Bos 28432 CP 14

14
Issues in Partnership Accounts

Question 1
Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2.
It was decided that Robert would retire on 31.3.2005 and in his place Richard would be admitted
as a partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.
Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:
Liabilities ` Assets `
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(a) Plant & Machinery to be depreciated by ` 30,000.
(b) Land and Building to be valued at ` 6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3
years. The relevant figures are:
Year ended 31.3.2002 − Profit ` 50,000
© The Institute of Chartered Accountants of India

Issues in Partnership Accounts 14.2

(g) Out of the amount due to Robert ` 2,00,000 would be retained as loan by the firm and
the balance will be settled immediately.
(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm. (16 Marks, November 2005) (PE-II)
Answer
Partners’ Capital Accounts
Dr. Cr.
Ram Rahim Robert Richard Ram Rahim Robert Richard
` ` ` ` ` ` ` `
To Revaluation 10,000 6,000 4,000 − By Balance 1,00,000 1,50,000 2,00,000 −

A/c(W.N. 1) b/d
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 −

Robert A/c reserve
To Bank 58,000 By Goodwill 55,000 33,000 22,000 −

(W.N. 2)
To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______
2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 −
To Goodwill∗ 55,000 36,667 − 18,333 By Balance 2,45,000 2,37,000 − −

b/d
By Loan A/c − − − 2,00,000

−
transfer
To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500
2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500
∗
As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when
some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the
time of retirement of Robert is to be written off in new ratio among remaining partners including new partner –
Richard.

14.3 Accounting
Balance Sheet as at 31.3.2005

after the admission of Richard
Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes:
(1) Revaluation Account
` `
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
______ Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2002 50,000
1,65,000
1,65,000
Average profit = = ` 55,000
3
Goodwill = ` 55,000 × 2 years = ` 1,10,000.
(3) Bank Account
` `
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500

Question 2
Laurel and Hardy are partners of the firm LH & Co., from 1.4.2003. Initially both of them
contributed `1,00,000 each as capital. They did not contribute any capital thereafter. They
maintain accounts of the firm on mercantile basis. They were sharing profits and losses in the
ratio of 5:4. After the accounts for the year ended 31.3.2007 were finalized, the partners
decided to share profits and losses equally with effect from 1.4.2003.
It was also discovered that in ascertaining the results in the earlier years certain adjustments,
details of which are given below, had not been noted.
Year ended 31st March 2004 2005 2006 2007
` ` ` `
Profit as per accounts prepared and finalized 1,40,000 2,60,000 3,20,000 3,60,000
Expenses not provided for (as at 31st March) 30,000 20,000 36,000 24,000
Incomes not taken into account (as at 31st18,000 15,000 12,000 21,000
March)
The partners decided to admit Chaplin as a partner with effect from 1.4.2007. It was decided
that Chaplin would be allotted 20% share in the firm and he must bring 20% of the combined
capital of Laurel and Hardy.
Following is the Balance sheet of the firm as on 31.3.2007 before admission of Chaplin and
before adjustment of revised profits between Laurel and Hardy.
Balance Sheet of LH & Co. as at 31.3.2007
Capital Accounts: Plant and machinery 60,000
Laurel 2,11,500 Cash on hand 10,000
Hardy 1,51,500 Cash at bank 5,000
Sundry creditors 2,27,000 Stock in trade 3,10,000
Sundry debtors 2,05,000
5,90,000 5,90,000
You are required to prepare:
(i) Profit and Loss Adjustment account;
(ii) Capital accounts of the partners; and
(iii) Balance Sheet of the firm after the admission of Chaplin. (20 Marks, May, 2007)(PCC)

14.5 Accounting
Answer
(i) Profit and Loss Adjustment Account∗
` `
To Expenses not provided for By Income not considered
(years 2004-2007) 1,10,000 (for years 2004-2007) 66,000
By Partners’ capital accounts
(loss)
Laurel 22,000
Hardy 22,000
1,10,000 1,10,000
(ii) Partners’ Capital Accounts

Laurel Hardy Chaplin Laurel Hardy Chaplin
` ` ` ` ` `
To P & L 22,000 22,000 - By Balance b/d 2,11,500 1,51,500 -
Adjustment
A/c
To Hardy 60,000 By Laurel - 60,000 -
To Balance c/d 1,29,500 1,89,500 63,800 By Cash - - 63,800
2,11,500 2,11,500 63,800 2,11,500 2,11,500 63,800
By Balance b/d 1,29,500 1,89,500 63,800
(iii) Balance Sheet of LH & Co.

as on 1.4.2007
(After admission of Chaplin)
Capital accounts: Plant and machinery 60,000
Laurel 1,29,500 Sundry debtors 2,05,000
Hardy 1,89,500 Stock in trade 3,10,000
Chaplin 63,800 Accrued income 66,000
Sundry creditors 2,27,000 Cash on hand (10,000 + 63,800) 73,800
Outstanding expenses 1,10,000 Cash at bank 5,000
7,19,800 7,19,800
∗
It is assumed that expenses and incomes not taken into account in earlier years were fully ignored.

Working Notes:
1. Computation of Profit and Loss distributed among partners
`
Profit for the year ended 31.3.2004 1,40,000
31.3.2005 2,60,000
31.3.2006 3,20,000
31.3.2007 3,60,000
Total Profit 10,80,000
Laurel Hardy Total
` ` `
Profit shared in old ratio i.e 5:4 6,00,000 4,80,000 10,80,000
Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 10,80,000
Excess share 60,000
Deficit share (60,000)
Laurel to be debited by `60,000 and Hardy to be credited by `60,000.
2. Capital brought in by Chaplin
Capital to be brought in by Chaplin must be equal to 20% of the combined
capital of Laurel and Hardy `
Capital of Laurel (2,11,500 – 22,000 – 60,000) 1,29,500
Capital of Hardy (1,51,500 – 22,000 + 60,000) 1,89,500
Combined Capital 3,19,000
20% of the combined capital brought in by Chaplin (20% of ` 3,19,000)
63,800
Question 3
A and B are equal partners. They admit C and D as partners with 1/5 and 1/6 share
respectively. What is the profit sharing ratio of all the partners? (2 Marks, May, 2007) (PCC)
Answer
Let total profits or losses of the firm be 1
1 1
Shares of C and D is and respectively.
5 6

14.7 Accounting
1 1 11 19
Balance remaining: 1 – ( + ) = 1− =
5 6 30 30
19 9.5 9.5
to be shared equally by A and B as :
30 30 30
New profit sharing ratio will be A: B: C: D
⎡ 9.5 2 ⎤ ⎡ 9.5 2 ⎤ ⎡ 1 12 ⎤ ⎡ 1 10 ⎤
⎢ 30 × 2 ⎥ : ⎢ 30 × 2 ⎥ : ⎢ 5 × 12 ⎥ : ⎢ 6 × 10 ⎥
⎣ ⎦ ⎣ ⎦ ⎣ ⎦ ⎣ ⎦
Thus new profit sharing ratio of all the partners will be 19:19:12:10.
Question 4
X and Y are partners sharing profits and losses in the ratio of 3:2. On 30th September, 2006
they admitted Z as a partner. The new profit sharing ratio agreed was 2:2:1.
At the time of admission Z brought in a fixture valued at ` 6,000 and a machinery worth
`24,000. No accounting entry was passed for the fixture brought in by partner Z in the books
of the firm.
Also at the time of admission the valuation of goodwill was made. The value of goodwill of X
and Y was decided at ` 40,000 and value of goodwill of partner Z was fixed at ` 20,000. No
effect was given to the goodwill value in the books of the firm.
On 31.3.2007, it was decided that partner X would retire and the other partners viz., Y and Z
would continue the business of the firm by converting it into a company called YZ Ltd., with
equal shareholding in the company.
The partners agreed as below:
(i) The goodwill of the firm shall be fixed at `80,000. Necessary effect for goodwill value
not recorded earlier shall be given. The present goodwill value being `80,000 shall be
reflected in the books of the company.
(ii) All the assets and liabilities of the firm shall be taken over by the company.
(iii) Partner X would take motor car of the firm at a value of `7,400.
(iv) A plant owned by the firm is sold for `6,000.
(v) The profit of the firm upto 30.9.2006 was `44,000.
(vi) Partner X agreed to leave `90,000 as loan with the firm in return for 12% interest per
annum.

