CBSE Class 12 Accountancy Reconstitution Of Partnership Assignment Part B

Admission of a Partner

Learning objectives:-

MCQ Questions for NCERT Class 12 AccountancyReconstitution of Partnership Firm – Admission of a Partner  

Question: When a new partner brings his share of goodwill in cash, the amount is debited to:
(a) Cash account
(b) Capital accounts of the new partner
(c) Goodwill account
(d) Capital accounts of the old partner

Answer: A

Question: At the time of admission of a new partner, the entry for unrecorded investment will be:
(a) Dr. Investment A/c and Cr. Revaluation A/c
(b) Dr. Partners’ Capital A/c and Cr. Investment A/c
(c) Dr. Revaluation A/c and Cr. Investment A/c
(d) None of the above 

Answer: A

Question: X and Y are partners in a firm with capital of Rs.180000 and Rs.200000. Z was admitted for 1/3rd share in profits and brings Rs.340000 as capital. Calculate the amount of goodwill
(a) Rs.2,40,000
(b) Rs.1,00,000
(c) Rs.1,50,000
(d) Rs.3,00,000 

Answer: D

Question: A and B are partners in a firm having capital of Rs.54,000 and Rs.36,000 respectively. They admitted C for 1/3^rd share in the profits. C brought proportionate amount of capital. The capital brought in by C would be
(a) Rs.90,000
(b) Rs.45,000
(c) Rs.54,000
(d) Rs.36,000

Answer: B

Question: Anil and Aman are partners sharing profits and losses in the ratio of 3:2. Akhil is admitted as a new partner for 1/3^rd share in the profits. Goodwill of the firm is valued at Rs.60000 and goodwill already appears in the books at Rs.18000. It is decided that the existing goodwill should continue to appear in the books at its old value. Akhil’s share of goodwill is:
(a) Rs.26,000
(b) Rs.14,000
(c) Rs.20,000
(d) Rs.6,000 

Answer: B

Question: A and B are partners sharing profits and losses in the ratio of 5:3. On admission, C brings Rs.70000 as capital and Rs.43000 against goodwill. New profit ratio between A, B and C is 7:5:4. The sacrificing ratio of A and B is:
(a) 3:1
(b) 1:3
(c) 4:5
(d) 5:9 

Answer: A

Question: A and B are partners sharing profits in the ratio of 7:3. A surrenders 1/7th of his share and B surrenders 1/3rd of his share in favour C the new partner. The sacrificing ratio will be:
(a) 3:7
(b) 1:1
(c) 7:3
(d) 3:2 

Answer: B

Question: Ramesh and Suresh are partners sharing profits in the ratio of 2:1 respectively. Ramesh’s capital is Rs.1,02,000 and Suresh capital is Rs.73,000. they admit Mahesh and agreed to give him 1/5^th share in future profit. Mahesh brings Rs.14,000 as his share of goodwill. He agrees to contribute capital in the new profits sharing ratio. How much capital will be brought by Mahesh?
(a) Rs.43,750
(b) Rs.45,000
(c) Rs.47,250
(d) Rs.48,000 

Answer: C

Question: The share of new partner and the sacrificing ratio of old partners is decided by:
(a) the new partner only
(b) the old partners only
(c) the old partners and the new partner
(d) the accountant of the firm 

Answer: C

Question: On admission of a new partner, the method of valuation of goodwill is decided by:
(a) the new partner only
(b) the old partners only
(c) the old partners and the new partner
(d) the accountant of the firm 

Answer: C

Question: At the time of admission of a new partner, the balance of Workmen Compensation Reserve will be transferred to:
(a) Old partners in the old profit sharing ratio
(b) Sacrificing partners in the sacrificing ratio
(c) Revaluation Account
(d) All partners in the new profit sharing ratio

Answer: A

Question: The profit sharing ratio of Seema and Ghosh was 5:3. They admitted Munmun as a new partner and the new profit sharing ratio of Seema, Gosh and Munmun was 4:3:3. The sacrificing ratio Seem and Gosh will be:
(a) 5:3
(b) 4:3
(c) 1:1
(d) 3:1 

Answer: D

Question: Which statement is true with respect to AS-26?
(a) Purchased goodwill can be shown in the Balance Sheet
(b) Revalued goodwill can be shown in the Balance Sheet
(c) Both purchased goodwill and revalued can be shown in the Balance Sheet
(d) None of the above 

Answer: A

Question: Premium brought by newly admitted partner should be:
(a) Credited to sacrificing partners
(b) Credited to all partners in the new profit sharing ratio
(c) Credited to old partners in the old profit sharing ratio
(d) Credited to only gaining partners

Answer: A

Question: The firm of P, Q and R with profit sharing ratio of 6:3:1, had the balance in General Reserve Account amounting Rs.1,80,000. S joined as a new partner and the new profit sharing ratio was decided to be 3:3:3:1. Partners decide to keep the General Reserve unchanged in the books of accounts. The effect will be:
(a) P will be credited by Rs.54,000
(b) P will be debited by Rs.. 54,000
(c) P will be credited by Rs.36,000
(d) P will be debited by Rs.36,000 

Answer: A

Question: Aryaman and Bholu are partners sharing profit and losses in ratio of 5:3. Chirag is admitted for 1/4^th share. On the date of reconstitution, the debtors stood at Rs. 40,000, bill receivable stood at Rs.10,000 and the provision for doubtful debts appeared at Rs.4000. A bill receivable, of Rs.10,000 which was discounted from the bank, earlier has been reported to be dishonoured. The firm has sold, the debtor so arising to a debt collection agency at a loss of 40%. If bad debts now have arisen for Rs.6,000 and firm decides to maintain provisions at same rate as before then amount of Provision to be debited to Revaluation Account would be:
(a) Rs. 4,400
(b) Rs. 4,000
(c) Rs..3,400
(d) None of the above

Answer: C 

True/ False: 

Question: Employee Provident Fund is a part of Accumulated profits and reserves.
Answer: False

Question: Admission of a partner changes the relationship between / among existing partners.
Answer: True

Question: Goodwill exists only when firm earns super profits.
Answer: True

Question: Admission of a new partner does not amount to reconstitution of the partnership firm.
Answer: False

