ACCOUNTANCY

ADMISSION OF A PARTNER

1. Why should a new partner contribute towards goodwill on his admission?

2. Why are assets and liabilities revalued on the admission of a new partner?

3.Give the journal entry to distribute general reserve and profit and loss account balance appearing on the liabilities side of the balance sheet.

4.Under what circumstances premium for goodwill paid by the incoming partner would never be recorded in the books of account?

5. X and Y should profits in the ratio of 3:1. They admit Z to one-third share in the future profits. What will be the new profit sharing ratio?

6.A and B who shared profits in the ratio of 3:1 admit C as a partner for 1/5 share in profits, which he requires equally from the old partners. What will be the new profit sharing ratio?

7. A and B share profits in the ratio of 2:1. C is admitted with 1/3 share in profits. C acquires 2/3 of his share from A and 1/3 of his share from B. What will be new profit sharing ratio?

8. X and Y are partners sharing profits in the ratio of 3:1. They admit Z as a partner. X surrenders 1/3^rd of his share and Y 1/4^th of his share in favour of Z. What will be new profit sharing ratio?

9. P and Q are partners sharing profits in the ratio of 5:3. R is admitted and the new ratio is 4:3:2. What will be sacrificing ratio?

10. M and N are partners. P is admitted for ¼ shares. What is the ratio in which M and N will sacrifice their share in favour of P?

11. Explain the accounting treatment of Goodwill when goodwill account already appears in the books of the firm and new partner brings his share of goodwill in cash.

12.Explain the accounting treatment of Goodwill when new partner cannot bring his share of goodwill in cash.

SOLUTIONS

1. Since a new partner gets his share of profit from old partners, he must compensate the old partners for the share sacrificed by them. The amount of compensation given by the new partner is known as goodwill.

2. Assets and liabilities are revalued because the entire profit and loss due to their revaluation is divided amongst the old partners in their old profits sharing ratio. The new partner should not share such profit or loss because it belongs to the period prior to his admission.

3. General Reserve A/c                           Dr.

Profit & Loss A/c                                Dr.

            To old partner’s capital A/c                (In old ratio)

4. When the circumstances premium for the goodwill in cash to the old partners privately outside the business no entries are passed for it.

5. Calculation of new profit sharing ratio:

Let total profit be = 1

Share given to Z = 1/3

Remaining share = 1-1/3 = 2/3

Now the old partners will share remaining profit in their old profit sharing ratio:

Hence,

x’s share = 3/4 of 2/3 = 6/12 or ¾ * 2/3 = 6/12

y’s share = ¼ of 2/3 = 2/12 or ¼ * 2/3 = 2/12

z’s share = 1/3

            Thus, the new profit sharing ratio of x, y and z will be:

= 6/12 : 2/12 : 1/3

= (6:2:4)/12 = 6:2:4 or 3:1:2

6. Share of profit given to C = 1/5

Share acquired by C from A = ½ of 1/5 = 1/10

Share acquired by C from B = ½ of 1/5 = 1/10

Therefore,

            A’s new share after surrendering 1/10 in C’s favour

                                    = ¾ - 1/10 = (15-2)/20

                                    = 13/20

            B’s new share after surrendering 1/10 in C’s favour

                                    = 1/4 - 1/10 = (5-2)/20

                                    = 3/20

            C’s share         = 1/10 + 1/10 = 2/10

            Therefore new share equal to

                                    13/20:3/20: 2:10          = (13:3:4)/20

                                                                        = 13:3:4 Ans.

7. Share of profit given to ‘C’ = 1/3 share

Share acquired by C from A = 1/3 * 2/3 = 2/9

Share acquired by C from B = 1/3 * 1/3 = 1/9

A’s new share after surrendering 2/9 = 2/3 – 2/9 = (6-2)/9

                                                            = 4/9

B’s new share after surrendering 1/9 = 1/3 – 1/9 = (3-1)/9

                                                            = 2/9

C’s share = 1/3

Therefore, new profit sharing ratio

            = 4/9 : 2/9: 1/3 = (4:2:3)/9 or 4:2:3

8. x : y – 3 : 1,                 z admitted

x -> 1/3 * ¾ = ¼         (x surrender 1/3 of his share)

y -> 1/4 * 1/4 = 1/6     (y surrender 1/4 of his share)

Therefore,  z’s share ->  ¼ + 1/16 = (4+1)/16 = 5/16

New profit sharing ratio:

            x = ¾ - ¼ = 2/4

            y = 1/4 – 1/16 = (4-1)/16 = 3/16

            z = 5/16

Therefore, 2/4 : 3/16 : 5/16

ð  (8:3:5)/16

ð  8:3:5

9. Old profit sharing ratio of P = 5/8

New profit sharing ratio of P = 4/9

P’s sacrificing ratio     = old ratio – new ratio

                                    = 5/8 – 4/9

                                    = (45 -32)/72 = 13/72

Old profit sharing ratio of Q = 3/8

New profit sharing ratio of Q = 3/9

Q’s sacrificing ratio     = old ratio – new ratio

                                    = 3/8 – 3/9 = (27-24)/72 = 3/72

Sacrificing ratio           = 13/72 : 3/72 or 13:3

10. Profit distributed equally.

11. For writing off the goodwill A/c already appearing in the books

Old partner’s Capital A/c’s                 Dr. (In old ratio)

            To Goodwill A/c

            (ii) For bringing goodwill in cash

                        Bank A/c                                             Dr.

                                    To premium for goodwill (with his share of goodwill)

            (iii) For distributing the amount of goodwill brought in by new partner:

                        Premium for goodwill A/c                  Dr.

                                    To sacrifice partner’s Capital A/c’s (In sacrificing ratio)

12. New Partner’s Capital A/c                              Dr. (with his share of goodwill)

                  To sacrificing Partner’s Capital A/c’s (In sacrifice ratio)