Partnership Accounts Admission of a New Partner
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1 Partnership Accounts Admission of a New Partner CPT Section A Fundamentals of Accountancy Chapter 8 Unit 3 Prof. Deepak Jaggi
2 Learning Objectives (1) Understand the reasons for which revaluation or assets and liabilities is done. (2) Logic of treatment of Reserves and Debit Balances in case of admission of partner. (3) Techniques of arriving at the various Ratio s. (4) Understand the Goodwill adjustment. (5) To Lay a solid foundation of accounting treatment in case of admission of partner.
3 Partnership Accounts (Admission of a Partner) When 2 or more Partners are already doing business & they admit 1 more partner into their running business it is a case of Admission of a Partner Cont.
4 Example Partners already doing business- A and B = Old Partners Partner Admitted Now C = Incoming Partner All the three partners together A, B & C = New Partners
5 Conti.. Reasons for Admission of Partner Additional capital required Specialized skill of the incoming partner Expansion of Business Avoiding competition
6 Profit Sharing Ratios Types of Profits Sharing Ratios Old Ratio Old Partners A & B New Ratio New Partners A,B& C Sacrifice Ratio - Old Partners A & B Contd
7 Old Ratio Types of Profits Sharing Ratios Given Otherwise Equal Among Old Partners Contd
8 New Ratio Types of Profits Sharing Ratios Given Otherwise Apply Formulae 1 Share of Incoming Partner = Balance Left Balance Left x Old Ratio = New Ratio of Old Partners Contd
9 Sacrifice Ratio Types of Profits Sharing Ratios Old Ratio If Old and New Ratio of Old Partners is same Otherwise Apply the Formulae Sacrifice given = Old Ratio New Ratio Contd
10 Example of Ratios - Question Deepika and Ranbir Old Partners - Ratio 3:2, Aditya Admitted for ¼ share D R A 3/5 2/5 x OR =3:2 9/20 6/20 5/20 NR=9:6:5 SR=3:2 Working: 1-1/4 = ¾ D = ¾ x 3/5 = 9/20 R = ¾ x 2/5 = 6/20 A = ¼ x 5/5 = 5/20
11 Revaluation of Various Assets and Liabilities: Value Again Convert Book Values into Agreed Values
12 Revaluation Account Revaluation Account is a Nominal Account Changes in the values of Assets and Liabilities. Conti
13 Revaluation Account or Profit & Loss Adjustment A/c Revaluation Profit / Loss is distributed among old partners in their old ratios. Conti..
14 Revaluation Account Hint for Problem Solving When Assets Increase and Liabilities Decrease = Good Thing = Revaluation A/c Credit When Assets Decrease and Liabilities Increase = Bad Thing = Revaluation A/c Debit. Conti..
15 Revaluation Account Example - Entries (1) For asset increase (Good) Asset A/c. Dr. To Revaluation A/c (2) For Liability decrease (Good) Liability A/c.. Dr. To Revaluation A/c (3) For Asset decrease (Bad) Revaluation A/c Dr. To Asset A/c (4) For liability increase (Bad) Revaluation A/c. Dr. To Liability A/c Conti..
16 GOODWILL It is the money value of reputation of business When the name, fame, reputation etc. expressed in terms of money. Conti..
17 Factors Affecting Goodwill Valuation Operating Profits Number of years in Business (Experience) Location Type of Business/Product People Doing the Business (Partners etc.)
18 Treatment of Goodwill - Conti.. Goodwill Case -I When incoming partner brings cash for his share of goodwill (Incoming partner pays premium in cash for goodwill) Cash/Bank A/c. Dr. To Old partner s Capital A/c CO(SAC) If l amount is withdrawn by old partners partly or fully Old partner s capital A/c. Dr. To Cash / Bank A/c OC(SAC)
19 Treatment of Goodwill - Conti Goodwill Case -II Goodwill is Raised and Written Off (ie. Goodwill amount not brought in cash) Goodwill A/c Dr. To Old Partner s Capital A/c (old ratio) GO(Old) New Partners Capital A/c. Dr. To Goodwill A/c (New Ratio) NG(New) Conti..
