Class 12 Commerce Accountancy - Reconstitution Of A Partnership Firm - Retirement / Death Of A Partner

$X, Y$ and $Z$ are partners in a firm sharing profits in $2 : 2 : 1$ ratio. The fixed capitals of the partners were: $X\ Rs. 5,00,000;\, Y\ Rs. 5,00,000$ and $Rs. 2,50,000$ respectively. The Partnership Deed provides that interest on capital is to be allowed @ 10% p.a. $Z$ is to be allowed a salary of $Rs.2,000$ per month. The profit of the firm for the year ended 31st March, 2018 after debiting Z's salary was $Rs. 4,00,000$
Prepare Profit and Loss Appropriation. Account.

Profit and Loss Appropriation a/c
(for the year ended 31st March,2018)

Dr. Cr.

Particulars	Amount	Particulars	Amount
To Interest on Capital: - X - Y - Z	50000 50000 25000	By Profit and Loss a/c (after charging Z's salary)	400000
To Profit transferred to: - X's Capital a/c - Y's Capital a/c - Z's Capital a/c	110000 110000 55000
	400000		400000

$A, B$ and $C$ are partners sharing profits and losses in the ratio of $2 : 2 :1$ respectively. $A$ is entitled to a commission of 10% on the net profit. Net profit for the year is Rs. 1,10,Determine the amount of commission payable to $A$ .

Net Profit before charging commission= 110000

Rate of commission= 10%

A's commission = [Rate/100]* Net profit

= 110000 * 10/100

= 11000

What is meant by Purchased Goodwill?

Purchased Goodwill arises when one business buys another business and the purchase consideration paid is more than the value of net tangible assets received. It can never exist in a new business except by purchase. The purchased goodwill is shown on the assets side of the balance sheet. AS-10 provides that only purchased goodwill should be shown in the books of accounts. Price paid for the goodwill purchased depends upon the purchaser's expectations of future profits.

The average profit earned by a firm is Rs. $7,50,000$ which includes overvaluation of stock of Rs. $30,000$ of an average basis. The capital invested in the business Rs. $42,00,000$ and the normal rate of return is $15%$ . Calculate goodwill of the firm on the basis of $3$ times the super profit.

Step 1: Calculation of Normal Profit:

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

= 4200000 * [15/100]

= 630000

Step 2: Calculation of Average Profit:

Average Profit= Profit- Overvaluation of Stock

= 750000- 30000

= 720000

Step 3: Calculation of Super Profit:

Super Profit= Average Profit- Normal Profit

= 720000-630000

= 90000

Step 4: Calculation of Goodwill:

Goodwill = Super profit * No. of years purchase

Goodwill= 90000* 3

= 270000

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method. Total capital of the firm is Rs. $16,00,000$ .
Normal rate of return $10\%$ . Profit for the year is Rs. $2,00,000$ .

Step 1: Calculation of Capitalised Value of Profit:

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

= [200000*100]/10

= 2000000

Step 2: Calculation of Total Capital:

Total Capital= 1600000

Step 3: Calculation of Goodwill:

Goodwill= Capitalised Value of Profit- Total Capital

= 2000000-1600000

= 400000

What is meant by Self-generated Goodwill?

Self-generated or Inherent Goodwill is the value of business in excess of the fair value of it's net tangible assets. It arises over a period of time due to the good reputation of the firm. A cost cannot be placed on this type of goodwill. It is never recorded in the books of accounts. The valuation of this type of goodwill depends entirely on the judgement of the valuer.

How does the market situation affect the value of Goodwill of a firm?

Market Situation is very important in the valuation of goodwill of a firm. Goodwill, in the economic terms, is the capacity of a firm to earn in future based on it's past performance. If the market situation implies that there is no future for the firm, valuation of goodwill is useless.

When the risk prevalent in the market is low, the goodwill created by the firm is high.

Why Goodwill considered as an intangible asset but not a fictitious asset?

Goodwill is an intangible asset, which means that it cannot be seen or felt but has some realisable value. They are not recorded in the books of accounts.

Whereas, Fictitious assets are assets that are made up and do have any realisable value when sold. They are, however, recorded in the books of accounts.

How does location affect the Goodwill of a business?

The place or locality where the business is situated affected the Goodwill of a business. If the business is centrally located or located in a very prominent place where it can attract more customers, the turnover of the firm increases and hence, its goodwill. Location of the business should always be taken into consideration while ascertaining the value of goodwill of a firm.

When the General Reserve is distributed, is the partner's Capital Account debited or credited?

Sometimes a firm may have undistributed reserves and profits yet to be transferred to the partner's capital accounts, for example, general reserve. At the time of admission of a partner, these reserves are distributed to the partner's capital accounts in their old profit sharing ratio. The partner's capital account is credited with his share of the reserve.

The accounting entry is:

General Reserve a/c..... Dr.

To Partner's Capital a/c

If the new partner brings in his share of goodwill in cash and if goodwill also appears in books, how is existing amount of goodwill dealt with?

A new partner may bring in his share of premium for goodwill to compensate for the loss of share of profit of the partners. This premium is distributed among the partners in the sacrificing ratio. However, if goodwill already appears in the books, this existing goodwill is distributed among the partners in their old profit sharing ratio.

The accounting entry for distribution of existing goodwill:

Partners' Capital a/c... Dr.

To Goodwill a/c

Why do we distribute reserves, accumulated profits and losses among the old partners?

Sometimes the firm may have accumulated profits and reserves in the form of General Reserve, Reserve Fund and/or Profit and Loss account. These have not yet been transferred to the partner's capitals accounts. The new partner is not entitled to have a share of these accumulated profits, since he was not a part of the firm when these profits were earned. These profits are only transferred to the old partner's capitals accounts in their old profit sharing ratio.

Similarly, if there is an accumulated loss, it is transferred to the debit side of the partner's capitals accounts in their old profit sharing ratio.

State the reason of contributing for goodwill by a new partner at the time of his admission.

If the partnership firm is a well established firm and earns profits greater than the normal rate of return on it's capital, the new partner is required to contribute some additional amount known as the Goodwill. This is done to compensate the existing partners for their loss in the super normal profits of the firm due to the admission of the new partner.

When capitals are made proportionate to profit-sharing ratio and excess capital is paid back to a partner, is his Capital Account debited or credited?

When capitals are made proportionate to their profit sharing ratios, it is agreed that the capitals contributed by each partner should be equal to his share in profit. Any partner having excess capital, after such adjustment, withdraws the excess capital. Hence, the partner's capital account is debited with the amount of withdrawal.

The accounting entry is:

Partner's capital a/c... Dr.

To Cash a/c

Under what circumstances will the premium for goodwill paid by the incoming partner not be recorded in the books of account?

The premium for goodwill is an additional amount paid by the new partner to compensate to the old partners for the part of profit taken up by him. When this amount of premium is paid privately by the incoming partner to the old partner's, no entry is recorded in the books of accounts.

Why should a new partner contribute for goodwill on admission?

At the time of admission of a partner, the incoming partner brings in an extra amount to compensate the existing partners for their loss in the super profits because of the addition of his share in the profits of the firm. This additional amount is termed as the premium for goodwill and is distributed among the old partners in the sacrificing ratio.

State whether Revaluation Account is debited or credited to record an unrecorded asset.

The revaluation account is credited with the amount of the unrecorded asset at the time of admission of a partner. Unrecorded assets are those assets which do not appear in the books but are present in the business. These unrecorded assets are a gain to the firm and hence, are credited to the revaluation account.

The accounting entry is:

Asset a/c... (unrecorded amount) Dr.

To Revaluation a/c

State the need for treatment of goodwill on admission of a partner.

Goodwill is the result of the past efforts of the existing partners. When a new partner is admitted, he shares into these profits. The old partners need to be compensated for their loss in share. Hence, the new partner brings in some amount known as the goodwill to compensate for this loss. This is why goodwill needs to be revalued and give treatment during admission of a partner.

When existing Goodwill is written off, is the partner's Capital Account debited or credited?

When a new partner is admitted, goodwill of the business is valued afresh. For this, the goodwill that already appears in the books of accounts is written off and is transferred to the old partner's capitals accounts in their old profit sharing ratio. The old partner's capital accounts are debited with their share of goodwill.

The accounting entry is:

Partner's capital a/c.... Dr.

To Goodwill a/c

$A, B$ and $C$ are partners having capitals of $Rs.3,00,000, Rs. 2,00,000$ and $Rs. 1,00,000$ . They admit $D$ as a partner for $1/5^{th}$ share on $1^{st}$ April,On this day, the firm has reserve of $Rs. 60,000$ . $A$ and $B$ demand that reserve should be shared in proportion of capital whereas $C$ is of the opinion that it should be shared equally as they do not have partnership deed. $A$ and $B$ agree to $C's$ viewpoint.
What argument must have been put by $C$ that convinced both $A$ and $B$ ?

C is correct. When there is no partnership agreement, reserves are shared equally among the partners. According to Section 24 of the Partnership Act, 1890, if there is no partnership deed in place, all profits and reserves are to be shared equally among the partners.

Mohan and Sohan were partners in a firm sharing profits and losses in the ratio of $3:2$ . they admitted Ram for $1/4^{th}$ share on $1^{st}$ April,It was agreed that goodwill of the firm will be valued at $3$ years purchase of the average profit of last $4$ years which were $Rs. 50,000$ for 2014-15, $Rs. 60,000$ for 2015-16, $Rs. 90,000$ for 2016-17 and $Rs. 70,000$ for 2017-Ram did not bring his share of goodwill premium in cash. Record the necessary Journal entries in the books of the firm on Ram's admission when:
(a) Goodwill appears in the books at $Rs. 2,02,500$
(b) Goodwill appears in the books at $Rs. 2,05,500$ .

Calculation of amount of goodwill:

Average profit= [50000+60000+90000+70000]/4

= 67500

Goodwill of the firm= 67500 * 3

= 202500

Ram's share of goodwill= 1/4 * 202500

= 50625

(a) Goodwill appears in the books at 202500

Since the difference between goodwill that already appears in the books and goodwill calculated is zero, no entry is passed.

(b) Goodwill appears in the books at 205500

Difference= 205500- 202500

= 3000

JOURNAL

Mohan's Capital a/c.... Dr. 1800

Sohan's Capital a/c..... Dr. 1200

To Goodwill a/c 3000

(Being goodwill brought down to its agreed value)

$X$ and $Y$ are partners sharing profits and losses equally. They admit $Z$ as partner for $1/3^{rd}$ share which he takes from $Y$ . $Z$ brings $Rs. 50,000$ as his share of goodwill. $X$ is of the opinion that goodwill brought by $Z$ should be shared equally whereas $Y$ is of the opinion that $Rs. 50,000$ should be credited to his capital $X$ finally agrees to $Y's$ view.
What argument must been given by $Y$ that made $X$ agree?

Premium for goodwill is the additional amount brought in by the incoming partner to compensate the existing partners for their sacrifice in the profits of the firm. Since, Z acquires his entire share from Y, only Y is to be compensated for the loss and it is not to be distributed equally among the partners. Hence, the entire amount of premium is credited to Y's Capital account.

$A, B$ and $C$ were partners sharing profits and losses in the ratio of $6:3:1$ . They decide to take $D$ into partnership with effect from $1^{st}$ April,The new profit-sharing ratio between $A, B, C$ and $D$ will be $3:3:3:1$ . They also decided to record the effect of the following without affecting their book values, by passing a single adjustment entry:
Book Value (Rs.)
General Reserve 1,50,000
Contingency Reserve 60,000
Profit and Loss A/c(Cr.) 90,000
Advertisement Suspense A/c (Dr.) 1,20,000
Pass the necessary single adjustment entry, through the partner's Current Account.

JOURNAL

1. General reserve a/c..... Dr. 150000

Contingency reserve a/c.... Dr. 60000

Profit and loss a/c... Dr. 90000

To Advertisement suspense a/c 120000

To A's Current a/c 108000

To B's Current a/c 54000

To C's Current a/c 18000

(Being adjustment of accumulated reserves through the partner's current accounts)

$X$ and $Y$ are partners in a firm, sharing profits and losses in the ratio of $3:2$ . $Z$ is admitted as partner with $1/4$ share in profit. $Z$ acquires his share from $X$ and $Y$ in the ratio of $2:1$ .
Calculate the new profit sharing ratio.

X's old share= 3/5

Y's old share= 2/5

Z is admitted for 1/4th share

Sacrificing ratio is 2:1

Z acquired 2/3 * 1/4 = 2/12 from X

Z acquired 1/3 * 1/4 = 1/12 from Y

Hence,

X's new ratio= 3/5-2/12

= 26/60

Y's new ratio= 2/5-1/12

= 19/60

Z's share= 15/60

New Profit sharing ratio= 26:19:15

$X$ and $Y$ are partners with capitals of $Rs. 50,000$ each. They admit $Z$ as a partner with $1/4^{th}$ share in the profits of the firm. $Z$ brings in $Rs. 80,000$ as his share of capital. The Profit and Loss Account showed a credit balance of $Rs. 40,000$ as on date of admission of $Z$ .
Give necessary Journal entries to record the goodwill.

Working Note:

Calculation of hidden goodwill:

Total Capital of the firm after admission= 50000+50000+80000+40000

= 220000

Total capital of the firm based on Z's capital= 80000 * 4/1

= 320000

Hidden goodwill= 320000-220000= 100000

Z's share of Goodwill= 100000 * 1/4= 25000

JOURNAL

1. Cash a/c..... Dr. 80000

To Z's Capital a/c 80000

(Being capital brought in by Z)

2. Z's Capital a/c... Dr. 25000

To X's Capital a/c 12500

To Y's Capital a/c 12500

(Being Z's share of goodwill distributed among the partners in the ratio of 1:1)

$X$ and $Y$ are partners sharing profits and losses in the ratio of $3:2$ . They admit $Z$ into partnership. $X$ gives $1/3^{rd}$ of his share, while $Y$ gives $1/10^{th}$ from his share to $Z$ . Calculate new profit-sharing and sacrificing ratio.

X's old share= 3/5

Y's old share= 2/5

Z is admitted as a partner.

X's sacrifice= 3/5 * 1/3

= 3/15

Y's sacrifice= 1/10

Therefore, Z's share= 3/15 + 1/10

= 9/30

X's new share= 3/5- 3/15

= 6/15

Y's new share= 2/5- 1/10

= 3/10

New profit sharing ratio= 4:3:3

Sacrificing ratio= 2:1

$A$ and $B$ , carrying on business in partnership and sharing profits and losses in the ratio of $3:2$ , require a partner, when their Balance Sheet stood as:
Liabilities (Rs.) Assets (Rs.)
Creditors
A's Capital 51,450
B's Capital 36,750 11,800

88,200 Cash
Stock
Debtors
Furniture
Machinery 1,500
28,000
19,500
2,500
48,500
1,00,000 1,00,000
They admit $C$ into partnership and give him $1/8^{th}$ share in the future profits on the following terms:
(a) Goodwill of the firm be valued at twice the average of the last three years profits which amounted to $Rs. 21,000; Rs. 24,000$ and $Rs. 25,560$ .
(b) $C$ is to bring in cash for the amount of his share of goodwill.
(c) $C$ is to bring in cash $Rs. 15,000$ as his capital.
Pass Journal entries recording these transactions, draw out the Balance sheet of the new firm and state new profit sharing ratio.

(i) Calculation of new profit sharing ratio:

A's old share= 3/5

B's old share= 2/5

C is admitted for 1/8th share.

Remaining share= 1-[1/8]

= 7/8

A's new share= 3/5 * 7/8 = 21/40

B's new share= 2/5 * 7/8 = 14/40

C's share= 1/8 * 5/5= 5/40

New profit sharing ratio= 21:14:5

(ii) JOURNAL

1. Cash a/c... Dr. 20880

To C's Capital a/c 15000

To Premium for Goodwill a/c 5880

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

2. Premium for Goodwill a/c... Dr. 5880

To A's Capital a/c 3528

To B's Capital a/c 2352

(Being premium for goodwill distributed among the partners in the ratio of 3:2)

PARTNER'S CAPITAL A/C
Dr. Cr.

Particulars	A	B	C	Particulars	A	B	C
				By Balance b/d	51450	36750	Nil
				By Cash a/c	Nil	Nil	15000
To Balance c/d	54978	39102	15000	By Premium for Goodwill a/c	3528	2352	Nil
Total	54978	39102	15000	Total	54978	39102	15000

(iii) BALANCE SHEET

( after admission of C)

Liabilities	Amount (in Rs.)	Assets	Amount (in Rs.)
		Cash (1500+20880)	22380
Capital - A - B - C	54978 39102 15000	Debtors	19500
Creditors	11800	Stock	28000
		Furniture	2500
		Machinery	48500
Total	120880	Total	120880

Working Note:

1. Calculation of goodwill:

Average profit= [21000+24000+25560]/3

= 23520

Goodwill= 23520 * 2

= 47040

2. C's share of Goodwill= 47040 * 1/8

= 5880

Distribution among partners:

A's share= 5880 * 3/5= 3528

B's share= 5880 * 2/5= 2352

What are the assumptions in calculation of goodwill by average profit method ?

The average profit method is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations. The person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years.

What are the assumptions in calculation of goodwill by super profit method?

Super profit method for calculating goodwill is based on assumption that value of goodwill lie in excess profit over normal profit, It is desirable to value, goodwill on the basis of the excess profits and not the actual profits.

What do you mean by joint life policy?

A Joint life policy is an assurance policy taken on the joint lives of the partners. At the time of death of a partner, the firm becomes liable to pay the executors of the deceased partner. Payment of such a heavy amount out of the firm's resources is likely to affect a firm's finances very adversely. Joint life policy help firm to tackle such issue. The premium for such a policy is paid by the firm.

Jayant, Karthik and Leena were partners in a firm sharing profits and losses in the ratio of $5:2:3$ . Kartik died and Jayant and Leena decided to continue the business. Their gaining ratio was $2:3$ .
Calculate the new profit sharing ratio of Jayant and Leena.

New ratio = old ratio + gain ratio

Jayant new ratio = 5/10 + 2/5 = 45/50

Leena new ratio= 3/10 + 3/5 = 45/50

so the new ratio will be 1:1.

X, Y and Z are partners in a business, sharing profits and losses equally. Z dies, and the firm is dissolved. On the date of dissolution, the capital of X, Y and Z were Rs. 20,000, 15,000 and Rs. 10,000 respectively and the outside liabilities amounted to Rs. 65,The total assets of the firm realized Rs. 50,What is the amount of deficiency and how the partners shall share such deficiency if the partnership agreement is silent?

Solution : Section to which the given problem relates: Section 48(a).
Decision
The deficiency works out at Rs. 15,000 (i.e. Rs. 65,000 - Rs. 50,000). Such deficiency must be shared by X, Y and the estate of Z in their profit sharing ratio.

X, Y and Z are partners. The partnership agreement is silent. State whether the firm is dissolved on 31.03.99 in each of the following alternative cases:
case (a): If the firm was constituted for 5 years and 5 years have expired on 31.03.99.
Case (b): If the firm was constituted for completion of a construction of a bridge and the construction completed on 31.03.99.
Case (C): If X died on 31.03.99.
Case (d): If X applies for insolvency on 31.03.99 and is declared insolvent on 30.04.99.
Case (e): If X retires on 31.03.99.
Case (f): If X is expelled as partner on 31 03.99 and the expulsion is invalid.

Solution: Section to which the given problem relates: Section 42.
Decision and Reason: Unless agreed otherwise, the provisions of Section 42 would be applicable.
Case (a): The firm is dissolved by the expiry of the fixed term.
Case (b): The firm is dissolved, on the completion of that particular adventure for which the firm was constituted.
Case (c): The firm is dissolved on the death of a partner.
Case (d): The firm is not dissolved on 31.03.99. The firm would be dissolved on the date of order of adjudication, i.e. 30.04.99.
Case (e): The firm is not dissolved on the retirement of a partner. It will reconstitute.
Case (f) The firm is not dissolved on expulsion of a partner irrespective of the fact whether expulsion is valid or not.

Solve.
X, Y and Z jointly promise to pay? Rs. 9,000 to W. Who is liable to pay the amount to W in each of the following alternative cases
Case (a) If X dies,
Case (b) X, Y and Z die?

Solution:Section to which the given problem relates: Section 42.
Decision:
Case (a) Legal representatives of X jointly with Y and Z.
Case (b) Legal representatives of X, Y and Z jointly.

X, Y and Z are partners in a business sharing profits and losses equally. X dies and the firm is dissolved. On the date of dissolution, the capitals of X, Y and Z were Rs. 20,000, Rs. 15,000 and Rs. 10,000 respectively and the outside liabilities amounted to Rs. 65,The assets of the firm realised Rs. 15,The private estate and debts of each partners were as follows:Private estate Rs. 1,00,000 Rs. 2,00,000, Rs. 3,00,000 Private debt Rs. 1,10,000, Y Rs. 1,90,000, Z Rs. 3,10,000 The outside creditors claim that the deficiency of Rs. 50,000 (i.e., Rs. 65,000 -Rs. 15,000) should be contributed by the partners out of their private estate which amounted to 6,00,000 because the partners are jointly and severally liable to
pay firms debts. Discuss the validity of their claim.

Solution: Section to which the problem relates: Section 49.
Decision: The creditors can only ask Y to contribute. As he has surplus of private asset of Rs. 10,000.
Reason: Partner's private assets can be used for payment of firm's debts only after his private debts have been paid off.

X, Y and Z are partners in a business, sharing profits and losses equally. Z dies, and the firm is dissolved. On the date of dissolution, the capitals of X, Y and Z were Rs. 20,000, Rs. 15,000 and 10,00 respectively and the outside liabilities amounted to Rs. 65,X had advanced Rs. 10,000 as loan to the firm. State how the amount realized shall be used if the assets realized (a) Rs. 1,35,000 (b)Rs. 1,05,000?

Solution: Section to which the given problem relates: Section 48(b).
Decision:
Case(a): First, Rs. 65,000 to pay outside liabilities. Next, Rs. 10,000 to pay X's loan, and then Rs. 45,000 to pay the capital of A, B and C and the balance Rs. 15,000 among A, B and C in their profit sharing ratio.
Case (b): First Rs. 65,000 to pay outside liabilities. Next Rs. 10,000 to pay X's loan. Rs. 30,000 to pay the capital balance of X, Y and Z i.e. after adjusting the loss of Rs. 15,000 (Rs. 1,20,000 - Rs. 1,05,000) in their profit sharing ratio
X will be paid Rs. 15,000 (i.e. Rs. 20,000 - 5,000)
Y will be paid Rs. 10,000 (i.e. Rs. 15,000 - Rs. 5,000)
Z will be paid Rs. 5,000 (i.e. Rs. 10,000 - Rs.5,000).

A, B C, D and E are partners of a banking firm. State the legal position Of the firm for the following acts of partners
(a) A borrow's money in the name of the firm.
(b) B orders for certain quantity of wine, on the firm's letter head.
(c) C receives money from a borrower of a firm and utilized this amount for personal use without informing other partners about the receipt of this money.
(d). D borrows money on his own credit by giving his own promissory note and utilizes subsequently this amount for firm's use.

Solution:
Analysts of partners acts whether satisfying the conditions of Sec. 19.
Decision and Reason:
(a) The firm is liable for the acts of A and C. Their acts fall- within the scope of implied authority because all the conditions of Section 19,have been fulfilled.
(b) The firm is not liable for the acts of B, D. Their acts do not fall within the scope of implied authority because all the conditions of Section 19 have not been fulfilled.

Partners act	Whether the act done relates to the normal business of the firm	Whether the act has been done in the usual way	Whether the act has been done in/firms name or with an intention to bind
As act	Yes	Yes	Yes
B's act	No	Yes	Yes
Cs act	Yes	Yes	Yes
Ds act	Yes	Yes	No

How is gain ratio calculated?

Gaining ratio is calculated by the following formula:

Gain ratio = New ratio - Old ratio

Does partnership firm has a separate legal entity? Give reason in support of your answer.

Unlike Companies, partnership firm does not have separate legal entity. A partnership is formed by two or more person who decides to carry on some business and share the profits in some agreed ratio.

The partners are the contributors of capital and their is no common seal of a partnership firm. The partners signature represents the firm. The liabilities of the partners are limited to the capital contributed by them and if there is insolvency then the private properties of the partners are also liable. If the partners of the firm become insolvent, then automatically the firm becomes insolvent too.

State any three circumstances other than (i) admission of a new partner, (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may raise.

Three circumstances that require the valuation of the goodwill of a firm are:
(i) When the company or the business is being sold off to another company or when the company is amalgamated with another company;
(ii) When the partnership is sold to some other concern ongoing concern basis;
(iii) When the profit-sharing ratio in which the partners share their profits, changes.

List the items that are debited to Profit and Loss Appropriation Account.

Profit and loss Appropriation account is prepared to show the distribution of net profit among the partners. It is only an extension of profit and loss account.

The profit and loss appropriation account is debited with items which are appropriation of profits. Such items are:-

1.Salary to partners.

2.Interest on capital.

3. Commission to partners.

4.Transfer to reserves.

5.Share of partners in the profits.

What is meant by `unlimited liability of a partner'?

Unlimited liability means that the liability of a partner is joint and several. The personal assets of the partner can be utilised for paying a firm's debts.

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value Goodwill at three years purchase on weighted average profit method taking profits of last five years. Weights assigned to each year as 1,2,3,4 and 5 respectively to profits for the year ended 31st march 2014 toThe profits for these years were Rs.70,000, Rs 1,40,000, Rs.1,00,000, Rs. 1,60,000 and Rs. 1,65,000 respectively.

Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of Rs.20,000 in the year ended 31st March,2014.
(ii) There was an abnormal gain (profit) of Rs.30,000 in the year ended 31st March ,2015.
(iii) Closing stock as on 31st March, 2017 was over valued by Rs.10,000.
Calculate the value of goodwill.

Step - 1 Adjustment of profit

Year Profit

2014 70,000 + 20,000 (Abnormal Loss) = 90,000

2015 1,40,000 - 30,000 (Abnormal Profit) = 1,10,000

2016 1,00,000 = 1,00,000

2017 1,60,000 - 10,000 (treatment of stock) = 1,50,000

2018 1,65,000 + 10,000 (treatment of stock) = 1,75,000

Step - 2 Calculation of product

Year	Profit	Weight	Product
2014 2015 2016 2017 2018	90,000 1,10,000 1,00,000 1,50,000 1,75,000	1 2 3 4 5	90,000 2,20,000 3,00,000 6,00,000 8,75,000
		15	20,85,000

weighed Avg. Profit =

$\dfrac{20,85,000}{15} = 1,39,000$

Step - 3 Goodwill = weighted Avg Profit

$\times$ No of years

$= 1,39,000 \times 3$

$= 4,17,000$

A and B are partners sharing profits and losses in the ratio of 5:3.On first 1st April,2018, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years purchase of last three years profit (after allowing partners remuneration).Profits to be weighted 1:2:3,the greatest weight being given to last year. Net profit before partners remuneration were 2015-16 : Rs. 2,00,000; 2016-17: Rs 2,30,000; 2017-18 :Rs.2,50,000.The remuneration of the partners is estimated to be RS. 90,000 p.a.Calculate amount of goodwill.

