GROUP - I PAPER - 1 ACCOUNTING V2 CHAPTER 14

14 I I P A SSUES N ARTNERSHIP CCOUNTS BASIC CONCEPTS (cid:190) Partnership is defined as the relationship between persons who have agreed to share the profit or loss of a business carried on by all or any of them acting for all. (cid:190) Two methods of accounting • Fixed capital method • Fluctuating capital method. (cid:190) Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. (cid:190) Necessity for valuation of goodwill in a firm arises in the following cases: • When the profit sharing ratio amongst the partners is changed; • When a new partner is admitted; • When a partner retires or dies, and • When the business is dissolved or sold. (cid:190) Methods for valuation of goodwill:- (1) Average profit basis : TotalProfit Average Profit = Numberof years Goodwill = Average Profit x No. of Years’ purchased The profits taken into consideration are adjusted with abnormal losses, abnormal gains, errors, return on non-trade investments and errors. (2) Super profit basis : Calculate Capital Employed Assets ……. Less: Liability ……. © The Institute of Chartered Accountants of India Accounting Capital Employed ….... (cid:131) Find the normal Rate of Return(NRR) (cid:131) Find Normal Profit=Capital Employed X Normal rate of Return (cid:131) Find Average Actual Profit (cid:131) Find Super Profit=Average Actual Profit-Normal Profit (cid:131) Find Goodwill=Super Profit X Number of Years Purchased (3) Annuity basis : Goodwill=Super Profit X Annuity Number (4) Capitalization basis : Super Profit Goodwill = NormalRate of Return Question 1 A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The Balance Sheet of the firm, as at 31st March, 2010 was as under : Liabilities Rs. Assets Rs. Capital Accounts : Fixed Assets 1,00,000 A 48,000 Current Assets : B 64,000 Stock 30,000 C 48,000 1,60,000 Debtors 60,000 Reserve 20,000 Cash and Bank 30,000 1,20,000 Creditors 40,000 2,20,000 2,20,000 The firm had taken a Joint Life Policy for Rs. 1,00,000; the premium periodically paid was charged to Profit and Loss Account. Partner C died on 30th September, 2010. It was agreed between the surviving partners and the legal representatives of C that : (i) Goodwill of the firm will be taken at Rs. 60,000. (ii) Fixed Assets will be written down by Rs. 20,000. (iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on 31st March, 2010. © The Institute of Chartered Accountants of India 14.2 Issues in Partnership Accounts Policy money was received and the legal heirs were paid off. The profits for the year ended 31st March, 2011, after charging depreciation of Rs. 10,000 (depreciation upto 30th September was agreed to be Rs. 6,000) were Rs. 48,000. Partners’ Drawings Accounts showed balances as under : A Rs. 18,000 (drawn evenly over the year) B Rs. 24,000 (drawn evenly over the year) C (up-to-date of death) Rs. 20,000 On the basis of the above figures, please indicate the entitlement of the legal heirs of C, assuming that they had not been paid anything other then the share in the Joint Life Policy. (November, 2000) Answer Computation of entitlement of legal heirs of C (1) Profits for the half year ended 31st March, 2011 Rs. Profits for the year ended 31st March, 2011 (after depreciation) 48,000 Add : Depreciation 10,000 Profits before depreciation 58,000 Profits for the first half (assumed : evenly spread) 29,000 Less : Depreciation for the first half 6,000 Profits for the first half year (after depreciation) 23,000 Profits for the second half (i.e., 1st October, 2010 to 31st March, 2011) 29,000 Less : Depreciation for the second half 4,000 Profits for the second half year (after depreciation) 25,000 (2) Capital Accounts of Partners as on 30th September, 2010 Dr. Cr. A B C A B C Rs. Rs. Rs. Rs. Rs. Rs. To Fixed Assets By Balance b/d 48,000 64,000 48,000 (loss on By Reserve 6,000 8,000 6,000 revaluation) 6,000 8,000 6,000 By Goodwill 18,000 24,000 18,000 To Drawings 9,000 12,000 20,000 By P & L Appro- To C Executor’s A/c 52,000 priation A/c © The Institute of Chartered Accountants of India 14.3 Accounting To Balance c/d 57,000 76,000 – (Interest on Rs. 48,000 @ 25% for 6 months) — — 6,000 72,000 96,000 78,000 72,000 96,000 78,000 (3) Application of Section 37 of the Partnership Act Legal heirs of C have not been paid anything other than the share in joint life policy. The amount due to the deceased partner carries interest at the mutually agreed upon rate. In the absence of any agreement, the representatives of the deceased partner can receive at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to the deceased partner. Thus, the representatives of C can opt for Either, (i) Interest on Rs. 52,000 for 6 months @ 6% p.a. = Rs. 1,560 Or (ii) Profit earned out of unsettled capital (in the second half year ended 31st March, 2011) 52,000 Rs. 25,000× =Rs. 7,027 (approx.) 57,000+76,000+52,000 In the above case, it would be rational to assume that the legal heirs would opt for Rs. 7,027. (4) Amount due to legal heirs of C Rs. Balance in C’s Executor’s account 52,000 Amount of profit earned out of unsettled capital [calculated in (3)] 7,027 Amount due 59,027 Question 2 A, B and C were partners, sharing Profits and Losses in the ratio of 5 : 3 : 2 respectively. On 31st March, 2011 their Balance Sheet stood as follows : Liabilities Rs. Assets Rs. A’s capital 7,79,000 Plant and Machinery 13,62,000 B’s capital 7,07,800 Furniture and Fittings 2,36,000 C’s capital 6,86,200 Stock 7,02,000 Creditors 4,91,000 Debtors 1,91,000 Cash at Bank 1,73,000 26,64,000 26,64,000 © The Institute of Chartered Accountants of India 14.4 Issues in Partnership Accounts On 31st July, 2011 A died. According to partnership deed, on the death of a partner, the capital account of the deceased partner was to be credited with : (i) his share of profit for the relevant part of the year of death calculated on the basis of profit earned during the immediately preceding accounting year, and (ii) his share of goodwill Goodwill was to be valued at two years’ purchase of the average profits of immediately preceding three accounting years. The profits, as per books of account were as follows: Rs. For accounting year ended 31st March, 