Marks Question Total

1 5 05
3 7 21
6 3 18
8 2 16
Total 19 60

Set- A

Q.1 What is meant by reconstitution of partnership firm?

Ans- Partnership is the the result of agreement and any change in existing agreement brings to an end the existing
agreement and a new agreement comes into force. It amount to reconstitution of the firm.

Q.2 What is meant by super profits?

Ans- Super profits is the excess of actual average profits over normal profits

Q.3 State two occasions when sacrificing ratio may be applied.

Sol -(i) On admission of a new partner.
(ii) On change on profit sharing ratio of existing partner
Q.4 Ajay and Naveen are partners sharing profits in the ratio of 5:3. Surinder is admitted in to the firm for
1/4th share in the profit which he acquires from Ajay and Naveen in the ratio of 2:1. Calculate the new
profit sharing ratio.
Sol- Ajay’s sacrifices = 1/4 X 2/3 = 2/12
Naveen’s sacrifices =1/4 X 1/3 = 1/12
Ajay’s new share= 5/8 – 2/12 = 11/24
Naveen’s New share= 3/8 – 1/12 = 7/24
Surrender’s share= 1/4 or 6/24
New ratio = 11:7:6
Q.5 Aarti and Bharti are partners sharing profits in the ratio of 5:3. They admit Shital for 1/4th share and
agree to share between them in the ratio of 2:1 in future. Calculate new and sacrificing ratio.
Sol- Old ratio = 5:3
Shital =1/4th Share
Let the profit be Rs. 1
Remaining profit = 1-1/4 =3/4
Arti : Babita = 2:1
Arti’s share = 3/4 X 2/3 = 1/2
Babita’s Share = 3/4 X 1/3 = 1/4
New Ratio = 1/2, 1/4, 1/4 Or 2:1:1
Sacrificing ratio = Old ratio – New ratio
Arti’s sacrifies = 5/8 – 2/4 = 1/8
Babita’s Sacrifies = 3/8 – 1/4 = 1/8
Sacrificing Ratio = 1:1
Q.6 Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four
(ending on 31st March of the firm were: 2013 - Rs.12,000; 2014 - Rs.18,000; 2015 - Rs.16,000; 2016-
Rs.14,000. Calculate amount of Goodwill.
Solution

Q.7 Ram and Mohan, two partners, drew for private use Rs.1, 20,000 and Rs.80, 000. Interest is
chargeable @ 6% p.a. on the drawings. What is the total interest? CH-1
Solution Date of drawings made by the partners is not given. Therefore, interest on drawings is calculated on
average basis for a period of six months.

Q.8 A and B are partners sharing profits equally. A drew regularly Rs.4, 000 in the beginning of every
month for six months ended 30th September, 2013. Calculate interest on drawings @ 5% p.a.Ch-1
Solution

Q.9 What is the nature of ‘ Revaluation Account’?

Ans- Nominal Account

Q.10 A and B are partners. The net divisible profit as per Profit and Loss Appropriation A/c is Rs
2,50,000. The total interest on partner’s drawing is Rs 4,000. A’s salary is Rs 4,000 per quarter and B’s
salary is Rs 40,000 per annum. Calculate the net profit/loss earned during this year
Sol. Net Profit during the year = Divisible profits + Salary to partners –
Interest on Drawings
= 2,50,000+16,000+40,000-4000= Rs3,02,000
Marks Question Total
1 5 05
3 7 21
6 3 18
8 2 16
Total 19 60

Q.1 X and Yare partners sharing profits in the ratio of 2:1. On 31st March, 2016, their Balance
Sheet show General Reserve of Rs.60,000. It was decided that in future they will share profits and
losses in the ratio of 3:2. Pass necessary Journal entry if they do not want to show General
Reserve in the new Balance Sheet.
Solution
(i) If they do not want to show General Reserve in the new Balance Sheet
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
General Reserve A/c Dr. 60,000
----------To X's Capital A/c 40,000
----------To Y's Capital A/c 20,000
(Being adjustment of general reserve A/c in
old ratio)

WN1 Calculation of Share of General Reserve

Q.2 Reya, Mona and Nisha shared profits in the ratio of 3: 2: 1. The profits for the last three years
were 1.40, 000: Rs.84,000 and Rs.1.06.000 respectively. These profits were by mistake shared equally
for all the three years. It is now decided to correct the error. Give necessary Journal entry for the
same ch-1
Solution
Journal
Debit Credit
Particulars L.F. Rs. Rs.
Nisha's Capital A/c Dr. 55,000
---------To Reya's Capital A/c 55,000
(Being adjustment of profit made)

Working Note :
Total Profits for Last 3 years
= 1,40,000 + 84,000 + 1,06,000
= 3,30,000

