Class 12 Commerce Accountancy - Reconstitution Of A Partnership Firm - Admission Of A Partner

Give any two features of Goodwill.

Features of goodwill:

(a) Goodwill is an intangible asset, which means that it cannot be seen or felt. But it is not a fictitious asset.

(b) Goodwill cannot be separated from the business and therefore cannot be realised separately without disposing off the business as a whole.

Give three items that may appear on the debit side of the Partner's Current Account

Three items that appear on the debit side of partner's capital A/c:-

(i) Interest on drawings, (ii) drawings, (iii) share of loss

What is meant by Capitalisation of Average Profit?

Capitalisation of Average profit is a method of valuation of goodwill. Under this method, goodwill is calculated by deducting the net assets of the business unit from the total value of the firm.

Total value of the firm= [Average Profit/ Normal rate of return]* 100

Hence, Goodwill= Total Value of the firm- Net assets of the business.

Enumerate two steps involved in valuing Goodwill according to Super Profit Method.

Steps involved in valuing Goodwill by Super Profit Method:

Step 1: Calculate Capital Employed, (Total shareholder's equity + Long term debt).

Step 2: Calculate normal return by multiplying capital employed with normal rate of return.

Step 3: Calculate average maintainable profit (profit after adjusting exceptional items)

Step 4: Super profit= Average maintainable profit- Normal Return

Step 5: Goodwill= Super Profit * Number of years' of purchase.

Give the formula for calculation Goodwill by 'Capitalisation of Super Profit Method'.

Calculation of Goodwill by Capitalisation of Super Profit Method:

Formula:

Goodwill= [Super Profit*100/Normal rate of return]

Goodwill is to be valued at three year's of average profit. Profit for past four years ending on $$31^{st}$$March of the firm were:
$$2015-Rs 12,000; 2016 -Rs 18,000; 2017 - Rs 16,000; 2018 - Rs 14,000$$
Calculate amount of Goodwill.

Step 1:

Calculation of Average Profit:

Average Profit= [12000+18000+16000+14000]/ 4

= 15000

Step 2:

Calculation of Goodwill:

= Average profit * No. of purchase year's

= 15000* 3

= 45000

What is meant by Average Profit?

The profit earned by a business during previous accounting periods on an average basis is termed as the Average Profit. It takes into account the average profits for the past few years and fixes the value of goodwill as to many year's purchase of this amount. Average profit maybe simple or weighted in nature.

Give the formula for calculation Goodwill by 'Capitalisation of Average Profit'.

Calculation of goodwill by Capitalisation of Average Profit method:

Step 1: Calculate average maintainable profit, which is average profit after the adjustment of abnormal and extraordinary items.

Step 2: Calculate capitalised value of the business:

Capitalised value of business= [Average maintainable profit/ Normal rate of return]

Step 3: Calculate net assets:

Net assets= All identifiable assets at their current value- Outsider's Liabilities

Step 4: Calculate Goodwill :

Goodwill= Capitalised value of business- Net assets

How is new partner admitted to the firm?

A new partner is admitted to the firm by the mutual consent of all the existing partners. A new agreement is formed between the old and the new partners and the firm is reconstituted. The new partner has the right to share in the assets and profits of the firm.

Does the change in profit-sharing ratio result into dissolution of partnership firm? Give reason in support of your answer.

No, a change in the profit sharing ratio does not result in the dissolution of a partnership firm. Dissolution of partnership firm means that the business is wound up and the firm is dissolved.

However, a change in the profit sharing ratio only results in the dissolution of the partnership and not dissolution of the partnership firm. Dissolution of partnership refers to a change in the agreement between the partners, it does not affect the continuation of the business. A change in the profit sharing ratio requires a reconstitution of the firm and a new agreement is drafted among the partners which signifies that the old partnership has been dissolved.

Gupta and Bose had a firm in which they had invested Rs. $$50,000$$. On a average, the profits were Rs. $$16,000$$. The normal rate in the industry is $$15%$$. Goodwill is to be valued at four years purchase of profits in excess of profits @$$15%$$ on the money invested. Find the value of the goodwill.

Step 1: Calculation of Normal Profit:

Normal Profit=[Capital employed* Normal rate of Return]

= 50000* [15/100]

= 7500

Step 2: Calculation of average profit

Average profit= 16000

Step 3: Calculation of super profit

Super profit= Average profit- Normal profit

= 16000- 7500

= 8500

Step 4: Calculation of Goodwill

Goodwill= 8500* 4

= 34000

$$A$$ and $$B$$ are partners sharing profits profits in the ratio of $$3:2$$. They decided to admit $$C$$ as a partner from $$1^{st}$$ April, 2018 on the following terms:
(i) $$C$$ will be given $$2/5^{th}$$ share of the profit.
(ii) Goodwill of the firm will be valued at two years purchase of three years normal average profit of the firm.
Profit of the previous three years ended $$31^{st}$$ March, were:
2018---Profit Rs.$$30,000$$(after debiting loss of stock by fire Rs. $$40,000$$)
2017---Loss Rs. $$80,000$$ (includes voluntary retirement compensation paid Rs. $$1,10,000$$).
2016---Profit Rs.$$1,10,000$$ (including a gain (profit) of Rs. $$30,000$$ on the sale of fixed assets).
you are required to value the goodwill.

Step 1: Calculation of Average Profit:

2016: 110000-30000= 80000

2017: (80000)+110000= 30000

2018: 30000+40000=70000

Average Profit= [80000+30000+70000]/ 3

= 60000

Step 2: Calculation of Goodwill:

Goodwill= 60000* 2

= 120000

State two main rights that a newly admitted partner acquires in the firm.

Two main rights of a newly admitted partner are:

1. Right to share the assets of the partnership firm.

2. Right to share the profits of the partnership firm.

$$X, Y$$ and $$Z$$ are partners sharing profits and losses in the ratio of $$5:3:2$$. They admit $$A$$ into partnership and give him $$1/5^{th}$$ share profits. Find the new profit ratio.

X's old ratio= 5/10

Y's old ratio= 3/10

Z's old ratio= 2/10

A is admitted for 1/5th share in the profits.

Hence, remaining share= 1-[1/5]

= 4/5

New Profit sharing ratio:

X's new share= 5/10 * 4/5

= 2/5

Y's new share= 3/10 * 4/5

= 6/25

Z's new share= 2/10 * 4/5

= 4/25

A's new share= 1/5

New profit ratio= 10:6:4:5

Durga and Naresh were partners in a firm. They wanted to admit five more members in the firm. List any two categories of individuals other than minors who cannot be admitted by them.

The individuals other minors who cannot be admitted by a patnership firm are:
(a) Persons of unsound mind
(b) Persons disqualified by any law

Kavi, Ravi, Kumar and Guru were partners in a firm sharing profits in the ratio of $$3 : 2: 2: 1$$. On. 1/2/2017, Guru retired and the new profit sharing ratio decided between Kavi, Ravi and Kumar was $$3: 1: 1$$. On Guru's retirement the goodwill of the firm was valued at $$Rs.3,60,000$$. Showing your working notes clearly, pass necessary journal entry in the books of the firm for the treatment of goodwill on Guru's retirement.

Journal

Date	Particular	L.F.	Debit Amount (Rs.)	Credit Amount (Rs.)
	Kavi's Capital A/c Dr. To Ravi's Capital A/c To Kumar's Capital A/c To Guru's Capital A/c (Goodwill adjusted through capitals)		$$81,000$$	$$18,000$$ $$18,000$$ $$45,000$$

Working Notes:

Gaining Ratio = New Ratio - Old Ratio

Kavi $$= \dfrac{3}{5} - \dfrac{3}{8} = \dfrac{9}{40}$$

Ravi $$= \dfrac{1}{5} - \dfrac{2}{8} = -\dfrac{2}{40}$$ (sacrifice)

Kumar $$= \dfrac{1}{5} - \dfrac{2}{8} = -\dfrac{2}{40} $$ (sacrifice)

Kavi's share of goodwill $$= 3,60,000 \times \dfrac{9}{40} = Rs. 81,000$$

Ravi's share of goodwill $$=3,60,000 \times \dfrac{2}{40} = Rs. 18,000$$

Kumar's share of goodwill $$= 3,60,000 \times \dfrac{2}{40} = Rs. 18,000$$

Guru's share of goodwill $$= 3,60,000 \times \dfrac{1}{8} = Rs. 45,000$$

Madhu and Neha were partners in a firm sharing profits and losses in the ratio of $$3 : 5$$. Their fixed capitals were $$Rs. 4,00,000$$ and $$Rs. 6,00,000$$ respectively. On 1/1/2016, Tina was admitted as a new partner for $$\dfrac{1}{4}^{th}$$ share in the profits. Tina acquired her share of profit from Neha. Tina brought $$Rs. 4,00,000$$ as her capital which was to be kept fixed like the capitals of Madhu and Neha. Calculate the goodwill of the firm on Tina's admission and the new profit sharing ratio of Madhu, Neha and Tina. Also, pass necessary journal entry for the treatment of goodwill on Tina's admisson considering that Tina did not bring her share of goodwill premium in cash

Working Notes:

Calculation of Tina's Share of Goodwill (Hidden)

Total capital of the firm $$= Rs. 16,00,000 \left(4,00,000 \times \dfrac{4}{1}\right)$$

Net worth $$= Rs. 14,00,000 (4,00,000 + 6,00,000 + 4,00,000)$$

Hidden goodwill $$= Rs. 2,00,000 (16,00,000 - 14,00,000)$$

Tina's Share of Goodwill $$= 2,00,000 \times \dfrac{1}{4} = Rs. 50,000$$

Calculation of New Profit Sharing Ratio:

Madhu's share $$= \dfrac{3}{8} $$ (same as old)

Neha $$= \dfrac{5}{8} - \dfrac{1}{4} = \dfrac{3}{8}$$

Tina $$= \dfrac{1}{4}$$

New Ratio $$= \dfrac{3}{8} : \dfrac{3}{8} \dfrac{1}{4} = 3 : 3: 2$$

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Neetu, Meentu and Teetu were partners in a firm. On 1st January, 2018, Meetu retired. On Meetu's retirement the goodwill of the firm was valued at Rs. $$4,20,000$$.
Pass necessary journal entry for the treatment of goodwill on Meetu's retirement.

Goodwill A/c Dr. 4.20,000

To Neetu's capital A/c 1,40,000

To Meentu's capital A/c 1.40.000

To Teetu's capital A/c 1,40,000

X, a resident in India and Y a resident In Pakistan are partners., The firm is carrying on the business of importing and exporting Commodity I and Commodity II. State whether the firm is. dissolved in each of the following, alternative cases:
Case (a): If a war breaks out between India and Pakistan.
Case (b): If a law is passed by which imports and exports of Commodity I are prohibited;
Case (C): If a law is passed by which import and export of Commodities I and II are prohibited.

Solution: Section to which the given problem relates: Section 41
Decision and Reason:
Case (a) The firm is compulsorily dissolved. On the outbreak of war, it becomes unlawful for the firms business to be carried on.
Case (b): The firm is not compulsorily dissolved because the illegality of the business shall not necessitate the dissolution of the firm in respect of- lawful business (i.e., Commodity II).
Case (c): The firm is compulsorily dissolved because on passing of law, prohibiting the import, and export of Commodities I and II, it becomes unlawful for the firm's business to be carried on.

X paid Y and Z a premium of Rs. 20,000 on entering into partnership for 10 year and the firm is dissolved at the end of 8 years. State Whether X is entitled to repayment of proportionate premium in each of the following alternative cases:
Case (a) If the dissolution is due to the death of Y
Case (b): If the dissolution is due to X s own misconduct
Case (C): If the dissolution is in pursuance of an agreement which contains no provision for return of the premium
Case (d): If the dissolution is due to Y's misconduct.
Case (e): If the dissolution is due to the insolvency of Y.