20 Treatment of Goodwill Conti.. Net Entry for the Goodwill Raised and Written Off ie. Goodwill directly adjusted through the Partner s Capital a/c Incoming Partner s Capital A/c.. Dr. To Old Partner s Capital A/c (Sacrifice Ratio ) IO (SAC)
21 When New Partner Pays Premium For Goodwill Privately / Secretly No Entry
22 Reserves Accumulated Profits Reserves are undistributed profits belonging to the partners. Contd
23 Reserves cont.. Examples of Reserves Profit & Loss A/c (Accumulated Profit) General Reserve / Contingency Reserve. Reserve fund Workmen compensation fund Capital Reserve, etc. Contd
24 Journal Entry: Reserve A/c. Dr. To Old partner s capital A/cs (in old ratio)
25 Deferred losses Deferred losses (Accumulated losses) To be borned by old Partners Examples of Deferred Losses Profit & Loss a/c (Asset Side) Deferred Advertising, etc. Contd
26 Entry for Deferred Losses Old partner s Capital A/c. Dr. To Deferred Losses A/c
27 Capital Adjustment 4 NEW S 1) New Partner 2) New Capital 3) New Firm 4) New Ratio Contd
28 Capital Adjustment Contd.. Capitals of New Partners Adjusted in New Ratio 1) Capital A/c Debit Side 2) Balance Sheet - Liability Side Contd
29 Capital Adjustment Contd.. Total Capital of the new Firm = Capital of Incoming Partner / His Share Example :- Incoming Partner s Capital is 100,000 and his share is ¼, then Total Capital = 1,00,000 / ¼ = 1,00,000 x 4 = 4,00,000 Contd
30 Capital Adjustment Contd.. Total Capital 4,00,000 Distributed among New Partners Distributed among New Partners In New Ratio
31 Accounting Treatment 1) Balance Sheet of Old Firm Information Given 2) Adjustments To be Prepared 1) Revaluation Account 2) Partner s Capital / Current A/c 3) Cash / Bank A/c 4) Balance Sheet of New Firm
32 Steps to Solve the Question 1 R Find out 3 Ratios 2 T Transfer all the old Balance Items in one of the things prepared 3 A Solve the Adjustments
33 Practical Problem Q.1. Ranbir Kapor and Imran khan are partners in a firm sharing profit & losses in the ratio of 3:2 respectively. Their Balance Sheet as on 31st December 2000 was as under: Liabilities? Assets? Sundry Creditors Ranbir Kapoor s Capital Imran Khan s Capital General reserve 7,000 Cash at Bank 8,000 32,000 Sundry debtors 14,000 Land & Building 25,000 22,000 Stock 10,000 12,000 Plant & 12,000 Machinery Furniture & 4000 Fixture 73,000 73,000
34 Problem no.1 Conti.. On 1 st January 2001, they are to admit Arjun in the partnership. The terms being that: He shall pay 10,000 as his share of goodwill, 50% amount of goodwill shall be withdrawn by the old partners. He shall bring 12,000 as his capital for 1/4th share in future profit. For the purpose of Arjun s admission, it was agreed that assets be revalued as follows: 1. Land & Building is to be valued at 30, Plant & Machinery to be valued at 10, Stock valued at 12,000 and Furniture &Fixtures at 2, Provision at 5% to be made for doubtful debts on debtors. Prepare: Profit & Loss Adjustment A/c, Partners Capital A/cs & Balance Sheet of the new firm.
35 Solution Profit and Loss Adjustment Account Particulars Amount Amount Particulars Amount Amount To Plant & Machinery To Furniture & Fixtures A/c To R.D.D. A/c 2,000 2, By Land and Building A/c By Stock A/c 5,000 2,000 To Partners Capital A/c. Ranbir Kapoor (3/5) 1,380 Imran Khan (2/5) 920 2,300 7,000 7,000 Contd..
36 Solution Conti.. Partner s Capital A/c Particulars Ranbir Imran Arjun Particulars Ranbir Imran Arjun To Cash / Bank (GW) A/c 3,000 2,000 By Balance b/d 32,000 22,000 - By Cash / Bank (GW) 6, By Bank A/c To Balance c/d (Bal. Fig.) ,720 12,000 By General Reserve A/c By Profit and Loss Adj. A/c , ,720 12,000 46,580 31,720 12,000
37 Solution Conti.. Bank Account Particulars Amount Particulars Amount To Balance b/d 8,000 By Ranbir s Cap A/c 3,000 To Ranbir s Cap A/c 6,000 By Imran s Cap A/c 2,000 To Imran s Cap A/c 4,000 To Arjun s Cap A/c 12,000 By Balance c/d (Bal. 25,000 Fig) 30,000 30,000 Contd..
