UNIT V | unit 5 accounting for dissolution of partnership firm

UNIT V

Accounting of Dissolution of Partnership firm

Q1) How do we prepare Final Accounting in Partnership Account?

A1) The final closing of a partnership company is similar to that of a sole proprietor. The only difference is that in a sole proprietorship, the profit is added to the business owner's capital, whereas the profit is distributed among the partners. First, prepare a trial balance from all debit and credit balances for all ledger accounts. This will generate a trading account and a profit and loss account. Finally, a balance sheet is created that reflects your position at the end of the period. The trading account shows gross profit or total loss, and the profit and loss account reflect the net position.

Manufacturing Account

This is provided only for manufacturing concerns. The production cost is displayed.

II. Trading Account

The trading account is prepared for the transaction and is part of the income statement. Record all transactions

Related to goods and direct costs. If the credit side is larger than the debit side, the gross profit thus obtained is

It will be credited to the income statement. On the other hand, if the debit is greater than the gross loss

It will be debited on the income statement.

a. Debit side of trading account

Opening stock
Purchases after deducting the amount of burnt items, partner withdrawn items, and items

Distributed as a free sample

Direct costs mean costs that are directly related to the production or purchase of goods, such as wages.

Manufacturing costs for inward freight, factory rent, octroi, import taxes, tariffs, electricity, etc. Factories, etc.

b. Credit side of Trading Account

Sale of goods
Closed stock
Items that have been burnt down, items that have been withdrawn by a partner, items that have been distributed as free samples, etc. may appear here instead of being deducted from your purchase.

Partnership-style business organizations are very similar to sole proprietorship-style businesses, but there are certain exceptions to this form of business organization that must be taken into account when preparing a partnership company account.

These exceptions, called special aspects of partnership accounts, are:

Maintaining a Partner's Capital Account

In partnership operations, capital accounts are maintained in two different ways: (a) fixed capital and (b) variable capital.

The fixed capital method maintains two accounts, the capital account and the current account, while the variable capital method maintains only the capital account.

Distribution of Profit and Loss Between Partners

Since multiple individuals are involved in the partnership business, care must be taken in the distribution of profit and loss. A profit and loss account is provided for this purpose.

Adjustment of Misappropriation of Profits

One of the special aspects of partnership is to coordinate your partnership account whenever you need to adjust or modify past events. In the past, the profit-sharing ratio between partners may have been incorrect, in which case the company will make adjustments to correct the error.

Reorganization of Partnership Firm

Restructuring is referred to as changes that occur with respect to partnerships or in partnership actions that lead to the creation of new terms and conditions between partners.

The following situations lead to the restructuring of the partnership company.

Admission of a new partner
Partner Retirement / Partner Death
Dissolution of partner

Q2) Write note on what Admission of Partnership means.

A2) Joining a partner means getting a new partner into a partnership company for a portion of the profit and paying back his or their share of the company's goodwill and capital. If a company needs more money or services / knowledge to grow its business, they will approach the new partner against the company's share of profits with the consent of all old partners.

Admission of Partner

Partner admission refers to the situation in which an individual joins an existing partnership company and the old partner agrees to sacrifice a share of profits. This is the mode of partnership rebuilding. This is because with the addition of a new partner, all partners, including the new partner, must create new contracts / contracts and terminate existing contracts / contracts.

All (smallest) old partners sacrifice some of the company's profits, and new partners receive some of their profits according to their transactions with the old partners, resulting in a new profit-sharing ratio among all partners.

According to Article 31 of the Indian Partnership Act of 1932

A person is recognized as a new partner:
If so, agreed in the partnership certificate, or
Without the above, if all partners agree to enrol.
After joining, the new partner will acquire her two rights:
The right to share the company's future interests, and
The right to share company assets.
At the same time, he is responsible for the business incurred after enrolment and for the losses suffered by the company.

Impact of Partner Admission:

There are many effects that affect the partnership, some of which appear as follows:

1. New Partnership Certificate:

The new partnership agreement / agreement between all partners must include the new partner, along with all new terms and conditions accepted by all partners. The old contract will be abolished.

2. Capital Share and Goodwill:

According to the contract between the new partner and the old partner, the new partner must bring in a share of the company's capital and good faith, depending on his share of the company's profits.

3. Reserve and cumulative P & L adjustments: –

Older partners will need to adjust their reserves and cumulative P & L with the old profit-sharing ratio as these items are related to the partner's pre-enrolment period.

4. Asset and liability revaluation: –

If, at the time of joining a partner, the old partner decides to know the true financial position of the company, all assets and liabilities of the company must be revalued.

5. Adjustment of Goodwill share brought about by new partners: –

The old partner adjusts the goodwill share of the new partner at the sacrifice ratio.

Adjustments Required for Partner Admission: –

The adjustments required after joining a new partner are displayed as follows:

Changes in Profit Sharing Rate
Evaluation of Goodwill
Adjustments for reserves, cumulative gains / losses, and deferred revenue costs.
Revaluation of Assets and Liabilities
Adjustment of Capital in Partnership

Q3) Define Partnership.

A3) A partnership is when two or more people work together and comply with share the profits / losses of the business in equal or already specified proportions. Within the case of a corporation restructuring, there's a change within the share ratio between existing partners consistent with the transactions between the partners.

"A partnership may be a connection between those that have agreed to share the interests of the business they are doing, or who act for everybody."

Partnership means two or more people do business together and comply with share the profits / losses of that business in equal or already specified proportions. Within the case of a corporation restructuring, there's a change within the share ratio between existing partners consistent with the transactions between the partners.

Changes in share between existing partners: –

Changing the share ratio between existing partners means if one or more of her existing partners want to share more of the business profit, the share ratio are going to be mutually determined from the predetermined share ratio. Means to vary . This process is understood as company restructuring.

In this process, those that want more share will earn an equivalent amount as another victim. Therefore, to calculate the quantity of additional capital required to earn more profits, you would like to calculate the partner acquisition / sacrifice ratio. To calculate the gain / sacrifice ratio, you would like to use the subsequent formula:

Share Sacrifice / Acquisition = Old Share – New Share

(Both shares are related to the partner for whom the sacrifice / gain share is calculated)

The results obtained from the above calculations are treated as sacrifices or acquisitions, as shown below.

If the result's positive, it's a Sacrificing Share.
If the result's negative, it's the earned share.

Q4) What adjustments are made in order to vary profit share?

A4) Five adjustments are made to vary the profit share. These are shown below, and every one the tweaks are illustrated during a separate article.

1. Determining the sacrifice ratio and acquisition ratio

2. Goodwill accounting

3. Reserve account, accounting for cumulative profit and loss,

4. Asset revaluation and liability revaluation, and

5. Capital Adjustment

1. Determining sacrifice ratio and acquisition ratio: –

First of all, to form all kinds of adjustments, you would like to calculate the sacrifice / profit ratio. With the assistance of this ratio, calculate the entire amount of other adjustments. These ratios are going to be discussed in additional detail within the next article.

What is the sacrifice ratio?
What is the speed of return?

2. Goodwill Accounting: –

Goodwill means one business acquires all or a number of the shares of another business for an amount that exceeds the entire assets of that business. The extra difference paid is named goodwill. It's a tangible asset.

Therefore, the winning partner must pay a well-meaning amount to sacrifice the partner. To pay this amount, create an adjustment entry or pay the victim in cash.

The winning partner brings a share of goodwill adequate to the share earned within the company's profits.

3. Reserve Account, Accounting for Cumulative Profit And Loss,

Reserve may be a proportional amount of net or surplus reserved for future payments. In other words, it's a reservation of known non-responsible interests.

This amount has been relevant for the past year and therefore the victim is entitled thereto. Therefore, reserves and cumulative P & L are split by the old profit share.

4. Asset revaluation and liability revaluation: –

According to accounting standards, all assets within the books are presented at their original (cost) value, but some assets are valuable compared to their value , while others have a lower market price .

Therefore, you would like to calculate truth / market price of your assets and liabilities and distribute the difference between your partners.

5. Capital Adjustment: –

Capital adjustments are essential because profitable partners must invest more so as to urge more share within the company. Therefore, partners bring the specified amount of capital consistent with their rate of return.

The selling partner will withdraw capital from the business because it will share less profit after the restructuring.

Q5) What is Goodwill Accounting?

A5) The amount of compensation paid by the winning partner to the sacrificial partner will be treated as determined by all older partners. They can record the amount of premium they receive in good faith in their books or personally distribute this amount to all partners through their partner's capital account. The premium amount of goodwill is calculated by the following formula.

Premium amount for goodwill = Value of corporate goodwill X Profit sharing

(i) When goodwill is adjusted through the partner's capital account: -

If goodwill processing is adjusted through a partner's equity / checking account, the following adjustment (journal) entry will be made.

A and B are partners of AB Co. Ltd. They shared the company's profits in her 3: 2 ratios. But now they want to share their profits equally in the future. That is, A sacrifices a tenth share and B gets a tenth share. The amount of goodwill of the company is Rs 1,75,000.

(a) If the variable capital account is maintained: –


Date	Particulars		L.F.	Debit	Credit

	Gaining Partners’ Capital, A/c	Dr.		XXXX
	To Sacrificing Partners’ Capital A/c				XXXX
	(Being adjustment of premium for goodwill.)

