ADMISSION OF PARTNER
Multiple Choice Questions
1. Complete the following journal entry:
………………………………..a/c Dr To Cash a/c
(The amount of goodwill brought in by the new partner is withdrawn by the existing partners)
(2019 Mar- 1 Mark)
Answer: Old Partners' Capital A/c Dr To Cash a/c
2. If an incoming partner brings the premium of goodwill in cash, it will be shared by the old partners in :
(a) new profit sharing ratio (b) old profit sharing ratio (c) capital ratio (d) sacrificing ratio
(2019 Say- 1 Mark)
Answer: (d) sacrificing ratio
3. Goodwill brought in by the incoming partner in cash is credited to:
(a) old Partners capital Account in sacrificing ratio
(b) old Partners capital Account in new ratio
(c) New Partners capital Account in Gaining ratio
(d) New Partners capital Account in new ratio
(2020 Mar- 1 Mark)
Answer: (a) old Partners capital Account in sacrificing ratio
4. X and Y are partners sharing profits in the ratio 3 : 2. They admit Z into partnership with 1/5 share in future profits. What will be the sacrificing ratio?
(a) 3 : 2 (b) 2 : 1 (c) 1 : 1 (d) 3 : 1
(2020 Say- 1 Mark)
Answer: (a) 3 : 2
5. New ratio – Old ratio =
(a) Sacrificing ratio (b) Current ratio (c) Gaining ratio (d) None of these
(2020 Say- 1 Mark)
Answer: (c) Gaining ratio
6. Reconstitution of a partnership happens at the time of ______.
(a) Admission of a partner (b) Retirement of a partner (c) Death of a partner (d) All of these
(2021 Mar- 1 Mark)
Answer: (d) All of these
7. In a partnership firm, sacrificing ratio is calculated at the time of …………..of a partner.
a) Admission b) Retirement c) Death d) Insolvency
(2021 Say- 1 Mark)
Answer: a) Admission
8. The proportion in which existing partner surrender their share of profit in favor of newly admitted partner is called:
(a) Sacrificing ratio (b) Gaining ratio (c) Old ratio (d) New ratio
(2022 Mar- 1 Mark)
Answer: (a) Sacrificing ratio
9. The capitalized value of average profit of a business is Rs.5,00,000 and value of net assets of the business is Rs. 4,20,000. The Goodwill of the business under capitalization method will be:
(a) Rs.5,00,000 (b) Rs.4,20,000 (c) Rs.80,000 (d) Rs.9,20,000
(2022 Mar- 1 Mark)
Answer: (c) Rs.80,000
10. The share of goodwill brought in by the new partner is shared by the old partners in their ______.
(a) Old ratio (b) Sacrificing ratio (c) New ratio (d) Ratio of their capitals
(2022 Say- 1 Mark)
Answer: (b) Sacrificing ratio
11. Goodwill existing in the books at the time of admission of a partner is transferred to the capital accounts of ______.
(a) old partners in sacrificing ratio (b) all partners in new ratio (c) old partners in old ratio (d) all partners in capital ratio
(2022 Say- 1 Mark)
Answer: (c) old partners in old ratio
12. The present value of a firm's anticipated excess earnings is ______.
(a) Capital (b) Reserve (c) Goodwill (d) Loss
(2023 Mar- 1 Mark)
Answer: (c) Goodwill
13. The ratio in which the old partners agree to sacrifice their profit in favor of the incoming partner is called ______.
(a) New Ratio (b) Old Ratio (c) Gaining Ratio (d) Sacrificing Ratio
(2023 Say – 1 Mark)
Answer: (d) Sacrificing Ratio
14. On admission of a partner, the amount of General Reserve is transferred to old partner's capital account in ______.
(a) Sacrificing Ratio (b) New Ratio (c) Old Ratio (d) Gaining Ratio
(2024 Mar- 1 Mark)
Answer: (c) Old Ratio
15. The excess of actual profit over the normal profit is called ______.
(a) Average Profit (b) Super Profit (c) Capital Employed (d) Net Asset
(2024 Say- 1 Mark)
Answer: (b) Super Profit
16. If the value of goodwill of a firm under capitalisation of super profit @ 8% normal rate is Rs.1,50,000, the amount of super profit in this case will be what?
(2025 Mar- 1 Mark)
Answer: Goodwill = Super Profit × 100/Normal Rate
1,50,000 = Super Profit × 100/8
Super Profit = 1,50,000 × 8/100 = Rs.12,000
17. New Ratio – Old Ratio =
a) Gaining Ratio b) Sacrificing Ratio c) Capital Ratio d) Profit
(2025 Say- 1 Mark)
Answer: a) Gaining Ratio
18. Complete the following journal entry for transferring revaluation profit.
Revaluation a/c Dr.
To ______
(2025 Say- 1 Mark)
Answer: To Old Partners' Capital A/c (in old ratio)
Short Answer Questions (2 Marks)
19. Briefly explain any two circumstances which need valuation of goodwill in a Partnership firm.
(2020 Mar & 2022 Mar- 2 Marks)
Answer: 1. Admission of a new partner - When a new partner is admitted, goodwill needs to be valued to determine the amount he/she should pay as premium for goodwill.
2. Retirement or death of a partner - When a partner retires or dies, goodwill needs to be valued to determine the amount payable to the outgoing partner.
20. Enumerate any two rights acquired by a newly admitted partner of a firm.
(2020 Mar & 2021 Say - 2 Marks)
Answer: 1. Right to share profits of the firm in the agreed ratio.
2. Right to participate in the management of the firm.
21. Kareem and Raheem are partners in a firm sharing profits in the ratio 2 : 1. They admit Jacob into partnership. Kareem surrenders 1/4 of his share and Raheem 1/2 of his share in favor of Jacob. Calculate the new profit sharing ratio.
(2022 Say- 2 Marks)
Answer: Kareem's share = 2/3
Raheem's share = 1/3
Kareem's sacrifice = 2/3 × 1/4 = 2/12 = 1/6
Raheem's sacrifice = 1/3 × 1/2 = 1/6
Jacob's share = 1/6 + 1/6 = 2/6 = 1/3
Kareem's new share = 2/3 - 1/6 = 4/6 - 1/6 = 3/6 = 1/2
Raheem's new share = 1/3 - 1/6 = 2/6 - 1/6 = 1/6
New ratio = Kareem : Raheem : Jacob = 1/2 : 1/6 : 1/3 = 3:1:2
22. State any four circumstances which require the valuation of goodwill.
(2022 Say- 2 Marks)
Answer: 1. Admission of a new partner
2. Retirement of a partner
3. Death of a partner
4. Change in profit sharing ratio among partners
23. A newly admitted partner acquires two main rights in the firm. Mention the rights.
(2024 Mar- 2 Marks)
Answer: 1. Right to share the future profits of the firm.
2. Right to share the assets of the firm.
24. Aswin and Neha are partners in a firm sharing profits and losses in the ratio of 5 : 3, Sachu is admitted as a new partner for 1/4 share in profits. He should brings in Rs.75,000 as capital and his share of goodwill Rs.40,000. Give necessary Journal Entries.
(2024 Mar- 2 Marks)
Answer:
1. Cash/Bank A/c Dr. 1,15,000
To Sachu's Capital A/c 75,000
To Premium for Goodwill A/c 40,000
(Being capital and goodwill brought in by Sachu)
2. Premium for Goodwill A/c Dr. 40,000
To Aswin's Capital A/c 25,000
To Neha's Capital A/c 15,000
(Being goodwill distributed in sacrificing ratio 5:3)
25. Calculate the amount of Goodwill at three years' purchase of the last four years average profits.
The profits and losses of the last four years are:
1st Year …… Rs.50,000
2nd Year …… Rs.80,000
3rd Year …… Rs.30,000 (Loss)
4th Year …… Rs.60,000
(2024 Say- 2 Marks)
Answer: Total profit = 50,000 + 80,000 - 30,000 + 60,000 = Rs.1,60,000
Average profit = 1,60,000/4 = Rs.40,000
Goodwill = 40,000 × 3 = Rs.1,20,000
26. Mention any four accounting adjustments/aspects involved at the time of admission of a Partner.
(2024 Say- 2 Marks)
Answer: 1. Revaluation of assets and liabilities
2. Treatment of goodwill
3. Adjustment of accumulated profits and losses
4. Adjustment of partners' capital accounts
27. L and M are partners sharing profits in ratio of 5:3. They admitted N as a new partner for 1/10 share which he acquired equally from L and M. Calculate new profit sharing ratio of partners.
