II PUC Accountancy I Term 24-25 PDF

Chapter - 2 Accounting for Partnership: Basic concepts (1+2+6) Marks Meaning of Partnership: It 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’. Features of Partnership: 1....

Chapter - 2 Accounting for Partnership: Basic concepts (1+2+6) Marks Meaning of Partnership: It 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’. Features of Partnership: 1. Agreement: Partnership is the result of an agreement between two or more persons to do business and share its profits and losses. 2. Sharing of Profit and loss: The agreement between partners must be to share profits and losses of a business. Partnership deed: The written document which contains terms of the agreement of partnership is called partnership deed. Contents of Partnership deed: Names and Addresses of the firm and its main business Names and Addresses of all partners Amount of capital to be contributed by each partner The date of commencement of partnership Profit and loss sharing ratio etc Provisions for Indian Partnership Act 1932 in the absence of Partnership deed: (a) Profit Sharing Ratio: If the partnership deed is silent about the profit sharing ratio, the profits and losses of the firm are to be shared equally by partners, irrespective of their capital contribution in the firm. (b) Interest on Capital: Partners are not having the right for interest on their capital balances. (c) Interest on Drawings: No interest is to be charged on the drawings made by the partners. (d) Interest on Advances: If any partner has advanced some money to the firm, he has the right to get an interest on the amount at the rate of 6% per annum. (e) Remuneration for Firm’s Work: No partner has the right to get salary or any other remuneration for taking part in the management of the business of the firm. Methods of maintenance of capital account of partners: (a) Fixed Capital Method: Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners. Partner’s Capital Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J. Amount (Rs.) F. (Rs.) To Cash / Bank A/c xxx By Balance b/d xxx ( withdrawal of capital) (opening balance) To Balance c/d xxx By Cash / Bank A/c xxx (closing balance) (fresh capital introduced) xxx xxx 1  Partner’s Current Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount (Rs.) (Rs.) To Balance b/d (debit xxx By Balance b/d xxx opening balance) (opening credit To Drawings A/c xxx balance) To Interest on xxx By Salary A/c xxx drawings A/c xxx By Commission A/c xxx To Profit & Loss A/c By Interest on To Balance c/d capital xxx (closing credit xxx By Profit & Loss balance) Appropriation A/c (share of profit) xxx By Balance c/d (closing credit balance) xxxx xxxx (b) Fluctuating capital method: It is a capital method in which the capitals of partners fluctuate or change from year to year. Distinction between Fixed and Fluctuating Capital Accounts: Basis of Distinction Fixed Capital Account Fluctuating Capital Account (i) Number of Under this method, partner’s Under this method only partner’s accounts capital A/c and current A/c capital A/c is maintained. are maintained. (ii) Adjustments All adjustments like drawings, All adjustments like drawings, salary, interest on capital, etc. salary, interest on capital, etc., are are made in the current accounts made in the capital accounts, and not in the capital accounts. Distribution of profit among partners: Profit and Loss Appropriation A/c is prepared to calculate the final amount of profit and loss to be distributed among the partners in their profit sharing ratio. Profit and Loss Appropriation A/c is the account which shows the distribution of profits of the firm among the partners. Profit and Loss Appropriation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) To Profit and Loss By Profit and Loss (if xxx (if there is loss) xxx there is profit) To Interest on Capital A/c xxx By Interest on Drawings xxx To Salary to Partner xxx By Partners’ capital(Distribution xxx To Commission xxx of loss) To Interest on Partner’s Loan xxx To Partners’ Capital Accounts xxx (distribution of profit) xxxx xxxx 2  Calculation of interest on capital: (i) On the opening balance of the capital accounts of partners, interest is calculated for the whole year (ii) On the additional capital brought in by any partner during the year, interest is calculated from the date of introduction of additional capital to the last day of the financial year. (iii) On the amount of