(b) If a fixed capital account is maintained: –

For variable capital, pass the journal through your partner's checking account. This is shown as: – –


Date	Particulars		L.F.	Debit	Credit

	Gaining Partners’ Current A/c	Dr.		XXXX
	To Sacrificing Partners’ Current A/c				XXXX
	(Being adjustment of premium for goodwill.)

(ii) When good intentions are solicited and cancelled: -

If goodwill is processed, it will be adjusted by creating accounting books, which will be fully amortized through the partner's capital / checking account and then adjusted.

Q6) Describe accounting transactions for the amount of Goodwill.

A6) The accounting for the amount of goodwill above is described in different ways:

(a) If the variable capital account is maintained: –

For variable capital, we pass the journal through the partner's capital account. This is shown as: – –

Date	Particulars		L.F.	Debit	Credit

	Goodwill A/c	Dr.		XXXX
	To Partners’ Capital A/c				XXXX
	(Being Credited the full amount of goodwill among the partners’ capital account in the old profit sharing ratio)

	Partners’ Capital A/c	Dr.		XXXX
	To Goodwill A/c				XXXX
	(Being Credited the full amount of goodwill among the partners’ capital account in the New profit sharing ratio)

(b) If a fixed capital account is maintained: –

For variable capital, pass the journal through your partner's checking account. This is shown as: – –

Date	Particulars		L.F.	Debit	Credit

	Goodwill A/c	Dr.		XXXX
	To Partners’ Current A/c				XXXX
	(Being Credited the full amount of goodwill among the partners’ Current account in the old profit-sharing ratio)

	Partners’ Current A/c	Dr.		XXXX
	To Goodwill A/c				XXXX
	(Being Credited the full amount of goodwill among the partners’ Current account in the new profit-sharing ratio)

Q7) Define Hidden or Guessed Credit with an example.

A7) At times, the value of Favor may not be given when a new partner enrolls. In these situations, goodwill is calculated based on the net worth of the business. Hidden goodwill is when the company's desired total capital exceeds the actual total capital of all partners.

For example

The capital of L and M is Rs. 2,00,000 and Rs. 1,50,000 each. They recognize N as a partner with a 1/5 share of Rs. 1,00,000 as his capital.

Based on N's capital, the company's total capital must be Rs. 5,00,000 (1,00,000 x 5/1). However, the actual capital of the company is Rs. 4,50,000 (2,00,000 +1,50,000 +1,00,000). Therefore, the hidden good intentions:

= Rs. 5,00,000 --Rs 4,50,000

= Rs. 50,000

Q8) What is Asset Revaluation and Debt Revaluation? Pass necessary entries to show how changes in the value of assets and liabilities are recorded in the books.

A8) Revaluing an asset means comparing the book value of the asset to the current market value of the asset. In the event of a company restructuring, such as a change in profit sharing, the assets will need to be revalued. The difference is credited to the partner's capital / current account if it increases and debited to the partner's capital / current account with the old profit-sharing ratio if it decreases.

The process of revaluing liabilities is the same as the process of revaluing assets above, but the processing of liabilities is the opposite of the asset account. Therefore, if the difference increases, it will be debited to the partner's capital / current account, and if it decreases, it will be credited to the partner's capital / current account with the old profit-sharing ratio.

Accounting for Revaluation of Assets and Liabilities: –

Partners must first decide whether to record asset and liability revaluations in their books. The accounting treatment in both cases is different and is explained as follows:

1. When changes in the value of assets and liabilities are recorded in the books: –

One account revaluation account or profit and loss adjustment account was opened when the partner decided to record all changes at the account booth. An increase in asset value and a decrease in liability value are debited to the revaluation account, and a decrease in asset value and an increase in liability value are debited to the revaluation account. It is then debited to the partner's capital or checking if the revaluation account balance is debited, and debited to the partner's capital or checking if the revaluation account balance is debited.

Accounting journal entries are passed: –

Date	Particulars		L. F.	Debit	Credit

(i) For an increase in the value of assets:
	Asset A/c (Individually)	Dr.		XXXX
	To Revaluation A/c				XXXX
	(Being adjustment made for the increase in the value of assets)

(ii) For a decrease in the value of assets:
	Revaluation A/c	Dr.		XXXX
	To Asset A/c (Individually)				XXXX
	(Being adjustment made for the Decrease in the value of assets.)

(iii) For an increase in the value of Liability:
	Revaluation A/c	Dr.		XXXX
	To Liability A/c (Individually)				XXXX
	(Being adjustment made for the increase in the value of assets)

(iv) For a decrease in the value of Liability:
	Liability A/c (Individually)	Dr.		XXXX
	To Revaluation A/c				XXXX
	(Being adjustment made for the Decrease in the value of the liability .)

(v) For the recording of unrecorded assets:
	Unrecorded Asset A/c	Dr.		XXXX
	To Revaluation A/c				XXXX
	(Being adjustment made for the recording of the value of assets.)

Vi) For the recording of unrecorded liability:
	Revaluation A/c	Dr.		XXXX
	To Unrecorded Liability A/c				XXXX
	(Being adjustment made for the recording of the value of liabilities)

(vii) For the balance of Revaluation Account: –
(i) if there is the Credit balance (Net Gain)
	Revaluation A/c	Dr.		XXXX
	To Partners’ Capital/Current A/c				XXXX
	(Being adjustment made for transfer the balance of revaluation a/c to partners’ capital/current a/c)

(ii) if there is the Debit balance (net loss)
	Partners’ Capital/Current A/c	Dr.		XXXX
	To Revaluation a/c				XXXX
	(Being adjustment made for transfer the balance of revaluation a/c to partners’ capital/current a/c)

Q9) What is Capital Adjustment in Partnership?

A9) Adjusting capital in a partnership means creating a share of capital according to the new profit-sharing ratio determined by the partner. If more or less capital is needed than is already invested in the partnership, the partner will introduce or withdraw each capital in cash.

The required balance of the partner's capital account is calculated as the new profit-sharing rate is calculated during the restructuring of the partner company and the difference between all old reserves or cumulative P & L, asset and liability revaluations is split among all partners Will be changed (old partner if new partner enrolled) at the old rate. If one of her partners sacrifices a share of profits, it will be paid by all other profitable partners. Therefore, the balance of his capital account will increase and will be greater than the balance required according to his share of the company's profits, and he will withdraw the share of capital to the extent that it meets the capital requirements.

Journal for Capital Adjustment: –

Revaluation of assets and liabilities with the journal of reserve balance or cumulative income statement already described above. Capital Adjustment journals such as:

Date	Particulars		L. F.	Debit	Credit
(i) For excess capital withdrawn by the partner
	Partners’ Capital A/c	Dr.		XXXX
	To Cash/Bank A/c				XXXX
	(Being excess capital withdrawn by the partners)
(ii) For the amount of capital introduced by the partner
	Cash/Bank A/c	Dr.		XXXX
	To Partners’ Capital A/c				XXXX
	(Being adjustment made for transfer the balance of revaluation a/c to retiring partners’ capital/current a/c)

Adjustment of Surplus / Deficit by Partner's Current Account:

(a) If the existing capital is greater than his required capital (surplus)

Partner Capital A / c Dr.

To The Partner's Current A / c

(b) If the existing capital is less than his required capital (deficiency)

Partner's current A / c Dr.

To Partner Capital A / c

However, if the checking account shows a debit balance, it will be placed on the asset side of the balance sheet.

Q10) What is the death of a partner?

A10) If one of her partners dies in an accident or medical problem, the partnership agreement / contract between all partners will be terminated. This situation is called the death of the partner. The partnership certificate ends, but if the remaining partners want to continue the partnership, the partnership can continue its activities.

Retirement Partner Responsibilities: –

The responsibilities of a retired partner are explained in her two situations:

Pre-retirement Act Debt: –

The retiring partner will be liable for any actions taken by the company prior to the retirement date, equally or in accordance with the certificate of partnership with all other partners. The remaining partner or other third party (who has some kind of contract with the retiring partner) exempts the retiring partner from liability by means of a written contract.

According to Section 32 (2): –

The retiring partner will continue to be responsible for all laws prior to the retirement date. However, the retiring partner may be exempt from liability by agreement with himself, a third party, and the continuing partner.

2. Debt for actions after retirement date: –

A retiring partner is a certificate of partnership with all remaining partners, equal to or with all other partners, for any actions taken by the company after his retirement date until the retirement notice of the retiring partner is not issued. We will take responsibility accordingly.

According to Section 32 (3): –

After retirement, the retiring partner will continue to be liable to third parties for the company's conduct until the retirement notice is given.

Impact of partner retirement: –

There are many effects that affect the partnership, some of which appear as follows:

1. New Partnership Certificate:

A new partnership agreement / agreement with the rest of the partners is required with all new terms and conditions accepted by all partners. The old contract will be abolished.

2. Capital share and goodwill:

According to the contract between the remaining partners, the remaining partners are required to pay a share of the company's capital and goodwill in order to retire the partner, depending on his share of the company's profits.

3. Reserve and cumulative P & L adjustments: –

Reserves and cumulative P & L are also paid to retired partners. Cumulative P / L at the old profit-sharing rate because these items are related to the pre-retirement period.

4. Asset and liability revaluation: –

At retirement, if the remaining partners decide to know the company's true financial position, they will need to revalue all of the company's assets and liabilities.