Question: The need for valuation of goodwill also arises when the firm is dissolved involving sale of business as a going concern.
Answer: True

Fill in the blanks

Question: At the time of admission of a partner, new profit sharing is used for sharing future………
Answer: Profits

Question: Revaluation account is a …………………
Answer: Nominal account 

Question: The newly admitted partner brings his/ her share of capital for which he/she will get ……….in firm.
Answer: Profit share

Question: At the time of admission, it the book value and the market value of investment is same then investment fluctuation reserved is transferred to …………….account of the old partners in their ………..ratio.
Answer: Capital accounts of old partners, old profit sharing ratio

Question: R and S are partners sharing profits equally. They admitted T for 1/3 share in the firm. New profit sharing ratio will be………..
Answer: Equal 

Question: A, B and C are partners sharing profits and losses in the ratio of 3:2:1. On admission of D, they agree to share profits and losses in the ratio of 5:4:2:1. Sacrificing ratio of A, B and C will be………..
Answer: Only A sacrifice- 1/12

Question: At the time of change in profit sharing ratio among the existing partners, where will you record an unrecorded liability? 
Answer: Revaluation Account-Debit side 

Question: Anand, Bhutan and Chadha are partners sharing profits in ratio of 3:2:1. On 1st April 2007, they decided to share profits equally.Name the partners who is gaining on consequence of such change. 
Answer: Chadha. 

Question: Give two characteristics of goodwill.  
Answer: (i) it is an intangible asset having a definite value. 

            (ii) It helps in earning more profit. 

Question: Name any two factors affecting goodwill of a partnership firm. 
Answer: (i) Favorable location (ii) Time period 

Question: In a partnership firm assets are Rs.5, 00,000 and liabilities are Rs. 2, 00,000. The normal profit rate is 15%. State the amount of normal profits. 
Answer: Rs.45,000 

Question: State the amount of goodwill, if goodwill is to be valued on the basis of 2 years‘ purchase of last year‘s profit. Profit of the last year was Rs.20, 000. 
Answer: Rs.40,000 

Question: Where will you record 'increase in machinery‘ in case of change in profit sharing ratio among the existing partners? 
Answer: Revaluation Account- Credit Side. 

Admission of a Partner
After studying this lesson, the students will be able to:

• Identify and deal effectively with the situation of reconstitution of partnership.

• Identify the problem arising due to admission of a partner in the firm.

• Calculate new and sacrifice ratio in different cases.

• Understand, calculate and make treatment of goodwill in different cases.

• Make accounting treatment of the revaluation of assets and liabilities and distribute the profit and loss on revaluation among the old partners.

• Make accounting treatment of unrecorded assets and liabilities

• Prepare capital Accounts, Cash A/c and Balance Sheet of the New firm

• Adjust the Partners‘ Capital Accounts 

Salient Points:- 

1. Goodwill is the monetary value of business reputation. It is an intangible asset. 

2. Goodwill may be of two types: 

a. Purchased goodwill 

b. Non-purchased goodwill 

3. When existing firm faces problem of limited financial resources and man power then one new additional partner enters into firm. 

4. There are three methods of valuation of goodwill: 

a. Average Profit Method 

b. Super Profit method 

c. Capitalisation Method

 5. When new partner is admitted into existing partnership then existing partners have to sacrifice in favour of new partner, it is called sacrificing ratio.  

Salient Points:- 

1. Goodwill is the monetary value of business reputation. It is an intangible asset. 

2. Goodwill may be of two types: 

    a. Purchased goodwill 

    b. Non-purchased goodwill 

3. When existing firm faces problem of limited financial resources and man power then one new additional partner enters into firm. 

4. There are three methods of valuation of goodwill: 

    a. Average Profit Method 

    b. Super Profit method 

    c. Capitalisation Method 

5. When new partner is admitted into existing partnership then existing partners have tosacrifice in favour of new partner, it is called sacrificing ratio. 

6. Share of goodwill of new partner will be credited to sacrificing partners into their sacrificing ratio. 

7. At the admission of new partner Profit & Loss on revaluation of assets and liabilities and balances of accumulated profits & losses will be distributed among old partners (only) in old ratio.  

Question Q1. At the time of change in profit sharing ratio among the existing partners, where will you record an unrecorded liability?
Answer: Revaluation Account-Debit side
In simple words: Unrecorded liabilities are losses and are debited to the Revaluation Account.

Exam Tip: Always remember that any increase in liabilities or decrease in assets is debited to the Revaluation Account.

Question Q2. Anand, Bhutan and Chadha are partners sharing profits in ratio of 3:2:1. On 1st April 2007, they decided to share profits equally. Name the partners who is gaining on consequence of such change.
Answer: Chadha.
In simple words: New ratio is equal (\(\frac{1}{3} : \frac{1}{3} : \frac{1}{3}\)) while old ratio is \(\frac{3}{6} : \frac{2}{6} : \frac{1}{6}\). Chadha's share increased from \(\frac{1}{6}\) to \(\frac{2}{6}\).

Exam Tip: Gaining Ratio = New Ratio - Old Ratio. If the result is positive, the partner is gaining.

Question Q3. Give two characteristics of goodwill.
Answer: (i) It is an intangible asset having a definite value.
(ii) It helps in earning more profit.
In simple words: Goodwill is a non-physical asset representing business reputation that attracts extra profits.

Exam Tip: State clear, standard characteristics as defined in accounting theory.

Question Q4. Name any two factors affecting goodwill of a partnership firm.
Answer: (i) Favorable location
(ii) Time period
In simple words: Location and business longevity directly build customer trust and goodwill.

Exam Tip: Other factors include quality of goods, management efficiency, and market monopolies.

Question Q5. In a partnership firm assets are Rs. 5,00,000 and liabilities are Rs. 2,00,000. The normal profit rate is 15%. State the amount of normal profits.
Answer: Capital Employed = Assets - Liabilities = Rs. 5,00,000 - Rs. 2,00,000 = Rs. 3,00,000
Normal Profit = Capital Employed \(\times \frac{\text{Normal Rate}}{100}\)
Normal Profit = Rs. 3,00,000 \(\times \frac{15}{100} =\) Rs. 45,000
In simple words: Normal profit is calculated by multiplying net capital employed by the normal rate of return.

