A and B are partners in a firm sharing profits in the ratio of 3 : 2. They decide to admit C as a new partner w.e.f. 1st April, 2019. In future, profits will be shared equally. The Balance Sheet of A and B as at 1st April, 2019 and the terms of admission are:

BALANCE SHEET OF A AND B

Liabilities Amount
(₹) Assets Amount
(₹)

Sundry Creditors 60,000 Cash in Bank
40,000

Outstanding Expenses 15,000 Sundry Debtors 36,000

Capital A/cs: Stock 84,000

A 3,00,000 Furniture and Fittings 65,000

B 3,00,000 6,00,000 Plant and Machinery 4,50,000

6,75,000 6,75,000

(a) Capital of the firm is fixed at ₹ 6,00,000 to be contributed by partners in the profit-sharing ratio. The difference will be adjusted in cash.
(b) C to bring in his share of capital and goodwill in cash. Goodwill of the firm is to be valued on the basis of two years' purchases of super profit. The average net profits expected in the future by the firm ₹ 90,000 per year. The normal rate of return on capital in similar business is 10%.
(c) The partners agreed to help maintain the plants and keep the area clean.
Calculate goodwill and prepare Partners' Capital Accounts and Bank Account.

BALANCE SHEET OF A AND B
Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	60,000	Cash in Bank	40,000
Outstanding Expenses	15,000	Sundry Debtors	36,000
Capital A/cs:		Stock	84,000
A	3,00,000		Furniture and Fittings	65,000
B	3,00,000	6,00,000	Plant and Machinery	4,50,000
	6,75,000		6,75,000

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Solution

In the books of A, B and C

Dr.
Partner’s Capital A/c
Cr.

Particulars

A

(₹)

B

(₹)

C

(₹)

Particulars

A

(₹)

B

(₹)

C

(₹)

To Bank A/c
1,16,000

1,04,000

By balance b/d
3,00,000

3,00,000

By Bank A/c

2,00,000

To balance c/d (6,00,000/3)
2,00,000

2,00,000

2,00,000
By Premium for Goodwill A/c
16,000

4,000

3,16,000

3,04,000

2,00,000

3,16,000

3,04,000

2,00,000

Working Notes:

1. Calculation of Sacrificing Ratio

Particulars

A

B

Old Ratio

3/5

2/5

New Ratio

1/3

1/3

Gain/Sacrifice

(3/5 – 1/3) = 4/15 (Sacrifice)

(2/5 – 1/3) = 1/15 (Sacrifice)

Sacrificing Ratio

4:1

2. Calculation of Goodwill brought in by C

Average Net Profits = ₹ 90,000

Capital Employed = ₹ 6,00,000

Normal Profits = (Capital Employed × Normal rate of return/100) = ₹ (6,00,000 × 10/100) = ₹ 60,000

Super Profits = Average Net Profits – Normal Profits= ₹ (90,000 – 60,000) = ₹ 30,000

Goodwill = Super Profits × No. of years of Purchase = ₹ (30,000 × 2) = ₹ 60,000

C’s Share of Goodwill = ₹ (60,000 × 1/3) = ₹ 20,000

Dr.

Bank A/c

Cr.

Date

Particulars

Amount

(₹)

Date

Particulars

Amount

(₹)

2019

2019

April 01 To balance b/d
40,000
March 31 By A’s Capital A/c
1,16,000

April 01 To C’s Capital A/c
2,00,000
March 31 By B’s Capital A/c
1,04,000

April 01 To Premium for Goodwill A/c
20,000
March 31 By balance c/d
40,000

2,60,000

2,60,000

Suggest Corrections

Similar questions

Q. Following is the Balance Sheet of A and B , who shared Profits and Losses in the ratio of 2 : 1 , as at 1st April, 2018:

BALANCE SHEET OF A AND B as on 1st April, 2018
Liabilities		₹	Assets	₹
Capital A/cs:			Land ad Buildings	2,90,000
A	3,00,000		Furniture	80,000
B	2,00,000	5,00,000	Stock	2,40,000
Reserve		1,50,000	Debtors	1,50,000
Creditors		2,00,000	Bank	60,000
			Cash	30,000

		8,50,000		8,50,000

On the above date , the partners changed their profit-sharing ratio to 3 : 2 . For this purpose, the goodwill of the firm was valued at ₹ 3,00,000 . The partners also agreed for the following:
(a) The value of Land and Building will be ₹ 5,00,000;
(b) Reserve is to be maintained at ₹ 3,00,000.
(c) The total capital of the partners in the new firm will be ₹ 6,00,000 , which will be shared by the partners in their new profit-sharing ratio .
Prepare Revaluation Account , Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.

Q. Following is the Balance Sheet of A and B, who shared Profits and Losses in the ratio of 2 : 1, as at 1st April, 2019:

BALANCE SHEET OF A AND B as on 1st April, 2019
Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/cs:			Land ad Building	2,90,000
A	3,00,000		Furniture	80,000
B	2,00,000	5,00,000	Stock	2,40,000
Reserve		1,50,000	Debtors	1,50,000
Creditors		2,00,000	Bank	60,000
			Cash	30,000

		8,50,000		8,50,000

On the above date, the partners changed their profit-sharing ratio to 3 : 2. For this purpose, the goodwill of the firm was valued at ₹ 3,00,000. The partners also agreed for the following:
(a) The value of Land and Building will be ₹ 5,00,000;
(b) Reserve is to be maintained at ₹ 3,00,000.
(c) The total capital of the partners in the new firm will be ₹ 6,00,000, which will be shared by the partners in their new profit-sharing ratio.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.

