2022-23

Accounting for partnership

BY:LOKESH KHUSHALANI

CPA | +91 9561405499

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Contents
Chapter Page no.
Introduction to partnership 3
Adjustment of goodwill 17
Admission of a partner 27
Retirement of a partner 79
Death of a partner 83
Dissolution of partnership 104

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 Chapter 1: PARTNERSHIP DEED

Introduction to Partnership

Partnership is an association between two or more persons who agree to do business and share its
profits and losses. The partners act both as agents and principals of the firm. Partnership is defined by
Indian Partnership Act, 1932, Section 4, as follows:

“Partnership is the relation between persons who have agreed to share the profits of a business
carried on by any of them acting for all."

A partnership, thus, is a business relationship among two or more persons to share profits and losses
of the business, carried on by all or any of them acting for all.
Partners, Firm and Firm Name: The persons who have entered into a partnership with one individually
are called partners and collectively a firm. The name under which the business is carried is called firm
name.

Nature of partnership
Partnership is a separate business entity from the accounting viewpoint. However, from the legal point
of view a partnership firm is not a separate legal entity from its partners. Thus legally, and business
are not separate from one another. It means, in case the firm is bankrupt, estates of the partners become
liable to meet the deficit.

Essential Features or Characteristics of Partnership

The essential characteristics of partnership are:
1. Two or More Persons: There must be at least two persons to form a partnership and such
persons must be competent to contract. According to Indian Contract Act, 1 every person except the
following is competent to contract:
(a) Minor, (b) Persons of unsound mind, and (c) Persons disqualified by any law.
Section 464 of the Companies Act, 2013 empowers the Central Government to pre maximum number
of partners in a firm but the number of partners so prescribed cannot be more than 100. The Central
Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the
Companies (Miscellaneous) Rules, 2014.Thus in effect, a partnership firm cannot have more than 50
members.
2. Agreement: Partnership comes into existence by an agreement, either written or oral agreement
among the partners is the basis of their relationship which may be particular venture, for a period or at
will. The written agreement among the partners is known as Partnership Deed.
3. Lawful Business: A partnership is formed to do a lawful business. Business inG trade, vocation
and profession. A joint ownership or charitable activity (such as running of a charitable clinic) is not

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business as it does not function with the objective of earning profit. Therefore, Partnership Deed is not
drawn.
4. Profit-sharing: The agreement between/among the partners must be to share pro
losses of the business. It is not essential that all the partners must share losses also. There may be a
provision in the Partnership Deed that a particular partner or partners shall not bear the losses.
5. Business can be carried on by All or Any of the Partners Acting for All: Business partnership
can be carried on by all the partners or by any of them acting for partners. In other words, partners are
agents as well as the principals.
As an agent, he (partner) represents other partners and thereby, binds them (other parnters) through
his acts.
As a principal, he is bound by the act of other partners.

Rights of Partners
1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of account and have a copy of
4. Every partner has the right to share profits or losses with others in the agreed
5. If a partner has advanced loan, he has the right to receive interest thereon at an agreed rate of
interest. In case the rate of interest is not agreed upon, interest is paid at the rate provided in the Indian
Partnership Act, 1932, i.e., @ 6% p.a.
6. In case of an emergency, a partner has the right to act according to his best judgement be
indemnified for the expenses incurred by him.
7. A partner has the right not to allow the admission of a new partner.
8. After giving proper notice, a partner has the right to retire from the firm.
9. If a partner incurs expenses on the business or he pays some money on behalf of that partner
may get indemnified against these payments from the firm.

Partnership comes into existence by an oral or written agreement. It is better to have an agreement to
avoid any dispute. This written document known as Partnership Deed details the terms and
conditions of partnership. It is a legal document signed by all the partners an clauses on the
following:

1. Description of the Partners: Names, description and addresses of the partners.

2. Description of the Finn: Name and address of the firm.
3. Principal Place of Business: Address of the principal place of business.
4. Nature of Business: Nature of business that the firm shall carry on.
5. Commencement of Partnership: Date of commencement of partnership.
6. Capital Contribution: The amount of capital to be contributed by each partner, whether
the Capital Accounts shall be fixed or fluctuating.
7. Interest on Capital: Rate of interest, if allowed, on capital.
8. Interest on Drawings: Rate of interest, if to be charged, on drawings.
9. Profit-sharing Ratio: Ratio in which profits or losses are to be shared by the partners.
10. Interest on Loan: Rate of interest on loan by a partner to the firm.
11. Remuneration to Partners: Amount of salary, commission, etc., if agreed, to be paid.

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 12. Valuation of Goodwill: Method by which goodwill of the firm will be valued at the time of
admission or retirement of a partner or at the time of death of a partner.
13. Valuation of Assets: The manner in which assets of the firm shall be valued in the case of its
reconstitution.
14. Settlement of Account: The manner in which accounts of partner(s) shall be settled in case of
his (their) retirement or death or at the time of dissolution of the firm.
15. Accounting Period: The date on which accounts shall be closed every year. Normally accounts
are closed on 31st March every year because every entity must submit the return of income on
31st March every year.
16. Rights and Duties of Partners: The rights and duties of partners are defined.
17. Duration of Partnership: The period of partnership, i.e., whether it is for a specified period or
for a venture or at will.
18. Bank Account Operation: How shall the Bank Account be operated? Whether it shall be
operated by any of the partners or jointly.
19. Death of a Partner: Whether the firm will continue or dissolve.
20. Settlement of Disputes: Disputes, if any, among the partners- how they shall be settled

INTEREST ON PARTNER`S LOAN

If any partner gives loan to the firm, he is entitled to receive interest at the agreed rate of interest and
specified in the Partnership Deed, provisions of Indian Partnership Act,1932 will apply and the
lending partner will get interest @6% p.a. on loan.

Nature of Interest on Partner`s loan: Interest on partners loan is a charge against profit. It means that
a partner will get interest on loan whether the firm has earned profit or has incurred loss.

Accounting Treatment: Interest on partner`s loan being a charge against profit is transferred to the
debit of profit and loss account. On the other hand, interest on partner`s loan is a gain to a partner as
a lender. Hence, it is credited on his loan account and not to his Capital Account. Journal entreies
passed are:

i) To provide interest on partner’s loan

Interest on partners loan a/c Dr

To partner’s loan a/c .

ii) To close the interest on partner`s loan A/c:

Profit and loss a/c Dr

To interest on partner`s loan a/c

It is important to distinguish loan account and capital account of a partner because:

i) As per the provision of Indian Partnership Act, 1932, partner`s loan is repayable on
dissolution before payment of capital tp partners; and

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 ii) In the absence of any agreement, partners are entitled to get interest @6% p.a. on loan
advanced whereas they are not entitled to interest on capital.

DISTRIBUTION OF PROFIT AMONG PARTNERS:

PROFIT AND LOSS APPROPRIATION ACCOUNT
A partnership firm, like a proprietorship firm prepares trading account, profit and loss account
and balance sheet. In addition, a partnership firm prepares profit and loss appropriation
account to which net profit or net loss as per the profit and loss account is transferred to show
its appropriation. This account , is an extension of the profit and loss account, and is credited
with the amount of net profit or debited with the amount of net loss (transferred from profit
and loss account). It is credited with the amount of interest on drawings of the partners (which
is loss to the partners but an income for the firm) and debited with interest on the capitals of the
partners, partners` salaries and commission, etc, (which is a loss for the firm and income for the
partners). If the partners decide, an amount is transferred to reserve and the balance profit (net
divisible profit) is distributed between/among the partners in their profit-sharing ratio.
Appropriation of profit is made up to the amount available for distribution. Thus, if after
transfer of net loss and credit of interest charged on drawings to profit and loss appropriation
account, the balance is loss, appropriation is not made. But if it results in profit, appropriation
is made up to the amount of profit.

RENT PAID TO A PARTNER

Rent paid to partner, like interest on loan by a partner, is a charge against the profit and not an
appropriation of profit. It is a charge on profit because of the reason that rent is paid to a partner
for using his or her property for business purpose. It is, therefore, debited to profit and loss
account (not to the profit and loss appropriation account) and credited to rent payable account.

APPROPRIATIONS ARE MORE THAN AVAILABLE PROFITS

So far, we have discussed the manner in which profit is appropriated when the profit available for
distribution among partners is more than the amount of appropriation. But, there may be a situation
where total amount of appropriation is more than the amount of profit available for appropriation. In
such situations, profit available for distribution among partners is distributed in the ratio of
appropriation to be made.

The ratio of appropriation is determined as follows:

i) Determine the amount payable as appropriation to each partner as per the partnership
deed (ignoring the profit available for distribution among partners). For example, salary
payable, commission payable and interest on capital, etc. payable to each partner is
determined.
ii) Total the amount of appropriation (as per step (i) above) for each partner separately.

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 iii) Ratio of the appropriation (as per step (ii) above) to be made to each partner is the ratio
in which profit is appropriated.

It should be kept in mind that no particular item like salary, commission, interest on capital, etc, has
priority over other items of appropriation.

2. SALARY OR COMMISSION (REMUNERATION) TO PARTNERS

Salary or commission is allowed to the partners for looking after the business of the firm. Salary or
commission to partners is allowed only if the partnership deed allows it to be paid. Also the amount
allowed is as stated in the partnership deed. Thus, if the partnership deed does not exist or it exists but
does not have a clause regarding salary and commission payable, it is not allowed.

Nature: salary or commission to a partner is an appropriation of profit, and not a charge against the
profit. It means, salary or commission to partners is allowed only if the partnership deed allows it and
also the firm earns profit during the year.

Salary payable to each partner is normally stated as an amount. But, commission payable to a partner
is stated as percentage of profit, which may be allowed to the partners either

(i) As a percentage of net profit before charging commission; or

(ii) As a percentage of net profit after charging commission.

Commission, under the two methods, is computed as follows:

i) Percentage of net profit before charging commission:

a. Net profit (before commission) x rate of commission
100
ii) Percentage of net profit after charging commission:
a. Net profit (before commission) x rate of commission
i. 100 + rate of commission

3) INTEREST ON PARTNERS` DRAWINGS

Drawings mean the amount withdrawn, in cash or in kind, by partners for their personal use. Drawings
may be out of capital or against profit. Drawings out of capital means withdrawal of part of capital
while drawings against profit means withdrawal of amount against profit earned during the year by
the firm.

Workmen Compensation Reserve

Workmen compensation reserve is a set aside out of firms profits to meet possible liability to
pay compensation to employees, if it arises. It means, a claim may or may not arise.it also means that
claim may be equal to or lower or higher than amount of reserve. At the time of change in profit-
sharing ratio.

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1) X and Y are partners they do not have any partnership agreement (partnership deed).
What should be done in the following cases:-
(a)X spends twice the time Y devotes to business. X claims that he should get a salary of 6,000/- per
month for his extra time spent.
(b) Y has provided a capital of 50,000/- whereas X has provided 5,000/- only as a capital. X however
has provided 10,000/- as loan to the firm. What interest (if any) will be given to X and Y?
(c) X wants to introduce his son Z into the business. Y objects to it.
(d) Y wants that profit should be distributed in the ratio of capitals but X wants that it should be
distributed equally.

Profit and Loss Appropriation Account

2) A, B, C are in a partnership with capitals of 40,000/-, 30,000/- and 20,000/-. B and C are entitled
to annual salaries of 5,000/- and 4,000/- respectively. Interest on capital is allowed at 5% per annum.
Of the first 10,000/- divisible as profits in any year, A is entitled to 50%, B 30% and C 20%. Annual
profits in excess of 10,000/- are divisible equally. The profits of the year ended 31st March 2014 was
35,500/-.
Prepare profit and loss appropriation account for the year ended 31st March, 2014.
3) A) (Journal entries and profit and loss appropriation account) Sanjay and Himanshu entered into
a partnership on 1st January, 2014, 3,00,000 /- and 2,00,000/- respectively. They agreed to share profits
and losses in the ratio of 3:2. Following information is provided regarding the partnership:
a. Each partner is allowed a salary of 10,000/- per annum.
b. Interest is to be allowed on capital @ 8% p.a.
c. The interest on drawings being 1,500/- and 2,500/- respectively for Sanjay and Himanshu.

The profit of the firm for the year ended 31st December, 2014 was 1,86,000/-. Pass necessary journal
entries relating to appropriation of profits and prepare profit and loss appropriation account for the
year ended 31st December, 2014.

3) B) Sanjay and Himanshu entered into a partnership on 1st January, 2014, 3,00,000 /- and 2,00,000/-
respectively. They agreed to share profits and losses in the ratio of 3:2. Following information is
provided regarding the partnership:

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 a Each partner is allowed a salary of 5,000/- per annum.
b Interest is to be allowed on capital @ 10% p.a.
c The interest on drawings being 3000/- and 2,000/- respectively for Sanjay and
Himanshu.

The profit of the firm for the year ended 31st December, 2014 was 3,65,000/-. Pass necessary journal
entries relating to appropriation of profits and prepare profit and loss appropriation account for the
year ended 31st December, 2014.

4) a. X and Y are partners sharing profits and losses in the ratio of 2:1. They had capitals of 5,00,000
/- and 4,00,000/- respectively.
a. Y is entitled to salary of 2000/- per month.
b. X is entitled to a salary of 3000/- per month
c. X is entitled for commission @ 10% on net profits after charging salary, but before his own
commission.
d. Y is entitled for commission @ 10% on net distributable profits
The profit earned for the year ended 31.3.2014 and is 170,000/-. Prepare profit and loss
appropriation account.
B) X and Y are partners sharing profits and losses in the ratio of 3:1. They had capitals of 2,00,000 /-
and 3,00,000/- respectively.
e. Both the partners are entitled to interest on capitals @ 5%.
f. Y is entitled to salary of 1,500/- per month.
g. X is entitled for commission @ 10% on net profits after charging Y’s salary and interest on
capitals, but before his own commission.
h. Interest on drawings will be `3000 and `2000.
i. Y is entitled for commission @ 10%on net distributable profits.
The profit earned for the year ended 31.3.2014 and is 98,000/-. Prepare profit and loss appropriation
account.

5) A and B are partners sharing profits and losses equally. The firm earned a profit of 2,70,000/- for
the year ended 31.3.2013. A and B had capitals of 3,00,000/- and 2,00,000/- respectively.
a. A and B withdrew 20,000/- and 30,000/- respectively during the year.
b. Interest on capital is allowed to be @ 5% p.a.
c. Interest on drawing is to be charged @ 6%.
d. A is entitled for commission @ 10% on net profits after charging B’s salary, interest on capitals
and his own commission.
Prepare profit and loss appropriation account and partner’s current capital A/c for the year ended
31st March, 2013.

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 Fixed Capital and Fluctuating Capital
6) A and B are partners sharing profits and losses in 3:2 ratio. Their capitals are 50,000/- and
40,000/-. As per the partnership agreement, A is to get salary of 1,500/- per month and B is to get
commission @ 5% on sale of 80,000. The profit earned by them are 90,000. They are to get interest on
capital @ 10% per annum. It was decided to transfer 10% of net profit to general reserve. Prepare
Profit and loss Appropriation Account and Capital Accounts.
7) X, Y and Z are partners with fixed capitals of 3,00,000/-, 2,00,000/- and 1,00,000/- respectively.
The balance of current accounts on 1st January 2014 were X 10,000 (Cr.) ; Y 5,000 (Cr.) ; Z 3,000 (Dr.).
The partnership deed provided for the following :
a. Interest on capitals 5% p.a
b. 20,000/- is to be transferred to reserve fund.
c. Drawings of X, Y and Z were 3,000/- ; 4,000/- ; 5,000/- respectively.
d. Profit and Loss to be shared in the proportion of 2:2:1.
e. Net profit of the firm for the year ended 31st December, 2014 before above adjustments was
1,50,000/-.

From the above information, prepare Profit and Loss Appropriation Account, Capital and Current
Accounts of the partners.

7. (a)Prem and Neeraj are partners in a firm sharing profits in the ratio of 3:2. The partnership deed
provides that prem was to be paid salary of ₹2,500 per month and Neeraj was to get a commission of
₹10,000 per year. Interest on capital was to be allowed @5% p.a. and interest on drawings was to be
charged @6% p.a. interest on prem’s drawings was ₹1,250 and on Neeraj’s drawings was ₹425.
Interest on capitals of the partners were ₹10,000 and ₹7,500 respectively. The firm’s net profit for the
year ended 31st march, 2019 was ₹90,575.
Prepare profit and loss appropriation account of the firm.

(b) Radhika and Khushboo were partners in firm, sharing profits in the ratio of 3:1.the partnership
deed provides that Radhika was to be paid salary of ₹5000 per month and Khushboo was to get a
commission of ₹14,000 per year. Interest on capital was to be allowed @6% p.a. and interest on
drawings was to be charged @7% p.a. interest on Radhika’s drawing was ₹3000 and on Khushboo’s
drawing was ₹850.
Interest on capitals of the partners were ₹ 30,000 and ₹ 13,000 respectively. The firm’s net profit for
the year ended 31st, march,2019 was ₹ 90,000.
Prepare profit and loss appropriation account.

8. (a) Reema and Seema are partners sharing profits equally. The partnership deed provides that both
Reema and Seema will get monthly salary of ₹15,000 each, interest on capital will be allowed ₹5% p.a
and interest on drawings will be charged 10% p.a. their capitals were ₹5,00,000 each and drawings
during the year were ₹60,000 each.
The firm incurred net loss of ₹1,00,000 during the year ended 31st march 2019.
Prepare profit and loss appropriation account during the year ended 31st march,2019

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(b) Jinal and Neha are partners sharing profits equally. The partnership deed provides that both Jinal
and Neha will get monthly salary of ₹24,000 each, interest on capital will be allowed ₹ 6% p.a. and
interest on drawings will be charged 10% p.a. their capitals were ₹6,00,000 each and drawings during
the year were ₹80,000 each.
The firm incurred net loss of ₹2,00,000 during the year ended 31st march 2019.
Prepare profit and loss appropriation account during the year ended 31st march 2019.

9. (a)Bhanu and Partap are partners sharing profits equally. The fixed capitals as on 1st april,2018 are
₹8,00,000 and ₹10,00,000 respectively. Their drawings during the year were ₹ 50,000 and ₹1,00,000
respectively. Interest on capital is a charge and is to be allowed @10% p.a. and interest on drawings is
to be charged @15% p.a. net profit for the year ended 31st march,2019 was ₹1,20,000
Prepare profit and loss appropriation account.
(B) Anjaney and Anushka are partners sharing profits equally. The fixed capital as on 1st april,2018
are ₹16,00,000 and ₹18,00,000 respectively. Their drawings during the year were ₹ 1,00,000 and
₹2,00,000 respectively. Interest on capital is a charge and is to be allowed @ 20 %p.a. and interest on
drawings is to be charged @ 30% p.a. net profit for the year ended 31st march,2019 was ₹2,40,000.
Prepare profit and loss appropriation account.

10. (a) Kamal and Kapil are partners having fixed capitals of ₹ 5,00,000 each as on 31st march,2018.
Kamal introduced further capital of ₹1,00,000 on 1st october,2018 whereas Kapil withdrew ₹1,00,000
on 1st october,2018 out of capital.
Interest on capital is to be allowed @10% p.a.
The firm earned net profit of ₹6,00,000 for the year ended 31st march,2019.
Pass the journal entry for interest on capital and prepare profit and loss appropriation account.

(B) Mohan and Rohan are partners having fixed capitals of ₹ 10,00,00 each as on 31st march,2018.
Mohan introduced further capital of ₹ 3,00,000 on 1st october,2018 whereas Rohan withdrew
₹1,00,000 on 1st october,2018 out of capital.
Interest on capital is to be allowed @15% p.a.
The firm earned net profit of ₹ 8,00,000 for the year ended 31st march,2019
Pass the journal entry for interest on capital and prepare profit and loss appropriation account.

11. (a) Simran and Reema are partners sharing profits in the ratio of 3:2. Their capitals as on 31st
march,2018 were ₹2,00,000 each whereas current accounts had balances of ₹50,000 and ₹25,000
respectively. Interest is to be allowed @5%p.a. on balances in capital accounts. The firm earned net
profit of ₹3,00,000 for the year ended 31st march,2019.
Pass the journal entries for interest on capital and distribution of profit. Also prepare profit and loss
appropriation account for the year.

(B) Sukriti and Prakriti are partners sharing profits in the ratio of their capitals as on 31st
march,2018 were ₹ 1,50,000 each whereas current accounts had balances of ₹ 1,00,000 and ₹50,000
respectively. Interest is to be allowed @6% on balances in capital accounts. The firm earned net profit
of ₹ 6,00,000 for the year ended 31st march,2019.
Pass the journal entries for interest on capital and prepare profit and loss appropriation account.
12. (a) Naresh and Suresh are partners with capitals of ₹3,00,000 each on 31st March,2019. Naresh had
withdrawn ₹50,000 against capital on 1st otober,2018 and also ₹1,00,000 besides the drawings against
capital. Suresh also had drawings of ₹1,00,000.

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Interest on capital is to be allowed @10% p.a.
Net profit for the year was ₹2,00,000, which is yet to be distributed.
Pass the journal entries for interest on capital and distribution of profit.

(B) Mohit and Rohit are partners with capitals of ₹ 5,00,000 each as on 31st march,2019. Mohit had
withdrawn ₹ 70,000 against capital on 1st october,2018 and also ₹1,00,000 besides the drawings
against capital. Rohit also had drawings of ₹ 1,50,000
Interest on capital is to be allowed @ 20% p.a.
Net profit for the year was ₹ 2,50,000 which is yet to be distributed.
Pass the journal entries for interest on capital and distribution of profit.

13. On 1st April 2013, Jay and Vijay entered in to partnership for supplying laboratory Equipments to
government schools situated in remote and backward areas. They contributed capitals ₹80,000 and
₹50,000 respectively and agreed to share the profits in the ratio of 3:2. The partnership deed provided
that interest on capital shall be allowed at 9% per annum. During the year the firm earned a profit of
₹7,800.
Showing your calculation clearly, prepare ‘profit and loss appropriation account’ of jay and Vijay for
the year ended 31st march, 2014.

Calculation of Interest on Capital:

14. Ramesh and Suresh were partners. Their monthly drawings were 5,000/- each. Interest on
drawings is to be charged @ 10% p.a. Calculate Interest on Ramesh’s drawings assuming drawings
are made:
a. In the beginning of every month.
b. In the middle of every month.

c. In the end of every month.

15. Calculate Interest on Drawings of A @5% p.a for the year ended 31.12.2001 in the following case:
a. If the drawings in 2001 were 28,000/-.
b. If he withdrew 2,400/- in the beginning of every month.
c. If he withdrew 2,400/- at the end of every month.
d. If he withdrew 2,400/- in the middle of every month.
16. Ram and Sham were partners in a firm with a profit sharing ratio of 3:2. Ram had given a sum
of 1,00,000/- to the firm as loan on 01.07.2005 and sham had given a sum of 50,000/- to the firm
as loan on 01.08.2005. The firm closes the books of accounts every year on the 31st of March and
the partnership deed is silent to the rate of interest on loan. Calculate the interest on loan
payable to each partner at the end of 2005-06.
17. Ram and Laxman started business on 1st Jan 2012 with a capital of 1,20,000/- and 80,000/-
respectively. Ram introduced 50,000/- to the firm on 1st July, 2012 as additional capital. His
drawings for the year were 20,000. Calculate interest payable to Ram and Laxman, if rate of
interest is 15% p.a. Firm closes its books of accounts on 31st December every year.

[Date] 12
18. X and Y were partners in a firm with profit sharing ration 7:5.During the year end 31.12.2012 Y makes
the drawings under :
DATE Amount (Rs)

01.02.2012 01.05.2012 14,000

30.06.2012 31.10.2012 10,000
31.12.2012 5,000
12,000
4,000

Partnership deed provided that partners are to be charged interest on drawings @10% p.a. Calculate
the interest chargeable to Y by using Simple Interest Method and Product Method.

19. X and Y sharing profits and losses in the ratio of 3:2 with capitals of 200000 and 300000 respectively.
Pass the journals for distribution of profits.
Case 1: If partnership deed is silent about IOC and profits were `20000.
Case 2: If partnership deed provides for IOC @6% but is silent about the treatment and the profits
were:
i) 40000
ii) 30000
iii) Loss of 20000

Case 3: if partnership deed provides IOC@6% as expense.

iii) 40000
iv) 30000
iii) Loss of 20000

20. A and B contribute ` 400000 and `200000 respectively. Their PSR was 2:3. The profits of the firm
U is `30000. Show the relevant account to allocate the IOC i) If partnership deed is silent about
the treatment of IOC.
ii) If Interest is treated as expense as per the deed.

21. Sita and Geeta decided to start a partnership on 1at January with a capital contribution of
36,000/- and 12,000/- respectively. Then from a partnership deed that states the following:
(i) Interest on capital and interest on drawings is to be charged @ 12% p.a.
(ii) Sita and Geeta will receive a monthly salary of 3,500/- each.
(iii)Profit sharing ratio should be 3:2.
Following transactions were made by Sita and Geeta during the year 2001:
a. On 1st July Sita permanently withdrew 7,000/- from her capital and Geeta introduced 5,000/- as
additional capital.

