G1 6.2 Partnership - Reconstitution

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. 2. 3. 4. 5.

Calculation of new profit and loss ratio Distribution of accumulated profit and loss Calculation of goodwill and accounting treatment of goodwill Revaluation of assets and liabilities 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. 2. 3. 4.

Old ratio: the ratio prior to the change of ratio New ratio: the ratio calculated after the change Sacrificing ratio: old ratio – new ratio 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 Let the total share be Balance after C’s share for A and B Total share – C’s share A’s share in the balance

Balance after C’s share × A’s share

B’s share in the balance

Balance after C’s share × B’s share

New ratio of A, B and C

Calculations Answer 1 1-

: :

4:3:1

Question 4: Type 2: A and B share P/L in 4:3 C is joined for 1/8th share. After C‟s admission A and B share profit and loss in the ratio of 3:4. Calculate the new profit and loss ratio Answer:

Financial Accounting

6.2.1

Particulars Formula Let the total share be Balance after C’s share for A and B Total share – C’s share

Calculations Answer 1 1-

A’s share in the balance

Balance after C’s share × A’s share

B’s share in the balance

Balance after C’s share × B’s 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: A‟s sacrificing ratio = 4/7 x 1/2 = 4/14 B‟s sacrificing ratio = 3/7 x 1/3 = 3/21 A‟s new ratio [old ratio – sacrificing ratio] = 4/7 – 4/14 = 8-4/14 = 4/14 B‟s 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

=6:6:9

=2:2:3

=12/42: 12/42: 18/42

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 C‟s share = 3/7 × 2/3 = 6/21 B sacrifices 1/3rd of C‟s share = 3/7 × 1/3 = 3/21 A‟s ratio after sacrificing = 4/7 – 6/21 = 12 – 6/21 = 6/21 B‟s 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 3. Simply gets

th

th

share to T in the ratio of 2: 3.

share of profit.

Answer: Calculation of new profit sharing ratio (i)

T Purchased 1/10th Share From R R

S

T

Old ratio Less

Partnership Accounting

th

from R

Nil

6.2.2

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 R’s sacrifice S’s 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 R’s Share

1 – (1/10) = 9/10×3/5

= 9/10 = 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.

Financial Accounting

6.2.3

Goodwill Nature – Goodwill is an Intangible Asset and not a Fictitious Asset. Need for valuation of Goodwill - In case of

1. 2. 3. 4. 5.

Change in Profit Sharing Ratio, Admission of new partner, Retirement and/or death of partner, Sale of firm and Amalgamation of firm Reason

Valuation

1 Location

Treatment

1 Simple Average Method

1 Non-cash method

[if profit does not show trend]

2 Size 3 Patent

Revaluation Method

2 Weight Average Method

Memorandum Method

[if profit shows trend] 4 Technical how

Know-

Revaluation

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

[CMA INTER D09, 3 Marks] 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

2

2

16,000

17,334

Years of Purchase Goodwill

Question 10: Calculation of Goodwill: [Super Profit Method, Capitalisation Method and Annuity Method]: Calculate goodwill under three years‟ purchase of super profit method and

Partnership Accounting

6.2.4

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

10,000×10%

₹1,000 ₹1,500

Actual Profit [AP] AP – NP

Super Profit [SP]

1,500 – 1,000

₹500 ₹ 1,500

Goodwill = 3 × SP Capitalisation Method

₹5,000

Goodwill OR Goodwill

– CE

- 10,000

₹5,000

Annuity Method [Super Profit] SP × Annuity Factor ₹ 500 × 2.486

Goodwill

₹ 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 1. Revaluation

Financial Accounting

2. Mem. 3. Premium Method Revaluation

II. Cash Method Premium Method

6.2.5

↑ the GW

GW A/c

Dr. Adjustment of GW of New Partner’s Share

Dr. GW A/c

To Old Partners Capital A/c

Gaining Partner‟s Dr. Cash A/c Capital A/c

To Old Partners Capital A/c

[Full GW is Shared in Old Ratio]

To Sacrificing Partner Capital A/c

All Partners Dr. Capital A/c

↓ the GW

Not Applicable

To Sacrificing Partner‟s Capital A/c

Dr.

To GW A/c [Full GW is Shared in New Ratio] Calculation of Hidden Goodwill A Incoming Partner‟s Capital / His share of profit B

Capitals of Old Partners + Incoming Partner‟s 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

Current Liabilities

20,000 Current Assets

-100,000 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 Partner‟s share 1) Good Will A/c To A‟s Capital A/c

15,000

To B‟s Capital A/c

10,000

2) Cash A/c To C‟s Capital

Partnership Accounting

Dr 25,0000

Dr

40,000 40,000

6.2.6

Balance Sheet ₹ Assets

Liabilities

₹

Capital A [70+15]

85,000 Goodwill

Capital B [60+10]

70,000 Fixed Asset

Capital C

40,000 Current Assets

Current Liabilities

20,000

25,000 100,000 90,000

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

To A‟s Capital A/c

15,000

To B‟s Capital A/c

10,000

(Goodwill raised in the books) 2) A‟s Capital A/c

Dr 12,000

B‟s Capital A/c

Dr 8,000

C‟s Capital A/c

Dr 5,000

To Goodwill A/c

25,000

(Goodwill cancelled in the books) 3) Cash A/c

Dr 40,000

To C‟s Capital

40,000

(Capital introduced by C‟s capital) Balance Sheet Liabilities

₹

Assets

Capital A [70+15-12]

73,000 Goodwill [25-25]

Capital B [60+10-8]

62,000 Fixed Asset

Capital C [40-5]

35,000 Current Assets

Current Liabilities

20,000 190,000

₹ ---100,000 90,000

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.

Financial Accounting

6.2.7

Answer: 1) C‟s Capital A/c

Dr

5,000

To A‟s Capital A/c

3,000

To B‟s Capital A/c

2,000

(Goodwill adjusted without raising it) 2) Cash A/c

Dr 40,000

To C‟s Capital

40,000

(Capital introduced by C‟s capital) Balance Sheet ₹

Liabilities

Assets

Capital A [70-3]

73,000 Goodwill [25-25]

Capital B [60-2]

62,000 Fixed Asset

Capital C [40-5]

35,000 Current Assets

Current Liabilities

20,000 190,000

₹ ---100,000 90,000

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

C‟s Capital A/c

Dr 5,000

Dr 5,000

To A‟s Capital A/c

3,000

To A‟s Capital A/c

3,000

To B‟s Capital A/c

2,000

To B‟s Capital A/c

2,000

Or

(Goodwill adjusted without raising it) 2) Cash A/c

Dr 40,000

To C‟s Capital

Cash A/c 40,000

Dr 45,000

To C‟s Capital

45,000

(Capital introduced by C‟s capital) Balance Sheet Liabilities

₹

Assets

Capital A

73,000 Goodwill

Capital B

62,000 Fixed Asset

Capital C

40,000 Current Assets

Current Liabilities

20,000 195,000

₹ ---100,000 95,000

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

Partnership Accounting

6.2.8

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: Journal Entries 1) Non-cash premium method C Capital A/c

3) Memorandum revaluation method

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 Goodwill A/c

Dr 60,000

A Capital A/c

Dr 20,000

B Capital A/c

Dr 20,000 Dr 20,000

To A Capital A/c

36,000

C Capital A/c

To B Capital A/c

24,000

To Goodwill A/c

60,000

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

B‟s Capital A/c

Dr

714

(10,000 × -2/28)

C‟s Capital A/c

Dr

2,500

(10,000 × -7/28)

To A‟s 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)