Necessary adjustments for Partnership Certificates: –

Partner Retirement The following adjustments are taken into account, all of which were described in previous articles, so click on the name to review all of these articles one at a time.

Changes in profit sharing rate
Evaluation of goodwill
Adjustments for reserves, cumulative gains / losses, and deferred revenue costs.
Revaluation of assets and liabilities
Adjustment of capital in partnership

Q11_ R, S and M are partners sharing profits in the ratio of 2/5, 2/5 and 1/5. M decides to retire from the business and his share is taken by R and S in the ratio of 1: 2. Calculate the new profit-sharing ratio.

A11) Old Ratio R, S and M = 2: 2: 1
M retires from the firm.

His profit share	=	1
		5

M’s share taken by R and S in ratio of 1: 2

Share taken by R	=	1	X	1
		5		3

Share taken by S	=	1	X	2
		5		3

	=	1
	=	15

	=	2
	=	15

	=	6 + 1
		15

New Ratio = Old Ratio + Share acquired from M

R’s New Share	=	2	+	1
		5		15

	=	7
	=	15

S’s New Share	=	2	+	2
		5		15

	=	6 + 2
		15

	=	8
	=	15

Q11) Amit, Balan, and Chander were partners in a firm sharing profits in the proportion of 1/2, 1/3, and 1/6 respectively. Chander retired on 1st April 2014. The Balance Sheet of the firm on the date of Chander’s retirement was as follows

Liabilities		Amount	Assets		Amount
Sundry Creditors		12,600	Bank		50,000
Provident Fund		3,000	Debtors	30,000
General Reserve		9,000	Less: Provision	1,000	29,000
Partner’s Capital A/cs:			Stock		25,000
Amit’s Capital	40,000		Investments		10,000
Balan’s Capital	36,500		Patents		5,000
Chander’s Capital	20,000	96,500	Machinery		48,000
		1,21,100			1,21,100

It was agreed that:

Goodwill will be valued at 27,000.
Depreciation of 10% was to be provided on Machinery.
Patents were to be reduced by 20%.
Liability on account of Provident Fund was estimated at 2,400.
Chander took over Investments for 15,800.
Amit and Balan decided to adjust their capitals in a proportion to their profit-sharing ratio by opening Current Accounts.

Prepare Revaluation Account and Partners’ Capital Accounts on Chander’s retirement.

A12) Revaluation Account

Particular		Amount	Particular	Amount
To Machinery A/c		4,800	By Investments A/c	5,800
To Patents		1,000	By Provident Fund A/c	600

To Profit transferred to:
Amit’s Capital A/c	300
Balan’s Capital A/c	200
Chander’s Capital A/c	100	600
		6,400		6,400

Partners’ Capital Account
Part.	Amit	Balan	Chander	Part.	Amit	Balan	Chander
To Investments A/c	–	–	15,800	By Balance B/d	40,000	36,500	20,000
To Chander’s Capital A/c	2,700	1,800	–	By Revaluation (Profit)A/c	300	200	100
To Chander’s Loan A/c	–	–	10,300	By General Reserve A/c	4,500	3,000	1,500
To Balan’s Current A/c	–	5,900	–	By Amit’s Capital A/c	–	–	2,700
				By Balan’s Capital A/c	–	–	1,800
				By Current A/c	5,900	–	–



	50,700	39,700	26,100		50,700	39,700	26,100

Working Note: -

Calculation of Gaining Ratio

Old Ratio of Amit, Balan, and Chander = 1/2: 1/3: 1/6

= 3/6:2/6:1/6 (make base equal)
Chander retires from the firm.
New or Gaining Ratio of Amit and Balan, = 3:2 (as per old ratio)

Adjustment of Goodwill

Goodwill of the firm = Rs 27,000

Chander’s Share of Goodwill	=	Firm’s Goodwill	X	Chander’s share

	=	27,000	X	1
	=	27,000	X	6

	=	Rs 4,500

Amit will pay	=	Chander’s Goodwill	X	Share of Amit

	=	4,500	X	3
	=	4,500	X	5

	=	Rs 2,700

Balan will pay	=	Chander’s Goodwill	X	Share of Balan

	=	4,500	X	2
	=	4,500	X	5

	=	Rs 1,800

Calculation of Addition/withdrawal of Capital by the Amit and Balan

Balance of Capital Amount after all adjustments

Opening Balance of Capital Account

All Credits

–

All Debits

Balance of Amit’s Capital Amount after all adjustments	=	40,000	+	300	+	4,500	–	2,700
	=	42,100/-

Balance of Balan’s Capital Amount after all adjustments	=	36,500	+	200	+	3,000	–	(1,800)

	=	37,900

Total Capital of the firm	=	Amit’s Capital Balance	+	Balan’s Capital Balance

	=	42,100	+	37,900

	=	80,000

Calculation of Total Capital

The total capital of the Firm= Rs 80,000

Amit’s New Capital	=	Firm’s new Capital	X	Share of Amit

	=	80,000	X	3
	=	80,000	X	5

	=	Rs 48,000

Balan New Capital	=	Firm’s new Capital	X	Share of Balan

	=	80,000	X	2
	=		X	5

	=	Rs 32,000

Calculation of Addition/withdrawal of Capital by the Amit and Balan

Addition/withdrawal by Amit’s in/from Capital A/c	=	New Capital Amount	–	Balance of Capital Amount after all adjustments

	=	48,000	–	42,100

	=	5,900/-

Addition/withdrawal by Balan’s in/from Capital A/c	=	New Capital Amount	–	Balance of Capital Amount after all adjustments

	=	32,000	–	37,900

	=	5,900/-

Q12) A B and C were partners sharing profits in the ratio of 3: 2: 1. The firm closes its books on 31st March every year. B died on 30th June 2018. On his death, Goodwill of the firm was valued at 6,00,000. B’s share in profit or loss till the date of death was to be calculated on the basis of the previous year’s profit which was 15,00,000 Loss. Pass necessary Journal entries for goodwill and his share of loss.

A13)

Date	Particulars		L.F.	Debit	Credit
	A’s Capital A/c 2,00,000 × 3/4	Dr.		1,50,000
	C’s Capital A/c 2,00,000 × 1/4	Dr.		50,000
	To B’s Capital A/c				2,00,000
	(Being B’s share of goodwill adjusted in gaining ratio 3: 1)
	B’s Capital A/c	Dr.		1,25,000
	To Profit & Loss Suspense A/c				1,25,000
	(Being B’s Share of loss debited to his Capital)

Working Notes:
Calculation of Gaining Ratio:

Calculation of B’s Share of Goodwill

Goodwill = 6,00,000

B’s Share of Goodwill	=	6,00,000	X	2
				6
	=	Rs 2,00,000

Calculation of B’s Share of Loss till the date of his death i.e., 30 th June 2018: –

Previous year’s loss = 15,00,000
B’s share of loss till the date of death = Previous year’s loss × B’s Share of Loss × Months till the date of his death/12

B’s share of loss till the date of death	=	15,00,000	X	2	X	3
B’s share of loss till the date of death	=	15,00,000	X	6	X	12

B’s share of loss till the date of death	=	Rs 1,25,000

Q13) The Balance Sheet of X, Y and Z as at 31st March, 2018 was

Liabilities		Amount	Assets	Amount
Bills Payable		2,000	Cash at Bank	5,800
Employees’ Provident Fund		5,000	Bills Receivable	800
Workmen Compensation Reserve		6,000	Stock	9,000
General Reserve		6,000	Sundry Debtors	16,000
Loans		7,100	Furniture	2,000
Capital A/cs:			Plant and Machinery	6,500
X	22,750		Building	30,000
Y	15,250		Advertising Suspense	6,000
Z	12,000	50,000
		76,100		76,100

The profit-sharing ratio was 3 : 2 : 1. Z died on 31st July, 2018. The Partnership Deed provides that:
a Goodwill is to be calculated on the basis of three years’ purchase of the five years’ average profit. The profits were: 2017-18: 24,000; 2016-17: 16,000; 2015-16: 20,000 and 2014- 15: 10,000 and 2013-14: 5,000.
b The deceased partner to be given a share of profits till the date of death on the basis of profits for the previous year.
c The Assets have been revalued as: Stock 10,000; Debtors 15,000; Furniture 1,500; Plant and Machinery 5,000; Building 35,000. A Bill Receivable for 600 was found worthless. d A Sum of 12,233 was paid immediately to Z’s Executors and the balance to be paid in two equal annual instalments together with interest @ 10% p.a. On the amount outstanding. Give Journal entries and show the Z’s Executors’ Account till it is finally settled.

