Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

Principles and Practice of Accounting

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CA Foundation : Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

The document Unit 3: Admission of a New Partner CA Foundation Notes | EduRev is a part of the CA Foundation Course Principles and Practice of Accounting.
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Unit 3: Admission of a New Partner CA Foundation Notes | EduRev3.1 INTRODUCTION 
New partners are admitted for the benefit of the partnership firm. New partner is admitted either for increasing the partnership capital or for strengthening the management of the firm. When a new partner joins a firm, it is desirable to bring all appreciation or reduction in the value of assets into accounts as on the date of admission. Similarly, if the books contain any liability which has not been paid or if the books do not contain a liability which has to be paid, suitable entries should be passed. The purpose of such entries is to make an updated Balance Sheet on the date of admission. Also, all profits which have accrued but not yet brought into books and similarly, all losses which have occurred but not recorded, should now be brought into books so that the Capital Accounts of the old partners reflect the proper figure. As a result of passing of such entries, any subsequent profits or losses will be automatically shared by the incoming partner along with old partners. Also the value of goodwill is to be assessed and proper accounting treatment is required to bring the value of goodwill into books of accounts. Treatment for goodwill has already been discussed in unit 2 of this chapter.

3.2 REVALUATION ACCOUNT OR PROFIT AND LOSS ADJUSTMENT 

ACCOUNT

When a new partner is admitted into the partnership, assets are revalued and liabilities are reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the purpose. This account is debited with all reduction in the value of assets and increase in liabilities and credited with increase in the value of assets and decrease in the value of liabilities. The difference in two sides of the account will show profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing ratio. The entries to be passed are:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevAs a result of the above entries, the capital account balances of the old partners will change and the assets and liabilities will have to be adjusted to their proper values. They will now appear in the Balance Sheet at revised figures.

When the revised values are not to be Recognised in the books
Sometimes all the partners including the new partner may agree to keep the assets and liabilities at the old values even when they agree to revalue them. To record these, a Memorandum Revaluation Account is opened. This account is divided into two parts.
(a) In the first part the entries for the revaluation of assets and liabilities are made in the usual way as explained earlier. No record for the revaluation of assets and liabilities is made through the respective ledger accounts. The resultant profit or loss on revaluation in the first part of this account is transferred to the capital accounts of old partners only in the old profit and loss sharing ratio.
(b) In order to complete the double entry, entries made in the first part of Memorandum Revaluation Account are reversed in the second part so that the values of the assets and liabilities remain unchanged. The balance of the second part is transferred to the capital accounts of all the partners including new partner in their new profit and loss sharing ratio. Thus if there is a profit in the first part there will be a loss of the same amount in the second part. The only point to be remembered is that the result of the first part of Memorandum Revaluation Account is shared by old partners in the old profit sharing ratio, while the result of the second part is shared by all partners including the new one in the new profit sharing ratio.
Alternatively, the partners may agree that revalued figures will not be shown in the Balance Sheet and Assets and liabilities would appear in the Balance Sheet at their old values.
In this case, Memorandum Revaluation Account is opened. Any increase in the value of assets and/or decrease in the liabilities is credited to Memorandum Revaluation Account. The journal entry will be:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevSimilarly, any decrease in the value of assets and/or increase in the liabilities is debited to Memorandum Revaluation Account. The journal entry will be:Memorandum Revaluation Account Dr.
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevIf the credit side of the Memorandum Revaluation Account is more than the debit side, there is a profit. This profit should be transferred to old Partner’s Capital Accounts in the old profit sharing ratio. The journal entry will be:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevIf the debit side of the Memorandum Revaluation Account is more than the credit side, there is a loss which is transferred to old Partner’s Capital Accounts in the old profit sharing ratio. The journal entry will:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevAfter completing the above procedure, reverse entries are made for increase in the values of assets and/ or decrease in the liabilities, and decrease in the values of assets and/or increase in the liabilities) in the later portion of the Memorandum Revaluation Account. The profit on revaluation is to be transferred to all Partners’ Capital Accounts in the new profit sharing ratio. The journey entry will be:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevThe loss on revaluation should be transferred to all Partners’ Capital Accounts in the new profit sharing ratio. The journal entry will be:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevIt should be noted that if there is a profit in the first half of the Memorandum Revaluation Account, the later half of the Memorandum Revaluation Account must show a loss. Conversely, if the first half of the Memorandum Revaluation Account shows a loss, the laterhalf of the Memorandum Revaluation Account must show a profit. When a Memorandum Revaluation Account is prepared, the book values of assets and liabilities do not change. In effect, the resultant profit or loss on revaluation is adjusted through the Partners’ Capital Accounts. In this way, the amount invested as a capital by the incoming partner may be set at a level that reflects the current fair value of the partnership, even though the book values of assets and liabilities of the existing partnership remain unchanged in the books of accounts. In case partners desire to disclose assets and liabilities in the balance sheet at old figures without opening Revaluation account then the change (i.e. increase or decrease) in the value of assets and liabilities may be adjusted through Partners’ Capital Accounts directly.