Solution. Section to which the given problem relates, Section 51
Decision and Reason:
Cases (a), (b) and (c): X is not entitled to claim any return of premium because the right to return of premium is not available under these three cases.
Cases (d) and (e): X is entitled to claim Rs. 4,000 (i.e., Rs. 20,000 x 2/10).

(When one of the Remaining Partners also sacrifices in addition to the Retiring Partner). X,Y and Z were partners sharing profits in the ratio of 3:2:Z retired and the new profit-sharing ratio between X and Y was 1:On Z's retirement, goodwill of the firm was valued at RS.30,Pass necessary Journal entries for the treatment of goodwill on Z's retirement without opening the Goodwill Account.

Goodwill $$= Rs.30,000$$

Partners	(3 : 2 :1) old ratio	(1 : 2) New ratio	Net effect
X Y Z	15,000 10,000 5,000	10,000 20,000 -	5,000 (Cr) 10,000 (Dr) 5,000 (Cr)
	30,000	30,000

$$\therefore$$ Journal entry

Y's capital a/c Dr $$10,000$$

To X's capital a/c $$5000$$

To Z's capital a/c $$5000$$

$$A, B$$ and $$C$$ are partners in a firm. They do not have a Partnership Deed. At the end of the first year of the commencement of the firm, they have faced the following problems:
$$C$$ wants that the loan given by him to the firm should bear interest $$@ 10\% p.a$$. but $$A$$ and $$B$$ do not agree.
State how you will settle these disputes if the partners approach you for the purpose.

In the given situation, C's claim is wrong.

When there is no partnership deed, a partner is still entitled to interest on any amount advanced by him in excess of his capital contribution. The rate of interest on loan should be 6%p.a not more than that and it should still be paid in case of loss in any year.

C should be paid interest on loan but not @10%p.a. He should be paid interest @6%p.a.

Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?

Partnership is a relationship between two or more person to share the profits of the business carried on by them. Partnership is based on mutual relationship and understanding among the partners.So, a partner has right not to allow admission of a new partner if he is not agreeing to the admission.

$$X$$ and $$Y$$ are partners. $$Y$$ wants to admit his son $$K$$ into business. Can $$K$$ become the partner of the firm? Give reason.

K can become the partner of the firm if both the partners consent to his admission. K can be admitted as a partner.

Suraj and Dilip are partners in firm dealing in stationary items. The firm is well managed and enjoys the advantage of being cost effective. It buys stationery items at resonable cost from Dilip's relative who is a manufacturer of stationary items. The firm's sale outlet is situated near a school. As a result, the firm has a steady demand of stationary items and is earning good profits. the firm is donating $$10\%$$ of its profit to the nearby school for the education of the students of below poverty line. State any two factors affecting the value of goodwill of the firm.

Two factors affecting the value of Goodwill of the firm:

Capital Required: When the profits of the business is higher compared to the investment of the company, the value of goodwill is higher than the business earning less amount of profits compared to its capital.
Management Efficiency: Management efficiency leads to earning of higher profits, which increases the value of goodwill of the firm. This efficiency is reached through planned production, proper distribution of goods, and services provided by the firm. When the management is able, competent and efficient, goodwill of the firm increases.

Name any two factors which affect the Goodwill of a partnership firm.

Two factors that affect the Goodwill of the firm are:

1. Time Factor: Time dimension is a factor that influences the goodwill of a firm. A comparatively older firm will enjoy a better reputation and name than a firm which has been newly constituted. An older firm has more loyal customers and maybe located with certain advantages. Hence, an older firm will have higher goodwill than a younger firm.

2. Trend of Profit: Earning capacity of a business is the most important factor while ascertaining a firm's goodwill. When there is an upward trend in the profits, the super profits ( difference between the average and normal profit) of the firm increases, which leads to an increase in the goodwill of the firm.

What are 'Super Profits'?

Super Profit is the excess of actual profit over the normal profit of an enterprise. A business unit may possess some extra advantages which enable it make extra profits over and above the amount that would be earned in the normal functioning of the business. These extra profits, i.e super profits, can be valued and goodwill is the value of the few year's purchase of super profit.

Super Profit= Average Profit- Normal Profit

Hence, Goodwill= Super profit * Number of year's of purchase

What is meant by Super Profit?

Super profits refers to the profits in excess of normal profits, that a business expects to earn. It is a way of calculating goodwill. Goodwill valuation based on super profits. Super profit is calculated by deducting following two from average profits.

1. Reasonable Managerial Remuneration.

2. An amount by way of reasonable return or yield on the invested amount that an investor would expect to get.

Example- Average adjusted profit = 20,000

Less:Managerial Remuneration = (5,000)

Reasonable Return:10% of 80,000 = (8,000)

Super profit = 7,000

The profit for the years ending on $$31^{st}$$March are as follows:
Year $$2014-Rs. 4,00,000; 2015 - Rs. 3,98,000; 2016 - Rs. 4,50,000; 2017 - Rs. 4,45,000$$ and $$2017 - Rs. 5,00,000$$
Calculate goodwill of the firm on the basis of $$4$$ years purchase of $$5$$ years average profit.

Step 1:

Calculation of Average Profit:

Average Profit = Rs.[400000+398000+450000+445000+500000]/ 5

= Rs.438600

Step 2:

Calculation of Goodwill:

Goodwill= Rs.4,38,600 x 4

= Rs.17,54,400.

Kamal and Kapil are partners having fixed capitals of $$Rs. 5,00,000$$ each as on 31st March,Kamal introduced further captial of $$Rs. 1,00,000$$ on 1st October, 2017 whereas Kapil withdrew $$Rs.1,00,000$$; on 1st October, 2017 out of capital.
Interest on capital is to be allowed @ 10% p.a.
The firm earned net profit of $$Rs.6,00,000$$ for the year ended 31st March,
Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation Account.

Journal Entry:-

Profit and Loss Appropriation A/c Dr. 1,00,000

To Kamal's Capital A/c 55000

To Kapil's Capital A/c 45000

(Being interest on capital transfer to profit and loss appropriation A/c)

Profit and Loss Appropriation Account

Particulars	Amount	Particulars	Amount
To Interest on Capital Kamal = 55,000 Kapil = 45,000	1,00,000	By Net Profit	6,00,000
To Partners Capital A/c Kamal = 2,50,000 Kapil = 2,50,000	5,00,000
	6,00,000		6,00,000

Calculation of Interest on Capital

Kamal:- Interest on 5,00,000 = 50,000

(5,00,000*10%)

Add: Interest on additional capital

(1,00,000*10%*1/2) = 5,000

Total Interest on Capital = 55,000

Kapil: Interest on 4,00,000 = 40,000

(4,00,000*10%)

Add:Interest on 1,00,000 from 1.4.2017

to 1/10/2017 = 5,000

Total interest on capital = 45,000

Calculate the goodwill of firm on the basis of years purchase of the weighted average profit of the last four year. The appropriate weight to be used and profits are:
Year 2014-15 2015-16 2016-17 2017-18
Profit(Rs) $$1,01,000$$ $$1,24,000$$ $$1,00,000$$ $$1,40,000$$
Weight $$1$$ $$2$$ $$3$$ $$4$$
On a scrunity of the accounts, the following matters are revealed:
(i) On $$1^{st}$$December,2016 a major repair was made in respect of the plant incurring Rs. $$30,000$$ which was charged to revenue. The said sum is agreed to be capitalised for calculation subject to adjustment of depreciation of $$10\%$$ p.a. on reducing balance method.
(ii) The closing stock for the year 2015-16 was overvalued by Rs. $$12,000$$
(iii) To cover management cost, an annual charge of Rs. $$24,000$$ should be made for the purpose of goodwill valuation.
(iv) On $$1^{st}$$April, 2015, a machine having a book value of Rs. $$10,000$$ was sold for Rs. $$11,000$$ but the proceeds were wrongly credited to Profit & Loss. Account. No affect has been given to rectify the same. Depreciation is charged on machine @$$10\%$$ p.a. on reducing balance method.

Here, we need to find out the goodwill on the basis of weighted average profit. But before finding out the weighted average profit, we need to make some adjustments to the profits of the previous and current year.

Year 2014-15 2015-16 2016-17 2017-18

Profits 1,01,000 1,24,000 1,00,000 1,40,000

Add:Major repairs 30,000

Less: Depreciation @ 10% ( 1,000) (2900) (2,610)

Less:Cl. stock (12,000)

Add:Op.stock 12,000

Less:Management Exp (24,000) (24,000) (24,000) (24,000)

Less: capital profit (1000)

Total 77,000 1,16,000 85,100 113390

Weights 1 2 3 4

Total 77,000 2,32,000 2,55,300 4,53,560

Weighted average profit = (77,000+2,32,000+2,55,300+4,53,560)/10

= 1,01,786

Also, Goodwill = 101786

Notes:- Major repairs to be capitalized in the year 2015-16. Depreciation for 4 months to be charged in the year 2015-16 and then full depreciation for the year 2016-17 and 2017-18.

Closing stock overvalued by 12,000,thus profit of 2015-16 to be reduced. Opening stock for the year 206-17 undervalued,hence profit to be increased.

$$X$$ and $$Y$$ are partners sharing profit and losses in the ratio $$3:2$$. They admit $$Z$$ into partnership for $$1/4^{th}$$ share in goodwill. $$Z$$ brings in his goodwill in cash. Goodwill for this purpose is to be calculated at two years purchase of the average normal profit of past three years. Profit of the last three years ended $$31^{st}$$March, were:
2016--Profit Rs.$$50,000$$(including profit on sale of asset Rs. $$5,000$$)
2017--Loss rs.$$20,000$$ (including loss by fire Rs.$$30,000$$).
2018--Profit Rs.$$70,000$$(including insurance claim received rs. $$18,000$$ and interest on investment and Dividend receive Rs. $$8,000$$).
Calculate value of goodwill. Also, calculate goodwill brought in by $$Z$$.

Step 1:

Calculation of Average Profit:

2016-- 50000-5000= 45000

2017-- (20000)+30000= 10000

2018-- 70000-(18000+8000)= 44000

Average Profit= [45000+10000+44000]/ 3

= 33000

Step 2:

Calculation of Goodwill:

Goodwill= 33000* 2

= 66000

Step 3:

Goodwill brought in Z= 66000/ 4

= 16500

What do you understand by Reconstitution of a Partnership Firm?

Whenever a partner is admitted to a firm, a partner retires from a partnership firm or there is any change in the profit sharing ratio of the partners, the reconstitution of the Partnership Firm takes place. In all the above cases, the partnership among the partners is dissolved and a new partnership is formed. Also, in all these cases some partners gain while some of them sacrifice the profit sharing ratio.

The total capital of the firm of Sakshi, Mehak and Megha is Rs. $$1,00,000$$ and the market rate of interest is $$15%$$. The net profits for the last $$3$$ years were Rs. $$30,000, Rs. 36,000$$ and $$Rs. 42,000$$. Goodwill is to be be valued at $$2$$ years purchase of the last $$3$$ years super. Calculate the goodwill of the firm.

Step 1: Calculation of normal profit:

Normal profit = Capital employed * [Normal rate of return/100]

= 100000 * [ 15/100]

= 15000

Step 2: Calculation of Average Profit:

Average Profit = [ 30000+36000+42000]/3

= 108000/3

= 36000

Step 3: Calculation of Super Profit:

Super Profit= 36000-15000

= 21000

Step 3: Calculation of Goodwill:

Goodwill= 21000* 2

= 42000

$$A$$ and $$B$$ partners in a firm sharing profits and losses in the ratio of $$2:1$$. They decide to take $$C$$ into partnership for $$1/4^{th}$$ share on $$1^{st}$$ April,For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years whichever is higher. The agreed profit for goodwill purpose of the past five years are:
Year 2013-14 2014-15 2015-16 2016-17 2017-18
Profit(Rs.) 14,000 15,500 10,000 16,000 15,000
Find the value of Goodwill.

