Admission of a Partner

1. Why should a new partner contribute towards goodwill on his admission?

2. Why are assets and liabilities revalued on the admission of a new partner?
3. Give the journal entry to distribute general reserve and profit and loss account balance appearing on
the liabilities side of the balance sheet.
4. Under what circumstances premium for goodwill paid by the incoming partner would never be
recorded in the books of account?
5. X and Y should profits in the ratio of 3:1. They admit Z to one-third share in the future profits. What
will be the new profit sharing ratio?
6. A and B who shared profits in the ratio of 3:1 admit C as a partner for 1/5 share in profits, which he
requires equally from the old partners. What will be the new profit sharing ratio?
7. A and B share profits in the ratio of 2:1. C is admitted with 1/3 share in profits. C acquires 2/3 of his
share from A and 1/3 of his share from B. What will be new profit sharing ratio?
8. X and Y are partners sharing profits in the ratio of 3:1. They admit Z as a partner. X surrenders 1/3rd
of his share and Y 1/4th of his share in favour of Z. What will be new profit sharing ratio?
9. P and q are partners sharing profits in the ratio of 5:3. R is admitted and the new ratio is 4:3:2. What
will be sacrificing ratio?
10. M and N are partners. P is admitted for ¼ shares. What is the ratio in which M and N will sacrifice
their share in favour of P?
11. Explain the accounting treatment of Goodwill when goodwill account already appears in the books
of the firm and new partner brings his share of goodwill in cash.
12. Explain the accounting treatment of Goodwill when new partner cannot bring his share of goodwill
in cash.
13. K.L and M partners sharing in the ratio of 3:2:1. They admit N for 1/6th share. It is agreed that M
would retain his original share. Calculate new ratios and sacrificing ratios.
14. A and B are partners in a firm. Their balance sheet as on 31/12/1993 was as follows.
Liabilities Rs Assets Rs

Provision for Doubtful Depts. 4,000 Cash 10,000

Workmen Compensation fund 5,600 Sundry 80,000
Outstanding Expenses 3,000 Debtors 20,000
Creditors 30,000 Stock 38,000
Capitals: A 50,000 Fixed Assets 4,000
B 60,000 Profit & loss
152,600 A/C 1,52,600
C was taken into partnerships as from 01.01.94. C brought Rs. 40,000 as his capital but he is unable to
bring any amount for goodwill. New profit sharing ratio is 3:2:1. Following terms were agreed upon:

1. Claim on account of workmen’s Compensation is Rs. 3,000.

2. To write off Bad Debts amounting to Rs. 6,000.
3. Creditors are to be paid Rs. 2,000 more.
4. Rs. 2,000 be provided for an unforeseen liability.
5. Outstanding expenses be brought down to Rs. 1,200
6. Goodwill is valued at 1 ½ years purchase of the average profits of last three years, less Rs. 12,000.
Profits of 3 years amounting to Rs. 12,000; Rs. 18,000, and Rs. 30,000. Prepare Journal Entries, capital
accounts and balance sheet.
 17. Following is Balance sheet of A and B who share profits in the ratio of 2:1

Rs Rs
Sundry Debtors 40,000
Bank overdraft 15,000 Less: Provision 3,600 36,400
Reserve fund 12,000 Stock 20,000
Sundry Creditors 20,000 Building 25,000
Capitals: A 40,000 Patents 2,000
B 30,000 Machinery 33,600

1,17,000 1,17,000

They admitted C into partnership on this date. New profit sharing ratio is agreed as 3:2:1. C brings in
proportionate capital after the following adjustments.

1. C brings in Rs. 10,000 in cash as his share of Goodwill.

2. Provision for doubtful debts is to be reduced by Rs. 2,000
3. There is an old typewriter valued Rs. 2,600. It does not appear in the books of the firm. It is now to be
recorded.
4. Patents valueless.
5. 2 % discount is to be received from creditors. Prepare revaluation A/C, Capital A/Cs and Balance Sheet.

Q 18. Following is the balance sheet of A,B and C sharing profits and losses in Proportion of 6:5:3
respectively.
Liabilities Rs Assets Rs
Creditors 18,900 Cash 1,890
Bills Payable 6,300 Debtors 26,460
General Reuse 10,500 Stock 29,400
Capitals: 79,800 Furniture 7,350
A 35,400 Land & building 45,150
B 29,850 Goodwill 5,250
C 14,550

1,15,500 1,15,500
They agreed to take D into partnership and give him 1/8 the share on the following terms.

