Question 63 Chapter 5 of +2-A
63. A and B are carrying on business in partnership and sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2019 stood as:
| Liabilities | Assets | |||
| Creditors | 11,800 | Cash | 1,500 | |
| A’s Capital | 51,450 | Stock | 28,000 | |
| B’s Capital | 36,750 | 88,200 | Debtors | 19,500 |
| Furniture | 2,500 | |||
| Machinery | 48,500 | |||
| 1,00,000 | 1,00,000 |
They admit C into partnership on 1st April, 2019 and give him 1/8th share in future profits on the following terms:
- Goodwill of the firm be valued at twice the average of the last three years’ profits which amounted to 21,000; 24,000 and 25,560.
- C is to bring cash for the amount of his share of goodwill.
- C is to bring cash 15,000 as his capital.
Pass Journal entries recording these transactions, draw out the Balance Sheet of the new firm and determine new profit-sharing ratio.
The solution of Question 63 Chapter 5 of +2-A: –
| Date | Particulars |
L.F. | Debit | Credit | |
| Cash A/c | Dr | 20,880 | |||
| To C’s Capital A/c | 15,000 | ||||
| To Premium for Goodwill A/c | 5,880 | ||||
| (Being C brought his share of goodwill and capital in cash) | |||||
| Premium for Goodwill A/c | Dr | 5,880 | |||
| To X’s Capital A/c | 3,528 | ||||
| To Y’s Capital A/c | 2,352 | ||||
| (Being Premium for goodwill distributed between X, Y and Z in sacrificing ratio i.e. 3:1) | |||||
Case A
| Particulars | A |
B | C | Particulars | A | B | C |
| By Balance B/d | 51,450 | 36,750 | – | ||||
| By Cash A/c | – | – | 15,000 | ||||
| By Premium for Goodwill A/c | 3,528 | 2,352 | – | ||||
| To Balance c/d | 54,978 | 39,102 | 15,000 | ||||
| 54,978 | 39,102 | 15,000 | 54,978 | 39,102 | 15,000 |
| Balance Sheet |
|||||
| Liabilities |
Amount | Assets | Amount | ||
| Creditors | 11,800 | Cash | (1,500 +20,880) | 22,380 | |
| Stock | 28,000 | ||||
| Capital: | Debtors | 19,500 | |||
| A’s | 54,978 | Furniture | 2,500 | ||
| B’s | 39,102 | Machinery | 48,500 | ||
| C’s | 15,000 | 1,09,080 | |||
| 1,20,880 | 1,20,880 | ||||
Working Note:-
| Old Ratio of A and B | = | 3 : 2 |
| C is admitted for 1/8th 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
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| Remaining share | = | 1 | – | 1 |
| 8 |
| = | 8 – 1 | |
| 8 |
| = | 7 | ||
| 8 |
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
| A’s New Ratio | = | 7 | X | 3 |
| 8 | 5 |
| = | 21 | ||
| 40 |
| B’s New Ratio | = | 7 | X | 2 |
| 8 | 5 |
| = | 14 | ||
| 40 |
| C’s New Ratio | = | 1 | X | 5 |
| 8 | 5 |
| = | 5 | ||
| 40 |
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New Profit sharing Ratio between A ,B and C = 21 : 14 : 5
| Average Profit | = | Total Profit for past given years |
| Number of years |
| = | 21,000 + 24,000 + 25,560 | |
| 3 |
| = | 70,560 | |
| 3 | ||
| = | 23,520 |
| Number of years’ purchase | = | 2 |
| Goodwill | = | Average Profit X Number of years’ purchase |
| Goodwill | = | 23,520 X 2 |
| Goodwill | = | 47,040 |
| C’s Share of Goodwill | = | Firm’s Goodwill X Share of HinaS |
| = | 47,040 | X | 1 | |
| 8 | ||||
| = | 5,880 |
Sacrificing Ratio of A and B = 3 : 2
| A will get Share of Goodwill | = | C’s Goodwill X Sacrifice share of A |
| = | 5,880 | X | 3 | |
| 5 | ||||
| = | 3,528 |
| B will get Share of Goodwill | = | C’s Goodwill X Sacrifice share of B |
| = | 5,880 | X | 2 | |
| 5 | ||||
| = | 2,352 |
T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)
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- 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
Check out T.S. Grewal +2 Book 2020@ Official Website of Sultan Chand Publication
