Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner Application Questions | accountancy Class 12 CBSE

Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner Application Questions | accountancy Class 12 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4 share in the future profits. With reference to the concept of new profit sharing ratio, calculate the new profit sharing ratio of A, B and C, assuming C acquires his share from A and B in their old ratio.

C's share is 1/4. Remaining share for A and B is 1 minus 1/4 equals 3/4. A's new share equals (3/4) of (3/4) equals 9/16. B's new share equals (1/4) of (3/4) equals 3/16.
C's share expressed with denominator 16 is 4/16. New profit sharing ratio of A, B and C is 9:3:4.
This means A sacrifices 3/16 (from 12/16 to 9/16) and B sacrifices 1/16 (from 4/16 to 3/16); the sacrificing ratio of A to B is 3:1, which is the same as their old ratio.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

In a real-world scenario, a profitable IT firm with patents and a well-known brand admits a new partner. With reference to factors affecting goodwill, explain why this firm's goodwill would be very high and state three factors contributing to it.

The firm's special advantages such as patents and a well-known brand (special advantages factor) protect it from competition and generate consistent demand, directly elevating goodwill value.
The IT industry typically has efficient management and high productivity, leading to cost efficiency and above-average profits (efficiency of management factor), which further increases goodwill.
A well-known brand creates monopoly-like conditions by establishing customer loyalty, reducing competitive pressure and enabling premium pricing (market situation factor), which sustains super profits and high goodwill.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

A firm's past five years' profits are Rs. 40,000; Rs. 50,000; Rs. 60,000; Rs. 50,000 and Rs. 60,000. Calculate goodwill on the basis of 4 years' purchase of average profits.

Total profits for 5 years equal Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 50,000 + Rs. 60,000 = Rs. 2,60,000.
Average profits equal Rs. 2,60,000 divided by 5 equals Rs. 52,000.
Goodwill equals Average Profits multiplied by Number of Years' Purchase equals Rs. 52,000 x 4 equals Rs. 2,08,000.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

The capital of Anu and Benu's firm is Rs. 1,00,000. Market rate of interest is 15%. Annual salary to partners is Rs. 6,000 each. Profits for last 3 years: Rs. 30,000; Rs. 36,000 and Rs. 42,000. Calculate goodwill at 2 years' purchase of average super profits.

Normal profit equals interest on capital Rs. 1,00,000 x 15/100 = Rs. 15,000 plus partners' salaries Rs. 6,000 x 2 = Rs. 12,000; total normal profit = Rs. 27,000.
Average actual profit equals (Rs. 30,000 + Rs. 36,000 + Rs. 42,000)/3 = Rs. 1,08,000/3 = Rs. 36,000. Super profit equals Rs. 36,000 minus Rs. 27,000 = Rs. 9,000.
Goodwill equals Super Profit x Years' Purchase = Rs. 9,000 x 2 = Rs. 18,000.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 5

Applied Concept

A business has earned average profits of Rs. 1,00,000. Normal rate of return is 10%. Net assets are Rs. 8,20,000. Calculate goodwill by (a) capitalisation of average profits method and (b) capitalisation of super profits method. Comment on whether both give the same result.

Capitalisation of Average Profits: Capitalised value = Rs. 1,00,000 x 100/10 = Rs. 10,00,000. Goodwill = Rs. 10,00,000 minus Rs. 8,20,000 = Rs. 1,80,000.
Capitalisation of Super Profits: Normal profit = 10% of Rs. 8,20,000 = Rs. 82,000. Super profit = Rs. 1,00,000 minus Rs. 82,000 = Rs. 18,000. Goodwill = Rs. 18,000 x 100/10 = Rs. 1,80,000.
Both methods yield the same result of Rs. 1,80,000, confirming that the Capitalisation of Average Profits and Capitalisation of Super Profits methods are mathematically equivalent.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

Sunil and Dalip share profits 5:3. Sachin is admitted for 1/5 share, bringing Rs. 20,000 as capital and Rs. 4,000 as goodwill by cheque. Pass journal entries when 50% of the goodwill is withdrawn by existing partners.

Entry 1: Bank A/c Dr. Rs. 24,000; To Sachin's Capital A/c Rs. 20,000 and To Premium for Goodwill A/c Rs. 4,000 (amount brought in by Sachin as capital and goodwill).
Entry 2: Premium for Goodwill A/c Dr. Rs. 4,000; To Sunil's Capital A/c Rs. 2,500 and To Dalip's Capital A/c Rs. 1,500 (goodwill transferred to Sunil and Dalip in sacrificing ratio 5:3).
Entry 3: Sunil's Capital A/c Dr. Rs. 1,250 and Dalip's Capital A/c Dr. Rs. 750; To Cash A/c Rs. 2,000 (50% of goodwill withdrawn by Sunil and Dalip).

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 7

Applied Concept

Vijay and Sanjay share profits 3:2 and admit Ajay for 1/4 share. New ratio is 2:1:1. The firm's goodwill is Rs. 20,000. Ajay brings the requisite goodwill in cash. Calculate the sacrificing ratio and pass journal entries.