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 b. Sita withdrew 4,000/- at the end of every quarter and Geeta withdrew 6,000/- at the end of each
half year for their domestic purposes.
Profit for the year ended December 31st, before considering any adjustments in the partnership deed
of 90,000/-.
Prepare:
(i) Profit and loss appropriation account.
(ii) Partner’s capital accounts and current accounts. ``

WRONG DISTRIBUTION OF PROFIT

22. P, Q and R are three partners in a business. On 31st December after all the necessary adjustments, the
capital accounts of P, Q and R stood as 80,000 /-, 50,000/- and 30,000/- respectively. It was discovered
that interest on capital 5% p.a. had me omitted. The profit for the same year amounted to 70,000/-
and the partners drawings had been 10,000/-, 7,500/- and 4,500/- respectively for P, Q and R. The
profit sharing ratio for P:Q:R is 4:1:2. Calculate the interest on capitals and also pass a rectification
entry for past adjustments.
23. Mohan, Panday and Anil are equal partners, the balances on their capital accounts being 30,000/-,
25,000/- and 20,000/- respectively. In arriving at these figures, the profits for the year ended
December 31st, 1992 are 24,000/- had already been credited to partners in the proportion in which
they shared profits. Their drawings were: Mohan 5,000/-, Panday 4,000 /- and Anil 3,000 in 1992.
Subsequently the following omissions were noticed and it was decided to bring them into account.
a. Interest on capital at 10% p.a
b. Interest on Drawing: Mohan 250/-, Panday 200/- and Anil 150/-.
Make the necessary corrections through a journal entry and show your working clearly.
24. X and Y are partners in a firm. Their capital accounts as on March 31st, 2012 showed balances of 70,000
/- and 60,000/- respectively. The drawings of X and Y during the year 2011-2012 were 8,000/- and
6,000/- respectively. After distributing the profits of the year 2011-2012 which amounted to 40,000/-
, it was subsequently found that the following items have been left out while preparing the final
accounts of the year ended 31st March,2012.
(i) The partners were entitled to interest on capitals @6% p.a
(ii) The interest on drawings was also to be charged @5% p.a
(iii)
X was entitled to salary of 10,000 /- and Y a commission of 4,000/- for the whole year.
Required: Pass the necessary single Adjusting Entry.
25. Rajat, Ranjan and Rajeev have fixed capitals of 20,000/-, 30,000/- and 40,000/- respectively.
During the year, the rate of interest was fixed at 10% but was wrong credited to them 12%.
Give the necessary adjustments entry.
26. A, B and C are sharing profits in the ratio 3: 2: 1 respectively. C wants that profits be shared equally
and it should be applicable retrospectively from the last three years. Other partners have no objection
to this. Profits for the last three years were 1,20,000/- . 94,000/- and 1,10,000/- respectively.
Record adjustments by means of a journal entry and show the working notes.

[Date] 14
 MANAGER BECOMES PARTNER
27. Ram and Shyam are partners sharing profits and losses in the ratio of 3:1. They agreed to admit their
manager. Hari as a partner with effect from 1st January. 2014 for 1/4th share in of the profit. Hari has
deposited 30,000/- as security. He was getting a salary of 24,000/- p.a and a commission of 10% on
the net profit after charging his salary and commission.
As per partnership deed, the security deposited by Hari is to be treated as his share of capital. Any
excess amount which Hari will get as a partner over the receipt as a manager would be borne by Ram
and Shyam in the ratio of 3:2. Profit for the years 2014 was 2,00,000 /- before payment of salary and
commission to Hari. Prepare profit and loss appropriation account of the firm during 2014.
28. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capital are 80,000/-, 50,000
and 40,000/- respectively. Each partner is entitled to interest on capitals@ 10% p.a. B is entitled to a
salary of 10,000 p.a and C is entitled for commission of 4,000
A guaranteed that the firm would earn a profits of 1,20,000 before allowing interest on capital, partner
salaries and commission. The actual profit for the year 2014 before commission, interest and salaries
amounted to 1,12,000/-. Prepare profit and loss appropriation a/c.
29. A and B are in a partner sharing profits and losses in the ration 4:1 They decided to admit C, their
manager, as a partner with effect from 1st January, 2014 for 1/8th share in profits. C as a manager was
getting a salary of 9,600/- p.a and commission of 5% of the net profits after charging such salary and
commission.
In terms of the partnership deed, any excess amount which C will be entitled to receive as a partner
over the amount which would have been due to him as a manager, would be personally borne by A
out of his own share of profit.
Profit for the year ended 31st December, 2014, amounted to 1,35,600 before payment of salary and
commission. Prepare profit and loss appropriation account of the firm during 2014.

GOODWILL
30. Calculate the value of goodwill as on 1st Jan, 2013 on the basis of three years purchases of the Average
profits of the last five years profits. The profits and losses for the year were 2007 – 30,000/- ; 2008 loss
40,000/- ; 2009 – 92,000/- ; 2010 – 55,000/- ; 2011 – 70,000 /-, 2012 – 90,000/-.
31. On 1st April, 1994 an existing firm had assets of 75,000/- including cash of 5,000/-. Its creditors
amounted to 5,000/- on that date. The firm had a reserve fund of 10,000 /- while partners capital
accounts showed a balance of 60,000/-. If the normal rate of return is 20% and the goodwill of the
firm is valued at 24,000/- at four years purchase of super profit, find the average profits per year, of
the existing firm.
32. The profits and losses for the last 5 years were
1st year – 3,000 (Including an abnormal gain of 1,000/-)

[Date] 15
 2nd year – 7,000/- (excluding 2,000/- as insurance premium)
3rd year – 2,000/- (after charging an abnormal loss of 1,000/-)
4th year – 3,000/- 5th year –
1,000/- (loss)
Calculate the amount of goodwill on the basis of 3 years purchase of last 5 years profits and losses.
33. The profits of A,B and C were for the last five years were as under:
YEAR PROFITS (Rs)
2007-08 38,000 1
2008-09 40,000 2
2009-10 60,000 3
2010-11 1,00,000 4
2011-12 1,25,000 5
6

Calculate the value of goodwill on the basis of two years’ purchase of weighted average profits based
on weights 1,2,3,4,5 respectively to the profits for the year 200708,2008-09, 2009-10,2010-11, 2011-12.
34. It was agreed to calculate the goodwill of a firm at three years’ purchase of the weighted average
profits of the past four years. The appropriate weights to be used to each year ended on 31st December
are: 1984 -1 ; 1985-2; 1986-3; 1887-4.
The profits for these years ended on 31st December are: 1984: 20,200/- ; 1985 – 24,800/- ; 1986:20,000/-
and 1987 30,000/-.
On scrutiny of the accounts the following matters are revealed:-
(i) On 1st September, 1986 a major repair was made in respect of the plant incurring 6,000/- which
amount was charged to revenue. The paid sum is agreed to be capitalized for goodwill calculation
subject to adjustments of depreciation of 10% p.a on reducing balance method.
(ii) The closing stock for the year 1985 was over – valued by 2,400/-.
(iii)
The cover management cost an annual charge of 4,800/- should be made for the purpose of
goodwill valuation. Compute the value of goodwill.

SUPERPROFIT

30) The profits and losses for the previous year are 2009 – profit 20,000/-, 2010- loss 34,000/-, 2011 –
profit 1,00,000/-, 2012 – profit 1,50,000. The average capital employed in the business is 4,00,000. The
rate of interest expected from capital invested in that class of business is 10%. The remuneration of
partner is estimated to be 12,000 p.a.
Calculate the value of goodwill on the basis of 2 years’ purchase of Super Profit based on the average
of 3 years.
31) Ajit and Baljit were sharing profits in the ratio of 3:2. They decided to admit Chaman into the
partnership for 1/6th share of future profits. Goodwill, valued at 3 times the average super profits of
the firm, was 18,000. The firm had assets worth 15 lakhs and liabilities to the tune of 12 lakhs. The
normal earning capacity of such firms is expected to be 10% p.a.

[Date] 16
Find the average profits/actual profits earned by the firm during the last 3 years.
CAPITALISATION
32) From the figures given below, calculate goodwill according to the capitalization of average profit
method :
(i) Actual average method = 72,000/-
(ii) Normal rate of return = 10%
(iii) Assets = 9,70,000/-
(iv) Liabilities = 4,00,000/-
33) A firm having the assets of 5,00,000/- and liabilities of 2,10,000/- earns the annual profits of
45,000/-. The rate of normal profit being 15%.
Calculate the amount of goodwill by capitalization of super profits method.
34) A firm earns profit of 2,00,000/-. The normal rate of return in the similar type of business is 10%.
The value of total assets (excluding goodwill) and total outside liabilities as on of valuation of
goodwill are 22,00,000/- and 5,60,000/- respectively.
a) Calculate the value of goodwill according to Capitalization of super profits method.
b) Calculate the value of goodwill according to Capitalization of average profits method.

GUARANTEE
35) A, B and C entered into partnership on 1st April, 2011 to share profits and losses in the ratio 4: 3:
3. A, however personally guaranteed that C’s share including interest on capital @ 5% p.a. would not
be less than 50,000 in any year. The capital contribution were: A 3,00,000/- ; B 2,00,000/- ; C 1,50,000/-
.
The profit for the year ended on 31st March,2012 amounted to 1,50,000. Required: Prepare profit
and loss appropriation account.

[Date] 17
Sums for practice.
1) A, B and C are partners in a firm. They have no partnership agreement for their guidance. At
the end of the year of commencement of the firm they have faced the following problems:
a. A wants interest on capital but B and C do not agree
b. B wants that partners should be allowed to draw salary but A and C do not agree.
c. C wants that the loan given by him to the firm should bear interest @ 10% p.a but A do not agree.
d. A and B having contributed larger amounts of capital, desire that profits should be divided in
the ratio of their capital contribution but C do not agree.
2) M and N are partners in a firm. M has given a loan of `8000 to the firm on 1st July 2016. The
partnership deed is silent about the question of provision of interest on partners’ loan. Compute the
amount of interest on loan from partners advanced by the M to the firm, assuming the books are
closed on 31st march.
3) Black and white are partners with capital of `50000 and `60000 respectively. Profits of the firm
were `87100. It is agreed that 5% interest on Capital as such shall be allowed there is no agreement
regarding sharing of profits or partners salary. Black is the whole time partner where as white does
attend business regularly. Black claims `600 salary per month and 60% of the profits. White
advanced loan of `10000 to the firm and claims an interest of 10%. Prepare P&L appropriation
account.
4) Lalu, Kalu and Sallu are partners in a firm having a capital of `50000, `50000 and `100000
respectively. Their current account balances were `10000, `5000 of A and B, the balance of C was 2000
(dr). According to the deed the partners were entitled to an IOC @ 10% p.a. C being the working
partner was also entitled to a salary of 12000 p.a. The profits were to be divided as:
a. The first `20000 in their capital ratios.
b. Next `30000 in the ratio of 5:3:2.
c. Remaining partners to be shared equally.

The firm made a profit of `172000 before charging any of the above items.

5) D, E and F were partners in a firm sharing profits in the ratio 5:7:8. Their fixed capital were D
`500000; E `70000 and F `800000. Their partnership deed provided the following:
a. Interest on capital @ 10%.
b. Salary of `10000 per month of F
c. Interest on drawing @12% p.a
D withdrew `40000 on 31st January 2009; E withdrew `50000 on 31st March 2009 and F withdrew
`30000 on 31st December. During the year firm earned a profit of `350000. Prepare P&L appropriation
a/c.

6) Ram and Mohan withdrew for private use of `120000 and `80000. Interest is chargeable @ 6% p.a
on the drawings. What is the total interest?

[Date] 18
7) B and M are partners in a firm. They withdrew `48000 and `36000 respectively during the year
evenly at the middle of every year. According to the partnership agreement, interest on drawings is
to be charged @ 10%.
8) A and B are partners sharing profits equally. A drew regularly `4000 at the end of every month
for six months ended 30th September, 2013. Calculate interest on drawings @ 5%.
9) Calculate interest on drawings @10% of Mr. Vibhu for the year ended 31st March 2017 in the
following:
a. If he withdrew `7500 in the beginning of each quarter.
b. If he withdrew `7500 at the end of each quarter.
c. If he withdrew `7500 during the middle of each quarter.
10) X and Y contribute `2000 and `10000 respectively. They decided to allow interest on Capital @6%
p.a. their respective share of profits is 2:3 and the business profit (before interest) for the year is
`1500. Show distribution of profits 1) where there is no agreement except for interest on capitals and
2) where there is a clear agreement that the interest on capitals will be allowed even if it involves the
firm in a loss.

Q. 12. X and Y are partners sharing the profits and losses in the ratio of 2 : I with capitals of 50,000
and 3o,ooo respectively. Show the distribution of profits in each of the following alternative cases :
(i) If the partnership deed is silent as to the Interest on Capital and the profits for the year are 9,000.
(ii) If the partnership deed provides for Interest on Capital @ 6% p.a. and the losses for the year are
6,000.
(iii) If the partnership deed provides for Interest on Capital @ 6% p.a. and the profits for the year are
9,000.
(iv) If the partnership deed provides for Interest on Capital @ 6% p.a. and the profits for the year are
3,ooo.
(v) If the partnership deed provides for Interest on Capital @ 6% p.a. even if it involves the firm in
loss and the profits for the year are 3,ooo.

Q13. On 1st April, 2012 P, Q and R started a business with capitals of `6,00,000; `4,50,000 and 3,50,000
respectively. According to partnership agreement:
(i) Profit earned in any year will be distributed as under:
(ii) Upto 1,80,000 equally
(iii) Excess over `1,80,000 one-third to P, one-sixth to Q and one-half to R.
(ii) Allow interest on capital @6% p.a. and charge interest on drawings @8% p.a.
(iii) P is entitled to get a salary `4,000 per month together with a commission of 5% on net profit
remaining after deducting salary and interest but before charging any commission.
(iv) Q is entitled to get a salary of `5 ,000 per month together with a commission of 5% on net profit
remaining after charging salary, interest and all commissions.
Drawings of the partners during the year were:
P withdrew regularly `5 ,000 at the beginning of every month.
Q withdrew regularly `7,500 at the end of every month.
R withdrew `70,000 during the year. The profit for the year before all of the above adjustments was
`4,96,310.

[Date] 19
 Distribute the profit among the partners and prepare partners' capital accounts when Capitals are
fluctuating

Q.14). Calculate the interest on drawings of Sh. Ganesh @ 9% p.a. for the year ended 31st March,
2016, in each of the following alternative cases:
Case (i) If he withdrew 4,000 p.m. in the beginning of every month;
(ii) If he withdrew 5 ,000 p.m. at the end of every month.;
(iii) If he withdrew 6,000 p.m;
(iv) If he withdrew 72,000 during the year;
(v) If he withdrew as follows : 30th April, 2015 10,000
1st July, 2015 15,000
1st Oct., 2015 18,000
30th Nov., 2015 12,000
31st March, 2016 20,000
(vi) If he withdrew 12,000 in the beginning of each quarter;
(vii) If he withdrew 18,000 at the end of each quarter;
(viii) If he withdrew 18,000 during the middle of each quarter

Q15) A, B and C are partners in a firm sharing profits in the ratio-of 2:2:1.
According to the terms of the partnership agreement C has to get a minimum of 6,000 irrespective of
the profits of the firm. Any deficit payable to C on account of such guarantee shall be borne by A.
Profits earned during the year ended 31st March, 2014 were
25,000. Pass journal entries in the books of the firm.

Q16) X, Y and Z were in partnership. X and Y sharing profits in the proportion of 2:1 and Z receiving
a salary of `1,790 per month plus 5% of the profit after charging
his salary and commission or 1/5th of the profit of the firm whichever is more. Any excess of the latter
-0ver the former received by Z is, under the partnership deed, to be borne by X
The profit for the year ended 31st March, 2014 amounted to `1,28,520 after charging Z' s salary.
Prepare the Profit and Loss Appropriation Account showing the division of the profit of the' year.

Q17) Pranshu and Himanshu are partners sharing profits and losses in the ratio of 3 : 2 respectively.
They admit Anshu as partner with 1/6 share in the profits of firm. Pranshu personally guaranteed
that Anshu's share of profit would not be less than 30,000 in any year. The net profit of the firm for
the year ending 31st March, 2013 was 90,000. Prepare Profit and Loss Appropriation Account.

Q18). On 1st April, 2010 A, B and C started a business in partnership and contributed 1 ,00,000, 80,000
and 60,000 respectively, as their capitals. They agreed to share profits and losses in the ratio of 3 : 2 :
1 after allowing interest on capital @ 10% p.a. and charging interest on drawings @ 12% p.a. The
drawings of the partners during the year ended 31st March, 2011 were : A `2,000; B `5,000 and C
`6,000 . C, to whom a salary of 1,000 p.m. was payable, had guaranteed that the firm would earn a
profit of 80000 before charging or allowing interest and salary payable to the partners. The actual
profit before interest and salary amounted to `70,000.

[Date] 20
 Prepare Profit and Loss Appropriation a/c and the Partner's Capital Accounts

Q18) Sachin, Kapil and Rashmi have been sharing profits in the ratio of 3 : 2 : 1 respectively. Rashmi
wants that she should share profits equally along with Sachin and Kapi l and she further wants that
change in profit sharing ratio should be applicable retrospectively for the last three years. Other
partners have no objection to this. The profits for the last three years were 60,000, 47,000 and 55,000.
Record the adjustment by means of a journal entry

Q19. A) Mohan, Vijay and Anil are partners, their capitals being 50,000, 25,000 and 20,000
respectively. In arriving at these figures, the profits for the year ended, 31st March, 2011 24,000 has
already been credited to the partners in the proportion in which they share profits. Their drawings
were 5,000 (Mohan); 4,000 (Vijay) and 3,000 (Anil) for the year ending 31st March, 2011.
Subsequently the following omissions were noticed and it was decided to bring them into Account.

(i) Interest on Capital at 10% p.a.

(ii) Interest on Drawings Mohan `250, Vijay `100 and Anil `150.

Make the necessary journal entry and prepare Capital Accounts of Partners.

(B) The capitals of A, B and C stood at `20.000, `15,000 and `10.000 respectively after the
necessary adjustment in respect of drawings and net profits. Subsequently, it was discovered that
interest on capital at 10% p.a. and interest on drawings `130, `90 and `50 respectively have been
ignored. profit of the year already adjusted was 10,000. drawings of the partners were 1,000, 800 and
500 respectively. They share profits and losses in the ratio of 2 · I : 1. Give necessary journals entry to
rectify accounts.

Practical problems:

1) A, B, and C are partners in a firm. A and B are to get annual salary of 1,20,000 p.a. each as they are
fully involved in the business. Net profit for the year is 4,80,000. Determine the share of profit to be
credited to each partner and Journalize

2) A. B and C are partners sharing profits and losses in the ratio of 2 :2 : 1 respectively. A is entitled to
a commission of 10% on the net profit. Net profit for the year is 1,10,000. Determine the amount of
commission payable to A and journalize.

3) X, Y and Z are partners sharing profits and losses equally. As per Partnership Deed, Z is entitled to
a commission of 10% on the net profit after charging such commission. The net profit before charging
commission is 2,20,000. Determine the amount of commission payable to Z.

4) A. B, C and D are partners in a firm sharing profits as 4 : 3 : 2 : 1 respectively. It earned a profit of t

1,80,000 for the year ended. 31st March, 2018. As per the Partnership Deed, they are to charge a
commission @ 20% of the profit after charging such commission which they will share as 2 :3 : 2 :3.
You are required to show appropriation of profits among the partners.

[Date] 21
5) A and B are partners. A's Capital is 1,00,000 and B's Capital is 60,000. Interest on capital is payable
6% p.a. 8 is entitled to a salary of 3,000 per month. Profit for the current year before interest and
salary to B is 80,000. prepare Profit and Loss Appropriation Account.

6) Y and Z are partners in a firm sharing profits in 2 : 2 : 1 ratio. The fixed capitals of the partners
were: 5,00,000; Y 5,00,000 and Z 2,50,000 respectively. The Partnership Deed provides that interest
on 'capital is to be allowed @ 10% p.a. Z is to be allowed a salary of 2,000 per month. The profit of the
firm for the year ended 31st March, 2018 after debiting Z' s salary was. 4,00,000. prepare Profit and
Loss Appropriation Account.

7) X and Y are partners sharing profits in the ratio of 3 :2 with capitals on 80,000 and 60,000
respectively. interest on capital is agreed @ 5% p.a. Y is to be allowed an annual salary of 6,000 which
has not been withdrawn. Profit for the year ended 31st March, 2018 before interest on capital but after
charging s salary amounted to 24,000. Provision of 5% of the profit is to be made in respect of
commission to the Manager. Prepare an account showing the allocation of profits.

8) Prem and Manoj are partners in a firm sharing profits in the ratio of 3 :2. The Partnership Deed
provided that Prem was to be paid salary of 2,500 per month and Manoj was to get a commission of
10,000 per Year. Interest on capital was to be allowed @ 5% p.a. and interest on drawings was to be
charged 6% p.a. Interest on Prem's drawings was 1,250 and on Manoj's drawings was 425. Interest on
Capitals of the partners were 10,000 and 7,500 respectively. The firm earned a profit of 90,575 for the
year ended 31st March, 2018. Prepare Profit and Loss Appropriation Account of the firm.

9) A,B and C are partners sharing profits and losses for 4:2:1. It is beinbg provided that C’s share
wouldn’t be less that `80000 in any year. The profits for the year ending 31st March 20uj16 amounted
to ` 10,50,000. Prepare prfot and loss appropriation account.

10) A, B and C are partners with capitals of `8,00,000, `6,00,000 and `5,00,000 respectively. After
providing IOC @ 8% they divide the profits in the ratio of ½, 1/3, 1/6. A and B have guaranteed that
C’s share shall not be less than `100000. During the year A and B had withdrawn `200000 and `100000.
The net profits for the year before providing IOC was `512000. Prepare current account.

11) A, B and C are partners sharing profits and losses in 3:2:1. C was guaranteed a minimum amount
of `10000 as share of profits every year. Any deficiency arising on that account will be met by A. the
profits for the 2 years were 2015: 30000 and 2016: 90000 respectively. Prepare profit and loss
appropriation account for two years.

12) X, Y and Z are partners with capitals of `400000: `300000 and `200000 respectively. They charge 8%
p.a interest on their capitals and divide the profits in the ratio of 3:2:1. X has guaranteed that Z’s
Share shall not be less than ` 50000 in any one year. Net profits for the year before charging IOC were
`252000. Prepare P&L appropriation account.

13) A, B and C are partners sharing profits and losses in the ratio of 4:3:2. It was provided that B’s
share of profits will not be less than ` 150000 per annum. The losses for the year ended 31st March
2015 were `85000, before allowing interest on loan of `100000 taken from Sandhya on 1st June 2014.

[Date] 22
 Chapter 2: Admission of a partner

Meaning, New Profit Sharing Ratio and Sacrificing Ratio

Meaning
An existing partnership firm may take up expansion/diversification of the business. In that case it
may need managerial help or additional capital. An option before the partnership firm is to admit
partner/partners, when a partner is admitted to the existing partnership firm, it is called admission
of a partner.

According to the Partnership Act 1932, a person can be admitted into partnership only
with the consent of all the existing partners unless otherwise agreed upon.

On the admission of a new partner, the following adjustments become necessary:

(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities; (iv) Distribution of
accumulated profits and reserves; and (v) Adjustment of partners’ capitals.

Adjustment in Profit sharing Ratio:

When a new partner is admitted he/she acquires his/her share in profit from the existing partners.
As a result, the profit sharing ratio in the new firm is decided mutually between the existing partners
and the new partner. The incoming partner acquires his/her share of future profits either incoming
from one or more existing partner. The existing partners sacrifice a share of their profit in the favour
of new partner, hence the calculation of new profit sharing ratio becomes necessary.

Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender some of their share in favour
of the new partner. The ratio in which they agree to sacrifice their share of profits in favour of
incoming partner is called sacrificing ratio. Some amount is paid to the existing partners for their
sacrifice. The amount of compensation is paid by the new partner to the existing partner for acquiring
the share of profit which they have surrendered in the favour of the new par

Sacrificing Ratio is calculated as follows:

Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise for the calculation of new profit sharing ratio and sacrificing ratio:

[Date] 23
(i) Only the new partner’s share is given
In this case, it is presumed that the existing partners continue to share the remaining profit in the
same ratio in which they were sharing before the admission of the new partner. Then, existing
partner’s new ratio is calculated by dividing remaining share of the profit in their existing ratio.
Sacrificing ratio is calculated by deducting new ratio from the existing ratio.

Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit Ashu as a new partner
for 1/5 share in profit. Calculate the new profit sharing ratio and sacrificing ratio.

Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak’s new share = 3/5 of 4/5 i.e. 12/25
Vivek’s new share = 2/5 of 4/5 i.e. 8/25
Ashu’s Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is :
= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5
So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25
Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25
Sacrificing Ratio = 3 : 2
Sacrificing ratio of the existing partners is same as their existing ratio.