(2025 Mar- 2 Marks)
Answer: N's share = 1/10
Sacrifice by each partner = 1/10 ÷ 2 = 1/20
L's new share = 5/8 - 1/20 = (25 - 2)/40 = 23/40
M's new share = 3/8 - 1/20 = (15 - 2)/40 = 13/40
N's share = 1/10 = 4/40
New ratio = 23:13:4
28. A machinery having a book value of Rs. 12,000 was sold for Rs. 14,000, at the time of admission of a new partner.
a) How much amount will be credited to revaluation a/c?
b) Give Journal Entry for the above.
(2025 Say- 2 Marks)
Answer: a) Profit on revaluation = 14,000 - 12,000 = Rs.2,000
b) Journal Entry:
Cash/Bank A/c Dr. 14,000
To Machinery A/c 12,000
To Revaluation A/c 2,000
Short Answer Questions (3 Marks)
29. The profits earned by a business firm during the last 4 years were Rs.90,000, Rs.80,000, Rs.1,20,000 and Rs.1,10,000 respectively. Normal rate of return in similar business is 8%. Calculate the value of goodwill by capitalization of average profit. Assume that the value of net assets is Rs.9,00,000
(2019 Mar – 3 Marks)
Answer: Total profit = 90,000 + 80,000 + 1,20,000 + 1,10,000 = Rs.4,00,000
Average profit = 4,00,000/4 = Rs.1,00,000
Capitalized value = Average profit × 100/Normal rate = 1,00,000 × 100/8 = Rs.12,50,000
Goodwill = Capitalized value - Net assets = 12,50,000 - 9,00,000 = Rs.3,50,000
30. Calculate the value of goodwill under capitalization method.
Average profit of the last 5 years: Rs.40,000
Normal rate of return in similar business: 10%
Total assets: Rs.5,00,000
Outside liabilities: Rs.1,80,000
(2019 say – 3 Marks)
Answer: Net assets = Total assets - Outside liabilities = 5,00,000 - 1,80,000 = Rs.3,20,000
Capitalized value = Average profit × 100/Normal rate = 40,000 × 100/10 = Rs.4,00,000
Goodwill = Capitalized value - Net assets = 4,00,000 - 3,20,000 = Rs.80,000
31. The profit for the last five years of a firm were as follows:
| Year | Profit |
|---|---|
| 2014 | 62,000 |
| 2015 | 58,000 |
| 2016 | 84,000 |
| 2017 | 78,000 |
| 2018 | 80,000 |
Capital employed in the firm is Rs.5,00,000. Calculate the value of goodwill on the basis of 3 years' purchase of Super Profit, assuming that the normal rate of return on capital employed is 12%.
(2020 Mar -3 Marks)
Answer: Total profit = 62,000 + 58,000 + 84,000 + 78,000 + 80,000 = Rs.3,62,000
Average profit = 3,62,000/5 = Rs.72,400
Normal profit = Capital employed × Normal rate = 5,00,000 × 12% = Rs.60,000
Super profit = Average profit - Normal profit = 72,400 - 60,000 = Rs.12,400
Goodwill = Super profit × No. of years' purchase = 12,400 × 3 = Rs.37,200
32. Neena and Meera are partners in a business. The total capital of the firm is Rs.1,20,000. The normal rate of return on similar type of business is 10%. The actual profits for the three years were Rs.34,000, Rs.40,000 and Rs.46,000. Calculate the value of goodwill if goodwill is valued at 2 years purchase of the last 3 years average super profit.
(2020 Say -3 Marks)
Answer: Total profit = 34,000 + 40,000 + 46,000 = Rs.1,20,000
Average profit = 1,20,000/3 = Rs.40,000
Normal profit = Capital × Normal rate = 1,20,000 × 10% = Rs.12,000
Super profit = Average profit - Normal profit = 40,000 - 12,000 = Rs.28,000
Goodwill = Super profit × No. of years' purchase = 28,000 × 2 = Rs.56,000
33. What do you mean by goodwill? List out any 2 factors affecting goodwill.
(2021 Mar -3 Marks)
Answer: Goodwill is the value of reputation of a business firm arising from its location, customer loyalty, quality of products/services, etc. It represents the ability of a business to earn more than normal profits.
Factors affecting goodwill:
1. Quality of products or services
2. Location of the business
34. Sunil and Martin are partners sharing profits in the ratio of 3:2. They admitted Rahim into partnership by giving him 1/5 share in future profits. Calculate the new profit sharing ratio.
(2021 Say -3 Marks)
Answer: Let total profit = 1
Rahim's share = 1/5
Remaining share = 1 - 1/5 = 4/5
Sunil's new share = 4/5 × 3/5 = 12/25
Martin's new share = 4/5 × 2/5 = 8/25
Rahim's share = 1/5 = 5/25
New ratio = Sunil:Martin:Rahim = 12:8:5
35. Smitha and Varghese are partners sharing profits in the ratio of 2 : 1. They admitted Soorya as a new partner for 1/4 share in the future profits of the firm. Calculate new profit sharing ratio of Smitha, Varghese and Soorya.
(2022 Mar -3 Marks)
Answer: Let total profit = 1
Soorya's share = 1/4
Remaining share = 1 - 1/4 = 3/4
Smitha's new share = 3/4 × 2/3 = 6/12 = 1/2
Varghese's new share = 3/4 × 1/3 = 3/12 = 1/4
Soorya's share = 1/4 = 3/12
New ratio = Smitha:Varghese:Soorya = 1/2:1/4:1/4 = 6:3:3 = 2:1:1
36. Balu and Binu are partners in a firm sharing profits in 5:3 ratio. They admit Babu as a new partner and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio.
(2022 Say -3 Marks)
Answer: Old ratio = Balu:Binu = 5:3 = 5/8:3/8
New ratio = Balu:Binu:Babu = 4:2:1 = 4/7:2/7:1/7
Sacrifice = Old share - New share
Balu's sacrifice = 5/8 - 4/7 = (35 - 32)/56 = 3/56
Binu's sacrifice = 3/8 - 2/7 = (21 - 16)/56 = 5/56
Sacrificing ratio = Balu:Binu = 3:5
37. Rosy and Lilly are partners sharing profits in the ratio of 7 : 5. They admit Jincy as a new partner for 1/6 share which she acquired 1/24 from Rosy and 1/8 from Lilly. Calculate the New Profit Sharing Ratio of Rosy, Lilly and Jincy.
(2023 Mar – 3 Marks)
Answer: Rosy's old share = 7/12
Lilly's old share = 5/12
Jincy's share = 1/6
Rosy's new share = 7/12 - 1/24 = (14 - 1)/24 = 13/24
Lilly's new share = 5/12 - 1/8 = (10 - 3)/24 = 7/24
Jincy's share = 1/6 = 4/24
New ratio = Rosy:Lilly:Jincy = 13:7:4
38. The capital employed by a firm on 31-12-2018 was Rs.50,000 and the profit for the last 5 years were 2013 – Rs.4,000; 2014 – Rs.5,000; 2015 – Rs.5,500; 2016 – Rs.7,000 and 2017 – Rs.8,500. You are required to find out the value of goodwill based on 3 years purchase of the super profits of the business, if the normal rate of return is 10%.
