Chapter 3
Reconstitution of Partnership
(Admission of Partner)
Q.1 Objective type questions.
(A) Select appropriate alternatives from those given below and rewrite the sentences.
1. Anuj and Eeshan are two partners sharing profits and losses in the ratio of 3:2. They decided to admit Aaroh for 1/5th share, the new profit sharing ratio will be .......................
(a) 12:8:5 (b) 4:3:1 (c) 12:8:1 (d) 12:3:1
2. Excess of proportionate capital over actual capital represents.......................
(a) Equal capital (b) Surplus Capital (c) Deficit Capital (d) Gain
3. .......................is credited when unrecorded asset is brought into business.
(a) Revaluation Account (b) Balance Sheet (c) Trading Account (d) Partners capital Account.
4. When goodwill is withdrawn by the partner .......................account is credited.
(a)Revaluation (b) Cash / Bank (c) Current (d) Profit and Loss Adjustment
5. If asset is taken over by the partner .......................account is debited.
(a) Revaluation (b) Capital (c) Asset (d) Balance Sheet
Answer:
1. To find the new profit sharing ratio after admitting Aaroh for a 1/5th share, the answer is (a) 12:8:5.
Explanation:
To find the new profit sharing ratio after admitting Aaroh for a 1/5th share, we need to calculate the new ratio among all the partners.
Let's assume the current total profit is represented by P.
According to the given information, Anuj and Eeshan share profits and losses in the ratio of 3:2. This means Anuj's share is 3/5 of the total profit, and Eeshan's share is 2/5 of the total profit.
After admitting Aaroh for a 1/5th share, the remaining share of the profit is 1 - 1/5 = 4/5.
Now, we need to divide this remaining share among Anuj and Eeshan. Since their current ratio is 3:2, we can divide the remaining share in the same ratio.
Anuj's share of the remaining profit = (4/5) * (3/5) = 12/25
Eeshan's share of the remaining profit = (4/5) * (2/5) = 8/25
Therefore, the new profit sharing ratio among Anuj, Eeshan, and Aaroh will be 12:8:5.
The answerg77 is (a) 12:8:5.
2. The excess of proportionate capital over actual capital represents (b) Surplus Capital.
3. When an unrecorded asset is brought into the business, (a) Revaluation Account is credited.
4. When goodwill is withdrawn by the partner, (c) Current Account is credited.
5. If an asset is taken over by the partner, (b) Capital Account is debited.
(B) Write a word/ phrase / term which can substitute each of the following statements.
1 Method under which calculation of goodwill is done on the basis of extra profit earned above the normal profit.
2 An account opened to adjust the value of assets and liabilities at the time of admission of a partner.
3 Reputation of business measured in terms of money.
4 The ratio in which general reserve is distributed to the old partners.
5 Name the method of the treatment of goodwill where new partner will bring his share of goodwill in cash.
6 The proportion in which old partners make a sacrifice.
7 Capital employed × NRR /100 =
8 An Account which is debited when the partner takes over the asset.
9 Profit and Loss account balance appearing on liability side of Balance Sheet.
10 Old ratio - New ratio =
Answer:
1. Super profit method
2. Revaluation account
3. Goodwill
4. Old profit sharing ratio
5. Goodwill brought in cash method
6. Sacrifice ratio
7. Return on capital employed (ROCE)
8. Partner's capital account
9. Reserves and surplus
10. Change in ratio
(C) State True or False with reasons
1 New Partner can bring capital in cash or kind.
Answer: True. A new partner in a partnership or a business venture can bring capital in cash or kind.
When a new partner joins a business, they can contribute capital in the form of cash, which involves injecting money into the partnership or company. This cash contribution increases the overall capital available to the business and can be used for various purposes such as investment, expansion, or working capital.
The choice of bringing capital in cash or kind depends on the agreement between the partners and the specific circumstances of the business. Both cash and kind contributions have their own implications and may affect the partner's ownership percentage, profit-sharing, and the overall financial position of the partnership.