2009 3,29,000 For accounting year ended 31st March, 2010 3,46,000 For accounting year ended 31st March, 2011 3,78,000 However, while going through the books of account on A’s death, it came to light that Rs. 30,000 worth of wages were spent on installation of a new machinery, but the same was not capitalized; the machinery was put into operation on 1st October, 2010. Depreciation was provided on the machinery @ 20% per annum. On 1st October, 2011 A’s son D was admitted into partnership with immediate effect on the following terms : (a) D would get one-fourth share in the profit of the firm, while the relative profit sharing ratio between B and C would remain unchanged. (b) The final balance of A’s capital account would be credited to D’s capital account (c) An adjustment would be made in the Capital Accounts for D’s share of goodwill. The basis of valuation of firm’s goodwill would be the same as was adopted at the time of the death of his father. On 31st March, 2012 the Profit and Loss Account of the firm showed that the firm had earned a profit of Rs. 4,16,000 for the year. The respective drawings accounts showed that while B and C had withdrawn Rs. 60,000 each during the year, D’s drawings totalled Rs. 30,000. The Drawings Accounts are closed at the end of the year by transfer to respective capital accounts. You are required to : (i) Prepare a statement showing distribution of profits for the accounting year ended 31st March, 2012; and (ii) Pass journal entries for all the transactions relating to death of the partner. D’s admission into partnership, and at the end of the year relating to transfer of Drawings Accounts and distribution of profit for the year. (May, 2001) © The Institute of Chartered Accountants of India 14.5 Accounting Answer (i) Statement Showing distribution of profits for the accounting year ended 31st March, 2012 Rs. Rs. Net profit for the year ended 31.03.2012 4,16,000 A’s share (Profit distributed to deceased partner A & his executor) (a) Profit for 4 months (1.4.2011 – 31.7.2011) (W.N.1 ) 67,500 (b) Application of Sec. 37 (1.8.2011 – 30.9.2011) (W. N. 5) 28,021 95,521 B’s share (a) Profit for 4 months (1.4.2011 – 31.7.2011) (W. N. 3) 42,700 (b) Profit for 2 months (1.8.2011 – 30.9.2011) (W. N. 6) 24,787 (c) Profit for 6 months (1.10.2011 – 31.3.2012) (W. N. 10) 93,600 1,61,087 C’s share (a) Profit for 4 months (1.4.2011 – 31.7.2011) (W. N. 3) 28,467 (b) Profit for 2 months (1.8.2011 – 30.9.2011) (W. N. 6) 16,525 (c) Profit for 6 months (1.10.2011 – 31.3.2012) (W. N. 10) 62,400 1,07,392 D’s share (a) Profit for 6 months (1.10.2011 – 31.3.2012) (W. N. 10) 52,000 52,000 4,16,000 (ii) Journal Entries Year 2011 Dr. Cr. Rs. Rs. July 31 Machinery A/c Dr 27,000 To A’s Capital A/c 13,500 To B’s Capital A/c 8,100 To C’s Capital A/c 5,400 (Wages spent on installation of new machinery capitalised and credited to partners’ capital accounts after providing depreciation for six months ended 31st March, 2011) Profit and Loss Suspense A/c Dr. 67,500 © The Institute of Chartered Accountants of India 14.6 Issues in Partnership Accounts To A’s Capital A/c 67,500 (A’s share of profit for four months as calculated in W. N. 1 credited to his capital account) Goodwill A/c Dr. 7,20,000 To A’s Capital A/c 3,60,000 To B’s Capital A/c 2,16,000 To C’s Capital A/c 1,44,000 (Goodwill raised in the books and credited to partners in the old profit sharing ratio 5 : 3 : 2) A’s Capital A/c Dr. 12,20,000 To A’s Executor’s A/c 12,20,000 (Balance due to A transferred to his executor’s account) Profit & Loss Suspense A/c Dr. 28,021 To A’s Executor’s A/c 28,021 (Profit earned out of the unsettled capital credited to A’s executor’s account as per W. N. 5) Oct. 1 A’s Executor’s A/c Dr. 12,48,021 To D’s Capital A/c 12,48,021 (Final balance of A’s executor’s account transferred to D’s capital account) B’s Capital A/c Dr. 3,24,000 C’s Capital A/c Dr. 2,16,000 D’s Capital A/c Dr. 1,80,000 To Goodwill 7,20,000 (Goodwill written off and debited to partners in the new profit sharing ratio 9 : 6 : 5) March 31 B’s Capital A/c Dr. 60,000 C’s Capital A/c Dr. 60,000 D’s Capital A/c Dr. 30,000 To B’s Drawings A/c 60,000 To C’s Drawings A/c 60,000 To D’s Drawings A/c 30,000 (Drawings debited to partners’ capital accounts) © The Institute of Chartered Accountants of India 14.7 Accounting March 31 Profit and Loss Appropriation A/c Dr. 4,16,000 To Profit and loss suspense A/c (Rs. 67,500 + 28,021) 95,521 To B’s Capital A/c 1,61,087 To C’s Capital A/c 1,07,392 To D’s Capital A/c 52,000 (Division of profits as shown in statement of distribution of profits and balance of profit & loss suspense account transferred to profit and loss appropriation account) Working Notes: (1) Computation of A’s share in profit for the period 1.4.2011 – 31.7.2011 A’s share in profit for the period of 1st April, 2011 to 31st July, 2011 is to be calculated on the basis of profit earned during the immediately previous accounting year i.e. year ended on 31st March, 2011 Rs. Profit for the year ended 31st March, 2011 3,78,000 Add : Capital expenditure of wages spent on installation of new machinery, treated as revenue expenditure 30,000 4,08,000 Less : Depreciation on Rs. 30,000 (being the value of machinery @ 20% p.a. for 6 months) 3,000 Correct profit for the year ended 31st March, 2011 4,05,000 4 Profit for 4 months on the basis of last year’s profit = Rs. 4,05,000× =1,35,000 12 5 A’s share in profit = 1,35,000 × =67,500 10 (2) Valuation of Goodwill Rs. Profit for the year ended 31st March, 2009 3,29,000 Profit for the year ended 31st March, 2010 3,46,000 Profit for the year ended 31st March, 2011 4,05,000 Total Profit 10,80,000 © The Institute of Chartered Accountants of India 14.8 Issues in Partnership Accounts 10,80,000 Average Profit = Rs. =Rs. 3,60,000 3 Goodwill (two years’ purchase) = Rs. 3,60,000 × 2 = Rs. 7,20,000 (3) Distribution of profit for 4 months ended 31st July, 2011 Rs. 4 Net Profit (Rs. 4,16,000 × ) 1,38,667 12 A’s share (W. N. 1) 67,500 3 B’s share (Rs. 71,167 × ) 42,700 5 2 C’s share (Rs. 71,167 × ) 28,467 5 (4) Partners’ Capital Accounts as on 31st July, 2011 A B C A B C Rs. Rs. Rs. Rs. Rs. Rs. To Drawings 20,000 20,000 By Balance b/d 7,79,000 7,07,800 6,86,200 To A’s Executor’s A/c 12,20,000 9,54,600 8,44,067 By Plant & Machinery 13,500 8,100 5,400 To Balance c/d – – By Goodwill 3,60,000 2,16,000 1,44,000 By Share in Profit (W. N. 3) 67,500 42,700 28,467 12,20,000 9,74,600 8,64,067 12,20,000 9,74,600 8,64,067 (5) Application of section 37 of the Partnership Act Either 6 2 (i) Interest of Rs. 12,20,000 × × = Rs. 12,200 100 12 Or (ii) Profit earned out of unsettled capital Rs. 4,16,000 × 2 Rs. 12,20,000 × =Rs. 28,021 (approx.) 