CHAPTER

24
2.0 3.0

Reconstitution of PartnershipAdmission Of a Partner

1.0 MEANING OF AN ADMISSION OF A PARTENER

Admission of a partner is one of the modes of reconstituting the firm under which old partnership comes to an end a new one between all partners (including incoming partner) comes into existence.
HOW CAN A PERSON BE ADMITTED AS A PARTNER?

According to the sec 31(1) of Indian partnership Act,1932, a person can be admitted as a new partner only with the consent of all the existing partners unless otherwise agreed upon.
TWO MAIN RIGHTS OF A NEW PARTNER

3.1

A new partner acquires two main rights in the firm--Right to share the assets of the firm To acquire this right,he usually brings in the agreed amount of capital.

Right to share the future profits of the firm To acquire this right,he usually brings his share of goodwill(also called premium) which is shared by the sacrificing partners who sacrifice a part of their share of profit incoming partner. favour of incoming partner. 4.0 ADJUSTMENTS REQUIRED AT THE TIME OF ADMISSION OF A NEW
3.2 PARTNER

4.1 4.2 4.3 4.4

Adjustment in Profit Sharing Ratio, Adjustment of Goodwill, Adjustment of Profit/Loss arising from the Revaluation of Assets and Liabilities,

Adjustment of Accumulated Profits ,Reserves and Losses,

4.5

Adjustment of Capitals(if agreed)

5.0 NEW PROFIT SHARING RATIO AND SACRIFICING RATIO

5.1

Why is new ratio determined even for old partners? When a new partner is admitted, he acquires his share in profits from the old partners. This reduces the old partners` shares in profits hence, profit sharing ratio for old partners have to be calculated Meaning of New Profit Sharing Ratio The ratio in which all partners(including incoming partner) share the future profits and losses is known as the new profit sharing ratio. The determination of new profit sharing ratio depends upon the ratio in which the incoming partner acquires his share from the old partners. An incoming partner may acquire his share: (a) from the old partners in their old profit sharing ratio; (b) from the old partners in some agreed ratio(other than old profit sharing ratio); (c) from one or more of old partners (but not from all partners).

5.2

Tutorial Note
Unless agreed otherwise ,it is presumed that the new partner acquires his share in profits from the old partners in their old profit sharing ratio and the old partners continue to share the remaining profit in the old ratio.

5.3

Meaning of Sacrificing Ratio The ratio in which the old partners have agreed to sacrifice their shares in profit in favour of a new partner is called the sacrificing ratio. This ratio is calculated by taking out the difference between old profit share and the new profit share.

Tutorial Note
Unless . agreed otherwise it is presumed that the old partners sacrifice in their old Profit sharing ratio
2

ILLUSTRATION 1 X and Y are partners sharing profits and losses in the ratio of7:5.They admit Z, a new partner, who acquires his share as 1/12 th from X and 1/8th from Y. Calculate the new profit sharing ratio and the sacrificing ratio. ILLUSTRATION 2 X and Y are partners in a firm sharing profits and losses in the ratio of 3:2.Z is admitted as partner with 1/4 share in profits. Z acquires his share from X and Y in the ratio of 2:1. Calculate the new profit sharing ratio. ILLUSTRATION 3 X and Y are partners in a firm sharing profits and losses in the ratio of 3:2.Z is admitted as partner with 1/5 share in the profits. Calculate the new profit sharing ratio and the sacrificing ratio. ILLUSTRATION 4 X and Y are partners sharing profits and losses in the ratio of 7:3.X surrenders 1/7th of his share and Y surrenders 1/3rd of his share in favour of Z, a new partner. Calculate the new profit sharing ratio and the sacrificing ratio. ILLUSTRATION 5 X and Y are partners sharing profits and losses in the ratio of 73.X surrenders 1/7th from his share and Y surrenders 1/3 rd of his share in favour of Z, a new partner. Calculate the new profit sharing ratio and the sacrificing ratio. ILLUSTRATION 6

X and Y are partners sharing profits and losses in the ratio of 4:3.Z Joins the firm as a new partner. The new profit sharing ratio of X,Y&Z is agreed at 7:4:3 respectively. Calculate the sacrificing ratio and the share of incoming partner. ILLUSTRATION 7 X and are partners in a firm sharing profits and losses in the ratio of 3:2.Z is admitted as partner with 1/8th share in profits. It is decided that X and Y will share profits and losses in future in the ratio of 4:3.Calculate the profit sharing ratio and the sacrificing ratio. ILLUSTRATION 8 X,Y and Z are partners in the ratio of 3:2:1. W is admitted with 1/6 share in profits. Z would retain his original share. Find out new profit sharing ratio. ILLUSTRATION 9 X AND Y are partners sharing profits and losses in the ratio of 3:2. Z is admitted for 1/4th share. Thereafter W enters for 20 paise in the rupee. Compute the profit sharing ratio of X,Y,Z and W after Ws admission. ILLUSTRATION 10 A and B are partners sharing profits in the ratio of 2:1.They admit C into partnership and the profit sharing ratio of the three partners is agreed at 2:2:1 respectively. Calculate the gain or sacrifice of the partners. ILLUSTRATION 11 A and B are partners sharing profits in the ratio of 3:2.They admit C for 1/5th share in the profit. C acquires 1/5th of his share from A. Calculate the new profit sharing ratio and sacrificing ratio.

