Reconstitution of a Partnership Firm – Admission of a Partner

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Summary

Admission of a Partner

Key Concepts

Reconstitution of Partnership Firm: Change in the existing partnership agreement.
Revaluation of Assets: Adjusting the value of assets at the time of a new partner's admission.
Goodwill: Intangible asset representing the firm's reputation and expected future profits.
Profit Sharing Ratio: The ratio in which partners share profits and losses.
Sacrificing Ratio: The ratio in which existing partners sacrifice their profit share for the new partner.

Matters Requiring Adjustments

Goodwill
Revaluation of assets and liabilities
Reserves and accumulated profits/losses
Capitals of old partners (if agreed)

Steps for Admission of a New Partner

Determine New Profit Sharing Ratio: Calculate based on the share acquired by the new partner.
Calculate Sacrificing Ratio: Old partners' share reduction to accommodate the new partner.
Treatment of Goodwill: Adjustments in capital accounts based on goodwill brought by the new partner.
Revaluation of Assets and Liabilities: Adjust values and distribute gains/losses among old partners.
Adjust Reserves and Accumulated Profits/Losses: Transfer to old partners' accounts in their profit sharing ratio.
Determine New Capitals: Adjust partners' capitals to reflect the new profit sharing ratio.

Common Numerical Problems

Example 1: A and B share profits in 3:2, admit C for 1/6 share. New ratio: 3:2:1.
Example 2: A, B, C share in 3:2:1, admit D for 10%. New ratio: 9:6:3:2.

Treatment of Goodwill

If the new partner brings cash for goodwill, adjust old partners' capital accounts in their sacrificing ratio.
If the new partner does not bring cash, debit their current account for the goodwill share and credit old partners' accounts accordingly.

Important Adjustments

Revaluation Account: Used for adjusting asset and liability values.
Capital Accounts: Reflect changes in partners' capital due to goodwill and revaluation adjustments.

Example Journal Entries

When Goodwill is Brought in Cash:
- Bank A/c Dr.
- To Partner's Capital A/c
- To Premium for Goodwill A/c
When Goodwill is Not Brought in Cash:
- Partner's Current A/c Dr.
- To Partner's Capital A/c (in sacrificing ratio)

Balance Sheet Adjustments

Prepare a new balance sheet reflecting the revalued assets, liabilities, and adjusted capital accounts after the admission of the new partner.

Learning Objectives

Explain the concept of reconstitution of partnership firm.
Identify the matters that need adjustments in the books of the firm when a new partner is admitted.
Determine the new profit sharing ratio and calculate the sacrificing ratio.
Define goodwill and enumerate the factors that affect it.
Explain the methods of valuation of goodwill.
Describe how goodwill will be treated under different situations when a new partner is admitted.
Make necessary adjustments for revaluation of assets and reassessment of liabilities.
Make necessary adjustments for accumulated profits and losses.
Determine the capital of each partner, if required according to the new profit sharing ratio and make necessary adjustments.
Make necessary adjustments on change in the profit sharing ratio among the existing partners.

Detailed Notes

Admission of a Partner

Key Concepts

Reconstitution of Partnership Firm: Change in the existing partnership agreement.
Revaluation of Assets: Adjusting the value of assets at the time of a partner's admission.
Goodwill: Intangible asset representing the firm's reputation.
Profit Sharing Ratio: The ratio in which profits are shared among partners.
Sacrificing Ratio: The ratio in which existing partners give up their share of profits for the new partner.

Matters Requiring Adjustments

Goodwill: Adjustments must be made for goodwill to ensure the new partner does not benefit from past profits without compensation.
Revaluation of Assets and Liabilities: Necessary adjustments are made through a Revaluation Account, distributing gains or losses among old partners in their profit-sharing ratio.
Accumulated Profits and Losses: These should be transferred to old partners' accounts in their profit-sharing ratio.
Capital Adjustments: Partners' capitals may need to be adjusted to align with the new profit-sharing ratio.

Treatment of Goodwill

Goodwill is valued at the time of a new partner's admission and adjustments are made based on whether the new partner brings in cash for goodwill.
If the new partner does not bring cash, their capital account is debited for their share of goodwill, and old partners' capital accounts are credited in their sacrificing ratio.

Examples of New Profit Sharing Ratios

Example 1: A and B share profits in a 3:2 ratio. C is admitted for 1/6 share. New ratio: 3:2:1.
Example 2: A, B, C share profits in 3:2:1 ratio. D is admitted for 10% profits. New ratio: 9:6:3:2.
Example 3: X and Y share profits in 5:3 ratio. Z is admitted for 1/10 share acquired equally from X and Y. New ratio: 23:13:4.

Journal Entries for Goodwill

When Goodwill is Brought in Cash:
- Debit Bank Account
- Credit Partner's Capital Account
- Credit Premium for Goodwill Account
When Goodwill is Not Brought in Cash:
- Debit Partner's Current Account for Goodwill
- Credit Old Partners' Capital Accounts in Sacrificing Ratio.