12 Rs. (12,20,000+9,54,600+8,44,067) In the absence of specific agreement amongst partners on the above subject matter, the representatives of the deceased partner can receive at their option, interest at the rate of 6% p.a. or share of profit earned for the amount due to the deceased partner. © The Institute of Chartered Accountants of India 14.9 Accounting In the above case, it would be rational to assume that A’s representatives would opt for Rs. 28,021. (6) Distribution of profit for 2 months ended 31st Oct, 2011 Rs. 2 Net profit (Rs. 4,16,000 × ) 69,333 12 A’s executor’s share (W. N. 5) 28,021 3 B’s share (Rs. 41,312 × ) 24,787 5 2 C’s share (Rs. 41,312 × ) 16,525 5 (7) A’s Executor’s Account Rs. Rs. To D’s Capital A/c 12,48,021 By A’s capital A/c 12,20,000 By Share in profit (W. N. 6) 28,021 12,48,021 12,48,021 (8) Partner’s Capital Accounts (1st August, 2011 to 30th Sept., 2011) Dr. B C B C Rs. Rs. Rs. Rs. To Drawings 10,000 10,000 By Balancd b/d 9,54,600 8,44,067 To Balance c/d 9,69,387 8,50,592 By P & L A/c 24,787 16,525 9,79,387 8,60,592 9,79,387 8,60,592 (9) Computation of new profit sharing ratio between B, C & D D is admitted for ¼ share B’s new ratio = 3/4 × 3/5 = 9/20 C’s new ratio = 3/4 × 2/5 = 6/20 D’s new ratio = 5/20 New profit sharing ratio = 9 : 6 : 5 (10) Distribution of profit for 6 months ended 31st March, 2012 Rs. 6 Net profit (Rs. 4,16,000 × ) 2,08,000 12 © The Institute of Chartered Accountants of India 14.10 Issues in Partnership Accounts 9 B’s share (Rs. 2,08,000 × ) 93,600 20 6 C’s share (Rs. 2,08,000 × ) 62,400 20 5 D’s share (Rs. 2,08,000 × ) 52,000 20 (11) Partner’s Capital Accounts as on 31st March, 2012 B C D B C D Rs. Rs. Rs. Rs. Rs. Rs. To Goodwill 3,24,000 2,16,000 1,80,000 By Balance b/d 9,69,387 8,50,592 To Drawings 30,000 30,000 30,000 By A’s Executor’s A/c 12,48,021 To Balance c/d 7,08,987 6,66,992 10,90,021 By Share of profit (W. N. 10) 93,600 62,400 52,000 10,62,987 9,12,992 13,00,021 10,62,987 9,12,992 13,00,021 Notes: 1. It is assumed that profit was earned uniformly throughout the year. Although notional profit was calculated for the first four months, it is to be transferred from the current year’s profit (as calculated in working note 3). The question requires that A’s share of profit for this period is to be calculated on the basis of profit earned during year ended 31st March. 2011. The balance amount after calculating his share has been credited to B and C in ratio 3 : 2. 2. It is assumed that drawings were made evenly throughout the year. However, single entry has been given at year end in the main solution relating to transfer of drawings and distribution of profit but the Partners’ capital accounts shown in the working notes include the entries of drawings and distribution of profit of respective dates within the year. Question 3 M/s Neptune & Co.’s Balance Sheet as at 31st March, 2011: Liabilities Rs. Assets Rs. Bank overdraft (State Bank) 54,000 Cash at Bank of India 800 Sundry Creditors 1,56,000 Sundry Debtors 2,80,000 Capital Accounts : Stock 1,00,000 Mr. A Motor Cars cost as per last B/S 1,60,000 Balance as per last B/S 4,02,000 Less : Depreciation till date 54,000 1,06,000 © The Institute of Chartered Accountants of India 14.11 Accounting Add : Profits for the year 95,400 Machinery : 4,97,400 Cost as per last B/S 3,00,000 Less : Drawings 40,000 4,57,400 Less : Depreciation till date 1,40,000 1,60,000 Mr. B Land and Building 2,40,000 Balance as per last B/s 2,00,000 Add : Profit for the year 95,400 2,95,400 Less : Drawings 76,000 2,19,400 8,86,800 8,86,800 You have examined the foregoing Draft of the Balance Sheet and have ascertained that the following adjustments are required to be carried out : (i) Land and Buildings are shown at cost less Rs. 60,000 being the proceeds of the sale during the year of premises costing Rs. 70,000. (ii) Machinery having a net book value of Rs. 4,300 had been scrapped during the year. The original cost was Rs. 12,300. (iii) Rs. 2,000 paid for the Licence fees for the year ending 30th September, 2011 had been written off. (iv) Debts amounting to Rs. 10,420 were considered to be bad and further debts amounting to Rs. 5,400 were considered doubtful and required 100% provision. Provision for doubtful debts had previously been made for Rs. 10,000. (v) An item in the Inventory was valued at Rs. 37,400, but had a realisable value of Rs. 26,000 only. Scrap Material having a value of Rs. 6,600 had been omitted from the stock valuation. (vi) The cashier had misappropriated Rs. 700. (vii) The cash-book for the year ending 31st March, 2011 included payments amounting to Rs. 6,924, the cheques having been made out, but not despatched to suppliers until April 2011. (viii) Interest is to be allowed on the Partners’ opening Capital Account balances less drawings during the year at 9%. You are required to prepare: (a) Profit & Loss Adjustment Account for the year. (b) Capital Accounts of the Partners. (November, 2001) © The Institute of Chartered Accountants of India 14.12 Issues in Partnership Accounts Answer (a) M/s Neptune & Co. Profit and Loss Adjustment Account for the year ended 31st March, 2011 Rs. Rs. To Land & Building (Loss on sale 10,000 By Partner’s Capital Accounts : To Machinery (Loss on scrapping)4,300 Mr. A 95,400 To Provision for Doubtful Debts 5,820 Mr. B 95,400 1,90,800 (Working note) To Stock Adjustment (Fall in the 11,400 By Prepaid expenses (Licence 1,000 Market value) fee) To Cash (Misappropriated) 700 By Stock Adjustment (items 6,600 To Interest on Capital omitted) Mr. A 32,580 Mr. B 11,160 43,740 To Profit transferred to Capital Accounts: Mr. A 61,220 Mr. B 61,220 1,22,440 1,98,400 1,98,400 (b) Partners’ Capital Accounts As on 31st March, 2011 Mr. A Mr. B Mr. A Mr. B 31.3.2011 Rs. Rs. 31.3.2010 Rs. Rs. To Drawings 40,000 76,000 By Balance b/d 4,02,000 2,00,000 To Profit & Loss 31.3.2011 Adjustment Account 95,400 95,400 By Profit & Loss A/c 95,400 95,400 To Balance c/d 4,55,800 1,96,380 By Profit & Loss Adjustment A/c: Interest on capital 32,580 11,160 Profit for the year 61,220 61,220 5,91,200 3,67,780 5,91,200 3,67,780 Working Notes : (1) Provision for doubtful debts charged to profit and loss adjustment account © The Institute of Chartered Accountants of India 14.13 Accounting Provision for Doubtful Debts Accounts Rs. Rs. To Bad Debts 10,420 By Balance b/d 10,000 To Balance c/d (required) 5,400 By Profit & Loss Adjustment A/c (balancing figure) 5,820 15,820 15,820 (2) Interest on Capitals Mr. A Rs. 3,62,000 × 9% p.a. = Rs. 32,580 Mr. B Rs. 1,24,000 × 9% p.a. = Rs. 11,160 Note : Misappropriation by cashier may be debited to cashier also. In that case, Rs. 700 will not be debited to Profit and Loss Adjustment Account and profit transferred to partners will be Rs. 1,23,140. Question 4 Manish, Jatin and Paresh were partners sharing Profits/ Losses in the ratio of Manish 40 percent, Jatin 35 percent, and Paresh 25 percent. The draft Balance Sheet of the partnership as on 31st December, 2011 was as follows : Rs. Rs. Sundry Creditors 30,000 Cash on hand and at Bank 67,000 Bills payable 8,000 Stock 42,000 Loan from Jatin 30,000 Sundry Debtors 34,000 Current Accounts : Less : Provision for Manish 12,000 Doubtful Debts 6,000 28,000 Jatin 8,000 Plant and Machinery Paresh 6,000 26,000 (at cost) 80,000 Capital Accounts : Less : Depreciation 28,000 52,000 Manish 90,000 Premises (at cost) 75,000 Jatin 50,000 Paresh 30,000 1,70,000 2,64,000 2,64,000 Jatin retired on 31st December, 2011. Manish and Paresh continued in partnership sharing Profits/ Losses in the ratio of Manish 60 percent and Paresh 40 percent. 50 percent of Jatin’s Loan was repaid on 1.1.2012 and it was agreed that of the amount then remaining due to him a sum of Rs. 80,000 should remain as loan to partnership and the balance to be carried © The Institute of Chartered Accountants of India 14.14 Issues in Partnership Accounts forward as ordinary trading liability. The following adjustments were agreed to be made to the above mentioned Balance Sheet: (i) Rs. 10,000 should be written off from the premises. (ii) Plant and Machinery was revalued at Rs. 58,000. (iii) Provision for doubtful debts to be increased by Rs. 1,200 (iv) Rs. 5,000 due to creditors for expenses had been omitted from the books of account. (v) Rs. 4,000 to be written off on stocks. (vi) Provide Rs. 1,200 for professional charges in connection with revaluation. As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be valued at an amount equal to one year’s purchase of the average profits of the preceding three years on the date of retirement. Before determining the said average profits a notional amount of Rs. 80,000 should be charged for remuneration to partners. The necessary profits before charging such remuneration were: Year ending 30.12.2009 Rs. 1,44,000 Year ending 31.12.2010 Rs. 1,68,000 Year ending 31.12.2011 Rs. 1,88,200 (As per draft accounts) It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2011 be recomputed after charging the loss on revaluation in respect of premises and stock, the unprovided expenses (except professional expenses) and increase in the provision for doubtful debts. The continuing partners decided to eliminate goodwill account from their books. You are required to prepare: (i) Revaluation Account: (ii) Capital Accounts (merging current accounts therein): (iii) Jatin’s Accounts showing balance due to him; and (iv) Balance Sheet of Manish and Paresh as at 1st January, 2012. (May, 2002) Answer (i) Revaluation Account Rs Rs. To Premises 10,000 By Plant and Machinery 6,000 To Provision for Doubtful Debts 1,200 By Loss on revaluation transferred © The Institute of Chartered Accountants of India 14.15 Accounting To Outstanding Expenses 5,000 to Capital Accounts: To Stocks 4,000 Manish (40%) 6,160 To Provision for Professional Charges 1,200 Jatin (35%) 5,390 Paresh (25%) 3,850 15,400 21,400 21,400 (ii) Capital Accounts of Partners Manish Jatin Paresh Manish Jatin Paresh Rs. Rs. Rs. Rs. Rs. Rs. To Revalutation A/c (loss) 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000 To Goodwill (written off in 48,000 – 32,000 By Current A/c 12,000 8,000 6,000 new Profit sharing ratio) To Personal A/c (Balance 80,610 By Goodwill 32,000 28,000 20,000 transferred) – (old profit sharing) To Balance c/d 79,840 20,150 1,34,000 86,000 56,000 1,34,000 86,000 56,000 (iii) Jatin’s Personal Account Rs. Rs. To Bank Account 15,000 By Capital Accounts 80,610 (50% of old loan) (Balance transferred) ToLoan Account 80,000 By Loan Account 30,000 (transferred) (old loan) To Balance c/d 15,610 1,10,610 1,10,610 (iv) Balance Sheet of Manish and Paresh as on 1st January, 2012 Liabilities Rs. Assets Rs. Capital Accounts Fixed Assets Manish 79,840 Plant and Machinery 86,000 Paresh 20,150 99,990 Less: Depreciation 28,000 58,000 Jatin’s Loan A/c 80,000 Premises 75,000 Current Liabilities Less: Written off 10,000 65,000 and Provisions Current Assets Bills Payable 8,000 Cash in hand & at Bank © The Institute of Chartered Accountants of India 14.16 Issues in Partnership Accounts Sundry Creditors 35,000 (67,000–15,000) 52,000 (30,000+5,000) Sundry Debtors 34,000 Jatin’s dues 15,610 Less: Provision for Provision for doubtful debts 7,200 26,800 Professional charges 1,200 59,810 Stock in trade 38,000 2,39,800 2,39,800 Working Notes : (1) Profit for the Year ending 31st December, 2011 Rs. As per draft accounts 1,88,200 Less: Premises written off 10,000 Provision for Doubtful debts 1,200 Outstanding Expenses 5,000 Stock 4,000 20,200 1,68,000 (2) Valuation of Goodwill Profit for the year ending 31st Dec.2011 (adjusted) 1,68,000 Profit for the year ending 31st Dec. 2010 1,68,000 Profit for the year ending 31st Dec. 2009 1,44,000 4,80,000 Average Profits before partners’ salaries 1,60,000 Less: Partners’ Salaries (notional) 80,000 Super Profit and Goodwill (one year’s