Q.No.66 | Chapter 5 – Admission of Partner | T.S. Grewal 12 Class Book Keeping Part - A - Vol. 1

Question 66 Chapter 5 of +2-A

66. Balance Sheet of J and K who share profits in the ratio of 3 : 2 is as follows:

Liabilities			Assets
Reserve		1,00,000	Cash	2,00,000
J's Capital	1,50,000		Other Assets	1,50,000
K's Capita	1,00,000	2,50,000
		3,50,000		3,50,000

M joins the firm from 1st April, 2019 for a half share in the future profits. He is to pay 1,00,000 for goodwill and 3,00,000 for capital. Draft the Journal entries and prepare Balance Sheet in each of the following cases:
(a) If M acquires his share of profit from the firm in the profit-sharing ratios of the partners.
(b) If M acquires his share of profits from the firm in equal proportions from the original partners.
(c) If M acquires his share of profit in the ratio of 3 : 1 from the original partners, ascertain the future profit-sharing ratio of the partners in each case.

 

The solution of Question 66 Chapter 5 of +2-A: -

 

Date	Particulars		L.F.	Debit	Credit
	Cash A/c	Dr		4,00,000
	To M’s Capital A/c				3,00,000
	To Premium for Goodwill A/c				1,00,000
	(M brought capital and his of goodwill in cash)
	Premium for Goodwill A/c	Dr		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(Premium for Goodwill distributed between J and K in their Sacrificing Ratio)
	Reserve A/c	Dr		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(Profit on revaluation of asset and liabilities distributed between J and K in their old ratio)

 

 

Partners’ Capital Account the year ended 31st March, 2019

Parti culars	J	K	M	Partic ulars	J	K	M
				By Balance B/d	1,50,000	1,00,000	-
				By Cash A/c	-	-	3,00,000
				By Premium for Goodwill A/c	60,000	40,000	-
				By Revaluation A/c	60,000	40,000	-
To Balance c/d	2,70,000	1,80,000	3,00,000
	2,70,000	1,80,000	3,00,000		2,70,000	1,80,000	3,00,000

 

Balance Sheet

Liabilities		Amount	Assets		Amount
			Cash	(2,00,000 + 4,00,000)	6,00,000
			Other Assets		1,50,000
Capital:
A’s	2,70,000
B’s	1,80,000
C’s	3,00,000	7,50,000
		7,50,000			7,50,000

Working Note:-

Old Ratio of A and B	=	3 : 2
C is admitted for 1/2th share of profit

Let the total share of the business = 1
Remaining share of A and B after C’s Admission = Total Share - C’s Share

Remaining share	=	1	-	1
				2

=	2 - 1
	2

=	1
		2

 

To Calculate to New Ratio distribute the remaining share in the old ratio of old partners’

New Ratio = Combined share of A and B X Old Ratio

J’s Sacrificing Ratio	=	1	X	3
		2		4

=	3
		8

K’s Sacrificing Ratio	=	1	X	1
		2		4

=	1
		8

M’s New Ratio	=	1	X	4
		2		4

=	4
		8

New Profit sharing Ratio between A ,B and C = 8 : 1 : 4

 

C’s Share of Goodwill =1,00,000
Sacrificing Ratio of A and B = 3 : 2
Distribution of Premium for Goodwill (in sacrificing ratio)

J will get Share of Goodwill

=

M’s Goodwill  X Sacrifice share of J

=	1,00,000	X	3
			5
=	60,000

 

K will get Share of Goodwill

=

M’s Goodwill  X Sacrifice share of K

=	1,00,000	X	2
			5
=	40,000

Distribution of Profit from Revaluation Account (in old ratio)

J will get	=	1,00,000	X	3
				5
	=	60,000

 

K will get	=	1,00,000	X	2
				5
	=	40,000

(b) If M acquires his share of profit from the firm in equal proportions from the original partners.

Date	Particulars		L.F.	Debit	Credit
	Reserve A/c	Dr		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(M brought capital and his of goodwill in cash)
	Cash A/c	Dr		4,00,000
	To M’s Capital A/c				3,00,000
	To J’s Premium for Goodwill A/c				1,00,000
	(Premium for Goodwill distributed between J and K in their Sacrificing Ratio)
	Reserve A/c	Dr		1,00,000
	To J’s Capital A/c				50,000
	To K’s Capital A/c				50,000
	(Profit on revaluation of asset and liabilities distributed between J and K in their old ratio)

 

Partners’ Capital Account the year ended 31st March, 2019

Parti culars	J	K	M	Partic ulars	J	K	M
				By Balance B/d	1,50,000	1,00,000	-
				By Cash A/c	-	-	3,00,000
				By Premium for Goodwill A/c	50,000	50,000	-
				By Revaluation A/c	60,000	40,000	-
To Balance c/d	2,60,000	1,90,000	3,00,000
	2,60,000	1,90,000	3,00,000		2,60,000	1,90,000	3,00,000