Calculation of profits

$2015-16 \,\, (2,00,000 - 90,000) = 1,10,000$

$2016-17 \,\, (2,30,000 - 90,000) = 1,40,000$

$2017-18 \,\, (2,50,000 - 90,000) = 1,60,000$

$\therefore$

Year	Profits	Weights	Product
$2016$	$1,10,000$	$1$	$1,10,000$
$2017$	$1,40,000$	$2$	$2,80,000$
$2018$	$1,60,000$	$3$	$4,80,000$
Total		$6$	$8,70,000$

$\therefore$ Average profits

$= \dfrac{8,70,000}{6}$

$= 1,45,000$

$\therefore$ Goodwill

$= 1,45,000 \times 2$ years purchase

$= Rs.2,90,000$

Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of $3:2:1:4$ . Kumar retires and his share is acquired by Lakshya and Manoj in the ratio of $3:2$ . Calculate new profit-sharing ratio and gaining ratio of the remaining partners.

$\begin{matrix} & Lakshy & Manoj & Naresh \\ \text{old share}& \dfrac{2}{10} & \dfrac{1}{10} & \dfrac{4}{10} \\ \text{Acquired sahre from kumar} & \dfrac{3}{5} \ of \dfrac{3}{10} & \dfrac{2}{5} \ of \dfrac{3}{10} & Nil \\ & \dfrac{9}{50} & \dfrac{6}{50} & - \\ \text{New share} = (i) = (ii)& \dfrac{2}{10}+\dfrac{9}{50} & \dfrac{1}{10} + \dfrac{6}{50} & \dfrac{4}{10} + Nil\\& \dfrac{19}{50} & \dfrac{11}{50} & \dfrac{20}{50}\end{matrix}$

The new profit sharing ratio is

$19: 11 : 20$

Gaining ratio is

$3:2:0$

Note:

1) Since Lakshy & Manoj are acquiring Kumar share of profit in the ratio of

$3:2$ hence the giving ratio will be

$3:2$ between Lakshya & Manoj

2) Naresh has Neither sacrificed nor gained

Short notes:
Define Goodwill.

Goodwill is an element that arises from the reputation, connections and advantages earned by a business because of the way it works. Goodwill allows the business to earn profits greater than the expected return of the firm. Goodwill is an intangible asset which means that it cannot be seen or felt but can be bought and sold in the market. A well-established firm has better connections and reputation which helps it in earning super normal profits compared to newly incorporated firms; this monetary advantage is termed as the Goodwill of the firm.

$X, Y$ and $Z$ are sharing profits and losses in the ratio of $5:3:2$ With effect from $1st$ April, $2018$ ,they decide to share profits and losses in the ratio of $5:2:3$ Calculate each partner's gain or sacrificed due to the change in ratio.

Gaining ratio or sacrificing ration will be calculated as:

Gaining/Sacrificing Ratio = New Ratio - Old Ratio

Therefore:

For X = 5/10 - 5/10

= 5 - 5

= No Change

For Y = 2/10 - 3/10

= 2 - 3

= 1/10 Sacrificing Ratio

For Z = 3/10 - 2/10

= 3 - 2

= 1/10 Gaining Ratio

Calculate the value of firm's goodwill on the basis of one and half years purchase of the average profit of the last three years. the profit for first year was Rs. $1,00,000$ , profit for the second year was twice the profit of the first year and for third year profit was one and half times of the profit of the second year.

Calculation of goodwill :

Profit of the first year = Rs. 100000

Profit of the second year = Rs. 20000 (twice of first year's profit)

Profit of the third year = Rs. 300000

(One and half times of profit of second year)

Average profit = Total profit/ no. of years

Average profit = Rs. (100000 + 200000 + 300000) / 3

Average profit = Rs. 600000 / 3

Average profit = Rs. 200000

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

Goodwill = Rs. 200000 * 1.5 years

Goodwill = Rs. 300000

Calculate value of goodwill on the basis of three years purchase of average profit of the preceding five years were as follows:
year 2017-18 2016-17 2015-16 2014-15 2013-14
Profits(Rs) $8,00,000$ $15,00,000$ $18,00,000$ $4,00,000$ (Loss) $13,00,000$

Calculation of goodwill :

(1) Average profit = Total profit/ No. of years

Average profit = Rs. (800000 + 1500000 + 1800000 - 400000 + 1300000) / 5

Average profit = Rs. 5000000/5

Average profit = Rs. 1000000

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

Goodwill = Rs. 1000000 * 3

Goodwill = Rs.3000000

$A$ and $B$ are sharing profits and losses equally. With effect from $1st$ April, 2018, they agree to sharing-profits in the ratio $4:3$ .Calculate individual partner's gain or sacrifice due to the change in ratio.

Gaining ratio or sacrificing ratio will be calculated as:

Gaining/(Sacrificing Ratio) = New Ratio - Old Ratio

Therefore:

For A = 4/7 - 1/2

= 8 - 7

= 1/14 Gaining Ratio

For B = 3/7 - 1/2

= 6 - 7

= 1/14 Sacrificing Ratio

How does the nature of business affect the value of Goodwill of a firm?

A firm having stable demand for its high value-added goods will be able to earn more profits, and therefore, will have more goodwill.

State any two factors affecting the value of Goodwill of a firm.

Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits.

There are various factors which affect goodwill:

Customer service- If any business provides better customer services such as after sales services, early services, etc. then it will raise goodwill of the firm and attract more customers.
Location- If the business is centrally located or located in a busy area, it can attract more customers and hence results in more profit. Therefore, locational factor has to be considered as a factor while valuing goodwill.

Why is the value of goodwill determined when a firm is reconstituted?

Reconstitution of firm takes place when there is a new admission of a partner, retirement of partner, death of a partner or simply a change of terms of a partner. At the time of reconstitution of a firm, all assets and liabilities need to be revalued, goodwill need to be determined, reserves must be distributed among all partners in old profit sharing ratio. All these adjustments need to be done before reconstitution of firm because it is the combined effort of all parrtners and hence should be distributed among old partners in their old profit sharing ratio.

$X, Y$ and $Z$ are sharing profits and losses in the ratio of $5:3:2$ With effect from $1st$ April, $2018$ ,they decide to share profits and losses equally. Calculate each partner's gain or sacrifice due to the change in ratio.

Gaining ratio or sacrificing ration will be calculated as:

Gaining/Sacrificing Ratio = New Ratio - Old Ratio

Therefore:

For X = 1/3 - 5/10

= 10 - 15

= - 5/30 Sacrificing Ratio

For Y = 1/3 - 3/10

= 10 - 9

= 1/30 Gaining Ratio

For Z = 1/3 - 2/10

= 10- 6

= 4/30 Gaining Ratio

Do you distribute Reserves at the time of Reconstitution of a firm? Why?

Yes we distribute reserves at the time of reconstitution of a firm.

Reserves are the accumulated funds of the company which are kept aside for the general financial strengthening of the company. At the time of admission of a partner the reserve is distributed among the old partners in the old profit sharing ratio because the new partner has no share in it.

During retirement or death of a partner the reserve is distributed among all the partners in their old profit sharing ratio because before the reconstitution of new profit sharing ratio due to retirement or death of a partner all the old accumulated funds of the company should be divided among the partners.

The average net profit expected in future by $XYZ$ firm is Rs. $36,000$ per year. Average capital employed in the business by the firm is Rs. $2,00,000$ . The normal rate of return from capital invested in his class of business is $10%$ . Remuneration of the partners is estimated to be Rs. $6,000$ p.s. Find out the value of goodwill on the basis of two years purchase of super profit.

Step 1: Calculation of Normal Profit:

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

= 200000* [10/100]

= 20000

Step 2: Calculation of Actual Profit:

Actual Profit= 36000-6000

= 30000

Step 3: Calculation of Super Profit:

Super Profit= Actual profit- Normal Profit

= 30000- 20000

=10000

Step 4: Calculation of Goodwill:

Goodwill= 10000* 2

= 20000

$A$ and $B$ are partners in a firm sharing profits in the ratio of $2:1$ . They decided with effect from $1st$ April, $2017$ ,that they would share profits in the ratio of $3:2$ .But, this decision was taken after the profit for the year $2017-18$ amounting to Rs. $90,000$ was distributed in the old ratio.
Value of firm's goodwill was estimated on the basis of aggregate of two years' profits preceding the date decision became effective.
The profits for $2015-16$ and $2016-17$ were Rs. $60,000$ and Rs. $75,000$ respectively. It was decided that Goodwill Account will not be opened in the books of the firm and necessary adjustment be made through Capital Accounts which, on $31st$ $$ stood, at Rs. 1,50,000
and Rs. $90,000$ for B. Pass necessary Journal entries and prepare Capital Accounts.

journal Entries

Date	Particulars		Amount(Dr.)	Amount(Cr.)
31 MAR	A's Capital A/c	Dr.	6000
	To B's Capital A/c			6000
	(Being adjustment made for profit)
31 Mar	B's Capital a/c		9000
	To A's Capital a/c (Being adjustment for goodwill made)			9000

Partner's Capital a/c

Date	Particulars	A	B	Date	Particulars	A	B
31 Mar	To B's Capital a/c	6000		31 Mar	By bal b/d	150000	90000
31 Mar	To A's Capital a/c		9000	31 Mar	By A's Capital a/c		6000
31 Mar	To Bal c/d	153000	87000	31 Mar	By B's Capital A/c	9000

		159000	96000			159000	96000

Working Notes:

1. The share of profit as per the old ratio:

A = 90000 X (2/3) = 60000

B = 90000 X (1/3) = 30000

The share as per new ratio:

A = 90000 X (3/5) = 54000

B = 90000 X (2/5) = 36000

2. Goodwill = Average Profit x Years of purchase

= 67500 x 2

= 135000

Average Profit = (60000 + 75000)/ 2 = 67500

3. A: 3/5 - 2/3 = (1/15) Sacrificing ratio

B : 1/15 gaining ratio

$X, Y$ and $Z$ are partners sharing profits and losses in the ratio of $5:3:2$ , decided to share future profits equally with effect from $1st$ April, $2018$ . On that date, the goodwill appeared in the books at Rs. $12,000$ . But it was revalued at Rs. $3,000$ . Pass journal entries assuming that goodwill will not appear in the books of account.

1. X's Capital A/c.........Dr. 6000

Y's Capital A/c.........Dr. 3600

Z's Capital A/c.........Dr. 2400

To Goodwill A/c 12000

(Being existing Goodwill written off in old ratio)

2. Y's Capital A/c.........Dr. 100

Z's Capital A/c.........Dr. 400

To X's Capital A/c 500

(Being goodwill shared among the partners)

workings:

X: 1/3 - 5/10 = (5/30) Sacrifice ratio

Y: 1/3 - 3/10 = 1/30 Gaining ratio

Z: 1/3 - 2/10 = 4/30 Gaining Ratio

A business has earned average profit of Rs. $4,00,000$ during the last few years and the normal rate of return in similar business is $10\%$ . Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at $3$ years purchase of super profits.
Assets of the business were Rs. $40,00,000$ and its external liabilities Rs. $7,20,000$ .

(i) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= Assets- External Liabilities

= 4000000- 720000

= 3280000

Step 2: Calculation of Normal Profit:

Normal Profit= 3280000 * [10/100]

= 328000

Step 3: Calculation of Average Profit:

Average Profit= 400000

Step 4: Calculation of Super Profit:

Super Profit= 400000- 328000

= 72000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * [100/Normal Rate Of Return]

= 72000 * [100/10]

= 720000

(ii) Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= Assets- External Liabilities

= 4000000- 720000

= 3280000

Step 2: Calculation of Normal Profit:

Normal Profit= 3280000 * [10/100]

= 328000

Step 3: Calculation of Average Profit:

Average Profit= 400000

Step 4: Calculation of Super Profit:

Super Profit= 400000- 328000

= 72000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * Number of years' of purchase

= 72000 * 3

= 216000

$X$ and $Y$ are partners in a firm sharing profits and losses in the ratio of $3:2$ , With effect from $1st$ April, $2018$ , they decided to share future profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account showed a credit balance of Rs. $1,50,000$ . Record the Journal entry for the distribution of the balance in the profit and Loss Account immediately before the change in the profit-sharing ratio.

Profit and Loss A/c..... Dr. 150000

To X's Capital A/c 90000

To Y's Capital A/c 60000

(Being profit distributed in old ratio)

Working notes :-

X's share in profit = 150000 * 3/5 = 90000

Y's share in profit = 150000 * 2/5 = 60000

A firm earns profit of Rs $5,00,000$ . Normal rate of Return in a similar type of business is $10%$ . The value of total assets (excluding goodwill) and total outsider liabilities as on the date of goodwill are Rs. $55,00,000$ and Rs. $14,00,000$ respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

(i) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 2: Calculation of Normal Profit:

Normal Profit= 4100000 * [10/100]

= 410000

Step 3: Calculation of Average Profit:

Average Profit= 500000

Step 4: Calculation of Super Profit:

Super Profit= 500000- 410000

= 90000

Step 5: Calculation of Goodwill:

Goodwill= 90000 * [100/10]

= 900000

(ii) Capitalisation of Average Profit Method:

Step 1: Calculation of Capitalised value of Profit:

Capitalised value of Profit= Profit * [100/ Normal Rate of return]

= 500000 * [100/10]

= 5000000

Step 2: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 3: Calculation of Goodwill:

Goodwill= Capitalised value of Profit- Capital Employed

= 5000000- 4100000

= 900000

$A, B$ and $C$ are partners sharing profit and losses in the ratio $5:4:1$ . Calculate new profit sharing ratio, sacrificing ratio in each of the following cases :
Case $1.C$ acquires $1/5th$ share from $A$ .
Case $2.C$ acquires $1/5th$ share from $A$ and $B$
Case $A, B$ and $C$ will share future profits and losses equally.
Case $C$ acquires $1/10th$ share of $A$ and $1/2$ share of $B$ .

Case 1.

Calculation of new profit sharing ratio:

A's new ratio= old ratio-sacrifice

= 5/10-1/5

= 3/10

B's ratio= 4/10

C's new ratio= 1/10+1/5

= 3/10

New ratio= 3:4:3

Calculation of sacrificing ratio:

A's sacrifice= 1/5

C's gain= 1/5

Case 2.

Calculation of new profit sharing ratio:

A's new ratio= 5/10-1/5

= 3/10

B's new ratio= 4/10-1/5

= 2/10

C's new ratio= 1/10+1/5+1/5

= 5/10

New ratio= 3:2:5

Calculation of sacrificing ratio:

A's sacrifice= 1/5

B's sacrifice= 1/5

Ratio= 1:1

C's gain= 1/5+1/5

= 2/5

Case 3.

New profit sharing ratio= 1:1:1

Calculation of sacrificing ratio:

A's sacrifice= 5/10-1/3

= 5/30

B's sacrifice= 4/10-1/3

= 2/30

Sacrificing ratio= 5:2

C's gain= 7/30

Case 4.

Calculation of sacrificing ratio:

A's sacrifice= 5/10 * 1/10

= 5/100

B's sacrifice= 4/10 * 1/2

= 4/20

Sacrificing ratio= 5:20 = 1:4

Calculation of new profit sharing ratio:

A's new share= 5/10-5/100

= 9/20

B's new share= 4/10-4/20

= 4/20

C's new share= 5/100+4/20

= 25/100

New ratio= 45:20:25

= 9:4:5

Jay and Raj are partners sharing profits in the ratio of $3:2$ , with effect from $1st$ April, $2018$ , they decided to share profits equally. Goodwill appeared in the books at Rs. $25,000$ . As on $1st$ April, $2018$ , it was valued at Rs. $1,00,000$ . They decided to carry goodwill in the books of the firm.
Pass the Journal entry giving effect to the above.

1. Jay's Capital A/c........Dr. 15000

Raj's Capital A/c........Dr. 10000

To Goodwill A/c 25000

(Being goodwill already appearing in the books written off in old ratio)

2. Goodwill A/c..........Dr. 100000

To Jay's Capital A/c 50000

To Raj's Capital A/c 50000

(Being the revalued amount of Goodwill raised in new ratio)

$A, B$ and $C$ shared profits and losses in the ratio of $3:2:1$ respectively. With effect from $1st$ April, $2018$ ,they agreed to share profits equally. The goodwill of the firm was valued at Rs. $18000.$ Pass necessary Journal entries when
(a) Goodwill Account is not opened
(b) Goodwill Account is opened.

Gaining ratio or sacrificing ration will be calculated as:

Gaining/Sacrificing Ratio = New Ratio - Old Ratio

Therefore:

For A = 1/3 - 3/6

= 2 - 3

= 1/6 Gaining Ratio

For B = 1/3 - 2/6

= 2 - 2

= No Change

For C = 1/3 - 1/6

= 2 - 1

= 1/6 Sacrificing Ratio

If no Goodwill account is not opened than an adjustment entry will be passed as under: Rs.18000 * 1/6 = Rs.3000

C's Capital Account Dr. 3000

To A's Capital Account 3000

If Goodwill Account is opened, first goodwill account is created by crediting partners capital account in their old profit sharing ratios:

Goodwill Account Dr. 18000

To A's Capital Account 9000

To B's Capital Account 6000

To C's Capital Account 3000

Than, Goodwill will be written off in the new profit sharing ratio:

A's Capital Account Dr.6000

B's Capital Account Dr. 6000

C's Capital Account Dr. 6000

To Goodwill Account 18000

$A$ and $B$ are partners in a firm, sharing profits in the ratio of $4:1$ . They decided to share future profit in the ratio of $3:2$ w.e.f. $1st$ April, $2018$ . On that day, Profit and Loss Account showed a debit balance of Rs. $1,00,000$ . Pass Journal entry to give effect to the above.

A's Capital A/c..............Dr. 80000

B's Capital A/c...............Dr. 20000

To Profit and Loss A/c 100000

(Being debit balance of profit and loss shared in old ratio)

$X, Y$ and $Z$ are partners sharing profits and losses in the ratio of $5:3:2$ . From $1st$ April, $2018$ , they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill should be valued at two years' purchase of the average profit of the preceding five years. The profits and losses of the preceding years are :
Year $2013-14$ $2014-15$ $2015-16$ $2016-17$ $2017-18$
Profit (Rs.) $70,000$ $85,000$ $45,000$ $35,000$ $10,000$ (Loss)
Pass the necessary journal entries:
(i) When goodwill account is opened
(ii) When goodwill account is not opened

The treatment of goodwill in partnership accounts is a major adjustment. Goodwill in simpler terms is the reputation of a business valued in monetary terms. Whenever there is change in the constitution of the partnership, an adjustments need to be made to the goodwill.

In the given question there is change in profit sharing ratio of the partners and we have to value the goodwill on the basis of information provided and then adjustment entries needed to be passed.

1. valuation of Goodwill:- calculation of average profit

Total profits of 5 years= ( 70,000+85,000+45,000+35,000-10,000)/5

= 2,25,000/5 = 45,000

2. Value of goodwill based on 2 years purchase= 2 * 45,000= 90,000

Our next step will be the adjustment. We have to pass separate entries for the separate given situation.

1. When goodwill account is opened:- As we have to open a goodwill account, any entry needs to be passed through the goodwill account. So, in this case first we will distribute goodwill among the partners in old ratio and then write off the goodwill in the new ratio.

Goodwill A/c 90,000

To X' capital A/c 45,000

To Y' capital A/c 27,000

To Z' capital A/c 18,000

( Goodwill distributed in ratio 5:3:2)

X' capital A/c 30,000

Y's capital A/c 30,000

Z's capital A/c 30,000

To Goodwill A/c 90,000

( Goodwill written off in 1:1:1)

2. When Goodwill account is not opened:- In this case we have to pass journal entries through the capital accounts of the partners. As there is change in profit sharing ratio, it means one or more partner is purchasing from another partner. So, there is loss to some and gain for some partner.

So, first we need to find the gaining ratio of the partners.

Gaining Ratio = New ratio - Old ratio

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

Y = 1/3 - 3/10 = 1/30

Z=1/3 - 2/10 = 4/30

X is the sacrificing partner and Y and Z are the gaining partner. So, Y and Z needs to compensate X.

Goodwill = 90,000 * 5/30= 15,000. So, now 15,000 amount of goodwill will be compensated to X by Y and Z in the ratio of 1:4 i.e gaining ratio.

Y's capital A/c 3000

Z's Capital A/c 12,000

To X's capital A/c 15,000

$A, B$ and $C$ who are presently sharing profits and losses in the ratio of $5:3:2$ decided to share future profits and losses in the ratio of $2:3:4$ . Give the Journal entry to distribute 'Investments Fluctuation Reserve' of Rs. $20,000$ at the time of change in profit sharing ratio, when Investment (market value Rs. $95,000$ ) appears in the books at Rs. $1,00,000$ .

1. Investment Fluctuation Reserve A/c.......Dr. 5000

To Investments A/c 5000

(Being the decrease in the market value of the investments adjusted with the reserve)

2. Investment Fluctuation Reserve A/c.......Dr. 15000

To X's Capital A/c 7500

To Y's Capital A/c 4500

To Z's Capital A/c 3000

(Being the balance in investment fluctuation reserve distributed in the old ratio)

Anita, Bimla and Cherry are three partners. On 1st April 2017, their Capitals stood as: Anita Rs. 1,00,000, Bimla Rs. 2,00,000 and Cherry Rs. 3,00,It was decided that: (a) they would receive interest on Capital @ 5% pa., (b) Anita would get a salary of Rs. 5,000 per month, (c) Bimla would receive commission @ 5% of net profit after deduction of commission, (d) 10% of the divisible profit would be transferred to the General Reserve. Before the above items were taken into account, the profit for the year ended 31st March 2018 was Rs. 5,00,Prepare Profit and Loss Appropriation Account and the Capital Accounts of the Partners.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To interest on capital Anita-1000005%=5000 Bimla-2000005%=10000 Cherry-300000*5% =15000	30000	By net profit	500000
To salary(5000*12)	60000
To commission(500000*5/105)	23810
To General Reserve(Notes)	38619
To profit T/f to Anita's capital A/c=115857 Bimla's capital A/c=115857 Cherry's capital A/c=115857	347571

Notes:- 500000-30000-60000-23809=386191*10%=38619

PARTNERS CAPITAL ACCOUNTS

Particulars	Anita	Bimla	Cherry	Particulars	Anita	Bimla	Cherry
				By balance b/d	100000	200000	300000
				By interest on capital	5000	10000	15000
				By salary	60000
				By commission		23810
To balance c/d	280857	349667	430857	By P/L Appropriation A/c	115857	115857	115857
Total	280857	349667	430857	Total	280857	349667	430857

$X$ and $Y$ are in partnership sharing profits in the ratio $2:3.$ With effect from $1st$ April, $2018$ , they agreed to share profits in the ratio of $1:2$ . For the purpose, goodwill of the firm is to be valued at two years' purchase of the average profit of last three years, which were Rs. $1,50,000 ; 1,60,000 ;$ and Rs. $2,00,000$ respectively. The reserves appear in the books at Rs. $1,10,000$ Partners decide to continue showing reserves in the books. You are required to give effect to the change by passing a single Journal entry.

1. Y's Capital a/c.......Dr 30000

To X's Capital a/c 30000

(Being adjustment for goodwill and reserve made)

Working notes:

1. Goodwill = Average profit x no. of years of purchase

= (150000 + 160000 + 200000)/3 x 2 = 340000

2. X : 2/5 - 1/3 = 1/15 sacrifice

Y : 3/5 - 2/3 = 1/15 gain

3. Debit Y's capital A/c and Credit X capital for goodwill + reserve = 22667 + 7333 =30000

The goodwill of a firm is valued at $Rs. 1,35,000$ at $3$ years purchase of super profit. Determine the missing values:
Average Profit $= \dfrac{3,60,000}{3} = Rs. 1,20,000$

Normal Profit $= Rs. ...\times \dfrac{15}{100} = Rs. ...$

Super Profit $=$ Average Profit $-$ Normal Profit
$= Rs. 1,20,000 - Rs. ... = Rs. ..$
Goodwill $=$ Super Profit $\times$ No. of year's purchase.

Step 1: Calculation of Super Profit from Goodwill:

Super Profit= Goodwill/ No. of years' of purchase

= 135000/3

= 45000

Step 2: Calculation of normal profit from super profit:

Normal Profit= Average profit- Super Profit

= 120000- 45000

= 75000

Step 3: Calculation of capital employed from normal profit:

Capital Employed= Normal Profit/ [Rate of return/100]

= 75000 / [15/100]

= 500000

Anshul and Asha are partners, sharing profits and losses in the ratio of 3 :Anshul being a non-working a - partner contributed Rs. 8,00,000 as her capital. Asha being a working partner did not contribute capital. The Partnership Deed provides for interest on capital @ 5% and salary to every working partner @ Rs.2,000 per month. Net profit before providing for interest on capital and partner's salary for the year ended 31st March 2018 was Rs. 32,Show distribution of profits.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Interest on capital (32,000*5/8)	20000	By net profit	32000
To salary(32,000*3/8)	12000
Total	32,000	Total	32,000

Interest on Anshul's capital = 8,00,000*5%= 40,000

Salary to Asha = 2000*12=24,000

As profit available is less than the appropriation to be made, the appropriation are to be made in the ratio of interest on capital and salary i.e. 40,000:24000 = 5:3

P and Q were partners in a firm sharing profits and losses equally. Their fixed capitals were Rs. 3,00,000 each respectively. The Partnership Deed provided for interest on capital @ 12% per annum. For the year ended 31st March, 2016, the profits of the firm were distributed without providing interest on capital. Pass necessary adjustment entry to rectify the error.

Here no need to pass adjustment as ultimate effect of transaction is similar.

Interest to be provided

P = 300000 * 12% = 36000 and Q = 300000 * 12% = 36000

Total = 36000+36000 = 72000

Above part wrongly distributed as a profit in equal ratio = P= 36000, Q = 36000

As both are same so it is compensating error as ultimate effect is same.

$X, Y$ and $Z$ who are presently sharing profits and losses in the ratio of $5:3:2$ decide to share future profits and losses in the ratio of $2:3:5$ . Give the Journal entry to distribute 'Workmen Compensation Reserve' of Rs. $1,20,000$ at the time of change in profit-sharing ratio, when there is a claim of Rs. $80,000$ against it.

