FINANCIAL ACCOUNTING
Partnership Accounts
Admission cum Retirement of Partners
Part A: Discussion of basic theories and explanation of different
methods of accounting under different situations pertaining to admission cum
retirement of partners into/from a partnership firm along with all the relevant
and necessary journal entries.
Part B: Six Illustrations with solutions
Part A
Accounting treatment of goodwill
For
solving partnership accounts problems which involve admission cum retirement of
partners, the method of accounting for goodwill followed is “Gaining Ratio and
Sacrificing Ratio Method” in pursuance of the principle of capital adjustment.
Journal entries under the “Gaining Ratio
and Sacrificing Ratio Method”
|
Date |
Particulars |
|
Dr (Rs) |
Cr (Rs) |
|
1 |
All partners’ capital A/c….. |
Dr |
|
|
|
|
To Goodwill A/c |
|
|
|
|
|
(Book value of goodwill, if any, at the time of retirement of partner
w/off by debiting the partners’ capital in the old
profit sharing ratio.) |
|
|
|
|
2 |
Remaining partners’ capital A/c……… |
Dr |
|
|
|
|
To Retiring partner’s capital A/c |
|
|
|
|
|
(Retiring partner’s share of revalued goodwill debited to remaining partners’
capital in their gaining ratio.) |
|
|
|
|
3 |
If the new partner
brings his share of revalued goodwill - |
|
|
|
|
|
Bank A/c……… |
Dr |
|
|
|
|
To Old partners’ capital A/c |
|
|
|
|
|
(New partner’s share of revalued goodwill credited to old partners’
capital in their sacrificing ratio) |
|
|
|
|
4 |
If the new partner
does not bring his share of revalued goodwill - |
|
|
|
|
|
New partner’s capital A/c… |
Dr |
|
|
|
|
To Old partners’ capital A/c |
|
|
|
|
|
(New partner’s share of revalued goodwill credited to old partners’
capital in their sacrificing ratio) |
|
|
|
Important Notes:
1.
As per Para – 35 of AS – 26, “internally generated
goodwill should not be recognised as an asset” and accordingly, should not be
shown in the balance sheet of the firm.
2.
As per AS-10 read with AS-26 the method of raising the amount of
goodwill and thereafter writing it off is no longer valid. Always follow the
principle of capital adjustment as discussed above.
Part B
Partnership Accounts
Admission cum Retirement of Partners
Selected Problems
Illustration: 1
X, Y, & Z were
equal partners. Their Balance Sheet as on 31.12.18 was as follows:
|
Liabilities |
Rs |
Rs |
Assets |
Rs |
|
Capital A/cs: |
|
|
Land and Property |
1,00,000 |
|
X |
1,00,000 |
|
P/M |
2,00,000 |
|
Y |
1,00,000 |
|
F/Equip |
50,000 |
|
Z |
2,00,000 |
4,00,000 |
Stock |
1,00,000 |
|
Current A/cs: |
|
|
Sundry Debtors |
1,00,000 |
|
X |
50,000 |
|
Bank |
1,50,000 |
|
Y |
75,000 |
|
|
|
|
Z |
25,000 |
1,50,000 |
|
|
|
Sundry Creditors |
|
1,50,000 |
|
|
|
|
|
7,00,000 |
|
7,00,000 |
On 1.1.19 X retired
and it was agreed that he should be paid all his dues in full on that date. For
this purpose, goodwill was to be calculated on the basis of 3 years purchase of
past 3 years profits which amounted to Rs 1,00,000, Rs 1,40,000 and Rs 1,20,000
respectively. In order to meet his obligation, a bank loan was arranged on
1.1.19 for Rs 2, 00,000 pledging the fixed assets as security.
Further, to
compensate a loyal manager Q, it was decided by Y and Z that Q should be
admitted as a partner, who should bring in, over and above a capital of Rs 1,
00,000, his share of Goodwill in cash to serve as working capital. Y and Z
agreed to forego 1/3rd of their individual share of profits to Q.
Show the necessary journal entries and prepare the
opening Balance Sheet of the firm as at 1.1.19.