Following is the Trial Balance of the firm as on 31.3.2007:

Particulars Dr. Cr.
` `
Capital Account:
X - 80,000
Y - 50,000
Z - 24,000
Drawings Account:
X 22,000 -
Y 20,000 -
Z 9,600 -
Sundry Debtors 70,000 -
Sundry Creditors - 32,000
Plant (Book value of plant sold `8,000) 46,000 -
Fixtures 14,000 -
Stock 24,000 -
Motor car 5,400 -
Cash at bank 34,600 -
Profit and Loss A/c (for the year) 59,600
2,45,600 2,45,600
(i) Goodwill Adjustment Account
(ii) Profit and Loss Appropriation Account
(iii) Partners’ Capital Accounts
(iv) Balance Sheet of YZ Ltd. after conversion. (20 Marks November, 2007) (PCC)
Answer
(i) Goodwill Adjustment Account
` `
30.9.07 To Partners’ Capital 30.9.06 By Partners’ Capital A/cs
A/cs
(in old ratio) (in new ratio)

14.9 Accounting
X 24,000 X 24,000
Y 16,000 Y 24,000
Z 20,000 Z 12,000
31.3.07 To Partners’ Capital 31.3.07 By Goodwill A/c
A/cs
X 32,000 (Goodwill raised in the 80,000
book)
Y 32,000
Z 16,000
1,40,000 1,40,000
(ii) Profit and Loss Appropriation Account
` `
To Plant - Loss on 2,000 By Motor Car 2,000
sale of plant
To Partners’ Capital By Profit and Loss A/c 59,600
A/cs
X 32,640
Y 23,840
Z 3,120
61,600 61,600
Calculation of profit Total X Y Z

apportionment:
` ` ` `
Upto 30.9.2006 44,000 26,400 17,600 NIL
From 01.10.2006 to 31.3.2007 15,600 6,240 6,240 3,120
59,600 32,640 23,840 3,120
(iii) Partners’ Capital Accounts
X Y Z X Y Z
` ` ` ` ` `
30.9.06 To Goodwill 24,000 24,000 12,000 30.9.06 By Balance 80,000 50,000 -
Adjustment
A/c
31.7.07 To Motor car 7,400 - - By Plant & - - 24,000

machinery
To Drawings 22,000 20,000 9,600 By Fixtures - - 6,000
To 12% Loan 90,000 - - By Goodwill 24,000 16,000 20,000
Adjustment
A/c
To Bank 25,240 - - By Profit upto 26,400 17,600 -
30.9.06
To Balance c/d - 77,840 47,520 31.7.07 By Profit for 6 6,240 6,240 3,120
months
ended
31.3.07
By Goodwill Adj.
A/c 32,000 32,000 16,000
1,68,640 1,21,840 69,120 1,68,640 1,21,840 69,120
31.7.07 To Bank 15,160 - 31.7.07 By Balance b/d 77,840 47,520
To Share By Bank 15,160
capital 62,680 62,680
77,840 62,680 77,840 62,680
(iv) Balance Sheet of YZ Ltd.

Share capital 1,25,360 Goodwill 80,000
12% Loan 90,000 Plant (46,000 – 8,000) 38,000
Sundry creditors 32,000 Fixtures (14,000 + 6,000) 20,000
Stock 24,000
Sundry debtors 70,000
Cash at bank 15,360
2,47,360 2,47,360
Bank A/c
` `
To Balance b/d 34,600 By X’s Capital A/c 25,240
To Plant (sold) A/c 6,000 By Y’s Capital A/c 15,160
To Z’s capital A/c 15,160 By Balance c/d 15,360
55,760 55,760

14.11 Accounting
Total capital of the firm before conversion:

Y 77,840
Z 47,520
1,25,360
As Y and Z would continue with equal shareholding, therefore, share capital of Y and Z would
be `1,25,360 / 2 = `62,680 each.
`
Z should bring cash `(62,680 – 47,520) = 15,160
Y should withdraw cash `(77,840 – 62,680) = 15,160
Question 5
A, B, and C are partners sharing profits and losses in the ratio of 3:2:1. B retired from the firm.
Partners A and C decided to take his share in 3:1 ratio. What is the new ratio of the partners
A and C? (2 Marks, November, 2007) (PCC)
Answer
Calculation of new profit and loss sharing ratio of partners A and C
1/3rd share of B taken by oartners A & C in 3:1 i.e.
1 3 1
=> A will receive from B = × =
3 4 4
1 1 1
=> C will receive from B = × =
3 4 12
Total share of A and C will be:
3 1 12 + 6 18 3
A= + = = or
6 4 24 24 4
1 1 2 +1 3 1
C= + = = or
6 12 12 12 4
Therefore, new profit and loss sharing ratio of A and C will be 3:1.
Question 6
A, B and C are partners of the firm ABC & Co., sharing profits and losses in the ratio of 5:3:2.
Following is the Balance Sheet of the firm as at 31.3.2008:

Balance Sheet as at 31.3.2008

Partners’ capital accounts: Goodwill 1,00,000
A 4,50,000 Building 10,50,000
B 1,30,000 Machinery 6,50,000
C 1,70,000 Furniture 2,15,000
Investment fluctuation reserve 1,00,000 Investments (market value
`75,000) 60,000
Contingency reserve 75,000 Stock 6,50,000
Long-term loan 15,00,000 Sundry debtors 6,95,000
Bank overdraft 2,20,000 Advertisement suspense 25,000
Sundry creditors 8,00,000
34,45,000 34,45,000
It was decided that B would retire from the partnership on 1.4.2008 and D would be admitted
as a partner on the same date. Following adjustments are agreed amongst the partners for
the retirement/admission:
(i) Goodwill is to be valued at `5,00,000, but the same will not appear as an asset in the
books of the firm.
(ii) Building and machinery are to be revalued at `10,00,000 and `5,20,000 respectively.
(iii) Investments are to be taken over by B at the market value.
(iv) Provision for doubtful debts to be maintained at 20% on sundry debtors.
(v) The capital of the reconstituted firm will be `10,00,000 to be contributed by the partners
A, C and D in their new profit sharing ratio of 2 :2 : 1.
(vi) Surplus funds if any will be used to pay the bank overdraft.
(vii) Amount due to retiring partner B will be transferred to his loan account.
Prepare:
(i) Revaluation Account;
(ii) Capital Accounts of the partners; and
(iii) Balance Sheet of the firm after reconstitution. (20 Marks, May, 2008) (PCC)

14.13 Accounting
Answer
(i) Revaluation Account
` `
To Building 50,000 By Investments 15,000
To Machinery 1,30,000 By Partners’ capital
A/cs (Loss on
revaluation)
To Provision for doubtful A 1,52,000
debts 1,39,000
B 91,200
C 60,800 3,04,000
3,19,000 3,19,000
(ii) Partners’ Capital Accounts
A B C D A B C D
` ` ` ` ` ` ` `
To Revaluation 1,52,000 91,200 60,800 - By Balance b/d 4,50,000 1,30,000 1,70,000 -
A/c
To Goodwill 50,000 30,000 20,000 - By Contingency 37,500 22,500 15,000 -
(W.N.2) Reserve
To A and B - - 1,00,000 1,00,000 By Investment 50,000 30,000 20,000 -
(W.N.3) fluctuation
Reserve
To Investments - 75,000 - -
To Advertisement 12,500 7,500 5,000 - By C and D 50,000 1,50,000 - -
suspense (W.N.3)
To B’s Loan A/c - 1,28,800 - - By Bank 27,000 - 3,80,800 3,00,000
(Bal. fig.) (Bal.fig.)
To Balance c/d
(W.N.4) 4,00,000 - 4,00,000 2,00,000
6,14,500 3,32,500 5,85,800 3,00,000 6,14,500 3,32,500 5,85,800 3,00,000
(iii) Balance Sheet as at 01.04.2008

(After retirement of B and admission of D)
Partners’ capital Building 10,00,000
accounts (W.N.4)
A 4,00,000 Machinery 5,20,000
C 4,00,000 Furniture 2,15,000

D 2,00,000 Stock 6,50,000

Long term loan 15,00,000 Debtors 6,95,000
B’s loan 1,28,800 Less: Provision for
doubtful debts 1,39,000 5,56,000
Sundry creditors 8,00,000 Cash at bank (W.N.1) 4,87,800
34,28,800 34,28,800
Working Notes:
1. Bank Account
` `
To A’s capital A/c 27,000 By Balance b/d (Overdraft) 2,20,000
To C’s capital A/c 3,80,800 By Balance c/d (Bal. fig.) 4,87,800
To D’s capital A/c 3,00,000
7,07,800 7,07,800
2. Goodwill, already shown in the Balance Sheet of ` 1,00,000, is firstly written
off and then an adjusting entry is passed for revalued goodwill of ` 5,00,000 in
sacrificing and gaining ratio of partners. This treatment is given based on the
para 36 of AS 10, which states that goodwill should be recorded in the books
only when some consideration in money or money’s worth has been paid for it.
3. Calculation of sacrificing and gaining ratio
Partners New share Old share Share Sacrificed Share Gained
A 2 5 2 5 1
- =
5 10 5 10 10
B 3 3
10 10
C 2 2 2 2 1
-
5 10 5 10 5
D 1 1
5 5
Adjusting Entry
` `
C’s Capital A/c Dr. 1,00,000

14.15 Accounting
D’s Capital A/c Dr. 1,00,000

To A’s Capital A/c 50,000
To B’s Capital A/c 1,50,000
4. Capitals of A, C and D as per new ratio `
Total Capital of the firm after admission 10,00,000
2
A’s share = 10,00,000 × 4,00,000
5
2
C’s share = 10,00,000 × 4,00,000
5
1
D’s share = 10,00,000 × 2,00,000
5
Question 7
P, Q and R share profit and losses in the ratio of 4:3:2 respectively. Q retires and P and R
decide to share future profits and losses in the ratio of 5:3. Then immediately H is admitted
for 3/10 share of profits half of which was gifted by P and the remaining share was taken by H
equally from P and R. Calculate the new profit sharing ratio after H’s admission and gaining
ratio of P and R after Q’s retirement. (2 Marks, November, 2008) (PCC)
Answer
(a) Calculation of new profit sharing ratio after H’s admission:
5 ⎡ 3 1⎤ ⎡ 3 1⎤
P= −⎢ × ⎥− ⎢ × ⎥
8 ⎣ 10 2 ⎦ ⎣ 10 4 ⎦
5 3 3
= − −
8 20 40
25 − 6 − 3 16
= =
40 40
3 ⎡ 3 1⎤
R= − ×
8 ⎢⎣ 10 4 ⎥⎦
3 3 15 − 3 12
= − = =
8 40 40 40
3 3 4 12
H= or × =
10 10 4 40

