’s capital and his share in the business, actual cash to be brought in or withdrawn by
old partner. As the case may be.
(vi) Goodwill of the firm is valued at Rs. 20,000.
Prepare journal entries, capital accounts and the opening Balance Sheet of the new firm.
( ISC modified 12 Marks )

Q.12 Neeraj and Pankaj are partner in a firm sharing profits and losses in the ratio 3 : 2. On 31st
March, 2009, their Balance Sheet was as under :
Liabilities Rs. Assets Rs.
Creditors 70,000 Bank 40,000
Capital A/cs : Debtors 1,20,000
Neeraj 1,50,000 Inventory 60,000
Pankaj 80,000 2,30,000 Plant and Machinery 50,000
Profit and Loss A/c 30,000

3,00,000 3,00,000

On the above date Sharvan is admitted as a partner. Neeraj surrendered 1/6th of his share and
Pankaj 1/3rd of his share in favor of Sharvan. Goodwill is valued at Rs. 1,20,000. Sharvan brings in
only ½ of his share of goodwill in Cash and Rs. 70,000 as his Capital. Following adjustment are
agreed upon :
(i) Inventory is to be reduced to Rs. 57,000 and Plant and Machinery by Rs. 6,000.
(ii) There is an unrecorded asset worth Rs. 20,000.
(iii) One month‘s rent of Rs. 15,000 is outstanding.
(iv) A Creditor for goods purchased for Rs. 10,000 had been omitted to be recorded although the goods
had been correctly included in stock.
(v) Insurance premium amounting to Rs. 8,000 was debited to P& L A/c, out of which Rs. 2,000 is to be
carried forward as an unexpired insurance (prepaid insurance)
(vi) Capital of the entire firm is to be adjusted on basis of new partner by opening current account .
You are required to prepare Revaluation Accounts, Partner’s Capital Accounts and the Balance
Sheet of the new firm . Also calculate the new profit sharing ratio. ( ISC modified 12 Marks)

Answer-

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Revaluation A/c

Particular Rs. Particular Rs.

To Inventory 3,000 By Unrecorded Assets 20,000
To Plant & Machinery 6,000 By Unexpired Insurance 2,000
To Outstanding Rent 15,000 By Partners Capital A/c
To Creditor 10,000 Neeraj - 7,200
Pankaj- 4,800 12,000

34,000 34,000

Partners Capital A/c

Particular Neeraj Pankaj Sharwan Particular Neeraj Pankaj Sharwan

To RevaluationA/c 7,200 4,800 By Balance b/f 1,50,000 80,000 -
To Profit & Loss A/c 18,000 12,000 By Bank 70,000
By Premium for
goodwill 6,000 8,000
By Sharwan’s -
Current A/c 6,000 8,000

To Balance c/d
1,36,800 79,200 70,000
Total 1,62,000 96,000 70,000 Total 1,62,000 96,000 70,000
By Balance b/d 1,36,800 79,200 70,000
By Neeraj’s 13,200
To Balance c/d 1,50,000 80,000 70,000 current A/c
By Pankaj’s
current A/c 800
Total 1,50,000 80,000 70,000 Total 1,50,000 80,000 70,000

Tutorial notes :

Calculation of Goodwill

Goodwill of firm = 1,20,000

Goodwill of Sharwan = 1,20,000 x7/30 =28,000

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Shravan could bring half of his share of goodwill in cash and the remaining share is to be adjusted
through Shravan’s Current A/c

Calculation of sacrificing ratio

Neeraj sacrifice his share in favour of Sharwan = 3/5 x 1/6=1/10

Pankaj sacrifice his share in favour of Sharwan= 2/5 x 1/3= 2/15
So above calculation shows clearly that Neeraj & Pankaj sacrificed in the ratio of 3:4 in favaur
of Sharwan.
Capital A/c of Neeraj & Pankaj will be credited with the amount of goodwill in sacrificing
ratio.

Calculation of New Profit Sharing Ratio

New share of Neeraj= 3/5-1/10(sacrifice in favour to Sharwan)= 5/10
New share of Pankaj= 2/5-2/15(sacrifice in favour to Sharwan)=4/15
Sharwan Share 1/10 +2/15 = 7/30
So, New profit sharing ratio= 5/10: 4/15:7/30
15:8 :7

Adjustment of Capital according to profit sharing ratio

Capital
X ofXnew X Reciprocal of Xhis=Adj X New Profit = Adjusted
partner share Sharing Ratio capital

X X
= Rs. 70,000 15 : 8 :7

Now the adjusted capital of all the partners are Rs

Neeraj’s Capital = 3,00,000 x 15/30= Rs 1,50,000

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Pankaj’s Capital = 3,00,000 x 8/30 = Rs 80,000

Shravan’s Capital = 3,00,000 x 7/30 = Rs 70,000

Alternatively :

Adjustment of Capital according to new partners capital

Capital of new partner Shravan is Rs 70,000 and his share of profit is 7/30;
So , corresponding to his share of profit, capital of the entire firm will be :

Rs 70,000 x 30/7 = Rs 3,00,000.

Now , in order to get the adjusted capital , the total capital should be divided in new profit sharing
ratios .
Neeraj’s Capital = 3,00,000 x15/30 = 1,50,000
Pankaj’s Capital = 3,00,000 x8/30 = 80,000
Shravan’s Capital = 3,00,000 x7/30 = 70,000

Take care :
i) When capital of the firm is adjusted taking the capital of the new partner as a base. Capital of the
new partner will remain the same .
ii) Out of the insurance of Rs 8,000, Rs 2,000 is to be carried forward as an unexpired insurance and
will be shown in credit side of revaluation account as it represents assets and will be shown be
shown in the assets side as well. We have got nothing to do with Rs 6,000 as it has corrected been
recorded .

Balance Sheet
As on 1st April, 2009
Liabilities Rs. Assets Rs.
Capital- Bank 1,24,000
Neeraj 1,50,000 Sundry Debtors 1,20,000
Pankaj 80,000 Stock in trade 57,000
Sharwan 70,000 3,00,000 Prepaid Insurance 2,000
Plant 50,000
Less: Depreciation 6,000 44,000
Outstanding Rent 15,000 Unrecorded Asset 20,000
Creditor 80,000 Neeraj’s Current A/c 13,200
Pankaj’s Current A/c 800
Shravan’s Current 14,000 28,000

3,95,000 3,95,000

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Home assignment 11
Neha and Tara are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their balance
sheet on 31st March, 2012, stood as follows:

Balance Sheet
As at 31st March, 2012
Liabilities Amount Assets Amount
Capital A/cs Plant and Machinery 12,000
Neha 8,000 Land and Building 14,000
Tara 10,000 18,000 Debtors 19,000
General Reserve 12,000 (-) Provision for
Workmen’s Compensation Fund 5,000 Doubtful Debts 4,000 15,000
Creditors 15,000 Stock 6,000
Cash 3,000

50,000 50,000

They agreed to admit Prachi into partnership for 1/5th share of profits on 1st April, 2012, on the
following terms
(i) All debtors to be considered as good and therefore the provision for doubtful debts to be written back.
(ii) Value of land and building to be increased to Rs. 18,000.
(iii) Value of plant and machinery to be reduced by Rs. 2,000.
(iv) The liability against workmen compensation fund is determined at Rs. 2,000 which is to be paid later in
the year.
(v) Prachi to bring in her share of goodwill of Rs. 10,000 in cash.
(vi) She will further bring in cash so as to make her capital equal to 20% of the total capital of the new firm.
(Show your working clearly)
You are required to prepare
(i) Revaluation account.
(ii) Partner’s capital accounts.
(iii) Balance sheet of the reconstituted firm.

Q.13 Neha and Sangeeta are partners in a firm sharing profits and losses in the ratio of 3:2. On 31st
December, 1988,their Balance Sheet was as under :

Liabilities Rs. Assets Rs.

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Sundry Creditors 16,000 Cash at Bank 6,000

Mortgage Loan 70,000 Stock 32,000
Employee’s gratuity fund 6,000 Prepaid Insurance 1,000
Unaccrued income 2,000 Sundry Debtors 28,800
Capital accounts : Less : Provision for 800
Neha 48,000 Doubtful Debts 28,000
Sangeeta 40,000 88,000 Plant and Machinery 48,000
Land and Building 48,000
Furniture 12,000
Profit and Loss A/c 4,000
Advertisement Suspense 3,000
1,82,000 1,82,000

On the above date, the partners decide to admit Savita as a partner on the following terms :
(i) The new profit-sharing ratio of Neha, Sangeeta and Savita will be 5 : 3 : 2 :, respectively.
(ii) Savita shall bring Rs. 32,000 as his capital.
(iii) Savita is unable to bring in any cash for his share of goodwill. Partner, therefore, decide to calculate
goodwill on the basis of Savita’s share in the profits and the capital contribution made by him to the firm.
(iv) Plant and Machinery in under casted by 20%
(v) Stock would be increased to Rs. 40,000.
(vi) Provision for Doubtful Debts is to maintained at Rs. 4,000. Value of Land and Building has been over
casted by 20%. Furniture has been over casted by 25% .
(vii) Employee’s gratuity fund has been increased to 14,000.
Prepare Revaluation Account, Partners’ Capital Account and the Balance Sheet of Neha, Sangeeta
and Savita. ( ISC modified 12 Marks )

Solution
Revaluation A/c
Particular Rs. Particular Rs.
To Furniture 2,400 By Plant & Machinery 12,000
To Provision for doubtful debts 3,200 By Stock 8,000
To Employees gratuity fund 8,000 By Partners Capital A/c
To Land & Building 8,000 Neha - 960
Sangeeta- 640 1,600

21,600 21,600

Partners Capital A/c

Particular Neha Sangeeta Savita Particular Neha Sangeeta Savita

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

To Revaluation A/c 960 640 By Balance b/f 48,000 40,000 -

To Profit & Loss A/c 2,400 1,600 By Bank 32,000
To Advertisement By Sharwan’s
Suspense 1,800 1,200 Current A/c 4,860 4,860
-
To Balance c/d 47,700 41,420 32,000
Total 52,860 44,860 32,000 Total 52,860 44,860 32,000

Tutorial notes :

CALCULATION OF HIDDEN GOODWILL

Particulars Rs.
A. Net Worth (including goodwill) of new firm on the basis of Capital brought in by
Incoming Partner(Rs. 32,000 x 10/2) 1,60,000
B. Less: Net Worth (excluding goodwill) of new firm (Adjusted old Capitals of old 11,400
partners + Incoming Partner’s Capital – Revaluation Loss - Profit and Loss ( Loss) – Rs
Advertisement Suspense )[Rs. 48,000 + Rs. 40,000 + Rs. 32,000 – Rs 1,600 - Rs. 4,000-
Rs. 3,000]
C. Value of Goodwill[A-B] 48,600

Goodwill of savita= 48600 x 2/10= 9,720

Calculation of sacrificing ratio

Old Ratio- New Ratio
Neha= 3/5-5/10= 6-5/10= 1/10(sacrifice)
Sangeeta= 2/5-3/10= 4-3/10= 1/10(sacrifice)
So above calculation shows clearly that Neha & Sangeeta sacrifice in the ratio of 1:1 in favaur of
Savita.
Capital A/c of Nahe & Sangeeta will be credited With amount of goodwill in sacrificing ratio.

Balance Sheet
As on 1st January, 1988
Liabilities Rs. Assets Rs.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Capital- Bank 38,000

Neha 47,700 Sundry Debtors 28,800
Sangeeta 41,420 Less: Provision 4,000 24,800
Savita 32,000 1,21,120 Stock in trade 32,000
Add: Appreciation 8,000 40,000
Prepaid Insurance 1,000
Mortgage Loan 70,000 Plant 48,000
Creditor 16,000 Add: Appriciation 12,000 60,000
Employees Gratuity Fund 14,000 Land & Building 48,000
Unacrued Income 2,000 Less: Depreciation 8,000 40,000
Furniture 12,000
Less: Depreciation 2,400 9,600
Savita’s Current A/c 9,720

2,23,120 2,23,120

Q. 14 A and B are partner and the profit is divided as follows : to A ; to B and carried to a
reserve Accounts. They admit C as a Partner on 1st April, 2009 on which date the Balance Sheet of
the firm was as under :
Liabilities Rs. Assets Rs.
Creditors 1,60,000 Cash at Bank 20,000
Outstanding Expenses 12,000 Debtors 2,20,000
Workmen compensation Reserve Stock 1,80,000
Capital A/c: 90,000 Plant and Machinery 1,20,000
A 3,18,000 Buildings 2,30,000
B 2,00,000 Advertisement Expenditure 10,000
5,18,000

7,80,000 7,80,000

Following terms were agreed upon :

(i) Stock is undervalued by 10%. *
(ii) Plant is overcastted by 20%**
(iii) Creditors included a Contingent liability of Rs. 50,000 Which has been decided by the Court at Rs.
43,000.
(iv) Debtors amounting to Rs 64,000 are doubtful and 50% amount is expected to be unrecoverd.
(v) Goodwill of the firm is valued at Rs.60,000. However, C is unable to bring his share of goodwill in Cash.
(vi) C is given the share of profit which he acquires equally from A and B. C is to bring in Capital
proportionate to his share of profits in the firm.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

You are required to prepare Revaluation Accounts, Capital Accounts and the new Balance Sheet of
the firm. (ISC Modified 12 Marks )
Solution

Revaluation A/c
Particular Rs. Particular Rs.
To Plant 20000 By Stock 20000
T Provision for doubtful debts 32000 By Creditors 7000
By Partners Capital A/c
A - 15,000
B 10,000 25,000
52,000 52,000

Partners Capital A/c

Particular A B C Particular A B C
To Advertisement 6000 4000 By Balance b \d 318000 200000 -
exp By Bank 1,46,250
To Revaluation A\c 15,000 10,000 By C’s Current A/c 6000 6000
By Workmen
To Balance c/d 3,57,000 2,28,000 1,46,250 compensation -
Reserve 54000 36000

Total 378000 242000 146250 Total 378000 242000 146250

Balance Sheet
As on 1st January, 1988
Liabilities Rs. Assets Rs.
Capital- Bank 1,66,250
A 3,57,000 Sundry Debtors 220000
B 2,28,000 Less Provision for bad debts 32000 1,88,000
C 1,46,250 7,31,250 Stock 2,00,000
Creditor 1,53,000 Plant and machinery 1,00,000
Outstanding exp 12,000 Buildings 2,30,000
C’s current A/c 12,000

8,96,250 8,96,250

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Tutorial notes :

i) Calculation of C’s share of goodwill

Goodwill of firm is Rs60000

C is supposed to bring Rs 60000x 1/ 5= 12000

Calculation of proportionate capital of new partner

Combind adjusted capital of A&B
A= Rs 3,57,000
B= Rs 2,28,000 = Rs 5,85,000 Share of A&B 4/5

X Share of new
Combined Reciprocal of
X X X = Capital of new
adjusted Capital of Combined share partner Partner
old Partners of Old Partners

Rs. 5,85,000 1
X X X x X =Rs 1,46,250
5

Alternatevely , it can be calculated as follows :

Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit ,
remaining after giving 1/5 th share to new partner :
Rs 5,85,000 x 5/4 share = Rs 7,31,250
Step 2 C’s share is 1/5th of the total capital of the firm , that is
Rs 7,31,250 x 1/5 = Rs 1,46,250

Stock is undervalued by 10% , it means stock which is having a book value of Rs 100 has been recorded in
the books at 90. In other words stock which is shown in the books at Rs 1,80,000 is having actual book
value of Rs 2,00,000 ( Rs 1,80,000 x 100/90 ) .and Rs 20,000 resulting appreciation will be shown in the
credit side of revaluation account .

