LORD JESUS PUBLIC SCHOOL ACCOUNTANCY ASSIGNMENT 2 ADMISSION OF A PARTNER

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1 LORD JESUS PUBLIC SCHOOL ACCOUNTANCY ASSIGNMENT 2 ADMISSION OF A PARTNER VALUATION OF GOODWILL Q1. Calculate Goodwill by average profit method if the profit for 2002 to 2005 are Rs.5,000; Rs. 8,000; Rs.4,000 and Rs.7,000 and the value of goodwill is at two years purchase. Q2. A and B are partners in a firm. The admit C into the firm. The goodwill for the purpose is to be calculated at 2 years purchase of the average normal profits of the last three years which were Rs.10,000; Rs.15,000 and Rs.30,000 respectively. Second years profit included profit on sale of machinery Rs.10,000. Find the value of goodwill of the firm on C s admission. Q3. Calculate Goodwill if : The goodwill of a firm is estimated at three years purchase of the average profit of the last five years which are as follows: Years: Profits(LosS) Rs.20,000 30,000 8,000 (10,000) 12,000 Q4. Ram and Shyam were partners from 1 st April They disclosed the profit for the last three years : Rs..2,800(Including an abnormal gain of Rs.800) Rs. 2,100(Including an abnormal loss of Rs.100) Rs. 3,000(Excluding Rs.600 as insurance premium of the firm.) Calculate the value of the firm s goodwill on the basis of 3 years purchase of the average profits for the last 3 years. (II) Super Profit Method Goodwill Super Profit Normal Profit = Super Profit * No. of Years Purchase = Average Actual Profit Normal Profit = Capital Employed * Normal rate of return 100 Q5. The average net profits expected in the future by the firm are Rs.46,000 per year. The average capital employed in the business by the firm is Rs. 3,00,000. The rate of return expected from capital invested in this class of business is 10%. The remuneration of the partners is estimated to be Rs. 8,000 per annum. Find out the value of goodwill on the basis of two years purchase of Super Profits.

2 Q6. The average net profit expected in the future by ABC firm are Rs. 86,000 per annum.the average capital employed in the business by the firm is Rs.5,00,000. The rate of interest expected from capital invested in this class of business is 10 %. The remuneration of the partners is estimated to be Rs. 6,000 per annum.find out the value of goodwill on the basis of two years purchase of Super Profits. Q7. A firm earned net profit during the last three years as follows: 1 st year 2 nd year 3 rd year 18,000 20,000 22,000 The capital investment of the firm is Rs.60,000. A fair return on the capital having regard to the risk involved is 10%. Calculate the value of goodwill on the basis of 3 years purchases. Q8. Dutta and Bose had a firm in which they had Invested Rs.50,000, On the average the profits were Rs. 16,000. The usual rate of earning in the industry is 15 %. Goodwill is to be valued at 4 years purchase of profits in excess of % on the money invested. Value the goodwill. Q9. A firm earned net profit during the last five years as follows : I Rs. 7,000; II Rs 6,500; III Rs. 6,00; IV Rs.7,500 and V Rs. 8,000 The capital investment of the firm is Rs.40,000. A fair return on capital in the market is 12%. Find out the value of goodwill of the business if it is based on three years purchase of average super profits of the past five years. Q10. On April 1 st 1998, an existing Firm had assets of Rs.75,000/ including cash of Rs.5,000/. The partner s capital accounts showed a balance of Rs.60,000/ and reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs. 24,000/ at 4 years purchase of super profits find the average profits of the firm. Q11. On 1 st April 1994, an existing Firm had assets of Rs. 75,000 including cash of Rs.5,000. It s creditors amounted to Rs.5,000 on that date. The firm had a Reserve Fund of Rs. 10,000 while partners capital accounts showed a balances of Rs.60,000. If the Normal Rate of return is 20%, and the goodwill of the firm is valued at Rs.24,000, at four years purchase of super profit, find the average profits per year, of the firm. Q12. A firm earns Rs. 3,00,000 as its annual profits, the rate of return being 12%. The assets of the firm amount to Rs. 36,00,000 and liabilities Rs. 12,00,000. Calculate the value of goodwill by capitalization method. Q13. A firm earns a profit of Rs.16,00,000 per year.in the same business at 10% return is generally expected. The total assets of the firm are Rs.1,70,000. The value of other liabilities is Rs.60,000. Find out the value of goodwill. Q14. A business has earned average profit Rs.10,000 during the last few years and the normal rate of return in a similar type of business is 10%. As certain the value of goodwill by capitalization method, given that the value of net assets of the business is Rs Q15. A firm has earned an average profit of Rs.55,000 during the last years and the normal rate of return in similar type of business is 10 %. Find out the goodwill by capitalization method