(ii) The new partner purchases his/her share of the profit from the Existing
partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be ascertained after deducting
the sacrifice agreed from his share. It means the incoming partner has purchased some share of profit
in a particular ratio from the existing partners.

Illustration 2
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit Nisha as a new partner
for 1/6 share in profit. She acquires this share as 1/8 from Neha and 1/24 share from Parteek.
Calculate the new profit sharing ratio and sacrificing ratio.

Solution:
Neha’s and Parteek existing ratio is 5 : 3
Neha’s new share = 5/8-1/8 = 4/8 or 12/24
Parteek’s new share = 3/8-1/24 = 8/24
Nisha’s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24

[Date] 24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1.

(iii) Existing partners surrender a particular portion of their share in favour of a new partner.

In this case, sacrificied share of the each partner is to be ascertained. This ascertained by multiplying
the existing partner share in the ratio of their sacrifice. The share sacrificed by the existing partners
should be deducted from his existing share. Therefore, the new share of the existing partners is
determined. The share of the incoming partner is the sum of sacrifice by the existing partners.

Illustration 3
Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a partner. Him surrendered 1/5
of his share and Raj 1/3 of his share in favour of Jolly. Calculate the new profit sharing ratio.

Solution :
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8 Raj
surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8 So,
sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal. Him’s
new share = 5/8 – 1/8 = 4/8 and Raj’s new share = 3/8 – 1/8
= 2/8
Jolly’s New share = 1/8 + 1/8 = 2/8
New profit sharing ratio of Him’s, Raj’s and Jolly’s is = 4/8 :
2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.

GOODWILL: MEANING, FACTORS AFFECTING

GOODWILL AND VALUATION

Meaning of Goodwill
Over a period of time, a business firm develops a good name and reputation among the customers.
This help the business earn some extra profits as compared to a newly set up business. In accounting
capitalised value of this extra profit is known as goodwill. For example, your firm earns say Rs 1200
and the normal profit was expected from your firm Rs 700. The rate of return is @ 10%. In this case
goodwill is ascertained as under:

Step 1 : Excess profit = Actual profit – Desired normal profit

1200 – 700 = 500
Step 2 : Goodwill = 500*100/10
= Rs 5000
In other words, goodwill is the value of the reputation of a firm in respect of the profit earned in
future over and above the normal profit. It may also be defined as the present value of the capacity
to earn future profits. This means that a firm can be said to have goodwill only if it has capacity to
earn profit in future. A firm earning only normal profits like similar firms cannot claim to have any
goodwill.

[Date] 25
Factors affecting the Goodwill:
The factors affecting goodwill are as follows:

1. Location: If the firm is located at a central place, resulting in good sale, the goodwill tends to be
high.

2. Nature of Business: A firm that produces high value products or having a stable demand is able
to earn more profits and therefore has more goodwill.

3. Efficient management: A well managed firm earns higher profit and so the value of goodwill
will also be high.

4. Quality : If a firm is known for the quality of its products the value of goodwill will be high.

5. Market Situation : The monopoly condition to earn high profits which leads to higher value of
goodwill.

6. Special Advantages : The firm has special advantages like importing licenses, long term contracts
for supply of material, patents, trademarks, etc. enjoy higher value of goodwill.

Methods of valuation of Goodwill:

The methods of valuation of goodwill are generally decided by the partners among themselves while
preparing partnership deed. The following are the important methods of valuing the goodwill of a
firm : (i) Average Profit Method
(ii) Super Profit Method
(iii) Capitalization Method

Treatment of goodwill

The new partner acquires his/her share profit from the existing partners. ThisThis will result in the
reduction of the share of existing partners. Therefore, he/she compensates the existing partners for
the sacrifices. He/she compensates them by making payment in cash or in kind. The payment is equal
to his/her share in the goodwill.

As per Accounting Standard 10(AS-10) that goodwill should be recorded in the books only
when some consideration in money has been paid for it. Thus, if a new partner does not

[Date] 26
bring necessary cash for goodwill, no goodwill account can be raised in the books. He/she
should pay for goodwill in addition to his/her contribution for capital.

If, he/she does not pay for goodwill, then amount equal to his/her share of goodwill will be deducted
from the capital. The amount brought in by him/her as goodwill or amount of goodwill deducted
from his/her capital and divided between the existing partners in their sacrificing ratio. At the time
of admission of a new partner any goodwill appearing in the books, will be written off in existing
ratio among the existing partners.

There are different situations relating to treatment of goodwill at the time of admission of a new
partner. These are discussed as under:

1. When the amount of goodwill is paid privately by the new partner.

2. When the new partner brings his/her share of goodwill in cash.
3. When the new partner does not bring his/her share of goodwill in cash.

1. The amount of goodwill is paid privately by the new partner. If the amount of goodwill is paid
by the new partner to the existing partner privately, no journal entries are made in the books of the
firm.

2. The new partner brings his/her share of goodwill in cash and the amount of goodwill is retained
in the Business: When, the new partner brings his/her share of goodwill in cash. The amount brought
in by the new partner is transferred to the existing partner in the sacrificing ratio. If there is any
goodwill account in the balance sheet of existing partner, it will be written off immediately in existing
ratio among the partners. The journal entries are as follows: (i) The existing goodwill in the books of
the firm will be written off in existing profit ratio as; Existing Partners Capital A/c Dr. [individually]
To Goodwill A/c
(Existing goodwill written off)
(ii) For bringing cash for Capital and goodwill
Cash/Bank A/c Dr.
To Goodwill A/c
To New partner’s Capital A/c
(Cash brought in for capital and goodwill)

(iii) For amount of goodwill transferred to existing partner capital account: Goodwill A/c Dr.
To Existing Partner’s Capital/current A/c [individually]
(The amount of goodwill credited to existing partner’s capitals in sacrificing ratio)

(iv) The amount of goodwill is withdrawn by the existing partners:

(Existing Partners Capital/current A/c Dr. [individually]
To Cash/Bank A/c
(The amount of goodwill withdrawn by the existing partners)

[Date] 27
3. New partner does not bring his/her share of goodwill in cash:

When the goodwill of the firm is calculated and the new partner is not able to bring his/her share of
goodwill in cash, goodwill will be adjusted through new partner’s capital accounts. In this case new
partner’s capital account is debited for his/her share of goodwill and the existing partner’s capital
accounts are credited in their sacrificing ratio. The journal entry is as under:
New Partner’s Capital A/c Dr.
To Existing Partner’s Capital A/c [individually in sacrificing ratio]
(New partner’s share in goodwill credited to exisitng partner’s in sacrificing ratio)

Goodwill in the books of the firm and new partner does not bring his/her share of goodwill in cash:
If the goodwill account appears in the books of the firm, and the new partner is not able to bring
goodwill in cash. In this case, the amount of goodwill existing in the books is written off by debiting
the capital account of existing partners in their existing profit sharing ratio.

[Date] 28
 REVALUATION OF ASSETS AND LIABILITIES

On admission of a new partner, the firm stands reconstituted and consequently the assets are
revalued and liabilities are reassessed. It is necessary to show the true position of the firm at the time
of admission of a new partner. If the values of the assets are raised, gain will increase the capital of
the existing partners. Similarly, any decrease in the value of assets, i.e. loss will decrease the capital
of the existing partners. For this purpose a‘ Revaluation Account’ is prepared. This account is credited
with all increases in the value of assets and decrease in the value of liabilities. It is debited with
decrease on account of value of assets and increase in the value of liabilities. The balance of this
account shows a gain or loss on revaluation which is transferred to the existing partner’s capital
account in existing profit sharing ratio The following journal entries made for this purpose are:

(i) For increase in the value of assets:

Asset A/c Dr. (individually)
To Revaluation A/c
(ii) For decrease in the value of Asset
Revaluation A/c Dr. (individually)
To Asset A/c
[Decrease in the value of assets]
(iii) For increase in the value of Liabilities:
Revaluation A/c Dr. (individually)
To Liabilities A/c
[Increase in the value of Liabilities]
(iv) For decrease in the value of Liabilities:
Liabilities A/c Dr.
To Revaluation A/c
[Decrease in the value of Liabilities]
(v) For unrecorded Assets
Asset A/c [unrecorded] Dr.
To Revaluation A/c
[Unrecorded asset recorded at actual value]
(vi) For unrecorded Liability :
Revaluation A/c Dr.
To Liability A/c [unrecorded]
[Unrecorded Liability recorded at actual value] (vii) For transfer
of gain on revaluation:

Revaluation A/c Dr.

To Existing Partner’s Capital/Current A/c
[Profit on revaluation transferred to capital account in existing ratio]

[Date] 29
(viii)For transfer of loss on revaluation:
Existing Partner’s Capital/Current A/c Dr. To Revaluation A/c
[Loss on revaluation transferred to capital account in existing ratio]

ADJUSTMENTS OF RESERVES AND ACCUMULATED OR LOSSES

2727

Any accumulated profit or reserve appearing in the balance sheet at the time of admission of a new
partner, is credited in the existing partner’s capital account in existing profit sharing ratio. If there is
any loss, the same will be debited to the existing partner in the existing ratio. For this purpose the
following journal entries are made as:

(i) For distribution of undistributed profit and reserve.

Reserves A/c Dr
Profit & Loss A/c(Profit) Dr.
To Partner’s Capital A/c [individually]
[Reserves and Profit & Loss (Profit) transferred to all partners capitals A/c in existing profit sharing
ratio]
(ii) For distribution of loss
Partner’s Capital A/c Dr. [individually]
To Profit and Loss A/c [Loss]
[Profit & Loss (loss) transferred to all partners capitals A/c in existing profit sharing ratio]

[Date] 30
Q1. A and B are partners sharing profit and losses in the ratio of 5:3. C admitted for 1/4th share in
profits.

Q2. A,B and C were partners in a firm sharing profits and losses in the ratio of 3:2:1. D was admitted
for 10% profits. Calculate new PSR.

Q3. Naru and Daru were partners sharing profits and losses in the ratio of 2:3. They admitted Haru
for 25% of profits. Haru acquired profits from old partners in the ratio of 3:2.

Q4. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. A surrenders 1/5 th of
his share and B surrenders 2/5th of his share in the favor of C. Calculate new PSR.

Q5. X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1. W is admitted as a new
partner for 1/6th share. Z will retain his share. Calculate new PSR.

Q6. On 1st April 2015, Sahil and Charu enters into a partnership by sharing profits and losses in the
ratio of 4:3. For the purpose of expansion they decided to admit another partner Tanu for 1/5th share
in profits. In the year the firm earned extra profits than normal profits. So, for further expansion of
their business they decided to admit Puna for 1/7th share in profits which she acquires form sahil and
charu in the ratio of 7:3.

Q7. A and B are partners sharing profits and losses in the ratio of 3:2. They admitted C for 1/8th share
in profits. Calculate Gaining and sacrificing ratio.

Q8. A and B are partners sharing profits and losses in the ratio of 5:3. They admitted C for 3/10th
share of profits out of which half was gifted by A and the remaining share was taken by c from A and
B equally. Calculate new PSR and gaining/sacrificing ratio.

Q9. Ram and Rahim were partners sharing profits in the ratio of 5:3. They admitted Asaram for 1/5th
share in profits. Calculate the new PSR when:
i) Asaram get his share equally from old partners.
ii) He gets his share from Ram and Rahim in the ratio of 3:5.
iii) He gets his ratio from Ram alone.
iv) He gets his share from Rahim alone.
v) He gets his share form ram 5/40 and from Rahim 3/40.

Q10. A and B are partners haring profits and losses in the ratio of 3:2. They admitted C and after the
admission their PSR was 5:3:2. Calculate the Gaining/Sacrificing ratio.

Q11. X and Y are partners sharing profits and losses in the ratio of 7:3. They admitted Z as a partner,
who acquired 1/12th from X and 1/6th from Y as his share. Calculate new PSR and
Gaining/Sacrificing ratio.

[Date] 31
Q12 . Suri and Muri are partners sharing profits and losses in the ratio of 5:3. A surrendered 1/20 th
of his share and B surrenders 1/24th share in the favor of C, new partner. Calculate new PSR and
Sacrificing ratio.

Q13. Suraj and Chand are partners sharing profits in the ratio of 3:2. They admitted Tara, who
acquires 1/4th of his share from Suraj and 3/16th from Y. calculate new PSR and sacrificing ratio.

Q14. A and B are partners sharing profits and losses in the ratio of 3:2. With effect from 1st April they
decided to admit C for 1/4th share in profits for this purpose the value of goodwill was `50000. Pass
necessary journal entries of goodwill when:
• When goodwill is adjusted through partners account.
• When goodwill account is opened.

Q15. Kumar, Gupta and Kavita re partners sharing profits and losses equally. Due to expansion in
business Gupta devoted more time to business and thus demanded to raise his share of profits and
other partners agree to it so the new PSR is 1:2:1. For this purpose, good will was valued at two year’s
purchase of the average profits of last 5 years.
Year I II III IV V
Profits 400000 480000 733000 (33000) 220000
You are required to:
1. Calculate the value of goodwill.
2. Give the adjustment entry for goodwill.

Q16. A,B and C sharing profits and losses in the ratio of 5:3:2 decided to share profits and losses
equally with effect from 1st April 18. Goodwill appeared in the books as `60000, and goodwill for the
purpose of change was value at `100000. Pass the necessary journals.

Q17. Reema and Seema are partners sharing profits and losses equally. They decided to change the
PSR to 3:2. However this decision was taken after distributing the profit which was `100000.
Goodwill of the firm as at 1st April 2017 was `75000. Capital accounts credit balances were Reema:-
500000 and Seema - `600000. Pass the necessary Journal entries an prepare Capital account.

Q18. Anil, Manvi and Payal sharing profits in the ratio of 5:3:2. Their balance sheet as at 31 st March
2018 stood as follows:
Liabilities Amount Assets Amount
Capital Land and building 260000 350000
Anil 350000 Machinery 90000
Manvi 250000 Stock 70000
Payal 300000 Bills receivable 100000
Debtors 25000
General reserve 20000 30000 Cash in hand 105000
Workmen Compensation Cash at Bank
Reserve 50000
Creditors
10,00,000 10,00,000

[Date] 32
They decided to share profits and losses in the ratio of 2:2:1. They agreed that:
1. Land is to be appreciated by 10%.
2. Machinery is to be depreciated by 15%
3. Stock is to be increased to `100000.
4. A provision for doubtful debts to be created @ 5% on debtors.
5. A claim of `5000 is not likely to arise.
6. A claim on account of workmen compensation is estimated at `10000
7. An expense of `2000 was paid by the firm for getting the value of Land certified. Pass the
necessary journal entries.

Q19. A, B and C are sharing profits and losses in the ratio of 5:3:2. They decided to share the profits
in the ratio of 2:3:5 with effect from 1st April ’18. They also decide to record the effect of the following
revaluations without affecting the actual book values by passing a single entry.
Book Value (`) Revised Value (`)
Land and Building 500000 550000
Plant and machinery 250000 240000
Creditors 60000 55000
Outstanding expenses 60000 75000
Pass the single adjustment entry

Q20. Ashok, Bhim and Chetan were sharing profits and losses in the ratio of 3:2:1. Their balance sheet
as on 31st March was as follows:
Liabilities Amount Assets Amount
Creditors 100000 Land 100000 100000
Bills payable 40000 Building 200000
General reserves 60000 Plant 80000
Capitals: Ashok 200000 Stock 60000
Bhim 100000 Debtors 10000
Chetan 50000 Bank

550000 550000
They decided to share the profits and losses equally.
a) Goodwill of the firm was to be valued at `30000.
b) Land be revalued at `160000 and building be depreciated by 6%.
c) Creditors of `12000 were not likely to be claimed and hence be written off. Prepare Revaluation
account, partners’ capital account and balance sheet of the firm.

Q21. Amar, Tarun and Akhil are partners sharing profits and losses in the ratio of 5:3:2. Their balance
as at 31st March 2018 was as follows:
Liabilities Amount Assets Amount

[Date] 33
 Creditors t160000 30000 Cash 25000
Salaries payable 80000 Bank 125000
Reserves 30000 Bills receivable 10000
Profit and losses A/c Sundry debtor 100000
Capital A/c 300000 Less: provision (10000) 90000
Amar 180000 Stock 200000
Tarun 120000 Furniture 50000
Akhil Computers 300000
Air conditioners 100000

900000 900000
Profit sharing ratio among the partners was agreed to be 2:2:1 w.e.f 1st April 2018. They agreed a)
Stock to be increased to `220000.
b) Provision for doubtful debts to be reduced by `2000.
c) Furniture to be reduced by 20%.
d) Computer to be reduced to `270000.
e) Goodwill of the firm was valued at `100000.
Pass the necessary adjustment entries.

Q22. P,Q,R and S were partners in a firm sharing profits in the ratio 1:4:2:3. On 1st April ’16. Their
balance sheet was as follows:

Liabilities Amount Assets Amount

Capital A/c’s Fixed Assets 1270000
P 2,00,000 Current Assets 530000
Q 3,00,000
R 4,00,000
S 5,00,000
Sundry creditors 2,30,000
Workmen Compensation Reserve 1,70,000

18,00,000 18,00,000
From the above date, partners decided to share profits and losses equally. For this purpose the
goodwill of the firm was valued at `270000. The partners also agreed the following: a) Claim
against w\Workmen Compensation Fund was estimated at `2,00,000.
case may be.
Prepare Revaluation a/c, partner’s Capital account and the balance sheet of the new firm.

Q23. S,T, U and V were partners in a firm sharing profits and losses in the ratio of 4:3:2:1. On 1st April
’16 their balance sheet was as follows:
Liabilities Amount Assets Amount

[Date] 34
 Capitals: Fixed Assets 440000
S 200000 Current Assets 200000
T 150000
U 100000
V 50000
Creditors 80000
Workmen
compensation reserve 60000
640000 640000
From the above date partners decided to share the future in 3:2:1:4 ratio. For this purpose the goodwill
of the firm was valued at `90000. The partners also agreed for the following:
a) The claim for workmen compensation has been estimated at `70000.
b) To adjust the capitals of the partner according the new profit sharing ratio by opening partners
current accounts.
Prepare revaluation account, partner’s Capital account and the balance sheet of the firm.

Q24. Aman, Chaman and Daman are partners sharing profits and losses in the ratio of 5:4:1.
Their balance sheet as at 31st March ’18.
Liabilities ` Assets `
Creditors 110000 Cash 210000
Salaries Payable 30000 Debtors 100000
Outstanding expenses 10000 Less: Provision (10000) 90000
General reserves Capital 40000 Stock 50000
A/c: Furniture 40000
Aman 300000 Computers 200000
Chaman 150000 Car 200000
Daman 150000

Profit-sharing ratio w.e.f 1st April 2018 was decided to be equal. It was agreed among the partners to
carry out following adjustments:
a) Stock to be reduced to `40000.
b) Provisions to be written back, since all debtors were good.
c) Computers to be reduced by `20000.
d) Out of the salaries payable, `10000 was not payable as the employee left.
e) Outside expenses were not payable anymore.
f) An unrecorded asset (Motor Cycle) valued at `10000 to be accounted.
g) Goodwill of the firm was valued at `60000.
h) Total capital of the firm `600000 was to be in profit-sharing ratio, excess capital to be withdrawn
and shortfall to be made good.

Adjustment of goodwill in case of admission of a new partner.

[Date] 35
Q25. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. They decided to
admit C for 1/5th share of profits. For this purpose he paid `80000 to X and Y directly as his share of
goodwill. Pass the necessary journal entries.

Q26. A and B are partners sharing profits and losses in the ratio of 3:2. A and B surrenders their ½ of
their respective share in the favour of C. C is to bring in his share of goodwill in cash. Goodwill of
the firm was valued at ` 40000.

Q27. A and B are partners sharing profits in the ratio of 2:1. On 1st April ’18 their respective capitals
were ` 400000 and `200000. On that date, they admitted C as their new partner, the profit sharing ratio
was 3:2:1. C brought in `100000 as his share of capital and `
21000 as his share of goodwill.

Q28. Ram and Shyam are partners sharing profits in the ratio of 4:1. They agreed to asmit Mohan as
their new partner for 1/3rd share in profits. It was agree that Ram and Shyam will share equally in
future. Mohan brought in his share of goodwill `50000. Journalize.

Q29. The capitals of Sushil and satish on 1st April ’18 were `80000 and `70000. On the above date they
admitted Samir as new partner on the following terms:
j. Sameer will bring his share of goodwill in cash and `100000 as his capital.
ii. Goodwill was valued at ` 140000.
iii. That new PSR will be 2:3:3. Journalize

Q30. Lalu and jadu are partners in a firm sharing profits and losses in the ratio of 2:3. On 1st April
they admit Bandu for 1/4th. He will bring `100000 for his capital and `36000 as premium for his 1/4th
share in profits. New PSR was 3:3:2. Old partners withdrew their share of goodwill.

Q31. Arun and Varun were partners in a firm sharing profits and losses in the ratio of 1:2.
Their fixed capitals were `200000 and `300000 respectively. On 1st April ’16 they admitted Marun for
1/4th share in profits. For this purpose he brought `200000 as capital. The goodwill was calculated on
the basis of his share of goodwill. Journalize when
i. He didn’t bring anything for goodwill.
ii. He brought 50% of his share.

Q32. A and B are partner sharing profits and losses in the ratio of 3:2. They ecided to admit C for 1/4th
share in profits which he acquired 1/6th from A and 1/12th from B. goodwill already appearing in the
books of accounts was `20000. He brought in `18000 for his share of goodwill out of `30000. It was
decided to adjust the shortfall from his current account.

Q33. Rocket and Groot were partners in a firm sharing profits and losses in the ratio of 3:2 having
capitals as `200000 and `150000. They decided to admit drax as their partner for 1/3rd share on the
following terms:
1) He was to bring `200000 as his share of capital. ii.He was unable to bring anything for his
share of goodwill. Goodwill of the firm was valued at `150000. Journalize

[Date] 36
Q34. A, B and C are in partnership sharing profits and losses in the ratio 5:4:1 respectively. Two new
partners D and E are admitted. Profits are to be shared in the ratio of 3:4:2:2:1 respectively. D is to
pay `30000 for his share of goodwill but E is unable to pay for goodwill. Both the new partners
introduced `40000 as their capital. Journalize.

Q35. A and Ba re partners with capitals of `160000 and `120000 respectively. They admit C as a partner
on 1st April 2018 for 1/4th share in profits. C brings in `160000 as his share of capital.

Q36. Abhay and Beena are partners in a firm. They admit chetan as a partner for 1/4 th share in the
profits of the firm. Chetan brings `200000 as his share of capital. The total assets of the firm were
`540000 and outside liabilities are valued `100000 on that date. Give necessary entry to record
goodwill at the time of Chetan’s admission.

Q37. Balance sheet of X and Y who share profits an losses in the ratio of 3:2 as at 31st March 2018 was:
Liabilities Amount Assets Amount
Sundry Creditors 100000 Cash t10000
Reserve 60000 Debtors 50000
Profit and loss A/c 25000 Stock 70000
X’s Capital 48000 Furniture 20000
Y’s capital 32000 Plant 100000
Advertisement suspense 15000

2650000 265000

They admit Z as a partner from 1st April 2018 for 1/5th share in the profits of the firm. Z brings in
`50000 as his capital. Journalize

Q38. Hemant and nishant are partners in a firm sharing profits in the ratio of 3:2. Their capitals were
`160000 and `100000 respectively. They admitted Somesh on 1st April as a new partner for 1/5h share
in profits. Somesh brought `120000 as his share of goodwill. Journalize.

Q39. Pass the journal entries to record the following transactions on admission of Z, as a partner on
the books of X and Y who are sharing profits and losses in the ratio of 3:2.
1) Value of furniture is to be increased by 10000. .
2) Value of the furniture is to be increased to `40000. (book value 25000)
3) The value of the furniture was to be brought up by 120%. Book value being `50000.
4) Stock in undervalued by 10%. Book value being `18000
5) Stock is overvalued by 20%, book value being `36000
6) The market value of stock is `25000 (book Value of stock `20000)
7) X takes over machinery for `80000 (book value `60000)
8) 1/3rd of the machine is taken over by Y for `30000 and the balance is revalue at 57500. (Book
Value being 72000)

[Date] 37
9) Out of the amount debited to p&l a/c being paid for insurance premium. `5000 was to be carried
forward to next year.
10) Expenses on revaluation amount to `5000 paid by X.
11) A debtor whose dues were written off previous year, paid `14000 for his claim of `20000 in full
settlement.