Exam Tip: Capital Employed must always be found first by subtracting outside liabilities from total assets.

Question Q6. State the amount of goodwill, if goodwill is to be valued on the basis of 2 years' purchase of last year's profit. Profit of the last year was Rs. 20,000.
Answer: Goodwill = Last Year Profit \(\times\) Number of Years' Purchase
Goodwill = Rs. 20,000 \(\times 2 =\) Rs. 40,000
In simple words: Multiply the given profit by the purchase years given in the problem.

Exam Tip: Read carefully whether the question asks for average profit or single past year profit.

Question Q7. Where will you record 'increase in machinery' in case of change in profit sharing ratio among the existing partners?
Answer: Revaluation Account - Credit Side.
In simple words: An increase in the value of an asset is a gain, hence credited to Revaluation Account.

Exam Tip: Asset increase = Credit Revaluation; Asset decrease = Debit Revaluation.

Question Q8. Name two methods for valuation of goodwill in case of partnership firm.
Answer: (i) Average Profit Method
(ii) Super Profit Method
In simple words: Goodwill is commonly valued using average profits or super profits earned above normal returns.

Exam Tip: Capitalisation method is also a third standard method.

Question Q9. Give formula for calculating goodwill under 'super profit method'.
Answer: Goodwill = Super Profit \(\times\) Number of Years' Purchase.
In simple words: Super profit is multiplied by the agreed number of years' purchase to find total goodwill.

Exam Tip: Super Profit = Average Profit - Normal Profit.

Question Q10. Pass the journal entry for increase in the value of assets or decrease in the value of liabilities in the Revaluation A/c?
Answer:
Assets A/c Dr. (with the amount of increase)
Liabilities A/c Dr. (with the amount of decrease)
To Revaluation A/c (with the total amount of gain)
(Being revaluation of assets and liabilities)
In simple words: Gains from asset appreciation and liability reduction are credited to Revaluation Account.

Exam Tip: Memorize standard journal entries for revaluation adjustments.

Question Q11. P, Q and R are partners in a firm sharing profits in the ratio of 2:2:1 on 1.4.2007 the partners decided to share future profits in the ratio of 3:2:1 on that day balance sheet of the firm shows General Reserve of Rs. 50,000. Pass entry for distribution of reserve.
Answer:
General Reserve A/c Dr. 50,000
To P's Capital A/c 20,000
To Q's Capital A/c 20,000
To R's Capital A/c 10,000
(Being Reserve distributed in old ratio 2:2:1)
In simple words: Accumulated reserves are distributed among partners in their old profit sharing ratio.

Exam Tip: Always distribute reserves, accumulated profits, and losses in the old profit sharing ratio.

Question Q12. "The gaining partner's should compensate to sacrificing partner's with the amount of gain." Journalise this statement.
Answer:
Gaining Partner's Capital A/c Dr.
To Sacrificing Partner's Capital A/c
(Being compensation given by gaining partner to sacrificing partner for goodwill)
In simple words: Gaining partners pay compensation to sacrificing partners in proportion to their sacrifice.

Exam Tip: This entry is passed for adjustment of goodwill when profit sharing ratio changes.

Question Q13. What are the two main rights acquired by the incoming new partner in a partnership firm?
Answer:
(i) Right to share the assets of the firm.
(ii) Right to share the future profits of the firm.
In simple words: A new partner gains entitlement to firm assets and future profits upon admission.

Exam Tip: These rights are acquired by bringing capital and a share of goodwill.

Question Q14. A and B are partners, sharing profits in the ratio of 3:2. C admits for \(\frac{1}{5}\) share. State the sacrificing ratio.
Answer: Sacrificing Ratio - 3:2.
In simple words: When no specific sacrifice is mentioned, old partners sacrifice in their old profit sharing ratio.

Exam Tip: Default rule: Old ratio equals sacrificing ratio if new partner's share acquisition details are absent.

Question Q15. How should the goodwill of the firm be distributed when the sacrificing ratio of any of the existing partner is negative (i.e. he is gaining)?
Answer: In this case the partner with a negative sacrificing ratio, i.e. the gaining partner to the extent of his gain should compensate to the sacrificing partner to the extent of his gain.
In simple words: Partners who gain during reconstitution must compensate partners who sacrifice.

Exam Tip: Apply the rule: Gaining Partner's Capital A/c Dr. to Sacrificing Partner's Capital A/c.

Question Q16. In case of admission of a partner, in which ratio profits or loss on revaluation of assets and reassessment of liabilities shall be divided?
Answer: Old ratio.
In simple words: Revaluation profit or loss belongs entirely to old partners in their old ratio.

Exam Tip: New partners have no claim over pre-admission revaluation profits.

Question Q17. Give journal entry for distribution of 'Accumulated Profits' in case of admission of a partner.
Answer:
Accumulated Profit A/c Dr.
To Old Partners Capital A/c
(Being distribution of accumulated profits among old partners in old ratio)
In simple words: Accumulated profits are transferred to old partners' capital accounts before a new partner joins.

Exam Tip: Accumulated profits carry credit balances, so they are debited to close and credited to capital accounts.

Question Q18. At the time of admission of partner where will you record 'unrecorded investment'?
Answer: Revaluation Account - Credit side.
In simple words: Discovering an unrecorded asset is a gain, recorded on the credit side of Revaluation Account.

Exam Tip: Unrecorded assets = Credit Revaluation; Unrecorded liabilities = Debit Revaluation.

Question Q19. The goodwill of a partnership is valued at Rs. 20,000. State the amount required by a new partner, if he is coming for \(\frac{1}{5}\) share in profits.
Answer:
New partner's share of goodwill = Total Goodwill \(\times\) New Partner's Share
= Rs. 20,000 \(\times \frac{1}{5} =\) Rs. 4,000
In simple words: Multiply total firm goodwill by the new partner's profit share fraction.

Exam Tip: This premium is credited to sacrificing partners in their sacrificing ratio.

Question Q20. What journal entries should be passed when the new partner brings his share of goodwill in kind?
Answer:
(i) Assets A/c Dr. (with individual asset values)
To Premium for Goodwill A/c
(Being goodwill brought in form of assets)
(ii) Premium for Goodwill A/c Dr.
To Sacrificing Partners' Capital A/c
(Being premium for goodwill transferred to sacrificing partners in sacrificing ratio)
In simple words: When goodwill is brought as assets instead of cash, specific asset accounts are debited.