3 assuming that the firm owns total assets worth Rs.5,50,000 including there in a goodwill of Rs.50,000 and the firm has to pay Rs.1,00,000 to the outside liabilities. Q16. X, Y and Z are partners in the ratio of 3:2:1. W is admitted with 1/6 share in profit. Z would retain his original share. Find out new profit sharing ratio. Q17. X and Y are partners sharing profit and losses in the ratio of 3:2. Z is admitted for 1/4 th share. Thereafter W enters for 20paise in the rupee. Compute the profit sharing ratio of X,Y and Z and W. Q18. A and b are partners,sharing profits and losses in the ratio of 3:2. Goodwill appears in their balance sheet at Rs.24,000. When C is admitted into partnership for 1/5 th share in profit, he pays Rs.50,000 for capital and Rs.18,000 for goodwill. The ratio of the partners A,B and C in the new firm would be 2:2:1. It is decided that goodwill account will not appear in the books. Pass journal entries in the books of the new firm to Record above adjustment. Q19. B and C are partners sharing profits in the ratio of 3:2. Goodwill appears in the books at Rs.3,000. Disadmitted into partnership on payment Rs.20,000 fro Goodwill for 1/4 th share, B and C sharing profits between themselves in the same proportion as before: Calculate the Sacrificing Ratio. Record the transactions assuming Goodwill account will not appear in the books of B,C and D. Q20. A and B are partners in a firm sharing profit and losses in the ratio 3:2. C is admitted into partnership. He will bring in Rs.60,000 as capital fro 1/3 rd share in profit. The goodwill of the firm has been valued at Rs.18,000. Give journal entries under the following circumstances: Case (a) When there is no goodwill appearing in the books of the firm. Case (b) When the goodwill account appears at Rs.9,000 in the books of the firm. Case (c) When the goodwill account appears at Rs.21,600 in the books of the firm. Q21. X and Y are partners in a firm sharing profits and losses in the ratio of 5:3. On March 1, 2004 they admitted Z as a new partner. The new profit sharing ratio will be 4:3:2. Z brought in Rs.1,00,000 in cash as his share of capital but could not bring any amount for goodwill in cash The firm s goodwill on Z s admission was valued at Rs.1,80,000. At the time of Z s admission goodwill existed in the books of the firm at Rs.2,40,000 Pass the necessary journal entries in the books of the firm on firm on Z s admission.show your workings clearly. Q23. A and B are partners with capital of Rs.16,000 and Rs.12,000 respectively. They admit C as a partner with 1/4 th share in the profits of the firm. C brings Rs.16,000 as his share of capital. Give journal entries to record goodwill. Q24. A and B are partners sharing profits in the ratio of 3:2. They admit C into the firm for 3/7 th share in profit of which he takes 2/7 th from A and 1/7 th from B and brings Rs.1,000 as premium out of his share of Rs.1,800.goodwill account does not appears in the books of A and B. Give the journal entries.

4 Q25. A and B are partners sharing profits in the ratio of Rs.5:3. They admit C into the firm for 3/10 th share in Profit which he takes 2/10 th from A and 1/10 th from B. C brings Rs.3,00,000 as premium in cash out of his share of Rs.7,800. Goodwill account does not appear in the books of A and B. Give necessary journal entries in the books of new firm. Q.26. A and B are partners sharing profits in the ratio of 3:2. They admit C into the firm for 3/7thy profits (which he takes 2/7 th from A and 1/7 th from B ) and brings Rs.3,000 as premium out of his share of Rs.3,600. Goodwill account does not appear in the books of A and B. Draft the necessary journal entries. Q27. The following was the balance sheet of A and B who were sharing profits 2:1 on 1 st December 1980: Liabilities Rs. Assets Rs. Sundry Creditors 65,900 Building 50,000 General Reserve 30,000 Plant and Machinery 35,000 Capital s accounts Stock 20,000 A 30,000 Sundry Debtors 9,700 B 20,000 50,000 Cash in Hand 1,200 Bank 30,000 1,45,900 1,45,900 On this date C is admitted into the partnership on the following terms: (a) C was to bring Rs.15,000 as his capital and Rs.6,000 as goodwill for one fourth share in the firm. (b) That the value of the stock and plant and machinery was to be reduced by 5%. (c) That a Reserve was to be created in respect of sundry Debtors, Rs.750. (d) That the building Account was to be appreciated by 10%. (e) That Goodwill money was to be retained in the business. Prepare Profit and loss Adjustment Account (Revaluation Account), Partners Capital accounts, and The Balance sheet of the new firm. Q28. M and N are partners in a firm sharing profits and losses in the ratio of 5:3. On 31 st December 1985, their Balance sheet was as under : Liabilities Rs. Assets Rs. Sundry Creditors 4,000 Machinery 12,000 Bills payable 2,000 Stock 8,000