2 When goodwill is paid privately to the partners it is not recorded in the books.
Answer: False
From an accounting standpoint, the goodwill payment should be recognized and recorded in the books of the partnership. It is important to accurately reflect the financial transactions and the impact they have on the partnership's financial statements. Typically, the payment for goodwill is treated as an expense for the remaining partners and as income for the departing partner.
The specific accounting treatment and the presentation of the goodwill payment may vary depending on the partnership's accounting policies, the legal agreements between the partners, and applicable accounting standards. It is recommended to consult with a professional accountant or financial advisor for guidance specific to your situation.
3 Gain ratio is calculated at the time of admission of partner.
4 Revaluation profit is distributed among all partners including new partner.
5 Change in relationship between the partners is called as Reconstitution of partnership.
6 New partner always brings his share of goodwill in cash .
7 When the goodwill is written off goodwill account is debited
8 New ratio minus old ratio is equal to sacrifice ratio.
9 Usually when a new partner is admitted in the firm there will be an increase in the capital of the firm.
10 Cash/ Bank Account is credited when goodwill is withdrawn by the old partners.
(D) Find the Odd one.
1. General reserve, Creditors, Machinery, Capital
Answer: Machinery
2. Decrease in Furniture, Patents written off, Increase in Bills Payable, RDD written off.
Answer: Increase in Bills Payable
3 Super profit method, Valuation method, Average profit method, Fluctuating capital method.
Answer: Fluctuating Capital Method
(E) Calculate the following
1. A and B are partners in a firm sharing profits and losses in the ratio of 1:1. C is admitted. A surrenders 1/4th share and B surrenders 1/5th of his share in favour of C. Calculate the new profit sharing ratio.
Ans: To calculate the new profit-sharing ratio after A surrenders 1/4th of their share and B surrenders 1/5th of their share in favor of C, we need to determine the revised shares of A, B, and C.
Let's assume the original shares of A and B were x and x, respectively (since they were sharing profits and losses in a 1:1 ratio). After A surrenders 1/4th of their share, their new share becomes (3/4)x.
Similarly, after B surrenders 1/5th of their share, their new share becomes (4/5)x.
Now, we need to find the new share of C. Since A and B have given up a total of 1/4 + 1/5 = 9/20 of their shares, the remaining share available for C is 1 - 9/20 = 11/20.
We can now calculate the new profit-sharing ratio:
A's new share = (3/4)x
B's new share = (4/5)x
C's share = (11/20)x
To express the ratio, we can multiply all shares by a common factor to eliminate fractions. In this case, multiplying by 20 gives us:
A's new share = (3/4)x * 20 = 15x/4
B's new share = (4/5)x * 20 = 16x/5
C's share = (11/20)x * 20 = 11x/20
Therefore, the new profit-sharing ratio of A, B, and C is 15x:16x:11x, or simplifying it, 15:16:11.
2. Anika and Radhika are partners sharing profits in the ratio of 5:1. They decide to admit Sanika in the firm for 1/5th share. calculate the sacrifice ratio of Anika and Radhika
Answer: Old Ratio of Anika and Radhika is 5:1
Future profit of Sanika is 1/5th
Balance Rato = 1- future profit = 1- 1/5 = 4/5 th
New Ratio = Old Ratio x New Ratio
Anika's Rato = 5/6 x 4/5 = 20/30
Radhika's = 1/6 x 4/5 = 4/30
Sanika' Share = 6/30
Sacrifices Ratio = old Ratio - New Ratio
Anika = 5/6 - 20/30
Multiply by 5 in N & D in 5/6
Anika = 25/30 - 20/30 = 5/ 30
Radhika's = 1/6 - 4/30
Multiple by 5 in N & D in 1/6
Radhika's share = 5/30 - 4/30 = 1/30
Sacrifices Ratio = 5:1
3. Pramod and Vinod are partners sharing profits and losses in the ratio 3:2. After admission of Ramesh the new ratio of Pramod, Vinod and Ramesh is 4:3:2. Find out the sacrifice ratio.