Balance Sheet Example

Liabilities	Amount (Rs.)
Ashish Capital	80,000
Dutta's Capital	35,000
Creditors	15,000
Bills Payable	10,000
Total	1,40,000

Assets	Amount (Rs.)
Land & Building	35,000
Plant	45,000
Debtors	22,000
Less: Provision	2,000
Stock	35,000
Cash	5,000
Total	1,40,000

Checklist for Understanding

Identify adjustments needed at the time of a new partner's admission.
Understand the necessity of determining a new profit-sharing ratio.
Define and calculate the sacrificing ratio.
Recognize the treatment of goodwill under different scenarios.

Exam Tips & Common Mistakes

Common Mistakes and Exam Tips for Admission of a Partner

Common Pitfalls

Ignoring Revaluation of Assets and Liabilities: At the time of admission of a new partner, it's crucial to revalue assets and liabilities. Failing to do so can lead to incorrect capital accounts.
Miscalculating New Profit Sharing Ratio: Ensure that the new profit sharing ratio is calculated correctly based on the shares acquired by the new partner from the old partners.
Neglecting Goodwill Treatment: Goodwill must be addressed properly. If the new partner does not bring in cash for goodwill, adjustments must be made in the capital accounts of the old partners.
Overlooking Accumulated Profits and Losses: Any existing accumulated profits or losses should be transferred to the old partners' accounts in their old profit sharing ratio.
Failing to Adjust Capital Accounts: If agreed, partners' capital accounts should be adjusted to reflect the new profit sharing ratio, which may involve cash transfers or adjustments to current accounts.

Tips for Avoiding Mistakes

Double-Check Calculations: Always verify calculations for new profit sharing ratios and goodwill contributions to avoid errors.
Understand Goodwill Valuation: Familiarize yourself with different methods of goodwill valuation and how they impact the capital accounts.
Review Journal Entries: Practice recording journal entries for various scenarios, including when goodwill already exists in the books and when it does not.
Practice with Balance Sheets: Be comfortable preparing balance sheets before and after the admission of a new partner, ensuring all adjustments are accurately reflected.
Clarify Terms: Make sure to understand terms like sacrificing ratio, revaluation account, and accumulated profits/losses to apply them correctly in exam scenarios.

Practice & Assessment

Multiple Choice Questions

Rs. 1,000

Rs. 500

Rs. 2,000

Rs. 1,500

Correct Answer: B

Solution:

C's share of the reserve fund is calculated as 1/8 of Rs. 4,000, which is Rs. 500.

Rs. 40,000

Rs. 16,000

Rs. 24,000

Rs. 8,000

Correct Answer: A

Solution:

The total amount to be distributed among Leela and Meeta is the sum of the general reserve and the Profit and Loss Account credit balance, which is Rs. 16,000 + Rs. 24,000 = Rs. 40,000.

F brings Rs. 10,000 in cash for goodwill.

G and H share Rs. 5,000 each from F.

F needs to bring Rs. 12,500 for goodwill.

Goodwill is adjusted without cash.

Correct Answer: C

Solution:

F's share of goodwill is 1/5 of Rs. 50,000, which amounts to Rs. 10,000. However, since the adjustment needs to be made, F should bring Rs. 12,500, considering the sharing ratio of G and H.

Rs. 95,000

Rs. 105,000

Rs. 110,000

Rs. 100,000

Correct Answer: B

Solution:

The revaluation increases the total value of the firm's assets by Rs. 15,000 + Rs. 10,000 = Rs. 25,000. The partner's capital account is credited with his share of this increase. Assuming the partner's share is 1/2, the increase in his capital is Rs. 12,500, resulting in a new capital of Rs. 80,000 + Rs. 12,500 = Rs. 105,000.

Rs. 20,000

Rs. 24,000

Rs. 36,000

Rs. 30,000

Correct Answer: D

Solution:

Average profit = (16,000 + 20,000 + 24,000 + 32,000) / 4 = Rs. 23,000. Normal profit = 18% of 1,00,000 = Rs. 18,000. Super profit = 23,000 - 18,000 = Rs. 5,000. Goodwill = 3 * 5,000 = Rs. 15,000.

12:8:4:5

11:7:5:5

14:9:7:5

10:6:4:5

Correct Answer: B

Solution:

D's share is 1/5, which he acquires equally from A, B, and C. Therefore, A, B, and C each sacrifice 1/15 of their share. The new shares will be: A = 3/6 - 1/15 = 11/30, B = 2/6 - 1/15 = 7/30, C = 1/6 - 1/15 = 5/30, and D = 1/5 = 6/30. The new ratio is 11:7:5:6.

Goodwill is a tangible asset; affected by location and customer loyalty.

