CBSE Class 12 Accountancy Admission Of A Partner Important Questions Set 02

Very Short Answer Questions (1 Mark)

Teacher's Note:
1. An unrecorded liability is a loss, so the Revaluation Account is debited.

Question 2. How does the market situation affect the value of goodwill of a firm? [CBSE Delhi 2011]
Answer:
The monopoly condition or limited competition enable the concern to earn high profits which leads to higher value of goodwill.

Teacher's Note:
1. More competition means lower profits and therefore lower goodwill.

Question 3. How does the factor ‘quality of product’ affect the goodwill of a firm? [CBSE Delhi 2010]
Answer:
Quality of product results in increase in turnover and profit which affects goodwill of the firm.

Teacher's Note:
1. Link every factor of goodwill to its effect on future profits.

Teacher's Note:
1. Here Gulab, whose share was 3/10, actually gains because 1/3 is more than 3/10 – always compute each partner’s change instead of guessing.

Question 5. Why are ‘Reserves and Surplus’ distributed at the time of reconstitution of the firm? [CBSE Delhi and (AI) 2010]
Answer:
‘Reserves and Surplus’ belong to old partners as they are created out of past profits. Hence, they are distributed among old partners in old profit-sharing ratio at the time of reconstitution of firm.

Teacher's Note:
1. If not distributed, a gaining partner would get a larger share of past profits he has not earned.

Question 6. What do you mean by change in profit-sharing ratio?
Answer:
A change in profit-sharing ratio basically implies the purchase of share of profit by one partner from another partner and he pays for it in the form of proportionate goodwill.

Teacher's Note:
1. One partner’s gain is always another partner’s sacrifice.

Question 7. Name methods of valuation of Goodwill.
Answer:
(i) Average Profit Method, (ii) Super Profit Method, (iii) Capitalisation Method.

Teacher's Note:
1. Average profit may be simple or weighted; capitalisation may be of average profit or of super profit.

Question 8. Who is sacrificing and gaining partner?
Answer:
Sacrificing partner, whose share in profit is decreased and Gaining partner, whose share in profit is increased due to change in profit-sharing ratio.

Teacher's Note:
1. A partner whose share does not change is neither sacrificing nor gaining.

Question 9. In what ways or means, the gaining partner pays compensation to the sacrificing partner in case of change in profit-sharing ratio? [HOTS]
Answer:
The gaining partner compensates the sacrificing partner by means of goodwill.

Teacher's Note:
1. The entry is: Gaining Partner’s Capital A/c Dr. To Sacrificing Partner’s Capital A/c.

Question 10. A, B and C are partners sharing profits in the ratio 5 : 3 : 2. With effect from 1st April, 2019, they decided to share future profits in the ratio of 5 : 2 : 3. Calculate each partner’s gain or sacrifice due to this change.
Answer:
A: \( \frac{5}{10} \) − \( \frac{5}{10} \) = Nil; B: \( \frac{3}{10} \) − \( \frac{2}{10} \) = \( \frac{1}{10} \) (Sacrifice); C: \( \frac{2}{10} \) − \( \frac{3}{10} \) = \( \frac{1}{10} \) (Gain)
C gains and B sacrifices by 1/10th share. A neither gains nor sacrifices.

Teacher's Note:
1. A positive result of Old − New is a sacrifice; a negative result is a gain.

Question 11. Distinguish between Average profit and Super profit.
Answer:
Average profit is the average of the profits of past few years whereas super profit is the excess of average profits over normal profits.

Teacher's Note:
1. Super Profit = Average Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate ÷ 100.

Question 12. Enumerate two main steps involved in valuing the goodwill according to Super profit method.
Answer:
(i) Ascertain Super profit by subtracting normal profits from average profit.
(ii) Calculate goodwill by multiplying super profit with number of years’ purchase.

Teacher's Note:
1. Normal profit is computed first from capital employed and the normal rate of return.

Question 13. A, B and C were partners in a firm sharing profits in 3 : 2 : 1 ratio. They decided to share future profits in 5 : 3 : 2 ratio. For this purpose, the goodwill of the firm was valued at ₹60,000. Pass an adjustment entry for the treatment of goodwill.
Answer:
Debit C’s Capital A/c Cr. B’s Capital A/c by ₹2,000, i.e., 60,000 × \( \frac{2}{60} \).
Working Note: A = \( \frac{30}{60} \) − \( \frac{30}{60} \) = Nil; B = \( \frac{20}{60} \) − \( \frac{18}{60} \) = \( \frac{2}{60} \) (Sacrifice); C = \( \frac{10}{60} \) − \( \frac{12}{60} \) = \( \frac{2}{60} \) (Gain)

Teacher's Note:
1. Take the LCM of both denominators (6 and 10 give 60) so the changes are easy to compare.