Q. A and B are partners sharing profits in the ratio of 3 : 2. They admit C as a new partner from 1st April, 2019. They have decided to share future profits in the ratio of 4 : 3 : 3. The Balance Sheet as at 31st March, 2019 is given below:


Liabilities		₹	Assets		₹
A's Capital	1,76,000		Goodwill		34,000
B's Capital	2,54,000	4,30,000	Land and Building		60,000
Workmen Compensation Reserve		20,000	Investment (Market value ₹ 45,000)		50,000
Investments Fluctuation Reserve		10,000	Debtors	1,00,000
Employee's Provident Fund		34,000	Less: Provision for Doubtful Debts	10,000	90,000
C's Loan		3,00,000	Stock		3,00,000
			Bank Balance		2,50,000
			Advertising Suspense A/c		10,000



		7,94,000			7,94,000

Terms of C's admission are as follows:
(i) C contributes proportionate capital and 60% of his share of goodwill in cash.
(ii) Goodwill is to be valued at 2 years' purchase of super profit of last three completed years. Profits for the years ended 31st March were:
2017 − ₹ 4,80,000; 2018 − ₹ 9,30,000; 2019 − ₹ 13,80,000.
The normal profit is ₹ 5,30,000 with same amount of capital invested in similar industry.
(iii) Land and Building was found undervalued by ₹ 1,00,000.
(iv) Stock was found overvalued by ₹ 31,000.
(v) Provision for Doubtful Debts is to be made equal to 5% of the debtors.
(vi) Claim on account of Workmen Compensation is ₹ 11,000.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet.

Q. Suresh, Ramesh, Mahesh and Ganesh were partners in a firm sharing profits in the ratio of 2 : 2 : 3 : 3. On 1st April, 2016, their Balance Sheet was as follows:

BALANCE SHEET OF SURESH, RAMESH, MAHESH AND Ganesh as on 1st April, 2016
Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/cs:			Fixed Assets	6,00,000
Suresh	1,00,000		Current Assets	3,45,000
Ramesh	1,50,000
Mahesh	2,00,000
Ganesh	2,50,000	7,00,000
Sundry Creditors		1,70,000
Workmen Compensation Reserve		75,000


		9,45,000		9,45,000

From the above date, the partners decided to share the future profits equally. For this purpose the goodwill of the firm was valued at ₹ 90,000. It was also agreed that:
(a) Claim against Workmen Compensation Reserve will be estimated at ₹ 1,00,000 and fixed assets will be depreciated by 10%.
(b) The Capitals of the partners will be adjusted according to the new profit-sharing ratio. For this, necessary cash will be brought or paid by the partners as the case may be.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.

Q. A and B were partners in a firm sharing profits in 3 : 1 ratio. They admitted C as a partner for 1/4th share in the future profits. C was to bring ₹ 60,000 for his capital. The Balance Sheet of A and B as at 1st April, 2019, the date on which C was admitted, was:


Liabilities		₹	Assets		₹
Capital A/cs:			Land and Building		40,000
A	50,000		Plant ad Machinery		70,000
B	80,000	1,30,000	Stock		30,000
General Reserve		10,000	Debtors	35,000
Creditors		70,000	Less: Provision for Doubtful Debts	1,000	34,000
			Investments		26,000
			Cash		10,000
		2,10,000			2,10,000

The other terms agreed upon were:
(a) Goodwill of the firm was valued at ₹ 24,000.
(b) Land and Building were valued at ₹ 65,000 and Plant and Machinery at ₹ 60,000.
(c) Provision for Doubtful Debts was found in excess by ₹ 400.
(d) A liability of ₹ 1,200 included in Sundry Creditors was not likely to arise.
(e) The capitals of the partners be adjusted on the basis of C's contribution of capital to the firm.
(f) Excess of shortfall, if any, be transferred to Current Accounts.
Prepare Revaluation Account, Partners' Capital Accounts and Balance Sheet of the new firm.

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	In the books of A, B and C
Dr.	Partner’s Capital A/c								Cr.
Particulars		A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Bank A/c		1,16,000	1,04,000		By balance b/d	3,00,000	3,00,000
					By Bank A/c			2,00,000
To balance c/d (6,00,000/3)		2,00,000	2,00,000	2,00,000	By Premium for Goodwill A/c	16,000	4,000

		3,16,000	3,04,000	2,00,000		3,16,000	3,04,000	2,00,000

Particulars	A	B
Old Ratio	3/5	2/5
New Ratio	1/3	1/3
Gain/Sacrifice	(3/5 – 1/3) = 4/15 (Sacrifice)	(2/5 – 1/3) = 1/15 (Sacrifice)
Sacrificing Ratio	4:1

Average Net Profits	=	₹ 90,000
Capital Employed	=	₹ 6,00,000
Normal Profits	=	(Capital Employed × Normal rate of return/100) = ₹ (6,00,000 × 10/100) = ₹ 60,000
Super Profits	=	Average Net Profits – Normal Profits= ₹ (90,000 – 60,000) = ₹ 30,000
Goodwill	=	Super Profits × No. of years of Purchase = ₹ (30,000 × 2) = ₹ 60,000
C’s Share of Goodwill	=	₹ (60,000 × 1/3) = ₹ 20,000

Dr.	Bank A/c						Cr.
Date		Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2019				2019
April 01		To balance b/d	40,000	March 31	By A’s Capital A/c	1,16,000
April 01		To C’s Capital A/c	2,00,000	March 31	By B’s Capital A/c	1,04,000
April 01		To Premium for Goodwill A/c	20,000	March 31	By balance c/d	40,000

			2,60,000			2,60,000