(1) That furniture be depreciated by Rs. 920.

(2) An old customer, whose account was written off as bad, has promised to pay Rs 2,000 in full settlement
of his full debt.
(3) That a provision of Rs. 1,320 be made for outstanding repair bills.
(4) That the value of land and building have appreciated be brought up to Rs. 54,910
(5) That D should bring in Rs. 14,700 as his capital.
(6) That D should bring in Rs. 14,070 as his share of goodwill.
(7) That after making above adjustment, the capital accounts of old partners be adjusted on the basis of the
proportion of D’s capital to his share in business i.e. actual cash to be paid off or brought in by the old
partners, as the case may be.

Prepare Journal Entries and prepare the balance sheet of new firm.
 Reconstitution of partnership

ADMISSION OF A PARTNER
SOLUTIONS
1. Since a new partner gets his share of profit from old partners, he must compensate
the old partners for the share sacrificed by them. The amount of compensation given
by the new partner is known as goodwill.

2. Assets and liabilities are revalued because the entire profit and loss due to their
revaluation is divided amongst the old partners in their old profits sharing ratio. The
new partner should not share such profit or loss because it belongs to the period
prior to his admission.

3. General Reserve A/c Dr. Profit & Loss A/c Dr.

To old partner’s capital A/c (In old ratio)

4. When the circumstances premium for the goodwill in cash to the old partners
privately outside the business no entries are passed for it.

5. Calculation of new profit sharing ratio:

Let total profit be = 1

Share given to Z = 1/3

Remaining share = 1-1/3 = 2/3

Now the old partners will share remaining profit in their old profit sharing
ratio:

Hence, x’s share = 3/4 of 2/3 = 6/12 or ¾ * 2/3 =

6/12 y’s share = ¼ of 2/3 = 2/12 or ¼ * 2/3 =
2/12 z’s share = 1/3

Thus, the new profit sharing ratio of x, y and z will be:

= 6/12 : 2/12 : 1/3
= (6:2:4)/12 = 6:2:4 or 3:1:2

6. Share of profit given to C = 1/5

Share acquired by C from A = ½ of 1/5 = 1/10
Share acquired by C from B = ½ of 1/5 = 1/10

Therefore,
 A’s new share after surrendering 1/10 in C’s favour
= ¾ - 1/10 = (15-2)/20
= 13/20
B’s new share after surrendering 1/10 in C’s favour
= 1/4 - 1/10 = (5-2)/20
= 3/20

C’s share = 1/10 + 1/10 = 2/10

Therefore new share equal to
13/20:3/20: 2:10 = (13:3:4)/20
= 13:3:4 Ans.

7. Share of profit given to ‘C’ = 1/3 share

Share acquired by C from A = 1/3 * 2/3 = 2/9

C’s share = 1/3

Therefore, new profit sharing ratio

= 4/9 : 2/9: 1/3 = (4:2:3)/9 or 4:2:3

8. x : y – 3 : 1, z admitted

x -> 1/3 * ¾ = ¼(x surrender 1/3 of his

share) y -> 1/4 * 1/4 = 1/6 (y

surrender 1/4 of his share) Therefore, z’s

share -> ¼ + 1/16 = (4+1)/16 = 5/16

New profit sharing ratio:

x = ¾ - ¼ = 2/4

y = 1/4 – 1/16 = (4-1)/16 = 3/16z = 5/16

Therefore, 2/4 : 3/16 : 5/16

 (8:3:5)/16
 8:3:5

9. Old profit sharing ratio of P = 5/8 New profit sharing ratio of P = 4/9
 P’s sacrificing ratio = old ratio – new ratio
= 5/8 – 4/9
= (45 -32)/72 = 13/72

Old profit sharing ratio of Q = 3/8

11. For writing off the goodwill A/c already appearing in the books

Old partner’s Capital A/c’s Dr. (In old ratio)

To Goodwill A/c

(ii) For bringing goodwill in cash

Bank A/c Dr.

