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Question
Bhuwan and Shivam were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were Rs 50,000 and Rs 75,000 respectively. They admitted Atul on 1st April, 2013 as a new partner for 1/4th share in the future profits. Atul bought Rs 75,000 as his capital. Calculate the value of goodwill of the firm and record necessary journal entries for the above transactions on Atul's admission.
Solution
Here, Atul is entered into partnership for 1/4th share in future profits. He contributes Rs 75,000 towards his share of capital.
Taking Atul’s capital as the base, we can calculate the firm’s capital as
Firm's Capital = New Partner's Capital × Reciprocal of his share
i.e., = 75,000 × 4 = Rs 3,00,000
However, the total capital as at that date is Rs 2,00,000 (i.e. 50,000 + 75,000 + 75,000)
So, the difference of 1,00,000 is hidden goodwill.
Atul’s share in goodwill = 1/4th of 1,00,000 = Rs 25,000
The journal entries are as follows:
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Journal |
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Date |
Particulars |
L.F. |
Debit Amount (Rs) |
Credit Amount (Rs) |
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Cash A/c |
Dr. |
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75,000 |
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To Atul’s Capital A/c |
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75,000 |
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(for capital brought on Atul’s admission) |
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Atul’s Capital A/c |
Dr. |
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25,000 |
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To Bhuwan’s Capital A/c |
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15,000 |
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To Shivam’s Capital A/c |
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10,000 |
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(for goodwill distributed in sacrificing ratio of 3:2) |
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Amount Rs |
|
Capitals A 60,000 B 20,000 |
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Sundry Assets
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|
Capitals K 80,000 L 1,00,000 |
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1,80,000
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Balance Sheet of S, T, U and V as on 1.4.2016 |
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Liabilities |
Amount (Rs) |
Assets |
Amount (Rs) |
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Capitals: |
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Fixed Assets |
4,40,000 |
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S |
2,00,000 |
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Current Assets |
2,00,000 |
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T |
1,50,000 |
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U |
1,00,000 |
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V |
50,000 |
5,00,000 |
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| Sundry Creditor | 80,000 | |||
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Workmen |
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Compensation Reserve |
60,000 |
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6,40,000 |
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6,40,000 |
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From the above data the partners decided to share the future profits in 3 : 1 : 2 : 4 ratio. For this purpose the goodwill of the firm was valued at Rs 90,000.
The partners also agreed for the following :
(i) The claim for workmen compensation has been estimated at Rs 70,000.
(ii) To adjust the capitals of the partners according to new profit sharing ratio by opening partners current accounts.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.
P, Q, R and S were partners in a firm sharing profits in the ratio of 1 : 4 : 2 : 3. On 1-4-2016 their Balance Sheet was as follows:
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Balance Sheet of P, Q, R and S as on 1.4.2016 |
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Liabilities |
Amount (Rs) |
Assets |
Amount (Rs) |
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Capitals: |
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Fixed Assets |
12,70,000 |
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P |
2,00,000 |
|
Current Assets |
5,30,000 |
|
Q |
3,00,000 |
|
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R |
4,00,000 |
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S |
5,00,000 |
14,00,000 |
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| Sundry Creditor | 2,30,000 | |||
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Workmen |
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Compensation Reserve |
1,70,000 |
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18,00,000 |
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18,00,000 |
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Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of the reconstituted firm.
X,Y and Z are partners sharing profits in the ratio of `1/2, 3/10 and 1/5` Calculate the gaining ratio of remaining partners when Y retires from the firm.
Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals on 1-4-2010 were: Arun Rs 60,000 and Arora Rs 80,000. They agreed to allow interest on capital @ 12% p.a. And to charge on drawings @ 15% p.a. The profit of the firm for the year ended 31-3 2011 before all above adjustments were Rs 12,600. The drawings made by Arun were Rs 2,000 and by Arora Rs 4,000 during the year. Prepare Profit and Loss Appropriation Account of Arun and Arora. Show your calculations clearly. The interest on capital will be allowed even if the firm incurs loss.
‘B’ and ‘C’ were partners sharing profits in the ratio of 3 : 2. Their Balance Sheet as on 31-3-2011 was as follows:
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Balance Sheet of B and C as on 31-3-2011 |
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Liabilities |
Amount Rs |
Assets |
Amount Rs |
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Capital: |
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Land and Building |
80,000 |
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‘B’ |
60,000 |
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Machinery |
20,000 |
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‘C’ |
40,000 |
1,00,000 |
Furniture |
10,000 |
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Debtors |
25,000 |
|
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Provision for bad debts |
1,000 |
Cash |
16,000 |
||
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Creditors |
|
60,000 |
Profit and Loss Account |
10,000 |
|
|
|
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1,61,000 |
|
1,61,000 |
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D’ was admitted to the partnership for 1/5th share in the profits on the following terms:
(i) The new profit sharing ratio was decided as 2:2:1.
(ii) D will bring Rs 30,000 as his capital and Rs 15,000 for his share of goodwill.
(iii) Half of goodwill amount was withdrawn by the partner who sacrificed his share of profit in favour of ‘D’.
(iv) A provision of 5% for bad and doubtful debts was to be maintained.
(v) An item of Rs 500 included in Sundry Creditors was not likely to be paid.
(vi) An provision of Rs 800 was to be made for claims for damages against the firm.
After making the above adjustments the Capital Accounts of ‘B’ and ‘C’ were to be adjusted on the basis of D’s Capital. Actual cash wash to be brought in or to be paid off as the case may be.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the new firm.
Sanjay and Sameer were partners in a firm sharing profits in the ration of 2 : 3. On 31.3.2011 their Balance Sheet was as follows:
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Balance Sheet of Sanjay and Sameer as on 31.3.2011 |
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Liabilities |
Amount Rs |
Assets |
Amount Rs |
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Capitals |
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Land and Building |
3,00,000 |
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Sanjay: |
2,00,000 |
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Stock |
1,00,000 |
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Sameer: |
3,00,000 |
5,00,000 |
Debtors |
1,50,000 |
|
Creditors |
1,05,000 |
Bank |
1,55,000 |
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Workmen compensation Fund |
1,00,000 |
|
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7,05,000 |
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The firm was dissolved on 1.4.2011 and the Assets and Liabilities were settled as follows:
(i) Sanjay agreed to take over land and Building at Rs 3,50,000 by paying cash;
(ii) Stock was sold for Rs 90,000.
(iii) Creditors accepted Debtors in full settlement of their claim.
Pass necessary Journal entries for dissolution of the firm.
Why are ‘Reserve and Surplus’ distributed at the time of reconstitution of the firm?
How does the factor ‘Efficiency of Management’ affect the goodwill of a firm?