Goodwill is an intangible asset; affected by reputation, location, and customer loyalty.

Goodwill is a liability; affected by debts and expenses.

Goodwill is a tangible asset; affected by machinery and equipment.

Correct Answer: B

Solution:

Goodwill is an intangible asset that is affected by factors such as reputation, location, and customer loyalty.

11:16:8:5

10:16:9:5

12:15:8:5

9:17:8:6

Correct Answer: A

Solution:

D's share is 1/8, which is acquired entirely from A. A's new share = 2/5 - 1/8 = 11/40, B's share remains 2/5 = 16/40, C's share remains 1/5 = 8/40, and D's share = 1/8 = 5/40. The new ratio is 11:16:8:5.

The new partner's share of goodwill is adjusted through the capital accounts of the old partners.

The new partner pays the goodwill amount to the old partners directly.

The goodwill is written off as an expense.

The goodwill is ignored and not recorded.

Correct Answer: A

Solution:

When a new partner cannot bring his share of goodwill in cash, it is adjusted through the capital accounts of the old partners in the sacrificing ratio.

Rs. 1,00,000

Rs. 1,80,000

Rs. 2,00,000

Rs. 2,20,000

Correct Answer: B

Solution:

The capital employed in the business is Rs. 10,00,000 - Rs. 1,80,000 = Rs. 8,20,000. The normal profit is 10% of Rs. 8,20,000 = Rs. 82,000. The super profit is Rs. 1,00,000 - Rs. 82,000 = Rs. 18,000. The goodwill is the capitalization of super profit at 10%, which is Rs. 18,000 / 0.10 = Rs. 1,80,000.

Distribute accumulated profits and losses among old partners in the old profit sharing ratio.

Distribute only accumulated profits among old partners.

Distribute only accumulated losses among old partners.

Do not distribute accumulated profits and losses.

Correct Answer: A

Solution:

Accumulated profits and losses should be distributed among the old partners in their old profit sharing ratio before the admission of a new partner.

Historical cost method

Super profit method

Depreciation method

Amortization method

Correct Answer: B

Solution:

The super profit method is a common method used for valuing goodwill in a partnership firm.

Rs. 15,00,000

Rs. 20,00,000

Rs. 10,00,000

Rs. 25,00,000

Correct Answer: A

Solution:

The average profit is Rs. 5,00,000. Goodwill is calculated as 4 times the average profit: Rs. 5,00,000 x 4 = Rs. 20,00,000.

Rs. 47,000

Rs. 40,000

Rs. 7,000

Rs. 33,000

Correct Answer: B

Solution:

Since the goodwill already appears in the books at Rs. 40,000 and Z brings Rs. 7,000 for his share, the total goodwill remains Rs. 40,000 as the new partner's share is adjusted against the existing goodwill.

Rs. 22,000

Rs. 20,000

Rs. 18,000

Rs. 24,000

Correct Answer: A

Solution:

Sam's share of goodwill = Total Goodwill × Sam's share = Rs. 1,10,000 × 1/5 = Rs. 22,000.

Rs. 5,000

Rs. 10,000

Rs. 15,000

Rs. 20,000

Correct Answer: B

Solution:

C's share of goodwill is calculated as 1/4 of Rs. 20,000, which equals Rs. 5,000. Therefore, C should bring Rs. 10,000 as the premium for goodwill.

D should bring an additional Rs. 25,000.

D's share is fully covered.

The remaining Rs. 75,000 is adjusted among existing partners.

D should bring Rs. 50,000 more.

Correct Answer: D

Solution:

D's share of goodwill for a 1/4 share is Rs. 25,000, but he should actually cover Rs. 25,000 more, making it Rs. 50,000 in total, to balance the goodwill adjustment.

Rs. 2,50,000

Rs. 1,50,000

Rs. 3,00,000

Rs. 2,00,000

Correct Answer: A

Solution:

The normal profit is calculated as 20% of the total capital, which is 20% of (3,00,000 + 2,00,000) = Rs. 1,00,000. The super profit is Rs. 1,50,000 - Rs. 1,00,000 = Rs. 50,000. The goodwill is then Rs. 50,000 * 5 = Rs. 2,50,000.

To adjust the capital accounts of the old partners.

To ensure the balance sheet reflects current market values.

To increase the firm's profits.

To decrease the firm's liabilities.

Correct Answer: B

Solution:

Revaluing assets and liabilities ensures that the balance sheet reflects the current market values, providing a fair basis for the new partner's admission.

Rs. 15,00,000

Rs. 16,00,000

Rs. 20,00,000

Rs. 22,00,000

Correct Answer: B

Solution:

The average profit for the last three years is (5,00,000 + 4,00,000 + 6,00,000) / 3 = Rs. 5,00,000. The goodwill is valued at four years' purchase, so the goodwill is 4 * 5,00,000 = Rs. 20,00,000.