Workmen Compensation Reserve A/c....... Dr. 120000

To X's Capital A/c 20000

To Y's Capital A/c 12000

To Z's Capital A/c 8000

To Workman compensation liability 80000

(Being the excess after the claim against the workmen compensation reserve, distributed in the old ratio and workman liability creation)

Nitin, Tarun and Amar are partners sharing profits equally and decide to share profits in the ratio of $2:2:1$ w.e.f. $1st$ April, $2018$ . The extract of their Balance Sheet as at $31st$ March, $2018$ is as follows :
Liabilities Rs. Assets Rs.
Investments Fluctuation $60,000$ Investments (At cost) $4,00,000$
Pass the Journal entries in each of the following situation :
(i) When its Market Value is not given
(ii) When its Market Value is given as Rs. $4,00,000$ ;
(iii) When its Market Value is given as Rs. $4,24,000$ ;
(iv) When its Market Value is given as Rs. $3,70,000$ ;
(v) When its Market Value is given as Rs. $3,10,000.$

1. Nitin's capital A/c 4000

Tarun's capital A/c 4000

To Amar's capital A/c 8000

(Being adjustment made for reserve, assuming that there is no decrease in value of investments)

2. Nitin's capital A/c 4000

Tarun's capital A/c 4000

To Amar's capital A/c 8000

(Being adjustment made for reserve)

3. Nitin's capital A/c 2400

Tarun's capital A/c 2400

To Amar's capital A/c 4800

(Being adjustment made for reserve)

4. Investment fluctuation reserve A/c.................Dr. 30000

To Investments A/c 30000

(Being a decrease in the market value of investment adjusted through reserve)

Nitin's capital A/c 2000

Tarun's capital A/c 2000

To Amar's capital A/c 4000

(Being adjustment made for balance reserve)

5. Investment fluctuation reserve A/c.................Dr. 60000

Profit and Loss A/c.............................................Dr. 30000

To Investments A/c 90000

(Being a decrease in the market value of investment adjusted through reserve)

Notes:

1. Calculation of gaining and sacrificing ratio

Nitin: 2/5 - 1/3 = 1/15

Tarun: 2/5 - 1/3 = 1/15

Amar: 1/5 - 1/3 = (2/15)

2. It is assumed that the partners decide to maintain the investment reserve in future.

$X, Y$ and $Z$ who are sharing profits and losses in the ratio of $5:3:2$ decide to share future profits and losses in the ratio of $2:3:5$ with effect from $1st$ April, $2018$ . Workmen Compensation Reserve appears at Rs. $1,20,000$ in the Balance Sheet as on $31st$ March, $2018$ and Workmen Compensation Claim is estimated at Rs. $1,50,000$ Pass Journal entries for the accounting treatment of Workmen Compensation Reserve.

Workmen compensation reserve A/c............Dr. 120000

Revaluation reserve a/c .................................Dr. 30000

To provision for W.C. Claim a/c 150000

(Being reserve distributed in old ratio)

X's Capital A/c 15000

Y's Capital A/c 9000

Z's Capital A/c 6000

To Revaluation reserve 30000

(Being reserve raised in the new ratio)

A, B and C are partners sharing profits and losses in the ratio $5:3:2$ . Their Balance Sheer as $31st$ March, $2017$ stood as follows :
Liabilities Rs. Assets Rs.
Capital A/cs' :
A 2,50,000
B 2,50,000
C 2,00,000

7,00,000 Land and Building 3,50,000
General Reserve 60,000 Machinery 2,40,000
Investments Fluctuation Reserve 30,000 Computers 70,000
Sundry Creditors 90,000 Investments (Market Value Rs. 90,000) 1,00,000
Sundry Debtors 50,000
Cash in Hand 10,000
Cash at Bank 55,000
Advertisement Suspense 5,000
8,80,000 8,80,000
They decide to share profits equally w.e.f. $1st$ April, $2017$ . They also agreed that :
(i) Value of Land and Building be decreased by $5 \%$
(ii) Value of Machinery be decreased by $5 \%$
(iii) A Provision for Doubtful Debts be created @ $5 \%$ on Sundry Debtors.
(iv) A motor cycle valued at Rs. $20,000$ was unrecorded and is now to be recorded in the books.
(v) Out of Sundry Creditors, Rs. $10,000$ is not payable.
(vi) Goodwill is to be valued at $2$ years' purchase of last $3$ years profits. Profits being for $2016-17$ - Rs. $50,000$ (Loss) ; $2015-16$ - Rs. $2,50,000$ and $2014-15$ - Rs. $2,50,000$
(vii) $C$ was to carry out the work for reconstituting the firm at a remuneration (including expenses) of Rs. $5,000$ . Expenses came to Rs. $3,000$ .
Pass Journal entries and prepare Revaluation Account.

Journal entries

Date	Particulars		Amt.(Dr.)	Amt.(Cr.)
1.	Revaluation A/c	Dr.	29500
	To Land and Building A/c			17500
	To Machinery A/c			12000
	(being decrease in assets)
2.	Motor cycle A/c	Dr.	20000
	To Revaluation A/c			20000
	(being motor cycle now recorded in books
3.	Sundry creditors A/c	Dr.	10000
	To Revaluation A/c			10000
	(being decrease in value of creditors)
4.	Revaluation A/c	Dr.	5000
	To Cash A/c (expenses)			3000
	To C’s Capital A/c			2000
	(being revaluation expenses and C’s remuneration recorded)
5.	Revaluation A/c	Dr.	2500
	To Provision for debtors A/c			2500
	(being provision on debtors created)
6.	A’s Capital A/c	Dr.
	B’s Capital A/c	Dr.
	C’s Capital A/c	Dr.
	To Revaluation A/c
	(being transfer of loss on revaluation in old ratio)
7.	A’s Capital A/c	Dr.	2500
	B’s Capital A/c	Dr.	1500
	C’s Capital A/c	Dr.	1000
	To Advertisement Suspense A/c			5000
	(being advertisement suspense written off)
8.	B’s Capital A/c	Dr.	13000
	C’s Capital A/c	Dr.	52000
	To A’s Capital A/c			65,000
	(being adjustment for goodwill, general reserve and investment fluctuation reserve)

Revaluation A/c

Particulars	Amount	Particulars	Amount
To Land and Buildings A/c	17500	By Motor cycle A/c	20000
To Machinery A/c	12000	By Sundry creditors A/c	10000
To Cash A/c	3000	By Partner’s Capital A/c:	7000
To C’s Capital A/c	2000	A (5/10) : 3500
To Provision for debtors A/c	2500	B (3/10) : 2100
		C (2/10) : 1400

	37000		37000

Workings:

1. Calculation of gain and sacrifice:

A: 1/3 -5/10 = (5/30)

B: 1/3 – 3/10 = 1/30

C: 1/3 – 2/10 = 4/30

2. Goodwill = [(50000) + 250000+ 250000] / 3

= 150000 x 2 = 300000

$R$ and $S$ are partners sharing profits in the ratio of $5:3$ . $T$ joins the firm as a new partner. $R$ gives $1/4^{th}$ of his share and $S$ gives $1/5^{th}$ of his share to the new partner.
Find out new profit-sharing ratio.

R's old share= 5/8

S's old share= 3/8

T's share= R's sacrifice + S's sacrifice

= [5/8 * 1/4] + [3/8 * 1/5]

= [5/32] + [3/40]

= 37/160

R's new share= 5/8- 5/32

= 15/32

S's new share= 3/8-3/40

= 12/40

New Profit sharing ratio= 75:48:37

$A$ and $B$ are partners sharing profits and losses in the proportion of $7:5$ . They agree to admit $C$ , their manager, into partnership who is to get $1/6^{th}$ share in the profit. He acquires this share as $1/24^{th}$ from $A$ and $1/8^{ht}$ from $B$ . Calculate new profit-sharing ratio.

A's old share= 7/12

B's old share= 5/12

C is admitted for 1/6th share

A's new ratio= 7/12- 1/24

= 13/24

B's new ratio= 5/12- 1/8

= 7/24

New Ratio of the firm= 13:7:4

State whether Revaluation Account is debited or credited to record the increase in the value of Plant and Machinery.

At the time of admission of a new partner, all assets are revalued and any gain or loss on such revaluation is transferred to the Revaluation account. An increase in the value of plant and machinery is recorded by crediting the revaluation account since it is a gain for the firm.

Kabir and Farid are partners in a firm, sharing profits and losses in the ratio of $7:3$ . Kabir surrenders $2/10^{th}$ from his share and Farid surrenders $1/10^{th}$ from his share in favour of Jyoti new partner.
Calculate new profit-sharing ratio and sacrifice ratio.

(i) Calculation of new ratio:

Kabir's old share= 7/10

Farid's old share= 3/10

Jyoti acquires 2/10 from Kabir and 1/10 from Farid

Therefore, Jyoti's share= 2/10 + 1/10

= 3/10

Kabir's new ratio= 7/10- 2/10

= 5/10

Farid's new ratio= 3/10- 1/10

= 2/10

New Profit sharing ratio= 5:2:3

(ii) Calculation of sacrificing ratio:

Kabir's sacrifice= 2/10

Farid's sacrifice= 1/10

Hence, sacrificing ratio= 2:1

Find new Profit-Sharing Ratio:
(i) $R$ and $T$ are partners in a firm sharing profits in the ratio of $3:2$ . $S$ joins the firm. $R$ surrenders $1/4^{th}$ of his share and $T$ surrenders $1/5^{th}$ of his share in favour of $S$ .
(ii) $A$ and $B$ are partners.They admit $C$ for $1/4^{th}$ share. In future, the ratio between $A$ and $B$ would be $2:1$ .
(iii) $A$ and $B$ are partners sharing profits and losses in the ratio of $3:2$ . They admit $C$ for $1/5^{th}$ share in profit. $C$ acquires $1/5^{th}$ of his share from $A$ and $4/5^{th}$ share from $B$ .
(iv) $X, Y$ and $Z$ are partners in the ratio of $3:2:1$ . $W$ joins the firm as a new partners for $1/6^{th}$ share in profits. $Z$ would retain his original share.
(v) $A$ and $B$ are equal partners. they admit $C$ and $D$ as partners with $1/5^{th}$ and $1/6^{th}$ share respectively.
(vi) $A$ and $B$ are partners sharing profits/losses in the ratio of $3:2$ . $C$ is admitted for $1/4^{th}$ share. $A$ and $B$ decide to share equally in future.

(i) R's old share= 3/5

T's old share= 2/5

R's sacrifice= 3/5 * 1/4

= 3/20

T's sacrifice= 2/5 * 1/5

= 2/25

New Profit Sharing ratio of the partners:

R= 3/5-3/20

= 9/20

T= 2/5-2/25

= 8/25

S= 3/20 + 2/25

= 23/100

Therefore,

Profit sharing ratio= 45:32:23

(ii) A's old share= 1/2

B's old share= 1/2

C is admitted for 1/4th share

Remaining share= 1-[1/4]

= 3/4

New Ratio between A and B should be 2:1

Hence, A's new share= 2/3 * 3/4

= 6/12

B's new share= 1/3 * 3/4

= 3/12

New Profit sharing ratio= 6:3:3

= 2:1:1

(iii) A's old share= 3/5

B's old share= 2/5

C is admitted for 1/5th share in the profit.

A's sacrifice= 1/5 * 1/5

= 1/25

B's sacrifice= 1/5 * 4/5

= 4/25

New profit sharing ratio of the partners:

A's new share= 3/5-1/25

= 14/25

B's new share= 2/5-4/25

= 6/25

C's share= 1/5

Ratio= 14:6:5

(iv) X's old share= 3/6

Y's old share= 2/6

Z's old share= 1/6

W is admitted for 1/6th share. Since, Z would retain his original share;

Remaining share= 1-[1/6]-[1/6]

= 4/6

X's new share= 4/6 * 3/5

= 12/30

Y's new share= 4/6 * 2/5

= 8/30

New Profit sharing ratio= 12:8:5:5

(v) A's old share= 1/2

B's old share= 1/2

C and D are admitted for 1/5th and 1/6th share respectively.

Hence, remaining share= 1- [1/5]- [1/6]

= 19/30

A's new share= 1/2 * 19/30

= 19/60

B's new share= 1/2 * 19/30

= 19/60

New Profit Sharing ratio= 19:19:12:10

(vi) A's old share= 3/5

B's old share= 2/5

C is admitted for 1/4th share.

Remaining share= 1-[1/4]

= 3/4

Since, A and B will share equally, their ratio is 1:1

A's new share= 1/2 * 3/4

= 3/8

B's new share= 1/2 * 3/4

= 3/8

New Profit sharing ratio= 3:3:2

State whether Revaluation Account is debited or credited to record the decrease in the value of Plant and machinery.

At the time of admission of a new partner, all assets are revalued to ascertain that they are recorded in the books at their current values. Any gain or loss from such revaluation is transferred to the revaluation account. A decrease in the value of plant and machinery is debited to the revaluation since it a loss for the firm.

$A$ and $B$ are partners sharing profits in the ratio of $4:3$ . Their Balance Sheet as at $31st$ March, $2018$ stood as :
Liabilities Rs. Assets Rs.
Sundry Creditors 28,000 Cash 20,000
Reserve 42,000 Sundry Debtors 1,20,000
Capital A/cs
$A$ 2,40,000
$B$ 1,20,00

3,60,000

Stock

1,40,000
Fixed Assets 1,50,000
4,30,000 4,30,000
They decided that with effect from $1st$ April, $2018$ , they will share profits and losses in the ratio of $2:1$ . For this purpose they decided that :
(i) Fixed Assets are to be depreciated by $10 \%$
(ii) A Provision for Doubtful Debts of $6 \%$ be made on Sundry Debtors.
(iii) Stock be valued at Rs. $1,90,000$
(iv) An amount of Rs. $3,700$ included in Creditors is not likely to be claimed.
Partners decided to record the revised values in the books. However, They do not want to disturb the Reserve. You are required to pass Journal entries, prepare Capital Accounts of Partners and the revised Balance Sheet.

Journal entries

Date

Particulars

Amt.(Dr.)

Amt.(Cr.)

Revaluation A/c

To Fixed assets A/c

(being fixed assets revalued)

Revaluation A/c

To Provision on debtors a/c

(being provision on debtors created)

Stock a/c

To Revaluation a/c

(being stock revalued)

Creditors a/c

To Revaluation a/c

(being creditors written off)

Revaluation a/c

To A’s capital a/c

To B’s capital a/c

(being revaluation profit shared in old ratio)

A’s capital a/c

To B’s capital a/c

(being adjustment for reserves in gaining ratio)

Dr.

15000

7200

50000

3700

31500

4000

15000

7200

50000

3700

18000

13500

4000

Particulars	A	B	Particulars	A	B
To B ’s capital a/c (Reserves)	4000		By bal b/d	240000	120000
To bal c/d	254000	137500	By revaluation a/c	18000	13500
			By A’s capital a/c (Reserves)		4000

	258000	137500		258000	137500

Revised Balance Sheet

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	24300	Cash	20,000
Reserve	42,000	Sundry Debtors 120000	1,12800
Capital A/cs A 2,54,000 B 137500	391500	Less:P/B/D 7200 Stock	1,90,000
		Fixed Assets	1,35,000
	4,57800		4,57800

Workings:

1. Calculation of gain and sacrifice:

A: 2/3 -4/7 = 2/21

B: 1/3 – 3/7 = (2/21)

$A$ and $B$ are in partnership sharing profits and losses as $3:2$ . $C$ is admitted for $1/4^{th}$ share. Afterwards, $D$ enters for $20$ paise in the rupee. Compute profit-sharing ratio of $A, B, C$ and $D$ after $D's$ admission.

A's old share= 3/5

B's old share= 2/5

C is admitted for 1/4th share

Remaining share= 1-[1/4]

= 3/4

A's new share= 3/5 * 3/4

= 9/20

B's new share= 2/5 * 3/4

= 6/20

New Profit sharing ratio after C's admission= 9:6:5

Now, ratio before D's admission= 9:6:5

D is admitted for 20/100th share

Remaining share= 1-[20/100]

= 80/100

Hence, A's new ratio= 9/20 * 80/100

= 72/200

B's new ratio= 6/20 * 80/100

= 48/200

C's new ratio= 5/20 * 80/100

= 40/200

New profit sharing ratio after D's admission= 72:48:40:40

= 9:6:5:5

$A$ and $B$ are partners in a firm, sharing profits and losses in the ratio of $3:2$ . $A$ new partner $C$ is admitted. $A$ surrender $1/5^{th}$ of his share and $B$ surrender $2/5^{th}$ of his share in favour of $C$ . For the purpose of $C's$ admission, goodwill of the firm is valued at $Rs. 75,000$ and $C$ brought in his share of goodwill in cash, which is retained in the firm's books. Journalize the above transactions.

JOURNAL

1. Cash a/c..... Dr. 21000

To Premium for goodwill a/c 21000

(Being Premium for goodwill brought in by C)

2. Premium for goodwill a/c.... Dr. 21000

To A's Capital a/c 9000

To B's Capital a/c 12000

(Being premium for goodwill brought in by C, distributed among the partners in the ratio 3:4)

Working Note:

A's old share= 3/5

B's old share= 2/5

C is admitted as a new partner.

A's sacrifice= 3/5 * 1/5

= 3/25

B's sacrifice= 2/5 * 2/5

= 4/25

Sacrificing ratio= 3:4

A share in premium of goodwill :- 21000 * 3/7 = 9000

B share in premium of goodwill :- 21000 * 4/7 = 12000

C's share= 3/25 + 4/25

= 7/25

Hence, C's share of goodwill= 7/25 * 75000

= 21000

$M$ and $J$ are partners in a firm, sharing profits in the ratio of $3:2$ . They admit $R$ s a new partner. The new profit sharing ratio between $M, J$ and $R$ will be $5:3:2$ . $R$ brought in $Rs. 25,000$ for his share of premium for goodwill. Pass necessary Journal entries for the treatment of goodwill.

JOURNAL

1. Cash a/c...... Dr. 25000

To Premium for Goodwill a/c 25000

(Being premium for goodwill brought in by R)

2. Premium for Goodwill a/c... Dr. 25000

To M's Capital a/c 12500

To J's Capital a/c 12500

(Being premium for goodwill brought in by R distributed in the ratio of 1:1)

Working Note:

1. Calculation of sacrificing ratio:

M's sacrifice= 3/5- 5/10 = 1/10

J's sacrifice= 2/5- 3/10 = 1/10

Sacrificing ratio= 1:1

2. Distribution of goodwill:

M's share= 1/2 * 15000= 12500

J's share= 1/2 * 15000= 12500

$A, B, C$ and $D$ are in partnership sharing profits and losses in the ratio of $36:24:20:20$ respective $E$ joins the partnership for $20\%$ share and $A, B, C$ and $D$ in future would share profits among themselves as $3/10:4/10:2/10:1/10$ . Calculate new profit sharing ratio after $E's$ admission.

A's old share= 36/100

B's old share= 24/100

C's old share= 20/100

D's old share= 20/100

E is admitted for 20/100th share

Remaining share= 1-[20/100]

= 80/100

New ratio among partners should be 3:4:2:1

A's new share= 3/10 * 80/100

= 24/100

B's new share= 4/10 * 80/100

= 32/100

C's new share= 2/10 * 80/100

= 16/100

D's new share= 1/10 * 80/100

= 8/100

New profit sharing ratio= 24:32:16:8:20

= 6:8:4:2:5

$A$ and $B$ are partners sharing profits and losses in the ratio of $2:1$ . They take $C$ as a partner for $1/5^{th}$ share. The Goodwill Account appears in the books at its full value, $Rs. 15,000$ . $C$ is to pay proportionate amount as premium for goodwill, which he pays to $A$ and $B$ privately.
Pass necessary entries.

A's Capital a/c.... Dr. 10000

B's Capital a/c.... Dr. 5000

To Goodwill a/c 15000

(Being goodwill written-off among the partners in the ratio 2:1)

Note:

Old profit sharing ratio= 2:1

A's Capital is debited by 2/3 * 15000= 10000

B's capital is debited by 1/3 * 15000= 5000

Goodwill paid privately is not shown in the books.

$A$ and $B$ are partners sharing profits and losses in the ratio of $2:5$ . They admit $C$ on the condition that he will bring in $Rs. 14,000$ as his share of goodwill in cash, to be distributed between $A$ and $B$ . $C's$ share in the future profits or losses will be $1/4^{th}$ . What will be the new profit-sharing ratio, and what amount of goodwill brought in by $C$ will be received by $A$ and $B$ ?

(i) New profit sharing ratio:

A's old ratio= 2/7

B's old ratio= 5/7

C is admitted for 1/4th share.

Remaining share= 1-[1/4]

= 3/4

A's new share= 3/4 * 2/7

= 6/28

B's new share= 3/4 * 5/7

= 15/28

New Profit sharing ratio of partners= 6:15:7

(ii) Distribution of Goodwill:

A's share= 2/7 * 14000

= 4000

B's share= 5/7 * 14000

= 10000

$B$ and $C$ are in partnership sharing profits and losses as $3:1$ . They admit $D$ into the firm, $D$ paying a premium of $Rs. 15,000$ for $1/3^{rd}$ share of the profits. As between themselves, $B$ and $C$ agree to share the future profits and losses equally. Draft journal entries showing appropriation of the premium money.

JOURNAL

1. Cash a/c.... Dr. 15000

To Premium for Goodwill a/c 15000

(Being premium for goodwill brought in by D)

2. Premium for Goodwill a/c... Dr. 15000

To B's Capital a/c 15000

(Being premium brought in by D transferred to B's capital)

3. C's Capital a/c... Dr. 3750

To B's Capital a/c 3750

(Being goodwill charged from C due to his gain in profit sharing)

Working Note:

1. Calculation of sacrificing ratio:

D is admitted for 1/3rd share

Remaining share= 1-[1/3]

= 2/3

B and C agree to share profits equally in future.

Hence, B's new share= 2/3 * 1/2 = 1/3

C's new share= 2/3 * 1/2 = 1/3

B's sacrifice= 3/4- 1/3

= 5/12

C's gain= 1/4- 1/3

= -1/12

2. D brings in 15000 as goodwill for 1/3rd share in profit.

Therefore, total goodwill of the firm= 15000 * 3/1

= 45000

C's share of goodwill= 45000 * 1/12

= 3750

$X$ and $Y$ were partners sharing profits in the ratio of $3:2$ . They admitted $P$ and $Q$ as new partner. X $X$ surrendered $1/3^{rd}$ of his share in favour of $P$ and $Y$ surrendered $1/4^{th}$ of his share in favour $Q$ . Calculate new profit-sharing ratio $X, Y, P$ and $Q$ .

X's old share= 3/5

Y's old share= 2/5

P is admitted for 3/5 * 1/3= 3/15

Q is admitted for 2/5 * 1/4= 2/20

X's new share= 3/5- 3/15

= 6/15

Y's new share= 2/5- 2/20

= 6/20

P's share= 3/15

Q's share= 2/20

New Profit sharing ratio= 4:3:2:1

Give journal entries to record the following arrangements in the books of the firm:
(a) $B$ and $C$ are partners sharing profits in the ratio of $3:2$ . $D$ is admitted, paying a premium (goodwill) of $Rs. 2,000$ for $1/4^{th}$ share of the profits, shares of $B$ and $C$ remain as before.
(b) $B$ and $C$ are partners sharing profits in the ratio of $3:2$ . $D$ is admitted, paying a premium of $Rs. 2,100$ for $1/4^{th}$ share of profits which he acquires $1/6^{th}$ from $B$ and $1/12^{th}$ from $C$ .

(a) JOURNAL

1. Cash a/c.... Dr. 2000

To Premium for Goodwill a/c 2000

(Being premium for goodwill brought in by D)

2. Premium for Goodwill a/c..... Dr. 2000

To B's Capital a/c 1200

To C's Capital a/c 800

(Being premium brought in by D distributed among the partners in the ratio of 3:2)

Working note:

Distribution of goodwill:

B's share= 3/5 * 2000 = 1200

C's share= 2/5 * 2000= 800

(b) JOURNAL

1. Cash a/c........ Dr. 2100

To Premium for Goodwill a/c 2100

(Being premium for goodwill brought in by D)

2. Premium for Goodwill a/c..... Dr. 2100

To B's Capital a/c 1400

To C's Capital a/c 700

(Being premium brought in by D distributed among the partners in the ratio of 2:1)

Working note:

1. Sacrificing ratio:

B's sacrifice= 1/6

C's sacrifice= 1/12

Ratio= 2:1

2. Distribution of goodwill:

B's share= 2/3 * 2100 = 1400

C's share= 1/3 * 2100 = 700

$X$ and $Y$ are partners in a firm sharing profits in the ratio of $3:2$ . On $1^{st}$ April, 2018, they admit $Z$ as a new partner for $1/4^{th}$ share in the profits. $Z$ contributes the following assets towards his capital and for his share of goodwill:
Stock $Rs. 60,000$ , Debtors $Rs. 80,000$ , Land $Rs. 1,00,000$ , Plant and machinery $Rs. 40,000$ . On the date of admission of $Z$ , the goodwill of the firm was valued at $Rs. 6,00,000$ .
Pass necessary Journal entries in the books of the firm on $Z's$ admission.

JOURNAL

1. Stock a/c.... Dr. 60000

Debtors a/c... Dr. 80000

Land a/c.... Dr. 100000

Plant and machinery a/c... Dr. 40000

To Z's Capital a/c 130000

To Premium for goodwill a/c 150000

(Being capital and premium for goodwill brought in by C in the form of assets)

2. Premium for Goodwill a/c.... Dr. 150000

To X's Capital a/c 90000

To Y's Capital a/c 60000

(Being premium for goodwill distributed among partners in the ratio of 3:2)

Working Note:

1. Calculation of Z's share of goodwill:

Z's share of Goodwill= 600000 * 1/4= 150000

Z's share of capital = 280000 - 150000 = 130000

2. Distribution of premium for goodwill:

X's share= 3/5 * 150000= 90000

Y's share= 2/5 * 150000= 60000

$A$ and $B$ are partners sharing profits and losses in the proportion of $7:5$ . They agree to admit $C$ , their Manager, into partnership who is to get $1/6^{th}$ share in the business. $C$ brings in $Rs. 10,000$ for his capital and $Rs. 3,600$ for the $1/6^{th}$ share of goodwill which he acquire $1/24^{th}$ from $A$ and $1/8^{th}$ from $B$ . The profits for the first year of the new partnership amount to $Rs. 24,000$ . Pass necessary journal entries in connection with $C's$ admission and apportion the profits between the partners.

JOURNAL

1. Cash a/c... Dr. 13600

To C's Capital a/c 10000

To Premium for Goodwill a/c 3600

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

2. Premium for Goodwill a/c.. Dr. 3600

To A's Capital a/c 900

To B's Capital a/c 2700

(Being premium for goodwill brought in by C distributed among the partners in the ratio of 1:3)

3. Profit and Loss Appro, a/c.... Dr. 24000

To A's Capital a/c 13000

To B's Capital a/c 7000

To C's Capital a/c 4000

(Being profit after C's admission distributed among the partners in the ratio of 13:7:4)

Working Note:

1. Calculation of sacrificing ratio:

A's sacrifice= 1/24

B's sacrifice= 1/8

Hence, Sacrificing ratio= 1:3

2. Distribution of premium for goodwill in sacrificing ratio:

A's share= 3600 * 1/4= 900

B's share= 3600 * 3/4= 2700

3. Calculation of new profit sharing ratio:

A's new share= 7/12- 1/24= 13/24

B's new share= 5/12- 1/8= 7/24

C's share= 1/4

New profit sharing ratio= 13:7:4

4. Distribution of profit in new profit sharing ratio:

A's share= 24000 * 13/24= 13000

B's share= 24000 * 7/24= 7000

C's share= 24000 * 4/24= 4000

Simrat and Manbir are partners in a firm. They being in a large unskilled labour is employed. The employees largely lived in slum area. They, in order to improve their hygiene, entered into agreement with a doctor to do routine medical check-up. They also set up a canteen in the business premises to provide hygienic food at a subsidised rate. Identify the values in their action.