Exam Tip: Ensure asset accounts are debited individually when brought in kind.

Question Q21. What journal entries will be passed when the new partner is unable to bring his share of goodwill in cash?
Answer:
New Partner's Capital A/c Dr.
To Sacrificing Partners' Capital A/c
(Being new partner's share of goodwill adjusted through current/capital account)
In simple words: When goodwill cash is not brought, the new partner's capital account is debited.

Exam Tip: Sometimes current accounts are used if capitals are fixed.

Question Q22. In case of admission of a new partner, goodwill was already appearing in the books of the firm. Give journal entry for its treatment.
Answer:
Old Partners Capital A/c Dr. (in old ratio)
To Goodwill A/c
(Being old goodwill written off among old partners in old ratio)
In simple words: Existing goodwill on the balance sheet is written off among old partners before admission.

Exam Tip: Existing goodwill must always be written off in the old profit sharing ratio.

Question Q23. At the time of admission of a new partner, workmen's compensation reserve is appearing in the Balance Sheet as Rs. 1,000. Give journal entry if workmen's compensation at the time of admission is estimated at Rs. 1,200.
Answer:
Revaluation A/c Dr. 200
To Workmen's Compensation Reserve A/c 200
(Being shortfall in reserve debited to revaluation account)
In simple words: The excess claim over the existing reserve is debited as a loss to the Revaluation Account.

Exam Tip: Claim exceeds reserve = Loss debited to Revaluation; Reserve exceeds claim = Surplus distributed to old partners.

Question Q24. Give journal entry for recording deceased partner's share in profit from the closure of last balance sheet till the date of his death.
Answer:
Profit & Loss Suspense Account Dr.
To Deceased Partner's Capital Account
(Being share of profit to deceased partner till date of death recorded)
In simple words: The deceased partner's estimated profit for the running period is debited to Profit and Loss Suspense.

Exam Tip: Profit & Loss Suspense is used when profit is calculated on time or turnover basis during the year.

Question Q25. Define gaining ratio.
Answer: Gaining ratio is the ratio in which remaining/continuing partners acquire the share of the outgoing partner(s).
In simple words: It shows how much extra profit share remaining partners get when someone leaves.

Exam Tip: Formula: Gaining Ratio = New Ratio - Old Ratio.

Question Q26. Give two circumstances in which gaining ratio can be applied.
Answer: (i) Retirement of a partner
(ii) Death of a partner
In simple words: Gaining ratio is needed when partners exit and remaining partners absorb their shares.

Exam Tip: It is also applied when existing partners change their profit sharing ratio.

Question Q27. At the time of retirement of a partner give journal entry for writing off the existing goodwill.
Answer:
All Partners Capital (including retiring) A/c Dr. (in old ratio)
To Goodwill A/c
(Being old goodwill written off among all partners in old ratio)
In simple words: Existing goodwill appearing in books is written off among all partners including the retiring partner.

Exam Tip: All partners share in writing off existing goodwill in their old profit sharing ratio.

1 Mark Questions - Admission of a Partner

Question Q.1. State the two financial rights acquired by a new Partner?
Answer: New partner acquires the right to share future profits of the firm and the right to share in the assets of the firm.
In simple words: A new partner gains financial claims over upcoming business profits and accumulated net assets.

Exam Tip: Section 31 of the Indian Partnership Act 1932 governs admission with consent of all partners.

Question Q.2. Give the name of the compensation which is paid by a new Partner to sacrificing Partners for sacrificing their share of profits.
Answer: Premium for Goodwill.
In simple words: Incoming partners pay premium for goodwill to compensate old partners for giving up profit shares.

Exam Tip: This is shared strictly in the sacrificing ratio.

Question Q.3. Enumeration the matters that need adjustment at the time of admission of a new Partner.
Answer:
(i) Adjustment in profit sharing ratio and adjustment of capital.
(ii) Adjustment for goodwill.
(iii) Adjustment of Profit / Loss arising from revaluation of assets and reassessment of liabilities.
(iv) Adjustment of accumulated profits, reserves and losses.
In simple words: Financial accounts and profit shares are fully adjusted when a new partner enters.

Exam Tip: Memorize all four core adjustments required upon partnership reconstitution.

Question Q.4. Give two circumstances in which sacrificing Ratio may be applied.
Answer:
(i) At the time of admission of a new partner for distributing goodwill brought in by the new partner.
(ii) For adjustment of goodwill in case of change in profit-sharing ratio of existing partners.
In simple words: Sacrificing ratio is used whenever old partners surrender a portion of their profit share.

Exam Tip: Sacrificing Ratio = Old Ratio - New Ratio.

Question Q.5. Why is it necessary to revalue assets and reassess liabilities of a firm in case of admission of a new partner?
Answer: The assets and liabilities of a firm are reassessed at the time of admission so that the new partner neither benefits nor suffers due to changes in asset/liability values prior to admission.
In simple words: Revaluation ensures past gains or losses belong solely to old partners.

Exam Tip: Revaluation profit/loss is always credited/debited to old partners in old ratio.

Question Q.6. What are the accumulated profit and accumulated losses?
Answer: Accumulated profits are undistributed profits earned over past years (e.g., General Reserve, Credit Balance of Profit and Loss A/c). Accumulated losses are unwritten-off losses appearing on the asset side (e.g., Debit Balance of Profit and Loss A/c, Advertisement Suspense).
In simple words: Accumulated profits/losses are historical earnings or deficits not yet transferred to capital accounts.

Exam Tip: Both are distributed among old partners in the old ratio on admission.

Question Q.7. Explain the treatment of goodwill in the books of a firm on the admission of a new Partner when goodwill already appears in the Balance Sheet at its full value and the new partner brings his share of goodwill in cash.
Answer: Existing goodwill appearing in the Balance Sheet is written off by debiting old partners' capital accounts in their old profit sharing ratio and crediting the Goodwill account.
Old partners capital A/c Dr. (in old ratio)
To Goodwill A/c
In simple words: Old balance sheet goodwill is written off among old partners before bringing in the new partner's share.