To premium for goodwill (with his share of goodwill)

(iii) For distributing the amount of goodwill brought in by new partner:

Premium for goodwill A/c Dr.

To sacrifice partner’s Capital A/c’s (In sacrificing ratio)

12. New Partner’s Capital A/c Dr. (with his share of goodwill)
To sacrificing Partner’s Capital A/c’s (In sacrifice ratio)

13. Calculation of New profit Sharing Ratio:

N’s share = 1/6; M’s share = 1/6

Remaining share for K and L = 1 – (1/6 + 1/6) = 4/6

This will be divided between K and L in their old ratio i.e., 3 : 2

Hence, the new share of K = 3/5 * 4/6 = 12/30

New share of L = 2/5 * 4/6 = 8/30

The new ratio of K, L and M, N = 12/30 : 8/30 : 1/6 :1 /6 or

= 12 : 8 :5 : 5

Calculation of sacrifice ratio:-

14.
 Date Particular Dr. Cr.
Rs. Rs.
Bank A/c 40,000
To D’s Capital A/c Dr.
To Premium for Goodwill A/c 40,000
(The amount of capital and goodwill/
Premium brought in cash)
Premium for Goodwill A/c Dr. 10,000 5,000
To A’s Capital A/c 5,000
To B’s Capital A/c
(The amount of goodwill transferred to old
partners in sacrificing ratio)
Working Note:- Calculation of sacrificing ratio :-

Sacrificing ratio = Old ratio – New ratio

Thus, A’s sacrifice ratio = 4/9 – 3/9 = 1/9

B’s sacrifice ratio = 3/9 – 2/9 = 1/9

C’s sacrifice ratio = 2/9 – 2/9 = 0

As, C has not made any sacrifice, therefore he will not be entitled to any amount of
goodwill brought in by new partner.

A & B have sacrificed in equal proportion, therefore they will get equal share in the
goodwill brought in by D.

Particular Amt Particular Amt

To Plant 5,000 By Patents 8,000
To Profit transferred
to capital Account
Krishna 1800
Suresh 1200 3,000
8,000 8,000

Particulars Krishna Suresh Mohan Particular Krishna Suresh Mohan

To Bal c/d 41,400 27,600 10,000 By Bal b/d 30,000 20,000

By Reserves 3,000 2,000

By Revaluation 1,800 1,200

By Joint life
Policy 4,200 2,800

By Cash A/c

By Premium
for goodwill A/
c 2,400 1,600 10,000
41,400 27,600 10,000 41,400 27,600 10,000
Ans . 15 Revaluation Account
Opening Balance Sheet
Liabilities Amount Assets Amount
Creditors 15,000 Plant & machinery 25,000
Patents 13,000
Furniture 3,000
Stock 16,000
Debtors 15,000
Joint Life Policy 7,000
Cash 15,000
94,000 94,000
Working Notes:

1) Valuation of Goodwill :-
Average profit = (10,000+9,000+8,000+13,000)/4 = Rs.10,000
Goodwill at 2 years purchase = 10,000 * 2 = Rs.20,000
Mohan’s share of goodwill = 20,000 * 1/5 = Rs.4,000
Mohan’s capital

To Krishna’s Capital A/c 4,200

To Suresh’s Capital A/c 2,800

16 Journal
Date Particular Amt Dr. Amt Cr.

A’s Capital A/c Dr. 2,000 4,000

B’s Capital A/c Dr. 2,000
To Profit & loss A/c
(Loss appearing in the balance sheet debited to
old partner’s A/c)
1,300
Workmen Compensation Fund Dr. 2,600 1,300
To A’s Capital A/c
To B’s Capital A/c
(Excess Fund (Rs. 5600-3000) shared by old
partners)
 Provision for doubtful debts A/c Dr. 4,000
Revaluation A/c 2,000
To Sundry Debtors A/c
(Bad Debts amounting to Rs. 6000 written off) 6,000

Revaluation A/c Dr.

To Creditors A/c 4,000
To Unforeseen Liability A/c
2,000
(Provision for Liabilities)
2,000
O/s Expenses A/c
1,800
To Revaluation A/c (O/s
Expenses reduced)
1,800
A’s Capital A/c Dr.
2,100
B’s Capital A/c Dr.
2,00
To Revaluation A/c
(Loss on revaluation transferred) 4,200
C’s Capital A/c Dr.
To B’s Capital A/c 3,000
C’s share of goodwill credited to B’s
capital A/c, as he alone has sacrificed) 3,000

Cash A/c Dr.