Rajesh and Mukesh will adjust their capital accounts by Rs. 12,000 each.

Rajesh will adjust his capital account by Rs. 24,000, and Mukesh by Rs. 12,000.

Rajesh will adjust his capital account by Rs. 18,000, and Mukesh by Rs. 18,000.

No adjustment is required.

Correct Answer: A

Solution:

Hari's share of goodwill is 2/9 of Rs. 36,000 = Rs. 8,000. Since Hari does not bring this in cash, Rajesh and Mukesh will compensate by adjusting their capital accounts by Rs. 12,000 each, as they sacrifice equally.

5:3:2

4:3:3

16:9:5

15:9:6

Correct Answer: C

Solution:

Ghosh takes 1/5 share, leaving 4/5 to be shared between Verma and Sharma in the 5:3 ratio. The new ratio is calculated as (5/8 * 4/5):(3/8 * 4/5):1/5, which simplifies to 16:9:5.

To ensure that the balance sheet reflects the current market values.

To increase the profit of the firm.

To decrease the liabilities of the firm.

To avoid paying taxes.

Correct Answer: A

Solution:

Revaluing assets and liabilities ensures that the balance sheet reflects the current market values, which is important for the fair distribution of profits and losses among partners.

3:2:1

5:3:2

9:6:3

4:3:2

Correct Answer: A

Solution:

To find the new profit sharing ratio, we need to determine the sacrifice made by A and B. C's share is 1/6, so the remaining share for A and B is 5/6. A's new share is (3/5) * (5/6) = 15/30 = 1/2, and B's new share is (2/5) * (5/6) = 10/30 = 1/3. The new ratio is A:B:C = 1/2 : 1/3 : 1/6 = 3:2:1.

Rs. 4,000

Rs. 3,200

Rs. 2,800

Rs. 2,000

Correct Answer: A

Solution:

The total goodwill premium brought by Ghosh is Rs. 4,000. If it is fully withdrawn, Verma and Sharma together will withdraw Rs. 4,000.

They should be distributed among old partners in the new profit sharing ratio.

They should be distributed among old partners in the old profit sharing ratio.

They should be transferred to the new partner's capital account.

They should be written off completely.

Correct Answer: B

Solution:

Accumulated profits and losses are distributed among the old partners in the old profit sharing ratio before the admission of a new partner.

3:1:1

2:2:1

4:2:1

5:3:2

Correct Answer: A

Solution:

R acquires his 1/5 share from P and Q in a 1:2 ratio, reducing P's and Q's shares. The new ratio is 3:1:1.

Rs. 10,000

Rs. 12,000

Rs. 15,000

Rs. 20,000

Correct Answer: B

Solution:

The new partner's share of goodwill is calculated as (1/5) * 60,000 = Rs. 12,000.

Goodwill is adjusted against the new partner's capital account

Goodwill is written off against the old partners' capital accounts in the sacrificing ratio

Goodwill is recorded as a liability

Goodwill is ignored completely

Correct Answer: B

Solution:

When the new partner does not bring his share of goodwill in cash, it is adjusted against the old partners' capital accounts in the sacrificing ratio.

3:2:1

2:2:1

3:3:2

4:3:2

Correct Answer: A

Solution:

The new profit sharing ratio is calculated by dividing the remaining share among A and B after C takes his 1/6 share. The remaining share is 5/6, which is divided in the ratio of 3:2. Therefore, the new ratio is 3:2:1.

1/9

2/9

1/3

1/4

Correct Answer: B

Solution:

The new ratio 4:3:2 sums up to 9 parts. Hari's share is 2 parts out of 9, which is 2/9.

Debit New Partner's Capital Account; Credit Old Partners' Capital Accounts

Debit Old Partners' Capital Accounts; Credit New Partner's Capital Account

Debit Goodwill Account; Credit New Partner's Capital Account

Debit New Partner's Capital Account; Credit Goodwill Account

Correct Answer: A

Solution:

When the new partner cannot bring his share of goodwill in cash, his capital account is debited, and the old partners' capital accounts are credited in the sacrificing ratio.

Rs. 22,000

Rs. 20,000

Rs. 18,000

Rs. 24,000

Correct Answer: A

Solution:

Sam's share of goodwill is calculated as (1/5) * 1,10,000 = Rs. 22,000.

A tangible asset

An intangible asset

A liability

A reserve

Correct Answer: B

Solution:

Goodwill is an intangible asset that represents the value of a firm's reputation and customer relationships.

The ratio in which the old partners agree to sacrifice their share of profits in favor of the new partner.

The ratio in which the new partner shares profits.

The ratio of the firm's total liabilities to total assets.

The ratio of the firm's total profits to total expenses.

Correct Answer: A

Solution:

The sacrificing ratio is the ratio in which the old partners agree to sacrifice their share of profits in favor of the new partner.