Statement Showing Adjustment

Reya Mona Nisha Total
Particulars Rs. Rs. Rs. Rs.
Right Distribution of Profit (3 :2 :1) 1,65,000 1,10,000 55,000 3,30,000
Less: Wrong Distribution of Profit (1,10,000) (1,10,000) (1,10,000) (3,30,000)
Net Effect 55,000 NIL (55,000) NIL

Q.3 A and B are partners sharing Profit and Loss in the ratio of 3:2 having Capital Account balances
of Rs.50,000 and Rs.40,000 on 1st April, 2015. On 1st July, 2015, A introduced Rs.10,000 as his
additional capital whereas B introduced only Rs.1,000. If the interest on capital is allowed to partners
@ 10% p.a.Calculate interest on A’ s capital if the financial year closes on 31st March. ch-1
Solution Calculation of Interest on A's Capital
Date Capital × Period = Product

April 01, 2015 to

June 30, 2015 50,000 × 3 = 1,50,000

July 01, 2015 to

March 31, 2016 60,000 × 9 = 5,40,000
Sum of Product 6,90,000

Q.4 X, Y and Z are sharing profits and losses in the ratio of 5:3:2. They decide to share future
profits and losses in the ratio of 2:3:5 with effect from 1st April, 2016. They also decide to record
the effect of the following accumulated profits, losses and reserves without affecting their book
figures by passing a single entry.
Book Figure (Rs.)
General Reserve 6,000
Profit and Loss A/c (Credit) 24,000
Advertisement Suspense A/c 12,000
Pass necessary Single Adjustment Entry.
Solution
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Z's Capital A/c Dr. 5,400
---------- To X's Capital A/c 5,400
(Being adjustment for general reserve, Profit and Loss A/c
and advertisement suspense account is made on change in
profit sharing ratio)
Worki
ng Notes :
1 Net Amount to be adjustment
= General Reserve + Profit and Loss A/c(Credit) - Advertisement Suspense A/c
= 6,000+24,000-12,000
= Rs.18,000
2 Calculation of Sacrificing (or Gaining) Ratio
Old Ratio (X,Y and Z)=5:3:2
New Ratio (X,Y and Z) = 2:3:5
Sacrificing (or Gaining) Ratio= Old Ratio-New Ratio

Q.5 A, B and C who are presently sharing profits and losses in the ratio of 5:3:2 decide to share future
profits and losses in the ratio of 2:3:5. Give the journal entry to distribute ‘Workmen Compensation
Reserve’ of Rs 1,20,000 at the time of change in profit- sharing ratio, when there is no claim against it
Solution
Date Particulars L.F. Debit Credit
Rs. Rs
Workmen Compensation Reserve A/c Dr. 1,20,000
To A’s Capital 60,000
To B’s Capital 36,000
To C’s Capital 24,000
(Being Workmen Compensation Reserve
distributed in 5:3:2))
Q.6 X, Y and Z who are sharing profits in the ratio of 5:3:2 decide to share profits in the ratio of 2:3:5 with
effect from 1st April, 2017. Workmen Compensation Reserve appears at Rs 1, 20,000 in the Balance sheet as
at 31st March 2017 and Workmen Compensation Claim is estimated at Rs 1,50,000. Pass necessary Journal
entries for the treatment of Workmen Compensation Reserve and Provision for Workmen Compensation
Claim .
Solution
Date Particulars L.F. Debit Credit
Rs. Rs
Workmen Compensation Reserve A/c Dr. 1,20,000
Revaluation A/c Dr. 30,000
To Provision for Workmen Compensation Claim A/c) 1,50,000

(Being Provision created and shortfall charged to

revaluation A/c)
X’s Capital A/c Dr. 15,000
Y’s Capital A/c Dr. 9,000
Z’s Capital A/c Dr. 6,000
30,000
(Being Loss on Revaluation transferred to capital A/c)
Q.7 A, B and C who are presently sharing profits and losses in the ratio of 5:3:2 decide
to share future profits and losses in the ratio of 2:3:5. Give the Journal entry to
distribute 'Investment Fluctuation Reserve' of Rs.20, 000 at the time of change in profit-
sharing ratio, when investment (market value Rs.95,000) appears at Rs.1, 00,000.
Solution
Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Investment Fluctuation Reserve A/c Dr. 5,000
--------To Investment A/c 5,000
(Being adjustment for decrease in the value of
investments)
Investment Fluctuation Reserve A/c Dr. 15,000
--------To A's Capital A/c 7,000
--------To B's Capital A/c 4,500
--------To C's Capital A/c 3,000
(Being adjustment of balance in Investment Fluctuation
Reserve A/c in old ratio)
Working Notes:
1 Calculation of Share of Investment Fluctuation Reserve

Q.8 X, Y and Z share profits as 5:3:2. They decide to share their future profits as 4:3:3 with effect
from 1st April, 2016. On this date the following revaluations have taken place.