capital withdrawn (other than usual drawings) during the year, interest for the period from the date of withdrawal to the last day of the financial year is calculated and deducted from the total of the interest calculated. Different methods of calculating interest on partners drawings: 1. Direct method or specific period method: Interest = Amount of drawings x Rate of interest x number of outstanding months / 12 2. Product method: Interest = Total product x Rate of interest x 1/12 3. Average period method or short cut method: Interest = Total drawings x Average period x Rate of interest x 1 / 12. Average period = longest period outstanding + shortest period outstanding / 2. a. Beginning of every month =12 + 1 = 13 / 2 2 b. Middle of every month = 11.5 +.5 = 12 / 2 2 c. End of every month = 11 + 0 = 11 / 2 2 d. Beginning of each quarter = 12 + 3 = 15 / 2 2 e. End of each quarter = 9 + 0 = 9 / 2 2 Problems: 1. Sameer and Yasmin are partners with capitals of Rs.15,00,000 and Rs. 10,00,000 respectively. They agree to share profits in the ratio of 3:2. Show how the following transactions will be recorded in the capital accounts of the partners in case: (i) the capitals are fixed, and (ii) the capitals are fluctuating. The books are closedon March 31, every year. Particulars Sameer Yasmin (Rs.) (Rs.) Additional capital contributed 3,00,000 2.00,000 on July 1, 2014 Interest on capital 5% 5% Drawings (during 2014-15) 30,000 20,000 Interest on drawings 1,800 1,200 Salary 20.000 Commission 10,000 7,000 Share in loss 60,000 40,000 for the year 2014-15 2. 2. A, B and C set up a partnership firm on April 1, 2015. They contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000, respectively as their capitals and agreed to share profits and losses in the ratio of 3: 2:1. A is to be paid a salary of Rs. 1,000 per month and B, a Commission of Rs. 5,000. It is also provided that interest to be allowed on capital at 6% p.a. The drawings for the year were A Rs. 6,000, B Rs. 4,000 and C Rs. 2,000. Intereston drawings of Rs. 270 was charged on A’s drawings, Rs. 180 on B’s drawings and Rs. 90, on C’s drawings. The net profit as per Profit and Loss Account for the year ending March 31, 2015 was Rs. 35,660. Prepare Profit and Loss Appropriation Account to show the distribution of profit among the 3  partners. 3. A and B are partners sharing profits in the ratio of 3:2, with capitals of Rs. 50,000 and Rs. 30,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs. 2,500. During the year 2016-17, the profits prior to the calculation of interest on capital but after charging B’s salary amounted to Rs. 12,500. A provision of 5% of the profit is to be made in respect of commission to the Manager. Prepare Profit and Loss Appropriation account showing the distribution of profit and the partners’ capital accounts for the year ending March 31, 2017 4. Sachin and Pratham commenced business in partnership on 1-4-2025 with a capital of Rs. 1, 00,000 and Rs. 80,000 respectively agreeing to share profits and losses in the ratio 3:2. They earned a profit of Rs. 36,000 for the year ending 31-3-2016 before allowing: (i) Interest on capital at 5% p.a (ii) Interest on drawings – sachin Rs. 600 and pratham Rs. 1,000 (iii) Yearly salary of Pratham – Rs. 6,000 and commission to sachin – Rs. 4,000 (iv) Their drawings during the year – sachin Rs. 16,000 and Pratham – Rs. 20,000 Prepare profit and loss appropriation account 5. X and Y are partners in a firm. Their capital accounts as on 1/4/12 showed a credit balance of Rs. 2,00,000 and Rs. 1,00,000 respectively. On 1/7/12, X introduced additional capital Rs. 50,000 and Y introduced additional capital Rs. 80,000. On 1/1/13 Y withdrew Rs. 30,000 from his capital. Interest is allowed at 10% p.a. Calculate interest payable on partners capitals during the accounting year 2012-13. 6. Shekhar, a partner of a firm has withdrawn the following amounts during the year ended 31/3/11. (i) on 1/7/13 Rs. 5,000 (ii) on 1/11/13 Rs. 3,000 (iii) on 1/1/14 Rs. 2,000. Calculate interest on shekhar’s drawing at 6% p.a for the accounting year ended 31/3/14. 7. Prasanna and Praveen are partners in a firm. Prasanna’s drawing for the year ended 2013-14 is as follows: Rs. 4,000 on 1/6/13, Rs. 6,000 on 30/9/13, Rs. 2,000 on 30/11/13, Rs. 3,000 on 1/1/14. Calculate interest on Prasanna’s drawings at 8% p.a under Product method. 