Hence,
New Ratio of P : R : H
16:12:12
Or 4:3:3
(b) Calculation of gaining ratio of P and R after Q’s retirement:
5 4 45 − 32 13
P= − = =
8 9 72 72
3 2 27 − 16 11
R= − = =
8 9 72 72
Question 8
A and M are partners, sharing profits and losses in the ratio of 3:2. G is admitted for 1/4th
share. Thereafter, N enters the partnership for 20 Paise in a Rupee. Compute new profit
sharing ratio. (2 Marks, June, 2009) (PCC)
Answer
Let the total share be = 1
1
Share of new partner G =
4
1 3
Remaining share of profit = 1- =
4 4
3 3 9
New ratio of (A) = × =
4 5 20
3 2 6
New ratio of (M) = × =
4 5 20
New ratio of A:M:G = 9: 6: 5
Again, let the total share at the time of admission of N = 1
1
Share of new partner N is 20% i.e.
5
1 4
Remaining share = 1- =
5 5
4 9 9
New ratio of A = × =
5 20 25

14.17 Accounting
4 6 6
New ratio of M = × =
5 20 25
4 5 5
New ratio of G = × =
5 20 25
New ratio of A:M:G:N = 9:6:5:5
Question 9
P, N and T are equal partners. The decided to change their profit sharing ratio into 5:4:3.
They raised the goodwill in the books to the extent of `2,40,000 and it is to be written off
immediately. Show Journal entries with narration to be passed for raising the goodwill and for
its subsequent write off. (2 Marks, November, 2009) (PCC)
Answer
Journal Entries
Dr. (`) Cr. (`)
Goodwill A/c Dr. 2,40,000
To B’s Capital A/c 80,000
To C’s Capital A/c 80,000
(Being the value of goodwill raised in the books, in old
profit sharing ratio)
A’s Capital A/c Dr. 1,00,000
B’s Capital A/c Dr, 80,000
C’s Capital A/c Dr. 60,000
To Goodwill A/c 2,40,000
(Being the value of goodwill written off from the books of
the firm, in new profit sharing ratio)
Note: As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded
in the books only when some consideration in money or money’s worth has been paid for it.
Therefore, the goodwill valued at the time of change in profit and loss sharing ratio is to be
adjusted through capital accounts of the partners directly. The journal entries for raising
goodwill and then writing it off is not in accordance with the said standard but have been given
due to the requirement of the question.
Alternatively, Capital accounts of partner A and partner C may be adjusted to give net effect to
the above entries.

The Adjusting Journal entry would be

` `
A’s Capital A/c Dr. 20,000
To C’s Capital A/c 20,000
(Being adjusting entry passed for goodwill, due to change in
profit and loss sharing ratio)
Question 10
On 1st April, 2008, X, Y and Z enter into partnership introducing capital of `80,000, `50,000
and `50,000 respectively. They agree to share Profits and Losses equally. At the end of the
accounting year on 31st March, 2009, X claims that he be paid interest on his additional
Capital of `30,000 @ 10% per annum, while Z demands salary of `600 per month for the
extra hours devoted by him daily at the shop. The partnership deed is silent on these matters.
Decide the matters with reasons. (2 Marks, November, 2009) (IPCC)
Answer
When the partnership deed is silent on the matter of interest on capitals and salary to
partners, then no partner is entitled to claim interest on capital and salary. Therefore, claim of
X and Z is not tenable. However, inclusion of specific provision regarding the said issues in
partnership deed can make them entitled for interest on capital and salary.
Question 11
Were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31 st March,
2009 Balance Sheet of the firm stood as follows:
Capital A/cs Buildings 55,000
E 50,000 Furniture 25,000
F 40,000 Stock 42,000
G 28,000 1,18,000 Debtors 20,000
Creditors 33,500 Cash at Bank 11,200
Outstanding Expenses 1,700
1,53,200 1,53,200
On 31st March, 2009, E decided to retire and F and G decided to continue as equal partners.
Other terms of retirement were as follows:
(i) Building be appreciated by 20%.
(ii) Furniture be depreciated by 10%.

14.19 Accounting
(iii) A provision of 5% be created for bad debts on debtors.

(iv) Goodwill be valued at two years’ purchase of profit for the latest accounting year. The
firm’s Profit for the year ended 31st March, 2009 was `25,000. No goodwill account is to
be raised in the books of accounts.
(v) Fresh capital be introduced by F and G to the extent of `10,000 and `35,000
respectively.
(vi) Out of sum payable to retiring partner E, a sum of `45,000 be paid immediately and the
balance be transferred to his loan account bearing interest @ 12% per annum. The loan
is to be paid off by 31st March, 2011.
One month after E’s retirement, F and G agreed to admit E’s son H as a partner with one-forth
share in Profits/Losses. E agreed that the balance in his loan account be converted into H’s
Capital. E also agreed to forgo one month’s interest on his loan.
It was also agreed that H will bring in, his share of goodwill through book adjustment, valued
at the price on the date of E’s retirement. No goodwill account is to be raised in the books.
You are requested to pass necessary Journal Entries to give effect to the above transactions
and prepare Partners’ Capital Accounts. (16 Marks November, 2009) (IPCC)
Answer
Dr. Cr.
` `
1. Building Account Dr. 11,000
To Revaluation Account 11,000
(Being building appreciated)
2. Revaluation Account Dr. 3,500
To Furniture Account 2,500
To Provision for Doubtful Debts Account 1,000
(Being furniture depreciated by 10% and Provision for
doubtful debts created @ 5% on Debtors)
3. Revaluation Account Dr. 7,500
To E’s Capital Account 3,750
To F’s Capital Account 2,250
To G’s Capital Account 1,500
(Being profit on revaluation transferred to capital accounts
of partners)
4. F’s Capital Account Dr. 10,000

G’s Capital Account Dr. 15,000

To E’s Capital Account 25,000
(Being adjustment for E’s share of goodwill)
5. Bank Account Dr. 45,000
(Being fresh capital introduced by F and G)
6. E’s Capital Account Dr. 78,750
To Bank Account 45,000
To E’s Loan Account 33,750
(Being settlement of E’s capital on his retirement)
7. E’s Loan Account Dr. 33,750

To H’s Capital Account 33,750
(Transfer of E’s Loan Account to H’s Capital Account)
8. H’s Capital Account Dr. 12,500
(Being adjustment entry passed for H’s share of goodwill)
E F G H E F G H
` ` ` ` ` ` ` `
To E (Goodwill) 10,000 15,000 By Balance b/d 50,000 40,000 28,000
To Bank 45,000 By Revaluation A/c 3,750 2,250 1,500
To E’s Loan A/c 33,750 By F (Goodwill) 10,000
To Balance c/d 42,250 49,500 By G (Goodwill) 15,000
By Bank (fresh capital) 10,000 35,000
78,750 52,250 64,500 78,750 52,250 64,500
To F (Goodwill) 6,250 By Balance b/d 42,250 49,500
To G (Goodwill) 6,250 By E’s Loan A/c 33,750
To Balance c/d 48,500 55,750 21,250 By H (goodwill) 6,250 6,250
48,500 55,750 33,750 48,500 55,750 33,750

14.21 Accounting
Working Notes:
1. Calculation of gaining ratio
Partners New ratio Old ratio Gain Sacrifice
E 5 5
10 10
F 1 3 1 3 2
– =
2 10 2 10 10
G 1 2 1 2 3
– =
2 10 2 10 10
Hence, ratio of gain between F and G = 2:3
2. Value of total goodwill of the firm = `25,000 × 2 = `50,000
5
E’s share = `50,000 × = Rs. 25,000
10
2
F will bear = `25,000 × =Rs.10,000
5
3
G will bear = `25,000 × =Rs.15,000
5
1
3. H’s share of goodwill = `50,000 × = `12,500
4
F and G share equal profits. Therefore, their sacrificing ratio will also be equal
Hence, each of them will be credited with `6,250
Question 12
SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on
01.04.2008 and paid `50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to
admit W as partner and the goodwill was valued at `1,00,000 for the purpose.
Please explain with reasons, at what price goodwill can be shown in the books of account.
(4 Marks, November, 2009) (IPCC)
Answer
Para 16 of AS 10,’ Accounting for Fixed Assets’ states that goodwill can be recorded in the
books only when some consideration in money or money’s worth has been paid for it.
Therefore, only purchased goodwill should be recorded in the books. In the said case,
payment of `50,000 was made towards purchase of goodwill, hence to this extent goodwill

can be recorded in the books. Para 35 of AS 26 ‘Intangible Assets’• also states that internally
generated goodwill∗ should not be recognized as an asset. Internally generated (self
generated) goodwill is not recognized as an asset because it is not an identifiable resource
controlled by the enterprise that can be measured reliably at cost.
Therefore, only purchased goodwill should be recorded in the books.
Additional goodwill of `50,000 is self generated goodwill, which should not be recorded. On
admission, death or retirement of a partner, goodwill adjustments can be carried out through
capital accounts.
Question 13
(i) A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their
capitals are ` 60,000 and ` 40,000 respectively. They admit C as a new partner who will
get 1/6th share in the profit of the firm. C brings in ` 25,000 as his capital. Find out the
amount of goodwill on the basis of the above information.
(ii) In the absence of a partnership deed, what will be your decision in disputes amongst
partners regarding the following matters:
(a) Profit sharing ratio;
(b) Interest rate, at which interest is to be allowed to a partner, on loan given to the firm
by a partner. (2 Marks May, 2010) (IPCC)
Answer
(i) Calculation of Goodwill
C brings capital for 1/6th share in profit = ` 25,000
Therefore, total capital of the firm = ` 25,000 × 6 = ` 1,50,000
Capital of old partners should be = ` 1,50,000 – ` 25,000 = ` 1,25,000
Actual combined capital of old partners = ` 60,000 + ` 40,000 = ` 1,00,000
So, the goodwill of the firm = ` 1,25,000- ` 1,00,000= ` 25,000
(ii) In the absence of a partnership deed:
(a) The partners will share profits/losses equally; and
(b) Interest @ 6% per annum is to be paid on the loan advanced to the firm by a
partner.
•
AS 26 does not form part of Paper 1 “Accounting” syllabus.
∗
The enterprise, while doing business, develops goodwill over a period of time. Goodwill generated in the process
of doing business is called internally generated goodwill.

