# Plus Two Accountancy Chapter Wise Questions and Answers Chapter 3 Reconstitution of a Partnership Firm – Admission of Partner

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## Kerala Plus Two Accountancy Chapter Wise Questions and Answers Chapter 3 Reconstitution of a Partnership Firm – Admission of Partner

### Plus Two Accountancy Reconstitution of a Partnership Firm – Admission of Partner One Mark Questions and Answers

Question 1.
Total value of business-Net tangible assets’ is the value of goodwill under.
(a) Superprofit method
(b) Present value of super profit method
(c) Capitalization of average profit method
(d) Weighted average profit method
(c) Capitalization of average profit method.

Question 2.
Which of the following does not lead to reconstitution of a partnership firm?
(a) Admission of a new partner
(b) Retirement of a partner
(c) Death of a partner
(d) Dissolution of a partnership
(d) Dissolution of a partnership

Question 3.
Change in agreement (relationship among the partners) lead to
(a) Reconstitution
(b) Dissolution
(c) Reconstruction
(d) Amalgamation
(d) Reconstitution

Question 4.
Change in profit sharing ratio of the existing partners result in
(a) Gain to all partners
(b) Sacrifice to ail partners
(c) Gain to some partners and sacrifice to others
(d) None of these
(c) Gain to some partners and sacrifice to others.

Question 5.
Unless otherwise mentioned, sacrificing ratio will be
(a) Equal ratio
(b) New ratio
(c) Old ratio
(d) None of these
(c) Old ratio

Question 6.
The profit or loss arising from revaluation of assets and liabilities is transferred to
(a) Old partners’ capital account
(b) All partners’ capital account
(c) New partners’ capital account
(d) Profit and Loss Appropriation account
(a) Old partners’ capital account

Question 7.
The profit or loss on revaluation is transferred to the old partners capital a/c in
(a) Old ratio
(b) Sacrificing ratio
(c) New ratio
(d) In the ratio of capital
(a) Old ratio

Question 8.
At the time of admission of a new partner the re-serves and accumulated profits in P & L account is transferred to
(a) Profit and Loss appropriation account
(b) Profit and Loss Adjustment Account
(c) Old Partner’s capital account
(d) Revaluation account
(c) Old partner’s capital account

Question 9.
The amount of goodwill brought in by the new partner is shared among the old partners in
(a) Old ratio
(b) Sacrificing ratio
(c) New ratio
(d) None of these
(b) Sacrificing ratio

Question 10.
The goodwill brought in kind (assets) by the new partner is transferred to
(a) Revaluation account
(b) Profit and Loss Account
(c) Sacrificing partners’ capital account
(d) All partners’ capital account
(c) Sacrificing partners’ capital account

Question 11.
When the new partner is not able to bring his share of goodwill, his account will be
(a) Debited
(b) Credited
(c) Omitted
(d) Closed
(a) Debited

Question 12.
In partnership, a minor
(a) Cannot be a partner
(b) Can be a partner
(c) Can be admitted only to the benefits of a partnership.
(d) Can be a partner and share profit & losses along with other partners.
(c) Can be admitted only to the benefits of a partnership.

Question 13.
Complete the following on the basis of the hint given

2. Revaluation profit – _______.

Old profit sharing.ratio

Question 14.
Joy’s capital A/c
Dr. Saju’s capital A/c Dr
To Profit and Loss A/c.
What is the entry stands for?
Accumulated losses transferred to old partners capital a/c.

### Plus Two Accountancy Reconstitution of a Partnership Firm – Admission of Partner Two Mark Questions and Answers

Question 1.
‘Goodwill is an asset, but is not visible’. Describe.
Goodwill is the value of the reputation of a firm. As such it is an asset to the firm. But it is an intangible asset and is not visible.

Question 2.
A firm has an average profit of Rs. 50,000 during the last certain years. The normal rate of return is 10%. The firm has net tangible assets of Rs. 3,00,000. Calculate the value of goodwill using capitalization method.
Average profit = Rs. 50,000
Normal rate of return = 10%
Capitalised value of
average profit = $$\frac{50,000 \times 100}{10}$$ = Rs. 5,00,000
Goodwill = Capitalised value of average profit – Total of net tangible assets.
= Rs. 5,00,000 – 3,00,000 = Rs. 2,00,000.

Question 3.
When a new partner is admitted into a firm?
Inclusion of a new partner into an existing firm is called admission of a partner. A new partner is admitted, when a firm needs more capital, managerial skill, etc.

Question 4.
What are the rights acquired by a new partner?

1. Right to share the assets of the firm – For this the new partner has to bring a certain amount of capital.
2. Right to share the profits of the firm – For this he has to bring his share of goodwill.