Illustration: 2
P, Q and R were
partners sharing Profits & Losses as 2: 3: 5. P retired on 31.3.19 and X
joined as a new partner on the same date, the new profit sharing ratio between
Q, R and X being 2: 3: 1. The Balance Sheet of P, Q & R on 31.3.2019 was as
follows:
|
Liabilities |
Rs |
Rs |
Assets |
Rs |
|
S/ Creditors |
|
50,000 |
Cash |
2,000 |
|
Loan from X |
|
50,000 |
Bank |
93,000 |
|
Gen. Res. |
|
40,000 |
S/ Debtors |
30,000 |
|
Capitals: |
|
|
Stock |
20,000 |
|
P |
10,000 |
|
Machinery |
30,000 |
|
Q |
15,000 |
|
Buildings |
10,000 |
|
R |
20,000 |
45,000 |
|
|
|
|
|
1,85,000 |
|
1,85,000 |
X was admitted on
the following terms:
1)
Machinery was to be depreciated by Rs
3,000;
2)
Buildings were revalued at Rs 30,000;
3)
Stock was to be written off by Rs 5,000;
4)
Provision of 5% was made against
doubtful debts;
5) General Reserve would be apportioned
among the partners;
6) The firm’s Goodwill was to be valued at
2 years’ purchase of the average profit of the last 3 years;
7) The amount due to P was retained in the
business as a loan but X’s Capital should be 1/5th
of the combined adjusted capitals of Q and R. His capital contribution would be
transferred from his Loan Account;
8) The Goodwill would be wiped off from the
books after X’s admission;
9) Partners decided not to alter the book
values of assets & liabilities after admission.
The profits/losses
during the last 3 years had been:
|
2016 − 17 |
Rs 20,000
(Profit) |
|
2017 − 18 |
Rs 15,000 (loss) |
|
2018 − 19 |
Rs 40,000
(Profit) |
Show the necessary
Accounts and Balance Sheet of the firm as at 1.4.2019.
Illustration: 3
Shukla,
Grewal, Jain and Narang were partners sharing profits and losses as 4: 3: 2: 1.
Their Balance Sheet as on 31.03.20 was as follows:
|
Liabilities |
Rs |
Rs |
Assets |
Rs |
|
Capital: |
|
|
Goodwill |
9,000 |
|
Shukla |
7,000 |
|
Stock |
2,000 |
|
Grewal |
6,500 |
|
S/ Debtors |
11,000 |
|
Jain |
5,000 |
|
Cash |
5,000 |
|
Narang |
4,000 |
22,500 |
P/L A/c (Dr Balance) |
3,000 |
|
S/ Creditors |
|
7,500 |
|
|
|
|
|
30,000 |
|
30,000 |
On that
date Grewal retired and the amount due to him was paid privately by the other
partners in their profit sharing ratio. Chakraborty was then admitted as a new
partner. The latter paid Rs 5,000 as capital and Rs 3,200 as his share of
goodwill, his share being 1/5th of the future profits. Shukla, Jain and Narang
resolved to share the remaining profits as 3: 3: 2. It was also decided that
the capitals of Shukla, Jain, Narang and Chakraborty should be made
proportionate to their new profit sharing ratio and for this they should bring
in or withdraw cash, as necessary.
Show
necessary Journal Entries to give effect to the above transactions and the
balance sheet of Shukla, Jain, Narang and Chakraborty as at 1.4.2020.
Illustration: 4
X, Y and Z are
partners sharing profits and losses in the proportion to 3: 2: 2 respectively.
The Balance Sheet of the firm as on 01.01.2019 was as follows:
|
Liabilities |
Rs |
Rs |
Assets |
Rs |
|
Capital: |
|
|
P/M |
72,000 |
|
X |
1,00,000 |
|
Furniture |
28,000 |
|
Y |
80,000 |
|
Stock |
1,12,000 |
|
Z |
70,000 |
2,50,000 |
S/ Debtors |
96,000 |
|
Bank O/D |
|
20,000 |
Bank |
18,000 |
|
S/ Creditors |
|
56,000 |
|
|
|
|
|
3,26,000 |
|
3,26,000 |
X retired on
01.01.2019 on which date R is admitted as new partner. For the purpose of
adjusting the rights as between on partners’ goodwill to be valued at Rs 84,000
and Sundry Debtors and Stock to be reduced by Rs 16,000 and to Rs 1, 00,000
respectively. X is to receive Rs 44,000 in cash on the date of retirement and
the balance due to him is to remain as loan at 8% p.a. Repayment of loan to be
made at the end of each year by annual instalments representing 25% of the
future profit before charging interest on loan.
R is to bring in Rs
1, 00,000 in cash as his capital on the date of admission. The new partners are
to share profits and losses equally after paying the interest on X’s Loan.