Goodwill

Revaluation of assets

Accumulated profits and losses

Personal savings of the new partner

Correct Answer: D

Solution:

The personal savings of the new partner are not adjusted in the books of the firm. Adjustments typically involve goodwill, revaluation of assets and liabilities, and accumulated profits and losses.

Debit Cash Rs. 24,000; Credit Ghosh's Capital Rs. 20,000; Credit Goodwill Rs. 4,000

Debit Cash Rs. 24,000; Credit Ghosh's Capital Rs. 24,000

Debit Cash Rs. 24,000; Credit Ghosh's Capital Rs. 20,000; Credit Verma's Capital Rs. 2,500; Credit Sharma's Capital Rs. 1,500

Debit Cash Rs. 24,000; Credit Goodwill Rs. 4,000; Credit Verma's Capital Rs. 2,500; Credit Sharma's Capital Rs. 1,500

Correct Answer: A

Solution:

The entire amount brought by Ghosh is credited to his capital and goodwill accounts, as the goodwill is retained in the business.

Debit General Reserve Rs. 16,000; Debit Profit and Loss Account Rs. 24,000; Credit Leela's Capital Rs. 25,000; Credit Meeta's Capital Rs. 15,000

Debit General Reserve Rs. 16,000; Debit Profit and Loss Account Rs. 24,000; Credit Leela's Capital Rs. 20,000; Credit Meeta's Capital Rs. 20,000

Debit General Reserve Rs. 16,000; Debit Profit and Loss Account Rs. 24,000; Credit Leela's Capital Rs. 16,000; Credit Meeta's Capital Rs. 24,000

Debit General Reserve Rs. 8,000; Debit Profit and Loss Account Rs. 12,000; Credit Leela's Capital Rs. 10,000; Credit Meeta's Capital Rs. 10,000

Correct Answer: A

Solution:

The reserves are distributed in the old profit sharing ratio of 5:3. Therefore, Leela receives 5/8 of Rs. 40,000 = Rs. 25,000, and Meeta receives 3/8 of Rs. 40,000 = Rs. 15,000.

Rs. 15,000

Rs. 20,000

Rs. 10,000

Rs. 5,000

Correct Answer: B

Solution:

E's share of goodwill is 1/4 of Rs. 60,000, which is Rs. 15,000. However, since he is bringing Rs. 15,000, he needs to bring an additional Rs. 5,000 to cover his full share of Rs. 20,000.

Rs. 15,000

Rs. 10,000

Rs. 20,000

Rs. 25,000

Correct Answer: A

Solution:

C's share of goodwill = Total Goodwill × C's share = Rs. 90,000 × 1/6 = Rs. 15,000.

3:1:1

5:2:1

4:2:1

6:3:1

Correct Answer: A

Solution:

R's share is 1/5, which is acquired from P and Q in the ratio 1:2. P gives up 1/15 and Q gives up 2/15. P's new share = 2/3 - 1/15 = 9/15 = 3/5, Q's new share = 1/3 - 2/15 = 3/15 = 1/5, and R's share = 1/5. The new ratio is 3:1:1.

Credit Partner A's Capital Rs. 18,000; Credit Partner B's Capital Rs. 12,000

Credit Partner A's Capital Rs. 18,000; Credit Partner B's Capital Rs. 30,000

Credit Partner A's Capital Rs. 30,000; Credit Partner B's Capital Rs. 20,000

Credit Partner A's Capital Rs. 30,000; Credit Partner B's Capital Rs. 15,000

Correct Answer: A

Solution:

The accumulated profits and losses are adjusted in the old profit sharing ratio. Partner A's share is (3/5) of Rs. 30,000 = Rs. 18,000, and Partner B's share is (2/5) of Rs. 30,000 = Rs. 12,000.

61:36:43:35

9:6:3:2

5:3:2:1

4:3:2:1

Correct Answer: A

Solution:

D's 1/5 share is acquired from A, B, and C in a 2:2:1 ratio, leading to the new ratio of 61:36:43:35.

1:1

2:1

3:2

4:3

Correct Answer: A

Solution:

The sacrificing ratio is the same as the old profit sharing ratio, which is 1:1.

Debit Bank Account; Credit Goodwill Account

Debit Goodwill Account; Credit Bank Account

Debit Bank Account; Credit Old Partners' Capital Accounts

Debit Old Partners' Capital Accounts; Credit Goodwill Account

Correct Answer: C

Solution:

When a new partner brings cash for goodwill, the bank account is debited, and the old partners' capital accounts are credited in the sacrificing ratio.

Distributed among old partners in their old profit sharing ratio.

Distributed among all partners in the new profit sharing ratio.

Retained in the business without any adjustment.

Distributed among old partners in the sacrificing ratio.

Correct Answer: A

Solution:

Accumulated profits should be distributed among the old partners in their old profit sharing ratio before the admission of a new partner, as the new partner is not entitled to these profits.