5 Capitals: M 12,000 N 10,000 22,000 28,000 Sundry Debtors Bank Balance Cash in hand 7, ,000 terms : On the above date the partners decide to admit R as a partner on the following (a) (b) (c) (d) (e) The new profit sharing ratio of M,N and R will be 7:5:4 respectively. R shall bring Rs.8,000 as his capital and Rs.4,000 for his share of goodwill. M and N will draw half of the goodwill in cash. Machinery is to be valued at Rs.15,000,Stock at Rs.10,000 and a provision for bad debts of Rs.1,000 is to be created. There is a liability of Rs.2,000, being the outstanding salary payable to employees of the firm. This liability is not included in the creditors. Partners decide to show this liability in the books of accounts of the new firm. Prepare Revaluation Account, Partners Capital accounts and Balance sheet of the M,N and R. Q29. A and B were partners sharing profits and losses equally. The balance sheet as on March 31,1999 was as follows: Liabilities Rs. Assets Rs. Creditors 50,000 Cash in hand 12,000 Bills Payable 15,000 Cash at Bank 15,000 Outstanding expenses General Reserve Capitals : 3,000 20,000 Debtors 20,000 Less : 500 Provision 19,500 20,000 A 50,000 Stock 10,000 B 30,000 Furniture 18,000 Machinery 73,500 1,68,000 Land & building 1,68,000

6 On that date, They agreed to admit C as a partner on the following terms: (a) C shall get 1/5 th share in profits and he will bring Rs.20,000 as Capital and Rs.5,000 as his share of goodwill. (b) Goodwill brought in by C shall be withdrawn by A and B. (c) Provision for doubtful debts should be brought up to 5% debtors. (d) Machinery be depreciated by Rs.1,000 and furniture by 12 ½ %. (e) Stock be revalued at Rs.23,000. (f) Land & Building be appreciated by 20% and (g) Investment of Rs.2, 000 which did not appear in books should be recorded. Prepare Revaluation A/c, Partners Capital A/c and Balance sheet. Q30. A and B are partners in a firm sharing profits in the ratio of 3:2. On 1 st Jan,1982 the position of the business was as follows: Liabilities Rs. Assets Rs. Capital Accounts Goodwill 5,000 A 30,000 Stock 19,000 B 25,000 Plant and Machinery 25,000 Sundry Creditors 10,000 Debtors 20,000 General reserve 5,000 Less : Provision for 1,000 19,000 Bad and doubtful debts Cash 2,000 70,000 70,000 C agree to join the business on the following conditions: (a) He will introduce Rs.20,000 as his capital and pay Rs.10,000 to the partners as premium for goodwill. The new profit sharing ratio is 2:1:1 for A,B and C respectively. (b) A revaluation of the assets of the firm will be made by reducing plant and machinery to Rs.22,000 stock is to be reduced by Rs.2,000 and create provision for bad and doubtful debts at 6% on debtors. You are asked to give necessary ledgers and give the new balance sheet Q31. A and B share profits in the proportion of 3/4 th and ¼. Their Balance sheet on December 31,1981 was as follows:

7 Liabilities Rs. Assets Rs. Sundry Creditors 41,500 Cash at Bank 26,500 Reserve Fund 4,000 Bills Receivable 3,000 Capitals: Debtors 16,000 A 30,000 Stock 20,000 B 16,000 Fixtures 1,000 Land and Buildings 25,000 91,500 91,500 On Jan,1,1982, C was admitted into partnership on the following terms: (a) That C pays Rs.10,000 as his capital for 1/5 th share. (b) That C pays Rs.5,000 for goodwill. Half of this sum is to be withdrawn by A and B. (c) That stock and fixtures be reduced by 10% and a 5% provision for doubtful debts be created on Sunday Debtors and Bills Receivable. (d) That the value of land and buildings be appreciated by 20%. (e) There being a claim against the firm for damages, a liability to the extent of Rs.1,000 should be created. (f) An item of Rs.650 included in sundry creditors is not likely to be claimed and hence should be written back. Record the above transactions(journal entries )in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new balances sheet on the admission of Mr. C. Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new balance sheet on the admission of Mr. C. Q32. B and C are partners in a firm, sharing profits and losses in the ratio of 5:3. They admit A into the firm on 1 st April 1991, When their balance sheet was as follows: Liabilities Rs. Assets Rs. B s Capital 32,000 Goodwill 8,000 C s Capital 34,000 Machinery 38,000 General Reserve 8,000 Furniture 5,000 Bank loan 6,000 Debtors 23,000 Creditors 6,000 Stock 7,000 Bank 5,000 86,000 86,000

8 Terms of A s admission were as follows : (a) (b) A will bring Rs.30,000 through cheque, as his share of capital and will be entitled to 1/3 rd share in the profits. A is not to bring goodwill in cash. Goodwill of firm valued on the basis of 2 years purchase of the average Profit of the last three years. (c) Average profits of the last three years are Rs.6,000. (d) Machinery and stock are revalued at Rs.45,000 and Rs.8,000 respectively. (e) Goodwill is not to be shown in the books of the firm. Prepare necessary ledgers and balance sheet. Q33. Deepika and Rajshree are partners in a firm sharing profits and losses in the ratio of 3:2. On 31 st December 1987, their balance sheet was as under : Liabilities Rs. Assets Rs. Sundry Debtors 16,000 Cash in hand 1,200 Public Deposits 61,000 Cash at bank 2,800 Bank overdraft 6,000 Stock 32,000 Outstanding liabilities 2,000 Prepaid Insurance 1,000 Capital Accounts : Sundry Debtors 28,800 Deepika 48,000 Less: Reserve for Rajshree 40,000 88,000 Doubtful debts ,000 Plant and Machinery 48,000 Land and Building 50,000 Furniture 10,000 1,73,000 1,73,000 On the above date, the partners decided to admit Anshu as a partner on the following terms : (a) The new profit sharing ratio of Deepika,Rajshree and Anshu will be 5:3:2 respectively. (b) Anshu shall bring Rs.32,000 as his capital. (c) Anshu is unable to bring in cash for his share of goodwill. They decide to calculate goodwill on the basis of Anshu s share in the profits and the capital contribution made by him to the firm. (d) Plant and machinery is to be valued at Rs.60,000. Stock at Rs.40,000 and the reserve for doubtful debts is to

9 Be maintained at Rs.4,000.Value of land and Building has appreciated by 20%. Furniture has depreciated by 10%. (e) There is an additional liability of Rs.8,000 being outstanding salary payable to employees of the firm. This Liability is not included in the outstanding liabilities, stated in the above balance sheet. Partners decide to show this liability in the books of accounts of the reconstituted new firm. Prepare Revaluation Account, Partners Capital Accounts and the balance sheet of Deepika,Rajshree and Anshu. Q34. The following was the balance sheet of A,B and C sharing profits and losses in the ratio of 6:5:3 respectively. Liabilities Rs. Assets Rs. Creditors 10,000 Land and building 24,000 Bills payable 4,000 Furniture 3,500 Capital Accounts : Stock 14,000 A 19,000 Debtors 12,600 B 16,000 Cash 2,900 C 8,000 57,000 57,000 They agreed to take D into partnership and give him a share of 1/8 th in the Profits on the following terms : (a) That D should bring in Rs.4,200 as goodwill and Rs.7,000 as his capital. (b) That furniture be depreciated by 12%. (c) That stock be depreciated by 10%. (d) That a provision of 5% be created for doubtful debts. (e) That the value of Land and building be brought up to Rs.31,000. (f) That after making the above adjustment the capital account of the old partners (who continue to share in the same proportion as before)be adjust on the basis of the proportion of D s Capital to his share in the business i.e. actual cash to be paid off to or brought in by the old partners as the case may be. Prepare the cash A/c,profit & loss adjustment A/c and the opening balance sheet of the new firm. Q35. A and B are partners in a firm sharing profits and losses in the ratio of 7:3. Their balance sheet as at 31 st march 1993 is as follows : Liabilities Rs. Assets Rs.