Financial Accounting

6.2.9

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

To Premium for Goodwill A/c

3) 8,000

A Capital A/c

Dr

2,000

B Capital A/c

Dr

6,000

To Cash A/c Premium for Goodwill A/c

Dr

8,000

Cash A/c

To A Capital A/c

2,000

To B Capital A/c

6,000

1+2

2)

8,000 Dr

8,000

To A‟s Capital A/c

2,000

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 1) Cash A/c

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

To Premium for Goodwill

3) 15,000

C Capital A/c Dr 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 1/4 th 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

C‟s 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

Partnership Accounting

1

6.2.10

Balance after C‟s Share

Total share

C‟s share

Balance

1

¼

¾

Balance share (a) Partner‟s old share (b) Partner‟s new share (a) × (b) A‟s new share

¾

5/9

15/36

B‟s new share

¾

4/9

12/36

C‟s 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

Cash A/c

To A‟s Capital

27,778

To B‟s Capital

22,222

Dr

10000

To A‟s Capital

5556

To B‟s Capital

4444

Dr

50,000

A‟s Capital

Dr

20,833

II. Non-cash portion of goodwill

B‟s Capital

Dr

16,667

i. Revaluation method

C‟s Capital

Dr

12,500

Good Will A/c

To Goodwill

Dr 50,000

To A‟s Capital

27,778

To B‟s Capital

22,222

50,000

iii. Non-cash premium method C‟s Capital

Dr

12,500

To A‟s Capital

6,944

To B‟s 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

Good Will A/c

Dr 45,000

Dr

45,000

To A‟s Capital

27,000

To A‟s Capital

27,000

To B‟s Capital

18,000

To B‟s Capital

18,000

iii. Non-cash premium method

A‟s Capital

Dr

20,000

B‟s Capital

B‟s Capital

Dr

25,000

Financial Accounting

Dr 7,000

6.2.11

To A‟s 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, Limited CRR

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

Partnership Accounting

6.2.12

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 firm‟s 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

Creditors

40,000 1,30,000

10,000

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)

Financial Accounting

9,000

6.2.13

Partners’ Capital Accounts Dr

Cr Particulars

G

S

R

To

Date - By

Cash A/c

5,400

3,600

Balance b/d Premium Goodwill

54,000 36,000 18,000

G

S

R

48,000 32,000

Reserve A/c

(premium withdrawn) To Balance c/d

Particulars

for

6,000

4,000

5,400

3,600

-

-

Cash A/c

-

59,400 39,600 18,000

- 18,000

59,400 39,600 18,000

Balance Sheet (after R’s admission) as at 1st April, 2011 ₹

Liabilities

₹

Assets

G‟s Capita

54,000

Other assets

1,20,000

‟s Capital

36,000

Cash

28,000

R‟s 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 R‟s 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

To

R

Particulars - By Balance b/d Premium Goodwill

To Balance c/d

Cash A/c

45,000 30,000 15,000 61,200 40,800 15,000

Partnership Accounting

S

R

48,000 32,000

Reserve A/c Cash A/c (Bal. 16,200 10,800 figure)

G

for

6,000

4,000

7,200

4,800

-

-

- 15,000

61,200 40,800 15,000

6.2.14

Balance Sheet (after R’s admission) as at 1st April, 2011 ₹

Liabilities

₹

Assets

G‟s Capita

45,000

Other assets

S‟s Capital

30,000

Cash

R‟s Capital

15,000

1,20,000 10,000

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:

Liabilities Creditors Capital Accounts: Rain Storm

Balance Sheet ₹ ₹ Assets 35,000 Cash Debtors 40,000 (-) Provision for doubtful debts 20,000 60,000 Stock Machinery Land & Building 95,000

₹

₹ 4,000

22,000 2000 20,000 18,000 20,000 33,000 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 1 Land and Building A/c To Revaluation A/c

Financial Accounting

Dr Dr

Cr

9,000 9,000

6.2.15

(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. To Liability for Damages A/c

1,000 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 To Storm Capital A/c (Being revaluation profit transferred to partners capital a/c) 4 Cash A/c To Premium for Goodwill A/c (WN2)

Dr

1,020 680

20,000 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) To Rain Capital A/c

Dr

5,000 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 Dust Current A/c To Storm Capital A/c

Dr

To Dust Capital A/c

3,120 2,200 3,120 2,200

(Being deficit capital of Storm and Dust’s transferred to currents a/c) Balance Sheet of the New firm as on 1st January, 2001 Liabilities ₹ ₹ Assets ₹ ₹ Land and Building [33+9] 42,000 Capital Accounts: Rain 38,700 Machinery [20-5] 15,000 Storm 25,800 Stock 18,000 Dust 17,200 81,700 Debtors 22,000 (-): Prov. for doubtful debts 3,000 19,000 Current A/c [2+1] 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

Partnership Accounting

6.2.16

R S D 3

Old ratio New ratio Combined new ratio

9

2 3

2

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 Rain‟s share = ₹81,700 × 9/19 = ₹38,700 Storm‟s share = ₹81,700 × 6/19 = ₹ 25,800 Dust‟s share = ₹81,700 × 4/19 = ₹ 17,200. (5) Partners’ Capital A/c Particulars To Current 5,320 a/c (bal)

Rain

Storm

----

----

Dust

Particulars By Bal. b/d

Balance (WN 38,700 25,800 17,200 4)

44,020 25,800 17,200

Bank A/c. Premium for Goodwill Revaluation A/c Current a/c (Bal)

Rain

Storm

Dust

40,000 20,000 ---3,000

---

---- 15,000 2,000 ----

1,020 680 ------- 3,120 2,200 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 1,700 (Rain – ₹1,020; Storm – ₹680 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 th On the above date, Manisha is admitted for 2/5 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. Financial Accounting

6.2.17

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 31,250 Machinery A/c 15,000 (Ranu- ₹20,833; Mili – ₹10,417 32,750 32,750 Partners’ Capital A/c Particulars Ranu Mili Manisha Particulars To Goodwill 12,000 6,000 12,000 By Balance b/d Balance c/d 65,833 42,417 38,000 Revaluation A/c General Reserve Goodwill (Nt 3) Bank A/c 77,833 48,417 50,000

Ranu 30,000 20,833 7,000 20,000 ---77,833

Mili Manisha 24,500 ---10,417 ---3,500 ---10,000 ------50,000 48,417 50,000

Balance Sheet of the Firm (after Manisha’s 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 7,500 (-) Provision for 3,000 17,000 (7,000+500) Doubtful Debt Investment Provision 2,500 Bills Receivable 12,500 (₹2,000 + 500) Workmen Comp Fund 750 Joint Life Policy 12,000 (6,000-5,250) Accrued Income 500 Bank (10+50) 60,000 1,57,000 1,57,000

Partnership Accounting

6.2.18

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 Capital Accounts A B Reserve fund Sundry creditors Bills payable

₹ 10,00,000 5,00,000 9,00,000 4,00,000

Assets Plant and machinery Building Sundry debtors Stock Cash

1,00,000 29,00,000

₹ 12,00,000 9,00,000 3,00,000 4,00,000 1,00,000 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 1/4 th 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: Particulars To Stock

Financial Accounting

Memorandum Revaluation A/c ₹ Particulars 40,000 By Building

₹ 1,80,000

6.2.19

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

To

Particulars Revaluation Loss Reserve Fund A (W.N.3) B (W.N.3) Balance W.N2

c/d

Partners’ Capital A/c C Particulars 3,750 By Balance b/d

A 7,500

B 3,750

4,50,000

2,25,000

2,25,000

-

-

17,500 8,750

11,70,000

5,85,000

5,85,000

16,27,500

8,13,750

8,40,000

Reserve Fund C (W.N.3) Revaluation Profit Cash (Bal)

A 10,00,000

B 5,00,000

C

6,00,000

3,00,000

-

17,500 10,000

8,750 5,000

-

-

8,40,000 16,27,500

8,13,750

8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006 Liabilities Capital Accounts A B C Reserve Fund Sundry Creditors Bills Payable

₹ 11,70,000 5,85,000 5,85,000 9,00,000 4,00,000 1,00,000 37,40,000

Assets ₹ Plant & Machinery 12,00,000 Building 9,00,000 Sundry Debtors 3,00,000 Stock 4,00,000 Cash (1,00,000 + 8,40,000) 9,40,000

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

Partnership Accounting

6.2.20

2.