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Machinery is overcastted by 20%. It means machine which is having a book value of Rs100 has been
recorded in the books at 120. In other words, machinery which is shown in the books at Rs 1,20,000 is
having actual book value of Rs 1,00,000 ( Rs 1,20,000 X 100/12), and resulting depreciation will be debited
in the Revaluation account .
Q.15 Gaurav and Pankaj are partner sharing profits and losses in the ratio 3 : 2. Their Balance
Sheet on 31st December, 1996 stood as under :
Liabilities Rs. Assets Rs.
Capitals : Machinery 66,000
Gaurav 70,000 Furniture 30,000
Pankaj 60,000 Investment 40,000
General Reserve 20,000 Stock 46,000
Employee’s Saving Bank A/c 18,000 Debtors 42,000
Creditors 72,000 Less : Provision 4,000 38,000
Workmen Compensation fund 6,000 Bank 24,000
Advertisement Suspense 2,000

2,46,000 2,46,000

On this date they admitted Neeraj for ¼ on following terms :

(i) Neeraj brings 1/4th of the combined Capital of the Gaurav and Pankaj and Rs. 8,000 for goodwill out
of his share of Rs. 14,000.
(ii) Machinery is over casted by 10% **
(iii) All Debtors are good.
(iv) Depreciate furniture by 10%
(vi) Claims against the workmen Compensation fund is Rs. 4,500.
(vii) Half of investments were to be taken over by A and B in their profit sharing ratio and remaining
valued at Rs. 26,000.
(vii) New ratio will be 3 : 3: 2.
(ix) Capital for the entire find is to be adjusted on the basis of new partner .
Prepare Revaluation Accounts, Capital Accounts and Balance Sheet after Neeraj’s admission.
Ans
Revaluation A/c
Particular Rs. Particular Rs.
To Machinery 6,000 By Provision for doubtful debts 4,000
To Furniture 3,000 By Investments 6,000
To Partners Capital A/c
Gaurav - 600
Pankaj 400 1,000

10,000 10,000

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Partners Capital A/c

Particular Gaurav Pankaj Neeraj Particular Gaurav Pankaj Neeraj
To Advertisement By Balance b \d 70,000 60,000 -
suspense 1,200 800 By Bank 28,900
To Investments 12,000 8,000 By Premium for
goodwill A/c 7,200 800
By Neeraj’s current -
A/c 5,400 600
By General Reserve 12.000 8,000
By Workmen
compensation fund 900 600
To Balance c/d 82,900 61,600 28,900 By Revaluation A/c 600 400

Total 96,100 70,400 28,900 Total 96,100 70,400 48,167

To Cash 39,550 18,250 By Balance c/d 82,900 61,600 28,900

To Balance c/d 43,350 43,350 28,900

Total 82,900 61,600 28,900 Total 82,900 61600 28,900

Tutorial notes

2. Calculation of New Partners Capital

X
Combined adjusted Capital of X
Partners of Gaurav and Pankaj Partner , that is 1/5
which is Rs 82,900+ Rs 61,600=
Rs 1,44,500

Rs. 1,44,500 X X

= Rs 28,900

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Adjustment of Capital according to new profit sharing ratio

Reciprocal of his =Adjusted

Capital of new New Profit capital
partner share
x Sharing Ratio
X X
x

Rs. 28,900 3:3:2

X X X

Now the adjusted capital of all the partners are Rs

Gaurav’s Capital = 1,15,600 x 3/8= Rs 43,350

Pankaj’s Capital = 1,15,600 x 3/8 = Rs 43,350
Neeraj’s Capital = 1,15,600 x 2/8 = Rs 28,900

Take care :
i) When capital of the firm is adjusted taking the capital of the new partner as a base. Capital
of the new partner will remain the same .

ii) Calculation of sacrificing ratio

Old Ratio- New Ratio
Gaurav= 3/5-3/8= 24-15/40= 9/40(sacrifice)
Pankaj= 2/5-3/8= 16-15/40= 1/40(sacrifice)
So above calculation shows clearly that Gaurav & Pankaj sacrifice in the ratio of 9:1 in favaur
of Neeraj.
iii) Capital A/c of Gaurav& Pankaj will be credited with the amount of goodwill in sacrificing
ratio.

iv) Machinery is over casted by 10%

It means machinery having book value of Rs 100 has been shown at Rs 110.
In other words ,It means machinery which has been shown in the books at Rs
66,000, is having a book value of
Rs (66,000 x100/110). 60,000 . It is now to be correct and Rs 6,000 will be shown
in the debit side of revaluation account .

v) All debtors are goods , means no provision is required , so provision for bad debts
will be credited to Revaluation account.

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vi) Claim made by workmen will be met out of workmen compensation fund and the
remaining fund will be distributed in old partners in old ratios . Don’t forget to show
claim against the workmen in the liabilities of Balance Sheet .

viii) Assets taken over by partner is treated as drawings and debited to capital
account .
Balance Sheet
As on 1st January, 1996
Liabilities Rs. Assets Rs.
Capital- Bank 3,100
Gaurav 43,350 Sundry Debtors 42,000
Pankaj 43,350 Stock 46,000
Neeraj 28,900 1,15,600 Plant & Machinery 60,000
creditor 72,000 Investment 40,000
Employee saving bank 18,000 Less: take by partner 20,000
Employees workmen compensation Add: Appreciation 6,000 26,000
liability 4,500 Furniture 30,000
Less: Depreciation 3,000 27,000
Partner’s current A/c
Neeraj 6,000

2,10,100 2,10,100

Q.16 Given below is the Balance Sheet of Mr. Sharukh Khan as on 31st December, 2014 :

Liabilities Rs. Assets Rs.

Capital 4,00,000 Plant and Machinery 1,05,000
Bank Loan 60,000 Building 1,95,000
Empolyee’s providend fund 10,000 Furniture and Fixtures 50,000
Creditors 55,000 Investments 25,000
Stock 45,000
Sundry Debtors 40,000
Cash at Bank 65,000

5,25,000 5,25,000

Sharukh Khan with a view to extend his business, negotiated with Salman Khan, who entered into
the partnership to share profits and losses in the ratio of 2:1.

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The arrangement made between them was as follows :

(a) Furniture and fixture are to be taken at 90% of their value.
(b) Buildings and Plant and Machinery are to be taken at an appreciated value of 10%.
(c) Rs. 4,000 of Sundry Debtors are bad and there was doubtful amount of Rs. 1,500.
(d) A creditor for Rs. 3,000 is not traceable for a number of year and the amount is to be written back.
(e) Stock is to be taken at Rs. 42,000.
(f) Investments and bank loan not be taken over by the new partnership.
An amount of Rs. 40,000 to be brought in by Salman as premium for goodwill.
Salman Khan to brings in further cash to make his capital equal to that of Sharukh Khan after making
therein the adjustment mentioned above.
Make the necessary Journal entries to record the above transaction and prepare the opening
Balance Sheet of the partnership ( ISC Internal exams 12 marks )

Answer-
Revaluation A/c
Particular Rs. Particular Rs.
To Bad debts 4,000 By Building 19,500
To Furniture 5,000 By Plant & Machinary 10,500
To Provision for bad debts 1,500 By Creditor 3,000
To Stock 3,000

By Capital A/c
Shahrukh Khan - 19,500

33,000 33,000

Partners Capital A/c

Particular Shahrukh Salman Particular Shahrukh Salman

By Balance b \d 4,00,000
To Investment 25,000 By Bank 4,94500
By Bank Loan 60,000
By Premium for 40,000
goodwill A/c
To Balance c/d 4,94,500 4,94,500 By Revaluation A/c 19,500

Total 5,19,500 4,94,500 Total 5,19,500 4,94,500

Balance Sheet
As on 31st December, 2014
Liabilities Rs. Assets Rs.

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Capital- Bank 5,99,500

Shahrukh Khan 4,94,500 Sundry Debtors 40,000
Salman Khan 4,94,500 Less: Bad debts 4,000
9,89,000 Less: Provision for bad debts 1,500 34,500
Provident fund 10,000 Building 2,14,500
Stock 42,000
Creditor 52,000 Plant & Machinery
Furniture 50,000 1,15,500
Less: 5,000
45,000

10,51,000 10,51,000

Tutorial Notes

i) New firm refuses to take over Investments , the same will taken up by Sharukh and will be
debited to his capital A/c .
ii) New firm also refuses to assume Bank Loan , the same will be assumed by Sharukh and will
be credited to his capital account .

Remember : Assets Ka lena debit and liability ka lena credit

iii) New partner Salman brings in capital which is equal to adjusted capital of Sharukh , which
is Rs 4,94,500 . That is why the equal amount been contributed by Salman.

Q.17. The following is the balance sheet of Ankur, Basu and Cyrus sharing profits and losses in
proportion 6 : 5 : 3.respectively :
Liabilities Rs Assets Rs
Creditors 18,900 Cash 1,890
Bills payable 6,300 Debtors 26,460
General Reserve 10,500 Stock 29,400
Capital : Furniture 7,350
Ankur 35,400 Land & Building 45,150
Basu 29,850 Goodwill 5,250
Cyrus 14,550 79,800

1,15,500 1,15,500
They agreed to take Dolly into partnership and give him 1/8th share on the following terms :
1) That furniture be depreciated by Rs 920.

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2) An old Customer, whose account was written off as bad ,has promised to pay Rs 2,000 in full Settlement
of his full debt.
3) Tax provision of Rs 1,320 be made for outstanding repairs bills.
4) That the value of land and building having appreciated be brought up to Rs 54,910.That Dolly should
bring in Rs 14,700 s his capital .
5)That Dolly should bring in Rs 14,070 as his share of goodwill.
6)That After making the above adjustments ,the capital accounts of old partners be adjusted on the basis
of the proportion of Dolly’s Capital to his share in business i.e., actual cash to be paid off or brought in by
the old partners ,as the case may be .
Pass The necessary journal entries and prepare the balance sheet of the new firm .

( ISC internal exams modified 12 Marks . CBSE 12 Marks old pattern )

SOLUTION Journal
Date Particulars L.F Dr. (Rs) Cr ( Rs)
General Reserve A/c Dr. 10,500
To Ankur’s Capital A/c 4,500
To Basu’s Capital A/c 3,750
To Cyru’s A/c 2,250
( General Reserves transferred to old partner’s capital
accounts )
2,240
Revaluation A/c Dr.
920
To Furniture A/c
1,320
To Provision for repairs A/c
(Reduction in the value of asset and a provision made
for outstanding repairs bills )
Debtors A/c Dr. 2,000
Land & building A/c Dr. 9,760
To Revaluation A/c 11,760
( Amount receivable from an old customer and increase
in the value of Land & building )
Revaluation A/c Dr. 9,520
To Ankur’s Capital A/c 4,080
To Basu’s Capital A/c 3,400
To Cyru’s Capital A/c 2,040
(Transfer of Profit on Revaluation to old partner’s capital
A/cs)
Ankur’s capital A/c Dr. 2,250
Basu’s Capital A/c Dr. 1,875
Cyrus’s Capital A/c Dr. 1,125
To goodwill A/c 5,250
(Goodwill appearing in the books written off)

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Cash A/c Dr.

To Dolly’s Capital A/c 28,770
To Premium for goodwill A/c 14,700
(Amount brought in cash by Dolly being Rs 14,700 for 14,070
capital and Rs 14,070 for goodwill)
Premium for goodwill A/c Dr
14,070
To Ankur’s Capital A/c
6,030
To Basu’s Capital A/c
5,025
To Cyrus’s Capital A/c
3,015
(Goodwill brought in by Dolly credited to old partners )

Ankur’s Capital A/c 1 Dr.

Basu’s Capital A/c 2 Dr.
To Cash A/ c 3,660
(Cash withdrawn by Ankur and Basu ) 3,400
7,060
3
Cash A/c Dr.
To Cyrus’s Capital A/c
(Cash brought in by Cyrus) 1,320
1,320

Dr. Revaluation Account Cr.

Particulars Rs Particulars Rs
To furniture A/c 920 By Debtors A/c 2,000
To Provision for Repairs 1,320 By Land & building A/c 9,760
To Profit transferred to capital A/cs:
Ankur 4,080
Basu 3,400
Cyrus 2,040
9,520
11,760 11,760

Dr. CAPITAL ACCOUNTS Cr.

Particulars Ankur Basu Cyrus Dolly Particulars Ankur Basu Cyrus Dolly

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To Goodwill 2,250 1,875 1,125 By bal/b/d 35,400 29,850 14,550 --

A/c By General
47,760 40,150 20,730 14,700 Reserve A/c 4,500 3,750 2,250 --
To balance By
c/d Revaluation 4,080 3,400 2,040
A/c --
By Premium
for Goodwill 6,030 5,025 3,015
A/c -- -- -
14,700
By cash A/c
50,010 42,025 21,855 14,700 50,010 42,025 21,855 14,700

To Cash A/c By bal. b/d 47,760 40,150 20,730 14,700

(Balancing Fig) 3,660 3,400 By cash A/c
-- -- (balancing fig.) -- -- 1,320 --
To balance c/d 44,100 36,750 22,050 14,700
47,760 40,150 22,050 14,700 47,760 40,150 22,050 14,700

BALANCE SHEET as at ………….

Liabilities Rs Asset Rs
Creditors 18,900 Cash 4 24,920
Bills payable 6,300 Debtors 28,460
Provision for Repairs 1,320 Stock 29,400
Capital Accounts Furniture 6,430
Ankur 44,100 Land & Building 54,910
Basu 36,750
Cyrus 22,050
Dolly 14,700 1,17,600
1,44,120 1,44,120

Tutorial Notes
Calculation of New Profit Sharing Ratio -
Let us assume that total profit of the firm is 1
Share of New Partner is 1/8
Remain share of profit after giving 1/8th share to Dolly = 1-1/8= 7/8

Share of Ankur = × =

Share of Basu= × = Share of Cyrus = × =

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New Share = 6 : 5 : 3 : 2

Adjustment of Capital according to profit sharing ratio

XCapital of new X X =Adjusted

Reciprocal of his X New Profit Adjusted
Sharing Ratio capital
partner share

Rs. 14,700 6:5:3:2

X X
=

Ankur = 1,17,600 x 6/16 = 44,100 Basu = 1,17,600 x 5/16 = 36,750 Cyrus = 1,17,600 x
3/16 = 22,050 Dolly = 1,17,600 x 2/16= 14,700
Alternatively :
Step 1 . Find out the capital of the entire firm on the basis of new
14,700 x 8/1 = Rs 1,17,600
Step 2 Divide this capital in the new profit sharing ratio in order to get the adjusted capital:
Ankur = 1,17,600 x 6/16 = 44,100 Basu = 1,17,600 x 5/16 = 36,750 Cyrus = 1,17,600 x
3/16 = 22,050 Dolly = 1,17,600 x 2/16= 14,700

Home assignment 12
. A And B are partners sharing profits and losses in the ratio 3:2 They Admit C As a partner on 1st
April ,2016 at which date the balance Sheet of the firm was as under :
Liabilities Rs Assets Rs
Sundry creditors 1,60,000 Cash at bank 20,000
Machinery replacement reserve 12,000 Debtors 2,20,000
Contingency Reserve 90,000 Furniture 80,000
Capital A/cs: Plant and Machinery 1,50,000
A 3,18,000 Buildings 3,00,000
B 2,00,000 5,18,000 Advertising Expenditure 10,000