14.23 Accounting
Question 14
Following two problems are regarding issues in Partnership Accounts, kindly solve both:
(i) Anil and Mukesh are partners sharing profit, and losses in the ratio 3 : 2. Govind is
admitted for ¼th share of firm. Thereafter, Madan enters for 20 paisa in a rupee.
Compute new profit sharing ratios under both the admission of partners.
(ii) The following Goodwill Account was opened by the partners R and S, on the admission
of H as a new partner into firm Om and Sons. Calculate the share of profit agreed to be
given to “H”.
Goodwill A/c
` `
1-4-2010 To R’s Capital A/c 24,800 1-4-2010 By R’s Capital A/c 12,400
1-4-2010 To S’s Capital A/c 18,600 1-4-2010 By S’s Capital A/c 12,400
1-4-2010 By H’s Capital A/c 18,600
43,400 43,400
Answer
(i) 1. At the time of admission of Govind
Let the total share of profit at the time of admission of Govind = 1
Share of New Partner - Govind = ¼
Remaining share of profit = 1 – ¼ = ¾
Now,
3 3 9
New share of Anil = x =
4 5 20
3 2 6
New share of Mukesh = x =
4 5 20
New ratio of Anil, Mukesh and Govind
9 6 1
: : i.e. = 9:6:5
20 20 4
2. At the time of admission of Madan
Let total share at the time of admission of Madan = 1
Share of new partner - Madan = 1/5

Remaining share = 1 – 1/5 = 4/5

Now,
4 9 9
New share of Anil = x =
5 20 25
New share of Mukesh = 4/5 x 6/20 = 6/25
New share of Govind = 4/5 x 5/20 =5/25
New ratio of Anil, Mukesh, Govind and Madan
9 6 5 1
: : : i.e. 9 : 6 :5 :5
25 25 25 5
(ii) Share of H in profit sharing ratio may be calculated as follows:
Share of H in Goodwill 18,600 3
H’s share = = =
Total Goodwill 43,400 7
Question 15
Ramu, Shamu and Raju were partners sharing profits and losses in the ratio of 3 : 2 : 2. Their
Balance Sheet as on 01-01-2009 was as follows:
Capital accounts Fixed assets 80,000
Ramu 30,000 Stock 15,000
Shamu 20,000 Debtors 12,000
Raju 20,000 70,000 Cash & bank 1,951
Reserves 14,000
Creditors 24,951
1,08,951 1,08,951
On 1st October, 2009, Ramu died. His heirs agreed that:
(i) Goodwill of the firm be valued at 2 years’ purchase of average profit of past three years.
Profits for the year 2006, 2007 and 2008 were ` 30,000, ` 40,000 and ` 47,600
respectively.
(ii) Fixed assets be revalued at ` 1,01,000.
(iii) Profit to be shared, earned in subsequent period after death of Ramu till settlement of his
executors’ claim.

14.25 Accounting
Ramu’s heirs account was settled on 31-12-2009 by bringing in required cash by remaining
partners in equal proportion leaving cash balance of ` 1,234. Each partner had drawn
@ ` 1,000 per month for personal use.
Profit for the current year after charging depreciation of ` 9,000 (` 6,000 for first three
quarters and ` 3,000 for last quarter ) was ` 46,600 earned evenly through-out the year.
You are requested to prepare Profit & Loss Appropriation A/c, Cash & Bank A/c, Ramu’s
Executor’s A/c and Partners’ Capital Accounts for the year ended on 31-12-2009 assuming
remaining partners’ decided not to retain goodwill in the books.
Answer
(i) Profit & Loss Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months)
To Depreciation 6,000 3,000 By Profit (W.N.1) 41,700 13,900
To Net profit 35,700 10,900
41,700 13,900 41,700 13,900
Profit & Loss Appropriation Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months
To Partners’ capital A/cs By Net Profit 35,700 10,900
Ramu 15,300 -
Shamu 10,200 3,043
Raju 10,200 3,044
To Ramu’s Executor A/c
(W.N.2) - 4,813
35,700 10,900 35,700 10,900
(ii) Partners’ Capital Accounts as on 1st October, 2009
Ramu Shamu Raju Ramu Shamu Raju
(`) (`) (`) (`) (`) (`)
To Drawings 9,000 9,000 9,000 By Balance b/d 30,000 20,000 20,000
To Ramu’s 87,414 - - By Reserves 6,000 4,000 4,000
Executors A/c

To Balance c/d - 55,276 55,276 By Goodwill∗

(W.N.3) 36,114 24,076 24,076
By Fixed 9,000 6,000 6,000
Assets∗∗
By Profit &
Loss
Appropriation 15,300 10,200 10,200
A/c
96,414 64,276 64,276 96,414 64,276 64,276
(iii) Partners’ Capital Accounts as on 31.12.2009

Shamu Raju Shamu Raju
(`) (`) (`) (`)
By Balance b/d 55,276 55,276
To Drawings 3,000 3,000 By Cash 62,255 62,255
To Goodwill 42,133 42,133 By Profit & Loss
To Balance c/d 75,441 75,442 Appropriation A/c 3,043 3,044
1,20,574 1,20,575 1,20,574 1,20,575
(iv) Ramu’s Executors’ A/c as on 31.12.2009

(`) (`)
To Bank 92,227 By Balance b/d 87,414
By P&L Appropriation
A/c 4,813
92,227 92,227
(v) Cash & Bank A/c
(`) (`)
To Balance b/d 1,951 By Ramu’s executors A/c 92,227
To Shamu’s capital A/c 62,255 By Partners’ Capital A/cs
(Drawings):
∗
As per para 36 of AS 10, ‘Accounting for fixed Assets, ‘goodwill should be recorded in the books only
when some consideration in money or money’s worth has been paid for it. However, in the above solution,
goodwill has been raised in the books at the time of death of a partner and written off by the remaining partners,
as per the information given in the question.
∗∗
Appreciation of fixed assets may also be recorded through “Revaluation Account”.

14.27 Accounting
To Raju’s capital A/c 62,255 Ramu 9,000

Shamu 12,000
Raju 12,000
By Balance c/d 1,234
1,26,461 1,26,461
Working Notes:
1. Profit for the year before depreciation:
`
Profit after depreciation 46,600
Add: Depreciation 9,000
Profit before depreciation 55,600
2. As per section 37 of the Partnership Act, in case of settlement of deceased

partner’s account on the date other then the date of death, the executor of
deceased partner has a choice to take
Either-
Unsettled capital as on 1.10.09
(A) Profit earned on un-settled capital = Profit x
Total capital as on 1.10.09
87,414
= 10,900 x
(87,414 + 55,276 + 55,276)
87,414
= 10,900 x = ` 4,813
1,97,966
Or-
(B) Interest on capital @ 6% i.e.
` 87,414 × 6% × 3/12 = ` 1,311
Option A is beneficial, therefore heirs of Ramu will opt for proportionate share
of profit i.e. ` 4,813.
3. Valuation of Goodwill:
` Weight Product
Profit for 2006 30,000 1 30,000
2007 40,000 2 80,000

2008 47,600 3 1,42,800

1,17,600 6 2,52,800
2,52,800
Weighted Average Profit = = ` 42,133
6
Goodwill = 2 years’ purchase of average profit = ` 42,133 × 2 = ` 84,266.
Question 16
Shiv and Mohan are partners in a firm sharing profits and losses equally. On 31st March, 2011,
the balances of their capital accounts were ` 3,00,000 and ` 2,00,000 respectively. The
average profits of the firm are ` 1,36,000 and the rate of normal profit is 20%.
On 1st April, 2011 they agreed to admit Hari as a partner for one fourth share. Hari will bring `
1,00,000 as capital.
You are required to compute the value of the goodwill of the firm on admission of Hari, if
goodwill is to be calculated on the basis of:
(1) 5 years purchase of super profit
(2) Capitalization method
(3) 3 years purchase of average profit. (5 Marks, May, 2011) (IPCC)
Answer
Valuation of goodwill
(1) 5 years purchase of super profit
`
Average profit 1,36,000
Less : Normal profit @ 20% of (` 3,00,000+ ` 2,00,000) (1,00,000)
Super profit 36,000
Value of goodwill = 5 × Super profit
= 5 × ` 36,000
= ` 1,80,000
Value of goodwill of the firm will be ` 1,80,000.
(2) Capitalisation method
Average profit
Normal value of business =
Normal rate of profit

14.29 Accounting
1,36,000
= = ` 6,80,000
20%
`
Normal value of business 6,80,000
Less: Actual capital employed – Shiv 3,00,000
– Mohan 2,00,000 (5,00,000)
Value of goodwill of the firm will be
1,80,000
(3) 3 years purchase of average profits
Goodwill = 3 × Average profit
= 3 × ` 1,36,000
= ` 4,08,000
Value of goodwill of the firm will be ` 4,08,000.
Question 17
Amit and Sumit are partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet
as on 31st March 2011 is given below:
Liabilities Amount Assets Amount
` `
Capital Accounts: Land & building 3,20,000
Amit 1,76,000 Investments (Market value ` 55,000) 50,000
Sumit 2,54,000 Debtors
3,00,000
Loan from Puneet 3,00,000 Less: Provision for doubtful debts 2,90,000
10,000
General Reserve 30,000 Stock 1,10,000
Employer’s provident fund 10,000 Cash at bank 50,000
Creditors 50,000
8,20,000 8,20,000
They decided to admit Puneet as a new partner from 1 April, 2011 on the following terms:
st
(1) Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet.
(2) Puneet’s loan account will be converted into his capital.
(3) The Goodwill of the firm is valued at ` 3,00,000. Puneet will bring his share of goodwill in
cash and the same was immediately withdrawn by the partners.