Difference between Revaluation Account and Memorandum Revaluation Account
1. Revaluation account is prepared to find out the profit or loss on revaluation of assets and liabilities which appear in the new balance sheet at the new or revalued figures. Memorandum revaluation account is also prepared to record the effect of revaluation of assets and liabilities which of course are recorded at their old figures in the new balance sheet.
2. Revaluation account is not divided into two parts. But the memorandum revaluation account has two parts: firstpart for old partners and second part for all partners including the new partner.
3. The net result of revaluation of assets and liabilities in the revaluation account is transferred to old partners’ capital accounts in the old profit sharing ratio. In the case of memorandum revaluation account the firstpart is used to record the changes in the values of assets and liabilities due to revaluation and in the second part the effect of the first part is cancelled. The balance of the first part is transferred to old partner’s capital accounts in the old profit sharing ratio while the balance of the second part is transferred to all partners including the new partner in the new profit sharing ratio.

ILLUSTRATION 1
The following is the Balance Sheet of Ram and Mohan, who share profits in the ratio of 3:2 as on 1st January, 2016:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevOn this date Shyam was admitted on the following:
On this date Shyam was admitted on the following: 1. He is to pay Rs 25,000 as his capital and Rs 10,000 as his share of goodwill for one fifth share in profits. 2. The new profits sharing ratio will be 5:3:2. 3. The assets are to be revalued as under:

Unit 3: Admission of a New Partner CA Foundation Notes | EduRev4. It was found that there was a liability for Rs 1,500 for goods received but not recorded in books.
Give journal entries to record the above. Also, give the Balance Sheet of the partnership firm after Shyam’s admission.
Sol:

Journal Entries
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorking Note:
Profit sacrificing ratio:
Ram =  3/5 less 1/2 = 1/10
Mohan = 2/5 less 3/10 = 1/10
Balance Sheet of Ram, Mohan and Shyam as at January 1, 2016

Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
ILLUSTRATION 2
A and B are partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet as on 31.3.2016 is given below:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevOn 1.4.2016 they admit C on the following terms:
(1) C will bring Rs 50,000 as a capital and Rs 10,000 for goodwill for 1/5 share;

(2) Provision for doubtful debts is to be made on Trade receivables @ 2%
(3)  Inventory to be written down by 10%.
(4) Freehold premises is to be revalued at Rs 2,40,000, plant at Rs 35,000, furniture Rs 25,000 and office equipment Rs 27,500.
(5) Partners agreed that the values of the assets and liabilities remain the same and, as such, there should not be any change in their book values as a result of the above mentioned adjustments.
You are required to make necessary adjustment in the Capital Accounts of the partners and show the Balance Sheet of the New Firm.

Sol:

Memorandum Revaluation Account
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevPartners’ Capital Accounts
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevBalance Sheet as at 1.4.2016
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
 ILLUSTRATION 3
A and B are partners in a firm, sharing profits and losses in the ratio of 3:2. The Balance Sheet of A and B as on 1.1.2016 was as follows:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

‘C’ was admitted to the firm on the above date on the following terms:
(i) C is admitted for 1/6 share in the future profits and to introduce a capital of Rs 25,000. (ii) The new profit sharing ratio of A, B and C will be 3:2:1 respectively.
(iii) ‘C’ is unable to bring in cash for his share of goodwill, they decide to calculate goodwill on the basis of C’s share in the profits and the capital contribution made by him to the firm. 

(iv) Furniture is to be written down by Rs 870 and Inventory to be depreciated by 5%. A provision is required for trade receivables @ 5% for bad debts. A provision would also be made for outstanding wages for Rs 1,560. The value of buildings having appreciated be brought upto Rs 29,200. The value of investments is increased by Rs 450.