Question 5.
What do you mean by sacrificing ratio?
At the time of admission of a new partner, the old partners have to sacrifice a certain portion of their profits for the incoming partner. The ratio in which they give up or sacrifice their profit is called sacrificing ratio.

Question 6.
What is a revaluation account?
Revaluation account is a nominal account prepared at the time of admission of a new partner. This is prepared to find out the profit or loss on revaluing the assets, if they are overstated or understated.

Question 7.
What is meant by premium or goodwill?
At the time of admission, the new partner has to bring in a certain amount for getting a share in future profit. This amount is called premium or goodwill.

Question 8.
What treatment is made of accumulated profits and losses on the admission of a new partner?
Accumulated profits and losses are distributed amongst the old partner’s in their old profit sharing ratio. The new partner should not share such profits or losses because these arose before his admission.

Question 9.
What is Memorandum Revaluation Account?
A memorandum revaluation account is prepared when the partners decide to record the effect of revaluation of assets and liabilities without affecting the old figures of assets and liabilities in the balance sheet.

Question 10.
A new partner is admitted into a firm; but he is not in a position to bring his share of goodwill. What the firm will do?
When the new partner is not able to bring his share of goodwill, his account is debited and the sacrificing partners capital account is credited. The following is the journal entry.
New Partners’ Capital A/c Dr.
To Sacrificing Partners’Capital A/c.

Question 11.
An equipment having a book value of Rs.2,600 was sold at Rs. 3,000 on the date of admission of a partner.

1. How much amount will be credited to Revaluation A/c?
2. Give journal entry for the above.

 Cash a/c Dr. 3000 To Equipment 2600 To Revaluation (Being equipment sold) 400

Question 12.
In connection with the admission of Mr.Santhosh Kumar as equal partner, one of the existing partners
of the firm Mrs. Sreema has taken over the plant and equipments worth Rs. 15000 at Rs. 18000 on the date of admission. Give a journal entry to this effect.

 Sreema’s capital Dr. 18000 To Plant & Equipment 15000 To Revaluation (Being P & E taken over by Sreema) 3000

Question 13.
X and Y are partners sharing profits and loses in the ratio of 2:1. They admit Z into the firm for a fourth, share. Calculate new ratio and sacrificing ratio.
Old ratio = 2:1
New ratio =2:1:1

Here old ratio and sacrificing ratio are the same.

Question 14.
P and Q are partners in a firm sharing profits in the ratio of 5 : 3. They admit R for 1/6 share. The total goodwill of the firm is Rs. 50,000. Goodwill existing in the books is Rs. 25,000. Pass the journal entry for the share of goodwill to be brought in by R.
Amount of goodwill to be brought in by R
= 1/6 of (50,000 – 25,000)
= 1/6 of 25,000
= 1/6 × 25,000 = Rs. 4,167
The Journal entry is

 Cash A/c Dr. 4,167 To Goodwill (Premium) (Share of Good will brought in by R) 4,167

### Plus Two Accountancy Reconstitution of a Partnership Firm – Admission of Partner Three Mark Questions and Answers

Question 1.
Calculate the value of goodwill at 2 years, purchase from the following 3 years average profits.

 1995 Rs. 27,000 1996 Rs. 28,000 1997 Rs. 29,000

Average profit = $$\frac{27,000+28,000+29,000}{3}$$
= 28,000
Goodwill = 2 yeas purchase of the average profit = 2 × 28,000 = 56,000.

Question 2.
A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation of superprofits method, given that the value of net assets of the business is Rs.8,20,000.
Goodwill = superprofit × 100/ Normal rate of return Super profit = Actual/Average profit – Normal profit Normal profit = Capital employed × Normal rate of return = 820000 × 10/100 = 82000
Super profit = 100000 – 82000 = 18000
Goodwill = 18000 × 100/10 = Rs. 180000.

Question 3.
Ram and Rahim are partners in a firm sharing profits in the ratio of 3:2. Their capitals were Rs.80000 and Rs.50000 respectively. They admitted Syam on January 1st 2014 as a new partner for 1/5 share in the future profits. Syam bought Rs.60,000 as his capital. Calculate the value of goodwill of the firm.
Syam’s capital = 60000
Syam’s share of capital = 1/5
Total capital of new firm = 60000 × 5/1 = 300000
Total capital of Ram, Rahim & Syam
= 80000 + 50000 + 60000 = 190000
Goodwill of the firm = 300000 – 190000 = 110000
Syam’s share of goodwill = 110000 × 1/5 = Rs.22,000.