Step 1: Calculation of Average Profit

(a) Average profit for five years= [14000+15500+10000+16000+15000]/ 5

= 14100

(b) Average profit for four years= [15000+16000+10000+15500]/ 4

= 14125

(b) > (a). Hence, average profit= 14125

Step 2: Calculation of Goodwill

Goodwill= 14125 * 4

= 56500

Change in profit-sharing ratios amounts to dissolution of the partnership or partnership Firm. Give reason.

Any change in the profit sharing ratio results in the dissolution of the partnership and not the partnership firm. The firm does not dissolve as it continues to operate and conduct its business activities. A firm after dissolution ceases to operate and exist.

State any two occasions on which a firm can be reconstituted.

A firm can be reconstituted on the following two occasions:

1. On the admission of a new partner as the old partners sacrifice their profit sharing ratio.

2. On the retirement of an existing partner as the remaining partners gain.

Why is revaluation of assets on reconstitution of partnership necessary?

At the time of reconstitution of partnership, it is necessary to revalue the assets to get its true value. The value of assets may have increased or decreased over time and their figures in the old balance sheet may be either undervalued or overvalued, it can also happen that some of the assets are left unrecorded. Thus, revaluation account is prepared for keeping the record of the increase and decrease of the market value of assets and liabilities.

Capital of the firm of Sharma and Verma is Rs. $$2,00,000$$ and the market rate of interest is $$15%$$. Annual salary to partners is rs. $$12,000$$ each. the profits for the last three years were $$Rs.60,000, Rs. 72,000$$ and $$Rs.84,000$$. Goodwill is to be at $$2$$ years purchase of last $$3$$ years average super profit. calculate goodwill of the firm.

Calculation of goodwill under super profit basis:

Net profit of last three years:

1st year = Rs. 60000 - Rs. 24000 (24000 being annual salary of rs. 12000 to each partner) = Rs. 36000

2nd year = Rs. 72000 - Rs. 24000 = Rs. 48000

3rd year = Rs. 84000 - Rs. 24000 = Rs. 60000

Average profit = Total net profit/ No. of years

Average profit = Rs. (36000 + 48000 + 60000)/3 years

Average profit = Rs. 144000/ 3 = Rs. 48000

Normal profit = Capital employed * rate of interest

Normal profit = Rs. 200000 * 15% = Rs. 30000

Super profit = Average profit - Normal profit

Super profit = Rs. (48000 - 30000) = Rs. 18000

Goodwill = Super profit * No. of year's purchase

Goodwill = Rs. 18000 * 2 years

Goodwil = Rs. 36000

A business earned an average profit of Rs. $$8,00,000$$ during the last few years. The normal rate of profit in the similar type of business is $$10%$$. The total value of assets and liabilities of the business were Rs. $$22,00,000$$ and Rs. $$5,60,000$$ respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at $$2^{\frac{1}{2}}$$ years purchase of super profit.

Calculation of goodwill under super profit basis:

Net assets or capital employed = Total assets - Total liabilities

Net assets or capital employed = Rs. (2200000 - 560000) = Rs. 1640000

Average profit = Rs. 800000

Normal profit = Capital employed * rate of interest

Normal profit = Rs. 1640000 * 10% = Rs. 164000

Super profit = Average profit - Normal profit

Super profit = Rs. (800000 - 164000) = Rs. 636000

Goodwill = Super profit * No. of year's purchase

Goodwill = Rs. 636000 * 2.5 years

Goodwill = Rs. 1590000

Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. $$1^{st}$$April,The agreed to value goodwill at $$3$$ years purchase of Super Profit Method for which they decided to average profit of last $$4$$ years. The profits for the last $$5$$ years were:
Year Ended Net Profit
$$31^{st}$$March,2014 $$1,50,000$$
$$31^{st}$$March, 2015 $$1,80,000$$
$$31^{st}$$March, 2016 $$1,00,00$$(Including abnormal loss of Rs. $$1,00,000$$)
$$31^{st}$$March, 2017 $$2,60,000$$(Including abnormal gain (point)of Rs.$$40,000$$)
$$31^{st}$$March, 2018 $$2,40,000$$
The firm has total assets of Rs. $$20,00,000$$ and Outside Liabilities of Rs. $$5,00,000$$ as on that date. Normal Rate of Return in similar business is $$10%$$.
Calculate value of goodwill.

Step 1: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 2000000- 500000

= 1500000

Step 2: Calculation of Normal Profit:

Normal Profit= 1500000 * [10/100]

= 150000

Step 3: Calculation of Average Profit:

Average Profit= [150000+180000+200000+220000+240000]/5

= 198000

Step 4: Calculation of Super Profit:

Super Profit= 198000- 150000

= 48000

Step 5: Calculation of goodwill:

Goodwill= 48000* 3

= 144000

The average profit earned by a firm is Rs. $$1,00,000$$ which includes undervaluation of stock of Rs. $$40,000$$ on an average basis. The capital invested in the business is Rs.$$6,30,000$$ and the normal rate of return is $$5%$$. Calculate goodwill of the firm on the basis of $$5$$ times the super profit.

Step 1: Calculation of Normal Profit:

Normal Profit= Capital employed * [ Normal rate of return/100]

= 630000 * [5/100]

= 31500

Step 2: Calculation of Average Profit:

Average Profit= Profit + Undervaluation of Stock

= 100000+40000

= 140000

Step 3: Calculation of Super Profit:

Super Profit= Average Profit- Normal Profit

= 140000-31500

= 108500

Step 4: Calculation of Goodwill:

Goodwill= 108500* 5

= 542500

$$A$$ and $$B$$ are equal partners. They decide to admit $$C$$ for $$\dfrac{1}{3}^{rd}$$ share. for the purpose of admission of $$C$$, goodwill of the firm is to be valued at four years purchase of super profit. Average capital employed in the firm is Rs.$$1,50,000$$. Normal rate of return may be taken as $$15%$$ p.a. Average profit of the firm Rs.$$40,000$$. Calculate value of goodwill.

Step 1: Calculation of Normal Profit:

Normal profit= Capital Employed* [ Normal Rate Of Return/100]

= 150000* [15/100]

= 22500

Step 2: Calculation of Average Profit:

Average Profit= 40000

Step 3: Calculation of Super Profit:

Super Profit= 40000- 22500

= 17500

Step 4: Calculation of Goodwill:

Goodwill= 17500* 4

= 70000

On $$1^{st}$$April,2018, an existing firm had assets of Rs.$$75,000$$ including cash of Rs.$$5,000$$. Its credit amounted to Rs.$$5,000$$ on that date. The firm had a Reserve of Rs. $$10,000$$ while Partners capital Account showed a balance of Rs.$$60,000$$. If Normal rate of Return is $$20%$$ and goodwill of the firm is valued at Rs.$$24,000$$ at four years purchase of super profit, find average profit per year of the existing firm.

Step 1: Calculation of Capital Employed:

Capital Employed= Total assets- Creditors

= 75000-5000

= 70000

Step 2: Calculation of Normal Profit:

Normal Profit= Capital Employed* [Normal Rate Of Return/100]

= 70000* [20/100]

= 14000

Step 3: Calculation of Super Profit from Goodwill:

Super Profit= Goodwill/ Number of year's of purchase

= 24000/4

= 6000

Step 4: Calculation of Average Profit from Super Profit:

Average Profit= Super Profit+ Normal Profit

= 14000+6000

= 20000

A partnership firm earned net profit during the past three years as follows:
year ended $$31^{st}$$March,2018 $$31^{st}$$March,2017 $$31^{st}$$March,2016
Net Profit(Rs.) $$2,30,000$$ $$2,00,000$$ $$1,70,000$$
Capital investment in the firm throughout the above mentioned period has been Rs. $$4,00,000$$. Having regard to the risk involved, $$15%$$ is considered to be return on the capital. The remuneration of the partners during this period estimated to be Rs. $$1,00,000$$p.a
Calculate value of goodwill on the basis of two years purchase of average super profit earned during the above mentioned three years.

Step 1: Calculation of Normal profit:

Normal Profit = Capital employed*[ Normal rate of return/100]

= 400000 *[15/100]

= 60000

Step 2: Calculation of Average Profit

2016-- 170000-100000= 70000

2017-- 200000-100000= 100000

2018-- 230000-100000= 130000

Hence, Average Profit= [130000+100000+70000]/3

= 100000

Step 3: Calculation of Super Profit:

Super Profit = Average profit - Normal Profit

Super Profit= 100000-60000

= 40000

Step 4: Calculation of Goodwill:

Goodwill= 40000* 2

= 80000

A business has earned average profit of Rs.$$1,00,000$$ during the last few years. Find out the value of goodwill by capitalization method, given that the asset of the business are Rs.$$10,00,000$$ and its external liabilities are Rs.$$1,80,000$$. The normal rate of return is 10%

Step 1: Calculation of Capital Employed:

Capital Employed= Assets- External Liabilities

= 1000000- 180000

= 820000

Step 2: Calculation of Capitalized value of Profit:

Capitalized Value of Profit= Profit * [100/rate of return]

= 100000 * [100/10]

= 1000000

Step 3: Calculation of Goodwill:

Goodwill= Capitalized value of profit- Capital employed

= 1000000-820000

= 180000

From the following information, calculate the value of goodwill of the firm:
(i) At three years purchase of Average Profit.
(ii) At three years purchase of Super Profit.
(iii) On the basis of capitalisation of Super Profit.
(iv) On the basis of capitalisation of Average Profit.

Information:
(a) Average Capital Employed is Rs.$$6,00,000$$.
(b) Net profit/(Loss) of the firm for the last three years ended are:
$$31^{st}$$March,2018 - Rs.$$2,00,000$$, $$31^{st}$$March,2017 - Rs.$$1,80,000$$ and $$31^{st}$$March,2016 - Rs.$$1,60,000$$
(c) Normal rate of Return in similar business is $$10%$$ .
(d) Remuneration of Rs$$1,00,000$$ to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is Rs.$$7,00,000$$ whereas Partner's capital is Rs. $$6,00,000$$ and outside Liabilities Rs.$$1,00,000$$.

(i) 3 Years' purchase of Average Profit method:

Step 1: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 2: Calculation of Goodwill:

Goodwill= 80000 * 3

= 240000

(ii) 3 Years' purchase of Super Profit method:

Step 1: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 2: Calculation of Normal Profit:

Normal Profit= 600000* [10/100]

= 60000

Step 3: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 4: Calculation of Super Profit:

Super Profit= 80000-60000

= 20000

Step 5: Calculation of goodwill:

Goodwill= 20000 * 3

= 60000

(iii) Capitalization of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 2: Calculation of Normal Profit:

Normal Profit= 600000* [10/100]

= 60000

Step 3: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 4: Calculation of Super Profit:

Super Profit= 80000-60000

= 20000

Step 5: Calculation of goodwill:

Goodwill= Super Profit * [100/Normal Rate of return]

= 20000*[100/10]

= 200000

(iv) Capitalisation of Average Profit method:

Step 1: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 2: Calculation of capitalised value of profit:

Capitalised value of profit= 80000*[100/10]

= 800000

Step 3: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 4: Calculation of goodwill:

Goodwill= 800000-600000

= 200000

Average profit of the firm is Rs.$$2,00,000$$. Total assets of the firm are Rs.$$15,00,000$$ whereas Partner's Capital is Rs.$$12,00,000$$. If normal rate of return in a similar business is $$10%$$ of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Step 1: Calculation of Capital Employed:

Capital employed= 1200000

Step 2: Calculation of Normal Profit:

Normal Profit= 1200000 * [10/100]

= 120000

Step 3: Calculation of Average Profit:

Average Profit= 200000

Step 4: Calculation of Super Profit:

Super Profit= 200000- 120000

= 80000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 80000 * [100/10]

= 800000

Average profit of GS &Co. Rs.$$50,000$$ per year. Average capital employed in the business is Rs. $$3,00,000$$. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years purchase and
(ii) Capitalisation of Super Profit Method.

