12th Accountancy PM Shri Study Material PDF

CEP Phase -2 (2024-25) Subject : ACCOUNTANCY Class : 10+2 PM SHRI STUDY MATERIAL SECTION - A UNIT - 1 : FUNDA...

CEP Phase -2 (2024-25) Subject : ACCOUNTANCY Class : 10+2 PM SHRI STUDY MATERIAL SECTION - A UNIT - 1 : FUNDAMENTALS OF PARTNERSHIP FIRMS MEANING OF PARTNERSHIP “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. PARTNERSHIP DEED The document containing the agreement in writing amongst partners is called ‘Partnership Deed’. In other words, partnership deed is a written agreement between two or more persons for managing the affairs of a partnership firm. PROVISIONS IF PARTNERSHIP DEED IS ABSENT/SILENT 1. Interest on Capital. No interest is to be allowed on capitals if partnership deed is silent regarding interest on capital. But in case the deed provides for payment of interest on capital but does not specify the rate, the interest will be paid at the rate of 6 per cent per annum. However, the interest is payable only out of the profits of the business and not if the firm incurs losses during the period. 2. Interest on Drawings. No interest is to be charged on drawings made by the partners. 3. Salary to Partners. No partner is entitled to get any salary from the firm. 4. Interest on Loan. If any partner, advances loan to the firm without any agreement to interest he is entitled to receive interest @ 6% per annum. 5. Profit-sharing Ratio. Profits and Losses are to be shared equally by partners irrespective of their capitals contribution in the firm PARTNERS’ CAPITAL ACCOUNTS In a partnership firm separate capital accounts are maintained in the names of partners. These capital accounts represent the balance of capital standing to the credit of partners individually. Capital Accounts are maintained using one of following two methods : (i) Fixed capital account method. (ii) Fluctuating capital account method. INTEREST ON DRAWINGS Interest is charged for the period from the date of drawings to the date of closing of the accounts at a predetermined rate on each and every withdrawal. The following is the formula to calculate the interest : 1  Amount of Drawings x Rate of Interest/100 x Average Months/12 SALARY OR COMMISSION TO PARTNERS According to Partnership Act, 1932, salary or commission is allowed to partners if partnership deed permits. Commission may be allowed as : (i) Percentage of net profit before charging such commission. (ii) Percentage of net profit after charging such commission Methods of Calculation (i) Percentage of Net Profit before charging commission Net profit (before commission) × Rate of Commission/100 (ii) Percentage of Net Profit after charging the Commission. Net Profit (after commission) × Rate of Commission/100+ Rate of Commission PROFIT AND LOSS APPROPRIATION ACCOUNT DIVISION OF PROFIT AMONG PARTNERS : PREPARATION OF PROFIT AND LOSS APPROPRIATION ACCOUNT PROFIT AND LOSS APPROPRIATION ACCOUNT Dr. for the year ending..... Cr Particulars Amt. (₹) Particulars Amt. (₹) To Net Loss as per P & L ×××× By Net Profit as per P&L ×××× A/c ×××× A/c ×××× To Partners’ Salary ×××× By Interest on Drawings To Partners’ Commission By Loss transferred to To Interest on Partners’ ×××× Partners’ Capital/Current Capital ×××× Accounts in their profit ×××× To General Reserves ×××× sharing ratio To Provision for tax To Profit transferred to Partners’ Capital ×××× Accounts/ Current Accounts in their Profit Sharing ratio ×××× ×××× MULTIPLE CHOICE QUESTIONS 2|Page  1. In the absence of agreement, Partners are entitled to : (a) Salary (b) Commission (c) Interest on Loans and Advances (d) Profit share in Capital ratio 2. Number of partners in a partnership firm may be : (a) Maximum Two (b) Maximum Ten (c) Maximum One Hundred (d) Maximum Fifty 3. Partnership Deed is also called (a) Prospectus (b) Principles of Partnership (c) Articles of Association (d) Articles of Partnership 4. Following are essential elements of a partnership firm except : (a) Atleast two persons (b) There is an agreement between all partners (c) Equal share of profits and losses (d) Partnership agreement is for some business 5. In case of partnership the act of any partner is : (a) Binding on all partners (b) Binding on that partner only (c) Binding on all partners except that particular partner (d) None of the above ANSWERS - (1) c, (2) d, (3) d, (4) c, (5) a Fill in the Blanks 1. Manager’s commission is a................against profits. (Charge/Appropriation) 2. Interest on partner’s loan is not credited to the Partner’s.................. A/c. (Capital/Drawings) 3................ A/c is an extension of Profit & Loss A/c. (Profit & Loss Appropriation/Revaluation) 4. Commission to a partner is an.......... out of profit. (Charge/Appropriation) 5. X drew ₹ 50,000 during the year. If the rate of interest on drawings is 10% then.............. will be the amount of interest on drawings. (₹ 2,500/₹ 5,000) One mark Questions 1. Define Partnership. Ans. Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. 2. Give two features/characteristics/elements of partnership. Ans. (i) Partnership comes into existence with an agreement among partners. (ii) Partners must share the profits & losses of the business. 3. Does partnership firm has a separate legal entity? Give reason in support of your answer. 3 Ans. No, a partnership firm has no separate legal entity. Reason. Private assets of the partners can be used to meet the liabilities of the firm in case firm’s assets are not adequate to meet the liabilities. 4. Define partnership deed. Ans. Partnership deed is a written agreement among partners for managing the affairs of a firm. 5. Why is it necessary to have a partnership deed? Ans. Partnership deed is necessary because of the following reasons : (i) It makes the partners aware of their partnership terms. (ii) It enables the partners to avoid future disputes Two Marks Questions 1. X, Y and Z started a business on 1st July, 2019 contributing ₹ 1,80,000 each as share of capital. Three months later on 1st October, 2019. X introduced ₹ 1,00,000 as additional capital and Y introduced ₹ 1,20,000 which will be treated as a loan to firm. The profit for the year ended March, 2020 amounted to ₹ 1,84,200 before charging any interest. Partners are allowed a salary of ₹ 4,500 per quarter. Partners withdraw each ₹ 5,000 per month. Prepare Profit and Loss Appropriation Account for the year ended 31st March 2020. [Ans. Divisible Profit : ₹ 41,000 to each partner.] 2. X and Y are partners in a firm sharing profits in the ratio 2 : 1. For the year ended 31st March, 2020 their drawings were as — X ₹ 4,10,000 and Y ₹ 3,60,000. Calculate interest on drawings at the rate of 9% p.a. [Ans. X — ₹ 18,450 and Y — ₹ 16,200] 3. If the Partners’ Capital Accounts are fixed, where will you record the following items: (a) Salary payable to a partner (b) Drawings made by a partner (c) Fresh capital introduced (d) Shares of profit earned by a partner Ans. (a) Credit side of partner’s current account (b) Debit side of partner’s current account (c) Credit side of partner’s capital account (d) Credit side of partner’s current account 4. Give two provisions if partnership deed is absent/silent. Ans. (i) No interest is allowed on partners’ capitals. (ii) No interest is charged on partners’ drawings. (iii) Salary is not paid to any partner. (iv) Interest on partner’s loan is given @ 6% per annum. (v) Partners share profits and losses equally. (any two) 4|Page  5. State two elements of the Partnership Deed. Ans. Elements of a partnership deed are as follows : (i) It contains all the terms and conditions agreed upon by all the partners and is a written document. (ii) It acts as an evidence in court in case of any dispute among the partners Four Marks Questions 1. Calculate interest on drawings in each of the following : (i) X withdrew ₹ 36,000 in the beginning of each quarter for the year ended March 31, 2019. Calculate interest on drawings @ 10% p.a. (ii) Y withdrew ₹ 60,000 during the year ended Dec. 31, 2018. Calculate interest on drawings @ 6% p.a. (iii) Z withdrew ₹ 60,000 during the year ended March 31, 2019. Calculate interest on drawings @ 6%. SOLUTION. (i) Average time period = 12 + 3 / 2 = 15 / 2  months Total drawings = ₹ 36,000 × 4 = ₹1,44,000 Interest on drawings = ₹ 1,44,000 × 10 /100 x 15 / 2 x 12 = ₹ 9,000 (ii) Total drawings = ₹ 60,000 Time = 6 months (Since no dates are mentioned) Interest on drawings = ₹ 60,000 × 6 / 12 x 6 / 100 = ₹ 1,800 (iii) Total drawings = ₹ 60,000 As time period for rate of interest is not given, so interest will be charged without considering any time period. Interest on drawings = ₹ 60,000 × 6 / 100 = ₹ 3,600 2. A and B were partners sharing profits in the ratio 2 : 1. On April 1, 2019 they had capitals of ₹ 1,80,000 and ₹ 1,60,000 respectively. According to deed : (a) Interest on capital will be allowed @ 6% p.a. (b) A will be allowed a quarterly salary of ₹ 3,500 each. (c) B will be allowed a monthly salary of ₹ 1,150. (d) A will get a commission of 5% after charging all salary and interest on capital but before any commission. 