(v) It is found that the trade payables included a sum of Rs 1,400, which is not to be paid off.
Prepare the following:
(i) Revaluation account.
(ii) Partners’ capital accounts.
Sol:

Revaluation Account
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevPartners’ Capital Accounts
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorking Notes:
1. Calculation of goodwill:  C’s contribution of Rs 25,000 consists of only 1/6th of capital. Therefore, total capital of firm should be Rs 25,000 x 6 = Rs 1,50,000 But combined capital of A, B and C amounts Rs 44,000 + 36,000 + 25,000 = Rs 1,05,000 Thus, the hidden goodwill is Rs 45,000 (Rs 1,50,000- Rs 1,05,000). Goodwill will be shared by A & B in their sacrificing ratio.2. Calculation of sacrificing ratio
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevUnit 3: Admission of a New Partner CA Foundation Notes | EduRev
3.3 RESERVES IN THE BALANCE SHEET 
Whenever a new partner is admitted, any reserve etc. lying in the Balance Sheet should be transferred to the Capital Accounts of the old partners in the old profit sharing ratio.
The necessary journal entry would be:
Debit: Reserves or Profit and Loss Account
Credit: Old Partners’ Capital Accounts (In the old profit sharing ratio)

ILLUSTRATION 4

Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1. Their Balance Sheet as on 31st March, 2016 is as below:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevThe partners have agreed to take Mr. Mistri as a partner with eect from 1st April, 2016 on the following terms:
(1) Mr. Mistri shall bring Rs 5,000 towards his capital.
(2) The value of Inventory should be increased by Rs 2,500 and Furniture should be depreciated by 10%.
(3) Reserve for bad and doubtful debts should be provided at 10% of the Trade receivables. (4) The value of land and buildings should be enhanced by 20% and the value of the goodwill be fixed at Rs 15,000.
(5) The value of the goodwill be fixed at Rs 15,000.
(6) General Reserve will be transferred to the Partners’ Capital Accounts.
(7) The new profit sharing ratio shall be: Mr. Dalal 5/15, Mr. Banerji 5/15, Mr. Mallick 3/15 andMr. Mistri 2/15.
The outstanding liabilities include Rs 1,000 due to Mr. Sen which has been paid by Mr. Dalal. Necessary entries were not made in the books.
Prepare (i) Revaluation Account, (ii) The Capital Accounts of the partners, (iii) Balance Sheet of the firm after admission of Mr. Mistri.
Sol:


Revaluation Account
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevPartners’ Capital Accounts
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorking Note:
Calculation of sacrificing ratio
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevUnit 3: Admission of a New Partner CA Foundation Notes | EduRev
Balance Sheet of M/s. Dalal, Banerji, Mallick and Mistri as on 1-4-2016
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
3.4 COMPUTATION OF NEW PROFIT SHARING RATIO 
When a new partner is admitted and there is no agreement to the contrary, it is supposed that old partners will continue to have inter se at the old profit sharing ratio.
For example, A and B are in partnership sharing profits and losses at the ratio of 3:2. They admitted C as 1/5 partner. For computation of new profit sharing ratio.
(i) Firstly, deduct the share oered to new partner from 1.
1 – 1/5 = 4/5
(ii) Divide the balance of share between A and B in the ratio of 3:2.
A = 4/5 x 3/5 = 12/25
B = 4/5 × 2/5 = 8/25
(iii) New profit sharing ratio is
A :  B  :  C
12/25  : 8/25 :  1/5
or 12/25  : 8/25 :  5/25
i.e. 12:8: 5
Computation of New profit sharing ratio- Cases
Case I: When new partner’s share is given but the question is silent about the sacrifice made by the old partners: In this case it is assumed that the old partner will share the remaining share in their old profit sharing ratio.
Example: A and B are partners sharing profits in the ratio 3:2. They admit C for 1/3 share in future profits. Calculate the new ratio.
Sol:
Share in Firm = 1
C’s Share = 1/3
Remaining Profit = 1 - 1/3 = 2/3
This remaining share of 2/3 is divided between A and B in the ratio 3:2