Q40. Swadesh and Swaraj are partners sharing profits and losses equally.
Liabilities Amount Assets Amount
Creditors 50000 Cash 12000
Bills payable 15000 Cash at bank 15000
Outstanding expenses 3000 Debtors 20000
Capitals A/c’s Less: provisions (500) 19500
Swadesh 60000 Stock 20000
Swaraj 40000 Furniture 10000
Machinery 18000
Land and building 73500

168000 168000

Sambhav has admitted as a partner from 1at April 18 on the following terms
i. Sambhav will get 1/5th share in orofits and he will bring in `20000 as his capital and `5000 as his
share of goodwill.
ii. Goodwill brought in by sambhav was withdrawn by Swadesh and Swaraj.
iii.Provisions for doubtful debts should be brought upto 5% on debtors.
iv. Machinery to be depreciated by `2000 and furniture by `2500.
v. Stock to be valued at `23000
vi. Land and building to be appreciated by 20%
vii. Investments of 2000 which did not appear in the books were to be recorded
viii. A bill of `5000 of electricity was omitted to be accounted. Journalize

Q41. Ram and Rahim are partners in a firm. They share profits and losses in the ratio of 3:2. Their
balance sheets were as follows on 31st March 2018:
Liabilities Amount Assets Amount
Creditors 150000 Cash at bank 130000
Bills Payable 80000 Debtors 200000
Outstanding rent 20000 Less: Provisions (20000) 180000
Capital A/c’s Stock 50000
Ram 300000 Prepaid expenses 10000
Rahim 160000 Plant and Machine 340000

710000 710000
They admitted asaram as their partner in the firm on 1st April 2018 on the following terms:
i.He will bring in `200000 as capital and the necessary amount for goodwill
ii.The new PSR between them will be 3:2:1

[Date] 38
iii.The amount of goodwill is to be based on asaram’s share in profits and capital contributed by them.
iv.Stock to be depreciated by 10%.
v.Provisions for doubtful debts is to be only `5000.
vi.Plant and machinery are to be depreciated by 5%.
vii.Expenses on the revaluation was to be paid by the firm `1400.
viii.An unrecorded Accrued income of `2000 to be accounted.
Prepare Revaluation a/c, Capital a/c and the balance sheet of the firm.

Memorandum revaluation account

Q42. Following was the balance sheet of A, B and C who were equal partners:

Liabilities ` Assets `
Bills payable 3300 Cash 600 10800
Creditors 6000 Debtors 11400
Capital Stock 2400
A 16800 Furniture 19500
B 12600 Building
C 6000

44700 44700
They agreed to take D into partnership from 1 April 2018 and give him 1/4 share in the profits on
st th

the following terms:

i. D should bring in `9000 for goodwill and `15000 as capital.
ii. Stock and furniture be depreciated by 10%.
iii. A provision of 5% on debtors be created for Doubtful debts.
iv. A liability for `1080 be created against bills discounted.
v. The value of the building in undervalued by `8500.
vi. The valued of Assets and liabilities were not to be changed.
Give necessary entries to give effect to the above stated arrangement and prepare opening balance
sheet of the firm as newly constituted.

Q43. A and B are partners in a firm sharing profits and losses in the ratio of 5:3. C was admitted for
1/3rd share in the profits. On the date of C’s admission, the balance sheet showed a general reserve
of `60000 and a balance of `20000 in Profit and loss a/c on the assets side of the balance sheet.
Journalize.

Q44. A, B and C sharing profits and losses in the ratio of 4:3:2, decided to take D as a partner for 1/5th
share in the firm with effect from 1st April, 18. An extract of their balance sheet
Liabilities Amount Assets Amount
Workmen Compensation fund 90000
Case 1: There is no liability regarding the fund.
Case 2: if a claim on account is estimated at `45000.
Case 3: If a claim in account is estimated at `99000. Journalise

[Date] 39
Q45. A, B and C sharing profits and losses in the ratio of 4:3:2 decided to admit D as a new partner
with effect from 1st April 2018. An extract of their balance sheet as at 31st March 18:
Liabilities ` Assets `Amount
Investment Fluctuation Fund 18000 Investment (at cost) 200000
Show the accounting treatment:
Case 1: If there is no other information
Case 2: If the market value of Investment is 200000.
Case 3: If the market value of Investment is 191000.
Case 4: If the market value of Investment is 173000.
Case 5: If the market value of Investment is 218000.

Q46. P, Q and R are partners were partners sharing profits and losses in the ratio of 6:3:1. They
decided to take S into partnership with effect from 1st April 2018. The new profit sharing amongst
them of 3:3:3:1. They also decided to the effect the following without changing the book values, by
passing an adjustment entry:
Book Value (`)
General Reserves 180000
Contingency Reserves 30000
Profit and losses A/c (cr.) 90000
Advertisement Suspense a/c (Dr) 120000
Pass the single adjustment entry.

Q47. W and R are partners sharing profits in the ratio of 3:2. Their balance sheet was as follows:
Liabilities ` Assets `
Sundry creditors 20000 Cash 12000
Provision for bad debts 2000 Debtors 18000
Outstanding salaries 3000 Stock 20000
General reserve Capital: 5000 Furniture 40000
W Plant and machinery 40000
R 60000
40000

130000 130000
On the above date C was admitted for 1/6 share on the following terms
th

1. C will bring in `30000 as his capital and `10000 for his share of goodwill, half of which was
withdrawn by the old partners.
2. Debtors 1500 will be written off as nad debts and a provision of 5% will be created for bad and
doubtful debts.
3. Outstanding salary will be pai off.
4. Depreciate stock by 10%, furniture by 500 and machinery by 8%.
5. Investments worth `2500 were not recorded in the books of accounts. Journalize

Q48. A and B are partners sharing profits in the ratio of 3:2. Their balance sheet was as follows:
Liabilities ` Assets `

[Date] 40
 Sundry creditors 250000 Cash 12000
Outstanding salaries 100000 Debtors 18000
General reserve Capital: 150000 Stock 20000
A Furniture 40000
B 800000 Plant and machinery 40000
400000

1700000 1700000
On the above date C was admitted for 1/3rd share on the following terms:
i. C will bring `500000 as capital and `200000 as his share of goodwill but the actually contributed
only `120000 towards goodwill.
ii. Building and Machinery to be depreciated by 5%.
iii. Stock to be revalued at `400000.
iv. There is an unrecorded asset worth `120000.
v. One month salary of `3000 is outstanding.
Prepare Revaluation account capital account and balance sheet of the firm.

Q49. Murari and Vohra were partners in a firm with capital of `120000 and `160000 respectively. On
1st April 2010 they admitted Yadav as one fouth share in profits on his payment of `200000 as his
capital and `90000 for his share of goodwill.
On that date the creditors of Murari and Vohra were `60000 and bank overdraft was `15000. Their
Assers apart from cash included stock `1000; Debtors `40000; plant `80000; Land `200000. It was
agreed that stock should be depreciated by `2000; Plant by 20%, `5000 should be written off as Bad
debts and Land should be appreciated by 25%. Prepare revaluation a/c, capital a/c and balance sheet
of the firm.

Q50. Subash and Asha are partners sharing profits in the ratio of 3:2. Their balance sheet was as
follows:
Liabilities ` Assets `
Sundry creditors 10000 Cash 22000
Provision for bad debts 8000 Less: Provisions (1000) 21000
Outstanding salaries 30000 Stock 11000
General reserve Capital: 15000 Bank 21000
W Plant and machinery 18000
R 15000 Land 12000
10000 Advertisement suspense 5000

88000 88000
On the above date Tanya was admitted for 1/6th share on the following terms:
i. Value of land and building by increased by `3000.
ii. Value of land to be increased by `2500.
iii. Provision for doubtful debts increased by `1500.
iv. A bill of exchange of `10000 which was previously written discounted with banker was dishonored
on 31st march but no entry was passed for dishonor.

[Date] 41
v. Liability against workmen compensation fund was determined at `20000.
vi. Tanya brought in `10000 as his share of goodwill.
vii. Tanya was to bring in further cheque of `15000 as her capital. Journalize.

Q51. A and B are partners sharing profits in the ratio of 3:2. Their balance sheet was as follows:
Liabilities ` Assets `
Workmen Compensate Fund 5600 Cash 10000
Outstanding 3000 Debtors 80000
salaries Creditors 30000 Less: (4000) 76000
Capital: Stock 20000
A 50000 Machinery 38600
B 60000 Profit and loss a/c 6000

110000 130000
On the above date C was admitted for 1/6 share on the following terms:
th

i. C brings in `40000 as his share of capital but he is unable to bring in any share for his goodwill.
C’s share is adjusted by opening a current account.
ii. The new PSR will be 3:2:1.
iii. Bad debts amounted to `6000
iv. Claim on workmen compensation fund was estimated to be `3000.
v. Creditors were to be paid `2000 more.
vi. Shikha a customer who was previously written off as bad debts paid `2500.
vii. `2000 to be provided for unrecorded liability.
viii. Goodwill was valued at 11/2 years’ purchase of average profits of last 3 years, less `12000. The
profits of the last year amounted to `10000; `20000, `30000 respectively. Prepare revaluation
a/c, Capital a/c and balance sheet of the firm.

Q52. Following is the balance sheet of A and B as at 31st March 2018 who are partners in a firm sharing
profits and losses in the ratio of 3:2 respectively.

Liabilities ` Assets `
Creditors 75000 Cash 25000
General Reserve Capital: 60000 Debtors 100000
A Less: Provision (4000) 96000
B 300000 Stock 74000
Current a/c 150000 Investment 4000
A Fixed Assets 360000
B 50000 Goodwill 50000
10000

645000 645000
C admitted as a new partners on 1st April on the following terms:
i. Provision for doubtful debts to be maintained at 5% on debtors.

[Date] 42
ii. An outstanding bill for repairs `25000 will be brought into books.
iii. An unaccounted income of `7500 to be provided for.
iv. A takes over investments at an agreed value of `30000.
iv. Expenses on revaluation amounted to `5000 which was paid by A.
v. Stock is to be revalued at `79000.
vi. New PSR will 4:3:2.
vii. C will bring in `100000 as his capital.
viii. C is to pay his share of profit valued at twice the average profits of last three years which were
`150000, `130000 and `125000 respectively. Half of the goodwill was withdrawn by A and B.

Q53. A and B were partners sharing profits and losses equally. Their balance sheet as at 31 st March
was as follows:
Liabilities ` Assets `
Creditors 260000 Cash 100000
General Reserve Capital: 10000 Debtors 150000
A Less: Provision (10000) 140000
B 410000 Stock 150000
Current a/c 200000 Land and Building 300000
A Plant and Machinery 200000
B 80000 Furniture 50000
40000 Bills receivable 60000

1000000 1000000
C admitted as a partner for 1/4th share in profits under the following conditions:
i. C is to introduce `250000 as his capital.
ii. Goodwill is agreed to be nil.
iii. It is found that the creditors included a sum of `15000 which was not to be paid.
iv. A liability of `20000 to workmen compensation was due.
v. It was decided henceforth to use fluctuating capital method.
vi. Bills accepted worth ` 40000 issued by creditors were not recorded in the books.
vii. A provides `100000 loan to the business carrying interest @12% p.a.
viii. Prepare revaluation a/c, Capital a/c and balance sheet of the new firm.

Adjustment of Capital

ADJUSTMENT OF PARTNER’S CAPITAL

Sometime, at the time of admission, the partners’ agree that their capitals be adjusted in proportion
to their profit sharing ratio. For this purpose, the capital accounts of the existing partners are
prepared, making all adjustments, on account of goodwill, general-reserve, revaluation of assets and
resettlement of liabilities. The actual capital so adjust will be compared with the amount of capital
that should be kept in the business after the admission of the new partner. The excess if any, of

[Date] 43
adjusted actual capital over the proportionate capital will either be withdrawn or transferred to
current account and vice versa. TheThe partners may decide to calculate the capitals which are to be
maintained in the new firm either on the basis of new Partner’s Capital and his profit sharing ratio
or on the basis of the existing partner’s capital account balances.

1. Adjustment of existing partner’s capital on the basis of the capital of the new
partner:
If the capital of the new partner is given, the entire capital of the new firm will be determined on the
basis of the new partner’s capital and his profit sharing ratio. the capital of other partners is
ascertained by dividing the total capital as per his profit sharing ratio. If the existing capital of the
partner after adjustment is in excess of his new capital, the excess amount is withdrawn by partner
or transferred to the credit of his current account. If the existing capital of the partner is less than his
new capital, the partner brings the short amount or makes transfer to the debit of his current account.

The journal entries are made as under:

(i) when excess amount is withdrawn by the partner or transferred to current account.
Existing Partner’s Capital A/c Dr.
To Bank A/c or Partner Current A/c
(Excess amount is withdrawn by the partner or transferred to current account]

(ii) For bringing in the Deficit amount or Balance transferred to current account. Bank A/c or
Partner Current A/c Dr.
To Existing Partner’s Capital A/c
(Bringing the Deficit amount or Balance transferred to current account)

Q54. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. The remaining capitals
of A and B after adjustment are `80000 and `60000 respectively. They admit Z as partner on his
contribution of `35000 as capital for 1/5th share in profits to be equally acquired by both X and Y. the
capital account of Z is to be adjusted on the basis of proportionate capital of Z. calculate the amount
of cash to be introduced by X and Y.

Q55. Badal and tara were partners sharing profits and losses in the ratio of 3:2. Their balance sheet
on 31st March 18 was as follows:
Liabilities ` Assets `
Creditors 17000 Cash 6000
General Reserve 4000 Debtors 15000
Workmen compensation fund 9000 Less: Provision (2000) 13000
Investment fluctuation fund 11000 Investment 20000
Capital: Plant 14000
A 30000 Land and building 38000
B 20000

93000 93000

[Date] 44
On that date, they admitted Sitara as their new partner for 1/5th share of profits on terms:
i.She will bring 20000 as her capital and `4000 as her share of goodwill.
ii. All debtors were considered to be good.
iii. The market value of investments were `15000.
iv. There was a liability of ` 6000 for workmen compensation.
v. Capitals of Badal and Tara were to be adjusted on the basis of Sitara’s capital by opening
current account. Prepare revaluation a/c, Capital a/c and balance sheet of firm

Q56. A and B are in partnership sharing profits and losses in the ratio of 3:2. Their balance sheet is
follows:
Liabilities ` Assets `
A’s capital 88000 Goodwill 5000
B’s capital 127000 Land and building 30000
Workmen Compensation fund 10000 Investments (Market Value 22500) 25000
Investment Fluctuation reserve Debtors 50000
Employees provident fund 5000 Less: Provision (5000)
C’s Loan Stock 45000
5000 Bank 150000
150000 Advertisement suspense a/c 125000
5000

385000 385000
On April 2018 they agreed to take X as a partner to increase the Capital for the terms:
1st
i. A will sacrifice 1/3rd of his share while B he sacrifices 1/10th from his share in favor of C.
ii. C’s loan will be converted into his capital.
iii. C brings his 60% share of his goodwill.
iv. Goodwill is to be valued at 2 years purchase of super profits of last three completed years. Profits
of the last 3 years was as follows: `240000, `465000 and `690000. The normal profits in the similar firm
was `315000.
v. Land was undervalued by `25000. Stock was found Overvalued by `35000. Provision for doubtful
debts were to be maintained at 5% of the debtors.
vi. Claim on workmen compensation fund was `5000. An unrecorded asset was `5000 to be provided
for. A debtors whose dues were `25000 written off as bad previously, paid 20000 in full settlement.
vii. Capital accounts of old partners were to be adjusted on the basis of incoming partners.

Q58 A,B and C are partner in a firm sharing profits and losses in the ratio of 3:2:1. On 1 st April 2018
their balance sheet was as follows:
Liabilities ` Assets `

[Date] 45
 A’s capital 350000 C’s current a/c 14000
B’s capital 300000 Land and building a/c 350000
C’s capital 250000 Plant 135000
A’s Current a/c 8000 Furniture 160000
B’s Current a/c 12000 Investment 73000
General reserve 30000 Bills receivable 34000
Profit and loss a/c 14000 Debtors 87000
Creditors 160000 Stock 274000
Bills payable 90000 Bank 87000

1214000 1214000
On the above d was admitted to the firm on the following terms:
i. D will bring in `100000 as his capital in the firm and will get 1/6th in profits
ii. He bring in necessary amount of cash for his goodwill. Goodwill of the firm was valued at
`180000.
iii. The new PSR is 2:2:1:1.
iv. A bill receivable of `14000 discounted by bank was dishonored, which was to be recorded in the
books.
v. The value of stock, Furniture and Investment was to be reduced by 20% whereas the value of
Land and plant was to be increased by 20% and 10% respectively.
vi. The capitals of A,B and C were to be adjusted on the basis of D’s capital through their current
a/c.
Prepare revaluation a/c, Capital a/c and balance sheet of the firm.

Q59. Following is the balance sheet of the firm of A and B as at 31st March 2018 was:
Liabilities ` Assets `
Creditors 10000 Plant 10000
General Reserve 15000 Land 8000
Workmen compensation fund 5000 Debtors 12000
Capital: Less: (1000) 11000
A 10000 Stock 12000
B 10000 cash 9000

50000 50000
On 1st April 2018 they agreed to admit C into partnership on the following terms:
i. Provision for doubtful debts would be increased to `2000.
ii. Value of land and building would be increased to `18000.
iii. The value of stock to be increased by `4000.
iv. The liability against Workmen compensation fund is determined at `2000.
v. C will bring in `10000 as his share of goodwill.
vi. C will bring in further cash as would make his capital equal to 20% of the total capital of the new
firm after revaluation of assets and liabilities.

[Date] 46
Q60. The balance sheet of the Madan and Raju who share profits and losses in the ratio of 3:1. Their
balance sheet on 31st march was as follows:
Liabilities ` Assets `
Creditors 28000 Cash 10000
General Reserve 12000 Debtors 65000
Workmen compensation fund 20000 Less: Provision (5000) 60000
Capital: Investment 30000
Madan 60000 Plant 50000
raju 40000 Patents 10000

160000 160000
They decided to admit Teka on April for 1/4 share in future profits on the terms:
1st th

i. Gopal should bring in `25000 as his share of goodwill

ii. The unaccounted income of `500 was to be provided for.
iii. The market value of the investment were ` 45000.
iv. A debtor who was written bad previously paid `800 in settlement of his dues.
v. A claim of `2000 on account of workmen compensation fund to be provided for.
vi. Patents were undervalued by `5000.
vii. Gopal to bring in necessary cash to make his capital proportionate to 1/4th of the total capital of
the firm after all adjustments.
Prepare Revaluation a/c, Capital a/c and the balance sheet of the firm.

Q61. Ranveer and Deepika are partners in a fiem sharing profits and losses in the ratio of 2:1. Since
they were having difficulties in running their business they decided to admit Ranbir to their firm for
1/3rd share in profits. On that date their balance sheet was as follows:
Liabilities ` Assets `
Creditors 30000 Machinery 120000
General Reserve 30000 Furniture 80000
Employee provident fund 4000 Stock 50000
Capital: Debtors 30000
Ranveer 120000 Cash 20000
Deepika 80000

300000 300000
It was decided to:
i. Reduce the value of stock by `5000.
ii. Depreciate furniture by 10% and Machinery by 5%.
iii. `3000 of debtors were proven bad. A provision of 5% was to be created on debtors.
iv. Goodwill of the firm was valued at `45000.
Ranbir brought 50% of his goodwill in cash and proportionate capital in the firm.

Q62. A,B and c are parnters in firm sharing profits and losses in the ratio of 3:2:1. On 31st march their
balance sheet was as follows:

[Date] 47
 Liabilities ` Assets `
Creditors 84000 Bank 17000
General Reserve Capital: 21000 Debtors 23000
A Stock 110000
B 60000 Investments 30000
C 40000 Furniture 10000
20000 Machinery 35000

225000 225000
On the above date they decided to admit D on the following terms:
i. The new PSR amongst the partners would be 2:2:1:1.
ii. Goodwill of the firm was valued at `90000 and D brought his share of goodwill premium in
cash.
iii. The market value of investments were `24000.
iv. Machinery to be reduced to `29000.
v. A creditor of ` 3000 was not likely to claim his dues hence to be written back.
vi. D will bring in proportionate capital so as to give him 1/6th share in profits. Prepare
Revaluation a/c, Capital a/c and balance sheet of the firm.

[Date] 48
 Admission during the year

Q63. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. With capitals of
`120000 and `80000 respectively. Interest on capital is allowed @10% per annum. They admitted Z
into the partnership with effect from 1st January on the following terms:
i.Z to bring `10000 as his share of goodwill.
ii.Z to contribute `125000 as his share of capital.
iii.Partners capital will carry an interest on capital @12%. iv.New
PSR amongst them is going to be 9:6:4.
v.X will be entitled to a 5% commission of the net profits.
vi. The profits for the year ended 31st March 2018 before providing commission to X and interest on
capitals amounted to `80000.
vii. Prepare Profit and loss appropriation a/c for the year ended 2018 and capital a/c.

Q64. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They admit C as a
new partner on 31st March 2018. They decided to share in the ratio of 4:3:3. The balance sheet was as
follows:
Liabilities ` Assets `
Workmen Compensation Fund Goodwill 34000
Investment Fluctuation Fund 20000 Land and Building 60000
Employees provident Fund 10000 Investment (market Value`45000) 50000
C’s Loan Capital: 34000 Debtors 100000
A 300000 Less: Provision (10000)
B Stock 90000
176000 Bank 300000
254000 Advertisement suspense 250000
10000

225000 225000
Terms of C’s admission are as follows:
1. C contributes proportionate Capital and 60% of his share of goodwill in cash.
2. Goodwill of the firm was valued `500000.
3. Land was undervalued by `100000
4. Building was overvalued by `31000.
5. Claim on workmen compensation fund was `11000.
Prepare revaluation a/c, partner’s capital a/c and balance sheet of the new firm.

Practice Questions

Q1) X sold his business to Y. Calculate the value of Goodwill taking into following condtions
and the following factors : ·

[Date] 49
 a) Goodwill is valued at three year's purchase of the average profits of the last Profits of the last
four years were as : year 2009 - 10,000, year 2010 year 2011 - `53,000, year 2012 -`62,000.
Abnormal loss of `1,000 due to theft has reduced the profits of the year 2009. Profits for the
year 2010 include abnormal profit of `4,000.
b) A speculative and lottery profit of `5,000 was received during the year 2011 and was included
in that year's profit.
c) Profits of the year 2012 were reduced by `10,000 on such a machinery which was destroyed by
fire during the year

Q2) Calculate the value of goodwill as on 1st April, 2015, on the basis of 2½ year's purchase of the
average profits of the last five years. The profits and losses for the years were: 2010 80,000; 2011:
1,00,000; 2012 ·Loss 30,000; 2013 `170,000; 2014 1,60,000 and 2015 1,80,000. You are informed that the
profits of the year 2014 included profit on sale of a fixed asset amounting to 50,000 and the profits
for the year 2015 were affected by a loss due to fire amounting to 20,000.

Q3) Calculate the value of goodwill at 2 year's purchase of the average profits of the last 3 years.
The profit for the first year was 50,000, for second year twice the profit of first year and for the third
year one and half times the profit of the second year.

Q4) A firm earned net profits during the last five years as follows:

I `7,000; II. `6,500, Ill. `8,000; IV. `7,500; V. `6,000.

The capital investment of the firm is `40,000. A fair return on capital in the market is 12%. Find out
the value of goodwill of the business if it is based on three year's purchase of average super profits
of the past five years.

Q4) . A firm earns a profit of t37,000 per year. Inthe same business a 10% return is .normally expected
. The total assets of the firm are 4,00,000. The value of other liabilities `10,000. Find out the value of
goodwill.

Q5) . An existing firm has assets `4,00,000 including cash of `15,000. The partner's capital accounts
showed a balance of `3,00,000 and reserves constituted the rest If the normal rate of return is 12% and
the goodwill of the firm is valued at t50,000 at 2 ½ year's purchase of super profits, find the average
profits of the firm.

Q6) The super profits of a firm are `14,000. If the normal rate of return is 7% calculate the amount of
goodwill by super profit capitalisation method.

Q7) A partnership firm earned net profits during th last three years as follows:
Years Net Profit
2007-2008 190000
2008-2009 220000
2009-2010 250000

[Date] 50
 the capital employed in the firm throughout the above mentioned period has been `400000. Having
regard to the risk involved, 15% is considered to be a fair return on the the remuneration of all the
partners during this period is estimated to be `1,00,000 per annum. .
calculate the value of goodwill on the basis of (1) two year's purchase of super profits based on
average basis during the above mentioned three years and (ii) by capitalization of average profits
method.

Q8) Following information .relates to a partnership firm :

(a) Sundry Assets of the furn t6,80,000. Outside Liabilities `60,000.
(b) Profits and losses for the past years : Profit 2013 `50,000; Loss 2014 `20,000; Profit 2015 1,64,000
and Profit 2016 `1,80,000.
(c) The normal rate of return in a similar type of business is 12%. Calculate the value of goodwill on
the basis of:
(i) Three year's purchase of average profits.
(ii) Three year's purchase of super profits.
(iii) Capitalisation of average profits, and
(iv) Capitalisation of super profits.

Q9) X, Y and Z are partners sharing profits in the ratio of 5 : 4 : 1. It is now agreed that they will share
future profits in the ratio of3 : 3 : 4. Goodwill is valued at l,00,000. You are required to pass a single
journal entry for the treatment of goodwill

Q10) Charu and Dinesh have been sharing profits in the ratio of 3 : l. The net profits of the past four
years have been `60,000; `50,000; `90000 and `1,20,000 respectively. It is now agreed that in future
Dinesh is to have 2/5th share in profits and for that purpose goodwill is to be valued on the basis of 2
½ year's purchase of average profits of the past four years. Give journal entry for the treatment of
goodwill assuming that no Goodwill Account is to be opened.

