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A, B, C and D were partners in a firm sharing profits in the ratio of 4:3:2:1. On 1-1-2015 they admitted E as a new partner for 1:10 share in the profits. E brought Rs 10,000 for his share of goodwill premium which was correctly recorded in the books by the accountant. The accountant showed goodwill at Rs 1,00,000 in the books. Was the accountant correct in doing so? Give reason in support of your answer.
According to AS 26, good will can be shown in books of accounts only when it is purchased. Otherwise, it should be immediately distributed among the old partners in their sacrificing ratio. Hereby showing it in the books of accounts, accountant has violated the law and made wrong accounting entry and hence he cannot be supported.
Kumar, Gupta and Kavita were partners in a firm sharing profits and losses equally. The firm was engaged in the storage and distribution of canned juice and its godowns were located at three different places in the city. Each godown was being managed individually by Kumar, Gupta and Kavita. Because of increase in business activities at the godown managed by Gupta, he had devote more time. Gupta demanded that his share in the profits of the firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was agreed to be 1: 2: 1. For this purpose the goodwill of the firm was valued at two years purchase of the average profits of last five years. The profits of the last five years were as follows:
| Year | Profit (Rs) |
| I | 4,00,000 |
| II | 4,80,000 |
| III | 7,33,000 |
| IV | 33,000 |
| V | 2,20,000 |
You are required to:
(i) Calculate the goodwill of the firm.
(ii) Pass necessary Journal Entry for the treatment of goodwill on change in profit sharing ratio of Kumar, Gupta and Kavita,
Working Notes:
Calculation of Goodwill of the firm:
Average Profit = (4,00,000+4,80,000+7,33,000+2,20,000-33,000)/5 = 3,60,000
Good will on the basis of 2 years purchase = 3,60,000*2 = 7,20,000.
Calculation of Gaining Ratio
Old Ratio = 1: 1: 1
New Ratio = 1: 2: 1
Gaining Ratio = New Ratio – Old Ratio
Kumar’s: 1/4 – 1/3 = (3-4)/120=01/12 (sacrifice)
Gupta’s: 2/4-1/3 = (6-4)/12 = 2/12 (Gain)
Kavita’s = ¼ - 1/3 = (3-4)/12 = 1/12 (Sacrifice)
Amount of goodwill to be adjusted = 7,20,000*1/12 = 60,000.
On 1-4-2010 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.
Calculation of New Profit Sharing Ratio of Sahil, Charu and Tanu for the year 2012-13
Old Ratio of Sahil and Charu = 4:3
Tanu admitted for 1/5th share, acquired by her equally from Sahil and Charu
Calculation of sacrificing ratio:
Sahil = 1/5 * ½ = 1/10
Charu = 1/5 * ½ = 1/10
New Profit Share = Old Share – Sacrificing Share
Sahil: 4/7 – 1/10 = (40-7)/70 =33/70
Charu: 3/7 – 1/10 = (30-7)/70 = 23/70
And Tanu: 1/5 or 14/70
Therefore, New Profit Sharing Ratio of Sahil, Charu and Tanu = 33: 23: 14
Calculation of New Profit Sharing Ratio of Sahil, Charu, Tanu and Puneet
Old Ratio of Sahil, Charu and Tanu = 33: 23: 14
Puneet admitted for 1/7th share, acquired from Sahil and Charu in the ratio of 7: 3
Calculation of sacrificing ratio:
Sahil = 1/7 * 7/10 = 7/70
Charu = 1/7 * 3/10 = 3/70
New Profit Share = Old Share – Sacrificing Share
Sahil: 33/70 – 7/70 = 26/70
Charu: 23/70 – 3/70 = 20/70
Tanu: 14/70
Puneet = 1/7 or 10/70
Therefore, New Profit Sharing Ratio of Sahil, Charu, Tanu and Puneet = 26: 20: 14: 10
Charu and Harsha were partners in a firm sharing profits in the ratio of 3: 2. On 1-4-2014 their Balance Sheet was as follows:
On the above date Vaishali was admitted for 1/4th share in the profits of the firm on the following terms:
(a) Vaishali will bring Rs 20,000 for her capital and Rs 4,000 for her share of goodwill premium.
(b) All debtors were considered good.
(c) The market value of investments was Rs 15,000.