Book Value Revised Value

(Rs.) (Rs.)
Investments 22,000 25,000
Plant and Machinery 25,000 20,000
Land and Building 40,000 50,000
Outstanding Expenses 5,600 6,000
Sundry Debtors 60,000 50,000
Trade Creditors 70,000 60,000
Pass necessary adjustment entry to be made because of the above changes in the values of assets
and liabilities. However, old values will continue in the books.
Solution

Journal

Debit Credit
Date Particulars L.F. Rs. Rs.

Z's Capital A/c Dr. 760

--------To X's Capital A/c 760
 (Being adjustment of revaluation profit
made)
Working Notes:
1 Calculation of Net Profit or Loss on Revaluation
Particulars (Rs.)
Increase in Investment 3,000(Cr.)
Decrease in Plant and Machinery (5,000)(Dr.)
Increase in Land and Building 10,000(Cr.)
Increase in Outstanding Expenses (400)(Dr.)
Decrease in Sundry Debtors (10,000)(Dr.)
Decrease in Trade Creditors 10,000(Cr.)
Profit on Revaluation 7,600(Cr.)
2 Calculation of Sacrificing (or Gaining) Ratio.
Old Ratio (X, Y and Z) = 5:3:2
New Ratio (X, Y and Z) =4:3:3
Sacrificing (or Gaining) Ratio = Old Ratio- New Ratio

3 Adjustment of Revaluation Profit

Q.9 A and B are partners sharing profits in the ratio of 3:2. They decided to admit C as a partner
from, 1st April, 2016 on the following terms:
i. C will be given 2/5th share of the profit.
ii. Goodwill of the firm will be valued at two years' purchase of three years' normal average profits
of the firm.
Profits of the previous three years ended 31st March were:
2016- Profit Rs.30,000 (after debiting loss of stock by fire Rs.40,000).
2015 - Loss Rs.80,000 (includes voluntary retirement compensation paid 1, 10,000).
2014 - Profit Rs.1,10,000 (including a profit of 30,000 on the sale of fixed assets).
You are required to value the goodwill.
Solution : Goodwill = Normal Average Profit x Number of years' purchase
Abnormal Abnormal
Loss Gain
Actual Non- Non- Normal
Year Profit + Recurring - Recurring = Profit
2016 30,000 + 40,000 - Nil = 70,000
2015 (80,000) + 1,10,00 - Nil = 30,000
2014 1,10,000 + Nil - 30,000 = 80,000
Normal Profits for last 3 years = 1,80,000
Q.10 X and Y are partners sharing profits and losses in the ratio of 3: 2. They admit Z into
partnership for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this
purpose is to be calculated at two years' purchase of the average normal profit of past three years.
Profits of the last three years ended 31st March, were:
2014 - Profit Rs.50,000 (including profits on sale of assets Rs.5,000).
2015 - Loss Rs.20,000 (including loss by fire Rs.30,000).
2016- Profit Rs.70,000 (including insurance claim received Rs.18,000 and interest on investments and
Dividend received Rs.8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.
Solution

Abnormal Abnormal
Loss Gain
Actual Non- Non- Normal
Year Profit + Recurring - Recurring = Profit

2014 50,000 + Nil - 5,000 45,000

2015 (20,000) + 30,000 - Nil 10,000

18,000
+
2016 70,000 + Nil - 8,000 44,000
99,000
Normal Profits for last 3 years

Q.11 A partnership firm earned the net profits during the last three years ended 31st March as
following:
2014 - Rs.17,000; 2015 - Rs.20,000; 2016 - Rs.23,000.
The capital investment in the firm throughout the above-mentioned period has been Rs.80,000. Having
regard to the risk involved, 15% is considered to be a fair return on the capital Calculate value of
goodwill on the basis of two years' purchases of average super profit earned during the above-
mentioned three years
Solution
Q.12 Bat and Ball are partners sharing the profits in the ratio of 2: 3 with capitals of Rs.1, 20,000 and Rs.60,
000 respectively. On 1st October, 2015, Bat and Ball granted loans of Rs.2, 40,000 and Rs.1, 20,000
respectively the firm. The losses for the year ended 31st March, 2016 before any interest amounted to Rs.9,
000. Bat had allowed the firm to use has property for business for a monthly rent of Rs 5,000.Show
distribution of profit/loss. Ch-1
Solution
Profit and Loss Account
for the year ended March 31,2016
Particulars Rs. Particulars Rs.
To Loss b/d (before interest) 9,000 By Loan transferred to
To Interest on Ball's loan 7,200 Bat’s Capital 31,920
To Interest on Bat's Loan 3,600 Ball’s Capital 47,880
To Bat Rent (5000 x12) 60,000
79,800 79,800
Working notes :
1 Interest on Partner's Loan