Taking care of health through regular medical check-up; and helping employees by making available hygienic food at a subsidized price.

Short answer type question:
For which share of goodwill a partner is entitled at the time of retirement?

At the time of retirement of a partner, the retiring partner is entitled to his share of goodwill, i.e., in his profit sharing ratio in the firm. Goodwill is valued as per the agreement or partnership deed and is compensated by remaining partners in their gaining ratio.

Short answer type question:
Why the value of goodwill need to be determined on retirement or death of a partner?

In case of a retirement or death of a partner, the continuing partner will gain in terms of profit sharing ratio. Therefore, continuing partner are required to compensate the retiring partner or heirs of deceased partner with his share of goodwill. For this purpose, goodwill need to be determined on the date of the retirement or death of a partner and adjusted through the capital accounts of a partner.

Short answer type question:
Give any one distinction between sacrificing ratio and gaining ratio.

Sacrificing ratio - It is that ratio in which the old partner have agreed to sacrifice their shares in profit in favour of the new partner.

Gaining ratio - It is the ratio in which the continuous partner acquire outgoing partner's share.

The difference between sacrificing ratio and gaining ratio is :

Sacrificing ratio is calculated at the time of admission of a new partner, while gaining ratio is calculated at the time of retirement of a partner.

$A$ and $B$ are partners in firm sharing profits and losses in the ratio of $3:2$ . They admit $C$ into partnership for $1/5^{th}$ share. $C$ brings in $Rs. 30,000$ as capital and $Rs. 10,000$ as goodwill. At the time of admission of $C$ , goodwill appears in the Balance Sheet of $A$ and $B$ at $Rs. 3,000$ . The new profit sharing ratio of the partners will be $5:3:2$ . Pass necessary Journal entries.

JOURNAL

1. A's Capital a/c.... Dr. 1800

B's Capital a/c.... Dr. 1200

To Goodwill a/c 3000

(Being goodwill written off in the ratio of 3:2)

2. Cash a/c.. Dr. 40000

To C's Capital a/c 30000

To Premium for goodwill a/c 10000

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

3. Premium for Goodwill a/c... Dr. 10000

To A's Capital a/c 5000

To B's Capital a/c 5000

(Being premium for goodwill brought in by C distributed among the partners in the ratio of 1:1)

Working Note:

1. Calculation of sacrificing ratio:

A's sacrifice= 3/5- 5/10= 1/10

B's sacrifice= 2/5- 3/10= 1/10

Sacrificing ratio= 1:1

2. Distribution of premium for goodwill:

A's share= 10000 * 1/2= 5000

B's share= 10000 * 1/2= 5000

$X$ and $Y$ are partners in a firm sharing profits in the ratio of $3:2$ . They decided to share profits equally w.e.f. $1st$ April, $2018$ and also that they will use $10 \%$ of the net profit in keeping the neighbourhood clean. Identify the values in their action.

Contribution towards the cleanliness of the surrounding and caring for the health and hygiene of the employees.

$A$ and $B$ are partners in a business, sharing profits and losses in the ratio of $1/3^{rd}$ and $2/3^{rd}$ . On $1^{st}$ April,2018, their capitals are $Rs. 8,000$ and $Rs. 10,000$ respectively. On that date, they admit $C$ in partnership and give him $1/4^{th}$ share in the future profits. $C$ brings in $Rs. 8,000$ as his capital and $Rs. 6,000$ as goodwill. The amount of goodwill is immediately withdrawn by the old partners in cash. Draft the Journal entries and show the Capital Accounts of all the Partners. Calculate the proportion in which partners would share profits and losses in future.

(i) JOURNAL

1. Cash a/c.... Dr. 14000

To C's Capital a/c 8000

To Premium for Goodwill a/c 6000

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

2. Premium for goodwill a/c... Dr. 6000

To A's Capital a/c 2000

To B's Capital a/c 4000

(Being premium for goodwill distributed among the partners in the ratio of 1:2)

3. A's Capital a/c.... Dr. 2000

B's Capital a/c.... Dr. 4000

To Cash a/c 6000

(Being amount of goodwill withdrawn by the partners)

(ii) PARTNER'S CAPITAL A/C

Dr. Cr.

Particulars	A	B	C	Particulars	A	B	C
To Cash	2000	4000	Nil	By Balance b/d	8000	10000	Nil
				By Cash	Nil	Nil	8000
				By Premium for Goodwill	2000	4000	Nil
To Balance c/d	8000	10000	8000
	10000	14000	8000		10000	14000	8000

(iii) Calculation of new Profit sharing ratio:

A's old share= 1/3

B's old share= 2/3

C is admitted for 1/4th share

remaining share= 1-[1/4]= 3/4

A's new share= 1/3 * 3/4= 1/4

B's new share= 2/3 * 3/4= 2/4

C's share= 1/4

New Profit sharing ratio= 1:2:1

$X$ and $Y$ are partners in a firm sharing profits in the ratio of $3:2$ With effect from, $1st$ April, $2018$ , they agreed to share profits equally. For this purpose, goodwill of the firm is valued at Rs. $75,000$ . You are required to fill up the following Journal entry :
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
2018
April
1

$Y's$ Capital A/c ...Dr
To $X's$ Capital A/c
(Being ?) ?

?

Date	Particulars	L.F.	Dr. (Rs.)	Cr. (Rs.)
2018 April 1	Y′s Capital A/c ...Dr To X′s Capital A/c (Being goodwill shared by the partners in the sacrificing ratio)		7500	7500

workings:
X: 1/2 - 3/5 = (1/10) sacrificing ratio
Y : 1/2 - 2/5 = 1/10 (gaining ratio)

Short answer type question:
State the ratio in which the partners share gain or loss from revaluation of assets and liabilities.

A revaluation account is prepared at the time of reconstruction of the firm, all assets are revalued, and all liabilities are reassessed. Increase in the value of asset or decrease in the value of liabilities are credited to revaluation account and Decrease in the value of asset and increase in the value of liability is debited to revaluation account. The difference between the two sides is either profit or loss, which is distributed among old partners in old profit sharing ratio.

Distinguish between the sacrificing ratio and the gaining ratio among partners.

Basis of Difference	Sacrificing ratio	Gaining ratio
Objective	It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner.	It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.
Meaning	It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner.	It is the ratio in which continuing partner acquires the share of profit from outgoing partners/partner.
Time	It is calculated at the time of admission of new partners/partner.	It is calculated at the time of retirement/death of old partners/partner.
Calculation	Sacrificing ratio = Old ratio – New ratio	Gaining ratio = New ratio – Old ratio
Effect	It reduces the profit sharing ratio of the existing partners.	It increases the profit sharing ratio of the remaining partners.

On the admission of Rao, it was agreed that the goodwill of Murty and Shah should be valued at $Rs. 30,000$ . Rao is to get $1/4^{th}$ share of profits. Previously Murty and Shah shared profits in the ratio of $3:2$ . Rao cannot bring in any cash. Give Journal entries in the books of Murty and Shah when: (a) there is no Goodwill Account and (b) Goodwill appears in the books at $Rs. 7,500$ .

Working Note:

1. Calculation of Rao's share of goodwill= 30000 * 1/4= 7500

2. Adjustment of Rao's share of goodwill:

Murty's share= 7500 * 3/5= 4500

Shah's share= 7500 * 2/5= 3000

(a) When there is no Goodwill account:

JOURNAL

1. Rao's Capital a/c.... Dr. 7500

To Murty's Capital a/c 4500

To Shah's Capital a/c 3000

(Being Rao's share of goodwill charged to his capital and distributed among the partners in the ratio of 3:2)

(b) Goodwill in the books appears at 7500:

JOURNAL

1. Murty's Capital a/c.... Dr. 4500

Shah's Capital a/c..... Dr. 3000

To Goodwill a/c 7500

(Being goodwill written off in the ratio of 3:2)

2. Rao's Capital a/c.... Dr. 7500

To Murty's Capital a/c 4500

To Shah's Capital a/c 3000

(Being Rao's share of goodwill charged to his capital and distributed among the partners in the ratio of 3:2)

$A$ and $B$ are partners sharing profit and losses in the ratio of $3:2$ . They admit $C$ into the firm for $1/4^{th}$ share in profits which he takes $1/6^{th}$ from $A$ and $1/12^{th}$ from $B$ . $C$ brings in only $60\%$ of his share of firm's goodwill. Goodwill of the firm has been valued at $Rs. 1,00,000$ . Pass necessary Journal entries to record this arrangement.

JOURNAL

1. Cash a/c... Dr. 15000

To Premium for goodwill a/c 15000

(Being 60% of premium for goodwill brought in by C)

2. Premium for goodwill a/c... Dr. 15000

C's Capital a/c.... Dr. 10000

To A's Capital a/c 16667

To B's Capital a/c 8333

(Being C's share of goodwill distributed among the partners in the sacrificing ratio)

Working Note:

Calculation of sacrificing ratio:

A's sacrifice= 1/6

B's sacrifice= 1/12

Ratio= 2:1

Goodwill of the firm= 100000

C's share= 1/4 * 100000

= 25000

Kangli, Mangli and Sanvali are partners, sharing profits in the ratio of $4:3:2$ . Kangali retires. Assuming Mangli and Sanvali will share profits in future in the ratio of $5:3$ , determine the gaining ratio.

Old ratio (Kangli, Mangli and Sanvali) = 4:3:2

New ratio (Mangli and Sanvali) = 5:3

Gaining ratio = New ratio – Old ratio

Mangli’s Gain = 5/8 – 3/9 = 45/72 – 24/72 = 21/72

Sanvali’s Gain = 3/8 – 2/9 = 27/72 – 16/72 = 11/72

Gaining ratio = 21:11

$A$ and $B$ are partners sharing profits in the ratio of $3:2$ . Their books show goodwill at $Rs. 2,000$ . $C$ is admitted with $1/4^{th}$ share of profits and brings in $Rs. 10,000$ as his capital but is not able to bring in cash for his share of goodwill $Rs. 3,000$ . Draft Journal entries.

JOURNAL

1. A's Capital a/c.... Dr. 1200

B's Capital a/c.... Dr. 800

To Goodwill a/c 2000

(Being goodwill written off in the ratio of 3:2)

2. Cash a/c...... Dr. 10000

To C's Capital a/c 10000

(Being capital brought in by C)

3. C's Capital.... Dr. 3000

To A's Capital a/c 1800

To B's Capital a/c 1200

(Being C's share of goodwill charged to his capital account and distributed among the partners in the ratio of 3:2)

$A$ and $B$ are partners sharing profits in the ratio of $2:1$ . They admit $C$ for $1/4^{th}$ share in profits. $C$ brings in $Rs. 30,000$ for his capital and $Rs. 8,000$ out of his share of $Rs. 10,000$ for goodwill. Before admission, goodwill appeared in books at $Rs. 18,000$ . Give Journal entries to give effect to the above arrangement.

JOURNAL

1. A's Capital a/c.... Dr. 12000

B's Capital a/c.... Dr. 6000

To Goodwill a/c 18000

(Being goodwill written off in the ratio of 2:1)

2. Cash a/c.... Dr. 38000

To C's Capital a/c 30000

To Premium for Goodwill a/c 8000

(Being capital and part premium for goodwill brought in by C)

3. Premium for Goodwill a/c... Dr. 8000

C's Capital a/c.... Dr. 2000

To A's Capital a/c 6667

To B's Capital a/c 3333

(Being premium for goodwill distributed among the partners in the ratio of 2:1)

Working Note:

Distribution of premium for goodwill:

A's share= 10000 * 2/3= 6667

B's share= 10000 * 1/3= 3333

$A$ and $B$ were partners in a firm sharing profits and losses in the ratio of $3:2$ . They admitted $C$ as a new partner for $3/7^{th}$ share in the profit and new profit sharing ratio will be $2:2:3$ . $C$ brought $Rs. 2,00,000$ as his capital and $Rs. 1,50,000$ as premium for goodwill. Half of their share of premium was withdrawn by $A$ and $B$ from the firm. Calculate sacrificing ratio and pass necessary Journal entries for the above transaction in the books of the firm.

JOURNAL

1. Cash a/c... Dr. 350000

To C's Capital a/c 200000

To Premium for Goodwill a/c 150000

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

2. Premium for Goodwill a/c... Dr. 150000

To A's Capital a/c 110000

To B's Capital a/c 40000

(Being premium for goodwill distributed among the partners in the ratio of 11:4)

3. A's Capital a/c.... Dr. 55000

B's Capital a/c.... Dr. 20000

To Cash a/c 75000

(Being half of the premium for goodwill withdrawn by the partners)

Calculation of sacrificing ratio:

A's sacrifice= 3/5- 2/7= 11/35

B's sacrifice= 2/5- 2/7= 4/35

Sacrificing ratio= 11:4

Working Note:

Distribution of goodwill:

A's share= 150000 * 11/15= 110000

B's share= 150000 * 4/15= 40000

$X, Y$ and $Z$ are partners in a firm sharing profits and losses in the ratio in the ratio of $3:2:1$ . $Z$ retires from the firm on 31st march,On the date of $Z's$ retirement, the following balance appeared in the books of the firm:
General Reserve $Rs. 1,80,000$
Profit and Loss Account (Dr.) $Rs. 30,000$
Workmen Compensation Reserve $Rs. 24,000$ which was no more required.
Employee's Provident Fund $Rs. 20,000$
Pass necessary Journal entries for the adjustment of these items on $Z's$ retirement.

Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
General Reserve A/c Dr.		1,80,000
Workmen Compensation Reserve A/c Dr.		24,000
To X’s Capital A/c			1,02,000
To Y’s Capital A/c			68,000
To Z’s Capital A/c			34,000
(Being accumulated profit distributed among partners in old ratio)

X’s Capital A/c Dr.		15,000
Y’s Capital A/c Dr.		10,000
Z’s Capital A/c Dr.		5,000
To Profit and Loss A/c			30,000
(Being debit balance in profit and loss A/c distributed among partners in old ratio)

Working note:

1. Calculation of share in credit balance of Reserve

Total credit balance of Reserves = General Reserve + WCF

= 1,80,000 + 24,000

= 2,04,000

X’s share = 2,04,000 X 3/6 = Rs. 1,02,000

Y’s share = 2,04,000 X 2/6 = Rs. 68,000

Z’s share = 2,04,000 X 1/6 = Rs. 34,000

2. Calculation of share in debit balance of Profit and Loss A/c

X’s share = 30,00 X 3/6 = Rs. 15,000

Y’s share = 30,000 X 2/6 = Rs. 10,000

Z’s share = 30,000 X 1/6 = Rs. 5,000

Note: Employer Provident Fund will not be distributed as it is a liability and not accumulated profit.

Bhuwan and Shivam were partners in a firm, sharing profits in the ratio of $3:2$ . Their capitals were $Rs. 50,000$ and $Rs. 75,000$ respectively. They admitted Atul on $1^{st}$ April, 2018 as new partner for $1/4^{th}$ share in the future profits. Atul brought $Rs. 75,000$ as his capital. Calculate the value of goodwill of the firm and record necessary Journal entries for the above transactions on Atul's admission.

(i) Calculation of goodwill of the firm:

Total capital of the firm after admission= 50000+75000+75000

= 200000

Total capital of the firm based on Atul's capital= 75000 * 4/1

= 300000

Hidden Goodwill= 300000- 200000= 100000

Atul's share of goodwill= 100000 * 1/4= 25000

(ii) JOURNAL

1. Cash a/c..... Dr. 75000

To Atul's Capital a/c 75000

(Being capital brought in by Atul)

2. Atul's Current a/c.... Dr. 25000

To Bhuwan's Capital a/c 15000

To Shivam's Capital a/c 10000

(Being goodwill distributed among the partners in the ratio of 3:2)

$A, B$ and $C$ are partners sharing profits in the ratio of $\dfrac{4}{9}:\dfrac{3}{9}:\dfrac{2}{9}$ . $B$ retired and his capital after making adjustment for reserves and gain (profit) on revaluation stands at $Rs. 1,39,200$ . $A$ and $C$ agreed to pay him $Rs. 1,50,000$ in full settlement of his claim. Record necessary Journal entry for adjustment of goodwill if the new profit-sharing ratio is decided at $5:3$ .

A's Capital A/c Dr. 5850

C's Capital A/c Dr. 4950

To B's Capital A/c 10800

(Being adjustment of B's share of goodwill made)

Working note:

(i) Calculation of B’s share of goodwill

A, B and C are sharing profit in ratio 4/9: 3/9: 2/9

B retires from the firm. Remaining partners agreed to pay him Rs. 1,50,000

B’s capital after making necessary adjustment Rs. 1,39,200

Therefore, hidden goodwill is Rs. 1,50,000 – Rs. 1,39,200 = Rs. 10,800

(ii) Gaining ratio

New profit sharing ratio between A and B is 5: 3

A’s gain = 5/8 – 4/9 = 13/72

C’s gain = 3/8 – 2/9 = 11/72

Gaining ratio = 13:11

Thus, B’s share of goodwill will be brought in by A and C in the gaining ratio 13:11 i.e.,

A is debited with 10,800 X 13/27 = Rs. 5,850

C is debited with 10,800 X 11/24 = Rs. 4,950

Anil and Sunil are partners in a firm with fixed capitals of $Rs. 3,20,000$ and $Rs. 2,40,000$ respectively. They admitted Charu as a new partner for $1/4^{th}$ share in the profits of the firm on $1^{st}$ April,Charu brought $Rs. 3,20,000$ as her share of capital. Give the necessary journal entries on Charu's admission with regard to capital and goodwill.

JOURNAL

1. Cash a/c.... Dr. 320000

To Charu's Capital a/c 320000

(Being capital brought in by Charu)

2. Charu's Current a/c........ Dr. 100000

To Anil's Capital a/c 50000

To Sunil's Capital a/c 50000

(Being Charu's share of goodwill adjusted through the current accounts)

Working Note:

Calculation of Hidden Goodwill:

Total Capital of the firm after admission= 320000+240000+320000

= 880000

Total Capital of the firm based on Charu's capital= 320000 * 4/1

= 1280000

Therefore, Hidden Goodwill= 1280000- 880000

= 400000

Charu's share of goodwill= 400000 * 1/4= 100000

$A, B$ and $C$ were partners in a firm sharing profits in the ratio of $8:4:3$ . $B$ retires and his share is taken up equally by $A$ and $C$ . Find the new profit-sharing ratio.

Old Ratio (A, B and C) = 8 : 4 : 3

B retires from the firm.

B's share taken by A and C in ratio of 1 : 1

Share taken by A = 4/15 X 1/2 = 2/15

Share taken by C = 4/15 X 1/2 = 2/15

New Ratio = Old Ratio + Share acquired from B

A's new share = 8/15 + 2/15 = 10/15 = 2/3

C's new share = 3/15 + 2/15 = 5/15 = 1/3

New profit (A and C) = 2 : 1

$W, X, Y$ and $Z$ are partners sharing profits and losses in the ratio of $\dfrac{1}{3}, \dfrac{1}{6}, \dfrac{1}{3}$ and $\dfrac{1}{6}$ respectively. $Y$ retires and $W, X$ and $Z$ decide to share the profit and losses equally in future. Calculate gaining ratio.

Old ratio (W, X, Y and Z) = 1/3:1/6:1/3:1/6 or 2 : 1 : 2 : 1

New ratio (W, X and Z) = 1 : 1 : 1

Gaining ratio = New ratio - Old ratio

W's gain = 1/3 - 2/6 = 2/6 - 2/6 = 0

X's gain = 1/3 - 1/6 = 2/6 - 1/6 = 1/6

Z's gain = 1/3 - 1/6 = 2/6 - 1/6 = 1/6

Gaining ratio = 0 : 1 : 1

$A, B$ and $C$ were partners, sharing profits and losses in the ratio of $2:2:1$ . $B$ decides to retire on 31st March, 2018. On the date of his retirement, some of the assets and liabilities appeared in the books as follows:
Creditors $Rs. 70,000$ ; Building $Rs. 1,00,000$ ; Plant and Machinery $Rs. 40,000$ ; Stock of Raw Materials $Rs. 20,000$ Stock of Finished Goods $Rs. 30,000$ and debtors $Rs. 20,000$ .
The following was agreed among the partners on B's retirement:
(a) Building to be appreciated by $20\%$ .
(b) Plant and Machinery to be depreciated by $10\%$
(c) A provision of $5\%$ on Debtors to be created for Doubtful Debt.
(d) Stock of Raw Material to be valued at $Rs. 18,000$ and finished Goods at $Rs. 35,000$
(e) An Old Computer previously written off was sold for $Rs. 2,000$ as scrap.
(f) Firm had to pay $Rs. 5,000$ to an injured employee.
Pass necessary Journal entries to record the above adjustments and prepare the Revaluation Account.

Revaluation Account

Dr.				Cr.
Particulars		Rs.	Particulars	Rs.
To Plant and Machinery A/c (40,000*10%)		4,000	By Building A/c (1,00,000*20%)	20,000
To Provision for Doubtful Debts		1,000	By Stock of Finished Goods, A/c	5,000
To Stock of Raw Materials A/c		2,000	By Computer A/c	2,000
To Workmen’s Compensation A/c		5,000
To Profit transferred to:
A’s Capital A/c	6,000
B’s Capital A/c	6,000
C’s Capital A/c	3,000	15,000
		27,000		27,000

Date	Particulars	L.F.	Debit	Credit
	Building A/c Dr.		20,000
	Stock of Finished Goods A/c Dr.		5,000
	Computer A/c Dr.		2,000
	To Revaluation A/c			27,000
	(Being increase in value of assets and decrease in value of liability is transferred to Revaluation Account)

	Revaluation A/c Dr.		12,000
	To Plant and Machinery A/c			4,000
	To Provision for Doubtful Debts A/c			1,000
	To Stock of Raw Material A/c			2,000
	To Workmen’s Compensation A/c			5,000
	(Being decrease in value of assets and increase in value of liability is transferred to Revaluation Account)

	Revaluation A/c Dr.		15,000
	To A’s Capital A/c			6,000
	To B’s Capital A/c			6,000
	To C’s Capital A/c			3,000
	(Being Revaluation profit transferred to Partner’s Capital A/c)

Ramesh wants to retire from the firm. The gain (profit) on revaluation on that date was $Rs. 12,000$ . Mohan and Rahul want to share this in their new profit-sharing ratio of $3:2$ . Ramesh wants this to be shared equally. How is the profit to be shared? Given reasons.

Revaluation of assets and liabilities is made at the time of Ramesh’s retirement and not after his retirement. Therefore, profits on revaluation will be distributed among all the partners in their old profit sharing ratio. In the absence of partnership deed, profits are distributed among all the partners in equal ratio.

Therefore, profit share of each partner = 12,000 X 1/3 = Rs. 4,000

Particulars	L.F.	Debit Rs.	Credit Rs.
Revaluation A/c Dr.		12,000
To Ramesh’s Capital A/c			4,000
To Mohan’s Capital A/c			4,000
To Rahul’s Capital A/c			4,000
(Being revaluation profit distributed among all the partners in their old ratio)

$A, B, C$ and $D$ were partners in a firm sharing in $5:3:2:2$ ratio. $B$ and $C$ retired from the firm. $B's$ share was acquired by $D$ and $C's$ share was acquired by $A$ . Calculate new profit-sharing ratio of $A$ and $D$ .

Old ratio (A, B, C and D) = 5: 3: 2: 2

B's profit share = 3/12

C's profit share = 2/12

B's share was acquired by D and C's share was acquired by A.

Therefore, D's new share = D's old share + Share of B = 2/12 +3/12 = 5/12

A's new share = A's old share + Share of C = 5/12 + 2/12 = 7/12

New profit share (A and D) = 7: 5

$E$ and $F$ were partners in firm sharing profits in the ratio of $3:1$ . They admitted $G$ and will share future profits equally. $G$ brought $Rs. 50,000$ in cash and machinery worth $Rs. 70,000$ fir his share of profit as premium of goodwill.
pass necessary Journal entries in the books of the firm.

JOURNAL

1. Cash a/c..... Dr. 50000

Machinery a/c... Dr. 70000

To Premium for goodwill a/c 120000

(Being cash and machinery brought in by G for his share of profit as premium for goodwill)

2. Premium for Goodwill a/c... Dr. 120000

F's Capital a/c... Dr. 30000

To E's Capital a/c 150000

(Being premium for goodwill and F's gain transferred to E)

Working Note:

1. Calculation of sacrificing ratio:

E's old ratio= 3/4

F's old ratio= 1/4

New ratio of firm after admission= 1:1:1

Sacrificing ratio = Old ratio - New ratio

E's sacrifice = 3/4- 1/3= 5/12

F's gain = 1/4- 1/3= -1/12

2. Total goodwill of the firm= 120000*3/1= 360000

F's gain= 360000 * 1/12= 30000

$X$ and $Y$ are partners sharing profits in the ratio of $3:2$ . They admitted $Z$ as new partner for $1/4^{th}$ share of profits. At the time of admission of $Z$ , investment appeared at $Rs. 80,000$ . Half of the investments to be taken over by $X$ and $Y$ in their profit-sharing ratio at book value. Remaining investment were valued at $Rs. 50,000$ . Pass the necessary Journal entries.

(i) X's Capital a/c... Dr. 24000

Y's Capital a/c... Dr. 16000

To Investment a/c 40000

(Being half of the investment taken over by the partners in the ratio of 3:2)

(ii) Investment a/c... Dr. 10000

To Revaluation a/c 10000

(Being revaluation of investment recorded)

(iii) Revaluation a/c.... Dr. 10000

To X's Capital a/c 6000

To Y's Capital a/c 4000

(Being profit on revaluation distributed among the partners in the ratio of 3:2)

Mr. $A$ commenced business with a capital $Rs. 2,50,000$ on $1^{st}$ April,During the five years ended $31^{st}$ March,2018, the following profits and losses were made:
$31^{st}$ March,2014 $=$ Loss $Rs. 5,000$
$31^{st}$ March,2015 $=$ Profit $Rs. 13,000$
$31^{st}$ March,2016 $=$ Profit $Rs. 17,000$
$31^{st}$ March,2017 $=$ Profit $Rs. 20,000$
$31^{st}$ March,2018 $=$ Profit $Rs. 25,000$
During this period he had drawn $Rs. 40,000$ for his personal use. On $1^{st}$ April,2018, he admitted $B$ into partnership on the following terms:
$B$ to bring for his half share in the business, capital equal to $A's$ Capital on $31^{st}$ March,2018 and to pay for the one-half share of goodwill of the business, on the basis of three times the average profit of the last five years. Prepare the statement showing what amount $B$ should invest to become a partner and pass entries to record the transaction relating to admission.

