# NCERT Solutions for Class 12 Accountancy Chapter 3 Reconstitution of Partnership Firm: Admission of a Partner

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy Chapter 3 Reconstitution of Partnership Firm: Admission of a Partner Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

## Reconstitution of Partnership Firm: Admission of a Partner NCERT Solutions for Class 12 Accountancy Chapter 3

### Reconstitution of Partnership Firm: Admission of a Partner Questions and Answers Class 12 Accountancy Chapter 3

Test Your Understanding-I [Page No. 122]

Question 1.
A and B are partners sharing profits in the ratio of 3 :1. They admit C for $$\frac{1}{4}$$ share in the future profits. The new profit sharing ratio will be :

(a)

Question 2.
X and Y share profits in the ratio of 3:2. Z was admitted as a partner who sets $$\frac{1}{5}$$ share. New profit sharing ratio, if Z acquires $$\frac{3}{20}$$ from X and $$\frac{1}{20}$$ from Y would be:
(a) 9:7:4
(b) 8:8:4
(c) 6:10:4
(d) 10:6:4
(a) 9 : 7 : 4

Question 3.
A and B share profits and losses in the ratio of 3 :1, C is admitted into partnership for $$\frac{1}{4}$$ share. The sacrificing ratio of A and B is:
(a) Equal
(b) 3:1
(c) 2 : 1
(d) 3:2

Test Your Understanding-II [Page No. 142]

Choose the correct alternative :
Question 1.
At the time of admission of a new partner, general reserve appearing in the old balance sheet is transferred to :
(a) all partner’s capital account
(b) new partner’s capital account
(c) old partner’s capital account
(d) none of the above.
(c) old partner’s capital account.

Question 2.
Asha and Nisha are partner’s sharing profit in the ratio of 2 :1. Asha’s son Ashish was admitted for $$\frac{1}{4}$$ share of which $$\frac{1}{8}$$ was gifted by Asha to her son. The remaining was contributed by Nisha. Goodwill of the firm in valued at Rs. 40,000. How much of the goodwill will be credited to the old partner’s capital account.
(a) Rs. 2,500 each
(b) Rs. 5,000 each
(c) Rs. 20,000 each
(d) None of the above.
(b) Rs. 5,000 each.

Question 3.
A, B and C are partners in a firm. If D is admitted as a new partner:
(a) old firm is dissolved
(b) old firm and old partnership is dissolved
(c) old partnership is reconstituted
(d) None of the above.
(c) old partnership is reconstituted.

Question 4.
On the admission of new partner increase in the value of assets is debited to:
(a) Profit and Loss Adjustment account
(b) Assets account
(c) Old partner’s capital account
(d) None of the above.
(b) Assets account.

Question 5.
At the time of admission of a partner, undistributed profits appearing in ti e balance sheet of the old firm is transferred to the capital account of:
(a) old partners in old profit sharing ratio
(b) old partners in new profit sharing ratio
(c) all the partners in the new profit sharing ratio.
(a) old partners in old profit sharing ratio.

Do it Yourself [Page No. 144]

Question 1.
A firm’s profits for the last three years are Rs. 5,00,000; Rs. 4,0, 000 and Rs. 6,00,000. Calculate value of firm’s goodwill on the basis of four years’, purchase of the average profits for the last three years. (Answer:Rs. 20,00,000)

Question 2.
A firm’s profits for the last five years were Rs. 20,000; Rs. 30,000; Rs. 40,000; Rs. 50,000 and Rs. 60,000. Calculate the value of firm’s goodwill on the basis of three years’ purchase of weighted average profits after using weight of 1,2,3,4 and 5 respectively.

Question 3.
A firm’s profits during 2003,2004,2005 and 2006 were Rs. 16,000; Rs. 20,000; Rs. 24,000 and Rs. 32,000 respectively. The firm has capital investment of Rs. 1,00,000. A fair rate of return on investment is 18% p.a. Compute goodwill based on three years’ purchase of the average super profits for the last four years.

Super Profit:
Average Profit – Normal Profit
= Rs, 23,000 – Rs. 18,000
= Rs. 5,000
Goodwill at 3 years purchased = Super Profit x 3
= Rs. 5,000 x 3
= Rs. 15,000

Question 4.
Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be different if it is computed by capitalisation of average profits? Confirm your answer by numerical verification.

Question 5.
Giri and Shanta are partners in firm sharing profits equally. They admit Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as goodwill for $$\frac{1}{5} t h$$ share of profits in the firm. What shall be journal entries if:
(a) no goodwill appears in the books of the firm;
(b) goodwill appears in the books of the firm at Rs. 40,000.
Old Ratio of Giri and Shanta = 1 : 1
New Ratio of Giri, Shanta and Kachroo = 2:2:1
Sacrificing Ratio = 1 : 1

Question 6.
A and B are partners in a firm sharing profits in the ratio of 3 : 2. They admit C into partnership for $$\frac{1}{5}$$ th share of profits in the firm. The goodwill of the firm is valued at Rs. 1,00,000. He is unable to bring in his share of goodwill. What will be the journal entries if:
(a) Goodwill is raised at full value and then written off;
(b) Goodwill is not raised.
Old Ratio of A and B = 3 : 2
New Ratio of A, B and C = 9:6:5
Sacrificing Ratio = 3:2
(a) Goodwill is raised at full value and then written off
Journal

Do it Yourself [Page No. 151]