The new partner's share of goodwill is adjusted through the capital accounts of the old partners.

The goodwill is written off against the profits of the firm.

The goodwill is recorded as an asset in the balance sheet.

No adjustment is made for goodwill.

Correct Answer: A

Solution:

When the new partner does not bring his share of goodwill in cash, the old partners' capital accounts are credited with the new partner's share of goodwill in the ratio of sacrifice.

Debit Cash Rs. 7,500; Credit D's Capital Rs. 7,500

Debit Goodwill Rs. 7,500; Credit Old Partners' Capital Rs. 7,500 equally

Debit Goodwill Rs. 7,500; Credit Old Partners' Capital Rs. 3,750 each

Debit Cash Rs. 7,500; Credit Goodwill Rs. 7,500

Correct Answer: B

Solution:

The amount brought by the new partner is credited to the old partners' capital accounts in their old profit sharing ratio, as the goodwill is adjusted among them.

Distributed among old partners in their old profit sharing ratio.

Transferred to the new partner's capital account.

Distributed equally among all partners.

Used to pay off liabilities.

Correct Answer: A

Solution:

Accumulated profits are distributed among the old partners in their old profit sharing ratio before the admission of a new partner.

2:1:1

3:2:1

3:1:1

4:3:2

Correct Answer: A

Solution:

C's 1/4 share is deducted from A and B's shares in the ratio of their sacrifice.

23:13:4

22:14:4

21:15:4

20:16:4

Correct Answer: A

Solution:

Z's share is 1/10, so X and Y each give up 1/20. X's new share = 5/8 - 1/20 = 23/40, Y's new share = 3/8 - 1/20 = 13/40, and Z's share = 1/10 = 4/40. The new ratio is 23:13:4.

The shortfall is ignored

The shortfall is adjusted against the new partner's future profits

The shortfall is adjusted against the new partner's capital account

The shortfall is adjusted against the old partners' capital accounts in the sacrificing ratio

Correct Answer: D

Solution:

The shortfall of Rs. 5,000 is adjusted against the old partners' capital accounts in the sacrificing ratio as the new partner did not bring the full amount of goodwill.

23:13:4

5:3:2

4:3:3

6:3:1

Correct Answer: A

Solution:

Z acquires 1/10 share equally from X and Y, reducing their shares proportionally. The new ratio is calculated as 23:13:4.

True or False

Correct Answer: True

Solution:

Goodwill is an intangible asset, and at the time of a new partner's admission, it belongs to the old partners, requiring adjustments in their capital accounts.

Correct Answer: False

Solution:

A new partner is not entitled to a share of accumulated profits that exist before their admission. These profits are distributed among the old partners.

Correct Answer: False

Solution:

Revaluation of assets and liabilities is necessary to reflect their current values when a new partner is admitted.

Correct Answer: False

Solution:

According to the Partnership Act 1932, a new partner can only be admitted with the unanimous agreement of the existing partners unless stated otherwise in the partnership deed.

Correct Answer: True

Solution:

When a new partner is admitted, it is often agreed that the capital of all partners should be proportionate to the new profit sharing ratio. This ensures fairness and equity among the partners.

Correct Answer: True

Solution:

Revaluation of assets and liabilities is necessary to ensure that the balance sheet reflects the current values, which is important when a new partner is admitted.

Correct Answer: True

Solution:

The new profit sharing ratio is calculated by deducting the share of sacrifice from the old partners' previous profit shares, as the new partner acquires their share from them.

Correct Answer: True

Solution:

Adjustments for goodwill can be made in the capital accounts of the old partners even if the new partner does not bring cash for their share of goodwill.

Correct Answer: False

Solution:

The new profit sharing ratio can differ from the old ratio as it depends on the agreement made during the new partner's admission.

Correct Answer: True

Solution:

The revaluation of assets and liabilities is typically done independently of a new partner's capital contribution, which is a separate transaction.

Correct Answer: True

Solution:

Goodwill is an intangible asset belonging to the old partners, and adjustments are needed to ensure the new partner does not gain from the goodwill without compensation.

Correct Answer: False

Solution:

The new profit sharing ratio is determined based on the share acquired by the new partner from the old partners, which may differ from the old profit sharing ratio.

Correct Answer: True

Solution:

Goodwill is considered an intangible asset and is owned by the firm at a specific point in time.

Correct Answer: True

Solution:

Goodwill is an intangible asset that belongs to the old partners, and adjustments must be made in their capital accounts when a new partner is admitted.

Correct Answer: True

Solution:

Goodwill is often valued based on the average profits of the last few years, using methods like average profit or super profit methods.

Correct Answer: True

Solution:

Revaluation of assets and liabilities is one of the key adjustments made in the books of the firm at the time of admission of a new partner to reflect the current market values.

Correct Answer: False

Solution:

Goodwill is an intangible asset and belongs to the old partners. On the admission of a new partner, adjustments must be made in the capital accounts of the old partners for goodwill, but it is not mandatory to show goodwill in the balance sheet after the admission.