(4) Land and building was found undervalued by ` 1,00,000.

(5) Stock was found overvalued by ` 60,000.
(6) Provision for doubtful debts will be made equal to 5% of debtors.
(7) Investments are to be valued at their market price.
It was decided that the total capital of the firm after admission of new partner would be
` 10,00,000. Capital accounts of partners will be readjusted on the basis of their profit sharing
ratio and excess or deficiency will be adjusted in cash.
(a) Revaluation A/c
(b) Partners’ capital A/cs
(c) Balance Sheet of the firm after admission of a new partner (16 Marks, May, 2011) (IPCC)
Answer
Revaluation A/c
Particulars ` Particulars `
To Stock 60,000 By Land & building 1,00,000
To Provision for doubtful 5,000 By Investments 5,000
debts
To Profit transferred to
Amit’s capital A/c 24,000
Sumit’s capital A/c 16,000
1,05,000 1,05,000

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet
` ` ` ` ` `
To Amit’s By Balance b/d 1,76,000 2,54,00 -
capital A/c - - 60,000 By Puneets' Loan - 0 3,00,000
A/c -
To Puneet’s - - 30,000 By Puneet’s
capital A/c capital A/c 60,000 30,000 -
To Bank A/c 60,000 30,000 - By Bank A/c (W.N.2) - - 90,000
To Balance By Revaluation 24,000 16,000 -
c/d 4,00,000 3,00,000 3,00,000 A/c

14.31 Accounting
By General
reserve 18,000 12,000 -
By Bank 1,82,000 18,000 -
4,60,000 3,30,000 3,90,000 4,60,000 3,30,00 3,90,000
0
Balance Sheet as on 1st April, 2011

(After admission of a new partner - Puneet)
` `
Capital accounts Land and building (3,20,000 + 1,00,000) 4,20,000
Amit 4,00,000 Investments 55,000
Sumit 3,00,000 Debtors 3,00,000
Puneet 3,00,000 Less: Provision for doubtful debts (15,000) 2,85,000
Creditors 50,000 Stock (1,10,000 – 60,000) 50,000
Employers’ Cash at bank (W.N. 3)
provident fund∗ 10,000 2,50,000
10,60,000 10,60,000
Working Notes:
(1) Calculation of incoming partner’s share, new profit sharing ratio and sacrificing
ratio
Amit Sumit
Old profit sharing ratio 3/5 2/5
Surrendered by old partners 3/5 x 1/3 = 1/5 2/5 x 1/4 = 1/10
Remaining share 3/5 – 1/5 = 2/5 2/5 – 1/10 = 3/10
Puneet’s total share in profits = 1/5 + 1/10 = 3/10

New profit sharing ratio of Amit : Sumit : Puneet =2/5 : 3/10 : 3/10 = 4:3:3
Sacrificing ratio of Amit : Sumit is 1/5 : 1/10 : or 2:1
∗
It is assumed that Employer’s Provident Fund represents employer’s contribution to provident fund
which is yet to be deposited. Hence, the same represents a current liability.

(2) Calculation of share of goodwill by old partners

Goodwill of the firm was ` 3,00,000
3
Share of Puneet in goodwill = ` 3,00,000 × = ` 90,000
10
Goodwill will be distributed among the old partners in their sacrificing ratio of 2:1 i.e.
` 60,000 by Amit and ` 30,000 by Sumit.
(3) Calculation of closing balance of bank account after admission
Bank A/c
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 50,000 By Amit’s capital A/c 60,000
To Puneet’s capital A/c 90,000 By Sumit’s capital A/c 30,000
To Sumit’s capital A/c 18,000 By Balance c/d 2,50,000
To Amit’s capital A/c 1,82,000
3,40,000 3,40,000
Question 18
X,Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On 31st
March, 2011 Y retires and X and Z decide to share profits and losses in the ratio of 5:3. Then
immediately, W is admitted for 3/10th shares in profits, 2/3rd of which was given by X and rest
was taken by W from Z . Goodwill of the firm is valued at ` 2,16,000 W brings required amount
of goodwill.
Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W if
they do not want to raise goodwill in the books of accounts. (4 Marks, May, 2011) (IPCC)
Answer
Journal Entries
Date Particulars L.F. Dr. (`) Cr.(`)
31.3.11 X’s capital A/c Dr. 39,000
Z’s capital A/c Dr. 33,000
To Y’s capital A/c (3/9 х ` 2,16,000) 72,000
(Being Y’s share of goodwill adjusted in the capital
accounts of gaining partners in their gaining ratio
13:11 – Refer Working Note.)
Cash A/c Dr. 64,800

14.33 Accounting
To W’s capital A/c (3/10 х ` 2,16,000) 64,800

(Being the amount of goodwill brought in by W)
W’s capital A/c Dr. 64,800
To X’s capital A/c 43,200
To Z’s capital A/c 21,600
(Being the goodwill credited to sacrificing partners
in their sacrificing ratio 2:1)
Working Note:
Calculation of gaining ratio of X and Z
Gaining ratio = New ratio – Old ratio
For X = 5/8-4/9 = 13/72
Z = 3/8-2/9 = 11/72
Gaining ratio = 13:11
Question 19
A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and
B are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes
` 35,000 as capital for 1/5th share of profits to be acquired equally from both A & B. The
capital accounts of old partners are to be adjusted on the basis of the proportion of C’s capital
to his share in the business. Calculate the amount of actual cash to be paid off or brought in
by the old partners for the purpose and pass the necessary journal entries.
Answer
Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each
Calculation of New Profit Sharing Ratio
A B
Existing ratio 3/5 2/5
Less: Share of profit transferred to C (1/10) (1/10)
New share 5/10 3/10
New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10
Calculation of Total Capital of the Reconstituted Firm
Capital brought in by C for 1/5th share = ` 35,000
Total Capital = ` 35,000 x (5/1) = ` 1,75,000

Calculation of Actual Cash to be paid or brought in by old partners

A B C
(`) (`) (`)
New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 52,500 35,000
Less: Adjusted old capital of A & B (80,000) (60,000) -
Cash brought in 7,500 35,000
Cash to be paid (7,500)
Journal Entries
Dr. Cr.
Particulars L.F. Amount Amount
` `
Cash A/c Dr. 7,500
(Being the shortage of capital brought in cash by A)
B’s Capital A/c Dr. 7,500
To Cash A/c 7,500
(Being the excess capital withdrawn by B)
Note: Entries for cash brought in and paid off only, have been passed.
Question 20
Good, Better and Best are in partnership sharing profits and losses in the ratio 3 : 2 : 4. Their
capital account balances as on 31st March, 2012 are as follows:
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:
(1) ` 22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, ` 1,600 and `
1,800 respectively.
(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are charged
interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net profit
before making any appropriation.

14.35 Accounting
(5) Better is entitled to commission @ 15% of the net profit before charging Interest on
Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
` 1,750 at the end of every month and Best ` 1,250 at the middle of every month.
(7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission of 12%
of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any of
the above adjustments was ` 2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year ended on 31st
March, 2012 (8 Marks, May 2012) (IPCC)
Answer
Profit and Loss Appropriation Account
for the year ended on 31st March, 2012
To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000
To Salaries to partners By Interest on drawings
(W.N.3)
Good 28,800 Good 1,040
Better 19,200 Better 770
Best 21,600 69,600 Best 600 2,410
To Interest on Capital
Good 10,200
Better 6,600
Best 7,320 24,120
To Commission to partners
Good 18,000
Better 10,281
(W.N.4)
Best 22,500 50,781
To Partners’ Capital A/cs
(profit)
Good 20,223
Better 13,482
Best 26,964 60,669
2,27,410 2,27,410