2 Distribution of Loss to the Partners

Q.13 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 Rs.2, 500 per month and Manoj was to get a commission
of Rs.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 Rs.1,250 and on Manoj's drawings was Rs.425.
Capitals of the partners were Rs.2,00,000 and Rs.1,50,000 respectively, and were fixed. The firm
earned a profit of Rs.90, 575 for the year ended 31st March, 2016. Prepare Profit and Loss
Appropriation Account of the firm ch-1
Solution –
Profit and Loss Appropriation Account
Dr. Cr.
Amount Amount
Particulars Particulars
Rs Rs
Salary to Prem (Rs 2,500 × 12) 30,000 Profit and Loss A/c (Net Profit) 90,575
Commission to Manoj 10,000 Interest on Drawings A/c:
Interest on Capital: Prem 1,250
Prem 10,000 Manoj 425 1,675
Manoj 7,500 17,500
Profit transferred to:
Prem’s Current A/c 20,850
Manoj’s Current A/c 13,900 34,750
92,250 92,250

Working Notes:
WN 1 Calculation of Interest on Capital
Interest on Prem’s Capital = 2,00,000 x 5/100 = 10,000
Interest on Manoj’s Capital = 1,50,000 x 5 /100 = 7,500
WN 2 Calculation of Profit Share of each Partner
Profit available for distribution = 90,575 + 1,675 − 30,000 − 10,000 − 17,500
= Rs 34,750
Profit sharing ratio = 3 : 2
Prem profit share = 3/5 x 34750 = 20,850
Manoj profit share = 2/5 x 34,750 = 13,900
Q.14 Ashish and Ankita are partners sharing profit in the ratio of 3:2. Their capital accounts showed a
credit balance of Rs 5,00,000 and Rs 6,00,000 respectively as on 31st March 2017 after debit of drawing
during the year of Rs 1,50,000 and Rs 1,00,000 respectively. Net profit for the year ended 31st March
was Rs 5,00,000 interest on capital is to be allowed @10%p.a. Pass the Necessary Journal Entry ch-1
Solution
Journal
Debit Credit
Date Particulars L.F. Amount Amount
(Rs) (Rs)

Profit & Loss Appropriation A/c Dr. 1,35,000

To Ashish’s Capital A/c 65,000
To Aakash’s Capital A/c 70,000
(Interest on capital transferred to Profit & Loss
Appropriation A/c)
3,65,000
Profit & Loss Appropriation A/c 2,19,000
To Ashish’s Capital A/c 1,46,000
To Akash’s Capital A/c
(Profit transferred to Partners’ Capital A/c)

Profit and Loss Appropriation Account

for the year ended 31, March 2017
Dr. Cr.
Amount Amount
Particulars Particulars
Rs Rs
Interest on Capital A/c: Profit and Loss A/c 5,00,000

Ashish 65,000

Aakash 70,000 1,35,000

Profit transferred to:

Ashish’s Capital A/c 2,19,000

Aakash’s Capital A/c 1,46,000 3,65,000

5,00,000 5,00,000

Working Notes:

WN1: Calculation of Opening Capital:

Particulars Ashish Aakash

Capital at the end 5,00,000 6,00,000
Add: Drawings made 1,50,000 1,00,000
Capital at the beginning 6,50,000 7,00,000
WN2: Calculation of Interest on Capital
Ashish Interest on capital =6,50,000 x 10/100 = Rs 65,000
Aakash Interest on Capital = 7,00,000 x 1
Marks Question Total
1 5 05
3 7 21
6 3 18
8 2 16
Total 19 60

Q.1 A and B are partners sharing profits and losses in the ratio of 3: 1. On 1st April, 2015, their
capitals were A Rs.50,000 and B Rs.30,000. During the year ended 31st March, 2016 they earned a net
profit of Rs.50,000.The terms of partnership are:
a. Interest on capital is to be charged @ 6% p.a.
b. A will get a commission @ 2% on turnover.
c. B will get a salary of Rs.500 per month.
d. B will get commission of 5% on profits after deduction of all expenses including such commission
Partners' drawings for the year were: A Rs.8, 000 and Rs.6, 000. Turnover for the year was
Rs. 3, 00,000. After considering the above facts, you are required to prepare Profit and Loss
Appropriation Account and Partners' Capital Accounts. Ch-1
Solution
Profit and Loss Appropriation Account
For the year ended March 31,2016
Dr Cr
Particulars Rs. Particulars Rs.
By Profit and Loss A/c (Net
To Interest on Capital Profit) 50,000
A 3,000
B 1,800 4,800
To B's Salary (500 × 12) 6,000
To Partner's Commission
A 6,000
B 1,581 7,581
To Profit transferred to :
A's Capital A/c 23,714
B's Capital A/c 7,905 31,619
50,000 50,000