Calculation of closing capital of C Closing capitals of A & B after all adjustments are: A-₹1170,000, B-₹5,85,000 Since B‟s capital is less than A‟s capital, therefore B‟s capital is taken as base. Hence, C‟s closing capital should be ₹585,000 i.e. at par with B (new p&l ratio)

3.

Adjustment entry for goodwill Partners A B C

Effect Goodwill as Goodwill as per old ratio per new ratio 70,000 52,500 + 17,500 35,000 26,250 + 8,750 26,250 - - 26,250 1,05,000 1,05,000 26,250 26,250

Adjustment entry: C’s Capital A/c Dr. 26,250 To A‟s Capital A/c 17,500 To B’s Capital A/c 8,750 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: Balance Sheet ₹

Liabilities Sundry Creditors.

Assets

₹

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

On 31 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: st

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. Financial Accounting

6.2.21

4. 5. 6. 7.

Provision for bad debts is to be made at 5%. Old credit balances of Sundry Creditors ₹20,000 is to be written-off. Joint Life Policy of the partners surrendered and cash obtained ₹80,000. Goodwill of the entire firm be valued at ₹1,40,000 & A‟s 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 ₹

Particulars To Machinery A/c tock A/c

₹

Particulars

60,000 By Land and Buildings A/c

60,000

25,000

Sundry Creditors A/c

20,000

Partners‟ Capital

10,000

Provision for bad debts A/c

5,000

(Answer: 2,857; B: 4,286 and C: 2,857) 90,000

90,000

Partners’ Capital A/c Particulars

A

B

C

2,857

4,286

2,857 By Balance b/d

A ---Capital(GW) Bank (50% ) 1,30,000

10,000

To Revaluation

A Loan A/c

1,30,000

Balance (required)

30,000

-------

---- 3,50,000 3,50,000 2,62,857 3,64,286 3,82,857

Particulars

A

B

C

2,00,000 3,00,000 2,00,000

J.L.P A/c

22,857

34,286

22,857

B Capital (GW) C Capital (GW) Bank (Bal)

10,000

----

----

30,000

----

----

----

30,000 1,60,000

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 A‟s Capital A/c 1,30,000 Joint Life Policy A/c 80,000 Balance c/d 2,40,000 B‟s Capital A/c 30,000 C‟s Capital A/c 1,60,000 3,70,000 3,70,000

Partnership Accounting

6.2.22

Liabilities Partners capital A/cs B C A‟s Loan A/c Sundry Creditors

Balance sheet of M/s. B and C as on 1st April, 1995 ₹ ₹ Assets ₹ ₹ Land and Buildings 2,60,000 3,50,000 Machinery 2,40,000 3,50,000 7,00,000 Closing Stock 75,000 1,30,000 Sundry Debtors 1,00,000 80,000 Less: Provision for Bad 5,000 95,000 Debts 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

₹

A‟s Capital

33,600 Plant and Machinery

49,000

B‟s Capital

25,200 Furniture and fittings

4,800

C‟s 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. Financial Accounting

6.2.23

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 C‟s 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 C‟s retirements Answer: Profit and Loss Adjustment A/c Particulars ₹ Particulars ₹ 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 Particulars ₹ To Provision for doubtful debts 1,110 By Depreciation (Plant & Machinery) 5,854 Liabilities for bills discounted 501 7,465

Particulars ₹ Partners‟ Capital A/c (Loss) A 2,986 B 2,986 C 1,493 7,465

Capital A/c C Particulars 1,493 By Balance b/d

Particulars A B To Revaluation A/c 2,986 2,986 (loss) C‟s Capital A/c 11,401 11,401 ( GW) Cash A/c - 17,710 C‟s Loan A/c - 17,710 Balance c/d

P/L Adjustment A/c A‟s Capital A/c B‟s Capital A/c (GW) Cash A/c

A B C 33,600 25,200 12,000 4,222 -

4,222

2,111

- 11,401 - 11,401

32,290 23,890 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 A 32,290 Less: Depreciation B 23,890 Furniture and Fittings C‟s Loan a/c 17,710 Stock in Trade 15% Mortgage Loan 16,600 Sundry Debtors Liabilities for bills 501 Less: Provision discounted

Partnership Accounting

₹ 58,540 5,854

22,200 1,110

₹ 52,686 4,800 22,800 21,090

6.2.24

Creditors

12,000 Interest on Loan prepaid Cash in hand Cash at Bank 1,02,991

415 1,000 200 1,02,991

Working Notes: Sundry Debtors Opening Debtors as on 31.3.1993 21,600

1

Add Rent received from Mr. X

600

Adjusted Debtors

22,200

Calculation of Goodwill 2

Profit

Year 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 Partner‟s Share of GW

22,802

Calculation of balance of Plant and Machinery Opening Plant and Machinery

3 Add

Machinery Purchased

Add

Installation charge

49,000

10,000 600

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 Ram 1,00,000 Cash in Bank Rahim 1,50,000 Sundry Debtors

Financial Accounting

₹ 20,000 1,00,000 5,00,000

6.2.25

Robert General Reserve Sundry Creditors Loan from Richard

2,00,000 Stock in Trade 2,00,000 Plant & Machinery 8,00,000 Land & Building 2,00,000 16,50,000

2,00,000 3,00,000 5,30,000 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 firm‟s 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

2. Year ended 31.3.2003 

Profit ₹60,000

3. Year ended 31.3.2004 

Profit ₹55,000

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. Richard‟s 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 reconstit uted firm. Answer: Dr To Revaluation A/c Robert‟s Loan1 Bank Balance c/d

Ram 10,000

Robert

6,000

4,000



200,000

245,000 255,000

237,000 243,000

58,000  262,000

 

55,000

36,667



18,333

Goodwill

Bal. c/d

Rahim

Partners’ Capital a/c Richard By

190,000

200,333

245,000

237,000

 

195,167 213,500

Balance b/d General reserve Goodwill2

Balance b/d Loan A/c transfer Bank

Ram

Rahim

Robert

Cr. Richard

100,000

150,000

200,000



100,000

60,000

40,000



55,000

33,000

22,000



255,000

243,000

262,000



245,000

237,000











200,000

 245,000

 237,000

 

13,500 213,500

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

Partnership Accounting

6.2.26

Ram Rahim Richard Sundry Creditors Loan from Robert

1,90,000 2,00,333 1,95,167 8,00,000 2,00,000 15,85,500

Plant and Machinery Stock Debtors Cash at Bank (W.N. 3) Cash in hand

2,70,000 1,90,000 4,50,000 55,500 20,000 15,85,500

Working Notes: 1:Revaluation A/c Particulars ₹ Particulars ₹ 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

Profit for the year ended 31.3.2003

60,000

Profit for the year ended 31.3.2004

55,000 165,000

Average Profit = 165,000/3 Number of years of purchase Goodwill 55,000 × 2

55,000 2 110,000

WN3: Bank A/c Particulars ₹ Particulars ₹ To Balance b/d 1,00,000 By Robert‟s Capital A/c 58,000 Richard‟s 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 1 st 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 Financial Accounting

6.2.27

Answer: Year Premium

Cumulative

Current

Loss of

Surrender Value

Value

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 31.12.2000

ii.