(d) There was a liability of Rs 6,000 for workmen compensation.
(e) Capital accounts of Charu and Harsha are to be adjusted on the basis of Vaishali's capital by opening current accounts.
Prepare Revaluation Account and Partners' Capital Accounts.
Working Notes:
Calculation of new profit sharing ratio:
Old profit sharing ratio = 3:2
Vaishali is admitted for 1/4th share.
Hence profit share available to old partners are 1-1/4=3/4
Charu’s new profit share= 3/5*3/4=9/20
Harsha’s new profit share = 2/5*3/4=6/20
Vaishali’s =1/4=5/20
Hence new profit sharing ratio= 9:6:5
Calculation of sacrificing ratio:
Old Ratio= 3:2
New ratio=9:6:5
Hence sacrificing ratio= old ratio – new ratio
Charu’s =3/5-9/20=3/20
Harsha’s =2/5-6/20=2/20
Sacrificing ratio= 3:2
Distribution of goodwill:
Goodwill brought in =Rs 4,000
Charu’s share =4,000*3/5=2,400 Rs
Harsha’s share = 4000*2/5=1600 Rs
Adjustment of Capital:
Total capital of the firm = Capitalising Vaishali’s capital
=20,000*4/1 = Rs 80,000
New profit sharing Ratio = 9:6:5
Charu’s new capital =80000*9/20=36,000 Rs
Harsha’s new capital = 80,000*6/20= 24,000 Rs
Vaishali’s new capital = 20,000 Rs
What is meant by 'Reconstitution of a Partnership Firm'?
In a partnership firm, any change in the existing agreement between the partners amounts to its reconstitution. It leads to the end of the existing agreement and a new agreement comes into being with a changed relationship among the members of the partnership firm.
X, Y and Z are partners sharing profits in the ratio of 1/2, 2/5, 1/10. Find the new ratio of remaining partners if Z retires.
Old profit sharing ratio =1/2, 2/5, 1/10 =5:4:1 (by taking 10 as LCM)
As Z retires, the new profit sharing ratio will be 5: 4.
Saloni and Shrishti were partners in a firm sharing profits in the ratio of 7:3. Their capitals were Rs 2,00,000 and Rs 1,50,000 respectively. They admitted Aditi on 1st April, 2013 as a new partner for 1/6 share in future profits. Aditi brought Rs 1,00,000 as her capital. Calculate the value of goodwill of the firm and record necessary journal entries for the above transaction on Aditi's admission.
Aditi is admitted for 1/6th share of profit, for capital amounting to Rs 100000.
Capitalized value of firm on the basis of Aditi’s capital = 100000*6/1=600000.
Actual capital = 200000+150000+100000=450000.
Value of goodwill = 600000-450000= 150000.
Aditi’s share in goodwill = 1/6th of 1,50,000 = Rs 25,000
The journal entries are as follows:
Mohan and Mahesh were partners in a firm sharing profits in the ratio of 3:2. On 1st April, 2012 they admitted Nusrat as a partner in the firm. The Balance Sheet of Mohan and Mahesh on that date was as under:
It was agreed that:
(i) The value of Building and Stock be appreciated to Rs 3,80,000 and Rs 1,60,000 respectively.
(ii) The liabilities of workmen's compensation fund was determined at Rs 2,30,000.
(iii) Nusrat brought in her share of goodwill Rs 1,00,000 in cash.
(iv) Nusrat was to bring further cash as would make her capital equal to 20% of the combined capital of Mohan and Mahesh after above revaluation and adjustments are carried out.
(v) The future profit sharing ratio will be Mohan 2 / 5, Mahesh 2/5, Nusrat 1/5.
Prepare Revaluation Account, Partner's Capital Accounts and Balance Sheet of the new firm. Also show clearly the calculation of Capital brought by Nusrat.
Working Notes:
Capital Adjustment
Nusrat’s Capital = (Mohan’s capital + Mahesh’s capital) x 20/100
= (3,92,000 + 2,08,000) x 20/100
= 6,00,000 x 20 /100 = 1,20,000
Cash in Hand = 1,40,000+1,20,000+1,00,000 = 3,60,000
Kushal Kumar and Kavita were partners in a firm sharing profits in the ratio of 3:1:1. On 1st April, 2012 their Balance Sheet was as follows:
On the above date Kavita retired and the following was agreed:
(i) Goodwill of the firm was valued at Rs 40,000.