Question 14. Balance Sheet of a firm shows workmen compensation reserve of ₹50,000. There is a workmen compensation liability of ₹10,000. State the ratio and amount of workmen compensation reserve that will be distributed to the partners?
Answer:
After making provision for workmen compensation claim of ₹10,000, the surplus reserve of ₹40,000 will be distributed to all the partners in the old profit-sharing ratio.

Teacher's Note:
1. Only the surplus over the actual claim is distributed; the claim itself is transferred to Workmen Compensation Claim A/c (a liability).

Question 15. On which basis, the amount of goodwill is decided to be paid to the sacrificing partner? [HOTS]
Answer:
The amount of goodwill to be paid to the sacrificing partner is determined by the change in profit-sharing ratio. The gaining partner compensates the sacrificing partner by paying him amount for goodwill which is equal to the share gained by him.

Teacher's Note:
1. Amount = Goodwill of the firm × share gained.

Question 16. State whether the following statement is True or False:
Payment of premium for Goodwill is the method of compensating sacrificing partners for the sacrifice they make in favour of new partner.
Answer:
True

Teacher's Note:
1. The premium is shared by old partners in their sacrificing ratio.

Question 17. State whether the following statement is True or False:
Contingent liability becoming a certain liability is credited to Revaluation Account at the time of admission of a partner.
Answer:
False

Teacher's Note:
1. A contingent liability that becomes payable is a loss, so it is debited to Revaluation A/c.

Question 18. State whether the following statement is True or False:
On revaluation of assets and reassessment of liabilities, capital Accounts of old partners remain unchanged.
Answer:
False

Teacher's Note:
1. Revaluation profit or loss is transferred to old partners' capital accounts, so their capitals change.

Short Answer Questions (2 Marks)

Question 19. The average net profits expected to a firm in future are ₹68,000 per year and capital invested in the business by the firm is ₹3,50,000. The rate of interest expected from capital invested in this class of business is 12%. The remuneration of the partners is estimated to be ₹8,000 for the year.
You are required to find out the value of goodwill on the basis of two years’ purchase of super profits.
Answer:
(i) Average profit = ₹68,000 − ₹8,000 = ₹60,000
(ii) Normal profit = Capital employed × Normal rate of return/100 = ₹3,50,000 × \( \frac{12}{100} \) = ₹42,000
(iii) Super profit = Average profit − Normal profit = ₹60,000 − 42,000 = ₹18,000
(iv) Value of goodwill = Super profit × No. of years’ purchase = ₹18,000 × 2 = ₹36,000

Teacher's Note:
1. Always deduct partners’ remuneration from expected profit before comparing it with normal profit.

Question 20. On 1st April, 2019 an existing firm had assets of ₹75,000 including cash of ₹5,000. The partners’ capital accounts showed a balance of ₹60,000 and reserves constituted the rest. If the normal rate of return is 20% and the goodwill of the firm is valued at ₹24,000 at 4 years purchase of super profits, find the average profits of the firm.
Answer:
(i) Calculation of Normal Profit:
Normal Profit = Capital employed × \( \frac{\text{Normal Rate}}{100} \) = 75,000 × \( \frac{20}{100} \) = ₹15,000
(ii) Calculation of Super Profit:
Goodwill = Super profit × No. of Years’ Purchase
₹24,000 = Super Profit × 4; Super Profit = \( \frac{24,000}{4} \) = ₹6,000
(iii) Calculation of Average Profit:
Super Profit = Average Profit − Normal Profit
₹6,000 = Average Profit − ₹15,000
Average Profit = ₹6,000 + ₹15,000 = ₹21,000

Teacher's Note:
1. Capital employed here is capital plus reserves (₹75,000), since the firm has no outside liabilities.

Teacher's Note:
1. Even a small change like 4 : 3 to 5 : 3 needs a common denominator (56) to find the exact gain.

Teacher's Note:
1. When a reserve is kept intact, only the gaining partner’s share is adjusted – the reserve itself stays in the Balance Sheet.

Teacher's Note:
1. Abnormal gain is deducted; abnormal loss already charged is added back.

Short Answer Questions (3 Marks)

Teacher's Note:
1. Net the reserve and the revaluation loss first; one entry then adjusts only the gainer and the sacrificers.

Teacher's Note:
1. If the net figure were a loss instead of a profit, the entry would reverse: the sacrificing partner would be debited.