A14)

Date	Particulars		L.F.	Debit	Credit
	Workmen’s Compensation Reserve	Dr.		6,000
	To X’s Capital A/c				3,000
	To Y’s Capital A/c				2,000
	To Z’s Capital A/c				1,000
	(Being Workmen’s Compensation Reserve distributed among partners in their old ratio)
	General Reserve A/c	Dr.		6,000
	To Z’s Capital A/c				3,000
	To Y’s Capital A/c				2,000
	To Z’s Capital A/c				1,000
	(Being General Reserve distributed among partners in their old ratio)
	X’ Capital A/c	Dr.		3,000
	Y’s Capital A/c	Dr.		2,000
	Z’s Capital A/c	Dr.		1,000
	To Advertisement Suspense A/c				6,000
	(Being Goodwill written off among partners in their old ratio)
	X’s Capital A/c	Dr.		4,500
	Y’s Capital A/c	Dr.		3,000
	To Z’s Capital A/c				7,500
	(Being T’s share of goodwill adjusted)
	Revaluation A/c	Dr.		3,600
	To Sundry debtors A/c				1,000
	To Furniture A/c				500
	To Plant and Machinery A/c				1,500
	To Bills Receivable A/c				600
	(Being Decrease in value of Assets transferred to Revaluation Account)
	Stock A/c	Dr.		1,000
	Building A/c	Dr.		5,000
	To Revaluation A/c				6,000
	(Being Increase in value of Assets transferred to Revaluation Account)
	Revaluation A/c	Dr.		2,400
	To X’ Capital A/c				1,200
	To Y’s Capital A/c				800
	To Z’s Capital A/c				400
	(Being Revaluation profit distributed among partners in their old ratio )
	Profit and Loss Suspense A/c	Dr.		1,333
	To Z’s Capital A/c				1,333
	(Being Z’s share of profit transferred his capital account)
	Z’s Capital A/c	Dr.		22,233
	To Z’s Executor’s A/c				22,233
	(Being Amount due to Z transferred to his Executor’s Account)
	(Being Amount due to Z transferred to his Executor’s Account)
	Z’s Executor’s A/c	Dr.		12,333
	To Bank A/c				12,333
	(Being Amount paid to Z’s Executor)

Z’s Executor’s Account
Date	Particular	Amount	Date	Particular	Amount
2018
July 31	To Bank A/c	12,233	July 31	By Z’s Capital A/c	22,233
2019
Mar. 31	To Cash A/c 25,000 + 5,000	10,667	Mar. 31	By Interest 10,000 × 10% for 8 months	5,000
		22,900			22,900
2019
July. 01	To Bank A/c 5,000 + 667 + 333	6,000	Aug. 01	By Balance b/d	10,667
2020
Mar. 31	To Balance c/d	5,333	Aug. 01	By Interest 75,000 × 10% for 4 months	333
			Mar. 31	By Interest 5,000 × 10% for 8 month	333
		11,333			11,333
2020
Aug. 01	To Bank A/c 5,000 + 333 + 167	5,500	Aug. 01	By Balance b/d	5,333
			Aug. 01	By Interest 25,000 × 10% for 4 months	167
		5,500			5,500

Working Notes:

Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase

Average Profit	=	24,000 + 16,000 + 20,000 + 10,000 + 5,000
Average Profit	=	5

	=	Rs 15,000

∴ Goodwill = Average Profit × Number of Years’ Purchase
=15,000 × 3 = Rs 45,000

Adjustment of Goodwill

Old Ratio = 3 : 2 : 1
Z died.
∴ New Ratio X and Y = 3 : 1
Gaining Ratio = 3 : 2

Z’s Share in Goodwill	=	45,000	X	1
Z’s Share in Goodwill	=	45,000	X	6

	=	Rs 7,500

This share of goodwill is to be distributed between X and Y in their gaining ratio i.e. 3 : 1.

X’s Share in Goodwill	=	7,500	X	3
X’s Share in Goodwill	=	7,500	X	5

	=	Rs 4,500

Y’s Share in Goodwill	=	7,500	X	2
Y’s Share in Goodwill	=	7,500	X	5

	=	Rs 3,000

Calculation Z’s Share of Prof

Profit for 2017-18 Immediate Previous Year = Rs 24,000

∴ Z’s Profit Share	=	24,000	X	1	X	4
∴ Z’s Profit Share	=	24,000	X	6	X	12

	=	Rs 1,333

Revaluation Account
Particular	Amount	Particular	Amount
To Sundry Debtors	1,000	By Balance b/d	80,000
To Furniture	500	By Interest on Capital A/c	1,600
To Plant and Machinery	1,500
To Bills Receivable	600
Profit transferred to:
X’s Capital A/c	1,200
Y’s Capital A/c	800
Z’s Capital A/c	400
	6,000		6,000

Q14) X, Y and Z were partners in a firm sharing profits in the ratio of 2: 2: 1. On 31st March 2018, their Balance Sheet was as follows:

Liabilities		Amount	Assets	Amount
Trade Creditors		1,20,000	Cash at Bank	1,80,000
Bills Payable		80,000	Stock	1,40,000
General Reserve		60,000	Sundry Debtors	80,000
Capital A/cs:			Building	3,00,000
X	7,00,000		Advance to Y	7,00,000
Y	7,00,000		Profit and Loss A/c	3,20,000
Z	60,000	14,60,000
		17,20,000		17,20,000

Y died on 30th June 2018. The Partnership Deed provided for the following on the death of a partner:
i Goodwill of the business was to be calculated on the basis of 2 times the average profit of the past 5 years. Profits for the years ended 31st March, 2018, 31st March, 2017, 31st March, 2016, 31st March, 2015 and 31st March, 2014 were 3,20,000 Loss; 1,00,000; 1,60,000; 2,20,000 and 4,40,000 respectively.
ii Y’s share of profit or loss from 1st April 2018 till his death was to be calculated on the basis of the profit or loss for the year ended 31st March 2018. You are required to calculate the following:
a Goodwill of the firm and Y’s share of goodwill at the time of his death.
b Y’s share in the profit or loss of the firm till the date of his death.
c Prepare Y’s Capital Account at the time of his death to be presented to his executors.

A15)

Y’s Capital Account
Particular	Amount	Particular	Amount
Profit & Loss A/c	1,28,000	Balance b/d	7,00,000
Profit & Loss Suspense Share of Loss	32,000	General Reserve	24,000
Advance to Y	7,00,000	X’s Capital A/c	64,000
		Z’s Capital A/c	32,000
	8,20,000		8,20,000

Working Notes:

Calculation of Share in General Reserve

Reserve	=	60,000	X	2
Reserve	=	60,000	X	5

	=	Rs 24,000

Q15) X, Y and Z are partners in firm sharing profits and losses in the ratio of 5: 3 : 2. Their Balance Sheet as at 31st March 2018 was as follows:

Liabilities		Amount	Assets		Amount
Sundry Creditors		18,000	Goodwill		12,000
Investments Fluctuation Reserve		7,000	Patents		52,000
Workmen Compensation Reserve		7,000	Machinery		62,400
Capital A/cs:			Investment		6,000
X	1,35,000		Stock		20,000
Y	95,000		Sundry Debtors	24,000
Z	74,000	3,04,000	Less: Provision for Doubtful Debts	4,000	20,000
			Loan to Z		1,000
			Cash at Bank		600
			Profit and Loss A/c		1,50,000
			Z’s Drawings		12,000
		3,36,000			3,36,000

Z died on 1st April 2018, X and Y decide to share future profits and losses in the ratio of 3: 5. It was agreed that:
i Goodwill of the firm be valued 212 years’ purchase of average of four completed years’ profits which were: 2014-15— 1,00,000; 2015-16— 80,000; 2016-17— 82,000.
ii Stock is undervalued by 14,000 and machinery is overvalued by 13,600.
iii All debtors are good. A debtor whose dues of 400 were written off as bad debts paid 50% in full settlement.
iv Out of the amount of insurance premium debited to Profit and Loss Account, 2,200 be carried forward as prepaid insurance premium.
v 1,000 included in Sundry Creditors is not likely to arise.
vi A claim of 1,000 on account of Workmen Compensation to be provided for. Vii Investment is sold for 8,200 and a sum of 11,200 be paid to executors of Z immediately. The balance to be paid in four equal half-yearly instalments together with interest @ 8% p.a. At half-year rest.
Show Revaluation Account, Capital Accounts of Partners and the Balance Sheet of the new firm.

A16)

Revaluation Account
Particular		Amount	Particular	Amount
Machinery		13,600	Creditors	1,000
			Stock	14,000
			Provision for Doubtful Debts	4,000
Profit transferred to:			Investment	2,200
X’s Capital A/c	5,000		Bad Debts Recovered	200
Y’s Capital A/c	3,000		Prepaid Insurance	2,200
Z’s Capital A/c	2,000	10,000
		23,600		23,600

Partners’ Capital Account
Part.	X	Y	Z	Part.	X	Y	Z
To Goodwill A/c	6,000	3,600	2,400	By Balance B/d	1,35,000	95,000	74,000
To Drawing A/c	–	–	12,000	By Revaluation A/c	5,000	3,000	2,000
To Profit & Loss A/c	75,000	45,000	30,000	By IFR	3,500	2,100	1,400
To X’s Capital A/c	–	8,750	–	By Y’s Capital A/c	8,750	–	14,000
To Z ’s Capital A/c	–	14,000	–	By WFC	3,000	1,800	1,200
To Loan to Z			1,000	By P & L Suspense A/c	–	–	35,000
To Executors A/c			47,200
To Balance c/d	74,250	30,550	–
	1,55,250	1,01,900	92,600		1,55,250	1,01,900	92,600

Z’s Executors Account
Particular	Amount	Particular	Amount
Bank A/c	11,200	Z’s Capital A/c	47,200
Z’s Executors Loan Account	36,000
	47,200		47,200

Balance Sheet
Liabilities		Amount	Assets	Amount
Creditors		17,000	Patents	52,000
Z’s Executors Loan A/c		36,000	Machinery	48,800
Workmen Compensation Claim		1,000	Stock	34,000
Capital:			Debtors	24,000
X	74,250		Prepaid Insurance	2,200
Y	30,550	30,550
Bank Overdraft 600 + 8,200- 11,200 + 200		2,200
		1,61,000		1,61,000

Q16) Ram, Manohar and Joshi were partners in a firm. Joshi died on 31st May 2018. His share of profit from the closure of the last accounting year till the date of death was to be calculated on the basis of the average of three completed financial years of profits before death. Profits for the years ended 31st March 2016, 2017 and 2018 were 7,000; 8,000 and 9,000 respectively. Calculate Joshi’s share of profit till the date of his death and pass necessary Journal entry for the same.