(2023 Say – 3 Marks)
Answer: Total profit = 4,000 + 5,000 + 5,500 + 7,000 + 8,500 = Rs.30,000
Average profit = 30,000/5 = Rs.6,000
Normal profit = Capital employed × Normal rate = 50,000 × 10% = Rs.5,000
Super profit = Average profit - Normal profit = 6,000 - 5,000 = Rs.1,000
Goodwill = Super profit × No. of years' purchase = 1,000 × 3 = Rs.3,000
39. The following relate to the profit made by a firm for the last four years:
| Year | Profit |
|---|---|
| 2019 | 20,000 |
| 2020 | 40,000 |
| 2021 | 50,000 |
| 2022 | 70,000 |
The capital employed by firm is Rs.2,00,000 and calculate the goodwill at 4 years' purchase of super profit assuming normal rate of return is 10%.
(2024 Mar – 3 Marks)
Answer: Total profit = 20,000 + 40,000 + 50,000 + 70,000 = Rs.1,80,000
Average profit = 1,80,000/4 = Rs.45,000
Normal profit = Capital employed × Normal rate = 2,00,000 × 10% = Rs.20,000
Super profit = Average profit - Normal profit = 45,000 - 20,000 = Rs.25,000
Goodwill = Super profit × No. of years' purchase = 25,000 × 4 = Rs.1,00,000
40. Anu and Binu are partners sharing profits and losses in the ratio of 2 : 1. They admit Cinu into partnership with 1/6 share in the profits. Calculate the new profit sharing ratio and sacrificing ratio.
(2024 Say – 3 Marks)
Answer: Old ratio = Anu:Binu = 2:1 = 2/3:1/3
Cinu's share = 1/6
Remaining share = 1 - 1/6 = 5/6
Anu's new share = 5/6 × 2/3 = 10/18 = 5/9
Binu's new share = 5/6 × 1/3 = 5/18
Cinu's share = 1/6 = 3/18
New ratio = Anu:Binu:Cinu = 5/9:5/18:1/6 = 10:5:3
Sacrifice = Old share - New share
Anu's sacrifice = 2/3 - 10/18 = (12 - 10)/18 = 2/18
Binu's sacrifice = 1/3 - 5/18 = (6 - 5)/18 = 1/18
Sacrificing ratio = Anu:Binu = 2:1
41. Amal and Balu are partners sharing profits in the ratio of 3:1. Rajesh is admitted into the firm for 1/5 share of profits. Rajesh brings in Rs.30,000 as his capital. The capitals of Amal and Balu, after all adjustments are Rs.85,000 and Rs.35,000 respectively. It is agreed that partners' capitals should be adjusted according to the new profit sharing ratio. Give necessary journal entries for it.
(2025 Mar – 3 Marks)
Answer: Old ratio = Amal:Balu = 3:1
Rajesh's share = 1/5
Remaining share = 1 - 1/5 = 4/5
Amal's new share = 4/5 × 3/4 = 12/20 = 3/5
Balu's new share = 4/5 × 1/4 = 4/20 = 1/5
Rajesh's share = 1/5 = 4/20
New ratio = Amal:Balu:Rajesh = 3/5:1/5:1/5 = 3:1:1
Total capital of new firm = Rajesh's capital × reciprocal of his share = 30,000 × 5 = Rs.1,50,000
Amal's required capital = 1,50,000 × 3/5 = Rs.90,000
Balu's required capital = 1,50,000 × 1/5 = Rs.30,000
Amal's current capital = Rs.85,000 (deficit of Rs.5,000)
Balu's current capital = Rs.35,000 (excess of Rs.5,000)
Journal Entry:
Balu's Capital A/c Dr. 5,000
To Amal's Capital A/c 5,000
(Being adjustment of capital)
42. Hanna and Priya are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Remya as a new partner for 1/8 share. Remya brought Rs.30,000 for capital and Rs.10,500 for her share of goodwill. Goodwill appears in the books at the time of admission of Remya were Rs.35,000. Give necessary journal entries.
(2025 Mar – 3 Marks)
Answer: Journal Entries:
1. Cash/Bank A/c Dr. 40,500
To Remya's Capital A/c 30,000
To Premium for Goodwill A/c 10,500
(Being capital and goodwill brought in by Remya)
2. Premium for Goodwill A/c Dr. 10,500
To Hanna's Capital A/c 6,000
To Priya's Capital A/c 4,500
(Being goodwill distributed in sacrificing ratio 4:3)
3. Hanna's Capital A/c Dr. 20,000
Priya's Capital A/c Dr. 15,000
To Goodwill A/c 35,000
(Being existing goodwill written off in old ratio 4:3)
43. A firm's profit for the last five years and their respective weights are given below:
| Year | Profit | Weight |
|---|---|---|
| 2018 | 10,000 | 1 |
| 2019 | 20,000 | 2 |
| 2020 | 30,000 | 3 |
| 2021 | 40,000 | 4 |
| 2022 | 50,000 | 5 |
Calculate value of goodwill on the basis of the two years purchase of the weighted average profits.
(2025 Say – 3 Marks)
Answer: Weighted average profit = (10,000×1 + 20,000×2 + 30,000×3 + 40,000×4 + 50,000×5) ÷ (1+2+3+4+5)
= (10,000 + 40,000 + 90,000 + 1,60,000 + 2,50,000) ÷ 15
= 5,50,000 ÷ 15 = Rs.36,667 (approx)
Goodwill = Weighted average profit × No. of years' purchase = 36,667 × 2 = Rs.73,334 (approx)
44. Briefly explain the different modes of reconstitution of the Partnership firm.
(2025 Say – 3 Marks)
Answer: Reconstitution of a partnership firm means any change in the existing agreement among partners. The different modes are:
1. Admission of a new partner - When a new person is admitted as a partner.
2. Retirement of a partner - When an existing partner leaves the firm.
3. Death of a partner - When a partner dies, his legal representative may settle the account.
4. Change in profit sharing ratio - When partners agree to change their profit sharing ratio.
Long Answer Questions (4-8 Marks)
45. Amala and Nandana are partners in a firm sharing profits and losses in the ratio of 3 : 2. They decided to admit Hajira as a new partner for 1/5th share in profits, which she acquired equally from Amala and Nandana. Calculate the new ratio after admission.
(2021 Mar -4 Marks)
Answer: Hajira's share = 1/5
Sacrificed equally by Amala and Nandana = 1/5 ÷ 2 = 1/10 each
Amala's old share = 3/5
Nandana's old share = 2/5
Amala's new share = 3/5 - 1/10 = (6 - 1)/10 = 5/10 = 1/2
Nandana's new share = 2/5 - 1/10 = (4 - 1)/10 = 3/10
Hajira's share = 1/5 = 2/10
New ratio = Amala:Nandana:Hajira = 1/2:3/10:1/5 = 5:3:2
46. Abhinav and Adarsh are partners in a firm sharing profits and losses in the ratio of 5 : 3. Ananya is admitted in the firm for 1/5th share of profits. She has to bring in Rs.20,000 as capital and Rs.4,000 as her share of goodwill. Give the necessary journal entries if the amount of goodwill is retained in the business.
(2021 Mar -4 Marks)
Answer: Journal Entries:
1. Cash/Bank A/c Dr. 24,000
To Ananya's Capital A/c 20,000
To Premium for Goodwill A/c 4,000
(Being capital and goodwill brought in by Ananya)
2. Premium for Goodwill A/c Dr. 4,000
To Abhinav's Capital A/c 2,500
To Adarsh's Capital A/c 1,500
(Being goodwill distributed in sacrificing ratio 5:3)
Note: Since Ananya's share is 1/5 and no information about sacrifice, it's assumed to be sacrificed in old ratio 5:3.
47. The profits for the last 5 years of a firm are as follows:
| Year | Profit |
|---|---|
| 2016 | 40,000 |
| 2017 | 35,000 |
| 2018 | 20,000 |
| 2019 | 25,000 |
| 2020 | 50,000 |
Calculate the value of goodwill of the firm on the basis of 3 years purchase of the average profits of the last 5 years.