purchase) 80,000 Question 5 Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was decided that Robert would retire on 31.3.2011 and in his place Richard would be admitted as a partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1. Balance Sheet of Ram, Rahim and Robert as at 31.3.2011: Liabilities Rs. Assets Rs. Capital Accounts: Cash in hand 20,000 Ram 1,00,000 Cash in Bank 1,00,000 Rahim 1,50,000 Sundry Debtors 5,00,000 © The Institute of Chartered Accountants of India 14.17 Accounting Robert 2,00,000 Stock in Trade 2,00,000 General Reserve 2,00,000 Plant & Machinery 3,00,000 Sundry Creditors 8,00,000 Land & Building 5,30,000 Loan from Richard 2,00,000 ________ 16,50,000 16,50,000 Retirement of Robert and admission of Richard is on the following terms: (a) Plant & Machinery to be depreciated by Rs. 30,000. (b) Land and Building to be valued at Rs. 6,00,000. (c) Stock to be valued at 95% of book value. (d) Provision for doubtful debts @ 10% to be provided on debtors. (e) General Reserve to be apportioned amongst Ram, Rahim and Robert. (f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The relevant figures are: Year ended 31.3.2008 − Profit Rs. 50,000 Year ended 31.3.2009 − Profit Rs. 60,000 Year ended 31.3.2010 − Profit Rs. 55,000 (g) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and the balance will be settled immediately. (h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim. Prepare: (i) Capital accounts of the partners; and (ii) Balance Sheet of the reconstituted firm. (November, 2005) Answer Partners’ Capital Accounts Dr. Cr. Ram Rahim Robert Richard Ram Rahim Robert Richard Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. To Revaluation 10,000 6,000 4,000 − By Balance 1,00,000 1,50,000 2,00,000 − A/c (W.N.1) b/d To Loan from 2,00,000 By General 1,00,000 60,000 40,000 − Robert A/c reserve © The Institute of Chartered Accountants of India 14.18 Issues in Partnership Accounts To Bank 58,000 By Goodwill 55,000 33,000 22,000 − (W.N. 2) To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______ 2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 − To Goodwill∗ 55,000 36,667 − 18,333 By Balance 2,45,000 2,37,000 − − b/d By Loan A/c − − − 2,00,000 − transfer To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500 2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500 Balance Sheet as at 31.3.2011 after the admission of Richard Liabilities Rs. Assets Rs. Capital Accounts: Land and Building 6,00,000 Ram 1,90,000 Plant and Machinery 2,70,000 Rahim 2,00,333 Stock 1,90,000 Richard 1,95,167 Debtors 4,50,000 Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500 Loan from Robert 2,00,000 Cash in hand 20,000 15,85,500 15,85,500 Working Notes: (1) Revaluation Account Rs. Rs. To Plant and Machinery 30,000 By Land and Building 70,000 To Stock 10,000 By Partners Capital A/cs: To Debtors 50,000 Ram 10,000 Rahim 6,000 ______ Robert 4,000 20,000 90,000 90,000 ∗ As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of retirement of Robert is to be written off in new ratio among remaining partners including new partner – Richard. © The Institute of Chartered Accountants of India 14.19 Accounting (2) Calculation of Goodwill: Profit for the year ended 31.3.2008 50,000 Profit for the year ended 31.3.2009 60,000 Profit for the year ended 31.3.2010 55,000 1,65,000 1,65,000 Average profit = = Rs. 55,000 3 Goodwill = Rs. 55,000 × 2 years = Rs. 1,10,000. (3) Bank Account Rs. Rs. To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000 To Richard’s Capital A/c 13,500 By Balance c/d 55,500 1,13,500 1,13,500 Question 6 The following was the Balance Sheet of ‘A’ and ‘B’, who were sharing profits and losses in the ratio of 2:1 on 31.12.2011: Liabilities Rs. Assets Rs. Capital Accounts Plant and machinery 12,00,000 A 10,00,000 Building 9,00,000 B 5,00,000 Sundry debtors 3,00,000 Reserve fund 9,00,000 Stock 4,00,000 Sundry creditors 4,00,000 Cash 1,00,000 Bills payable 1,00,000 29,00,000 29,00,000 They agreed to admit ‘C’ into the partnership on the following terms: (i) The goodwill of the firm was fixed at Rs.1,05,000. (ii) That the value of stock and plant and machinery were to be reduced by 10%. (iii) That a provision of 5% was to be created for doubtful debts. (iv) That the building account was to be appreciated by 20%. (v) There was an unrecorded liability of Rs.10,000. (vi) Investments worth Rs.20,000 (Not mentioned in the Balance Sheet) were taken into account. © The Institute of Chartered Accountants of India 14.20 Issues in Partnership Accounts (vii) That the value of reserve fund, the values of liabilities and the values of assets other than cash are not to be altered. (viii) ‘C’ was to be given one-fourth share in the profit and was to bring capital equal to his share of profit after all adjustments. Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance Sheet of the newly reconstituted firm. (November, 2007) Answer Memorandum Revaluation Account Rs. Rs. To Stock 40,000 By Building 1,80,000 To Plant & machinery 1,20,000 By Investments 20,000 To Provision for doubtful debts 15,000 To Unrecorded liability 10,000 To Profit transferred to Partners’ Capital A/cs (in old ratio) A = 10,000 B = 5,000 15,000 2,00,000 2,00,000 To Building 1,80,000 By Stock 40,000 To Investments 20,000 By Plant & machinery 1,20,000 By Provision for doubtful debts 15,000 By Unrecorded liability 10,000 By Loss transferred to Partners’ Capital A/cs (in new ratio) A = 7,500 B = 3,750 C = 3,750 15,000 2,00,000 2,00,000 Partners’ Capital Accounts A B C A B C To Loss on 7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 - Revaluation To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve Fund 6,00,000 3,00,000 - To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 - To B (W.N.3) - - 8,750 By Profit on 10,000 5,000 Revaluation © The Institute of Chartered Accountants of India 14.21 Accounting To Balance c/d By Cash (Bal. Fig.) 8,40,000 (Refer W.N.2) 11,70,000 5,85,000 5,85,000 16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000 Balance Sheet of newly reconstituted firm as on 31.12.2011 Liabilities Rs. Assets Rs. Capital Accounts Plant & Machinery 12,00,000 A 11,70,000 Building 9,00,000 B 