5  (e) B will get a commission of 10% after charging all salary, interest and commission ended 31st March, 2020. Profit for the year amounted to ₹ 1,62,000. You are required to prepare Profit and Loss Appropriation A/c. [Ans. A’s Commission ₹ 5,690; B’s Commission ₹ 9,828; Profit Divided — A—₹₹ 65,521; B — ₹ 32,761] Q. 3. How Profit & Loss Account differ from Profit & Loss Appropriation Account ? Ans. Basis Profit & Loss Account Profit and Loss Appropriation Account Stage This account is prepared after the This account is prepared after the Trading Account. Profit & Loss Account. Purpose This account is prepared to know This account is prepared to the Profit or loss of the business. distribute the profit as shown by Profit & Loss Account among the partners. Balance It has no opening balance. It has net profit/loss as opening balance. Items In this account all items relating to In this account items which are the business and which are appropriation in nature are to be charged against the Profit, shall be recorded. shown. Basis Except interest on partners’ loan, Preparation of this account is solely preparation of this account is not based on partnership agreement. based on partnership agreement. Matching While preparing this account While preparing Profit and Loss matching principle (i.e. revenue is Appropriation Account matching matched against expenses) is principle is not followed. followed. Q. 4. Distinguish between fixed and fluctuating capital accounts. Ans. Basis of Difference Fixed Capital Account Fluctuating Capital Account (a) Number of Accounts Two accounts namely capital Only one account namely account and current account capital account is are maintained for each maintained for each partner. partner. (b) Fluctuation in Opening and closing balance Opening and closing 6|Page  Balance of a capital account usually balance of a capital account remains same. is different. (c) Adjustments relating Adjustments relating to Adjustments relating to to different drawings, interest on drawings, interest on transactions. drawings, interest on capital, drawings, interest on share of profit or loss, salary, capital, share of profit or commission etc. are made in loss, salary, commission etc. current account. are made in capital account. (d) Nature of balance Capital account in this Capital account in this method usually shows credit method may show debit or (positive) balance. credit balance. Q. 5. Ramesh and Suresh are partners in a firm sharing profits in the ratio of their capitals contributed on commencement of the business, which were ₹ 40,000 and ₹ 30,000 respectively. The firm started business on 1st April, 2023. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a. respectively. Ramesh and Suresh are to get a monthly salary of ₹ 1,000 and ₹ 1,500 respectively. The net profit for the year ended 31st March, 2024 before making above appropriations was ₹ 50,150. The drawings of Ramesh and Suresh were ₹ 20,000 and ₹ 25,000 respectively. Interest on drawings amounted to ₹ 1,000 for Ramesh and ₹ 1,250 for suresh. Prepare Profit and Loss Appropriation Account. Solution : DR. PROFIT AND LOSS APPROPRIATION ACCOUNT CR. Particulars ₹ Particulars ₹ To Interest on Capital : By Net Profit 50,150 Ramesh (40,000  12%) 4,800 By Interest on Drawings : Suresh (30,000  12%) 3,600 8,400 Ramesh 1,000 To Salary : Suresh 1,250 2,250 Ramesh (1,000  12) 12,000 Suresh (1,500  12) 18,000 30,000 To Profit transferred to : Ramesh’s Capital A/c (14,000 8,000  4/7) 7  Suresh’s Capital A/c (14,000  6,000 14,000 3/7) 52,400 52,400 Q. 6. The partnership agreement of A and B provides that : (i) Profits will be shared equally. (ii) A will be allowed a salary of ₹ 400 p.m. (iii) A who manages the sales department will be allowed a commission equal to 10% of the net profit after allowing A’s salary. (iv) 6% interest will be allowed on partner’s fixed capital. (v) 5% interest will be charged on partner’s annual drawings. (vi) The fixed capitals of A and B are ₹ 1,20,000 and ₹ 80,000 respectively. Their annual drawings were ₹ 16,000 and ₹ 14,000 respectively. The net profit for the year ending March 31, 2024 amounted to ₹ 50,000. Prepare firm’s Profit and Loss Appropriation Account. Solution : PROFIT AND LOSS APPROPRIATION ACCOUNT Dr. FOR THE YEAR ENDED 31ST MARCH, 2024 Cr. Particulars ₹ Particulars ₹ To Salary to A 4,800 By Profit & Loss A/c To Commission to B (Profit for the year) 50,000 10% on (50,000 – 4,520 By Interest on Drawings 4,800) = To Interest on Capital : (5% on annual drawings) A Current A/c 7,200 A Current A/c B Current A/c 4,800 12,000 (5% on 16,000) 800 To Profit transferred to B Current A/c : A Current A/c 15,090 (5% on 14,000) 700 1,500 B Current A/c 15,090 30,180 51,500 51,500 Note : Since the rate is 5% and not 5% per annum interest will be charged for full year instead of six months. 8|Page  UNIT 2: ACCOUNTING FOR GOODWILL Goodwill is an indication of the good name, reputation and connections of a business. It is because of goodwill that old customers will resort to the same place and at the same time new customer will be attracted. It results in an increase in both sales and profit of the enterprise. Goodwill is an intangible asset which helps in earning extra profit over and above the normal profits prevailing in the industry. According to Lord Eldon, “Goodwill is nothing more than the probability that the old customers will resort to the old place.” Lord Lindley defines “It is generally used to denote the benefit arising from connection and reputation and its value is what can be got for the chance of being able to keep that connection and improve it.” Classification of Goodwill Goodwill of a firm can be divided into following two categories : (a) Self Generated Goodwill (b) Purchased or Acquired Goodwill (a) Self Generated Goodwill. As the name suggests it is an internally generated form of goodwill. It is created because of a number of attributes possessed by a running business. It is created over a period of time. Its valuation is subjected to the judgement of the valuer. As per AS-26, self generated goodwill cannot be raised and recorded in the books of accounts though it is considered an Asset. (b) Purchased or Acquired Goodwill. It is that form of goodwill which is acquired by a business after making a compensation for it in cash or in kind. It mainly arises on the purchase of a business or brand name etc. It will be recorded in the books of accounts as some consideration has been paid for it. It is also shown as an asset in the Balance Sheet. Value of purchased goodwill is ascertained by the mutual consent of buyer and seller Factors affecting Value of Goodwill 1. Location of Business. If the firm is situated at a prominent centrally located convenient place, its goodwill will be more due to better business and sales. 2. Types of the Business. In case it is a monopoly business, where it is difficult for other firms to enter, the business will definitely have excellent goodwill. 3. Efficiency of Management. If the firm is managed and controlled by the experienced and efficient management, with whose best efforts the firm enjoys the benefits of high productivity and low cost its profit will go on increasing, which results in increasing the value of goodwill. 4. Better Quality of Products. If the firm produces goods of better quality, then it will lead to increase in turnover and will gain more goodwill. Similarly, if a business produces goods of daily use, it will have steady profits as the demand for these goods will be stationary. Such business will 9  have more goodwill. But if it produces fancy goods, its profits will be uncertain and the value of the goodwill will be less. 5. Impressive Publicity and Advertisement. Effective and impressive publicity and advertisement by the firm will create demand for its products resulting an increased goodwill. 6. Favourable Contracts. If the contracts of the firm have been with other reputed firms and business houses or the firm has received bulk orders from highly reputed firms, its goodwill will increase tremendously Methods of Valuation of Goodwill 1. Average Profit Method. 2. Super Profit Method. 3. Capitalisation Method MULTIPLE CHOICE QUESTIONS 1. Which one of the following does not affect goodwill? (a) Nature of business (b) Location of customers (c) Efficiency of management (d) Technical know-how 2. Which one of the following markets will have maximum goodwill? (a) Monopoly (b) Oligopoly (c) Duopoly (d) Perfect Competition 3. Goodwill is: (a) A tangible asset (b) An intangible asset (c) A fictitious asset (d) None of the above 4. Goodwill can be: (a) Purchased (b) Self-earned (c) Both (a) and (b) (d) None of these 5. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called: (a) Goodwill (b) Reserve (c) Super Profits (d) Surplus FILL IN THE BLANKS 1. ………… is the excess of actual profits over the normal profits. (Super Profit/Average Profit) 2. A change in relationship among the partners amount to ………… of the partnership firm. (Reconstitution/Goodwill) 100 3. Goodwill = Super Profit ×. (Normal Rate of Return/Super Rate of Return)...... 4.Goodwill is an intangible and ………… asset of a business. (Tangible/Valuable) 5. Goodwill is a ………… which arises due to connection and reputation of a business. (Loss/Benefit) ONE MARK QUESTIONS 1. Define goodwill. Ans. Goodwill is the value of reputation of a firm in respect of the profits expected in future over and above the normal profits. 2. When is the goodwill valued ? 10 | P a g e  Ans.1. Admission, 2. Retirement, 3. Dissolution, 4. Amalgamation, 5. Change in profit sharing ratio. 3. Name different methods of valuation of goodwill. Ans.Average profit, Super Profit Method, Capitalisation Method. 4. How is super profit calculated under super profit method ? Ans.Goodwill = Super Profits  No of Years’ Purchase. 5. How is goodwill valued under the super profit method ? Ans.Super Profit/Average Profits – Normal Profits. Two Marks Questions 1. What are the features of goodwill? Ans. Goodwill of a business has some special features, and is therefore distinct from other assets. 1. Goodwill of a business cannot be sold in a part or isolation. 2. There is no relation between the value of goodwill and the amount spent to build the same. 3. The valuation of goodwill is subjective and not objective, because its valuation will differ from estimator to estimator. 4. Value of goodwill changes from time to time with changes in factors of goodwill. 5. Goodwill is an intangible asset. 2. Distinguish between ‘Average Profits’ and ‘Super Profit’. Ans. Basis Average Profit Super Profit 1. Capital Employed For Calculation of average Capital employed is profit capital employed is not required in this case. required. 2. Formula Total Profit Actual Profit – Normal No. of years Profit 3. Profit for No. of Profit for more than one year Only one year actual year is required to get average profit is required. profit. NUMERICALS Q. 1. From the following data calculate goodwill on the basis of two years purchase of the last three years’ average profits. The profits for the last three years are : Year 2021 – ₹ 40,000 ; Year 2022 – ₹ 35,000 ; Year 2023 – ₹ 30,000 Solution : Total profits of the last three years = ₹ 40,000 + ₹ 35,000 + ₹ 30,000 = ₹ 1,05,000 1, 05, 000 Average Profits of last three years = = ₹ 35,000 3 Goodwill = Average Profits  No. of Years Purchase = ₹ 35,000  2 = ₹ 70,000 Q.2. Calculate goodwill of the firm on the basis of 3 year’s purchase of the average profits of the last 11 five years. The profits of the last five years were : YearAmount (₹) 2018-194,00,000 2019-205,00,000 2020-21(60,000) 2021-221,50,000 2022-232,50,000 Additional Information : (i) On 1st January, 2021, a fire broke out which resulted into a loss of goods of ₹ 3,00,000. A claim of ₹ 70,000 was received from the insurance company. (ii) During the year ended 31st March, 2023 the firm received an unexpected tax refund of ₹ 80,000. Solution Total Profits of last 5 years : ₹ 2018-19 4,00,000 2019-20 5,00,000 2020-21 (– ₹ 60,000 + Abnormal Loss ₹ 2,30,000) 1,70,000 2021-22 1,50,000 2022-23 (₹ 2,50,000 – Abnormal Gain ₹ 80,000) 1,70,000 13,90,000 Average Profit= ₹ 13,90,000 ÷ 5 = ₹ 2,78,000 Goodwill= Average Profit × Number of Year’s Purchase = ₹ 2,78,000 × 3 = ₹ 8,34,000 Q. 3. Calculate goodwill of the firm on the basis of 3 year’s purchase of the average profits of the last five years. The profits of the last five years were : Year Amount (₹) 2019-20 4,00,000 2020-21 5,00,000 2021-22 (60,000) 2022-23 1,50,000 2023-24 2,50,000 Additional Information : (i) On 1st January, 2022, a fire broke out which resulted into a loss of goods of ₹ 3,00,000. A claim of ₹ 70,000 was received from the insurance company. (ii) During the year ended 31st March, 2023 the firm received an unexpected tax refund of ₹ 80,000. Solution : Total Profits of last 5 years : ₹ 12 | P a g e  2019-20 4,00,000 2020-21 5,00,000 2021-22 (– ₹ 60,000 + Abnormal Loss ₹ 2,30,000) 1,70,000 2022-23 (1,50,000 – Abnormal Gain ₹ 80,000) 70,000 2023-24 2,50,000 13,90,000 Average Profit = ₹ 13,90,000  5 = ₹ 2,78,000 Goodwill = Average Profit  Number of Year’s Purchase = ₹ 2,78,000  3 = ₹ 8,34,000 Q. 4. X and Y are partners sharing profits and losses in the ratio of 5 : 3. They agree to take Z into partnership for 1/5th share. For this purpose, goodwill is to be valued at 200% of the average profit of last four years which were as follows : ₹ st Year ending on 31 March 2021 50,000 (Profit) st Year ending on 31 March 2022 1,20,000 (Profit) Year ending on 31st March 2023 1,80,000 (Profit) st Year ending on 31 March 2024 70,000 (Loss) On 1st April, 2023 a Motor bike costing ₹ 50,000 was purchased and debited to traveling expenses account, on which depreciation is to be charged @ 20% p.a. calculate the value of goodwill. Solution : Calculation of Average Profits : ₹ 31st March 202150,000 (Profit) 31st March 20221,20,000 (Profit) 31st March 20231,80,000 (Profit) 31st March 202430,000(1) (Loss) 3,20,000 Average Profit = ₹ 3,20,000  4 = ₹ 80,000 Goodwill = Average Profit  Number of year’s purchase 200 = ₹ 80,000  = ₹ 1,60,000 100 Note : (1) (i) Cost of Motor bike was wrongly debited to traveling expenses amount. After rectification, the loss of 2021 will be reduced by ₹ 50,000. (ii) Depreciation on Motor bike ₹ 10,000 (20% of 50,000) was not charged to Profit and Loss Account of 2024 which will increase the loss of 2024 by ₹ 10,000. Hence, the final loss will be ₹ 70,000 – ₹ 50,000 + ₹ 10,000 = ₹ 30,000. Q.5. The average Net Profits expected in the future by Kritika Firm are ₹ 72,000 per year. The average capital employed in the business by the firm is ₹ 4,00,000. The rate of return expected from capital 13 invested in this class of business is 10%. The remuneration of the partners is estimated to be ₹ 12,000 per annum. Find out the value of goodwill on the basis of two years’ purchase of Super Profits. Solution (i) Actual Average Profit : ₹ 72,000 – ₹ 12,000 = ₹ 60,000 Normal Rate of Return (ii) Normal Profit= Capital Invested × 100 10 = ₹ 4,00,000 × = ₹ 40,000 100 (iii) Super Profit= Actual Average Profit – Normal Profit = ₹ 60,000 – ₹ 40,000 = ₹ 20,000 (iv) Value of Goodwill = Super Profit × No. of Year’s Purchased = ₹ 20,000 × 2 = ₹ 40,000 Note : Partner’s remuneration is deducted from average profit, because in future if a manager is appointed to run the business in place of partners, he will have to be paid the remuneration. Q. 6. A firm’s average profits are ₹ 80,000. It includes an abnormal profit of ₹ 5,000. Capital invested in the business is ₹ 5,00,000 and the normal rate of return is 10%. Calculate goodwill at three times the super profit. Solution : (i) Calculation of Actual Average Profit : Average Profit 80,000 Less : Abnormal Profit 5,000 Actual Average Profit : 75,000 Normal Rate of Return (ii) Normal Profits = Capital Invested  100 10 = 5,00,000  = ₹ 50,000 100 (iii) Super Profit = Actual Average Profit – Normal Profit = 75,000 – 50,000 = ₹ 25,000 (iv) Goodwill = Super Profit  Number of years purchased = ₹ 25,000  3 = ₹ 75,000 Q. 7. The average Net Profits expected in the future by ABC Firm are ₹ 50,000 per year. The average capital employed in the business by the firm is ₹ 4,00,000. The rate of return expected from capital invested in this class of business is 10%. The remuneration of the partners is estimated to be ₹ 5,000 per annum. Find out the value of goodwill on the basis of three years’ purchase of Super Profits. Solution : (i) Actual Average Profit : ₹ 50,000 – ₹ 5,000 = ₹ 45,000 Normal Rate of Return (ii) Normal Profit= Capital Invested  100 14 | P a g e  10 = ₹ 4,00,000  = ₹ 40,000 100 (iii) Super Profit= Actual Average Profit – Normal Profit = ₹ 45,000 – ₹ 40,000 = ₹ 5,000 (iv) Value of Goodwill= Super Profit  No. of year’s Purchased = ₹ 5,000  3 = ₹ 15,000 Q. 8. On 1st April, 2023 a firm had assets of ₹ 90,000 including cash of ₹ 6,000. The partners’ capital accounts showed a balance of ₹ 68,000 and reserve constituted the rest. If the normal rate of return is 12% and goodwill of firm is valued at ₹ 32,000 at four years’ purchase of Super Profits, find the average profits of the firm. Solution : Goodwill = Super Profits  4 years’ purchase ₹ 32,000 = Super Profits  4 32, 000 Super Profits =₹ 4 Super Profits = ₹ 8,000 Normal Profits = Capital Employed  Normal Rate of Return 12 = ₹ 90, 000  = ₹ 10,800 100 Super Profits = Actual average profits—Normal Profits ₹ 8,000 = Average Profits—₹ 10,800 Average Profits = ₹ 8,000 + ₹ 10,800 Average Profits = ₹ 18,800 Q. 9. A firm earns ₹ 60,000 as its annual profits, the rate of normal profit being 10%. The assets of firm amount to ₹ 7,20,000 and liabilities to ₹2,40,000. Find out value of goodwill by capitalization of average profits. Average Profit  100 Solution : Total Capitalized value of firm = Normal Rate of Return 60, 000  100 = = ₹ 6,00,000 10 Net assets of firm= ₹ 7,20,000—₹ 2,40,000=₹4,80,000 Goodwill = ₹ 6,00,000—₹ 4,80,000 = ₹1,20,000. UNIT 3: CHANGE IN THE PROFIT-SHARING RATIO Reconstitution of Partnership Any change in the economic relationship among existing partners amounts to “Reconstitution of the Partnership’’. Reconstitution of partnership puts curtain on the existing agreement among partner and a new partnership agreement is established. 