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7,80,000 7,80,000

Following terms were agreed upon :

i) Furniture is undervalued by 20%.**
ii) Machinery is to be depreciated by 30%**
iii) Creditors include a Contingent liability of Rs 50,000 which has been decided by the court at Rs 43,000.
iv) In respect of debtors ,the following debts proved bad or doubtful :
Rs 15,000 due from Adarsh – bad to the full extent
Rs 20,000 due from Shayam – Insolvent ,estate expected to pay only 40 %.
v) Goodwill of the firm is valued at Rs 60,000 .However ,C is unable to bring his share of goodwill in cash .
vi) C is given 1/5th share of profits which he acquires equally from A and B . C will bring 1/5th of the total
capital of the firm.
You are required to prepare Revaluation Account ,Capital and the new Balance Sheet of the firm .
( ISC modified 12 Marks)

Q.18. A , B and C are partners sharing Profits and losses in ratio of 3:2:1. Their Balance Sheet as
at 31st March ,2016 is as follows :
Liabilities Rs Assets Rs
Creditors 36,000 Cash 14,000
Bills payable 20,000 Sundry Debtors 55,000
Reserve fund 20,000 Less: Provision 2,500 52,500
Capitals : Stock 60,000
A 60,000 Patents 6,000
B 60,000 Fixed Assets 98,500
C 50,000 1,70,000 Profit and loss a/c 15,000

2,46,000 2,46,000

On 1st April ,2016 ,D is admitted into the firm with 1/4th Share in the profits ,which he gets
equally from A and B. Other terms of agreement are as under:
a) D will introduce Rs 60,000 as his capital and he is to pay Rs 18,000 as his share of goodwill, but he could
bring only Rs 9,000.
b) 10% of the reserve fund is to remain as a provision against bad and doubtful debts.
(c) Firm is to meet an unforeseen liability of Rs 1,000
(d) An item of Rs 4,000 included in Bills payable is not likely to arise .
(e) Stock is to be reduced by 30 % and patents to be written off in full.
(f) A is to pay off the Bills Payable

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(g)After making the above adjustments the capital accounts of the old partners be adjusted on the basis of
D’s 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 Capital Accounts and the balance Sheet of the new firm . ( ISC internal exams )

SOLUTION :
Dr. Capital Accounts Cr.
A B C D Particulars A B C D
Rs Rs Rs Rs Rs Rs Rs Rs
To Rev. 10,500 7,000 3,500 -- ByBal.b/d 60,000 60,000 50,000 --
To Profit & By Reserve fund 9,000 6,000 3,000 --
Loss A/c 7,500 5,000 2,500 -- By cash A/c 60,000
To Bal.c/d 76,000 63,000 47,000 60,000 By Premium for -- --
goodwillA/c 4,500 4,500
By D’s current A/c 4,500 4,500
By Bills Payable 16,000
A/c

--
94,000 75,000 53,000 60,000 94,000 75,000 53,000 60,000

To cash -- 13,000 7,000 -- 76,000 63,000 47,000 60,000

To Bal. c/d 90,000 50,000 40,000 60,000 By Bal.b/d 14,000
By Cash A/c
90,000 63,000 47,000 60,000 90,000 63,000 47,000 60,000

BALANCE SHEET
As at 1st April,2016
Liabilities Rs Assets Rs
Provision for Liability 1,000 Cash 77,000
Creditors 36,000 D,s Current 9,000
Capitals : Sundry Debtors 55,000
A 90,000 Less: Provision 4,500 50,500
B 50,000 Stock 42,000
C 40,000 Fixed Assets 98,500
D 60,000

2,77,000 2,77,000

Tutorial notes :

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

(1) New Profit sharing ratios :

A = – ( × ) =

B= − ( × ) =

C =

D =

Hence ,the new profit ratio between A ,B , C and D will be : ∶ ∶ or ∶ ∶ ∶ or 9 :
5 : 4 : 6.

Adjustment of Capital

Capital ofxnew X X Reciprocal of his share

X New profit
partner sharing Ratios = Adjusted
Capital
all the partners

× × X =Rs 2,40,000
60,000 X 24/6 X 9: 5 : 4 : 6 =

Capital of A = Rs 2,40,000 x 9/24 =90,000, B = Rs 2,40,000 x 5/24 = 50,000

C = Rs 2,40,000 x 4/24 =Rs 40,000 D = Rs 2,40,000 x 6/24 = 60,000

Home assignment 13
Given below is the Balance sheet of Mr. Raymond as at 31st March ,2014 .

Liabilities Rs Assets Rs
Capital 4,00,000 Plant and Machinery 1,05,000
Bank Overdraft 60,000 Building 1,95,000
Bill Payable 15,000 Furniture and fixtures 50,000
Creditors 50,000 Investments 25,000

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Stock 45,000
Sundry Debtors 40,000
Cash at bank 65,000

5,25,000 5,25,000
Raymond with a view to extend his business ,negotiated with Simon ,who entered
into the partnership on 1st April ,2014 to share profits and losses on the ratio of 2 :1.
The arrangement made between them was as follows :
i) Furniture are to be taken at 10% less.
ii) Buildings and Plant and Machinery are to be taken at an appreciated value of 10 %.
Rs 4,000 of Sundry Debtors are bad and there was doubtful amount of Rs 1,500.
iii) A creditor for Rs 3,000 is not traceable for a number of years and the amount is to be written off.
iv) Stock is to be taken at Rs 42,000.
v) Investments and bank overdrafts not to be taken over by the new partnership an amount of Rs 40,000 to
be brought in by Simon as premium for goodwill.
vi) Simon to bring in further cash to make his capital equal to that of Raymonds after making therein the
adjustments mentioned above .
Make the necessary Journal entries to record the above transactions and prepare the opening
balance Sheet of the partnership .

Home assignment 14
Arjun And Bhakti are partners and the profit is divided as follows : to A ; to B and carried to

Reserve Account .They Admit vivek As a partner on 1st April ,2009 at which date the balance Sheet
of the firm was as under :
Liabilities Rs Assets Rs
Sundry creditors Cash at bank 20,000
O/s Expenses 1,60,000 Debtors 2,20,000
Reserve 12,000 Stock 1,80,000
Capital A/cs: 90,000 Plant and Machinery 1,50,000
Arjun 3,18,000 Buildings 2,00,000
Bhakti 2,00,000 Advertising Expenditure 10,000

5,18,000
7,80,00
7,80,000 0

Following terms were agreed upon :

i) Stock is undervalued by 10%.
ii) Depreciation of Rs 30,000 had been omitted on plant and machinery for the year ended 31st March
,2009
iii) Creditors include a Contingent liability of Rs 50,000 which has been decided by the court at Rs 43,000.

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In respect of debtors ,the following debts proved bad or doubtful :

Rs 15,000 due from Ram – bad to the full extent
Rs 20,000 due from Shyam – Insolvent ,estate expected to pay only 40 %.
iv)Goodwill of the firm is valued at Rs 60,000 .However ,Vivek is unable to bring his share of goodwill in
cash .
v) Vivek is given 1/5th share of profits which he acquires equally from Arjun and Bhakti .Vivek is to bring in
Capital proportionate to his share of profits in the firm .
You are required to prepare Revaluation Account ,Capital and the new Balance Sheet of the firm .
( Modified ISC)

Q.19 Amir ,Badshah and Shub are partners sharing Profits and losses in ratio of 3:2:1. Their
Balance Sheet as at 31st March ,2014 is as follows :
Liabilities Rs Assets Rs
Sundry Creditors 36,000 Cash 14,000
Bank overdraft 20,000 Sundry Debtors 50,000
Reserve 15,000 Less: Provision 2,500 47,500
Capitals : Stock 60,000
Amir 60,000 Patents 6,000
Badshah 60,000 Fixed Assests 98,500
Shub 50,000 1,70,000 Goodwill 15,000

2,41,000 2,41,000

On 1st April ,2014 ,Danish is admitted into the firm with 1/4th Share in the profits ,which he gets
1/8th from Amir and 1/8 from Badshah .Other terms of agreement are as under:
i) Danish will introduce Rs 60,000 as his capital and pay Rs 18,000 as his share of goodwill.
ii) 20% of the reserve is to remain as a provision against bad and doubtful debts.**
iii) A liability to the extent of Rs 1,000 be created in respect of a claim for damages against the firm .
iii) An item of Rs 4,000 included in sundry creditors is not likely to be claimed
iv) Stock is to be reduced by 30 % and patents to be written off in full .
V)Amir is to pay off the bank Overdraft.**
vi)After making the above adjustments the capital accounts of the old partners be adjusted on the basis of
Danish’s capital to his share in the business ,i.e. ,actual cash to e paid off to ,or brought in by ,the old
partners ,as the case may be .
Prepare journal entries ,capital Accounts and the balance Sheet of the new firm .
SOLUTION : JOURNAL ENTRIES
Date Particulars L.F Dr.(Rs) Cr. (Rs)

2014 Reserve A/c Dr. 15,000

April 1 To Provision for doubtful debts A/c 3,000
To Amir’s Capital A/c 6,000
To Badshah capital A/c 4,000
To Shub capital A/c 2,000

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(20% of Reserve retained as provision for doubtful debts

and the balance credited to old partners in 3:2:1)
25,000
1,000
18,000
6,000
Revaluation A/c Dr.
To claim for damages A/c
To Stock A/c 4,000
To Patents A/c 4,000
(Recording the liability for damages and decrease in the
value of stock and patents )
Sundry creditors Dr. 10,500
To Revaluation A/c 7,000
(Decrease in the creditors ) 3,500
21,000
Amir’s Capital A/c Dr.
Badshah’s capital’s A/c Dr. 20,000
Shub’s capital A/c Dr. 20,000
To Revaluation A/c
(Transfer of Loss on revaluation )
Bank Overdraft A/c Dr. 7,500
To Amir’s Capital A/c 5,000
(Bank overdraft paid off by Amir credited to his capital 2,500
A/c ) 15,000
Amir’s Capital A/c Dr.
Badshah’s Capital A/c Dr.
Shub’s Capital A/c Dr. 78,000
To goodwill A/c 60,000
(Goodwill already existing in the books written off in the 18,000
old ratio )
Cash A/c Dr. 18,000
To Danish’s capital A/c
9,000
To premium for goodwill A/c 9,000
(Danish brings in Rs 60,000 for his capital and Rs
18,000 as his share goodwill)
Premium For Goodwill A/c Dr.
To Amir’s Capital A/c 13,000
To Badshah’s Capital A/c 13,000
(Amount of goodwill shared by Amir and Badshah in their
sacrificing ratio (1:1) 11,000

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Cash A/c Dr. 6,000

To Amir’s Capital A/c 17,000
(Deficit capital brought in by Amir )
Badshah’s capital A/c Dr.
Shub’s Capital A/c Dr.
To Cash A/c
(Surplus capital withdrawn by Badshah by Shub)

Dr. Capital A/c Cr.

Particulars Amir Badshah Shub Danish Particulars Amir Badshah Shub Danish
Rs Rs Rs Rs Rs Rs Rs Rs
To Rev. 10,500 7,000 3,500 -- By Bal.b/d 60,000 60,000 50,000 --
To By Reserve 6,000 4,000 2,000
Goodwill 7,500 5,000 2,500 -- By bank --
To Bal.c/d 77,000 61,000 46,000 60,000 overdraft 20,000 -- --
By cash 60,000
By
Premium
for 9,000 9,000
goodwill
A/c --
95,000 73,000 52,000 60,000 95,000 73,000 52,000 60,000
To cash -- 11,000 6,000 -- By Bal.b/d 77,000
To Bal. c/d 90,000 50,000 40,000 60,000 By Cash 13,000 61,000 46,000 60,000

90,000 61,000 46,000 60,000 90,000 61,000 46,000 60,000

¶
BALANCE SHEET
As at 1st April,2014
Liabilities Rs Assets Rs
Sundry Creditors 32,000 Cash 88,000
Claim for Damages 1,000 Sundry Debtors 50,000
Capitals : Less: Provision 5,500 44,500
Amir 90,000 Stock 42,000
Badshah 50,000 Fixed Assests 98,500
Shub 40,000
Danish 60,000

2,73,000 2,73,000

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Tutorial notes :

(1) New Profit sharing ratios :

Amir = - =

Badshah = − =

Shub =

Danish =

Hence ,the new profit ratio between Amir ,Badshah , shub and Danish will be : ∶ ∶ or

∶ ∶ ∶ or 9 : 5 : 4 : 6.

Adjustment of Capital

x X New profit sharing Ratios

Capital of new partner Reciprocal of his share
X X

= Adjusted Capital of all the partners

60,000 24
60,000 × 4/1 × X 9: 5 : 4 : 6 =Rs 2,40,000
6

Capital of Amir = Rs 2,40,000 x 9/24 =90,000, Badshah = Rs 2,40,000 x 5/24 = 50,000

Shub = Rs 2,40,000 x 4/24 =Rs 40,000 Danish = Rs 2,40,000 x 6/24 = 60,000

Q.20 Anuj and Animesh share profits in the ratio of 3 :1 .Their Balance Sheet as at 31st March
,2012, was as under :
Liabilities Rs Assets Rs
Outstanding Expenses 5,000 Cash 7,800
Sundry Creditors 36,000 Sundry Debtors 24,000
Provision for Doubtful Debts 800 Stock 5,000
Capital Accounts : Fixed Assests 80,000
Anuj Goodwill 8,000
Animesh 68,000 P&L A/c 16,000
31,000

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1,40,800 1,40,800
Riya is admitted into partnership on 1st April ,2012 the following terms :
Fixed assets are to be depreciated by 20 %.
Provision for doubtful debts should remain at 5% on debtors.
The new profit sharing Ratio will be 5 : 3: 2.
Riya will pay Rs 20,000 as capital and the capital of old partners will be adjusted on the basis of new
partner’s capital and his share in the business ,actual cash to be brought in or withdraw by old partners ,as
the case may be .
Goodwill of the firm is valued at Rs 20,000.
Prepare Journal entries ,capital accounts and the opening Balance Sheet of the new firm .
( ISC modified 12 Marks)

SOLUTION.
Journal
Date Particulars L.F Dr.(Rs) Cr.
(Rs)
2012
April 1 Anuj’s Capital A/c Dr. 12,000
Animesh capital A/c Dr. 4,000
To P&L A/c 16,000
(Transfer of debit balance of P&A/c)

Revaluation A/c Dr. 16,400

To Fixed assets A/c 16,000
To Provision for Doubtful Debts A/c 400
( Decrease in the value of fixed assets and increase
required in provision for doubtful debts)
Anuj’s Capital A/c Dr. 12,300
Animesh’s Capital A/c Dr. 4,100
To Revaluation A/c 16,400
(loss on revaluation transferred to old partners)

6,000
Anuj’s Capital A/c Dr.
Animesh’s Capital A/c Dr. 2,000
8,000
To Goodwill A/c
(Goodwill already appearing in the books written

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off I old profit sharing ratio i.e. 3 :1 )

Animesh’s Capital a/c (1/20 of 20,000) Dr.

Riya ‘s Current A/c (2) ( 4/20 of 20,000) Dr. 1,000
To Anuj’s capital a/c (5/20 of 20,000) 4,000
Anuj compensated for goodwill due to his 5,000
sacrificing 5/20th Share ,animesh gaining 1/20th
and riya gaining 4/20th share)
Cash A/c Dr. 20,000
To Riya’s capital A/c 20,000
(Capital introduced by Riya )
Cash A/c Dr. 17,400
To Anuj’s Capital A/c 7,300
To Animesh A/c 10,100
(Deficit capital brought in by Anuj and Animesh)

Dr. CAPITAL ACCOUNTS Cr.