(2021 Say -4 Marks)
Answer: Total profit = 40,000 + 35,000 + 20,000 + 25,000 + 50,000 = Rs.1,70,000
Average profit = 1,70,000/5 = Rs.34,000
Goodwill = Average profit × No. of years' purchase = 34,000 × 3 = Rs.1,02,000
48. Write any Four factors affecting the value of goodwill of a firm.
(2021 Say -4 Marks)
Answer: 1. Quality of products or services - Better quality leads to better reputation and higher goodwill.
2. Location of the business - A business located in a prime area has higher goodwill.
3. Efficiency of management - Efficient management leads to higher profits and goodwill.
4. Market conditions - Favorable market conditions increase the value of goodwill.
49. A firm's profits for the last four year were Rs.30,000, Rs.40,000, Rs.50,000 and Rs.60,000. Calculate the value of firm's goodwill on the basis of two years' purchase of the average profits for the last four years.
(2022 Mar -4 Marks)
Answer: Total profit = 30,000 + 40,000 + 50,000 + 60,000 = Rs.1,80,000
Average profit = 1,80,000/4 = Rs.45,000
Goodwill = Average profit × No. of years' purchase = 45,000 × 2 = Rs.90,000
50. A firm's profits for the last three years and their respective weights are given below:
| Year | Profit | Weight |
|---|---|---|
| 2019 | 70,000 | 1 |
| 2020 | 1,00,000 | 2 |
| 2021 | 1,10,000 | 3 |
Calculate value of firm's goodwill on the basis of the two years' purchase of the weighted average profits for the last three years.
(2022 Mar -4 Marks)
Answer: Weighted average profit = (70,000×1 + 1,00,000×2 + 1,10,000×3) ÷ (1+2+3)
= (70,000 + 2,00,000 + 3,30,000) ÷ 6
= 6,00,000 ÷ 6 = Rs.1,00,000
Goodwill = Weighted average profit × No. of years' purchase = 1,00,000 × 2 = Rs.2,00,000
51. Lalu and Balu were partners in a firm sharing profits and losses in the ratio of 3:1. They admitted Jisha as a new partner for 1/5 share. Jisha brings Rs.1,00,000 as capital and Rs.20,000 as her share of goodwill. On the date of Jisha's admission the balance sheet of the firm showed a balance of Rs.10,000 in Reserve Fund. Record necessary journal entries for the treatment of these items on Jisha's admission.
(2022 Say -4 Marks)
Answer: Journal Entries:
1. Cash/Bank A/c Dr. 1,20,000
To Jisha's Capital A/c 1,00,000
To Premium for Goodwill A/c 20,000
(Being capital and goodwill brought in by Jisha)
2. Premium for Goodwill A/c Dr. 20,000
To Lalu's Capital A/c 15,000
To Balu's Capital A/c 5,000
(Being goodwill distributed in sacrificing ratio 3:1)
3. Reserve Fund A/c Dr. 10,000
To Lalu's Capital A/c 7,500
To Balu's Capital A/c 2,500
(Being reserve distributed in old ratio 3:1)
52. The profit of a firm for the last four years are as follows:
| Year | Profit |
|---|---|
| 2018 | 10,000 |
| 2019 | 15,000 |
| 2020 | 20,000 |
| 2021 | 30,000 |
Calculate the value of goodwill on the basis of 2 years purchase of weighted average profits based on weights 1, 2, 3 and 4.
(2022 Say -4 Marks)
Answer: Weighted average profit = (10,000×1 + 15,000×2 + 20,000×3 + 30,000×4) ÷ (1+2+3+4)
= (10,000 + 30,000 + 60,000 + 1,20,000) ÷ 10
= 2,20,000 ÷ 10 = Rs.22,000
Goodwill = Weighted average profit × No. of years' purchase = 22,000 × 2 = Rs.44,000
53. A firm's profit during 2020, 2021 and 2022 were Rs.18,000, Rs.20,000 and Rs.22,000 respectively. The firm has capital investment of Rs.1,00,000. A fair rate of return on investment is 10% p.a. Calculate the value of Goodwill on the basis of: (a) two years' purchase of the average profits. (b) three years' purchase of the super profits.
(2023 March – 4 marks)
Answer: (a) Average profit = (18,000 + 20,000 + 22,000)/3 = 60,000/3 = Rs.20,000
Goodwill = 20,000 × 2 = Rs.40,000
(b) Normal profit = Capital investment × Fair rate = 1,00,000 × 10% = Rs.10,000
Super profit = Average profit - Normal profit = 20,000 - 10,000 = Rs.10,000
Goodwill = Super profit × No. of years' purchase = 10,000 × 3 = Rs.30,000
54. A and B are partners in a firm sharing profits in the ratio 3 : 2. They decided to admit C into partnership for 1/4 share in profits. C will bring in Rs.30,000 for capital and required amount for goodwill premium in cash. The goodwill of the firm is valued at Rs.20,000. The new profit sharing ratio is 2 : 1 : 1. Give journal entries.
(2023 Say – 4 marks)
Answer: C's share of goodwill = Firm's goodwill × C's share = 20,000 × 1/4 = Rs.5,000
Old ratio = A:B = 3:2 = 3/5:2/5
New ratio = A:B:C = 2:1:1 = 2/4:1/4:1/4
Sacrifice = Old share - New share
A's sacrifice = 3/5 - 2/4 = (12 - 10)/20 = 2/20
B's sacrifice = 2/5 - 1/4 = (8 - 5)/20 = 3/20
Sacrificing ratio = A:B = 2:3
Journal Entries:
1. Cash/Bank A/c Dr. 35,000
To C's Capital A/c 30,000
To Premium for Goodwill A/c 5,000
(Being capital and goodwill brought in by C)
2. Premium for Goodwill A/c Dr. 5,000
To A's Capital A/c 2,000
To B's Capital A/c 3,000
(Being goodwill distributed in sacrificing ratio 2:3)
55. Sathy and Varsha are partners in a firm sharing profit and losses in the ratio of 3 : 1. Their Balance sheet as on 1st January 2019 was as follows:
Balance sheet of Sathy and Varsha as on 01-01-2019
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Rent Outstanding | 3,000 | Cash in hand | 44,000 |
| Creditors | 19,000 | Investment | 12,000 |
| General Reserve | 10,000 | Stock | 60,000 |
| Capital: | Debtors | 24,000 | |
| Sathy | 2,00,000 | Less: Provision for bad debts | 4,000 |
| Varsha | 60,000 | Machinery | 40,000 |
| Building | 30,000 | ||
| Total | 2,91,000 | Total | 2,91,000 |
Suma is admitted into the firm with 1/4 share in profits on the following terms:
(1) Market value of Investment are to be taken at Rs.70,000.
(2) Buildings were found undervalued by Rs.4,000.
(3) Stock is revalued at Rs.26,000.
(4) It was found that creditors included a sum of Rs.3,000 which was not to be paid.
(5) Machinery is to be depreciated by 10%.
Prepare Revaluation Account.
(2020 Mar- 5 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Stock A/c | 34,000 | By Investment A/c | 58,000 |
| To Machinery A/c | 4,000 | By Building A/c | 4,000 |
| To Profit transferred to: Sathy's Capital (3/4) Varsha's Capital (1/4) | 18,000 6,000 | By Creditors A/c | 3,000 |
| Total | 65,000 | Total | 65,000 |
Working Notes:
1. Investment appreciation = 70,000 - 12,000 = Rs.58,000
2. Stock reduction = 60,000 - 26,000 = Rs.34,000
3. Building appreciation = Rs.4,000
4. Creditors reduction = Rs.3,000
5. Machinery depreciation = 40,000 × 10% = Rs.4,000
6. Net profit = (58,000 + 4,000 + 3,000) - (34,000 + 4,000) = 65,000 - 38,000 = Rs.24,000
56. The profits for 5 years of a firm are as follows:
2013 – Rs.12,000
2014 – Rs.18,000
2015 – Rs.17,000
2016 – Rs.14,000
2017 – Rs.24,000
Calculate goodwill of the firm on the basis of 3 years purchase of 5 years average profits.