15 Sacrificing Ratio Sacrificing Ratio = Old Ratio – New Ratio Gaining Ratio Gaining Ratio = New Ratio – Old Ratio Accounting Treatment of Goodwill when there is change in Profit Sharing ratio among Existing Partners (A) When Goodwill is not raised : Gaining Partner’s Capital A/c Dr. To Sacrificing Partner’s Capital A/c (B) When Goodwill is raised and written off : (a) Goodwill A/c Dr. [At full value in To Partners’ Capital A/cs old profit sharing ratio] (Being Goodwill raised in old profit sharing ratio) (b) Partners’ Capital A/cs Dr. [New profit To Goodwill A/c sharing ratio will be used] (Being Goodwill written off in new profit-sharing ratio) Distribution of Accumulated Profits and Reserves (1) When reserves and accumulated profits are not distributed then following entry is passed Gaining Partner’s Capital A/c Dr. To Sacrificing Partners’ Capital A/c (2) When partners decide to distribute reserves and profits then following entries are passed (i) For transfrer of Reserves and Accumulated profits in old ratio Reserves/Profit and Loss A/c Dr. To Partners’ Capital A/c (ii) For transfer of Accumulated losses and Deffered Revenue expenditure in old ratio All Partners’ Capital A/c Dr. To P & L A/c/Deffered Revenue Expentiture A/c Workmen Compensation Reserve 16 | P a g e 1. If there is no claim against workmen compensation reserve. The amount of workmen compensation reserve will be distributed among partners in old profit sharing ratio. JOURNAL Workmen Compensation Reserve A/c Dr. To Partners’ Capital A/cs (Being Workmen Compensation Reserve distributed in old profit sharing ratio) 2. If there is a claim for workmen comepnsation is less than the amount of workmen compensation reserve. JOURNAL Workmen Compensation Reserve A/c Dr. To Provision for Workmen Compensation Claim To Partners’ Capital A/cs (Being amount for workmen compensation provided and balance of workmen compensation reserve distributed among partners in old ratio) 3. If the claim is exactly equal to the amount of workmen compensation reserve : In such a situation the entire amount of workmen compensation reserve will be transferred to workmen compensation claim. JOURNAL Workmen Compensation Reserve A/c Dr. To Provision for Workmen Compensation Claim (Being the amount provided for workmen compensation claim) 4. If the claim is more than the amount of workmen compensation reserve : JOURNAL Workmen Compensation Reserve A/c Dr. Revaluation A/c Dr. To Provision for Workmen Compensation Claim (Being amount for workmen compensation provided) Partners’ Capital (or Current) A/cs Dr. To Revaluation A/c (Being Loss on Revaluation transferred to Capital Accounts in old ratio) Investments Fluctuation Reserve Investments Fluctuation Reserve A/c Dr. To Partners’ Capital (or Current) A/cs 17 MULTIPLE CHOICE QUESTIONS 1. Sacrificing Ratio is: (a) New Ratio–Old Ratio (b) Old Ratio–Gaining Ratio (c) Old Ratio–New Ratio (d) Gaining Ratio–Old Ratio 2. Profit or loss on revaluation is transferred to partners’ capital accounts: (a) Continuing partner (b) Old partners (c) New partner (d) All partners 3. Unrecorded liabilities are shown on which side of the revaluation account? (a) Credit side (b) Debit side (c) Both (a) and (b) (d) None of these 4. Decrease in assets is recorded on which side of the revaluation account? (a) Credit side (b) Debit side (c) Both (a) and (b) (d) None of these 5. X and Y are partners in a firm sharing profits and losses 2:3 with effect from 1st April, 2024, they decided to share profits equally. What is X’s gain/sacrifice? (a) Gain 1/5 (b) Sacrifice 1/5 (c) Gain 1/10 (d) Sacrifice 1/10 FILL IN THE BLANKS 1. An increase in the value of an asset is recorded on the ………. side of Revaluation Account. (Debit/Credit) 2. Old ratio is, itself ………. ratio unless, otherwise mentioned. (Credit/Sacrificing) 3. Decrease in liability is a ………. (Gain/Loss) 4. Revaluation Account is ………. Account. (Real/Nominal) 5. Revaluation Account is prepared at the time of ………. (Dissolution/Reconstitution of Firm) 6. In the case of downward revaluation of a liability, Revaluation Account is ………. (Debited/Credited) 7. In the case of depreciation of an asset, Revaluation Account is ………. (Debited/Credited) ONE MARK QUESTIONS 1. What is meant by “Reconstitution of a Partnership Firm’’? Ans. Any change in the economic relationship among existing partners amounts to “Reconstitution of the Partnership Firm. 2. What is Sacrificing ratio? Ans. The ratio in which the old partners agree to sacrifice their share of profit in favour of the new partners is called Sacrificing ratio 3. What is meant by change in profit sharing ratio. Ans. A change in profit sharing ratio implies purchase of share of profit by one or more partners from other partners. 4. Change in profit-sharing ratio amounts to dissolution of partnership or partnership firm? Give reason in support of your answer. Ans. Change in profit-sharing ratio amounts to dissolution of partnership and not dissolution of firm as the existing agreement comes to an end and the firm continues under new agreement. 18 | P a g e  Two Marks Questions 1. A, B and C are partners sharing profits in the ratio 5 : 3 : 2. In future they will share profits and losses equally. Calculate the gaining ratio as well as the sacrificing ratio. [Ans. A Sacrifices 1/6 and B gains 1/30 and C gains 2/15 ] 2. Calculate goodwill by capitalisation of average profits method : (i) Actual Average Profits ₹ 72,000 (ii) Normal Rate of Return 12% (iii) Assets ₹ 8,00,000 (iv) Liabilities ₹ 3,50,000 [Ans. ₹ 1,50,000} 3. Name any two factors affecting goodwill of a partnership firm 4. Calculate the value of Goodwill on the basis of three years’ purchase of the average profit of the last five years. The Profit/Losses were 2020 — Profit ₹ 40,000 2017 — Profit ₹ 70,000 2019 — Loss ₹ 32,000 2016 — Profit ₹ 82,000 2018 — Profit ₹ 80,000 [Ans. ₹ 1,44,000 ] 5. The average net profits expected in the future by ABC firm are ₹ 45,000 per year. The average capital employed in the business by the firm is ₹ 2,20,000. The rate of return expected from capital invested in this class of business is 10%. The remuneration of partner is estimated to be ₹ 6,500 per annum. Calculate the value of goodwill on the basis of two years’ purchase of super profits. [Ans. Rs 33,000 ] Four Marks Questions Q 1. Mention occasions on which reconstitution of partnership firm can take place. Ans. 1. Change in profit sharing ratio of existing partners. Sometimes, the partners of a firm may mutually decide to change their profit sharing ratio. For example, X, Y and Z are partners in 2 : 1 : 3 ratio. But they have decided to change the ratio to 3 : 2 : 1. 2. Admission of a new partner. In order to have more resources in term of capital and managerial skill sometimes, a partner is admitted in the firm. For example Sonu and Monu are partners in a firm in 2 : 1 ratio. Sahil is admitted for 1/6 ratio. This will lead to reconstitution of firm and ascertaining of new ratio among Sonu, Monu and Sahil. 3. Retirement of a Partner. A partner may retire from the firm due to his personal reasons or business reasons. On retirement the old constitution of the firm is changed. 4. Death of a Partner. On death of a partner, a partnership is reconstituted provided the remaining partners decide to continue with the firm. For example : A, B and C are partners in a firm in 5 : 3 : 2 ratio. C died on 31st March A and B decided to continue the business in future equally. 