Question 4.
L and M are partners sharing profits in the ratio of 5: 4. On 1st July 2005 they admit N into the firm for 1/10 share in future profits. N contributed the following assets for his capital and share of goodwill. Stock-in-trade Rs. 50,000, Furniture Rs. 25,000 and Land and Buildings Rs. 75,000 and machinery Rs. 50,000. Goodwill of the firm was valued at Rs. 45,000. Give the journal entries.
Journal

Question 5.
P and Q are partners sharing profits and losses in the ratio of 3:2. They admit R into the firm with 2/5 share which he gets equally from P & Q. Calculate the new ratio and sacrificing ratio.
Old ratio = 3 : 2 = 3/5 : 2/5
R’s share = 2/5 ie. (1/5 from P 1/5 from Q)

Here the sacrificing ratio is equal (1: 1) as R gets equally from P&Q.

Question 6.
Which are the matters on which accounting adjustments are required at the time of the admission of a new partner?
At the time of the admission of a new partner, accounting adjustments are required on the following

1. Capital of the new partner
2. Ascertainment of profit sharing ratios – new and sacrificing
3. Revaluation of assets and liabilities
4. Adjustment of accumulated profits (including reserves) or losses.
5. Calculation of goodwill
6. Adjustment of capital accounts of partners.

Question 7.
Explain the premium method of treatment of goodwill.
Under premium method, the new partner brings his share of goodwill in cash. The amount so brought in by him is shared among the old partners in the sacrificing ratio.
The journal entries here are:

1. Cash a/c Dr.
To premium for goodwill a/c (cash brought in by the new partner for goodwill)
2. Premium for good will a/c
To old partners capital a/c (Goodwill shared among the old partners)

“If the amount of premium is paid privately to the old partners, no need of entering the same in the books.”

Question 8.
A new partner instead of bringing his share of good¬will in cash brought the same as assets. How will you treat it?
When an incoming partner brings his share of goodwill in kind (as assets), the assets account will be debited. Credit is given to premium for good will account with the share of goodwill and new partner’s capital account with the share of capital.
The journal entries here are:

1. Assets a/c Dr. To New partner’s Capital A/c
To Premium (goodwill) A/c (Assets brought in by the new Partner)
2. New partners’ capital a/c Dr. To Sacrificing partners Capital A/c
(Share of goodwill brought in by the new partner transferred to old partners capital).

Question 9.
A and B are partners sharing profits and losses equally (1:1). They admit C for 1/6 share in future profits. Calculate the new ratio and sacrificing ratio.
Old Ratio = 1:1 C’s
Share = 1/6
Remaining portion = 1 – 1/6 = 5/6
This 5/6 is to share among A & B in their old ratio.
So their new shares will be
A’s share 1/2 of 5/6 = 1/2 × 5/6 = 5/12
B’s share 1/2 of 5/6 = 1/2 × 5/6 = 5/12
The new ratio between

Old ratio and sacrificing ratio are the same here.

Question 10.
Roshi and Riya are partners sharing profits and losses in the ratio of 5 : 3. Maria is admitted into the firm. Roshi sacrifices 1 /5 of her share and Riya sacrifices 1/6 in favour of Maria. Calculate the new ratio.
Old ratio = 5:3

Question 11.
Ansa and Valsa are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Sona into the partnership fora sixth share for which she brings in Rs. 35000 as capital and Rs. 20,000 for good will. Pass journal entries in the books of the firm.
Journal

Note: Old ratio itself is the sacrificing ratio here as the ratio between old partners is not changed.

Question 12.
X and Y are partners sharing profits and losses equally. They admit Z for a third share for which he brings Rs. 15,000 for good will. X and Y withdrew the full amount of goodwill immediately. Pass journal entries in the books of the firm.
Journal

Question 13.
P and Q are partners sharing profits and losses in the ratio of 2:1. They admit R for a third share. He brings in Rs. 30,000 for goodwill, half of which is withdrawn by the old partners. Pass journal entries.
Journal

Question 14.
X and Y are partners sharing profits in the ratio of 4:3. Z is admitted for 1/6 share in profits. Their capitals were Rs. 50,000 and 40,000 respectively. It is also agreed that Z’s capital should be proportionate to her profit sharing ratio. Find out the amount to be brought in by Z as capital.
Share of Profit of Z = $$\frac{1}{6}$$
Share of profit of X and Y = 1 – $$\frac{1}{6}$$ = $$\frac{5}{6}$$
Total capital of X & Y= 50,000+ 40,000 = 90,000
Capital of X and Y for 5/6 share = 90,000
∴ Total capital of X,
Y and Z = 90,000×6/5 = 1,08,000
∴ Capital to be brought in by Z = 1,08,000 – 90,000
or 1,08,000 × 1/6 = 18,000.