Partner's Current Account

Dr Cr
A B A B
Particulars Rs. Rs. Particulars Rs. Rs.
To Drawings A/c 8,000 6,000 By Balance b/d 50,000 30,000
By Interest on Capital A/c 3,000 1,800
By Commission A/c 6,000 1,581
To Balance c/d 74,714 35,286 By P/L Appropriation A/c 23,714 7,905
82,714 47,286 82,714 47,286
Working Notes :
1 Calculation of Interest on Capital

2 Calculation of Commission to Partners

Commission to B = 5% on Profits after all Expense including such Commission

Profits after all expense
= Rs.50,000 - Rs.4,800 - Rs.6,000 - Rs.6,000
= Rs.33,200

3 Calculation of Profit Share of each Partner

Profit available for Distribution
= Rs.50,000 - Rs.4,800 - Rs.6,000 - Rs.7,581
= Rs.31,619
Profit sharing ratio = 3 :1

Q.2 A, B and C were partners in a firm having capitals of Rs.50,000; Rs.50,000

and Rs.1,00,000 respectively. Their Current Account balances were A: Rs.10,000; B: 5,000 and C:
2,000 (Dr.). According to the Partnership Deed the partners were entitled to an interest on Capital @
10% p.a. C being the working partner was also entitled to a salary of Rs.12,000 p.a. The profits were
to be divided as: ch-1
a. The first Rs.20,000 in proportion to their capitals.
b. Next Rs.30,000 in the ratio of 5 : 3 : 2.
c. Remaining profits to be shared equally.
The firm made a profit of Rs.1,72,000 before charging any of the above items.
Prepare Profit and Loss Appropriation Account and pass necessary Journal entry for the
appropriation of profits. Ch-1
Solution
Profit and Loss Appropriation Account
Dr. Cr.
Particulars Rs. Particulars Rs.
To Interest on Capital By Profit and Loss A/c (Net Profit) 1,72,000
A 5,000
B 5,000
C 10,000 20,000
To Salary to C 12,000
To Profit transferred to :
A's Capital A/c 50,000
B's Capital A/c 44,000
C's Capital A/c 46,000 1,40,000
1,72,000 1,72,000
Journal Entries
 L. Debit Credit
Date Particulars F. Rs. Rs.
D
Interest on Capital A/c r. 20,000
____To A's Current A/c 5,000
____To B's Current A/c 5,000
____To C's Current A/c 10,000
(Being Interest on partner's capital allowed to
partners)
D
Salary A/c r. 12,000
____To C's Current A/c 12,000
(Being Salary Allowed to C)
D
Profit and Loss Appropriation A/C r. 1,40,000
____To A's Current A/c 50,000
____To B,s Current A/c 44,000
____To C's Current A/c 46,000
(Being profit available for distribution
transferred to partners' current account)
Working Notes :
1 Calculation of Interest on Capital

2 Calculation of Profit Share of each Partner

Profits available for Distribution = 1, 72,000 - 20,000 - 12,000 = Rs. 1, 40,000

i. Distribution of first Rs. 20,000 in the Capital ratio i.e. 1:1:2

ii. Distribution of Next Rs. 30,000 in the ratio of 5: 3: 2

iii. Remaining profit available for distribution = 1,40,000 - 20,000 - 30,000 = Rs.90,000
This profit of Rs.90,000 is to be shared equally by the partners.

Therefore,
Total Profit Share of A = 5,000 + 15,000 + 30,000 = Rs.50, 000
Total Profit Share of B = 5,000 + 9,000 + 30,000 = Rs.44, 000
Total Profit Share of C = 10,000 + 6,000 + 30,000 = Rs.46, 000
Q.3 Balance Sheet of X and Y, who share profits and losses as 5:3, as at 1st April, 2016 is:

Liabilities Rs. Assets Rs.

X's Capital 52,000 Goodwill 8,000
Y's Capital 54,000 Machinery 38,000
General Reserve 4,800 Furniture 15,000
Sundry Creditors 5,000 Sundry Debtors 33,000
Employee's Provident Fund 1,000 Stock 7,000
Workmen Compensation Reserve 10,000 Bank 25,000
Advertisement
Suspense's A/c 800
1,26,800 1,26,800

On the above date, they decided to change their profit-sharing ratio to 3:5 and agreed upon:
a. Goodwill be valued on the basis of two years' purchase of the average profit of the
last three years. Profits for 2013-14 - Rs.7,500; 2014 -15- Rs. 4,000; 2015-16- Rs. 6,500.
b. Machinery and Stock be revalued at Rs.45,000 and Rs.8,000 respectively.
c. Claim on account of workmen compensation is Rs.6,000.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the new firm.
Solution

Revaluation Account
Dr Cr
Particulars Rs. Particulars Rs.
To Profit transferred to: By Machinery A/c 7,000
X's Capital A/c 5,000 By Stock A/c 1,000
Y's Capital A/c 3,000 8,000
8,000 8,000

