g1 6.2 partnership - reconstitution

Financial Accounting 6.2.1

6. PARTNERSHIP ACCOUNTING

Question: What is Reconstitution of Firm?

Answer: Reconstitution of firm means any change in agreement between the partners that takes place

during Change in Profit Sharing Ratio, Admission of new partner, Retirement and death of partner,

Sale of firm and Amalgamation of firm

Question: What are adjustments required for reconstitution of firm?

Answer:

1. Calculation of new profit and loss ratio

2. Distribution of accumulated profit and loss

3. Calculation of goodwill and accounting treatment of goodwill

4. Revaluation of assets and liabilities

5. Adjustment in capital balance

[CMA INTER D05, 3 Marks]

Question: Write short notes on Change in the profit sharing ratio

Answer: Change in profit sharing ratio occurs in the following situations

1. On admission of new partner

2. On retirement of existing partner

3. On change of scope of partner

Formula:

1. Old ratio: the ratio prior to the change of ratio

2. New ratio: the ratio calculated after the change

3. Sacrificing ratio: old ratio new ratio

4. Gaining ratio: new ratio old ratio

Calculations regarding new profit and loss ratio

Question 3: Type 1: A and B share profit and loss in 4:3. C is joined for 1/8th share. Calculate the

new profit and loss ratio

Answer:

Particulars Formula Calculations Answer

Let the total share be 1

Balance after Cs share for A and B Total share Cs share 1 -

As share in the balance Balance after Cs share As share

Bs share in the balance Balance after Cs share Bs share

New ratio of A, B and C

:

:

4:3:1

Question 4: Type 2: A and B share P/L in 4:3 C is joined for 1/8th share. After Cs admission A and

B share profit and loss in the ratio of 3:4. Calculate the new profit and loss ratio

Answer:

Partnership Accounting 6.2.2

Particulars Formula Calculations Answer

Let the total share be 1

Balance after Cs share for A and B Total share Cs share 1 -

As share in the balance Balance after Cs share As share

Bs share in the balance Balance after Cs share Bs share

New ratio of A, B and C

:

:

3:4:1

Question 5: Type 3: A and B share profit and loss in the ratio of 4:3. C is admitted as new partner. A

sacrifices 1/2 of his share for C, and B sacrifices 1/3 of his share for C. Calculate new profit and loss

ratio.

Answer: As sacrificing ratio = 4/7 x 1/2 = 4/14

Bs sacrificing ratio = 3/7 x 1/3 = 3/21

As new ratio [old ratio sacrificing ratio] = 4/7 4/14 = 8-4/14 = 4/14

Bs new ratio [old ratio sacrificing ratio] = 3/7 3/21 = 9-3/21 = 6/21

New ratio A, B and C = 4/14 : 6/21 : [4/14 + 3/21] = 4/14 : 6/21 : 12+6/42

= 4/14:6/21:18/42 = 4/14 3/3 : 6/21 2/2 : 18/42 =12/42: 12/42: 18/42

= 6 : 6 : 9 = 2 : 2 : 3

Question 6: Type 4: A and B share profit and loss in the ratio of 4:3. C is admitted for 3/7th share. C

gets 2/3 of his share from A and 1/3 of his share from B. Calculate new profit and loss ratio

A sacrifices 2/3rd

of Cs share = 3/7 2/3 = 6/21

B sacrifices 1/3rd

of Cs share = 3/7 1/3 = 3/21

As ratio after sacrificing = 4/7 6/21 = 12 6/21 = 6/21

Bs ratio after sacrificing = 3/7 3/21 = 9 3/21 =6/21

New ratio = 6/21 : 6/21 : 3/7 = 2 : 2 : 3

[CMA INTER J04, 6 Marks]

Question 7: R & S are in partnership sharing profit and losses at the ratio 3: 2. They take T as a new

partner. Calculate the new profit sharing ratio if:

1. T purchases

th share from R.

2. R & S agree to sacrifice

th share to T in the ratio of 2: 3.

3. Simply gets

th share of profit.

Answer: Calculation of new profit sharing ratio

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

R S T

Old ratio

Less

th from R

Nil


New Ratio

New Ratio of R, S & T

:

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

Rs sacrifice

Ss Sacrifice

R S T

Old ratio

-/(+) Sacrifice / (gets)

New Ratio 28:17:5

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

Let total share =1

Remaining share 1 (1/10) = 9/10

Rs Share = 9/103/5 = 27/50

= 9/10 2/5 = 18/50

New Ratio

[CMA RTP D11]

Question 8: W and X are equal partners. They admit Y and Z as partners with 1/5 and 1/6 share

respectively. What is the profit sharing ratio of all the partners?

Answer: Let total profits or losses of the firm be 1

Shares of W and Z is 1/5 and 1/6 respectively.

Balance remaining: 1 (1/5 + 1/6) = 1 11/30 = 19/30

19/30 to be shared equally by W and X as 9.5/30 : 9.5/30

New Profit sharing ratio will be W : X : Y : Z

[9.5/30 2/2] : [9.5/30 2/2] : [1/5 12/12] : [1/6 10/10]

Thus new profit sharing ratio of all the partners will be 19 : 19 : 12 : 10.

[CMA INTER D03, J04, J05 & J06, 4 Marks, 4 Marks, 3 Marks & 4 Marks]

Question: Write short notes on Goodwill

Goodwill is the value of reputation of firm in respect of profits expected in future over and above

normal profits earned by firm belonging to same industry.


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

Need for valuation of Goodwill - In case of

1. Change in Profit Sharing Ratio, 2. Admission of new partner, 3. Retirement and/or death of partner, 4. Sale of firm and 5. Amalgamation of firm

Reason Valuation Treatment

1 Location 1 Simple Average Method

[if profit does not show

trend]

1 Non-cash method

2 Size Revaluation Method

3 Patent 2 Weight Average Method

[if profit shows trend]

Memorandum Revaluation

Method

4 Technical Know-

how

Premium Method

5 Management 3 Super Profit Method 2 Cash Method: Premium Method

6 Market Situation 4 Capitalization Method 3 Cash and non-cash method

7 5 Annuity Method 4 Pay privately no entry


Question: Write short notes on Memorandum revaluation account;

Question 9: Calculation of Goodwill: [Simple Average Method and Weighted Average Method]:

Calculate goodwill under 2 years purchase of 3 years simple average profit method and weighted

average profit method from the profits for 2009-10, 2008-09 and 2007-08 are 10,000, 8,000 and

6,000 respectively.

Answer:

i. Simple Average ii. Weighted Average Method

Year Profit Weight Weighted Profit

2009-10 10,000 3 30,000

2008-09 8,000 2 16,000

2007-08 6,000 1 6,000

Total 24,000 6 52,000

Average Profit 8,000 8,667

Years of Purchase 2 2

Goodwill 16,000 17,334

Question 10: Calculation of Goodwill: [Super Profit Method, Capitalisation Method and

Annuity Method]: Calculate goodwill under three years purchase of super profit method and


capitalization method from the details given. Capital employed 10,000, Normal Rate of Return 10%

and Actual Profit 1,500.

Annuity factor [AF] for 1 invested every year will fetch 2.486 in the end of third year

Particulars Formula Calculation

Purchase of Super Profit Method

Capital Employed [CE] 10,000

Normal Rate of Return [NRR] 10%

Normal Profit [NP] CE NRR 10,00010% 1,000

Actual Profit [AP] 1,500

Super Profit [SP] AP NP 1,500 1,000 500

Goodwill = 3 SP 1,500

Capitalisation Method

Goodwill

5,000

OR

Goodwill

CE

- 10,000 5,000

Annuity Method [Super Profit]

Goodwill SP Annuity Factor 500 2.486 1243

Question 11: Calculation of Goodwill: [Annuity Method]

Question: Calculate Goodwill under annuity method from the given information: Future maintainable

profit [FMP] of 10000 p.a. is expected for the 3 years. The expected NRR is 10%. Annuity factor

[AF] for 1 invested every year will fetch 2.486 in the end of third year

Answer:

Year FMP 10% PVF PV

1 10,000 0.909 9090

2 10,000 0.826 8260

3 10,000 0.751 7510

Goodwill 2.486 24860

Or

GW = FMP AF 10000 x 2.486 24860

Note: Future maintainable profit [FMP]: is the profit calculated based on past years adjusted

profit and loss and subject to future applicability. FMP is always considered for calculating goodwill

not just the book profit.

Treatment of Goodwill

I. Non Cash Method II. Cash Method

1. Revaluation 2. Mem.

Revaluation

3. Premium Method Premium Method


t

he

GW

GW A/c Dr. GW A/c Dr. Adjustment of GW of New Partners Share

To Old

Partners

Capital A/c

To Old

Partners

Capital A/c

Gaining Partners

Capital A/c

Dr. Cash A/c Dr.

[Full GW is Shared in Old Ratio] To Sacrificing

Partners Capital

A/c

To Sacrificing

Partner Capital

A/c

t

he

GW

Not Applicable All Partners

Capital A/c

Dr.

To GW A/c

[Full GW is Shared

in New Ratio]

Calculation of Hidden Goodwill

A Incoming Partners Capital / His share of profit

B Capitals of Old Partners + Incoming Partners Capital

C Hidden Goodwill (A-B)

Question 12: Revaluation Method [no goodwill in B/S]: Show the journal entry to adjust the

goodwill on admission of the new partner C. The existing partners A and B share profit and loss in the

ratio of 3 : 2 and C is admitted for 1/5th share of profit. The balance sheet of the firm is given below

Balance Sheet

Liabilities Assets

Capital A 70,000 Goodwill --

Capital B 60,000 Fixed Asset 100,000

Current Liabilities 20,000 Current Assets 50,000

150,000 150,000

Goodwill of the firm valued at 25,000. C is not able to bring cash for his share of goodwill but cash

brought in for capital is 40, 000

Answer:

Premium for Goodwill = Goodwill New Partners share

1) Good Will A/c Dr 25,0000

To As Capital A/c 15,000

To Bs Capital A/c 10,000

2) Cash A/c Dr 40,000

To Cs Capital 40,000


Balance Sheet

Liabilities Assets

Capital A [70+15] 85,000 Goodwill 25,000

Capital B [60+10] 70,000 Fixed Asset 100,000

Capital C 40,000 Current Assets 90,000

Current Liabilities 20,000

215,000 215,000

Question 13: Memorandum revaluation [no goodwill in B/S]: Keep the above illustration as it is,

except that the partners decided to write off goodwill from the books.