(ii) Land was to be appreciated by 30% and building was to be depreciated by Rs 1,00,000.
(iii) Value of furniture was to be reduced by Rs 20,000.
(iv) Bad debts reserve is to be increased to Rs 15,000.
(v) 10% of the amount payable to Kavita was paid in cash and the balance was transferred to her Loan Account.
(vi) Capitals of Kushal and Kumar will be in proportion to their new profit sharing ratio. The surplus/deficit, if any in their Capital Accounts will be adjusted through Current Accounts.
Prepare Revaluation Account, Partner's Capital Accounts and Balance Sheet of Kushal and Kumar after Kavita's retirement.
Working Notes:
Capital of Kushal before adjustment = Rs 3,63,000
Capital of Kumar before adjustment = Rs 3,01,000
Total capital = Rs 6,64,000
Kushal’s adjusted capital= ¾ * Rs 6,64,000 = Rs 4,98,000
Kumar’s adjusted capital= ¼ * Rs 6,64,000 = Rs 1,66,000
State the ratio in which the partners share profits or losses on revaluation of assets and liabilities, when there is a change in profit sharing ratio amongst existing partners?
The profit and loss on revaluation of assets and liabilities will be shared in the old profit and loss ratio by the partners.
Mona, Nisha and Priyanka are partners in a firm. They contributed Rs. 50,000 each as capital three years ago. At that time Priyanka agreed to look after the business as Mona and Nisha were busy. The profits for the past three years were Rs. 15,000, Rs. 25,000 and Rs. 50,000 respectively. While going through the books of accounts Mona noticed that the profit had been distributed in the ratio of 1 : 1 : 2. When the enquired from Priyanka about this, Priyanka answered that since she looked after the business she should get more profit. Mona disagreed and it was decided to distribute profit equally retrospectively for the last three years.
(a) You are required to make necessary corrections in the books of accounts of Mona, Nisha and Priyanka by passing an adjustment entry.
(b) Identify the value which was not practiced by Priyanka while distributing profits.
b) The following are the values which was not practiced by Priyanka.
1. Honesty, truthfulness and loyalty towards her co-partners
2. Mutual trust and understanding.
Abhay and Beena are partners in a firm. They admit Chetan as a partner with 1/4th shares in the profits of the firm. Chetan brings Rs. 2,00,000 as his share of capital. The value of the total assets of the firm is Rs. 5,40,000 and outside liabilities are valued at Rs. 1,00,000 on that date. Give the necessary entry to record goodwill at the time of Chetan's admission. Also show your working notes.
Working Note:
Calculation of Value of hidden goodwill:
Capital brought by Chetan for 1/4th share = 200000
Capitalised value of share capital= 200000*4/1=800000
Combined Share capital of Abhay and Beena = Total assets – outsider’s liability
= 5,40,000-1,00,000= 4,40,000
Actual share capital = 4,40,000 + 200000 = 6,40,000
Hidden Good will= Capitalised value of share capital – actual share capital =
8,00,000- 6,40,000 = 1,40,000
Chetan’s share of goodwill = 1,40,000* 1 / 4 = Rs 40,000.
Naresh, David and Aslam are partners sharing profits in the ratio of 5:3:7. On April 1st, 2012, Naresh gave a notice to retire from the firm. David and Aslam decided to share future profits in the ratio of 2:3. The adjusted capital accounts of David and Aslam show a balance of Rs. 33,000 and Rs. 70,500 respectively. The total amount to be paid to Naresh is Rs. 90,500. This amount is to be paid by David and Aslam in such a way that their capitals become proportionate to their new profit sharing ratio. Pass necessary journal entries for the above transactions in the books of the firm. Show your working clearly.
Working Notes
David’s Capital = 33,000
Aslam’s Capital = 70,500
Naresh to be paid = 90,500
Total Capital of new firm = 1, 94,000
David’s New Capital = 1,94,000 x 2/5 = 77,600
Aslam’s New Capital=` 1,94,000 x 3/5 = 1,16,400
Sahaj and Nimish are partners in a firm. They share profits and losses in the ratio of 2:1. Since both of them are especially abled, sometimes they find it difficult to run the business on their own. Gauri, a common friend decides to help them. Therefore, they admitted her into partnership for a 1/3rd share. She brought her share of goodwill in cash and proportionate capital. At the time of Gauri’s admission, the Balance sheet of Sahaj and Nimish was as under:
It was decided to:
(a) Reduce the value of stock by Rs 5,000.