Capital as on April,1 2013 Less: Loss on 31st March, 2014 Add: Profit on 31st March, 2015 Add: Profit on 31st March, 2016 Add: Profit on 31st March, 2017 Add: Profit on 31st March, 2018	250000 (5000) 13000 17000 20000 25000
Less: Drawings	320000 (40000)
Capital as on March 31st, 2018	280000

Calculation of Goodwill:

Average profit= [-5000+13000+17000+20000+25000]/5

= 14000

Goodwill= 14000 * 3

= 42000

B's share of Goodwill= 42000 * 1/2= 21000

B's Capital= A's Capital= 280000

JOURNAL

1. Cash a/c..... Dr. 301000

To B's Capital a/c 280000

To Premium for Goodwill a/c 21000

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

2. Premium for Goodwill a/c... Dr. 21000

To A's Capital a/c 21000

(Being premium for goodwill transferred to A's Capital account)

$X$ and $Y$ are partners in firm sharing profits in the ratio of $3:2$ . They admitted $Z$ as a new partner and fixed the new profit-sharing ratio as $3:2:1$ . At time of admission of $Z$ , Debtors and Provision for Doubtful Debts appeared $Rs. 5,000$ respectively All debtors are good. Pass the necessary Journal entries.

(i) Provision for Doubtful Debts a/c.... Dr. 5000

To Revaluation a/c 5000

(Being provision for doubtful debts written off)

(ii) Revaluation a/c... Dr. 5000

To X's Capital a/c 3000

To Y's Capital a/c 2000

(Being profit on revaluation distributed among the partners in the ratio of 3:2)

$A$ and $B$ were partners in a firm sharing profit in $4:3$ ratio. On $1^{st}$ April,2018, they admitted $C$ as a new partner. On the date of $C's$ admission, the Balance Sheet of $A$ and $B$ showed a General Reserve of $Rs. 84,000$ and a debit balance of $Rs. 8,400$ in the 'Profit and Loss Account'. Pass necessary Journal entries.

(i) General Reserve a/c... Dr. 84000

To A's Capital a/c 48000

To B's Capital a/c 36000

(Being general reserve transferred to the partner's capital accounts in the ratio of 4:3)

(ii) A's Capital a/c... Dr. 4800

B's Capital a/c... Dr. 3600

To Profit and loss a/c 8400

(Being adjustment of profit and loss account in the ratio of 4:3)

Following was the Balance Sheet of $A$ and $B$ who were sharing profits in the ratio of $2:1$ as at $31^{st}$ March,2018:
Liabilities (Rs.) Assets (Rs.)
Capital A/c:
A 15,000
B 10,000
Sundry Creditors

25,000
32,950 Building
Plant and Machinery
Stock
Sundry Debtors
Cash in Hand 25,000
17,500
10,000
4,850
600
57,950 57,950
They agree to admit $C$ into the partnership on the following terms:
(a) $C$ was to bring in $Rs. 7,500$ as his capital and $Rs. 3,000$ as goodwill for $1/4^{th}$ share in the firm.
(b) Values of the Stock and Plant and Machinery were to be reduced by $5%$ .
(c) A provision for Doubtful Debts was to be created in respect of Sundry Debtors $Rs. 375$ .
(d) Building Account was to be appreciated by $10%$ .
Pass necessary Journal entries to give effect to the arrangements. Prepare Profit and Loss Adjustment Account (or Revaluation Account), Capital Accounts and Balance Sheet of the new firm.

(i) JOURNAL

1. Cash a/c... Dr. 10500

To C's Capital a/c 7500

To Premium for goodwill a/c 3000

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

2. Premium for goodwill a/c... Dr. 3000

To A's Capital a/c 2000

To B's Capital a/c 1000

(Being premium for goodwill distributed among the partners in the ratio of 2:1)

3. Building a/c... Dr. 2500

To Revaluation a/c 2500

(Being increase in asset transferred to revaluation account)

4. Revaluation a/c.... Dr. 1750

To Plant and Machinery a/c 875

To Stock a/c 500

To Provision for doubtful debts a/c 375

(Being decrease in assets and increase in liabilities transferred to revaluation account)

5. Revaluation a/c... Dr. 750

To A's Capital a/c 500

To B's Capital a/c 250

(Being profit on revaluation transferred to the partner's capital accounts)

(ii) REVALUATION A/C

Dr. Cr.

Particulars	Amount (in Rs.)	Particulars	Amount (in Rs.)
To Stock a/c	500	By Building a/c	2500
To Plant and Machinery a/c	875
To Provision for doubtful debts a/c	375
To Profit transferred to - A's Capital a/c - B's Capital a/c	500 250
TOTAL	2500	TOTAL	2500

(iii) PARTNER'S CAPITAL A/C

Particulars	A	B	C	Particulars	A	B	C
				By Balance b/d	15000	10000	-
				By Cash a/c	-	-	7500
To Balance c/d	17500	11250	7500	By Premium for goodwill a/c	2000	1000	-
				By Revaluation a/c	500	250	-

(iv) BALANCE SHEET

(after admission of C)

Liabilities	Amount (in Rs.)	Assets	Amount (in Rs.)
		Building (25000+2500)	27500
Capital - A - B - C	17500 11250 7500	Plant and Machinery (17500-875)	16625
Sundry Creditors	32950	Stock (10000-500)	9500
		Debtors 4850 -- Provision for Doubtful debts (375)	4475
		Cash (600+10500)	11100

TOTAL	69200	TOTAL	69200

Give the Journal entry to distribute "Workmen Compensation Reserve" of $Rs. 72,000$ at the time of admission of $Z$ When there is claim of $Rs. 48,000$ against it. The firm has two partners $X$ and $Y$ .

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

To Workmen Compensation Claim a/c 48000

To X's Capital a/c 12000

To Y's Capital a/c 12000

(Being adjustment of workmen compensation reserve partly for the claim and rest in the ratio of 1:1)

$X, Y$ and $Z$ are equal partners with capitals of $Rs. 1,500; Rs. 1,750$ and $Rs. 2,000$ respectively. They agree to admit $W$ into equal partnership upon payment in cash $Rs. 1,500$ for $1/4^{th}$ share of the goodwill and $Rs. 1,800$ as his capital, both sums to remain in the business. The liabilities of the old firm amounted to $Rs. 3,000$ and the assets, apart from cash, consist of Motors $Rs. 1,200$ , Furniture $Rs. 400$ , Stock $Rs. 2,650$ and Debtors $Rs. 3,780$ . The Motors and Furniture were revalued at $Rs. 950$ and $Rs. 380$ respectively.
Pass Journal entries to give effect to the above arrangement and also show Balance Sheet of the new firm.

(i) Calculation of amount of Cash before admission of partner:

Total assets excluding cash= 1200+400+2650+3780= 8030

Total liabilities= 1500+1750+2000+3000= 8250

Therefore, Cash= 8250- 8030

= 220

(ii) JOURNAL

1. Cash a/c... Dr. 3300

To W's Capital a/c 1800

To Premium for goodwill a/c 1500

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

2. Premium for goodwill a/c... Dr. 1500

To X's Capital a/c 500

To Y's Capital a/c 500

To Z's Capital a/c 500

(Being premium for goodwill distributed among the partners in the ratio of 1:1:1)

3. Revaluation a/c... Dr. 270

To Motor Car a/c 250

To Furniture a/c 20

(Being decrease in value of assets transferred to revaluation account)

4. X's Capital a/c.... Dr. 90

Y's Capital a/c.... Dr. 90

Z's Capital a/c.... Dr. 90

To Revaluation a/c 270

(Being loss on revaluation transferred to partner's capital accounts in the ratio of 1:1:1)

(iii) BALANCE SHEET

(After admission of W)

Liabilities	Amount (in Rs.)	Assets	Amount (in Rs.)
		Motor Car	950
Capital - X (1500+500-90) - Y (1750+500-90) - Z (2000+500-90) - W	1910 2160 2410 1800	Furniture	380
Other Liabilities	3000	Stock	2650
		Debtors	3780
		Cash (220+3300)	3520
TOTAL	11280	TOTAL	11280

$X$ 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. At the time of admission of $Z$ , Stock (Book Value $Rs. 1,00,000$ ) is to be reduced by $40\%$ and Furniture (Book Value $Rs.60,000$ ) is to be reduced to $40\%$ . Pass the necessary Journal entries.

(i) Revaluation a/c... Dr. 76000

To Stock a/c 40000

To Furniture a/c 36000

(Being stock and furniture revalued)

(ii) X's Capital a/c... Dr. 45600

Y's Capital a/c.... Dr. 30400

To Revaluation a/c 76000

(Being loss on revaluation distributed among the partners in the ratio of 3:2)

(a) $X, Y$ and $Z$ are partners sharing profits and losses in the ratio of $5:3:2$ . They decided to admit $W$ for $1/6^{th}$ share. Following is the extract of the Balance Sheet on the date of admission:
Liabilities (Rs.) Assets (Rs.)
General Reserve 36,000 Advertisement Suspense A/c 24,000
Contigency Reserve 6,000
Profit and Loss A/c 18,000
Pass necessary Journal entries.

(i) General Reserve a/c.... Dr. 36000

Contingency Reserve a/c.... Dr. 6000

Profit and loss a/c... Dr. 18000

To X's Capital a/c 30000

To Y's Capital a/c 18000

To Z's Capital a/c 12000

(Being undistributed reserves adjusted with the partners in the ratio of 5:3:2)

(ii) X's Capital a/c.... Dr. 12000

Y's Capital a/c... Dr. 7200

Z's Capital a/c... Dr. 4800

To Advertisement Suspense a/c 24000

(Being advertisement suspense distributed among the partners in the ratio of 5:3:2)

$A$ and $B$ are partners sharing profits and losses in ratio of $2 :3$ with capitals of $Rs.2,00,000$ and $Rs. 1,00,000$ respectively. On 1st October, 2017, $A$ and $B$ granted loans of $Rs. 4,00,000$ and $Rs. 2,00,000$ respectively to the film. The Partnership Deed is silent as to the interest on
Partner's Loan. Determine the amount of profit/loss for the year ended 31st March, 2018 in each of the following cases to be distributed among partners:
Case 1: If the Profit before interest for the year amounted to $Rs. 25,000$ .
Case 2: If the Profit before interest for the year amounted to $Rs. 15,000$ .
Case 3: If the Loss before interest for the year amounted to $Rs. 25,000$ .

When the Partnership Deed is silent as to Interest on Partner's Loan, as per the Indian Partnership Act, 1932, interest @ 6% p.a. is allowed on loan by a partner.
Case 1: Distributable Profit/Loss

$=$ Profit before Interest

$-$ Interest on Partners' Loan

$= Rs. 25,000 - Rs. 18,000 = Rs.7,000$ .
*Interest on A's Loan

$\left(Rs. 4,00,000 \times \dfrac{6}{100} \times \dfrac{6}{12}\right)$

$Rs. 12,000$
Interest on B's Loan

$\left(Rs. 2,00,000 \times \dfrac{6}{100}\times \dfrac{6}{12}\right)$

$\underline{Rs.\, \,\,6,000}$
Total

$\underline{Rs. 18,000}$
Case 2: Distributable Profit/Loss

$=$ Profit before Interest

$-$ Interest on Partners' Loan

$=Rs. 15,000 - Rs.18,000 =Rs. 3,000$ (Loss).
Case 3: Distributable Profit/Loss

$=$ Loss before Interest

$+$ Interset on Paetner's Loan

$= Rs. 25,000 +Rs. 18,000 =Rs. 43,000$ (Loss)

$X$ and $Y$ are partners sharing profits and lossesin the ratio of $3:2$ . $X$ is a non-working partner and contributes $Rs. 20,00,000$ as his capital. $Y$ is a working partner of the firm. The Partnership Deed provides for interest on capital @ 8% P.a. and salary to every working partner @ $Rs. 8,000$ per month. Net profit before providing for interest on capital and patner's salary for the year ended 31st March, 2018 was $Rs. 80,000$ . Show the distribution of profit.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Interest on capital X= 50,000 To Salary Y= 30,000	80,000	By net profit	80,000
Total	80,000	Total	80,000

Interest on X's capital = 20,00,000*8%=1,60,000

Salary to Y = 8000*12 = 96,000

Total = 2,56,000

Net profits available is less than the appropriations to be made. So,the appropriations are to be made in the ratio of interest and salary i.e 5:3.

$A$ and $B$ are partners sharing profits and losses in the ratio of $3 : 2$ with capitals of $Rs. 4,00,000$ and $Rs. 3,00,000$ respectively. Interest on capital is agreed @ $5\%$ p.a. $B$ is to be allowed an annual salary of $Rs. 30,000$ which has not been withdrawn. Profit for the year ending 31st March, 2018 prior to calculation of interest on capital but after charging B's salary is $Rs.1,20,000$ . A provision of $5\%$ of the profit is to be made in respect of commission to the manager. Prepare an account showing the appropriation of profit.

Profit and Loss Account

Particulars	Amount	Particulars	Amount
To Mangers commission A/c-5%*1,50,000	7500	By profit(1,20,000+30,000)	1,50,000
To Net profit transferred to P&L APP A/c	1,42,500
Total	1,50,000	Total	1,50,000

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To B's salary A/c	30,000	By Net profit (1,20,000+30,000)*5%=7500 1,50,000-7500	1,42,500
To Interest on capital A/c A- 4,00,0005%=20,000 B- 3,00,0005%=15,000	35,000
To profit transferred to A's capital A/c- 46,500 B's capital A/c - 31,000	77,500

(Profit and Loss Appropriation Account). $X$ and $Y$ started business on 1st April, 2017 with capitals of $Rs. 5,00,000$ each As per the Partnership Deed, both $X$ and $Y$ are to get monthly salary of $Rs. 10,000$ each and interest on capitals @ $10\%$ p.a. Drawings during the year were $X- Rs. 60,000$ and $Y- Rs.1,00,000$ ; interest being chargeable @ $10\%$ p.a.
During the year, the firm incurred a loss of $Rs. 2,00,000$ .
Pass Journal entries for the above and prepare Profit and Loss Appropriation Account. The Finn closes its accounts on 31st March, every year.

Journal Entries

Profit and loss App A/c Dr. 2,00,000

To profit and loss A/c 2,00,000

(Being loss transferred to profit and loss A/c)

X's capital A/c Dr. 3000

Y's capital A/c Dr. 5000

To Interest on drawings 8000

(Being interest charged)

Interest on drawings A/c Dr.8000

To profit and loss App A/c 8000

(Being Interest charged transferred to P&L App account)

X's capital A/c Dr. 96,000

Y's capital A/c Dr. 96,000

To Profit and loss App A/c 1,92,000

(Being loss transferred to partners capital A/c)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To net loss	2,00,000	By Interest on drawings A/c X -60,00010%6/12= 3000 Y-1,00,00010%6/12=5000	8000
		By loss transfer to By X's capital A/c	96000
		By Y's capital A/c	96000
Total	2,00,000	Total	2,00,000

(When drawings are made for a period of 6 months only). $A, B$ and $C$ are partners sharing profits equally. $A$ drew regularly $Rs. 6,000$ in the beginning .of every month for the six months ended 30th September, $B$ drew regularly $Rs. 6,000$ at the end of every month for the six months ended 30th September, $C$ drew regularly $Rs. 6,000$ in the middle of every month for the six months ended 30th September,Calculate interest on drawings @ $5\%$ p.a. when the books are closed on 31st March every year.

Average period = Months left after first drawings+Months left after last drawings/2

A B C

Average period= (6+1)/2 (5+0)/2 (5.5+0.5)/2

=3.5 months = 2.5 months = 3 months

Interest on drawings= (6000*6)*5%*3.5/12 (6000*6)*5%*2.5/12 (36000*5%*3/12)

= 525 =375 =450

Ayub and Amit are partners in M/s amit Papers sharing profits and losses equally. Following trial balance is prepared from the books of account as at 31st March, 2018.
Prepare Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account for the year ended 31st March, 2018 and Balance Sheet as at that date accounting the following adjustments:
(i) Stock as at 31st March, 2018 was $Rs. 50,000$ ;
(ii) Rent is $Rs. 10,000$ per month;
(iii) Depreciate Furniture and Fixture and Computers @ $20\%$ p.a., Machinery @ $10\%$ p.a.; and
(iv) Interest on Capitals is allowed @ $6\%$ p.a.

Trading Profit and Loss and Profit and Loss Appropriation Account

Particulars	Amount	Particulars	Amount
To opening stock To purchases 7,60,000 Less:Returns (10,000) To GP To salary & wages To rent 1,10,000 Ad;O/s 10,000 To general exp To depreciation Furniture & fix computers machinery To net profit To interest on capital Ayub - 24,000 Amit-23,100 To profit transferred to Ayub's capital A/c-6950 Amit's capital A/c-6950	45,000 7,50,000 4,80,000 1,80,000 1,20,000 35,000 10,000 44,000 30,000 61,000 47,100 13,900	By sales 12,50,000 Less: returns (25,000) By closing stock By GP b/d By Net profit	12,25,000 50,000 4,80,000 61,000
Total	61,000	Total	61,000

BALANCE SHEET FOR THE YEAR 31ST MARCH,2018

Liabilities	Amount	Assets	Amount
Capital A/cs Ayub 4,00,000 Add:interest on capital 24,000 Share of profit 6950 Less:drawings (60,000) Amit 3,85,000 Add:interest on capital 23,100 share of profit 6950 Less:drawings (50000) Sundry Creditors Rent outstanding	3,70,950 3,65,050 90,000 10,000	Computers 2,20,000 Less:-Depreciation (44,000) Furniture 50,000 Less:Depreciation (10,000) Machinery 3,00,000 Less: Depreciation (30,000) Sundry Debtors Closing stock Cash in Hand Cash at bank	1,76,000 40,000 2,70,000 2,00,000 50,000 25,000 75,000
Total	8,36,000	Total	8,36,000

(Profit and Loss Appropriation Account). $A$ and $B$ started a business on 1st April, 2017 with capitals of $Rs. 3,00,000$ and $Rs. 2,00,000$ respectively. According to the Partnership Deed, B is to get salary of $Rs. 5,000$ per month, $A$ is to get $10\%$ commission on Profit after allowing salary to $B$ and interest is to be allowed on capitals @ $6\%$ p.a. Profit-sharing ratio`between the two partners is $3 : 2$ . During the year, the firm earned a profit of $Rs. 2,50,000$ .
Pass Journal entries for division of profits and prepare Profit and Loss Appropriation Account. The firm doses its accounts on 31st March every year.

Journal Entries

Profit and loss A/c Dr. 2,50,000

To Profit and loss App A/c 2,50,000

(Being profit transferred to P&L app account)

B's salary A/c Dr. 60,000

To B's capital A/c 60,000

(Being salary paid to partner)

A's commission A/c Dr. 19,000

To A's capital A/c 19,000

(Being commission paid to partner)

Profit and loss App A/c Dr. 79,000

To B's salary A/c 60,000

To A's commission A/c 19,000

(Being salary and commission transferred)

Interest on capital A/c Dr. 30000

To A's capital A/c 18,000

To B's capital A/c 12,000

(Being interest allowed)

Profit and loss App A/c Dr. 30,000

To Interest on capital A/c 30,000

(Being interest transferred)

Profit and loss App A/c Dr. 1,41,00

To A's capital A/c 84,600

To B's capital A/c 56,400

(Being profit distributed)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To B's salary A/c	60,000	By net profit	2,50,000
To A's commission A/c	19,000
To Interest on capital A/c A- 18,000 B- 12,000	30,000
To profit transferred to- A's capital A/c - 84,600 B's capital A/c- 56,400	141000

Total	250000	Total	250000

X, Y and Z are partners in a firm sharing profits in the ratio of 3:2:1 respectively. The firm was dissolved on 1st March,After transferring assets (other than cash) and third party liabilities to the 'Realisation Account' you are provided with the following information:
(a) There was a balance of Rs. 18,000 in the firm's Profit and Loss Account.
(b) There was an unrecorded bike of Rs. 50,000 which was taken over by X.
(c) Creditors of Rs. 5,000 were paid Rs. 4,000 in full settlement of accounts.
Pass necessary Journal entries for the above at the time of dissolution of firm.

(a) Profit and Loss A/C.... Dr. 18000

To X's Capital A/C 9000

To Y's Capital A/C 6000

To Z's Capital A/C 3000

(Being transfer of accumulated profits to the partner's capital accounts)

(b) X's Capital A/C....... Dr. 50000

To Realisation A/C 50000

(Being unrecorded asset taken over by X)

$A, B$ and $C$ are partners sharing profits and losses equally. $A$ and $C$ have granted loan to the firm on 1st October, 2016 of $Rs. 1,00,000$ and $Rs.1,50,000$ respectively. It is agreed that interest @ $9\%$ p.a. will be paid on loan. Books of account of the firm are closed on 31st March every year. Interest on loan is yet to be paid as on 31st March,You are required to pass Journal entries in the books of account of the firm and prepare ledger accounts of the two partners.

Journal Entries

Bank A/c Dr. 2,50,000

To A's Loan A/c 1,00,000

To C's loan A/c 1,50,000

(Being loan received from partners)

Interest on loan A/c Dr. 11,250

To A's loan A/c 4500

To B's loan A/c 6750

(Being interest on loan received)

Profit and loss A/c Dr. 11,250

To Interest on partners loan A/c 11,250

(Being interest on loan transferred to p&l account)

A's Loan Account

Particulars	Amount	Particulars	Amount
to bal c/d	1,04,500	By bank a/c	1,00,000
		By interest on partners' loan a/c	4500
Total	1,04,500	Total	1,04,500

B's Loan Account

Particulars	Amount	Particulars	Amount
To bal c/d	1,56,750	By Bank A/c	1,50,000
		By interest on capital	6750
Total	1,56,750	Total	1,56,750

The Balance Sheet of Madhu and Vidhi who are sharing profits in the ratio of $2:3$ as at $31^{st}$ March, 2016 is given below:
Liabilities (Rs.) Assets (Rs.)
Madhu's Capital
Vidhi's Capital
General Reserve
Bills Payable 5,20,000
3,00,000
30,000
1,50,000 Land and Building
Machinery
Stock
Debtors 3,00,000
Less: Provision (10,000)
Bank 3,00,000
2,80,000
80,000

2,90,000
50,000
10,00,000 10,00,000
Madhu and Vidhi decided to admit Gayatri as a new partner from $1^{st}$ April 2016 and their new profit-sharing ratio will be $2:3:5$ . Gayatri brought $Rs. 4,00,000$ as her share of capital in cash.
(a) Goodwill of the firm was valued at $Rs. 3,00,000$ .
(b) Land and Building was found undervalued by $Rs. 26,000$ .
(c) Provision for doubtful debts was to be made equal to $5\%$ of the debtors.
(d) There was a claim of $Rs. 6,000$ on account of workmen compensation.
Prepare Revaluation Account, Partners Capital Account and the Balance Sheet of the reconstituted firm.

(i) REVALUATION A/C
Dr. Cr.

Particulars	Amount	Particulars	Amount
To Provision for Doubtful Debts a/c	5000	By Land and Building a/c	26000
To Workmen Compensation a/c	6000
To Profit transferred to: - Madhu's Capital a/c - Vidhi's Capital a/c	6000 9000
	26000		26000

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

Particulars	Madhu	Vidhi	Gayatri	Particulars	Madhu	Vidhi	Gayatri
				By Balance b/d	520000	300000
				By General Reserve a/c	12000	18000
				By Cash a/c			400000
				By Premium for Goodwill a/c	60000	90000
To Balance c/d	598000	417000	400000	By Revaluation a/c	6000	9000
	598000	417000	400000		598000	417000	400000

(iii) BALANCE SHEET

Liabilities	Amount	Assets	Amount
Capital a/cs: - Madhu - Vidhi - Gayatri	598000 417000 400000	Land and Building	326000
Bills Payable	150000	Machinery	280000
Provision for Workmen Compensation Reserve	6000	Stock	80000
		Debtors 300000 (-) Provision (15000) for doubtful debts	285000
		Bank (50000+400000+150000)	600000
	1571000		1571000

Working Note:

Calculation of sacrificing ratio:

Madhu's sacrifice= 2/5-2/10

= 2/10

Vidhi's sacrifice= 3/5-3/10

= 3/10

Sacrificing ratio= 2:3

$A$ and $B$ started business on 1st April, 2017 with capitals of $Rs. 6,00,000$ and $Rs. 4,00,000$ respectively During the year, A introduced $Rs.1,00,000$ to the firm as additional capital on 1st October,They withdrew $Rs.50,000$ per month for household expenses against profits. Interest on capital is to be allowed @ $10\%$ per annum. Calculate interest payable to $A$ and $B$ for the year ended 31st March, 2018.

Interest on A's Capital:	Rs.
Interest on $Rs. 6,00,000$ for one year: $\left(Rs. 6,00,000 \times \dfrac{10}{100}\right)$ Interest on $Rs. 1,00,000$ for 6 months: $\left(Rs. 1,00,000 \times \dfrac{6}{12}\times \dfrac{10}{100}\right)$ (from 1st October, 2017 to 31st March, 2018)	60,000 5,000
	65,000

Interest on B's Capital:
Interest on

$Rs. 4,00,000$ for one year

$Rs. 4,00,000\times \dfrac{10}{100}$

$Rs. 40,000$

Ramesh and Naresh are partners in a firm. Their capitals as on 1st April, 2017 were $Rs.150,000$ and $Rs. 1,50,000$ respectively. They share profits equally. On 1st July, 2017, they decided that their capitals should be $Rs.2,00,000$ each. The necessary adjustment in the capitals were made by introducing or withdrawing capital. Interest on capital is allowed @ $8\%$ p.a. Compute interest on capital for both the partners for the year ended 31st March, 2018.

Calculation of interest on capital:
(i) Interest on Ramesh's Capital:

$Rs.$
From 1st April, 2017 to 30th June, 2017

$= Rs. 1,50,000 \times \dfrac{8}{100}\times \dfrac{3}{12}$

$3,000$
From 1st July, 2017 to 31st March, 2018

$=Rs. 2,00,000 \times\dfrac{8}{100}\times \dfrac{9}{12}$

$12,000$

$\underline{\overline{15,000}}$

(ii) Interest on Naresh's Capital:
From 1st April, 2017 to 30th June, 2017

$=Rs. 1,50,000 \times \dfrac{8}{100}\times \dfrac{3}{12}$

$3,000$
From 1st July, 2017 to 31st March, 2018

$=Rs. 2,00,000 \times \dfrac{8}{100}\times \dfrac{9}{12}$

$12,000$

$\underline{\overline{15,000}}$

$A$ and $B$ are partners in a business and their capitals at the end of the year were $Rs. 7,00,000$ and $Rs 6,00,000$ 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 profit credited to Capital Accounts was $Rs. 1,00,000$ each.