1) Good Will A/c Dr 25,000



(Goodwill raised in the books)

2) As Capital A/c Dr 12,000

Bs Capital A/c Dr 8,000

Cs Capital A/c Dr 5,000

To Goodwill A/c 25,000

(Goodwill cancelled in the books)

3) Cash A/c Dr 40,000


(Capital introduced by Cs capital)

Balance Sheet

Liabilities Assets

Capital A [70+15-12] 73,000 Goodwill [25-25] ----

Capital B [60+10-8] 62,000 Fixed Asset 100,000

Capital C [40-5] 35,000 Current Assets 90,000


190,000 190,000

Question 14: Non-cash premium method [no goodwill in B/S]: Keep the above illustration as it is

except that the partners decided to adjust the goodwill without opening it.


Answer:

1) Cs Capital A/c Dr 5,000



(Goodwill adjusted without raising it)

2) Cash A/c Dr 40,000



Balance Sheet

Liabilities Assets

Capital A [70-3] 73,000 Goodwill [25-25] ----

Capital B [60-2] 62,000 Fixed Asset 100,000

Capital C [40-5] 35,000 Current Assets 90,000


190,000 190,000

Question 15: Cash premium method [no goodwill in B/S]: Keep the above illustration as it is

except that the new partner C can bring his share of goodwill also in cash apart from his capital.

1) Cash A/c Dr 5,000

Or

Cs Capital A/c Dr 5,000

To As Capital A/c 3,000 To As Capital A/c 3,000

To Bs Capital A/c 2,000 To Bs Capital A/c 2,000

(Goodwill adjusted without raising it)

2) Cash A/c Dr 40,000 Cash A/c Dr 45,000

To Cs Capital 40,000 To Cs Capital 45,000


Balance Sheet

Liabilities Assets

Capital A 73,000 Goodwill ----

Capital B 62,000 Fixed Asset 100,000

Capital C 40,000 Current Assets 95,000


195,000 195,000

Note: If goodwill is given in the B/S, then it can be solved either the goodwill can be written off first

and then proceed as usual or adjustment entry to be passed to the difference only


Question 16: Treatment of Goodwill (non-cash) Revaluation Method, Memorandum

Revaluation Method and Premium Method: A & B are partners in a firm sharing profits and losses

in the ratio of 3:2. C joins the firm for 1/3rd

share, and is to pay 20,000 as premium for goodwill but

cannot pay anything. As between A and B, they decided to share profits & losses equally. Pass

required journal entry.

Answer:

Question 17: A and B share profit and loss in the ratio of 4:3. They admitted C into the firm and the

new profit and loss ratio is 1:2:1. The goodwill is valued at 10,000 and the new partner C failed to

bring cash for his share of goodwill. The partners decided to adjust goodwill account without opening

the goodwill account.

Answer:

Journal Entry Dr Cr Note

Bs Capital A/c Dr 714 (10,000 -2/28)

Cs Capital A/c Dr 2,500 (10,000 -7/28)

To As Capital 3,214 (10,000 9/28)

Goodwill account is adjusted without raising it under sacrificing ratio

Calculation of sacrificing ratio

Partners Old Ratio New Ratio Sacrificing Ratio

A

+ B

C 0

Alternatively

A B C

Raise GW using [old ratio] 5,714 4,286 ----

Cancelling GW [new ratio] 2,500 5000 2,500

3,214 (714) (2,500)

Journal Entries

1) Non-cash premium method 3) Memorandum revaluation method

C Capital A/c Dr 20,000 Goodwill A/c Dr 60,000

To A Capital A/c 16,000 To A Capital A/c 36,000

To B Capital A/c 4,000 To B Capital A/c 24,000

2) Revaluation method A Capital A/c Dr 20,000

Goodwill A/c Dr 60,000 B Capital A/c Dr 20,000

To A Capital A/c 36,000 C Capital A/c Dr 20,000

To B Capital A/c 24,000 To Goodwill A/c 60,000


Question 18: Treatment of Goodwill (cash) Premium Received: A & B are equal partners. C is

coming as a new partner who pays 8,000 as premium for goodwill. The new profit sharing ratio

among A, B & C is 4:3:2. Pass necessary journal entries showing the appropriation of premium

money assuming that the premium for goodwill is immediately withdrawn by the old partners.

Answer:

Journal Entries

1) Cash A/c Dr 8,000 3) A Capital A/c Dr 2,000

To Premium for Goodwill A/c 8,000 B Capital A/c Dr 6,000

To Cash A/c 8,000

2) Premium for Goodwill A/c Dr 8,000

1+

2

Cash A/c Dr 8,000

To A Capital A/c 2,000 To As Capital A/c 2,000

To B Capital A/c 6,000 To B Capital A/c 6,000

Question 19: Treatment of Goodwill (cash and non-cash) Premium Paid Partly: A and B are

partners in a firm sharing profits & losses in the ratio of 3:2. C is coming for 1/3rd

share, is to pay

30,000 as premium for goodwill but pays only 15,000. As between A and B, they decided to share

profits & losses equally.

Answer:

Journal Entries Under Premium Method

For cash portion of 15,000 For non cash portion of 15,000

1) Cash A/c Dr 15,000 3) C Capital A/c Dr 15,000

To Premium for Goodwill 15,000 To A Capital 12,000

To B Capital 3,000

2) Premium for Goodwill A/c Dr 15,000

To A Capital A/c 12,000

To B Capital A/c 3,000

Note1: Revaluation or memorandum revaluation method can also be used for adjusting non-cash

portion of goodwill

Note2: Cash for premium can be withdrawn by partners fully or partly

Question 20: A and B share profit and loss in the ratio of 5:4. They admit C for 1/4th share. The

goodwill is valued at 90,000. C is able to bring cash for his capital and 10,000 for his share of

goodwill.

Working Note 1: Accounting Treatment

Cs share of goodwill 90000 1/4 22,500

Less Cash portion of goodwill 10,000 Cash premium method

Non cash portion 12,500 Any one of the non-cash method

Working Note 2: Calculation of new ratio and sacrificing ratio

Let total profit be 1


Balance after Cs Share Total share Cs share Balance

1

Balance share (a) Partners old share (b) Partners new share (a) (b)

As new share 5/9 15/36

Bs new share 4/9 12/36

Cs share 9/36

New share of A,B and C 15:12:9

Sacrificing Ratio (SR) Old ratio (OR) New ratio (NR) SR = OR NR

A 5/9 15/36 5

B 4/9 12/36 4

C -

I. Cash portion of goodwill ii. Memorandum revaluation method

i. Cash Premium Method Good Will A/c Dr 50,000

Cash A/c Dr 10000 To As Capital 27,778

To As Capital 5556 To Bs Capital 22,222

To Bs Capital 4444

As Capital Dr 20,833

II. Non-cash portion of goodwill Bs Capital Dr 16,667

i. Revaluation method Cs Capital Dr 12,500

Good Will A/c Dr 50,000 To Goodwill 50,000

To As Capital 27,778

To Bs Capital 22,222 iii. Non-cash premium method

Cs Capital Dr 12,500

To As Capital 6,944

To Bs Capital 5,556

Question 21: Treatment of goodwill when change in profit-sharing ratio: A and B share profit and

loss in the ratio of 3:2. They decided to share their future profit and loss in the ratio of 4:5. Goodwill

is valued at 45,000. Pass the journal entry/s to adjust the goodwill to show the impact of change in

profit and loss ratio.

i. Revaluation method ii. Memorandum revaluation method

Goodwill A/c Dr 45,000 Good Will A/c Dr 45,000

To As Capital 27,000 To As Capital 27,000

To Bs Capital 18,000 To Bs Capital 18,000

iii. Non-cash premium method As Capital Dr 20,000

Bs Capital Dr 7,000 Bs Capital Dr 25,000


To As Capital 7,000 To Goodwill 45,000

Return of Premium to a partner on dissolution before expiry of term:

Conditions:

1. A partner was admitted in the partnership firm for a fixed term period,

2. Such partner had paid a premium for goodwill at the time of admission.

3. The partnership firm has dissolved.

Exceptions: The partner will not be entitled to any claim under any of the following conditions:

1. the firm is dissolved due to death of a partner

2. the dissolution is due to the misconduct of the partner claiming refund

3. dissolution is in pursuance of an agreement containing no provision for the return of the premium.

Amount of Refund: the amount to be repaid will be determined having regard to the terms upon

which the admission was made and to the length of the period agreed upon and the period that has

expired.

Liability of other partners: the amount of refund payable shall be borne by the other partners in their

p/l ratio.

Admission of a Partner: A person can be admitted as new partner only with the consent of all

existing partners and the a new partner acquires right to Share Assets of firm and right to Share Future

Profits of firm

Revaluation Account: is a Nominal Account and prepared to ascertain Profit / Loss on Revaluation

of Assets and Liabilities. Decrease in Value of Assets and Increase in Amount of Liabilities are

debited and Increase in Value of Assets and Decrease in Amount of Liabilities are credited. The

balance of this account transferred to old partners in old ratio.