ILLUSTRATION 12
4

A and B are partners sharing profits in the ratio of 3:2.They admit C, a new partner who acquires 1/5 th of his share from and 4/25 th share from B. Calculate the new profit sharing ratio and sacrificing ratio. ILLUSTRATION 13 X and Y share profits and losses in the ratio of 5:3.Z is admitted for 3/10 th share of profits half of which was gifted by X and the remaining share was taken by Z equally From X and Y. Calculate the new profit sharing ratio. ILLUSTRATION 14 X and Y sharing profits and losses in the ratio of 5:3.They admit Z and decide that the profit sharing ratio between Y and Z shall be the same as existing between X and Y. Calculate the new profit sharing ratio and the sacrificing ratio. 6.0 WHY IS ADJUSTMENT OF GOODWILL REQUIRED?
6.0

When the existing partners of a firm decide to admit a new partner, new partner will gain in future profits while other(s) will lose. The new partner who gains by acquiring a right to share future profits must compensate the partner or partners who has or have made the sacrifice. The amount of compensation should be equal to the proportionate amount of firms goodwill. For example, Z a new partner acquires his 1/5th share of profits from X, an existing partner and the present value of firms goodwill is Rs 50,000. In this case, Z is required to pay 1/5th of Rs 50,000, i.e.Rs.10,000 to X.

6.2

7.0 RECOMMENDATION OF ACCOUNTING STANDARD ISSUED BY ICAI

5

7.1

Goodwill should be recorded in the books only when some consideration in money or moneys worth has been paid for it. Therefore , only purchased good will should be recorded in the books. In case of admission /retirement/death of a partner or in case of change in profit Sharing ratio among partners , goodwill cannot be raised in the books of the firm because no consideration in money or moneys worth is paid for it. If any partner brings any premium over and above his capital contribution at the time of his admission, such premium should be distributed to other existing partners. Sometimes at the time of any change in the constitution of the firm (by way of admission/retirement/death/change in profit sharing ratio) goodwill of the firm is evaluated. In that situation, the value of the goodwill should not be brought to books since it is inherent goodwill. Rather the value of goodwill should be adjusted through partners capital accounts.

7.2

7.3

7.4

8.0 ACCOUNTING TREATMENT OF GOODWILL UNDER DIFFERENT SITUATIONS SITUATION-I : WHEN THE INCOMING PARTNER PAYS HIS SHARE OF FIRMS GOODWILL PRIVATELY When the incoming partner pays his share of goodwill privately to the sacrificing Partner(s) outside the business, no entry is passed in the books of the firm.

ILLUSTRATION 15
6

X and Y are partners in a firm sharing profits and losses in the ratio of 3:2.They admit Z as a partner for 1/5 th share. Z acquires his share from X and in the ratio of 2:3.The Goodwill of the firm has been valued at Rs 25,000. Z paid Rs 5,000privately to X and Y as his share of goodwill. What should be the journal entry in the books of the firm? SITUATION-II: WHEN THE INCOIMING PARTNER BRINGS IN HIS SHARE OF FIRMS GOODWILL IN CASH When the incoming partner brings in his share of firms goodwill in cash, the following simplified approach is suggested: Step1 write off the existing book value of goodwill (if any) appearing in the books of the firm by debiting the old partners Capital accounts(in case of fluctuating capitals) or Current accounts(in case of fixed capitals) in their old profit sharing ratio and crediting the Goodwill Account. Old partners Capitals/current A/cs Dr. To Goodwill A/c (Being the existing goodwill written off in old ratio) [in old Ratio]

Step2 Record the amount brought in by Incoming partner Cash A/c/Bank A/c Dr. [with capital& share of goodwill] (b) Incase ofpartners Fixed Capitals To incoming Capital A/c [ with capital] To premium/c [with share of goodwill] Premium A/c Dr. [with share of goodwill] (Being the amount brought in by incoming partner) To sacrificing partners Current A/cs [in sacrificing ratio] (Being the share of incoming partner in firms goodwill credited to Step3 Give credit for Incoming partners full share of goodwill to sacrificing partners in the sacrificing ratio] sacrificing partners by debiting premium Account and crediting Sacrificing partners in their sacrificing ratio. Step4 Record the withdrawal (if any) of amount of goodwill (brought in by incoming partner) by the sacrificing (a) In case of fluctuating capitals partner(s). Sacrificing partners extent of withdrawal] Premium A/c Capital/Current A/cs Dr. [To Dr.the [with share of goodwill] To cash A/c/Bank A/c To sacrificing partners capital A/cs [in sacrificing Ratio] [Being (Being the goodwill brought in by Incoming partner withdrawn by Sacrificing the share of incoming partner in firms goodwill to sacrificing partner(s)] partners in their sacrificing ratio]
7

Tutorial Note
Unless otherwise stated the partners capitals should be assumed to be fluctuating.

ILLUSTRATION 16 [Treatment of goodwill when incoming partner bring in his share of firms Goodwill in cash capitals are fluctuating] X and Y are partners in a firm sharing profits and losses in the ratio of 3:2.They admit Z as a partner for 1/5 th share. Z acquires his share from X and Y in the ratio of 2:3.The goodwill of the firm has been valued at RS 25,000.Z brings in the necessary amount in cash as his share of firms goodwill and Rs 1,00,000 as his capital. Pass the necessary journal entries under each of the following alternative cases: Case(a) When no goodwill appears in the books and the amount of goodwill is retained in the firm. Case(b) When no goodwill appears in the books and the amount of goodwill is withdrawn by the concerned partners to the extent of 30% of what is credited to them. Case(c) When goodwill appears in the books at Rs 20000. ILLUSTRATION 17 [treatment of Goodwill when incoming partner brings in his share of firms Goodwill in cash and Capitals are 8 fixed]