Answer: Pramod and Vinod are partners sharing profits and losses in the ratio 3:2
Old Ratio of partners:
Pramod's share = 3/5
Vinod's share = 2/5
After admission of Ramesh the new ratio of Pramod, Vinod and Ramesh is 4:3:2
New Ratio of partners:
Pramod's share = 4/8
Vinod's share = 3/8
Ramesh's share = 2/8
Sacrifices Ratio = old Ratio - New Ratio
Pramod's share = 3/5 - 4/8 = 24-20/40 = 4/40
Vinod's share = 2/5 - 3/8 = 16-15/40 = 1/40
Hence Sacrifices Ratio = 4:1
(F) Answer in one sentence.
1 What is Revaluation Account?
Answer: Revaluation Account is a financial account used to record the adjustment of assets and liabilities to their current market values during a partnership revaluation.
2 What is meant by Reconstitution of partnership?
Answer: Reconstitution of partnership refers to the process of making changes to the existing partnership by admitting or retiring partners, altering profit-sharing ratios, or making other adjustments to the partnership agreement.
3 Why is new partner admitted?
Answer: A new partner may be admitted to bring additional expertise, resources, or capital to a business, enhance its growth prospects, or strengthen its competitive advantage.
4 What is sacrifice ratio?
Answer: Sacrifices ratio refers to the ratio in which the partners agree to share the losses in a partnership based on their capital contributions.
5 What do you mean by raising the goodwill at the time of admission of a new partner?
Answer: Raising the goodwill at the time of admission of a new partner means increasing the value of the intangible assets, such as the reputation and customer base, to reflect the new partner's contribution and potential benefits to the partnership.
6 What is super profit method of calculation of goodwill?
Answer: The super profit method of calculating goodwill involves determining the excess earnings of a business beyond a normal rate of return and valuing that excess as goodwill.
7 When is the ratio of sacrifice calculated for distribution of goodwill?
Answer: The ratio of sacrifice is calculated for the distribution of goodwill when a partner leaves the partnership or when a new partner is admitted.
8 What is the treatment of accumulated profits at the time of admission of a partner?
Answer: The treatment of accumulated profits at the time of admission of a partner involves adjusting the partner's capital account by including their share of accumulated profits as part of their initial capital contribution.
9 State the ratio in which old partner’s capital A/c will be credited for goodwill when the new partner does not bring his share of goodwill in cash.
Answer: The old partner's capital account will be credited for goodwill in the ratio of their profit-sharing ratio with the new partner when the new partner does not bring their share of goodwill in cash.
10. What does the excess of debit over credits in Profits and Loss Adjustment account indicate?
Answer: The excess of debit over credits in the Profit and Loss Adjustment account indicates a net loss incurred by the partnership.
(G) Complete the table
1. ___________ = Total profit/ Number of years.
Answer: Average Profit = Total Profit / Number of Years
2. Normal Profit = _________ × NRR 100
Answer: Normal Profit = Capital Employed x NRR / 100
3. Stock shown in Balance Sheet g Stock undervalued by 20% g Cost of Stock `
1,60,000 ___________ __________
Answer: Stock shown in Balance Sheet g Stock undervalued by 20% g Cost of Stock `
1,60,000 40000 2,00,000
1. Vikram and Pradnya share profits and losses in the ratio 2:3 respectively. Their balance sheet as on 31st March 2018 was as under.
Balance Sheet as on 31st March, 2018
|
Liabilities |
Amount |
Assets |
Amount |
|
Creditors Capital A/c Vikram Pradnya |
105000 75000 75000 |
Cash Land &
Building Plant Furniture Stock Debtors |
7,500 37,500 45,000 3,000 75,000 87,000 |
|
|
2,55,000 |
|
2,55,000 |
They agreed to admit Avani as a partner on 1st April 2018 on the following terms:
1 Avani shall have 1/4th share in future profits.
2. He shall bring ` 37,500 as his capital and ` 30,000 as his share of goodwill.
3. Land and building to be valued at ` 45,000 and furniture to be depreciated by 10%.
4. Provision for bad and doubtful debts is to be maintained at 5% on the Sundry Debtors.
5. Stocks to be valued ` 82, 500.
The capital A/c of all partners to be adjusted in their new profit and loss ratio and excess amount be transferred to their loan accounts.