(i) Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * Number of years' of purchase

= 20000 * 3

= 60000

(ii) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 20000 * [100/10]

= 200000

Goodwill of the firm is valued at Rs. $$5,00,000$$ at $$2$$ years purchase of average profit. Determine the missing value.
Total Profits $$= Rs. 2,50,000 + ..... + Rs. 3,00,000 - Rs. 1,00,000 + Rs. 3,50,000 = Rs....$$
Average Profit $$= \dfrac{Total \,\,Profits}{Number \,\,Of \,\,Years} = \dfrac{Rs.}{5} =$$ Rs.
Goodwill $$= Rs. .... \times 2 = Rs. 5,00,000$$

Step 1: Calculation of Average Profit from goodwill:

Average Profit= Goodwill/ number of years' of purchase

= 500000/2

= 250000

Step 2: Calculation of Total profit from Average Profit:

Total Profit= Average Profit * Number of years

= 250000 * 5

= 1250000

Step 3: Calculation of missing profit from total profit:

Missing profit= 1250000- 250000- 300000+ 100000- 350000

= 450000

From the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending $$31^{st}$$March are 2018 --Rs.$$54,000$$, 2017 --Rs.$$42,000$$, 2016--Rs.$$39,000$$,2015--Rs.$$67,000$$ and 2014--Rs.$$59,000$$.
(ii) Capitalisation rate $$20%$$.
(iii) Net assets of the firm Rs.$$2,00,000$$.

Step 1: Calculation of Average Profit:

Average Profit= [54000+42000+39000+67000+59000]/5

= 261000/5

= 52200

Step 2: Calculation of Capitalised value of Profit:

Capitalised Value of profit= [Profit * 100]/ Normal Rate Of Return

= [52200*100]/20

= 261000

Step 3: Calculation of Goodwill:

Goodwill= 261000-200000

= 61000

Rajan and Rajani are partners in the firm. Their capital were Rajan Rs.$$3,00,00$$, Rajani Rs.$$2,00,00$$. During the year 2017-18, the firm earned a profit of Rs.$$1,50,000$$. Calculate the value of goodwill of the firm by capitalisation of super profit, assuming that the normal rate of return is 20%.

Step 1: Calculation of Capital Employed:

Capital employed= Total Capital Employed

= 300000+ 200000

= 500000

Step 2: Calculation of Normal Profit:

Normal Profit= 500000 * [20/100]

= 100000

Step 3: Calculation of Average Profit:

Average Profit= 150000

Step 4: Calculation of Super Profit:

Super Profit= 150000- 100000

= 50000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 50000 * [100/20]

= 250000

$$P, Q$$ and $$R$$ were partners in a firm sharing profits in the ratio of $$3:2:1$$. They admitted $$S$$ as a new partner for $$1/8^{th}$$ share in the profits, which he acquired $$1/16^{th}$$ from $$B$$ and $$1/16^{th}$$ form $$R$$. Calculated the new profit sharing ratio of $$P, Q, R$$ and $$S$$.

Profit Sharing Ratio of P, Q and R $$= 3 : 2 : 1$$

S's share $$= \dfrac{1}{8}$$ (acquired $$\dfrac{1}{16}th$$ share each from P and Q)

R's share $$= \dfrac{1}{6}$$ (retained original share)

P's new share $$= \dfrac{3}{6} - \dfrac{1}{16} = \dfrac{21}{48}$$

Q's new share $$= \dfrac{2}{6} - \dfrac{1}{16} = \dfrac{13}{48}$$

New Ratio of P, Q, R and S $$=\dfrac{21}{48} : \dfrac{13}{48} : \dfrac{1}{6} : \dfrac{1}{8}$$ or $$21:13:8:6$$

Geeta, Sunita and Anita were partners in a firm sharing profits in the ratio of $$5:3:2$$. On $$1^{st}$$January,2015, they admitted Yogita as a new partner $$1/10^{th}$$ share in the profits. On Yogita's admission the Profit and Loss Account of the firm was showing a debit balance of $$Rs. 20,000$$ which was credited by the accountant of the firm to the Capital Accounts of Geeta, Sunita and Anita in their profit-sharing ratio. Did the accountant give correct treatment? Give reason in support of your answer.

A debit balance of Profit & Loss a/c represents the loss incurred by the firm.
At the time of Yogita’s admission, the loss must be divided amongst the old partners in their old profit-sharing ratio, i.e., 5:3:2.
Hence, the treatment of Profit and Loss a/c (Dr.) is incorrect. It should be debited to the capital accounts of Geeta, Sunita and Anita.

Vikas and Vivek were partners in a firm sharing profits in the ratio of 3.:On 1st April, 2017, they admitted Vandana as a new partner for 1/8th share in the profits with a guaranteed profit of Rs. 1,50,The new profit-sharing ratio between Vikas and Vivek will remain same but they decided to bear any deficiency on account of guarantee to Vandana in the ratio 3 :The profit of the firm for the year ended 31st March, 2018 was Rs. 9,00,Prepare Profit and Loss Appropriation Account of Vikas, Vivek and Vandana for the year ended 31st March, 2018.

Working Notes:

Vandana's Share in profit $$= 9,00,000 \times (1/8) = 1, 12,500$$

Minimum Guaranteed Profit to Vandana $$= 1, 50,000$$

Deficiency $$= 37, 500 (1, 50,000 - 1,12, 500)$$

Deficiency to be borne by Vikas and Vivek in the ratio of $$2: 3$$

Amount to be borne by Vikas $$= 37,500 \times (2/5) = 15,00$$

Amount to be borne by Vivek $$= 37,500 \times (3/5) = 22,500$$

Remaining profit share $$= 7,50,000$$

$$\therefore$$ Vikas's Profit Share $$= 7,50,000 \times (3/5) = 4,50,000$$

& Vivek's Profit Share $$= 7,50,000 \times (2/5) = 3,00,000$$

1957492_1031380_ans_63c824baddde4e8d892d50d8ea70e970.png

$$A, B, C$$ and $$D$$ were partners in a firm sharing profits in the ratio of $$4:3:2:1$$. On $$1^{st}$$January,2015, they admitted $$E$$ as a new partner for $$1/10th$$ share in the profits. $$E$$ brought $$Rs. 10,000$$ for his share of goodwill premium, which was correctly recorded in the books by the accountant. The accountant showed goodwill at $$Rs. 1,00,000$$ in the books. Was the accountant correct in doing so? Give reason in support of your answer.

The accountant is not correct.
Reason: It is a self-generated goodwill and only purchased goodwill is recorded in the books of accounts as per AS-26.

Short answer type question:
Why heirs of deceased partner are entitled to share of goodwill of the firm?

Heirs of deceased partner are entitled to share of goodwill of the firm because the goodwill earned by the firm is the result of the efforts of all the existing partners in the past. As they will not be sharing future profits, it will be fair to compensate their share to their heirs by the remaining partners.

Anu and Bhagwan were partners in a firm sharing profit in the ratio of $$3:1$$. Goodwill appeared in the books at $$Rs. 4,40,000$$. Raja was admitted to the partnership. The new profit-sharing ratio among Anu, Bhagwan and Raja was $$2:2:1$$. Raja brought $$Rs. 1,00,000$$ for his capital and necessary cash for his goodwill premium. The goodwill of the firm was valued at $$Rs. 2,50,000$$.
Record necessary Journal entries in the books of the firm for the above transaction.

(i) Anu's Capital a/c... Dr. 330000

Bhagwan's Capital a/c.... Dr. 110000

To Goodwill a/c 440000

(Being goodwill written off)

(ii) Bank a/c.... Dr. 150000

To Raja's Capital a/c 100000

To Premium for Goodwill a/c 50000

(Being cash and premium for goodwill brought in by Raja)

(iii) Premium for goodwill a/c.... Dr. 50000

Bhagwan's Capital a/c.... Dr. 37500

To Anu's Capital a/c 87500

(Being premium for goodwill and Bhagwan's gain transferred to Anu)

Working Note:

Calculation of sacrificing ratio:

Anu's sacrifice= 3/4- 2/5= 7/20

Bhagwan's gain= 1/4- 2/5= -3/20

Total goodwill of the firm= 250000

Bhagwan's share= 3/20* 250000

= 37500

Pass entries in the firm's Journal for the following on admission of a partner:
(i) Machinery be depreciated by $$Rs. 16,000$$ and Building be appreciated by $$Rs. 40,000$$.
(ii) A provision be creaated for Doubtful Debts @ $$5 \%$$ of Debtors amounting to $$Rs. 80,000$$.
(iii) Provision for warranty claims be increased by $$Rs. 12,000$$.

JOURNAL

(i) Revaluation a/c.... Dr. 16000

To Machinery a/c 16000

(Being depreciation on machinery transferred to Revaluation account)

Building a/c..... Dr. 40000

To Revaluation a/c 40000

(Being appreciation on building transferred to Revaluation account)

(ii) Revaluation a/c...... Dr. 4000

To Provision for Doubtful Debts a/c 4000

(Being provision of 5% on debtors created)

(iii) Revaluation a/c.... Dr. 12000

To Provision for Warranty Claims 12000

(Being provision for warranty claims increased and transferred to Revaluation account)

Pass entries in the firm's Journal for the following on admission of a partner:
(i) Unrecorded Investment worth $$Rs. 20,000$$.
(ii) Unrecorded liability towards suppliers for $$Rs. 5,000$$.
(iii) An item of $$Rs. 1,600$$ included in Sundry Creditors is not likely to be claimed and hence should be written back.

JOURNAL

1. Investment a/c...... Dr. 20000

To Revaluation a/c 20000

(Being unrecorded asset transferred to Revaluation account)

2. Revaluation a/c..... Dr. 5000

To Creditors a/c 5000

(Being unrecorded liability transferred to Revaluation account)

3. Creditors a/c... Dr. 1600

To Revaluation a/c 1600

(Being claim of sundry creditors, written back)

$$X$$ and $$Y$$ are partners in a firm sharing profits in the ratio of $$3:2$$. They admitted $$Z$$ as a new partner for $$1/4^{th}$$ share of profits. At the time of admission of $$Z$$ Debtors and Provision for Doubtful Debts appeared at $$Rs. 76,000$$ and $$Rs. 8,000$$ respectively. $$Rs. 6,000$$ of the debtors proved bad. A provision of $$5\%$$ is to be created on Sundry Debtors for doubtful debts. Pass the necessary Journal entries.

Provision for doubtful debts is created as a reserve for any bad debt that occurs. According to the company's credit policies and other information, some percentage is fixed over sundry debtors as provision.

In the question, sundry debtors balance is 76,000 and provision for doubtful debt is 8,000. We need to pass journal entries for the bad debt that occurred and 5% provision that needs to be maintained.