Write a short note on reserves

No Types of

Reserves

Examples Purpose

1 General Reserve P/L, General Reserve, Reserve Fund Multi

2 Specific Reserve Provision for DD, Investment Fluctuation Reserve, Workmen

Compensation,

Specific

3 Capital Reserve Share forfeiture, Capital Reserve, Profit Prior to Incorporation,

CRR

Limited

4 Secret Reserve Asset/Liabilities shown less/more than its book value [Prohibited]

Investment Fluctuation Reserve: surplus if any, after adjusting p/l on revaluation of investments to

reflect its market value, should be transferred to old partners in old ratio

Workmen Compensation Reserve: surplus if any, after adjusting any liability for workmen

compensation, should be transferred to old partners in old ratio

Distribution of Accumulated Profits, Reserves and Losses: transferred to old partners in the old

ratio


Machinery Replacement Fund: is in the nature of Accumulated Depreciation and not Accumulated

Profits and hence it is not transferred to partners.

Adjustment of Partners Capitals: either Adjusting the Capitals of Old Partners on the basis of

Capital of Incoming Partner or Calculating new Capital on the basis of combined of old partners

Retirement of a Partner: For firms acts after his retirement a retiring partner is not liable to third

party only if Public notice of his retirement is given by himself or by any other partner, [Sec.32(3)] or

Third party deals with firm without knowing that retiring partner was partner [Sec.32(4)]

[CMA RTP D11]

Question 22: The Balance Sheet of G and S, who share profits and losses in the ratio of 3 : 2, as on

31.3.2011 appears as below

liabilities Assets

Capital G 48,000 Other Assets 1,20,000

Capital S 32,000

Reserve 10,000 Cash 10,000

Creditors 40,000

1,30,000 1,30,000

They admit R as a partner on 1.4.2011. You are required to prepare Partners Capital Accounts and

the Balance Sheet of the new firm under each of the following cases. Assume partners withdrawn the

premium for Goodwill paid by R.

a. R is to contribute to the firm 27,000 for 1/6th share in the partnership.

b. R is to purchase 1/6th share in the partnership from the existing partners G and S in the ratio of 3 :

2, for 27,000.

Answer: Case a: R is admitted by investing additional capital in the partnership. In effect, both the

total assets and the total capital of the firm are increased by the amount of capital brought in by R.

Since R is given 1/6th share, G and S get 5/6th share in the partnership.

Following is the calculation of premium for goodwill brought in by R

Total capital of G and S for 5/6th share (48,000 + 32,000 + 10,000) 90,000

Total capital after the admission of R will be (90,000 / 5 6) 1,08,000

R is to bring in 1/6th of 1,08,000 18,000

Total amount brought in by R for capital and premium for goodwill 27,000

Therefore, premium for goodwill brought in by him (27,000 18,000) 9,000


Partners Capital Accounts

Dr Cr

Particulars G S R Date Particulars G S R

To - By Balance b/d 48,000 32,000 -

Cash A/c 5,400 3,600 Reserve A/c 6,000 4,000

(premium

withdrawn)

Premium for

Goodwill

5,400 3,600

-

To Balance c/d 54,000 36,000 18,000 Cash A/c - - 18,000

59,400 39,600 18,000 59,400 39,600 18,000

Balance Sheet (after Rs admission) as at 1st April, 2011

Liabilities Assets

Gs Capita 54,000 Other assets 1,20,000

s Capital 36,000 Cash 28,000

Rs Capital 18,000 1,08,000 [10,000+27,000-9,000]

Creditors 40,000

1,48,000 1,48,000

Case b: R is admitted by purchasing of an interest from the old partners G and S. Since the capital

interest of the incoming partner R is obtained from the old partners G and S, neither the total assets

nor the total capital of the partnership firm is affected

Following is the calculation of premium for goodwill brought in by R

Total capital after Rs admission is same as before (48,000 + 32,000 + 10,000) 90,000

R is to bring in 1/6th of 90,000 15,000

Total amount brought in by R for capital and premium for goodwill 27,000

Therefore, premium for goodwill brought in by him (27,000 15,000) 12,000

Partners Capital Accounts

Dr Cr

Particulars G S R Particulars G S R

To - By Balance b/d 48,000 32,000 -

Reserve A/c 6,000 4,000

Cash A/c (Bal.

figure)

16,200 10,800 Premium for

Goodwill

7,200 4,800 -

To Balance c/d 45,000 30,000 15,000 Cash A/c - - 15,000

61,200 40,800 15,000 61,200 40,800 15,000


Balance Sheet (after Rs admission) as at 1st April, 2011

Liabilities Assets

Gs Capita 45,000 Other assets 1,20,000

Ss Capital 30,000 Cash 10,000

Rs Capital 15,000 90,000

Creditors 40,000

1,30,000 1,30,000

Note: total capital of the firm is same as before. Out of 90,000, R gets , 15,000. The balance of

capital of 75,000 is shared by G and S in the ratio of 3:2

Admission of Partner

Question 23: Rain and Storm are partners in a firm sharing profits and losses as 3:2 respectively.

Their Balance sheet on 31.12.2000 stands as under:

Balance Sheet

Liabilities Assets

Creditors 35,000 Cash 4,000

Capital Accounts: Debtors 22,000

Rain 40,000 (-) Provision for doubtful debts 2000 20,000

Storm 20,000 60,000 Stock 18,000

Machinery 20,000

Land & Building 33,000

95,000 95,000

On 1.1.2001, they agreed to take Dust as a partner on the following conditions:

1. Goodwill of the firm shall be valued at 23,750 and Dust shall pay his share of goodwill in cash.

2. Dust shall contribute 15,000 as his share of capital.

3. Land and Building shall be valued at 42,000. Machinery shall be depreciated by 5,000.

Provision for doubtful debts shall be raised to 3,000 and another provision shall be made for a

probable liability for damages amounting to 1,300.

4. Profit & loss sharing ratio shall be so adjusted that, between Rain & Storm the former ratio is

maintained, while between Storm & Dust there shall be the same ratio as between Rain & Storm.

5. The capital shall be adjusted (without disturbing the ultimate total capital) so as to correspond

with the new ratio, the excess or deficit being transferred to their respective current accounts.

Show the journal entries to give effect to the above arrangement and prepare the opening B/S of the

new firm

Answer:

Journal Entries Dr Cr

1 Land and Building A/c Dr 9,000

To Revaluation A/c 9,000


Balance Sheet of the New firm as on 1st January, 2001

Liabilities Assets

Capital Accounts: Land and Building [33+9] 42,000

Rain 38,700 Machinery [20-5] 15,000

Storm 25,800 Stock 18,000

Dust 17,200 81,700 Debtors 22,000

Current A/c (-): Prov. for doubtful debts

[2+1]

3,000 19,000

Rain 5,320 Cash (4,000 + 20,000) 24,000

Creditors 35,000 Current A/c

Liability for Damages 1,300 Storm 3,120

Dust 2,200 5,320

1,23,320 1,23,320

Working Notes:

(1) Calculation of new profit sharing ratio and sacrificing ratio

(Being land and building appreciated)

2 Revaluation A/c Dr 7,300

To Machinery A/c 5,000

To Provision for Doubtful Debts A/c. 1,000

To Liability for Damages A/c 1,300

(Being machinery written down and provision for DD and damages created)

3 Revaluation A/c (9,000 7,300) Dr 1,700

To Rain Capital A/c 1,020

To Storm Capital A/c 680

(Being revaluation profit transferred to partners capital a/c)

4 Cash A/c Dr 20,000

To Premium for Goodwill A/c (WN2) 5,000

To Dust Capital A/c 15,000

(Being cash brought in for capital and premium by new partner)

5 Premium for Goodwill A/c (WN3) Dr 5,000

To Rain Capital A/c 3,000

To Storm Capital A/c 2,000

(Being premium for goodwill shared by old partners in sacrificing ratio)

6 Rain Capital A/c.(WN4 and 5) Dr 5,320

To Rain Current A/c 5,320

(Being excess capital of rain transferred to current a/c)

7 Strom Current A/c (WN4 and 5) Dr 3,120

Dust Current A/c Dr 2,200

To Storm Capital A/c 3,120

To Dust Capital A/c 2,200

(Being deficit capital of Storm and Dusts transferred to currents a/c)


R S D

Old ratio 3 2

New ratio 3 2

Combined new ratio 9 6 4

(2) Premium for goodwill brought in by Dust = 23,750 / 19 4 = 5,000.

(3) The partners old profit sharing ratio (3:2) is their sacrificing ratio.

(4) Total capital of the new firm = Opening capital + Capital and premium brought in by Dust +

Revaluation profit

=(60,000 + 15,000 +5,000 + 1,700) = 81,700

Rains share = 81,700 9/19 = 38,700

Storms share = 81,700 6/19 = 25,800

Dusts share = 81,700 4/19 = 17,200.

(5) Partners Capital A/c

Particulars Rain Storm Dust Particulars Rain Storm Dust

To Current a/c

(bal)

5,320 ---- ---- By Bal. b/d 40,000 20,000 ---

Bank A/c. ---- ---- 15,000

Balance (WN

4)

38,700 25,800 17,200 Premium for

Goodwill

3,000 2,000 ----

Revaluation A/c 1,020 680 ----

Current a/c (Bal) ---- 3,120 2,200

44,020 25,800 17,200 44,020 25,800 17,200

Working Note 6: Revaluation A/c

Debit Credit

To Decrease in plant and machinery 5,000 By Increase in land and building 9,000

Provision for bad debts A/c. 1,000

Liability for damages 1,300

Partners Capital A/cs Profit (Rain 1,020; Storm 680

1,700

9,000 9,000

Question 24: Ranu & Mili are partners in a firm sharing profits & losses in the ratio of 2:1

Balance sheet of the firm on 31.12.2002 was as follows:

Liabilities Assets

Creditors 7,000 Investments 25,000

Investment provision 2,000 Stock 15,000

General Reserve 10,500 Debtors 20,000

Workmen compensation Fund 6,000 Less: Provision for bad debts 2,500 17,500

Capital A/c: Ranu 30,000 Bills Receivable 12,500

Capital A/c: Mili 24,500 54,500 Bank 10,000

80,000 80,000

On the above date, Manisha is admitted for 2/5th share in the profits or losses of the firm. Following

adjustments were made at the time of admission:

a. Manisha is required to bring in 50,000 as capital.


b. Her goodwill was calculated at 12,000.

c. Ranu and Mili purchased a Machinery on hire purchase system for 15,000 of which only 500

are to be paid. Both machinery and unpaid liability did not appear in the Balance sheet.

d. There was a joint life policy on the lives of Ranu and Mili for 75,000. Surrender value of the

policy on the date of admission amounted to 12,000.

e. Accrued incomes not appearing in the books were 500.

f. Market value of investments is 22,500.

g. Claim on account of compensation is estimated at 750.

h. S, an old customer, whose account was written-off as bad, has promised to pay 1,750 in

settlement of the full claim.

i. Provision for bad debts is required at 3,000.