10 Sundry Creditors 40,000 Cash in hand 36,000 Bank Overdraft 20,000 Sundry debtors 46,000 Reserve 10,000 Less: Provision for 2,000 44,000 Capital Doubtful debt A 50,000 Furniture 30,000 B 40,000 90,000 Stock in Trade 50,000 1,60,000 1,60,000 On 1 st April 1993, C joins the firm as a third partner for 1/4 th share of the future profits on the following terms and conditions : (a) Goodwill is valued at Rs.40,000 and C is to bring the necessary amount in cash as premium for goodwill. (b) 20% of the reserve is to remain as a provision against bad and doubtful debts. (c) Stock in trade is to be reduced by 40% and furniture is to be reduced to 40%. (d) (e) A is to pay off the bank Overdraft. C is to introduce Rs.30,000 as his share of capital to which amount other partner s capital shall have to be adjusted. Show the necessary journal entries to carry out the above transaction and prepare balance sheet of the firm immediately after C has become a partner.

11 LORD JESUS PULIC SCHOOL VIJAY PARK, GURGAON NOTES ADMISSION OF A PARTNER Admission of a partner Meaning: When a new partner is admitted in a running business due to the requirement of more capital or may be to take advantage of the experience and competence of the newly admitted partner or any other reason, it is called admission of a partner in partnership firm. According to section 31(1) of Indian partnership Act,1932, A new partner can be admitted only with the consent of all the existing partners. At the time of admission of a new partner, following adjustments are required: 1. Calculation of new profit sharing ratio and sacrificing ratio. 2. Accounting treatment of Goodwill. 3. Accounting treatment of accumulated profit. 4. Accounting treatment of revaluation of assets and reassessment of liabilities. 5. Capital account (including new partner) 6. new balancesheet NEW PROFIT SHARING RATIO The ratio in which all the partners (including incoming partner) share the future profits and losses is known as the new profit sharing ratio. New profit sharing ratio = old ratio sacrificing ratio SACRIFICING RATIO The ratio in which old partners agree to sacrifice their share of profit in favour of the new partner is called the sacrificing ratio. Sacrificing ratio = old ratio new ratio # TREATMENT OF GOODWILL Accounting treatment of goodwill at the time of admission of a partner is classified in four parts: (1) When new partner pays amount of goodwill privately: In this case no entry will be passed in the books of the firm. (2) When new partner brings his share of goodwill in Cash. In this case the following entries are passed:

12 i. For amount of Capital + Goodwill brought in by new partner Cash / Bank/ Dr. To New Partner s Capital A/c (for amount of capital) To Premium A/c (for amount of goodwill) ii. For amount of goodwill brought in by new partner credited to Old Partner s Capital A/cs in their Sacrificing Ratio. Premium for goodwill A/c Dr. To Old Partner s Capital A/cs iii. When old partners withdraw the amount of goodwill. Old Partner s Capital A/c Dr. To Cash/Bank A/c Condition: When new partner brings his share of goodwill in cash, in this case no goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner s Capital A/cs To Goodwill A/c Dr. Example: A and B are partners sharing profit and losses in the ratio of 5:3. C is admitted as a new partner for 1/5 th share. C brings Rs. 15,000 as his Capital and necessary amount of his share of goodwill in cash. Total goodwill of the firm is Rs. 60,000. Goodwill already appears in the Balance Sheet of A and B is Rs. 20,000. Pass necessary journal entries. Solution: Journal S. No. Particulars L.F. Dr. Rs. Cr. Rs. (i) Cash A/c Dr. 27,000 To C s Capital A/c 15,000 To Premium for goodwill A/c 12,000 (For amount of Capital and Goodwill brought in by C) (ii) Premium for goodwill A/c Dr. 12,000 To A s Capital A/c 7,500