5,000

Profit and Loss a/c

5,000

To Joint Life Policy a/c 01.01.2001

i.

Joint Life Policy a/c

5,000 Dr

5,000

To cash a/c 31.12.2001

ii.

5,000

Profit and Loss a/c

5,000

To Joint Life Policy a/c 01.01.2002

i.

Joint Life Policy a/c

5,000 Dr

5,000

To cash a/c 31.12.2002

ii.

5,000

Profit and Loss a/c

5,000

To Joint Life Policy a/c 01.01.2003

i.

Joint Life Policy a/c

5,000 Dr

5,000

To Cash 31.03.2003

ii.

5,000

Cash a/c

100,000

To Joint Life Policy a/c 31.03.2003

iii.

Joint Life Policy a/c

100,000 Dr

95,000

To X‟s Capital a/c

38,000

To Y‟s Capital a/c

38,000

To Z‟s Capital a/c

19,000

Joint Life Policy A/c Date

Debit

01.01.00 To Cash 01.01.01 To Cash

Partnership Accounting

₹

Date

Credit

₹

5,000 31.12.00 By Profit & Loss A/c

5,000

5,000

5,000

5,000 31.12.01 By Profit & Loss A/c

5,000

5,000

5,000

6.2.28

01.01.02 To Cash 01.01.03 To Cash

5,000 31.12.02 By Profit & Loss A/c

5,000

5,000

5,000

5,000 31.03.03 By Cash

1,00,000

X, Y & Z‟s Capital a/c 95,000

31.03.03

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 01.01.00

i.

Joint Life Policy a/c

Dr

5,000

To Cash 31.12.00

ii.

5,000

Profit and Loss a/c

5,000

To Joint Life Policy a/c 01.01.01

i.

5,000

Joint Life Policy a/c

Dr

5,000

To cash a/c 31.12.01

ii.

5,000

Profit and Loss a/c

4,000

To Joint Life Policy a/c 01.01.02

i.

4,000

Joint Life Policy a/c

Dr

5,000

To cash a/c 31.12.02

ii.

5,000

Profit and Loss a/c

3,500

To Joint Life Policy a/c 01.01.03

i.

3,500

Joint Life Policy a/c

Dr

5,000

To Cash 31.12.03

ii.

5,000

Cash a/c

100,000

To Joint Life Policy a/c 31.12.03

iii.

100,000

Joint Life Policy a/c

Dr

92,500

To X‟s Capital a/c

37,000

To Y‟s Capital a/c

37,000

To Z‟s Capital a/c

18,500

Joint Life Policy A/c Date

Debit

01.01.00 To Cash 01.01.01 To Cash

₹

Date

Credit

₹

5,000 31.12.00 By Profit & Loss A/c

5,000

5,000

5,000

5,000 31.12.01 By Profit & Loss 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 Profit & Loss A/c

3,500

01.01.02

5,000

2,500

Cash

Financial Accounting

Balance c/d

6.2.29

6,000

6,000

01.01.03 To Balance b/d

2,500 31.03.03 By Cash

01.01.03

Cash

5,000

31.03.03

X, Y & Z‟s Capital a/c 92,500

1,00,000

95,000

Liabilities

1,00,000

Balance Sheet 2000 – 01 ₹ Assets Joint Life Policy a/c 2001 – 02 Joint Life Policy a/c 2002 – 03 Joint Life Policy a/c

₹ Nil 1,000 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 Profit and Loss a/c

5,000 Dr

5,000

To JLP Reserve a/c JLP Reserve a/c

5,000 Dr

5,000

To Joint Life Policy a/c

5000

Year 2001 ii.

Joint Life Policy a/c

5,000 Dr

5,000

To Cash Profit and Loss a/c

5,000 Dr

5,000

To JLP Reserve a/c JLP Reserve a/c

5,000 Dr

4,000

To Joint Life Policy a/c

4,000

Year 2002 iii.

Joint Life Policy a/c

Dr

5,000

To Cash Profit and Loss a/c

5,000 Dr

5,000

To JLP Reserve a/c JLP Reserve a/c

5,000 Dr

3,500

To Joint Life Policy a/c

3,500

Year 2003 iv.

Joint Life Policy a/c To Cash

Partnership Accounting

Dr

5,000 5,000

6.2.30

Cash a/c

Dr

100,000

To Joint Life Policy a/c

7,500

To JLP Reserve

92,500

JLP Reserve a/c

Dr

95,000

To Partners‟ Capital a/c

95,000

Joint Life Policy A/c Date

₹

Debit

01.01.00 To Cash 01.01.01 To Cash

Date

₹

Credit

5,000 31.12.00 By JLP Reserve a/c

5,000

5,000

5,000

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

5,000

2,500

Cash

Balance c/d

6,000

6,000

01.01.03 To Balance b/d

2,500 31.03.03 By Cash

01.01.03

Cash

5,000

31.03.03

JLP Reserve a/c

1,00,000

92,500 1,00,000

1,00,000

Joint Life Policy Reserve A/c Date

Debit

01.01.00 To Joint Life Policy a/c 01.01.01 To Joint Life Policy a/c Balance c/d

₹

Date

Credit

₹

5,000 31.12.00 By Profit and Loss a/c

5,000

5,000

5,000

4,000 31.12.01 By Profit and Loss a/c

5,000

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

2,500 31.12.02

5,000

Balance c/d

Profit and Loss a/c

6,000

6,000

31.03.03 To Partners‟ Capital a/c 95,000 01.01.02 By Balance b/d 31.12.02 95,000

Financial Accounting

2,500

Joint Life Policy a/c 92,500 95,000

6.2.31

Death of a Partner Deceased partner’s 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 Partner‟s 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 firm‟s 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 C‟s 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 Partner‟s 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 firm‟s name, Represent the firm and Solicit the firm‟s customer [Sec.36(1)]

Partnership Accounting

6.2.32

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 firm‟s 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

₹

₹

Capital Accounts:

Assets

₹

Fixed Assets

₹ 100,000

A

48,000

Current Assets

B

64,000

Stock

30,000

C

48,000 160,000

Debtors

60,000

Cash in hand

30,000 120,000

Reserves

20,000

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. A‟s drawings - ₹18,000 (drawn evenly over the year) 2. B‟s drawings - ₹24,000 (drawn evenly over the year) 3. C‟s drawings - (up-to-date of death) ₹20,000

Financial Accounting

6.2.33

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: ₹ st Profits for the year ended 31 March, 1999 (after depreciation) 48,000 10,000 Add Depreciation Profits before depreciation 58,000 Period 01.04.98- 01.10.9830.09.98 31.03.99 Profit split for two half years (assumed: evenly spread) 29,000 29,000 6,000 4,000 Less Depreciation [I half ₹6,000 and II half ₹4,000] Profits

23,000

Capital Accounts of partners as on 30th September, 1998: Particulars A B C Particulars A To Fixed Assets 6,000 8,000 6,000 By Balance c/d 48,000 Drawings 9,000 12,000 20,000 Reserve* 6,000 Goodwill 18,000 C‟s Executor - 52,000 P/L A/c Appropriation* Balance c/d 57,000 76,000 72,000 96,000 78,000 72,000 * (Interest on ₹48,000 @ 25% for 6 m)

25,000

B C 64,000 48,000 8,000 6,000 24,000 18,000 - 6,000

96,000 78,000

(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

(ii)

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

(Or)

₹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 C‟s Executor‟s account Add Amount of profit earned out of unsettled capital [calculated in (3)] Amount due

52,000 7,027 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”.