Bad Debt A/c Dr 6,000

To Debtor A/c 6,000

(Being , Debtor proved bad)

Provision for bad debt a/c debit 6000

To bad debt a/c 6000

(Being, Bad debt charged against provision)

Revaluation a/c Dr 1,500

To Provision for doubtful debts A/c 1,500

(Being, Excess provision made)

X capital a/c debit 900

Y capital a/c debit 600

To Revaluation a/c 1500

(Being, Loss on revaluation)

Notes:- New provision to be created = 5%* (76,000 - 6000) = 3500

Add:- Bad debts = 6,000

Less:- Old provision =( 8,000)

Balance provision to be created from P&L = 1500

Give the Journal entry to distribute "Workmen Compensation Reserve" of $$Rs. 72,000$$ at the time of admission of $$Z$$, when these is no claim against it. The firm has two partners $$X$$ and $$Y$$.

(i) Workmen Compensation Reserve a/c.... Dr. 72000

To X's Capital a/c 36000

To Y's Capital a/c 36000

(Being adjustment of workmen compensation reserve in the ratio of 1:1)

$$A$$ and $$B$$ are partners in a business and their capitals at the end of the year were $$Rs. 7,00,000$$ and $$6,00,000$$ respectively. Calculate their opening capitals considering the following information:
(a) Drawings of $$A$$ and $$B$$ for the year were $$Rs. 75,000$$ and $$Rs. 50,000$$ respectively.
(b) $$B$$ introduced capital of $$Rs.1,00,000$$ during the year.
(c) Interest on capital credited to the Capital Accounts of $$A$$ and $$B$$ were $$Rs.15,000$$ and $$Rs. 10,000$$ respectively.
(d) Interest on drawings debited to the Capital Accounts of $$A$$ and $$B$$ were $$Rs. 7,500$$ and $$Rs. 5,000$$ respectively.
(e) Share of loss debited to Capital Accounts was $$Rs. 20,000$$ each.

CALCULATION OF OPENING CAPITAL :

Particulars A B

Closing capital 7,00,000 6,00,000

Add:-Drawings 75,000 50,000

Interest on drawings 7500 5000

Share of loss 20,000 20,000

Less: capital Introduced Nil (1,00,000)

Interest on capital (15,000) (10,000)

Total 7,87,500 5,65,000

$$X$$ and $$Y$$ share profits in the ratio of $$5:3$$. Their Balance Sheet as at $$31^{st}$$March,2018 was:
Liabilities (Rs.) Assets (Rs.)
Creditors
Employees Provident Fund
Workmen Compensation Reserve
Capital A/cs:
X 70,000
Y 31,000

15,000
10,000
5,800

1,01,000 Cash at Bank
Sundry Debtors 20,000
Less: Provision for Doubtful Debts
600
Stock
Fixed Assets
Profit and Loss A/c 5,000

19,400

25,000
80,000
2,400
1,31,800 1,31,800
They admit $$Z$$ into partnership with $$1/8^{th}$$ share in profits on this date. $$Z$$ brings $$Rs. 20,000$$ as his capital. $$Rs. 12,000$$ for goodwill in cash. $$Z$$ acquires share entirely from $$X$$. Following revaluation are also made.
(a) Employees Provident Fund liability is to be increased by $$Rs. 5,000$$.
(b) All Debtors are good. Therefore, no provision is required on Debtors.
(c) Stock includes $$Rs. 3,000$$ for obsolete items.
(d) Creditors are to be paid $$Rs. 1,000$$ more.
(e) Fixed Assets are to be revalued at $$Rs. 70,000$$.
Prepare Journal entries, necessary account and new Balance Sheet. Also calculate new profit-sharing ratio.

(i) REVALUATION ACCOUNT
Dr. Cr.

Particulars	Amount	Particulars	Amount
To Employee provident fund a/c	5000	By Provision for Doubtful Debts /ac	600
To Fixed Assets a/c	10000	By Loss transferred to: - X's Capital a/c - Y's Capital a/c	11500 6900
To Stock a/c	3000
To Creditors a/c	1000
	19000		19000

(ii) PARTNER'S CAPITAL A/C
Dr. Cr.

Particulars	X	Y	Z	Particulars	X	Y	Z
To Revaluation a/c	11500	6900		By Balance b/d	70000	31000
To Profit and loss a/c	1500	900		By Cash a/c			20000
To Balance c/d	72625	25375	20000	By Workmen Compensation Fund a/c	3625	2175
				By Premium for Goodwill a/c	12000
	85625	33175	20000		85625	33175	20000

(iii) BALANCE SHEET

Liabilities	Amount	Assets	Amount
Capital a/cs: - X - Y - Z	72625 25375 20000	Cash at Bank(5000+20000+12000)	37000
Creditors	16000	Debtors	20000
Provident Fund	15000	Fixed Assets	70000
		Stock (25000-3000)	22000

	149000		149000

Working Note:

Calculation of New profit sharing ratio:

Old ratio= 5:3

Z is admitted for 1/8th share

Z acquired entire share from X.

X's new share= 5/8-1/8

= 4/8

New profit sharing ratio= 4:3:1

Balance Sheet of Ram and Shyam who share profits in proportions to their capitals as at $$31^{st}$$March,2018 is:
Liabilities (Rs.) Assets (Rs.)
Capital A/cs:
Ram 30,000
Shyam 25,000
Current A/cs:
Ram 2,000
Shyam 1,800
Creditors
Bills Payable 55,000

3,800
19,000
16,000

Freehold Premises
Plant and Machinery
Fixture and Fittings
Vehicle
Stock
Bills Receivable
Debtors
Bank
Cash 20,000
13,500
1,750
1,350
14,100
13,060
27,500
1,590
950
93,800 93,800
On $$1^{st}$$April,2018, they admitted Arjun into partnership on the following terms:
(a) Arjun to bring in $$Rs. 20,000$$ as capital and $$Rs. 6,600$$ for goodwill, which is to be in the business and he is to receive $$1/4^{th}$$ share of the profits.
(b) Provision for Doubtful Debts is to be $$2 \%$$ on Debtors.
(c) Value of Stock to be written down by $$5\%$$.
(d) Freehold Premises are to be taken at valuation of $$Rs. 22,400$$; Plant and Machinery $$Rs. 11,800$$; Fixtures and Fittings $$Rs. 1,540$$ and Vehicles $$Rs. 800$$.
You are required to make necessary adjustment entries in the firm, give Balance Sheet of the new firm as at 1st April,2018 and also give the proportions in which the partners will share profits, there being no change in the proportions of Ram and Shyam.

(i) JOURNAL

1. Cash a/c.... Dr. 26600

To Arjun's Capital a/c 20000

To Premium for Goodwill a/c 6600

(Being capital and premium for goodwill brought in by Arjun)

2. Premium for Goodwill a/c.... Dr. 6600

To Ram's Current a/c 3600

To Shyam's Current a/c 3000

(Being premium for goodwill distributed among the partners in the ratio of 6:5)

(ii) REVALUATION ACCOUNT
Dr. Cr.

Particulars	Amount	Particulars	Amount
To Provision for Doubtful debts a/c	550	By Freehold Premises a/c	2400
To Stock a/c	705	By Loss transferred to: - Ram's Current a/c - Shyam's Current a/c	717 598
To Plant and Machinery a/c	1700
To Fixture and Fittings a/c	210
To Vehicles a/c	550
	3715		3715

(iii) PARTNER'S CAPITAL A/C

Dr. Cr.

Particulars	Ram	Shyam	Arjun	Particulars	Ram	Shyam	Arjun
				By Balance b/d	30000	25000
To Balance c/d	30000	25000	20000	By Cash a/c			20000
	30000	25000	20000		30000	25000	20000

(iv) PARTNER'S CURRENT A/C
Dr. Cr.

Particulars	Ram	Shyam	Arjun	Particulars	Ram	Shyam	Arjun
To Revaluation a/c	717	598		By Balance b/d	2000	1800
				By Premium for Goodwill a/c	3600	3000
To Balance c/d	4883	4202
	5600	4800			5600	4800

(v) BALANCE SHEET

Liabilities	Amount	Assets	Amount
Capital a/cs: - Ram 30000 - Shyam 25000 - Arjun 20000	75000	Freehold Premises	22400
Creditors	19000	Plant and Machinery	11800
Bills Payable	16000	Fixture and Fittings	1540
Current a/cs: - Ram 4883 - Shyam 4202	9085	Vehicle	800
		Stock (14100-705)	13395
		Bills Receivable	13060
		Debtors 27500 (-) Provision for (550) doubtful debts	26950
		Bank	1590
		Cash (950+20000+6600)	27550
	119085		119085

Working Note:

Old ratio= 30000:25000

= 6:5

Arjun is admitted for 1/4th share

Remaining share= 3/4

Ram's new share= 6/11 * 3/4

= 18/44

Shyam's new share= 5/11 * 3/4

= 15/44

New profit sharing ratio= 18:15:11

(Provisions of the Indian Partnership Act, 1932). $$A, B$$ and $$C$$ are partners in a firm. They do not have a Partnership Deed.
(i) $$A$$, who has contributed more capital than other partners, demands interest on capital at $$10\% p.a$$. But $$B$$ and $$C$$ do not agree with this.
(ii) $$B$$ has devoted full time to run the business and demands a salary of $$Rs. 5,000 p.m$$. But $$A$$ and $$C$$ do not agree with him.
(iii) $$C$$ demands interest on the loan of $$Rs. 50,000$$ advanced by him at the market rate of interest which is $$12\% p.a$$.
(iv) $$A$$ has drawn $$Rs. 10,000$$ from the firm for personal use. $$B$$ and $$C$$ demand that interest should be charged @ $$10\%$$ per annum.
(v) Net Profit before taking into account any of the above claims amounted to $$Rs. 50,000$$ at the end of the first year of the business. $$A$$ demands share of profit in the capital ratio.
How will the disputes be settled?

The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act, 1932 will apply to settle the disputes:
(i) Interest on capital is not payable to any partner. Therefore, $$A$$ is not entitled to interest on the capital.
(ii) Remuneration is not payable to any partner. Therefore, $$B$$ is not entitled to any salary.
(iii) Interest on Partner's Loan is payable @ $$6\% p.a$$. Therefore, $$C$$ is to get interest $$Rs. 3,000\left(i.e., Rs. 50,000 \times \dfrac{6}{100}\right)$$.
(iv) Interest on A's Drawings will not be charged.
(v) Profit after Interest on Loan, i.e., $$Rs. 47,000$$ is to be distributed equally.

$$P,Q$$ and $$R$$ were partners in a firm.On $$31^{st}March ,2018$$ $$R$$ is retired.The amount payable to $$R \,RS.2,17,000$$ was transferred to his loan account. $$R$$ is agreed to receive interest on this amount as per the provision of Partnership Act, $$1932$$. State the rate at which interest will be paid to $$R$$.

P, Q and R were partners in a firm. On 31st March, 2017, R is retires. The amount payable to R Rs. 2,17,000 was transferred to his loan account. R is agreed to receive interest on this amount as per the provision of Partnership Act, 1932. The rate of interest payable to R would be 6% per annum as per the provisions of Partnership Ac, 1932.

$$X, Y$$ and $$Z$$ are partners in a firm. Their profit sharing ratio is $$5 : 3 : 2$$. $$Z$$ is guaranteed a minimum profit of $$Rs. 10,000$$ every year. Any deficiency arising is to be met by $$Y$$. The profits for the two years ended 31st March, 2017 and 2018 were $$Rs. 40,000$$ and $$Rs. 60,000$$ respectively. Prepare Profit and Loss Appropriation Account for the two years.

