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Study Note 4.1, Page 143-168

Study Note 4.1, Page 143-168

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Published by: s4sahith on Dec 17, 2009
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Financial Accounting
This study note includes
Admission of a Partner
Appropriation of Profits
Retirement, Death and Dissolution
Amalgamation of Firms and Conversions to a Company
Partners of a continuing business may, by common consent, decide to admit a new partner foradditional capital, technical skill or managerial efficiency. At the time of such admission, theusual adjustments required are : (1) Adjustment regarding Profit Sharing Ratio; (2) Adjust-ment regarding Valuation of Assets and Liabilities; (3) Adjustment regarding Goodwill; (4)Adjustments regarding accumulated Profits or Losses and (5) Adjustment regarding CapitalContribution of New partner and Capitals of existing partners.
 Adjustment regarding Profit Sharing Ratio :
The new partner becomes entitled to a shareof future profits which is sacrificed by the existing (old) partners in his favour. The sacri-fice may be made by one or all of the existing partners.
The new profit sharing ratio hasto be found out.
It should be noted that :(a)The new profit sharing ratio may be agreed upon by the partners. [It may be given and weneed not calculate it :(b)The mutual profit sharing ratio among the existing partners may remain unaltered aftergiving away the new partner’s share.
:X and Y were partners sharing profit/losses as 3 : 2. They admit as a new partnergiving him 1/5th share of future profits. What should be the new profit sharingratio?
:Z’s share = 1/5 Balance = 1 1/5 = 4/5Xs share = 4/5 x 3/5 = 12/25; Ys share = 4/5x2/5 = 8/25; Z’s share = 1/5 = 1/25.The new profit sharing ratio = 12 : 8 : 5.(c)The mutual profit sharing ratio among existing partners may be changed by agreement.
Financial Accounting
:P and Q were partners sharing profits/losses as 4 : 3. R is admitted as a new part-ner for 1/5 th share. P and Q decide to share the balance of profits equally.
:Rs share = 1/5 Balance = 1- 1/5 = 4/5.P’s share = 4/5 x 1/2 = 4/10; Q’s share = 4/5 x 1/2 = 4/10; R’s share = 1/5 = 2/10.New Ratio = 4 : 4 : 2 or 2 : 2 : 1.(d)If the sacrifice made individually by the existing partners is given then New Ratio shouldbe calculated by deducting the sacrifice from the old ratio.
:A, B & C were partners sharing profits/loses as 3 : 2: 1. They admitted D as a newpartner giving him 1/6th share of future profits. D acquired 3/24 th share from Aand 1/24 share from B. Calculate the new Profit Sharing Ratio.
:New Ratio = Old Ratio Sacrifice RatioA=3/6 3/24 = 12/24 3/24 = 9/24; B=2/6-1/24 = 8/24 1/24 = 7/24; C=1/6 Nil = 4/24 Nil = 4/24; D=3/24 + 1/24=4/24 The new ratio = 9 : 7 : 4 : 4.
Thus regarding Profit Sharing Ratio we can sum up as follows :-
Old Ratio
=Profit Sharing Ratio of existing Partners (before admission of newpartner)=Given or Equal ( If not mentioned )2.
New Ratio
=Future Profit Sharing Ratio among all partners (including newpartner, after his admission)=Given
= Old Ratio – Sacrificing Ratio made by each of existingpartners.3.
Sacrificing ratio
=Share of an existing partner under Old Ratio – his Share undernew ratio.
But unless otherwise mentioned the mutual profit sharing Ratio between the existingpartners will remain unaltered. In that case Sacrifice Ratio = Old Ratio.
It will be evident from subsequent discussions that proper use of the above ratios will be re-quired for solving problems regarding Admission of a new partner.
 Adjustment Regarding Valuation of Assets and Liabilities
: The Book values of assets asshown in the Balance Sheet may not reflect their current realizable values. Similarly theliabilities included in the Balance Sheet may not exhibit their actual position. Whenever achange takes place in a partnership business in the form of admission or retirement ordeath of a partner or due to change in profit sharing ratio, revaluation of assets or liabili-ties become necessary.
Financial Accounting
The effect of Revaluation are given in two ways : (a)
by incorporation the changes of theBalance Sheet Values
and (b)
without changing the Balance Sheet values.By Incorporating Changes in the Balance sheet values prepare : Revaluation Account
(i)For decrease in the value of assets, increase in the value of liabilities, provition forunrecorded liabilities Revaluation A/c DrTo Assets A/c (with the decrease in value)To Liabilities A/c (with the increase in value)(ii)For increase in the value of assets, decrease in the value of liabilities, unrecordedassetsAssets A/c Dr (with the increase in value)Liabilities A/c Dr (with the decrease in value)To Revaluation A/c(iii)For profit on revaluation :Revaluation A/c DrTo old papartners capital A/c (in their old profit sharing ratio)[ For loss on revaluation, the reverse entry should be made ]
Without changing the Balance sheet Values.
Prepare : Memorandum Revaluation Account(i)Record increase/decrease in the value of assets and liabilities as discussed.(ii)Share the profit or loss on Revaluation amongst the old partners in thire old profitsharing Ratio.(iii)Reverse the increase/decrease in the value of assets and liabilities.(iv)After reversal, calculate profit or loss.(v)Share the profit/loss, after reversal amongst all the partners (including the new partner) in their new profit sharing ratio.Proforma : Revaluation AccountRs.Rs.To Assets (Decrease)xxBy Assets (Increase)xxTo Liabilities (Increase)xxBy Liabilities (Decrease)xxTo Partners Capital A/cxxBy Partners Capital A/cxx(Share of Revaluation Profit)(Share of Revaluation loss)xxxx

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