Particulars Anuj Animesh Riya Particulars Anuj Animesh Riya
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs (Rs)
To P&L A/c 12,000 4,000 By Bal. b/d 68,000 31,000 --
To Revaluation 12300 4100 By Animesh ‘s
To Goodwill 6,000 2000 capital a/c 1,000
To Anuj’s Capital 1000 -- By Riya’s Current
A/c a/c 4,000
To Bal .c/d 42700 19900 20000 By Cash 20,000

73,000 31,000 20,000 73,000 31,000 20,000

By Bal. b/d 42,700 19,900 20,000
To bal. c/d 50,000 30,000 20,000 By Cash 7,300 10,100

50,000 30,000 20,000 50,000 30,000 20,000

BALANCE SHEET As at 1st April ,2012

Liabilities Rs Assets Rs

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Outstanding Expenses 5,000 Cash** 45,200

Sundry Creditors 36,000 Sundry Debtors 24,000
Capital Accounts : Less : Provision 1,200 22,800
Anuj 50,000 Stock 5,000
Animesh 30,000 Fixed Assests 64,000
Riya 20,000 1,00,000 Riya’s current A/c 4,000

1,41,000 1,41,000

Tutorial Notes

Calculation of sacrificing and Gaining Ratio :

Old ratio of Anuj and Animesh = ∶

New Ratio of Anuj ,Animesh and Riya = ∶ ∶

Anuj = − = = (Sacrifice)

Animesh = − = = (Gain )

Riya = (Gain )

Read it very carefully ( Very Very Important )

In this question Anuj is sacrificing and New partner Ria and Old partner Animesh is gaining .
Firstly Anuj will ask Animesh to compensate him for 1/20 th share that he has gained at the
cost of him.

Goodwill of the firm is Rs 20,000 . So he is suppose to compensate Rs 1,000 ( Rs 20,000 x 1/20) to

Aunj . Since Animesh is a old partner he is not supposed to bring goodwill in cash . Adjustment
entry will be made.His capital account will be debited and Anuj’s capital account will be
credited .

Now new partner Ria who is purchasing his entire share from Anuj is compensate Anuj’s
amount equivalent to share which she has got from Anuj. But in question it is not been clearly
stated whether Ria is going to bring his share of goodwill in cash. So Anuj’s Capital account will
be credited and Ria’s current account will be debited by Rs 4,000 ( Rs 20,000 x 4/20).

Animesh’s Capital a/c (1/20 of 20,000) Dr. 1,000

Riya ‘s Current A/c (2) ( 4/20 of 20,000) Dr. 4,000
To Anuj’s capital a/c (5/20 of 20,000) 5,000
Anuj compensated for goodwill due to his sacrificing 5/20th Share ,Animesh gaining 1/20th
and Riya gaining 4/20th share)

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Adjustment of Capital

x X X
Capital of new partner Reciprocal of his share New profit sharing Ratios

= Adjusted Capital of all the partners

60,000 24
20,000 × 10/2 × X 5 :3 :2 =
6

Anuj’s Capital in the new firm = 1,00,000 × = 50,000

Animesh’s Capital in the new firm = 1,00,000 × = 30,000
Riya’s Capital in the new firm = 1,00,000 × = 20,000

**Cash Balance = Rs 7,800 + Rs 20,000 + Rs 7,300 + Rs 10,100 = Rs 45,200.

Advanced questions
Q.21 X and Y are partners in a firm sharing profits and losses in the ratio of 2:1 .Their balance
Sheet as at 31.3.16 stood as follows:
Liabilities Rs Assets Rs
Sundry Creditors 80,000 Plant and Machinery 2,00,000
General Reserve 60,000 Land and Building 60,000
Workmen Accident fund 60,000 Debtors 1,10,000
Provision for repairing of Building 20,000 Stock 1,50,000
Capital : Bank 20,000
X
Y
2,20,000
1,00,000

5,40,000 5,40,000
On 1st April 2016, they admit Z as a partner and the following terms were agreed upon:
The new profit sharing Ratio should be 2:1:1.

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Z is to bring in Rs 1, 30,000 as his capital and he could bring half of his share of goodwill in cash.
Goodwill is to be valued on the basis of Capitalization at 12% of the normal average profits of the last three
years .Profits of the last three years were as follows :
For the year ended 31.3.14 Profit Rs 20,000 (Including insurance claim received Rs 55,000)
For the year ended 31.3.15 loss Rs 20,000 (including voluntary retirement compensation paid Rs 1.00, 000).
For the year ended 31.3.16 profits Rs 1, 75,000 (including a profit of Rs 40,000 on the sale of assets).
Of the Sundry Debtors, Rs 15,000 proved to be bad and there is doubtful amount of Rs 5,000.
Provision is to be made for an unrecorded bill of a supplier amounting to Rs 20,000 .Provision for repair of
plant and machinery should also be increased to Rs 50,000.
Land and Building are to be increased to Rs 1,00.000
Capitals to be adjusted to profit sharing ratio taking Z’s capital as the base ,any excess or shortfall to be
adjusted in cash .
Show necessary journal entries and draw up the readjusted balance sheet of the new firm.

SOLUTION: JOURNAL
Date Particulars L.F Dr. (Rs) Cr. (Rs)
2016 General Reserve A/c Dr. 60,000
April 1 To X’s Capital A/c 40,000
To Y’s capital A/c 20,000
(Transfer of General Reserve to old partners )
70,000
Revaluation A/c Dr.
15,000
To sundry Debtors A/c
5,000
To Provision for doubtful Debts A/c
20,000
To sundry Creditors A/c
30,000
To provision for Repairing of Building A/c
(Recording of decrease in debtors and increase in liabilities I

Land & building A/c Dr. 40,000

To Revaluation A/c 40,000
(Recording of increase in the value of land and buildings )

20,000
X’s capital A/c Dr.
10,000
Y’s Capital A/c Dr.
To Revaluation A/c 30,000

( loss on revaluation transferred to old partner’s capital

accounts )
1,37,500
Bank A/c Dr. 1,30,000
To Z’s Capital A/c 7,500
To Premium for goodwill A/c(1)
(Amount Brought in by Karan as his capital and half of his
share of goodwill)

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Premium for goodwill A/c Dr. 7,500

Z’s Current A/c Dr. 7,500
To X’s Capital A/c 10,000
To Y’s A/c 5,000
(Premium for goodwill credited to old partners in their
sacrificing i.e. 2 :1

Dr. CAPITAL ACCOUNTS Cr.

Particulars X Y Z Particulars X Y Z
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)
By Bal. b/d 2,20,000 1,00,000 --
To Revaluation By General Res. 40,000 20,000
20,000 10,000 -- By Bank 1,30,000
To Bal .c/d 2,90,000 1,35,000 1,30,000 By Premium for
Goodwill a/c 5,000 2,500
By Z’s Current 5,000 2,500 --
A/c
By Workman 40,000 20,000
Accident Fund
3,10,000 1,45,000 1,30,000 3,10,000 1,45,000 1,30,000
To Bank A/c 30,000 5,000 -- 2,90,000 1,35,000 1,30,000
To Bal. c/d 2,60,000 1,30,000 1,30,000 By Bal. b/d -- --
2,90,000 1,35,000 1,30,000 2,90,000 1,35,000 1,30,000

Balance Sheet at 1st April, 2006

Liabilities Rs Assets Rs
Sundry Creditors 1,00,000 Plant & Machinery 2,00,000
Provision for repairing of Building 50,000 Stock 1,50,000
Capital : Sundry Debtors
X (1,10,000-15,000) 95,000
Y 2,60,000 Less : Provision for
Z 1,30,000 Doubtful Debts 5,000 90,000
1,30,000 Bank 1,22,500
Z’s Current account 7,500
Land & Building 1,00,000

6,70,000 6,70,000

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Tutorial notes

Note carefully:
For the valuation of goodwill Profit and loss that is used, should be Normal + Maintainable +
operating profit.
i) In order to make profit normal profit, abnormal loss should be added and abnormal gain should
be subtract.
ii) In order to make profit Maintainable, future gains should be added and future pains should be
subtracted.
iii) In order to make profit operating, non operating gains should be subtracted and non operating
expenses should be Added.

iv) Valuation of goodwill.

Profit for the year ended 31. 3 .14 20,000
Less: Insurance Claim 55,000 -- 35,000
Profit /Loss for the year ended 31. 3. 15 (-) 20,000
Add: Voluntary retirement Compensation 1, 00,000 + 80,000
Profit for the year ended 31.3.16 1, 75,000
Less: Profit on sale of assets (-) 40,000 (+) 1, 35,000
Total Profit of last Three years Rs 1,80,000
Average Profit = Rs1,80,000 ÷ 3 =Rs 60,000

Goodwill = Average profit ×

-- Capital employed
= 60,000 × -- 4, 40,000 = 60,000
Capital employed = Capital + Reserve and surplus
3,20,000 ( Capitals of Old partners ) + 60,0000 ( General Reserve ) + 60,000 ( Workmen
Accident fund) = 4,40,000

Treatment of goodwill.
In this question Z is supposed to bring Rs 15,000 for goodwill, he could bring only 7,500; the
remaining amount will be adjusted.

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Adjustment of Capital
X X
Capital of new partner X Reciprocal of his share X New profit sharing
Ratios

24
1,30,000 X 4/1 X 2:1:1 =
6

X = 5,20,000 x 2/4 = 2,60,000 Y = 5,20,000 x ¼ = 1,30,000 Z = 5,20,000 x ¼ =

1,30,000

Q.22.Ajay and vijay who were sharing profit in the ratio of 5:3 admit Raju as partner with 1/5 share
in Profits .He had to contribute proportionate capital. The financial position was as under:
Balance Sheet as at 1st April 2015
Liabilities Rs Assets Rs
Creditors 19,000 Goodwill 10,000
Bills payable 8,000 Land &building 25,000
Capital : Plant & machinery 35,000
Ajay 55, 000 Debtors 25,000
Vijay 30,000 85,000 Stock 20,000
General Reserve 16,000 Investments 14,000
Provision for bad debts 1,500 Bank 2,400
Outstanding Salary 2,400 Prepaid Insurance 500

1,31 ,900 1,31,900

On this day they agreed to admit Raju, a new partner on the following terms:
Raju brings in Rs 26,000 as his share of goodwill.
Land & Building and plant & Machinery were to be valued at Rs 38,000 and Rs 30,000 respectively.
The provision for bad debts was of be maintained upto Rs 1,000
A liability for Rs 1,200 included in Sundry Creditors was not likely to arise.
Rs 10,000 of investments were taken over by old partners in their profit ratio.
Vijay is to withdraw Rs 2,400 in cash.
An amount of Rs 100 is outstanding for repairs
The capitals of the partners were to be adjusted in profit sharing ratios by opening current accounts.
Give journal entries and balance sheet on the admission of Raju.
SOLUTION : ( Most Most Most important question for internal exams for ISC and CBSE)
JOURNAL ENTRIES
Date Particulars L.F Dr. (Rs) Cr ( Rs)

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

2006 General Reserve A/c Dr. 16,000

April 1 To Ajay’s Capital A/c 10,000
To Vijay’s Capital A/c 6,000
(Transfer of General Reserves )
5,100
Revaluation A/c Dr.
To Plant & Machinery A/c 5,000
To Outstanding Repairs A/c 100
(value of Plant decreased and Provision made for
outstanding repairs )
Creditors A/c Dr. 1,200
Land & building A/c Dr. 13,000
Provision for Doubtful Debts A/c Dr. 500
To Revaluation A/c 14,700
( Increase in the value of asset and decrease in
liabilities )
9,600
Revaluation A/c Dr. 6,000
To Ajay’s Capital A/c 3,600
To Vijay’s Capital A/c
(Transfer of Profit on Revaluation ) 6,250
Ajay’s capital A/c Dr. 3,750
Vijay’s Capital A/c Dr. 10,000
To goodwill A/c
(Goodwill already appearing in the books write-
off)
26,000
26,000
Bank A/c Dr.
To Premium for goodwill A/c(1)
(Premium for goodwill brought in by Raju)
26,000
16,250
Premium for goodwill A/c Dr
9,750
To Ajay’s Capital A/c
To Vijay’s Capital A/c
(Premium for goodwill credited to old partners )
2,400
2,400
Vijay’s Capital A/c Dr.
To Bank A/ c
(Amount withdrawn by Vijay )
6,250
Ajay’s capital A/c Dr. 3,750
Vijay’s capital A/c Dr. 10,000
To Investment A/c
(Investments taken over by old partners) 28,550

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Bank A/c (1) Dr. 28,500

To Raju’s Capital A/c
(Raju brings his proportionate capital )
3,375
Ajay’s capital A/c (2) Dr.
3,375
To Ajay’s Current A/c
(Surplus capital credited to current A/c)
3,375
Vijay’s Current A/c Dr. 3,375
To Vijay Capital A/c
(Deficit capital brought through current account)

Dr. REVALUATION ACCOUNTS Dr

Particulars Rs Particulars Rs
To Plant and Machinery .A/c 5,000 By creditors 1,200
To Outstanding Repairs 100 By Land & Building 13,000
To capital A/c By provision for Doubtful Debts
Ajay 6,000 500
Vijay 3,600

14,700 14,700

Partners Capital Account

Particulars Ajay(Rs) Vijay ( Rs) Raju Particulars (Rs) Ajay (Rs) Vijay(Rs) Raju(Rs)
(Rs)

To Goodwill 6,250 3,750 By Bal. b/d 55,000 30,000

To Bank 2,400 By General Res. 10,000 6,000
To Investments 6,250 3,750 By Revaluation 6,000 3,600
To bal.c/d 74,750 39,450 28,550 By Premium for
Goodwill 16,250 9,750
By Bank 28,550

87,250 49,350 28,550 87,250 49,350 28,550

To Current A/c By Bal. b/d
To Bal. c/d 3,375 By Current A/c 74,750 39,450 28,550
71,375 42,825 28,550 3,375

74,750 42,825 28,550 74,750 42,825 28,550

BALANCE SHEET OF NEW FIRM
as at 1st April, 2015
Liabilities Rs Assets Rs

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Sundry Creditors Land and Buildings(25,000+13,000) 38,000

( 19,000-1,200) 17,800 Plant &Machinery
Bills payable 8,000 (35,000-5,000) 30,000
Capital : Stock 20,000
Ajay 71,375 Debtors 25,000
Vijay 42,825 Less: Provision 1,000 24,000
Raju 28,550 Investments 4,000
Outstanding Salary 2,400 Bank 54,550
Outstanding Repairs 100 Prepaid Insurance 500
Ajay’s Current A/c 3,375 Vijay’s Current A/c 3,375

1,74,425 1,74,42
5

Tutorial Notes

: .Calculation of New Profit Sharing Ratio -

Let Total Profit = 1
Share of New Partner = 1/5 Remain share = 1-1/5= 4/5

Share of Ajay = × = Share of Vijay = × =

New Share = 5: 3: 2

Proportionate capital of new partner

X X
Combined adjusted Capital X Reciprocal of combined
X share X Share of new partner
X of old partners X = Rs 28,550
of old partners.