A17)

Average Profit	=	Profit of last 3 year
Average Profit	=	3

	=	7,000 + 8,000 +9,000
	=	3

	=	Rs 8,000

Joshi’s Profit Share from April 01, 2018 to May 31, 2018	=	8,000	X	2	X	1
Joshi’s Profit Share from April 01, 2018 to May 31, 2018	=	8,000	X	12	X	3

	=	Rs 444

Journal Entries

Date	Particulars		L.F.	Debit	Credit
	Profit and Loss Suspense A/c	Dr.		444
	To Joshi’s Capital A/c				444
	(Being Joshi’s profit share credited to his capital account)

Q17) A B and C were partners in a firm sharing profits in the ratio of 5 : 3: 2. On 31st March 2018, their Balance Sheet was as follows:

Liabilities		Amount	Assets	Amount
Creditors		11,000	Building	20,000
Reserves		6,000	Machinery	30,000
A’s Loan A/c		5,000	Stock	10,000
Capital A/cs:			Patents	11,000
A	25,000		Debtors	8,000
B	25,000		Cash	8,000
C	15,000
		87,000		87,000

A died-on 1st October 2018. It was agreed among his executors and the remaining partners that:
i Goodwill to be valued at 212 years’ purchase of the average profit of the previous 4 years, which were 2014-15: 13,000; 2015-16: 12,000; 2016-17: 20,000 and 2017-18: 15,000.
ii Patents be valued at 8,000; Machinery at 28,000; and Building at 25,000.
iii Profit for the year 2017-18 be taken as having accrued at the same rate as that of the previous year.
iv Interest on capital be provided @ 10% p.a.
v Half of the amount due to A to be paid immediately to the executors and the balance transferred to his Executors’ Loan Account. Prepare A’s Capital Account and A’s Executors’ Account as on 1st October 2018.

A18)

A’s Capital Account
Particular	Amount	Particular	Amount
To Bank A/c	28,450	By Balance b/d	25,000
To A’s Executors A/c	28,450	By Reserve	3,000
		By B’s Capital A/c Goodwill	11,250
		By C’s Capital A/c Goodwill	7,500
		By Profit & Loss Suspense	3,750
		By Interest on Capital WN2	1,250
		By A’s Loan A/c WN6	5,150
	56,900		56,900

A’s Executors Account
Particular	Amount	Particular	Amount
To Bank A/c	28,450	By Balance b/d	56,900
To A’s Executors A/c	28,450

	56,900		56,900

Working Notes:

Calculation of Share in Reserve

=	6,000	X	5
=	6,000	X	10

=	Rs 3,000

Calculation of Interest on Capital

=	25,000	X	6	X	10
=	25,000	X	100	X	12

=	Rs 1,250

Calculation of Profit & Loss Suspense

Profit & loss Suspense	=	15,000	X	5	X	6
Profit & loss Suspense	=	15,000	X	100	X	12

	=	Rs 3,750

Calculation of Share in Revaluation Profit/Loss

Revaluation=Nil(−3,000−2,000+5,000)

Q18) X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3 : 2: 1. Z died on 30th June 2018. The Balance Sheet of the firm as at that 31st March 2018 is as follows:

Liabilities		Amount	Assets	Amount
X’s Capital A/c	2,40,000		Machinery	2,40,000
Y’s Capital A/c	1,60,000		Furniture	1,50,000
Z’s Capital A/c	80,000	4,80,000	Investments	40,000
X’s Current A/c		16,000	Stock	64,000
Y’s Current A/c		5,000	Sundry Debtors	50,000
Reserve		60,000	Bills Receivable	22,000
Bills Payable		34,000	Cash at Bank	37,000
Sundry Creditors		40,000	Cash in Hand	22,000
			Z’s Current A/c	10,000
		6,35,000		6,35,000

The following decisions were taken by the remaining partners:

A Provision for Doubtful Debts is to be raised at 5% on Debtors.
b While Machinery to be decreased by 10%, Furniture and Stock are to be appreciated by 5% and 10% respectively.
Advertising Expenses 4,200 are to be carried forward to the next accounting year and, therefore, it is to be adjusted through the Revaluation Account.
Goodwill of the firm is valued at 60,000.
X and Y are to share profits and losses equally in future.
f Profit for the year ended 31st March 2018 was 8,16,000 and Z’s share of profit till the date of death is to be determined on the basis of profit for the year ended 31st March 2018.
The Fixed Capital Method is to be converted into the Fluctuating Capital Method by transferring the Current Account balances to the respective Partners’ Capital Accounts. Prepare the Revaluation Account, Partners’ Capital Accounts and prepare C’s Executors’ Account to show that C’s Executors were paid in two half-yearly instalments plus interest of 10% p.a. On the unpaid balance.

The first instalment was paid on 31st December 2018.

A19)

Revaluation Account
Particular	Amount	Particular		Amount
Machinery	1,00,000	Furniture		7,500
Provision for Doubtful Debts	2,500	Stock		6,400
		Prepaid Advertisement Expenses		4,200
		Loss transferred to
		X’s Capital A/c	4,200
		Y’s Capital A/c	2,800
		Z’s Capital A/c	1,400	8,400
	26,500			26,500

Partners’ Capital Account
Part.	X	Y	Z	Part.	X	Y	Z
To Current A/c	–	–	10,000	By Balance B/d	2,40,000	1,60,000	80,000
To Revaluation A/c	4,200	2,800	1,400	By Current A/c	16,000	5,000	–
To Z’s Capital A/c	–	10,000	–	By Reserve	30,000	20,000	10,000
To Z’s Capital A/c	–	34,000	–	By Y’s Capital A/c	–	–	34,000
To Executors A/c	–	–	1,22,600	By Y’s Capital A/c	–	–	10,000
					–	–
To Balance c/d	2,81,800	1,38,200	–
	2,86,000	1,85,00	1,34,000		2,86,000	1,85,00	1,34,000

T’s Executor’s Account
Date	Particular	Amount	Date	Particular	Amount
2018
Dec. 31	To Bank A/c 61,300 + 6,130	67,430	Jun. 30	By Z’s Capital A/c	1,22,600
2019
Mar. 31	To Balance c/d	62,832.5	Dec. 31	By Interest (1,22,600×10100×612	6,130
			Mar. 31	By Interest (61,300×10100×312)	1,532.5
		1,30,262.5			1,30,262.5
2019
Jun. 30	To Bank 61,300 + 3,065	28,750	April 01	By Balance b/d	62,832.5
2020
Jan. 31	To Cash A/c 25,000 + 2,500	27,500	Jun. 30	By Interest (61,300×10100×312	1,532.5


		64,365			64,365

Working Notes:

Calculation of Profit & Loss Suspense

Profit & loss Suspense	=	8,16,000	X	1	X	6
Profit & loss Suspense	=	8,16,000	X	3	X	12

	=	Rs 34,000

Q19) On 31st March 2014, the Balance Sheet of Pooja, Qureshi and Ross, who were partners in a firm was as under:

Liabilities		Amount	Assets	Amount
Sundry Creditors		2,50,000	Building	2,60,000
Reserve Fund		2,00,000	Investment	1,10,000
Capital A/c			Qureshi’s Loan	1,00,000
Pooja	1,50,000		Debtors	1,50,000
Qureshi	1,00,000		Stock	1,20,000
Ross	1,00,000	3,50,000	Cash	60,000
		8,00,000		8,00,000

Qureshi died on 1st July 2014. The profit-sharing ratio of the partners was 2 : 1: 1. On the death of a partner, the partnership deed provided for the following:

His share in the profits of the firm till the date of his death will be calculated on the basis of average profits of the last three completed years.
Goodwill of the firm will be calculated on the basis of the total profit for the last two years.
Interest on loan given by the firm to a partner will be charged at the rate of 6% p.a. Or 4,000, whichever is more.
iv Profits for the last three years were 45,000; 48,000 and 33,000.
Prepare Qureshi’s Capital Account to be rendered to his executors. A20)

Qureshi’s Capital A/c
Particular	Amount	Particular	Amount
To Drawings A/c	1,04,000	By Balance b/d	1,00,000
To Executor’s A/c	68,875	By Pooja’s Capital A/c WN1	13,500
		By Ross’s Capital A/c WN1	6,750
		By Profit & Loss Suspense A/c WN2	2,625
		By Reserve Fund A/c 2,00,000 × 1/4	50,000
	1,72,875		1,72,875

Working Notes:

Calculation of Qureshi’s Share of Goodwill

Goodwill = 48,000 + 33,000 = 81,000
Qureshi’s Share of Goodwill = 81,000 × 1/4 = 20,250
Gaining Ratio = Pooja: Ross = 2: 1

