Annamalai Academy

CA – CMA – MBA Classes

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Partnership Firm
- Share of Profits / Losses
- Salary
- Commission
- Interest on Capital
Partnership Deed
- Profit Sharing Ratio

- Admission of Partner
- Retirement of Partner
- Death of Partner
- Insolvency of Partner (S)
- Dissolution of Firm
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Admission of Partner
- New Sharing Ratio
- Sacrificing Ratio
- Revaluation of Assets & Liabilities

- Valuation of Goodwill

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Dr P Neelakantan www.annamalaiacademy.co.in
 Statements to be Prepared
- Revaluation A/c
Debit Side Credit Side
Decrease in Value of Asset Increase Value of Assets
Increase in Liability Decrease in Liability

Profit on Revaluation Loss on Revaluation

(Transfer to Partners (Transfer to Partners
Capital Account Credit Side) Capital Account Debit Side)

- Partner’s Capital Account

- Cash Account
- Balance Sheet of New Firm

Solution for Question 1

Revaluation Account
Particulars Amount Particulars Amount
To Furniture 420 By Land & Buildings 7,000
To Stock 1,400
To Provision
for D Debts 630

To Profit on
Revaluation
- A Capital 1950
- B Capital 1625
- C Capital 975 4,550
7,000 7,000

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Dr P Neelakantan www.annamalaiacademy.co.in
 Partner’s Capital Account
Particulars A B Particulars A B
To Cash 1,750 1,625 By Balance B/d 19,000 16,000
(Balance) By Revaluation Profit 1,950 1,625
To Balance C/d 21,000 17,500 By Goodwill 1,800 1,500
22,750 19,125

Partner’s Capital Account

Particulars C D Particulars C D
By Balance B/d 8,000
By Revaluation Profit 975
To Balance C/d 10,500 7,000 By Goodwill 900
By Bank 7,000
By Cash ( Balance) 625
10,500 7,000 10,500 7,000

Cash Account
Particulars Amount Particulars Amount
To Balance B/d 900 By A’s Capital A/c 1,750
To C’s Capital 625 By B’s Capital A/c 1,625
To D’s Capital 7,000
To Goodwill 4,200 By Balance C/d 9,350
( D Brought in)
12,725 12,725

Balance Sheet as on 31-March-2018

Liabilities Amount Assets Amount
Capital A/c s Land & Buildings 31,000
- A Capital 21,000 Furniture 3,500
- B Capital 17,500 (Less) Depreciation 420 3,080
- C Capital 10,500
- D Capital 7,000 56,000 Debtors 12,600
(Less) Provision 630 11,970
Creditor’s 9,000
Bills Payable 3,000 Stock 14,000
(Less) Depreciation 1,400 12,600
Cash 9,350
68,000 68,000

_______________________________________________________
Dr P Neelakantan www.annamalaiacademy.co.in
Working Note 1 : New Profit Sharing Ratio
• D’s Share 1/8 = 14/112 ; Remaining 7/8
• A’s New Share = 6/14 x 7/8 = 42/112
• B’s New Share = 5/14 x 7/8 = 35/112
• C’s New Share = 3/14 x 7/8 = 21/112
• A : B : C : D = 42 : 35 : 21 : 14 = 6 : 5 : 3 : 2
• New Sharing Ratio = 6 : 5 : 3 : 2
• Sacrificing Ratio = Old Ratio -- Ne Ratio
• Sacrificing Ratio = 6 : 5 : 3

Working Note 2 : Goodwill Sharing

• D Brings in Goodwill Rs.4,200
• Shared by A : B : C in Sacrificing Ratio
• A – 1,800 B – 1,500 C – 900

Working Note 3 : New Capital of Partners

• D brings in Rs.7,000 for 1/8 th Share
• Total Capital of Firm 7,000 x 8 / 1 = 56,000
• Therefore A’s Capital = Rs.21,000
• Therefore B’s Capital = Rs.17,500
• Therefore C’s Capital = Rs.10,500

Solution for Question 2

Revaluation Account
Particulars Amount Particulars Amount
To Patents 17,000 By Stock 2,000
To Investments 10,000 By Bad Debts Recovered 8,000
By Sundry Creditors 9,000
To Profit on By Prepaid Insurance 10,000
Revaluation By Accrued Income 2,000
- X Capital 2,400
- Y Capital 1,600 4,000
31,000 31,000

_______________________________________________________
Dr P Neelakantan www.annamalaiacademy.co.in
 Partner’s Capital Account
Particulars X Y Z Particulars X Y Z
To Investments 27,000 18,000 By Balance B/d 1,68,000 1,12,000
To Goodwill 48,000 32,000 By General Reserve 19,200 12,800
By Workmen Comp. 10,800 7,200
To X Capital 8,000 40,000 By Revaluation 2,400 1,600
By Bank (Goodwill) 24,000
By Z’s Current A/c 16,000
To Balance C/d 1,73,400 75,600 83,000 By Y‘s Capital 8,000
By Z’s Capital 40,000
By Cash 83,000
2,48,400 1,33,600 1,23,000 2,48,400 1,33,600 1,23,000