Partnership Accounting

6.2.34

(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.

[CMA INTER D10, 10 Marks] 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 Capital a/cs Asha Bipasha Chitra Reserves B‟s loan Trade Creditors

₹

₹

Asset ₹ ₹ Plant &machinery 80,000 50,000 furniture 10,000 40,000 Stock 40,000 30,000 1,20,000 Trade Debtors 52,000 30,000 Less; provision (2,000) 50,000 20,000 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) (ii) (iii)

Interest on capital at 5% Interest on B‟s loan and Transfer 20% of the divisible profit to the reserves after charging such reserve.

Answer: Memorandum Revaluation A/c Particulars ₹ 500 By Machiery 3,000 Reserves 10,000

Particulars To Furniture Provision for Debtors Contingent Liability Partners Capital A/C Asha 8/20 9,800 Bipasha 7/20 8,575 Chitra 5/20 6,115 24,500

Financial Accounting

₹ 8,000 30,000

6.2.35

Machinery

38,000 8,000

Reserves

30,000

38,000

38,000 500 3,000 10,000

Furniture Provision for Debtors Contingent Liability Partners capital A/C Asha 5/10 12,250 Bipasha 4/10 9,800 Chitra 1/10 2,450 24,500 38,000

Net Effect Cr Dr 9,800 12,250 2,450 Dr A 8,575 9,800 1,225 Dr B 6,115 2,450 3,675 Cr C Adjustment Entry Asha‟s Capital A/c Dr 2,450 Bipasha‟s Capital A/c Dr 1,225 To Chitra‟s 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 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 (61,500×20/120) 10,250 Partner‟s Capital A/C: Asha 5/10 25,625 Bipasha 4/10 20,500 Chitra 1/10 5,125 51,250 68,700

₹

₹ 68,700

68,700

ADDITIONAL PROBLEMS ADMISSION OF A PARTNER

[CMA INTER D01, 20 Marks] 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:

Fixed assets : Cost Less : Accumulated depreciation

Partnership Accounting

₹ ₹ (In crores) (In crores) 60 40 20

6.2.36

Investments at cost in equity shares of : A Ltd. (Market value ₹80 Cr.) B Ltd. (Market value ₹70 Cr.)

30 25

Current Assets Less : Current Liabilities

140 65

Financed by: Loan from Zed Ltd. carrying interest at 15% p.a Reserves Current accounts of partners : X Ltd. Y Ltd. Capital Accounts : X Ltd. Y Ltd.

55

75 150 40 30

3 2 40 35

5

75 150

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

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

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.

Financial Accounting

6.2.37

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.

3.

4.

5.

6.

7.

8.

9.

Goodwill A/c Dr. To X A/c To Y A/c (Being Goodwill raised in old Ratio)

50

X A/c Dr. Y A/c Dr. Z A/c Dr. To Goodwill A/c (Being Goodwill written off in new ratio)

25 15 10

Fixed Asset A/c Dr. To X A/c To Y A/c (Being Fixed Asset‟s revaluation transferred to Partners Capital A/c in old profit sharing ratio.

30

30 20

50

18 12

X A/c Dr. 15 Y A/c Dr. 9 Z A/c Dr. 6 To Fixed Assets A/c (Being Fixed Assets revaluation transferred in new profit sharing ratio amount among all partners) Reserve A/c Dr. To X A/c To Y A/c (Being Reserves distributed in old ratio)

30

X A/c Dr. Y A/c Dr. Z A/c Dr. To reserves Assets A/c (Being Reserve debited in new ratio at 5:3:2)

15 9 6

X A/c Dr. To Investment A/c To Realisation A/c (Being investments in A Ltd. takeover by X Ltd.)

70

Y A/c To Investment on B Ltd. A/c To Realisation A/c

60

Partnership Accounting

Dr.

30

18 12

30

30 40

25 35

6.2.38

(Being Investment Taken Over by Y Ltd.) 10.

11.

Realisation A/c Dr. To X A/c To Y A/c (Being Profit on takeover of investments credited to partners capital in old profit sharing ratio)

75 45 30

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 Before Admission Admission ₹ ₹ ₹ ₹ 60 60 I. Assets 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 55 140 140 Current Assets Bank 60 135 65 Current Liability 65 155 150 Financed by :Loan from Z Ltd. Owner‟s fund Reserves Current A/c X Y Capital A/c (W.N.1) X Y Z

3 2

Nil

40

30

30

5

3 2

60 36 120 24 155

40 35 Nil

5

75 150

Working Note 1 Particulars To Goodwill Fixed Asset A/c Reserve A/c Investment A/c Investment A/c Balance c/d Financial Accounting

Partner’s Capital A/c X Y Z Particulars 25 15 10 By Balance b/d 15 9 6 Zed loan A/c 15 9 6 Goodwill A/c 70 -- -Fixed Asset -- 60 -Reserve A/c 60 36 24 Profit

X 40 -30 18 18 45

Y Z 35 --- 40 20 -12 -12 -30 -6.2.39

Bank A/c 185 129 46

34 20 6 185 129 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 P‟s Capital 7,800 Land & Building A/c 15,600 R‟s 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 R‟s Capital is taken as base to calculate remaining Partner‟s Capital.

Partnership Accounting

6.2.40

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

[CMA INTER D04, 14 Marks] 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. Assets ₹ ₹ ₹ 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 Liabilities Capital Accounts

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 C‟s capital as base. C is to bring premium for goodwill in cash. Goodwill amount is being calculated on the basis of C‟s share in the profits and capital contributed by him. Following revaluations are made:

i. ii. iii. iv.

Stock to be depreciated by 5%; Provision for bad debts is to be raised to ₹500; Furniture to be depreciated by 10%; Buildings are revalued at ₹41,350.

Prepare necessary Ledger Accounts and the Balance Sheet of the new firm. Answer: Revaluation A/c Particulars Amount Particulars To Stock A/c 750 By Building A/c 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

Financial Accounting

Amount 6,350

6,350

6.2.41

Balance Sheet Liabilities Amount Asset Amount Building 41,350 Capital A/c 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: Capital Reserve Revaluation Profit 1 Total 2 Total Capital [using C‟s capital base] Goodwill of A and B [2 – 1] Total Goodwill of the firm

A B C 29,000 15,000 6,000 4,000 3,000 2,000 38,000 21,000 21,000

Total

80,000 1,05,000 25,000

Partner Capital A/c Particulars A B C Particulars A B 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; Particulars Amount Particulars Amount To Balance b/d 2,000 By A‟s Capital A/c 3,000 A‟s Capital A/c 14,500 B‟s Capital A/c 2,000 B‟s Capital A/c 10,500 Balance c/d (B/F) 48,000 C‟s Capital A/c 26,000 53,000 53,000

[CMA INTER D05, 14 Marks] 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 Capital : A B Reserve Creditors

Partnership Accounting

₹ 35,000 30,000 10,000 25,000

Assets Land and Building Plant and Machinery Stock Debtors

₹

₹ 30,000 20,000 10,000

20,000

6.2.42

Less : PDD Bank Cash

1,000

1,00,000

19,000 11,000 10,000 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. ii. iii. iv. v.