Question 1.
Aslam, Jackab, Hari are equal partners with capitals of Rs. 1,500; Rs. 1,750 and Rs. 2,000 respectively. They agree to admit Satnam into equal partnership upon payment in cash of Rs. 1,500 for one-fourth share of the goodwill and Rs. 1,800 as his capital, both sums to remain in the business. The liabilities of the old firm amount Rs. 3,000 and the assets, apart from cash, consist of Motors Rs. 1,200; Furniture Rs. 400; Stock Rs. 2,650; Debtors of Rs. 3,780. The Motors and Furniture were revalued at Rs. 950 and Rs. 380 respectively, and the depreciation written-off. Ascertain cash in hand and prepare the balance sheet of the firm after Satnam’s admission.
Books of Aslam, Jackab and Hari
Balance Sheet as at… (before admission)

Question 2.
Benu and Sunil are partners sharing profits in the ratio of 3 : 2 on April 1, 2003. Ina was admitted for $$\frac{1}{4}$$ share who paid Rs. 2,00,000 as capital and Rs. 1,00,000/- for premium in cash. At the time of admission, general reserve amounting to Rs. 1,20,000/- and profit and loss account amounting to Rs. 60,000 appeared on the asset side of the balance sheet. Required: Record necessary journal entries to record the above transactions.

Question 3.
Ashoo and Rahul are partners sharing profits in the ratio of 5 : 3. Gaurav was admitted for $$\frac{1}{5}$$ share and was asked to contribute proportionate capital and Rs. 4,000 for premium (goodwill). The Capitals of Ashoo and Rahul, after all adjustments relating to revaluation, goodwill etc., worked out to be Rs. 45,000 and Rs. 35,000 respectively.Required: Calculate new profit sharing ratio, capital to be brought in by Gaurav and record necessary journal entries for the same.

(ii) Capital to be brought in by Gaurav
Capital of the Firm = Combined Adjusted Capital of Ashoo and Rahul x Reciprocal Proportion of Share of Ashoo and Rahul.

Question 1.
Identify various matters that need adjustments at the time of admission of a new partner.
At the time of admission of new partner, the followings are the various matters that need adjustments :

• Profit Sharing Ratio
• Valuation and adjustment of goodwill
• Revaluation of assets and Reassessment of liabilities
• Distribution of accumulated profits and reserves

Various entries are to be passed at the time of goodwill brought in by new partner in cash, partial in cash and unable to brought in cash, then the goodwill be adjusted through capital account of new partner.

Revaluation of assets and Reassessment of liabilities of the firm are recorded through Revaluation Account and the resultant profit or loss is to be recorded in the Capital Accounts of old partners in old profit sharing ratio.
Reserves and accumulated profits or losses exist in the books must be adjusted through the capital accounts of old partners in old profit sharing ratio.

Lastly, the capitals of old partners should be adjusted on the basis of capital of new partner or capital of all partners should be adjusted on the basis of adjusted capital of old partners.

Question 2.
Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?
On the admis ‘ion of a new partner, the old partners sacrifice a share of their profits ir favour of the new’ partner. On admission of a new partner, the profit sharing ratio among the old partners will change keeping in view their respective contribution to the profit sharing ratio of the incoming partner.

Hence, there is a need to ascertain new profit sharing ratio even for old partners when a new partner is admitted. Given the new partner’s share in profits and the ratio, in which he acquires it from the old partners the new share of each old partner shall be worked out by deducting his share of sacrifice from his old share in profits.

Question 3.
What is sacrificing ratio? Why is it calculated?
The ratio in which the old partners have agreed to sacrifice their shares in profits in favour of new partner is called the sacrificing ratio. In principle, the sacrifice ratio is the difference between the old profit sharing ratio and the new profit sharing ratio.

Sacrificing Ratio = Old Ratio – New Ratio
The new partner is required to compensate the old partner’s for their sacrifice of share in the profits of the firm for which he brings in an additional amount known as premium or goodwill. This amount is shared by the old partners in the ratio in which they forego their shares in favour of the new partner which is known as sacrificing ratio.

Question 4.
On what occasions sacrificing ratio is used?
Sacrificing ratio is used in following occasions :
1. To compensate old partners for their sacrifice of share in profits in favour of new partner by the way of goodwill which is brought in by new partner.
2. At the time of change in profit sharing ratio of the existing partners.
3. To find out the new profit sharing ratio of the firm.

Question 5.
If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?
If the goodwill already exists is books of firms and new partner bring in his share of goodwill in cash, then goodwill appearing in the books of accounts will have to be written off by crediting goodwill and debiting old partners in their old profit sharing ratio.

The following journal entry will passed :
Old Partner’s Capital A/c’s Dr.
To Goodwill A/c
(For goodwill written off in old ratio)

Question 6.
Why there is need for the revaluation of assets and liabilities on the admission of a partner?
At the time of admission of a partner, it is necessary to assess the correct and current value of assets and liabilities of the firm shown in books because the current value of various assets and liabilities may be different from the values shown in the balance sheet.

To revalue the assets and liabilities new account is opened called Revaluation Account. To revalue the assets and liabilities, all necessary adjustments are made through the Revaluation Account or Profit and Loss Adjustment Account.

Revaluation of assets and liabilities is needed at the time of admission so that the profit or loss arising on account of such revaluation may be adjusted in the old partner’s Capital Account in old profit sharing ratio and the new partner may not be affected by the profit or loss on account of revaluation of assets and liabilities.