So A’s share = 2/3 × 3/5 = 6/15
B’s share = 2/3 × 2/5 = 4/15
C’s share = 1/3 × 5/5 = 5/15
New ratio = 6/15: 4/15: 5/15 = 6:4:5
Case II: When new partner purchases his share from old partner’s in a particular ratio: In this case the new ratio of the old partners will be calculated by deducted the proportion given to the new partner from the shares of old partner.
Example: A and B are partners sharing in the ratio 3:2. They admit C as a new partner for 1/3rd share in future profits which he gets 1/9 from A and 2/9 from B. Calculate the new ratio.
Sol:
A’s old share = 3/5; A sacrifice in favour of C = 1/9
So A’s new share = 3/5 - 1/9 = 22/45
B’s old share = 2/5; B sacrifice in favour of C = 2/9
So B’s new share = 2/5 - 2/9 = 8/45
C’s new share = 1/9 x 5/5 = 5/45
New ratio = 22: 8: 5

Case III: When the old partners surrender a particular fraction of their share in favour of new partner: In this case following steps are followed:
1. Determine the share surrendered by the old partners. 

2. Find the new share of the old partners by deducting share surrendered from their old share.
3. Calculate share of the new partner by taking the sum of surrendered share of old partners. 

4. Calculate the new ratio.
Example:
A and B are partners sharing in the ratio 3:2. They admit C as the new partner. A surrenders 1/3rd of his share and B surrenders 2/3rd of his share in favour of C. calculate the new ratio.
Sol:
A’s old share = 3/5; A surrender in favour of C = 3/5 x 1/3 = 3/15
A’s new share = 3/5 - 3/15 = 6/15 

B’s old share = 2/5; B surrender in favour of C = 2/5 x 2/3 = 4/15
B’s new share = 2/5 - 4/15 = 2/15
C’s share = 3/15 + 4/15 = 7/15
New ratio = 6:2:7
Case IV: When the new partner acquires his share entirely from the new partner: In this case the sacrificing partner share is calculated by deducting his sacrifice from his old
share.

Example: A and B are partners sharing in the ratio 3:2. They admit C for 1/5th share in profits which he acquires entirely from A. Calculate the new ratio.
Sol:
A’s old share = 3/5; Sacrifice in favour of C = 1/5
A’s new share = 3/5 - 1/5 = 2/5
B’s share = 2/5
C’s share = 1/5
New ratio = 2:2:1
Case V: When the new partner acquires his share from the old partners in the certain ratio: In this the sacrifice of each partner is deducted from their old shares.
Example: A and B are partners sharing profits in the ratio 3:2. C is admitted for 1/3rd share which he acquires from A and B in the ratio of 2:1. Calculate the new ratio.
Sol:
A’s old share = 3/5, A’s sacrifice = 1/5 × 2/3 = 2/15
A’s new share = 3/5 - 2/15 = 7/15
B’s old share = 2/5, B’s sacrifice = 1/5 × 1/3 = 1/15
B’s new share = 2/5 - 1/15 = 5/15
C’s share = 1/3 × 5/5 = 5/15
New ratio = 7:5:5
Sacrificing Partner:
The partners whose shares have decreased as a result of change are known as sacrificing partners.
Sacrificing Ratio:
Ratio in which the old partners sacrifice their share in favour of new partner is called sacrificing ratio. This ratio is calculated by taking out the dierence between old profit shares and new profit shares
Sacrificing ratio = Old Profit sharing ratio - New Profit sharing ratio
Gaining Partners
The partners whose shares have increased as a result of change are known as gaining partners.
Gaining Ratio

The ratio in which the partners have agreed to gain their shares in profit from the other partner or partners, is known as gaining ratio. This ratio is calculated by taking out the difference between new profit shares and old profit shares
Example: X and Y are partners in a firm sharing profits and losses in the ratio 5:3. They admit Z into partnership. The new ratio 3:2:1. Calculate the Sacrificing Ratio.

Sol:
X’s sacrifice = X’s old share - X’s new ratio = 5/8 - 3/6 = 6/48
Y’s sacrifice = Y’s old share - Y’s new ratio = 3/8 - 2/6 = 2/48
Thus, sacrificing ratio = 6:2 or 3:1
Example A , B and C are sharing profits and losses in the ratio of 5:3:2. Calculate the new profit sharing ratio and the sacrificing ratio in each of the following alternative cases:

Case (a) If C acquires 1/10th share from B Case (b) If C acquired 1/10th share equally from A and B Case (c) If C’s share is increased by 1/10th share by acquiring from A.

Case (d) If C’s share is increased to 3/10th by acquiring from B.

Case (e) if A, B and C decide to share future profits and losses in the ratio of 5:2:3.

Case (f)   if A, B and C decide to share future profits and losses in the ratio of 2:3:5.