Prepare Revaluation A/c, Partners Capital A/c & Opening Balance Sheet after the admission of

Manisha in the books of the firm

Answer:

Revaluation A/c

Debit Credit

To Investment Provision A/c (Nt 1) 500 By Accrued income A/c 500

Prov. For bad debts A/c. 500 Workmen Comp. Fund A/c (Note 2) 5,250

Creditors A/c (hire purchase) 500 Joint Life Policy A/c 12,000

Partners Capital A/cs Profit (Ranu- 20,833; Mili 10,417

31,250 Machinery A/c 15,000

32,750 32,750

Partners Capital A/c

Particulars Ranu Mili Manisha Particulars Ranu Mili Manisha

To Goodwill 12,000 6,000 12,000 By Balance b/d 30,000 24,500 ----

Balance c/d 65,833 42,417 38,000 Revaluation A/c 20,833 10,417 ----

General Reserve 7,000 3,500 ----

Goodwill (Nt 3) 20,000 10,000 ----

Bank A/c ---- ---- 50,000

77,833 48,417 50,000 77,833 48,417 50,000

Balance Sheet of the Firm (after Manishas admission)

Liabilities Assets

Capital A/c Machinery 15,000

Ranu 65,833 Investment 25,000

Mili 42,417 Stock 15,000

Manisha 38,000 Debtors 20,000

Creditors + HP installment

(7,000+500)

7,500 (-) Provision for

Doubtful Debt

3,000 17,000

Investment Provision

(2,000 + 500) 2,500 Bills Receivable 12,500

Workmen Comp Fund

(6,000-5,250)

750 Joint Life Policy 12,000

Accrued Income 500

Bank (10+50) 60,000

1,57,000 1,57,000


Working Notes:

1. Since there is a fall in the market value of investments of 2,500, investment provision is

increased form 2,000 to 2,500.

2. Workmen compensation fund is nothing but retained profit. Therefore, it is credited to

Revaluation A/c. Alternatively, it could have been credited to partners Capital A/c in the old

profit sharing ratio.

3. Since Manisha is not paying the required amount of premium for goodwill. Therefore, 30,000

goodwill will be adjusted through the Capital Accounts of the partners.

4. There will be no entry for the promise made by S, Since it is an event and not a transaction.

Admission of Partner with Memorandum Revaluation Method

[CA INTER N07, 16 marks]

Question 25: Following was the B/S of A&B, who were sharing profit & loss in the ratio of 2:1 on

31.12.2006:

Balance Sheet

Liabilities Assets

Capital Accounts Plant and machinery 12,00,000

A 10,00,000 Building 9,00,000

B 5,00,000 Sundry debtors 3,00,000

Reserve fund 9,00,000 Stock 4,00,000

Sundry creditors 4,00,000 Cash 1,00,000

Bills payable 1,00,000

29,00,000 29,00,000

They agreed to admit C into the partnership on the following terms:

1. The goodwill of the firm was fixed at 105,000.

2. That the value of stock and plant and machinery were to be reduced by 10%.

3. That a provision of 5% was to be created for doubtful debts.

4. That the building account was to be appreciated by 20%.

5. There was an unrecorded liability of 10,000.

6. Investments worth 20,000 (Not mentioned in the B/S) were taken into account.

7. That the value of reserve fund, the values of liabilities & the values of assets other than cash

are not to be altered.

8. C was to be given 1/4th share in the profit and was to bring capital equal to his share of profit

after all adjustments.

Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance Sheet of

the newly reconstituted firm.

Answer:

Memorandum Revaluation A/c

Particulars Particulars

To Stock 40,000 By Building 1,80,000


Plant & machinery 1,20,000 Investments 20,000

Provision for doubtful debts 15,000

Unrecorded liability 10,000

Partners Capital A/c (OR)

A 10,000

B 5,000 15,000

2,00,000 2,00,000

To Building 1,80,000 By Stock 40,000

Investments 20,000 Plant & machinery 1,20,000

Provision for doubtful debts 15,000

Unrecorded liability 10,000

Partners Capital A/c (NR)

A 7,500

B 3,750

C 3,750 15,000

2,00,000 2,00,000


Particulars A B C Particulars A B C

To Revaluation

Loss

7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -

Reserve

Fund

4,50,000 2,25,000 2,25,000 Reserve

Fund

6,00,000 3,00,000 -

A (W.N.3) - - 17,500 C (W.N.3) 17,500 8,750 -

B (W.N.3) - - 8,750 Revaluation

Profit

10,000 5,000

Balance c/d

W.N2

11,70,000 5,85,000 5,85,000 Cash (Bal) 8,40,000

16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006

Liabilities Assets

Capital Accounts Plant & Machinery 12,00,000

A 11,70,000 Building 9,00,000

B 5,85,000 Sundry Debtors 3,00,000

C 5,85,000 Stock 4,00,000

Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000

Sundry Creditors 4,00,000

Bills Payable 1,00,000

37,40,000 37,40,000

Working Notes:

1. Calculation of new profit and loss sharing ratio

C will get 1/4 th share in the new profit sharing ratio.

Therefore, remaining share will be 1-1/4 =3/4,

Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2

Share of B will be 3/4 x 1/3 = 1/4

New ratio will be A : B : C - 1/2 : 1/4 : 1/4 - 2 : 1: 1


2. Calculation of closing capital of C

Closing capitals of A & B after all adjustments are: A-1170,000, B-5,85,000

Since Bs capital is less than As capital, therefore Bs capital is taken as base.

Hence, Cs closing capital should be 585,000 i.e. at par with B (new p&l ratio)

3. Adjustment entry for goodwill

Partners Goodwill as

per old ratio

Goodwill as

per new ratio

Effect

A 70,000 52,500 + 17,500 -

B 35,000 26,250 + 8,750 -

C - 26,250 - - 26,250

1,05,000 1,05,000 26,250 26,250

Adjustment entry:

Cs Capital A/c Dr. 26,250



Profit / (loss) on revaluation, accumulated profits / reserves / losses on retirement of a partner is

credited (debited) to all the partners in their old profit sharing ratio

Special point to be noted: Adjustment of the capitals of continuing partners

Payment to retiring partner: immediately paid on retirement or holding as loan to be repayable in

the later period.

Retirement of Partner

Question 26: On 31-3-1995, the Balance Sheet of M/s A, B and C sharing profits and losses in

proportion to their capitals, stood as follows:

On 31st March 1995, A desired to retire from the firm and the remaining partners decided to carry

on. It was agreed to revalue the assets and liabilities on that date on the following basis:

1. Land and Buildings be appreciated by 30%

2. Machinery is to be depreciated by 20%

3. Stock is to be valued at 75,000.

Balance Sheet

Liabilities Assets

Sundry Creditors. 1,00,000 Land and Buildings 2,00,000

Capital A/cs. Machinery 3,00,000

A 2,00,000 Stock 1,00,000

B 3,00,000 Sundry Debtors 1,00,000

C 2,00,000 7,00,000 Cash and Bank 1,00,000

8,00,000 8,00,000


4. Provision for bad debts is to be made at 5%.

5. Old credit balances of Sundry Creditors 20,000 is to be written-off.

6. Joint Life Policy of the partners surrendered and cash obtained 80,000.

7. Goodwill of the entire firm be valued at 1,40,000 & As share of the Goodwill be adjusted in the

accounts of B & C who share the future profits equally. No Goodwill A/c being raised.

8. The capital of the firm is to be the same as before retirement. Individual capital be in their profit

sharing ratio.

9. Amount due to A is to be settled on the following basis: 50% on retirement and the balance

50% within one year.

Prepare Revaluation A/c, Capital A/c of partners, Cash & Bank A/c and Balance Sheet as on 1.4.1995

of M/s. B&C.

Answer: In the Books of M/s/ A, B and C

Revaluation A/c


To Machinery A/c 60,000 By Land and Buildings A/c 60,000

tock A/c 25,000 Sundry Creditors A/c 20,000

Provision for bad debts A/c 5,000 Partners Capital 10,000

(Answer: 2,857; B: 4,286 and C: 2,857)

90,000 90,000



To Revaluation 2,857 4,286 2,857 By Balance b/d 2,00,000 3,00,000 2,00,000

A

Capital(GW)

---- 10,000 30,000 J.L.P A/c 22,857 34,286 22,857

Bank (50% ) 1,30,000 ---- B Capital

(GW)

10,000 ---- ----

A Loan A/c 1,30,000 ---- C Capital

(GW)

30,000 ---- ----

Balance

(required)

---- 3,50,000 3,50,000 Bank (Bal) ---- 30,000 1,60,000

2,62,857 3,64,286 3,82,857 2,62,857 3,64,286 3,82,857

Nt: JLP can otherwise be credited to revaluation a/c

Cash and Bank A/c

To Balance b/d 1,00,000 By As Capital A/c 1,30,000

Joint Life Policy A/c 80,000 Balance c/d 2,40,000

Bs Capital A/c 30,000

Cs Capital A/c 1,60,000

3,70,000 3,70,000


Balance sheet of M/s. B and C as on 1st April, 1995

Liabilities Assets

Partners capital A/cs Land and Buildings 2,60,000

B 3,50,000 Machinery 2,40,000

C 3,50,000 7,00,000 Closing Stock 75,000

As Loan A/c 1,30,000 Sundry Debtors 1,00,000

Sundry Creditors 80,000 Less: Provision for Bad

Debts

5,000 95,000

Cash and Bank Balances 2,40,000

9,10,000 9,10,000

Calculation of Share of Goodwill

Right of Goodwill before retirement [Old Ratio] (2:3:2) 40,000 60,000 40,000

Right of Goodwill after retirement [New ratio] (1:1) ---- 70,000 70,000

Sacrifice (-)/Gain (+) (-)40,000 (+)10,000 (+)30,000

[CA INTER M94]

Question 27: Following is the B/S of A, B & C who were the partners as on 31.3.93.