Question 15.
A trading firm has in its ledger book, an accumulated profit balance of Rs. 30,000 in general reserve. The partners Smitha, Neha, and Anila who share profits in the ratio of 3:2:1. They have decided to become equal partners. Show journal entry to adjust the existing general reserve through capital accounts.
Old ratio = 3:2:1 = 3/6 : 2/6: 1/6
New ratio = 1:1:1 = 1/3:1/3:1/3

Share of general reserve = 30,000 × $$\frac{1}{6}$$ = 5000
Anila’s capital A/c Dr. 5000
To Smitha’s capital 5000
(Being goodwill adjusted between capital a/cs of Smitha and Anila, Neha’s profit sharing ratio remains
unchanged (Neha’s old ratio = $$\frac{2}{6}$$ – $$\frac{1}{3}$$, New ratio = $$\frac{1}{3}$$).

Question 16.
The Profits of firm for the last five years were as follows

 Year Profits 2002-03 20,000 2003-04 24,000 2004-05 30,000 2005-06 25,000 2006-07 18,000

Calculate the value of goodwill on the basis of 3 year’s Purchase of weighted average profit based on weights 1, 2, 3, 4, & 5 respectively to the profits for 2002, 2003, 2004, 2005 and 2006.

Weighted Average Profit = $$\frac{3,48,000}{15}$$ = 23,200
Goodwill = 23,200 × 3 = 69,600

### Plus Two Accountancy Reconstitution of a Partnership Firm – Admission of Partner Five Mark Questions and Answers

Question 1.
List the factors affecting goodwill.
Following are the important factors affecting the goodwill of a firm

1. Nature of business -A firm producing goods having constant demand will have more goodwill.
2. Suitable location – A firm which is situated in a favourable locality will have more goodwill.
3. Efficiency of management – if the management of a firm is efficient, it wil have high goodwill.
4. Running period – a firm which is running for a long period of time, will have more goodwill.
5. Requirement of capital – if a firm requires a lesser amount of capital, it will have high goodwill.
6. Market situation – if competition in the market is limited, it helps a firm to have more goodwill.

Question 2.
Describe the methods of valuing goodwill.
The following are the common methods used for valuing good will

1. Average profit method/simple average profit method.
2. Super profit method
3. capitalisation method.

1. Average Profit method:
Under this method, the goodwill is valued at agreed number of years purchase of the average profits of the past few years.
Goodwill = Average profits × No. of years purchased.
Average profit = $$\frac{\text { Total profits }}{\text { No. of years }}$$
Weighted Average Profit method:
Goodwill = weighted Average Profit × No. of years purchase. Weighted average is based on specified weights like 1, 2, 3, 4 for respective year’s profit.

2. Superprofit Method:
Under this method, goodwill is calculated by multiplying the super profit with the agreed num-ber of years.
Goodwill = Super Profit × No.of years purchase
Super Profit = Actual or Average Profit – Normal Profit
Normal profit = Capital employed × Normal Rate of Return
Capital employed = Total Assets – Total Liabilities or outside liabilities
Average profit = $$\frac{\text { Total profits }}{\text { No. of years }}$$.

3. Capitalisation Method:
Under this method, the goodwill can be calcu-lated in two ways

• by capitalising the average profits.
• by capitalising the super profits.

(i) Capitalisation of average profits
Under this method, the value of goodwill is calculated by deducting the capital employed (net assets) in the business from the capitalized value of average profits on the basis of normal rate of return.
Good will = capitalised value – capital employed (net asset)
Capitalised value of average profit
Average Profit × $$\frac{100}{\text { Normal Rate of Return }}$$

(ii) Capitalisation of Super Profits
Under this method the goodwill can be ascer tained by capitalising the super profit directly.
Goodwill = Super Profits × $$\frac{100}{\text { Normal Rate of Return }}$$.

Question 3.
The following are the particulars in respect of two partnership firms.

Manu wishes to join in any one of the above firm which can make better profit. He seeks your advice as to which firm is more worth while and reputed.
Capital Exployed = Assets – Liabilities = (10,000 + 15,000 + 20,000 + 20,000) – 5,000 = 60,000
Normal profit = Capital employed × Normal rate of return
60,000 × 10/100 = 6,000
Actual profit = 5,500
Super profit = Actual profit – Normal Profit
= 5,500 – 6,000 = -500
Firm Y
Capital Employed= (2,000 + 8,000 + 10,000 + 20,000) – 5,000 = 35,000
Normal profit = 35.000 × 10/100 = 3,500
Actual profit = 4,000
Superprofit = 4,000 – 3,500 = 500
Conclusion: Firm ‘Y’ earns Rs. 4,000 which is above normal profit.
Firm Y’s performance is better. So select Firm Y’.