(b) Depreciate furniture by 10% and appreciate machinery by 5%.
(c) Rs 3,000 of the debtors proved bad. A provision of 5% was to be created on Sundry Debtors for doubtful debts.
(d) Goodwill of the firm was valued at Rs 45,000.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the reconstituted firm. Identify the value being conveyed in the question.
Working Notes:
1) Calculation of Gauri’s Share of Goodwill
Value of Firm’s Goodwill = 45,000
Gauri’s share of goodwill = 45000* 1 / 3 = 15,000
2) Calculation of new profit sharing ratio:
Old Ratio = 2:1
Gauri is admitted for 1/3rd share
Sahaj’s new profit share = 2 / 3 * 2 / 3 = 4 / 9
Nimish’s new profit share = 2 / 3 * 1 / 3 = 2 / 9
Gauri’s profit share = 1 / 3 = 3 / 9
New ratio =4:2:3
3) Calculation of Gauri’s Capital:
Sahaj’s Capital = 142433
Nimish’s Capital = 91217
Capital for 2/3 Share = 233650
Total Capital= 233650 x 3/2
Gauri’s Capital = 233650 x 3/2 x 1/3 = 116825
The following are the values involved
a. Valuing friendship and helping friends
b. Sympathy and sensitivity towards differently abled individuals.
State any two occasions on which a firm can be reconstituted.
A firm can be reconstituted on
1) Retirement or
2) Death of a partner.
State the two main rights that a newly admitted partner acquires in the firm.
The two main rights a newly admitted partner acquires in a firm are:
i. Right to share the assets of the partnership firm; and
ii. Right to share the profits of the partnership firm
How does the market situation affect the value of goodwill of a firm?
The monopoly condition of a market and limited competition helps a firm to earn huge profit which will ultimately lead to higher value of goodwill.
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A and B are partners in a firm sharing profits and losses in the ratio of 3:2. The following was the Balance Sheet of the firm as on 31-3-2010.
|
Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Capital A
B |
60,000
20,000 |
Sundry Assets |
80,000 |
|
|
80,000 |
|
80,000 |
The profits Rs. 30,000 for the year ended 31-3-2010 were divided between the partners without allowing interest on capital @ 12% p.a. and salary to A @ Rs. 1,000 per month. During the year A withdrew Rs. 10,000 and B Rs. 20,000. Pass the necessary adjustment journal entry and show your working clearly.
|
Date |
Particulars |
LF |
Debit (Rs) |
Credit (Rs) |
|
|
B’s capital a/c Dr
To a’s capital a/c
(being interest on capital and salary unpaid adjusted.)
|
|
5280 |
5280 |
Working Notes
Calculation of opening Capital
|
PARTICULARS |
A |
B |
|
Capital closing balance Less profit
Add drawings
Capital opening balance
|
60,000 18,000
|
20,000 12,000
|
|
42,000 10,000 |
8,000 20,000 |
|
|
52,000 |
28,000 |
Calculation of Net amount to be adjusted:
|
Particulars |
Partner A’s a/c |
Partner B’s a/c |
Firm a/c |
|||
|
Dr |
Cr |
Dr |
Cr |
Dr |
Cr |
|
|
Interest on capital |
|
6,240 |
|
3,360 |
9,600 |
|
|
Salary to A |
|
12,000 |
|
|
12,000 |
|
|
|
12,960 |
|
8,640 |
|
|
21,600 |
|
Total |
12,960 |
18,240 |
8,640 |
3,360 |
21,600 |
21,600 |
|
Net amount to be adjusted |
|
5280(Cr) |
5280(Dr) |
|
|
|
A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of Goodwill by (i) Capitalisation of super profit method and (ii) Super profit method if the goodwill is valued at 3 years purchase of super profit. The assets of the business were Rs. 10,00,000 and its external liabilities Rs. 1,80,000.