Partner's Capital Account

Dr. Cr.
Particulars X Y Particulars X Y
To Advertisement Suspense A/c 500 300 By Balance B/d 52,000 54,000
To Goodwill A/c 5,000 3,000 By General Reserve A/c 3,000 1,800
To X's Capital (Adjustment of
Goodwill) -3,000 By WCF 2,500 1,500
By Revaluation A/c
To Balance c/d 60,000 54,000 (Profit) 5,000 3,000
By Y's Capital A/c
(Adjustment Goodwill) 3,000 -
65,500 60,300 65,500 60,300

Balance Sheet
As on April 01, 2016 (after Change in Profit Sharing Ratio)
Liabilities Rs. Assets Rs.
X's Capital 52,000 Goodwill 8,000
Y's Capital 54,000 Machinery 38,000
General Reserve 4,800 Furniture 15,000
Sundry Creditors 5,000 Sundry Debtors 33,000
Employee's Provident Fund 1,000 Stock 7,000
Workmen Compensation Reserve 10,000 Bank 25,000
Advertisement Suspense's A/c 800
1,26,800 1,26,800

Working Notes:
1 Calculation of Sacrificing (or Gaining) Ratio
Old Ratio (X and Y)= 5:3
New Ratio (X and Y) = 3:5
Sacrificing (or Gaining) Ratio= Old Ratio- New Ratio

2 Calculation of New Goodwill

Goodwill= Average Profit × Number of Year's Purchase= 6,000 × 2= Rs.12,000

3 Adjustment of Goodwill

Journal

Debit Credit
Date Particulars L.F. Rs. Rs.

Workmen's Compensation Reserve A/c Dr. 10,000

----------To Workmen's Compensation Claim A/c 6,000
----------To X's Capital A/c 2,500
----------To Y's Capital A/c 1,500
(Being workmen's compensation claim distributed among
partners in their old ratio i.e.5:3)
X's Capital A/c 5,000
Y's Capital A/c 3,000
----------To Goodwill A/c 8,000
 (Being goodwill written off among partners in their old ratio)
X's Capital A/c 500
Y's Capital A/c 300
----------To Advertisement suspense A/c 800
(Being advertisement suspense written off among partners in
their old ratio)
General Reserve A/c Dr 4,800
----------To X's Capital A/c 3,000
----------To Y's Capital A/c 1,800
(Being general reserve distributed among partners in their old
ratio)
Revaluation A/c Dr. 8,000
----------To X's Capital A/c 5,000
----------To Y's Capital A/c 3,000
(Being revaluation profit distributed among partners in their old
ratio)
Y's Capital A/c Dr. 3,000
----------To X's Capital A/c 3,000
(Being adjustment of goodwill made )

Q.4 Balance Sheet of P,Q and R who share profits in the ratio of 2:2:1 as at 31st March, 2016 is:

Liabilities Rs. Assets Rs.

Capital A'cs; Land 2,00,000
P 2,40,000 Building 80,000
Q 2,00,000 Plant 1,60,000
R 1,60,000 6,00,000 Stock 2,10,000
General Reserve 48,000 Debtors 60,000
Creditors 55,000 Cash 10,000
Bills Payable 17,000
7,20,000 7,20,000

From 1st April, 2016 the partners decided to share the profits equally. For this purpose, the
following adjustments were agreed upon:
a. The Goodwill of the firm should be valued atRs. 60,000.
b. Land should be valued at Rs.3, 00,000 and Building and Plant should be depreciated
by 5%. Stock be valued at Rs.2, 25,000.
c. Creditors amounted to Rs.2,000 were not likely to be claimed and hence should be
written off.
You are required to:
i. record necessary Journal entries to give effect to the above agreement, without
opening the Revaluation Account;
ii. prepare Capital Accounts of the Partners and
iii. prepare Balance Sheet of the firm after reconstitution.
Solution
 Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
R's Capital A/c Dr. 8,000
----------To P's Capital A/c 4,000
----------To Q's Capital A/c 4,000
(Being adjustment of goodwill made)
R's Capital A/c Dr. 14,000
----------To P's Capital A/c 7,000
----------To Q's Capital A/c 7,000
(Being profit on revaluation adjustment)
General Reserve A/c Dr. 48,000
----------To P's Capital A/c 19,200
----------To Q's Capital A/c 19,200
----------To R's Capital A/c 9,600
(Being general reserve distributed among partners in old ratio)

Partners Capital Accounts

Dr. Cr.
Particulars P Q R Particulars P Q R
To P's Capital A/c
(Goodwill) 4,000 By Balance b/d 2,40,000 2,00,000 1,60,000
To Q's Capital A/c By R's Capital A/c
(Goodwill) 4,000 (Goodwill) 4,000 4,000 -
To P's Capital A/c By R's Capital A/c
(Revaluation) 7,000 (Revaluation) 7,000 7,000 -
To Q's Capital A/c
(Revaluation) 7,000 By General Reserve 19,200 19,200 9,600
To Balance c/d 2,70,200 2,30,200 1,47,600
2,70,200 2,30,200 1,69,600 2,70,200 2,30,200 1,69,600