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR 2017

Particulars	Amount	Particulars	Amount
To profit transferred to X's capital A/c=20,000 Y's capital A/c=12,000 Less:-Z's share=(2000) Z's capital A/c=8000 Add:-Y's share=2000	40,000	By net profit	40,000
Total	40,000	Total	40,000

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR 2018

Particulars	Amount	Particulars	Amount
To Profit transferred to X's capital A/c=30,000 Y's capital A/c=18,000 Z's capital A/c=12,000	60,000	By net profit	60,000
Total	60,000	Total	60,000

Sujata and Sanjota are partners sharing profits and losses in the ratio of $$3:2$$. Their Balance Sheet as on $$31.03.2016$$ was as follows.
Balance sheet as on $$31.03.2016$$
Liabilities Rs Assets Rs
Creditors
Bills Payable
Reserve fund
Capitals:
Sujata 1,20,000
Sanjota 80,000

1,00,000
50,000
50,000

2,00,000

Cash
Stock
Debtors
Furniture
Machinery
Building
Investments
P and L Account

40,000
50,000
40,000
40,000
80,000
1,00,000
40,000
10,000

4,00,000 4,00,000

On $$01.04.2016$$ Sangeeta admitted into partnership on the following terms.
a) She brings in $$Rs.60,000$$ as capital and $$Rs.20,000$$ towards Goodwill for $$1/4th$$ share in future profits.
Goodwill amount is withdrawn by old partners.
b) Depreciate Machinery and Furniture by $$10\%$$
c) Provision for doubtful debts is maintained at $$5\%$$ on debtors.
d) Appreciate Buildings by $$Rs.22,000$$.
e) Provide $$Rs.2,000$$ fot outstanding salaries.
f) Investment are to be revalued at $$Rs.50,000$$
Prepare:
i) Revaluation A/c
ii) Partner's Capital A/c
iii) New Balance sheet as on $$01.04.2016$$

1458694_1690645_ans_477f7dd29f624b999904d91c8ac2dd85.PNG

If the amount brought by a new partner is more than his share in capital, the excess is known as _____.

If the amount bought by a new partner is more than his share in capital, the excess is known as Goodwill.

Given below is the Balance sheet of Kumar and Rajashekar, who are carrying on partnership business as on 31 March,Kumar and Rajashekar share profits and losses in the ratio of $$2:1$$.
Balance sheet of Kumar and Rajashekar as on $$31.3.2018$$
Liabilities
Rs. Assets Rs.
Bills payable
Sundry creditors
Outstanding expenses
Capitals:
Kumar
Rajashekar

$$1,80,000$$
$$1,50,000$$ $$10,000$$
$$58,000$$
$$2,000$$

$$3,30,000$$ Cash in hand
Cash at Bank
Sundry debtors
Stock
Plant and Machinery
Building $$10,000$$
$$40,000$$
$$60,000$$
$$40,000$$
$$1,00,000$$
$$1,50,000$$
$$4,00,000$$ $$4,00,000$$
Shamanth is admitted as a partner on the date of the Balance sheet on the following terms.
a) Shamanth bring in $$Rs.1,00,000$$ as his capital and $$Rs.60,000$$ as his share of goodwill for $$1/4^{th}$$ share in profits.
b) Plant is to be appreciated to $$Rs.1,20,000$$ and the value of Building is to be appreciated by $$10\%$$
c) Stock is found over valued by $$Rs.5,000$$
d) A provision for Doubtful debts is to be created at $$5\%$$ on Debtors. Prepare Revaluation account, partners capital accounts and Balance sheet of the constituted firm after admission of the new partner.

1458706_1690668_ans_6c8a494185294eddab94f93e321b560d.PNG

Sonu and Rajat Started a partnership firm on April $$1,2017$$.They contributed $$Rs.8,00,000$$ and $$Rs.6,00,000$$ respectively as their capitals and decided to share profits an losses in the ratio of $$3:2$$.
The partnership deed provided that Sonu was to be paid salary of $$Rs.20,000$$ per month and Rajat a commissions of $$5\%$$ on turnover.It also provided that interest on capital be allowed $$@8\%$$ p.a. Sonu withdraw $$Rs.20,000$$ on $$1^{st}December ,2017$$ and Rajat withdrew $$Rs.5,000$$ at the end of each month.Interest on drawing was charged $$@6\%$$ p.a.The net profit as per profit and loss Account for the year ended $$31^{st}March,2018$$ was $$Rs.4,89,950$$. The turnover of the firm for the year ended $$31^{st}March ,2018$$ amounted to $$Rs.20,00,000$$. Pass necessary journal entries for the above transactions in the books of Sonu and Rajat.

Journal of Sonu and Rajat
Date	Particulars	L.F.	Dr. (Rs.)	Cr. (Rs.)
2018
March 31	Profit & Loss Appropriation A/c Dr.		2,40,000
	To Sonu’s Capital A/c			2,40,000
	(Being salary for the year payable to Sonu)

March 31	Profit & Loss Appropriation A/c Dr.		1,00,000
	To Rajat’s Capital A/c			1,00,000
	(Being commission on turnover @ 5% payable to Rajat)

March 31	Profit & Loss Appropriation A/c Dr.		1,12,000
	To Sonu’s Capital A/c			64,000
	To Rajat’s Capital A/c			48,000
	(Being interest on capital @ 8% p.a)

March 31	Sonu’s Capital A/c Dr.		400
	Rajat’s Capital A/c Dr.		1,650
	To Profit & Loss Appropriation A/c			2,050
	(Being interest on drawings of partners charged @ 6% p.a)

March 31	Profit & Loss Appropriation A/c Dr.		40,000
	To Sonu’s Capital A/c			24,000
	To Rajat’s Capital A/c			16,000
	(Being divisible profit in 3:2 distributed)

Working notes:

1. Computation of interest on drawings of partners

Drawings of Sonu = 20,000

Drawings of Rajat = 12 * 5,000 = 60,000

Interest on Sonu’s drawings = 20,000 * 6/100 * 4/12 = 400

Interest on Rajat’s drawings = 60,000 * 6/100 * 5.5/12 = 1,650

2. Computation of divisible profit and its distribution between partners

Profit as per the Profit and Loss account = 4,89,950

Divisible profit = Net Profit + Interest on Drawings – Interest on Capital – Salary of Sonu – Commission to Rajat

Divisible profit = 4,89,950 + 2,050 -1,12,000 – 2,40,000 – 1,00,000 = 40,000

Sonu’s share in divisible profit = 40,000 * 3/5 = 24,000

Rajat’s share in divisible profit = 40,000 * 2/5 = 16,000

Jay, Vijay and Karan were partners of an architect firm sharing profits in the ratio of 2 : 2 :Their partnership deed provided the following :
(i) A monthly salary of Rs. 15,000 each to Jay and Vijay.
(ii) Karan was guaranteed a profit of Rs. 5,00,000 and Jay guaranteed that he will earn an annual fee of Rs. 2,00,0(X). Any deficiency arising because of guarantee to Karan will be borne by Jay and Vijay in the ratio of 3 :During the year ended 31" March, 2018 Jay earned fee of Rs. 1,75,000 and the profits of the firm amounted to Rs. 15,00,
Showing your workings clearly prepare Profit and Loss Appropriation Account and the Capital Account of Jay, Vijay and Karan for the year ended 31st March, 2018.

Profit and Loss Appropriation Account
For the year ended 31^st March 2018
Particulars	Amount (Rs.)		Particulars	Amount (Rs.)
To salary to be credited to capital accounts of:			By Profit for the year	15,00,000
Jay	1,80,000		By Jay’s Capital A/c	25,000
Vijay	1,80,000	3,60,000
To divisible profit to be credited to Capital accounts of:
Jay	3,05,800
Vijay	3,59,200
Karan	5,00,000	11,65,000
		15,25,000		15,25,000

Working note 1:

Computation of divisible profit and its distribution between partners:

Divisible profit = 11,65,000

Jay’s share in divisible profit = 11,65,000 * 2/5 = 4,66,000

Vijay’s share in divisible profit = 11,65,000 * 3/5 = 4,66,000

Karan’s share in divisible profit = 11,65,000 * 1/5 = 2,33,000

Profit share guaranteed to Karan = 5,00,000

Deficiency to Karan’s share in profit = 5,00,000 – 2,33,000 = 2,67,000

Deficiency to be borne by Jay = 2,67,000 * 3/5 = 1,60,200

Deficiency to be borne by Vijay = 2,67,000 * 2/5 = 1,06,800

Final share in divisible profit for:

Jay = 4,66,000 – 1,60,200 = 3,05,800

Vijay = 4,66,000 – 1,06,800 = 3,59,200

Karan = 2,33,000 + 1,60,200 +1,06,800 = 5,00,000

Dr. Partner’s Capital A/c Cr.
Date	Particulars	Jay (Rs.)	Vijay (Rs.)	Karan (Rs.)	Date	Particulars	Jay (Rs.)	Vijay (Rs.)	Karan (Rs.)
2018					2018
Mar. 31	To Profit & Loss Appropriation A/c	25,000			Mar. 31	By Profit & Loss Appropriation A/c	1,80,000	1,80,000
Mar. 31	To Balance c/d	4,60,800	5,39,200	5,00,000	Mar. 31	By Profit & Loss Appropriation A/c	3,05,800	3,59,200	5,00,000
		4,85,800	5,39,200	5,00,000			4,85,800	5,39,200	5,00,000

Average profits of a firm during the last few years are $$Rs. 80,000$$ and the normal rate of return in a similar business is $$10\%$$. If the goodwill of the firm is $$Rs. 1,00,000$$ at $$4$$ years purchase of super profit, find the capital employed by the firm.

Jayesh and Kamal are partners in a firm sharing profits and losses in the ratio $$3 : 1$$. The following is their Balance Sheet as on 31st March, 2016 :

Balance Sheet as on $$31^{st} \, March, \, 2016$$
Liabilities Amount ₹ Assets Amount ₹
Capital accounts
Jayesh
Kamal
Current accounts
Jayesh
Kamal
Sundry creditors
General reserve

60,000
50,000

3,000
2,000
21,000
4,000
Building
Stock
Sundry debtors
Cash
Profit and loss account

60,000
40,000
31,000
4,000
5,000

1,40,000 1,40,000

They admitted Vimal as a partner on 1st April, 2016 in the firm on the following terms:
(1) She should bring $$Rs. 40,000$$ as her capital for $$\dfrac{1}{4}^{th}$$ share in future profits and $$Rs.20,000$$ as her share of goodwill.
(2) Building is found overvalued by 20% and stock is found undervalued by 20% in the books. These assets are to be adjusted at their proper values.
(3) $$Rs. 1000$$ are to be maintained as reserve for doubtful debts.
Prepare Balance Sheet of the firm after Vimal's admission.

1501977_1700579_ans_f78e092436524156a5a790467232d61b.jpg

Jayesh and Kamal are partners in a firm sharing profits and losses in the ratio $$3 : 1$$. The following is their Balance Sheet as on 31st March, 2016 :

Balance Sheet as on $$31^{st} \, March, \, 2016$$
Liabilities Amount ₹ Assets Amount ₹
Capital accounts
Jayesh
Kamal
Current accounts
Jayesh
Kamal
Sundry creditors
General reserve

60,000
50,000

3,000
2,000
21,000
4,000
Building
Stock
Sundry debtors
Cash
Profit and loss account

60,000
40,000
31,000
4,000
5,000

1,40,000 1,40,000

They admitted Vimal as a partner on 1st April, 2016 in the firm on the following terms:
(1) She should bring $$Rs. 40,000$$ as her capital for $$\dfrac{1}{4}^{th}$$ share in future profits and $$Rs.20,000$$ as her share of goodwill.
(2) Building is found overvalued by 20% and stock is found undervalued by 20% in the books. These assets are to be adjusted at their proper values.
(3) $$Rs. 1000$$ are to be maintained as reserve for doubtful debts.
Prepare old partners current accounts.