Balance Sheet as on 31-March-2018

Liabilities Amount Assets Amount
Capital A/c s Debtors 1,30,000
- X Capital 1,73,400 (Less) Provision 18,000 1,12,000
- y Capital 75,600
- Z Capital 83,000 Stock 62,000
Investment 45,000
Creditor’s 27,000 Patent 3,000
Employee PF 20,000 Accrued Income 2,000
Workmen 6,000 Prepaid Insurance 10,000
Comp. Cash 1,35,000
Z’ Current A/c 6,000
3,85,000 3,85,000

Working Note : Calculation of Goodwill

• Average Profit Rs.70,000; Normal Profit ; Rs.30,000
• Super Profit = Average Profit – Normal Profit = 70,000 – 30,000 = 40,000
• Goodwill = 4 x 40,000 = Rs.1,60,000
• Z’s Share of Goodwill 1,60,000 x ¼ = Rs.40,000
• Z Brings in Rs.24,000 : Balance to be Brought Rs.16,000
•
• Sacrificing Ratio = Old Ratio - New Ratio
• X’s Sacrificing Ratio = 3/5 – 6/20 = 6/20 Sacrifice
• Y’s Sacrificing Ratio = 2/5 – 9/20 = (1/20) Gain
• Y’s Share of Goodwill Gain = 1,60,000 x 1/20 = 8,000
• Capital of X + Capital of Y = 1,73,400 + 75,600 = 2,49,000 x 1/3 = 83,000

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Dr P Neelakantan www.annamalaiacademy.co.in
 Solution for Question 3

Memorandum Revaluation Account

Particulars Amount Rs. Particulars Amount Rs.

To Stock 30,000 By Building 1,11,000
To Plant & Machinery 50,000
To Unrecorded Liability 10,000

To Profit Transfer
- A’s Capital A/c 14,000
- B’s Capital A/c 7,000
(Old Ratio 2 : 1)
1,11,000 1,11,000
To Building 1,11,000 By Stock 30,000
By Plant & Machinery 50,000
By Unrecorded Liability 10,000

By Loss Transfer
- A’s Capital A/c 9,000
- B’s Capital A/c 6,000
- P’s Capital A/c 3,000
- Q’s Capital A/c 3,000
(New Ratio 3 : 2 : 1 : 1)
1,11,000 1,11,000

Partners’ Capital Account

Particulars A B Particulars A B
To Memorandum 9,000 6,000 By Balance B/d 8,00,000 4,00,000
Revaluation By Memorandum
Revaluation Profit 14,000 7,000
To General Reserve 2,25,000 1,50,000 By General Reserve 3,50,000 1,75,000
By P & Q Capital A/c 20,000 4,000
To Balance C/d 9,50,000 4,30,000
11,84,000 5,86,000 11,84,000 5,86,000

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Dr P Neelakantan www.annamalaiacademy.co.in
 Partners’ Capital Account
Particulars P Q Particulars P Q
To Memorandum 3,000 3,000
Revaluation

To General Reserve 75,000 75,000 By Bank 3,05,000 3,05,000

To A & B Capital A/c 12,000 12,000
To Balance C/d 2,15,000 2,15,000
3,05,000 3,05,000 3,05,000 3,05,000

Balance Sheet of Newly Reconstituted firm as on 31-03-2017

Liabilities Amount Rs. Assets Amount Rs.
Capital Accounts Plant and Machinery 5,00,000
- A’s Capital A/c 9,50,000 Building 9,00,000
- B’s Capital A/c 4,30,000 Sundry Debtors 2,50,000
- P’s Capital A/c 2,15,000 Stock 3,00,000
- Q’s Capital A/c 2,15,000 18,10,000 Cash 7,60,000
(1,50,000
Reserves 5,25,000 + 3,05,000 +
Sundry Creditors 2,75,000 3,05,000)
Bills Payables 1,00,000

27,10,000 27,10,000

Working Note 1 : Valuation of Goodwill

Years Profits Weights Weighted Profits
2014 37,000 1 37,000
2015 40,000 2 80,000
2016 45,000 3 1,35,000
6 2,52,000
• Weighted Average Profit 2,52,000 / 6 = Rs.42,000
• Goodwill = 2 Years Purchase x Weighted Average Profit
• Goodwill = 2 x 42,000 = Rs.84,000

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Dr P Neelakantan www.annamalaiacademy.co.in
Working Note 2 : Adjustment of Goodwill
Partners Goodwill as Goodwill as Impact for Partners
Per Old Ratio Per New Ratio
(2:1) (3 : 2 : 1 : 1)
A 56,000 36,000 20,000
B 28,000 24,000 4,000
P 12,000 12,000
Q 12,000 12,000
84,000 84,000 24,000 24,000

P’s Capital A/c Dr 12,000

Q’s Capital A/c Dr 12,000
To A’s Capital A/c 20,000
To B’s Capital A/c 4,000

(i) P and Q were to bring capitals equal to their shares of profit considering

B’s capital as base after all adjustments.

Working Note 3 : Estimation of Closing Capital
- A:B:P:Q=3:2:1:1
- B’s Capital Rs.4,30,000 for 2/7 th Share
- Total Capital of the Firm = 4,30,000 x 7/2 = Rs.15,05,000
- Capital of P & Q = Rs. 15,05,000 x 1/7 = Rs.2,15,000 each

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Dr P Neelakantan www.annamalaiacademy.co.in