Balance Sheet
Liabilities Rs. Assets Rs.
Creditor's 55,000 Land 2,00,000
Bill's payable 17,000 Building 80,000
Capital A/c Plant 1,60,000
P 2,70,200 Stock 2,10,000
Q 2,30,200 Debtors 60,000
R 1,47,600 6,48,000 Cash 10,000

7,20,000 7,20,000

Working Notes:
1 calculation of Sacrificing (or Gaining ) Ratio
Old Ratio (X,Y and Z)=2:2:1
New Ratio (X,Y and Z)= 1:1:1
Sacrificing (or Gaining) Ratio= Old Ratio- New Ratio

2 Adjustment of Goodwill

3 Calculation of Profit or Loss on Revaluation

Particulars Amount (Rs)

Increase in Land 1,00,000 (Cr.)
Decrease in Building (4,000)(Dr.)
Decrease in Plant (8,000)(Dr.)
Increase in Stock 15,000(Cr.)
Decrease in Creditors 2,000(Cr.)
1,05,000(Cr.)
Profit on Revaluation

4 Adjustment of Profit on Revaluation

Q.5 A and B are partners in a firm sharing profits in the ratio of 2: 1. They decided with effect
from 1st April, 2016, that they would share profits in the ratio of 3:2. But, this decision was taken
after the profit for the year 2016-17 amounted to Rs.90,000 has been distributed in the old ratio.
Value of firm's goodwill was estimated on the basis of aggregate of two years' profits preceding
the date decision became effective.
The profits for 2014-15 and 2015-16 were Rs.60,000 and Rs.75,000 respectively. It was decided
that Goodwill Account will be opened in the books of the firm and necessary adjustment be made
through Capital Accounts which, on 31st March stood, at Rs.1,50,000 for A and Rs.90,000 for B.
Pass necessary Journal entries and prepare Capital Accounts
Sol-
 Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
A's Capital A/c Dr. 6,000
----------To B's Capital A/c 6,000
(Being adjustment of profit for 2016-17 on change in
profit sharing ratio)
B's Capital A/c Dr. 9,000
----------To A's Capital A/c 9,000
(Being adjustment of goodwill made on change in profit
sharing ratio)

Partner's Capital Accounts

Dr Cr
Particulars A B Particulars A B
To B's Capital A/c 6,000 - By Balance b/d 1,50,000 90,000
(Adjustment of profit) By A's Capital A/c 6,000
To A's Capital A/c 9,000 (Adjustment Profit)
(Adjustment of Goodwill) By B's Capital A/c 9,000 -
To Balance c/d 1,53,000 87,000 (Adjustment of Goodwill)
1,53,000 96,000 1,59,000 96,000

Working Notes:
1 Calculation of Sacrificing (or Gaining) Ratio
Old Ratio (A and B)=2:1
New Ratio (A and B)=3:2
Sacrificing (or Gaining) Ratio=Old Ratio-New Ratio

2 Adjustment of Profit for 2016-17

3 Calculation of New Goodwill

= Profit of 2014-15+ Profit of 2015-16
= 60,000+75,000
= Rs.1,35,000
4 Adjustment of Goodwill
Q.6 X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed that that
goodwill will be valued at three year’s purchase of average profit of last five years. Profits for the last five
years were.
Year Ended 31st March 2013 31st March 2014 31st March 2015 31st March 2016 31st March 2017
Profits (Rs) 90,000 (loss) 1,60,000 1,50,000 65,000 1,77,000
Books of Account of the firm revealed that:
(1) The firm had gain (profit) of Rs 50,000 from sale of machinery sold in the year ended 31st March, 2014.
The gain (profit) was credited in profit and loss account.
(2) There was an abnormal loss of Rs 20,000 incurred in the year ended 31st March, 2015 because of a
machine becoming obsolete in accident.
(3) Overhauling cost of second hand machinery purchased on 1st July, 2015 amounting to Rs 1, 00,000 was
debited to Repair Account. Depreciation is charged @ 20% p.a on Written Down Value Method. Calculate
the value of Goodwill.
Solution
Goodwill = Average Profit × No. of years' purchase = 1,00,000 × 3 = Rs 3,00,000
Working Notes:
WN: 1 Calculation of Normal Profits

Year Profit/(Loss) (Rs) Adjustment Normal Profit (Rs)