19  UNIT – 4 : ADMISSION OF A PARTNER One Mark Questions Q. 1.What is meant by admission of a new partner ? Ans.When a new partner is admitted into an existing firm. Q. 2.Why is it necessary to revalue the assets and liabilities in case of admission of a new partner ? Ans.So that any 'gain' or 'loss' in assets and liabilities should not be shared/borne by new partner. Q. 3.What is hidden goodwill ? Ans.Excess of desired total capital over the actual combined capital of all partners. Q. 4.Define new profit sharing ratio in case of admission of a new partner. Ans.The profit sharing ratio of all the partners (including new) after the admission of a new partner. Q. 5.What is the formula for calculating Sacrifice Ratio ? Ans.Sacrifice Ratio = Old Ratio — New Ratio Fill in the Blanks 1. Profit or loss arising from revaluation is shared by............ partners. (Old/New) 2. Share of goodwill brought in cash by new partner is called............ (Goodwill/Assets) 3. If new partner's capital is not given, it can be worked out with the help of............ (Balance of old Partner’s Capital Account/All Partner Capital Account) 4. When premium is raised in the books for the purpose of admission of a partner, it is credited to the capitals of............ partners. (Old/New) 5. The amount paid by the new partner to the old partners as a compensation for their past effort is called............ (Reserve/Goodwill) Ans.1. Old, 2. goodwill, 3. Balance of old partners capital accounts, 4. old, 5. Goodwill. SHORT NUMERICALS (2 MARKS) Q.1. Raman and Shaman are partners sharing profits in the ratio of 7 : 3. Mohan was admitted with 3 2 1 th share in the profits which he took th from Ram and th from Shyam. Calculate new ratio of 7 7 7 partners. Q. 2. Sita, Priya and Ragini were partners in a firm sharing profits in 3 : 3 : 2 ratio. They admitted Gita as a new partner for 4/7 profit. Gita acquired his share 2/7 from Sita, 1/7 from Priya and 1/7 from Ragini. Calculate new profit sharing ratio. Q. 3. Puneet and Rahul are partners in a firm sharing profits in the ratio of 7 : 3. Vikas is admitted as a new partner. Puneet sacrifices 1/7th of his share in profits in favour of Vikas and Rahul 2/7 th of his share 20 | P a g e in favour of Vikas. Calculate the new profit sharing ratio between Puneet, Rahul and Vikas. NUMERICALS (4 MARKS) Q.1. The following was the Balance Sheet of A and B who were sharing profits in the ratio of 2/3 and 1/3 as at 31st march, 2023 : Liabilities ₹ Assets ₹ Creditors 65,900 Cash 1,200 Capitals : Sundry Debtors 9,700 A 30,000 Stock 20,000 B 20,000 Plant & Machinery 35,000 Building 50,000 1,15,900 1,15,900 On 1st April, 2023 they agreed to admit C into partnership on the following terms : (a) C was to be given 1/3 share in profits, and was to bring ₹ 15,000 as capital and ₹ 6,000 as share of goodwill. (b) That the value of stock and plant & machinery were to be reduced by 10%. (c) That a provision of 5% was to be created for doubtful debts. (d) That the building account was to be appreciated by 20%. (e) Investments worth ₹ 1,400 (not mentioned in the Balance Sheet) were to be taken into account. (f) That the amount of goodwill was to be withdrawn by the old partners. Prepare the Revaluation A/c, Capital Accounts of the new firm. Solution Dr. REVALUATION ACCOUNT Cr. Particulars ₹ Particulars ₹ To Stock A/c 2,000 By Building A/c 10,000 To Plant & Machinery A/c 3,500 By Investments A/c 1,400 To Provision for Doubtful debts 485 A/c To Profit transfer to A’s Capital A/c 3,610 B’s Capital A/c 1,805 5,415 11,400 11,400 Dr. CAPITAL ACCOUNTS Cr. Particulars A B C Particulars A B C ₹ ₹ ₹ ₹ ₹ ₹ 21  To Cash A/c 4,000 2,000 – By Balance b/d 30,000 20,000 – To Balance 33,610 21,805 15,000 By Revaluation 3,610 1,805 – c/d A/c By Cash A/c – – 15,000 By Premium for Goodwill A/c 4,000 2,000 – 37,610 23,805 15,000 37,610 23,805 15,000 Q.2. X and Y share the profits of a business in the ratio of 5 : 3. They admit Z, into the firm for 1/4th share in the profits to be contributed equally by X and Y. On the date of admission of Z, the Balance Sheet of the firm was as follows : Liabilities ₹ Assets ₹ X’s Capital 40,000 Machinery 30,000 Y’s Capital 30,000 Furniture 20,000 Workmen’s Compensation 4,000 Stock 15,000 Reserve Creditors 2,000 Debtors 15,000 Provident Fund 10,000 Bank 6,000 86,000 86,000 Terms of Z’s admission were as follows : (i) Z will bring ₹ 30,000 for his share of capital and goodwill. (ii) Goodwill of the firm has been valued at 3 year’s purchase of the average super profits of last four years. Average profits of the last four years are ₹ 20,000 while the normal profits that can be earned with the capital employed are ₹ 12,000. (iii) Furniture is undervalued by ₹ 12,000 and the value of stock is reduced to ₹ 13,000. Provident Fund be raised by ₹ 1,000. (iv) Creditors are unrecorded to the extent of ₹ 6,000. Prepare Revaluation Account, Partner’s Capital Accounts of X, Y and Z. Solution Dr. REVALUATION ACCOUNT Cr. Particulars ₹ Particulars ₹ To Stock A/c 2,000 By Furniture A/c 12,000 To Provident Fund A/c 1,000 To Creditors 6,000 To Profit transferred to 22 | P a g e  X’s Capital A/c 1,875 Y’s Capital A/c 1,125 3,000 12,000 12,000 Dr. CAPITAL ACCOUNTS Cr. Particulars X Y Z Particulars X Y Z ₹ ₹ ₹ ₹ ₹ ₹ To Balance c/d 47,375 35,625 24,000 By Balance b/d 40,000 30,000 By workmen’s compensation reserve 2,500 1,500 By Revaluation A/c 1,875 1,125 By Bank A/c 24,000 By Premium for Goodwill A/c 3,000 3,000 47,375 35,625 24,000 47,375 35,625 24,000 Note 1. Since there is no specific liability related to Workmen’s Compensation Reserve it is divided in old partners in their old profit sharing ratios. Calculation of Goodwill : Super Profits= Average Profits – Normal Profits = ₹ 20,000 – ₹ 12,000 = ₹ 8,000 Goodwill= Super Profits × No. of years purchased = ₹ 8,000 × 3 = ₹ 24,000 Z brings in his share of goodwill in cash. Therefore, he brings in ₹ 24,000 × 1/4 = ₹ 6,000 for goodwill which is included in the total amount of ₹ 30,000 brought by him. This amount of ₹ 6,000 will be divided between X and Y equally, because they have sacrificed in equal proportions. Q.3. The following was the Balance Sheet of A and B who were sharing profits in the ratio of 2/3 and 1/3 as at 31st march, 2023 : Liabilities ₹ Assets ₹ Creditors 65,900 Cash 1,200 Capitals : Sundry Debtors 9,700 A 30,000 Stock 20,000 B 20,000 Plant & Machinery 35,000 Building 50,000 1,15,900 1,15,900 23  On 1st April, 2023 they agreed to admit C into partnership on the following terms : (a) C was to be given 1/3 share in profits, and was to bring ₹ 15,000 as capital and ₹ 6,000 as share of goodwill. (b) That the value of stock and plant & machinery were to be reduced by 10%. (c) That a provision of 5% was to be created for doubtful debts. (d) That the building account was to be appreciated by 20%. (e) Investments worth ₹ 1,400 (not mentioned in the Balance Sheet) were to be taken into account. (f) That the amount of goodwill was to be withdrawn by the old partners. Prepare the Revaluation A/c, Capital Accounts of the new firm. Q.4. The following is the Balance Sheet of A and B as at 31st March, 2023 who share profits in the ratio of 2 : 1. Liabilities ₹ Assets ₹ Bank Overdraft 15,000 Sundry Debtors 40,000 Reserve Fund 12,000 Less : Provision 3,600 36,400 Sundry Creditors 20,000 Stock 20,000 Capitals : A 40,000 Building 25,000 B 30,000 Patents 2,000 Machinery 33,600 1,17,000 1,17,000 3 2 1 They admitted C into partnership on 1st April, 2023. New profit sharing ratio is agreed as : :.C 6 6 6 brings in proportionate capital after the following adjustments : (1) C brings in ₹ 10,000 in cash as his share of Goodwill. (2) Provision for doubtful debts is to be reduced by ₹ 2,000. (3) There is an old typewriter valued ₹ 2,600. It does not appear in the books of the firm. It is now to be recorded. (4) Patents are valueless. (5) 2% discount is to be received from creditors. Prepare Revaluation Account, Capital Accounts. UNIT – 5 : RETIREMENT OR DEATH OF A PARTNER One Word to one Sentence Questions Q. 1.What do you mean by Retirement of a partner ? Ans. Retirement of a partner means that the partner ceases to be a partner of the firm. It results in 24 | P a g e  reconstitution of the firm by which old partnership comes to an end and a new partnership among the continuing (remaining) partners comes into existence. Q. 2.What is Gaining Ratio ? Ans.Ratio acquired by continuing partners on the retirement of a partner. Q. 3.What is the formula for calculating Gaining Ratio ? Ans.New Ratio — Old Ratio = Gaining Ratio. Q. 4.Who are called Gaining Partners ? Ans.The partners whose shares have increased as a result of change are known as Gaining Partners. Q. 5. What is meant by reconstitution of partnership firm ? Ans.Any change in existing agreement of partnership amounts to reconstitution of partnership firm. Fill in the Blanks 1. Gaining Ratio = New Ratio -.......... (Old Ratio/Sacrificing Ratio) 2 Sacrificing Ratio = old Ratio-.......... (New Ratio/Gaining Ratio) 3. Retiring partner share of goodwill is adjusted from remaining partner capital account in ……... (Gaining Ratio/Sacrificing Ratio) 4. Revaluation account is a ………account. (Nominal /Real) 5. A joint life policy became due when any of partner…......... or the policy mature whichever is earlier. (Dies/Live) Answer:(1) Old Ratio (2) New Ratio (3) Gaining Ratio (4) Nominal (5) Dies SHORT NUMERICALS (2 MARKS) Q.1. (i) X, Y and Z are partners sharing profits in the ratio of 1/2 : 1/3 : 1/6. Find out the new ratio if Y retires. (ii) A, B and C are partners sharing profits in the ratio of 1/2 : 2/5 : 1/10. Find out the new ratio if A retires. Q.2. P, Q and R were partners sharing profits in the ratio of 5 : 4 : 3. R retired and his share was taken up by P and Q in the ratio of 3 : 2. Find out the new ratio. Q.3. M, N, O and P are partners sharing profits and losses in the ratio of 1/3, 1/6, 1/3 and 1/6 respectively. O retires and M, N and P decide to share the profits and losses equally in future. Calculate the gaining ratio. 