8. Uma and Suma are partners in a firm sharing profits and losses in the ratio of 3:2. Uma withdrew regularly Rs. 800 on first of every month for six months ending 30 th September 2013. Calculate interest on drawings of Uma at 8% p.a under Product method. 9. Uma and Suma are partners in a firm sharing profits and losses in the ratio of 3:2. Uma withdrew regularly Rs. 3,000 quarterly at the beginning of each quarter. Calculate interest on drawings of Uma at 8% p.a for the year ending 31.3.14 under Product method. 10. Bharath and Pavan are partners in a firm sharing profits and losses in the ratio of 2:1. Bharath withdrew Rs. 2,000 at the end of each quarter. Calculate interest on drawings of Bharath at 12% p.a for the year ending 31.3.14 under Product method. 11. A and B are partners sharing profits and losses equally. A withdrew Rs. 1,500 at the beginning of each month and B withdrew Rs. 2,000 at the end of each month for the year ending 31/3/14. Calculate interest on partners’ drawings at 12% p.a under average period method. 12. A and B are partners sharing profits and losses in the ratio 1:2. A withdrew Rs. 2,500 at the beginning of each quarter and B withdrew Rs. 5,000 at the end of each quarter for the year ending 31/3/12. Calculate interest on partners’ drawings at 8% p.a under average period method. 13. Sachin and Rahul were partners in a firm sharing profits and losses in the ratio of 3:2. They admit Bharath for 1/6th shares in the profit and guaranteed that his share of profit will not be less than Rs. 25,000. Total profits of the firm were Rs. 90,000. Calculate share of profits for each partner when the guarantee is given by the firm. Prepare profit and loss appropriation account. 14. Roja and Usha were partners in a firm sharing profit and losses in the ratio 3:2. They admit Sahana for 1/6 th shares in profit and guaranteed that her shares of profits will not be less than Rs. 25,000. Total profits of the 4 firm were Rs. 90,000. Calculate share of profits for each partner when the guarantee is given only by Roja. Prepare profit and loss appropriation account. 15. Charan and Sharan were partners in a firm sharing profit and losses in the ratio 3:2. They admit Sachin for 1/6th shares in profit. Charan personally guaranteed that Sachin’s share of profit after charging interest on capital at 10 % p.a will not be less than Rs. 15,000 in a a year. The capital provided was as follows: Charan – Rs. 1,25,000, Sharan – Rs. 1,00,000 and Sachin – Rs. 75,000. The profit for the year ending was Rs. 75,000 before providing interest on capital. Prepare profit and loss appropriation account if the new profit sharing ratio is 3:2:1. ********************************** Chapter – 3 Reconstitution of Partnership firm – Admission of a Partner (1+12) Marks Reconstitution of Partnership firm: It refers to any change in the existing agreement of partnership firm. Modes of reconstitution of partnership firm:  Admission of a new partner  Change in the profit sharing ratio among the existing partners  Retirement of an existing partner  Death of a partner Admission of a Partner: It refers to taking a person into the partnership firm as a partner for the benefit of the firm. New profit sharing ratio: It refers to the ratio in which all the partners share the future profits and losses of the firm. New profit sharing ratio = Old share – shares sacrificed New profit sharing ratio = Old share x Remaining shares Sacrificing ratio: The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called Sacrificing ratio. Sacrificing ratio = Old ratio – New ratio Meaning of Goodwill: Goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. Factors Affecting the Value of Goodwill:  Nature of business  Location  Efficiency of management  Market situation Method of valuation of goodwill: 1. Average profits method: Average profit = Total profit / Number of years Goodwill = Average profit x Number of years purchased 2. Super profits method: Normal profit = Capital employed x Normal rate of return 100 Super profit = Average profit – Normal profit Goodwill = Super profit x Number of years purchased 5  3. Capitalisation method: Under this method, goodwill can be calculated in two ways: i) By capitalising the average profits ii) By capitalising the super profits i) Capitalising the average profits: Capitalised value of average profit = Average Profits × 100 / Normal Rate of Return Goodwill = capitalised value – Net assets ii) Capitalisation of super profits : Goodwill = Super Profits × 100 / Normal Rate of Return Meaning