Exam Tip: Always write off existing goodwill first before accounting for the incoming partner's goodwill.

Question Q.8. Under what circumstances the premium for goodwill paid by the incoming Partner will not be recorded in the books of Accounts?
Answer: When the premium for goodwill is paid by the incoming partner privately to the sacrificing partners outside the business.
In simple words: Private cash settlements outside the firm books require no journal entry in business accounts.

Exam Tip: Private payments of goodwill do not affect firm cash or capital books.

Question Q.9. A and B share profits and losses in the ratio of 4:3, they admit C with \(\frac{3}{7}\)th share; which he gets \(\frac{2}{7}\)th from A and \(\frac{1}{7}\) from B. What is the new profit sharing ratio?
Answer:
A's new share = \(\frac{4}{7} - \frac{2}{7} = \frac{2}{7}\)
B's new share = \(\frac{3}{7} - \frac{1}{7} = \frac{2}{7}\)
C's share = \(\frac{3}{7}\)
New Profit Sharing Ratio = \(2 : 2 : 3\)
In simple words: Subtract each partner's surrendered share from their old share to find the new ratio.

Exam Tip: Check that the sum of new numerator shares equals the denominator: \(2 + 2 + 3 = 7\).

Question Q.10. The capital of A and B are Rs. 50,000 and Rs. 40,000. To increase the capital base of the firm to Rs. 1,50,000, they admit C to join the firm; C is required to pay a sum of Rs. 70,000, what is the amount of premium of goodwill?
Answer:
Total combined capital of A and B = Rs. 50,000 + Rs. 40,000 = Rs. 90,000
Total desired capital of firm = Rs. 1,50,000
Required capital contribution by C to reach Rs. 1,50,000 base = Rs. 1,50,000 - Rs. 90,000 = Rs. 60,000
Amount brought by C = Rs. 70,000
Premium for Goodwill = Total cash brought - Required Capital = Rs. 70,000 - Rs. 60,000 = Rs. 10,000
In simple words: The excess money brought by C over his required capital contribution represents goodwill premium.

Exam Tip: Separate capital contribution from goodwill premium when total cash brought exceeds required capital.

Question Q.11. Distinguish between New Profit-sharing ratio and sacrificing ratio?
Answer:
1) New Profit Sharing Ratio relates to all partners (including the new partner); Sacrificing Ratio relates to old partners only.
2) New ratio is the proportion in which all partners share future profits; Sacrificing ratio is the proportion in which old partners give up shares in favor of the incoming partner.
3) Formula: New Ratio = Old Ratio - Sacrificing Ratio; Sacrificing Ratio = Old Ratio - New Ratio.
In simple words: New ratio applies to all future profits, while sacrificing ratio measures old partners' losses on admission.

Exam Tip: Present distinctions clearly in comparative tabular format when asked in exams.

2-3 Marks Questions

Question Q1. A & B are partners sharing in the ratio of 3:2. C is admitted. C gets \(\frac{3}{20}\)th from A and \(\frac{1}{20}\)th from B. Calculate new and sacrifice ratio.
Answer:
Old Ratio of A and B = \(\frac{3}{5} : \frac{2}{5} = \frac{12}{20} : \frac{8}{20}\)
Sacrifice by A = \(\frac{3}{20}\), Sacrifice by B = \(\frac{1}{20}\)
Sacrificing Ratio = \(\frac{3}{20} : \frac{1}{20} = 3 : 1\)
A's New Share = \(\frac{12}{20} - \frac{3}{20} = \frac{9}{20}\)
B's New Share = \(\frac{8}{20} - \frac{1}{20} = \frac{7}{20}\)
C's Share = \(\frac{3}{20} + \frac{1}{20} = \frac{4}{20}\)
New Profit Sharing Ratio = \(9 : 7 : 4\)
In simple words: Subtract each partner's direct sacrifice from their old share to find the new ratio.

Exam Tip: Ensure denominators match before subtracting or adding fractions.

Question Q2. X & Y are partners share profits in the ratio of 5:3. Z the new partner gets \(\frac{1}{5}\) of X's share and \(\frac{1}{3}\)rd of Y's share. Calculate new ratio.
Answer:
Old Ratio of X and Y = \(\frac{5}{8} : \frac{3}{8}\)
X surrenders to Z = \(\frac{1}{5} \times \frac{5}{8} = \frac{1}{8}\)
Y surrenders to Z = \(\frac{1}{3} \times \frac{3}{8} = \frac{1}{8}\)
X's New Share = \(\frac{5}{8} - \frac{1}{8} = \frac{4}{8}\)
Y's New Share = \(\frac{3}{8} - \frac{1}{8} = \frac{2}{8}\)
Z's Share = \(\frac{1}{8} + \frac{1}{8} = \frac{2}{8}\)
New Ratio = \(\frac{4}{8} : \frac{2}{8} : \frac{2}{8} = 4 : 2 : 2\) or \(2 : 1 : 1\)
In simple words: Calculate shares surrendered by multiplying old shares by the given fractions, then subtract.

Exam Tip: Reduce ratios to their simplest lowest terms if required.

Question Q3. P & Q are partners sharing in the ratio of 5:3. They admit R for \(\frac{1}{4}\)th share and agree to share between them in the ratio of 2:1 in future. Calculate new ratio.
Answer:
Remaining share after R's admission = \(1 - \frac{1}{4} = \frac{3}{4}\)
P's New Share = \(\frac{3}{4} \times \frac{2}{3} = \frac{6}{12} = \frac{2}{4} = \frac{1}{2}\)
Q's New Share = \(\frac{3}{4} \times \frac{1}{3} = \frac{3}{12} = \frac{1}{4}\)
R's Share = \(\frac{1}{4}\)
New Ratio = \(\frac{2}{4} : \frac{1}{4} : \frac{1}{4} = 2 : 1 : 1\)
In simple words: Multiply the remaining profit share by the old partners' new agreement ratio.

Exam Tip: When old partners decide a specific future ratio among themselves, multiply remaining share by that ratio.