Amount debited to Pooja’s Capital A/c	=	20,250	X	2
Amount debited to Pooja’s Capital A/c	=	20,250	X	3

	=	Rs 13,500

Amount debited to Ross’s Capital A/c	=	20,250	X	1
Amount debited to Ross’s Capital A/c	=	20,250	X	3

	=	Rs 6,750

Calculation of Qureshi’s Share of Loss till the date of his death

Average Profit of the last three years = 45,000 + 48,000 + 33,000/3 = 42,000
Qureshi’s share of loss till the date of death = Previous year’s loss × Qureshi’s Share of Loss × Months till the date of his death/12

=	42,000	X	1	X	3
=	42,000	X	4	X	12

=	Rs 2,625

Calculation of Amount due on account of Loan given to Qureshi

Loan given to Qureshi by a firm = 1,00,000

Amount of interest till 1st July, 2014	=	1,00,000	X	6	X	3
Amount of interest till 1st July, 2014	=	1,00,000	X	100	X	12

	=	Rs 1,500

Total Amount due to firm on 1st July	=	Loan amount	+	Amount of Interest

	=	1,00,000	+	4,000
	=	Rs 1,04,000

Adjustment of Goodwill
Q21) From the following Trial Balance of Ajit and Sujit, you are required to prepare a Trading and Profit & Loss A/c for the year ended 31st December 2003 and a Balance Sheet as on that date:

Trial Balance Sheet as on 31st December 2003

Particulars

Debit

Rs.

Credit Rs.

Particulars

Debit

Rs.

Credit

Rs.

Capital A/c:

Ajit

Sujit

Drawing A/c

Ajit

Sujit

Stock on 1-1-2003

Bills Receivable

Purchases and Sales

Return

Salaries

2,000

1,000

44,000

1,800

1,90,000

6,000

10,000

60,000

40,000

3,02,000

2,000

Carriage Outward

Wages

Insurance

Discount Received

Postage

(Debtors and Creditors)

Furniture

Cash in Hand

Machinery

Rent & Taxes

(Printing & Stationery)

1,400

24,000

1,600

800

70,400

24,000

9,800

80,000

1,200

400

4,68,400

200

64,200

4,68,400

Adjustments:

The closing stock on 31st December 2003 was valued at Rs. 56,000.
The outstanding expenses were: (a) Wages Rs. 2,000 and (b) Salaries Rs. 930.
Goods of Rs. 2,000 were distributed as free samples.
Interest on partner’s capital was to be provided at 7% p.a.
Prepaid Insurance was Rs. 100.
Depreciation was to be provided on furniture at 10% and on machinery at 5%.
A reserve for bad and doubtful debts was to be created at 5% of sundry debtors.

A21)

In the books of Ajit & Sujit

Trading, Profit & Loss A/c for the year ended 31st Dec, 2003

Particulars	Amount (Rs)	Amount (Rs)	Particulars	Amount (Rs)	Amount (Rs)
To Opening stock		44,000	By Sales Less : Return Inwards	3,02,000 6,000	2,96,000
To Purchase Less : Return Outwards	1,90,000 (2,000)	1,88,000	By Goods Given as Samples (3)		2,000
To Wages Add : Outstanding (2)	24,000 2,000	26,000	By Closing Stock (1)		56,000
To Gross Profit c/d		96,000

Total		3,54,000	Total		3,54,000

To Salaries	10,000		By Gross Profit b/d		96,000
Add : Outstanding (2)	930	10,930	By discount Received		200
To Insurance Less : Prepaid (5)	1,600 (100)	1,500
To Postage		800
To Rent & Taxes		1,200
To Printing & stationery		400
To Carriage Outwards		1,400
To free Samples Given (3)		2,000
To Reserve for Doubtful Debt (5% of 70,400) (7)		3,520
To Depreciation : (6) Machinery (5% of 80,000) Furniture (10% of 24,000)	4,000 2,400	6,400
To Net Profit c/d		68,050

Total		96,200	Total		96,200

To Interest on Capitals : (4) Ajit (7% of 60,000) Sujit (7% of 40,000)	4,200 2,800	7,000	By Net Profit b/d		68,050
To Net profit transferred: Ajit Sujit	30,525 30,525	61,050

Total		68,050	Total		68,050

Balance Sheet as on 31st Dec, 2003

Liabilities	Amount (Rs)	Amount (Rs)	Assets	Amount (Rs)	Amount (Rs)
Capital Account of Ajit:			Machinery	80,000
Balance b/d	60,000		Less : Depreciation (6)	(4,000)	76,000
Add : Interest (4)	4,200		Furniture	24,000
Add : Net Profit	30,525		Less : Depreciation (6)	(2,400)	21,600
	94,725
Less : Drawings	(2,000)	92,725

Capital Account of Sujit:			Prepaid Insurance (5)
Balance b/d	40,000		Stock (1)
Add : Interest (4)	2,800		Debtors	70,400
Add : Profit	30,525		Less : Reserve for D.D (7)	(3,520)	66,880
	73,325		Bills Receivable		1,800
Less : Drawings	(1,000)	72,325	Cash in Hand		9,800
Sundry Creditors		64,200
Outstanding Expenses : (2)
Wages	2,000
Salaries	930	2,930

Total		2,32,180	Total		2,32,180

Notes:

In absence of information, partner’s share is assumed to be equal.
Numbers written in brackets are effect of adjustment numbers.

Q20) A, B and C carried on business in partnership as Ready Made Cloth Dealers. The partnership agreement provided that –

The partners were to be credited at the end of each year with interest at 5% per annum on Opening Balance of Capital.
No Interest was to be charged on drawings.
Profits and Losses were to be shared as to A5, B 3 and C2. It was agreed that C’s Share of profit in any should not be less than Rs. 10,000 and any deficiency in such share was to be borne by the other two partners in their profit sharing ratio.

Trial Balance of the Partnership as on 31stDecember 2003

Account

Debit Rs.

Credit Rs.

Shop Fittings (at cost)

Freehold Premises

Leasehold Premises Purchased During the year

Additions and Alterations to Leasehold Premises

Purchases

Stock as at 1-1-2003

Salaries and wages

Office and Trade Expenses

Rent, Rates and Insurance

Professional Charges

Debtors

Balance at Central Bank Ltd.

Partners Capital Account:

Partners Current Account:

Sales

Trade Creditors

Depreciation Reserve

Reserve for Doubtful Debts

Drawings Other Than Monthly Payments:

36,000

60,000

45,000

25,000

2,80,000

42,000

64,000

45,200

10,500

3,500

20,600

43,700

7,000

6,000

4,000

6,92,500

80,000

50,000

30,000

16,000

8,000

12,000

4,45,000

37,000

14,000

500

6,92,500

You are given the following additional information:

Stock on December 31, 2003 was valued at the market value of Rs. 35,000 but if valued at cost it was Rs. 42,000.
Goods worth Rs. 1,000 were destroyed by fire and the Insurance Company has admitted claim for Rs. 700 only.
A debt of Rs. 600 is to be written off and provision for doubtful debts is to be at 5%.
Salaries and wages include the following monthly drawings by the partners: A: Rs. 500; B: Rs. 300 and C: Rs. 250.
Partners had during the year been supplied with goods worth Rs. 600 to A and Rs. 400 to B
On December 31, 2003 rates paid in advance and office and trade expenses owing were Rs. 2,500 and Rs. 2,100 respectively.
Depreciation of shop fittings to be provided at 5% p.a. On cost.
Professional Charges include Rs. 2,500 fees paid in respect of the acquisition of leasehold premises.
The cost of addition and alterations to the leasehold premises were to be written off over 25 years commencing from 1-1-2003.

You are requested to prepare the Trading Account and Profit & Loss Account for the year ending. 31st December, 2001 and Balance Sheet as at 31st December 2003.

A22)

In the books of A, B & C

Profit & Loss A/c for the year ended 31 Dec, 2003

Particulars	Amount (Rs)		Amount (Rs)	Particulars	Amount (Rs)	Amount (Rs)
To Salaries & Wages Less : Salaries to Partners	64,000 (12,600)		51,400	By Gross Profit b/d		1,60,000
To Office/ Trade Expenses Add: Outstanding	45, 200 2,100		47,300
To Rent, Rates & Insurance Less : Prepaid Rates	10,500 (2,500)
To Professional Charges Less: Expenses on acquisition of Leasehold Premises	3,500 (2,500)		1,000
To Bad Debts Add: RDD (New)	600 1,000
	1,600
Less : RDD (Old)	(500)		1,100
To Depreciation on : Leasehold Premises Shop Fitting	2,900 1,800		4,700
To Goods Destroyed by Fire (Cost Less Insurance claim)			300
To Net Profit c/d			46, 200
Total			1,60,000	Total		1,60,000
Profit & Loss Appropriation A/c
Particulars		Amount (Rs)	Amount (Rs)	Particulars	Amount (Rs)	Amount (Rs)
To Interest on Partner’s Capitals			8,000	By Net Profit b/d		46,200
To Net Profit transferred to Current A/c - A (28,200 x 5/8) - B (28,200 x 3/8) - C (minimum guaranteed)		17,625 10,575 10,000	38,200
Total			46,200	Total		46,200