Q11) . A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. It is now agreed that they will
share profits in the ratio of 5 : 4 : 3. Goodwill is valued at 1,20,000. Pass a single journal entry for the
treatment of goodwill.

Q12) P, Q and R are partners sharing profits and losses in the ratio of 5:3:2. From 1st April, 2016,
they decide to share profits and losses in equal proportions. The partnership deed provides
that in the event of any change in profit sharing ratio, the goodwill should be valued at three years'
purchase of the average of five years' profits. The profits and losses of the preceding five years ending
3lst March are :

Profits : 2012 : 60,000, 2013 :1,50,000, 2014 : 170,000, 2015 : 1,90,000.

Loss : 2016 : 70,000. Give the necessary journal entry to record the above change.

Q13) A and B have been carrying on business in partnership since 2002 with fixed capitals of 2,40,000
and l,20,000 respectively and sharing profits in the same proportion. They decided that with effect

[Date] 51
from April 1, 2016 they would share profits and losses in the ratio of3 : 2. For this purpose goodwill is
to be valued at three year's purchase of the average of preceding three year's profits. The profits for
the years ending 31st March re 2013 : 75,000; 2014 : 60,000; 2015 80,000 and 2016 1,30,000. Give the
necessary journal entry.

Q14) A, B and C were partners in a firm sharing profits in the ratio of 1 : 3 : 2. They decided that with
effect from 1st April, 2016, they will share profits in the ratio of 4 :6 : 5. For this purpose the goodwill
of the firm is valued at the total of preceding three year's profits. The profits were :

2011-12 `40000
2012-13 `10000 (Loss)
2013-14 `80000 (Loss)
2014-15 `120000
2015-16 `140000

Reserves and Profits appeared in the balance sheet at 40,000 and 30,000 respectively. Partners neither
want to show goodwill in the books nor ant to distribute the reserves and profits appearing in the
balance sheet. Pass a single journal entry to record the change.

Q14) . x; Y and Z are partners sharing protlts and losses in the ratio of 5 : 3 : 2. Their

position as at 31st March 2016 was as follows:

Liabilities ` Assets `

Sundry Creditors 44,000 Cash in Hand 8,000

Outstanding Expenses 10,000 Cash at Bank 22,000

Capitals: Debtors 56,000

X 2,80,000 Less: Provision (6,000) 50,000

Y 2,80,000 Stock 2,80,000

Z 1,00,000 6,60,000 Machinery 1,54,000

Building 2,00,000

7,14,000 7,14,000

It was decided that with effect from l st April 2016, profit and loss sharing ratio will be 3 : 3 : 1. They
agreed on the following terms :

(i) Goodwill of the firm be valued at two year's purchase of the average super profits oflast three
years. Average profits of the last three years are 1,08,000, while the normal profits may be taken at
66,000.

( ii) Provision on debtors be reduced by 2,000.

(iii) Value of stock be increased by 10% and machinery be valued at 1,00,000 .

[Date] 52
(iv) An item of 3,000 included in sundry creditors is not likely to be claimed. Partners do not want to
record the altered values of assets and liabilities. In the books and also do not want to record the
goodwill. Pass an entry to give effect to the above and prepare the revised balance sheet.

Q15) . Calculate the value of goodwill as on 1st April, 2015, on the basis of 2 year's of purchase of the
average profits of the last five years. The profits and losses for the years were: 2010 80,000; 2011
1,00,000; 2012 ·Loss 30,000; 2013 1,70,000; 2014 1,60,000 and 2015 1,80,000. You are
informed that the profits of the year 2014 included profit on sale of a fixed asset amounting to 50,000
and the profits for the year 2015 were defected by a loss due to fire amounting to 10,000.

Q16) . Calculate the value of goodwill at 2 year's purchase of the average profits of the last 3 years.
The profit for the first year was 50,000, for second year twice the profit of first year and for the third
year one and half times the profit of the second year.

Q17) A firm earned net profits during the last five years as follows:

I 17,000; II. `6,500, III. `8,000; IV. `7,500; V. `6,000.

The capital investment of the firm is `40,000. A fair return on capital in the market is 12%. Find out
the value of goodwill of the business if it is based on three year's purchase of average super profits of
the past five years.

Q18) A firm earns a profit of `37,000 per year. In the same business a 10% return is normally expected.
The total assets of the firm are 4,00,000. The value of other liabilities are 40,000. Find out the value of
goodwill.

Q19) An existing firm has assets of `4,00,000 including cash of `15,000. The partner's capital accounts
showed a balance of `3,00,000 and reserves constituted the rest If the normal rate of return is 12% and
the goodwill of the firm is valued at `50,000 at 2 year's purchase of super profits, find the average
profits of the firm.

Q20) An existing firm had assets of `4,00,000 including cash of `15,000. Its creditors amounted to
`20,000 on that date. The partner's capital accounts showed a balance of 4,00,000 and reserves
amounted to `80,000. If the normal rate of return is 10% and the goodwill of the firm is valued 75000
at ` 3 year's purchase of super profits, find the average profits of the firm

Q21) The super profits of a firm are `14,000. If the normal rate of return is 7% calculate the amount of
goodwill by super profit capitalization method.

Q22) A partnership firm earned net profits during the last three years as follows:

Years Net Profit `

2007-2008 190000

2008-2009 220000

2009-2010 250000

the capital employed in the firm throughout the above-mentioned period has been 400000. Having
regard to the risk involved, 15% is considered to be a fair return on the remuneration of all the

[Date] 53
partners during this period is estimated to be ` 1,00,000 per annum. Calculate the value of goodwill
on the basis of (1) two year's purchase of super profits based on average basis during the above
mentioned three years and (ii) by capitalization average profits method.

Q23) Following information .relates to a partnership firm :_

(a) Sundry Assets of the firm `6,80,000. Outside Liabilities `60,000.

(b) Profits and losses for the past years: Profit 2013 `50,000; Loss 2014 `10,000; Profit 2015 `1,64,000
and Profit 2016 `1,80,000.

(c) The normal rate of return in a similar type of business is 12%. Calculate the value of goodwill
on the basis of:

(i) Three year's purchase of average profits.

(ii) Three year's purchase of super profits.

(iii) Capitalization of average profits, and

(iv) Capitalization of super profits.

Q24 ) Charu and Dinesh have been sharing profits in the ratio of 3 : l. The net profits of the past four
years have been 60,000; 50,000; 9000 and 1,20,000 respectively. It is now agreed that in future
Dinesh is to have 2/5th share in profits and for that purpose. The goodwill is to be valued on the
basis of 2½ year's purchase of average profits of the past four years. Give journal entry for the
treatment of goodwill assuming that no Goodwill Account is to be opened.

Q25) A and B are partners sharing profits in the ratio of 5 : 3. C is admitted to the partnership for
1/4th share of future profits. Calculate the new profit sharing ratio.

Q26) A and B were partners sharing profits in the ratio of 21: 9. C was admitted on 9/21 share in the
profits. Calculate new profit-sharing ratio of the partners.

Q27). A and B are in partnership sharing profits and losses in the ratio of3:2. They admit C into
partnership with 1/4th share which he acquires equally from B. Calculate the new profit sharing
ratio.

Q28) P and Q are partners sharing profits and losses in the ratio of 4 : 3. They admit R as partner for a
1/7th share in profits which he acquires equally from P and Q. Calculate new profit sharing ratio of
the partners.

Q29) R and S share profits in the ratio of 3 : 2. They admitted T as partner for 1/8 share which will be
borne by R and S equally. Find out the new profit sharing ratio.

Q30). A firm earned net profits during the last five years as follows:

I. 7,000; II. 6,500, III. 8,000; IV. 7,500; V. 6,000.

The capital investment of the firm is 40,000. A fair return on capital in the market is 12%. Find out the
value of goodwill of the business if it is based on three year's purchase of average super profits of the
past five years.

[Date] 54
Q31) A firm earns a profit of 37,000 per year. In the same business a 10% return is normally expected.
The total assets of the firm are 4,00,000. The value of other liabilities are 10,000. Find out the value of
goodwill

Q32) P, Q and R were on partnership terms sharing profits and losses in the ratio of 6 : 3 : 1. They
decide to take S in the partnership with effect from 1st April, 2018. The new profit sharing ratio
between P, Q, R and S will be 3 : 3 : 3 : 1. They also decide to record the effect of the following without
affecting their book values, by passing a single adjustment entry:

Book value (Rs)

General reserve 180000

Contingency reserve 30000

Profit and loss a/c (cr.) 90000

Advertisement suspense a/c (Dr.) 120000

Pass the necessary single adjustment entry.

IILUSTRATION 33: (When premium for goodwill is brought in cash and half of the premium amount
is withdrawn). W and R are partners in the firm sharing profits in the ratio of 3:2. Their balance sheet
as on 31st march, 2016 was as follows:

Balance sheet as on 31st march 2016

Capital and Amount Assets Amount

Liabilities
Capitals: Cash 12000
W 60000 Debtors 18000
R 40000 Stock 20000
Sundry creditors 20000 Furniture 40000
Provisions for bad 2000 Plant and machinery 40000
debts
Outstanding salary 3000
General reserve 5000
130000 130000

On the above date, C was admitted for 1/6th share in the profits on the following terms:

i) C will bring Rs.30000 as his capital and Rs.10000 for his share of goodwill premium, half of
which will be withdrawn by W and R.

ii) Debtors Rs.1500 will be written off as bad debts and a provision of 5% will be created for
bad and doubtful debts.

iii)outstanding salary will be paid off.

iv)stock will be depreciated by 10%, furniture by Rs.500 and plant and machinery by 8%.

[Date] 55
 v)investments Rs.2500 not mentioned in the balance sheet were to be taken into account.

vi)A creditor of Rs.2100 not recorded in the books was to be taken into account.

Pass necessary journal entries for the above transactions in the books of the firm on C`s admission.

ILLUSTRATION 34: (when the new partner brings in only a part of goodwill in cash). A and B are
partners sharing profits and losses in the ratio of 3 : 2. On 31st march, 2018, their balance sheet was as
follows:

Capital and Amount Assets Amount

Liabilities
Capital a/cs: Cash in hand 25000
A 800000 Cash at bank 575000
B 400000 Debtors 50000
Creditors 250000 Stock 300000
Bills payable 100000 Building 500000
General reserve 150000 Machinery 200000
Goodwill 50000

1700000 1700000

They agree to admit C as a partner with effect from 1st April, 2018 with 1/3rd share on the following
terms:

i)C will bring in Rs.500000 as capital and Rs.200000 as his share of goodwill but he actually
contributed only Rs.120000 towards goodwill.

ii)Building and machinery to be depreciated by 5%.

iii)Stock to be revalued at Rs.400000.

iv)There is an unrecorded asset worth Rs.120000.

v)One month salary of Rs.30000 is outstanding.

Prepare revaluation account, bank account, capital accounts of partners and the balance sheet after
the admission of C.

ILLUSTRATION 38: Following is the balance sheet of A and B as at 31st March, 2018 who are
partners in a firm sharing profits and losses in the ratio of 3 : 2 respectively:

Capital and Liabilities Amount Assets Amount

[Date] 56
 Capital A\cs: Cash at bank 25000
A 300000 Debtors 100000
B 150000 450000 Less: provision for doubtful debts 4000 96000
Current A/cs: Stock 74000
A 50000 Investments 40000
B 10000 60000 Fixed assets (tangible) 360000
Creditors 75000 goodwill 50000
General reserve 60000

645000 645000

C is admitted as a new partner on 1st April, 2018 on the following terms:

i)Provision for doubtful debts is to be maintained at 5% on debtors.

ii)An outstanding bill for repairs Rs.25000 will be brought into books.
iii)An unaccounted accrued income of Rs.7500 be provided for.
iv)A takes over the investments at an agreed value of Rs.30000.
v)Expenses on revaluation amounting to Rs.5000 are paid by A.
vi) stock is revalued at Rs.79000.
vii) New profit sharing ratio of partners will be 4 : 3 : 2.
viii) C will bring in Rs.100000 as his capital.
ix) C is to pay an amount equal to his share in firm`s goodwill valued at twice the average profit of
the last three years which were Rs.150000, Rs.130000 and Rs.125000 respectively.
x) Half of the amount of goodwill is to be withdrawn by A and B.
prepare revaluation account, partners` capital and current accounts, and the balance sheet of the new
firm.
ILLUSTRATION 39: A and B are partners sharing profits and losses equally. Their balance sheet as at
31st March, 2018 is given below:

Capital and Liabilities Amount Assets Amount

Capital A\cs: Land and building 300000
A 300000 Plant and machinery 200000
B 200000 500000 Furniture and fittings 50000
Current A\cs: Stock 150000
A 80000 Debtors 150000
B 60000 140000 Less: provision for doubtful debts 10000
Creditors 260000 bills receivable 140000
Bills payable 100000 bank 60000
100000
1000000 1000000

C is admitted as a partner for 1\4th share on 1st April, 2018, under the following terms:

i)C is to introduce Rs.250000 as capital.

ii)Goodwill is agreed to be nil.

[Date] 57
iii)It is found that the creditors included a sum of Rs.15000 which was not to be paid.
iv)A liability for compensation to workmen amounting to Rs.20000.
v)Provisions for doubtful debts is to be credited @ 10% on debtors.
vi)It was decided to henceforth follow fluctuating capital method.
vii)Bills accepted worth Rs.40000 issued by creditors were not recorded in the books.
viii)A provides Rs.100000 loan to the business carrying interest @ 12% p.a.
prepare revaluation account, partners` current accounts, partners` capital accounts and balance sheet
of the new firm.

ILLUSTRATION 40: Charu and Harsha were partners in a firm sharing profits in the ratio of 3 : 2. On
1st April, 2014, their balance sheet was as follows:

Capital and Liabilities Amount Assets Amount

Creditors 17000 Cash 6000
General reserve 4000 Debtors 15000
Workmen compensation reserve 9000 Investments 20000
Investment fluctuation fund Plant 14000
Provision for bad debts 11000 Land and building 38000
Capital A\cs
Charu 2000
Harsha
30000
20000
93000 93000

On the above date vaishali was admitted for 1/4th share in the profits of the firm on the following
terms:

i)Vaishali will bring Rs.20000 for her capital and Rs.4000 for her share of goodwill premium.
ii)All debtors were considered good.
iii)The market value of investments was Rs.15000.
iv)There was a liability of Rs.6000 for workmen compensation.
Prepare revaluation account and partners` capital accounts.

ILLUSTRATION 41: On 31st March, 2010, the balance sheet of W and R who shared profits in 3 : 2
ratio was as follows:

Capital and Liabilities Amount Assets Amount

Creditors 20000 Cash 5000
Profit and loss a\c 15000 Sundry debtors 20000
Capital A\cs: Less: provision 700 19300
W 40000 Stock 25000
R 30000 70000 Plant and Machinery 35000
Patents 20700

[Date] 58
 105000 105000

On this date B was admitted as a partner on the following conditions:

i)B will get 4/15th share of profits.
ii)B had to bring Rs.30000 as his capital
iii)He would pay cash for his shares of goodwill which would be based on 2.5 years purchase of
average profits of past 4 years.
iv)the assets would be revalued as under:
sundry debtors at book value less 5% provision for bad debts. Stock at Rs.20000, plant and
machinery at Rs.40000.
v)The profits of the firm for the years 2007, 2008 and 2009 were Rs.20000, Rs.14000 and Rs.17000
respectively.
Prepare revaluation account, partners capital accounts and the balance sheet of the new firm.

Illustration 42: A and B are in partnership sharing profits and losses in the ratio of 3 : 2. Their balance
sheet as on 31st March, 2018 is as under:

Capital and Liabilities Amount Assets Amount

Capital A\cs: Goodwill 5000
A 88000 Land and building 30000
B 127000 215000 Investments (market value Rs.22500) 25000
Workmen compensation reserve 10000 Debtors 50000
Investment fluctuation reserve Less: provision for doubtful debts: 5000 45000
Employees` provident fund 5000 Stock 150000
C`s loan 5000 Bank balance 125000
150000 Advertisement suspense a/c 5000

385000 385000

On 1st April, 2018, they agree to take C as a partner to increase the capital base of the firm, under the
following terms:

i)A will sacrifice 1\3rd of his share while B sacrifices 1\10 from his share in favour of C.

ii)C`s loan will be converted into his capital.

iii)C brings in 60% of his share of goodwill in cash.

iv)Goodwill is to be valued at 2 years` purchase of super profit of last three completed years. Profits
for the last three years ended 31st March, are as follows:

2016- Rs.240000, 2017 – Rs.465000, and 2018 – 690000.

The normal profit is Rs.315000 with same amount of capital invested in similar industry.

[Date] 59
v)land and building was found undervalued by Rs.25000, stock was found overvalued by Rs.35000
and provision for doubtful debts is to be made equal to 5% of the debtors.

vi)claim on account of workmen compensation is Rs.5000. An unrecorded accrued income of Rs.5000

be provided for. A debtor whose dues of Rs.25000 were written off as bad debts, paid Rs.20000 in full
settlement.

Prepare revaluation account, partners` capital accounts and the balance sheet.

ILLUSTRATION 43: A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. On 1st
April, 2018, their balance sheet is as follows:

Balance sheet of A, B AND C as at 1st April,2018

LIABILITIES AMOUNT ASSETS AMOUNT

Capital A\cs: B`s current a\c 14000
A 350000 Land and building 350000
B 300000 Plant and machinery 135000
C 250000 900000 Furniture 160000
Current A\cs: Investments 73000
A 8000 Bills receivable 34000
C 12000 20000 Sundry debtors 87000
General reserve 30000 Goodwill 270000
Profit and loss account 14000 bank 91000
Creditors 160000
Bills payable 90000

1214000 1214000

On the above date, D is admitted on the following terms:

i)D will bring Rs.100000 as his capital and will get 1\6th share in profits.

ii)He will bring necessary cash for his share of goodwill premium. The goodwill of the firm was
valued at Rs.180000.

iii)The new profit sharing ratio will be 2 : 2 : 1 : 1.

iv)A bill receivable of Rs.7000 discounted with bank was dishonoured, which is to be recorded in the
books of account.

v)The value of furniture and investment is reduced by 20% whereas the value of land and building
and plant and machinery will be appreciated by 20% and 10% respectively.

Prepare revaluation account, partners current accounts, capital accounts and balance sheet.

ILLUSTRATION 44: following is the balance sheet of A and B, who had been sharing profits in
proportion of 3/4th and 1/4th as at 31st March, 2017:

LIABILITIES AMOUNT ASSETS AMOUNT

[Date] 60
 Creditors 37500 Cash at bank 22500
General reserve 6000 Bills receivable 3000
Capital a/cs: Debtors 16000
A Stock 20000
28500 44000 Office furniture 1000
B Land and building 25000
15500 87500 87500

They agree to take C into partnership on 1st April, 2017 on the following terms:

i)C pays Rs.14000 as his capital for 1/5th share in the future profits.

ii)Goodwill account be valued at Rs.20000. C is unable to bring cash for his share of goodwill.

iii)Stock and furniture be reduced by 10% and 5% provision for doubtful debts be created on debtors.

iv)Land and building be appreciated by 20%

Prepare revaluation account, partners` capital accounts and the balance sheet of the new firm.

ILLUSTRATION 45: Following is the balance sheet as at 31st March, 2018 of A and B who share
profits and losses in the ratio of 3 : 2.

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a/cs: Plant and machinery 10000
A 10000 Land and building 8000
B 10000 20000 Debtors 12000
General reserve 15000 Less: provision for
Workmen compensation doubtful debts 1000 11000
reserve 5000 Stock 12000
Creditors 10000 cash 9000
50000 50000

On 1st April, 2018, they agreed to admit C into partnership on the following terms:

i)Provision for doubtful debts would be increased by Rs.2000.

ii)Value of land and building would be increased to Rs.18000.

iii)The value of stock would be increased by Rs.4000.

iv)The liability against the workmen compensation reserved is determined at Rs.2000.

v)C brought in as his share of goodwill Rs.10000 in cash.

Prepare revaluation account, partners` capital accounts and balance sheet of the firm after C`s
admission.

[Date] 61
ILLUSTRATION 46: The balance sheet of Madan and Mohan who share profits and losses in the ratio
of 3 : 2, as at 31st March, 2010 was as follows:

LIABILITIES AMOUNT ASSETS AMOUNT

Creditors 28000 Cash at bank 10000
Workmen`s compensation 12000 Debtors 65000
reserve Less: reserve for doubtful
General reserve 20000 debts 5000 60000
Capital a\cs: Stock 30000
Madan 60000 Investments 50000
Mohan 40000 100000 patents 10000
160000 160000

They decide to admit Gopal on 1st April, 2010 for 1\4th share on the following terms:

i)Gopal shall bring Rs.25000 as his share of premium for goodwill.

ii)That unaccounted accrued income of Rs.500 be provided for.

iii)The market value of investments was Rs.45000.

iv)A debtor whose dues of Rs.1000 were written off as bad debts paid Rs.800 in full settlement.

v)A claim of Rs.2000 on account of workmen compensation to be provided for.

vi)Patents are undervalued by Rs.5000.

Prepare revaluation account, capital accounts of partners and the balance sheet of the new firm.

Illustration 47: X and Y are partners sharing profits and losses equally. Their balance sheet as on 31st
March, 2018 is given below:

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a\cs: Land and building 150000
X 150000 Plant and machinery 100000
Y 100000 250000 Furniture and fittings 25000
Current a\cs: Stock 75000
X 40000 Debtors 75000
Y 30000 70000 Less: provision for
Creditors 130000 doubtful debts 5000 70000
Bills payable 50000 Bills receivable 30000
Bank 50000
500000 500000

Z is admitted as a new partner for 1/4th share under the following terms:

i)Z is to introduce Rs.125000 as capital.

ii)Goodwill of the firm was valed at nil.

[Date] 62
iii)It is found that the creditors included a sum of Rs.7500 which was not to be paid. But it was also
found that there was a liability for compensation to workmen accounting to Rs.10000.

iv)Provision for doubtful debts is to be created @ 10% on debtors.

v)In regard to the partners` capital accounts, present fixed capital method is to be converted into
fluctuating capital method.

vi)Bills of Rs.20000 accepted from creditors were not recorded in the books.

vii)X provides Rs.50000 loan to the business carrying interest @ 10% p.a.

you are required to prepare revaluation account, partners` capital accounts, bank account and the
balance sheet of the new firm.

Illustration 48: A and B are partnership a firm sharing profits in the ratio of 3 : 2. They admit C as a
partner on 1st April, 2018 on which date the balance sheet of the firm was:

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a\cs: Building 50000
A 60000 Plant and machinery 30000
B 40000 100000 Stock 20000
Creditors 20000 Debtors 10000
Bank 10000
120000 120000

You are required to prepare revaluation account, partners` capital account and balance sheet of the
new firm after considering the following:

i)C brings in Rs.30000 as capital for 1/4th share. He also brings Rs.10000 for his share of goodwill.

ii)part of stock which had been included at cost of Rs.2000 had been badly damaged in storage and
could only expect to realise Rs.400.

iii)Bank charges had been overlooked and amounted to Rs.200 for the year 2017-18.

iv)Depreciation on building of Rs.3000 had been omitted for the year 2017-18.

v)A credit for goods for Rs.800 had been omitted from both purchases and creditors although the
goods had been correctly included in stock.

vi)An expense of Rs.1200 for insurance premium was debited in the profit and loss account of 2017-18
but Rs.600 of this are related to the period after 31st March, 2018.

ILLUATRATION 49: A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2.
Following is their balance sheet as at 31st March, 2018:

LIABILITIES AMOUNT ASSETS AMOUNT

[Date] 63
 Capital a/cs: Building 35000
A 50000 Machinery 25000
B 30000 80000 Stock 15000
Creditors 20000 Debtors 15000
Investments 5000
Bank 5000
100000 100000

C is admitted as a partner on 1st April,2018 on the following terms:

i)C is to pay Rs.20000 as capital for 1\4th share. He also pays Rs.5000 as premium for goodwill.

ii)Debtors amounted to Rs.3000 is to be written off as bad and a provision of 10% is created against
doubtful debts on the remaining amount.

iii)No entry has been passed in respect of a debt of Rs.300 recovered by A from a customer, which
was previously written off as bad in previous year. The amount is to be paid by A.

iv)Investments are taken over by B at their market value of Rs.4900 against cash payment.

You are required to prepare revaluation account, partners` capital accounts and new balance sheet.

ILLUSTRATION 50: X and Y are partners sharing profits and losses in the ratio of 3\4 and 1\4.
Theior balance sheet as at 31st march, 2018 is:

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a/cs Land and building 125000
X 150000 Furniture 5000
Y 80000 230000 Stock 100000
Workmen compensation Sundry debtors 80000
reserve 20000 Bills receivable 15000
Sundry creditors 150000 Cash at bank 100000
Bills payable 37500 Cash in hand 12500
437500 437500

They admit Z into partnership on 1st April, 2018 on the following terms:

i) Goodwill is to be valued at Rs.100000.

ii) Stock and furniture to be reduced by 10%.

iii) A provision for doubtful debts is to be created @ 5% on sundry debtors.

iv) The value of land and building is to be appreciated by 20%.

v) Z pays Rs.50000 as his capital for 1\5th share in the future profits.