5,85,000 Sundry Debtors 3,00,000 C 5,85,000 Stock 4,00,000 Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000 Sundry Creditors 4,00,000 Bills Payable 1,00,000 37,40,000 37,40,000 Working Notes: 1. Calculation of new profit and loss sharing ratio C will get 1/4 th share in the new profit sharing ratio. Therefore, remaining share will be 1-1/4 =3/4 Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2 Share of B will be 3/4 x 1/3 = 1/4 New ratio will be A : B : C 1/2 : 1/4 : 1/4 2 : 1: 1 2. Calculation of closing capital of C Closing capitals of A & B after all adjustments are: A = Rs.11,70,000 B = Rs. 5,85,000 Since B’s capital is less than A’s capital, therefore B’s capital is taken as base. Hence, C’s closing capital should be Rs.5,85,000 i.e. at par with B (as per new profit and loss sharing ratio) © The Institute of Chartered Accountants of India 14.22 Issues in Partnership Accounts 3. Adjustment entry for goodwill∗ Partners Goodwill as per old ratio Goodwill as per new ratio Effect A 70,000 52,500 + 17,500 - B 35,000 26,250 + 8,750 - C - 26,250 - -26,250 1,05,000 1,05,000 26,250 26,250 Adjustment entry will be: C’s Capital A/c Dr. 26,250 To A’s Capital A/c 17,500 To B’s Capital A/c 8,750 Question 7 P, Q, R are three doctors who are running a Polyclinic. Their capital on 31st March, 2009 was ` 1,00,000 each. They agreed to admit X, Y and Z as partners w.e.f. 1st April 2009. The terms for sharing profits & losses were as follows: (a) 70% of the visiting fee is to go to the specialist concerned. (b) 50% of the chamber fee will be payable to the individual specialist. (c) 40% of operation fee and fee for pathological reports, X-rays and ECG will accrue in favour of the doctor concerned. (d) Balance of profit or loss is shared equally. (e) All the partners are entitled for 6% interest on capital employed. They further agreed that: (i) X, Y and Z brought in ` 20,000 each as goodwill. Goodwill is shared by the existing partners equally. (ii) X, Y and Z brought in ` 50,000 each as capital. Each of the original partners also contributed ` 50,000 by way of capital. The receipts for the year after admission of new partners were: Name of Particulars Visiting Fees Chambers Fees Fees for reports, doctors (`) (`) operation etc. (`) P General Physician 1,50,000 2,00,000 - ∗ As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of admission of C is to be written off in new ratio among all partners including new partner, C. © The Institute of Chartered Accountants of India 14.23 Accounting Q Gynecologist 25,000 1,75,000 1,00,000 R Cardiologist - 1,00,000 75,000 X Child Specialist 1,00,000 1,50,000 - Y Pathologist - - 1,00,000 Z Radiologist - 40,000 2,00,000 Total 2,75,000 6,65,000 4,75,000 Expenses for the year were as follows: Particulars ` Medicines, injections and other consumables 1,00,000 Printing and stationery 5,000 Telephone expenses 5,000 Rent 42,000 Power and light 10,000 Nurses salary 20,000 Attendants wages 20,000 Total 2,02,000 Depreciation: X-Ray machines 15,000 ECG equipments 5,000 Furniture 5,000 Surgical equipments 5,000 Total Depreciation 30,000 You are requested to: (i) Pass necessary journal entries on admission of partners. (ii) Prepare the Profit and Loss Account of the polyclinic for the year ended 31st March, 2010. (iii) Prepare capital accounts of all the partners at the end of the financial year 2009-10. Also show the distribution of profit among partners. (November, 2010) Answer (i) Journal Entries (on admission of partners) Date Particulars Debit (`) Credit (`) 1st April, 2009 X’s capital A/c Dr. 20,000 Y’s capital A/c Dr. 20,000 © The Institute of Chartered Accountants of India 14.24 Issues in Partnership Accounts Z’s capital A/c Dr. 20,000 To P’s capital A/c 20,000 To Q’s capital A/c 20,000 To R’s capital A/c 20,000 (Being goodwill adjusted through capital accounts) Bank A/c Dr. 2,10,000 To X’s capital A/c ( 20,000 + 50,000) 70,000 To Y’s capital A/c ( 20,000 + 50,000) 70,000 To Z’s capital A/c ( 20,000 + 50,000) 70,000 (Being goodwill and capital brought in by new partners) Bank A/c Dr. 1,50,000 To P’s capital A/c 50,000 To Q’s capital A/c 50,000 To R’s capital A/c 50,000 (Being capital brought in by existing partners) (ii) Profit & Loss Account for the year ended 31st March, 2010 Particulars (`) Particulars (`) To Medicines, injections and 1,00,000 By Visiting fee 2,75,000 other consumables To Printing and stationery 5,000 By Chamber fee 6,65,000 To Telephone expenses 5,000 By Fee for report, 4,75,000 operation etc. To Rent 42,000 To Power and light 10,000 To Nurses salary 20,000 To Attendants wages 20,000 To Depreciation X-ray machine 15,000 ECG equipment 5,000 © The Institute of Chartered Accountants of India 14.25 Accounting Furniture 5,000 30,000 Surgical equipment 5,000 To Interest on capital (W.N.3) 39,600 To Net profit transferred to partners’ capital accounts 11,43,400 14,15,000 14,15,000 (iii) Partners’ Capital Accounts for the year ended 31st March, 2010 Debit side Particulars P Q R X Y Z ` ` ` ` ` ` To P, Q & R A/cs - - - 20,000 20,000 20,000 (Goodwill) To Balance c/d 4,56,600 3,96,600 3,31,600 2,69,400 1,64,400 2,24,400 4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400 Credit side Particulars P Q R X Y Z ` ` ` ` ` ` By Balance b/d 1,00,000 1,00,000 1,00,000 - - - By X, Y & Z A/cs 20,000 20,000 20,000 - - - (Goodwill) By Bank 50,000 50,000 50,000 70,000 70,000 70,000 By Interest on 10,200 10,200 10,200 3,000 3,000 3,000 capital (W.N.3) By Fee (share) 2,05,000 1,45,000 80,000 1,45,000 40,000 1,00,000 (W.N.1) By Profit (share) (W.N.2) 71,400 71,400 71,400 71,400 71,400 71,400 4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400 Working Notes: 1. Statement showing distribution of fee among partners Partner Name Visiting fees Chamber fees Operations fees Total (70%) (`.) (50%) (`) (40%) (`) (`) P 1,05,000 1,00,000 - 2,05,000 Q 17,500 87,500 40,000 1,45,000 R - 50,000 30,000 80,000 © The Institute of Chartered Accountants of India 14.26 Issues in Partnership Accounts X 70,000 75,000 - 1,45,000 Y - - 40,000 40,000 Z - 20,000 80,000 1,00,000 1,92,500 3,32,500 1,90,000 7,15,000 2. Statement showing distribution of profit among partners ` Profits as per profit and loss account 11,43,400 Less: Fee payable to partners (7,15,000) Profit to be divided equally among partners 4,28,400 Share of each partner in remaining profit = ` 4,28,400/6 = ` 71,400. 