Question 1.
Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the books of account?
At the time of admission of a partner, it is necessary to assess the correct and current value of assets and liabilities of the firm shown in books because the current value of various assets and liabilities may be different from the values shown in the balance sheet. Unrecorded assets and unrecorded liabilities must also be recorded at the time of admission of a partner.

To revalue the assets and liabilities and to record unrecorded assets and unrecorded liabilities, new account is opened called Revaluation Account. To revalue the assets and liabilities, all necessary adjustments are made through the Revaluation Account or Profit and Loss Adjustment Account.

Any gain or loss on revaluation of assets and reassessment of liabilities is transferred to the capital accounts of old partners in their old profit sharing ratio. Revaluation account is credited with increase in the value of assets and decrease in the value of liabilities.

Similarly, decrease of assets and increase in the value of liabilities is debited to revaluation account. If revaluation account shows a credit balance then it indicates gain and if there is debit balance then it indicates loss. Gain or loss on revaluation will be transferred to the capital accounts of the old partners in old ratio.

Revaluation of assets and reassessment of liabilities is needed at the time of admission, so that the profit or loss arising on account of such revaluation may be adjusted in the old partners capital accounts in old profit sharing ratio and the new partner may not be affected by the profit or loss on account of revaluation of assets and liabilities.

The following Journal Entries are recorded on revaluation of assets and liabilities:

Question 2.
What is goodwill? What factors affect goodwill?
Goodwill: Goodwill is the value of reputation of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. In other words, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to newly set-up business.

This advantage in monetary terms called ‘Goodwill’. In arises only if a firm is able to earn higher profits than normal.
“Goodwill is nothing more than the probability that old customers will resort to the old place.” —Lord Eldon

“The term goodwill is generally used to denote the benefit arising from connections and reputation.” —Lord Lindley
“Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.” —Lord Macnaghten .

“Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a business which enable it to C earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business.” —Spicer and Pegler.

“When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” —Dicksee Thus, goodwill can be defined as “the present value of a firm’s anticipated excess earnings ‘or as’ the capitalised value attached to the differential profits capacity of a business.”

Characteristics of Goodwill:
1. Goodwill is an intangible asset but not a fictitious asset,
2. It is valuable asset. Its value is dependent on the subjective judgement of the valuer.
3. It helps in earning higher profits than normal.
4. It is very difficult to place an exact value on goodwill. It is fluctuating from time to time due to changing circumstances of the business.
5. Goodwill is an attractive force which brings in customers to old place of business.
6. Goodwill comes into existence due to various factors.

Factors Affecting the Value of Goodwill:

1. Nature of Business : Company produces high value added products or having stable demand in market. Such company will have more goodwill and is able to earn more profits.

2. Location : If a business is located at a favourable place, it will attract more customers and therefore will have more goodwill.

3. Efficient Management : Efficient management brings high productivity and cost efficiency to the business which enable it to earn higher profits and thus more goodwill.

4. Market Situation : A firm under monopoly or limited competition enjoys high profits which leads to higher value of goodwill.

5. Special Advantages: A firm enjoys higher value of goodwill if it has special advantages like import licences, low rate and assured’ supply of power, long-term contracts for sale and for purchase, patents, trademarks etc.

6. Quality of Products : If the quality of product of firm is good and regular, then it has more goodwill.

Question 3.
Explain various methods of valuation of goodwill.
Goodwill is an intangible asset, so it is very difficult to calculate its exact value. There are various methods for the valuation of goodwill in the partnership, but the value of goodwill may differ in different methods. The method by which the value of goodwill is to be calculated, may be specifically decided among all the partners. The methods followed for valuing goodwill are :
1. Average Profit Method
2. Super Profit Method
3. Capitalisation Method.

1. Average Profit Method: Goodwill is calculated on the basis of the number of past years profits. In this method, the goodwill is valued at agreed number of ‘year’ purchase of the average profits of the past few years.

Steps:
1. Find the total profit of past given years.

2. Add all’abnormal losses like loss from fire or theft etc. and any normal income if not added before to the total profits of past given year.

3. Then, subtract, Abnormal Income (income from speculation or lottery etc.), Normal expenses (if not deducted), Income from investment (if not related to general activities of business) and remuneration of proprietor (if not given), if any, from the total profit of past given years.

4. After this, calculate actual average profit by dividing total profit by No. of years.

5. Then multiply Average Profit to the No. of years purchases to find out the value of goodwill.

Weighted Average Profit Method
Sometimes, if there exists an increasing or decreasing trend, it is considered to be better to give a higher weightage to the profits to the recent years than those of the earlier years. This method is an extension of average profit method.

Steps:
1. Multiply each year’s profits to the weight assigned to each year respectively.
2. Find the total of product.
3. Divide this product by total of weights for ascertaining average profits.
4. Average profits then multiplied with No’s of year purchased to find the value of goodwill.

2. Super Profit Method : Under this method goodwill is valued on the basis of excess profits earned by a firm in comparison to average profits earned by other firms when a similar type of firm gets return as a certain percentage of the capital employed, it is called ‘normal return’. The excess of actual profit over the normal profit is called ‘super profits’. To find out the value of goodwill, super profit is multiplied with the agreed number of year’s purchase.