Calculation of Opening Capital

A B

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

Add:Drawings 75,000 50,000

Interest on drawings 7500 5000

Less:-Additional capital nil (1,00,000)

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

Share of profits (1,00,000) (1,00,000)

Opening capital 6,67,500 4,45,000

Ram and Mohan are partners in a firm. They admitted Rakhi as a partner without capital for 1/3rd share in the profit of the firm. She is blind by birth but having good management qualities. The new partnership agreement provides for the following:
(i) $10\%$ of the trading profit will be donated to Prime Minister's Relief Fund.
(ii) $5\%$ of the trading profit will be donated to the National Blind Relief Fund.
(iii) Products will be sold at a discount of $15\%$ on Maximum Retail Price to the people living below poverty line.
(iv) New retail shops will be opened in the Naxal affected areas of the country.
(v) New jobs of sales persons will be reserved for the girls belonging to Scheduled Castes and Scheduled Tribes.
Trading profit of the firm for the year ended 31st March, 2012 was $Rs. 10,00,000$ , identify any four values considered by Ram, Mohan and Rakhi while preparing new Partnership Deed and also prepare 'Profit and Loss Appropriation Account' of Ram, Mohan and Rakhi for the year ended 31st March, 2012.

PROFIT AND LOSS APPROPRIATION A/C FOR THE YEAR 2012

Particulars	Amount	Particulars	Amount
To Prime Minister;s Relief Fund A/c	1,00,000	By net profit	10,00,000
To National Bling Relief Fund	50,000
To profit transferred to:- Ram's capital A/c- 2,83,333 Mohan's capital A/c-2,83,333 Rakhi's capital A/c-2,83,333	8,50,000
Total	10,00,000	Total	10,00,000

Values considered by the partners are:-

1. Providing employment ventures for the upliftment of girls belonging to lower castes.

2. Opening retails shops for providing more employment opportunities in naxal areas.

3. Duty towards Nation by providing discount for below poverty line people.

4. Responsibilities and sensitivity towards differently abled people.

$X$ and $Y$ are partners sharing profits and losses in the ratio of $7 : 3$ . Their Capital Accounts as at 1st April, 2017 stood at $X - Rs.5,00,000; \, Y- Rs. 4,00,000$ . The partners are allowed interest on capital @ $5\%$ .p.a. The drawings of the partners during the year ended 31st March, 2018 amounted to $Rs. 72,000$ and $Rs.50,000$ respectively. The profit for the year before allowing interest on capital and salary to $Y$ @ $Rs.5,000$ per month amounted to $Rs. 8,00,000$ . $10\%$ of the divisible profit is to be set aside as General Reserve.
Prepare an account showing the allocation of profits, Partners' Capital and Current Accounts.

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR 2017

Particulars	Amount	Particulars	Amount
To interest on capital X-5,00,0005% Y-4,00,0005%	45,000	By net profit	8,00,000
To Y's salary A/c (5000*12)	60,000
To General Reserve A/c (8,00,000-45,000-60,000)*10%	69,500
To profit transferred to X's current A/c-4,37,850 Y's current A/c-1,87,650	6,25,500
	8,00,000		8,00,000

PARTNER'S CAPITAL ACCOUNT

Particulars	X	Y	Particulars	X	Y
To bal c/d	5,00,000	4,00,000	By bal b/d	5,00,000	4,00,000
Total	5,00,000	4,00,000	Total	5,00,000	4,00,000

PARTNERS CURRENT ACCOUNT

Particulars	X	Y	Particulars	X	Y
To Drawings	72,000	50,000	By Interest on Capital A/c	25,000	20,000
			BY Y's salary A/c		60,000
To bal c/d	3,90,850	2,17,650	By P&L App. A/c	4,37,850	1,87,650
Total	4,62,850	2,67,650	Total	4,62,850	2,67,60

From the following Balance Sheet of $X$ and $Y$ , calculate interest on capital $5\%$ pa. for the year ended 31st March, 2018:
During the year ended 31st March, 2018, $X's$ drawings were $Rs. 10,000$ and $Y's$ drawings were $Rs. 30,000$ . Profit for the year ended 31st March, 2018 was $Rs. 60,000$ . The amount of Reserve, i.e., $Rs.40,000$ is transferred from Current Year's profit to strengthen the financial position of the firm.

Calculation of Interest on

$X's$ Capital:

$Rs.$

$X's$ Capital as at 31st March, 2018

$90,000$
Add: Drawings made during the year

$10,000$

$\overline{ 1,00,000}$
Less: Profit added (credited)

$[1/2 (Rs. 60,000 - Rs.40,000)]$

$10,000$
Capital as at 1st April, 2017

$\underline{\overline{90,000}}$
Interest on capital @

$5\% p.a. = Rs. 90,000 \times \dfrac{5}{100} = Rs.4,500$ .

Calculation of Interest on

$Y's$ Capital:

$Rs.$

$Y's$ Capital as at 31st March, 2018

$80,000$
Add: Drawings made during the year

$30,000$

$\overline{ 1,10,000}$
Less: Profit added (credited)

$[1/2 (Rs. 60,000 - Rs.40,000)]$

$10,000$
Capital as at 1st April, 2017

$\underline{\overline{1,00,000}}$
Interest on capital @

$5\% p.a. = Rs. 1,00,000 \times \dfrac{5}{100} = Rs.5,000$ .
Notes:
1. capital in the beginning is calculated by adding drawings and deducting profit distributed.
2. Profit during the year was

$Rs. 60,000$ out of which

$Rs. 40,000$ is transferred to Reserve and is shown in the Balance sheet. Thus, in effect, only

$Rs. 20,000$ were distrubuted which have been deducted.
3. In the absence of any profit-sharing ratio being given, partners will share profit and loss equally.

$P$ and $Q$ were partners in a firm sharing profits equally. Their fixed capitals were $Rs.1,00,000$ and $Rs.50,000$ respectively. The Partnership Deed provided for Interest on Capital at the rate of $10\%$ per annum. For the year ended 31st March, 2016, the profits of the firm were distributed without providing Interest on Capital.
Pass necessary adjustment entry to rectify the error.

Rectification Entry is as follows:-

Q's capital A/c Dr. 2500

To P's capital A/c 2500

(Being Adjustment entry passed)

Due to omission of interest on capital,profit is excessively credited to the extent of interest of capital. So, Profit to the extent of interest is to be reversed.

Table Showing Adjustments To Be Made

Particulars	P	Q
Interest on capital	10,000	5000
Excess Profits credited	(7500)	(7500)
Net Effect	2500	(2500)

$X$ and $Y$ are partners sharing profits in the ratio of $3 : 2$ . On 31st March, 2017 after closing the books of account, their capitals are $Rs. 10,00,000$ and $Rs. 12,50,000$ respectively. On 1st May, 2016, $X$ had introduced an additional capital of $Rs. 2,50,000$ and $Y$ withdrew $Rs. 1,25,000$ from his capital. On 1st October, 2016, $X$ withdrew $Rs. 5,00,000$ from his capital and $Y$ introduced $Rs. 6,25,000$ . After closing the accounts, it was discovered that Interest on Capital @ $6\%$ p.a. has been omitted. During the year ended 31st March, 2017, $X's$ drawings and $Y's$ drawings were $Rs. 2,50,000$ and $Rs. 1,25,000$ . Profits (before interest on Capital) during the year were $Rs. 5,00,000$ .
Calculate Interest on Capital if the capitals are (a) fixed and (b) fluctuating.

1. When Capitals are Fixed

Calculation of Opening Capital X Y

Closing Capital 10,00,000 12,50,000

Add:-withdrawal of capital 5,00,000 1,25,000

Less:Additional Capital (2,50,000) (6,25,000)

Opening Capital 12,50,000 7,50,000

Calculation of Interest on Capital X Y

Interest on Opening capital 75,000 45,000

(12,50,000*6%) (7,50,000*6%)

Add:Interest on additional capital 13,750 18,750

(2,50,000*6%*11/12) (6,25,000*6%*6/12)

Less:Interest on capital withdrawn (15000) (6875)

[5,00,000*6%*6/12] [1,25,000*6%*11/12]

Total 73750 56875

2. When capitals are Fluctuating :

Calculation of Opening Capital X Y

Closing capital 10,00,000 12,50,000

Add:withdrawal of capital 5,00,000 1,25,000

Drawings 2,50,000 1,25,000

Less:additional capital (2,50,000) (6,25,000)

Less:profits (3,00,000) (2,00,000)

Total 12,00,000 6,75,000

Calculation of interest on capital X Y

Interest on opening capital 72,000 40,500

(12,00,000*6%) (6,75,000*6%)

Add interest on add capital 13,750 18,750

(2,50,000*6%*11/12) (6,25,000*6%*6/12)

Less: Interest on withdrawal ( 15,000) (6875)

(5,00,000*6%*6/12) (1,25,000*6%*11/12)

Total 70750 52,375

$X$ and $Y$ are partners sharing profits and losses in the ratio of $7 : 3$ . Their Capital Accounts as at 1st April, 2017 stood at $X - Rs. 5,00,000; \, Y- Rs. 4,00,000$ . The partners are allowed interest on capital @ $5\%$ p.a. The drawings of the partners during the year ended 31st March, 2018 amounted to $Rs. 72,000$ and $Rs. 50,000$ respectively. The profit for the year before allowing interest on capital and salary to $Y$ @ $Rs. 5,000$ per month amounted to $Rs. 8,00,000$ . $10\%$ of the net profit is to be set aside as General Reserve.
Pass the Journal entries for Appropriation. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2018, and Capital and Current Accounts of the partners.

Journal Entries are as follows:-

Profit and loss A/c Dr. 8,00,000

To P&L Appropriation A/c 8,00,000

(Being profit transferred )

Interest on capital A/c Dr. 45,000

To X's current A/c 25000

To Y's current A/c 20000

(Being interest on capital allowed @5%)

Y's salary A/c Dr. 60,000

To Y's current A/c 60,000

(Being salary allowed)

Profit and loss Appropriation A/c Dr. 1,05,000

To Interest on capital A/c 45,000

To Y's salary A/c 60,000

(Being interest on capital and salary transferred to p&l app A/c)

X's drawings A/c Dr. 72,000

Y's drawings A/c Dr. 50,000

To Bank A/c 1,22,000

(Being drawings made by partners)

Profit and Loss Appropriation A/c Dr. 6,95,000

To X'S current A/c 4,30,500

To Y's current A/c 1,84,500

To General Reserve 80,000

(Being share of profit and amount transferred from p&l App A/c)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To interest on capital X-5,00,0005%=25000 Y-4,00,0005%=20,000	45,000	By Net profit	8,00,000
To Y's salary	60,000
To general reserve (8,00,000*10%)	80,000
To profit transferred to X's current A/C-4,30,500 y'S current A/c- 1,84,500	6,15,000
Total	8,00,000	Total	8,00,000

PARTNERS CAPITAL ACCOUNT

Particulars	X	Y	Particulars	X	Y
To bl c/d	5,00,000	4,00,000	By bal b/d	5,00,000	4,00,000
Total	5,00,000	4,00,000	Total	5,00,000	4,00,000

PARTNERS CURRENT ACCOUNT

Particulars	X	Y	Particulars	X	Y
To drawings	72,000	50,000	By interest on capital	25,000	20,000
			By Y's salary		60,000
By bal c/d	3,83,500	2,14,500	By P&L App A/c	4,30,500	1,84,500
Total	4,55,500	2,64,500	Total	4,55,500	2,64,500

$X$ and $Y$ are partners sharing profits and losses in the ratio of $2 : 3$ with capitals of $Rs. 2,00,000$ and $Rs. 1,00,000$ respectively. Pass the necessary Journal entry or entries for distribution of profit/loss for the year ended 31st March, 2018 in each of the alternative cases:
CaseIf Partnership Deed is silent as to the interest on capital and the profit for the year is $Rs. 20,000$ .
CaseIf Partnership Deed provides for interest on capital @ $6\%$ p.a. and loss for the year is $Rs. 15,000$ .
CaseIf Partnership Deed provides for-interest on capital @ $6\%$ p.a. and the profit for the year is $Rs. 21,000$ .
CaseIf Partnership Deed provides for interest on capital @ $6\%$ p.a. as a charge on profit and the profit for the year is $Rs. 20,000$ .
CaseIf Partnership Deed provides for interest on capital @ $6\%$ p.a. as a charge on profit and the profit for the year is $Rs. 2,000$ .
CaseIf Partnership Deed provides for interest on capital @ $6\%$ p.a. as a charge on profit and the profit for the year is $Rs. 18,000$ .

Journal Entries

Case 1- Profit and Loss A/c Dr. 20,000

To Profit and Loss Appropriation A/c 20,000

(Being profit transferred to p &L app Account)

Profit and loss Appropriation A/c Dr 20,000

To X's capital A/c 8000

To Y's capital A/c 12,000

(Being profit distributed among partners)

Case 2- Profit and loss A/c Dr. 15000

To Profit and Loss Apprpriation A/c 15000

(Being loss transferred to P&L A/c)

X's capital A/c Dr. 6,000

Y's capital A/c Dr. 9000

To profit and loss A/c 15,000

(Being the loss distributed among partners)

No interest on capital is allowed in case of loss.

Case 3- Profit and loss A/c Dr. 21,000

To profit and loss Appropriation A/c 21,000

(Being profit transferred to P&L app account)

Profit and loss appropriation A/c Dr. 18,000

To X's capital A/c 12,000

To Y's capital A/c 6000

(Being interest on capital allowed to partners)

Profit and loss Appropriation A/c Dr. 3000

To X's capital A/c 1200

To Y's capital A/c 1800

(Being the profit distributed among partners)

Case 4- Profit and loss A/c Dr. 20000

To profit and loss Appropriation A/c 20000

(Being the net profit transferred to p&l app account)

Profit and loss Appropriation A/c Dr. 2000

To X's capital A/c 800

To Y's capital A/c 1200

(Being profit distributed among partners)

Profit and loss A/c Dr. 18,000

To X's capital A/c 12,000

To Y's capital A/c 6000

(Being interest allowed)

Case 5- Profit and loss A/c Dr. 18,000

To X's capital A/c 12,000

To Y's capital A/c 6000

(Being interest charged from profit)

X's capital A/c Dr. 6400

Y's capital A/c Dr. 9600

To Profit and loss A/c (18000-2000) 16000

(Being loss transferred to partners account)

Case 6- Profit and loss A/c Dr. 18,000

To X's capital A/c 12,000

To Y's capital A/c 6000

(Being interest allowed to partners)

$A$ and $B$ are partners sharing profits and losses in the ratio of $3 : 2$ . At the end of the year, i.e., on 31st March, 2018,(after division of the year's profit), they decided to take $C$ into partnership with effect from 1st April,As $C$ was getting annual salary of $Rs. 45,000$ , he had also advanced $Rs. 3,00,000$ to the firm by way of a loan on which he is getting interest @ $10\%$ ,p.a. During the three financial years, firm's profits after adjusting salary to $C$ , interest on loan and interest on the capital of the partners were:
Year Ended
31st March, 2016 Profit Rs. 4,00,000
31st March, 2017 Loss Rs. 2,00,000
31st March, 2018 Profit Rs. 6,00,000
According to the new agreement, $C$ is to be given annual salary of $Rs. 35,000$ and $\dfrac{1}{5}th$ share in the profits of the firm. $C's$ loan shall be treated as his capital from the beginning and similar to other partners, his capital will carry interest @ $6\%$ p.a.
Record necessary entries to give effect to the above arrangement.

Year 2016 2017 2018

Profit/Loss 4,00,000 (2,00,000) 6,00,000

Interest on Loan 30,000 30,000 30,000

as manager

Salary as manager 45,000 45,000 45,000

Profit before 4,75,000 (1,25,000) 6,75,000

loan and salary as manager

Less:-Interest on capital

@6% (18,000) Nil (18,000)

Less:-Salary as partner (35,000) Nil (35,000)

Adjusted Profit 4,22,000 (1,25,000) 6,22,000

Notes:- Interest on capital and salary to partners are not allowed in case of loss.

Total Adjusted Profit= (4,22,000+(1,25,000)+6,22,000)

= 9,19,000

C's Total Share as a partner

Share of profit(1/5*9,19,000) = 1,83,800

Interest on capital = 36,000

Salary = 70,000

Total = 2,89,800

C's share as manager

salary = 1,35,000

Interest = 90,000

Total = 2,25,000

Credit to C to be borne by A and B in the ratio of 3:2 is (2,89,800-2,25,000)= 64,800.

Journal entry is :

C's Loan A/c Dr. 3,00,000

To C's capital A/c 3,00,000

(Being C's loan converted to Capital)

A's capital A/c Dr. 38,800

B's capital A/c Dr. 25,920

To C's capital A/c 64,800

(Being credit given to C on conversion to partner)

Mannu and Shristhi are partners in a firm sharing profits in the ratio of $3:2$ . Following is the Balance Sheet of the firm as on 31st March,(Ref. image)
Profit for the year ended 31st March, 2018 was Rs. 5,000 which was divided in the agreed ratio, but interest @ $5\%$ p.a. on capital and $6\%$ p.a. on drawings was inadvertently omitted. Adjust interest on drawings on an avarage basis for 6 months. Give the adjustment entry.

Rectification Entry is as follows:-

Shristhi's capital A/c Dr 288

To Mannu's capital A/c 288

(Being adjustment entry passed)

Calculation of Opening Capital Mannu Shristhi

Closing capital 30,000 10,000

Less:profits (3000) (2000)

Opening capital 27,000 8000

Interest on capital @5% 1350 400

Drawings are already included in the capital. Interest on drawings is calculated for 6 months.

Table showing adjustments to be made

Particulars	Mannu	Shristhi
Interest on capital to be credited	1350	400
Interest on drawings to be debited	(120)	(60)
Profits to be credited	2058	1372
Profit wrongly credited	(3000)	(2000)
Net Effect	288	(288)

Anwar, Biswas and Divya are partners in a firm. Their Capital Accounts stood at : $Rs. 8,00,000;\, Rs. 6,00,000$ and $Rs.4,00,000$ respectively on 1st April,They shared profits and losses in the ratio of $3 : 2 :1$ respectively. Partners are entitled to interest on capital @ $6\%$ per annum and salary to Biswas and Divya @ $Rs. 4,000$ per Month and $Rs. 6,000$ per quarter respectively as per the provisions of Partnership Deed.
Biswas's share of profit including interest on capital but excluding salary is guaranteed at a minimurn of $Rs. 82,000$ p.a. Any deficiency arising on that account shall be met by Divya. Profit for the year ended. 31st March, 2014 amounted to $Rs. 3,12,000$ . Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2014.

Notes:- Biswa's share includes share of profit and interest on capital

Share of profit = 44,000

Add;Interest on capital= 36,000

Total = 80,000

Guaranteed amount = 82,000

The deficiency of 2000 is to be borne by Divya.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Interest on capital Anwar- 8,00,0006%=48,000 Biswas-6,00,0006%=36,000 Divya-4,00,000*6%=24,000	1,08,000	By net profit	3,12,000
To Partner's salary A/c Biswas-400012 = 48,000 Divya-60004 = 24,000	72,000
To Profit Transferred to Anwar's capital A/c- 66000 Biswa's capital A/c -44,000 Add:-Divya's share 2000 Divya = 22,000 Less:deficiency cont =(2000)	1,32,000
Total	3,12,000	Total	3,12,000

$X, Y$ and $Z$ entered into partnership on 1st July, 2016 to share Profit and Losses in the ratio of $3 : 2 :1$ . $X$ personally guaranteed that $Z's$ share of profit after charging interest on capital @ $6\%$ per annum would not be less than $Rs. 36,000$ p.a. The capital contributed by : $X- Rs. 2,00,000;\, Y- Rs. 1,00,000$ and $Z- Rs. 1,00,000$ . Profit for the year ended on 31st March, 2017 was $Rs. 1,38,000$ . Prepare Profit and Loss Appropriation Account.

Profit of 1,20,000 is to be distributed among partners as such

X= 1,20,000*3/6=60,000

Y=1,20,000*2/6=40,000

Z=1,20,000*1/6= 20,000

As Z's guaranteed profit is 36,000 for one year. So, for 9 months its (36000*9/12) = 27,000. The deficiency of Z is to be contributed by X. So, 7000(27,000-20,000) is paid by X.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Interest on capital X-2,00,0006%9/12=9000 Y-1,00,0006%9/12=4500 Z-1,00,0006%9/12=4500	18,000	By Net profit	1,38,000
To profit transferred to X-53,000 (60000 - 7000) Y-40,000 Z-27,000 (20000 + 7000)	1,20,000
Total	1,38,000	Total	1,38,000

$A$ and $B$ are partners in a firm sharing profits and losses in the ration of $3:2$ . Follwoing was the Balance Sheet of the firm as at 31st March,(Ref. image)
Profit $Rs. 30,000$ for the year ended 31st March, 2018 was divided between the partners without allowing interest on capitals @ $12\%$ p.a. and salary to $A$ @ $Rs.1,000$ per month. During the year, $A$ withdrew $Rs. 10,000$ and $B$ $Rs. 20,000$ .
Pass necessary adjustment Journal entry and show your working dearly.

Rectification Entry is as follows:-

B's capital A/c Dr. 5280

To A's capital A/c 5280

(Being adjustment entry passed)

Calculation of Opening Capital

A B

Closing Capital 60,000 20,000

Add:Drawings 10,000 20,000

Less:Profits (18,000) (12,000)

Opening Capital 52,000 28,000

Interest on capital @12% 6240 3360

Table Showing Adjustments To be Made

Particulars	A	B
Interest on capital	6240	3360
Salary	12,000
Profit to be credited(30,000-12,000-6240-3360)	5040	3360
Less:wrongly credited profits	(18,000)	(12,000)
Net Effects	5280	(5280)

$A, B$ and $C$ were partners. Their capitals were $A- Rs. 30,000;\, B-Rs. 20,000$ and $C-Rs. 10,000$ respectively. According to the Partnership Deed, they were entitled to an interest on capital at $5\%$ p.a. In addition, $B$ was also entitled to draw a salary of $Rs. 500$ per month. $C$ was entitled to a commission of $5\%$ on the profits after charging the interest on capital, but before charging the salary payable to $B$ . Net profit for the year was $Rs. 30,000$ distributed in the ratio of capitals without providing for any of the above adjustments. The profits were to be shared in the ratio of $5 : 2 : 3$ .
Pass necessary adjustment entry showing the Workings clearly.

Rectification Entry is as follows:-

A's current A/c Dr. 3675

To B's current A/c 930

To C's capital A/c 2745

(Being adjustments made)

Notes:-Capitals of the partners are assumed to be fixed.

Table Showing Adjustments To be Made

Particulars	A	B	C
Interest on capital to be provided@5%	1500	1000	500
Salary(500*12)		6000
Commission (30,000-`1500-1000-500)*5/100			1350
Profits to be distributed 5:3:2 (30,000-3000-6000-1385)	9825	3930	5895
Total	11,325	10930	7745
Less:profits wrongly credited 3:2:1 Net Adjustment	( 15,000) (3675)	(10,000) 930	(5,000) 2745

On 31st March, 2014, balances in the Capital Accounts of Eleen, Monu and Ahmad after making adjustments for profits and drawings were $Rs. 1,60,000, \, Rs.1,20,000$ and $Rs. 80,000$ respectively. Subsequently, it was discovered that the interest on capital and drawings had been omitted.
(i) The profit for the year ended 31st March, 2014 was $Rs. 40,000$ .
(ii) During the year, Eleen and Monu each withdrew a total sum of $Rs. 24,000$ in equal instalments in the beginning of each month and Ahmad withdrew a total sum of $Rs. 48,000$ in equal instalments at the end of each month.
(iii) The interest on drawings was to be charged @ $5\%$ p.a. and interest on capital was to be allowed @ $10\%$ p.a.
(iv) The profit-sharing ratio among the partners was $2 :1 : 1$ . Showing your working notes clearly, pass the necessary rectifying entry.

Rectification entry is as follows :-

Eleen's capital A/c Dr. 3850

To Monu's capital A/c 2950

To Ahmad's capital A/c 900

(Being adjustment entry passed)

Calculation of Opening Capital Eleen Monu Ahmad

Closing capital 1,60,000 1,20,000 80,000

Add:Drawings 24,000 24,000 48,000

Less:Profits credited (20,000) (10,000) (10000)

Opening Capital 1,64,000 1,34,000 1,18,000

Interest on Capital @10% 16,400 13,400 11,800

Calculation of Interest on Drawings Eleen Monu Ahmad

Interest on Drawings (24,000*5%*6.5/12) (24,000*5%*6.5/12) (48,000*5%*5.5/12)

= 650 650 =1100

Table Showing Adjustments To Be Made

Particulars	Eleen	Monu	Ahmad
Interest on capital	16,400	13,400	11,800
Interest on Drawings	(650)	(650)	(1100)
Profit to be credited	400	200	200
Profit wrongly credited	(20000)	(10000)	(10000)
Net Effect	(3850)	2950	900

$P, Q$ and $R$ are partners sharing profits in the ratio of $5 : 4 :1$ respectively. $R$ is guaranteed that his share of profit in any year will not be less than $Rs.50,000$ . The profit for the year ending 31st March, 2018 is $Rs. 3,50,000$ . Amount of shortfall in the profits of $R$ will be borne by $P$ and $Q$ in the ratio of $3 : 2$ respectiyely. Pass necessary Journal entry regarding deficiency borne by $P$ and $Q$ .

Calculation of Share of profits

P's Share -3,50,000*5/10 = 1,75,000

Q's share - 3,50,000*4/10 = 1,40,000

R's share - 3,50,000*1/10 = 35,000

R's guaranteed share is 50,000. So,the deficiency of 15,000 (50,000-35,000) is to be contributed by P and Q in the ratio of 3:2

P's contribution = 15,000*3/5=9,000

Q's contribution= 15,000*2/5 =6000

Journal entry is as follows:-

P's capital A/c Dr 9,000

Q's capital A/c Dr 6,000

To R's capital A/c 15,000

(Being deficiency contributed by partners)

$P$ and $Q$ were partners in a firm sharing profits in the ratio of $5 : 3$ . On 1st April, 2014 they admitted $R$ as a new partner for $\dfrac{1}{8}th$ share in the profits with a guaranteed profit of $Rs.75,000$ . The new profit-sharing ratio between $P$ and $Q$ will remain the same but they agreed to bear any deficiency on account of guarantee to $R$ in the ratio $3 : 2$ . The profit of the firm for the year ended 31st March, 2015 was $Rs. 4,00,000$ .
Prepare Profit and Loss Appropriation Account of $P, Q$ and $R$ for the year ended 31st March, 2015.

Calculation of New profit sharing Ratio

Let total share be 1.

Share of incoming partner= 1-1/8=7/8

P's New Share= 7/8*5/8=35/64

Q's New Share =7/8*3/8=21/64

R's share = 8/64

Share of partners in profit :

P's share=4,00,000*35/64=2,18,750

Q's share=4,00,000*21/64=1,31,250

R's share=4,00,000*8/64=50,000

R's share of deficiency i.e 25,000 is to be borne by P and Q in the ratio of 3:2.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To profit transferred to : P's capital A/c 2,18,750 Less: R's share (15,000) Q's capital A/c 1,31,250 Less: R's share (10,000) R's capital A/c 50,000 Add: share from P&Q 25,000	203750 121250 75000	By net profit	4,00,000
Total	4,00,000	Total	4,00,000

$A, B$ and $C$ are partners'in a firm sharing profits and losses in the ratio of $4 : 2 :1$ ; It is provided that $C's$ share in profit would not be less than $Rs. 37,500$ . The profit for the year ended 31st March; 2018 amounted to $Rs.1,57,500$ .
Pass Journal entries in the books of firm and prepare Profit and Loss Appropriation Account.