6-8 Marks Questions

Question Q.1 Dinesh, Yasmine and Faria are partners in a firm, sharing profits and losses in 11:7:2 respectively. The Balance Sheet of the firm as on 31st Dec 2001 was as follows... Annie is admitted as a partner for one-sixth share in the profits with Capital of Rs. 4,500 and necessary amount for his share of goodwill on terms specified. Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new firm.
Answer:
Revaluation Account:
To Bills Discounted A/c: Rs. 1,670
By Public Deposits A/c: Rs. 190
By Machinery A/c: Rs. 200
Loss on Revaluation transferred to:
- Dinesh's Capital A/c: Rs. 704
- Yasmine's Capital A/c: Rs. 448
- Faria's Capital A/c: Rs. 128 (Total Loss = Rs. 1,280)
Total = Rs. 1,670 on both sides.

Partners' Capital Accounts Balances (c/d):
Dinesh: Rs. 2,258
Yasmine: Rs. 900
Faria: Rs. 3,829
Annie: Rs. 4,500

Balance Sheet of New Firm:
Liabilities: Sundry Creditors Rs. 800, Public Deposits Rs. 1,000, Capitals (Dinesh Rs. 2,258, Yasmine Rs. 900, Faria Rs. 3,829, Annie Rs. 4,500) = Rs. 11,487, Bills Discounted Rs. 1,670. Total = Rs. 14,957.
Assets: Cash in Hand Rs. 2,757, Factory Buildings Rs. 7,350, Machinery Rs. 2,000, Furniture Rs. 200, Stock Rs. 1,450, Debtors Rs. 1,200. Total = Rs. 14,957.
In simple words: Adjust revaluation, write off reserves, distribute goodwill premium, and close capital balances into the new balance sheet.

Exam Tip: Follow strict ledger balancing procedures step-by-step to tally both sides of the balance sheet.

Question Q.2 X and Y are partners sharing profits in the proportion of 3:1... Z is admitted for \(\frac{1}{5}\)th share with proportionate capital and goodwill adjustments. Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet.
Answer:
Revaluation Account:
Debit: Stock A/c Rs. 2,000, Furniture A/c Rs. 2,420, Provision for bad debts A/c Rs. 4,224, Claim against damages A/c Rs. 1,500.
Credit: Land A/c Rs. 16,500, Creditors A/c Rs. 1,000, Provision of discount on creditors A/c Rs. 3,612.
Profit transferred to X's Capital (Rs. 8,266) and Y's Capital (Rs. 2,742). Total = Rs. 21,112.

Partners' Capital Accounts Closing Balances:
X: Rs. 2,54,901, Y: Rs. 84,967 (with Y's Current A/c Rs. 64,900), Z: Rs. 84,967.

Balance Sheet Total: Rs. 5,77,923 on both sides.
In simple words: Revalue assets and liabilities, compute Z's proportionate capital, and adjust current accounts as specified.

Exam Tip: Calculate proportionate capital carefully based on combined adjusted capitals of old partners.

Question Q.3 Rashmi and Pooja are partners sharing profits in ratio 2:1. Admit Santosh for \(\frac{1}{3}\)rd share with Rs. 30,000 goodwill and proportionate capital. Prepare accounts and Balance Sheet.
Answer:
Revaluation Account Loss: Rs. 15,000 distributed to Rashmi (Rs. 10,000) and Pooja (Rs. 5,000).
Capital Accounts Closing Balances: Rashmi: Rs. 1,45,000, Pooja: Rs. 1,30,000, Santosh: Rs. 1,37,500.
Balance Sheet Total: Rs. 4,52,500.
In simple words: Revalue items, bring goodwill, adjust reserves, and determine Santosh's required capital contribution.

Exam Tip: Santosh's capital is \(\frac{1}{3}\)rd of total capital, meaning old partners' capital combined equals \(\frac{2}{3}\)rd.

Question Q.4 A, B and C are equal partners. Admit D as equal partner on specified terms. Prepare Revaluation, Capital Accounts and Balance Sheet.
Answer:
Revaluation Profit: Rs. 75,000 distributed equally to A, B, and C (Rs. 19,500 each after adjustments).
Capital Accounts Closing Balances: All partners at Rs. 1,00,000 each.
Balance Sheet Total: Rs. 6,72,000.
In simple words: Revalue assets, write off old goodwill, adjust reserves, and transfer excess/deficit to current accounts.

Exam Tip: Excess capital is transferred to current accounts as per instructions.

Question Q.5 A, B and C were partners sharing equally. C retires. Prepare Revaluation, Capital Accounts and Balance Sheet of continuing partners.
Answer:
Revaluation Profit: Rs. 9,600 distributed equally.
C's Loan Account: Transferred Rs. 46,116.
Balance Sheet Total: Rs. 2,38,516.
In simple words: Revalue assets, credit C's share of reserves and goodwill, settle C's balance to loan, and adjust remaining capital in ratio 2:3.

Exam Tip: Deficiencies in continuing partners' capital are brought in cash as instructed.

Retirement of a Partner - Short Questions

Question Q.1 What is meant by retirement of a partner?
Answer: Retirement of a partner is a mode of reconstituting the firm where an existing partner leaves the partnership, terminating the old partnership agreement while the remaining partners continue business operations.
In simple words: Retirement means an existing partner terminates their association with the firm.

Exam Tip: Reconstitution changes profit sharing arrangements among remaining partners.

Question Q.2 How can a partner retire from the firm?
Answer: A partner may retire in accordance with partnership agreement terms, with the consent of all other partners, or by giving written notice of intent to retire in a partnership at will.
In simple words: Retirement requires contract terms, unanimous consent, or written notice.

Exam Tip: Section 32 of the Indian Partnership Act covers retirement conditions.

Question Q.3 What do you understand by Gaining Ratio?
Answer: Gaining ratio is the ratio by which remaining partners' profit shares increase due to the retirement or death of a partner. It is calculated as New Ratio minus Old Ratio.
In simple words: It measures the extra profit share acquired from an outgoing partner.

Exam Tip: Formula: Gaining Ratio = New Ratio - Old Ratio.

Question Q.4 What do you understand by Gaining Partner?
Answer: A gaining partner is a continuing partner whose proportionate share in profits increases as a result of partnership reconstitution.
In simple words: Partners who get a larger profit share after someone leaves are gaining partners.

Exam Tip: Gaining partners compensate the retiring partner for goodwill.