Prepare Profit and Loss Adjustment Account, Capital Accounts and New Balance Sheet.
(Ans: (Revaluation Profit 10,350, Capital Balance - Vikram 45,000, Pradnya 67,500, Avani 37,500, Balance Sheet Total - 3,32,850)
2. Amalendu and Sameer share profits and losses in the ratio 3:2 respectively Their balance sheet as on 31st March 2017 was as under.
Balance Sheet as on 31st March, 2017
|
Liabilities |
Amount |
Assets |
Amount |
|
Sundry Creditors Amlendu capital Sameer capital General reserve |
10,000 60,000 40,000 20,000 |
Cash at bank Sundry
debtors Land &
Building Stock Plant and
machinery Furniture & fixture |
12,000 24,000 50,000 16,000 20,000 8,000 |
|
|
1,30,000 |
|
1,30,000 |
On 1st April 2017 they admit Paresh into partnership. The term being that:
1 He shall pay ` 16,000 as his share of Goodwill 50% amount of Goodwill shall be withdrawn by the old partners.
2 He shall have to bring in ` 20,000 as his Capital for 1/4 share in future profits.
3. For the purpose of Paresh’s admission it was agreed that the asssets would be revalued as follows.
A) Land and Building is to be valued at ` 60,000
B) Plant and Machinery to be valued at `16,000
C) Stock valued at ` 20,000 and Furniture and Fixtures at ` 4,000
D) A Provision of 5% on Debtors would be made for Doubtful Debts.
Pass The necessary Journal Entries in the Books of a New Firm.
3. Vasu and Viraj Share Profits and Losses in the Ratio of 3:2 respectively Their Balance Sheet as on 31st March 2019 was as under
Balance Sheet as on 31st March, 2019
|
Liabilities
|
Amount (`)
|
Assets |
Amount (`) |
|
Sundry
Creditors General
Reserve Capital :
Vasu Viraj |
45,000 30,000 1,08,000 72,000 |
Cash at bank Sundry
debtors Stock Investment Plant Building |
750 66,750 25,500 36,000 90,000 36,000 |
|
|
2,55,000 |
|
2,55,000 |
They admit Hari into Partnership on 1.4. 2019 the terms being that :
1 He shall have to bring in ` 60,000 as his Capital for 1/4 share in future profits
2 Value of Goodwill of the Firm is to be fixed at The average profits for the last three years. The Profit were. 2016-17 ` 48,000, 2017-18 ` 81,000 2018-19 ` 73,500 Hari is unable to bring the value of the Goodwill in cash. It is decided to raise the Goodwill in the books of accounts.
3. Reserve for Doubtful Debts is to be created at ` 1,500.
4. Closing Stock is valued at ` 22, 500
5. Plant and Building is to be depreciated by 5%.
Prepare Profit and Loss Adjustment A/c, Capital Accounts of Partners And Balance Sheet of the New Firm.
(Ans : Revaluation Loss 10,800, Capital balances - Vasu 1,60,020, Viraj 1,06,680, Hari 60,000, Balance sheet total - 3,71,700)
4. Mr. Deep & Mr. Karan were in Partnership sharing Profits & Losses in the proportion of 3:1 respectively. Their Balance Sheet On 31st March 2018 Stood as follows.
Balance Sheet as on 31st March, 2018
|
Liabilities
|
|
Amount (`)
|
Assets |
|
Amount (`) |
|
Sundry
Creditors Bill Payable Bank
Overdraft Capital A/c: Deep Karan General
Reserve |
60,000 20,000 |
40,000 10,000 11,000 80,000 8,000 |
Cash at bank Sundry
debtors Land &
Building Stock Plant &
Machinery Furniture |
|
40,000 32,000 16,000 20,000 30,000 11,000 |
|
|
|
1,49,000 |
|
|
1,49,000 |
They admit Shubham into Partnership on 1 April, 2018 The term being that :