4 MARKS QUESTIONS Q. 1. What adjustments are required to be made at the time of retirement of a partner? Ans. The following adjustments are usually required to be made at the time of retirement of a partner : (a) Adjustment in profit sharing ratio. 25  (b) Adjustment of goodwill. (c) Adjustment of profit or loss arising on the revaluation of assets and liabilities. (d) Adjustment of reserves, accumulated profits and losses. (e) Adjustment of joint life policy,. (f) Making payment to the retiring partner. (g) Adjustment of partners’ capitals. Q. 2. Give any two differences between Sacrificing Ratio and Gaining Ratio. Ans. Distinction between Sacrificing Ratio and Gaining Ratio : Basis Sacrificing Ratio Gaining Ratio Meaning Sacrificing Ratio is the ratio in Gaining Ratio is the ratio in which old partners surrender a which the remaining partners part of their share in favour of acquire the share of the retiring the new partner. or deceased partner. Formula Sacrificing Ratio = Old Ratio – Gaining Ratio = New Ratio – Old New Ratio Ratio When to This ratio is calculated at the This ratio is calculated at the Calculate ? time of admission of a partner. time of retirement or death of a partner. Use This ratio is calculated to find out This ratio is calculated to find out the amount of compensation to the amount of compensation to be paid by the new partner. be paid to the retiring partner. Q. 3. What adjustments are required to be made at the time of death of a partner ? Ans. The following adjustments are usually required to be made at the time of death of a partner: (1) Calculation of new profit sharing ratio of the remaining partners. (2) Adjustment of goodwill. (3) Revaluation of assets and liabilities and distribution of the profit or loss arising on such revaluation. (4) Adjustment of reserves, accumulated profits and losses. (5) Adjustment of deceased partner’s share of profit from the date of last balance sheet to the date of his death. (6) Adjustment of joint life policy. (7) Making payment to the executors of the deceased partner. (8) Adjustment of partners’ capitals. UNIT – 6 : DISSOLUTION OF PARTNERSHIP FIRM One Word to One Sentence Questions 26 | P a g e Q. 1.What is meant by Dissolution of Partnership firm ? Ans.According to Section 39 of the Partnership Act 1932 : “Dissolution of firm means dissolution of partnership between all the partners in the firm.’’ Q. 2.When may the court order dissolution of a firm ? Ans.(i) Partner becomes of unsound mind (ii) Permanent incapability of partner (iii) Misconduct of a partner transfers his share to third party without consent of other partners. Q. 3.What are the important causes of dissolution of partnership firm ? Ans.A firm may be dissolved by Agreement, by happening of an event voluntarily, Compulsory or by orders of the court. Q. 4.What is meant by compulsory dissolution of a firm ? Ans.That condition under which dissolution of firm has become compulsory, it is called compulsory dissolution of the firm. Q. 5.Give two cases of compulsory dissolution of firm. Ans.(a) On the Insolvency of any partner. (b) Business of firm developed illegal. Fill in the Blanks 1. Amount received from realisation of an unrecorded asset is showed ----------- side of Realisation Account. (Debit/credit) 2. When firm is dissolved goodwill account is closed by transfer to ------- -- (Realisation account/Nominal) 3. Realisation account is a ------------account. (Nominal/Book) 4. On dissolution all assets and liabilities are transferred to the realization account at their respective ------------values. (Letter/(Book). 5. In the event of dissolution of a firm partners---------------- assets are first use are payment of personal liabilities. (Real/Personal) Answer: (1) credit (2) Realisation account (3) Nominal (4) Book (5) Personal Multiple Choice Questions: 1. On the dissolution of a firm, an amount realized firm the underscored assets is credited to (a) cash account (b) realization account (c) revaluation account(d) None of these 2. Out of the proceeds received from the sale of Sunday asset-will be paid first and all. (a) Partner's capital (b) Creditors liability (c) Partner's loss (d) None of these 3. When a first dissolved goodwill account closed by transfer to (a) realization account (b) capital account and the partner (c) revaluation account (d) None of these 4. Unrecorded Liability when paid on dissolution of a firm is desisted to (a) Liability account (b) Realization account (c) partners capital account the partners personal Assets (d) None of above 5. At the time of dissolution on unrecorded assets taken away by Mr. X a partner should be debited to (a) assets account (b) Mr. X capital account (c) profit and loss (d) None of above 27 Answer: (1) Realization account (2) Creditors liability (3) Realization account (4) Realization account (5) Mr. X capital account 2 Marks Questions Q. 1. What is meant by Dissolution of Partnership Firm ? Ans. Dissolution of Partnership Firm means firm comes to an end and ceases to function as a firm. According to Section 39 of Indian Partnership Act, 1932, “Dissolution of a firm means dissolution of partnership between all the partners in the firm”. If all the partners decide to dissolve the firm, as a result, all the business activities come to an end, accounting books of the firm are closed and accounts of all assets & liabilities are closed by transferring these to realisation account. The assets of the firm are sold, auctioned or disposed off and external liabilities are paid. After paying the external liabilities, the balance is paid to the partners in settlement of their accounts. Q. 2. Write any two difference between Firm’s debts and Private debts. Ans. DIFFERENCE BETWEEN FIRM’S DEBTS AND PRIVATE DEBTS Basis Firm’s debts Private debts Meaning Firm’s debt means the debt Private debt means debt owed owed by the firm to outsiders. by a partner in his personal capacity to any other person. Liability Partners are jointly & severally The partners are personally liable for the firm’s debt. liable for their private debts. Q. 3. What is Compulsory Dissolution of Firm ? Ans. According to Section 41 of Indian Partnership Act, 1932, there will be compulsory dissolution of partnership firm under following circumstances :  On the insolvency of all partners or all except one.  If the resident of an enemy country becomes a partner in the firm.  If the business of the firm is declared illegal. Q.4. Pass journal entries for the following transactions : (i) Realisation expenses amounted to ₹ 10,000. (ii) Realisation expenses amounted to ₹ 7,000 were paid by partner M. (iii) Realisation expenses amounted to ₹ 20,000 were paid by the firm on behalf of a partner. Q.5. Pass journal entries for the following transactions : 28 | P a g e  (i) Vijay, a partner, is allowed a remuneration of ₹ 20,000 for dissolution work and is to bear all expenses of realisation which amounted to ₹ 12,000 were paid by the firm. (ii) Raman, a partner, is to be paid remuneration of ₹ 30,000 for dissolution work. Realisation expenses amounted to ₹ 7,000 were paid by the firm. 4 Marks Questions Q. 1. Give any four difference between dissolution of partnership and dissolution of partnership firm. Ans. Difference between Dissolution of Partnership and Dissolution of Partnership Firm : Basis Dissolution of Partnership Dissolution of Partnership Firm Meaning Dissolution of partnership Dissolution of a firm means the means the change in the complete closure of the existing relations of partners. business. Business The firm may continue its All business activities of the Activities business activities as usual. firm come to an end. Revaluation/ It involves reconstitution of the It involves winding up of the Realisation firm and thus requires firm and thus requires revaluation of the assets and realization