Teacher's Note:
1. For liabilities, an increase is a loss and a decrease is a gain – the opposite of assets.

Teacher's Note:
1. Remember to subtract the loss year when finding the average profit.

Teacher's Note:
1. Only A sacrifices, so the whole goodwill goes to A; B's share does not change.

Long Answer Questions (5 Marks)

Teacher's Note:
1. The opening cash is not given, so find it as the balancing figure of the old Balance Sheet. As no ratio is given, Murari and Vohra share equally.

Question 30. On 1-4-2012 Sahil and Charu entered into partnership for sharing profits in the ratio of 4 : 3. They admitted Tanu as a new partner on 1-4-2012 for 1/5th share which she acquired equally from Sahil and Charu. Sahil, Charu and Tanu earned profits at a higher rate than the normal rate of return for the year ended 31-3-2013. Therefore, they decided to expand their business. To meet the requirements of additional capital they admitted Puneet as a new partner on 1-4-2013 for 1/7th share in profits which he acquired from Sahil and Charu in 7 : 3 ratio.
Calculate:
(i) New profit-sharing ratio of Sahil, Charu and Tanu for the year 2012-13.
(ii) New profit-sharing ratio of Sahil, Charu, Tanu and Puneet on Puneet's admission. [CBSE Delhi 2015]
Answer:
(i) Calculation of New Profit-sharing Ratio of Sahil, Charu and Tanu:
Sahil's old share = \(\frac{4}{7}\), Sahil surrenders in favour of Tanu = \(\frac{1}{5} \times \frac{1}{2} = \frac{1}{10}\)
Sahil's new share = \(\frac{4}{7} - \frac{1}{10} = \frac{33}{70}\)
Charu's old share = \(\frac{3}{7}\), Charu surrenders in favour of Tanu = \(\frac{1}{5} \times \frac{1}{2} = \frac{1}{10}\)
Charu's new share = \(\frac{3}{7} - \frac{1}{10} = \frac{23}{70}\); Tanu's share = \(\frac{1}{10} + \frac{1}{10} = \frac{2}{10}\)
New Profit-sharing ratio among Sahil, Charu and Tanu = \(\frac{33}{70} : \frac{23}{70} : \frac{2}{10}\) or \(\frac{14}{70}\) = 33 : 23 : 14
(ii) Calculation of New Profit-sharing Ratio of Sahil, Charu, Tanu and Puneet:
Sahil's old share = \(\frac{33}{70}\), Sahil surrenders in favour of Puneet = \(\frac{1}{7} \times \frac{7}{10} = \frac{7}{70}\)
Sahil's new share = \(\frac{33}{70} - \frac{7}{70} = \frac{26}{70}\)
Charu's old share = \(\frac{23}{70}\), Charu surrenders in favour of Puneet = \(\frac{1}{7} \times \frac{3}{10} = \frac{3}{70}\)
Charu's new share = \(\frac{23}{70} - \frac{3}{70} = \frac{20}{70}\); Tanu's share = \(\frac{14}{70}\)
Puneet's new share = \(\frac{1}{7}\) or \(\frac{10}{70}\)
New Profit-sharing ratio among partners = \(\frac{26}{70} : \frac{20}{70} : \frac{14}{70} : \frac{10}{70}\) = 26 : 20 : 14 : 10 = 13 : 10 : 7 : 5.

Teacher's Note:
1. For the second admission, the 'old shares' are the new shares from part (i), not the original 4 : 3.

Teacher's Note:
1. With fixed capitals, goodwill adjustments go through current accounts, never the fixed capital accounts.

Teacher's Note:
1. The fall in investments is first met from the Investment Fluctuation Fund; only the excess fall (7,000) is a revaluation loss.

Teacher's Note:
1. Withdrawal of premium is a separate entry debiting the old partners' capitals in the same ratio in which the premium was credited.

Teacher's Note:
1. Bad debts are first met from the existing provision; only the extra provision needed is a revaluation loss.

Teacher's Note:
1. Sacrificing ratio: Rajesh 6/10 − 5/10 = 1/10, Ravi 4/10 − 3/10 = 1/10, so 1 : 1, not the old ratio 3 : 2.

Teacher's Note:
1. Since old partners sacrifice in their old ratio, the premium is shared 6 : 5 : 3; balance the capital accounts against the required capitals to find cash paid off or brought in.

Teacher's Note:
1. The debit balance of Profit and Loss Account is an accumulated loss: debit it to old partners in the old ratio (3 : 2) before adjusting capitals.
2. Only the partner who sacrifices (B here) gets the premium, so only B withdraws half of it.