(i) Calculation of good will by capitalisation of super profit method:
* Average profit earned by the firm = Rs 1,00,000
|
* Capital employed = Asset – Liabilities |
= 10,00,000 – 1,80,000= 8,20,000
|
* Normal profit = capital employed* normal rate of return |
= 8,20,000* 10% = 82,000
|
* Super Profit = Average profit earned – Normal profit |
= 1,00,000- 82,000 = 18000
|
* Good will = Capitalisation of super profit = Super profit * 100/ Normal rate of return |
=18000*100/10 =Rs 1,80,000/-
(ii) Calculation of good will by super profit method:
Average profit earned by the firm = 1,00,000
Normal profit earned = capital employed * normal rate of return
Capital employed = asset – liabilities = 8,20,000
Normal profit = 820000* 10/100 =82,000
Super profit = average profit – normal profit
= 1,00,000 – 82,000 = 18,000
Goodwill valued at 3 years purchase of super profit = 18000* 3 = Rs 54000/-
On 31-3-2010 the Balance Sheet of W and R who shared profits in 3:2 ratio was as follows:
|
Liabilities |
Amount( Rs) |
Assets |
Amount ( Rs) |
|
Creditors Profit and Loss Account Capital account W 40,000 R 30,000
|
20,000 15,000
70,000 |
Cash Sundry Debtors 20,000 Less:Provision 700
Stock Plant and Machinery Patent |
5,000
35,000 20,700 |
|
|
1,05,000 |
|
1,05,000 |
On this date B was admitted as a partner on the following conditions:
(a) 'B' will get 4/15th share of profits.
(b) 'B' had to bring Rs. 30,000 as his capital to which amount other Partners capitals shall have to be adjusted.
(c) He would pay cash for his share of goodwill which would be based on 2½ years purchase of average profits of past 4 years.
(d) The assets would be revalued as under:
Sundry debtors at book value less 5% provision for bad debts. Stock at Rs. 20,000, Plant and Machinery at Rs. 40,000.
(e) The profits of the firm for the years 2007, 2008 and 2009 were Rs. 20,000; Rs. 14,000 and Rs. 17,000 respectively.
Prepare Revaluation Account, Partner's Capital Accounts and the Balance Sheet of the new firm.
Revaluation Account
|
Particulars |
Rs |
Particulars |
Rs |
||||||||||||||||||||||||
|
To Provision for bad debts a/c To Stock a/c |
300 5000 |
By Plant and machinery a/c By loss transferred to W’s capital a/c 180 R’s capital a/c 120 |
5000
300 |
||||||||||||||||||||||||
|
5300 |
5300 |
||||||||||||||||||||||||||
|
Partner’s Capital a/c
|
|||||||||||||||||||||||||||
Balance Sheet of W, R & B as on 31st Mar 2010
|
Liabilities |
Rs |
Assets |
Rs |
|
Creditors
Capital Accounts W 49500 R 33000 B 30000 |
20000
112500
|
Cash
Sundry Debtors 20000
Less Provision for Bad Debts 1000
Stock
Plant & Machinery
Patents
|
32800
19000
20000
40000
20700 |
|
|
132500 |
|
132500 |
Working Note:
1. Average Profit = Total profit / No. of Years = Rs.66,000 / 4 = 16,500.
2. Calculation of Good Will = Average Profit x No. Of Year of Purchase = 16500 x 2 ½ = Rs. 41,250.
3. B’s Share in Goodwill = 41250 x 4 /15 = Rs. 11,000
4. New Profit Share is calculated as under:
Let Total Profit = 1
B’ share = 4 / 15th share
Remaining Profit = 1 – 4/15 = 11 / 15
W’s Share = 11 / 15 x 3 / 5 = 33 / 75
R’s Share = 11 / 15 x 2 / 5 = 22 / 75
New Ratio of W :R :B = 33/75 : 22/75 : 4/15 or 33:22:20
5. Adjustment of Capital
For 4 / 15 share, B Brought Capital = Rs. 30,000
Therefore Total Capital of the firm = Rs. 30,000 x 15 / 4 = 1,12,500
W’s Capital = 1,12,500 x 33 / 75 = Rs. 49,500
R’s Capital = 1,12,500 x 22 / 75 = Rs. 33,000
B’s Capital = 1,12,500 x 20 / 75 = Rs. 30,000
State any three circumstances other than (i) admission of a new partner; (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may arise.
Valuation of goodwill also arises in the following cases:
(i) When the partnership firm is sold to some other concern on going concern basis.