Balance sheet as at 31.3.1993

Liabilities Assets

As Capital 33,600 Plant and Machinery 49,000

Bs Capital 25,200 Furniture and fittings 4,800

Cs Capital 12,000 Stock in Trade 22,800

Sundry creditors 12,000 Sundry debtors 21,600

15% Mortgage Loan 16,600 Cash on hand 1,000

Cash at bank 200

99,400 99,400

They share profits and losses in the ratio of 2:2:1 on 1st April, 1993, C retired from the firm and

claimed his share of secret reserve/profits arising out of the following.

a. During the year ended 31.3.1993 purchase of Machinery at a cost of 10,000 was charged to

purchase account, the erection charges of 600 being charged to machinery repairs account.

(Depreciation is to be charged at 10% p.a.)

b. 600 received from Mr. X on 31.3.93 towards rent of the property sublet was credited to his

personal accounts instead of to rent account so as to reduce his debit balance from 1,000 to 400

debit on 31.3.93.

c. Interest on mortgage loan was paid in advance up to 31.5.93 and the whole amount was charged

to interest account during the year ended 31.3.93.

d. After rectifying the above errors, it was mutually decided as under:

1. The goodwill of the firm is valued at 5 times the average profits of the last 3 years. Such profits

should be correct profits & not the book profits. The book profits for the last 3 financial year

were: 1990-91 18,380; 1991-92 32,000; 1992-93 ,7,471.


2. Plant & Machinery to be depreciated by 10% and provision for bad doubtful debts to be made at

5% on sundry debtors.

3. The goodwill should not appear in the books.

4. There is a liability for 501 for bill discounted. This has to be accounted for.

5. C should be paid half of his dues in cash which shall be brought in by A and B in their profit

sharing proportion and the other half shall be left in the business as Cs loan fetching an interest

of 18% p.a.

Prepare Profit & Loss A/c, Revaluation A/c, Capital A/c of the partners and the Balance Sheet of

A & B after Cs retirements

Answer:

Profit and Loss Adjustment A/c


To Partners Capital A/c (2:2:1) By Plants and Machinery A/c 9,540

A 4,222 Interest on Mortgage Loan 415

B 4,222 Sundry Debtors A/c (Rent) 600

C 2,111

10,555 10,555

`

Revaluation A/c


To Provision for doubtful debts 1,110 By Partners Capital A/c (Loss)

Depreciation (Plant & Machinery) 5,854 A 2,986

Liabilities for bills discounted 501 B 2,986

C 1,493

7,465 7,465

Capital A/c


To Revaluation A/c

(loss)

2,986 2,986 1,493 By Balance b/d 33,600 25,200 12,000

Cs Capital A/c ( GW)

11,401 11,401 - P/L Adjustment

A/c

4,222 4,222 2,111

Cash A/c - - 17,710 As Capital A/c - - 11,401

Cs Loan A/c - - 17,710 Bs Capital A/c (GW)

- - 11,401

Balance c/d 32,290 23,890 - Cash A/c 8,855 8,855 -

46,677 38,277 36,913 46,677 38,277 36,913

Cash paid 17,710 to C is out of the receipts from B and C [ 8,855 each]

Balance Sheet of M/s A and B as on 1.4.1993

Liabilities Assets

Capital A/c : Plant and Machinery 58,540

A 32,290 Less: Depreciation 5,854 52,686

B 23,890 Furniture and Fittings 4,800

Cs Loan a/c 17,710 Stock in Trade 22,800

15% Mortgage Loan 16,600 Sundry Debtors 22,200

Liabilities for bills

discounted

501 Less: Provision 1,110 21,090


Creditors 12,000 Interest on Loan prepaid 415

Cash in hand 1,000

Cash at Bank 200

1,02,991 1,02,991

Working Notes:

Sundry Debtors

1 Opening Debtors as on 31.3.1993 21,600

Add Rent received from Mr. X 600

Adjusted Debtors 22,200

Calculation of Goodwill

2 Year Profit

1990-91 18,380

1991-92 32,000

1992-93 [7,471+10,555] 18,026

Total Profit [TP] 68,406

Average Profit [AP] = TP/3 22,802

Number of years of purchase 5

Goodwill = AP 5 114,010

1/5 Retiring Partners Share of GW 22,802

Calculation of balance of Plant and Machinery

3 Opening Plant and Machinery 49,000

Add Machinery Purchased 10,000

Add Installation charge 600

Total 10,600

Less Depreciation 1,060 9,540

Closing Plant and Machinery 58,540

Question 28: Admission cum Retirement: Ram, Rahim and Robert are partners, sharing Profits and

Losses in the ratio of 5:3:2. It was decided that Robert would retire on 31.3.2005 and in his place

Richard would be admitted as a partner with new profit sharing ratio between Ram, Rahim and

Richard at 3 : 2 : 1.

Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:

Liabilities Assets

Capital Accounts: Cash in hand 20,000

Ram 1,00,000 Cash in Bank 1,00,000

Rahim 1,50,000 Sundry Debtors 5,00,000


Robert 2,00,000 Stock in Trade 2,00,000

General Reserve 2,00,000 Plant & Machinery 3,00,000

Sundry Creditors 8,00,000 Land & Building 5,30,000

Loan from Richard 2,00,000

16,50,000 16,50,000

Retirement of Robert and admission of Richard is on the following terms:

a. Plant & Machinery to be depreciated by 30,000.

b. Land and Building to be valued at 6,00,000.

c. Stock to be valued at 95% of book value.

d. Provision for doubtful debts @ 10% to be provided on debtors.

e. General Reserve to be apportioned amongst Ram, Rahim and Robert.

f. The firms goodwill to be valued at 2 years purchase of the average profits of the last 3 years.

The relevant figures are:

1. Year ended 31.3.2002 Profit 50,000



g. Out of the amount due to Robert 2,00,000 would be retained as loan by the firm and the

balance will be settled immediately.

h. Richards capital should be equal to 50% of the combined capital of Ram and Rahim.

Prepare: (i) Capital accounts of the partners; and (ii) Balance Sheet of the reconstituted firm.

Answer:

Dr Partners Capital a/c Cr.

To Ram Rahim Robert Richard By Ram Rahim Robert Richard

Revaluation

A/c

10,000 6,000 4,000 Balance b/d

100,000 150,000 200,000

Roberts Loan

1

200,000 General

reserve

100,000 60,000 40,000

Bank 58,000 Goodwill2 55,000 33,000 22,000

Balance c/d 245,000 237,000

255,000 243,000 262,000 255,000 243,000 262,000

Goodwill 55,000 36,667 18,333 Balance b/d

245,000 237,000

Loan A/c

transfer 200,000

Bal. c/d 190,000 200,333 195,167 Bank 13,500

245,000 237,000 213,500 245,000 237,000 213,500

Assumptions:

1. Richards loan is considered as part of his capital

2. Memorandum revaluation method is followed for goodwill treatment. Hence it is raised and

cancelled.

Balance Sheet of Ram, Rahim and Robert as at 31.3.2005 after the admission of Richard

Liabilities Assets

Capital Accounts: Land and Building 6,00,000


Ram 1,90,000 Plant and Machinery 2,70,000

Rahim 2,00,333 Stock 1,90,000

Richard 1,95,167 Debtors 4,50,000

Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500

Loan from Robert 2,00,000 Cash in hand 20,000

15,85,500 15,85,500

Working Notes: 1:Revaluation A/c


To Plant and Machinery 30,000 By Land and Building 70,000

To Stock 10,000 By Partners Capital A/cs:

To Debtors 50,000 Ram 10,000

Rahim 6,000

Robert 4,000 20,000

90,000 90,000

WN2: Calculation of Goodwill:

Profit for the year ended 31.3.2002 50,000



165,000

Average Profit = 165,000/3 55,000

Number of years of purchase 2

Goodwill 55,000 2 110,000

WN3: Bank A/c


To Balance b/d 1,00,000 By Roberts Capital A/c 58,000

Richards Capital A/c 13,500 Balance c/d 55,500

1,13,500 1,13,500

Joint Life Policy

Question 29: X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1. On 1st January

2000, they took out a joint life policy of 100,000. Annual premium of 5,000 was payable on 1st

January each year. Last premium was paid on 1.1.2003. Y died on 1.3.2003, and policy money was

received on 31st March, 2003.

The surrender values of policy as on 31st December of each year were as follows:

2000 Nil; 2001-1,000; 2002-2,500.

Show necessary accounts and Balance sheet as on 31st Dec, each year, assuming that:

1. premium is charged to profit and loss Account every year.

2. premium is debited to Joint Life Policy A/c and the balance of the Joint Life Policy A/c is

adjusted every year to its surrender Value.

3. premium is debited to JLP A/c & a sum equal to premium is debited to JLP Revenue


Answer:

Year Premium Cumulative

Surrender Value

Current

Value

Loss of

Premium

2000 5,000 - - 5,000

2001 5,000 *1,000 1,000 4,000

2002 5,000 2,500 1,500 3,500

2003 5,000

Note: Sum assured of 100,000 is received on 1.3.2003 the date of death of one of the partners.