1501975_1700578_ans_c6fa62248573435db609bdfe5cbce3b5.jpg

Kiya and Leela are partners sharing profits in the ratio of $$3: 2$$ . Kiran was admitted as a new partner with $$\dfrac{1}{5}th$$ share in the profits and brought in $$Rs. 24,000$$ as her share of goodwill premium that was credited to the capital accounts of Kiya and Leela respectively with $$Rs. 18,000$$ and $$Rs. 6000$$.
Calculate the new profit sharing ratio of Kiya, Leela and Kiran.

Amit and Been are partners in a firm sharing profits and losses in the ration of $$3:1$$. Chaman was admitted as a new partner for $$\cfrac{1}{6}$$ th share in the profits. Chaman acquired $$\cfrac{2}{5}$$th of his share from Amit. How much share did Chaman acquired from Beena?

Old ratio 3:1

chaman's share is 1/6

share acquired by chaman from amit 1/6 * 2/5 = 2/30

share acquired by chaman from beena = chaman share - share acquired from amit

= 1/6 - 2/30

= 5-2/30 = 3/30 = 1/10

so share acquired by chaman from beena = 1/10

P, Q and R are in a partnership and as at 1st April 2017 their respective capitals were; Rs. 40,000, Rs. 30,000 and Rs. 30,Q is entitled to a salary of Rs. 6,000 and Rs. 4,000 p.a. payable before division of profits. Interest is allowed on capital @ 5% p.a. and is not charged on drawings. Of the divisible profits, P is entitled to 50% the first Rs. 10,000, Q to 30% and R to 20%, rest of the profits are shared equally. Profits for the year ended the 31st March 2018, after debiting partners' salaries but before charging interest on capital was Rs. 21,000 and the partners had drawn Rs. 10,000 each on account of salaries, interest and profit.
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2018 showing the distribution of profit and the Capital Accounts of the Partners.

Profit And Loss Appropriation Account

Particulars	Amount	Particulars	Amount
To Interest on capital P = 400005%=2000 Q=300005%=1500 R=30000*5%=1500	5000	By net profit(after salary)	21000
To Profit T/f to First 10000 P=1000050%=5000 Q=1000030%=3000 R=10000*20%=2000 Remaining 6000 Equally i.e each 2000	16000
Total	21000	Total	21000

PARTNERS CAPITAL ACCOUNT

Particulars	P	Q	R	Particulars	P	Q	R
To drawings	10000	10000	10000	By bal b/d	40000	30000	30000
				By salaries		6000	4000
To bal c/d	39000	32500	29500	By Interest on capital	2000	1500	1500
				By P/L Appropriation A/c	7000	5000	4000

Total	49000	42500	39500		49000	42500	39500

Balance Sheet as on 31.03.2012
Liabilities Amount
Rs. Assets Amount
Rs.
Capital:
Ram
Madan
General reserve
Sundry creditors
1,00,00
1,00,00
40,000
55,300 Plant and machinery
Furniture
Sundry debtors 92,600
Less: R.D.D 1,000
Stock
Cash in hand
Cash at bank 90,000
15,000

91,000
68,000
4,200
27,100
2,95,300 2,95,300
Ram and Madan were partners in a firm sharing profits and losses equally. Following was their balance Sheet as on 31.03.2012:
On $$1^{st}$$April, 2012, Soham was admitted as a partner in the firm on the following terms:
(1) Soham is to bring in Rs. 1,00,000 as his capital. He is to be given $$\dfrac{1}{3}^{rd}$$ share in future profits.
(2) Goodwill of the firm to be raised at Rs. 30,It was decided that 'goodwill' should not appear in the books of the new firm.
(3) Furniture to be depreciated by 10%. Stock was valued at Rs. 70, 500.

Prepare:
(1) Profit and Loss Adjustment Account.
(2) Partner's Capital Accounts.
(3) Balance Sheet of the new firm.

Calculation of new ratio

Ram & Madan are partners in equal ratio

New ratio $$=$$ old ratio $$\times$$ balance ratio

Ram $$= \dfrac{1}{2} \times 2 \times 3 = \dfrac{2}{6}$$

Madam $$= \dfrac{1}{2} \times 2 \times 3 = \dfrac{2}{6}$$

Soham $$= \dfrac{1}{3} \times \dfrac{2}{2} = \dfrac{2}{6}$$

Therefore new ratio $$= 1 : 1: 1$$

1172512_978775_ans_4268b538defd4be4a2023fc0bc6228e5.png

On 31st March, 2014, the balances in the Capital Accounts of Saroj, Mahinder and Umar after making adjustments for profits and drawings, etc., were Rs. 80;000,Rs. 60,000 and Rs. 40,000 respectively. Subsequently it was discovered that the Interest on capital and drawings has been omitted. (a) The profit for the year ended 31st March, 2014 was Rs. 80,000;
(b) During the year Saroj and Mahinder each withdraw a sum of Rs. 24,000 in equal instalments in the end of each month and Umar withdrew Rs. 36,000.
(c) The interest on drawings was to be charged @ 5% pa. and interest on capital was to be allowed @ 10% p.a.
(d) The profit-sharing ratio among partners was 4 : 3 :1.
Showing your workings clearly, pass the necessary rectifying entry.

Calculation of opening capital

Saroj Mahinder Umar

Closing capital 80000 60000 40000

Add:drawings 24000 24000 36000

Less:profits (40000) (30000) (10000)

Opening capital 64000 54000 66000

Interest on capital@10% 6400 5400 6600

Interest on drawings@5%

(Total drawings*5%*5.5/12) 550 550 900

Notes: As date of drawings for Umar is not given we have assumed an average of 6 months.

36000*5%*6/12= 900

The adjusting entry is:-

Saroj's Capital A/c Dr. 2350

Mahinder's Capital A/c Dr. 1300

To Umar's Capital A/c 3650

(Being adjustment entry passed)

Table showing adjustments

Particulars	Saroj	Mahinder	Umar
Interest on capital	6400	5400	6600
Interest on drawings	(550)	(550)	(900)
Profits to be distributed	31800	23850	7950
Total	37650	28700	13650
Less:profits wrongly distributed	(40000)	(30000)	(10000)
Adjustments	(2350)	(1300)	3650

Azad and Benny are equal partners, Their capitals are Rs. 4,00,000 and Rs.7,80,000 respectively. After the accounts for the year have been prepared, it is discovered that interest @ 5% p.a. as provided in the partnership agreement has not been credited to the Capital Accounts before distribution of profit. It is decided to make an adjustment entry in the beginning of the next year. Record the necessary Journal entry.

Table showing Adjustments to be made

Partners	Profits to be withdrawn	Interest on capital to be provided	Adjustment
Azad	- 29500	20000	-9500
Benny	- 29500	39000	+9500

As interest on capital is calculated on the opening balance of capital and no information regarding profit credited is given,its not possible to ascertain the opening capital. Hence, we will assume that the capitals of the partners are fixed.

Due to omission of interest on capital, excess profits has been distributed to the partners which needs to be withdrawn.

Interest on capital is 4,00,000*5% + 780000*5% = 20000+39000 = 59000

This 59000 has been distributed in equal amounts among partners as profits.

So, Adjusting Entry is:-

Azad's Capital A/c Dr. 9500

To Benny's Capital A/c 9500

(Being adjustment entry provided )

Ritu and Gurpreet are partners in a firm. On 1st April, 2017, their capitals were Rs. 2,00,000 and Rs. 3,00,000 respectively. They decided to adopt a school, in the locality and develop play ground, instail drinking water facility and develop toilets. They decided to earmark 10% of the net profit every year for the above purpose. The Partnership Deed provides for the following:
(a) Ritu and Gurpreet each will get salary of Rs. 7,500 per month.
(b) Interest on capital is to be allowed. @ 5% p.a.
(c) Charge interest on drawings @ 10% p.a. Interest on Drawings was computed as Rs. 7,500 and Rs. 10,000 respectively for Ritu and Gurpreet. Profit of the firm for the year ended 31st March, 2018 was Rs. 10,00,Identify any four values that were kept in mind by Ritu and Gurpreet. Also, prepare Profit and Loss Appropriation Account of the firm for the year ended 31st March, 2018.

1. Discharging duty towards Nation.

2. Concern towards health of Children.

3. Encouraging education

4. Giving priority to education

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR 2018

Particulars	Amount	Particulars	Amount
To funds earmarked for facilities	1,00,000	By Net Profit	10,00,000
To Interest on capital Ritu's capital- 2,00,0005% & Gurpreet's capital- 3,00,0005%	25,000	By interest on drawings	17500
To Salary Ritu- 750012 Gurpreet-750012	1,80,000
To profit transferred to- Ritu's capital A/c-3,56,250 Gurpreet's capital A/c- 3,56,250	712500
Total	1017500	Total	1017500

$$R,S$$ and $$T$$ were partners in a firm sharing profits in the ratio of $$1:2:3$$. Their Balance sheet as on $$31.3.2015$$ as follows.
Refer image,
$$R, S$$ and $$T$$ decided to share the profits equally with effect from 1.4.For this it was agreed that :
(a) Goodwill of the firm be valued at $$Rs.1,50,000$$.
(b) Land be revalued at $$Rs.80,000$$ and building be depreciated by $$6\%$$.
(c) Creditors of $$Rs.6,000$$ were not likely to be claimed and hence be written off.
Prepare Revaluation Account, Partner's Capital Accounts and the Balance Sheet of the reconstituted firm.

Working Notes
Old Ratio 1 : 2 : 3
New Ratio 1 : 1 : 1

S/R of R $$= old Ratio - New Ratio = \dfrac{1}{6} - \dfrac{1}{3} =\boxed{ -\dfrac{1}{6}} \Rightarrow $$ Gaining

S/R of R $$= old Ratio - New Ratio = \dfrac{2}{6} - \dfrac{1}{3} = -\dfrac{0}{6} $$

S/R of R $$= old Ratio - New Ratio = \dfrac{3}{6} - \dfrac{1}{3} =\boxed{\dfrac{1}{6}} \Rightarrow $$ Sacrificing

R will compensate T, since he is gaining

R's Capital A/c Dr. 25,000

To T's Capital A/c 25,000

1957509_1944471_ans_5df2ab2b6d2741de92cc2cffa9a405f5.png

Reconstitution Of A Partnership Firm - Admission Of A Partner - Class 12 Commerce Accountancy - Extra Questions

Give any two features of Goodwill.

Give three items that may appear on the debit side of the Partner's Current Account

What is meant by Capitalisation of Average Profit?

Enumerate two steps involved in valuing Goodwill according to Super Profit Method.

Give the formula for calculation Goodwill by 'Capitalisation of Super Profit Method'.

Goodwill is to be valued at three year's of average profit. Profit for past four years ending on $$31^{st}$$March of the firm were:
$$2015-Rs 12,000; 2016 -Rs 18,000; 2017 - Rs 16,000; 2018 - Rs 14,000$$
Calculate amount of Goodwill.

What is meant by Average Profit?

Give the formula for calculation Goodwill by 'Capitalisation of Average Profit'.

How is new partner admitted to the firm?

Does the change in profit-sharing ratio result into dissolution of partnership firm? Give reason in support of your answer.

State two main rights that a newly admitted partner acquires in the firm.

$$X, Y$$ and $$Z$$ are partners sharing profits and losses in the ratio of $$5:3:2$$. They admit $$A$$ into partnership and give him $$1/5^{th}$$ share profits. Find the new profit ratio.

Durga and Naresh were partners in a firm. They wanted to admit five more members in the firm. List any two categories of individuals other than minors who cannot be admitted by them.