of Revaluation Account: It is an account prepared to record the increase or decrease in the value of assets and liabilities and to find out profit or loss on revaluation. Unrecorded assets and liabilities: It means the assets and liabilities not appearing in the balance sheet of the old firm. Format of Revaluation Account: Dr Revaluation A/c Cr Particulars Amount Particulars Amount (Rs.) (Rs.) To decrease in the value of asset xxx By increase in the value of asset xxx To increase in the value of xxx By decrease in the value of xxx liability xxx liability xxx To unrecorded liability(loss) xxx By unrecorded asset(profit) xxx To Old partners’ capital By Old partners ' capital A/c(profit on revaluation) A/c(loss on revaluation) xxxx xxxx Format of Partners’ capital Account: Dr Partners’ capital A/c Cr Particulars Amount Particulars Amount (Rs.) (Rs.) To Profit / Loss A/c xxx By Balance b/d xxx To Old partners capital By Revaluation A/c(profit on revaluation) A/c(goodwill in SR) xxx By Reserves A/c xxx To Cash / Bank A/c(goodwill By Cash / Bank A/c(capital + Goodwill) xxx withdrawn by old partners) xxx By New partners’ capital A/c(distribution xxx To Revaluation A/c(loss on of goodwill among old partners) revaluation) xxx By Cash / Bank A/c(deficit / debit xxx To Goodwill A/c(writing off balance) goodwill in new ratio) xxx xxx To Cash / Bank A/c(surplus / credit balance) xxxx xxxx Cash Balance in New Balance sheet: Cash balance in old balance sheet xxx (+) New partners’ capital xxx (+) Goodwill of new partner xxx xxx (-) Goodwill written off xxx Cash Balance in new balance sheet xxx 6 Important Note: I. Provision for doubtful debts: 1. Increased to or at – difference amount (balance sheet amount – adjustment amount) in debit side of revaluation account and in balance sheet take the amount given in adjustment and reduce from Debtors original value. 2. Increased by – same amount given in adjustment in debit side of revaluation account and in balance sheet take the total amount(old balance sheet amount + adjustment amount) and reduce from Debtors original value. 3. Reduced to – difference amount (balance sheet amount – adjustment amount) in credit side of revaluation account and in balance sheet take the amount given in adjustment and reduce from Debtors original value. 4. Reduced by – same amount given in adjustment in credit side of revaluation account and in balance sheet take difference amount (old balance sheet amount – adjustment amount) and reduce from Debtors original value. II. A. Unrecorded assets: Prepaid expenses – Credit side of Revaluation A/c and Assets side of Balance sheet. B. Unrecorded liabilities: Outstanding expenses –Debit side of Revaluation A/c and Liabilities side of Balance sheet 7 8 9 10 11 12 13 14 Problems: 1. Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted Sumit as a new partner for 1/5th share in future profits of the firm. Calculate new profit sharing ratio of Anil, Vishal and Sumit. 2. A and B are partners sharing profits in the ratio of 3:2. They admitted C as a new partner for 3/10 share which she acquired 2/10 from A and 1/10 from B. Calculate the new profit sharing ratio of A, B and C 3. Rohit and Mohit are partners in a firm sharing profits in the ratio of 5:3. Theyadmit Bijoy as a new partner for 1/7 share in the profit. The new profit sharing ratio will be 4:2:1. Calculate the sacrificing ratio of Rohit and Mohit. 4. A and B are partners in a firm sharing profits in the ratio of 3:2. They admitted M as a new partner for 1/4 share. The new profit sharing ratio between A and B will be 2:1. Calculate their sacrificing ratio. 5. The profit for the five years of a firm are as follows – year 2013 Rs. 4,00,000; year 2014 Rs. 3,98,000; year 2015 Rs. 4,50,000; year 2016 Rs. 4,45,000 and year 2017 Rs. 5,00,000. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits. 6. The books of a business showed that the capital employed on December 31, 2015, Rs. 5,00,000 and the profits for the last five years were: 2010– Rs. 40,000: 2012-Rs. 50,000; 2013-Rs. 55,000; 2014-Rs.70,000 and 2015-Rs. 85,000. You are required to find out the value of goodwill based on 3 years purchase of the super profits of the business, given that the normal rate of return is 10%. 7. A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation average profits method, given that the value of netassets of the business is Rs. 8,20,000. 15  8. 