Balance Sheet as on 31 Dec, 2003

Liabilities	Amount (Rs)	Amount (Rs)	Assets	Amount (Rs)	Amount (Rs)
Capital Accounts: - A - B - C	80,000 50,000 30,000	1,60,000	Fixed Assets: Shop fitting (at Cost) Less: Dep. Upto Current year (14,000 + 1,800)	36,000 15,800	20,200
Current Accounts: - A - B - C	24,025 11,075 16,500	51,600	Freehold Premises		60,000
Trade Creditors		37,000	Leasehold Premises Add: Addition during the Year Add: Expenses on acquisition of Leasehold Premises	45,000 25,000 2,500 72,500
Outstanding office & Trade Expenses		2,100	Less: Depreciation (1/25)	(2,900)	69,600
			Debtors Less Bad Debts	20,600 (600)
				20,000
			Less : Provision for bad debts	(1,000)	19,000
			Balance at Central bank Ltd.		43,700
			Insurance Claim Receivable		700
			Prepaid Rates		2,500
			Closing stock		35,000

Total		2,50,700	Total		2,50,700

Partner’s Current Accounts

Particulars	A (Rs)	B (Rs)	C (Rs)	Particulars	A (Rs)	B (Rs)	C (Rs)
To Drawing	7,000	6,000	4,000	By Balance b/d	16,000	8,000	12,000
To Drawing (salary)	6,000	3,600	3,000	By Interest on capital	4,000	2,500	1,500
To Drawing (goods)	600	400		By Profit & Loss A/c	17,625	10,575	10,000
To Balance c/d	24,025	11,075	16,500
Total	37,625	21,075	23,500	Total	37,625	21,075	23,500

Q21) A and B were partners sharing profits and losses in the ratio of 3:2. With effect from 1-10-2002, C joins as a third partner. The new profit sharing ratio was 2:2:1.

The following is their trial balance as on 31st March, 2003:

Particulars

Dr. Rs.

Cr. Rs.

A’s Drawings and Capital

B’s Drawings and Capital

C’s Drawings and Capital

Opening Stock (1-4-2002)

Purchases and Sales

Wages

Furniture

General Expenses

Selling Expenses

Debtors and Creditors

Cash and Bank Balance

Amount brought by C (for his share of Goodwill)

15,000

10,000

5,000

30,000

9,00,000

1,40,000

2,00,000

60,000

14,000

6,26,000

3,50,000

23,50,000

3,00,000

2,00,000

1,50,000

14,00,000

2,50,000

50,000

23,50,000

Other Information:

Stock on 31-3-2003 was Rs. 1,80,000.
Purchases from 1-4-2002 to 30-9-2002 were Rs. 4,00,000.
Sales from 1-4-2002 to 30-9-2002 were Rs. 6,00,000.
Wages from 1-4-2002 to 30-9-2002 were Rs. 60,000.
Stock on 30-9-2002 was Rs. 80,000.
Furniture worth Rs. 1, 00,000 was purchased 1-1-2003. Write off depreciation on furniture at 20% p.a.
Interest on partner’s capital is to be provided at 12% p.a.
No Interest is to be charged on partners drawings.

You are required to prepare:

Trading A/c containing the columns for: 1-4-2002 to 30-9-2002 and 1-10-2002 to 31-3-2003.
Profit & Loss A/c containing the columns for: 1-4-2002 to 30-9-2002 and 1-10-2002 to 31-3-2003.
Balance sheet as on 31st March, 2003.

A23)

M/s A, B, C

Trading, Profit & Loss A/c for the year ended 31st March, 2003

Particulars	Apr-Sep (Rs)	Oct-Mar (Rs)	Particulars	Apr-Sep (Rs)	Oct-Mar (Rs)
To Opening Stock	30,000	80,000	By Sales	6,00,000	8,00,000
To Purchases	4,00,000	5,00,000
To Wages	60,000	80,000	By Closing Stock	80,000	1,80,000

To Gross Profit c/d	1,90,000	3,20,000

Total	6,80,000	9,80,000	Total	6,80,000	9,80,000

To General Expenses (WN2)	30,000	30,000	By Gross Profit b/d	1,90,000	3,20,000
To Selling Expenses (WN2)	6,000	8,000
To Depreciation on Furniture (WN 3)	10,000	15,000

To Net Profit c/d	1,44,000	2,67,000

Total	1,90,000	3,20,000	Total	1,90,000	3,20,000

To Interest on Capital			By Net Profit b/d	1,44,000	2,67,000
A(3 L x 12% x 1/2)	18,000	18,000
B(2 L x 12% x 1/2)	12,000	12,000
C(1.5 L x 12% x 1/2)	-	9,000

To Net Profit trfd to Partner’s capital
A (3/5) (2/5)	68,400	91,200
B (2/5) (2/5)	45,600	91,200
C ( - ) (1/5)	-	45,600

Total	1,44,000	2,67,000	Total	1,44,000	2,67,000

Partner’s Capital A/c

Particulars	A	B	C	Particulars	A	B	C
To Drawings	15,000	10,000	5,000	By Balance b/d	3,00,000	2,00,000	-
To Balance c/d	5,30,600	3,50,800	1,99,600	By Bank	-	-	1,50,000
				By Interest	36,000	24,000	9,000
				By Goodwill (WN1)	50,000	-	-
				By Net Profit	1,59,600	1,36,800	45,600
Total	5,45,600	3,60,800	2,04,600	Total	5,45,600	3,60,800	2,04,600

Balance Sheet as on 31st March, 2003

Liabilities	Amount (Rs)	Amount (Rs)	Assets	Amount (Rs)	Amount (Rs)
Partner’s capitals			Furniture	2,00,000
A	5,30,600		Less: Depreciation	(25,000)	1,75,000
B	3,50,800		Debtors		6,26,000
C	1,99,600	10,81,000	Stock		1,80,000
			Cash & Bank		3,50,000
Creditors		2,50,000


Total		13,31,000	Total		13,31,000

Working Notes:

Sacrifice by partners

SR = OR – NR

A = (3/5) - (2/5) = 1/5

B = (2/5) - (2/5) = NIL

2. General Expenses: Time Basis & Selling Expenses: Sales Basis.

3. Depreciation on Furniture

Particulars	Total	Before Admission	After Admission
Opening (1,00,000 x 20%)	20,000	10,000	10,000
Purchases (1,00,000 x 20% x 3/12)	5,000	-	5,000
Total	25,000	10,000	15,000

Q22) X and Y shared profits and losses equally. Their Trial Balance as on 31st December 2003 was as under:

Particulars

Rs.

Capital : X

Current : X

Fixed Assets

Debtors

Bank

Stock (Opening)

Purchases

Wages

Office & Administrative Expenses

Selling & Distribution Expenses

Creditors

Sales

Advances

7,500

75,000

25,000

12,500

62,500

6,250

12,500

10,000

31,250

2,75,000

75,000

12,500

1,12,500

2,75,000

Additional Information:

Z retired on 30th June 2003. His capital was paid off but the amounts due to him for (i) Profit of the year (ii) Share of Goodwill Rs. 10,000 (iii) Interest on his capital Rs. 1,250 were to be paid.
X, Y and Z were sharing profits and Losses 2:2:1.
Closing Stock was Rs. 6,250 on 30-6-2003 and Rs. 7,500 on 31-12-2003
Item Up to 30-6-2003 after 1-7-2003 Purchase 37,500 25,000 Wages 3,750 2,500 Sales 75,000 37,500

Other expenses were to be equally distributed between the two periods.

5. Depreciate Fixed Assets by 10% p.a.

6. Allow interest at 10% p.a. On capital.

Show the Final Accounts.

A24)

M/s X & Y

Trading, Profit & Loss A/c for the year ended 31st Dec, 2003

Particulars	Jan-June (Rs)	Jul-Dec (Rs)	Particulars	Jan-June (Rs)	Jul-Dec (Rs)
To Opening Stock	12,500	6,250	By Sales	75,000	37,500
To Purchases	37,500	25,000
To Wages	3,750	2,500	By Closing Stock	6,250	7,500

To Gross Profit c/d	27,500	11,250

Total	81,250	45,000	Total	81,250	45,000
			By Gross Profit b/d	27,500	11,250
To Office & Admin Expenses	6,250	6,250	By Net Loss c/d	-	3,750
To Selling Expenses	5,000	5,000
To Depreciation on Fixed assets(75,000 x 10% = 7,500)	3,750	3,750

To Net Profit c/d	12,500	-

Total	27,500	15,000	Total	27,500	15,000

To Net Loss b/d	-	3,750	By Net Profit b/d	12,500	-
To Interest on Capital
X (75,000 x 10%)	3,750	3,750
Y (75,000 x 10%)	3,750	3,750	By Net Loss after 1-7
Z(given)	1,250	-	X (11,250 x 1/2)		5,625
			Y (11,250 x 1/2)		5,625
To Net Profit (upto 30-6)
X (3,750 x 2/5)	1,500
Y (3,750 x 2/5)	1,500
Z (3,750 x 1/5)	750

Total	12,500	11,250		12,500	11,250

Balance Sheet as on 31st Dec, 2003

Liabilities	Amount (Rs)	Amount (Rs)	Assets	Amount (Rs)	Amount (Rs)
Partner’s capitals			Fixed Assets	75,000
X	75,000		Less: Depreciation	(7,500)	67,500
Y	75,000	1,50,000	Debtors		25,000
			Stock		7,500
Due to Z		12,000	Bank		25,000
Creditors		12,500	Advances		31,250
			Current Account:
			X		9,125
			Y		9,125

Total		1,74,500	Total		1,74,500

Partner’s Current A/c

Particulars	X	Y	Z	Particulars	X	Y	Z
To Balance b/d	7,500	7,500	-	By Interest	7,500	7,500	1,250
To Goodwill W/off	5,000	5,000	-	By Net Profit (upto 30-6)	1,500	1,500	750
To Net Loss ( after 1-7)	5,625	5,625	-	By Goodwill			10,000
To Due to Z A/c			12,000	By Balance c/d	9,125	9,125	-

Total	18,125	18,125	12,000	Total	18,125	18,125	12,000

Notes:

Expenses are divided in the ratio of Time (6:6) i.e. (1:1).
Profit/Loss upto the date of retirement is distributed in old ratio & Profit/Loss after the date of retirement is distributed in new ratio.
Share of goodwill is distributed in gain ratio between remaining partners

Q23) Following is the Balance Sheet of Shashi and Ashu shari profit as 3 : 2.