Assuming that the capitals are fixed in previous Illustration 16,pass the necessary Journal Entries. ILLUSTRATION 18 X and Y ar partners in firm sharing profits and losses in the ratio of 3:2.They admit Z as a partner for share.Z acquires his share from X and Y in the ratio of 2:1.The goodwill of the firm has been valued ar RS 24,000.Z brings in the necessary amount in ash as his share of firms goodwill. Pass the necessary journal entries under each of the following alternative case: Case (a) When no goodwill appears in the books and the amount of goodwill is retained in the firm. Case (b) When no goodwill appears in the books and the amount of goodwill is withdrawn by the concerned partners to the extent of 30% of what is Credited to them. Case (c) When goodwill appears in the books at Rs 15,000 ILLUSTRATION 19 A and B are partners sharing profits and losses in the ratio of 3:2.They admit C into partnership for th share.C brings in his requisite share of firms goodwill in cash and Rs 10,000 for capital. The goodwill of the firm is valued at Rs 4,000.Goodwill already appears in the book at Rs 500.pjartners withdrew their share of goodwill. Give the necessary journal entries.

ILLUSTRATION 20
9

A and B are partners sharing profits in the ratio of 3:2.C is admitted paying a premium for th share of profit of which he acquires 1/6 th from A and 1/12 th from B. Goodwill of the firm is valued at Rs 8,400.Goodwill already appears in the books at Rs 5,000.Partners withdrew 50% of goodwill credited to them. Give the necessary journal entries. ILLUSTRATION 21 A and B are partners sharing profits in the ratio of 2:1.They admit C who brings in his requisite share of firms goodwill in cash and Rs 10,000 as his capital A,B and C Agree to share future profits equally.The amount of goodwill is withdrawn from the Business. The value of goodwill was determined as Rs 9,000.Goodwill already Appears in the books at Rs 3,000.Give the necessary journal entries. ILLUSTRATION 22 A,B and C are partners sharing profits in the ratio of 43:2.D is admitted for 2/9 th share of profit and brings in RS 30,000 as his capital and his requisite share of firms Goodwill .The new profit sharing ratio of A,B,C and D will be 3:2:2:2.The goodwill Of the firm is valued at Rs 45,000.Goodwill already appears in the books at Rs 9,000.Partners withdrew half of the goodwill. Journalise this arrangement in the books.. ILLUSTRATION 23 A and B are partners sharing profits and losses in the ratio of 3:2 respectively. They admit C paying a premium for th share while A and B as between them sharing profits and losses equally. Goodwill already appears at Rs 5,000.Partners withdrew half of the goodwill. Goodwill of the firm is valued at Rs 4,000.Give the necessary journal entries.

ILLUSTRATION 24
10

A and B are in partnership sharing profits and losses in the ratio of 5:3.C is admitted as a partner paying Rs 40,000 as capital and the necessary amount of goodwill which is valued at Rs 60,000 for the firm. Goodwill already appears in the books at Rs 8,000.Partners withdrew half of goodwill. His share of profit is 1/5 th of which he takes 1/10 th from A and 1/10 th from B. The profit for the first year of new partnership amounts to Rs 24,000.Pass the necessary journal entries to adjust goodwill and to distribute profits. ILLUSTRATION 25 B and C are in partnership sharing profits and losses in the ratio of 31.They admit D for one third share of profits.D brings RS 15,000 in cash for his share of goodwill. As between themselves, B and C agree to share future profits and losses equally. The amount of goodwill brought in cash is withdrawn by the concerned partners to the extent of 40% of what is credited to them. Draft Journal entries showing the appropriation of the premium money. ILLUSTRATION 26 A ,B and C are partners sharing profits and losses in the ratio of 3:2:1.D is admitted. The new profit sharing ratio between A,B,C and D will be 3:3:2:2.Goodwill of the firm is valued at Rs 3,00,000.Goodwill already appears in the books at Rs 6,000.D brings his share of firms goodwill in cash. The amount of goodwill is withdrawn by the concerned partners to the extent of 30% of what is credited to them. Give the Journal entries relating to adjustment of goodwill.

ILLUSTRATION 27
11

X and Y share profits & losses in the ratio of 5:3.Z is admitted for 3/10 th share of profits half of which was gifted by X and the remaining share was taken by Z equally from X and Y. The goodwill of the firm is valued at Rs 21,600.Z brings in his requisite share of firms goodwill. The profit for the first year of new partnership amounts to Rs 24,000.pass the necessary journal entries to adjust goodwill and to distribute profits. SITUATIONIII : WHEN THE INCOMING PARTNER BRINGS IN HIS SHARE OF GOODWILLIN KIND (a) (b) (c) A new partner instead of bringing in cash may bring his share of goodwill in the form of assets. Usually , this happens in the case of a sole proprietorship. The incoming partner joins hands with others to carry on the business as a partnership firm. In such a situation , the assets brought in are debited and the incoming partners capital account is credited with capital brought in and premium Account is credited with amount of goodwill brought in. Afterwards, incoming partners share of goodwill is transferred by debiting the premium account and crediting the capital accounts of the sacrificing partners in their sacrificing ratio.