of assets and liabilities of the firm. settlement of liabilities. Closure of Books It does not require final closure It requires final closure of of Accounts of books of accounts of the books of accounts of the firm. firm. Q. 2. What are the various steps to be taken to close the books of accounts at the time of dissolution ? Ans. Dissolution of the firm involves closure of firm’s books of accounts. Following are steps to be taken to close the books of accounts. (1) Balance Sheet on the date of dissolution is to be prepared if it is not given. (2) After preparation of Balance Sheet, Realisation Account should be prepared to know profit or loss on realisation. (3) Partners’ capital accounts are then prepared to find out final amount to be paid to partners or to be brought by them. (4) Lastly, cash account is prepared. Balance of both Receipts & Payments side should be equal which also verify the arithmetical accuracy of accounting treatment. Q.3. Diya and Riya were partners sharing profits and losses equally. On 31st March, 2023, the Balance Sheet of the firm was as follows : BALANCE SHEET AS AT 31ST MARCH, 2023 Liabilities ₹ Assets ₹ 29  Sundry Creditors 60,000 Cash 25,000 Riya’s Loan 15,000 Debtors 42,000 General Reserve 15,000 Less : Provision for Investment Fluctuation Fund 2,000 Doubtful Debts 6,000 36,000 Riya’s Capital 30,000 Stock 12,000 Diya’s Capital 10,000 Investments 18,000 Plant and Machinery 39,000 Diya’s Loan 2,000 1,32,000 1,32,000 Their firm was dissolved on above date and the assets and liabilities were settled as follows : (i) The creditors were paid off by giving them the plant and machinery at a discount of 10% and the balance in cash. (ii) Riya’s loan was paid with interest of ₹ 500. (iii) Debtors realised 10% less of the amount due from them. (iv) Stock was taken over by Riya at ₹ 7,000. (v) Investments realised 80% of their book value. (vi) Realisation expenses ₹ 600 were paid by Diya. You are required to prepare Realisation Account. Solution Dr. REALISATION ACCOUNT Cr. Particulars ₹ Particulars ₹ To Debtors A/c 42,000 By Provisions for Doubtful To Stock a/c 12,000 Debts A/c 6,000 To Investments A/c 18,000 By Sundry Creditors A/c 60,000 To Plant and Machinery A/c 39,000 By Investment Fluctuation To Cash A/c (Creditors) Fund A/c 2,000 (₹ 60,000 – ₹ 35,100) 24,900 By Cash A/c (Assets Realised) To Riya’s Loan A/c (Interest) 500 Debtors 37,800 To Diya’s Capital A/c 600 Investments 14,400 52,200 (Expenses) By Riya’s Capital A/c (Stock taken) 7,000 30 | P a g e  By Loss on Realisation transferred to : Diya’s Capital A/c 4,900 Riya’s Capital A/c 4,900 9,800 1,37,000 1,37,000 Q.4. Ashish and Kanav were partners in a firm sharing profits and losses in the ratio of 3:2. On 31st March, 2023 their Balance Sheet was as folows : BALANCE SHEET OF ASHISH AND KANAV AS AT 31ST MARCH, 2023 Liabilities ₹ Assets ₹ Trade Creditors 42,000 Bank 35,000 Employee’s Provident Fund 60,000 Stock 24,000 Mrs. Ashish’s Loan 9,000 Debtors 19,000 Kanav’s Loan 35,000 Furniture 40,000 Workmen’s Compensation 20,000 Plant 2,10,000 Reserve Investment Fluctuation 4,000 Investments 32,000 Reserve Capitals : Profit and Loss Account 10,000 Ashish 1,20,000 Kanav 80,000 2,00,000 3,70,000 3,70,000 On the above date they decided to dissolve the firm. (i) Ashish agreed to take over furniture at ₹ 38,000 and pay off Mrs. Ashish’s loan. (ii) Debtors realised ₹ 18,500 and plant realised 10% more. (iii) Kanav took over 40% of the stock at 20% less than the book value. Remaining stock was sold at a gain of 10%. (iv) Trade creditors took over investments in full settlement. (v) Kanav agreed to take over the responsibility of completing dissolution at an agreed renumeration of ₹ 12,000 and to bear realization expenses. Actual expenses of realization amounted to ₹ 8,000. Prepare Realisation Account. Solution 31  Dr. REALISATION ACCOUNT Cr. Particulars ₹ Particulars ₹ To Sundry Assets : By Sundry Liabilities : Stock 24,000 Trade Creditors 42,000 Debtors 19,000 Employee’s Provident Furniture 40,000 Fund 60,000 Plant 2,10,000 Mrs. Ashish’s Loan 9,000 1,11,000 Investments 32,000 3,25,000 By Investment Fluctuation To Ashish’s Capital Reserve 4,000 A/c (Mrs. Ashish’s Loan) 9,000 By Ashish’s Capital A/c To Kanav’s Capital (Furniture) 38,000 A/c (Remuneration) 12,000 By Bank A/c : To Bank A/c Debtors 18,500 (Payment made) : To Employee’s 60,000 Plant 2,31,000 Provident Fund To Partner’s Capital Stock 15,840 2,65,340 A/cs : (Gain) By Kanav’s Capital 7,680 A/c (Stock) Ashish 12,012 Kanav 8,008 20,020 4,26,020 4,26,020 Q.5. D and R were partners sharing profits and losses equally. On 31st March, 2023, the Balance Sheet of the firm was as follows : BALANCE SHEET AS AT 31ST MARCH, 2023 32 | P a g e  Liabilities ₹ Assets ₹ Sundry Creditors 60,000 Cash 25,000 R’s Loan 15,000 Debtors 42,000 General Reserve 15,000 Less : Provision for Investment Fluctuation Fund 2,000 Doubtful Debts 6,000 36,000 R’s Capital 30,000 Stock 12,000 D’s Capital 10,000 Investments 18,000 Plant and Machinery 39,000 D’s Loan 2,000 1,32,000 1,32,000 Their firm was dissolved on above date and the assets and liabilities were settled as follows : (i) The creditors were paid off by giving them the plant and machinery at a discount of 10% and the balance in cash. (ii) R’s loan was paid with interest of ₹ 500. (iii) Debtors realised 10% less of the amount due from them. (iv) Stock was taken over by R at ₹ 7,000. (v) Investments realised 80% of their book value. (vi) Realisation expenses ₹ 600 were paid by D. You are required to prepare Realisation Account. SECTION - B UNIT -7 : ACCOUNTING FOR SHARE CAPITAL One Mark Questions: 1. What is Company? Ans. Company is an artificial person created by law, having separate entity with perpetual succession and common seal. 2. What do you mean by shares? Ans. The units into which the capital of a company is divided are called shares. 3. Name the types of shares issued as Per Companies Act 2013. Ans. Equity shares and Preference shares. 4. State any one essential feature of a company. Ans. It is an artificial person created by law. 5. What is preference share? Ans. That part of share capital which enjoys preferential right to (a) payment of dividend (b) Return of Capital. 33 Fill in the Blanks: 1. A new company cannot issue shares at a………... (Discount/Premium) 2. Shares which are not preference shares are called……… (Equity Share /debenture) 3. Premium received on issue of shares is shown on the side of balance sheet. (Assets/Liabilities) 4. Balance in share forfeited account is shown in balance sheet under the head.............. (Shares Capital/Current Liabilities) 5. Share allotment account is a ……….. account.(Personal/Real) Answer:(1) Discount (2) Equity shares (3) Liabilities (4) Share capital (5) Personal Multiple Choice Questions:- 1. A company has ………… (a) Limited Liability (b) Perpetual Existence (c) Separate Legal Entity (d) All of the above 2. Shareholders are : (a) Creditors of the company (b) Owners of the company (c) Customers of the company (d) None of these 3. The Liability of members in a company is ………… (a) Fluctuating (b) Stable (c) Unlimited (d) Limited 4. Maximum number of members in a private company is : (a) No Limit (b) 20 (c) 200 (d) 7 5. Shareholders receive from the company : (a) Dividend (b) Profit (c) Commission (d) Interest 1. (d), 2. (b), 3. (d), 4. (c), 5. (a), Two Marks Questions: Q.1 What is meant by equity share ? Ans. An equity share is that share which does not carry those preferential rights which are attached to every preference share. “An equity share is a share which is not a preferential share.” Equity shares carry no special rights in respect of annual dividend and return of capital in case of winding up of company. Unless otherwise stated, the shares of a company are deemed to be equity or ordinary share. Equity shareholders are entitled to surplus profits after all preferential rights have been satisfied. Q.2 What is Sweat Equity Shares ? Ans. Sweat equity shares means the equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know how or making available intellectual property rights provided that not less than one year has elapsed since the date of commencement of business. Such shares cannot be resold by their holders within a period of one year called lock-in-period. Q.3 Make a difference between Calls in Arrears & Calls in Advance. 34 | P a g e  Ans. Calls in Advance Calls in Arrears 1. Applicants send more money than 1. Shareholder makes a default in sending called up is called Calls-in-Advance. call money is called as calls in arrears. 2. Company allow interest on calls in 2. Company charge interest on calls in arrears. advance. 