3. Interest on capital employed P Q R X Y Z ` ` ` ` ` ` Opening balance 1,00,000 1,00,000 1,00,000 - - - Add: Premium for 20,000 20,000 20,000 - - - goodwill shared equally by old partners Add: Capital brought in cash 50,000 50,000 50,000 50,000 50,000 50,000 1,70,000 1,70,000 1,70,000 50,000 50,000 50,000 Interest @ 6% 10,200 10,200 10,200 3,000 3,000 3,000 Total interest = ` 39,600. Note: It is assumed that amount of premium for goodwill brought in by new partners X, Y and Z has not been withdrawn by old partners P, Q and R and it is still kept in the business. Question 8 The Balance Sheet of Amitabh, Abhishek and Amrish as at 31.12.2008 stood as follows: Liabilities Amount Assets Amount Rs. Rs. Capital: Land & Buildings 74,000 Amitabh 60,000 Investments 10,000 © The Institute of Chartered Accountants of India 14.27 Accounting Abhishek 40,000 Goodwill 37,800 Amrish 40,000 1,40,000 Life Policy (at surrender value): Creditors 25,800 Amitabh 2,500 General Reserve 8,000 Abhishek 2,500 Investment Fluctuation Reserve 2,400 Amrish 1,000 Stock 20,000 Debtors 20,000 Less: Provision for doubtful debts 1,600 18,400 Cash & bank balance 10,000 1,76,200 1,76,200 Amrish died on 31 March, 2009, due to this reason the following adjustments were agreed upon: (i) Land and Buildings be appreciated by 50%. (ii) Investment be valued at 6% less than the cost. (iii) All debtors (except 20% which are considered as doubtful) were good. (vi) Stock to be reduced to 94%. (v) Goodwill to be valued at 1 year’s purchase of the average profits of the past five years. (vi) Amrish’s share of profit to the date of death be calculated on the basis of average profits of the three completed years immediately preceeding the year of death. The profits of the last five years are as follows: Year Rs. 2004 23,000 2005 28,000 2006 18,000 2007 16,000 2008 20,000 1,05,000 The life policies have been shown at their surrender values representing 10% of the sum assured in each case. The annual premium of Rs.1,000 is payable every year on 1st August. Give the necessary Journal Entries in the books of account and prepare the Balance Sheet of the reconstituted firm. (June, 2009) © The Institute of Chartered Accountants of India 14.28 Issues in Partnership Accounts Answer Journal Entries Particulars Amount Amount 1. Insurance Company’s A/c Dr. 10,000 To Life Policy A/c 10,000 (Being the policy on the life of Amrish matured on his death) 2. Life Policy A/c Dr. 9,000 To Amitabh’s Capital A/c 3,000 To Abhishek’s Capital A/c 3,000 To Amrish’s Capital A/c 3,000 (Being the transfer of balance in life policy account to all partners’ capital accounts) 3. Amitabh’s Capital A/c Dr. 12,600 Abhishek’s Capital A/c Dr. 12,600 Amrish’s Capital A/c Dr. 12,600 To Goodwill A/c 37,800 (Being goodwill standing in the books written off fully) 4. Land & Buildings A/c Dr. 37,000 To Revaluation A/c 37,000 (Being an increase in the value of assets recorded) 5. Investment Fluctuation Reserve A/c Dr. 600 To Investment A/c 600 (Being reduction in the cost of investment adjusted through Investment Fluctuation Reserve) 6. Revaluation A/c Dr. 3,600 To Stock A/c 1,200 To Provision for Doubtful Debts A/c 2,400 (Being the fall in value of assets recorded) 7. Amitabh’s Capital A/c Dr. 3,500 Abhishek’s Capital A/c Dr. 3,500 To Amrish’s Capital A/c 7,000 (Being the share of Amrish’s revalued goodwill adjusted through capital accounts of the remaining partners) © The Institute of Chartered Accountants of India 14.29 Accounting 8. Profit & Loss Suspense Account Dr. 1,500 To Amrish’s Capital A/c 1,500 (Being Amrish’s Share of profit to date of death credited to his account) 9. Revaluation A/c Dr. 33,400 To Amitabh’s Capital A/c 11,133 To Abhishek’s Capital A/c 11,133 To Amrish’s Capital A/c 11,134• (Being the transfer of profit on revaluation) 10. General Reserve A/c Dr. 8,000 Investment Fluctuation Reserve A/c (Rs. 2,400 - Rs. 600) Dr. 1,800 To Amitabh’s Capital A/c 3,267 To Abhishek’s Capital A/c 3,267 To Amrish’s Capital A/c 3,266 (Being the transfer of accumulated profits to capital accounts) 11. Amrish’s Capital A/c Dr. 53,300 To Amrish’s Executor’s A/c 53,300 (Being the transfer of Amrish’s Capital A/c to his Executor’s A/c) Balance Sheet as at 31st March, 2009 Liabilities Amount Assets Amount Amithabh’s Capital Account 61,300 Land & Building 1,11,000 Abhishek’s Capital Account 41,300 Life Policy: Amitabh 2,500 Amrish’s Executor’s Account 53,300 Abhishek 2,500 5,000 Sundry Creditors 25,800 Investments 9,400 Stock 18,800 Debtors 20,000 Less: Provisions 4,000 16,000 Insurance Company 10,000 Cash & Bank Balance 10,000 Profit and loss Suspense A/c 1,500 1,81,700 1,81,700 • Rounded off. © The Institute of Chartered Accountants of India 14.30 Issues in Partnership Accounts Working Notes: (i) Calculation of Amrish’s Share of Profit Total profit for last three years Rs. 18,000+16,000+20,000= Rs.54,000 Average profit 54,000/3 = 18,000 Profit for 3 months = 18,000 x 3/12 = 4,500 Amrish’s share of Profit = 4,500 x 1/3 = 1,500 (ii) Calculation of Goodwill Total profits for last five years Rs.1,05,000 Average profit 1,05,000/5 = 21,000 Goodwill at one year’s purchase Rs. 21,000 x 1 =Rs. 21,000 Question 9 A, B and C run a business sharing profits and losses in proportion of 2:2:1. On 1st January, 2008 their respective capitals were Rs.96,000, Rs.90,000 and Rs.84,000. On 30th June, 2008 the following was the position: Rs. Creditors 30,000 Furniture 9,000 Book debts 1,80,000 Stock 90,000 Cash in hand and at bank 36,000 The drawings of the partners respectively were Rs.12,000, Rs.9,000 and Rs.6,000 during the half-year. Each partner is entitled to an interest at the rate of 5% p.a. on capital. Interest on drawings was calculated as Rs.600 for A, Rs.450 in case of B and Rs.300 in case of C. You are required to prepare: (i) A statement of affair as on 30th June, 2008. (ii) Calculate the profits for the half-year ending on 30th June, 2008 and allocate the same amongst the partners. Also calculate