Steps:
1. Calculate Actual Average Profit $$\text { i.e. }\left[\frac{\text { Total Profit }}{\text { No’s of Year }}\right]$$

2. Calculate Normal Profit i.e.
Capital Employed x $$\frac{\text { Normal Rate of Return }}{100}$$
[Capital Employed = Total Assets – Outside Liabilities]

3. Find Out Super Profits
Superprofits = Actual Average Profit-Normal Profit

4. Calculate the Value of Goodwill
= Super Profit x No’s of year purchased

3. Capitalisation Methods :
(a) by capitalizing the average profits
(b) by capitalizing the super profits.

(a) Capitalisation of Actual Average Profit Method : Steps:
1. Calculate Actual Average Profit: $$\left[\frac{\text { Total Profit }}{\text { No’s of Year }}\right]]$$

2. Capitalize the average profit on the basis of the normal rate of return:
Capitalised value of actual average profit
= Actual Average Profit x $$\frac{100}{\text { Normal Rate of Return }}$$

3. Find the actual capital employed :
Actual Capital Employed = Total Assets at their current value other than [Goodwill, Fictitious Assets and non-trade investments] – Outside Liabilities.

4. Compute the value of Goodwill
Goodwill = Capitalised value of Actual Average Profit – Actual capital employed.

(b) Capitalisation of Super Profit Method :
Steps:
1. Calculate Actual Capital Employed [same as above].
2. Calculate Super Profit [same as under Super Profit method].
3. Multiply the super profit by the required rate of return multiplier
Goodwill = Super Profit x $$\frac{100}{\text { NormalRate of Return }}$$

Question 4.
If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give example and state how necessary adjustments will be made?
Sometimes at the time of admission, the partners may agree that their capitals should also be adjusted so as to proportionate to their profit sharing ratio. There are two situations. Under the first situation, the capital of new partner is given and the same can be used as a base for calculating the new capitals of the old partners.

New capitals of partners may be compared with their old capitals after all adjustments have been made, the partner adjustments have been made, the partner whose capital falls short, will bring the sufficient amount as necessary and the partner who has a surplus, will withdraw excess amount of capital.

This may be clarified with the following example : Alok and Bhola are partners sharing profits in the ratio of 2 :1. Charan is admitted into the tirm for $$\frac{1}{4} \mathrm{th}$$ share of profits.

Charan brings in Rs. 20,000 as capital. The capitals of other partners after all adjustments have been worked out at Rs. 45,000 for Alok and Rs. 15,000 for Bhola. It is agreed that partner’s capitals will be according to the new profit sharing ratio. Determine the new capitals of Alok and Bhola and make necessary Journal Entries.
Solution:
Firstly, to calculate new profit sharing ratio as follows : Total share of the firm ± 1

Required capital of Alok and Bhola on the basis of Charan’s capital be calculated as follows:
Charan invested Rs. 20,000 as capital for $$\frac{1}{4} \text { th }$$ share. Hence the capital of the entire firm should be Rs. 80,000 i.e. $$\left(20,000 \times \frac{4}{1}\right)$$ and be divide;’ ‘tween the partners in their new profit stuuing ratio.

Alok’s share = Rs. 80,000 x $$\frac{2}{4}$$ = Rs. 40,000 .
Bhola’s share = Rs. 80,000 x $$\frac{1}{4}$$ = Rs. 20,000

The adjusted capitals of old partner Rs. 15,000 falls short by Rs. 5,000 and Rs. 45,000 shows surplus by Rs. 5,000. The Journal Entries of the above be passed as follows :

(ii) In the second situation, the total capitals of the firm be given and it is agreed that the capital of each partner should be proportionate to his share in profits. In such a situation each partner’s capital (including the new partner’s capital to be brought by him) is calculated on the basis of his share in profits.

The surplus or deficiency in old partner’s capital account can be transferred to respective current account subject to agreement between the partners. This may be proved through the following examples:

Example: A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. D is admitted into the firm for $$\frac{1}{4}$$ th share in profits which he gets from $$\frac{1}{8}[latex] A and [latex]\frac{1}{8}$$ from B. The total capital of the firm is agreed upon Rs. 1,20,000 and D is to bring in cash the equivalent of $$\frac{1}{4}$$ of amount as capital. The capitals of A, B and C after all adjustments have been worked out at Rs. 40,000; Rs. 35,000 and Rs. 30,000 respectively. Calculate the final capitals.

A will bring in Rs. 5,000; B will withdraw Rs. 10,000; C will also withdraw Rs. 10,000 and D will bring in Rs. 30,000. Alternatively, the current accounts can be opened and the amounts to be brought in or withdrawn by A, B and C will be transferred to their respective current account: The Journal Entries in this regard will be passed as follows :

Question 5.
Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.
If new partner is not in a position to bring his share of goodwill in cash, then Revaluation Method is followed. In this situation, the goodwill account is raised in the books of accounts. When goodwill account is to be raised in the books there may be two possibilities :
(i) No goodwill appears in books at the time of admission;
(i) No Goodwill appears in the books :

Goodwill A/c Dr.
To Old Partner’s Capital A/c’s
(For goodwill raised at full value in the old profit sharing ratio)

The good will thus raised shall appear in the balance sheet at its full value.
Example : Aman and Amit are partners in a firm sharing profits and losses in the ratio of 3 : 2. They decide to admit Sumit into partnership for — share of profits which he acquire equally from Aman and Amit.