Question 4.
How the capital accounts of the partners are adjusted at the time of admission of a new partner?
At the time of admission of a new partner the capital accounts of the partners may be adjusted in the following ways.
1. Asking the new partner to bring in the capital on the basis of the existing partner’s capitals. Here new partners’ capital is calculated as follows.

• Totalling the capitals of the existing partners left after making all adjustments.
• Totalling the new profit sharing rights of the old partners.
• Total capital as per (a) is treated as the capital for the total rights as per (b)
• On the basis of the above, calculating the amount of capital to be brought in by the new partner.

2. Adjusting the capital of the old partners on the basis of the capital brought in by the new partner. This is done as follows.

• Comparing the capital of the incoming partner with the capitals of old partners.
• Asking the partner to bring in the required amount whose capital is less.
• Allowing the partner to withdraw the surplus amount whose capital is more.

Question 5.
A and B are partners sharing profits in the ratio of 3:2. On 1st April 2005 they admit C into the firm. C brought in Rs. 1,00,000 for his capital but he was not in a position to bring his share of goodwill. The goodwill of the firm was valued at Rs. 1,50,000. Goodwill existing in the books of the firm is Rs. 2,75,000. The new profit sharing ratio is 2: 1: 1. Pass the journal entries.
Working Note:
Sacrificing Ratio = Old Ratio – New ratio

C’s share of goodwill = 1,50,000 × 1/4 = 37,500 This Rs. 37,500 is to be debited to the new partner’s capital account and credited to old partners’ capital as C (new partner) cannot bring in the same.
Journal

Question 6.
R & S are partners sharing profits and losses in the ratio of 3:2. They admitted T into the firm. They have agreed to share the future profits – equally. T brought in Rs. 45,000 as his capital and Rs. 40,000 for his share of goodwill. The goodwill of the firm as in the books is Rs. 12,500. Write the journal entries.
Notes
Sacrificing Ratio = Old ratio – New ratio
Old ratio = 3:2
New ratio = 1:1:1

Journal

Question 7.
Terry and C.L. Stephen are in partnership engaged in software development on accounting packages to various companies.
Ledger balances as shown by the books of accounts are:

 Capital: Terry 3,00,000 C.L. Stephen 2,50,000 Plant and Machinery 2,00,000 Office Fixtures 1,00,000 Current Assets 1,50,000 General Reserve 80,000 Bank loan 1,60,000 Stock in trade 40,00,000 Land and Building 3,00,000
• They have decided to admit Francis who is the son of Mr. Terry on the following terms.
• Fixed Assets valued 10% more than the book value.
• Interest payable on Bank loan Rs 16,000
• Office Fixtures was taken over by C.L. Stephen.

The new partner’s capital A/c is to be credited with half of Mr. Terry’s capital A/c before making any adjustments. Prepare capital accounts of the partners.
Revaluation A/c

Capital Accounts

Note: The new partners capital A/c is to be credited with half of Mr. Terry’s capital a/c before making Adjustment.
Journal entry is:

Question 8.
A and B are partners sharing profit & losses in the ratio of 3:2. They admit C as a partner who is unable to bring goodwill in cash, but pays Rs. 16,000 as his capital. A Goodwill Account is raised in the books of the firm. Goodwill of the firm is valued at two year’s purchase of average three year’s profits. The profits for the three years were Rs. 10,000, Rs. 8,000 and Rs. 9,000. The net profit sharing ratio will be 5:2:2. The partners decided to write off goodwill after C’s admission. Make the Journal Entries, write up the Capital A/c. of partners & Goodwill calculation.
Journal

Capital A/c

Calculation of Goodwill
Average profit = $$\frac{10,000+8,000+9,000}{3}$$ = 9,ooo
Goodwill = Average profit × No. of years purchase
= 9,000 × 2 = 18,000
C’s share of Goodwill = 18,000 × 2/9 = 4,000
Sacrificing ratio = Old ratio – New ratio
Old ratio = 3:2
New ratio = 5:2:2
Sacrifice of A = 3/5 – 5/9 = 27 – 25 / 45 = 2/45
Sacrifice of B = 2/5 – 2/9 = 18 – 10 / 45 = 8/45
Sacrificing ratio of A and B = 2 : 8 = 1 : 4

Question 9.
You are given the following information on a reconstitution of a firm.
Partners capital

• Ammu – Rs. 20,000
• Beena – Rs. 30,000
• Ceema – Rs. 20,000
• Old profit sharing ratio – 2:3:1
• New Ratio – 1:2:3
• Revaluation profit – 22,500
1. State the reason for reconstitution.
2. Give a journal entry to adjust the revaluation profit through capital accounts of partners.