Case (g) if A, B and C decide to share future profits and losses in the ratio of 2:1:2.

Case (h) if A, B and C decide to share future profits and losses equally.

Case(i) If A , B and C decide that the future profit sharing ratio between B and C shall be the same as existing between A and B

Sol:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevNew Profit sharing ratio of A, B and C = 5 : 2 : 3
Share sacrificed by B = 1/10 
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

New Profit sharing ratio of A, B and C = 9 : 5 : 6
Sacrificing ratio of A and B = 1 : 1
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevNew Profit sharing ratio of A, B and C = 4 : 3 : 3
Share sacrificed by A = 1/10
Share acquired by C = New Share – Old share = 3/10 -2/10 = 1/10
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevNew Profit sharing ratio of A, B and C = 5 : 2 : 3
Share sacrificed by B = 1/10 

Unit 3: Admission of a New Partner CA Foundation Notes | EduRevC gains by 1/10th share &B sacrifice 1/10th Share
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevC gains by 2/10th share &A sacrifices 1/10th Share &B sacrifices 1/10th share.
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevB gains by 1/30th share, C gains by 4/30th share and A sacrifices by 5/30th Share
Case (i)
Ratio of A and B= 5 : 3
Ratio of B and C should be                        = 5 : 3
Since B’s share in relation to A is 3/5 or 60% of A’s share, C’s share should also be 60% of B’s share  

Thus C’s share = 60% of 3  =  1.8
New ratio of A, B and C =  5 : 3 : 1.8                  or 25 : 15 : 9
Their existing shares
Their new share
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevC sacrifices by 8/490 and A gains by 5/490 and B gains by 3/490
 ILLUSTRATION 5
A and B are in partnership sharing profits and losses at the ratio 3:2. They take C as a new partner. Calculate the new profit sharing ratio if -
(i) C purchases 1/10 share from A
(ii) A and B agree to sacrifice 1/10th share to C in the ratio of 2: 3 

(iii) Simply gets 1/10th share of profit.
Sol:

(i) New profit sharing ratio:  
A = 3/5 – 1/10 = 5/10

B = 2/5 i.e. 4/10
C = 1/10
 i.e. 5:4: 1

(ii) A’s sacrifice 1/10× 2/5 = 2/50  
B’s sacrifice 1/10 × 3/5 = 3/50
New profit sharing ratio
A = 3/5 – 2/50 = 28/50

B = 2/5 – 3/50 = 17/50

C = 1/10 i.e. 5/50
 i.e. 28:17: 5
(iii)  Let total share be 1
C’s share=1/10
Remaining share=1-1/10=9/10
Distribution:  
A = 9/10 × 3/5 = 27/50

B = 9/10 × 2/5 = 18/50

C = 1/10. i.e. = 5/50
i.e. 27:18: 5

ILLUSTRATION 6
A and B are in the partnership sharing profits and losses in the proportion of three-fourth and one-fourth respectively. Their balance sheet as on 31st March, 2016 was as follows:
Cash Rs 1,000; trade receivables Rs 25,000; Inventory Rs 22,000; plant and machinery Rs 4,000; trade payables Rs 12,000; bank overdraft Rs 15,000; A’s capital Rs 15,000; B’s capital Rs 10,000.
On 1st April, 2016, they admitted C into partnership on the following terms:
(i) C to purchase one–third of the goodwill for Rs 2,000 and provide Rs 10,000 as capital. Goodwill not to appear in books.
(ii) Further profits and losses are to be shared by A, B and C equally.
(iii) Plant and machinery is to be reduced by 10% and Rs 500 is to be provided for estimated bad debts. Inventory is to be taken at a valuation of Rs 24,940. 

(iv) By bringing in or withdrawing cash and capitals of A and B are to be made proportionate to that of C on their profit-sharing basis.

Set out entries to the above arrangement in the firm’s journal and give the partners’ capital accounts in tabular form.
Sol:

Journal Entries as on 1st April, 2016



Dr. (')

Cr. (')

Revaluation Account

To Plant and machinery Account

To Provision for bad debts Account (Plant & machinery reduced by 10% and '500 provided for bad debts)

Dr.

900

400

500

Inventory Account

To Revaluation Account (Value of inventory increased by '2,940)

Dr.

2,940

2,940

Revaluation Account

To A's capital Account

To B's capital Account (Profit on revaluation transferred)

Dr.