Correct Answer: True

Solution:

If it is agreed that the capital of all partners should be proportionate to the new profit sharing ratio, adjustments will be made accordingly.

Correct Answer: False

Solution:

Revaluation of assets and liabilities is a necessary adjustment when a new partner is admitted to ensure that the balance sheet reflects the current value of the firm's assets and liabilities.

Correct Answer: False

Solution:

A new partner's share of goodwill does not have to be brought in cash. If the new partner is unable to bring cash, adjustments can be made in the capital accounts of the partners.

Correct Answer: False

Solution:

The admission of a new partner usually results in a change in the profit sharing ratio among the partners.

Correct Answer: True

Solution:

Accumulated profits and losses are distributed among the old partners as the new partner is not entitled to them.

Correct Answer: True

Solution:

Goodwill is considered an intangible asset that belongs to the old partners at the time of admission of a new partner. Adjustments must be made to ensure that the new partner does not acquire a share in the firm's goodwill without compensation.

Correct Answer: True

Solution:

Accumulated profits and losses are typically distributed among the existing partners in their old profit sharing ratio before the admission of a new partner.

Correct Answer: True

Solution:

If the new partner cannot bring his share of goodwill in cash, adjustments can be made in the capital accounts of the old partners.

Correct Answer: True

Solution:

The new profit sharing ratio is based on the agreement among partners and can differ from the old ratio depending on the terms agreed upon.

Correct Answer: True

Solution:

When a new partner is admitted, their capital contribution is often adjusted to be proportionate to the new profit sharing ratio to maintain balance in the partnership.

Correct Answer: True

Solution:

Revaluation of assets and liabilities is a common practice when a new partner is admitted to ensure that the balance sheet reflects the current market values.

Correct Answer: True

Solution:

The new profit sharing ratio is calculated by determining the share of sacrifice of the old partners and adjusting their old share in profits accordingly.

Correct Answer: False

Solution:

The capital brought in by a new partner is often agreed upon by the partners and may not always be proportional to the profit sharing ratio.

Correct Answer: False

Solution:

Accumulated profits are not automatically shared with the new partner; they are distributed among the old partners in the old profit sharing ratio.

Correct Answer: False

Solution:

The sacrificing ratio is usually the same as the old profit sharing ratio, but it can be different based on the agreement among partners.

Correct Answer: False

Solution:

According to the Partnership Act, a new partner can be admitted only with the unanimous consent of all existing partners unless otherwise stated in the partnership deed.

Correct Answer: True

Solution:

Revaluation of assets and liabilities is necessary at the time of admission of a new partner to ensure that the balance sheet reflects the current values, and any gains or losses are appropriately adjusted in the partners' capital accounts.

Correct Answer: True

Solution:

Accumulated profits and losses need to be adjusted in the capital accounts of the old partners before a new partner is admitted, as the new partner is not entitled to these.

Correct Answer: False

Solution:

Goodwill may not always be shown in the balance sheet after a new partner's admission, especially if it is decided not to open a goodwill account.

Correct Answer: True

Solution:

According to the Partnership Act 1932, a new partner can be admitted only with the unanimous consent of all existing partners unless otherwise provided in the partnership deed.

Correct Answer: True

Solution:

According to the Partnership Act 1932, a new partner can be admitted only with the unanimous consent of the existing partners unless the partnership deed specifies otherwise.

Correct Answer: True

Solution:

Revaluation ensures that the assets and liabilities are recorded at their current values, providing a fair basis for the new partner's capital contribution.

Correct Answer: False

Solution:

Goodwill can be adjusted in the books without being paid in cash by the new partner.

Correct Answer: False

Solution:

Revaluation of assets and liabilities is not mandatory; it is done if agreed upon by the partners.

Correct Answer: False

Solution:

Accumulated profits and losses are not shared with the new partner; they are distributed among the existing partners in their old profit sharing ratio.

Correct Answer: False

Solution:

The new profit sharing ratio can be the same as the old profit sharing ratio, but it often changes based on the agreement between the partners.

Correct Answer: False

Solution:

Goodwill may not be shown in the balance sheet if the partners decide to adjust it through capital accounts without opening a goodwill account.

Correct Answer: False

Solution:

A new partner may not always bring goodwill in cash. If they cannot bring it in cash, adjustments are made in the capital accounts of the existing partners.

Correct Answer: False

Solution:

Accumulated profits and losses are distributed among the old partners before a new partner is admitted, and the new partner does not share in these accumulated amounts.