Reconstitution refers to a change in the nature of relationship among partners due to

1. Change in profit sharing ratio
3. Retirement
4. Death or Amalgamation of two partnership firms.

In the firm of Ammu, Beena and Ceema reconstitution of firm takes place because they decided to change their profit sharing ratio:
Old ratio = 2:3:1 = 2/6 : 3/6: 1/6
New ratio = 1:2:3 = 1/6 : 2/6: 3/6
Ammu’s sacrifice = old ratio – new ratio
= 2/6 – 1/6 = 1/6
Beena’s sacrifice = old ratio-new ratio
= 3/6 – 2/6 = 1/6
Ceema’s gain = new ratio-old ratio = 3/6 – 1/6 = 2/6
Ammu’s revaluation profit = 22,500 × $$\frac{1}{6}$$ = 3750
Beena’s revaluation profit = 22,500 × $$\frac{1}{6}$$ = 3750
Ceema’s revaluation profit = 22,500 × $$\frac{1}{6}$$ = 7500.

Question 10.
Ann and Gopu were doing sole proprietorship business of same nature. Both are close friends. On 1st April 2005, they have decided to start a partnership business and have brought their existing assets into the new firm. They share profits in the ratio of 3:2. Details of existing assets and liabilities.

On 31st December, 2006, they have changed their profit sharing ratio and become equal partners. The assets were then revalued as follows:

• Building is up by 10%
• Plant is down by 10%
• Furniture is up by 10%
• Stock is valued at 1,50,000
• Goodwill valued at Rs. 10,000
1. Give journal entries at to bring capital into the records on 01.04.2005.
2. Prepare :
• Revaluation A/c
• Capital A/c
3. New Balance Sheet

Revaluation A/c

Capital A/c

New B/S

Question 11.
Haridas and Sudheer Raj are partners in a firm sharing profits in the ratio 3:2. On 1.04.2004, they admit Ramdas into the firm for a 5th share in profits. Ramdas contributed the following in respect of his capital and goodwill.

 Stock Rs. 10,000 Furniture Rs. 20,000 Plant Rs. 30,000 Building Rs. 40,000

Goodwill has been valued at 2 years purchase of super profit of past 3 years.

 1.4.2002 profit Rs. 18,000 1.4.2003 profit Rs. 25,000 1.4.2004 profit Rs. 32,000

Capital employed is Rs. 2,00,000 and normal rate of return is 10%.
Give journal entries in respect of:

1. Capital contributed by Ramdas.
2. Goodwill brought in by him.

Super profit = (Actual profit) Average profit – Normal profit
Average profit =

Normal Profit = Capital employed × Normal rate of
return =200000 × $$\frac{10}{100}$$ = 20000
Super Profit = 25000 – 20000 = 5000
Value of Goodwill = Super profit × No. of years purchase = 5000 × 2 = 10000
Ramdas’s (New Partner) Share of goodwill = Total goodwill of firm × Ramdas’ share
= 10000 × $$\frac{1}{5}$$ = 2000 5

### Plus Two Accountancy Reconstitution of a Partnership Firm – Admission of Partner Eight Mark Questions and Answers

Question 1.
Jo and Sony are partners sharing profits and losses in the raito of 2: 1. Their Balance Sheet as on 31st December 2004 was as follows.
Balance Sheet As on 31st December 2004

Ebo is admitted into the partnership on the Balance Sheet date on the basis of the following.

1. Ebo will bring Rs. 50,000 as his capital.
2. Stock in trade should be decreased by Rs. 5,000
3. Plant and Machinery should be increased to Rs. 35,000 and Land and Building should be appreciated by 10%.
4. Bills payable and creditors be decreased by 5% and 10% respectively.

Record necessary journal entries, prepare revaluation account and partner’s capital account and also prepare the Balance sheet after Ebo’s admission.
Journal

Revaluation A/c

Partner’s Capital A/c

Balance Sheet as on 1st January 2005

Question 2.
Sunu and Jinu are partners in a firm sharing profits and losses equally. The following is their Balance Sheet as on 31.12.2005.

On the balance sheet date Tinu is admitted into the partnership on the following terms.

1. Tinu should bring in Rs. 60,000 as his capital
2. Furniture should be revalued at Rs. 50,000 and machinery at 25% less.
3. Bank overdraft should be decreased to Rs. 75,000
4. A provision of 10% is to be made for bad debts.
5. An unrecorded liability of Rs. 5,000 on rent is to be recorded.

Give journal entries, prepare revaluation account, capital accounts of partners and the Balance Sheet after Tinu’s admission.
Journal

Revaluation A/c

Partner’s capital A/c

Balance Sheet as on 1st January 2006

Question 3.
The following is the Balance sheet of L & M as on 30th June 2005.