Vijay's sacrifice = 3/5 minus 2/4 = 12/20 minus 10/20 = 2/20. Sanjay's sacrifice = 2/5 minus 1/4 = 8/20 minus 5/20 = 3/20. Sacrificing ratio = 2:3.
Ajay's goodwill = 1/4 x Rs. 20,000 = Rs. 5,000. Entry 1: Bank A/c Dr. Rs. 35,000; To Ajay's Capital A/c Rs. 30,000 and To Premium for Goodwill A/c Rs. 5,000.
Entry 2: Premium for Goodwill A/c Dr. Rs. 5,000; To Vijay's Capital A/c Rs. 2,000 and To Sanjay's Capital A/c Rs. 3,000 (in sacrificing ratio 2:3).

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 8

Applied Concept

With reference to the Revaluation Account, identify the accounting treatment for each of the following at the time of admission: (a) increase in plant value by Rs. 5,000, (b) provision for doubtful debts Rs. 600, (c) unrecorded investment Rs. 1,000.

Increase in plant value: Plant and Machinery A/c Dr. Rs. 5,000 to Revaluation A/c Rs. 5,000 — this is a gain since the asset value has risen, so it is credited to Revaluation Account.
Provision for doubtful debts: Revaluation A/c Dr. Rs. 600 to Provision for Doubtful Debts A/c Rs. 600 — this is a loss since a liability/contra-asset is being created, so Revaluation Account is debited.
Unrecorded investment: Investment A/c Dr. Rs. 1,000 to Revaluation A/c Rs. 1,000 — an unrecorded asset is a gain (credit to Revaluation Account), increasing the net worth of the firm.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

Rajinder and Surinder share profits 4:1. On April 15, 2017, they admit Narender. General Reserve balance is Rs. 20,000 and Profit and Loss debit balance is Rs. 10,000. Pass the necessary journal entries.

Entry 1: General Reserve A/c Dr. Rs. 20,000; To Rajinder's Capital A/c Rs. 16,000 and To Surinder's Capital A/c Rs. 4,000 (general reserve transferred to old partners in 4:1 ratio).
Entry 2: Rajinder's Capital A/c Dr. Rs. 8,000 and Surinder's Capital A/c Dr. Rs. 2,000; To Profit and Loss A/c Rs. 10,000 (debit balance of P&L transferred to old partners in 4:1 ratio).
Narender is not affected by these entries since both the reserve (profit) and the P&L loss relate to the period before his admission; old partners bear them in their old profit sharing ratio.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 10

Applied Concept

A and B are partners sharing profits in the ratio of 2:1. C is admitted for 1/4 share, bringing Rs. 20,000 as capital. Old partners' adjusted capitals are Rs. 45,000 and Rs. 15,000 respectively. Partners agree capitals should be proportionate to new profit sharing ratio. Determine adjustments needed.

New profit sharing ratio of A, B and C (assuming C acquires in old ratio 2:1) is 2:1:1. C's capital is Rs. 20,000 for 1/4 share, so total capital = Rs. 80,000. A's required capital = 2/4 x Rs. 80,000 = Rs. 40,000; B's required capital = 1/4 x Rs. 80,000 = Rs. 20,000.
A's adjusted capital is Rs. 45,000 vs. required Rs. 40,000; A has Rs. 5,000 excess and will withdraw Rs. 5,000.
B's adjusted capital is Rs. 15,000 vs. required Rs. 20,000; B has Rs. 5,000 deficiency and will bring in Rs. 5,000. Entries: A's Capital A/c Dr. Rs. 5,000 to Cash A/c; Cash A/c Dr. Rs. 5,000 to B's Capital A/c.

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Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner | Application Questions

A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4 share in the future profits. With reference to the concept of new profit sharing ratio, calculate the new profit sharing ratio of A, B and C, assuming C acquires his share from A and B in their old ratio.

In a real-world scenario, a profitable IT firm with patents and a well-known brand admits a new partner. With reference to factors affecting goodwill, explain why this firm's goodwill would be very high and state three factors contributing to it.

A firm's past five years' profits are Rs. 40,000; Rs. 50,000; Rs. 60,000; Rs. 50,000 and Rs. 60,000. Calculate goodwill on the basis of 4 years' purchase of average profits.

The capital of Anu and Benu's firm is Rs. 1,00,000. Market rate of interest is 15%. Annual salary to partners is Rs. 6,000 each. Profits for last 3 years: Rs. 30,000; Rs. 36,000 and Rs. 42,000. Calculate goodwill at 2 years' purchase of average super profits.

A business has earned average profits of Rs. 1,00,000. Normal rate of return is 10%. Net assets are Rs. 8,20,000. Calculate goodwill by (a) capitalisation of average profits method and (b) capitalisation of super profits method. Comment on whether both give the same result.

Sunil and Dalip share profits 5:3. Sachin is admitted for 1/5 share, bringing Rs. 20,000 as capital and Rs. 4,000 as goodwill by cheque. Pass journal entries when 50% of the goodwill is withdrawn by existing partners.

Vijay and Sanjay share profits 3:2 and admit Ajay for 1/4 share. New ratio is 2:1:1. The firm's goodwill is Rs. 20,000. Ajay brings the requisite goodwill in cash. Calculate the sacrificing ratio and pass journal entries.

With reference to the Revaluation Account, identify the accounting treatment for each of the following at the time of admission: (a) increase in plant value by Rs. 5,000, (b) provision for doubtful debts Rs. 600, (c) unrecorded investment Rs. 1,000.

Rajinder and Surinder share profits 4:1. On April 15, 2017, they admit Narender. General Reserve balance is Rs. 20,000 and Profit and Loss debit balance is Rs. 10,000. Pass the necessary journal entries.

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