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Question

If it is agreed that the capital of all the partners should proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.


Solution

At the time of admission of a new partner when all the partners decided that the capital of all the partners should be proportionate to the new profit sharing ratio, the calculation of new capital will be calculated in two different situations as follows. 

(i) When the Capital of the New Partner is Known: Sometimes, at the time of admission, the partners agree that their capitals should also be adjusted so as to be proportionate to their profit sharing ratio. In such a situation, if the capital of the new partner is given, the same can be used as a base for calculating the new capitals of the old partners.

 The capitals thus ascertained should be compared with their old capitals after all adjustments relating to goodwill reserves and revaluation of assets and liabilities etc have been made and then the partner whose capital falls short, will bring in the necessary amount to cover the shortage and the partner who has a surplus, will withdraw the excess amount of capital.

 Let us understand the above situation with the help of an example.

A and B are partners sharing profit and loss equally. They agree to admit C for 25% share in profit. C brings Rs 1,00,000 as capital. The old capitals of A and B are Rs.1,60,000 and Rs.1,40,000 respectively, al the time of admission of C. 

The Total capital of the new firm on the basis of 

C = 1,00,00025×100=4,00,000

Now the total capital of the firm is Rs. 4,00,000. If C's capital is Rs.1,00,000 than the capital of A and B will be 4,00,000 - 1,00,000= Rs.3,00,000

A's New Capital = 3,00,0002=Rs.1,50,000

B.s New Capital = 3,00,0002=Rs.1,50,000

In this, way the following adjustment will be made.

ParticularsABNew Capital1,50,0001,50,000(-)Existing Capital(1,60,000)(1,40,000)(Withdrawal)/ Deposit(10,000)10,000

Hence, according to the new adjustment A will withdraw Rs.10,000 from the firm and B will bring Rs.10,000.

(ii) When the Total Capital of the New firm is Given: Sometimes, the total capital of the firm may clearly be specified and it is agreed that the capital of each partner should be proportionate to his share in profits. In such a situation each partner's capital (including the new partner's capital to be brought by him) is calculated on the basis of his share in profits.

By bringing in additional amount or withdrawal of excess amount, the final capital of each partner can be brought up to the required level. In this case, the proportionate capital of the new partner will be calculated as follows:

Proportionate Capital of the New Partner = Total Capital of the Old Partners x Reciprocal of the Combined New Share of the Old Partners x Share of the New Partner 

To understand the above situation in a better manner we can take an example as follows:

A and B are partners in a firm sharing profit and loss equally. They agree to admit C for 1/3 rd (33%) share in profit. A's  capital is Rs. 1,75,000 and B's capital is Rs. 1,25,000. C brings sufficient capital for his share in profit.

The total capital of the old partners' = Rs. 1,75,000 + Rs. 1,25,000 = Rs. 3,00,000

C's share in capital = 3,00,000×32×13=Rs.1,50,000

ParticularsXYOld Capital1,75,0001,25,000(-) New Partner(1,50,000)(1,50,000)Withdrawal /(Deposit)25,000(25,000)

A will withdraw Rs. 25,000 and B will bring Rs.25,000 in order to adjust their capital according to their new profit sharing ratio.


Accountancy

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