Goodwill of the firm is valued at Rs. 1,20,000. Sumit brings in Rs. 48,000 as his share of capital but unable to bring his share of goodwill. No goodwill accounts appears in books of the firm. Goodwill account is to be raised at full value.
Solution:

(ii) When goodwill already exist in the books :

(i) When the value of goodwill appearing in books is equal to the agreed value : [No Entry is Required]

(ii) If the value of goodwill appearing in the books is less than the agreed value:
Goodwill A/c    –  Dr.
To Old Partner’s Capital A/c’s (For goodwill is raised to its agreed value)

(iii) If the value of goodwill appearing in the books is more than the agreed value :
Old Partner’s Capital A/c’s         –  Dr.
To Goodwill A/c’s
(For goodwill brought down to its agreed value) Example : Roily and Polly are partners in a firm sharing profits
and losses in the ratio 3 :2. They admit Dolly into partnership with share in profits.

Goodwill of the firm is valued at Rs. 1,20,000. Dolly bring in only her share of capital of Rs. 40,000 but unable to bring her share of goodwill. Give necessary journal entries under each of the following situations

(i) When the goodwill appears at Rs. 1,20,000 in the books.
(ii) When the goodwill appears at Rs. 80,000 in the books.
(iii) When the goodwill appears at Rs. 1,50,000 in the books.
Solution:
(i) When the goodwill appears at Rs. 1,20,000 in the books.
[No’Entry Required]
(ii) When the goodwill appears at Rs. 80,000 in the books.

If partners, after raising goodwill in the books and making necessary adjustments decide that the goodwill should not appear in the firm’s balance sheet, then it has to be written off.
All Partner’s Capital A/c’s        – Dr.
To Goodwill A/c
(For goodwill written off)
If in above example Roily, Roily and Dolly do not want goodwill to appear in the Balance Sheet, the entry for goodwill is follows :

Sometimes, the partners may decide not to show goodwill account anywhere in books.
New Partner’s Capital A/c Dr.
To Old Partner’s Capital A/c’s
(For adjustment for New Partner’s share of goodwill)
If in above example, we were to treat goodwill in this manner, the entry for goodwill is follows :

Question 6.
Explain various methods for the treatment of goodwill on the admission of a new partner.
To compensate old partners for the loss (sacrifice) of their share in profits, the incoming partner, who acquire his share of profits from the old partners brings in some additional amount termed as share of goodwill.
Goodwill, at the time of admission, can be treated in two ways :
(ii) Revaluation Method.

(i) Premium Method : Premium method is followed when the incoming partner pays his share of goodwill in cash. From the accounting point of view, following are the different situation related to treatment of goodwill:

(a) Goodwill (premium) paid privately (directly to old partners)
[No Entry is required]
(b) Goodwill (premium) brought in cash through the firm

(i) Cash A/c Dr.
To Goodwill A/c
(For the amount of goodwill brought by new partner)

When goodwill already exists in books: If the goodwill already exists in books of firms and incoming partner brings his share of goodwill in cash, then the goodwill appearing in the books will have to be written off.

(ii) Revaluation Method: If the incoming partner does not bring in his share of goodwill in cash, then this method is followed. In this case, the goodwill account is raised in the books of accounts. When goodwill account is to be raised in the books there are two possibilities :
(a) No goodwill appears in books at the time of admission.

If the incoming partner brings in a part of his share of goodwill. In that case, after distributing the amount brought in for goodwill among the old partners in their sacrificing ratio, the goodwill account is raised in the books of accounts based on the portion of premium not brought by the incoming partner.

Example : X and Y are partners sharing profits in the ratio 3 : 2. They admit Z as new partner for $$\frac{1}{4} \text { th }$$ share. The sacrificing ratio of X and Y is 2 : 1. Z brings Rs. 12,000 as goodwill out of his share of Rs. 18,0. No goodwill account appears in the books of the firm.
Solution:

(b) When goodwill already exists in the books
(i) When the value of goodwill appearing in books is equal to the agreed value :
[No Entry is Required]

(ii) If the value of goodwill appearing in the books is less than the agreed value :
Goodwill A/c  – Dr.
To Old Partner’s Capital A/c’s (For goodwill is raised to its agreed value)

(iii) If the value of goodwill appearing in the books is more than the agreed value :
Old Partner’s Capital A/c’s   – Dr.
To Goodwill A/c
(For goodwill brought down to its agreed value)

• If partners, after raising goodwill in the books and making necessary adjustments decide that the goodwill should not appear in the firm’s balance sheet, then it has to be written off.
All Partners Capital A/c’s  – Dr.
ToGoodwil A/c
(For goodwill written-off)

• Sometimes, the partners may decide not to show goodwill account anywhere in books.
New Partner’s Capital A/c – Dr.
To Old Partner’s Capital A/c
(For adjustment for new partner’s share of goodwill)

Hidden or Inferred Goodwill:
(i) To find out the total capital of the firm by new partner’s capital and his share of profit.
Example : New partner’s capital for $$\frac{4}{1}$$ th share is Rs. 80,000, the entire capital of the new firm will be
Rs. 80,000 x $$\frac{4}{1}$$ = Rs. 3,20,000

(ii) To ascertain the existing total capital of the firm : We will have to ascertain the existing total capital of the new firm by adding the capital (of all partners, including new partner’s capital after adjustments, if any excluding goodwill)

→ If assets and liabilities are given:
Capital = Assets (at revalued figures) –  Liabilities (at revalued figures)

(iii) Goodwill = Capital from (i) — Capital from (ii) Generally, this method is used, when the incoming partner does not briñg his share of goodwill in cash. Here, we find out the total goodwill of the firm. After that we can find out (he new partner’s share of goodwill and treat accordingly.