 

Balance Sheet

Liabilities		Amount	Assets		Amount
			Cash	(2,00,000 + 4,00,000)	6,00,000
			Other Assets		1,50,000
Capital:
A’s	2,60,000
B’s	1,90,000
C’s	3,00,000	7,50,000
		7,50,000			7,50,000

Working Note:-

Old Ratio of J and K	=	3 : 2
M is admitted for 1/2th share of profit

=	1	X	1
	2		2

=	1
	4

New Ratio=Old Ratio – sacrifice Ratio

J’s New Ratio	=	3	-	1
		5		4

=	12 - 5
	20

=	7
		20

 

KJ’s New Ratio	=	2	-	1
		5		4

=	8 - 5
	20

=	3
		20

New Profit sharing Ratio between J ,K and M= 7 : 3 : 1
Sacrifice Ratio of J and K = 1 : 1 

Distribution of Premium for Goodwill (in sacrificing ratio)

K will get Share of Goodwill

=

M’s Goodwill  X Sacrifice share of J and K

=	1,00,000	X	1
			2
=	50,000

Distribution of General Reserve (in old ratio)

J will get	=	1,00,000	X	3
				5
	=	60,000

K will get	=	1,00,000	X	2
				5
	=	40,000

 

(c) If M acquires his share of profit in the ratio of 3:1 from the original partners

Date	Particulars		L.F.	Debit	Credit
	Reserve A/c	Dr		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(M brought capital and his of goodwill in cash)
	Cash A/c	Dr		4,00,000
	To M’s Capital A/c				3,00,000
	To J’s Premium for Goodwill A/c				1,00,000
	(Premium for Goodwill distributed between J and K in their Sacrificing Ratio)
	Reserve A/c	Dr		1,00,000
	To J’s Capital A/c				75,000
	To K’s Capital A/c				25,000
	(Profit on revaluation of asset and liabilities distributed between J and K in their old ratio)

 

Partners’ Capital Account the year ended 31st March, 2019

Parti culars	J	K	M	Partic ulars	J	K	M
				By Balance B/d	1,50,000	1,00,000	-
				By Cash A/c	-	-	3,00,000
				By Premium for Goodwill A/c	75,000	25,000	-
				By Revaluation A/c	60,000	40,000	-
To Balance c/d	2,85,000	1,65,000	3,00,000
	2,85,000	1,65,000	3,00,000		2,85,000	1,65,000	3,00,000

 

Balance Sheet

Liabilities		Amount	Assets		Amount
			Cash	(2,00,000 + 4,00,000)	6,00,000
			Other Assets		1,50,000
Capital:
A’s	2,85,000
B’s	1,65,000
C’s	3,00,000	7,50,000
		7,50,000			7,50,000

 

Working Note:-

New Ratio = Old Ratio − Sacrificing Ratio

J’s New Ratio	=	3	-	3
		5		8

=	24 - 15
	40

=	9
		40

 

K’s New Ratio	=	2	-	1
		5		8

=	16 - 5
	40

=	11
		40

New Profit sharing Ratio between J ,K and M = 11 : 9 : 1

C’s Share of Goodwill = 1,00,000
Sacrificing Ratio of J and K= 3 : 1

Distribution of Premium for Goodwill (in sacrificing ratio)

K will get Share of Goodwill

=

M’s Goodwill  X Sacrifice share of J

=	1,00,000	X	3
			4
=	75,000

 

K will get Share of Goodwill

=

M’s Goodwill  X Sacrifice share of K

=	1,00,000	X	1
			4
=	25,000

 

Distribution of General Reserve (in old ratio)

J will get	=	1,00,000	X	3
				5
	=	60,000

 

K will get	=	1,00,000	X	2
				5
	=	40,000

 

T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)

• Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
• Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
• Chapter No. 3 – Goodwill: Nature and Valuation
• Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
• Chapter No. 5 – Admission of a Partner
• Chapter No. 6 – Retirement/Death of a Partner
• Chapter No. 7 – Dissolution of a Partnership Firm

T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)

• Chapter No. 8 – Company Accounts –  Accounting for Share Capital
• Chapter No. 9 – Company Accounts – Issue of Debentures
• Chapter No. 10 – Redemption of Debentures

T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)

• Chapter No. 1 – Financial Statements of a Company
• Chapter No. 2 – Financial Statement Analysis 
• Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
• Chapter No. 4 – Accounting Ratios
• Chapter No. 5 – Cash Flow Statement

 

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