1. He shall have to bring in ` 20,000 as his capital for 1/5 Share in future profits & 10,000 as his share of Goodwill.
2. A Provision for 5% doubtful debts to be created on Sundry Debtors.
3. Furniture to be depreciated by 20%
4. Stock should be appreciated by 5% and Building be appreciated by 20%
5. Capital A/c of all partners be adjusted in their new profit sharing ratio through cash account. Prepare Profit and Loss Adjustment A/c , Partner’s capital A/c, Balance sheet of new firm. (Ans : Revaluation Profit - 400, Cash transferred to Deep 13800, to Karan 4,600, Balance Sheet total 1,61,000)
5. Mr. Kishor & Mr. Lal were in partnership sharing profits & losses in the proportion of 3/4 and 1/4 respectively.
Balance Sheet as On 31 March 2018
|
Liabilities
|
|
Amount (`)
|
Assets |
|
Amount (`) |
|
Creditors General
Reserve Capital A/c: Kishor Lal |
90,000 48,000 |
1,20,000 12,000
138,000 |
Land &
Building Furniture Stock Debtors Bills Receivable Cash at bank |
|
75,000 6,000 60,000 60,000 39,000 30,000 |
|
|
|
2,70,000 |
|
|
2,70,000 |
They decided to admit Ram on 1 April 2018 on following terms:
1. He should be given 1/5th share in profit and for that he brought in ` 60,000 as capital through RTGS.
2. Goodwill should be raised at ` 60,000
3. Appreciate Land and Building by 20%
4. Furniture and Stock are to be depreciated by 10%
5. The Capitals of all partners should be adjusted in their new profit sharing ratio through Bank A/c. Pass necessary Journal Entries in the books of the Partnership firm and a Balance sheet of new firm.
6. Vrushali and Leena are equal partners in the business. Their Balance sheet as on 31 March 2018 stood as under.
Balance Sheet as on 31 March 2018
|
Liabilities
|
|
Amount (`)
|
Assets |
|
Amount (`) |
|
Sundry
Creditors Capitals : Vrushali Leena General
Reserves |
45,000 30,000 |
90,000 75,000 18,000 |
Cash in Bank Debtors Less: R.D.D Building Machinery Bills
Receivable |
31,000 1,000 |
62,000 30,000 55,000 24,000 12,000 |
|
|
|
1,83,000 |
|
|
1,83,000 |
They decided to admit Aparna on 1st April 2018 on the following terms:
1. The Machinery and Building be depreciated by 10%. Reserve for Doubtful Debts to be increased by ` 5,000
2. Bills Receivable are taken over by Vrushali at the discount of 10%
3. Aparna should bring ` 60,000 as capital for her 1/4 th share in future profits.
4. The capital accounts of all the partners be adjusted in proportion in the new profit sharing ratio by opening current accounts of the partners.
Prepare Profit and Loss Adjustment A/c, Partner’s capital A/c, Balance sheet of new firm. (Ans : Revaluation loss - 14,100, Current A/c Vrushali 53,850, Leena 58,050, Balance Sheet 3,30,000)
7. The balance sheet of Medha and Radha who share profit and loss in the ratio 3:1 is as follows :
Balance Sheet as on 31 March 2018
|
Liabilities
|
Amount (`)
|
Assets |
Amount (`) |
|
Sundry
Creditors Bills Payable
Bank
overdraft Capital A/c :
Medha Radha General
reserve |
80,000 20,000 20,000 1,20,000 40,000 16,000 |
Cash Sundry
debtors Stock Plant &
Machinery Furniture Land and
Building |
78,000 64,000 40,000 60,000 22,000 32,000 |
|
|
2,96,000 |
|
2,96,000 |
They decided to admit krutika on 1st April 2018 on the following terms:
1. Krutika is taken as partner on 1st April 2018 she will pay 40,000 as her capital for 1/5 share in future profits and ` 2,500 as goodwill
2. A 5% provision for bad and doubtful debt be created on debtors.
3. Furniture be depreciated by 20%.
4. Stocks be appreciated by 5% and plant & machinery by 2%
5. The Capital accounts of all partners be adjusted in their new profit sharing ratio by adjusting amount through current.
6. The new profit sharing ratio will be 3/5 1/5 1/5 respectively. You are required to prepare profit and loss adjustment A/c,
Partner’s capital A/c, Balance Sheet of the new firm.