13 To B s Capital A/c 4,500 (For amount of goodwill brought in by C credited to A and B in their Sacrificing Ratio, which is 5:3) (iii) A s Capital A/c Dr. 12,500 B s Capital A/c Dr. 7,500 To Goodwill A/c 20,000 (For existing goodwill written off in Old Ratio) Workings: C s Share of Goodwill = 1/5 x Rs. 60,000 = Rs. 12,000 (3) when new partner bring goodwill in cash and withdrawn by the old partners In this case one more entry will pass i.e Old partners capital a/c Dr To cash/bank a/c (4) When new partner does not bring his share of goodwill in cash. In this case new partner s share of goodwill is charged to his current account and t/f to old partner s capital accounts in their sacrificing ratio. Entries for this will be: (i) For amount of capital brought in by new partner Cash / Bank Dr. To New Partner s Capital A/c (ii) For new partner s share of goodwill credited to old partner s capital accounts in their sacrificing ratio New Partner s Current A/c Dr. To Old Partner s Capital A/cs Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner s Capital A/cs Dr. To Goodwill A/c Example: A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5 th share. C brings Rs. 50,000 as his capital but he is not able to bring his share of Goodwill in cash. Total Goodwill of the firm is Rs. 60,000. Pass necessary journal entries when in the books of A and B: a. No Goodwill already appears.

14 b. Goodwill already appears at Rs. 24,000. Solution: Journal Date Particulars L.F. Debit Rs. Credit Rs. (a) Bank A/c Dr. 50,000 To C s Capital A/c 50,000 (For amount of capital brought in by C) C s Current A/c Dr. 12,000 To A s Capital A/c 7,500 To B s Capital A/c 4,500 (For C s share of goodwill credited to A s and B s Capital A/cs in their sacrificing ratio.) (b) Bank A/c Dr. 50,000 To C s Capital A/c 50,000 (For amount of capital brought in by C) C s Current A/c Dr. 12,000 To A s Capital A/c 7,500 To B s Capital A/c 4,500 (For C s share of goodwill credited to A s and B s Capital A/cs in their sacrificing ratio.) A s Capital A/c Dr. 15,000 B s Capital A/c Dr. 9,000 To Goodwill A/c 24,000

15 (For existing goodwill in the books written off in old ratio) (5) When new partner brings only a part of his share of goodwill in cash or kind. In this case amount brought in by new partner as his share of goodwill t/f to old partner s capital accounts in their sacrificing ratio and the amount that is not brought in by him is charged to his capital account and is also t/f to old partner s capital accounts in their sacrificing ratio. Entries will be in following manner: 1. For amount of Capital + Goodwill brought in by new partner Cash / Bank Dr. To New Partner s Capital A/c (Amount of Capital) To Premium for goodwill A/c (Amount of Goodwill brought in by new partner) Date Particulars L.F. Debit Rs. Credit Rs. Bank A/c Dr 57,200 To C s Capital A/c 50,000 To Premium A/c 7,200 (For amount of capital and goodwill brought in by C) Premium A/c Dr. 7,200 To A s Capital A/c 4,500 To B s Capital A/c 2,700 (For amount of goodwill brought in by credited to old partner s capital account in their sacrificing ratio) C s Current A/c Dr. 4,800 To A s Capital A/c 3,000

16 To B s Capital A/c 1,800 (For amount of goodwill not brought in by C charged to his capital A/c and credited to old partner in their sacrificing ratio) A s Capital A/c Dr. 2,250 B s Capital A/c Dr. 1,350 To Bank A/c 3,600 (For amount of goodwill withdrawn by old partners) A s Capital A/c Dr. 10,000 B s Capital A/c Dr. 6,000 To Goodwill A/c 16,000 (For existing goodwill in the books written off in old ratio) 2. For amount of goodwill brought in by new partner credited to old partner s capital accounts in their sacrificing ratio. Premium for goodwill A/c Dr. To Old Partner s Capital A/cs 3. For amount of goodwill not brought in by new partner charged to his capital account and credited to old partner s capital accounts in their sacrificing ratio. New Partner s current A/c Dr. To Old Partner s Capital A/cs Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner s Capital A/cs Dr. To Goodwill A/c Example: A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5 th share. C brings Rs. 50,000 as his capital and brings only 60% of his share of Goodwill in cash. Total Goodwill of the firm is Rs. 60,000. Pass necessary journal entries when A and B withdraw 50% of the amount

