It should be noted that before following any of the below mentioned methods of goodwill, if goodwill already appears in the old books (old Balance Sheet) of the firm, then first of all, this goodwill should be written off among all the old partners in their old profit sharing ratio. The following Journal entry is passed to distribute the goodwill.

1. Premium Method- This method is used when a new partner pays his/her share of goodwill in cash. The following are the different situations under this method.

i) When the new partner privately pays his/her share of goodwill to the old partners.

In this case, there is no need to pass any Journal entry in the books of accounts as the goodwill is privately paid.

ii) When the new partner brings his/her share of goodwill in cash and the goodwill is retained in the business.

Accounting Entries

a) For premium or goodwill brought in cash by the new partner

Question - 12 : -
How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?

Answer - 12 : -

When a new partner is admitted in a partnership firm, then all past accumulated profits or losses and reserves are distributed among all the old partners in their old profit sharing ratio. This is because these profits and losses are attributable to the hard work and labours of the old partners and consequently, the old partners are liable to bear past losses or profits, if any. The new partner is not entitled for a share in these profits as he/she did not contribute anything for the past performance of the business.

Accounting Treatment of Accumulated Profits and Losses

i) For distributing accumulated profits and reserves

Question - 13 : -
At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been done? Show with the help of an imaginary balance sheet.

Answer - 13 : -

After revaluation has been done, the assets and liabilities appear at their current market values in the Balance Sheet of the reconstituted firm. This can be better explained with the help of the below explained example.

A and B shares profit and loss equally.

Balance Sheet of A and B as on April 01, 2011
Liabilities	Amount Rs	Assets	Amount Rs
Sundry Creditors	1,00,000	Cash in Hand	8,000
Capital Accounts		Cash at Bank	28,000
A 75,000		Debtors	40,000
B 75,000	1,50,000	Stock	36,000
		Furniture	38,000
		Plant and Machinery	1,00,000
	2,50,000		2,50,000

1) On that date C is admitted for 1/3rd share and brings 1,00,000 as capital.

2) The value of stock is increased by Rs 7,000.

3) A provision of Rs 2,000 has been created against Debtors.

4) Furniture revalued at Rs 35,000.

5) A machinery costing Rs 50,000 purchased is not recorded in books.

6) Rent outstanding Rs 2,000.

Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet.

Sol:

Revaluation Account
Dr.					Cr.
Particular			Amount Rs	Particular	Amount Rs
Rent Outstanding A/c			2,000	Stock	7,000
Provision for Debtors			2,000	Machinery	50,000
Furniture			35,000
Profit transferred:
	A’s Capital A/c	25,000
	B’s Capital A/c	25,000	50,000
			57,000		57,000

A’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount Rs	Date	Particular	J.F.	Amount Rs
	Balance c/d		1,00,000		Balance b/d		75,000
					Revaluation A/c		25,000
			1,00,000				1,00,000

B’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount Rs	Date	Particular	J.F.	Amount Rs
	Balance c/d		1,00,000		Balance b/d		75,000
					Revaluation A/c		25,000
			1,00,000				1,00,000

C’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount Rs	Date	Particular	J.F.	Amount Rs
	Balance c/d		1,00,000		Cash A/c		1,00,000

			1,00,000				1,00,000

Cash Account
Dr.							Cr.
Date	Particular	J.F.	Amount Rs	Date	Particular	J.F.	Amount Rs
	Balance b/d		8,000		Balance c/d		1,08,000
	C’s Capital A/c		1,00,000

			1,08,000				1,08,000

Balance Sheet of A, B & C as at April
Liabilities		Amount Rs	Assets		Amount Rs
Sundry Creditors		1,00,000	Cash in hand		1,08,000
Rent Outstanding		2,000	Cash at Bank		28,000
			Debtors	40,000
			Less: Provision	2,000	38,000
Capital Account
A	1,00,000		Stock		43,000
B	1,00,000		Furniture		35,000
C	1,00,000	3,00,000	Plant and Machinery		1,50,000

		4,02,000			4,02,000

Question - 14 : -
A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?

Answer - 14 : -

Question - 15 : - A, B, C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?

Answer - 15 : -

D admits for

share in the new firm

Let new firm profit = 1

Remaining share of A, B and C in new firm = 1 − D’s share

New Ratio = Old Ratio × Remaining Share of A, B and C in new firm

Question - 16 : - X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally for X and Y. Calculate new profit sharing ratio?

Answer - 16 : -

Question - 17 : - A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio?

Answer - 17 : -

Question - 18 : - P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio?

Answer - 18 : -

Question - 19 : - A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio respectively. Calculate new profit sharing ratio?

Answer - 19 : -

New Ratio = Old Ratio − Sacrificing Ratio

Question - 20 : - A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio?

Answer - 20 : -

New Ratio = Old Ratio − Sacrificing Ratio

Free - Previous Years Question Papers

Any questions? Ask us!

NodeJS Interview Questions Answers

ASP.Net Interview Questions Answers

Interview Questions Answers

Chapter 3 Reconstitution Admission of a Partner Solutions

Subscribe Now!