Working Notes:
1. Profit and Loss Account
To Salary (Firm’s Accountant) 24,000 By Profit 2,76,000
To Commission (Firm’s
Accountant) (W.N.2) 27,000
To Net Profit transferred to
P & L Appropriation A/c 2,25,000
2,76,000 2,76,000
2. Commission of Firm’s Accountant
Profit after salary of firm's accountant ( 2,76,000 - 24,000 )
= × 12% = × 12% = ` 27,000
(100+12 ) % (100+12 ) %
3. Interest on Drawings
`
Good (at the beginning of every month) (` 2,000 x 6.5 x 8%) 1,040
Better (at the end of every month) (` 1,750 x 5.5 x 8%) 770
Best (at the middle of every month) (` 1,250 x 6 x 8%) 600
2,410
4. Commission of Better
Commission of Better = [Net profit for appropriation (excluding interest on drawings) -
General reserve – Interest on capital - Salaries to partners – Commission to Good and
Best] x 15%
Commission to Better = ` [2,25,000 – 22,240 – 24,120 – 69,600– 18,000 – 22,500] x 15%
= ` 68,540 x 15% = `10,281.
Question 21
X, Y and Z are partners sharing profits and losses equally. On 1st December, 2011 Z retired
from the partnership firm. The capitals of the partners, after all necessary adjustments stood at
` 45,000, ` 75,000 and ` 50,000 respectively. X and Y continued to carry on the business
without settling the accounts of Z. Final payment to Z made on 1st March, 2012. The
partnership firm made profit amounting to ` 30,000 during the period from 1st December,
2011 to 29th February, 2012.
What are the rights of Z to share subsequent profit as per the provisions of Section 37 of the
Indian Partnership Act? (4 Marks, May 2012) (IPCC)

14.37 Accounting
Answer
Under Section 37 of the Partnership Act, Z can exercise any of the following two options in the
absence of a contract:
1. Z is entitled at his option to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the firm or
2. Z is entitled to interest at the rate of six per cent per annum on the amount of his share in
the property of the firm.
It may be noted that Z is not bound to make election until the share of the profit that would be
payable to him has been ascertained.
Question 22
Arun and Varun were partners sharing profits in the ratio of 13 : 11 respectively. On 1st April,
2012 they admitted Tarun as a new partner on the following conditions:
(i) All partners would share profits equally in the new firm.
(ii) Tarun would bring in ` 52,000 as his capital and ` 36,000 as his share of goodwill. No
goodwill account appeared in the books of the firm at the time of Tarun's admission and it
was decided not to open any goodwill account. Adjustment for Tarun's goodwill being
made through capital accounts.
Pass journal entries to record all the transactions on Tarun's admission.
Clearly show the calculation of ratio of sacrifice. (5 Marks, November 2012) (IPCC)
Answer
Journal Entries on Tarun’s admission
Year Dr. Cr.
2012 ` `
1st April Bank A/c Dr. 88,000
To Tarun’s Capital A/c (52,000 + 36,000) 88,000
(Being amount brought by Tarun towards its Capital and
share of Goodwill)
Tarun’s Capital A/c Dr. 36,000
To Arun’s Capital A/c 22,500
To Varun’s Capital A/c 13,500
(Being Tarun’s share of goodwill in the firm ` 36,000, has
been credited to the old partners in the sacrificing ratio 5:3)

Working Note:
Calculation of Sacrificing Ratio
Old Ratio New Ratio Sacrificing Ratio (Old – new)
Arun 13/24 1/3 (13/24 – 1/3) = 5/24
Varun 11/24 1/3 (11/24 – 1/3) = 3/24
Tarun -- 1/3 --
Therefore sacrificing ratio is 5:3.

Question 23
Atul, Balbir and Chatur were carrying on a business in partnership sharing profits in the ratio
of 5 : 3 : 2 respectively. On 31st March, 2012 their Balance Sheet stood as follows:
Liabilities ` Assets ` `
Atul's Capital 6,25,000 Goodwill 80,000
Balbir's Capital 3,75,000 Land and Buildings 7,00,000
Chatur's Capital 2,50,000 Furniture 1,65,000
General Reserve 1,00,000 Stock 2,86,000
Trade Creditors 2,10,000 Trade Debtors 1,80,000
Less: Provision for Bad 3,600 1,76,400
Cash at Bank 1,52,600
Total 15,60,000 15,60,000
Atul retired on the above mentioned date and partners agreed that :
(i) The current value of goodwill be taken to be equal to the book value of the asset.
(ii) Land and Buildings be considered worth ` 9,00,000.
(iii) The provision for bad debts on trade debtors be raised to 5%.
(iv) Provision be made for compensation of ` 5,000 to an ex-employee.
(v) Half of the amount due to Atul be paid immediately in cash and the balance be treated as
10% loan, repayable within 3 years.
In order to facilitate cash payment to Atul, Balbir and Chatur brought in ` 3,00,000 in the ratio
of 3 : 2 respectively.
Prepare Revaluation Account, the Capital Accounts of all the partners and Bank Account.
Also draw the Initial Balance Sheet of Balbir and Chatur, immediately after Atul's retirement.
(16 Marks, November 2012) (IPCC)

14.39 Accounting
Answer
1 Revaluation Account
` `
To Provision for doubtful debts 5,400 By Land and Buildings 2,00,000
[(5% of 1,80,000) – 3,600]
To Provision for compensation 5,000
To Partners’ Capital Accounts
(Profit)
Atul 94,800
Balbir 56,880
Chatur 37,920 1,89,600
2,00,000 2,00,000
2. Partners’ Capital Accounts
Particulars Atul Balbir Chatur Particulars Atul Balbir Chatur

` ` ` ` ` `
∗
To Goodwill By Balance b/d 6,25,000 3,75,000 2,50,000
(5:3:2) 40,000 24,000 16,000
To Cash A/c 3,84,900 By General
Reserve 50,000 30,000 20,000
To 10% Loan 3,84,900 By Revaluation 94,800 56,880 37,920
A/c
To Atul’s By Balbir’s &
Capital - 24,000 16,000 Chatur’s
A/c Capital
Accounts 40,000
To Balance By Cash A/c 1,80,000 1,20,000
c/d 5,93,880 3,95,920
8,09,800 6,41,880 4,27,920 8,09,800 6,41,880 4,27,920
3. Bank Account
` `
To Balance b/d 1,52,600 By Atul’s Capital A/c 3,84,900
∗
Goodwill appearing in the given balance sheet as on 31st March, 2012 has been written off in line with
the provisions of Accounting Standards.

To Balbir’s capital A/c 1,80,000 By Balance c/d 67,700

To Chatur’s capital A/c 1,20,000
4,52,600 4,52,600
4. Balance Sheet of Balbir and Chatur
as at 31.03.2012 (after Atul’s retirement)
Equity & Liabilities ` Assets `
Capital Accounts: Land and Buildings 9,00,000
Balbir 5,93,880 Furniture 1,65,000
Chatur 3,95,920 Stock 2,86,000
10% Loan from Atul 3,84,900 Trade Debtors 1,80,000
Trade Creditors 2,10,000 Less: Provision for 1,71,000
Provision for doubtful debts (9,000)
Compensation 5,000 Cash at Bank 67,700
15,89,700 15,89,700
Question 24
P, Q and R were carrying on a business in partnership, sharing profits and losses in the ratio
of 5 : 3 : 2 respectively. The firm earned a profit of ` 3,60,000 for the accounting year ended
31st March, 2012 on which date the firm's Balance Sheet stood as follows:
Balance Sheet as at 31st March, 2012
P's Capital 7,00,000 Freehold Land and Building 8,00,000
Q's Capital 5,70,000 Machinery 3,50,000
R's Capital 4,30,000 Furniture & Fixtures 1,02,000
Creditors 79,400 Stock 2,98,800
Outstanding Expenses 4,900 Debtors 1,60,000
Cash at Bank 73,500
Total 17,84,300 Total 17,84,300
P died on 31st August, 2012. According to firm's partnership deed, in case of death of a
partner:-
(i) Assets and Liabilities have to be revalued by an independent valuer.
(ii) Goodwill is to be calculated at two years' purchase of average profits for the last three
completed accounting years and the deceased partner's capital account is to be credited

14.41 Accounting
with his share of goodwill.

(iii) The share of the deceased partner in the profits for the period between end of the previous
accounting year and the date of death is to be calculated on the basis of the previous
accounting year's profits. Post death of P, Q & R will share profit in the ratio of 3 : 2.
Profits for the accounting years 2009-2010 and 2010-2011 were as follows :-
`
For the year ended 31st March, 2010 2,90,000 .
For the year ended 31st March, 2011 3,40,000
Drawings by P from 1st April, 2012 to the date of his death totalled ` 46,000.
On revaluation, Freehold Land and Building was appreciated by ` 1,00,000; Machinery was
depreciated by ` 10,000 and a Provision for Bad Debts was created @ 5% on Debtors as on
31st March, 2012. P's sole heir was given ` 5,00,000 immediately and the balance along with
interest @ 12% per annum was paid to him on 31st March, 2013.
Prepare Revaluation Account, P's Capital Account and P's Heir Account, giving important
working notes. (16 Marks, May 2013) (IPCC)
Answer
Revaluation Account
Particulars ` ` Particulars `
To Machinery 10,000 By Freehold Land &
To Provision for doubtful Building 1,00,000
debts( 5% of 1,60,000) 8,000
To Capital accounts:
P 41,000
Q 24,600
R (Profit transferred) 16,400 82,000
1,00,000 1,00,000
P’s Capital Account
To Drawings 46,000 By Balance b/d 7,00,000
To P’s heir 11,00,000 By Q’s capital A/c 1,98,000
(Balance transferred) By R’s capital A/c 1,32,000
By Profit and Loss Suspense A/c 75,000
By Revaluation A/c 41,000
11,46,000 11,46,000