The new profit sharing ratio among A, B and C will be equal. The capitals of the partners should also be equal taking C‟s capital as base. The reserve of the new firm will be ₹15,000. Provision for doubtful debts is to be created @ 10% of total debtors. 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 Amount Asset Land & Building 50,000 Plant & Machinery 50,000 Stock 50,000 1,50,000 Investment 25,000 (-) Provision 15,000 Sundry Debtors (-) Prov. for Bad Debts Bank (W.N.1) Cash (10,000 + 15,000) 1,90,000

Liabilities Capital A B C Creditors Reserve

Partner Capital A/c B C Particulars 5,000 5,000 By Balance b/d 400 1,000 Stock A/c

Particulars A To Reserve A/c 5,000 Prov. for Bad Debts A/c (WN2) Prov. for 600 -2000 Investment (WN3) Balance c/d 50,000 50,000 50,000

55,600 55,400 58,000

Amount 30,000 20,000 31,000 12,000 2,000 30,000 3,000

A

10,000 27,000 47,000 25,000 1,90,000

B

C

Investment A/c Cash A/c Debtors A/c Bank A/c Reserve A/c 55,600 55,400 58,000

Working Note 1: Bank A/c Particulars Amount Particulars Amount To Balance b/d 11,000 By Balance c/d 47,000 A‟s Capital A/c 14,600 B‟s Capital A/c 21,400 47,000 47,000

Financial Accounting

6.2.43

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 C‟s Capital A/c. Working Note 3: Investment provision is to be created by debiting C‟s 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 Particulars Amount Particulars To Prov. for Doubtful Debts A/c 25,000 By Building A/c Advance 13,250 Partners Capital A/c Sa 8,375 Re 8,375 16,750 55,000

Partnership Accounting

Amount 55,000

55,000

6.2.44

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 Liabilities Amount Asset Amount 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 for Bad Debts 25,000 2,25,000 Current Liabilities 2,95,000 Advance 1,32,500 Less: Provision 13,250 1,19,250 17,95,000 17,95,000 Working Notes 1: Bank A/c Particulars Amount Particulars Amount To Balance b/d 22,500 By Balance c/d 7,95,750 Ga‟s Capital A/c 6,00,000 Sa‟s Capital A/c 36,625 Re‟s Capital A/c 36,625 Ga‟s Capital A/c 1,00,000 7,95,750 7,95,750 Journal Entries Particulars 1. Fixed Assets A/c To Revaluation A/c (Being Plant revalued)

L.F Dr.

Dr. 55,000

55,000

2. Revaluation A/c Dr. To Provision for Doubtful Debts A/c To Advance A/c (Being 10% Provision for Doubtful Debts created and written off 10% of the Advance)

38,250

3. Revaluation A/c To Sa‟s Capital A/c To Re‟s Capital A/c (Being Revaluation Profit distributed equally)

Dr.

16,750

4. Goodwill A/c

Dr.

Financial Accounting

Cr.

25,000 13,250

8,375 8,375

6,00,000

6.2.45

To Sa‟s Capital A/c To Re‟s Capital A/c (Being Goodwill raised in old ratio)

3,00,000 3,00,000

5. Sa‟s Capital A/c Re‟s Capital A/c Ga‟s Capital A/c To Goodwill A/c (Being Goodwill to be written off in new ratio)

Dr. Dr. Dr.

2,00,000 2,00,000 2,00,000 6,00,000

6. Bank A/c Dr. To Ga‟s Capital A/c (Being Cash brought by Ga as Goodwill & Capital and adjustment his Capital to profit sharing ratio)

7,00,000

7. Bank A/c Dr. To Sa‟s Capital A/c To Re‟s Capital A/c (Being Cash brought by Sa and Re to adjust their Share of Capital to Profit sharing ratio)

73,250

7,00,000

36,225 36,225

[CMA INTER D06, 14 Marks] Question: Admission of partner: A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1. D is admitted as a new partner of 31.12.2005 for an equal share and is to pay ₹25,000 as capital. Following is the balance sheet on the date of admission. : Liabilities Capital: A B C Creditors Bills Payable

₹ 30,000 30,000 20,000 15,000 5,000

Assets Land and Building Plant and Machinery Furniture & Fixture Stock Debtors Bills Receivable Bank

1,00,000 Followings are required adjustments on D‟s admission:

₹ 25,000 20,000 15,000 10,000 15,000 10,000 5,000 1,00,000

i. Out of the creditors, a sum of ₹5,000 is owing to D. ii. Bills worth ₹8,000 were discounted with the bankers, out of which, a bill of ₹2,000 was dishonoured on 31.12.2005 but no entry has been passed for that. Due dates of the other discounted bills fall in January, 2006. iii. Unexpired insurance premium ₹600. iv. Expenses debited to the Profit and Loss Account includes a sum of ₹1,000 paid for B‟s personal life insurance policy. v. A provision for bad debts @ 5% is to be created against Debtors. vi. Expenses on revaluation amounting to ₹1,010 is paid by A. vii. During 2005. Part of the furniture sold was ₹4,000 and the written down value on the date of sale is ₹3,500, the proceeds was wrongly credited to the Sales Account. You are required to prepare the Revaluation A/c and the Balance Sheet after D‟s admission.

Partnership Accounting

6.2.46

Answer: Revaluation A/c Particulars Particulars To Prov. for Bad Debts (17,000 x 5%) 850 By Insurance Premium A/c 600 Furniture A/c (Dep.) 500 B‟s Capital A/c 1,420 Furniture A/c 2,500 C‟s Capital A/c 710 (wrongly credited to sales A/c) 5,860 5,860

Particulars T Revaluati o on Revaluati on Balance b/d

A --

B 1,000

2,130

1,420

28,88 0

27,58 0

31,01 0

30,00 0

Partner Capital A/c D Particulars --- B Balance y b/d 710 -Cash A/c

C

19,29 0

20,00 0

25,00 0

25,00 0

A 30,00 0 --

B 30,00 0 --

C 20,00 0 --

Creditors

--

--

--

20,00 0 5,000

Revaluati on

1,010 30,00 0

20,00 0

25,00 0

31,01 0

D --

Balance Sheet of the firm as on 31.12.2005 (After Admission) Liabilities Amount Asset Amount Capital A/c Land & Building 25,000 A 28,880 Plant & Machinery 20,000 B 27,580 Furniture & Fixture (WN1) 11,000 C 19,290 Stock 10,000 D 25,000 1,00,750 Debtors 17,000 Creditors (15,000 – 5,000) 10,000 (-) Provision for Bad Debts 850 16,150 Bills Payable 5,000 Bills Receivable 10,000 Bank (WN2) 23,000 Unexpired Insurance 600 1,15,750 1,15,750 Working Note 1: Furniture & Fixture A/c Particulars Amount Particulars Amount To Balance b/d 15,000 By Depreciation A/c 500 Loss on Sale P/L A/c 1,000 Bank A/c 2,500 Balance c/d (B/F) 11,000 15,000 15,000 Working Note 2: Particulars To Balance b/d

Financial Accounting

Bank A/c Amount Particulars 5,000 By Debtors A/c

Amount 2,000

6.2.47

D‟s Capital A/c

20,000 25,000

Balance c/d (B/F)

23,000 25,000

[CMA INTER D09, 10 Marks] Question: Admission of partner: The balance sheet of a firm as on 31.03.2007 was Liabilities Capital: Sun Moon Loan (Sun) General Reserve Sundry Creditors Outstanding Expenses