C's share of profit is (1,57,500*1/7) 22,500. So,the deficiency of (37,500-22,500) i.e 15,000 is to be borne by A and B in the ratio of 4:2.

Journal Entries are:-

Profit and Loss A/c Dr. 1,57,500

To Profit and Loss appropriation A/c 1,57,500

(Being profit transferred to P&L appropriation account)

Profit and Loss Appropriation A/c Dr. 1,57,500

To A's capital A/c 90,000

To B's capital A/c 45,000

To C's capital A/c 22,500

(Being actual distribution of profit)

A's capital A/c Dr. 10,000

B's capital A/c Dr. 5000

To C's capital A/c 15,000

(Being deficiency of C,contributed by A and B)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To A's capital A/c 90,000 Less:C's deficiency (10,000) To B's capital A/c 45,000 Less: C's deficiency (5000) To C's capital A/c 22,500 Add: share from A&B 15,000	1,57,500	By Net profit	1,57,500
Total	1,57,500	Total	1,57,500

State any two methods of valuing goodwill.

Years’ Purchase of Average Profit Method:

Under this method, average profit of the last few years is multiplied by one or more number of years in order to ascertain the value of goodwill of the firm. How many years’ profit should be taken for calculating average and the said average should be multiplied by how many number of years — both depend on the opinions of the parties concerned. The average profit which is multiplied by the number of years for ascertaining the value of goodwill is known as Years Purchase. It is also called Purchase of Past Profit Method or Average Profit Basis Method.

Years’ Purchase of Weighted Average Method:

This method is the modified version of Years’ Purchase of Average Profit Method. Under this method, each and every year’s profit should be multiplied by the respective number of weights, e.g. 1, 2, 3 etc., in order to find out the value of product which is again to be divided by the total number of weights for ascertaining the weighted average profit. Therefore, the weighted average profit is multiplied by the years’ purchase in order to ascertain the value of goodwill. This method is particularly applicable where the trend of profit is rising.

Goodwill of the firm is valued at two years purchase of the average profit of last four years. The total profits for last four years is $Rs. 40,000$ .
Calculate the goodwill of the firm.

Goodwill of last four years : 40,000 / 4

: 10,000

Goodwill at two years purchase : 10,000 x 2

: 20,000

Ankit, Suchita and Chandru are partners in a firm sharing profits and losses in the ration $4:3:2$ . Ankit retires from the firm. Suchit and Chandru agreed to share in the ratio of $5:3$ in future.
Calculate gain ration of suchita and chandru.

gain ratio = new ratio - old ratio

for suchita =

=5/8 - 3/9

= new ratio multiply by 9 and old ratio multiply by 8

so, = 45/72 - 24/72

= 21/72

for chandru =

= 3/8 - 2//9

= nwe ratio multiply by 9 and old ratio multiply by 8

so, 27/72 - 16/72

= 11/72

Swarna, Swapna and Vidya are partners in a firm sharing profits and losses in the ratio of $4:3:2$ . Vidya retires fro the firm. Swarna and Swapna agreed to share equally in future.
Calculate the gain ratio of swarna and Swapna.

gain ratio = new ratio - old ratio

for Swarna =

= 1/2 - 4/7

= new ratio multiply by 7 and old ratio multiply by 2

= 7/14 - 8/14

= (-1)/14

for swapna =

1/2 - 3/7

same here new ratio multiply by 7 and old ratio multiply by 2

so, 7/14 - 6/14

= 1/14

Anurag and Bhawana entered into partnership on $1.4.2014$ . On $1.1.2015$ they admitted Monika as a new partner for $\dfrac{3}{10} th$ share in the profits which she acquired equally from Anurag and Bhawana. The new profit sharing ratio of Anurag, Bhawana and Monika was $4:3:3$ . Calculate the profit sharing ratio of Anurag and Bhawana at the time of forming the partnership.

Anurag : Bhawana : Monika
New ratio is

$4$ :

$3$ :

$3$
or,

$\dfrac{4}{10}$ :

$\dfrac{3}{10}$ :

$\dfrac{3}{10}$
Anurag's old share = New share + Share sacrificed to Monika
=

$\dfrac{4}{10} + \left(\dfrac{3}{10} \times \dfrac{1}{2} \right) = \dfrac{11}{10}$
Bhawana's old share old share = New share + Share sacrificed to Monika
=

$\dfrac{3}{10} + \left(\dfrac{3}{10} \times \dfrac{1}{2} \right) = \dfrac{9}{20}$
Old ratio of Anurag and Bhawana is

$11:9$

Chhavi and Neha were partners in the firm sharing profits and losses equally. Chhavi withdrew a fixed amount at the beginning of each quarter. Interest on drawing is charged $@6\% p.a.$ At the end of the year, interest on Chhavi's drawing amounted to $Rs.900$ .Pass necessary journal entries for charging interest on drawings.

Date

Particulars

L.F.

Debit (Rs.)

Credit (Rs.)

Chhavi’s Capital A/c Dr.

900

To Interest on Drawings A/c

900

(Being interest on drawings charged)

Interest on Drawings A/c Dr.

900

To Profit & Loss Appropriation A/c

900

(Being interest on drawings transferred to profit & loss account)

Raja, Rani and Mantri are partners sharing profits and losses in the ratio of $2:2:1$ . The Balance sheet of the firm as on $31.03.2017$ was as follows:
Balance sheet as on $31.03.2017$
Liabilities Rs Assets Rs
Creditors
Bills payable
Capitals:
Raja
Rani
Mantri 40,000
20,000

1,00,000
60,000
40,000
Cash
Stock
Debtors
Building
Plant and Machinery

20,000
40,000
90,000
1,00,000
10,000

2,60,000 2,60,000

Raja died on $31.12.2017$ . His executors are entitled to the following :
a) His capital on the date of his death.
b) His share of profit till the date of his death. Estimated profit for the current years is $Rs.80,000$ .
c) Interest on capital is allowed at $10\%$ p.a.
d) His drawing till death amounted to $Rs.20,000$ .
e) Salary of Raja is $Rs. 1,000$ per month.
Prepare Raja's capital account.

Particulars	Amount in Rs.	Particulars	Amount in Rs.
To Drawing To Raja's executors A/C	20000 120500	By Bal b/d By interest on capital By Raja's Salary By P&L Sus. A/c	100000 7500 9000 24000
	140500		140500

Three Chartered Accountants $X, Y$ and $Z$ form a partnership sharing profits and losses in the ratio of $3 : 2 : 1$ subject to the following conditions:
(1) $Z's$ share of profits is guaranteed to be not less than $Rs. 30,000$ p.a.
(ii) $Y$ gives a guarantee to the effect that the gross fee earned by him for the firm shall not be less than the average gross fee earned by him during the preceding five years when he was carrying on the profession alone (the average ofwhich works out at $Rs.50,000$ ).
Profit for the first year (year ended 31st March, 2018) of the partnership is $Rs.1,50,000$ . The gross fee earned by $Y$ for the firm is $Rs. 32,000$ .
Prepare Profit and Loss Appropriation Account after giving effect to the above.

Notes:- The profit sharing ratio is 3:2:1. Z has been guaranteed a profit of 30,000.The deficiency of 2000 will be contributed by X and Y in the ratio of 3:2.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars	Amount	Particulars	Amount
To Profit T/f to: X's capital - 84,000 Less:Z's Deficiency (1200)	82,800	By net profit	1,50,000
Y's capital - 56,000 Less:- (800)	55,200	By Y's capital A/c (50,000-32,000)	18,000
Z's capital A/c 28,000 Add:-X's share 1200 Y's share 800	30,000
Total	1,68,000	Total	1,68,000

Write the journal entry to close Revaluation account when there is profit .

The profit on revaluations will be transferred to old partners’ capital accounts in the old profit sharing ratio:

Revaluation A/c	Dr.
To Old Partner's Capital a/c’s

Sheenu, Shankar and Sharan are partners sharing profits and losses in the ratio of $4: 3 : 3$ . Their capital balance on 01-04-2016 stood at $Rs. 1,00,000;\, Rs. 80,000$ and $Rs. 50,000$ respectively.
Sheenu died on 01-10-The partnership deed provides the followings:
a) Interest on capital at $12\%$ p.a.
b) He had withdrawn $Rs. 5,000$ upto date death.
c) Sheenu's share of goodwill $Rs. 5,000$
d) His share of profit upto the date of death on the basis of previous year profits. Previous year profits $Rs. 20,000$
Prepare Sheenu's Executors account.

Particulars	Amount in Rs.	Particulars	Amount in Rs.
To Drawing To Goodwill To Shenu's Executor's A/C	5000 5000 100000	By Bal b/d By int. on cap. By P&L Sus. A/c	100000 6000 4000
	110000		110000

Particulars	Amount in Rs.	Particulars	Amount in Rs.
To bal b/d	100000	By sheenu's Capital A/c	100000
	100000		100000

$A$ and $B$ are partners sharing profits and losses in the ratio of $6:4$ . They admit ' $C$ ' into the partnership, giving him $\dfrac{6}{20}th$ share, which he acquires in the proportion of $\dfrac{4}{20}$ and $\dfrac{2}{20}$ from $A$ and $B$ .
Calculate the new profit sharing ratio of all the partner's.

Partners A & B, admitted partner C

A = 6/10 * 4/20 = 24/200

B= 4/10*2/20 = 8/200

Now new ratios

A= 6/10-24/200=69/200

B=4/10-8/200= 72/200

C=24/200+8/200=32/200

NEW RATIOS

12:9:4

M/s. TB is a partnership firm with the partners A , B and C sharing profits and losses in the ratio $3 : 2 : 5$ . The balance sheet of the firm as on $30^{th}$ June, $2020$ was an under :

Balance Sheet of M/s. TB as on $30-6-2020$
Liabilities Amount
(Rs.) Assets Amount
(Rs.)
A's capital A/c

B's Capital A/c

C's Capital A/c

Long Term Loan

Bank Overdraft

Trade Payables

$1,24,000$

$96,000$

$1,60,000$

$4,20,000$

$64,000$

$2,13,000$
$\overline{10,77,000}$ Land

Building

Plant & Machinery

Investments

Inventories

Trade receivables

$1,20,000$

$2,20,000$

$4,00,000$

$42,000$

$1,36,000$

$1,59,000$
$\overline{10,77,000}$

It was mutually agreed that B will retire from partnership and in his place D will be admitted as a partner with effect from $1^{st}$ July, $2020$ . For this purpose, following adjustments are to be made:

(a) Goodwill of the firm is to be values at $Rs. 3$ lakhs due to the firm's location advantage but the same will not appear as an asset in the books of the reconstituted firm.

(b) Building and plant & Machinery are to be valued at $95\%$ and $80\%$ of the respective balance sheet values. Investments are to be taken over by the retiring partner at $Rs. 46,000$ . Trade receivables are considered good only up to $85\%$ of the balance sheet figure. Balance to be considered bad.

(c) In the reconstituted firm, the total capital will be $Rs. 4$ lakhs, which will be contributed by A , C and D in their new profit sharing ratio, which is $3 : 4 : 3$ .

(d) The amount due to retiring partner shall be transferred to his loan account.

You are required to prepare Revaluation Account and Partners' Capital; Accounts after reconstitution, along with working notes.

2034141_1959275_ans_d6d5af2bc6fd4577a02aee405ebdd2e9.png

Shobha, Sudha and Rathna are partners. Sharing profits and losses in the ratio of $2:2:1$ .
Their Balance sheet as on $31.3.2018$ was as follows:
Balance Sheet as on $31.3.2018$
Liabilities
Rs. Assets Rs.
Sundry Creditors
$30,000$ Cash in hand $10,000$
Capitals:
Shobha
Sudha
Rathna

$15,000$
$25,000$
$30,000$

$70,000$
Debtors $25,000$
Reserve fund $15,000$ Stock $40,000$
Plant and Machinery $40,000$
$1,15,000$ $1,15,000$
Rathna died on $30.06.2018$ . Her executor's should be entitled to:
a) Her capital on the date of last Balance sheet.
b) Her share of reserve fund on the date of last Balance sheet
c) Her share of profit up to the date of death, on the basis of previous year's profit. Previous year profit is $Rs.20,000$ .
d) Her share of goodwill. Goodwill of the firm is valued at $Rs.40,000$
e) Interest on capital at $10\%$ p.a.
You are required to ascertain amount payable executors of Rathna by preparing Rathna's capital account.

Dr Rathana capital account Cr

Particulars	Amt	Particulars	Amt
To goodwill a/c	8000	By bal b/d	30000
To Rathana executors a/c	26750	By R & S	3000
		By P & L A/c	1000
		By Int. On capital	750

	34750		34750

Dr Rathana executors account Cr

Particulars	Amt	Particulars	Amt
To bal c/d	26750	By Rathana A/c	26750

	26750		26750

Mohan, Vinay and Nitya were partners in a firm sharing profits and losses in the proportion of $\dfrac{1}{2},\dfrac{1}{3}$ and $\dfrac{1}{6}$ respectively. On 31st March,2018, their Balance Sheet was as follows.
Balance Sheet of Mohan, Vinay and Nitya as at 31st March, 2018
Liabilities

Amount
Rs. Assets

Amount
Rs.
Creditors
Employees' Provident Fund
Contingency Reserve
Capital:
Mohan 1,20,000
Vinay 1,00,000
Nitya 90,000
48,000
1,70,000
30,000

3,10,000 Cash at Bank
Bills Receivable
Book Debts 63,000
Less: Provision
for doubtful debts 2,000
Plant and Machinery
Land and Building
31,000
54,000

61,000
1,20,000
2,92,000
5,58,000 5,58,000
Mohan retired on the above date and it was agreed that :
(i) Plant and machinery will be depreciated by $5\%$ .
(ii) An old computer previously written off was sold for $Rs.4,000$ .
(iii) Bad debts amounting to $Rs.3,000$ will be written off and a provision of $5\%$ on debtors for bad and doubtful debts will be maintained.
(iv) Goodwill of the firm was valued at $Rs.1,80,000$ and Mohans share of the same was credited in his account by debiting Vinays and Nityas accounts.
(v) The capital of the new firm was to be fixed at $Rs.90,000$ and necessary adjustments were to be made by bringing in or paying off cash as the case may be.
(vi) Vinay and Nitya will share future profits in the ratio of $3 : 2$ .
Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of the reconstituted firm.

Calculate of Gaining & Sacrificing Share

Vinay's Gain = New Share - Old Share

$= \dfrac{3}{5} - \dfrac{1}{3} = \dfrac{9-5}{15} = \dfrac{4}{15}$

Nitya's Gain = New Share - Old Share

$= \dfrac{2}{5} - \dfrac{1}{6} = \dfrac{12 - 5}{30} = \dfrac{7}{30}$

Goodwill of the firm

$= Rs. 1,80,000$

Mohan's Share of Goodwill

$= 1,80,000 \times \dfrac{1}{2} = Rs. 90,000$

Vinay's Share of Goodwill

$= 1,80,000 \times \dfrac{4}{15} = Rs. 48,000$

Nitya's Share of Goodwill

$= 1,80,000 \times \dfrac{7}{30} = Rs.42,000$

1958119_1944059_ans_e062120dfdb649acbf946bc5a90ebd5c.png

Prepare Executor's Loan Account with imaginary figures showing the repayment of loan in two annual equal installments along with interest.

1456862_1690679_ans_71eeaac484bb4d14a36555347dd32887.PNG

Ashok, Babu and Chetan were partners in a firm sharing profits in the ratio of $4 : 3 : 3$ . The firm closes its books on 31 $^{st}$ March every year. On 31 $^{st}$ December, 2016 Ashok died. The partnership deed provided that on the death of a partner his executors will be entitled to the following :
(i) Balance in his capital account. On 1/4/2016, there was a balance of $Rs. 90,000$ in Ashok's Capital Account.
(ii) Interest on capital $@ 12\%$ per annum.
(iii) His share in the profits of the firm in the year of his death will be calculated on the basis of rate of net profit on sales of the previous year, which was $25\%$ . The sales of the firm till 30 $^{st}$ December, 2016 were $Rs. 4,00,000$ .
(iv) His share in the goodwill of the firm. The goodwill of the firm on Ashok's detah was valued at $Rs. 4,50,000$ .

The partnership deed also provided for the following deductions from the amount payable to the executor of the deceased partner:
(i) His drawings in the year of his death. Ashok's drawings till 31/12/2016 were $Rs 15,000$ .
(ii) Interest on drawing $@ 12\%$ per annum which was calculated as $Rs. 1,500$ .
The accountant of the firm prepared Ashok's Capital Account to be presented to the executor of Ashok but in a hurry he left in incomplete. Ashok's Capital Account as prepared by the firm's accountant is given below :
Dr. Ashok's Capital Account Cr.
Date Particulars Amount
(Rs) Date Particulars Amount
(Rs)
2016 2016
Dec 31 ..... 15,000 April 1 ..... 90,000
Dec 31 ..... ..... Dec 31 .... 8,100
Dec 31 ..... ..... Dec 31 ..... 40,000
Dec 31 ..... 90,000
Dec 31 ..... 90,000
3,18,100 3,18,100
You are required to complete Ashok's Capital Account.

Pass necessary journal entries on the dissolution of a partnership firm in the following cases :
(i) Dissolution expenses were $Rs. 800$ .
(ii) Dissolution expenses $Rs. 800$ were paid by Prabhu, a partner.
(iii) Geeta, a partner, was appointed to look after the dissolution work, for which she was allowed a remuneration of $Rs. 10,000$ . Geeta agreed to bear the dissolution expenses. Actual dissolution expenses $Rs. 9,500$ were paid by Geeta.
(iv) Janki, a partner, agreed to look after the dissolution work for a commission of $Rs.5,000$ . Janki agreed to bear the dissolution expenses. Actual dissolution expenses $Rs. 5,500$ were paid by Mohan, another partner, on behalf of Janki.
(v) A partner, Kavita, agreed to look after the dissolution process for a commission of $Rs. 9,000$ . She also agreed to bear the dissolution expenses. Kavita took over furniture of $Rs 9,000$ for her commission. Furniture had already been transferred to realisation account.
(vi) A debtor, Ravinder, for $Rs. 19,000$ agreed to pay the dissolution expenses which were $Rs. 18,000$ in full settlement of his debt.

Pranav, Karan and Rahim were partners in a firm sharing profits and losses in the ratio of $2:2:1$ . On 31st March, 2017 their Balance Sheet was as follows:
Balance Sheet of Pravan, Karan and Rahim as on 31.3.2017
Liabilities

Amount
Rs. Assets

Amount
Rs.
Creditors $30,00,000$ Fixed Assets $4,50,000$
General Reserve $1,50,000$ Stock $1,50,000$
Capitals:
Pranav $2,00,000$
Karan $2,00,000$
Rahim $\underline{1,00,000}$

_________
$5,00,000$ Debtors
Bank

$2,00,000$
$1,50,000$

$9,50,000$

$9,50,000$

Karan died on 12.06.According to the partnership deed, the legal representative of the deceased partner were entitled to the following:
(i) Balance in his Capital Account
(ii) Interest on Capital @ $12$ % p.a
(iii) Share of goodwill. Goodwill of the firm on Karan's death was valued at Rs. $60,000$
(iv) Share in the profits of the firm till the date of this death, calculated on the basis of last year's profit. The profit of the firm for the year ended 31.3.2017 was Rs. $5,00,000$
Prepare Karan's Capital a/c to be presented to his representatives.

Ashish, Satish and Manish were partners in a business sharing profits and losses in the ratio of $3:1:1$ respectively.
Their Balance Sheet as on $31^{st}$ March, $2016$ was as follows":
Balance Sheet as on $31^{st}$ March, $2016$
Liabilities Amount (Rs.) Assets Amount(Rs.)
Capital accounts Plant and machinery $70,000$
Ashish $80,000$ Stock $50,000$
Satish $60,000$ Debtors $40,000$
Manish $50,000$ Cash $60,000$
Creditors $10,000$
Reserve fund $20,000$

$2,20,000$ $2,20,000$
Manish dies on $1$ st October, $2016$ and the partnership deed provided that:
$(1)$ The deceased partner to be given his share of profit upto the date of death on the basis of the profit of the previous year.
$(2)$ His share of goodwill will be calculated on the basis of two years purchase of average profit to the last four years.
The net profits for the last four years were:
First year: Rs. $1,40,000$ , Second year: Rs. $1,10,000$ .
Third year: Rs. $90,000$ , Fourth year: Rs. $60,000$ .
$(3)$ Plant and machinery to be valued at Rs. $80,000$ . Reserve for doubtful debts of Rs. $4,000$ to be created.
$(4)$ The drawings of Manish upto the date of death amounted to Rs. $40,000$
$(5)$ Interest on capital is to be allowed at $10\%$ p.a. and interest on drawings is charged at $6\%$ p.a.
Prepare:
$(1)$ Profit and Loss Adjustment Account.
$(2)$ Manish's Capital Account.
$(3)$ Working of Manish's share in profit and goodwill.

R.E.F image

Working Note

Manish Profit

$= 60000*1/5*6/12 = 6000$

Interest on Capital

$= 50000*10/100*6/12 = 2500$

Int on Drawing

$= 40000*6/100*6/12 = 1200$

Calculation of Goodwill of Manish

Avg Profit

$= 140000+110000+90000+60000/4$

$40000/4 = 100000$

goodwill

$= 100000*2$

Mansih share

$= 200000*1/5 = 40000$

Ashish

$3/4 = 30000$

Satish

$1/4 = 10000$

1158910_864834_ans_e100a150dd0b461290bd2092eaa2d120.png

Answer briefly the following question:
Give the formula for valuation of goodwill by the Capitalisation of Average Profit Method.

Formula for calculating goodwill by the Capitalisation of Average Profit Method is :

Goodwill = Capitalised value - Net assets of business where,

Capitalised Value = (Average Future maintainable profits/ Normal Rate of Return) * 100

Net assets = All Assets - Outsider's Liability

Ashish, Aakash and Amit are partners, sharing profits and losses equally. The Balance Sheet as at $31st$ March, $2018$ was as follows :
Liabilities Rs. Assets Rs.
Sundry Creditors 75,000 Cash in Hand 24,000
General Reserve 90,000 Cash at Bank 1,40,000
Capital A/c's:
Sundry Debtors 80,000
Ashish 3,00,000 Stock 1,40,000
Aakash 3,00,000 Land and Building 4,00,000
Amit 2,75,000 8,75,000 Machinery 2,50,000
Advertisement 6,000
10,40,000 10,40,000
The partners decided to share profits in the ratio of $2:2:1$ w.e.f. $1st$ April, $2018$ . They also decided that :
(i) Value of stock to be reduced to Rs. $1,25,000$ .
(ii) Value of machinery to be decreased by $10\%$ .
(iii) Land and Building to be appreciated by Rs. $62,000$ .
(iv) Provision for Doubtful Debts to be made $@ 5\%$
(v) Aakash was to carry out reconstruction of the firm at a remuneration of Rs. $10,$
Pass necessary Journal entries to give effect to the above.

Journal entries:

1. Revaluation A/c Dr. 15000

To Stock A/c 15000

(Being Value of stock to be reduced to Rs. 1,25,000)

2. Revaluation A/c Dr. 25000

To machinery A/c 25000

(Being Value of machinery to be decreased by 10%)

3. Land and Building A/c Dr. 62000

To Revaluation A/c 62000

(Being Value of machinery to be decreased by 10%)

4. Revaluation A/c Dr. 4000

To Provision for Doubtful Debts A/c 4000

(Being Provision for Doubtful Debts is created @ 5% on debtors)

5. Revaluation A/c Dr. 10000

To Akash's capital A/c 10000

(Being remuneration for carry out reconstruction paid)

6. Revaluation A/c Dr. 8000

To Ashish's capital A/c 2666

To Aakash's capital A/c 2666

To Amit's capital A/c 2668

(Being profit on revaluation is distributed among partners in their old ratio)

7. General Reserver A/c Dr. 90000

To Ashish's capital A/c 30000

To Aakash's capital A/c 30000

To Amit's capital A/c 30000

(Being general reserve is distributed among partners in their old ratio)

10% . 10% . 1,25,00

X and Y are partners, sharing profits and losses in the ratio of 3 :They employed Z as their Manager, to whom they paid a salary of Rs. 7,500 per month. Z had deposited Rs. 2,00,000 on which interest was payable @ 9% pa. At the end of the accounting year (i.e., 31st March 2018) 2017-18 (after division of the year's profits), it was decided that Z should be treated as a partner with effect from 1st April 2014 with 1/6th share of profits, his deposits being considered as capital carrying interest @ 6% p.a. like capitals of other partners. The firm's profits and losses after allowing interest on capitals were-2014-15: Profit 5,90,000; 2015-16: Profit 6,26,000; 2016-17: Loss 40,000 and 2017-18: Profit 7,80,Record necessary Journal entries to give effect to the above.
Note: Interest on capital Is to be allowed as a charge.

Calculation of profit before Z's salary and Interest on loan

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

profit/loss 590000 626000 (40000) 780000

Add:-Salary 90000 90000 90000 90000

Add:-Interest on Z's loan 18000 18000 18000 18000

Profit before Z's salary

and Interest on loan 698000 734000 68000 888000

Total profit for 4 years = 2388000

Calculation of interest on capital = 200000*6% = 12000

Interest on capital for 4 years= 12000*4=48000

Profit after Z's interest on capital = 2388000-48000

= 2340000

Z's share of profit= 2340000/6=390000

Z's share as partner= 390000+48000=438000

Less Z's share as manager= salary+interest on loan=360000+72000

= (432000)

Z to get from X and Y = 6000

The following journal entries need to be passed:-

X's capital A/c Dr.(6000*3/5) 3600

Y's capital A/c Dr.(6000*2/5) 2400

To Z 's capital A/c 6000

(Being Z paid by X and Y in 3:2 ratio)

Z's loan A/c Dr. 200000

To Z's capital A/c 200000

(Being Z's loan transferred to Z' capital A/c)

$A$ and $B$ are partners in a firm with capital of $Rs. 1,20,000$ respectively. They decide to admit $C$ into the partnership for $1/4^{th}$ share in the future profits. $C$ is to bring in a sum of $Rs. 70,000$ as his capital. Calculate amount of goodwill.

Goodwill is the reputation of a business earned over some years represented in monetary terms. Whenever there is a change in the constitution of a partnership by way of admission,retirement or death, a valuation of goodwill is necessary.

In the given question we have to calculate hidden goodwill. Hidden goodwill is the goodwill which is not given in the question and we have to calculate it on the basis of total capital of the firm and other given information.

C's share is 1/4th and he brings 70,000 as his capital.