P’s Heir Account

Date Particulars ` Date Particulars `
31.08.2012 To Bank A/c 5,00,000 31.08.2012 By P’s Capital A/c 11,00,000
31.03.2013 To Bank A/c 6,42,000 31.03.2013 By Interest A/c
⎛ 7⎞
⎜ 6,00,000 × 12% × ⎟ 42,000
⎝ 12 ⎠
11,42,000 11,42,000
Working Notes:
1. Calculation of gaining ratio of Partners Q and R
New share Old share Gaining share Sacrificing share
P 5/10 5/10
Q 3/5 3/10 3 3 6−3 3
− = =
5 10 10 10
R 2/5 2/10 2 2 4−2 2
− = =
5 10 10 10
2. Calculation of Goodwill
`
2009-10 2,90,000
2010-11 3,40,000
2011-12 3,60,000
9,90,000
Average Profit = 9,90,000/3 = ` 3,30,000
Goodwill = 3,30,000 x 2 = ` 6,60,000
5
Share of P in goodwill = 6,60,000 × = ` 3,30,000
10
Adjustment for P’s share of goodwill through Q’s and R’s capital accounts (in their
gaining ratio 3:2) :
Q’s capital A/c (3,30,000 x 3/5) ` 1,98,000
R’ s capital A/c (3,30,000 x 2/5) ` 1,32,000
3. Share of P in Profits for the period between 1.4.2012 to 31.8.2012 i.e. till the date of
death
1st April, 2012 to 31st August, 2012 = 5 months
Profit for year 2011-12 = ` 3,60,000

14.43 Accounting
5
Estimated profit for 5 months = 3,60,000 x =` 150,000
12
5
Share of P = 1,50,000 x =` 75,000
10
Question 25
Pathak, Quereshi and Ranjeet were partners sharing profits in the ratio of 7 : 5 : 3 respectively. On
31st March, 2013 Quereshi retired when the firm's Balance Sheet was as follows :
Capital Accounts : Land and Building 10,00,000
Pathak 8,50,000Plant and Machinery 4,65,000
Quereshi 6,20,000Furniture, Fixture and Fittings 2,30,100
Ranjeet 3,70,000Stock 1,82,200
General Reserve 2,25,000Trade Debtors 2,00,000
Trade Creditors 1,13,000Less : Provision for Bad Debts 6,000 1,94,000
Cash at Bank 1,06,700
Total 21,78,000 Total 21,78,000
It was agreed that :
(i) Land & Building be appreciated by 20%.
(ii) Plant & Machinery be depreciated by 10%.
(iii) Provision for Bad Debts be made equal to 4% of Trade Debtors.
(iv) Outstanding repairs bill amounting to ` 1,500 be recorded in the books of account.
(v) Goodwill of the firm be valued at ` 3,00,000 and Quereshi's capital account be
credited with his share of goodwill without raising goodwill account.
(vi) Half of the amount due to Quereshi be immediately paid to him by means of a cheque
and the balance be treated as a loan bearing interest @ 12% per annum.
After Quereshi's retirement, Pathak and Ranjeet admitted Swamy as a new partner with effect
from 1st April, 2013. Pathak, Ranjeet and Swamy agreed to share profits in the ratio of 2 : 1 : 1
respectively. Swamy brought patents valued at ` 20,000 and ` 3,80,000 in cash including
payment for his share of goodwill as valued by the old firm. The entire amount of
` 4,00,000 was credited to Swamy's Capital Account. Adjustments were made in the capital
accounts for Swamy's share of goodwill.
You are required to :
(a) Pass journal entries for all the above transactions without any narration, and

(b) Prepare the capital account of all the partners. (16 Marks, November 2013) (IPCC)
Answer
(a) Journal Entries on 31st March, 2013
` `
1 Land and Building Dr. 2,00,000
To Revaluation A/c 2,00,000
2. Revaluation A/c Dr. 46,500
To Plants and Machinery 46,500
3 Revaluation A/c Dr 3,500
To Provision for bad debts 2,000
[(` 2,00,000 x 4%) - ` 6000]
To Provision for Outstanding repair bills 1,500
4 Pathak’s Capital A/c Dr. 70,000
Ranjeet’s Capital A/c Dr. 30,000
To Quereshi’s Capital A/c 1,00,000
5 Revaluation A/c Dr. 1,50,000
To Pathak’s Capital A/c 70,000
To Quereshi’s Capital A/c 50,000
To Ranjeet’s Capital A/c 30,000
6 General reserve A/c Dr. 2,25,000
To Pathak’s Capital A/c 1,05,000
To Quereshi’s Capital A/c 75,000
7 Quereshi’s Capital A/c Dr. 8,45,000
To Bank A/c 4,22,500
To Quereshi’s Loan A/c 4,22,500
8 Patents Dr. 20,000
Cash A/c Dr. 3,80,000
To Swamy’s Capital A/c 4,00,000
9 Swamy’s Capital A/c (` 3,00,000/4) Dr. 75,000
To Pathak’s Capital A/c 60,000

(b) Capital Accounts of partners
14.45
Amount Amount
Pathak Quereshi Ranjeet Swamy Pathak Quereshi Ranjeet Swamy
31.3.13 31.3.13
To Quereshi 70,000 30,000 By Bal. b/d 8,50,000 6,20,000 3,70,000
By general reserve 1,05,000 75,000 45,000
Accounting
To Bank A/c 4,22,500 By Pathak & 1,00,000

Ranjeet
To Loan A/c 4,22,500 By Revaluation A/c 70,000 50,000 30,000
To Bal. c/d 9,55,000 4,15,000

10,25,000 8,45,000 4,45,000 10,25,000 8,45,000 4,45,000
1.4.13 1.4.13
To Pathak 60,000 By Bal. b/d 9,55,000 4,15,000
To Ranjeet 15,000 By Patents 20,000
To Bal. c/d 10,15,000 4,30,000 3,25,000 By Cash 3,80,000
By Swamy 60,000 15,000
10,15,000 4,30,000 4,00,000 10,15,000 4,30,000 4,00,000
Working Notes:
1. Calculation of Gaining ratio after retirement of Quereshi on 31st March, 2013
Pathak : Quereshi : Ranjeet Pathak : Ranjeet
Old Ratio 7/15 : 5/15 : 3/15 New Ratio 7/10 : 3/10
Gain of Pathak New Ratio - Old Ratio
7/10 - 7 / 15
(105 – 70) / 150
35 / 150
Gain of Ranjeet 3/10 – 3/15 = (45 – 30)/150 = 15/150
Gaining Ratio = 35 : 15 =7:3
2. Calculation of Sacrificing ratio of Pathak and Ranjeet at time of admission of
Swamy
1st April, 2013 7:3 (ratio between old partners)
2 7 1 3
New ratio 2:1:1 − −
4 10 4 10
10 - 14 5-6
20 20
4 1
=
20 20
Sacrificing ratio 4:1
Question 26
The Balance Sheet of Amit, Bhushan and Charan, who share profits and losses as 3 : 2 : 1
respectively, as on 01.04.2013 is as follows:

(`) (`)
Capital Accounts: Amit 1,80,000 Machinery 1,50,000
Bhushan 1,60,000 Furniture 1,50,000
Charan 1,40,000 Debtors 80,000
Current Accounts: Bhushan 16,000 Less: Provision for 4,000 76,000
doubtful Debts
Creditors 1,20,000 Stock 2,10,000
Cash 20,000

14.47 Accounting
- Current Account: Charan 10,000

6,16,000 6,16,000
1
Dev is admitted as a partner on the above date for th share in the profit and loss. Following
5
are agreed upon:
(1) The profit and loss sharing ratio among the old partners will be equal.
(2) Dev brings in ` 1,50,000 as capital but is unable to bring the required amount of premium
for goodwill.
(3) The goodwill of the firm is valued at ` 60,000.
(4) Assets and liabilities are to be valued as follows:
Machinery ` 2,06,000 : Furniture ` 1,28,000 : Provision for doubtful debts @ 10% on
debtors.
(5) Necessary adjustments regarding goodwill and Profit / loss on revaluation are to made
through the Partner's Current Accounts.
(6) It is decided that the revalued figures of assets and liabilities will not appear in the
Balance Sheet of the new firm.
(7) Capital Accounts of the old partners in the new firm should be proportionate to the new
profit and loss sharing ratio, taking Dev's Capital as base. The existing partners will not
bring cash for further capital. The necessary adjustments are to be made through the
partner’s Current Account.
Prepare Partner's Capital & Current Account, and the Balance Sheet of the new firm after
admission. (16 Marks, IPCC May, 2014)

Answer
In the books of Firm
Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance c/d 2,00,000 2,00,000 2,00,000 1,50,000 By Balance b/d 1,80,000 1,60,000 1,40,000
(Working Note 1) By Bank A/c - - - 1,50,000
By Partners’ 20,000 40,000 60,000
Current A/cs
(bal. fig)
2,00,000 2,00,000 2,00,000 1,50,000 2,00,000 2,00,000 2,00,000 1,50,000
Partners’ Current Accounts

Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance b/d - - 10,000 - By Balance b/d - 16,000 - -
To Memorandum 8,000 8,000 8,000 6,000 By Memorandum 15,000 10,000 5,000 -
Revaluation A/c Revaluation
To Amit and - - 6,000 12,000 By Dev and Charan 14,000 4,000 - -
Bhushan (Goodwill
(Goodwill adjustment) adjustment)
To Partners Capital 20,000 40,000 60,000 - By Balance c/d - 18,000 79,000 18,000
Issues in Partnership Accounts
A/cs
To Balance c/d 1,000 - -
29,000 48,000 84,000 18,000 29,000 48,000 84,000 18,000
14.48
14.49 Accounting
Balance Sheet of new firm