17 brought in by C as his share of goodwill in cash. Goodwill already appears in the books at Rs. 16,000. Solution: Journal Workings: C s Share of Goodwill = 1/5 x Rs. 60,000 = Rs. 12,000. But C brings only 60% of his share of goodwill in cash i.e. Rs. 12,000 x 60/100 = Rs. 7,200. C does not bring 40% of his share of goodwill in cash i.e. Rs. 12,000 x 40/100 = Rs. 4,800. Recommendation of Accounting Standard 10 (AS-10) Issued by The Institute of Chartered Accountants of India According to AS 10 goodwill should be recorded in the books only when some consideration in money or money s worth has been paid for it. Thus, in case of admission or retirement/death of a partner or in case of change in profit sharing ratio among partners, goodwill, following the accounting standard should not be raised in the books of the firm because no consideration in or money worth is paid for it. If any partner brings any premium over and above his capital should be distributed to other existing partners. If goodwill is evaluated at the time of change in the constitution of the firm (by way of admission/retirement/death/change in profit sharing ratio), goodwill should not be brought in books since it is inherent goodwill. If it is raised then it should be immediately written off. Hidden goodwill or inferred goodwill hidden goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners. The following steps will be taken for calculating hidden goodwill: Step 1 find out the total capital of the new firm on the basis of the capital brought in by the new partner for his share. Step 2 Ascertain the existing total capital of the new firm by adding the capital of all partners, including new partners capital after adjustments. Step 3 goodwill is assumed to be the excess of the total capital of the new firm on the basis of new partners capital over the existing total capital of all the partners. # ACCOUNTS 1. Revaluation and Memorandum Revaluation Account

18 Revaluation account is the amount which is prepared to record changes in the value of assets and liabilities at the time of admission of a partner, retirement, death and changes in profit sharing ratio. It is a nominal account in nature. It is also known as profit and loss adjustment accounts. REVALUATION ACCOUNT Decrease in Assets Increase in Liabilities Unrecorded Liabilities Outstanding Expenses Profit : A s Capital A/c B s Capital A/c Increase in Assets Decrease in Liabilities Unrecorded Assets Accrued Incomes Loss: A s Capital A/c B s Capital A/c Accounting treatment of reserves, accumulated profits/ losses The various journal entries to be passed are given below: 1) For the transfer of reserves and accumulated profits Reserve a/c dr Profit and loss a/c dr Workmen compensation reserve a/c dr Investment fluctuation reserve a/c dr To old partners capital account 2) For the transfer of accumulated losses Old partners capital accounts dr To profit and loss a/c To deferred revenue expenditure a/c # JOURNAL ENTRIES 1. For decrease in the value of an asset: Revaluation A/c Dr To Asset A/c 2. For increase in the value of an asset: Asset A/c Dr To Revaluation A/c 3. For unrecorded asset:

19 Asset A/c Dr To Revaluation A/c 4. For outstanding expense: Revaluation A/c Dr To Outstanding expense A/c 5. For accrued income or prepaid expense: Accrued income/prepaid expense A/c To Revaluation A/c Dr 6. For increase in some liability: Revaluation A/c To Liability A/c Dr 7. For decrease in some liability: Liability A/c Dr To Revaluation A/c 8. For some unrecorded liability: Revaluation A/c To Liability A/c Dr 9. For Profit: Revaluation A/c Dr To Old Partner s Capital A/c 10. For Loss: Old Partner s Capital A/c To Revaluation A/c Dr # ADJUSTMENT OF CAPITAL 1. Adjustment Of Capital On The Basis Of New Partner s Capital: Steps: a. Calculate total capital of the firm on the basis of C s Capital. Example- C is admitted for 1/6 th share and brings capital worth Rs.5,000. When share is 1/6 th then capital is 5,000 When share is 1 then capital is = 5,000 x 6/1= 30,000 Now total capital of the firm is 30,000 b. Find out Remaining Capital i.e. Total Capital New partner s capital.

20 c. Distribute Remaining Capital in old partners in old ratio. OR (Alternatively) Distribute total Capital in old partners in new ratio. d. This calculated capital would be your closing capital (Balance c/d). e. Now your Balancing Figure is termed as cash. It means excess capital is withdrawn or deficiency is to be brought in by the old partners. f. Transfer this balancing figure (cash) to the cash a/c. Balancing figure of Dr side in Capital a/c is transferred to the Cr side of the Cash a/c and vice versa. 2. Adjustment Of Capital On The Basis Of Old Partner s Capital. Steps: a. Prepare capital a/c of old partners to find out their closing Balance (i.e. Balance c/d). b. Calculate total capital of the firm on the basis of capital of A & B. Here, Total Capital of the firm = Combined Capital of A & B x Reciprocal of Remaining share. Remaining share = 1 C s Share. c. Now find out C s Capital (Total Capital x C s Share).