capital of each partner as on 30th June, 2008. (November, 2009) © The Institute of Chartered Accountants of India 14.31 Accounting Answer (i) Statement of Affairs of A, B & C As on 30th June, 2008 Liabilities Rs. Assets Rs. Capital (Bal. Fig.) 2,85,000 Furniture 9,000 Creditors 30,000 Stock 90,000 Book debts 1,80,000 Cash in hand and at bank 36,000 3,15,000 3,15,000 (ii) Statement showing Profit and Loss of partners A, B and C for six months ending on 30th June, 2008 Particulars Rs. Capital as on 30th June, 2008 2,85,000 Add: Drawings of A, B and C (Rs.12,000 + Rs.9,000 + Rs.6,000) 27,000 Add: Interest on drawings of A, B and C (Rs.600 + Rs.450 + 1,350 Rs.300) 3,13,350 Less: Interest on capital of A, B and C (6,750) (Rs.2,400+Rs.2,250+Rs.2,100) 3,06,600 Less: Capital as on 1st January, 2008 of A, B and C (Rs.96,000 + Rs.90,000 + Rs.84,000) (2,70,000) Net Profit 36,600 Statement showing allocation of profits and other adjustments in the capital accounts of A, B and C Particulars A (Rs.) B (Rs.) C (Rs.) Capital as on 1st January, 2008 96,000 90,000 84,000 Add: Net profit in the ratio of 2:2:1 14,640 14,640 7,320 Add: Interest on capital @ 5% p.a. for 6 months 2,400 2,250 2,100 © The Institute of Chartered Accountants of India 14.32 Issues in Partnership Accounts 1,13,040 1,06,890 93,420 Less: Drawings (12,000) (9,000) (6,000) Less: Interest on drawings (600) (450) (300) Capital as on 30th June, 2008 1,00,440 97,440 87,120 Question 10 ‘A’ and ‘B’ are partners sharing Profits and Losses in the ratio of 3:1. Their capitals were Rs.3,00,000 and Rs.2,00,000 respectively. As from 1st April, 2009, it was agreed to change the profit sharing ratio to 3:2. According to the partnership deed, goodwill should be valued at two years’ purchase of the average of three years’ profits. The profits of the previous three years ending 31st March were: 2007-Rs.1,50,000; 2008-Rs.2,00,000 and 2009-Rs.2,50,000. Pass the necessary journal entry to give effect to the above arrangement in the capital accounts of the partners. (November, 2009) Answer Journal Entry Rs. Rs. B’s Capital A/c Dr. 60,000 To A’s Capital A/c 60,000 (Being the adjusting entry for goodwill, passed due to change in profit and loss sharing ratio, through capital accounts of partners) Working Notes: 1. Calculation of Goodwill Rs. Profit for the year 2007 1,50,000 Profit for the year 2008 2,00,000 Profit for the year 2009 2,50,000 Total profit of 3 years 6,00,000 6,00,000 Average Profit = =Rs.2,00,000 3 Goodwill = Rs.2,00,000 × 2 = Rs.4,00,000 © The Institute of Chartered Accountants of India 14.33 Accounting 2. Effect of change in Profit Sharing Ratio Old ratio of A and B = 3 : 1 New ratio of A and B = 3 : 2 Gaining Ratio = New Ratio – Old Ratio 3 3 12−15 3 3 For A = - = = i.e. A loses by 5 4 20 20 20 2 1 8−5 3 3 For B = - = = i.e. B gains by 5 4 20 20 20 3. Amount of compensation payable by B to A 3 ×Rs.4,00,000=Rs.60,000 20 EXERCISES 1. X, Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that : (a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his remuneration, but before charging interest on capital and provision for taxation; (b) Interest is to be provided on capital at 15% per annum; (c) Balance profits after making provision for taxation, is to be shared in the ratio of 1 : 2 : 2 by the three partners. During the year ended 31st March, 2011 : (i) the net profit before tax and before making any payment to partners amounted to Rs. 6,90,000; (ii) interest on capitals at 15% per annum amounted to : (iii) Rs. 60,000 for X; Rs. 1,50,000 for Y Ltd. and Rs. 1,80,000 for Z Ltd. The capitals have remained unchanged during the year; provision for tax is to be at 40% of “total income” of the firm. The total income has been computed at Rs. 1,95,000. You are asked by : (a) the firm to pass closing entries in relation to the above; (b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show the investment in partnership account as it would appear in its ledger; (c) Z Ltd. to show, how the above information will appear in its financial statements for the year; (d) Shri X to show the working, if any, in relation to the above. (Hints: Investment in partnership with Shri X and Z Ltd. Rs. 12,02,800) © The Institute of Chartered Accountants of India 14.34 Issues in Partnership Accounts 2. Avinash, Basuda Ltd. and Chinmoy Ltd. were in partnership sharing profits and losses in the ratio of 9 : 4 : 2. Basuda Ltd. retired from the partnership on 31st March, 2011, when the firm’s balance sheet was as under : Rs. in thousand Sundry creditors 600 Cash and bank 284 Capital accounts : Sundry debtors 400 Avinash 2,700 Stock 800 Basuda Ltd. 1,200 Furniture 266 Chinmoy Ltd. 600 4,500 Plant 850 Land and building 2,500 5,100 5,100 Basuda Ltd.’s share in goodwill and capital was acquired by Avinash and Chinmoy Ltd. in the ratio of 1 : 3, the continuing partners bringing in the necessary finance to pay off Basuda Ltd. The partnership deed provides that on retirement or admission of a partner, the goodwill of the firm is to be valued at three times the average annual profits of the firm for the four years ended on the date of retirement or admission. The profits of the firm during the four years ended 31st March, 2011 in thousands of rupees were: Rs. in thousand 2007-2008 450 2008-2009 250 2009-2010 600 2010-2011 700 The deed further provided that goodwill account is not to appear in the books of accounts at all. The continuing partners agreed that with effect from 1st April, 2011, Ghanashyam, son of Avinash is to be admitted as a partner with 25% share of profit. Avinash gifts to Ghanashyam, by transfer from his capital account, an amount sufficient to cover up 12.5% of capital and goodwill requirement. The balance 12.5% of capital and goodwill requirement is purchased by Ghanashyam from Avinash and Chinmoy Ltd. in the ratio of 2 : 1. The firm asks you to: (i) Prepare a statement showing the continuing partners’ shares; (ii) Pass journal entries including for bank transactions; and (iii) Prepare the balance sheet of the firm after Ghanashyam’s admission (Hints: New ratio 11:7:6; Total of Balance Sheet Rs.66,00,000) © The Institute of Chartered Accountants of India 14.35