(d)

Step 1 Record assets brought in the incoming partner. Assets A/c Dr. [Individually] To Incoming partners Capital A/c [ with amount of capital brought in] To premium A/c [with share of goodwill brought in] Step 2 Give credit for Incoming partners full share of goodwill to sacrificing partners by debiting Premium Account and crediting the sacrificing partners in their sacrificing ratio. partner brings his share of goodwill ILLUSTRATION 28 [When incoming Premium Dr.[with share of goodwill in kind] A/c brought in] sacrificing Partners X and Y areTo partners in a firm sharing profits in the ratio of 3:2 . On Capital/Current A/cs [In Sacrificing Ratio]
12

April 1,2007 they admit Z as a new partner for 3/13 share in the profits. The new ratio will be 5:5:3. Z contributed the following assets towards his capital and for his share of goodwill: Stock Rs 80,000, Debtors Rs 70,000,Land RS 50,000. Plant and Machinery Rs 90,000. On the date of admission of Z, the goodwill of the firm was valued at RS 6,50,000 . Record necessary journal entries in the books of the firm ion Z admission . ILLUSTRATION 29 A and B were sharing profits and losses in the ratio of 2:1 respectively .hey admitted C for 2/7 th share . he actual value of goodwill , however ,on that date was Rs 42,000. C contributed the following assets towards the payment of his capital and goodwill. Cash Rs 2,000,Sunday Debtors Rs 10,000 , stock Rs 12,000,Goodwill Rs 10,000. Required : Pass the journal entries to give effect to the above . Also Step give 1 the Write off the existingratio. book value of goodwill (if any) new profit-sharing appearing in the books of the firm by debiting the old partners capital accounts ( in case of fluctuating ILLUSTRATION capitals) 30 or current accounts (in case of fixed capitals ) in their old profit sharing ratio and crediting the Goodwill Account. A and B are partners in a firm sharing profits and losses equally . They admitted C as a partner for 1/5th share of profit. C brought into Old Partners Capital/Current A/cs Dr.[In Old Ratio ] partnership Book Debts amounting to Rs 20,000 less provision for To Goodwill A/c Doubtful Debts of 5% ) , the Goodwill of his connections valued at Rs [being existingamount goodwill off in old ratio] 40,000 and the the balance in written cash , borrowed from his friend D , so as to take his Capital of Rs 1,20,000. Step 2 Give credit forthe Incoming full share of goodwill Required: Show Journal Partners Entry in the books of the firm. to sacrificing partners by debiting incoming Partner and crediting:Sacrificing Partners in theirPARTNER sacrificing DOES SITUATIONIV WHEN THE INCOMING ratio . NOT BRING HIS SHARE OF FIRMS (a) Incase of Fluctuating Capitals GOODWILL IN CASH Incoming Partners Capital A/c Dr. sacrificing Capital [In sacrificing Ratio] WhenTo the incoming Partners partner does not A/cs bring in his share of firms goodwill in cash , the following simplified approach is suggested: (Being the share of incoming partner in firms goodwill credited to sacrificing partners in their sacrificing ratio] (b)In case ofFixed Capitals Incoming Partners Current A/c . To sacrificing Partners current A/cs [In sacrificing Ratio] 13 ( being the share of incoming partner in firms goodwill credited to sacrificing partners in their sacrificing ratio)

TUTORIAL NOTE Unless otherwise stated, the partners should be assumed to be fluctuating

ILLUSTRATION 31 [Treatment of Goodwill when incoming partner does not bring his share of Firms Goodwill in cash and Capital are fluctuating ]
14

X and Y are partners in a firm sharing profits and losses in the ratio of 3:2 . they admit Z as a partner for 1/5th share . Z acquires his share from X and in ratio of 2:3. the goodwill of the firm has been valued at Rs 25,000. Z bring in Rs 1,00,000 as his capital but is unable to bring in the necessary amount in cash as his share of firms goodwill. Pass the necessary journal entries under each of the following alternative cases: Case (a) Case (b) When no goodwill appears in the books. When goodwill appears in the books at 20,000.

ILLUSTRATION 32 [Treatment of Goodwill when Incoming partner does not bring his share of Firms Goodwill in cash and Capitals are fixed] Assuming that the capitals are fixed in previous Illustration 31 , Pass the necessary Journal Entries. ILLUSTRATION 33 X and Y are partners in a firm sharing profits and losses in the ratio of 3:2 . they admit Z as a partner with 1/4 th share of profit. Z acquires is share from Z and in the ratio of 2:1. he value of goodwill is calculated at 24,000.At present , Z is not in position to bring any amount for firms goodwill. Pass the necessary journal entries under each of the following alternative cases: Case (a) When no goodwill account appears in the books of the firm. Case (b) When the goodwill account appears at Rs 15,000 in the books of the firm. SITUATIONV : WHEN INCOMING PARTNER BRINGS IN ONLY PART OF HIS SHARE OF FIRMS
15

GOODWILL IN CASH When the incoming partner brings in only part of his share of firms goodwill in cash, the following simplified approach is suggested Step 1 Write off the existing book value of goodwill (if any) appearing the books of the firm full by debiting old Step 3 Give creditin for incoming partners share ofthe firms partnersto Capital account (in case fluctuating capitals) goodwill sacrificing partners byof debiting premium or current accounts in case ofbrought fixed capitals) the old Account with share of(goodwill in andin incoming profit sharing ratio and crediting the Goodwill Account. partner with unpaid share of goodwill and crediting sacrificing partners in their sacrificing ratio. Old Partners Capital/current A/cs Dr.[In old Ratio] A/c (a)To InGoodwill case of Fluctuating Capitals (being the A/c existing goodwill written in the oldbrought ratio) in] Premium Dr.[With share of goodwill Incoming Capital A/c Dr.[With unpaid partner share of Step 2 record Partners the amount brought in by Incoming goodwill] To Sacrificing Partners Capital Cash A/c / Bank A/c Dr.[with capital & share of A/cs [With Sacrificing Ratio] goodwill] to incoming Partners capital A/c [with capital brought in] (being the share firms goodwill credited to Premium A/c of incoming partner [in with share of goodwill too sacrificing partners in their sacrificing ratio] brought in] (Being the amount brought in by incoming partner]