38 Solution Conti.. Liabilities Amt. Amt. Assets Amt. Amt. Partner s Capital Land and Building 30,000 Ranbir Kapoor 43,580 Plant and Machinery 10,000 Imran Khan 29,720 Stock 12,000 Arjun 12,000 85,300 Furniture & Fixtures 2,000 Creditors 7,000 Debtors 14,000 Less: ,300 Cash/Bank 25,000 92,300 92,300 Old PSR = SR in the question as, New PSR is not given directly or indirectly. It is recommended to always find out the ratios separately
39 MCQ s
40 MCQ:1 Q.1. Profit or loss on revaluation is shared among the partners in ratio. a) Old Profit b) New Profit Sharing c) Capital d) Equal A) Old Profit
41 MCQ.2 Q.2. X, Y and Z are equal partners in a firm with capital of 16,800, 12,600 and 6,000 respectively. With bills payable 3,300, creditors 6,000, cash 600, debtors 10,800, stocks 11,400, furniture 2,400 and building 19,500 R is admitted to the firm and brings 9,000 as goodwill and 15,000 as capital. Half the goodwill is withdrawn by old partners, and stock and furniture is depreciated by 10%. A provision of 5% on debtors is created and value of building is taken at 27,000. The profit on revaluation will be: (a) 5,500 (b) 5,580 b) 5580 (c) 5,400 (d) 5,680
42 MCQ.3 Q.3. X and Y are partners sharing profits and losses in the ratio of 3:2(X s Capital is 30,000 and Y s Capital is 15,000). They admitted Z agreed to give 1/5 th share of profits to him. How much Z should bring in towards his capital? a) 9,000 b) 12,000 c) 14,500 d) 11,250 Ans. d) 11,250
43 MCQ.4 Q.4. X and Y are partners sharing the profit in the ratio of 3:2. They take Z as the new partner, who is supposed to bring 25,000 against capital and 10,000 against goodwill. New profit sharing ratio is 1:1:1. Z is able to bring only his share of capital. How this will be treated in the books of the firm. a) X and Y will share goodwill bought by Z as 4,000 : 1,000 b) Goodwill will be raised to 30,000 in old profit sharing ratio c) Both d) None Ans. b) Goodwill will be raised to 30,000 in old profit sharing ratio.
44 MCQ.5 Q.5. X and Y are partners sharing the profit in the ratio of 3:2. They take Z as the new partner, who is supposed to bring 25,000 against capital and 10,000 against goodwill. New profit sharing ratio is 1:1:1. Z bought cash for his share of capital and agreed to compensate to X and Y outside the firm. How this will be treated in the books of the firm. a) Cash bought by Z will only be credited to his capital account. b) Goodwill will be raised to full value in old ratio. c) Goodwill will be raised to full value in new ratio. d) Cash bought by Z will be credited to his account and debited to his share of goodwill, which will be debited to X and Y s account in sacrificing ratio. Ans. a) Cash bought by Z will only be credited to his capital account.
45 MCQ.6 Q.6. Karan and Arjun are partners of a partnership firm sharing profits in the ratio of 5:3 respectively. Rohit was admitted on the following terms: Rohit would pay 50,000 as capital and 16,000 as goodwill, for 1/5th share of profit. Machinery would be appreciated by 10% (book value 80,000) and building would be depreciated by 20% ( 2,00,000). Unrecorded debtors o 1,250 would be bought into books now and a creditors amounting to 2,750 died and need not to pay anything to its estate. Find the distribution of profit / loss on revaluation, Karan and Arjun. a) Loss 17,500 : 10,500: 0 b) Loss 14,000 : 8,400 : 5,600. c) Profits 17,500: 10,500: 0. d)profits -14,000 : 8,400 : 5,600 Ans. a) Loss 17,500 : 10,500: 0
46 MCQ.7 Q.7. X and Y are partners sharing profits and losses in the ratio 5:3. On admission, Z bring 70,000 cash and 48,000 against goodwill. New profit sharing ratio between X, Y and Z are 7: 5 : 4. The sacrificing ratio among X and Y will be a) 3 : 1 b) 4 : 7. c) 20,000 d) None of these Ans. a) 3 : 1
47 MCQ.8 Q.8. X and Y are partners with capital of 10,000 and 20,000 respectively and sharing profits equally. They admitted Z as their third partner with one-fourth profits of the firm on the payment of 12,000. The amount of hidden goodwill is: a) 6,000 b) 10,000. c) 8,000 d) None Ans. a) 6,000
48 MCQ.9 Q.9. Unless given otherwise, the ratio of sacrifice is the same as a) New profit sharing ratio b) Equal ratio. c) Old profit sharing ratio d) None of the above Ans. C) Old profit sharing ratio
49 MCQ.10 Q.10. A and B are shares profits and losses in the ratio of 2 : 1. They take C as a partner and the new profit sharing ratio becomes 3: 2: 1. C brings 4,500 as premium for goodwill. The full value of goodwill will be. a) 4,500 b) 18,000 c) 27,000 d) 24,000 Ans. C) 27,000
50 Lesson Summary Incoming Partner = 1 C Outsider becomes Insider Old Partners = 2 A & B New Partners = 3 A, B & C Capital Adjustment = 4 New s Total Capital = Capital of Incoming Partner / His Share Ratios = OR, NR, SR Goodwill = CO(SAC) or IO(SAC) Given - Balance Sheet & Adjustment Prepare Revaluation A/c Partner s Capital A/c Cash Bank A/c New Balance Sheet
51 Thank You
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