31 March, 2013 (90,000) - (90,000)
31 March, 2014 1,60,000 (50,000) 1,10,000
31 March, 2015 1,50,000 20,000 1,70,000
31 March, 2016 65,000 85,000* 1,50,000
31 March, 2017 1,77,000 (17,000) 1,60,000
5,00,000
* Adjustment Amount

Overhauling cost of second hand machinery wrongly accounted as expense 1,00,000

instead of capital expenditure. Profit to be increase by Rs
1,00,000
Depreciation to be debited from P&L A/c ( 1,00,000 × 20/100 × 9/12 ) (15,000)
Amount to be added back 85,000
WN: 2 Calculation of Average Profit
Average Profit = Total Profit for past given years Number of Years = 5,00,000/5 = Rs 1,00,000
Marks Question Total
1 5 05
3 7 21
6 3 18
8 2 16
Total 17 60

Q.1 Divya and Pooja are partners in a firm, sharing profit and losses in the ratio of 3:2. On 31st
March, 2015, their Balance-sheet was as under:
Balancesheet
Liabilities Amount Assets Amount
Sundry Creditors 9,800 Goodwill 16,000
General Reserve 23,400 Land and Building 20,000
Profit and Loss A/c 4,000 Investment 66,000
Investment Fluctuation 12,600 Debtors 18,600
Reserve Bill Receivable 7,400
Capital Cash in Hand 11,100
Divya 60,000 1,00,000 Advertisement Suspense Account 10,700
Pooja 40,000
1,49,800 1,49,800
st
The partners decided that with effect from 1 April 2015 they would share profit and losses
equally. For the purpose they decided that
(a) Investment to be valued at Rs 60,000
(b) Goodwill to be valued at Rs 24,000
(c) General Reserve not to be distributed between partners
You are required to
(a) Pass journal entries (b) Prepare the revised Balance-sheet of the firm
Sol-

Journal
Debit Credit
Date Particulars L.F. Rs. Rs.
Profit and loss A/c Dr. 4,000
To Divya 2400
To Pooja 1600
(being profit distributed in old ratio)
\
IFF Ac Dr. 12,600
6000
To Invt 3960
To Divya 2640
To Pooja
( loss on invt written off from IFF)

DIVYA A/C Dr. 9600

Pooja Dr. 6400 .
 To goodwill 16,000
(being purchase of goodwill written off)
6420
Divya A/c 4280
Pooja A/c Dr. 10700
To Advt suspense
(Advt suspense A/c Written off)

Pooja A/c Dr. 4740 4740

To Divya
(Being adjustment for general reserve and goodwill)

Balancesheet

Liabilities Amount Assets Amount

Sundry Creditors 9,800 Land and Building 20,000
General Reserve 23,400 Investment 60,000
Capital Debtors 18,600
Divya 55,080 Bill Receivable 7,400
Pooja 28,820 Cash in Hand 11,100
1,17,100 1,17,100
Working notes
Net adjustment to be made
General reserve 23,400
Goodwill 24,000
47,400
Sacrifing ratio
Old- 3:2 New 1;1
Divya 3/5-1/2= 1/10(s) Pooja 2/5-1/2=1/10(g)
Since Divya has sacrificed she will credited from 1/10 of 47400 = 4,740
Since Pooja has gained she will credited from 1/10 of 47400 = 4,740

Capital Account
Particular Divya Pooja Particular Divya Pooja
To Goodwill 9,600 6,400 By Balance b/d 60,000 40,000
To advertisement suspense 6,420 4,280 By profit and loss A/c 2,400 1,600
To Divya -- 4,740 By IFF A/c 3,960 2,640
To Balace c/d 55,080 28,820 By Pooja 4,740 ---
71,100 44,240 71,100 44,240
Q.2 A, B and C are partners sharing profits and losses in the ratio of 2:2:1. As a result of change in profit
sharing ratio to 1:1:1, following Revaluation Account and Capital Account were drawn, in which some
values are missing. You are required to complete the accounts.
Revaluation Account
Particular Amount Particular Amount
To stock A/c 10,000 By Machinery A/c ….(f)….
To Provision for D.D 10,000 By Creditors 10,000
To outstanding Exp. ….(a)….
To Gain(Profit) Transfer to
A’s Capital A/c ….(b)….
B’s Capital A/c ….(c)….
C’s Capital A/c ….(d)…. ….(e)….
50,000 50,000
Partners Capital Account

Particular A B C Particular A B C
To Advertisement ….(g)…. 4,000 2,000 By Balance 1,46,000 1,36,000 ….(h)….
suspense A/c b/d
To Balance c/d 1,50,000 1,40,000 1,30,000 By
Revaluation 8,000 8,000 4,000
A/c
1,54,000 1,44,000 1,32,000 1,54,000 1,44,000 1,32,000
Ans- (a) 10,000 (b) 8,000 (c) 8,000 (d) 4,000 (e) 20,000 (f) 40,000 (g)4,000 (h)1,28000