₹ 50,000 41,000 5,000 5,000 15,000 1,500 1,17,500

Assets Property Motor Car Furniture Debtors Stock Cash

₹ 35,000 7,500 1,000 25,000 45,000 4,000 1,17,500

The profit sharing ratio between Sun & Moon was 3: 2. They decided to admit Pluto as a new partner from 1st April, 2007 on the following terms & conditions: Property & Motor Car to be revalued at ₹45,000 & ₹6,500 respectively and 5% provision to be created on debtors. Pluto should pay premium for goodwill to be valued at 2 years‟ purchase of last three years average profits. Such amount of premium was to be credited to old partners loan accounts. Pluto should pay ₹37,500 as capital. The new profit sharing ratio should be 2 : 1 : 1. Last three years‟ profits were ₹5,000, ₹6,000 and ₹7,500. The last three years‟ books of accounts, on verification, disclosed the following discrepancies: 2004 – 05 – Bad debts previously written of recovered ₹400, credited to Debtors Account, Closing Stock undervalued by ₹1,250. 2005 – 06 – Furniture purchased ₹300 debited to Purchases Account, Depreciation was provided @ 10% on reducing balance method but closing stock was overvalued by ₹2,000. 2006 – 07 – A purchase invoice of ₹1,000 was omitted from the books and Closing Stock was undervalued by ₹1,000. Pass the journal entries at the time of admission of Pluto and prepare the balance sheet just after his admission Answer: Revaluation A/c Particulars Particulars ₹ ₹ ₹ To Motor Car 1,000 By Property 10,000 Provision for bad debts 1,250 Profit on Revaluation Sun 4,650 Moon 3,100 7,750 10,000 10,000

Partnership Accounting

6.2.48

Partner Capital A/c Particulars A B C Particulars A B C To Balance c/d 57,650 46,100 37,500 By Balance b/d 50,000 41,000 -Cash A/c --- 37,500 Profit on Reval. 4,650 3,100 -General Reserve 3,000 2,000 -57,650 46,100 37,500 57,650 46,100 37,500 Calculation of sacrificing / gaining ratio of sun & moon because of admission of Pluto Old Ratio

Sun: Moon: Pluto

New Ratio

3:2:-

Sacrificing Ratio

= - =

Moon’s Sacrificing Ratio = - =

= =

Rectification of Profits of Last 3 years. Revaluation A/c Particulars 2004-05 2005-06 2006-07 Profits 5,000 6,000 7,500 Bad debts recovered +400 --Closing stock undervalued +1,250 -1,250 -Furniture purchased debited to purchases A/c +300 -Depreciation -30 -Closing stock overvalued -2,000 +2,000 Purchased not recorded -1,000 Closing stock undervalued +1,000 6,650 3,020 9,500 Calculation of premium to be paid by Pluto = Average profit of 3 year‟s:

6650  3020  9500 3

= 6,390

Goodwill = 6,390 ×2 = 12,780 Pluto‟s share of goodwill = 12,780 × 1 = 3,195 4

Particulars 1. Property A/c To Revaluation A/c (Being Revaluation of property done at the time of admission of Pluto)

Dr.

Dr. 10,000

10,000

2. Revaluation A/c Dr. To Motor Car A/c To Provision for bad debts A/c (Being Revaluation done of motor car & Provision calculated on debtors @ 5%)

2,250

3. Revaluation A/c To Sun‟s Capital A/c

7,750

Financial Accounting

Cr.

Dr.

1,000 1,250

4,650

6.2.49

To Moon‟s Capital A/c (Being profit on Revaluation distributed to partner‟s capital A/c)

3,100

4. Cash A/c To Pluto‟s Capital A/c (Cash brought in by Pluto as his share of capital)

Dr.

5. Cash A/c To Pluto‟s Capital A/c (Being cash brought by Pluto for his share of goodwill)

Dr.

37,500 37,500

3,195 3,195

6. Pluto‟s Capital A/c Dr. 3,195 To Sun‟s loan A/c 1,278 To Moon‟s loan A/c 1,917 (Being pluto‟s share of premium for goodwill credited to old partner‟s capital a/c in their sacrificing ratio) Balance sheet (After Admission) Liabilities Amount Assets Amount Capital: Sun 57,650 Property (35,000 + 10,000) 45,000 Capital: Moon 46,100 Motor Car (7,500 – 1,000) 6,500 Capital: Pluto 37,500 Furniture 1,000 Loan (Sun) (5000 + 1278) 6,278 Debtors (25,000 – 1,250) 23,750 Moon 1,917 Stock 45,000 Sundry Creditors 15,000 Cash (4,000 + 37,500 + 3,195) 44,695 1,65,945 1,65,945

[CMA INTER J10, 15 Marks] Question: Admission of partner: X & Y share profit & loss in the ratio of 5: 3. They admit Z with 1/5th share of profits. He pays ₹80,000 as capital but does not contribute anything towards goodwill which is valued at ₹60,000. The Capitals of the Partners are fixed. All adjustments are to be made through partners‟ current accounts. Their balance sheet as on March 31, 2010 is as follows: Balance Sheet as on 31.03.10 Liabilities Assets ₹ ₹ ₹ Capital : Plant and Machinery 50,000 X 80,000 Investments 31,000 Y 60,000 1,40,000 Sundry Debtors 60,000 Current Account : Stock and Trade 90,000 X 5,000 Bank 30,000 Y 6,000 11,000 General Reserve 60,000 Sundry Creditors 50,000 2,61,000 2,61,000 Additional Information:

i. Plant and Machinery is valued at ₹46,000 and stock at ₹96,000.

Partnership Accounting

6.2.50

ii. One Creditor for ₹6,000 is dead and nothing is likely to be paid on this account. iii. The Capital accounts are to be proportionately adjusted on the basis of Z‟s capital and his share of profit, through Current accounts. iv. Partners decide to maintain the General Reserve in the books of the firm. Prepare Revaluation account, Bank account, Capital and Current accounts and Balance Sheet of the new firm. Answer:

ADDITIONAL PROBLEMS RETIREMENT OF A PARTNER [CMA INTER J05, 8 Marks] Question: Retirement of partner: Morning, Day and Night Carry on business in partnership sharing the Profits and Losses in the proportion of 25%, 25% and 50% respectively. Their Balance Sheet as on 31.03.2005 was as under: Liabilities ₹ Sundry Creditors General Reserves Capitals -Morning 24,00,000 Day 24,00,000 Night

Assets ₹ ₹ 1,20,000 Cash / Bank 1,00,000 80,000 Sundry Debtors 75,00,000 Inventories 10,00,000 Fixed Assets W.D.V 4,00,000 Investments (At cost) 10,00,000 (Market value ₹15,00,000/-) 50,00,000 98,00,000 1,00,00,000 1,00,00,000

On 1st April, 2005, Morning and Day retired and Night continued the business. Night paid ₹36,00,000 to Morning and ₹36,00,000 to Day in full and final discharge of their claim in the partnership. This amount was brought in Night for the purpose of payment to the retiring partners. None of the assets and liabilities is to be revalued. Passing accounting entries in relation to the above in the books of business Unit. Prepare the Balance Sheet of the business Unit after the above transactions are recorded. Answer: Journal Entries in the books of Business Unit Particulars Bank A/c To Night‟s Capital A/c (Being Capital Brought in by Night for payment to retiring partners)

Dr. Dr. 72,00,000

72,00,000

Morning‟s Capital A/c Day‟s Capital A/c To Bank A/c (Being Capital paid off on retirement)

Dr. 36,00,000 Dr. 36,00,000

Night‟s Capital A/c To Morning‟s Capital A/c

Dr. 24,00,000

Financial Accounting

Cr.