Case I. Joint Life Policy

JLP Premium is treated as expenses and debited to profit and loss a/c and

receipt of the claim will be credited to partners capital account

01.01.2000 i. Joint Life Policy a/c Dr 5,000

To Cash 5,000

31.12.2000 ii. Profit and Loss a/c 5,000

To Joint Life Policy a/c 5,000


To cash a/c 5,000




To cash a/c 5,000




To Cash 5,000

31.03.2003 ii. Cash a/c 100,000


31.03.2003 iii. Joint Life Policy a/c Dr 95,000

To Xs Capital a/c 38,000

To Ys Capital a/c 38,000

To Zs Capital a/c 19,000

Joint Life Policy A/c

Date Debit Date Credit

01.01.00 To Cash 5,000 31.12.00 By Profit & Loss A/c 5,000

5,000 5,000


5,000 5,000



5,000 5,000

01.01.03 To Cash 5,000 31.03.03 By Cash 1,00,000

31.03.03 X, Y & Zs Capital a/c 95,000

95,000 1,00,000

Note: Nothing will appear in balance sheet

Case II. Joint Life Policy:

JLP Premium is treated as asset up to its surrender value


To Cash 5,000




To cash a/c 5,000




To cash a/c 5,000




To Cash 5,000

31.12.03 ii. Cash a/c 100,000


31.12.03 iii. Joint Life Policy a/c Dr 92,500

To Xs Capital a/c 37,000

To Ys Capital a/c 37,000

To Zs Capital a/c 18,500




5,000 5,000


Balance c/d 1,000

5,000 5,000

01.01.02 To Balance b/d 1,000 31.12.02 By Profit & Loss A/c 3,500

01.01.02 Cash 5,000 Balance c/d 2,500


6,000 6,000

01.01.03 To Balance b/d 2,500 31.03.03 By Cash 1,00,000

01.01.03 Cash 5,000

31.03.03 X, Y & Zs Capital a/c 92,500

95,000 1,00,000

Balance Sheet 2000 01

Liabilities Assets

Joint Life Policy a/c Nil

2001 02

Joint Life Policy a/c 1,000

2002 03

Joint Life Policy a/c 2,500

Case III. Joint Life Policy

JLP Premium is treated as asset up to its surrender value

JLP Reserve a/c is created to adjust the loss on JLP

Year: 2000

i. Joint Life Policy a/c Dr 5,000

To Cash 5,000

Profit and Loss a/c Dr 5,000

To JLP Reserve a/c 5,000

JLP Reserve a/c Dr 5,000

To Joint Life Policy a/c 5000

Year 2001 5,000

ii. Joint Life Policy a/c Dr 5,000

To Cash 5,000





Year 2002

iii. Joint Life Policy a/c Dr 5,000

To Cash 5,000





Year 2003

iv. Joint Life Policy a/c Dr 5,000

To Cash 5,000


Cash a/c Dr 100,000


To JLP Reserve 92,500


To Partners Capital a/c 95,000



01.01.00 To Cash 5,000 31.12.00 By JLP Reserve a/c 5,000

5,000 5,000

01.01.01 To Cash 5,000 31.12.01 By JLP Reserve a/c 4,000

Balance c/d 1,000

5,000 5,000

01.01.02 To Balance b/d 1,000 31.12.02 By JLP Reserve a/c 4,000

01.01.02 Cash 5,000 Balance c/d 2,500

6,000 6,000

01.01.03 To Balance b/d 2,500 31.03.03 By Cash 1,00,000

01.01.03 Cash 5,000

31.03.03 JLP Reserve a/c 92,500

1,00,000 1,00,000

Joint Life Policy Reserve A/c


01.01.00 To Joint Life Policy a/c 5,000 31.12.00 By Profit and Loss a/c 5,000

5,000 5,000

01.01.01 To Joint Life Policy a/c 4,000 31.12.01 By Profit and Loss a/c 5,000

Balance c/d 1,000

5,000 5,000

31.12.02 To Joint Life Policy a/c 3,500 01.01.02 By Balance b/d 1,000

31.12.02 Balance c/d 2,500 31.12.02 Profit and Loss a/c 5,000

6,000 6,000

31.03.03 To Partners Capital a/c 95,000 01.01.02 By Balance b/d 2,500

31.12.02 Joint Life Policy a/c 92,500

95,000 95,000


Death of a Partner

Deceased partners share of profit: is calculated based on the previous year/s profit, proportionate

up to the date of death to the extent of his share. Journal entry:

P/L Suspense A/c Dr

To Deceased Partners Capital a/c

Some important provisions of the Indian Partnership Act, 1932

Right to Share Subsequent Profits: Every outgoing partner or Estate of deceased Partner has the

right to claim either interest @ 6% p.a. or his share of profit attributable to the use of his share of

firms property at his option, if the remaining partners carry on the business without any final

settlement (Sec.37)

[CMA RTP J11]

Discuss the applicability of Section 37 of the Partnership Act: In case of retirement, the retiring

partner or in case of death, the executor of the deceased partner, if the dues are not settled, then such

retired partner or the executor is entitled to the following:

Maximum of:

Interest @ 6% p.a. on the amount due to them [Or] The share of profit earned for the amount due to

the partner

Conditions:

(a) The surviving partners/continuing partners continue to carry on the business of the firm.

(b) The business is carried on without any final settlement of accounts between the continuing

partners and the outgoing partners or his estate.

(c) There is no contract to the contrary of the options contained in Section 37 i.e. share in the profits

or interest @ 6% p.a. on the unsettled capital.

Example: Unsettled capital of C 52,000 (Date of retirement: 30.9.08, financial year 2008-09). Net

Profit earned by the firm after Cs retirement 25,000. Capitals of A: 57,000 and B 76,000)

C is entitled to the maximum of the following:

(i) interest on unsettled capital = 52,000 6% 6 months = 1,560 [Or]

(ii) Profit earned out of unsettled capital = Profit x Retired or Deceased Partners unsettled

Dues /Total Capital of the firm (including the amount due to the retired or deceased partner)

= .(25,000 52,000 ) / (52,000 + 57,000 + 76,000) = 7,027.

Right to Carry on Competing Business: Unless otherwise agreed, every outgoing partner has a right

to carry on competing business and to advertise such business but he cannot: Use the firms name,

Represent the firm and Solicit the firms customer [Sec.36(1)]


Dissolution on Death: Unless otherwise agreed, a firm is dissolved on the death of a partner [Sec

42(c)]

No Liability of Estate of Deceased Partner to third parties for firms act after his death (Sec. 35)

No Public Notice is required on the death of partner

Special considerations for a retiring partner and the estate of a deceased partner in relation to

debts contracted by the partnership firm:

1. debts due on the date of retirement/death: the retiring partner and the estate of the deceased partner is liable for the whole of the debts due by the firm at the date of

retirement or death, to the extent of their share.

2. debts incurred after retirement: where the notice of retirement is not published in accordance with law, the retiring partner is liable for debts contracted after retirement.

3. deceased/ insolvent partner: the estate of a deceased or bankrupt partner will not be liable for debts contracted by the firm after the death or bankruptcy.

Question 30: A, B and C were partners of a firm sharing profits and losses in the ratio of 3:4:3.

Balance Sheet as at 31st March,1998

Liabilities Assets

Capital Accounts: Fixed Assets 100,000

A 48,000 Current Assets

B 64,000 Stock 30,000

C 48,000 160,000 Debtors 60,000

Reserves 20,000 Cash in hand 30,000 120,000

Sundry Creditors 40,000

220,000 220,000

The firm had taken a joint life policy for 100,000; the premium periodically paid was charged to

Profit and Loss Account. Partner C died on 30th September 1998. It was agreed between the surviving

partners and the legal representatives of C that:

1. Goodwill of the firm will be taken at 60,000

2. Fixed Assets will be written down by 20,000

3. In lieu of profits, C should be paid at the rate of 25% p.a. on his capital as on 31-3-98,

Policy money was received and the legal heirs were paid off. The profits for the year ended 31-3-99,

after charging depreciation of 10,000 (depreciation up to 30-Sep was agreed to be 6,000), were

48,000.

Partners Drawings Accounts showed balances as under:

1. As drawings - 18,000 (drawn evenly over the year)

2. Bs drawings - 24,000 (drawn evenly over the year)

3. Cs drawings - (up-to-date of death) 20,000


On the basis of the above figures, please indicate the entitlement of the legal heirs of C, assuming that

they had not been paid anything other than the share in the Joint Life Policy.

Answer: Determination of entitlement of legal heirs of C

Profits for the half year ended 31st March, 1999:

Profits for the year ended 31st March, 1999 (after depreciation) 48,000

Add Depreciation 10,000

Profits before depreciation 58,000

Period 01.04.98-

30.09.98

01.10.98-

31.03.99

Profit split for two half years (assumed: evenly spread) 29,000 29,000

Less Depreciation [I half 6,000 and II half 4,000] 6,000 4,000

Profits 23,000 25,000

Capital Accounts of partners as on 30th

September, 1998:


To Fixed Assets 6,000 8,000 6,000 By Balance c/d 48,000 64,000 48,000

Drawings 9,000 12,000 20,000 Reserve* 6,000 8,000 6,000

Goodwill 18,000 24,000 18,000

Cs Executor A/c

- - 52,000 P/L

Appropriation*

- - 6,000

Balance c/d 57,000 76,000 -

72,000 96,000 78,000 72,000 96,000 78,000

* (Interest on 48,000 @ 25% for 6 m)

(3) Application of Section 37 of the partnership Act: Legal heir of C has not been paid anything

other than the share in joint life policy. Amount due to the deceased partner carries interest at the

mutually agreed rate. If there is no agreement the representatives of the deceased partner can receive

at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to

the deceased partner.