Question 7.
How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?
If, at the time of admission of a new partner, any reserves or accumulated profits or losses appear in the books of the firm, these should be transferred to old partner’s capital/current accounts in their old profit sharing ratio. This should be done because the new partner is not entitled to any share in such accumulated profits and losses as
these are earned/unclaimed by the old partners.

Question 8.
At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.
After revaluation the assets and liabilities appears in the books of the firm are shown at their current values. For this it is necessary to assess the correct and current value of assets and liabilities of the firm shown in books because this current value of assets and liabilities are shown in the balance sheet of the reconstituted firm.

Unrecorded assets and unrecorded liabilities must also be recorded the time of revaluation. To revalue the assets and liabilities and to record unrecorded assets and unrecorded liabilities, new account is opened called Revaluation Account. To revalue the assets and liabilities, all necessary adjustments are made through the Revaluation Account or Profit and Loss Adjustment Account.

Any gain or loss on revaluation of assets and reassessment of liabilities is transferred to the capital accounts of existing partners in their old profit sharing ratio. Revaluation account is credited with increase in the value of assets and decrease in the value of liabilities.

Similarly decrease of assets and increase in the value of liabilities is debited to revaluation account. If revaluation account shows a credit balance then it indicates gain and if there is debit balance then it indicates loss. Gain or loss on revaluation will be transferred to the capital accounts of the existing partners in old ratio.

Revaluation of assets and reassessment of liabilities is needed at the time of admission, so that the profits or loss arising on account of such revaluation may be adjusted in the old partner’s capital accounts in old profit sharing ratio and the new partner may not be affected by the profit or loss on account of revaluation of assets and liabilities.

Example: Following is the Balance Sheet of Sahil and Isha, who share profits in the ratio of 3 : 2. .
Balance Sheet of Sahil and Isha as at April 1st, 2007

On that date, they admitted Ashu into partnership on the following terms :
1. That Ashu is to bring in Rs. 45,000 as capital and Rs. 15,000 as premium for goodwill for
2. That the value of stock is reduced by 10% while plant and machinery is appreciated by 15%.
3. That furniture is revalued at Rs. 27,000.
4. That a provision for doubtful debts is to be created on Sundry debtors at 5% and Rs. 600 is to be provided for an electricity bill.
5. Investment worth Rs. 3,000 (not recorded in the balance sheet) is to be taken into account.
6. A creditor of Rs. 300 is not likely to claim his money and is to be written off.
Record journal entries and prepare revaluation A/c, capital account of partners and the balance sheet of newly reconstituted firm.
Solution :
Books of Sahil, Isha and Ashu ‘
Journal
On that date, they admitted Ashu into partnership on the following terms :
1. That Ashu is to bring in Rs. 45,000 as capital and Rs. 15,000 as premium for goodwill for $$\frac{1}{6} \text { th }$$
2. That the value of stock is reduced by 10% while plant and machinery is appreciated by 15%.
3. That furniture is revalued at Rs. 27,000.
4. That a provision for doubtful debts is to be created on Sundry debtors at 5% and Rs. 600 is to be provided for an electricity bill.
5. Investment worth Rs. 3,000 (not recorded in the balance sheet) is to be taken into account.
6. A creditor of Rs. 300 is not likely to claim his money and is to be written off.
Record journal entries and prepare revaluation A/c, capital account of partners and the balance sheet of newly reconstituted firm.
Solution :
Books of Sahil, Isha and Ashu
Journal

Numerical Questions

Question 1.
A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with $$\frac{1}{6}p$$ share in the profits. Calculate the new profit sharing ratio.

Question 2.
A, B and C were partners in a firm sharing prof its in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio.

Question 3.
X and Y are partners sharing profits in 5:3 ratio admited Z for $$\frac{1}{10}$$ share which he acquired equally for X and Y. Calculate new profit sharing ratio.

Question 4.
A, B and C are partners sharing profits in 2:2:1 ratio admitted D for $$\frac{1}{8}$$ which he acquired entirely from A. Calculate new profit sharing ratio?

Question 5.
p and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him $$\frac{1}{5}$$ share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio.

Question 6.
A, B and C are partners sharing profits in 3 : 2 : 2 ratio. They admitted D as a new partner for $$\frac{1}{5}$$ share which he acquired from A, B and C in 2 : 2 :1 ratio respectively. Calculate new profit sharing ratio?

Question 7.
A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for $$\frac{3}{7}$$ share which he took$$\frac{2}{7}$$ from A and $$\frac{1}{7}$$ from B. Calculate new profit sharing ratio.

Question 8.
A, B and C were partners in a finn sharing profits in 3:3:2 ratio. They admitted D as a new partner for $$\frac{4}{7}$$ profit. D acquired his share $$\frac{2}{7}$$ from A, $$\frac{1}{7}$$ from B and $$\frac{1}{7}$$ from C. Calculate new profit sharing ratio.

Question 9.
Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha $$\frac{1}{3}$$ surrendered of her share in favour of Gopi and Rukmani $$\frac{1}{4}$$ surrendered of her share in favour of Gopi. Calculate new profit sharing ratio.