Question Q.5 Give two circumstances in which gaining ratio is computed.
Answer: (i) Retirement or death of a partner.
(ii) Change in profit-sharing ratio among existing partners.
In simple words: Gaining ratio is computed whenever profit shares are redistributed among continuing partners.

Exam Tip: Always use the gaining ratio to distribute the retiring partner's share of goodwill.

Question Q.6 Why is it necessary to revalue assets and reassess liabilities at the time of retirement of a partner?
Answer: Revaluation ensures that profits or losses up to the date of retirement are accurately ascertained and distributed to all partners (including the retiring partner) in their old profit sharing ratio.
In simple words: Revaluation ensures fair distribution of historical asset value changes to retiring partners.

Exam Tip: Retiring partners are entitled to revaluation profits earned during their tenure.

Question Q.7 Why is it necessary to distribute Reserves Accumulated, Profits and Losses at the time of retirement or death of a partner?
Answer: To ensure that the retiring partner receives their due share of past undistributed profits or bears their share of past losses accumulated in the business.
In simple words: Past reserves belong to all partners who earned them during their active partnership.

Exam Tip: Reserves and accumulated P&L balances are distributed in the old ratio.

Question Q.8 What are the adjustments required on the retirement or death of a partner?
Answer: (i) Adjustment for goodwill.
(ii) Revaluation of assets and reassessment of liabilities.
(iii) Distribution of accumulated profits, reserves, and losses.
(iv) Determination and settlement of amount due to retiring/deceased partner.
In simple words: Comprehensive accounting adjustments settle all financial claims when a partner exits.

Exam Tip: Memorize all four core adjustments for retirement and death problems.

Question Q.9 X wants to retire from the firm. Profit on revaluation is Rs. 10,000. X wants it distributed among all partners in old ratio, while Y and Z want it in new ratio. Who is correct?
Answer: X is correct because a retiring partner is entitled to share revaluation profits arising before the date of retirement in the old profit sharing ratio.
In simple words: Retiring partners participate in all pre-retirement revaluation gains.

Exam Tip: Revaluation profits always belong to all partners in the old ratio.

Question Q.10 How is goodwill adjusted in the books of a firm when a partner retires from partnership?
Answer: Remaining partners compensate the retiring partner for their share of goodwill in their gaining ratio through the entry: Remaining Partners' Capital A/cs Dr. to Retiring Partner's Capital A/c.
In simple words: Gaining partners buy out the retiring partner's share of goodwill.

Exam Tip: Entry: Gaining Partners Capital A/cs Dr. To Retiring Partner Capital A/c.

Question Q.11 X, Y and Z share in 3:2:1. Z retires. Goodwill is valued at Rs. 60,000. What is the new profit-sharing ratio between X and Y?
Answer:
Z's share of goodwill = \(60,000 \times \frac{1}{6} = 10,000\)
Goodwill adjustment shows X gains \(10,000\) and Y gains \(20,000\).
New ratio between X and Y is \(1 : 2\).
In simple words: By analyzing goodwill adjustments, the effective new profit sharing ratio between X and Y is determined as \(1 : 2\).

Exam Tip: Use goodwill adjustment statements to back-calculate new ratios when required.

Question Q.13 State the ratio in which profit or loss on revaluation will be shared by the partners when a partner retires.
Answer: Old profit-sharing ratio.
In simple words: All partners including the retiring partner share revaluation results in the old ratio.

Exam Tip: Never use new or gaining ratios for revaluation profits/losses.

Question Q.14 How is the account of retiring partner settled?
Answer: By paying cash immediately, transferring the balance to a Retiring Partner's Loan Account, or a combination of both.
In simple words: Retiring balances are settled via immediate cash payment or converted into a loan.

Exam Tip: Entry: Retiring Partner's Capital A/c Dr. To Cash / To Retiring Partner's Loan A/c.

Retirement - Comprehensive Questions

Question Q.1 The Balance Sheet of A, B and C on 31st December 2007 given. C retires. Terms and conditions specified. Prepare Revaluation Account, Capital Accounts and Balance Sheet of A and B.
Answer:
Revaluation Account Loss: Rs. 3,400 distributed to A (Rs. 1,600), B (Rs. 800), and C (Rs. 1,000).
Capital Accounts Balances (c/d): A: Rs. 36,466, B: Rs. 28,234.
Balance Sheet Total: Rs. 2,23,200.
In simple words: Revalue assets, calculate goodwill, pay off C via bank loan, and finalize A and B's capital accounts.

Exam Tip: Handle bank borrowings carefully when raised specifically to payoff a retiring partner.

Death of a Partner - Short & Long Questions

Question 1 (Death). A, B and C share in 5:4:1. Profit for year ended 31 March 2010 was Rs. 1,00,000. B died on 30th June 2010. Calculate C's share of profit and pass journal entry.
Answer:
Profit and Loss Suspense A/c Dr. 10,000
To B's Capital Account 10,000
(Being B's share of profit transferred: \(1,00,000 \times \frac{4}{10} \times \frac{3}{12} = 10,000\))
In simple words: The deceased partner's profit share is estimated for the active months using the previous year's profit.

Exam Tip: Always multiply annual profit by the profit share fraction and the time fraction (months / 12).

Question 2 (Death). X, Y and Z share in 5:4:1. Sales for 2009-10 was Rs. 8,00,000 and sales from April 1, 2010 to June 30, 2010 was Rs. 1,50,000. Profit for 2009-10 was Rs. 1,00,000. Y died on 30th June 2010. Calculate share of profit and pass entry.
Answer:
Profit and Loss Suspense A/c Dr. 7,500
To Y's Capital Account 7,500
(Being Y's share of profit calculated on turnover basis: \(\frac{1,00,000}{8,00,000} \times 1,50,000 \times \frac{4}{10} = 7,500\))
In simple words: When profit is based on sales, estimate current period profit using the sales ratio of the previous year.

Exam Tip: Formula: \(\text{Profit} = \frac{\text{Previous Profit}}{\text{Previous Sales}} \times \text{Current Sales to Date} \times \text{Partner's Share}\).