(b) In case of Fixed Capitals Premium A/c Dr.[With share of goodwill brought in] Incoming Partners Current A/c Dr.[With unpaid share of goodwill] To Sacrificing Partners Current A/cs [With Sacrificing Ratio] (being the share of incoming partner in firms goodwill credited too sacrificing partners in their sacrificing ratio] Step 4 Record the withdrawal(if any) of amount of goodwill (brought in by Incoming Partner(s). Sacrificing Partners Capital/Current A/cs Dr.[o the extent of withdrawal] To Cash A/c/Bank A/c (being the goodwill brought in by incoming partner 16 withdrawn by sacrificing partner(s)]

TUTORIAL NOTE
17

Unless otherwise stated, the partners should be assumed to be fluctuating

ILLUSTRATION 34 [Treatment of Goodwill when Incoming Partner brings in only part of his share of firms Goodwill . in cash and capitals are fluctuating] X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. hey admit Z as a partner for 1/5th share. Z acquires his share from X and in the ratio of 2:3. The goodwill of the firm has been valued at Rs 25,000. Z brings in only 60% of his requisite share of firms goodwill and Rs 1,00,000 as his capital in case .Pass the necessary journal entries under each of the following alternative cases: Case (a) When no goodwill appears in the nooks and the amount of goodwill brought in is retained in the firm. Case (b) When no goodwill appears in the books and the amount of goodwill brought in cash is withdrawn by the concerned partners to the extent of 30% of what is credited to them. Case (c) When goodwill appears in books at Rs 20,000. IILUSTRATION 35 [Treatment of Goodwill when Incoming Partner bring in only part of his share of Goodwill in cash capitals are fixed] Assuming that the capitals are fixed in previous Illustration 34 , pass the necessary Journal Entries.

ILLUSTRATION 36
18

X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. they admit Z as a new partner for 1/5th share .as between themselves, X and Y decide to share future profits & losses in the ratio of 13:7.the goodwill of the firm is valued at Rs 25,000. Goodwill already appears in the books at Rs 20,000. Z brings in 60% of his requisite share of firms goodwill and Rs 1,00,000 as his capital in cash. The amount of goodwill brought in cash is withdrawn by the concerned partners to the extent of 30% of what is credited to them . the profits for the first year of new partnership amount to Rs 1,00,000. Required :Give the necessary entries to adjust goodwill and to distribute profits. ILLUSTRATION 37

X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. they admit Z as a partner for 1/4th share . Z acquires his share from X and Y in the ratio of 2:1. the goodwill of the firm has been values at Rs 24,000. Pass the necessary journal entries under each of the following alternative cases. Case (a) If Z brings his requisite share of firms goodwill in cash . Case (b) If Z is unable to bring his requisite share of firms goodwill in cash. Case (c) If Z brings only 60% of his requisite share of firms goodwill in cash. Case (d) If goodwill already appears at Rs 15,000 and Z bring his requisite share of firms goodwill in cash. Case (e) If goodwill already appears at Rs 15,000 and Z brings his requisite share of firms goodwill in cash. Case (f) If goodwill already appears at Rs 15,000 and Z brings only 60% of his requisite share of firms goodwill in cash.

9.0

CALCULATION OF HIDDEN GOODWILL

19

6.2

When the value of the goodwill of the firm is not specifically given,the value of goodwill has to be inferred on the basis of the net worth of the firm as follows: Rs xxxx

A. Net worth (including goodwill) on the basis of capital Brought in by incoming partner (Incoming partners capital x reciprocal of share of incoming Partner) B. Less: Net worth(excluding goodwill) of the reconstituted firm(i.e., after taking into consideration the capital brought in by incoming partner) C. Value of Goodwill (A-B) TUTORIAL NOTE

xxxx -------------------xxxx

Net Worth = Sunday Assets Outsiders liabilities Or = Capitals of Partners + Net Accumulated Profits & Reserves (if any)

ILLUSTRATION 38 A and B are partners with capitals of Rs 5,000 each . they admit C as a partner with 1/4th share in the profits of the firm. C brings Rs 8,000 as his share of capital. The Profit and Loss account showed a credit balance of Rs 4,000 as on date of admission of C. Give the necessary journal entry to record goodwill.

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10.0 REVALUATION OF ASSETS AND LIABILITIES

10.1

10.2

Why is Revaluation of Assets and Liabilities required? --- At the time of admission of a partner , the assets and liabilities are revalued so that the profit or loss arising on account of such revaluation upto the date of admission of a new partner may be ascertained and adjusted in the old partners Capital accounts in their old profit sharing ratio since it belongs to old partners and not to new partner. How to record the Effect of Revaluation---Usually the effect of revaluation of assets and liabilities is recorded through Revaluation Account. Revaluation Account (a) Meaning ---Revaluation Account (or alternatively Profit & Loss Adjustment Account ) is a nominal Account. (b) Purpose The purpose of revaluation Account is to ascertain the profit/loss arising on account of revaluation of assets and liabilities (c) Contents--- Reservation Account is Credit with increase in the value of assets and decrease in the amount of liabilities (it is a gain) and is debited liabilities (it is a loss). Unrecorded assets are recorded liabilities are recorded through the Reservation Account as increase in liabilities. (d) Balance---The balance of Reservation Account shows the net effect on account of revaluation which is transferred to the partners Capital accounts in their old profit sharing ratio. Accounting entries--- The various journal entries to be passed to record to record the revaluation of assets and liabilities are given below:

10.3

10.4

21

Accounting Entries to record the Revaluation of Assets and Liabilities 1. For increase in the value of an asset Concerned Assets A/c To Revaluation A/c (being the increase in the value of an asset recorded) 2.For decrease in the value of an asset Reservation A/c To Revaluation A/c (Being the decrease in the value of an asset recorded) Dr.