1,14,200 5/4 1/5

X X = Rs 28,550

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Adjustment of capital
X X
Capital of new partner X Reciprocal of his share X New profit sharing ratios

= Adjusted Capital

28,550 5/1 5:3:2

x x

Ajay, s capital = 1, 42,750 x 5/10= 71,375 vijay’s capital 1, 42,750 x 3/10 = 42825
Raju’s capital 1, 42,750 x 2/10= 28,550

Q.23. John,Bull and Wool were in partnership sharing profits and loses in the ratio of 2:2:1. Their
Balance Sheet as at March 2015, is given below :
Liabilities Rs Assets Rs
Sundry Creditors 25,700 Land &building 50,000
Outstanding Liabilities 3,000 Furniture 13,000
General Reserve 13,000 Stock of Goods 13,500
Capital Accounts : Sundry Debtors 11,000
John 24,000 Cash 12,200
Bull 24,000
Wool 10,000 58,000

99,700 99,700

The partners have agreed to take Tuna as partner with effect from 1st April 2015, on the following
terms.
i) Tuna shall bring Rs 10,000 towards his capital .
ii) The value of goodwill shall be fixed at Rs 15,000
iii) The value of the stock should be increased by 5,000 ,The furniture should be depreciated by 10 % .The
value of land & Buildings should be enhanced by 20%.
iv) Provision for doubtful Debts should be made at 10 % of the debtors.
v) The outstanding liabilities include Rs 1,000 due to Mr. Grip ,which has been paid by John privately . The
new profit –sharing ratio will be 5:5:3:2.
(vi) ) Capital of the entire firm is to be adjusted , taking the partner as a base whose relative capital is
the highest , any excess or short fall should be adjusted through current account. ***
Prepare revaluation Account and the capital Accounts of all the four partners’ .Also prepare a
balance Sheet of the new firm. (ISC modified 2012)
SOLUTION:
REVALUATION ACCOUNT

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Particulars Rs Particulars Rs
To Furniture A/c 1,300 By Stock A/c 5,000
To Provision for Doubtful Debts By Land and Building A/c 10,000
To Profit transferred 1,100
to :
John 5,040
Bull 5,040
Wool 2,520
12,600

15,000 15,000
Capital Account
Particulars John(Rs) Bull Wool Tuna Particulars John Bull Wool Tuna
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs) (Rs
To Bal c/d 36,240 35,240 15,120 10,000 By Bal. b/d 24,000 24,000 10,000
By cash A/c 10,000
By Tuna --
current A/c
(in 1,000 1,000
sacrificing
ratio i.e.
1:1) 5,200 5,200 2,600
By General
Reserve 1,000
By
outstanding
liabilities 5,040 5,040 2,520
A/c
By
Revaluation
(Profit )

Total 36,240 35,240 15,120 10,000 Total 36,240 35,240 15,120 10,000
To Bal.c/d 36,240 36,240 21,744 14,496 By Balance 36,240 35,240 15,120 10,000
c/d
By Bull 1,000
Current A/c
By Tuna 6,624
Current A/c
By Wool 4,496

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Current A/c

36,240 36,240 21,744 14,496 36,240 36,240 21,744 14,496

Balance sheet 31st March 2015

Liabilities Rs Assets Rs
Sundry Creditors 25,700 Land &building 60,000
Outstanding Liabilities 2,000 Furniture 11,700
Capital Accounts : Stock of Goods 18,500
John 36,240 Sundry Debtors 11,000
Bull 36,240 Less: Provision for
Wool 21,744 doubtful debts 1,100 9,900
Tuna 14,496 1, 08,720, Cash 22,200
Tuna’s Current A/c 6,496
Wool’s Current A/c 6,624
Bull’s Current A/c 1,000
1,36,420 1,36,420

Tutorial notes
Here Capital of the firm is to adjusted taking the partner whose capital is relatively highest .
Relative capital means capital for one share . Following steps are required to be taken :
Step 1 :Calculation of Highest Relative Capital :
. , . , . ,
John = = , Bull = = , Wool = = ,
. ,
Tuna = = ,

Step 2 Relative capital of John is the highest and will be taken as a base
For one share , John’s share of capital is Rs 7,248 , Bull’s share is 5 then his capital should be
Rs 7,248 x 5 = Rs 36,240
For one share ,John’s share of capital is Rs 7,248, Wool’s share is 3, then his capital should be
Rs 7,248 x3 = Rs 21,744
For one share , John’s share of capital is Rs 7,248 , Tuna’s share is 2 , then his capital should be

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Rs 7,248 x 2 =Rs 14,496.

In this question John has paid firm’s liability , firm will increase his capital by crediting it.

Q 24 Gopal and Govind are partners sharing profits and losses in the ratio of 60 : 40. The
firm’s Balance Sheet as on 31st March, 2016 was as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Fixed Assets 3,00,000
Gopal 1,20,000 Investments 50,000
Govind 80,000 Current Assets 2,00,000
Long –term –Loan 2,00,000 Loans and Advances 1,00,000
Current Liabilities 2,50,000
6,50,000 6,50,000

Due to financial difficulties, they have decided to admit Guru as a partner in the firm from 1st
April, 2016 on the following terms:
i) Guru will be entitled to 40% of the profits.
ii) Guru will bring in cash Rs. 1,00,000 as capital. It is agreed that Goodwill of the firm will be valued at 2
year’s purchase of 3 year’s normal average profits of the firm and Guru will bring in cash his share
Goodwill. It was also decided that the partners will not withdraw their share of goodwill nor will the
goodwill appear in the books of account.
The profits of the previous three years as follows:
Year ended 31.3.2014 profit Rs. 20,000 (including insurance claim received Rs. 40,000)
Year ended 31.3.2015 loss Rs. 80,000 (including voluntary retirement compensation paid Rs. 1,10,000).
Year ended 31.3.2016 profit Rs. 1,05,000 (including a profit of Rs. 25,000 on the sale of assets).
iii) It was decided to revalue the assets on 31st March, 2016 as follows:
Fixed Assets (net) Rs. 4,00,000
Investments Nil
Current Assets Rs. 1,80,000
Loans and Advances Rs. 1,00,000
iv) The new profit – sharing ratio after the admission of Guru was 35 : 25 : 40.
Pass journal entries on admission, show goodwill calculation and prepare Revaluation Account,
partners Capital Accounts, and Balance Sheet as on 1.4.2016 after the admission of Guru.
( CA foundation )
Answer-
Journal
Date Particulars L.F Rs. Rs.
2016 Bank A/c Dr. 1,24,000
1 Apr To Guru’s Capital A/c 1,00,000
To Premium for goodwill A/c 24,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

(Amount introduced by Guru as his capital and

premium for goodwill )
Premium for goodwill A/c Dr 24,000
To Gopal’s Capital A/c 15,000
To Govind’s Capital A/c 9,000
(Premium for goodwill brought in by Guru credited to
Gopal and Govind in the sacrifice ratio of 5 : 3)
Fixed Assets A/c Dr. 1,00,000
To Revaluations A/c 1,00,000
(Increase in the value of fixed assets as a result of
revaluation on admission of Guru)
Revaluation A/c Dr. 70,000
To Investments A/c 50,000
To Current Assets A/c 20,000
(Decrease in the value of assets)
Revaluations A/c Dr. 30,000
To Gopal’s Capital A/c 18,000
To Govind’s Capital A/c 12,000
(Profit on revaluations credited to Gopal and Govind in
the old ratio of 60 : 40)
Revaluations
Particulars Rs. Particulars
1.4.16 1.4.16
To Investments A/c 50,000 By Fixed Assets A/c 1,00,000
To Current Assets A/c 20,000
To Profit on revaluation:
Gopal (60%) 18,000
Govind(40%) 12,000 30,000
1,00,000 1,00,000

Capital Accounts
Particulars Gopal Govind Guru Particulars Guru Govind Guru
1.4.16 1.4.16
To Balance c/f 1,53,000 1,01,000 1,00,000 By Balance b/f 1,20,000 80,000 -
By Bank a/c - - 1,00,000
By premium for 15,000 9,000 -
goodwill)
By Revaluation a/c 18,000 12,000 -
(profit)
1,53,000 1,01,000 1,00,000 1,53,000 1,01,000 1,00,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Balance Sheet as on 1st April, 2016

Liabilities Rs. Assets Rs.
Capital Accounts: Fixed Assets 4,00,000
Gopal 1,53,000 Current Assets(including bank balance) 3,04,000
Govind 1,01,000 (Rs. 1,80,000 + 1,00,000 + 24,000)
Guru 1,00,000 Loans and Advances 1,00,000
Long –term –Loan 2,00,000
Current Liabilities 2,50,000
8,04,000 8,04,000

Tutorial Notes: Year ended

31.3.14 31.3.15 31.3.16
Profit (Loss) for the year P/L a/c 20,000 (80,000) 1,05,000
Adjustment for abnormal items (40,000) 1,10,000 (25,000)
(20,000) 30,000 80,000
Total Profit for three years Rs. 90,000
Average Profit Rs. 30,000
Goodwill on the basis of 2 year’s purchase:
Rs. 30,000 X 2 = Rs. 60,000
Premium for goodwill to be paid by Guru for 40% share:
40/100 X Rs. 60,000 = Rs. 24,000
(2) Calculation of profit –sacrificing ratio:
Gopal Govind Guru
Old profit –sharing ratio 60/100 40/100 -
New profit –sharing ratio 35/100 25/100 40/100
25/100 15/100 40/100

This question is from past CA intermediate exams and teaches you how to distributed
goodwill when out 3 sacrificing partners two have a different stake in goodwill.
Q .25 P,Q and R are partners in a firm sharing profit and losses in the ratio 2 : 3 : 1. Their Balance
Sheet as on 31st December, 2015, on which date S is admitted as a partner is as follows:
Liabilities Rs. Assets Rs.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Q’s Capital 35,000 Furniture 10,000

R’s Capital 22,000 Motor Car 20,000
Cash 18,000
P’s Capital 9,000
57,000 57,000

S is given ¼ share in profits and profit sharing ratio among the old partners remains the same.
The following adjustments are agreed upon:
(i) Motor car is taken over by Q at a value of Rs. 15,000.
(ii) Furniture is revalued at Rs. 28,000.
(iii) Goodwill is valued at Rs. 50,000. It is further agreed by P, Q and R that P is interested in goodwill only
upto a value of Rs. 30,000.
(iv) Expenses outstanding not brought into accounts Rs. 30,000. It is to be provided for.
(v) Accrued income Rs. 11,000 is to be brought into accounts.
S bring Rs. 20,000 in cash towards his capital contribution.
Pass necessary journal entries and prepare Balance Sheet of the firm after S’s admission.
( CA foundation )
Answer-

Journal
Date Particulars L.F Amount Amount
2015 S’s Current A/c Dr. 12,500
Dec, 31 To P’s Capital A/c 2,500
To Q’s Capital A/c 7,500
To R’s Capital A/c 2,500
(Adjustment for goodwill on admission of S as a
partner)
Revaluation A/c Dr. 8,000
To Motor car a/c 5,000
To Outstanding Expenses A/c 5,000
(Decrease in the value of motor car and
expenses incurred but not paid brought into
account)
Furniture A/c Dr. 18,000
Accrued Income A/c Dr. 11,000
To Revaluation A/c 29,000
(Increase in the value of motor car and accrued
income brought into account)
Revaluation A/c Dr. 21,000
To P’s Capital A/c 7,000
To Q’s Capital A/c 10,500
To R’’s Capital A/c 3,500
(Profit on revaluation transferred to capital

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Liabilities
Ex Hod Army Public School, Ex visitingRs
faculty LoretoAssets
Convent and CMS Gomtinagar Rs
Capital Accounts: 500 Furniture 28,000
P’s Capital A/c 38,000 Cash( 18,000 + 20,000) 38,000
Q’s Capital A/c 28,000 Accrued Income 11,000
R’s Capital A/c 20,000 D’s Current a/c 12,500
D’s Capital A/c 3,000
Outstanding expenses

89,500 89,500

accounts)
Q’s Capital A/c Dr. 15,000
To Motor car A/c 15,000
(Motor car taken over by Q at agreed value)
Cash A/c Dr. 20,000
To S’s Capital A/c 20,000
(Amount brought in by S as capital)
Balance Sheet
Particulars P Q R S Particulars P Q R S
To Balance 9,000 1.4.16
b/d 15,000 By Balance b/f 35,000 22,000
To Motor 500 38,000 28,000 20,000 By Bank a/c 20,000
Car By S,s Current
To Balance A/c goodwill) 2,500 7,500 2,500
c/f By Revaluation
a/c 7,000 10,500 3,500
(profit)
9,500 53,000 28,000 20,000 9,500 53,000 28,000 20,000

Balance Sheet

Tutorial Note
S’s share in the goodwill of P, Q and R (1/4X Rs. 30,000) is Rs. 7,500 will be debited to S
and credited to P,Q and R in the ratio of 2 : 3 : 1. Similarly, S’s share in the goodwill of Q and
R(1/4 X Rs. 20,000) or Rs. 5,000 will be debited to S and credited to Q and R in the ratio of 3
: 1.
P Q R S
For goodwill of P,Q and R (+)2,500 (+)3,750 (+)1,250 (-)7,500
For goodwill of Q and R (+)3,750 (+)1,250 (-)5,000
Net adjustment (+) 2,500 (+)7,500 (+) 2,500 (-) 12,500

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Q .23 The following is the Balance Sheet of the firm, Ashirvad, owned by A,B and C who share the
profits and losses of the business in the ratio of 3 : 2 : 1.
Balance Sheet as on 31st May,2016
Liabilities Rs. Assets Rs.
A’s Capital 1,20,000 Furniture 95,000
B’s Capital 1,20,000 Business Premises 2,05,000
C’s Capital 1,20,000 Stock –in –Trade 40,000
Sundry Creditors 20,000 Debtors 28,000
Outstanding salaries and wages 7,200 Cash at Bank 15,000
Cash in hand 4,200
3,87,200 3,87,200

On 1st June, 2016, they admit D as a partner on the following conditions:

(a) D will bring Rs. 1,20,000 as his capital and also Rs. 30,000 as goodwill premium for a quarter of
the share in the future profit/loss of the firm.
(b) The values of the fixed assets of the firm will be increased by 10% before the admission of D.
(c) The future profits and losses of the firm will be shared equally by all the partners.
Show the Journal entries, Revaluation Account and the partner’s Capital Accounts to include the
above-mentioned transactions assuming that the conditions were duly satisfied. Also prepare the
revised Balance Sheet. ( Most Important questions ) ( CBSE modified and ISC modified )
Answer-
Books of A,B,C and D
Journal
Date Particulars L.F Rs. Rs.
2016 Bank A/c Dr. 1,50,000
June 1 To D’s Capital A/c 1,20,000
T0 Premium for goodwill A/c 30,000
(Amount introduced by D as his capital and Premium for
goodwill )
Premium for goodwill A/c Dr. 30,000
To A’s Capital A/c 22,500
To B’s Capital A/c 7,500
(Premium for goodwill paid by D credited to A and B in
the profit –sacrificing ratio 3 : 1)
C’s Capital A/c Dr. 10,000
To A’s Capital A/c 7,500
To B’s Capital A/c 2,500
(Transfer of capitals in order to make adjustment for
goodwill for acquiring 1/12th share by C)
Furniture A/c Dr. 9,500
Business Premises A/c Dr. 20,500
To Revaluation A/c 30,000
(Increase in the value of assets as a result of revaluation

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on D’s admission)
2016 Revaluation A/c Dr. 30,000
June 1 To A’s Capital A/c 15,000
To B’s Capital A/c 10,000
To C’s Capital A/c 5,000
(Profit on revaluation credited to old partners in the
ratio of 3 : 2 : 1)

Revaluation A/c
Particulars Rs. Particulars Rs.
1.6.16 1.6.16
To Profit on revaluation: By Furniture A/c 9,500
A 15,000 By Business premises A/c 20,500
B 10,000
C 5,000 30,000
30,000 30,000

Capital Accounts
Particulars A B C D Particulars A B C D
To A’s By Balance 1,20,000 1,20,000 1,20,000
Capital A/c - 7,500 b/d
To B’s - - By Bank A/c - - - 1,20,000
Capital A/c - - 2,500 By premium
To Balance - for goodwill 22,500 7,500 - -
c/d 1,65,000 1,40,000 1,15,000 1,20,000 By C’s
Capital A/c 7,500 2,500
By
Revaluation 15,000 10,000 5,000
A/c(profit) -

1,65,000 1,40,000 1,25,000 1,20,000 1,65,000 1,40,000 1,25,000 1,20,000

Balance Sheet as on 1.3.16

Liabilities Rs. Assets Rs.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

A’s Capital 1,65,000 Furniture

B’s Capital 1,40,000 Business Premises 1,04,500
C’s Capital 1,15,000 Stock –in –Trade 2,25,500
D’s Capital 1,20,000 Debtors 40,000
Sundry Creditors 20,000 Cash at Bank 28,000
Outstanding salaries and wages 7,200 Cash in hand 1,65,000
4,200
5,67,200 5,67,200

Tutorial Notes
A B C D
Old profit –sharing ratio 3/6 2/6 1/6 -
New profit –sharing ratio 1/4 1/4 1/4 1/4
3/12 1/12 1/12 3/12
Sacrifice Sacrifice Gain Gain

Solution of assignment 1
Dr. REVALUAITON ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Provision for Doubtful Debts A/c 2,000 By Land & Building A/c 10,000
To Profit Transferred to: By Stock A/c 4,000
A’s Capital A/c 7,200 12000
B’s Capital A/c 4,800
14,000 14,000

Dr. PARTNERS’ CAPITAL A/C Cr.