Question 3 (Death). Ram, Mohan and Sohan share in 5:3:2. Balance Sheet given. Sohan died on 1st August 2006. Adjustments given. Prepare Sohan's Capital Account and Revaluation Account.
Answer:
Revaluation Account Profit: Machinery loss Rs. 10,000 offset by Leasehold gain Rs. 25,000 and Patents gain Rs. 10,000. Net profit distributed to partners.
Sohan's Executor's Account Balance: Rs. 1,26,000.
In simple words: Revalue assets, credit Sohan's share of goodwill, reserves, and profit, and transfer total due to Sohan's Executor.

Exam Tip: Time fraction for Sohan: April 1 to August 1 = 4 months (\(\frac{4}{12}\)).

Question 4 (Death). P, Q and R share in 5:3:2. P died on 1st July 2011. Prepare Revaluation, P's Capital and P's Executor Account.
Answer:
Revaluation Account: Net profit distributed.
P's Executor's Account: Paid Rs. 11,500 in cash, balance Rs. 50,000 transferred to P's Executor's Loan Account.
In simple words: Account for interest on capital, reserves, revaluation, goodwill, and profit to date, then settle the executor.

Exam Tip: Time fraction for interest and profit: 3 months (\(\frac{3}{12}\)) from Jan 1 to July 1.

Question 5 (Death). X, Y and Z share in 2:2:1. Z died on 30th September 2007. Prepare Z's Capital Account and Executor's Account till final closure.
Answer:
Z's Capital Account Balance: Rs. 75,400 transferred to Z's Executor's Account.
Z's Executor's Account: Settled through yearly installments and 12% interest over multiple years.
In simple words: Maintain the executor's loan account with annual interest calculations and installment payments until fully paid.

Exam Tip: Accurately compute 6-month interest intervals on the diminishing loan balance.

Question 6 (Death). Anil, Jatin and Ramesh share in 2:1:1. Ramesh died on 31st March 2002. Prepare revaluation, capital accounts, Ramesh's Executor's Account, and Balance Sheet.
Answer:
Ramesh's Executor's Account Balance: Rs. 50,925. Paid Rs. 18,425 immediately; balance Rs. 32,500 transferred to loan.
Balance Sheet Total: Rs. 1,44,300.
In simple words: Execute all valuation adjustments, transfer dues to executor, pay part cash, and present the post-death balance sheet.

Exam Tip: Double-check asset and liability totals after removing the deceased partner's capital account.

Dissolution of Partnership Firm

Question 1 (Dissolution). Distinguish between Dissolution of Partnership and Dissolution of Partnership firm.
Answer:
1) Partnership dissolution changes business relations among partners, but the business may continue; Firm dissolution terminates the business completely.
2) In partnership dissolution, assets/liabilities are revalued; in firm dissolution, assets are sold and liabilities paid off via Realisation Account.
3) Books of accounts are not closed in partnership dissolution; books are permanently closed in firm dissolution.
In simple words: Partnership dissolution is a structural change, whereas firm dissolution shuts down the entire business.

Exam Tip: Present structural differences clearly in tabular format.

Question 2 (Dissolution). State the provisions of Section 48 of the Partnership Act 1932 regarding settlement of Accounts during Dissolution.
Answer:
(a) Losses including capital deficiencies are paid first out of profits, next out of capital, and lastly by partners individually in their profit sharing ratio.
(b) Assets and partner contributions are applied first to pay third-party debts, next to partner loans, then partner capitals, and any residue is distributed in profit sharing ratio.
In simple words: Section 48 dictates the exact priority sequence for paying losses and distributing realization proceeds.

Exam Tip: Memorize the precise statutory payment hierarchy under Section 48.

Question 3 (Dissolution). Distinguish between Realisation Account and Revaluation Account.
Answer:
Realisation Account is prepared during firm dissolution to sell assets and pay off liabilities. Revaluation Account is prepared during admission, retirement, or death to reassess asset and liability values while the business continues.
In simple words: Realisation closes down the firm by selling assets, while Revaluation updates asset values for ongoing partnerships.

Exam Tip: Contrast their purpose and timing clearly.

Question 4 (Dissolution). Pass journal entries for specified dissolution transactions of A and B.
Answer:
(a) Realisation A/c Dr. 4,000 to A's Capital A/c 4,000 (Commission given to A).
(b) A's Capital A/c Dr. 14,000, B's Capital A/c Dr. 14,000 to Advertisement Suspense A/c 28,000.
(c) Realisation A/c Dr. 13,000 to Cash A/c 13,000.
(d) B's Capital A/c Dr. 4,900 to Realisation A/c 4,900.
(e) A's Loan A/c Dr. 15,000 to Cash A/c 15,000.
(f) Realisation A/c Dr. 12,000 to Cash A/c 12,000.
In simple words: Pass standard journal entries for asset realization, expense payments, and liability settlements.

Exam Tip: Partner loans are settled directly through cash, not through the Realisation Account.

Question 5 (Dissolution). Following is the Balance sheet of X and Y sharing 4:1. Prepare Realisation account, Partners capital accounts and Bank account.
Answer:
Realisation Account Loss: Rs. 9,000 transferred to X (Rs. 7,200) and Y (Rs. 1,800).
Bank Account Final Settlement: Final cash payouts made to X (Rs. 42,800) and Y (Rs. 32,200).
In simple words: Transfer assets/liabilities to Realisation, realize values, pay creditors, and distribute remaining cash to partners.

Exam Tip: Ensure Bank Account totals match cash inflows and outflows perfectly.

Question 6 (Dissolution). A, B and C commenced business on 1st January 2008. Dissolved on 31st December 2009. Prepare Realisation a/c, Capital accounts and Cash account.
Answer:
Closing Capitals: A: Rs. 58,000, B: Rs. 43,500, C: Rs. 33,500.
Cash Account Total: Rs. 1,52,000.
In simple words: Calculate closing capitals after adding accumulated profits and deducting drawings, then prepare realization and cash accounts.

Exam Tip: Compute opening-to-closing capital adjustments correctly before closing partners' accounts.

UNIT 4: Company Accounts - Share Capital

Salient Features of a Company:

* A company is an artificial person having a separate legal entity.
* A company is created by law and dissolved by law.
* A private company can be formed with a minimum of 2 members and a maximum of 50.
* For a public company, minimum members required are 7 with no maximum limit.