Dr.

3.For increase in the amount of a liability Revaluation A/c Dr. To Concerned Liability A/c (Being the increase in the amount of a liability recorded) 4. For decrease in the amount of a liability Concerned Liability A/c Dr. To Revaluation A/c (Being the decrease in the amount of a liability recorded) 5. For recording an unrecorded asset Unrecorded Asset A/c Dr. To Reservation A/c Being an agreed value of an unrecorded asset brought into account ) 6. For recording an unrecorded liability Revaluation A/c Dr. To Unrecorded Liability A/c (being an agreed amount of an unrecorded liability brought into account ) 7. For transfer of Balance in Revaluation Account (i) If credit side exceeds debit side (net Gain ) Revaluation A/c To Old Partner Capital A/cs (Individually in old Ratio) (ii) If debit side exceeds credit side (Net Loss) Old Partners Capital A/cs (individually in old Ratio)Dr. To Revaluation A/c (Being the net loss on revaluation transferred to old partners capital accounts in old profit sharing ratio)

22

TUTORIAL NOTE When Revaluation Account is prepared , the assets and liabilities appear in the Balance Sheet of new firm at their revised figures. ILLUSTRATION 39 The Balance Sheet of A and B Who share profits in ratio of 3:1 as at 31st March , 20X2 is as follows: Liabilities Sundry Creditors A s Capital Bs capital Rs 41,000 33,000 17,000 Assets cash at Bank bills Receivable Debtors Stock Furniture & Fixtures Land & Building Rs 26,500 3,000 16,000 20,000 1,000 25,000 91,500

91,500

On 31st March 20X2 ,C was admitted into partnership on the following terms: (a) That C pays Rs 10,000 as his capital for one fifth 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% prevision for Doubtful Debts be created on Sundry 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, liabilities 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. Required: Give the necessary journal entries and the balance sheet of the reconstituted firm.

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11.0 ADJUSTMENT FOR RESERVAES AND ACCUMULATED PROFITS/LOSSES

11.1

Why is adjustment for Reserves and accumulated Profits/Losses required? If , at the time of admission of a partner , any reserves or accumulated profits/losses exist in the books of the firm, these should be transferred To old partners Capital Account (if capitals are fluctuating) or Current Accounts (if capital are fixed ) in their old profit sharing ratio since the reserves, accumulated profits/losses upto the date of admission of a new partner belong to the old partners and not to the new partner. Accounting Entries --- The various Journal Entries to be passed are given below: Accounting treatment of Reserves , Accumulated Profits / Losses (a) For transfer of Reserves and Accumulated Profits Reserve A/c Dr. P & l A/c Dr. Workmen Compensation Reserve A/c [Excess of Reserve over Actual Liability]Dr. Investment Fluctuation [Excess of Reserve over the difference between book value and market value] Reserve A/c Dr. Joint Life Policy Reserve A/c To old partners capital (or Current ) accounts (individually) (Old ratio) (Being the reserves &profits transferred to old partners in their old ratio) (b) For transfer of accumulated losses 24 Old partners Capital (or Current) Accounts

11.2

ILLUSTRATION 40 The balance sheet of A and B sharing profits & Losses in the ratio of 3:2 .as on 31st March ,20X2 was as under : Liabilities Rs As Capital 30,000 Bs Capital 35,000 General Reserve Rs 40,000 Land & Building 30,000 Plant & machinery 4,000 Investments (Market value Rs 19,000) Assets

20,000 P & l A/c 3,450 Investment Fluctuation Reserve 1,500 Machinery Replacement Joint Life Policy Reserve 1,000 Fund Investment Workmens Compensation Reserve 1,200 Life Policy 1,000 Machinery Replacement Fund 1,000 current Assets 2,000 Employees Provident fund 2,000 advertisement Expenditure Creditors 5,850 (Deferred Revenue) 90,000 90,000

1,000 Joint

1,000

25

New partner C was admitted for 1/5th share of profits to be acquired from both A and B. A claim on account of workmens compensation is estimated at Rs 150 only . Required : Given the necessary journal entries to adjust accumulated Profits &Losses . Working Notes: (i) Investment Fluctuation Reserve Account has been transferred directly To partners capital accounts. After providing for an anticipated loss of Rs 1,000. (ii) Workmens Compensation Reserve Account has been transferred directly to partners capital accounts. (iii) Machinery Replacement Fund has not been transferred since it is in the nature of accumulated depreciation and not in nature of accumulated profits. (iv) Employees Provident Fund represents amount due to employees Provident Fund. Case(a) If the jointtowards Life policy is not appearing in the books on that 12.0 ADJUSTMENT OF SURRENDER VALUE OF date. UNRECORDED JOINT LIFE POLICY Alternative I-Through Capital Accounts Incoming partners Capital A/c Dr. To Sacrificing partners Capital A/cs [In sacrificing Ratio] why anof adjustment of joint lifesurrender policy required (Being the share Incoming partner in the value of 12.1 since the insurance policy adjusted through the capital unmatured of joint life policy were paid out of the accounts premiums of sacrificing partners in their sacrificing ratio.) profits earned Alternative II-Through Joint life policy Account before theA/c date of admission of a new partner (i) Joint Life policy Dr. ,only the old partners To old partners capital A/cs [in old Ratio] must credit for theof surrender value policy of such policy. (Being the get surrender value the Insurance recorded) 12.2 Accounting Treatment The accounting treatment in (ii) All partners Capital A/cs various new cases [including one] Dr. [In New ratio] is summarized as follows: To joint Life policy A/c (Being the surrender value of the insurance policy written off in the new profit sharing ratio.) 26 Tutorial Note: In view of author, Alternative I should be preferred to Alternative II