Particulars A B C Particulars A B C
Amt. Amt. Amt. Amt. Amt. Amt.
(Rs) (Rs.) (Rs) (Rs) (Rs.) (Rs)
To Balance c/d 34,000 24,000 14,500 By Balance b/d 10,000 8,000 ---
By General
Reserve 9,000 6,000 ---
By Workmen’s
Compensation
Fund A/c 1,800 1,200 ---
By Revaluation
A/c (Profit) 7,200 4,800 ---
By Premium for
goodwill A/c 6,000 4,000 ---

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By Bank A/c --- --- 14,500

34,000 24,000 14,500 34,000 24,000 14,500

BALANCE SHEET (AFTER ADMISSION)

as at 31st December, 2004
Liabilities Rs. Assets Rs.
Capitals A/cs: 72,500 Plant and Machinery 10,000
A 34,000 2,000 Land and Building
B 24,000 12,000 Debtors 12,000 18,000
C 14,500 Less: Provision for
Workmen’s Compensation Fund Doubtful Debts 3,000 9,000
Creditors Stock 16,000
Cash (Rs. 9,000+Rs. 14,500+Rs. 33,500
10,000)

86,500 86,500

Working Note

,It can be calculated as follows :

Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit
, remaining after giving 20% or 1/5th share to new partner :
Rs 58,000 x 5/4 share = Rs 72,500
Step 2 C’s share is 1/5th of the total capital of the firm , that is
Rs 72,500 x 1/5 = Rs 14,500

Alternatevely

Calculation of proportionate capital of new partner

Share of profit of
Combined X Reciprocal of X = Proportionate
new partner
capital of newCapital
adjusted partnerof X Combined share capital of new
partner
old Partners of Old Partners
Capiof C = 23,450

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Rs. 58,000 1
X X
5

= Rs 14,500

Solution of home assignment 2

Dr. REVALUAITON ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Stock A/c 1,150 By Provision for Doubtful Debts A/c 2,000
To furniture A/c 1,500 By Partner’s Capital A/cs 1,650
To Outstanding Bill for RepairA/c 1,000 (Loss on Revaluation)
A (3/5) 990
B (2/5) 660

3,650 3,650

Dr. PARTNERS’ CAPITAL A/C Cr.

Particulars A B C Particulars A B C

To Revaluation A/c 990 660 -- By Balance b/d 35,000 30,000 --

(Loss) 6,000 4,000 -- By General Reserve 6,000 4,000 --
To Investment A/c 40,310 30,040 23,450 By Bank A/c -- -- 23,450
To Balance c/d By Premium for --
goodwill A/c 6,300 700
47,300 34,700 23,450 47,300 34,700 23,450

BALANCE SHEET A, B AND C

as at 31st December, 2004
Liabilities Rs. Assets Rs.

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Outstanding Bill for repair 1,000 Machinery 33,000

Creditors 36,000 Furniture (Rs. 15,000 Rs.1,500) 13,500
Capital A/cs: Investment (Rs. 20,000-10,000) 10,000
A 40,310 Debtors 19,000
B 30,040 Stock (Rs. 23,000 – Rs. 1,150) 21,850
C 23,450 93,800 Cash * 33,450

1,30,800 1,30,800

Tutorial Notes :
Old Ratio – New Ratio = Sacrificing ratio
A = 3/5 – 3/8 = 9/40
B = 2/5 – 3/8 =1/40 So the sacrificing ratio is 9 :1

2. Calculation of proportionate capital of new partner

X X = Proportionate
Combined Reciprocal of Share of new
capital of new capital share of new partner
adjusted
Capital of Capital
C = 23, of Combined share partner
X
old Partners of Old Partners

Rs. 70,350 X 1
4
X X X X =23,450

Alternatevely ,
i) It can be calculated as follows :
Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit
, remaining after giving ¼ th share to new partner : Rs 70,350 x 4/3 share = 93,800
Step 2 C’s share is 1/4th of the total capital of the firm , that is Rs 93,800 x ¼ = 23,450

ii) Cash has been calculated as follows :

Cash = 12,000 (Balance) + Rs. 23,450 (C’s Capital) + Rs. 7,000 (Goodwill) – Rs. 9,000 (Bank
Loan).
iii) Reserve and surplus are distributed .

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iv) Claim made by the workmen will be met out of workmen compensation fund and the
remaining fund will be distributed in old partners in old ratios .

Solution of home assignment 3

Dr. REVALUATION ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Investment 5,000 By Accrued Income 500
To Profit transferred to : By Bad Debts Recovered 800
Madan’s Capital A/c 780 By Patents 5,000
Mohan’s Capital A/c 520 1,300

6,300 6,300

Dr. Partners’ Capital A/c Cr.

Particulars Madan Mohan Gopal Particulars Madan Mohan Gopal
By Balance b/d 60,000 40,000 -
To Balance c/d 93,780 62,520 52,100 By General Reserve
A/c 12,000 8,000 -
By Revaluation A/c 780 520 -
By Workmen
Compensation A/c 6,000 4,000 -
By Premium for
Goodwill A/c 15,000 10,000
By Cash 52,100
93,780 62,520 52,100 93,780 62,520 52,100

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Calculation of proportionate capital of new partner

Combined X X Share of profit of = Proportionate

Reciprocal of
capital of new partner capital of new partner
adjusted new partner
Capiof C = Capital
23,450 of Combined share
old Partners
X X of Old Partners

Rs. 1,56,300 1
X X 4

= Rs 52,100

Alternatevely , it can be calculated as follows :

Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit ,
remaining after giving 1/4th share to new partner Rs ,156,300 x 4/3 share = Rs 2,08,400
Step 2 C’s share is 1/4th of the total capital of the firm , that is Rs 2,08,400 x 1/4 = Rs 52,100

Workmen’s compensation fund is Rs 12,000 and claim against the workmen compensation
fund is Rs 2,000 and remaining fund is Rs 10,000 will be distributed in old partner’s in old
ratios .
Note carefully : Don’t forget to show the claim in the liabilities side of the
balance sheet .

BALANCE SHEET OF THE NEW FIRM

at as 1st April 2010
Particulars Rs. Particulars Rs.
Creditors 28,000 Cash at Bank 87,900
Workmen’s Compensation Fund 2,000 Debtors 65,000 60,000
Capital A/cs: Less Reserve for
Madan 93,780 Doubtful Debts 5,000
Mohan 62,520 Stock 30,000
Gopal 52,100 Investment 45,000
2,08,400 Patents 15,000
Accrued Income 500
2,38,400 2,38,400

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Solution of assignment 4
Dr. REVALUAITON ACCOUNT Cr.
Particulars Rs. Particulars Rs.
To Building A/c 15,000 By Loss transferred to:
To Machinery A/c 2,000 A’s Capital A/c 11,424
To Provision for Doubtful Debts A/c 2,040 B’s Capital A/c 7,616

19,040 19,040

Dr. PARTNERS’ CAPITAL A/C Cr.

Particulars A B C Particulars A B C
To Revaluation A/c 11,424 7,616 By Balance b/d 1,50,000 80,000
By General 14,400 9,600
To Balance c/d 1,60,176 86,784 40,000 Reserve -
By Cash A/c 40,000
By Premium for 7,200 4,800
Goodwill
1,71,600 94,400 40,000 1,71,600 94,400 40,000
To Current A/c
(Bal. fig.trf) 40,176 6,784 By Balance b/d 1,60,176 86,784 40,000
To Balance c/d
1,20,000 80,000 40,000
1,60,176 86,784 40,000 1,60,176 86,784 40,000

BALANCE SHEET OF A, B AND C

as at 1ST March, 2004
Liabilities Rs. Assets Rs.
Capital A/cs: 2,40,000 Building 1,85,000
A 1,20,000 40,176 Machinery 40,000
B 80,000 6,784 Stock 24,000
C 40,000 36,000 Debtors 34,000 31,960
A’s Current A/c 20,000 Less: Provision for Doubtful 62,000
B’s Current A/c Debts 2,040
Creditors Cash (Rs. 10,000 + Rs. 52,000)
Bills Payables
3,42,960 3,42,960

Tutorial Notes

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

i) Calculation of New Profit-Sharing Ratio:

Let us assume total profit = 1, C’s share is 1/6,
Remaining share aftergiving 1/6th share to C = 1-1/6=5/6
Now the remaining share will be distributed in old partners in old ratios
A’s share = 3/5 x 5/6 = 1/2; B’s share = 2/5 x 5/6 = 1/3
New Profit-Sharing Ratio of A,B and C = 1/2 : 1/3 : 1/6 or 3:2:1,

(ii) Sacrificing ratio: Old ratio – New Ratio

A’s sacrifice = 3/5 – 3/6 = 3/30; B’s sacrifice = 2/5 – 2/6 = 2/30.
Sacrificing Ratio = 3.2.
Goodwill is distributed in the sacrificing partners in the sacrificing ratios . In this question A and B
are sacrificing in 3:2 ,
A’s share = Rs. 12,000 x 3/5 = Rs. 7,200; B’s share = 12,000 x 2/5 = Rs. 4,800.

Note carefully : whenever question is silent , it is assumed that old partners are sacrificing in
old ratios . So in this case old and sacrificing ratios will be the same .

Calculation of adjusted capital

:

CapitalXof new
X X Reciprocal ofX X New Profit =Adjusted
partner his share Sharing Ratio capital

X =
Rs. 40,000 X X X3 :2 :1

Capital of A = 1,20,000 ; Capital of B = 80,000; Capital of C = 40,000

 In this question capital of the firm is to adjusted by opening current A/c , In this
situation you are required to transfer the balance of capital A/c in the respective
partner’s current A./c and if the current A/c is in the credit side of partner’s capital

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

A/c , it will have a other effect on the assets side of the balance sheet and if the
current A/c is in the debit side of capital A/c other effect will be in the liabilities side
of the balance sheet .

 Reminder : Whenever capital is to be adjusted on the basis of new partner ,

capital of new partner will remain the same , in this question capital of new
partner was Rs 40,000 and after adjustment it will remain Rs 40,000

Solution of home assignment 5

Dr. REVALUAITON ACCOUNT

Particulars Rs. Particulars Rs.

To Investment A/c 500 Accrued Income A/c 100
By Cash A/c (Bad Debts 400
Recovered
500 500

Dr PARTNER’S CAPITAL A/C Cr.

Particulars Ram Shyam Mohan Particulars Ram Shyam Mohan

To Balance c/d 12,000 6,000 4,500 By Balance b/d 6,000 4,000 --

By General 1,500 500
Reserve
By Premium for --
goodwill A/c 4,500 1,500 --
By Cash A/c -- 4,500

--
12,000 6,000 4,500 12,000 6,000 4,500

Balance Sheet
as at 31st April, 2009
Particulars Rs. Particulars Rs.
Creditors 2,800 Cash (Note) 12,900
Employees’ Provision Fund 1,200 Accrued Income 100
Capitals A/cs: 22,500 Debtors 6,500 6,000
Ram 12,000 Less: Provision 500 3,000
Shyam 6,000 Stock 4,500
Mohan 4,500 Investment

26,500 26,500

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

2.
Calculation of proportionate capital new partner

Combined Share of new

X X X Reciprocal of X
adjusted Capital of partner
Combined share
old Partners
of Old Partners

= Proportionate capital of new partner

X X X X 1 = Rs 4,500
Rs. 18,000
5
=

Alternatevely , it can be calculated as follows :

Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit
, remaining after giving 1/5 th share to new partner :
Rs 18,000 x 5/4 share = Rs 22,500

Step 2 C’s share is 1/5th of the total capital of the firm , that is
Rs 22,500 x 1/5 = Rs 4,500

Note carefully : 1/5th of total capital and proportionate capital is the same thing

Solution of home assignment 6

REVALUAITON ACCOUNT Cr.

Dr.
Particulars Rs. Particulars Rs.
To Profit transferred to Ishu’s By Plant and Machinery 14,000
Capital A/c 18,480 By Provision for Doubtful Debts A/c 7,000
Vishu’s Capital A/c 12,320 30,800 By Sundry Creditors A/c 9,800

30,800 30,800

Dr PARTNERS’ CAPITAL A/C Cr.