You are required to show revaluation account, partners` capital accounts and balance sheet of the
new firm.

[Date] 64
ILLUSTRATION: Deepika and Rajshree are partners in the firm sharing profits and losses in the ratio
of 3 : 2. On 31st march2018 their balance sheet was :

LIABILITIES AMOUNT ASSETS AMOUNT

Sundry creditors 16000 Cash in hand 1200
Public deposits 61000 Cash at bank 2800
Bank overdraft 6000 Stock 32000
Outstanding liabilities 2000 Prepaid insurance 1000
Capital a\cs: Sundry debtors 28800
Deepika 48000 Less: provision for doubtful
Rajshree 40000 88000 debts (800) 28000
Plant and machinery 48000
Land and building 50000
Furniture 10000

173000 173000

On the above date, the partners decide to admit Anshu as a partner on the following terms:

i)The new profit sharing ratio of Deepika, Rajshree and Anshu will be 5 : 3 : 2 respectively.

ii) Anshu shall bring in Rs.32000 as his capital.

iii) Anshu is unable to bring in any cash for his share of goodwill. Partners, therefore, decide to
calculate the goodwill on the basis of Anshu`s share in the profits and the capital contribution made
by her to the firm.

iv) Plant and machinery is to be valued at Rs.60000, stock at Rs.40000 and the provision for doubtful
debts is to be maintained at Rs.4000. value of land and building has appreciated by 20%. Furniture
has been depreciated by 10%.

v) There is an additional liability of Rs.8000 being outstanding salary payable to employees of the
firm. This liability is not included in the outstanding liabilities, stated in the above balance sheet.
Partners decide to show this liability in the books of account of the reconstituted firm.

Prepare revaluation account, partners` capital accounts and balance sheet of Deepika, Rajshree and
Anshu.

ILLUSTRATION: A and B are in partnership sharing profits and losses in the proportion of 2\3 and
1\3rd respectively. Their balance sheet as at 31st March, 2018 was: cash Rs.1000, sundry debtors
Rs.15000, stock Rs.22000, plant and machinery Rs.4000, sundry creditors Rs.2000, bank overdraft
Rs.15000, A`s capital Rs.15000, B`s capital Rs.10000. on 1st April, 2018 they admitted C into
partnership on the following terms:

i)C to purchase one-quarter of the goodwill for Rs.3000 and provide Rs.10000 as capital. C brings in
necessary cash for goodwill and capital.

ii)Profits and losses are to be shared in the proportion of one-quarter to A, one-quarter to B and one
quarter to C.

[Date] 65
iii)Plant and machinery is to be reduced by 10% and Rs.500 are to be provided for estimated bad
debts. Stock is to be taken at a valuation of Rs.24940.

iv)By bringing in or withdrawing cash the capitals of A and B are to be made proportionate to that of
C on their profit sharing basis.

Prepare necessary ledger accounts in the books of the firm relating to the above arrangement and
submit the opening balance sheet of the new firm.

ILLUSTRATION: The balance sheet of X, Y and Z who share profits and losses in the ratio of 3 : 2 : 1,
as on 1st April, 2018 is as follows:

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a\cs: Y`s current account 7000
X 175000 Land and building 175000
Y 150000 Plant and machinery 67500
Z 125000 450000 Furniture 80000
Current a\cs: Investment 36500
X 4000 Bills receivable 17000
Y 6000 10000 Sundry debtors 43500
General reserve 15000 Stock 137000
Profit and loss a\c 7000 bank 43500
Creditors 80000
Bills payable 45000
607000 607000

On the above date, W is admitted as a partner on the following terms:

i)W will bring Rs.50000 as his capital and get 1\6th share in the profits.

ii)He will bring necessary amount for his share of goodwill premium. Goodwill of the firm is valued
at Rs.90000.

iii)New profit sharing ratio will be 2 : 2 : 1 : 1.

iv)A liability of Rs.7004 will be created against bills receivable discounted earlier but now
dishonoured.

v)The value of stock, furniture and investments is reduced by 20%, whereas the value of land and
building and plant and machinery will be appreciated by 20% and 10% respectively.

vi)Capital accounts of the partners will be adjusted on the basis of W`s capital through their current
accounts.

Prepare revaluation account, partners` current account and capital accounts.

ILLUSTRATION: L, M and N were partners in a firm sharing profits in the ratio of 3 : 2 : 1. Their
balance sheet on 31st March, 2015 was as follows:

LIABILITIES AMOUNT ASSETS AMOUNT

[Date] 66
 Creditors 168000 Bank 34000
General reserve 42000 Debtors 46000
Capital a\cs: Stock 220000
L 120000 Investments 60000
M 80000 Furniture 20000
N 40000 240000 Machinery 70000
450000 450000

On the above date, O was admitted as a new partner and it was decided that:

i)The new profit sharing ratio between L, M, N and O will be 2 : 2 : 1 : 1.

ii)Goodwill of the firm was valued at Rs.180000 and O brought his share of goodwill premium in
cash.

iii)The market value of investments was Rs.36000.

iv)Machinery will be reduced to Rs.58000.

v)A creditor of Rs.6000 was not likely to claim the amount and hence was to be written off.

vi)O will bring proportionate capital so as to give him 1\6th share in the profits of the firm.

Prepare revaluation account, partners` capital account and the balance sheet of the new firm.

ILLUSTRATION: A and B are partners sharing profits in the ratio of 3 : 2. They admit C as a new
partner from 1st April, 2018. They have decided to share future profits in the ratio of 4 : 3 : 3. The
balance sheet as at 31st March, 2018 is given below.

LIABILITIES AMOUNT ASSETS AMOUNT

A`s capital 176000 Goodwill 34000
B`s capital 254000 Land and building 60000
Workmen compensation reserve 20000 Investment (Market value 50000
Investment fluctuation reserve 10000 Rs.45000)
Employees` provident fund 34000 Debtors 100000
C`s loan 300000 Less: provision for doubtful
Profit and loss 990000 debts 10000 90000
stock 300000
bank balance 1240000
advertisement suspense a\c 10000
1784000 1784000

Terms of C's admission are as follows:(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:2015₹ 4,80,000; 2016₹
9,30,000; 2017 ₹ 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
undervalued by ₹ 31,000.(v) Provision for Doubtful Debts is to be made equal to 5% of the debtors(vi)

[Date] 67
Claim on account of Workmen Compensation is ₹ 11,000 .Prepare Revaluation Account , Partners'
Capital Accounts and Balance Sheet.

ILLUSTRATION: Sarthak and Vansh are partners sharing profits in the ratio of 2 : 1. Since both of
them specially abled sometimes they find it difficult to run the business on their own. Mansi, a
common friend , decides to help them. Therefore, they admit her into the partnership for 1\3rd share
in profits. She brings Rs.60000 for goodwill and 60000 for her capital. At the time of admission of
Mansi, the balance sheet of Sarthak and Vansh was as under:

LIABILITIES AMOUNT ASSETS AMOUNT

Capital a\cs: Plant 66000
Sarthak 70000 Furniture 30000
Vansh 60000 130000 Investments 40000
General reserve 18000 Stock 46000
Bank loan 18000 Debtors . 38000
Creditors 72000 Less: provision for doubtful debts
4000 34000
cash 22000

238000 238000

It was decided to:

i)Reduce the value of stock by Rs.10000.

ii)Plant is to be valued Rs.80000.

iii)An amount of Rs.3000 included in creditors was not payable.

iv)Half of the investments were taken over by Sarthak and remaining were valued at Rs.25000.

prepare revaluation account, partners` capital accounts and balance sheet of reconstituted firm.
Identify the value being conveyed in the question.

ILLUSTRATION: A, B and C are partners sharing profits and losses in the ratio of 2 : 3 : 5. On 31st
March, 2018, their balance sheet was:

LIABILITIES AMOUNT ASSETS AMOUNT

Creditors 64000 Cash 18000
Bills payable 22000 Bills receivable 14000
General reserve 14000 Stock 44000
Capital a\cs: Debtors 42000
A 36000 Machinery 94000
B 44000 Goodwill 20000
C 52000 132000

232000 232000

[Date] 68
They decided to admit D into the partnership on the following terms:

i)Machinery is to be depreciated by 15%.

ii)Stock is to be revalued at Rs.48000.

iii)It is found that the creditors included a sum of Rs.12000 which was not to be paid.

iv)Outstanding rent is Rs.1900.

v)D is to bring in Rs.6000 as goodwill and 50000 for his capital for 2\5th share.

vi)The partners decided to use 10% of the profits every year in providing drinking waters in schools,
where required.

Prepare revaluation account, partners’ capital accounts, cash account and balance sheet of the new
firm. What values are being conveyed by using 10% profit in providing drinking water in schools.

ILLUATRATION: Following was the balance sheet of A, B and C who were equal partners as at 31st
March, 2018.

LIABILITIES AMOUNT ASSETS AMOUNT

Bills payable 3300 Cash 600
Creditors 6000 Debtors 10800
Capital a/cs Stock 11400
A 16800 Furniture 2400
B 12600 Building 19500
C 6000 35400

44700 44700

They agreed to admit D into partnership from 1st April, 2018 and give him 1\4th share in the profits
on the following terms.

i)D should bring in Rs.9000 for goodwill and Rs.15000 as capital.

ii)Stock and furniture be depreciated by 10%.

iii)A provision of 5% on debtors be created for doubtful debts.

iv)A liability for Rs.1080 be created against bills discounted.

v)The value of the building is undervalued by Rs.8500.

vi)The values of liabilities and assets other than cash are not to be altered.

Give necessary entries to give effect to the above stated arrangement and prepare opening balance
sheet of the firm as newly constituted.

[Date] 69
DIFFERENCE BETWEEEN REVALUATION ACCOUNT AND MEMORANDUM REVALUATION
ACCOUNT.
BASIS REVALUATION ACCOUNT
1.Purpose It is prepared to record the effect of
revaluation of assets and liabilities
when the assets and liabilities are to
appear at their revised (new) figures.
2.Parts It is not divided into two parts.
3.Transfer of The balance of the revaluation
balance account is transferred to the old
partners’ capital accounts in the old
profit sharing ratio.
MEMORANDUM REVALUATION
ACCOUNT
It is prepared to record the effect of
revaluation of assets and liabilities
when the assets and liabilities are to
appear at their old figures.
It is divided into two parts, viz. the
first part to record the changes in the
value of assets and liabilities and the
second part to nullify the changes
recorded in first part.
The balance of the first part (profit or
loss) of this account is transferred to
the capital accounts of the old
partnership their old profit sharing
ratio. The balance (profit or loss) of
the second part is transferred to the
capital accounts of all the partners
including the new partner in the new
profit sharing ratio in case of the
admission of the partner and
continuing partner in the case of
retirement of a partner.
[Date] 70
Chapter 3: Retirement of the partner

Meaning

Retirement of a partner means retiring from the firm i.e. ceasing to be a partner of the firm. A partner
may retire from the firm:

1. I there in an agreement to that effect.

2. If all partners agrees to his retirement
3. If the partnership is at will, he may provide a notice to all the other partners of his decision to
retire.

Retirement of a partner is also reconstitution of the firm under which old partnership comes to
an end and new partnership is formed among the existing and continuing partners. The firm
however continues.

Liability of a retiring partner.

Liability for the act before retirement: A retiring partner remains liable for all the acts of the firm
till his date of retirement. However, a retiring partner may be discharged from his liability by an
agreement between him and the other partners or third parties.
[Section 32(2)]

Liability for the acts after retirement: A retiring partner also continuous to be liable to third
partners for the acts of the firm even after retirement until a public notice of his retirement is
given.

Adjustments on retirement of a partner.

The adjustments required at the time of retirement of the partner are:

1) Change in profit sharing ratio i.e., determining the new profit sharing ratio and gaining ratio.
2) Valuation and Adjustment of goodwill.
3) Revaluation of assets and liability.
4) Reserves distribution.
5) Computing amount payable to the retiring partner, interest amount payable and payment made
6) Adjustment of capital (if required).
New profit sharing ratio and gaining ratio

[Date] 71
As soon as a partner retires the profit sharing ratio of the continuing lget changed. The share of
the retiring partner is distributed amongst the continuing partners. In the absence of information,
the continuing partners take the retiring partner’s share in their profit sharing ratio or in an agreed
ratio. The ratio in which retiring partner’s share is distributed amongst continuing partners is
known as gaining ratio. It is

Gaining Ratio = New Ratio – Existing Ratio

SETTLEMENT OF RETIRING PARTNER’S CLAIM

The amount due to the retiring partner is paid according to the terms of partnership agreement. The
retiring partners’ claim consists of

(a) The credit balance of Capital Account;

(b) His/her share in the Goodwill of the firm; (c) His/her share in the
Revaluation Profit:
(d) His/her share in General Reserve and Accumulated Profit;
(e) Interest on Capital
(f) But, the following deductions are made from his/her Capital Account on account of :
(a) His/her share in the Revaluation loss;
His/her Drawings and Interest on Drawings up to the date of retirement
His/her share of any accumulated losses
Loan taken from the firm

The total amount so calculated is the claim of the retiring partner. He/she is interested in
receiving the amount at the earliest. Total payment may be made immediately after his/her
retirement. However, the resources of the firm may not be adequate to make the payment to the
retiring partner in lumsum. The firm makes payment to retiring partner in instalments.

(i) Payment in Lump Sum

Retiring partners’ claim is paid either out of the funds available with the firm or out of funds
brought in by the remaining partners. The following journal entry is made for disposal of-the
amount payable to the retiring partner:

On payment of cash in lump sum.

Retiring Partner’s Capital A/c Dr.
To Cash/Bank A/c
(Being amount paid to the retiring partner)

(ii) Payment in instalments

In this case the amount due to retiring partner is paid in instalments. Usually, some amount is
paid immediately on retirement and the balance is transferred to his loan account. This loan is

[Date] 72
paid in one or more instalments The loan amount carries some interest. In the absence of any
agreement the rule under Section 37 of the Indian Partnership Act 1932 applies.

According to this rule, if the amount due to him is not paid immediately on his retirement, he can
claim interest @ 6% p.a. on the amount due. An instalment consists of two parts:

(i) Principal Amount of instalment due to retiring partner.

(ii) Interest at an agreed rate,

Interest due on loan amount is credited to retiring partners’ loan account. Instalment inclusive of
interest then is paid to the retiring partner as per schedule agreed upon.

(i) On part payment in cash and balance transferred to his/her loan account.
Retiring Partner’s Capital A/c Dr.
To Cash/Bank A/c
To Retiring Partner’s Loan A/c
(Part payment made and balance transferred to loan A/c)

(ii) Total amount due transferred to loan A/c

Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c
(Total amount due transferred to loan A/c)
(iii) For interest due

Interest on loan A/c Dr.

To Retiring Partners’ Loan A/c

(Interest due on loan)

(iv) For payment of instalment

Retiring Partners’ Loan A/c
To Cash/Bank A/c

ADJUSTMENT OF REMAINING PARTNER’S CAPITAL ACCOUNT AFTER RETIREMENT

After retirement of a partner the remaining partners may decide to adjust their capital. Often the
remaining partners determine the total amount of capital of the reconstituted firm and decide to
keep their respective capital accounts in proportion to the new profit sharing ratio. The total
capital of the firm may be more or less than the total of their capital at the time of retirement. The
new capitals of the partners are compared with the balance standing to the credit of respective
partner’s capital account. If there is a surplus in the capital account, the amount is withdrawn by
the concerned partner. The partner brings cash in case the balance in the capital account is less
than the calculated amount.

[Date] 73
Adjustment of remaining partner’s capital in their profit sharing ratio, when the total capital of
the new firm is not pre-determined.
In this case the total amount of adjusted capital of the remaining partners is rearranged as per
agreed proportion in which they share profit of the reconstituted firm. The following steps may be
adopted:
(i) Add the balance standing to the credit of the remaining partners’ capital accounts.
(ii) The total so obtained is the total capital of the firm.
(iii) This capital is divided according to the new profit sharing ratio.

[Date] 74
 Chapter 4: DEATH OF A PARTNER

On the death of a partner, the accounting treatment regarding goodwill, revaluation of assets and
reassessment of liabilities, accumulated reserves and undistributed profit are similar to that of the
retirement of a partner, When the partner dies the amount payable to him/her is paid to his/her
legal representatives. The representatives are entitled to the followings:

(a) The amount standing to the credit to the capital account of the deceased partner (b) Interest
on capital, if provided in the partnership deed up to the date of death:
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities; (f) Share of profit up to the date of
death; (g) Share of Joint Life Policy.

The following amounts are debited to the account of the deceased partner’slegal representatives:
(i) Drawings
(ii) Interest on drawings
(iii) Share of loss on the revaluation of assets and liabilities;
(iv) Share of loss that have occurred till the date of his/her death.
The above adjustments are made in the capital account of the deceased partner and then the
balance in the capital account is transferred to an account opened in the name of his/her executor.

The payment of the amount of the deceased partner depends on the agreement. In the absence of an
agreement, the legal representative of a deceased partner is entitled to interest @ 6% p.a. on the
amount due from the date of death till the date of final payment.

Calculation of profit upto the date of death of a partner.

If the death of a partner occurs during the year, the representatives of the deceased partner are
entitled to his/her share of profits earned till the date of his/her death. Such profit is ascertained by
any of the following methods:
(i) Time Basis (ii) Turnover or Sales Basis

(i) Time Basis

In this case, it is assumed that profit has been earned uniformly through out the year.
For example:
The total profit of previous year is Rs. 2,25,000 and a partner dies three months after the close of
previous year, the profit of three months is Rs. 31,250 i.e. 1,25,000 × 3/12, if the deceased partner
took 2/10 share of profit, his/her share of profit till the date of death is Rs. 6,250 i.e. Rs. 31,250 ×
2/10

[Date] 75
(ii) Turnover or Sales Basis
In this method, we have to take into consideration the profit and the total sales of the last year.
Thereafter the profit upto the date of death is estimated on the basis of the sale of the last year.
Profit is assumed to be earned uniformly at the same rate.

Comprehensive sums
Death of a Partner

ILLUSTRATION 40. P, R and S are in a partnership sharing profits in the ratio 4:3:1 respectively.
It is provided in the partnership deed that, on the death of any partner, his share of goodwill is
to be valued at half of the profits credited to his account during the previous four completed
years.

[Date] 76
R died on 1st April, 2016. The firm’s profits/losses for the last four years ended 31st March, 2013:
Rs.1, 20, 000; 2014: Rs.60, 000; 2015: Rs.20, 000 (loss): 2016: Rs.80, 000.

(i) Determine the amount that should be credited to R in respect of his share of goodwill.
(ii) Pass journal entry for adjustment of goodwill assuming that profit-sharing ratio between P and
S in future will be 3:2.

ILLUSTRATION 41. (Treatment of Goodwill). D, E, F, P and Z were partners in a firm sharing

profits and losses in the ratio of 5:4:3:2:1 respectively. Unfortunately, P and Z met with a tragic
car accident in which both of them died.

The goodwill of the firm was valued at Rs.1, 50, 000 and D, E and F decided to share the future profits
and losses in the ratio of 4:6:5 respectively.

Give journal entries to record the above.

ILLUSTRATION 42. (Treatment of Goodwill and Revaluation of Assets). Sita, Reeta and Geeta
are partners in a firm sharing profits and losses in the ratio of 4:3:1. As per the terms of Partnership
deed on the death of any partner, Goodwill was to be valued at 50% of the net profits credited to
that partner’s capital account during the last three completed years before her death. Sita died on
28th February 2012. The profits for the last five years were: 2007 – Rs.60, 000; 2008 – Rs.97, 000;
2009 – Rs.1, 05, 000; 2010 – Rs.30, 000 and 2011 – Rs.84, 000.

On the date of Sita’s death, Building was found undervalued by Rs.80,000, which was to be
considered. Calculate amount of Sita’s share of Goodwill in the firm and record the adjustment
Journal Entries of Goodwill and revaluation of Building. The new profitsharing ratio between
Reeta and Geeta will be equal.

ILLUSTRATION 43. (Death of a Partner – Amount payable to the Legal Representatives of the
Deceased Partner). X, Y and Z partners in a business sharing profits as ¾, 1/8 and 1/8 respectively
and their balance sheet as at 31st March, 2015 was:

Liabilities Rupees Assets Rupees

Capital A/cs: Plant

Debtors 5,00,000
X 5,00,000

Stock 3,50,000
Y 3,00,000
10,50,000 Bank 2,00,000
Z 2,50,000
2,50,000 2,50,000

13,00,000 13,00,000
Z died on 31st December, 2015 and the Partnership Deed provided the following:

[Date] 77
(i) The deceased partner will be entitled to his share of profits up to the date of death, calculated
on the basis of previous year’s profits.
(ii) He will be entitled to his share of goodwill of the firm, calculated on the basis of three years’
purchase of the average profits of the last four years. The net profits for the last four years ended
31st March were 2012: Rs.8, 00, 000; 2013: Rs.6, 00, 000; 2014: Rs.4, 00, 000 and 2015: Rs.2, 00, 000.
His drawings amounted to Rs.18, 000 up to the date of death. Interest on capital was to be allowed
and on drawings on the total amount).

Ascertain the amount payable to the legal representatives of the deceased partner.

ILLUSTRATION 44. A, B and C were partners in a firm sharing profits in the ratio of 5:3:2.
On 31st March, 2015, their Balance sheet was as follows:

Liabilities Rupees Assets Rupees

Creditors 11,000 Building 20,000
Reserves 6,000 Machinery 30,000
Capital A/cs: Stock 10,000
A 30,000 Patents 11,000
B 25,000 Debtors 8,000
C 15,000 70,000 Cash 8,000

=87,000 =87,000
A died on 1st October, 2015. It was agreed among his executors and the remaining partners that:

(i) Goodwill to be valued at 2 ½ years’ purchase of the average profits of the previous 4 years, which
were 2011 – 12: Rs.13, 000; 2012 – 13: Rs `12000; 13-14 `20000; 14-15 `15000..
(ii) Profits for the year 2015 – 2016 be taken as having accrued at the same rate as that of the previous
year.
(iii) Patents be valued at `8000; Machinery at ``28000; and building at `25000.
(iv) Interest on capital to be provided @ 10% p.a
(v) Half of the amount due to A to be aid immediately to the executor and the balance transfer to
his executor’s loan.
Prepare revaluation a/c, A’s Capital a/c and his executor a/c on 1st Oct 2015.

Q45. A, B and C were partners in a firm sharing profits and losses in the ratio of 5:3:2. A died on 28th
Feb 2015. The balance sheet at that date was as follows:

Liabilities ` Assets `

[Date] 78
 Capital Machinery 35000
A 12000 Furniture 6000
B 16000 Stock 15000
C 12000 Debtors 15000
General reserves 12000 Cash 3000
Creditors 22000

74000 74000
The partnership deed provided that on the death of the partner the assets and liabilities are to be
revalued. Assets and liabilities were revalued as follows:

1) Machinery `45000
2) Furniture `7000
3) A provision of 10% was to be created for doubtful debts
4) A provision of `15000 was made for Tax.
5) The goodwill of the firm was valued at `15000 was valued on his death
The amount payable to A was transferred to his executor’s account. Prepare the revaluation a/c
capital a/c’s pf the partners and the balance sheet of B and C.

Q46. The balance sheet of Joy, Julie and Saraha who were haring profits in the ratio of 4:3:3 on 31st
march 2018 their balance sheet was as follows:

Liabilities ` Assets `
Capital Cash 48000
Joy 180000 Stock 132000
Julie 150000 Investments 141000
Sara 120000 Building 180000
Bills payable 30000 Joy’s Loan 30000
General reserves 15000
Creditors 36000
531000 531000

Joy dies on 31st May 2018, The deed provided for the following on the death of a partner.

i) Goodwill of the firm was to be valued at 2 yyears purchase of average profits for the last 3 years
which were as follows: 120000.
ii) Joy’s share of profit till the date of his death was to be calculated on the basis of last years’ profit.
iii) Sales the year ended 31st March 2018 amounted to `120000 and from 1st April to 31st Mat 2018
`450000. Profit for the year ended was`300000.
iv) Interest on capital was to be provided @ 10% p.a

[Date] 79
v) According to his will , the executor will donate his share to “Roshan’ a Not for profit
Organisation.

Prepare Joy’s capital a/c and identify the value being portrayed

Q47. Following is the balance sheet of Mohan and Sohan as at 31st March,

Liabilities ` Assets `
Capital Tools 3000
Ram 20000 Firniture 18000
Mohan 10000 Stock 12000
Sohan 10000 Debtors 16000
Workmen Compensation 7500 Bank 8000
reserves Cash 500
Creditors 10000

57500 57500.
Their profits sharing ratio was 2:2:1. Sohan died on 30th June 2018. Under the partnership agreement,
the executors of sohan was entitled to:

I) Amount standing to his creditor a/c

II) Interest on capital which amounted to `150.
III) His share of goodwill `5000.
IV) His share of profits upto his date of death, `750.