To C’s Capital A/c 40,000
Cash Brought in by C as Capital)
4,00,000
CAPITAL ACCOUNTS
Particulars A B C Particular A B C
To P& L A/c 2,000 2,000 By Bal b/d 50,000 60,000

To Revaluation 2,100 2,100 By workmen’s

A/c compensation
fund 1,300 1,300
To B’s capital A/
c By C’s Capital 3,000
3,000 A/c
To Bal c/d 47,200 60,200
37,000 By Cash 40,000
51,300 64,300 40,000 51,300 64,300 40,000
OPENING BALANCE SHEET
Particulars Amt Assets Amt
Liabilities for workmen Cash 50,000
3,000
compensation fund O/S
Expenses 1,200 Sundry Debtors 74,000

Unforeseen Liabilities 2,000 Stock 20,000

Creditors 32,000 Fixed Assets 38,600

Capitals: A 47,200
B 60,200
C 37,000
1,82,600 1,82,600
Working Note :- Valuation of Goodwill

Average Profit = (2000+18000+30000)/3 = Rs.20000

= 20000 * 11/2 = 30000(-) 12000 = Rs.18000 C’s
share of goodwill = 18,000 x 1/6 = Rs.3,000

Sacrificed ration = Old Ratio – New Ratio

A = ½ - 3/6 = 0
B = ½ - 2/6 = 1/6 Hence, B alone has sacrificed

17. REVALUATION A/C

Particular Amt.(Rs) Particular Amt.(Rs)
To Patents 2,000 By Provision for doubtful
debts 2,000
To Profit transferred to:
A 2,000 By typewriter 2,600
B 1,000
By provision for discount on 400
creditors
5,000 5,000
CAPITAL A/C
Particulars A(Rs) B(Rs) C(Rs) Particulars A(Rs) B(Rs) C(Rs)
To Balance c/d 60,000 35,000 By Balance b/d 40,000 30,000

By Reserve fund 8,000 4,000

By Revaluation
By Premium for 2,000 1,000
goodwill A/c 10,000
 60,000 35,000 60,000 35,000

To Balance c/d 60,000 35,000 19,000 By Balance b/d 60,000 35,000

By Bank 19,000
60,000 35,000 19,000 60,000 35,000 19,000
OPENING BALANCE SHEET

Liabilities Amt(Rs) Assets Amt(Rs)

Sundry Creditors 20,000 Bank 14,000
Less Provision: 400 19,600 Sundry Debtors 40,000
Less Provision: 1,600 38,400
Capitals
A 60,000 Stock 20,000
B 35,000 Building 25,000
C 19,000 Machinery 33,600
Typewriter 2,600
1,33,600 1,33,600
1. Sacrifice Ratio = Old Ratio – New Ratio
Sacrifice by A = old 2/3 – new 3/6 = 1/6
Sacrifice by B = old 1/3 – new 2/6 = 0

Since B has not made any sacrifice, the ratio amount of premium for goodwill
brought in by C will be credited to A.

2. C’s Capital is not given in the question. He will bring in capital proportionate to
his share of profits. C is given 1/6th share of profits, balance 5/6th is shared by A
and B. Total capital of A and B after all adjustments is Rs.60,000 + 35,000 =
95,000.