Question 10.
Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jam as a new partner. Singh surrendered $$\frac{1}{3}$$ of his share in favour of Jam : Gupta surrendered $$\frac{1}{4}$$ of his share in favour of Jam and Khan surrendered $$\frac{1}{5}$$  in favour of Jam. Calculate new profit sharing ratio.

Question 11.
Sandeep and Navdeep are partners in a firm sharing profits in 5 : 3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4 : 2 :1. Calculate the sacrificing ratio.

Question 12.
Rao and Swami are partners in a firm sharing profits and losses in 3 :2 ratio. They admit Ravi as a new partner for $$\frac{1}{8}$$ share in the profits. The new profit sharing ratio between Rao and Swami is 4 :3. Calculate new profit sharing ratio and sacrificing ratio?

Question 13.
Compute the value of goodwill on the basis of four years, purchase of the average profits based on the last five years? The profits for the last five years were as follows:

Question 14.
Capital employed in a business is Rs. 2,00,000. The normal rate of return on capital employed is 15%. During Ihe year 2002 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit.

Super Profit = Average Profit – Normal Profit
Rs. 48,000 – Rs. 30,000
Rs. 18,000

Goodwill = Super Profit x 3 years purchase
Rs. 18,000 x 3
Rs. 54,000.

Question 15.
The books of Ram and Bharat showed that the capital employed on 31.12.2002 was Rs. 5,00,000 and the profits for the last 5 years: 2002 Rs. 40,000; 2003 Rs. 50,000; 2004 Rs. 55,000; 2005 Rs. 70,000 and 2006 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%.

Question 16.
Rajan and Rajani are partners in a firm. Their capitals. were Rajan Rs. 3,00,000; Rajani Rs 2,00,000. During the year 2002 the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%.

Question 17.
A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%.

Goodwill = Total Capitalised value of the firm – Total Assets of the firm
= Rs. 10,00,000 – Rs. 8,20,000
= Rs. 1,80,000.

Question 18.
Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for $$\frac{1}{5}$$ share of profits. Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill premium. Give the necessary journal entries:
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
(d) When goodwill is paid privately.
Ans.
Old ratio of Verma and
Sharma = 5:3 Sacrificing Ratio = 5:3
(a) When the amount of goodwill is retained in the business :

(d) When goodwill is paid privately: No entry is required.

Question 19.
A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with $$\frac{1}{4}$$ share in profits. C will bring in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs. 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries.

Question 20.
Arti and Bharti are partners in a firm sharing profits in 3:2 ratio. They admitted Sarthi for $$\frac{1}{4}$$ share in the profits of the firm. Sarthi brings Rs. 50,000 for his capital and Rs. 10,000 for his $$\frac{1}{4}$$ share of goodwill. Goodwill already appears in the books of Arti and Bharti at Rs. 5,000. The new profit sharing ratio between Arti, Bharti and Sarthi will be 2: 1 : 1. Record the necessary journal entries in the books of the new firm.
Old ratio of Arti and Bharti = 3 :2
Newratio of Arti,BhartiandSarthi = 2:1:1
Sacrificing Ratio = Old Ratio – New Ratio
$$\text { Arti’s sacrifice }=\frac{3}{5}-\frac{2}{4}=\frac{12-10}{20}=\frac{2}{20}$$

Question 21.
X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z $$\frac{1}{8}$$ for share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for his $$\frac{1}{8}$$ share of goodwill. Subsequently X, Y and Z decided to show goodwill in their books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z.

Question 22.
Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for $$\frac{1}{4}$$ share in the profits. The new profit sharing ratio agreed was 2:1:1. Christopher brought Rs. 50,000 for his capital. His share of goodwill was agreed to at Rs. 15,000 . Christopher could bring only Rs. 10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm
Old ratio of Aditya and Balance = 3:2
New Ratio of Aditya, Balan and Christopher = 2:1:1
Sacrificing Ratio = Old Ratio – New Ratio

Question 23.
Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for $$\frac{1}{4}$$ share of profits. Kanwar could not bring his share of goodwill premium in cash. The goodwill of the firm was valued at Rs. 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on Kanwar’s admission.

Question 24.
Mohan Lai and Sohan Lai were partners in a firm sharing profits and losses in 3 : 2 ratio. They admitted Ram Lai for $$\frac{1}{4}$$ share on 1.1.2003. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were Rs. 50,0 for 2003, Rs. 60,000 for 2004, Rs. 90,000 for 2005 and Rs. 70,000 for 2006. Ram Lai did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lai’s admission when:
(a) Goodwill already appears in the books at Rs. 2,02,500.
(b) Goodwill appears in the books at Rs. 2,500.
(c) Goodwill appears in the books at Rs. 2,05,000.

(a) When Goodwill already appears in the books at Rs. 2,02,500:
No Entry is required.
Because there is no difference between the value of goodwill appearing in the books and the agreed value of Goodwill.
(b) When Goodwill appears in the books at Rs. 2,500 :

Question 25.
Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio.between Rajesh, Mukesh and Hari is 4:3: T. On Hari’s admission goodwill of the firm is valued at Rs. 36,000. Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh and Hari decided not to show goodwill in their balance sheet. Record necessary journal entries for the treatment of goodwill on Hari’s admission.