L & M were sharing profits and losses in the ratio of 2:1. N is admitted into the firm for a fourth share. The following are the conditions agreed upon.

1. Provision for bad and doubtful debts be increased to Rs. 2,500
2. Land and Buildings was to be depreciated by Rs. 10,000
3. The firm had an unrecorded machinery of Rs. 10,000 which is to be recorded.
4. N is asked to bring Rs. 50,000 as his capital and Rs. 15,000 for good will.
5. L & M had to withdraw half of the goodwill brought in by N.

Record journal entries, prepare Profit Loss adjustment account, capital accounts, and the New Balance Sheet
Journal

Profit & Loss Adjustment (Revaluation) a/c

Partner’s Capital A/c

Balance Sheet as on 1st July 2005

Question 4.
Edwin and Abel are partners sharing profits and losses in the ratio of 4:3. Their Balance sheet as on 30th June 2005 is as follows.

Jerin is admitted into the firm with 2/7th share. The following are the terms and conditions.

1. Jerin should bring in Rs. 40,000 as his capital and share of goodwill. The value of the goodwill of the firm is fixed at Rs. 35,000.
2. The amount of furniture and fittings should be written down by Rs. 5,000.
3. The full amount of goodwill should be withdrawn by old partners.
4. Creditors should be reduced by Rs. 2,000.
5. The new profit sharing ratio should be 3: 2:2.

Prepare necessary accounts and the Balance Sheet after the admission of Jerin.
Working notes :
1. Jerin’sshare of goodwill = Goodwill of the firm × 2/7
= 35,000 × 2/7 = 10,000

2. Sacrificing ratio = Old share – New share
Edwin’s sacrifice = 4/7 – 3/7 = 1 / 7
Abel’s sacrifice = 3/7 – 2/7 = 1 / 7
Ratio = 1/7 : 1/7 ie. = 1 :1
Revaluation A/c

Partner’s capital a/c

Balance Sheet as on 1s July 2005

Question 5.
Ram and Gopal are partners in a firm sharing profit and loss in the ratio of 3:1 respectively. The following is their Balance Sheet as on 31 /12/2008.
Balance Sheet

They admit Menon into partnership on 1-1-2009 on the following terms.

1. Menon should bring Rs. 10,000 as his capital for 1/5th share and 18,000 as her share of good will.
2. Liability for workmen compensation estimated at Rs. 1500.
3. Value of land and building be appreciated by Rs. 5000.
4. Stock reduced by 5%
5. A provision of 5% should be made for doubtful debts in debtors.

Prepare revaluation a/c, capital account of partners and the Balance sheet of new firm.
Revaluation A/c

Capital A/c

Balance Sheet

Working Note:
Menon’s share of goodwill = 18,000 Sacrificing ratio = 3:1
Goodwill credited in Ram = 18,000 × 3/4 = 13,500 Gopal = 18,000 × 1/4 = 4,500.

Question 6.
The following is the Balance Sheet of A and B as on 31st Dec. 2004.

A & B share profits and losses in the ratio of 5 : 3. They admit C into the partnership for equal share. C brings in Rs. 50,000 as capital and Rs. 5,000 for his share of goodwill. Goodwill of the firm is valued at Rs. 30,000. The following conditions were agreed upon.

1. Land and buildings are appreciated by 20%.
2. Stock is decreased by Rs. 5,000/-
3. Creditors include Rs. 2,500/- not become payable.
4. Unexpired insurance or insurance paid in advance Rs. 2,500 is to be recorded.

Record journal entries, prepare ledger accounts and the new Balance Sheet.
Notes:
Calculation of sacrificing ratio
Sacrificing ratio = old ratio – new ratio

Journal

Revaluation A/c

Partner’s Capital A/c

Balance sheet as on 1st January 2005

Question 7.
P and Q are partners sharing profits and losses in the ratio of 4:3. Their balance sheet as on 30th June 2004 is as follows.

R is admitted into the firm on the basis of the follow-ing conditions.

1. Sundry debtors should be revalued at Rs. 1,00,000.
2. R should bring in Rs. 15000 as capital and Rs. 10000 as his share of goodwill. He will get 1/6 share in future profits.
3. The capital accounts of all partners should be adjusted on the basis of their profit sharing ratio by bringing in or paying off the cash as the case may be.