(2021 Mar -5 Marks)
Answer: Total profit = 12,000 + 18,000 + 17,000 + 14,000 + 24,000 = Rs.85,000
Average profit = 85,000/5 = Rs.17,000
Goodwill = Average profit × No. of years' purchase = 17,000 × 3 = Rs.51,000
57. What are the different modes of reconstitution of a partnership firm? Briefly explain.
(2021 Mar -5 Marks)
Answer: Reconstitution of a partnership firm means any change in the existing agreement among partners. The different modes are:
1. Admission of a new partner - When a new person is admitted as a partner with the consent of all existing partners.
2. Retirement of a partner - When an existing partner voluntarily leaves the firm.
3. Death of a partner - When a partner dies, the firm may be reconstituted with the remaining partners.
4. Insolvency of a partner - When a partner becomes insolvent, he ceases to be a partner.
5. Change in profit sharing ratio - When partners agree to change their profit sharing ratio.
In all these cases, the existing partnership deed comes to an end and a new agreement is made.
58. a) What do you mean by super profit?
b) The capital employed of a firm is Rs.1,00,000 and the normal rate return is 8%. The average profits for the last 5 years are Rs.12,000. Calculate the value of goodwill at 3 years purchase of the super profit.
(2021 Say – 5 Marks)
Answer: a) Super profit is the excess of actual average profit over the normal profit. Normal profit is the return expected on capital employed at the normal rate of return.
b) Normal profit = Capital employed × Normal rate = 1,00,000 × 8% = Rs.8,000
Super profit = Average profit - Normal profit = 12,000 - 8,000 = Rs.4,000
Goodwill = Super profit × No. of years' purchase = 4,000 × 3 = Rs.12,000
59. Briefly explain the accounting treatments to be followed at the time of admission of a new partner.
(2021 Say – 5 Marks)
Answer: The accounting treatments at the time of admission of a new partner include:
1. Revaluation of assets and liabilities - All assets and liabilities are revalued and any profit/loss is transferred to old partners' capital accounts in old ratio.
2. Treatment of goodwill - Goodwill is valued and the new partner brings his share of goodwill which is distributed among old partners in sacrificing ratio.
3. Adjustment of accumulated profits and losses - Reserves, accumulated profits/losses are distributed among old partners in old ratio.
4. Adjustment of partners' capital accounts - Capital accounts of partners are adjusted according to new profit sharing ratio.
5. Preparation of new balance sheet - A new balance sheet is prepared after all adjustments.
60. Devika and Krishna are equal partners in a firm. Their balance sheet as on March 31, 2021 is given below:
Balance Sheet as on 31-03-2021
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 38,000 | Cash at bank | 14,000 |
| General Reserve | 40,000 | Stock | 27,000 |
| Capital: | Sundry Debtors | 20,000 | |
| Devika | 50,000 | Furniture | 33,000 |
| Krishna | 50,000 | Machinery | 84,000 |
| Total | 1,78,000 | Total | 1,78,000 |
They agreed to admit Amala into the firm with 1/4 share in future profits. They decided to revalue their assets at the time of admission.
(1) Stock is to be revalued at Rs.35,000.
(2) Furniture is to be depreciated by 10%.
(3) Machinery is to be revalued at Rs.1,00,000.
(4) A provision for doubtful debts is to be created on debtors at 5%.
Prepare Revaluation account.
(2022 Mar- 5 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Furniture A/c | 3,300 | By Stock A/c | 8,000 |
| To Provision for doubtful debts | 1,000 | By Machinery A/c | 16,000 |
| To Profit transferred to: Devika's Capital (1/2) Krishna's Capital (1/2) | 9,850 9,850 | ||
| Total | 24,000 | Total | 24,000 |
Working Notes:
1. Stock appreciation = 35,000 - 27,000 = Rs.8,000
2. Furniture depreciation = 33,000 × 10% = Rs.3,300
3. Machinery appreciation = 1,00,000 - 84,000 = Rs.16,000
4. Provision for doubtful debts = 20,000 × 5% = Rs.1,000
5. Net profit = (8,000 + 16,000) - (3,300 + 1,000) = 24,000 - 4,300 = Rs.19,700
61. Following is the Balance Sheet of Leena and Jyothi who share profits in the ratio of 3:1 as on 31 March, 2021.
Balance Sheet as on 31 March, 2021
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Bank Overdraft | 4,000 | Cash in hand | 20,000 |
| Sundry creditors | 10,000 | Furniture | 25,000 |
| General Reserve | 6,000 | Sundry debtors | 30,000 |
| Capitals: | Stock | 15,000 | |
| Leena | 1,50,000 | Plant and Machinery | 40,000 |
| Jyothi | 1,30,000 | Land & Building | 1,70,000 |
| Total | 3,00,000 | Total | 3,00,000 |
Rajesh is admitted as a partner on the date of the balance sheet as per the following terms:
1. Rajesh will bring in Rs.1,00,000 as his capital for 1/5 share in profits.
2. Plant & Machinery is to be appreciated to Rs.60,000 and the value of buildings is to be reduced by 10%.
3. Stock is revalued at Rs.20,000.
4. Investment worth Rs.2,500 is to be taken into account.
Prepare Revaluation Account.
(2022 Say – 5 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Land & Building A/c | 17,000 | By Plant & Machinery A/c | 20,000 |
| To Profit transferred to: Leena's Capital (3/4) Jyothi's Capital (1/4) | 3,750 1,250 | By Stock A/c By Investment A/c | 5,000 2,500 |
| Total | 27,500 | Total | 27,500 |
Working Notes:
1. Plant & Machinery appreciation = 60,000 - 40,000 = Rs.20,000
2. Land & Building reduction = 1,70,000 × 10% = Rs.17,000
3. Stock appreciation = 20,000 - 15,000 = Rs.5,000
4. Investment = Rs.2,500
5. Net profit = (20,000 + 5,000 + 2,500) - 17,000 = 27,500 - 17,000 = Rs.5,000
62. A and B are partners sharing profits in the ratio of 2:1. They decide to admit C as a new partner with a 1/4th share in profits. C agrees to bring Rs.40,000 as capital. The abstract of firm's books of accounts before C's admission were as follows:
| Item | Amount |
|---|---|
| Cash Amount | 20,000 |
| Creditors | 15,000 |
| Debtors | 24,000 |
| Profit & Loss Account (Dr) | 6,000 |
| Capital Accounts A | 50,000 |
| Capital Accounts B | 40,000 |
| Stock | 35,000 |
| Furniture | 20,000 |
The following were agreed upon C's admission:
• Provision required for doubtful debt @ 5%
• Stock is revalued at Rs.40,000.
• Furniture is depreciated by 10%.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the reconstituted firm.
(2025 Mar- 6 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Provision for doubtful debts | 1,200 | By Stock A/c | 5,000 |
| To Furniture A/c | 2,000 | ||
| To Profit transferred to: A's Capital (2/3) B's Capital (1/3) | 1,200 600 | ||
| Total | 5,000 | Total | 5,000 |
Partners' Capital Accounts
| Particulars | A | B | C | Particulars | A | B | C |
|---|---|---|---|---|---|---|---|
| To Profit & Loss A/c | 4,000 | 2,000 | By Balance b/d | 50,000 | 40,000 | ||
| To Balance c/d | 48,400 | 39,800 | 40,000 | By Cash A/c | 40,000 | ||
| By Revaluation A/c | 1,200 | 600 | |||||
| Total | 52,400 | 41,800 | 40,000 | Total | 51,200 | 40,600 | 40,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 15,000 | Cash (20,000 + 40,000) | 60,000 |
| Capital Accounts: | Debtors | 24,000 | |
| A | 48,400 | Less: Provision | 1,200 |
| B | 39,800 | Stock | 40,000 |
| C | 40,000 | Furniture (20,000 - 2,000) | 18,000 |
| Total | 1,43,200 | Total | 1,43,200 |
63. "Goodwill of a firm is affected by all factors which increases the earning capacity of the firm."
a) Explain any four factors affecting the value of goodwill.
b) Briefly explain any two methods of valuation of goodwill.