Reconstitution of a Partnership Firm – Admission of a Partner

AI Learning Assistant

Summary

Admission of a Partner

Key Concepts

Matters Requiring Adjustments

Steps for Admission of a New Partner

Common Numerical Problems

Treatment of Goodwill

Important Adjustments

Example Journal Entries

Balance Sheet Adjustments

Learning Objectives

Learning Objectives

Detailed Notes

Admission of a Partner

Key Concepts

Matters Requiring Adjustments

Treatment of Goodwill

Examples of New Profit Sharing Ratios

Journal Entries for Goodwill

Balance Sheet Example

Checklist for Understanding

Exam Tips & Common Mistakes

Common Mistakes and Exam Tips for Admission of a Partner

Common Pitfalls

Tips for Avoiding Mistakes

Practice & Assessment

Multiple Choice Questions

Q1.A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016, showed a reserve fund of Rs. 4,000. If C is admitted into partnership, what amount should be credited to C's capital account?

Correct Answer: B

Correct Answer: A

Q3.In a partnership, the goodwill of the firm is valued at Rs. 50,000. If partner F is admitted for a 1/5 share and the existing partners G and H share profits equally, how should the goodwill be adjusted?

Correct Answer: C

Q4.If a partner's capital is Rs. 80,000 and the firm decides to revalue its assets increasing the value of land by Rs. 15,000 and plant by Rs. 10,000, what will be the new capital of the partner after revaluation, assuming no other changes?

Correct Answer: B

Q5.If a firm has profits of Rs. 16,000, Rs. 20,000, Rs. 24,000, and Rs. 32,000 over four years, and the capital investment is Rs. 1,00,000 with a fair rate of return of 18% p.a., what is the goodwill based on three years' purchase of the average super profits?

Correct Answer: D

Q6.A firm has three partners A, B, and C sharing profits in the ratio of 3:2:1. They decide to admit D into the partnership for a 1/5 share of the profits. D acquires his share equally from A, B, and C. What will be the new profit-sharing ratio?

Correct Answer: B

Q7.What is goodwill and what factors affect it?

Correct Answer: B

Q8.A, B, and C are partners sharing profits in the ratio of 2:2:1. They admit D for a 1/8 share, which he acquires entirely from A. What is the new profit-sharing ratio?

Correct Answer: A

Q9.If a new partner is admitted and the goodwill of the firm is valued at Rs. 20,000, how should this be treated if the new partner is unable to bring his share of goodwill in cash?

Correct Answer: A

Q10.A firm has earned average profits of Rs. 1,00,000 during the last few years. The assets of the business are valued at Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. If the normal rate of return is 10%, what is the value of goodwill using the capitalization method?

Correct Answer: B

Q11.A firm has accumulated profits of Rs. 50,000 and accumulated losses of Rs. 20,000. How should these be adjusted when a new partner is admitted?

Correct Answer: A

Q12.Which of the following is a method for valuing goodwill in a partnership firm?

Correct Answer: B

Q13.If a firm's profits for the last three years are Rs. 5,00,000; Rs. 4,00,000; and Rs. 6,00,000, what is the value of the firm's goodwill on the basis of four years' purchase of the average profits for the last three years?

Correct Answer: A

Correct Answer: B

Q15.In a partnership firm, the goodwill is valued at Rs. 1,10,000. If Sam's share is 1/5, how much does he need to bring for goodwill?

Correct Answer: A

Correct Answer: B

Q17.If a new partner, D, is admitted into a firm and the goodwill is valued at Rs. 100,000, with D bringing Rs. 25,000 as his share for a 1/4 profit share, how should the remaining goodwill be adjusted?

Correct Answer: D

Q18.Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year 2015, the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%.

Correct Answer: A

Q19.What is the purpose of revaluing assets and liabilities at the time of admission of a new partner?

Correct Answer: B

Q20.If a firm's profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and Rs. 6,00,000, what is the value of the firm's goodwill on the basis of four years' purchase of the average profits for the last three years?

Correct Answer: B

Q21.Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership, and the new profit sharing ratio is 4:3:2. If the goodwill of the firm is valued at Rs. 36,000 and Hari is unable to bring his share of goodwill premium in cash, what is the adjustment for goodwill?

Correct Answer: A

Q22.Verma and Sharma are partners sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. What is the new profit sharing ratio?

Correct Answer: C

Q23.When a new partner is admitted to a partnership firm, why is it necessary to revalue assets and liabilities?

Correct Answer: A

Q24.A and B are partners sharing profits in the ratio of 3:2. They admit C into the partnership with a 1/6 share in the profits. What will be the new profit sharing ratio?

Correct Answer: A

Correct Answer: A

Q26.When a new partner is admitted, how should accumulated profits and losses be adjusted?

Correct Answer: B

Q27.P and Q are partners sharing profits in a 2:1 ratio. They admit R into the partnership, giving him a 1/5 share, which he acquires from P and Q in a 1:2 ratio. What is the new profit sharing ratio?

Correct Answer: A

Q28.If a firm's goodwill is valued at Rs. 60,000 and a new partner is admitted for 1/5 share, how much should the new partner bring as goodwill?