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Chapter 3 Reconstitution Admission of a Partner Solutions

Question - 11 : -
Explain various methods for the treatment of goodwill on the admission of a new partner?

Answer - 11 : -

The methods for the treatment of goodwill on the admission of a new partner are given below.

1. Premium Method
2. Revaluation Method

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


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