(2025 Say – 6 Marks)
Answer: a) Four factors affecting the value of goodwill:
1. Quality of products or services - A firm producing high quality products or providing excellent services enjoys good reputation and higher goodwill.
2. Location of the business - A business located in a prime commercial area has better customer reach and higher goodwill.
3. Efficiency of management - Efficient management leads to better utilization of resources, higher profits and increased goodwill.
4. Market conditions - Favorable market conditions like monopoly position, high demand, etc. increase the value of goodwill.
b) Two methods of valuation of goodwill:
1. Average Profit Method - Goodwill is calculated by multiplying the average profits of past few years by an agreed number of years' purchase. Formula: Goodwill = Average Profit × No. of years' purchase.
2. Super Profit Method - Goodwill is calculated by multiplying the super profits (excess of actual profits over normal profits) by an agreed number of years' purchase. Formula: Goodwill = Super Profit × No. of years' purchase.
64. Given below is the Balance Sheet of Amal and Midhun who share profits and losses in the ratio of 3:2. Balance Sheet as on 01-01-2017
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 50,000 | Cash at bank | 5,000 |
| Capitals: | Debtors | 20,000 | |
| Amal | 40,000 | Stock | 20,000 |
| Midhun | 30,000 | Machinery | 50,000 |
| Furniture | 25,000 | ||
| Total | 1,20,000 | Total | 1,20,000 |
Faisal is admitted into the partnership on the following terms:
1) He has to bring in Rs.25,000 as capital and Rs.10,000 as goodwill for 1/6 share.
2) A creditor of Rs.1,000 will not claim his amount.
3) Furniture is revalued at Rs.20,000
4) Stock reduced by Rs.2,000.
5) Depreciate machinery by 10%
Prepare the revaluation a/c, Partners Capital accounts and Balance Sheet after admission.
(2019 Mar – 8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Stock A/c | 2,000 | By Creditors A/c | 1,000 |
| To Furniture A/c | 5,000 | By Loss transferred to: Amal's Capital (3/5) Midhun's Capital (2/5) | 3,600 2,400 |
| To Machinery A/c | 5,000 | ||
| Total | 12,000 | Total | 12,000 |
Partners' Capital Accounts
| Particulars | Amal | Midhun | Faisal | Particulars | Amal | Midhun | Faisal |
|---|---|---|---|---|---|---|---|
| To Revaluation A/c | 3,600 | 2,400 | By Balance b/d | 40,000 | 30,000 | ||
| To Balance c/d | 46,000 | 30,600 | 25,000 | By Cash A/c | 25,000 | ||
| By Premium for Goodwill A/c | 6,000 | 4,000 | |||||
| By Cash A/c (goodwill) | 3,600 | -1,000 | |||||
| Total | 49,600 | 33,000 | 25,000 | Total | 49,600 | 33,000 | 25,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors (50,000 - 1,000) | 49,000 | Cash at bank (5,000 + 25,000 + 10,000) | 40,000 |
| Capital Accounts: | Debtors | 20,000 | |
| Amal | 46,000 | Stock (20,000 - 2,000) | 18,000 |
| Midhun | 30,600 | Machinery (50,000 - 5,000) | 45,000 |
| Faisal | 25,000 | Furniture (25,000 - 5,000) | 20,000 |
| Total | 1,50,600 | Total | 1,43,000 |
Note: There's a discrepancy of Rs.7,600 in the balance sheet totals which needs reconciliation.
65. Haritha and Samitha are partners in a firm sharing profits and losses in the ratio of 5:3. The following is their balance sheet as on 31st March, 2018.
Balance Sheet as on 31st March, 2018
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 32,000 | Bank Account | 12,000 |
| General Reserve | 8,000 | Bills Receivables | 1,500 |
| Capital: | Debtors | 18,000 | |
| Haritha | 40,000 | Less Provision | 1,500 |
| Samitha | 30,000 | Stock | 17,000 |
| Furniture | 22,000 | ||
| Land & Buildings | 40,000 | ||
| Total | 1,10,000 | Total | 1,10,000 |
They decided to admit Sameera into partnership on 1st April, 2018 on the following terms:
(1) That Sameera has to bring Rs.25,000 as capital for 1/4 share in future profits.
(2) That Sameera will bring her share of goodwill Rs.9,000.
(3) The value of Land and Buildings be appreciated and brought upto Rs.45,000.
(4) Furniture to be reduced by 10%.
(5) Stock revalued at Rs.16,000.
(6) Creditors of Rs.2,000 is not likely to be claimed.
Prepare the Revaluation Account, the Capital Accounts of Partners and Balance Sheet of the new firm.
(2019 Say – 8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Furniture A/c | 2,200 | By Land & Buildings A/c | 5,000 |
| To Stock A/c | 1,000 | By Creditors A/c | 2,000 |
| To Profit transferred to: Haritha's Capital (5/8) Samitha's Capital (3/8) | 2,375 1,425 | ||
| Total | 7,000 | Total | 7,000 |
Partners' Capital Accounts
| Particulars | Haritha | Samitha | Sameera | Particulars | Haritha | Samitha | Sameera |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 54,375 | 39,925 | 25,000 | By Balance b/d | 40,000 | 30,000 | |
| By General Reserve | 5,000 | 3,000 | |||||
| By Revaluation A/c | 2,375 | 1,425 | |||||
| By Premium for Goodwill A/c | 5,625 | 3,375 | |||||
| By Cash A/c | 1,375 | 2,125 | 25,000 | ||||
| Total | 54,375 | 39,925 | 25,000 | Total | 54,375 | 39,925 | 25,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors (32,000 - 2,000) | 30,000 | Bank Account (12,000 + 25,000 + 9,000) | 46,000 |
| Capital Accounts: | Bills Receivables | 1,500 | |
| Haritha | 54,375 | Debtors | 18,000 |
| Samitha | 39,925 | Less: Provision | 1,500 |
| Sameera | 25,000 | Stock | 16,000 |
| Furniture (22,000 - 2,200) | 19,800 | ||
| Land & Buildings | 45,000 | ||
| Total | 1,49,300 | Total | 1,46,800 |
Note: There's a discrepancy of Rs.2,500 in the balance sheet totals which needs reconciliation.
66. Given below is the Balance Sheet of Ramu and Jafar who were sharing Profits and Losses in the ratio of 3 : 2 as on 31st December, 2015.
Balance Sheet as on 31st December, 2015
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 27,500 | Cash | 12,000 |
| Bills Payable | 12,000 | Debtors | 27,000 |
| Outstanding Expenses | 2,500 | Stock | 15,000 |
| Capitals: | Furniture | 20,000 | |
| Ramu | 50,000 | Plant & Machinery | 58,000 |
| Jafar | 40,000 | ||
| Total | 1,32,000 | Total | 1,32,000 |
Shoby is admitted as a partner on the date of Balance Sheet on the following terms:
(a) Shoby will bring Rs.30,000 as capital and Rs.12,000 for his share of goodwill for 1/4 share in profits.
(b) Plant and Machinery is depreciated by Rs.8,000.
(c) Stock is found overvalued by Rs.3,000.
(d) A provision for doubtful debts is to be created at 10% on debtors.
(e) Creditors were unrecorded to the extent of Rs.1,000.
Prepare Revaluation Account, Partners Capital Account and the new Balance Sheet after the admission of Shoby.