Particulars Ishu Vishu Nishu Particulars Ishu Vishu Nishu

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By Balance b/d 1,19,000 1,12,000 -

By Revaluation
A/c(Profit) 18,480 12,320 -
By Genaral
Reserve A/c 6,000 4,000 -
By Investment
By Balance c/d 1,53,080 1,34,720 56,000 Fluct. Fund(WN- 1,200 800 -
1)
By Premium for 8,400 5,600 -
Goodwill 56,000
By Bank A/c
1,53,080 1,34,720 56,000 1,53,080 1,34,720 56,000

By Bank A/c 22,720 1,53,080 1,34,720 56,000

By Balance c/d 1,68,000 1,12,000 56,000
By Balance b/d 14,920
1,68,000 1,34,720 56,000 By Bank A/c 1,68,000 1,34,720 56,000

Solution of home assignment 7

REVALUATION ACCOUNT
Particulars Rs. Particulars Rs.
To Claim for damages 325 By Creditors 2,500
To Provision for outstanding Bill 3,000 By Provision for Bad & Doubtful
Debts
Existing 1,200
Less: Required 1,175 25
(Rs. 47,000 X2.5/100)
By Loss transferred to : 500
Atal’s Capital A/c 300
Madan’s Capital A/c
3,325 3,325

PARTNERS CAPITAL ACCOUNTS

Particulars Atal Madan Mehra Particulars Atal Madan Mehra
To Profit & 12,500 7,500 By Balance b/d 1,50,000 90,000 -
LossA/c By Cash A/c - - 40,000
To Revaluation 500 300 By Premium for
A/c 5,000 3,000 Goodwill 10,000 6,000 -
To Cash A/c By Workmen
(Goodwill) 1,62,000 97,200 40,000 Compensation 20,000 12,000 -

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

To Balance c/d 1,80,000 1,08,000 40,000 fund 1,80,000 1,08,000 40,000

62,000 37,200 40,000 1,62,000 97,200 40,000
To Cash A/c By Balance b/d
1,00,000 60,000
(Bal. fig.)
To Balance c/d
1,62,000 97,200 40,000 1,62,000 97,200 40,000

BALANCE SHEET
As on 31st March, 2011
Liabilities Rs. Assets Rs.
Capitals : Land and Building 1,50,000
Atal 1,00,000 Machinery 40,000
Madan 60,000 Patents 5,000
Mehra 40,000 2,00,000 Stock 27,000
Creditors (20,000 – 2,500) 17,500 Debtors 47,000
Claim for Damages 325 Provision for Bad debts 1,175 45,825
O/s Electricity Bill 3,000
Bank Overdraft 47,000

2,67,825 2,67,825

Tutorial Notes :
1. Calculation of Sacrificing Ratio
Sacrificing Ratio = Old Ratio – New ratio

Atal = − = =

Madan = − = =

Sacrificing Ratio = 5 : 3

Calculation of adjusted capital

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Capital of new Reciprocal of his New Profit

partnerX X X
share
X X =Adjusted
Sharing Ratio capital

X X
Rs. 40,000 X X 5:3:2

Atal’s Capital = Rs. 1,00,000; Madan’s Capital = Rs. 60,000; Mehra’s Capital = Rs. 40,000

Solution of home assignment 8

REVALUATION ACCOUNT
Particulars Amount Particulars Amount
To Stock 10,000 By Plant A/c 14,000
To Profit transferred to : By Creditors A/c 3,000
Sarthak’s Capital A/c 8,000 By Investment A/c 5,000
Vansh’s Capital A/c 4,000 12,000 (25000 – 20000)
22,000 22,000

PARTNERS CAPITAL ACCOUNTS

Particulars Sarthak Vansh Mansi Particulars Sarthak Vansh Mansi
To Investments 20,000 By Balance b/d 70,000 60,000
A/c 1,10,000 90,000 1,00,000 By General 12,000 6,000
To Balance A/c Reserve 8,000 4,000
By Revaluation 40,000 20,000
A/c
By Premium for 1,00,000
Goodwill
By Cash A/c
1,30,000 90,000 1,00,000 1,30,000 90,000 1,00,000

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

BALANCE SHEET OF NEW FIRM(AS ON…….)

Liabilities Amount Assets Amount
Capital Accounts: Plant 80,000
Sarthak 1,10,000 Furniture 30,000
Vansh 90,000 Investments 25,000
Mansi 1,00,000 3,00,000 Stock 36,000
Bank Loan 18,000 Debtors 38,000
Creditors(Rs. 72,000 – Rs. 3,000) 69,000 Less: Provision for
Bad debts 4,000 34,000
Cash 1,82,000

3,87,000 3,87,000

Value being conveyed in the question – Friendship/Sympathy/Support.

Tutorial Notes:
2. Calculation of proportionate capital of new partner

X X = Proportionate
Combined X Reciprocal of Share of new Capital
adjusted Capital of Combined share partner
old Partners of Old Partners

Rs. 2,00,000 X X 1
3

=Rs 1,00,000

Alternatevely , it can be calculated as follows :

Step 1 Find out the capital of the entire firm corresponding to the old partner’s share of profit
, remaining after giving 1/3 th share to new partner :
Rs 2,00,000 x 3/2 share = Rs 3,00,000
Step 2 C’s share is 1/3th of the total capital of the firm , that is
Rs 3,00,000 x 1/3 = Rs 1,00,000

CASH ACCOUNT
Particulars Rs. Particulars Rs.

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To Balance b/d 22,000 By Balance c/d 1,82,000

To Mansi’s Capital A/c 1,00,000
To Premium for Goodwill 60,000

1,82,000 1,82,000

Solution of home assignment 9

Revaluation A/c
Particular Rs. Particular Rs.
To Inventory 6,040 By Partners Capital A/c
To Provision for doubtful debts 200 A 4,000
To Provision for Discount 760 B 3,000
7,000

7,000 7,000

Partners Capital A/c

Particular A B C Particular A B C
To Revaluation A/c 4,000 3,000 By Balance b/d 50,000 40,000 -
To Goodwill 2,857 2,143 By C’s Loan 30,000
To Advertisement 4,000 3,000 By Contingency Reserve 4,000 3,000
Suspense 4,000 3,000 By C’s Current A/c 857 1,143
To Investment 8,000 -
To Bank 40,000 25,000
To Balance c/d
30,000
Total 54,857 44,143 30,000 Total 54,857 44,143 30,000
By Balance b/d 40,000 25,000 30,000
By Bank.A/c 50,000 35,000
To Balance c/d 90,000 60,000 30,000

Total 90,000 60,000 30,000 Total 90,000 60,000 30,000

Calculation of Goodwill
Average profit = Rs 6,000 Goodwill of firm = Rs 6,000 x 2= Rs 12,000

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Goodwill of C = 12,000/6 = Rs 2,000

Calculation of sacrificing ratio= Old Ratio- New Ratio

Old Ratio New Ratio

A 4/7 - 3/6 = 24-21/42 = 3/42(sacrfice)
B 3/7 - 2/6 = 18-14/42 = 4/42(sacrifice)
C - 1/6 = 1/6 (Gain)
So above calculation shows clearly that A & B sacrifice in the ratio of 3:4 in favaur to C.
C’ s capital A/c will be credited for amount of goodwill.

Adjustment of Capital according to profit sharing ratio

X ofXnew
Capital ReciprocalX of his New Profit =Adjusted
X X capital
partner share Sharing Ratio

X X
Rs. 30,000 X X 3:2:1

Now the adjusted capital of all the partners are Rs

A’s Capital = 1,80,000 x 3/6 = Rs 90,000 B’s Capital = 1,80,000 x 2/6 = Rs 60,000
C’s Capital = 1,80,000 x 1/6 = Rs 30,000

Take care : When capital of the firm is adjusted taking the capital of the new partner as a
base. Capital of the new partner will remain the same .
Alternatively :

Adjustment of Capital according to new partners capital

Capital of new partner C is Rs 30,000 and his share of profit is 1/6;

So , corresponding to his share of profit , capital of the enfire firm will be :

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Rs 30,000 x 6/1 = Rs 1,80,000.

Now , in order to get the adjusted capital , the total capital should be debited in new profit
sharing ratios .
A’s Capital = 1,80,000 x3/6 = 90,000
B’s Capital = 1,80,000 x2/6 = 60,000
C’s Capital = 1,80,000 x1/6 = 30,000

2. Calculation of Capital of A and B on the basis of C’s Capital as a base ;

Balance Sheet
As on 1st April, 2009
Liabilities Rs. Assets Rs.
Capital- Bank 87,000
A 90,000 Sundry Debtors 40,000
B 60,000 Less: Provision Bad debts 2,000
C 30,000 1,80,000 Less: Provision Discount 760 37,240
Employees benevolent fundA/c 9,600 Inventory 54,360
Creditor 19,000 Investment 3,000
Furniture 25,000
C’s Current A/c 2,000

2,08,600 2,08,600

Solution of home assignment 10

Revaluation A/c
Particular Rs. Particular Rs.
To Plant & Machinery 20,000 By furniture 1,000
To Provision for bad debts 400 By Land & Building 3,000
By Partners Capital A/c
Saurabh- 12,300
Munish- 4,100
16,400

20,400 20,400

Partners Capital A/c

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Particular Saurav Munish Sharad Particular Saurav Munish Sharad

To Revaluation A/c 12,300 4,100 By Balance b \d 68,000 31,000 -
To Goodwill 6,000 2,000 By Bank 20,000
To Saurav’s Capital A/c 1,000 By Munish 1,000
To Profit & Loss A/c 12,000 4,000 Capital A/c
By Sharad Current A/c 4,000 -
To Balance c/d 42,700 19,900 20,000
Total

Total
73,000 31,000 20,000 73,000 31,000 20,000
By Balance c/d 42,700 19,900 20,000
To Balance c/d 50,000 30,000 20,000 By cash 7,300 9,100

Total 50,000 30,000 20,000 Total 50,000 30,000 20,000

Calculation of Sacrifice Ratio

Old Ratio - New Ratio
Saurav= 3/4 – 5/10 = 5/20(sacrifice)
Munish= 1/4- 3/10 = 1/20(gain)
Sharad= 0 - 2/10 = 2/10 or 4/20(gain)

Above calculation shows clearly that only saurav sacrifice his share in favaur to munish & Sharad

Adjustment of capital on the basis of new partners capital

Capital of new partner= 20,000
Share of new partner= 2/10
Total Capital of firm= 1,00,000
Saurav= 1,00,000*5/10= 50,000
Munish= 1,00,000*3/10= 30,000
Sharad= 1,00,000*2/10= 20,000

Adjustment of Capital according to profit sharing ratio

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Capital Reciprocal of his New Profit

X ofX new X =Adjusted
partner X share X Sharing Ratio Capital
capital

Rs. 20,000 X x X x =
5:3:2

Now the adjusted capital of all the partners are Rs

Now the adjusted capital of all the partners are Rs
A’s Capital = 1,00,000 x 5/10= Rs 1,50,000
B’s Capital = 3,00,000 x 8/30 = Rs 80,000
C’s Capital = 3,00,000 x 7/30 = Rs 70,000

Take care : When capital of the firm is adjusted taking the capital of the new partner
as a base. Capital of the new partner will remain the same .
Alternatively :
Adjustment of Capital according to new partners capital
Capital of new partner C is Rs 70,000 and his share of profit is 7/30;
So , corresponding to his share of profit , capital of the enfire firm will be :

Rs 70,000 x 30/7 = Rs 3,00,000.

Now , in order to get the adjusted capital , the total capital should be devided in new profit
sharing ratios .
A’s Capital = 3,00,000 x15/30 = 1,50,000
B’s Capital = 3,00,000 x8/30 = 80,000
C’s Capital = 3,00,000 x7/30 = 70,000

Balance Sheet
As on 31st December, 1996
Liabilities Rs. Assets Rs.

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Capital- Cash 44,200

Saurav 50,000 Sundry Debtors 24,000
Munish 30,000 Less: Provision for bad debts 1,200 22,800
Sharad 20,000 1,00,000 Land & Building 15,000
Outstanding Expenses 5,000 Add: Appreciation 3,000 18,000
Stock 5,000
Creditor 36,000 Plant & Machinery 20,000
Furniture & Fitting 25,000
Add:Apriciation 1,000 26,000
Partners Current A/c
Sharad 4,000
Munish 1,000 5,000

1,41,000 1,41,000

Solution of home assignment 11

Revaluation Account
Particulars Amount(Rs.) Particulars Amount(Rs.)
To Plant and Machinery A/c 2,000 By Provision for Doubtful Debts
To Profit Transferred to Capital A/cs A/c 4,000
Neha 3,600 By Land and Buildings A/c 4,000
Tara 2,400
6,000
8,000 8,000

Capital Account
Particulars Neha Tara Prachi Particulars Neha Tara Prachi
To Balance c/d 26,600 22,400 12,250 By Balance b/d 8,000 10,000 -
By General Reserve A/c 7,200 4,800 -
By W.C. Fund A/c 1,800 1,200 -
By Revaluation A/c 3,600 2,400 -
By Cash A/c 12,250
By Premium for Goodwill
A/c 6,000 4,000 -

26,600 22,400 12,250 26,600 22,400 12,250

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Balance Sheet
As at 1st April, 2012
Liabilities Amount Assets Amount
Capital A/cs Plant and Machinery 10,000
Neha 26,600 Land and Building 18,000
Tara 22,400 Debtors 19,000
Prachi 12,250 61,250 Stock 6,000
Cash 25,250
Workmen’s Compensation Fund
Creditors 2,000
15,000
78,250 78,250

Tutorial Notes

1. Goodwill brought in by Prachi is to be distributed in the sacrificing ratio 3 : 2 which is same as the
old ratio, as the new ratio is not specified in the question.

Hence, Neha’s share = × 10,000= 6,000 ; Tara’s share = × 10,000 = 4,000

2. Calculate of Prachi’s Capital

Reciprocal of Share of New
Combined Capital of X X = Capital of Prachi
profit
X share of Partner
Tara and XNeha X
Tara and Neha

X 5 X 1 = Rs 12,250
26,600+22,400 =
49,000 4 5

Solution of home assignment 12

Dr. REVALUATION ACCOUNTS Cr.

Particulars Rs Particulars Rs

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To Plant and Machinery 45,000 By Furniture (note 1) 20,000

To Debtors (Bad Debts) 15,000 By Sundry Creditors 7,000
To Provision for Doubtful Debts By loss transferred to
12,000 A’s Capital A/c 27,000
B’s Capital A/c 18,000 45,000

72,000 72,000

Capital Accounts
Particulars A B C Particulars A B C

To Advertisement 6,000 4,000 By Bal. b/d 3,18,000 2,00,000

Exp. 27,000 18,000
To Revaluation 3,45,000 2,20,000 By C’s Current A/c 6,000 6,000
To Bal. c/d (Note2)
By Contingency 54,000 36,000
Reserve A/c
3,78,000 2,42,000 3,78,000 2,42,000
3,45,000 2,20,000
3,45,000 2,20,000 By Balance b/d 1,41,250
To Bal.c/d 1,41,250 By Bank
(Note 3 )
3,45,000 2,20,000 1,41,250 3,45,000 2,20,000 1,41,250

BALANCE SHEET
as at 1st April.2016
Liabilities Rs Assets Rs
Creditors 1,53,000 Cash at bank 1,61,250
Machinery Replacement Reserve 12,000 Debtors 2,20,000
Capital A/cs: Less : Bad Debts 15,000
A 3,45,000 2,05,000
B 2,20,000 Less: Provision 12,000 1,93,000
C 1,41,250 7,06,250 Furniture 1,00,000
Plant and Machinery 1,05,000
Buildings 3,00,000
C’s Current A/c 12,000

8,71,250 8,71,250

Tutorial Notes

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Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

Full value of Furniture = 80,000 × = 1,00,000

Value shown in Balance Sheet 80,000

Furniture to be increased by : 20,000

In this question new partner C fails to bring his share of goodwill in cash . So goodwill will be
adjusted .C ’s share of goodwill = 60,000 × = Rs 12,000 will be adjusted . C’s Current A/c will be
debited and A,s Capital A/c and B’s Capital A/c will be credited with Rs 6,000 each .

Sacrificing Ratio :
In this question C is admitted for 1/5th , which C gets equally from A and B .
Here A sacrifices 1/5 x ½ = 1/10
B sacrifices 1/5 x ½ = 1/10

Calculation of proportionate capital of new partner

Combined Reciprocal of New Profit

X = Adjusted Capital
adjusted Capital of
= Proportionate Combined
X share X Sharing Ratio
X
old Partners of Old Partners

X X 1
Rs. 5,65,000
5

=Rs 1,41,250
Alternatively :
Step 1 :Find out the capital of entire firm on the basis of the combined share of old partner
after giving 1/5th share to C ;
5,65,000 x 5/4 = 7,06,250 ( Total capital of firm )
Step 2 : C is supposed to bring 1/5 th of total capital of the firm
Rs 7,06,250 x 1/5 = Rs 1,41,250
Other Important Points:

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Machinery replacement fund is not a fund ,it is a long term provision , so it should not be
distributed among the partners .
Other funds which should not be distributed are Provident fund , gratuity fund , pension fund ,
staff welfare fund etc.
Advertisement suspense given in the assets side is a fictitious assets having no economic
value , so it should be written off by debiting it in Capital accounts of old partners in old ratios
.