3. Rate of interest as per Table ‘F’ is 12% 3. Rate of interest as per Table ‘F’ is 10% p.a. p.a. Q.4 Spencer took over assets of ₹ 25,00,000 and liabilities of ₹ 6,00,000 of Queen Ltd. Spencer Ltd. paid the purchase consideration by issuing 12,000 Equity Shares of ₹ 100 each at a premium of 10% and ₹ 10,00,000 by Bank Draft. Calculate purchase consideration and pass necessary Journal entries in the books of King Ltd. Solution : Calculation of Purchase Consideration : ₹ Nominal value of shares issued = 12,000  ₹ 100 = 12,00,000 Securities Premium Reserve = 1,20,000 Bank Draft = 10,00,000 Purchase consideration = 23,20,000 JOURNAL OF SPENCER LTD. Date Particulars L.F. Dr. (₹) Cr. (₹) (i) Sundry Assets A/c Dr. 25,00,000 Goodwill A/c (Balancing Figure) Dr. 4,20,000 To Sundry Liabilities A/c 6,00,000 To Queen Ltd. 23,20,000 (Purchase of assets and liabilities of Queen Ltd.) (ii) Queen Ltd. Dr. 23,20,000 To Equity Share Capital A/c 12,00,000 To Securities Premium Reserve A/c 1,20,000 To Bank A/c 10,00,000 (12,000 equity shares of ₹ 100 each issued at a premium of 10% and ₹ 10,00,000 paid by bank draft) Q. 5 Raghav Ltd. issued fully paid equity shares of ₹ 60 each at a premium of 25% for the purchase of a running business from Gupta Bros. for a sum of ₹ 15,00,000. The assets and liabilities consisted of the following : 35  Plant ₹ 6,00,000; Trucks ₹ 8,00,000; Stock ₹ 3,00,000; Machinery ₹ 6,00,000 and Sundry Creditors ₹ 5,00,000. You are required to pass necessary journal entries for the above transactions in the books of Raghav Ltd. Solution : JOURNAL OF RAGHAV LTD. Date Particulars L.F. Dr. (₹) Cr. (₹) Plant A/c Dr. 6,00,000 Trucks A/c Dr. 8,00,000 Stock A/c Dr. 3,00,000 Machinery A/c Dr. 6,00,000 To Sundry Creditors A/c 5,00,000 To Gupta Bros. 15,00,000 To Capital Reserve (Balancing Figure) 3,00,000 (Purchase of Business from Gupta Bros.) Gupta Bros. Dr. 15,00,000 To Equity Share Capital A/c 12,00,000 To Securities Premium Reserve A/c 3,00,000 (Issue of 20,000 Shares of ₹ 60 each at a premium of ₹ 15 per share) ` 15,00, 000 Note : No. of Shares to be issued  20,000 75 Q. 6. On 1.1.2022 A Ltd. received in advance the first call of ₹ 3 per share on 10,000 equity shares. The first call was due on 15-2-2022. Journalise the above transactions and transfer the advance to first call account by opening a Calls-in- Advance Account. Solution : JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) 2022 Jan. 1 Bank A/c Dr. 30,000 To Calls-in-Advance A/c 30,000 (First call money received in advance on 10,000 equity shares) Feb. Calls-in-Advance A/c Dr. 30,000 15 To Equity Share First Call A/c 30,000 (Amount transferred from Calls-in-advance account) 36 | P a g e DR. CALLS-IN-ADVANCE ACCOUNT CR. Date Particulars ₹ Date Particulars ₹ 2022 2022 Feb. To Equity Share First 30,000 Jan. 1 By Bank A/c 30,000 15 Call A/c Q. 7. A Limited company forfeited 100 equity shares of the face value of 10 each. Rs 6 per share called up, for non-payment of first call of Rs 2 per share, The forfeited share were subsequently re-issued as fully paid @Rs7 each. Give necessary entries in company's journal. Q. 8. A Ltd. Purchased assets for Rs 4,50,000 from B & Co. A sum of Rs 1.75,000 was paid by means of bank draft and for the balance due A 1.td. issued equally share of Rs 10 each at a premium of 10% journalise the above transactions in the books of the company. Four Marks questions: Q. 1 Explain Types of Preference Shares. Ans. (i) Cumulative Preference Shares. Cumulative Preference Shares are those shares on which arrears of dividend accumulate. It means that if dividend is not declared in any year due to non availability of profit then arrears of dividends are to be carried forward and paid out of profits of subsequent years before dividend is paid to equity shareholders. For example. A company has 10,000 9% preference shares of ₹ 100 each and dividend is not paid for 2012 and 2013. The directors must pay ₹ 2,70,000 to preference shareholders before they can pay the dividend to equity shareholders for 2014. (ii) Non cumulative preference shares. In this case, if no dividend is declared in any particular year, the right to receive such dividend for that year expires or Arrears of dividend do not accumulate. (iii) Participating Preference Shares. Shares providing a right to its holders to participate in the surplus profits left after paying dividend to equity shareholders at a stipulated rate are participating preference shares. These shares usually also provide a right to participate in the surplus assets left after the repayment of capital to equity shareholders on the winding up of the company. (iv) Non-participating preference shares. The preference shares which do not carry the right to participate in the profits remaining after equity shareholders, have been paid dividend are ‘Non- participating Preference Shares’. Unless otherwise stated, a preference share is always deemed to be a non- participating preference share. (v) Convertible preference shares. Convertible preference shares are those shares which can be converted into equity shares with in a certain period. (vi) Non-convertible preference shares. These are the shares which do not have the right of the conversion into equity shares. Unless otherwise stated, a preference share is always deemed to be a non- convertible one. (vii) Redeemable preference shares. These are the shares, the amount of which will be returned by the company to the holder of such shares after the specified time or at a time earlier to it. (viii) Irredeemable Preference Shares. Irredeemable Preference Shares are those Preference Shares the amount of which can be returned by the company to the holders of such shares when the company is wound up. The Companies Act, 2013 does not permit issue of Irredeemable Preference Shares. Q. 2 What are the categories in which the share capital of a company is divided ? 37  Ans. The term share capital refers to the amount of money raised by the issue of shares. The share capital of a company is divided into following categories : 1. Authorised capital. It is the capital with which the Joint Stock Company is registered. It is the maximum amount of share capital which is stated in the memorandum of company which a company is authorised to issue. It is also called as registered or Nominal Capital. 2. Issued capital. It is that part of Authorised capital which is issued for cash or for consideration other than cash and includes shares issued to the signatories of the memorandum. 3. Subscribed Capital. It is that part of issued capital which is actually subscribed for by the public and includes shares subscribed by the signatories of memorandum. 4. Called up capital. It is that part of subscribed capital which is actually called up by the company. 5. Paid up capital. It is that part of called up capital which has actually been paid by the shareholders. It is equal to called up capital minus calls in arrears., 6. Reserve Capital. A company may by special resolution determine that any portion of it’s uncalled share capital shall not be called up except in the event and for the purpose of winding up of the company. Such capital is known as ‘Reserve Capital’. Q. 3 Distinguish between ‘Reserve Capital’ and ‘Capital Reserve’. Ans. Reserve Capital Capital Reserve 1. It refers to that portion of uncalled Capital reserve is made out of capital share capital which shall not be called up profits. It refers to those amounts which except in the event of winding up of the are not regarded as free for distribution company. by way of dividend. 2. It is not mandatory to create reserve It is mandatory to create capital reserve in capital. case of capital profits. 3. It is not shown in the company’s It is shown as a first item under the head balance sheet. ‘Reserve and Surplus’ on the liabilities side of company’s balance sheet. 4. A special resolution is required to be No special resolution is required to create passed for its creation. capital reserve. Q.4 Alpha limited company invited applications for 30,000 equity shares of ₹ 10 each payable as follows : On Application ……… ₹ 3 On Allotment ……… ₹ 4 On First Call ……… ₹ 2 On Final Call ……… The Balance Applications were received for 33,000 shares. Allotments were made on following basis : (i) To applicants for 21,000 shares – in full. (ii) To applicants for 12,000 shares – 9,000 shares Excess money paid on application was utilized towards allotment money. Ram who was allotted 900 shares out of the group applying for 12,000 shares failed to pay allotment 38 | P a g e money and money due on calls. His shares were forfeited. 600 forfeited shares were re-issued as fully paid on receipt of ₹ 8 per share. Pass journal entries in the books of the company. Solution : JOURNAL Date Particulars Dr. (₹) Cr. (₹) Bank A/c (33,000  3) Dr. 99,000 To Equity Share Application A/c 99,000 (Application money received) Equity Share Ap