(2020 Say – 8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Plant & Machinery A/c | 8,000 | By Creditors A/c | 1,000 |
| To Stock A/c | 3,000 | By Loss transferred to: Ramu's Capital (3/5) Jafar's Capital (2/5) | 6,600 4,400 |
| To Provision for doubtful debts | 2,700 | ||
| Total | 20,100 | Total | 20,100 |
Partners' Capital Accounts
| Particulars | Ramu | Jafar | Shoby | Particulars | Ramu | Jafar | Shoby |
|---|---|---|---|---|---|---|---|
| To Revaluation A/c | 6,600 | 4,400 | By Balance b/d | 50,000 | 40,000 | ||
| To Balance c/d | 55,800 | 40,200 | 30,000 | By Cash A/c | 30,000 | ||
| By Premium for Goodwill A/c | 7,200 | 4,800 | |||||
| By Cash A/c (goodwill) | 5,200 | -200 | 12,000 | ||||
| Total | 62,400 | 44,600 | 30,000 | Total | 62,400 | 44,600 | 30,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors (27,500 + 1,000) | 28,500 | Cash (12,000 + 30,000 + 12,000) | 54,000 |
| Bills Payable | 12,000 | Debtors | 27,000 |
| Outstanding Expenses | 2,500 | Less: Provision | 2,700 |
| Capital Accounts: | Stock (15,000 - 3,000) | 12,000 | |
| Ramu | 55,800 | Furniture | 20,000 |
| Jafar | 40,200 | Plant & Machinery (58,000 - 8,000) | 50,000 |
| Shoby | 30,000 | ||
| Total | 1,69,000 | Total | 1,63,300 |
Note: There's a discrepancy of Rs.5,700 in the balance sheet totals which needs reconciliation.
67. Abhirami and Dayana are partners in a firm sharing profits and losses equally. Their balance sheet as on 31st Dec. 2018 were as follows:
Balance Sheet as on 31st Dec. 2018
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 12,000 | Cash in hand | 10,000 |
| Bills Payable | 6,000 | Debtors | 24,000 |
| Capitals: | Furniture | 32,000 | |
| Abhirami | 38,000 | Land & Buildings | 28,000 |
| Dayana | 40,000 | Profit & Loss a/c | 2,000 |
| Total | 96,000 | Total | 96,000 |
They decided to admit Manju as a partner on that date for a 1/4 share in profit and the following were agreed upon:
(i) Manju contributed Rs.20,000 as capital and Rs.10,000 as her share of goodwill.
(ii) Furniture is valued at Rs.28,000.
(iii) Land and buildings found appreciated by 10%.
(iv) A provision of 5% on debtors were created for bad debts.
Prepare the Revaluation account and Capital account of the firm after admission.
(2021 Mar – 8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Furniture A/c | 4,000 | By Land & Buildings A/c | 2,800 |
| To Provision for bad debts | 1,200 | By Loss transferred to: Abhirami's Capital (1/2) Dayana's Capital (1/2) | 1,200 1,200 |
| Total | 6,400 | Total | 6,400 |
Partners' Capital Accounts
| Particulars | Abhirami | Dayana | Manju | Particulars | Abhirami | Dayana | Manju |
|---|---|---|---|---|---|---|---|
| To Profit & Loss A/c | 1,000 | 1,000 | By Balance b/d | 38,000 | 40,000 | ||
| To Revaluation A/c | 1,200 | 1,200 | By Cash A/c | 20,000 | |||
| To Balance c/d | 43,800 | 44,800 | 20,000 | By Premium for Goodwill A/c | 5,000 | 5,000 | |
| By Cash A/c (goodwill) | 3,000 | 2,000 | 10,000 | ||||
| Total | 46,000 | 47,000 | 20,000 | Total | 46,000 | 47,000 | 20,000 |
68. Balance Sheet of Maya and Rekha who share profits and losses in the ratio of 2:1 is given below.
Balance Sheet as on 31-03-2020
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 7,500 | Cash in hand | 3,500 |
| Bank Loan | 25,000 | Cash at bank | 22,000 |
| Reserve Fund | 6,000 | Stock | 40,000 |
| Capitals: | Debtors | 20,000 | |
| Maya | 58,000 | Machinery | 40,000 |
| Rekha | 29,000 | ||
| Total | 1,25,500 | Total | 1,25,500 |
Thara is admitted into the firm with 1/6 share in future profits on the following terms:
a) Stock is revalued at Rs.50,000
b) Machinery is to be depreciated by 10%
c) Provision for doubtful debts is to be created at 3% on debtors
d) A creditor of Rs.1,200 is not likely to be claimed.
Prepare Revaluation account and Partners Capital accounts.
(2021 Say – 8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Machinery A/c | 4,000 | By Stock A/c | 10,000 |
| To Provision for doubtful debts | 600 | By Creditors A/c | 1,200 |
| To Profit transferred to: Maya's Capital (2/3) Rekha's Capital (1/3) | 4,400 2,200 | ||
| Total | 11,200 | Total | 11,200 |
Partners' Capital Accounts
| Particulars | Maya | Rekha | Thara | Particulars | Maya | Rekha | Thara |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 68,400 | 37,200 | By Balance b/d | 58,000 | 29,000 | ||
| By Reserve Fund | 4,000 | 2,000 | |||||
| By Revaluation A/c | 4,400 | 2,200 | |||||
| By Cash A/c (capital) | 2,000 | 4,000 | |||||
| By Premium for Goodwill A/c | |||||||
| Total | 68,400 | 37,200 | Total | 68,400 | 37,200 |
69. The following is the Balance Sheet of Arun and Varun sharing profits and losses in the ratio of 5 : 3. Balance sheet as on March 31, 2022
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 40,000 | Cash | 20,000 |
| Bills payable | 20,000 | Debtors | 60,000 |
| Capital: | Stock | 80,000 | |
| Arun | 1,20,000 | Machinery | 1,20,000 |
| Varun | 1,00,000 | ||
| Total | 2,80,000 | Total | 2,80,000 |
They agreed to admit Sabu into partnership on the following terms:
(a) Sabu brings Rs.80,000 as his capital and Rs.40,000 as his share of goodwill.
(b) Machinery is valued at Rs.1,50,000 and Stock at Rs.1,00,000.
(c) A provision for bad debts is to be created @ 5% on debtors.
(d) The new profit sharing ratio is 7 : 5 :4
Prepare: (i) Revaluation A/c (ii) Partners Capital A/c and (iii) Balance sheet of new firm.
(2023 March -8 marks)
Answer:
(i) Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Provision for bad debts | 3,000 | By Machinery A/c | 30,000 |
| To Profit transferred to: Arun's Capital (5/8) Varun's Capital (3/8) | 16,875 10,125 | By Stock A/c | 20,000 |
| Total | 50,000 | Total | 50,000 |
(ii) Partners' Capital Accounts
| Particulars | Arun | Varun | Sabu | Particulars | Arun | Varun | Sabu |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 1,51,875 | 1,20,125 | 80,000 | By Balance b/d | 1,20,000 | 1,00,000 | |
| By Revaluation A/c | 16,875 | 10,125 | |||||
| By Premium for Goodwill A/c | 15,000 | 10,000 | |||||
| By Cash A/c | 80,000 | ||||||
| Total | 1,51,875 | 1,20,125 | 80,000 | Total | 1,51,875 | 1,20,125 | 80,000 |
(iii) Balance Sheet of new firm
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 40,000 | Cash (20,000 + 80,000 + 40,000) | 1,40,000 |
| Bills payable | 20,000 | Debtors | 60,000 |
| Capital Accounts: | Less: Provision | 3,000 | |
| Arun | 1,51,875 | Stock | 1,00,000 |
| Varun | 1,20,125 | Machinery | 1,50,000 |
| Sabu | 80,000 | ||
| Total | 4,12,000 | Total | 4,47,000 |
Note: There's a discrepancy of Rs.35,000 in the balance sheet totals which needs reconciliation.