After Dev’s Admission
Capital Accounts: A/cs Machinery 1,50,000
Amit 2,00,000 Furniture 1,50,000
Bhushan 2,00,000 Stock 2,10,000
Charan 2,00,000 Debtors 80,000
Dev 1,50,000 7,50,000 Less: Provision for doubtful debts 4,000 76,000
Current Account: Amit 1,000 Cash 1,70,000
Creditors 1,20,000 Current Accounts:
Bhushan 18,000
Charan 79,000
Dev 18,000
1,15,000
8,71,000 8,71,000
Working Notes:
1. Dev. joins the business for 1/5th share and brings ` 1,50,000 as capital. Thus, total
capital of new firm will be ` 7,50,000 (1,50,000 × 5). Total capital of Amit, Bhushan &
Charan will be ` 6,00,000 (7,50,000 – 1,50,000) which will be shared by them equally i.e.
2,00,000 each.
2. Calculation of New profit sharing ratio
Amit Bhushan Charan Dev
4 1 4 1 4 1 1
× × ×
5 3 5 3 5 3 5
4 4 4 3
15 15 15 15
4:4:4:3
3. Adjustment of Goodwill
Sacrificing/gaining ratios of old partners
Amit Bhushan Charan Dev
4 3 4 2 4 1 1
- - -
15 6 15 6 15 6 5
24 − 45 24 − 30 24 − 15
90 90 90

21 6 9 18
Sacrifice Sacrifice Gain Gain
90 90 90 90
Entry for adjustment for goodwill of ` 60,000
Charan Dr. 6,000
Dev Dr. 12,000
To Amit 14,000
To Bhushan 4,000
(Being goodwill adjusted in partners sacrificing/gaining ratios)
4. Memorandum Revaluation A/c
Amount Amount`
`
To Furniture 22,000 By Machinery 56,000
To Provision for doubtful debts 4,000
To Partners’ Current A/cs:
Amit 15,000
Bhushan 10,000
Charan 5,000 30,000
56,000 56,000
To Machinery 56,000 By Furniture 22,000
By Provision for doubtful debts 4,000
By Partners’ Current A/cs:
Amit 8,000
Bhushan 8,000
Charan 8,000
Dev 6,000 30,000
56,000 56,000
Question 27
Anuj, Ayush and Piyush are in partnership sharing profits and losses in the ratio 2 : 2 : 1. Their
Balance Sheet as on 31.3 .2014 is as follows:
Liabilities ` ` Assets `
Capital accounts: Fixed assets:
Anuj 3,75,000 Plant 7,87,000

14.51 Accounting
Ayush 2,80,000 Current assets:

Piyush 2,25,000 8,80,000 Stock 1,03,000
General Reserve 1,88,000 Debtors 1,56,000
Creditors 2,16,000 Bank FD 2,25,000
Bank balance 13,000
12,84,000 12,84,000
Anuj decided to retire with effect from 1.4.2014.
The remaining partners agreed to share profits and losses equally in future.
The following adjustments were agreed to be made upon retirement of Anuj.
(i) Goodwill was to be valued at 1 year purchase of the average profits of the preceding 3
years on the date of retirement.
The average profits of the past 3 years were as follows:
Year ended `
31.3.2014 3,30,000 (as per draft accounts)
31.3.2013 2,32,000
31.3.2012 2,20,900
The partners decided not to raise goodwill account in the books.
(ii) The assets were revalued as follows:
Plant to be depreciated by 10%
Creditors amounting to ` 10,000 were omitted to be recorded;
` 6,000 is to be written off from stock;
Provision for doubtful debts to be created @ 5% of the debtors;
Interest accrued on FD amounting to ` 9,000 was omitted to be recorded.
The above adjustments were to be made from the profit for the year ended 31.3 .2014
before calculation of goodwill.
(iii) Anuj agreed to take over the bank FD including interest accrued thereon in part payment
of his dues and the balance would remain as a loan, carrying interest of 8% p.a.
(iv) Ayush and Piyush agreed to bring in sufficient cash to make their capital proportionate
and maintain a bank balance of ` 1,50,000.
You are required to prepare
(I) Capital accounts of partners as on 1.4.2014 giving effect to the above adjustments.

(2) Balance Sheet as on 1.4.2014 after Anuj’s retirement. (16 Marks, IPCC November, 2014)
Answer
Partners’ Capital Accounts as on 1.4.2014
Anuj Ayush Piyush Anuj Ayush Piyush
To Anuj 22,950 68,850 By Balance b/d 3,75,000 2,80,000 2,25,000
To Revaluation 37,400 37,400 18,700 By General 75,200 75,200 37,600
Loss Reserves
To Bank FD 2,34,000 By Ayush 91,800
To 8% Loan 2,70,600 and Piyush
To Balance c/d* 3,03,450 3,03,450 By Cash
(Bal. fig.) - 8,600 1,28,400
5,42,000 3,63,800 3,91,000 5,42,000 3,63,800 3,91,000
Balance Sheet as on 1.4.2014 after Anuj’s retirement

Liabilities Amount (`) Assets Amount (`)
Anuj’s Loan 2,70,600 Plant(90% of ` 7,87,000) 7,08,300
Creditors(2,16,000+10,000) 2,26,000 Stock (` 1,03,000 less ` 97,000
6,000)
Capital Accounts*: Debtors(95% of ` 1,56,000 1,48,200
Ayush 3,03,450 Bank Balance 1,50,000
Piyush 3,03,450
11,03,500 11,03,500
*Total of capital balances should be ` 6,06,900 which is proportioned to individual partners in
their profit sharing ratio.
Working Notes:
1. Profit / Loss on revaluation
Revaluation Account
Amount Amount
(`) (`)
To Plant 78,700 By Interest on FD 9,000
To Creditors 10,000 By Loss on revaluation 93,500
To Inventory 6,000
To Provision for doubtful debts 7,800 -
1,02,500 1,02,500

14.53 Accounting
2. Calculation of Goodwill
Goodwill Valuation
Profit of year ended `
31.3.2014 (` 3,30,000 less ` 93,500) 2,36,500
31.3.2013 2,32,000
31.3.2012 2,20,000
Total Profits 6,88,500
Average Profit = 6,88,500/3 = 2,29,500
Goodwill valued at 1 year purchase amounting ` 2,29,500.
3. Adjustment for goodwill among partners
Anuj’s share of goodwill (2,29,500 x 2/5) = 91,800
Gaining ratio of Ayush and Piyush
Ayush Piyush
1 2 1 1
− −
2 5 2 5
5−4 1 5−2 3
= =
10 10 10 10
Gaining Ratio = 1: 3
Entry for adjustment of goodwill
` `
Ayush’s capital A/c Dr. 22,950
Piyush’s capital A/c Dr. 68,850
To Anuj’s capital A/c 91,800
(Being Anuj’s share of goodwill debited to remaining
partners in their gaining ratio)

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14

Issues in Partnership Accounts

© The Institute of Chartered Accountants of India

Year ended 31.3.2004 − Profit ` 55,000

Ram Rahim Robert Richard Ram Rahim Robert Richard

To Revaluation 10,000 6,000 4,000 − By Balance 1,00,000 1,50,000 2,00,000 −

To Loan from 2,00,000 By General 1,00,000 60,000 40,000 −

To Bank 58,000 By Goodwill 55,000 33,000 22,000 −

To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______

2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 −

To Goodwill∗ 55,000 36,667 − 18,333 By Balance 2,45,000 2,37,000 − −

By Loan A/c − − − 2,00,000

To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500

2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500

© The Institute of Chartered Accountants of India

Balance Sheet as at 31.3.2005

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Partners’ Capital Accounts

(iii) Balance Sheet of LH & Co.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Following is the Trial Balance of the firm as on 31.3.2007:

© The Institute of Chartered Accountants of India

Calculation of profit Total X Y Z

© The Institute of Chartered Accountants of India

(iv) Balance Sheet of YZ Ltd.

© The Institute of Chartered Accountants of India

Total capital of the firm before conversion:

© The Institute of Chartered Accountants of India

Balance Sheet as at 31.3.2008

© The Institute of Chartered Accountants of India

(iii) Balance Sheet as at 01.04.2008

© The Institute of Chartered Accountants of India

D 2,00,000 Stock 6,50,000

© The Institute of Chartered Accountants of India

D’s Capital A/c Dr. 1,00,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

The Adjusting Journal entry would be

© The Institute of Chartered Accountants of India

(iii) A provision of 5% be created for bad debts on debtors.

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G’s Capital Account Dr. 15,000

7. E’s Loan Account Dr. 33,750

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Remaining share = 1 – 1/5 = 4/5

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© The Institute of Chartered Accountants of India

To Balance c/d - 55,276 55,276 By Goodwill∗

96,414 64,276 64,276 96,414 64,276 64,276

(iii) Partners’ Capital Accounts as on 31.12.2009

(iv) Ramu’s Executors’ A/c as on 31.12.2009

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To Raju’s capital A/c 62,255 Ramu 9,000

2. As per section 37 of the Partnership Act, in case of settlement of deceased

© The Institute of Chartered Accountants of India

2008 47,600 3 1,42,800

To Balance c/d 2,45,000 2,37,000 − − ___ _ _ ___