The net profit for
the year ended 31.12.2019, is Rs 64,000 before taking into account the
instalment payable to X.
You are required to
show:
(a) Profit and Loss
Appropriation Account for the year ended 31.12.2019;
(b) Capital Accounts of
the new partners;
(c) X’s Loan Account as
on 31.12.2019; and
(d) Balance sheet of
the firm as at 31.12.2019.
Illustration: 5
Gita and Mita are
equal partners. Gita, by agreement, retires and Lata joins the firm on the
basis of one third share of profits on 01.04.2020. The balances of the books as
on 31.03.2020 were:
|
Particulars |
Debit (Rs) |
Credit (Rs) |
|
Fixed Assets: |
|
|
|
Goodwill |
10,000 |
|
|
Other Fixed Assets
at Cost |
1,20,000 |
|
|
Current Assets: |
|
|
|
Stock |
60,000 |
|
|
Debtors |
40,000 |
|
|
Bank Balance |
8,000 |
|
|
Current Liabilities and
Prov. |
|
|
|
Creditors |
|
20,000 |
|
Provision for
Depreciation |
|
12,000 |
|
Capital Accounts: |
|
|
|
Gita |
|
1,04,000 |
|
Mita |
|
1,02,000 |
|
|
2,38,000 |
2,38,000 |
Goodwill and Fixed Assets are now revalued at Rs 30,000 and Rs 1, 40,000 respectively for the purpose of retirement cum admission of the partners. Sufficient money is to be introduced so as to enable Gita to be paid off and leave Rs 5,000 cash at Bank; Mita and Lata are to provide such sum as to make their Capitals proportionate to their share of profit.
Assuming that the agreement was carried out, show the journal entries required and prepare Partners’ Capital Accounts and the Balance Sheet as at 01.04.2020 after admission of Lata.
Click here for Solution: 5 in PDF
Illustration: 6
A,
B and C are partners sharing profits and losses in the ratio of 3: 2: 1
respectively. The balance sheet of the partnership firm as at 31.03.2022 is as
under:
|
Liabilities |
Rs |
Rs |
Assets |
Rs |
|
Capital A/cs: |
|
|
Premises |
1,80,000 |
|
A |
1,70,000 |
|
Plant |
74,000 |
|
B |
1,30,000 |
|
Vehicles |
30,000 |
|
C |
70,000 |
3,70,000 |
Fixtures |
4,000 |
|
Current A/cs: |
|
|
Current A/cs: |
|
|
A |
7,428 |
|
B |
5,018 |
|
C |
9,356 |
16,784 |
Stock |
1,24,758 |
|
Loan - C |
|
56,000 |
Debtors |
69,960 |
|
Creditors |
|
38,072 |
Cash |
1,520 |
|
Bank O/D |
|
8,400 |
|
|
|
|
|
4,89,256 |
|
4,89,256 |
C decides to retire
from the business as on the above date and D is admitted as a partner on that
date. The following matters are agreed:
1. Assets are revalued
as:
|
Premises |
Rs 2,40,000 |
|
Plant |
Rs
70,000 |
|
Stock |
Rs 1,08,358 |
2. A provision of Rs
6,000 is created against debtors.
3. Goodwill is to be
recorded in the books on the day C retires at Rs 84,000. The partners in the
new firm do not wish to maintain a Goodwill Account and so, that amount is to
be written off against the new partners’ Capital Accounts.
4. Partners A and B
are to share profits in the same ratio as before and D is to have the same
share of profits as B.
5. C is to take a car
at the book value of Rs 7,800 in part payment and the balance of all he is owed
by the firm in cash except Rs 40,000 which he is willing to leave as a Loan
Account.
6. The partners in the
new firm are to start on an equal footing so far as Capital and Current
Accounts are concerned. D is to contribute cash to bring his Capital and Current
Account to the same amount as the original partner from the old firm who has
the lower investment in the business. The original partner in the old firm who
has the higher investment will draw out cash so that his Capital and Current
Account balances equal those of his new partners.
7. Revaluation profits
or losses are to be adjusted in the partners’ Current Accounts.
You are required to
prepare (a) Revaluation Account, (b) Partners’ Capital Accounts, (c) Partners’
Current Accounts, (d) C’s Loan Account, (e) Bank Account, and (f) Balance Sheet
of the newly constituted firm as at 01.04.2022.
Click here for Solution: 6 in PDF
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