Neetu, Meentu and Teetu were partners in a firm. On 1st January, 2018, Meetu retired. On Meetu's retirement the goodwill of the firm was valued at Rs. $$4,20,000$$.
Pass necessary journal entry for the treatment of goodwill on Meetu's retirement.

Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?

$$X$$ and $$Y$$ are partners. $$Y$$ wants to admit his son $$K$$ into business. Can $$K$$ become the partner of the firm? Give reason.

Name any two factors which affect the Goodwill of a partnership firm.

What are 'Super Profits'?

What is meant by Super Profit?

The profit for the years ending on $$31^{st}$$March are as follows:
Year $$2014-Rs. 4,00,000; 2015 - Rs. 3,98,000; 2016 - Rs. 4,50,000; 2017 - Rs. 4,45,000$$ and $$2017 - Rs. 5,00,000$$
Calculate goodwill of the firm on the basis of $$4$$ years purchase of $$5$$ years average profit.

What do you understand by Reconstitution of a Partnership Firm?

Change in profit-sharing ratios amounts to dissolution of the partnership or partnership Firm. Give reason.

State any two occasions on which a firm can be reconstituted.

Why is revaluation of assets on reconstitution of partnership necessary?

A business has earned average profit of Rs.$$1,00,000$$ during the last few years. Find out the value of goodwill by capitalization method, given that the asset of the business are Rs.$$10,00,000$$ and its external liabilities are Rs.$$1,80,000$$. The normal rate of return is 10%

Average profit of the firm is Rs.$$2,00,000$$. Total assets of the firm are Rs.$$15,00,000$$ whereas Partner's Capital is Rs.$$12,00,000$$. If normal rate of return in a similar business is $$10%$$ of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Average profit of GS &Co. Rs.$$50,000$$ per year. Average capital employed in the business is Rs. $$3,00,000$$. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years purchase and
(ii) Capitalisation of Super Profit Method.

$$P, Q$$ and $$R$$ were partners in a firm sharing profits in the ratio of $$3:2:1$$. They admitted $$S$$ as a new partner for $$1/8^{th}$$ share in the profits, which he acquired $$1/16^{th}$$ from $$B$$ and $$1/16^{th}$$ form $$R$$. Calculated the new profit sharing ratio of $$P, Q, R$$ and $$S$$.

Short answer type question:
Why heirs of deceased partner are entitled to share of goodwill of the firm?

Give the Journal entry to distribute "Workmen Compensation Reserve" of $$Rs. 72,000$$ at the time of admission of $$Z$$, when these is no claim against it. The firm has two partners $$X$$ and $$Y$$.

If the amount brought by a new partner is more than his share in capital, the excess is known as _____.

Average profits of a firm during the last few years are $$Rs. 80,000$$ and the normal rate of return in a similar business is $$10\%$$. If the goodwill of the firm is $$Rs. 1,00,000$$ at $$4$$ years purchase of super profit, find the capital employed by the firm.

Amit and Been are partners in a firm sharing profits and losses in the ration of $$3:1$$. Chaman was admitted as a new partner for $$\cfrac{1}{6}$$ th share in the profits. Chaman acquired $$\cfrac{2}{5}$$th of his share from Amit. How much share did Chaman acquired from Beena?

Class 12 Commerce Accountancy Extra Questions

Year	2014-15	2015-16	2016-17	2017-18
Profit(Rs)	$$1,01,000$$	$$1,24,000$$	$$1,00,000$$	$$1,40,000$$
Weight	$$1$$	$$2$$	$$3$$	$$4$$

Year	2013-14	2014-15	2015-16	2016-17	2017-18
Profit(Rs.)	14,000	15,500	10,000	16,000	15,000

Year Ended	Net Profit
$$31^{st}$$March,2014	$$1,50,000$$
$$31^{st}$$March, 2015	$$1,80,000$$
$$31^{st}$$March, 2016	$$1,00,00$$(Including abnormal loss of Rs. $$1,00,000$$)
$$31^{st}$$March, 2017	$$2,60,000$$(Including abnormal gain (point)of Rs.$$40,000$$)
$$31^{st}$$March, 2018	$$2,40,000$$

year ended	$$31^{st}$$March,2018	$$31^{st}$$March,2017	$$31^{st}$$March,2016
Net Profit(Rs.)	$$2,30,000$$	$$2,00,000$$	$$1,70,000$$

Liabilities	(Rs.)	Assets	(Rs.)
Creditors Employees Provident Fund Workmen Compensation Reserve Capital A/cs: X 70,000 Y 31,000	15,000 10,000 5,800 1,01,000	Cash at Bank Sundry Debtors 20,000 Less: Provision for Doubtful Debts 600 Stock Fixed Assets Profit and Loss A/c	5,000 19,400 25,000 80,000 2,400
	1,31,800		1,31,800

Liabilities	Rs	Assets	Rs
Creditors Bills Payable Reserve fund Capitals: Sujata 1,20,000 Sanjota 80,000	1,00,000 50,000 50,000 2,00,000	Cash Stock Debtors Furniture Machinery Building Investments P and L Account	40,000 50,000 40,000 40,000 80,000 1,00,000 40,000 10,000
	4,00,000		4,00,000

Liabilities		Rs.	Assets	Rs.
Bills payable Sundry creditors Outstanding expenses Capitals: Kumar Rajashekar	$$1,80,000$$ $$1,50,000$$	$$10,000$$ $$58,000$$ $$2,000$$ $$3,30,000$$	Cash in hand Cash at Bank Sundry debtors Stock Plant and Machinery Building	$$10,000$$ $$40,000$$ $$60,000$$ $$40,000$$ $$1,00,000$$ $$1,50,000$$
		$$4,00,000$$		$$4,00,000$$

Liabilities	Amount ₹	Assets	Amount ₹
Capital accounts Jayesh Kamal Current accounts Jayesh Kamal Sundry creditors General reserve	60,000 50,000 3,000 2,000 21,000 4,000	Building Stock Sundry debtors Cash Profit and loss account	60,000 40,000 31,000 4,000 5,000
	1,40,000		1,40,000

Liabilities	Amount Rs.	Assets	Amount Rs.
Capital: Ram Madan General reserve Sundry creditors	1,00,00 1,00,00 40,000 55,300	Plant and machinery Furniture Sundry debtors 92,600 Less: R.D.D 1,000 Stock Cash in hand Cash at bank	90,000 15,000 91,000 68,000 4,200 27,100
	2,95,300		2,95,300

Reconstitution Of A Partnership Firm - Admission Of A Partner - Class 12 Commerce Accountancy - Extra Questions

Give any two features of Goodwill.

Give three items that may appear on the debit side of the Partner's Current Account

What is meant by Capitalisation of Average Profit?

Enumerate two steps involved in valuing Goodwill according to Super Profit Method.

Give the formula for calculation Goodwill by 'Capitalisation of Super Profit Method'.

Goodwill is to be valued at three year's of average profit. Profit for past four years ending on $$31^{st}$$March of the firm were:$$2015-Rs 12,000; 2016 -Rs 18,000; 2017 - Rs 16,000; 2018 - Rs 14,000$$Calculate amount of Goodwill.

What is meant by Average Profit?

Give the formula for calculation Goodwill by 'Capitalisation of Average Profit'.

How is new partner admitted to the firm?

Does the change in profit-sharing ratio result into dissolution of partnership firm? Give reason in support of your answer.

State two main rights that a newly admitted partner acquires in the firm.

$$X, Y$$ and $$Z$$ are partners sharing profits and losses in the ratio of $$5:3:2$$. They admit $$A$$ into partnership and give him $$1/5^{th}$$ share profits. Find the new profit ratio.

Durga and Naresh were partners in a firm. They wanted to admit five more members in the firm. List any two categories of individuals other than minors who cannot be admitted by them.

Neetu, Meentu and Teetu were partners in a firm. On 1st January, 2018, Meetu retired. On Meetu's retirement the goodwill of the firm was valued at Rs. $$4,20,000$$.Pass necessary journal entry for the treatment of goodwill on Meetu's retirement.

Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?

$$X$$ and $$Y$$ are partners. $$Y$$ wants to admit his son $$K$$ into business. Can $$K$$ become the partner of the firm? Give reason.

Name any two factors which affect the Goodwill of a partnership firm.

What are 'Super Profits'?

What is meant by Super Profit?

The profit for the years ending on $$31^{st}$$March are as follows:Year $$2014-Rs. 4,00,000; 2015 - Rs. 3,98,000; 2016 - Rs. 4,50,000; 2017 - Rs. 4,45,000$$ and $$2017 - Rs. 5,00,000$$Calculate goodwill of the firm on the basis of $$4$$ years purchase of $$5$$ years average profit.

What do you understand by Reconstitution of a Partnership Firm?

Change in profit-sharing ratios amounts to dissolution of the partnership or partnership Firm. Give reason.

State any two occasions on which a firm can be reconstituted.

Why is revaluation of assets on reconstitution of partnership necessary?

A business has earned average profit of Rs.$$1,00,000$$ during the last few years. Find out the value of goodwill by capitalization method, given that the asset of the business are Rs.$$10,00,000$$ and its external liabilities are Rs.$$1,80,000$$. The normal rate of return is 10%

Average profit of the firm is Rs.$$2,00,000$$. Total assets of the firm are Rs.$$15,00,000$$ whereas Partner's Capital is Rs.$$12,00,000$$. If normal rate of return in a similar business is $$10%$$ of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Average profit of GS &Co. Rs.$$50,000$$ per year. Average capital employed in the business is Rs. $$3,00,000$$. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:(i) Super Profit Method at three years purchase and(ii) Capitalisation of Super Profit Method.

Short answer type question:Why heirs of deceased partner are entitled to share of goodwill of the firm?

Give the Journal entry to distribute "Workmen Compensation Reserve" of $$Rs. 72,000$$ at the time of admission of $$Z$$, when these is no claim against it. The firm has two partners $$X$$ and $$Y$$.

If the amount brought by a new partner is more than his share in capital, the excess is known as _____.

Average profits of a firm during the last few years are $$Rs. 80,000$$ and the normal rate of return in a similar business is $$10\%$$. If the goodwill of the firm is $$Rs. 1,00,000$$ at $$4$$ years purchase of super profit, find the capital employed by the firm.

Amit and Been are partners in a firm sharing profits and losses in the ration of $$3:1$$. Chaman was admitted as a new partner for $$\cfrac{1}{6}$$ th share in the profits. Chaman acquired $$\cfrac{2}{5}$$th of his share from Amit. How much share did Chaman acquired from Beena?

Class 12 Commerce Accountancy Extra Questions

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Goodwill is to be valued at three year's of average profit. Profit for past four years ending on $$31^{st}$$March of the firm were:
$$2015-Rs 12,000; 2016 -Rs 18,000; 2017 - Rs 16,000; 2018 - Rs 14,000$$
Calculate amount of Goodwill.

Neetu, Meentu and Teetu were partners in a firm. On 1st January, 2018, Meetu retired. On Meetu's retirement the goodwill of the firm was valued at Rs. $$4,20,000$$.
Pass necessary journal entry for the treatment of goodwill on Meetu's retirement.

The profit for the years ending on $$31^{st}$$March are as follows:
Year $$2014-Rs. 4,00,000; 2015 - Rs. 3,98,000; 2016 - Rs. 4,50,000; 2017 - Rs. 4,45,000$$ and $$2017 - Rs. 5,00,000$$
Calculate goodwill of the firm on the basis of $$4$$ years purchase of $$5$$ years average profit.

Average profit of GS &Co. Rs.$$50,000$$ per year. Average capital employed in the business is Rs. $$3,00,000$$. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years purchase and
(ii) Capitalisation of Super Profit Method.

Short answer type question:
Why heirs of deceased partner are entitled to share of goodwill of the firm?