Question 26.
Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4 : 3 :2. Anthony could not bring this share of goodwill Rs. 45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account. Pass the necessary journal entry for the treatment of goodwill.
Old ratio of Amar and Akbar = 1 : 1
New profit sharing ratio of Amar, Akbar and Anthony = 4 : 3 : 2
Sacrificing Ratio – Old Ratio – New Ratio

Question 27.
Given below is the Balance Sheet of A and B, who are carrying on partnership business of 31.12.2006. A and B share profits and losses in the ratio of 2 :1.

C is admitted as a partner on the date of the balance sheet on the following terms:
(i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his $$\frac{1}{4}$$ share of goodwill for share in the profits.
(ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%.
(iii) Stock is found over valued by Rs. 4,000.
(iv) A provision for bad and doubtful debts is to be created at 5% of debtors.
(v) Creditors were unrecorded to the extent of Rs. 1,000. Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.
Old Ratio of A and B = 2 :1
Sacrificing Ratio of A and B = 2 : 1

Partner’s Capital Accounts

Question 28.
Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. On 1st Jan., 2007 they admitted Om as a new partner. On the date of Om’s admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000 in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of these items on Om’s admission. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.

Question 29.
Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2007 they admitted Ranjan as a partner.
On Ranjan’s admission the profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000. Record necessary journal entry for the treatment of the same.

Question 30.
A and B share profits in the proportions of $$\frac{3}{4}$$ and $$\frac{1}{4}$$ Their Balance Sheet on Dec. 31, 2006 was as follows:

On jan. 1, 2007. C was admitted into partnership on the following terms:
(a) That C pays Rs. 10,000 as his capital. .
(b) That C pays Rs. 5000 for goodwill. Half of this sum is to be withdrawn by A and B.
(c) That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be created on Sundry Debtors and Bills Receivable.
(d) That the value of land and buildings be appreciated by 20%.
(e) There being a claim against the firm for damages, a liability to the extent of Rs. 1,000 should be created.
(f) An item of Rs. 650 included in sundry creditors is not likely to be claimed and hence should be written back. Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.

Question 31.
A and B are partners sharing profits and losses in the ratio of 3:1. On 1st Jan., 2007 they admitted C as a new partner for $$\frac{1}{4}$$ share in the profits of the firm. C brings Rs. 20,000 as for his $$\frac{1}{4}$$ share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and Band pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for makin their capitals in proportion to their profit sharing ratio.

New Profit Sharing Ratio among A, B and C =9 :3:4
Required Capital of A and B
Total capital of the firm based on C’s capital
= Rs. 20,000 x $$\frac{4}{1}$$ = Rs. 80,000
Hence, based on their share in profits, the capital of A and B will be:
A’s capital = $$\frac{9}{16}$$ x Rs. 80,000 = Rs. 45,000
B’s capital = $$\frac{3}{16}$$ x Rs. 80,000 = Rs. 15,000
The capital of A and B after all adjustments:
A’s capital = Rs. 50,000
B’s capital = Rs. 12,000
Hence,
A will withdraw Rs. 5,000 (Rs. 50,000— Rs. 45,000)
and B will contribute additional capital of Rs. 3,000 (Rs. 15,000—
Rs. 12,000)

Question 32.
Pinky, Qumar and Roopa are partners ¡n a firm sharing profits and losses in the ratio of 3:2:1. S is admitted as a new partner for $$\frac{1}{4}$$ share in the profits of the firm, which he gets $$\frac{1}{8}$$ from Pinky, and $$\frac{1}{16}$$ each from Qumar and Roopa. The total capital of the new firm after Seema’s admission will be Rs. 2,40,00. Seema is required to bring in cash equal $$\frac{1}{4}$$ to of the total capital of the new firm. The capitals of the old partners.also have to be adjusted in proportion of their profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all adjustments in respect of goodwill and revaluation of assets and liabilities have been made are Pinky Rs. 80,000, Qumar Rs. 30,000 and Roopa Rs. 20,000. Calculate the capitals of all the partners and record the necessary journal entries for doing adjustments in respect of capitals according to the agreement between the partners.
Calculation of new profit sharing ratio:
Old ratio of Pinky, Qumar and Roopa =3:2: 1
Seema acquire

Question 33.
The following was the Balance Sheet of Aran, Bablu and Chetan sharing profits and losses in the ratio of \frac{6}{14}: $$\frac{5}{14}: \frac{3}{14}$$ respectively.

They agreed to take Deepak into partnership and give him a $$\frac{1}{8}$$ share of on the following terms: (a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful debts; (e) that the value of land and buildings having appreciated be brought upto Rs. 31,000; (f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’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 Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.

Question 34.
Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2 :1. Chintan is admitted into the firm with $$\frac{1}{4}$$ share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on December 31,2006 (before Chintan’s admission) was as follows :

It was agreed that:
(ï) Chintan will bring in Rs. 12,000 as his share of goodwill premium.
(ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000.
(iii) A provision for doubtful debts is to be created @ 6% on debtors.
(iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.

Question 35.
Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2007 they admitted Vimal for $$\frac{1}{5}$$ share in the profits. The Balance Sheet of Ashish and Dutta as on Jan. 01, 2007 was as follows:

It was agreed that:
(i) The value of Land and Building be increased by Rs. 15,000.
(ii) The value of plant be increased by 10,000.
(iii) Goodwill of the firm be valued at Rs. 20,000.
(iv) Vimal to bring in capital to the extent of $$\frac{1}{5} \text { th }$$ of the total capital of the new firm.
Record the necessary journal entries and prepare Balance Sheet of the firm after Vimal’s admission.

error: Content is protected !!