Joint Life Policy A/c Dr. To Old Partners Capital A/cs [in Old Ratio] (Being the is surrender value of the Insurance Policy recorded) Case(c) If the Joint Policy is appearing in the books on that date. No entry is to be passed since old partners have already got credit to their capital accounts with surrender value of the policy. Case (d) If the Joint Life policy is appearing in the books on that date but the partners decide not to show joint Life policy in the books of new firm. (i) Old Partners Capital A/cs Dr. [In Old Ratio] To Joint Life policy A/c (Being the existing surrender value of the policy written off by debiting old partners in their old ratio) (ii)Incoming partners Capital A/cs Dr To Sacrificing partners Capital A/cs [In Sacrificing Ratio] (Being the share of Incoming partners in the surrender value of unmatured insurance policy adjusted through the capital Accounts of sacrificing partners in their sacrificing ratio.) Case (e) If the Joint Life Policy and Joint Life Policy Reserve are appearing in the books on that date. Joint Life Policy Reserve A/c Dr. To Old Partners Capital A/cs [in Old Ratio] Case (f) If the joint Life Policy and Joint policy Reserve are appearing in the books on that date but the partners decide not to show these accounts in the books of new firm. (i) Joint Life Policy Reserve A/c Dr. 27 To Joint Life policy A/c (Being the joint Life policy A/c and joint Life policy

ILLUSTRATION 41 X and Y are partners in a firm sharing profits and losses in the ratio of 3:2.Theyhad taken out a joint Life Policy for Rs 1,25,000.The Surrender value of Joint Life policy on 31 st March,20x4 is 20%.On 31st March ,20x4,they admit Z as a partner for 1/5th share. Z acquires his share from X and Y in the ratio of 2:3. Given the necessary journal entries in each of the following alternative cases: Case (a) If the Joint Life Policy is not appearing in the books on that date. Case (b) If the Joint Life Policy is not appearing in the books on that date but the partners decided to show Joint Life Policy in the books of new firm.

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Case (c) If the Joint Life Policy is appearing in the books on that date. Case (d) If the Joint ife Policy is appearing in the books on that date but the partners decided not to show Joint Life Policy in the books of new firm. Case(e) If the Joint Life Policy and Life Policy Reserve are appearing in the books on that date . Case(f) If the Joint Life Policy and Joint policy Reserve are appearing in the books on that date but the partners decided not to show these accounts in the books of new firm. 13.0 ADJUSTMENT OF CAPITAQL The capitals of the partners may be adjusted in any one of the following ways: 13.1 Adjusting the Capitals of Old Partners on the Basis oif the Capital of Incoming Partner when the Total Capital of New Firm is not given The various steps involved in adjusting the capitals of old partners are given below:

Step 1 Calculate Total Capital of new firm as under: Total Capital = New Partners Capital * reciprocal of proportion Of share of new partner. Step 2 calculate the new capitals of old partners by dividing the Practical steps involved in Adjusting the Capitals of old partners total capital in their new profit sharing ratio. Step 3 calculate the adjusted old capitals of old partners (i.e. after all adjustments relating to Goodwill , profit / reserves / Losses ) by preparing their capital Accounts . Step 4 calculate the surplus / deficiency in each of the old partners capital Account by comparing the new capital with adjusted old capital . Step 5 Adjust the surplus by paying off or by transfer to the credit of his Current Account and adjust the deficiency by asking 29 the concerned partner to bring in the required amount or by transfer to the debit of his Current Account

13.2

Journal Entry: Journal Entry 1. In case the adjusted old capital is less than the new capital Cash A/c or Concerned partners Current A/c Dr. To Concerned Partners Capital A/c 2. In case the Adjusted Old Capital is More than the New Capital Concerned partners Capital A/c Dr. To cash A/c or Concerned Partners Current A/c Tutorial Note

In the absence of any contract , surplus or deficiency should be adjusted in cash and not by transfer to Current Account. ILLUSTRATION 42 A and B are in partnership sharing profits and losses in the ratio of 3:2 . the capitals of A and B remaining after adjustments are Rs 80,000 and Rs 60,000 respectively . they admit C as a partner who contributes Rs 35,000 as capital for 1/5th share of profits to be acquired equally from both A and B . the capital accounts of old partners are to be adjusted on the basis of the proportion of Cs capital to his share in the business .calculate the amount of actual cash to be paid of or brought in by the old partners for the purpose and pass the necessary journal entries .
13.3 30

Determining the new partners Capitals on the basis of combined capital of old partners --- the various steps involved in determining the capital of new partner are given bellow: Practical steps involved in the determination of capital of new partner Step 1 calculate the adjusted old capitals of old partners ( After all adjustments have been made) Step 2 calculate the total capital of new firm as follows : Total capital = Combined adjusted old capitals * Reciprocal Of old partners proportion of share of old partners Step 3 calculate the proportionate capital of new partner as follows: New partners capital = total capital * proportion of shared of new partner.

ILLUSTRATION 43 A and B are in partnership sharing profits and losses in the ratio of 3:2 . the capitals of A and B remaining after adjustments are Rs 80,000 and Rs 60,000 respectively. They admit C as a third partner who has to contributes sufficient capital to acquire a 1/5th share of the total capital of the new firm equally from both the partners A and B Calculate the capital to be brought in by C.