2,040

1,530

510

Cash Account

To C's capital Account (Cash brought in by C as his capital)

Dr.

12,000

12,000

C's Capital Account

Dr.

2,000


B's capital Account

To A's capital Account (Entry for goodwill purchased by B and C)

Dr.

500

2,500


A’s capital Account

Dr.

9,030


B’s capital Account

Dr.

10


To Cash Account



9,040

(Excess amount of capital withdrawn)




Partners’ Capital Accounts
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorking Note:
Calculation of goodwill
C pays Rs 2,000 on account of goodwill for 1/3rd share of profit/loss. Total goodwill is Rs 2,000 x 3 = Rs 6,000.
Gaining ratio:
B: 1/3-1/4 = 1/12
C: 1/3
Goodwill to be paid to A:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
ILLUSTRATION 7
A and B are partners of X & Co. sharing profits and losses in 3:2 ratio between themselves. On 31st March, 2016, the balance sheet of the firm was as follows:

Balance Sheet of X & Co. as at 31.3.2016
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevX agrees to join the business on the following conditions as and from 1.4.2016:
(a) He will introduce Rs 25,000 as his capital and pay Rs 15,000 to the partners as premium for goodwill for 1/3rd share of the future profits of the firm.
(b) A revaluation of assets of the firm will be made by reducing the value of plant and machinery to Rs 15,000, Inventory by 10%, furniture and fitting by Rs 1,000 and by making a provision of bad and doubtful debts at Rs 750 on trade receivables.
Prepare profit and loss adjustment account, capital accounts of partners including the incoming partner X assuming that the relative ratios of the old partners will be in equal proportion after admission.
Sol:
Profit and Loss Adjustment Account

Unit 3: Admission of a New Partner CA Foundation Notes | EduRevPartners’ Capital Accounts
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorking Notes:
(i) New profit sharing ratio: On admission of X who will be entitled to 1/3rd share of the future profits of the firm. A and B would share the remaining 2/3rd share in equal proportion i.e. 1:1.  

A: 2/3 x 1/2 = 1/3
B: 2/3 x 1/2 = 1/3
X:1/3A,
B and X would share profits and losses in equal ratio.
(ii)  Adjustment of goodwill:  
X pays Rs 15,000 as premium for goodwill for 1/3rd share of the future profits.
Thus, total value of goodwill is Rs 15,000 x 3 i.e. Rs 45,000
Sacrificing ratio:
A: 3/5 - 1/3 = 4/15

A: 2/5 - 1/3 = 1/15

Hence, sacrificing ratio is 4:1

Adjustment of X’s share of goodwill through existing partners’ capital accounts in the profit sacrificing ratio:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
3.5 HIDDEN GOODWILL 
When the value of the goodwill of the firm is not specifically given, the value of goodwill has to be inferred as follows:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev
ILLUSTRATION 8
A and B are partners with capitals of Rs 7,000 each.  They admit C as a partner with 1/4th share in the profits of the firm.  C brings Rs 8,000 as his share of capital.  Give the necessary journal entry to record goodwill.
Sol:
Journal Entry
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevUnit 3: Admission of a New Partner CA Foundation Notes | EduRev
ILLUSTRATION 9
A and B are in partnership sharing profits and losses equally. The Balance Sheet M/s. A and B as on 31.12.2016, was as follows:
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevOn 1.1.2017 they agreed to take C as 1/3rd partner to increase the capital base to Rs 1,35,000.  C agrees to pay Rs 60,000. Show the necessary journal entries and prepare partners’ capital accounts.
Sol:
In the Books of M/s. A, B and C Journal Entries
Unit 3: Admission of a New Partner CA Foundation Notes | EduRevWorkings:
(1) Old Profit Sharing Ratio:1: 1
(2) New Profit Sharing Ratio: 1:1:1
(3) C’s share of capital Rs 1,35,000 × 1/3 = Rs 45,000
(4) Goodwill Rs 60,000 – Rs 45,000 = Rs 15,000 for 1/3rd share.
Total Goodwill: Rs 15,000 × 3 = Rs 45,000
Partners’ Capital A/cs
Unit 3: Admission of a New Partner CA Foundation Notes | EduRev


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,

Objective type Questions

,

shortcuts and tricks

,

ppt

,

Exam

,

Viva Questions

,

Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

,

Semester Notes

,

video lectures

,

mock tests for examination

,

Unit 3: Admission of a New Partner CA Foundation Notes | EduRev

,

Sample Paper

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