Prepare necessary ledger accounts and the new Balance sheet of the firm.
Working notes:
Calculation of new ratio:
Old Ratio between P & Q = 4 : 3
R’s share = 1/6
Remaining portion = 1 – 1/6 = 5/6
P’s new share = 4/7 of 5/6 = 4/7 × 5/6 = 20/42
Q’s new share = 3/7 of 5/6 = 3/7 × 5/6 = 15/42
R’s share = 1/6 = 7/42

Calculation of capital required:
R’s capital for
1/6 share in profits = 15,000
Total capital of the firm= 15,000 × 6/1 = 90,000
P’s capital = 90,000 × 20/42 = 42,857
Q’s capital = 90,000 × 15/42 = 32,143
Revaluation A/c

Partners capital a/c

Cash A/c

Balance sheet as on 1st July 2004

Question 8.
A and B are partners in a firm sharing profits and losses as 3/5 and 2/5.C, comes in for 1/5Th share of profit. He pays Rs. 8,000 as goodwill premium and 50% of the adjusted capitals of A and B. Balance Sheet of A and B on the date of Cs’ admission stand as follows:
Balance Sheet

Land and Buildings are to be valued at Rs. 40,000. Plant is to be depreciated by 10% and stock by Rs. 500.Sundry Debtors is worth Rs. 31,750. A liability of Rs. 1,750 for outstanding expenses has been omitted to be recorded in the books. A and B have a joint life policy of Rs. 15,000 not shown in the books, the premium for which has been charged to Profit & Loss Account. The surrender value of the policy on the date of admissions is Rs. 2,000, and is agreed to raise a life policy account in the books at this value. Give Journal Entries.
Journal

Revaluation A/c

Dr. Partner’s Capital A/c Cr.

Capital to be brought in by C = 50% of the adjusted capital of A and B.
i.e., = 50% of 57,500+ 40,000 = 50% of 97,500 = 48,750.

Question 9.
Below given the details related to a firm.

Can you analyse the adjustment on admission of a new partner and show the balance sheet after admission.
Revaluation A/c

Capital Accounts

Balance Sheet

Working Note
Goodwill Calculation: Here, Goodwill is calculated on the basis of super profit method.
Goodwill = Superprofit × No. years purchase
Superprofit = Actual or Average profit – Normal profit
Normal profit = Capital Employed × Normal rate of return
Capital employed = Asset – Liabilities
= (10,000 + 20,000 + 31,500 + 30,000+ 20,000) – 11,500
= 1,00,000
Normal profit = 1,00,000 × 10/100 = 10,000
Superprofit =40,000 – 10,000 = 30,000
Goodwill = 30,000 × 2 = 60,000
New partner’s share of Goodwill – 60,000 × 1/3
= 20,000
Sacrifacina ratio
Manu = 3/5 – 1/3 = 9 – 5/15 = 4/15
Raju = 2/5 – 1/3 = 6 – 5/15 = 1/15
Sacrificing ratio = 4:1
Manu = 3/5 – 1/3 = 9 – 5/15 = 4/15
Manu’s Sacrifice = 20,000 × 4/5 = 16,000
Raju’s Sacrifice = 20,000 × 1/5 = 4,000 [Hint: New ratio 1:1:1].

Question 10.
Observe the following table.

Furniture was sold at Rs. 2700 on the date of admission. You are required:

1. Revaluation A/c
2. Capital Accounts
3. Balance sheet of the new firm

Revaluation A/c

Capital A/c

Cash A/c

Balance Sheet

Question 11.
A and B are partners in a firm sharing profits in the ratio of 2:1 ‘C’ is admitted into the firm with 1/4 share in Profits. He will bring in Rs. 30,000 as capital and capital of A and B are to be adjusted in the profit sharing ratio. The balance sheet of A and B as on 31/03/2017 (before c’s admission) was as under.
Balance sheet of A and B as on 31/03/2017

The terms of agreement are as follows:

1. ‘C’ will bring in Rs. 12,000ashisshareofgoodwill.
2. Building was valued at Rs. 45,000 and Machinery at Rs. 23,000
3. A provision for bad debts is to be created @ 6% on debtors
4. The capital accounts of A and B are to be adjusted by opening current accounts.

Prepare necessary ledger accounts and new balance of the firm.
Revaluation A/c

Capital A/c

Balance Sheet

Working Note:
1. New Profit Sharing ratio C’s share of Profit = 1 /4

2. New capital of A and B on the basis of c’s capital
Total capital of the new firm = 30,000 × $$\frac{4}{1}$$ = 1,20,000
As new capital = 1,20,000 × $$\frac{2}{4}$$ = 60,000
The Existing capital of A = 63,680 Excess (A) = 3,680
B’s new capital = 1,20,000 × $$\frac{1}{4}$$ = 30,000
The existing capital of B = 38,840
Excess (B) – 8,840
The current accounts can be opened and the amount to be withdrawn by A and B will be transferred to their respective current accounts.