Particulars	(Rs.)	Assets	(Rs.)
Creditors General reserve Workmen’s compensation fund Capital: Shashi Ashu	18,000 25,000 15,000 15,000 10,000	Debtors 22,000 Less: Provision for DD 1,000 Land and Building Plant and machinery Stock Bank	21,000 18,000 12,000 11,000 21,000
	83,000		83,000

On admission of Tanya for 1/6 th share in the profit it was decided that:
(i) Provision for doubtful debts to be increased by Rs. 1,500.
(ii) Value of land and building to be increased to Rs. 21,000.
(iii) Value of stock to be increased by Rs. 2,500.
(iv) The liability of workmen’s compensation fund was determined to be Rs. 12,000.
(v) Tanya brought in as her share of goodwill Rs. 10,000 in cash.
(vi) Tanya was to bring further cash of Rs. 15,000 for her capital.
Prepare Revaluation A/c, Capital A/cs and the Balance Sheet of the new firm

A25)
Revaluation Account

Particulars	(Rs.)	Assets	(Rs.)
To Provision for D.D. To Capital A/cs : Shashi 3/5 2,400 Ashu 2/5 1,600	1,500 4,000	By Land and Building A/c By Stock	3,000 2,500
	5,500	By Land and Building A/c By Stock	83,000

Partners’ Capital Account

Particulars	Shashi	Ashu	Tanya	Particulars	Shashi	Ashu	Tanya
To Balance e/d	40,200	26,800	15,000	By balance b/d By general reserve By workmen’s compensation A/c By Revaluation A/c By Bank A/c By Premium for goodwill	15,000 15,000 1,800 2,400 – 6,000	10,000 10,000 1,200 1,600 – 4,000	– – – – 15,000 –
	40,200	26,800	15,000		40,2000	26,800	15,000

Balance Sheet of the New Firm

Liabilities	(Rs.)	Assets	(Rs.)
Creditors Work compensation fund Capital : Shashi Ashu Tanya	18,000 12,000 40,200 26,800 15,000	Debtors 22,000 Less: Provision for DD 1,000 Land and Building Plant and machinery Stock Bank	19,000 21,000 12,000 13,500 46,000
	1,12,000		1,12,000

Q24) A and B partners sharing profits and losses in the ratio of 3:2. They admit C into partnership for 1/4 share in profits. C’s brings Rs. 3,00,000 as capital and Rs. 1,00,000 as goodwill. New profit-sharing ratio of the partners shall be 3:3:2. Pass necessary Journal entries.

A26) Entries

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Bank A/c Dr. To Premium for Goodwill A/c To C’s Capital A/c (Being the amount of goodwill and capital brought in by new partner C)		4,00,000 1,00,000	1,00,000 3,00,000 90,000 10,000
	Premium for Goodwill A/c Dr. To Premium for Goodwill A/c To C’s Capital A/c (Being the amount of goodwill distributed between A and B in their sacrificing ratio i.e., 9 : 1)

Q25) A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. C is admitted as a new partner. A Surrenders 1/5 of his share and B 2/5 of his share in favour of C. For purpose of C’s admission, goodwill of the is valued at Rs. 75,000 and C brings his share of goodwill in cash which is retained in the firm’s books. Journalise the above transactions.

A27) Journal

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Bank A/c Dr. To Premium for Goodwill A/c (Being the amount of goodwill and capital brought in by new partner C)		21,000 21,000	21,000 9,000 12,000
	Premium for Goodwill A/c Dr. To Premium for Goodwill A/c To C’s Capital A/c (Being the amount of goodwill distributed between A and B in their sacrificing ratio i.e., 3 : 4)

Note: (i) Calculation of sacrifice ratio:

A’s sacrifices = 1/5 of his share = 1/5 of 3/5 = 3/25
B’s sacrifices = 2/5 of his share = 2/5 of 2/5 = 4/25
Sacrificing ratio between A and B i.e., 3/25 : 4/25 = 3 : 4

(ii) Calculation of C’s share of profit:
C’s share of profit = 3/25 + 4/25 = 7/25

(ii) Calculation of C’s share profit:

Treatment of Existing Goodwill shown in the books
If goodwill already shown in the balance sheet, it should be written off by debiting old partners in their old profits sharing ratio.

Q26) Anubhav and Babita are partners in a firm sharing profits and losses in the ratio of 3:2. On April 1, 2015 they admit Deepak as a new partner for 3/13 share in the profits. Deepak contributed the following assets towards his capital and for his share of goodwill.
Land Rs. 90,000, Machinery Rs. 70,000 stock Rs. 60,000 and debtors Rs. 40,000. On the date of admission of Deepak, the goodwill of the firm was valued at Rs. 5,20,000, which is not appear in the books. Record necessaries journal entries in the books of the firm. Show your calculation clearly.

A28) Entries in the books of the firm

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
2015 April -1	Land A/c Dr. Machinery A/c Dr. Stock A/c Dr. Debtors A/c Dr. To Premium for Goodwill A/c To Deepak’s Capital A/c (Balancing figure) (Being the amount of goodwill and capital brought in kind by new partner)		90,000 70,000 60,000 40,000 1,20,000	1,20,000 1,40,000 72,000 48,000
April – 1	Premium for Goodwill A/c Dr. To Anubhav’s Capital A/c To Babita’s Capital A/c (Being the amount of goodwill distributed between Anubhav and Babita in their sacrificing ratio i.e., 3 : 2)		90,000 70,000 60,000 40,000 1,20,000	1,20,000 1,40,000 72,000 48,000

Note: Here Sacrificing Ratio = Old Ratio i.e., 3 : 2

Case (iii) Amount of goodwill which was brought in by new partner, is withdrawn by old partner:

In this case one additional journal entry may be passed:
Old Partners’ Capital A/c Dr.
To Bank/Cash A/c
(Cash withdrawn by old partners)

Case (iv) when the new partner is unable to bring his share of goodwill in cash.
Sometimes the new partner does not bring his share of goodwill in cash. Then his share of goodwill is calculated and adjusted by the following Journal entry.

New Partners’ Capital Dr.
To old partners’ Capital A/cs
(in the sacrificing ratio)

Q27) Neeta and Sumita are partners sharing profits and losses in the ratios of 2:1. They admit Geeta as a partner for 1/4th share. Geeta pays Rs. 50,000 as capital but does not bring any amount for goodwill. The goodwill of the new firm is valued at Rs. 36,000. Give Journal entries.

A29)
Journal

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1. 2.	Cash A/c Dr. To Geeta’s Capital A/c (Being the amount of goodwill and capital brought in by new partner)		50,000 9,000	50,000 6,000 3,000
	Geeta’s Capital A/c Dr. To Neeta’s Capital A/c To Sunit’s Capital A/c (Being the amount of new Partner’s share of goodwill transferred to old Partner’s Capital A/c in their sacrificing ratio i.e., 3 : 4)

Working Note :

(1) As nothing is given about sacrifice etc. except the old ratio and the new partners share of profit.
Sacrificing Ratio = Old Ration = 2 : 1

(2) Goodwill of the firm = Rs. 36,000
Geeta’s share of profit = 1/4
Geeta’s share of Goodwill = Rs. 36,000 = 1/4 Rs. 9,000
Case (v) Partly goodwill brought in by new partner :

Q28) Sheetal and Raman share profits equally. They admit Chiku into partnership. Chiku pays only Rs. 1,000 for premium out of his share of premium of Rs. 1,800 for ¼ share of profit. Goodwill Account appears in the books at Rs. 6,000. All partners have decided that goodwill should not appear in the books of the new fir, Journalise.

A30)

Journal

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Bank A/c Dr. To Premium for Goodwill A/c (Being the amount of goodwill brought in cash by new partner)		1,000 1,000 800 3,000 3,000	10,000 900 900 6,000
	Premium for Goodwill A/c Dr. Chiku’s Capital A/s Dr. To sheetal’s Capital A/c To Raman’s Capital A/c (Being the amount of goodwill transferred to sacrificing partners in their sacrificing ratio i.e., 1 : 1)
	Seeta’s Capital A/c Dr. Raman’s Capital A/c Dr. To Goodwill A/c (Being existing goodwill written off between old partners in their old ratio i.e., equal)

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