72,00,000

12,00,000

6.2.51

To Day‟s Capital A/c (Being purchase of Night‟s shares of Goodwill, unrecorded increase in value of Assets and Reserves from Morning and Day on their retirement)

12,00,000

Balance Sheet of Business unit (After Retirement of Morning and Day) Liabilities Amount Asset Amount Night‟s Capital A/c 98,00,000 Fixed Assets W.D.V 4,00,000 Reserves 80,000 Investment (At cost) 10,00,000 Sundry Creditors 1,20,000 (Market values ₹15,00,000) Inventories 10,00,000 Sundry Debtors 75,00,000 Cash / Bank 1,00,000 1,00,00,000 1,00,00,000

Particulars T o

Bank A/c Mornin g Capital A/c Day‟s

Mornin g 36,00,00 0

Day

Partner’s Capital A/c Night Particulars

36,00,00 0

--- B y

12,00,000

Balanc e Bank A/c Night‟s Capital A/c

Capital A/c Balance c

Mornin g 24,00,00 0 --

Day

Night

24,00,00 0 --

50,00,000

12,00,00 0

12,00,00 0

--

36,00,00 0

36,00,00 0

1,22,00,00 0

72,00,000

12,00,000 98,00,000 36,00,00 0

36,00,00 0

1,22,00,00 0

ADDITIONAL PROBLEMS ADMISSION CUM RETIREMENT OF PARTNER [CMA INTER J07, 5+5+2+2=14 Marks] Question: Admission cum retirement: Pradip and Parimal are equal partners. Pradip, by agreement, retires and Gopal joins the firm on the basis of one-third share of profits on 01.04.2007. The balances of the books as on 31st March, 2007 were: Goodwill Fixed Assets at Cost Current Assets : Stock Debtors Bank Balance

Partnership Accounting

Dr. ₹ 10,000 1,20,000 --60,000 40,000 8,000

Cr. ₹ -------------

6.2.52

Creditors Provision for Depreciation Capital Accounts: Pradip Parimal

-----

20,000 12,000

--- 1,04,000 --- 1,02,000 2,38,000 2,38,000 Goodwill and Fixed Assets valued at ₹30,000 and ₹1,40,000 respectively and it was agreed to be written up accordingly before admission of Gopal as partner. Sufficient money is to be introduced so as to enable Pradip to be paid off and leave ₹5,000 Cash at Bank; Parimal and Gopal are to provide such sum as to make their Capitals proportionate to their share of profits. Assuming the agreement was carried out, show the Journal entries required and prepare the Balance Sheet after admission of Gopal. All working should form part of your answer. Answer: Balance Sheet of the firm As on (After Admission) Liabilities Amount Asset Amount Capital A/cs (WN1) Fixed Assets 1,20,000 Parimal 1,28,667 (-) Provision for Depn 12,000 1,08,000 Gopal 64,333 1,93,000 Current Assets Creditors 20,000 Stock 60,000 Debtors 40,000 Bank Balance (W.N.2) 5,000 2,13,000 2,13,000 Working Note 1: Particulars Pradeep Parimal Gopal Particulars Pradeep Parimal Gopal To Goodwill -20,000 10,000 By Bal b/d 1,04,000 1,02,000 -Bank 1,14,000 --Goodwill 10,000 10,000 -Bal c/d -- 1,28,667 64,333 Bank A/c --- 74,333 Bank A/c -36,667 -1,14,000 1,48,667 74,333 1,14,000 1,48,667 74,333 Working Note 2: Bank A/c Particulars Amount Particulars Amount To Balance b/d 8,000 By Pradip Capital A/c 1,14,000 Gopal Capital A/c 74,333 Balance c/d 5,000 Parimal Capital A/c 36,667 1,19,000 1,19,000 Journal Entries in the books of the Partnership Firm Particulars 1. Goodwill A/c To Pradip‟s Capital A/c To Parimal Capital A/c (Being Goowill Realised)

Financial Accounting

Dr.

Dr. 20,000

Cr. 10,000 10,000

6.2.53

2. Parimal Capital A/c Dr. Gopal Capital A/c Dr. To Goodwill A/c (Being Goodwill written off in their new profit sharing ratio)

20,000 10,000 30,000

3. Pradip Capital A/c To Bank A/c (Being Cash paid to Pradig in final settlement)

Dr. 1,14,000

4. Bank A/c To Gopal Capital A/c To Parimal Capital A/c (Being Cash brought by Partners for final settlement)

Dr. 1,11,000

1,14,000

74,333 36,667

ADDITIONAL PROBLEMS DEATH OF A PARTNER [CMA INTER D02, 16 Marks] Question: Death of a partner: A, B and C were in partnership sharing profits and losses in the ratio of 5:4:3 respectively. A died on 31.12.2001, on which date the balance sheet of the firm was as under: Liabilities Capital Accounts: A 42,500 B 30,000 C 22,500 Current Accounts: A 4,250 B 6,500 C 5,750 Loan: A Creditors

₹

Assets Premises Less : Prov. for dep. Plant 95,000 Less : Prov. for dep. Stock Debtors Less : Prov. for dep. 16,500 Bank 20,000 21,250 1,52,750

₹ 40,000 4,000 46,000 13,500 21,000 3,750

₹ 36,000 32,500 27,000 17,250 40,000

1,52,750

B and C decided to carry on the business sharing profits and losses in the ratio of 7:5 respectively. The following adjustments were made on 31.12.2001. a. Plant, Stock and debtors were valued at ₹34,500, ₹24,300 and ₹16,850 respectively. b. Valuer‟s charge of ₹700 was to be provided for. c. Goodwill was to be valued as equal to 3 years‟ purchase of super profits. The required return was to be calculated as 25% on partner‟s capital current and loan accounts, and was to be set against weighted average profits of the last three years. Profits were: 2001 = ₹52,000; 2000 = ₹46,000; 1999 = ₹45,250. Adjustments for goodwill were to be made in and out of the capital accounts.

Partnership Accounting

6.2.54

₹25,000 was repaid to A‟s executors on 01.01.2002, the balance owing to be a loan to the partnership. Prepare necessary ledger accounts and the balance sheet on 01.01.2002. Answer: Particulars Amount Particulars Amount To Stock A/c 2,700 By Plant A/c 2,000 Debtors A/c 400 Partner Capital A/c Prov. for Valuer‟s Charges 700 A 750 B 600 C 450 Balance c/d 1,800 3,800 3,800 Valuation of Goodwill: Calculate weighted average profit Year Profit Weight Profit ×Weight 2001 52,000 3 1,56,000 2000 46,000 2 92,000 1999 45,250 1 45,250 6 2,93,250 Weighted average profit = 2,93,250/6= 48,875 Total of Partner Capital + Current Account + Loan Account = 95,000 + 16,500 + 20,000 = 1,31,500 Normal Return = 1,31,250 × 25% = 32,875 Super Profit = Weight Average Profit – Normal Return = 48,875 – 32,875 = 16,000 Goodwill = Super Profit x 3 year‟s purchase = 16,000 × 3 = 48,000/Partner Capital A/c Particulars A B C Particulars To Goodwill a/c -- 28,000 20,000 By Balance b/d Bank A/c 25,000 --Current A/c Loan A/c 61,000 Goodwill A/c Revaluation 750 600 450 Loan A/c Balance c/d -- 23,900 19,800 86,750 52,500 40,250

A B C 42,500 30,000 22,500 42,500 6,500 5,750 20,000 16,000 12,000 20,000 --86,750 52,500 40,250

Balance Sheet of the firm As on 01.01.2002 Capital A/c Fixed Assets B 23,900 (-) Prov. for dep C 19,800 43,700 Plant Creditors 21,250 (-) Prov. for dep A‟s Loan A/c 61,000 Stock Prov. for Valuer‟s Charges 700 Debtors (-) Prov. for Bad debts Bank 1,26,650

Financial Accounting

40,000 4,000 48,000 13,500 21,000 4,150

36,000 34,500 24,300 16,850 15,000 1,26,650

6.2.55