Sohan’s executor was paid `1400 on 1st July, 2018 and the balance in four equal yearly instalments
from 30th June 2019 with interest @ 6% p.a. Journalize.

Q48 X, Y and Z are equal partners. Z died on 30th June, 2017. The balnce sheet of the firm was as
follows:

Liabilities ` Assets `
Capital Cash 2500
X 75000 Bank 10000
Y 50000 Debtors 25000
Z 50000 Less: provision (2000) 23000
Investment luctuation 3000 Stock 25000
reserves Investments (cost) 12500
Contingency reserves 9000 Land 100000
Creditors 33250 Goodwill 47250

220250 220250.

[Date] 80
In order to arrive at the balance sue to Z, it was mutually agreed that:

i) Land and building to be valued at `125000.

ii) Investment Fluctuation reserve was brought to `1350.
iii) Debtors were all good.
iv) Stock is to be valued at ` 23500.
v) Goodwill was to be valued at one year’s of purchase of average profits of last 5 years which were
as follows: 13-14 `28750, 14-15 `35000, 15-16 ``22500, 16-17 `20000, 17-18 `25000.
vi) Z’s share of profits to the date of death was to be calculated on the basis of average profits of last
3 years.

Show revaluation a/c, Capital a/c’s and the balance sheet of the firm as at 1st July.

Q49. Sharma, Verma and Goyal are partners in a firm. On 1st April, 2012 the balances in their Capital
Accounts were as follows:

Sharma Rs.4, 00, 000; Verma Rs.4, 20, 000 and Goyal Rs.3, 70, 000. Firm closes its accounts every
year on 31st March. Verma died on 30th September, 2012. In the event of death of any partner
following are the provisions in the Partnership Deed:

(i) Interest on Capital will be calculated at the rate of 10% p.a.

(ii) The deceased partner’s legal representative will be paid Rs.35, 000 for his share of goodwill.
(iii) Firm had a reserve fund of Rs.2, 10, 000. The deceased partner will be paid his share in the
Reserve fund.
(iv) His share of profit till the date of death will be calculated on the basis of sales. It is also specified
that the sales during the year 2011-12 were Rs.15, 00, 000. The sales from 1st April, 2012 to 30th
September, 2012 were Rs.3, 00, 000. The profit of the firm for the year ending 31st March, 2012 was
Rs.3, 00, 000.

Prepare Verma’s Capital Account to be presented to his representative.

Q50. Virad, Vishad and Roma were partners in a firm sharing profits in the ratio of 5:3:2 respectively.
On 31st March, 2013, their balance sheet was as under:

Liabilities Rupees Assets Rupees

Capital A/cs: Buildings 2,00,000
Virad 3,00,000 Machinery 3,00,000
Vishad 2,50,000 Patents 1,10,000
Roma 1,50,000 7,00,000 Stock 1,00,000
Reserve fund 60,000 Debtors 80,000
Creditors 1,10,000 Cash 80,000
=8,70,000 =8,70,000

[Date] 81
Virad died on 1st October, 2013. It was agreed between his executors and the remaining partners that:

(i) Goodwill of the firm be valued at 2 ½ years purchase of average profits for the last three years.
The average profits were Rs.1, 50, 000.
(ii) Interest on capital be provided at 10% p.a.
(iii) Profit for the year 2013 – 14 be taken as having accrued at the same rate as that of the previous
year which was Rs.1, 50, 000.

Prepare Virad’s Capital Account to be presented to his executors as on 1st October, 2013.

Q51. (Value based). The Balance Sheet of Sadhu, Raja and Karan who were sharing profits in the
ratio 4:2:4 as on 31st March, 2012 was as follows:

Liabilities Rupees Assets Rupees

General reserve 10,000 Cash 26,000
Bill payable 20,000 Stock 64,000
Loan 22,000 Investments 85,000
Sadhu 80,000 Land and Building 97,000
Raja 60,000 Sadhu’s loan 20,000
Karan 1,00,000 2,40,000
=2,92,000 =2,92,000

Sadhu died on 31st July, 2012. The partnership deed provided for the following on the death of a
partner:

(i) Goodwill of the firm be valued at two years’ purchase of average profits for the last three years.
(ii) Sadhu’s share of profit or loss till the date of his death was to be calculated on the basis of sales.
Sales for the year ended 31st March, 2012 amounted to Rs.4, 50, 000 and that from 1st April to 31st
July, 2012 to Rs.2, 70, 000. The profit for the year ended 31st March, 2012 was calculated as Rs.1, 25,
000.
(iii) Interest on capital was to be provided @ 5% p.a.
(iv) The average profits of the last three years were Rs.55,000.
(v) According to Sandhu’s will, the executors should donate his share to “Matri Chayaan orphanage
for girls”.

Prepare Sandhu’s Capital accounts to be rendered to his executor. Also identify the value being
highlighted in the question.
Q52. Following is the balanced sheet of Punita, Rashi and Seema who are sharing profits in the ratio
2:1:2 as on 31st March, 2013.

Liabilities Rupees Assets Rupees

[Date] 82
 Creditors 38,000 Building 2,40,000
Bills payable 2,000 Stock 65,000
Capital A/cs: Debtors 30,000
Punita 1,44,000 Cash at Bank 5,000
Rashi 92,000 Profit and Loss A/c 60,000
Seema 1,24,000 3,60,000
=4,00,000 4,00,000

Punita died on 30th September, 2013. She had withdrawn 44,000 from her capital on July 1st ,
2013. According to the partnership agreement, she was entitled to interest on capital @8% p.a.
Her share of profit till date of death was to be calculated on the basis of the average profits of the
last three years. Goodwill was to be calculated on the basis of three times the average profits of
the last four years. The profits for the years ended 2009 – 10 , 2010 – 11 and 2011 – 12 were Rs.30,
000, Rs.70, 000 and Rs.80, 000 respectively.

Prepare Punita’s Capital accounts to be rendered to her executors.

Q53. Ram, Rahim and Robert partners sharing profits in 2:3:1 ratio respectively.

The Partnership Deed provided that in case of death of a partner of the deceased partners’ share
of capital will be donated for the construction of a hospital in the tribal area.

Due to ill health Robert died on 30th September, 2013. The Balance sheet of Ram, Rahim and Robert
on 31st March, 2013 was as follows:

Liabilities Rupees Assets Rupees

Capital A/cs: Cash 14,000
Ram 1,00,000 Bank 2,96,000
Rahim 2,00,000 Stock 80,000
Robert 3,00,000 6,00,000 Debtors 3,00,000
Creditors 3,60,000 Investments 50,000
Workmen Land 2,50,000
Compensation Fund 20,000
Provision for doubtful 10,000
debts

990000 990000
On the date of Robert’s death, i.e, 30th September, 2013, the following was agreed upon:

(i) Goodwill is to be valued at two years’ purchase of average profits of last three completed years
i.e, 2010 – 11 – Rs.45, 000; 2011 – 12 – Rs.90, 000 and 2012 – 13 – Rs.1, 35, 000.
(ii) Robert’s share of profits till the date of his death will be calculated on the basis of average
profits of last three years.

[Date] 83
(iii) Land was undervalued by Rs.25,000 and the Stock overvalued by Rs.8,000.
(iv) Provision for doubtful debts is to be made at 5% of debtors.

(v) Claim of workmen compensation estimated at Rs.5000.

Prepare Robert’s capital account to be presented to his executors. Also identify a value that Ram,
Rahim and Robert wanted to communicate to the society.

Q54. Dev, Swati and Sanskar were partners in a firm sharing profits in the ratio of 2:2:1. On 31st
March, 2014, their balance sheet was as follows:

Liabilities Rupees Assets Rupees

Capital A/cs: Building 1,04,000
Dev 77,000 Inventory 16,000
Swati 87,000 Trade receivables 23,000
Sanskar 46,000 2,10,000 Cash 40,000
Trade payables 17,000 Profit and Loss A/c 57,000
Bank loan 13,000
=2,40,000 =2,40,000

On 30th June, 2014. Dev died. According to the partnership agreement Dev was entitled to
interest on capital at 12% p.a. His share of profit till the date of his death was to be calculated on
the basis of the average profits of last four years. The profits of the last four years were:

Year 2010 – 11 2011 – 12 2012 – 13 2013 – 14

Profit (Rs) 2,04,000 1,80,000 90,000 (57,000) Loss

On 1st April, 2014, Dev withdrew Rs.15,000 to pay for his medical bills.
Prepare Dev’s account to be presented to his executors.

Q55. On 1st April, 2014 the Balance sheet of Anant, Sampat and Gunvant was as follows:

Liabilities Rupees Assets Rupees

Sundry Creditors 9,000 Bank 15,000
General reserve 9,600 Bills receivable 18,000
Capital A/cs: Stock 18,000
Anant 30,000 Tools 3,000
Sampat 15,000 Furniture 24,000
Gunvant 15,000 60,000
=78,000 =78,000

Gunvant died on 30th September, 2014. Under the terms of Partnership deed, executors of the
deceased partner were entitled to:

[Date] 84
(i) Amount standing to the credit of Partner’s capital account.
(ii) Interest on capital @ 12% p.a.
(iii) Share of goodwill on the basis of twice the average of past three years profits. (iv) Share of
profits from closing of last financial year to the date of death on the basis of last year’s profit. The
profits of the last three years were as follows:

Year 2011 – 12 2012 – 13 2013 – 14

Profit (Rs) 18,000 21,000 24,000

The firm closes its books on 31st March every year. Partners share profits in the ratio of their capitals.

Prepare Gunvant’s Capital account to be presented to his executors.

Q56. On 31st March, 2014, the balance sheet of Pooja, Qureshi and Ross, who were partners in a firm
was as under:

Liabilities Rupees Assets Rupees

Sundry creditors 2,50,000 Building 2,60,000
Reserve fund 2,00,000 Investment 1,10,000
Capital A/cs: Qureshi’s loan 1,00,000
Pooja 1,50,000 Debtors 1,50,000
Qureshi 1,00,000 Stock 1,20,000

Ross 1,00,000 3,50,000 Cash 60,000

=8,00,000 =8,00,000
Qureshi died on 1st July, 2014. The profit- sharing ratio of the partners was 2:1:1. On the death of a
partner, the partnership deed provided for the following:

(i) His share in the profits of the firm till the date of his death will be calculated on the basis of
average profits of last three completed years.
(ii) Goodwill of the firm will be calculated on the basis of total profit of last two years. (iii) Interest
on loan given by the firm to a partner will be charged at the rate of 6 % p.a. or Rs.4,000 whichever
is more.
(iv) Profits for the last three years were Rs.45,000; Rs.48,000 and Rs.33,000.

Prepare Qureshi’s capital account to be rendered to his executors.

Q57. A, B and C were partners sharing profits and losses in the ratio of 4:3:2. C retired on 1st July,
2013 on which date the capitals of A, B and C after all necessary adjustments stood at Rs.75,000;
Rs.65,000 and Rs.45,000 respectively. A and B continued to carry on the business for 6 months
without settling the account of C. During the period of 6 months ended 31st December, 2013, a
profit of Rs.50,000 is earned by the firm.

[Date] 85
state which of the two options available with C under Section 37 of the Indian Partnership Act, 1932
should be exercised?

What You’ve learnt

I. Retirement
1. Due to some reasons like old age, poor health, strained relations etc. an existing partner may
decide to retire from the partnership. Due to retirement, the existing partnership comes to an end
and the remaining partners form a new agreement and the partnership firm is reconstituted with
new terms and conditions.

2. At the time of retirement the following accounting issues are dealt:

(a) New profit sharing ratio and gaining ratio.
(b) Goodwill
(c) Adjustment of changes in the value of Assets and liabilities
(d) Treatment of reserve and accumulated profits. (e) Settlement of retiring partner’s dues, (f) New
capital of the continuing partners.
II. Death
1. When the partner dies, the amount payable to him is paid to his/her legal representatives.
2. The representatives of deceased partner is entitled to the followings:
(a) The amount standing to the credit to the capital account and the deceased partner.
(b) Interest on capital, if provided in the partnership deed, upto the date of death:
(c) Share of the value of goodwill of the firm; ‘
(d) Share of undistributed profit or reserves;
(e) Share of profit on the revaluation of assets and liabilities; (f) Share of profit up to the date of
death; (g) Share of Joint Life Policy.
The following amounts are debited to the account of the deceased partner’s legal representatives:
(i) Drawings
(ii) Interest on drawings
(iii) share of loss on the revaluation of assets and liabilities;
(iv) share of loss that have occurred till the date of his/her death
3. Calculation of Profit upto the date of death Two Methods
(i) Time basis
(ii) Sales basis

[Date] 86
CHAPTER 5: DISSOLUTION OF A PARTNERSHIP FIRM.

Rakesh and Mukesh were very good friends. They were running a business as a partnership firm.
They were very successful. People were jealous of their relations. But one day people came to know
that they have closed the business. Some dispute had arisen between the two on a trivial issue.
Similarly, firm may come to an end because of dispute among the partners or firm running in
losses for last few years or because of order of the court and so on. We can say that the partnership
firm is dissolved. In this lesson, you will learn about the accounting treatment in case of dissolution
of partnership firm.

DISSOLUTION OF PARTNERSHIP FIRM

The term dissolution means coming to an end or discontinuation. The dissolution of the firm
implies a complete breakdown of the partnership relation among all the partners. Dissolution of
the partnership (owing to retirement, death or insolvency of a partner), merely involves change in
the relation of the partners but it does not end the firm; the partnership would certainly come to
an end but the firm, the reconstituted one might continue under the same name. So the dissolution
of the partnership may or may not include the dissolution of the firm but the dissolution of the
firm necessarily means the dissolution of the partnership. On dissolution of the firm, the business
of the firm ceases to exist since its affairs are wound up by selling the assets and by paying the
liabilities and discharging the claims of the partners. The dissolution of partnership among all
partners of a firm is called dissolution of the firm.

Dissolution by Agreement: A firm is dissolved in case z all the partners give consent or z as per the
terms partnership agreement.

(iii) Compulsory dissolution: A firm is dissolved compulsorily in the following cases.

• when all the partners or all excepting one partner becomes insolvent or of unsound mind.
• When the business becomes unlawful.
• When all the partners excepting one decide to retire from the firm.
• When all the partners or all excepting one partner die.
• A firm is also dissolved compulsorily if the partnership deed includes any provision regarding
the happening of the following events (a) expiry of the period for which the firm was formed, (b)
completion of the specific venture or project for which the firm was formed.

Dissolution by Notice: In case of a partnership at will, the firm may be dissolved if any one of the
partner gives a notice in writing to the other partners.
Dissolution by Court: A court may order a partnership firm to be dissolved in the following cases:
(a) When a partner becomes of unsound mind
(b) When a partner becomes permanently incapable of performing his/her duties as a partner,
(c) When partner deliberately and consistently commits breach of agreements relating to the
management of the firm;

[Date] 87
(d) When a partner’s conduct is likely to adversely affect the business of the firm; (e) When a
partner transfers his/her interest in the firm to a third party; (f) When the court regards dissolution
to be just and equitable.

Distinction between Dissolution of Partnership and Dissolution of Partnership Firm

You have already studied that on the occasion of admission, retirement and death existing
partnership comes to an end, but the business of the firm continues under a new agreement. When
a firm decides to wind up its business operations under any of the circumstances mentioned, it
stands dissolved. Dissolution of a partnership firm is different from the dissolution of a
partnership.

Dissolution of a firm means that the firm closes its business and comes to an end.

While dissolution of a partnership means termination of old partnership agreement and a

reconstitution of firm due to admission, retirement and death of a partner. In dissolution of a
partnership the remaining partners may agree to carry on the business under a new agreement.

TREATEMENT OF ASSETS AND LIABILITIES

When the partners decide to discontinue the business of the firm, it becomes necessary to settle its
accounts. For this purpose, it disposes off all its assets (except cash and bank balances) for
satisfying all the claims against it. For this purpose a separate account called ‘Realisation Account’
is opened. Realisation Account is an account in which assets excluding cash in hand and bank are
transferred at their book value and all external liabilities are transferred at their book value.
It also shows what amount were realised on the sale of assets and which liabilities were discharged
at what amount.
In order to record the disposal of assets and discharge of liabilities, the following journal entries are
recorded:
1. For Transfer of Assets: Assets account is closed by transferring it to the Realisation Account at its
Book Value.
Realisation A/c Dr.
To Assets A/c (Individually)
(Transfer of assets)

It is to be noted that the following items on the assets side of the Balance Sheet are not transferred to
the Realisation Account :
(a) (i) Undistributed loss (i.e. Debit Balance of Profits and Loss account)
(ii) Fictitious assets or deferred revenue expenditures such as preliminary expenses. All the above
items are closed by transferring them to the partners’ Capital Account in their profit sharing ratio.
The Journal entry is made:
Partner’s capital A/c Dr. (Individually)
To Profit & Loss A/c
To Fictitious Assets A/c
(Transfer of loss and fictitious Assets)

[Date] 88
(b) Cash in hand, and Cash at Bank, will be the opening balance of the Cash/ Bank account;
(c) Provisions and reserves against assets should be closed by crediting the Realisation Account.
The Journal entry is made:
Provision for Doubtful Debts A/c Dr.
Provision for Depreciation A/c Dr. Any other
Provision A/c Dr. To Realisation A/c
(Transfer of provision on assets)

2. For Transfer of Liabilities: The accounts of various

external liabilities are closed by transferring them to the
Realisation Account. The loan given to the firm by a
partner’s wife is treated as an external liability and is
transferred to the credit of Realisation Account. The
relevant Journal entry is as under:
External Liabilities A/c Dr. (Individually) To Realisation A/c
(Transfer of external liability)

Capital and Loan account of the partners’ are treated separately and so are not transferred to the
Realisation Account.

3. Treatment of Accumulated Reserves and Profit/Loss

: Any balance of accumulated reserves (e.g. general
reserves), Profit and Loss Account (Cr.), Reserve Fund
and other reserves on the date of dissolution will be
credited to the Partners’ Capital accounts on the basis of
profit sharing ratio. The following journal entry will be
recorded :
Profit and Loss A/c Dr.
General Reserve A/c Dr.
Any Other Fund Dr.
To Partners’ Capital A/c (Individually)
(Transfer of profit and reserve)

4. For Sale of Assets (for cash)

Bank/ Cash A/c Dr. (Realised Value) To Realisation A/c
(Sale of assets)

5. For Assets taken Over by the Partner Partners’

Capital A/c Dr.
To Realisation A/c (Agreed Price)
(Assets taken over by partner)

[Date] 89
Bank/Cash/Partners capital A/c Dr. To Partner’s Loan
A/c
(Settlement of loan to a partner)

6. Settlement of loans given by the Partner Partners’

Loan A/c Dr.
To Bank/Cash/Partners’ capital A/c
(Settlement of loan given by the partner)

7. Payment of Liabilities in Cash Realisation A/c Dr. To

Cash A/c
(Payment of liabilities)

8. Payment of Liabilities by the Partner(s) Realisation

A/c Dr.
To Partner Capital A/c
(Liabilities taken over by partner)

Treatment of Unrecorded Assets and Liabilities

Sometimes, there may be some assets that have already been written off completely in previous years
and thus, do not appear in the Balance Sheet but physically they still exist for operational purposes.
For example, there is an old computer, which is still in working condition though its book value is
zero. Similarly, there may be some liabilities, which do not appear in the Balance Sheet, but actually
they are still there. For example, a bill discounted with bank, on dissolution it was dishonoured and
had to be taken up by the firm for payment purposes. It is to be kept in mind that an unrecorded
asset would never be transferred to the debit of the Realisation Account, because the amount realised
from its sale is in nature of a gain and the Realization Account is only credited accordingly. Similarly,
an unrecorded liability need not be transferred to Realisation. Reason being that its payment is a loss
and Realisation Account is only debited with the actual payment. In such cases, the following journal
entries are made:

(a) When the amount realised from the sale of an unrecorded asset.
Cash/Bank A/c Dr. To Realisation A/c
(Sale of unrecorded assets)
(b) When an unrecorded asset is taken over by a partner at an agreed value. Partner’s Capital A/c
Dr. To Realisation A/c
(Unrecorded assets taken by partner)

(c) When unrecorded liability has been discharged by the firm.

Realisation A/c Dr. To Bank/Cash A/c
(Payment of unrecorded liabilities)

(d) When an unrecorded liability is discharged by a partner on behalf of the firm.

Realisation A/c Dr.

[Date] 90
To Partner’s Capital A/c
(Unrecorded Liabilities payment by partner)
(Payment of Realisation Expenses)

(a) When realisation expenses are paid by the firm (i.e. borne by the firm). The following journal
entry will be recorded:
Realisation A/c Dr. To Bank/ Cash A/c
(Payment of realisation expenses)
(b) When Realisation expenses are paid by the partner on behalf of the firm (i.e.
realisation expenses paid by the partner but borne by the firm). The following journal entry is made:
Realisation A/c Dr.
To Partners’ Capital A/c
(Payment of realisation expenses by partner on behalf of firm)

(c) Realisation expenses were agreed to be paid by the partner and were paid by the firm
Partner’s Capital A/c Dr. To Cash/Bank
A/c
(Realisation expenses paid and borne by partner)

Closing of Realisation Account

The balance in the realisation account would show either profit or loss on dissolution. If the total
of the credit side is more than the debit side, then there is a profit and following journal entry is
made :
Realisation A/c Dr. (Individually)
To Partner’s Capital/ Current A/c (Individually)
(Profit on realisation transferred to capital accounts)

If, the debit side is more than credit side, then there is a loss on dissolution and following journal
entry is made:
Partner’s Capital/Current A/c Dr. (Individually) To Realisation A/c
(Loss on realisation transferred to capital account)

Preparation of Cash/Bank account after closing the partners’ capital accounts, bank account is
prepared and all entries pertaining to the bank/cash are posted in it including any cash brought in
by the partner on the dissolution of firm. Partners’ capital accounts are closed by making payment
from the bank account and thereby bank account stands closed by making/receiving payment. In
this way all the accounts stand closed. If cash/bank account does not show any balance, it implies
that all the accounts of the dissolved firm have been closed properly.

ILLUSTRATION 1. The firm of X, Y and Z was dissolved on 31st March, 2016. Y demands that
his loan of Rs.25,000 should be paid before payment of capitals of the partners. But X and Z
demand that capital should be paid before the payment of Y’s loan. Who is correct?

[Date] 91
ILLUSTRATION 2. All partners decided to dissolve the firm on 31st March, 2016. Y, a partner,
demands that his loan of 80,000 should be paid before payment of Mrs. X’s loan of Rs.20,000.
But X, another partner, demands that Mrs. X’s loan should be paid before payment of Y’s loan. Who
is correct?

ILLUSTRATION 3. A and B are partners in a firm sharing profits in the ratio of 3:2 Mrs. A has
given a loan of Rs.20,000 to the firm and the firm also had taken a loan of Rs.10,000 from B. The
firm was dissolved and its assets were realised for 25,000. State the order of payment of Mrs. A’s
loan and B’s loan with reason, if there were no other creditors of the firm.

ILLUSTRATION 4. X and Y were partners sharing profits in the ratio 3:2. Give journal entries under
the following situation at the time of dissolution of the firm:
Workmen Compensation Reserve stood at Rs.75000 in the balance sheet and there were no liability
towards Workmen Compensation.
Workmen Compensation Reserve stood at 60,000 and liability for it was ascertained at Rs.35000.
Workmen Compensation Reserve stood at 60,000 and liability in respect of it was ascertained at
Rs.75000.
Workmen Compensation Reserve stood at Rs.60,000 and liability in respect of it was ascertained at
Rs.60,000.
There was no Workmen Compensation Reserve and firm had to pay Rs.15,000 as compensation to
the workers.

ILLUSTRATION 5. Pass Journal entries for the following transactions:

Realisation expenses amounted Rs.10,000.
Realisation expenses amounted Rs.5000 were paid by a partner.
Realisation expenses amounted to Rs.5000 were paid by the firm on behalf of a partner.
A partner was paid remuneration (including expenses) of Rs.75000 to carry out dissolution of the
firm. Actual expenses were Rs.10000.
Dissolution expenses were Rs.8,000; Rs.3000 were to be borne by the firm and the balance by a
partner. The expenses were paid by a partner.
Dissolution expenses were Rs.8000. Out of the said expenses, Rs.3000 were to be borne by the firm
and the balance by a partner. Rs.8000 are paid by the firm.
Realisation expenses of Rs.5000 were to be borne and paid by a partner.
X, the partner, is paid remuneration of Rs.5,000 for dissolution of the firm. Realisation expenses of
Rs.8000 are met by the firm.
Realisation expenses of Rs.5000 were to be borne and paid by X, a partner. However, it was paid by
Y.