(Ans: Revaluation Loss 4,400, Current A/c Medha 10,575, Radha 3,525, Balance Sheet 3,34,100)
8. The Balance Sheet of Sahil and Nikhil who share profits in the ratio of 3:2 as on 31st March, 2017 Balance Sheet as on 31st March 2017
|
Liabilities
|
|
Amount (`)
|
Assets |
|
Amount (`) |
|
Creditors Capitals: Sahil Nikhil |
1,00,000 80,000 |
60,000 1,80,000 |
Furniture Building Debtors Closing Stock
Cash in Hand |
|
60,000 72,000 40,000 48,000 20,000 |
|
|
|
2,40,000 |
|
|
2,40,000 |
Varad admitted on 1St April 2017 on the following terms :
1. Varad was to pay 1,00,000 for his share of capital.
2. He was also to pay 40,000 as his share of goodwill.
3. The new profit sharing ratio was 3:2:3
4. Old partners decided to revalue the assets as follows: Building 1,00,000, Furniture- 48,000, Debtors - 38,000 (in view of likely bad debts)
5. It was found that there was a liability for 3,000 for goods in March 2017 but recorded on 2nd April 2017 .
You are required to prepare : a) Profit and Loss adjustment accounts b) Capital accounts of the partners c) Balance sheet after the admission of Varad.
(Ans : Revaluation Profit ` 11,000 Capital A/c Sahil ` 1,10,600, Nikhil ` 1,20,400, Varad ` 1,00,000, Balance sheet ` 3,94,000)
9. Mr. Amit and Baban share profits and losses in the ratio 2:3 respectively. Their balance sheet as on 31st March 2018 was as under.
Balance Sheet as On 31st March 2018
|
Liabilities
|
Amount (`)
|
Assets |
Amount (`) |
|
Creditors Capitals: Sahil Nikhil |
1,400,000 1,00,000 1,00,000 |
Cash Land and
Building Plant Furniture Stock Debtors |
110,000 50,000 60,000 4,000 100,000 16,000 |
|
|
3,40,000 |
|
3,40,000 |
They agreed decided to admit Kamal on 1st April 2018 on following terms:
1. Kamal shall have 1/4th share in future profits.
2. They agreed to admit Kamal as a partner on 1st April 2018 on the following terms:
3. She shall bring 50,000 as her capital and 40,000 as her share of goodwill.
4. Land and building to be valued at 60,000 and furniture to be depreciated by 10%
5. Provision for bad and doubtful debts is tobe maintained at 5% on the sundry debtors. 6. Stocks to be valued 1,10,000 The capital A/c of all partners to be adjusted in their new profit and loss ratio and excess amount be transferred to their loan accounts.
Prepare profit and loss adjustment A/c, Capital A/cs, and New Balance Sheet (Ans : Revaluation Profit 18,800, Loan A/c Amit 63,520, Baban 45,280, Balance Sheet total 4,48,800)
10. The following is the Balance Sheet of Om and Jay on 31st March 2018, they share profits and losses in the ratio 3:2
Balance Sheet as On 31st March 2018
|
Liabilities
|
Amount (`)
|
Assets |
Amount (`) |
|
Creditors Capital A/c Om Jay Current A/c Om Jay |
30,000 21,000 21,000
3,750 3,450 |
Cash Building Machinery Furniture Stock Debtors |
3,000 15,000 21,000 900 12,300 27,000 |
|
|
79,200 |
|
79,200 |
They take Jagdish into partnership on 1st April 2018 the terms being
1. Jagdish should pay 3,000 as his share of Goodwill. 50% of goodwill withdrawn by partners in cash.
2. He should bring 9,000 as capital for 1/4th share in future profits.
3. Building to be valued at 18,000, Machinery and Furniture to be reduced by 10%
4. A Provision of 5% on debtors to be made for doubtful debts.
5. Stock is to be taken at the value of 15,000.
Prepare profit and loss A/c, Partner’s Current A/c, Balance Sheet of the new firm. (Ans : Revaluation Profit ` 2,160, Current A/c Om ` 5,946, Jay ` 4,914, Balance Sheet total ` 91,860)
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