Therefore, the representatives of C can Choose: - Either,

(i) Interest on 52,000 for 6 months @ 6% p.a. = 1,560 (Or)

(ii) Profit earned out of unsettled capital (in the second half year ended 3s1t march, 1999)

25,000 52,000/57,000 + 76,000 + 52,000 = 7,027 (approx)

In the above case, it would be clear that the legal heir of C would chose option of 7,027.

Amount due to legal heirs of C:

Balance in Cs Executors account 52,000

Add Amount of profit earned out of unsettled capital [calculated in (3)] 7,027

Amount due 59,027

Settlement of Accounts on Dissolution:

(a) Regarding Losses: Losses, including deficiencies of capital, shall be paid first out of profits,

next out of capital and lastly if necessary, by the partners individually in the proportions in which they

are entitled to share profits.


(b) Regarding Assets: The assets of the firm, including any sums contributed by the partners to

make up deficiencies of capital, shall be applied in the following manner and order in paying:

1. the debts of the firm to third parties;

2. each partner ratably what is due to him from the firm for advances as distinguished from capital ;

3. to each partner ratably what is due to him as capital; and

4. The residue shall be divided among the partners in the proportions in which they are entitled to share profits.


Question 31: Asha, Bhipasa and Chitra are partners in a partnership firm sharing profits and losses as

8:7:5. From 1.4.09 the partners decided to change their profit sharing ratio as 5:4:1 and for that

purpose the following adjustments were agreed upon. Balance Sheet of the firm as on 31.3.2009 was

as under.

Liabilities Asset

Capital a/cs Plant &machinery 80,000

Asha 50,000 furniture 10,000

Bipasha 40,000 Stock 40,000

Chitra 30,000 1,20,000 Trade Debtors 52,000

Reserves 30,000 Less; provision (2,000) 50,000

Bs loan 20,000

Trade Creditors 40,000

Bank 30,000

1,20,000 1,20,000

(i) Furniture and Machinery were to be depreciated and appreciated and appreciated by 5% and 10% respectively.

(ii) Provision for bad debts was to be increased by 3,000. (iii) P&L A/c of the firm for the year ended 31.3.10 showed a net profit of 68,700. (iv) A contingent liability of 10,000 was to be treated as actual liability.

The partners decided not to alter the book values of the assets, liabilities and reserves but recorded

the change by passing one single journal entry.

You are required:

a) To show a single journal entry adjusting the capitals of the partners as on 1-4-09, and b) To show the P&L A/C for the year ended 31.3.10 after considering the following adjustments:

(i) Interest on capital at 5% (ii) Interest on Bs loan and (iii) Transfer 20% of the divisible profit to the reserves after charging such reserve.

Answer:

Memorandum Revaluation A/c

Particulars Particulars To Furniture 500 By Machiery 8,000

Provision for Debtors 3,000 Reserves 30,000

Contingent Liability 10,000

Partners Capital A/C

Asha 8/20 9,800

Bipasha 7/20 8,575

Chitra 5/20 6,115 24,500


38,000 38,000

Machinery 8,000 Furniture 500

Provision for Debtors 3,000

Contingent Liability 10,000

Reserves 30,000 Partners capital A/C

Asha 5/10 12,250

Bipasha 4/10 9,800

Chitra 1/10 2,450 24,500

38,000 38,000

Net Effect Cr Dr

A 9,800 12,250 2,450 Dr

B 8,575 9,800 1,225 Dr

C 6,115 2,450 3,675 Cr

Adjustment Entry

Ashas Capital A/c Dr 2,450

Bipashas Capital A/c Dr 1,225

To Chitras Capital A/c 3,675

Profit and loss A/C for the year ended 31.3.2010

Particulars Particulars To Interest on capital @5% By Balance b/d 68,700

Asha (50,000 2,450) 2,378 2,378

Bipasha (40,000 1,225) 1,938 1,938

Chitra (30,000 + 3,575) 1,684 1,684

Reserve (61,50020/120) 10,250

Partners Capital A/C:

Asha 5/10 25,625

Bipasha 4/10 20,500

Chitra 1/10 5,125 51,250

68,700 68,700

ADDITIONAL PROBLEMS

ADMISSION OF A PARTNER


Question: Admission of a partner where Ltd. companies are partners: On 30th November, 2001

the following was the balance sheet of XY & Co., a partnership firm where X Ltd. and Y Ltd. Were

partners sharing profits and losses in the ratio of 3:2 after payment of interest on fixed capitals at 12%

per annum:

(In crores)

(In crores)

Fixed assets : Cost 60

Less : Accumulated depreciation 40 20


Investments at cost in equity shares of :

A Ltd. (Market value 80 Cr.) 30

B Ltd. (Market value 70 Cr.) 25 55

Current Assets 140

Less : Current Liabilities 65 75

150

Financed by:

Loan from Zed Ltd. carrying interest at 15% p.a 40

Reserves 30

Current accounts of partners :

X Ltd. 3

Y Ltd. 2 5

Capital Accounts :

X Ltd. 40

Y Ltd. 35 75

150

On 1st December, 2001 they decided to admit Z Ltd. as a partner. The following terms were agreed

upon:

(i) Zed Ltd.s loan is to be converted into fixed capital.

(ii) The goodwill of the firm is considered to be worth 50 crores; however the necessary adjustment should be recorded through fixed capital accounts of the partners.

(iii) The fixed assets are considered to be worth 50 crores. However they are to continue to appear in the books at the present cost of 60 crores and the present accumulated provision for depreciation of 40 crores. The necessary adjustment is to done through fixed capital accounts.

(iv) There is no change in the valuations of current assets and current liabilities. (v) Reserves are to continue to appear at the balance sheet figures. However necessary

adjustment is to be through fixed capital accounts.

(vi) The investments in A Ltd. are to be taken over by X Ltd. as 70 crores. The investments in B Ltd. are to be taken over by Y Ltd. at 60 crores.

(vii) X Ltd., Y Ltd., and Z Ltd are to bring in such amounts as fixed capital as would enable

combined balance of 120 crores in the fixed capital accounts carried forward in revised profit sharing ratio.

(viii) Interest at 1% per month is to be calculated on the fixed capitals and credited to partners current accounts.

(ix) 10% of the annual profit (after considering interest on fixed capitals) is to be credited to reserves.

(x) The balance 90% of annual profit is to shared by X Ltd., Y Ltd. and Z Ltd. In the ratio of 5 : 3 : 2. The same is to be credited to current accounts.

(xi) Drawings of the partners during the year are to be within the upper ceiling of credit to current accounts. The same is to be credited to current accounts.

You are asked to pass necessary accounting entries through the journal of the firm on the morning of

December 1, 2001 and prepare the balance sheet before any other transaction takes place on

December 1, 2001. The balance sheet should also show the comparative position before admission of

Zed Ltd.


Answer:

Journal Entries in the Books of XY & Co. Ltd. [ In crores]

Particulars L.F Dr. Cr.

1. Zed Ltd Loan A/c Dr. 40

To Zed Capital A/c 40

(Being transferred of Loan to Zed Capital)

2. Goodwill A/c Dr. 50

To X A/c 30

To Y A/c 20

(Being Goodwill raised in old Ratio)

3. X A/c Dr. 25

Y A/c Dr. 15

Z A/c Dr. 10

To Goodwill A/c 50

(Being Goodwill written off in new ratio)

4. Fixed Asset A/c Dr. 30

To X A/c 18

To Y A/c 12

(Being Fixed Assets revaluation transferred to Partners Capital A/c in old profit sharing ratio.

5. X A/c Dr. 15

Y A/c Dr. 9

Z A/c Dr. 6

To Fixed Assets A/c 30

(Being Fixed Assets revaluation transferred in

new profit sharing ratio amount among all partners)

6. Reserve A/c Dr. 30

To X A/c 18

To Y A/c 12

(Being Reserves distributed in old ratio)

7. X A/c Dr. 15

Y A/c Dr. 9

Z A/c Dr. 6

To reserves Assets A/c 30

(Being Reserve debited in new ratio at 5:3:2)

8. X A/c Dr. 70

To Investment A/c 30

To Realisation A/c 40

(Being investments in A Ltd. takeover by X Ltd.)

9. Y A/c Dr. 60

To Investment on B Ltd. A/c 25

To Realisation A/c 35


(Being Investment Taken Over by Y Ltd.)

10. Realisation A/c Dr. 75

To X A/c 45

To Y A/c 30

(Being Profit on takeover of investments credited

to partners capital in old profit sharing ratio)

11. Bank A/c Dr. 60

To X A/c 34

To Y A/c 20

To Z A/c 6

(Being fixed capital introduced by the three partners

in pursuance of clause of partnership deed dated Dec 1, 2001)

Balance Sheet

Particulars After

Admission

Before

Admission

I. Assets 60 60

Less : Accumulated Depreciation 40 20 40 20

Investment at Cost

A Ltd (M.V. 80 cr.) Nil Nil 30

B Ltd (M.V.70 cr.) Nil Nil 25 55

Current Assets 140 140

Bank 60 135 65

Current Liability 65 155 150

Financed by :- Nil 40

Loan from Z Ltd.

Owners fund 30 30

Reserves

Current A/c

X 3 5 3 5

Y 2 2

Capital A/c (W.N.1)

X 60 40

Y 36 120 35 75

Z 24 Nil

155 150

Working Note 1


Particulars X Y Z Particulars X Y Z

To Goodwill 25 15 10 By Balance b/d 40 35 --

Fixed Asset A/c 15 9 6 Zed loan A/c -- -- 40

Reserve A/c 15 9 6 Goodwill A/c 30 20 --

Investment A/c 70 -- -- Fixed Asset 18 12 --

Investment A/c -- 60 -- Reserve A/c 18 12 --

Balance c/d 60 36 24 Profit 45 30 --


Bank A/c 34 20 6

185 129 46 185 129 46

[CMA INTER J03, 4+6+6=16 Marks]

Question: Admission of partner: The Balance Sheet of P & R, Partnership Firm, as at 31st March,

2003m is as follows:

Liabilities Assets

Capital Account : Goodwill 14,000

P 26,400 Land and Building 14,400

R 33,600 60,000 Furniture 2,200

Contingency Reserve 6,000 Stock 26,000

Sundry Creditors 9,000 Sundry Debtors 6,400

Cash at Bank 12,000

75,000 75,000

P & R share Profits and Losses as 1:2. They agree to admit S (who is also in business of his own) as a

third partner from 01.04.2003.