Total capital = 70,000 * 4 = 2,80,000

3/4th capital = 2,80,000-70,000 = 2,10,000

Total capital of A and B = 1,20,000+1,20,000 = 2,40,000

Value of goodwill = Difference between old and new capital

= 2,40,000 - 2,10,000 = 30,000

For 1/4th share, C is bringing 70,000 as capital. So,the new capital of the firm on the basis of C's capital is 2,80,000. A and B capital according to their ratio i.e 1:1 should be 2,10,000/2 = 1,05,000 each. So,the excess is goodwill.

J,H and K were partners in a firm sharing profits in the ratio of $5:3:2$ . On $31.3.2015$ their Balance Sheet was as follows.
Refer image,
On the above date H retired and J and K agreed to continue the business on the following terms :
(i) Goodwill of the firm was valued at $Rs.1,02,000$ .
(ii) There was a claim of $Rs.8,000$ for workmen's compensation.
(iii) Provision for bad debts was to be reduced by $Rs.2,000$ .
(iv) H will be paid $Rs.14,000$ in cash and the balance will be transferred in his loan account which will be paid in four equal yearly instalments together with interest $@ 10\%$ p.a.
(v) The new profit sharing ratio between J and K will be $3 : 2$ and their capitals will be in their new profit sharing ratio. The capital adjustments will be done by opening current accounts.
Prepare Revaluation Account, Partner's Capital Accounts and Balance Sheet of the new firm.

Working Notes:

WN1: Calculation of Gaining Ratio

Gaining Ratio = New Ratio - Old Ratio

$J's = \dfrac{3}{5} - \dfrac{5}{10} = \dfrac{1}{10}$

$K's = \dfrac{2}{5} - \dfrac{2}{10} = \dfrac{2}{10}$

Gaining Ratio =

$1: 2$

WN2: Adjustment of Goodwill

H's Share of Goodwill

$= 1,02,000 \times \dfrac{3}{10} = Rs. 30,600$

$Rs. 30,600$ will be debited to gaining partners (J and K) in the ratio of

$1:2$

J's share

$=30,600 \times \dfrac{1}{3} = Rs. 10,200$

K's share

$=30,600 \times \dfrac{2}{3} = Rs. 20,400$

WN3: Adjustment of capital

Adjusted Capital of J

$= 1,00,000 + 10,000 + 40,000 - 3,000 - 10,200 = Rs. 1,36,800$

Adjusted Capital of K

$= 40,000 + 4,000 + 16,000 - 1,200 - 20,400 = Rs.38,400$

Total Adjusted Capital

$= 1,36,800 + 38,400=Rs. 1,75,200$

J's New Capital

$= 1,75,200 \times \dfrac{3}{5} = Rs. 1,05,120$

K's New Capital

$=1,75,200 \times \dfrac{2}{5} = Rs. 70,080$

K's New Capital > K's Adjusted Capital (K owes

$Rs.31,680$ to the firm)

J's New Capital < J's Adjusted Capital (Firm owes

$Rs. 31,680$ to J)

WN4: Amount transferred to H's Loan A/C

Amount to be transferred = (Credit side - Debit side) - Cash Paid

$= (1,40,600 - 1,800)-14,000 = Rs. 1,24,800$

1957626_1944491_ans_3e8486a9449a4c88992f0cdcad300bb1.png

Following is the Balance Sheet of $A$ and $B$ , who shared Profits and Losses in the ratio $2:1$ as at $1st$ April, $2018$ :
Liabilities Rs. Assets Rs.
Capital A/cs
$A$ 3,00,000
$B$ 2,00,000

5,00,000

Land and Buildings

2,90,000
Reserve 1,50,000 Furniture 80,000
Creditors 2,00,000 Stock 2,40,000
Debtors 1,50,000
Bank 60,000
Cash 30,000
8,50,000 8,50,000
On the above date, the partners changed their profit-sharing ratio to $3:2$ . For this purpose, the goodwill of the firm was valued at Rs. $3,00,000$ . The partners also agreed for the following :
(a) The value of Land and Building will be Rs. $5,00,000$ ;
(b) Reserve is to be maintained at Rs. $3,00,000$
(c) The total capital of the partners in the new firm will be Rs. $6,00,000$ , which will be shared by the partners in their new profit sharing ratio.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.

Revaluation A/c

Particulars	Amt.	Particulars	Amt.
To Partner's Capital A/c:	210000	By Land and Bldg A/c	210000
A 140000
B 70000

	210000		210000

Partner's Capital A/c

Particulars	A	B	Particulars	A	B
To Reserve A/c	180000	120000	By bal b/d	300000	200000
To A's Capital A/c		20000	By Revaluation A/c	140000	70000
To Cash A/c	20000		By Reserve A/c	100000	50000
To Bal c/d	360000	240000	By B's Capital A/c (goodwill)	20000
			By Cash A/c		60000

	560000	380000		560000	380000

Balance Sheet

Liabilities	Amount	Assets	Amount
Capital A/cs: A - 360000 B - 240000	600000	Land and Building	500000
Reserves	300000	Furniture	80000
Creditors	200000	Stock	240000
		Debtor	150000
		Cash	70000
		Bank	60000
	1100000		1100000

Workings:

A's sacrificing ratio: 3/5 - 2/3 = (1/15)

Arun, Varun and Karan were partners in a firm sharing profits in the ratio of $4 : 3 : 3$ . On $31.3.2014$ , their Balance Sheet was as follows :

Liabilities Amount
Rs. Assets Amount
Rs.
Creditors
Bills Payable
Karan's Loan
Capitals :
Arun $70,000$
Varun $\underline{68,000}$ $17,000$
$12,000$
$28,000$

$1,38,000$
Cash
Debtors
Bills Receivables
Furniture
Machinery
Koran's Capital
$8,000$
$13,000$
$9,000$
$27,000$
$1,25,000$
$13,000$
$1,95,000$ $1,95,000$

On $30.9.2014$ , Karan died. The Partnership Deed provided for the following to the executors of the deceased partner :

(a) His share in the goodwill of the firm calculated on the basic of three years' purchase of the average profits of the last four years. The profits of the last four years were $Rs. 1,90,000; \ Rs. 1,70,000; \ Rs. 1,80,000$ and $Rs. 1,60,000$ respectively.
(b) His share in the profits of the firm till the date of his death calculated on the basis of the average profits of the last four years.
(c) Interest $@ \ 8\%$ p.a. on the credit balance, if any, in his Capital Account.
(d) Interest on his loan $@ 12\%$ p.a.
Prepare Karan's Capital Account to be presented to his executors, assuming that his loan and interest on loan were transferred to his Capital Account.

Karan's Capital Account

Dr. cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/d To Executor A/c	13,000 2,00,430	By Arun's Capital A/c By Varun's Capital A/c By Profit and Loss Suspense A/c By Karan's Loan A/c By Interest on Karan's Loan	90,000 67,500 26,250 28,000 1,680
	2,13,430		2,13,430

Working Notes:

WN1 Calculation of interest on Karan's Loan

Interest on Loan

$= 28000\times \dfrac{12}{100} \times \dfrac {6}{12} = 1680$

WN2 Calculation of Karan's share of Profits

Average profit

$= \dfrac{190000 + 170000 + 180000 + 160000}{4} = 175000$

Share of Karan's in profit

$= 175000 \times \dfrac{3}{10} \times \dfrac{6}{12} = 26250$

WN3 Adjustment of Goodwill

Average Profit

$= 1,75,000$

Goodwill of the form

$=$ Average Profit

$\times$ Number of year's purchase

$= 175000\times 3 = 525000$

Karan's share of Goodwill

$= 525000\times \dfrac{3}{10} = 157500$

Arun will pay

$= 157500 \times \dfrac{4}{7} = 90000$

Varun will pay

$= 157500 \times \dfrac{3}{7} = 67500$

Note; Gaining ratio is same as their new profit sharing ratio i.e 4:3.

	Book Value (Rs.)
General Reserve	1,50,000
Contingency Reserve	60,000
Profit and Loss A/c(Cr.)	90,000
Advertisement Suspense A/c (Dr.)	1,20,000

Liabilities	(Rs.)	Assets	(Rs.)
Creditors A's Capital 51,450 B's Capital 36,750	11,800 88,200	Cash Stock Debtors Furniture Machinery	1,500 28,000 19,500 2,500 48,500
	1,00,000		1,00,000

year	2017-18	2016-17	2015-16	2014-15	2013-14
Profits(Rs)	$8,00,000$	$15,00,000$	$18,00,000$	$4,00,000$ (Loss)	$13,00,000$

Year	$2013-14$	$2014-15$	$2015-16$	$2016-17$	$2017-18$
Profit (Rs.)	$70,000$	$85,000$	$45,000$	$35,000$	$10,000$ (Loss)

Liabilities	Rs.	Assets	Rs.
Investments Fluctuation	$60,000$	Investments (At cost)	$4,00,000$

Liabilities	Rs.	Assets	Rs.
Capital A/cs' : A 2,50,000 B 2,50,000 C 2,00,000	7,00,000	Land and Building	3,50,000
General Reserve	60,000	Machinery	2,40,000
Investments Fluctuation Reserve	30,000	Computers	70,000
Sundry Creditors	90,000	Investments (Market Value Rs. 90,000)	1,00,000
		Sundry Debtors	50,000
		Cash in Hand	10,000
		Cash at Bank	55,000
		Advertisement Suspense	5,000
	8,80,000		8,80,000

Liabilities	(Rs.)	Assets	(Rs.)
General Reserve	36,000	Advertisement Suspense A/c	24,000
Contigency Reserve	6,000
Profit and Loss A/c	18,000

Year Ended
31st March, 2016	Profit	Rs. 4,00,000
31st March, 2017	Loss	Rs. 2,00,000
31st March, 2018	Profit	Rs. 6,00,000

Liabilities	Rs	Assets	Rs
Creditors Bills payable Capitals: Raja Rani Mantri	40,000 20,000 1,00,000 60,000 40,000	Cash Stock Debtors Building Plant and Machinery	20,000 40,000 90,000 1,00,000 10,000
	2,60,000		2,60,000

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
A's capital A/c B's Capital A/c C's Capital A/c Long Term Loan Bank Overdraft Trade Payables	$1,24,000$ $96,000$ $1,60,000$ $4,20,000$ $64,000$ $2,13,000$ $\overline{10,77,000}$	Land Building Plant & Machinery Investments Inventories Trade receivables	$1,20,000$ $2,20,000$ $4,00,000$ $42,000$ $1,36,000$ $1,59,000$ $\overline{10,77,000}$

Liabilities	Amount Rs.	Assets	Amount Rs.
Creditors Employees' Provident Fund Contingency Reserve Capital: Mohan 1,20,000 Vinay 1,00,000 Nitya 90,000	48,000 1,70,000 30,000 3,10,000	Cash at Bank Bills Receivable Book Debts 63,000 Less: Provision for doubtful debts 2,000 Plant and Machinery Land and Building	31,000 54,000 61,000 1,20,000 2,92,000
	5,58,000		5,58,000

Date	Particulars	Amount (Rs)	Date	Particulars	Amount (Rs)
2016			2016
Dec 31	.....	15,000	April 1	.....	90,000
Dec 31	.....	.....	Dec 31	....	8,100
Dec 31	.....	.....	Dec 31	.....	40,000
			Dec 31	.....	90,000
			Dec 31	.....	90,000
		3,18,100			3,18,100

Liabilities	Amount Rs.	Assets	Amount Rs.
Creditors	$30,00,000$	Fixed Assets	$4,50,000$
General Reserve	$1,50,000$	Stock	$1,50,000$
Capitals: Pranav $2,00,000$ Karan $2,00,000$ Rahim $\underline{1,00,000}$	_________ $5,00,000$	Debtors Bank	$2,00,000$ $1,50,000$
	$9,50,000$		$9,50,000$

Liabilities	Amount (Rs.)	Assets	Amount(Rs.)
Capital accounts		Plant and machinery	$70,000$
Ashish	$80,000$	Stock	$50,000$
Satish	$60,000$	Debtors	$40,000$
Manish	$50,000$	Cash	$60,000$
Creditors	$10,000$
Reserve fund	$20,000$
	$2,20,000$		$2,20,000$

Liabilities	Rs.	Assets	Rs.
Capital A/cs $A$ 3,00,000 $B$ 2,00,000	5,00,000	Land and Buildings	2,90,000
Reserve	1,50,000	Furniture	80,000
Creditors	2,00,000	Stock	2,40,000
		Debtors	1,50,000
		Bank	60,000
		Cash	30,000
	8,50,000		8,50,000

Reconstitution Of A Partnership Firm - Retirement / Death Of A Partner - Class 12 Commerce Accountancy - Extra Questions

A,BA, B and CC are partners sharing profits and losses in the ratio of 2:2:12 : 2 :1 respectively. AA is entitled to a commission of 10% on the net profit. Net profit for the year is Rs. 1,10,Determine the amount of commission payable to AA.

What is meant by Purchased Goodwill?

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method. Total capital of the firm is Rs.16,00,00016,00,000.Normal rate of return 10%10\%. Profit for the year is Rs. 2,00,0002,00,000.

What is meant by Self-generated Goodwill?

How does the market situation affect the value of Goodwill of a firm?

Why Goodwill considered as an intangible asset but not a fictitious asset?

How does location affect the Goodwill of a business?

When the General Reserve is distributed, is the partner's Capital Account debited or credited?

If the new partner brings in his share of goodwill in cash and if goodwill also appears in books, how is existing amount of goodwill dealt with?

Why do we distribute reserves, accumulated profits and losses among the old partners?

State the reason of contributing for goodwill by a new partner at the time of his admission.

When capitals are made proportionate to profit-sharing ratio and excess capital is paid back to a partner, is his Capital Account debited or credited?

Under what circumstances will the premium for goodwill paid by the incoming partner not be recorded in the books of account?

Why should a new partner contribute for goodwill on admission?

State whether Revaluation Account is debited or credited to record an unrecorded asset.

State the need for treatment of goodwill on admission of a partner.

When existing Goodwill is written off, is the partner's Capital Account debited or credited?

XX and YY are partners in a firm, sharing profits and losses in the ratio of 3:23:2. ZZ is admitted as partner with 1/41/4 share in profit. ZZ acquires his share from XX and YY in the ratio of 2:12:1.Calculate the new profit sharing ratio.

XX and YY are partners sharing profits and losses in the ratio of 3:23:2. They admit ZZ into partnership. XX gives 1/3rd1/3^{rd} of his share, while YY gives 1/10th1/10^{th} from his share to ZZ. Calculate new profit-sharing and sacrificing ratio.

What are the assumptions in calculation of goodwill by average profit method ?

What are the assumptions in calculation of goodwill by super profit method?

What do you mean by joint life policy?

Jayant, Karthik and Leena were partners in a firm sharing profits and losses in the ratio of 5:2:35:2:3. Kartik died and Jayant and Leena decided to continue the business. Their gaining ratio was 2:32:3.Calculate the new profit sharing ratio of Jayant and Leena.

Solve.X, Y and Z jointly promise to pay? Rs. 9,000 to W. Who is liable to pay the amount to W in each of the following alternative casesCase (a) If X dies,Case (b) X, Y and Z die?

How is gain ratio calculated?

Does partnership firm has a separate legal entity? Give reason in support of your answer.

State any three circumstances other than (i) admission of a new partner, (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may raise.

List the items that are debited to Profit and Loss Appropriation Account.

What is meant by `unlimited liability of a partner'?

Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of 3:2:1:43:2:1:4. Kumar retires and his share is acquired by Lakshya and Manoj in the ratio of 3:23:2. Calculate new profit-sharing ratio and gaining ratio of the remaining partners.

Short notes:Define Goodwill.

X,YX, Y and ZZ are sharing profits and losses in the ratio of 5:3:25:3:2 With effect from 1st1st April, 20182018 ,they decide to share profits and losses in the ratio of 5:2:35:2:3 Calculate each partner's gain or sacrificed due to the change in ratio.

Calculate value of goodwill on the basis of three years purchase of average profit of the preceding five years were as follows:year2017-182016-172015-162014-152013-14Profits(Rs)8,00,0008,00,00015,00,00015,00,00018,00,00018,00,0004,00,0004,00,000(Loss)13,00,00013,00,000

AA and BB are sharing profits and losses equally. With effect from 1st1st April, 2018, they agree to sharing-profits in the ratio 4:34:3 .Calculate individual partner's gain or sacrifice due to the change in ratio.

How does the nature of business affect the value of Goodwill of a firm?

State any two factors affecting the value of Goodwill of a firm.

Why is the value of goodwill determined when a firm is reconstituted?

X,YX, Y and ZZ are sharing profits and losses in the ratio of 5:3:25:3:2 With effect from 1st1st April, 20182018 ,they decide to share profits and losses equally. Calculate each partner's gain or sacrifice due to the change in ratio.

Do you distribute Reserves at the time of Reconstitution of a firm? Why?

AA and BB are partners in a firm, sharing profits in the ratio of 4:14:1. They decided to share future profit in the ratio of 3:23:2 w.e.f. 1st1st April, 20182018. On that day, Profit and Loss Account showed a debit balance of Rs. 1,00,0001,00,000. Pass Journal entry to give effect to the above.

RR and SS are partners sharing profits in the ratio of 5:35:3. TT joins the firm as a new partner. RR gives 1/4th1/4^{th} of his share and SS gives 1/5th1/5^{th} of his share to the new partner.Find out new profit-sharing ratio.

AA and BB are partners sharing profits and losses in the proportion of 7:57:5. They agree to admit CC, their manager, into partnership who is to get 1/6th1/6^{th} share in the profit. He acquires this share as 1/24th1/24^{th} from AA and 1/8ht1/8^{ht} from BB. Calculate new profit-sharing ratio.

State whether Revaluation Account is debited or credited to record the increase in the value of Plant and Machinery.

Kabir and Farid are partners in a firm, sharing profits and losses in the ratio of 7:37:3. Kabir surrenders 2/10th2/10^{th} from his share and Farid surrenders 1/10th1/10^{th} from his share in favour of Jyoti new partner.Calculate new profit-sharing ratio and sacrifice ratio.

State whether Revaluation Account is debited or credited to record the decrease in the value of Plant and machinery.

AA and BB are in partnership sharing profits and losses as 3:23:2. CC is admitted for 1/4th1/4^{th} share. Afterwards, DD enters for 2020 paise in the rupee. Compute profit-sharing ratio of A,B,CA, B, C and DD after D′sD's admission.

XX and YY were partners sharing profits in the ratio of 3:23:2. They admitted PP and QQ as new partner. X XX surrendered 1/3rd1/3^{rd} of his share in favour of PP and YY surrendered 1/4th1/4^{th} of his share in favour QQ. Calculate new profit-sharing ratio X,Y,PX, Y, P and QQ.

Short answer type question:For which share of goodwill a partner is entitled at the time of retirement?

Short answer type question:Why the value of goodwill need to be determined on retirement or death of a partner?

Short answer type question:Give any one distinction between sacrificing ratio and gaining ratio.

XX and YY are partners in a firm sharing profits in the ratio of 3:23:2 . They decided to share profits equally w.e.f. 1st1st April, 20182018 and also that they will use 10%10 \% of the net profit in keeping the neighbourhood clean. Identify the values in their action.

Short answer type question:State the ratio in which the partners share gain or loss from revaluation of assets and liabilities.

Distinguish between the sacrificing ratio and the gaining ratio among partners.

Kangli, Mangli and Sanvali are partners, sharing profits in the ratio of 4:3:24:3:2. Kangali retires. Assuming Mangli and Sanvali will share profits in future in the ratio of 5:35:3, determine the gaining ratio.

A,BA, B and CC were partners in a firm sharing profits in the ratio of 8:4:38:4:3. BB retires and his share is taken up equally by AA and CC. Find the new profit-sharing ratio.

W,X,YW, X, Y and ZZ are partners sharing profits and losses in the ratio of 13,16,13\dfrac{1}{3}, \dfrac{1}{6}, \dfrac{1}{3} and 16\dfrac{1}{6} respectively. YY retires and W,XW, X and ZZ decide to share the profit and losses equally in future. Calculate gaining ratio.

Ramesh wants to retire from the firm. The gain (profit) on revaluation on that date was Rs.12,000Rs. 12,000. Mohan and Rahul want to share this in their new profit-sharing ratio of 3:23:2. Ramesh wants this to be shared equally. How is the profit to be shared? Given reasons.

A,B,CA, B, C and DD were partners in a firm sharing in 5:3:2:25:3:2:2 ratio. BB and CC retired from the firm. B′sB's share was acquired by DD and C′sC's share was acquired by AA. Calculate new profit-sharing ratio of AA and DD.

Give the Journal entry to distribute "Workmen Compensation Reserve" of Rs.72,000Rs. 72,000 at the time of admission of ZZ When there is claim of Rs.48,000Rs. 48,000 against it. The firm has two partners XX and YY.

$A, B$ and $C$ are partners sharing profits and losses in the ratio of $2 : 2 :1$ respectively. $A$ is entitled to a commission of 10% on the net profit. Net profit for the year is Rs. 1,10,Determine the amount of commission payable to $A$ .

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method. Total capital of the firm is Rs. $16,00,000$ .
Normal rate of return $10\%$ . Profit for the year is Rs. $2,00,000$ .

$X$ and $Y$ are partners in a firm, sharing profits and losses in the ratio of $3:2$ . $Z$ is admitted as partner with $1/4$ share in profit. $Z$ acquires his share from $X$ and $Y$ in the ratio of $2:1$ .
Calculate the new profit sharing ratio.

$X$ and $Y$ are partners sharing profits and losses in the ratio of $3:2$ . They admit $Z$ into partnership. $X$ gives $1/3^{rd}$ of his share, while $Y$ gives $1/10^{th}$ from his share to $Z$ . Calculate new profit-sharing and sacrificing ratio.

Jayant, Karthik and Leena were partners in a firm sharing profits and losses in the ratio of $5:2:3$ . Kartik died and Jayant and Leena decided to continue the business. Their gaining ratio was $2:3$ .
Calculate the new profit sharing ratio of Jayant and Leena.

Solve.
X, Y and Z jointly promise to pay? Rs. 9,000 to W. Who is liable to pay the amount to W in each of the following alternative cases
Case (a) If X dies,
Case (b) X, Y and Z die?

Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of $3:2:1:4$ . Kumar retires and his share is acquired by Lakshya and Manoj in the ratio of $3:2$ . Calculate new profit-sharing ratio and gaining ratio of the remaining partners.

Short notes:
Define Goodwill.

$X, Y$ and $Z$ are sharing profits and losses in the ratio of $5:3:2$ With effect from $1st$ April, $2018$ ,they decide to share profits and losses in the ratio of $5:2:3$ Calculate each partner's gain or sacrificed due to the change in ratio.

Calculate value of goodwill on the basis of three years purchase of average profit of the preceding five years were as follows:
year 2017-18 2016-17 2015-16 2014-15 2013-14
Profits(Rs) $8,00,000$ $15,00,000$ $18,00,000$ $4,00,000$ (Loss) $13,00,000$

$A$ and $B$ are sharing profits and losses equally. With effect from $1st$ April, 2018, they agree to sharing-profits in the ratio $4:3$ .Calculate individual partner's gain or sacrifice due to the change in ratio.

$X, Y$ and $Z$ are sharing profits and losses in the ratio of $5:3:2$ With effect from $1st$ April, $2018$ ,they decide to share profits and losses equally. Calculate each partner's gain or sacrifice due to the change in ratio.

$A$ and $B$ are partners in a firm, sharing profits in the ratio of $4:1$ . They decided to share future profit in the ratio of $3:2$ w.e.f. $1st$ April, $2018$ . On that day, Profit and Loss Account showed a debit balance of Rs. $1,00,000$ . Pass Journal entry to give effect to the above.

$R$ and $S$ are partners sharing profits in the ratio of $5:3$ . $T$ joins the firm as a new partner. $R$ gives $1/4^{th}$ of his share and $S$ gives $1/5^{th}$ of his share to the new partner.
Find out new profit-sharing ratio.

$A$ and $B$ are partners sharing profits and losses in the proportion of $7:5$ . They agree to admit $C$ , their manager, into partnership who is to get $1/6^{th}$ share in the profit. He acquires this share as $1/24^{th}$ from $A$ and $1/8^{ht}$ from $B$ . Calculate new profit-sharing ratio.

Kabir and Farid are partners in a firm, sharing profits and losses in the ratio of $7:3$ . Kabir surrenders $2/10^{th}$ from his share and Farid surrenders $1/10^{th}$ from his share in favour of Jyoti new partner.
Calculate new profit-sharing ratio and sacrifice ratio.

$A$ and $B$ are in partnership sharing profits and losses as $3:2$ . $C$ is admitted for $1/4^{th}$ share. Afterwards, $D$ enters for $20$ paise in the rupee. Compute profit-sharing ratio of $A, B, C$ and $D$ after $D's$ admission.

$X$ and $Y$ were partners sharing profits in the ratio of $3:2$ . They admitted $P$ and $Q$ as new partner. X $X$ surrendered $1/3^{rd}$ of his share in favour of $P$ and $Y$ surrendered $1/4^{th}$ of his share in favour $Q$ . Calculate new profit-sharing ratio $X, Y, P$ and $Q$ .

Short answer type question:
For which share of goodwill a partner is entitled at the time of retirement?

Short answer type question:
Why the value of goodwill need to be determined on retirement or death of a partner?

Short answer type question:
Give any one distinction between sacrificing ratio and gaining ratio.

$X$ and $Y$ are partners in a firm sharing profits in the ratio of $3:2$ . They decided to share profits equally w.e.f. $1st$ April, $2018$ and also that they will use $10 \%$ of the net profit in keeping the neighbourhood clean. Identify the values in their action.

Short answer type question:
State the ratio in which the partners share gain or loss from revaluation of assets and liabilities.

Kangli, Mangli and Sanvali are partners, sharing profits in the ratio of $4:3:2$ . Kangali retires. Assuming Mangli and Sanvali will share profits in future in the ratio of $5:3$ , determine the gaining ratio.

$A, B$ and $C$ were partners in a firm sharing profits in the ratio of $8:4:3$ . $B$ retires and his share is taken up equally by $A$ and $C$ . Find the new profit-sharing ratio.

$W, X, Y$ and $Z$ are partners sharing profits and losses in the ratio of $\dfrac{1}{3}, \dfrac{1}{6}, \dfrac{1}{3}$ and $\dfrac{1}{6}$ respectively. $Y$ retires and $W, X$ and $Z$ decide to share the profit and losses equally in future. Calculate gaining ratio.

Ramesh wants to retire from the firm. The gain (profit) on revaluation on that date was $Rs. 12,000$ . Mohan and Rahul want to share this in their new profit-sharing ratio of $3:2$ . Ramesh wants this to be shared equally. How is the profit to be shared? Given reasons.

$A, B, C$ and $D$ were partners in a firm sharing in $5:3:2:2$ ratio. $B$ and $C$ retired from the firm. $B's$ share was acquired by $D$ and $C's$ share was acquired by $A$ . Calculate new profit-sharing ratio of $A$ and $D$ .

Give the Journal entry to distribute "Workmen Compensation Reserve" of $Rs. 72,000$ at the time of admission of $Z$ When there is claim of $Rs. 48,000$ against it. The firm has two partners $X$ and $Y$ .