Solution of home assignment 13

Date Particulars L.F Dr.(Rs) Cr.
(Rs)
2014 Revaluation A/c Dr. 13,500
April To Furniture and fixtures A/c 5,000
1 4,000
To Sundry Debtors A/c(bad Debts)
1,500
To Provision for doubtful debts A/c 3,000
To Stock A/c
(Amount of decrease in the value of Assets as a result of
revaluation )
Building A/c Dr 19,500
Plant and Machinery A/c Dr. 10,500
Creditors A/c Dr 3,000
To Revaluation A/c 33,000
(Increase in value of assets and reduction in the value of liability
of creditors )
Revaluation A/c Dr.
19,500
To Raymond’s capital A/c
19,500
(Profit on revaluation credited to Raymond’s capital )

Raymond’s Capital A/c Dr. 25,000

To Investments A/c 25,000
(Investments not taken over by the partnership )

Bank Overdraft A/c Dr 60,000

To Raymond’s Capital A/c 60,000
(Bank overdraft not taken over by the partnership )

Bank A/c Dr. 5,34,500 4,94,500

To Simon’s capital A/c 40,000
To premium for goodwill A/c
(Amount introduced by Simon’s Rs 4,94,500 for capital and Rs

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40,000 as premium for goodwill )

40,000
40,000

Premium For Goodwill A/c Dr.

To Raymond’s Capital A/c
(Premium for goodwill credited to Raymond’s Capital)

Dr. CAPITAL ACCOUNT Cr.

Particulars Raymond Simon Assests Raymond Simon
By Balance b/d 4,00,000
To Investments 25,000 By Revaluation 19,500
To balanced c/d 4,94,500 4,94,500 By bank Overdraft 60,000
By Premium for
goodwillA/c 40,000
By Bank A/c 4,94,500

5,19,500 4,94,500 5,19,500

4,94,500

Balance sheet at as 1st April ,2014

Liabilities Rs Assets Rs
Capital Account: Plant and Machinery 1,15,500
Raymond ‘ 4,94,500 Building 2,14,500
Simon 4,94,500 9,89,000 Furniture and fixtures 45,000
Bill Payable 15,000 Stock 42,000
Creditors 47,000 Sundry Debtors 36,000
Less : Provision for
doubtful Debts 1,500 34,500
Cash at bank 5,99,500

10,51,000 10,51,000

Tutorial Notes :

1) When a partner takes over assets , his capital account is debited , because it reduces his capital ,
on the other hand , if a partner takes over any liability his capital a/c is credited , because it will
increase his capital .
2) In this question , when Raymond makes Simon his partner , investments and Bank overdraft
are not included in the firm , so these investments and bank overdraft will be taken over by

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Raymond himself. Investments will be debited to his capital account and Bank overdraft will
credited to his capital account .
3) In order to find out Simon’s capital , first of all , adjusted capital of Raymond will be calculated
and then amount equivalent to Raymond’s capital will be brought in by Simon .

Solution of home assignment 14

Dr. REVALUATION ACCOUNTS Cr.
Particulars Rs Particulars Rs
To Plant and Machinery 30,000 By Stock (note 1) 20,000
To debtors (Bad Debts) 15,000 By creditors 7,000
To Provision for Doubtful Debts By loss transferred to
12,000 Arjun’s Capital A/c 18,000
Bhakti Capital A/c 12,000

57,000 57,000

∶
Profit Sharing Ratio Arjun and Bhakti = :
=

Capital Accounts
Particulars Arjun Bhakti Vivek Particulars Arjun Bhakti Vivek

To Advertisement 6,000 4,000 By Bal. b/d 3,18,000 2,00,000

Exp. By Reserve 54,000 36,000
To Revaluation 18,000 12,000 By Vivek’s
To Bal. c/d 3,54,000 2,42,000 Current A/c 6,000 6,000
(Note2)
3,78,000 2,42,000 3,78,000 2,42,000
By Balance b/d 3,54,000 2,26,000
To Bal.c/d 3,54,000 2,26,000 1,45,000 By Bank 1,45,000
(Note 3 )

3,54,000 2,26,000 1,45,000 3,54,000 2,26,000 1,45,000

BALANCE SHEET
as at 1st April.2009
Liabilities Rs Assets Rs

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creditors 1,53,000 Cash at bank 1,65,000

O/s Expenses 12,000 Debtors 2,20,000
Capital A/cs: 90,000 Less : Bad Debts 15,000
Arjun 3,54,000 2,05,000
Bhakti 2,26,000 Less: Provision 12,000 1,93,000
Vivek 1,45,000 7,25,000 Stock 2,00,000
Plant and Machinery 1,20,000
Buildings 2,00,000
Vivek’s Current A/c 12,000

8,90,000 8,90,000

Tutorial Notes :

Stock has been shown at Rs 90 when it’s Book Value is Rs 100

It means stock which has been shown at Rs 1,80,000, having original book value of Rs
= 1,80,000 × = 2,00,000

Value shown in balance sheet 1,80,000

Stock to be increased by : 20,000

In this question new partner Vivek fails to bring his share of goodwill in cash . So goodwill will
be adjusted .Vivek ’s share of goodwill = 60,000 × = Rs 12,000 will be adjusted . Vivek’s Current
A/c will be debited and Arjun,s Capital A/c and Bhakti’s Capital A/c will be credited with Rs 6,000
each .
Hence ,entry for goodwill will be :
Vivek’s Current A/c Dr. 12,000
To Arjun’s account A/c 6,000
To Bhakti’s Account A/c 6,000
(Goodwill Credited to Arjun and Bhakti in sacrificing ratio )

Calculation of proportionate capital of new partner

Combined Reciprocal of New Profit

X = Adjusted Capital
adjusted Capital of
= Proportionate Combined
X share X Sharing Ratio
X
old Partners of Old Partners

5
Rs. 3,54,000 + X X 1
2,26,000 = 5
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Mall Avenue and Gomtinagar
Ex Hod Army Public School, Ex visiting faculty Loreto Convent and CMS Gomtinagar

=Rs 1,45,000

Alternatively :
Step 1 :Find out the capital of entire firm on the basis of the combined share of old partner
after giving 1/5th share to Vivek ;
5,80,000 x 5/4 = 7,25,000 ( Total capital of firm )
Step 2 : Vivek is supposed to bring 1/5 th of total capital of the firm
Rs 7,25,000 x 1/5 = Rs 1,45,000

Theory

Q.1 What is meant by the admission of a partner ?

Ans :1 When a new partner is admitted as a partner with the prior consent of the existing partners
then it is known as admission of partner . Admission of new partner amounts to reconstitution of
the partnership. According to Sec 31 (1) of Indian Partnership Act, 1932 , “ A new partner cannot be
admitted without the consent of all the partners unless otherwise agreed upon .

Q.2 State the two main right acquired by the new partner .

Ans: 2

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A) Right to share the assets of the firm : When a new partner takes admission , he gets a stake in
the joint estate of the firm ,to acquire the share in the joint estate he contributes agreed amount
of capital .

b) Right to share the future profit of the firm : When a new partner takes admission , he
gets certain in the profit in the future profit, which is sacrificed by the old partners , to acquire
the share in the future profit he compensate the sacrificing partner by bringing his share of
goodwill.

Q.3 State the two reasons for the admission of a partner .

Ans :3

1) New partner is admitted for procuring additional capital and infusing managerial skill in the
firm .

2) If some influential and famous person is admitted it enhances the reputation of the firm,
which culminates into higher returns .

Q.4 Why should a new partner contribute towards goodwill on his admission ?

Ans:4 When a new partner takes admission , share that he gets is sacrificed by the old partner or
partners , so it is imperative to compensate the partner/ partners for sacrificing his share in favor of
new partner . The amount of compensation given by the new partner is known as goodwill.

Q.5 What accounting steps are taken when the new partner is unable to bring the business
guaranteed . (ISC 2004)

Ans.5 When the new partner is unable to bring the business guaranteed by him . he will have to
compensate the firm. the short fall in the profit arising there from will be debited to his
Capital/Current Account and credited to the Profit and Loss Appropriation Account.

Partner’s Capital/ Current A/c Dr

To Profit and Loss Appropriation A/c

Q.6What is hidden goodwill and how is it calculated ? ( ISC 2004)

Ans :6 When the value of the goodwill of the firm is not given at the time of admission on
partner , but it is to be inferred by deducting the adjusted capital of all the partners from the
capital of the entire firm taking the capital of new partner as a basis , such difference is regarded
as hidden goodwill.

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Q.7 Write down the steps to taken to ascertain the hidden goodwill .

Ans:Following steps are to be taken to calculate the hidden goodwill.

a) Find out the Net worth/ capital of the entire firm taking the capital of the new partner as a
basis.

b) Sum the capital of all the partners if capital is fixed only capital will be taken for this purpose ,
on the other hand if the capital is fluctuating capital will be calculated as follows: Capitals of all
the partners + Reserves and surplus + Profit on revaluation – Goodwill given in the assets
side –loss of the business – loss on revaluation .

c) Total capital of firm calculated from step A less Total capital calculated from step B = Hidden
goodwill .

Q.6 Under what circumstances premium for goodwill paid by the incoming partner would
never be recorded in the books of accounts ? ( ISC 2003)

Ans :6 When the amount of goodwill is paid to the sacrificing partners privately or directly or
outside the business by the new partner , no journal entry is required to be passed .

Q.7 How will you deal with the goodwill , when new partners fails to bring his share of
goodwill in cash ?

Ans :7 When the new partner fails to bring his share of goodwill in cash ,in such a situation new
partner’s current account is debited for his share of goodwill and the sacrificing partners
capital account will be credited in their sacrificing ratio .The entry will be :

New Partner’s current A/C Dr

To Sacrificing Partner’s Capital A/c
( Being share of goodwill transferred to
sacrificing partners capital A/c in their
sacrificing ratio )

Q.8 What is specific reserve .Name two examples .

Ans : 8 Specific reserves are those reserves which are created to meet future contingencies or
obligation .Money accumulated in these funds is to be first used for the purpose for which these
funds have been created and the remaining amount should be distributed in old partners in old
ratio and if the money falls short of the obligation than the difference money should be
transferred to revaluation account. example Workmen’s compensation fund and Investment
Fluctuation fund.

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Q.9 What is the treatment of workmen’s compensation fund ?

Ans :9 If the fund is more than the claim made by the workmen :

Workmen’s Compensation Fund a/c Dr

To Liability for workmen’s compensation claim A/c
To Old partner’s Capital A/c

If the fund is less than the claim made by the workmen

Workmen’s Compensation Fund A/C Dr

Revaluation A/C Dr
To Liability for workmen’s compensation
claim A/C .

Q.10 What is the treatment of Investment fluctuation fund ?

Ans : 10 If the fund is more than the fall in the value of investment :

Investment Fluctuation Fund A/c Dr.

To Investment A/c
To Old Partners Capital A/c
If the fund is less than the fall in the value of investment :

Investment Fluctuation Fund A/c Dr.

Revaluation A/c Dr.
To Investment A/c
To Old Partners Capital A/c

Q. 11 Name the funds ,which are not distributed among the partners.

Ans :11Following funds are not distributed among the partners , these funds are not
accumulated profits but they are liabilities .

a) Employees Provident fund

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b) Employees Gratuity Fund

c) Employees Pension Fund

d) Workmen Profit – sharing fund

e) Machinery replacement fund

Q.12 On what occasion does the need for valuation for goodwill arise ?

Ans:12 Under the following situation need for valuation for goodwill arises :

a) When there is a change in profit sharing ratio .

b) When new partner is admitted in the firm.

c) When a partner retires or in the event of death of a partner .

Q.13 What is Revaluation Account ?

Ans :13 At the time of reconstitution of partnership , existing partners revalue assets and
liabilities , To show the changes in the value of assets and liabilities , accounts that is prepared is
known as Revaluation.

Q.14 Distinguish between Profit and Loss Appropriation Account and Profit and Loss
Adjustment A/C.

Ans :14

Basic Profit and Loss Appropriation A/c Profit and Loss Adjustment A/c or
Revaluation A/c
Purpose Profit and Loss Appropriation A/C is Profit and Loss Adjustment A/c/
prepared to show the distribution of Revaluation A/c is prepared to revalue
profit among the partners and to the assets and liabilities and to rectify
ascertain the divisible profit. errors in the event of reconstitution of
partnership.

When do Profit and Loss Appropriation A/C is Profit and Loss Adjustment A/c/
we prepared is prepared at the end of the Revaluation A/c is prepared at the time
prepare financial year of admission, retirement and death of a
partner .

Q.15 How are the capitals of old partners adjusted on the basis of new partner’s Capital?

Ans :15 Following steps are required to be taken for adjusting the capital of firm:

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a) Find out the Capital of the entire firm on the basis of new partner ( Capital of New Partner x
Reciprocal of proportion of share of new partner )

b) Calculate the New Profit Sharing ratio.

c) Multiply the Capital of the entire firm by the new profit sharing ratio and outcome will be the
adjusted capital.

d) Show it in the debit side of capital A/C and calculate the surplus/ deficiency in each of the old
partner’s capital a/c

e) Adjust the surplus by paying cash and deficit by bring cash and if it given in the question that
for this purpose current account is to be opened , than surplus and deficiency should be
transferred to current account accordingly .

Precisly it can be calculated as follows

CAPITAL OF THE NEW PARTNER X RECIPROCAL OF PROPROTION OF SHARE OF NEW

PARNTER = CAPITAL OF THE ENTIRE FIRM X NEW PROFIT SHARING RATIOS = ADJUSTED
CAPITAL .

Q.16 How do we calculate the proportionate capital , when capital of the new partner is not
given .

Ans :16

Following steps are required to be taken :

a) Find out the adjusted capital of old partners.

b) Multiply the adjusted Capital of old partner by reciprocal of proportion of share of old
partners in order to find out the total capital of new firm.

c) Multiply the capital of new firm by proportion of share of new partner and this will give you
the capital that new partner which he/she is supposed to bring as a capital .

Q.17 Can a partner be held responsible for acts of the firm before his admission ?

Ans :17 NO. An incoming partner is not liable for all the acts of the firm done before his
admission . A partner can be held responsible for any act after joining the firm.

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Q.18 Can a partner transfer his interest in the firm ?

Ans :18 YES . A Partner may transfer his interest in the firm by sale , mortgage or charge fully or
partially. And the person to whom he has transferred his share is entitled to receive the share of
profits of the transferring partner and the account of profits agreed to by the partners .

Q.19 How will you deal with accumulated losses at the time of admission of partner:

Ans :19 If there is an accumulated loss given in the Assets side of the Balance Sheet , at the time
of admission of a partner , the same should be written off by debiting to old partner’s capital
accounts in their old ratio because such loss has been incurred by firm prior to the admission of
the new partner , it belongs to the past period and the new partner shall not bear the same .

Q.20 Give two circumstances in which sacrificing ratio may be applied .

Ans :20 Sacrificing ratio is applied under the following circumstances :

a) When there is an admission of a partner .

b) When there is a change in profit sharing ratio of partners .

Q.21 Why are assets and liabilities revalued at the time of admission of a partner ? ( ISC
2001)

Ans : When a new partner is admitted into the partnership firm , he becomes the owner of the
assets and owns the responsibility of the liabilities of the firm , that is why it becomes
imperative both from the point of view of the coming partner as well as the existing partners
that the value of assets and liabilities existed in the firm should be properly valued and profit/
loss resulting from such revaluation should be accounted for and duly distributed among the old
partner .

Q.22 Why is general reserve distributed , among the old partners before a new partner is
admitted ? ( ISC 1997)

Ans 22: Reserves existing in the Balance Sheet prior to the admission of partner are created
out of the profits that belongs to the old partner. So the partner , who is going to take admission
can’t take share in the existing reserves and therefore they are distributed in old partners in old
ratios .

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