Thus, for 5/6th share of profits the capital = 95,000

Then total capital of the firm = 95,000 * 6/5 = Rs.1,14,000

Therefore C’s capital for 1/6th share profits = 1,14,000 * 1/6 = Rs.19,000

3. Calculation of balance at bank:

Amt. of Cash brought in by C as goodwill = 10,000

Amt. of Cash brought in by C as capital = 19,000

29,000
(-) bank overdraft 15,000
Balance at bank 14,000
 18. JOURNAL
Particular Amt Amt
Rs. Dr. Rs. Cr.
(i) General Reserve A/c Dr. 10,500
To A’s Capital A/c
To B’s Capital A/c 4,500
To C’s Capital A/c 3,750
(General reserve transferred to old partner’s capital 2,250
A/c’s
(ii) Revaluation A/c Dr. 2,240
To Furniture A/c
To Provision for repairs A/c 920
(Reduction in the value of assets and a provision made 1,320
for o/s repair bills
(iii) 2,000
Debtors A/c Dr.
To Revaluation A/c
(Amount receivable from an old customer) 2,000
(iv) 9,760
Land & Building A/c Dr.
To Revaluation A/c
9,760
(Increase in the value of land and building)
(v) 9,520
Revaluation A/c Dr.
To A’s Capital A/c
4,080
To B’s Capital A/c
3,400
To C’s Capital A/c
2,040
(transfer of profit on revaluation to old partner’s capital
(vi) A/c’s 2,250
A’s Capital A/c Dr. 1,875
B’s Capital A/c Dr. 1,125
C’s Capital A/c Dr.
To Goodwill A/c 5,250
(Goodwill appearing in the books written off)
(vii) 28,770
Cash A/c Dr.
To D’s Capital A/c 14,700
To premium for goodwill A/c 14,070
 (The mount brought in cash by D being Rs.14,700 for
capital and Rs.14070 for goodwill)

Premium for Goodwill A/c Dr.

To A’s Capital A/c
(viii) To B’s Capital A/c 14,070 6,030
To C’s Capital A/c 5,025
(Goodwill brought in by ‘D’ credited to old partners) 3,015

A’s Capital A/c Dr.

B’s Capital A/c Dr.
(ix) To Cash A/c 3,660
(Cash withdrawn by A and B) 3,400 7,060

Cash A/c
To C’s Capital A/c
(x) (Cash brought in by C) 1,320 1,320
REVALUATION ACCOUNT

Particulars Amt (Rs.) Particulars Amt (Rs.)

To Furniture A/c 920 By Debtor’s A/c 2,000
To Provision for repairs 1,320 By Land and Building A/c 9,760
To profit transferred to
Capital’s A/c’s
A 4,080
B 3,400C
2,040 9,520

11,760 11,760
CAPITAL ACCOUNTS
Particular A(Rs.) B(Rs.) C(Rs.) D(Rs.) Particular A(Rs.) B(Rs.) C(Rs.) D(Rs.)
To 2,250 1,875 1,12 By Balance
Goodwill b/d 35,400 29,850 14,550

To By general
Balance 47,760 40,150 20,730 Reserve A/
c/d c 4,500 3,750 2,250

By
Revaluation
14,700 A/c 4,080 3,400 2,040
 14,700

By Cash A/
c

By premium
for goodwill
A/ c 6,030 5,025 3,015
50,010 42,025 21,855 14,700 50,010 42,025 21,855 14,700

To Cash By Balance 47,760 40,150 20,730 14,700

A/c 3,660 3,400 c/d

To By Cash A/ 1,320
Balance c
c/d 44,100 36,750 (Balancing
22,050 14,700 figure)
47,760 40,150 22,050 14,700 47,760 40,150 22,050 14,700
BALANCE SHEET AS ON….

Liabilities Amt(Rs.) Assets Amt(Rs.)

Creditors 18,900 Cash 24,920
Bills Payable 6,300 Debtors 28,460
Provision for repairs 1,320 Stock 29,400
Furniture 6,430
Land and Building 54,910
1,44,120 1,44,120

New profit sharing ratio will be calculated as under:-

Share given to D = 1/8
Balance of profits = 1 – 1/8 = 7/8
A’s new share = 7/8 * 6/14 = 3/8
B’s new share = 7/8 * 5/14 = 5/16
C’s new share = 7/8 * 3/14 = 3/16
D’s share = 1/8

A:B:C:D = 3/8 : 5/16 : 3/16 : 1/8 = 6/16 : 5/16 : 3/16 : 2/16

D bring in Rs.14,700 as capital according to his 1/8th share of profit. Therefore,
according to D’s capital, the total capital of the new firm will be:

= 14,700 * 8/1 = Rs.1,17,600

Therefore A’s Capital in new firm = 1,17,600 * 6/16 = Rs.44,100

B’s Capital in new firm = 1,17,600 * 5/16 = Rs.36,750

C’s Capital in new firm = 1,17,600 * 3/16 = Rs.22,050

D’s Capital in new firm = 1,17,600 * 2/16 = Rs.14,700