(ii) When two firms amalgamate that is merger or acquisition of two businesses.
(iii) When the existing partners in the firm jointly agree to change the profit sharing ratio between them.
Ashok, Bhim and Chetan were partners in a firm sharing profits in the ratio of 3:2:1. Their Balance Sheet as on 31-3-2015 was as follows:
Ashok, Bhim and Chetan decided to share the future profits equally, w.e.f. April 1, 2015. For this it was agreed that:
(i) Goodwill of the firm be valued at 3,00,000.
(ii) Land be revalued at 1,60,000 and building be depreciated by 6%.
(iii) Creditors of 12,000 were not likely to be claimed and hence be written off.
Prepare Revaluation Account Partner's Capital Accounts and Balance Sheet of the reconstituted firm
A, B and C were partners in a firm sharing profit in the ratio of 3:2:1. On 31-3-2015 their Balance sheet was as follows:
On the above date D was admitted as a new partner and it was decided that
(i) The new profit sharing ratio between A, B, C and D will be 2:1:1:1.
(ii) Goodwill of the firm was valued at ₹ 90,000 and D brought his share of goodwill premium in cash.
(iii) The Market value of investments was ₹24,000.
(iv) Machinery will be reduced to ₹29,000.
(v) A Creditor of ₹ 3,000 was not likely to claim the amount and hence to be written off.
(vi) D will bring proportionate capital so as to give him 1/6th share in the profits of the firm. Prepare Revaluations Account, Partner’s Capital Accounts and Balance Sheet of the reconstitute firm
Durga and Naresh were partners in a firm. They wanted to admit five more members in the firm. List any two categories of individuals other than minors who cannot be admitted by them.
The following persons other than Minor, cannot be admitted to a Partnership
(a) Persons disqualified by any law
(b) Persons of Unsound mind
A and B were partners in a firm sharing profits and losses in the ratio of 5:3. They admitted C as a new partner. The new profit sharing ratio between A, B and C was 3 : 2 : 3. A surrendered 
th of his share in favour of C. Calculate B's sacrifice.
B's Sacrifice = Old Share - New Share
B's Sacrifice = 
B's Sacrifice = 
Madhu and Neha were partners in a firm sharing profits and losses in the ratio of 3: 5. Their fixed capitals were ₹4,00,000 and ₹6,00,000 respectively. On 1.1.2016, Tina was admitted as a new partner for 
share in the profits. Tina acquired her share of profit from Neha. Tina brought ₹ 4,00,000 as her capital which was to be kept fixed like the capitals of Madhu and Neha. Calculate the goodwill of the firm on Tina's admission and the new profit sharing ratio of Madhu, Neha and Tina. Also, pass necessary journal entry for the treatment of goodwill on Tina's admission considering that Tina did not bring her share of goodwill premium in cash.
Suresh, Ramesh, Mahesh and Ganesh were partners in a firm sharing profits in the ratio of 2:2:3:3. On 1.4.2016 their Balance Sheet was as follows:
From the above date the partners decided to share the future profits equally. For this purpose the goodwill of the firm was valued at ₹ 90,000.
It was also agreed that:
(i) Claim against Workmen Compensation Reserve will be estimated at ₹ 1,00,000 and fixed assets will be depreciated by 10%.
(ii) The capitals of the partners will be adjusted according to the new profit sharing ratio. For this, necessary cash will be brought or paid by the partners as the case may be.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.
C and D are partner in a firm sharing profits in the ratio of 4:1. On 31.3.2016 their Balance Sheet was as follows:
On the above date, E was admitted 1/4 th share in the profits of the following terms:
(i) E will bring 1,00,000 as his capital and 20,000 for his share of goodwill premium half of which will be withdrawn by C and D.
(ii) Debtors 2,000 will be written off as bad debts and a provision of 4% will be created on debtors for bad debts and doubtful debts.
(iii) Stock will be reduced by ₹2,000, furniture will be depreciated by ₹4,000 and 10% depreciation will be charged on plant and machinery.
(iv) Investments of 7,000 not shown in the Balance Sheet will be taken into account.
(v) There was an outstanding repairs bill of ₹ 2,300 which will be recorded in the books.
Pass necessary Journal entries for the above transactions in the books of the firm on E's admission.
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