ILLUSTRATION 45 Adjusted old capitals of A and are Rs 90,000 and Rs 70,000 respectively. Calculate Incoming Partners proportionate capital and surplus/shortage of existing capitals of old partners (if any) in each of the following alternative cases: Case (a) If C is to contribute proportionate capital for his 1/5th share. Case (b) If C is to contribute 1/5 th of the total capital of the new firm.
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Case (c) If C is to contribute th of the combined capitals of the existing partners. Case (d) if C is to contribute proportionate capital for his 1/5th share and the capitals of all the partners are to be adjusted in new profit sharing ratio of 3:1:1. COMPREHENSIVE ILLUSTRATIONS

ILLUSTRATION 46 A and B are in partnership sharing and losses in the ratio of 3:1 .they admit C for one third share of the profits. As between themselves , A and B agree to share future profits and losses equally. Pass the necessary journal entries in each of the following alternative cases Case (a) If C brings in Rs 15,000 in cash towards his share of firms goodwill. Case (b) If C brings in Rs 5,000 in cash and machinery worth Rs 10,000 towards his share of firms goodwill. Case (c) If C is unable to bring his share (Rs 15,000) of forms goodwill in cash. Case (d) If C brings in Rs 9,000 out of his share of Rs 15,000 for goodwill in Cash.

ILLUSTRATION 47

The balance sheet of A,B and C who are sharing profits in the ratio of 2:3:1,as at 31st March ,20X5 is given below: Liabilities As Capital Bs Capital Rs Assets 1,00,000 Goodwill 2,00,000 Land & Building Rs 12,000 2,50,000
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Cs Capital Workmens Compensation Reserve Investment Fluctuation Reserve Provision for Doubtful Debts Creditors

3,00,000 Investment 20,000 (Market Value Rs 10,000 46,000) 10,000 Stock 3,60,000 Debtors Bank Advertisement Suspense A/c 10,00,00 0

50,000 80,000 3,00,000 2,96,000 12,000 10,00,000

A,B and C decided to admit as a new partner from 1st April ,20X5 and fix their new profit sharing ratio as 1:2:3:4. D brings in Rs 4,00,000 as his capital and brings in Rs 5,000 in cash and machinery worth Rs 25,000 towards his share of firms goodwill. 1. Goodwill is to be valued at 2 years purchase of average / profits of last three completed yeas. The profits of last three completed years. The profits of last three completed years. The profits were 20X1-20X2 Rs 45,000, 20X2 -20X3 Rs 90,000 ,20X3-20X4 Rs 1,35,000. 2. A Joint Life Policy for Rs 60,000 taken out by partners on which premiums totaling Rs 10,000 have been paid has a surrender value of Rs 6,000 . JLP is not to appear in the books of new firm. 3. Land & Building was found under valued by Rs 25,000 and Stock was found overvalued by Rs 8,000. 4. provision for doubtful debits is to be made equal to 5% of the debtors. 5. Claim on account of workmen compensation is Rs 8,000. Required: pass the necessary journal entries and prepare the necessary ledger account and the Balance Sheet.

ILLUSTRATION 48 Mr. A commenced business with a capital of Rs 5,00,000 on 1st Jan,20X1 . during the five years ending 31st Dec , 20X5, the following profits and losses were made: 20X1 Loss Rs 10,000 , 20X2 profit Rs 26,000 ,20X3 Profit Rs 34,000,20X4 Profit Rs 40,000,20X5 Profit Rs 50,000.
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During this period , he had drawn Rs 80,000 for his personal use . on 1st Jan ,20X6,A admitted B into partnership on the following terms : B to bring capital equal to As Capital for his half share in the business on 1st Jan.20X6 and to pay for one half share of goodwill of the business ,on the basis of three times the average profits of the last five years. Required : Prepare statement showing what amount should invest to become a partner assuming that the goodwill is to be retained in the business and make entries to record the transactions pertaining to admission . ILLUSTRATION 49 A and B are partners sharing profits in the ratio of 3:2. they admit C as a new partner from 1stApril . A given 1/3rd of his share while B gives 1/10th from his share. The balance Sheet as at 31st March ,20X4 is given below: Liabilities As Capital Bs Capital Workmen Compensation Fund Investment Fluctuation Fund Employees Provident Fund Provision for Doubtful Fund Cs Loan Rs 17,600 25,400 2,000 1,000 1,000 1,000 30,000 78,000 Assets Goodwill Land & Building Investments [Market Value Rs 4,5000] Debtors Stock Bank Balance Advertisement Suspense A/c 5,000 30,000 10,000 25,000 1,000 78,000 Rs 1,000 6,000

Terms of Cs admission are as fallows : 1. Cs loan will be converted into his capital. C brings in 60% of his share of 2. goodwill in cash Goodwill is to be valued at 2 years purchase of super profit of last three completed years. the profits were 20X1-20X2 Rs 45,000,20X3 Rs 90,000,20X4 Rs 1,35,000. the normal profits are Rs 60,000 . No goodwill is to appear in the books of new firm . 3. Land & building was found undervalued by Rs 10,000
34

4. 5. 6. 7.

Stock was found overvalued by Rs 6,000. Provision for doubtful debts is to be made equal to 5% of the debtors. claim on account of workmen compensation is Rs 1,000. Capital account of the partners be re-adjusted on the basis of their profit sharing ratio and any excess or deficiency be adjusted in cash.

A Joint Life Policy for Rs 50,000 taken out by A and B on which premium totaling Rs 10,000 have been paid has a surrender value of Rs 6,000. Required: Prepare Revaluation Account , partners Capital Account and the Balance Sheet.

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