ILLUSTRATION 6. Shanti and Satya were partners in a firm sharing profits in the ratio of 4:1. On
31st March, 2013, their Balance Sheet was as follows:
BALANCE SHEET OF SHANTI AND SATYA as at 31st March, 2013
Liabilities Rupees Assets Rupees

[Date] 92
 Creditors 45,000 Bank 55,000
Workmen Compensation Fund 40,000 Debtors 60,000
Satya’s Current account 65,000 Stock 85,000
Capital A/Cs: Furniture 1,00,000
Shanti 2,00,000 Machinery 1,30,000
Satya 1,00,000 Shanti’s Current Account 20,000

4,50,000 4,50,000

On the above date the firm was dissolved:

Shanti took over 40% of the stock at 10% less than its book value and the remaining stock was sold
for Rs.40,000. Furniture realised Rs.80,000.
An unrecorded investment was sold for Rs.20,000. Machinery was sold at a loss of Rs.60,000.
Debtors realised Rs.55,000.
There was an outstanding bill for repairs of which Rs.19,000 was paid. Prepare
Realisation Account.

ILLUSTRATION 7. Hanif and Jubed were partners in a firm sharing profits in the ratio of their
capitals. On 31st March, 2013, their Balance Sheet was as follows:
BALANCE SHEET OF HANIF AND JUBED as at 31st March, 2013
Liabilities Rupees Assets Rupees
Creditors 1,50,000 Bank 2,00,000
Workmen 5Compensation Reserve 3,00,000 Debtors 3,40,000
General Reserve 75,000 Stock 1,50,000
Hanif’s Current Account Furniture 4,60,000
Capital A/Cs: 25,000 Machinery 8,20,000
Hanif 10,00,000 Jubed’s Current
Jubed 5,00,000 Account 80,000
15,00,000
=20,50,000
= 20,50,000
On the above date the firm was dissolved:
Debtors were realised at a discount of 5%. 50% of the stock was taken over by Hanif at 10% less than
the book value. Remaining stock was sold for Rs.65,000.
Furniture was taken over by Jubed for Rs.1,35,000. Machinery was sold as scrap for Rs.75,000.
Creditors were paid in full.
Expenses on realisation Rs.8000 were paid by Hanif.
Prepare Realisation Account.

[Date] 93
ILLUSTRATION 8. (Dissolution –Journal Entries). What journal entries will be passed in the
books of A and B sharing profits and losses in the ratio of 3:1, for the following transactions on
dissolution of the firm?
An unrecorded asset realised Rs25,000.
Stock of Rs.20,000 was taken by partner A.
Creditors were paid Rs.30,000.
B to bear realisation expenses for which he will get Rs.1,900.The actual expenses paid by B were
Rs.1,500 .
There was a balance of Rs.10,000 in the General Reserve Account on the date of dissolution.
Gain (Profit) on realisation of Rs.40,000 is to be distributed between partners A and B in the ratio of
3:1.

ILLUSTRATION 9. Pass necessary journal entries for the following transactions at the time of
dissolution of the firm: Realisation expenses Rs.3000 paid.
Realisation expenses amounting to Rs.2000 paid by Mr. X, a partner, who was to bear these expenses.
Y, a partner, took machine for Rs.20,000.
Z, a partner, agreed to take a creditor of Rs.30,000 for Rs.20,000.
A, a partner, has given loan to the firm of Rs.10,000. It was paid back to him at the time of dissolution.

ILLUSTRATION 10. Pass necessary journal entries for the following transactions at the time of
dissolution of the firm:
Loan of Rs.10,000 advanced by a partner to the firm was refunded.
X, a partner, takes over an unrecorded asset (Typewriter) at Rs.300.
Undistributed balance (Debit) of Profit and Loss Account Rs.30,000. The firm has three partners X, Y
and Z.
Assets of the firm realised Rs.1,25,000.
Y who undertakes to carry out the dissolution proceedings is paid Rs.2000 for the same. Creditors
paid Rs.28,000 in full settlement of their account of Rs.30,000.

ILLUSTRATION 11. Pass journal entries for the following transactions on the dissolution of the
firm of T and P after various assets (other than cash) and outside liabilities have been transferred
to realisation account :
Bank loan of Rs.34,000 was paid.
Furniture worth Rs.70,000 was taken by partner T at Rs.43,000.
Partner P agreed to pay a creditor Rs.7500.
A computer previously written off fully, realised Rs.3,900.
Expenses of realisation Rs.3,200 were paid by partner T.
Profit on realisation Rs.4800 was distributed between T and P in 5:3 ratio.

ILLUSTRATION 12. Parul, Payal and Priyanka are partners. They decided to dissolve their firm.
Pass necessary journal entries for the following after various assets (other than Cash and Bank)
and the third party liabilities have been transferred to Realisation Account: There were total
Debtors of Rs.76,000. Provision for Doubtful Debts also stood in the books at Rs.6,000. Rs.12,000
Debtors proved bad and rest paid the amount due.
Parul agreed to pay off her husband’s loan of Rs.7,000 at a discount of 5%.

[Date] 94
A machine which was not recorded in the books was taken over by Payal at Rs.3,000 whereas its
expected value was Rs.5,000.
A contingent liability (not provided for) of Rs.4,000 was also discharged.
The firm had a debit balance of Rs.27,000 in the Profit and Loss account on the date of dissolution.
Priyanka paid realisation expenses of Rs.15,000 out of her pocket and she was to get a remuneration
of Rs.18,000 for completing the dissolution process.

ILLUSTRATION 13. (Gain (Profit) on Dissolution). Balance Sheet of a firm as at 31st March, 2016 was:
Liabilities Rupees Assets Rupees
X’s Capital 5,00,000 Freehold property 8,00,000
Y’s Capital 4,00,000 Investments 2,00,000
Z’s Capital 3,00,000 12,00,000 Sundry Debtors 1,00,000
Sundry Creditors 2,00,000 Stock 1,50,000
Profit and Loss A/c 1,50,000 Cash at bank 3,00,000
= 15,50,000 = 15,50,000

The partnership was dissolved on the above date. X took over the Investments at a value of
Rs.1,90,000. Cash realised was: Freehold property Rs.9,00,000; Sundry Debtors Rs.90,000 and
Stock Rs.1,40,000. Creditors were paid at a discount of 5%. Expenses of realisation came to
Rs.20,000. Pass journal entries and prepare necessary Ledger Accounts to close the books.

ILLUSTRATION 14. Mohan, Sohan and Rohan were partners in a firm sharing profits in the ratio
of 2:2:1. On 28th February,2004, their firm was dissolved. The balance sheet of the firm at the date
of dissolution was:
Liabilities Rupees Assets Rupees
Creditors 80,000 Cash 7,000
Mohan’s Capital 75,000 Sundry Assets 1,30,000
Sohan’s Capital 5,000 Rohan’s Capital 23,000
= 1,60,000 = 1,60,000

Sundry assets were taken over by Rohan for Rs.65,000 and Mohan took over the Creditors
for Rs.75,000. Expenses of dissolution paid by Sohan were Rs.5000 Prepare
Realisation Account, Partners’ Capital Account and Cash Account.

ILLUSTRATION 15. (Goodwill is shown in the Balance Sheet). A, B and C are partners in a firm
sharing profits in the ratio of 2:1:1. Their Balance Sheet as at 31st March, 2016 was as follows:
Liabilities Rupees Assets Rupees

[Date] 95
 Creditors 50,000 Goodwill 30,000
Capital A/cs: Land and Building 80,000
A 80,000 Plant and Machinery 56,000
B 80,000 Car 54,000
C 60,000 2,20,000 Debtors 48,000
Cash 2,000
= 2,70,000
= 2,70,000
The firm was dissolved on that date. Assets realised: Goodwill Rs.20,000; Land and Building
Rs.1,00,000; Plant and Machinery Rs.50,000; Car Rs.28,000 and Debtors 50% of the book value.
Realisation Expenses were Rs.2,000. Prepare Realisation Account, Capital Accounts of Partners
and Cash Account to close the books of the firm.

ILLUSTRATION 16. Parth and Shivika were partners in a firm sharing profits in the ratio of 3:2.
The balance sheet of the firm on 31st March, 2014 was as follows:
Liabilities Rupees Assets Rupees
Sundry Creditors 80,000 Bank 1,72,000
Shivika’s Sister’s 20,000 Debtors 27,000
loan Stock 50,000
Capital A/cs: Furniture 2,20,000
Parth 1,75,000
Shivika 1,94,000
3,69,000
=4,69,000 = 4,69,000

On the above date, the firm was dissolved. The assets were realised and the liabilities were paid off
as follows:
50% of the furniture was taken over by Parth at 20% less than book value. The remaining furniture
was sold for Rs.1,05,000.
Debtors realised Rs.26,000.
Stock was taken over by Shivika for Rs.29,000.
Shivika’s Sister’s Loan was paid off along with interest of Rs.2,000.
Expenses on realisation amounted to Rs.5,000.
Prepare Realisation Account, Partners’ Capital Accounts and Bank Account.

ILLUSTRATION 17. Following is the Balance Sheet of A and B as at 31st March, 2016:
Liabilities Rupees Assets Rupees

[Date] 96
 Sundry Creditors 30,000 Cash in hand 500
Bills Payable 8,000 Cash at bank 8,000
Mrs. A’s Loan 5,000 Stock-in-Trade 5,000
Mrs. B’s Loan 10,000 Investments 10,000
General Reserve 10,000 Debtors 20,000
Investments Fluctuation Reserve 1,000 Less: Provision (2,000) 18,000
A’s Capital Plant and Machinery 20,000
B’s Capital 10,000 Building 15,000
10,000 Goodwill 4,000
Profit and Loss A/c 3,000

=84,000 = 84,000

The firm dissolved on 31st March,2016 and following was agreed: (i) A promised to pay Mrs. A’s
Loan and took Stock-in-trade at Rs.4000. (ii) B took half the investments @10% discount. (iii)
Debtors realised Rs.19,000. (iv) Creditors and Bills payable were due on an average basis of one
month after 31st March but they were paid immediately on 31st March @6% discount per annum.
(v) Plant realised Rs.25,000; Building Rs.40,000; Goodwill Rs.6000 and remaining Investments at
Rs.4,500. (vi) There was an old typewriter in the firm which had been written off completely from
books. It is now estimated to realise rs.300. It was taken away by B at this estimated price. (vii)
Realisation expenses were Rs.1,000.
Show the Realisation Account, Bank Account and Partners’ Capital Accounts in the books of the
firm.

ILLUSTRATION 18. (Dissolution and Unrecorded Asset). X, Y and Z carrying on business as a

partnership firm decided to dissolve the firm on 31st March, 2016 when their balance sheet was
as follows:
Liabilities Rupees Assets Rupees
Creditors 34,000 Cash 25,000
Capital A/cs: Debtors 62,000
X 1,20,000 Stock 37,000
Y 90,000 Tools 8,000
2,70,000 Car 12,000
Z 60,000
Machinery 60,000
Building 1,00,000

=3,04,000 =3,04,000

The Partnership Deed provided that profits will be divided in the ratio of 3:2:1 respectively among
X, Y and Z. Assets realised are:

[Date] 97
Tools Rs.5,000; Machinery Rs.82,000; Building Rs.84,000; Car Rs.25,000; Goodwill Rs.60,000; Debtors
Rs.59,000
Creditors agreed to take Stock in settlement of their dues. There was an unrecorded asset valued at
Rs.3000, which was taken by X for Rs.2000.
Prepare Realisation Account, Partners’ Capital Accounts and Cash Account.

ILLUSTRATION 19. (Value Based). Prashant and Rajesh were partners in a firm sharing profits
in the ratio of 3:2. In spite of repeated reminders by the authorities, they kept dumping hazardous
material into a nearby river. The court ordered for the dissolution of their partnership firm on
31st March, 2012. Prashant was deputed to realise the assets and to pay the liabilities. He was
paid Rs.1,000 as commission for his services. The financial position of the firm on 31st March,
2012 was as follows:
Liabilities Rupees Assets Rupees
Creditors 80,000 Building 1,20,000
Mr. Prashant’s Loan 40,000 Investments 30,000
Rajesh’s Loan 24,000 Debtors 34,000
Investments 8,000 Less: Provisions (4,000) 30,000
Fluctuation Fund Capital Bills Receivable 37,000
A/cs: Cash 6,000
Prashant 42,000 Profit and Loss A/c 8,000
Rajesh 42,000 84,000 Goodwill 4,000

=2,36,000 =2,36000

Following was agreed upon:

1. Prashant agreed to pay off his wife’s loan.
2. Debtors realised Rs.24,000
3. Rajesh took all investments at Rs.27,000
4. Building realised Rs.1,52,000.
5. Creditors were payable after 2 months. They were paid immediately at 10% discount.
6. Bills Receivable were settled at a loss of Rs.1, 400.
7. Realisation expenses amounted to Rs.2,500.
Prepare Realisation Account, Partners’ Capital Accounts and Cash Account to close the books of the
firm. Identify the value being conveyed in the question.

ILLUSTRATION 20. (Comprehensive Illustration). A, B and C are three partners sharing profits
in the ratio of 3:1:1 on 31st March, 2016, they decided to dissolve their firm. On that date their
Balance Sheet was:
Liabilities Rupees Assets Rupees

[Date] 98
 Creditors 6,000 Cash 3,2000
Loan 1,500 Debtors 24,000
Capital A/cs: Less: Provision (1,200) 23,000
A 27,000 Stock-in-trade 7,000
B 10,000 Furniture 1,000
C 7,000 Sundry Assets 17,000
44,000

=52,000 =52,000

It is agreed that:
A is to take over furniture at Rs.800 and Debtors amounting to Rs.20,000 at Rs.17,000; the Creditors
of Rs.6,000 to be paid by him at this amount.
B is to take over all the Stock-in-trade at Rs.7,000 and some of the Sundry Assets at Rs.7,200 (being
10% less than book value).
C is to take over the remaining Sundry Assets at 90% of the book value, less Rs.100 as a discount
and assume the responsibility for the discharge of the Loan together with accrued interest of Rs.30
which has not been recorded in the books.
The expenses of dissolution were Rs.240. The remaini8ng Debtors were sold to a debt collecting
agency for 50% of the book value.
Prepare necessary Ledger accounts to close the books of the firm.

ILLUSTRATION 21. (Comprehensive Illustration). A and B sharing profits and losses in the ratio
of 3:2 agreed upon the dissolution of the firm on 31st March, 2016 at which date their Balance
Sheet was as follows:
Liabilities Rupees Assets Rupees
Trade creditors 80,000 Cash 6,000
Bills payable 25,000 Bank 30,000
Loan from Mrs. B 15,000 Stock 80,000
Reserve 24,000 Sundrydebtors 66,000
Profit and loss A/cs: 11,000 Less: Provision (6,000) 60,000
Plant and Machinery 30,000
A 90,000 Land and Building 33,000
B 30,000 1,20,000 Furniture 10,000
Goodwill 15,000

Prepaid Insurance 1,000

Deferred Revenue
Advertisement 10,000
Expenditure
=2,75,000 =2,75,000

The firm was dissolved on the given date and following transactions took place:

[Date] 99
B undertook to pay Mrs. B’s Loan.
A took 50% of the stock at a discount of 20% Remaining stock
was sold at a profit of 30% on cost.
Rs.12, 000 of the Book Debts proved bas.
Land and building realised Rs.1,40,000.
Half of the Trade Creditors accepted Plant and Machinery at 10% less than books value and cash of
Rs.5,000 in full settlement of their claims.
Remaining trade creditors were paid out at a discount of 10%.
Bills payable were paid in full.
Realisation expenses were Rs.5000
Z, an old customer, whose account was written off as bad in the previous year, paid Rs.500 which is
not included in the above stated Books Debts.
The contingent liability (not provided for) of Rs.1000 was also discharged.
Furniture was sold for Rs.10,000.
Prepare realisation account, Partners’ Capital accounts and Bank account.

ILLUSTRATION 22. Following was the Balance Sheet of D, T and G as at 28Th February, 2013.
Liabilities Rupees Assets Rupees
Creditors 50,000 Bank 20,000
Bills payable 10,000 Debtors 30,000
G’s Loan 8,000 Stock 20,000
R’s loan 12,000 Furniture 15,000
General Reserve 20,000 Land and Building 2,45,000
Capital A/cs: G’s Capital 20,000
D 1,00,000
T 1,50,000 2,50,000
=3,50,000 =3,50,000

The firm was dissolved on the above date on the following terms:
Debtors realised Rs.28,000; Creditors and bills payable were paid at a discount of 10%.
Stock was taken by T for Rs.15,000 and Furniture was sold to N for Rs.12,000.
Land and Building was sold for Rs.2, 80, 000.
R’s loan was paid by a cheque for the same amount.
An unrecorded asset estimated at Rs.1,20,000 was sold for Rs.1,00,000 Prepare
realisation account, Capital Account of D, T and G and Bank account.

ILLUSTRATION 23. (Realisation Expenses are Borne by a Partner). A,B and C are partners
sharing profits in the ratio 5:3:2. They decided to dissolve the firm whose Balance Sheet is as
follows:
Liabilities Rupees Assets Rupees

[Date] 100
 A’s Capital 2,00,000 Bank 70,000
B’s Capital 1,50,000 Debtors 50,000
C’s capital 1,50,000 Stock 60,000
A’s current A/c 30,000 Furniture 25,000
B’s current A/c 20,000 Patents 35,000
Profit and loss A/c 50,000 Machinery 1,00,000
Trade Creditors 70,000 Building 3,20,000
C’s Current A/c 10,000
=6,70,000 =6,70,000

Following transactions took place at the time of dissolution:

Realisation expenses were to be borne by A for which he is to get a credits of Rs.10,000.
Actual realisation expenses paid out of firm’s Bank Account amounted to Rs.12,000.
B took stock for Rs.55,000 and C took over Building for Rs.4,00,000.
Other assets realised: Debtors Rs.48,000; Furniture Rs.17,000 and Machinery Rs.80,000.
Trade creditors were settled in full by paying them Rs.65,000.
Prepare realisation account ,Partners’ capital account, Capital accounts and Bank account.

ILLUSTRATION 24. Following is the Balance Sheet of A and B as at 31st March, 2016 who share
profits and losses in the ratio 3:2.
Liabilities Rupees Assets Rupees
Sundry Creditors 75,000 Cash at bank 4,500
Bills payable 30,000 Stock 25,000
Mrs. A’s Loan 25,000 Debtors 4,500
Workmen Less: Provision (1,000) 39,000
compensation Bills receivable 15,000
reserve 8,000 Investments 60,000
Bank loan 50,000 Plant and Machinery 80,000
General Building 61,000
reserve Capital 27,000
A/cs:
A 30,000
B 40,000 70,000

=2,85,000 =2,85,000

On the above date, the firm was dissolved and the following arrangements were made:
A, promised to pay Mrs. A’s Loan and took half of the investment @ 10% discount.
Stock and remaining investments were sold @ 10% discount.
Goodwill was taken by B for Rs.40,000. He also agreed to pay bills payable at a discount of 10%.

[Date] 101
Debtors realised Rs.35,000; bills receivable Rs.13,500; Plant and Machinery Rs.38,000 and building
Rs.1,20,000.
There was a car in the firm, which was completely written off from the books. It was taken over by
A, for Rs.23,400.
Creditors were paid 90% in full and final settlement pf their dues.
Expenses of dissolution amounted to Rs.1,700.
Prepare Realisation account, Capital accounts of Partners and bank account in the books of the firm.

ILLUSTRATION 25. X, Y and Z were partners sharing profits in the ratio of 2:2:1. The balance sheet
as at 31st March, 2016, when they dissolved the firm was as follows:
Liabilities Rupees Assets Rupees
X’s capital 1,27,000 Other sundry assets 1,17,000
Y’s capital 1,10,000 Furniture 11,000
Z’s capital 17,000 Debtors 1,24,000
Loan 11,500 Less:Provision (1,000) 1,23,000
Creditors 16,000 Stock 17000
Cash 13,200
=2,82,000 =2,82,000

It was agreed that:

X to take over furniture at Rs.8,000 and debtors amounted to Rs.1,20,000 at Rs.1,17,200 and the
creditors of Rs.16,000 were to be paid by him at this figure.
Y, is to take over all the stock for Rs.17,000 and some sundry assets at Rs.72,000 (being 10% less than
the book value).
Z, to take over the remaining sundry assets at 80% of the book value and assume the responsibility
of discharge of loan together with accrued interest of Rs.2300.
The expenses of realisation were Rs.2,700. The remaining debtors were sold to a debt collecting
agency at 50% of the value.
Prepare necessary accounts to closed the books of the firm.

ILLUSTRATION 26. X and Y are partners sharing profits and losses in the ratio of 3:1.
The decided to dissolve their firm on 31st March, 2016. Their balance sheet as at the above date was:
Liabilities Rupees Assets Rupees

[Date] 102
 Bank Overdraft 30,000 Leasehold Property 40,000
Creditors 44,000 Machinery 35,000
Capital A/cs: Furniture 7,000
X 54,000 Investments 10,000
Y 27,000 81,000 Stock 35,000
Debtors 24,000
Commission 3,000
receivable
Cash at bank 1,000

= 1,55,000
= 1,55,000

Leasehold property, machinery and furniture were divided among themselves and valuations
were agreed at Rs.60,000 and Rs.40,000 respectively for X and Y. X agreed to pay Creditors and Y
agreed to meet the Bank Overdraft.
Commission receivable was realised.
Realisation expenses were Rs.3000.
Stock is worth 80% of the book value. Investments are worth Rs.18,000. Stock and other assets
except those stated above are divided equally. The accounts are settled by cash payment.
Show Ledger Accounts.

ILLUSTRATION 27. (Value of assets not given). Ram, Mohan and Sohan are partners sharing
their profit and losses in the ratio of 5:3:2. On 31st March, 2016, Ram’s Capital and Mohan’s capital
were Rs.90,000 and Rs.60,000 respectively. But Sohan owed Rs.15,000 to the firm. The Creditors
were od Rs.60,000. The assets realised Rs.1,50,000. Prepare realisation account, partners’ capital
accounts and bank account.

ILLUSTRATION 28. (Balance Sheet as at the date of dissolution not given). A and B, who were
partners sharing profits and losses in the proportion of 4/7 and 3/7 respectively, decided to
dissolve the partnership firm as at 31st March, 2016. At the date of dissolution A’s capital was
Rs.1,25,30 and B’s Capital was Rs.2,070. Creditors amounted to Rs.23,150 and Cash Rs.4,520.
Remaining assets realised Rs.1,24,910 and the expenses of dissolution were Rs.1,860. Both A and
B were solvent.
Prepare Balance Sheet of the firm as at the date of dissolution and also necessary accounts to close
the books of the firm, showing final adjustment of cash between the partners.

ILLUSTRATION 29. X and Y, who were sharing profits and losses in the ratio of 3:1 respectively,
decided to dissolve the firm on 31st March, 2016 at which date some of the balances were:
X’s Capital – Rs.1,00,000; Y’s Capital – Rs.10,000 (Debit Balance); profit and loss A/c – Rs.8000
(Debit balance); Trade creditors – Rs.30,000; Loan from Mrs. X – Rs.10,000; Cash at bank – Rs.2,000.
Assets (other than cash at bank) realised Rs.1,10,000 and liabilities were paid at 5% discount.
Realisation expenses amounted to Rs.1,000.
Prepare realisation account, Capital accounts of the partners and bank account assuming that both
the partners are solvent.

[Date] 103
ILLUSTRATION 30. (Comprehensive Illustration). A and B were partners from 1st April, 2010
with capitals of Rs.60,000 and Rs.40,000 respectively. They shared profits in the ratio of 3:2. They
carried on business for two years. In the first year ended 31st March, 2011, they earned a profit of
Rs.50,000 but in the second year ended 31st March, 2012, a loss of Rs.20,000 was incurred. As the
business was no longer profitable, they dissolved the firm on 31st March, 2012. Creditors on that
date were Rs.20,000. The partners withdrew for personal use Rs.8,000 per partner per year. The
assets realised Rs.1,00,000. The expenses of realisation were Rs.3,000.
Prepare realisation account, partners’ capital account and cash account.

ILLUSTRATION 31. P, Q and R commenced business on 1st January, 2005 with capitals of: P –
Rs.2,00,000; Q – Rs.2,00,000 and R – Rs.1,00,000.
Profits are shared in the ratio of 4:4:3. Capital carried interest @ 5% p.a. During the year 2005, the
firm suffered a loss of Rs.1,50,000 before allowing interest on capital. Drawings of each partner
during the year were Rs.20,000.
On 31st December, 2005, the partners agreed to dissolve the firm as it was no longer profitable.
The creditors on that date were Rs.40,000. The assets realised a net value of Rs.3,20,000 and the
expenses of realisation were Rs.7000.
Prepare Realisation account, partners’ capital accounts and cash account along with necessary
working to close the books of the firm.

ILLUSTRATION 32. X, Y and Z commenced business on 1st April, 2013 with capitals of
Rs.5,00,000; Rs.4,00,000 and Rs.3,00,000 respectively. Profits and losses were shared in the ratio
4:3:3. Interest on capitals was aid at 5% p.a. during 2013 – 14 and 2014 – 15 they earned profit of
Rs.2,00,000 and Rs.2,50,000 (before allowing interest on capital). Drawings of each partner were
Rs.50,000 per year. On 31st March, 2015 the firm was dissolved. Creditors on that date were
Rs.1,20,000. The assets realised Rs.13,00,000 net. Give necessary accounts to close the books of the
firm.

[Date] 104