The Assets are revalued as under:

Goodwill 18,000, Land and Building 30,000, Furniture 6,000. S brings the following Assets into

Partnership Goodwill 6,000, Furniture 2,800, Stock 13,600.

Profits in the new firm are to be shared equally by the three Partners and the Capital Accounts are to

be so adjusted as to be equal.

Prepare Revaluation A/c, Partners Capital A/c and Balance Sheet after the admission of S.

Answer:

Revaluation A/c

Particulars Amount Particulars Amount

To Partner Capital A/c By Goodwill A/c 4,000

Ps Capital 7,800 Land & Building A/c 15,600

Rs Capital 15,600 23,400 Furniture A/c 3,800

23,400 23,400

Partner Capital A/c

Particulars P R S Particulars P R S

To Balance c/d 53,200 53,200 53,200 By Balance b/d 26,400 33,600 --

Contingency 2,000 4,000 --

Revaluation

Profit & Loss 7,800 15,600 --

Goodwill A/c -- -- 6,000

Furniture A/c -- -- 2,800

Stock A/c -- -- 13,600

Bank A/c 17,000 -- 30,800

53,200 53,200 53,200 53,200 53,200 53,200

Note: It is assumed that Rs Capital is taken as base to calculate remaining Partners Capital.


Balance Sheet

Liabilities Amount Asset Amount

Sundry Creditors 9,000 Goodwill 24,000

Partner Capital A/c Land & Buildings 30,000

P 53,200 Furniture 8,800

R 53,200 Stock 39,600

S 53,200 1,59,600 Sundry Debtors 6,400

Cash and Bank 59,800

1,68,600 1,68,600


Question: Admission of Partner with hidden goodwill: A and B are partners sharing profits and

losses in the ratio of 3: 2. Their Balance Sheet stood as under on 01.01.2003.

Liabilities Assets

Capital Accounts A 29,000 Buildings 35,000

B 15,000 Machinery 19,000

Reserve 10,000 Furniture 5,000

Creditors 28,500 Stock 15,000

Outstanding Expenses 4,000 Debtors 9,400

Less : Provision for Bad Debts 400 9,000

Prepaid Insurance 1,500

Cash 2,000

86,500 86,500

C is admitted as a new partner introducing a capital of 21,000. The capitals of the partners are to be

adjusted in the new profit sharing ratio, which is 5 : 3 : 2 taking Cs capital as base. C is to bring

premium for goodwill in cash. Goodwill amount is being calculated on the basis of Cs share in the

profits and capital contributed by him. Following revaluations are made:

i. Stock to be depreciated by 5%;

ii. Provision for bad debts is to be raised to 500; iii. Furniture to be depreciated by 10%;

iv. Buildings are revalued at 41,350. Prepare necessary Ledger Accounts and the Balance Sheet of the new firm.

Answer:

Revaluation A/c


To Stock A/c 750 By Building A/c 6,350

Furniture A/c 500

Provision for Bad Debts A/c 100

Partner Capital A/c

A 3,000

B 2,000 5,000

6,350 6,350


Balance Sheet


Capital A/c Building 41,350

A 52,500 Machinery 19,000

B 31,500 Furniture 4,500

C 21,000 1,05,000 Stock 14,250

Creditors 28,500 Sundry Debtors 9,400

Outstanding Expenses 4,000 Less: Provision 500 8,900

Prepaid insurance 1,500

Cash (WN1) 48,000

1,37,500 1,37,500

Working Notes:

A B C Total

Capital 29,000 15,000 -

Reserve 6,000 4,000

Revaluation Profit 3,000 2,000

1 Total 38,000 21,000 21,000 80,000

2 Total Capital [using Cs capital base] 1,05,000

Goodwill of A and B [2 1] 25,000

Total Goodwill of the firm

Partner Capital A/c


To Cash A/c -- -- 3,000 By Balance b/d 29,000 15,000 --

Cash A//c -- -- 2,000 Reserve A/c 6,000 4,000 --

Balance c/d 52,500 31,500 21,000 Revaluation A/c 3,000 2,000 --

Cash A/c -- -- 26,000

Cash A/c 14,500 10,500

52,500 31,500 26,000 52,500 31,500 26,000

Working Note 1;


To Balance b/d 2,000 By As Capital A/c 3,000

As Capital A/c 14,500 Bs Capital A/c 2,000

Bs Capital A/c 10,500 Balance c/d (B/F) 48,000

Cs Capital A/c 26,000

53,000 53,000


Question: Admission of Partner: The following is the Balance Sheet of A and B, who share profits

and losses as 3 : 2 respectively, as at 31.12.2004:

Liabilities Assets

Capital : A 35,000 Land and Building 30,000

B 30,000 Plant and Machinery 20,000

Reserve 10,000 Stock 10,000

Creditors 25,000 Debtors 20,000


Less : PDD 1,000 19,000

Bank 11,000

Cash 10,000

1,00,000 1,00,000

On 01.01.2005, C joins the firm and brings in the following assets:

Stock 21,000; Investments 12,000; Cash 15,000; Debtors 10,000.

Following were agreed upon:

i. The new profit sharing ratio among A, B and C will be equal. ii. The capitals of the partners should also be equal taking Cs capital as base.

iii. The reserve of the new firm will be 15,000. iv. Provision for doubtful debts is to be created @ 10% of total debtors.

v. An investment provision of 2,000 is to be created. You are required to prepare the Balance Sheet of the new firm.

Answer:

Balance Sheet of the New Firm as on 31.12.2004


Capital Land & Building 30,000

A 50,000 Plant & Machinery 20,000

B 50,000 Stock 31,000

C 50,000 1,50,000 Investment 12,000

Creditors 25,000 (-) Provision 2,000 10,000

Reserve 15,000 Sundry Debtors 30,000

(-) Prov. for Bad Debts 3,000 27,000

Bank (W.N.1) 47,000

Cash (10,000 + 15,000) 25,000

1,90,000 1,90,000

Partner Capital A/c


To Reserve A/c 5,000 5,000 5,000 By Balance b/d

Prov. for Bad Debts

A/c (WN2)

400 1,000 Stock A/c

Prov. for

Investment (WN3)

600 -- 2000 Investment

A/c

Balance c/d 50,000 50,000 50,000 Cash A/c

Debtors A/c

Bank A/c

Reserve A/c

55,600 55,400 58,000 55,600 55,400 58,000

Working Note 1:

Bank A/c


To Balance b/d 11,000 By Balance c/d 47,000

As Capital A/c 14,600

Bs Capital A/c 21,400

47,000 47,000


Working Note 2: Debtors of A & B were 20,000. Provision for Doubtful Debts for is to be

maintained at 10%. Therefore for Doubtful Debtors for these Debtors will be 2,000. To create further

Provision of 1,000 Capital of A & B will debited in the ratio of 3 : 2 respectively. For the Debtors of

10,000 brought in by C, entire provision is to be created by debiting Cs Capital A/c.

Working Note 3: Investment provision is to be created by debiting Cs capital A/c only.

[CMA INTER J06, 14 Marks]

Question: Admission of Partner: Sa and Re were equal partners of M/s.Sabda Swara. Givern below

is the Balance Sheet of M/s.Sabda Swara as on 31.03.2006. On the same date GA was admitted as a

partner.

Balance Sheet as on 31.03.2006

Liabilities Amount Amount Capital

Sa 3,55,000

Re 3,55,000 7,10,000

Current Liabilities 2,95,000

10,05,000

Assets

Fixed assets 6,00,000

Bank 22,500

Sundry Debtors 2,50,000

Advance 1,32,500

10,05,000

Ga was admitted on the following terms:

1. Ga to bring 4,00,000/- towards capital and 2,00,000/- for 1/3 share of profit.

2. Partners to shares profit or loss equally.

3. Not to show Goodwill in the Books after admission.

4. To revalue Plant at 6,55,000/-

5. To provide 10% for Doubtful Debts.

6. To write 10% of the advances.

7. To show the assets at revalued rate in the Balance Sheet.

8. Each partner to have 5,00,000/- as balance in Capital A/c. The difference to be adjusted by

bringing the short fall or by withdrawing the excess.

Pass necessary Journal and prepare Revaluation A/c and Balance sheet after admission in the Books

of M/s. Sabda Sawara.

Answer:

Revaluation A/c


To Prov. for Doubtful Debts A/c 25,000 By Building A/c 55,000

Advance 13,250


Sa 8,375

Re 8,375 16,750

55,000 55,000


Partner Capital A/c

Particulars Sa Re Ga Particulars Sa Re Ga

To Goodwill 2,00,000 2,00,000 2,00,000 By Balance b/d 3,55,000 3,55,000 --

Bank A/c -- -- 6,00,000

Revaluation 8,375 8,375 --

Bank A/c 36,625 36,625 1,00,000

Balance 5,00,000 5,00,000 5,00,000 Goodwill 3,00,000 3,00,000 --

7,00,000 7,00,000 7,00,000 7,00,000 7,00,000 7,00,000

Balance Sheet of M/s. Sabda Swara As on 31.03.2006


Capital A/c Fixed Assets 6,55,000

Sa 5,00,000 Bank (W.N.1) 7,95,750

Re 5,00,000 Sundry Debtors 2,50,000

Ga 5,00,000 15,00,000 Less: Provision

g1 6.2 partnership - reconstitution

Documents