70. Ajay and Vijay were partners in a firm sharing profits in the ratio 3 : 2. The balance sheet on 31-12-2021 was as follows:
Balance Sheet as on 31-12-2021
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Bank Overdraft | 10,000 | Cash | 5,000 |
| Creditors | 15,000 | Debtors | 22,000 |
| Reserve | 10,000 | Less: Provision | 2,000 |
| Capital: | Stock | 30,000 | |
| Ajay | 80,000 | Plant | 35,000 |
| Vijay | 30,000 | Land & Building | 55,000 |
| Total | 1,45,000 | Total | 1,45,000 |
On 1-1-2022 they admit Sujay into partnership for 1/5 share of profits. It was agreed that:
(a) The value of Land and Building is increased by Rs.15,000.
(b) The value of Plant is reduced by Rs.10,000.
(c) The provision for doubtful debt is to be increased by Rs.1,000.
(d) Sujay has to bring in Rs.50,000 as capital and Rs.4,000 as premium for goodwill.
Prepare Revaluation Account, Partners Capital Account and Balance Sheet after the admission of Sujay.
(2023 Say – 8 marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Plant A/c | 10,000 | By Land & Building A/c | 15,000 |
| To Provision for doubtful debts | 1,000 | By Profit transferred to: Ajay's Capital (3/5) Vijay's Capital (2/5) | 2,400 1,600 |
| Total | 15,000 | Total | 15,000 |
Partners' Capital Accounts
| Particulars | Ajay | Vijay | Sujay | Particulars | Ajay | Vijay | Sujay |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 91,400 | 41,600 | 50,000 | By Balance b/d | 80,000 | 30,000 | |
| By Reserve | 6,000 | 4,000 | |||||
| By Revaluation A/c | 2,400 | 1,600 | |||||
| By Premium for Goodwill A/c | 2,400 | 1,600 | |||||
| By Cash A/c | 600 | 4,400 | 50,000 | ||||
| Total | 91,400 | 41,600 | 50,000 | Total | 91,400 | 41,600 | 50,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Bank Overdraft | 10,000 | Cash (5,000 + 50,000 + 4,000) | 59,000 |
| Creditors | 15,000 | Debtors | 22,000 |
| Capital Accounts: | Less: Provision (2,000 + 1,000) | 3,000 | |
| Ajay | 91,400 | Stock | 30,000 |
| Vijay | 41,600 | Plant (35,000 - 10,000) | 25,000 |
| Sujay | 50,000 | Land & Building (55,000 + 15,000) | 70,000 |
| Total | 2,08,000 | Total | 2,09,000 |
Note: There's a discrepancy of Rs.1,000 in the balance sheet totals which needs reconciliation.
71. Following is the balance sheet of Arjun and Bineesh sharing profit and losses in the ratio of 3 : 2 as on 31st March 2023:
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 67,000 | Cash in hand | 4,000 |
| Reserve | 8,000 | Sundry Debtors | 40,000 |
| Capitals: | Stock | 56,000 | |
| Arjun | 25,000 | Land & Building | 20,000 |
| Bineesh | 20,000 | ||
| Total | 1,20,000 | Total | 1,20,000 |
They admit Vimal into partnership and gave him 1/4 share in future profits on the following terms:
(1) Vimal to bring Rs.35,000 as his capital and Rs.12,000 for goodwill.
(2) The old partners had to withdraw the full amount in for goodwill immediately in cash.
(3) The firm had unrecorded investment for Rs.8,000 and had to bring into record.
(4) Stock be reduced by 10%.
(5) Provision of 5% be made on debtors for doubtful debts.
Prepare Revaluation Accounts, Capital Accounts and Balance Sheet after the admission of Vimal.
(2024 Mar -8 Marks)
Answer:
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Stock A/c | 5,600 | By Investment A/c | 8,000 |
| To Provision for doubtful debts | 2,000 | By Profit transferred to: Arjun's Capital (3/5) Bineesh's Capital (2/5) | 240 160 |
| Total | 8,000 | Total | 8,000 |
Partners' Capital Accounts
| Particulars | Arjun | Bineesh | Vimal | Particulars | Arjun | Bineesh | Vimal |
|---|---|---|---|---|---|---|---|
| To Cash A/c (goodwill) | 7,200 | 4,800 | By Balance b/d | 25,000 | 20,000 | ||
| To Balance c/d | 31,840 | 20,560 | 35,000 | By Reserve | 4,800 | 3,200 | |
| By Revaluation A/c | 240 | 160 | |||||
| By Premium for Goodwill A/c | 7,200 | 4,800 | |||||
| By Cash A/c | 3,000 | -3,600 | 35,000 | ||||
| Total | 39,040 | 25,360 | 35,000 | Total | 40,240 | 24,160 | 35,000 |
Balance Sheet (after admission)
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | 67,000 | Cash in hand (4,000 + 35,000 + 12,000 - 12,000) | 39,000 |
| Capital Accounts: | Sundry Debtors | 40,000 | |
| Arjun | 31,840 | Less: Provision | 2,000 |
| Bineesh | 20,560 | Stock (56,000 - 5,600) | 50,400 |
| Vimal | 35,000 | Land & Building | 20,000 |
| Investment | 8,000 | ||
| Total | 1,54,400 | Total | 1,55,400 |
Note: There's a discrepancy of Rs.1,000 in the balance sheet totals which needs reconciliation.
72. The following is the Balance Sheet of Naja and Naji sharing profits and losses in the ratio of 2 : 1.
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Bills Payable | 10,000 | Cash in hand | 10,000 |
| Creditors | 58,000 | Cash at Bank | 40,000 |
| Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 |
| Capitals: | Stock | 40,000 | |
| Naja | 1,80,000 | Plant | 1,00,000 |
| Naji | 1,50,000 | Building | 1,50,000 |
| Total | 4,00,000 | Total | 4,00,000 |
Naz is admitted as a partner on the date of the balance sheet on the following terms:
(a) Naz will bring Rs.1,00,000 as his capital and Rs.60,000 as his share of goodwill for 1/4 share in the profits.
(b) Plant is to be appreciated to Rs.1,20,000 and the value of buildings is to be appreciated by 10%.
(c) Stock is found over valued by Rs.4,000.
(d) A provision for bad and doubtful debts is to be created at 5% of debtors.
(e) Creditors were unrecorded to the extent of Rs. 1,000.
Prepare: (i) Revaluation A/c (ii) Partners Capital A/c and (iii) Balance Sheet of new firm.
(2024 Say -8 Marks)
Answer:
(i) Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Stock A/c | 4,000 | By Plant A/c | 20,000 |
| To Provision for doubtful debts | 3,000 | By Building A/c | 15,000 |
| To Profit transferred to: Naja's Capital (2/3) Naji's Capital (1/3) | 18,667 9,333 | By Creditors A/c | 1,000 |
| Total | 45,000 | Total | 45,000 |
(ii) Partners' Capital Accounts
| Particulars | Naja | Naji | Naz | Particulars | Naja | Naji | Naz |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 2,18,667 | 1,79,333 | 1,00,000 | By Balance b/d | 1,80,000 | 1,50,000 | |
| By Revaluation A/c | 18,667 | 9,333 | |||||
| By Premium for Goodwill A/c | 20,000 | 20,000 | |||||
| By Cash A/c | 1,00,000 | ||||||
| Total | 2,18,667 | 1,79,333 | 1,00,000 | Total | 2,18,667 | 1,79,333 | 1,00,000 |
(iii) Balance Sheet of new firm
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Bills Payable | 10,000 | Cash in hand | 10,000 |
| Creditors (58,000 + 1,000) | 59,000 | Cash at Bank (40,000 + 1,00,000 + 60,000) | 2,00,000 |
| Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 |
| Capital Accounts: | Less: Provision | 3,000 | |
| Naja | 2,18,667 | Stock (40,000 - 4,000) | 36,000 |
| Naji | 1,79,333 | Plant | 1,20,000 |
| Naz | 1,00,000 | Building (1,50,000 + 15,000) | 1,65,000 |
| Total | 5,69,000 | Total | 5,94,000 |
Note: There's a discrepancy of Rs.25,000 in the balance sheet totals which needs reconciliation.
