Question 63 Chapter 5 of +2-A – T.S. Grewal 12 Class Part – A Vol. 1

Question 63 Chapter 5 of +2-A

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:

  1. 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.
  2. C is to bring cash for the amount of his share of goodwill.
  3. 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

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

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)

  • 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)

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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2 Book 1 min - Question 63 Chapter 5 of +2-A - T.S. Grewal 12 Class Part - A Vol. 1
Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms

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