'A' and 'B' are partners sharing profits and losses in the ratio of 2:1. Their Balance Sheet as on 31.3.2018 was as follows: Balance Sheet as on 31.03.2018 Liabilities Rs Assets Rs Creditors 20,000 Cash in Hand 5,000 Bills Payable 10,000 Stock 15,000 Reserve Fund 12,000 Debtors 20,000 Capitals: Machinery 30,000 A 60,000 Buildings 60,000 B 40,000 Investments 12,000 142,000 142,000 On 01.04.2018, 'C' is admitted into partnership on the following conditions: a. 'C' should bring in cash RS. 25,000 as his capital and RS.15, 000 as goodwill (As per AS-26) for his 1/5th share in future profits. b. Appreciate buildings at 20% and stock is revalued at RS. 12,000. c. Provision for doubtful debts maintained at 5% on debtors. d. Outstanding salary RS. 2,000. Prepare: i) Revaluation Account. ii) Partners' Capital Accounts & iii) New Balance Sheet of the firm. (Ans:- Profit on Revaluation Account RS. 6,000, Capital Account balance A-RS.82,000,B-RS.51,000,C-RS.25,000,CashAccountRS.45,000,Balance Sheet total RS. 1,90,000) 9. Sachin and Dravid are partners in a firm sharing profits and losses in the ratio of 3:2. Their balance sheet is given below: Balance Sheet as on 31.03.2017 Liabilities Rs Assets Rs Creditors 18,000 Cash in Hand 2,000 Bills Payable 12,000 Cash at Bank 18,000 Reserve Fund 3,000 Sundry debtors 25,000 Capitals: Less: PDD 2,000 23,000 Sachin 50,000 Stock 10,000 Dravid 50,000 100,000 Furniture 25,000 Buildings 50,000 P & L Account 5,000 133,000 133,000 On 01.04.2017, they admit Ashwin as a new partner into partnership on the following terms: a) He brings in RS. 40,000 as capital and RS.18,000 towards goodwill (As per AS- 26) for 1/4th share in future profits. b) Depreciate furniture by 10% and buildings are revalued at RS. 45,000. 16 c) PDD is increased to RS. 3,500. d) Prepaid insurance RS. 2,000. Prepare: i) Revaluation Account. ii) Partners' Capital Accounts & iii) New Balance Sheet as on 01.04.2017. (Ans:- Loss on Revaluation Account RS. 7,000, Capital Account balance: Sachin - RS. 55,400, Dravid - RS. 53,600, Ashwin -RS. 40,000, Bank Account RS. 78,000, Balance Sheet total RS. 1,79,000) 10. Rajesh and Rakesh are partners in a firm sharing profits and losses in the ratio of 3:2. Their balance sheet as on 31.03.2018 stood as follows: Balance Sheet as on 31.03.2018 Liabilities Rs Assets Rs Creditors 41,500 Cash at Bank 22,500 General Reserve 4,000 Bi lls Receivable 3,000 Capital Accounts: Debtors 18,000 Rajesh 30,000 Less: PDD 1,000 17,000 Rakesh 16,000 46,000 Stock 20,000 Buildings 25,000 Machinery 4,000 91,500 91,500 On 01.04.2018, they admit Shyam as a new partner and offered hi m 1/5th share in the future profits on the following terms: a) He has to bring in RS. 10,000 as his capital and RS. 5,000 towards goodwill (As per AS-26). b) Appreciate buildings by 20%. c) Maintain 5% PDD on debtors. d) Provide for outstanding repair bills RS. 1,000. Prepare: i) Revaluation Account ii) Partners' Capital Accounts & iii) New Balance Sheet of the firm. (Ans: Profit on Revaluation Account RS. 4,100, Partners Capital Account balance: Rajesh - RS. 37,860, Rakesh - RS. 21,240, Shyam - RS. 10,000, Bank Account RS. 37,500, Balance Sheet total RS. 1,11,600) 11. Raja and Rani are partners in a firm sharing profits and losses in the ratio of 3:2. Their balance sheet as on 31.03.2018 was as follows: Balance Sheet as on 31.03.2018 Liabilities Rs Assets Rs Creditors 40,000 Cash 5,000 Bills Payable 20,000 Machinery 60,000 General Reserve 25,000 Stock 25,000 Capitals: Debtors 23,000 Raja 60,000 Less: PDD 3,000 20,000 Rani 40,000 100,000 Buildings 50,000 Investments 20,000 P & L Account 5,000 185,000 185,000 On 01.04.2018, they admit Mantri as a new partner and offer him 1/5th share in the future profits on the following terms: a. Mantri has to bring in Rs. 30,000 as his capital and Rs. 10,000 towards goodwill (As per AS-26). Goodwill is to be withdrawn by the old partners. b. Depreciate 17 Machinery by 5%. c. Appreciate buildings by 10%. d. PDD is reduced to Rs.2,000 and investments are to be revalued at Rs. 25,000. Prepare: i) Revaluation Account ii) Partners' Capital Account iii) New Balance Sheet of the firm. (Ans: Profit on Revaluation Account Rs. 8,000, Capital Account: Raja – Rs. 76,800, Rani – Rs. 51,200, Mantri – Rs. 30,000, Cash Account Rs. 35,000, Balance Sheet total Rs. 2,18,000) 12. Pujari and Purohit are equal partners. Their Balance Sheet as on 31.03.2017 was as follows: Balance Sheet as on 31.03.2017 Liabilities Rs Assets Rs Bills Payable 6,600 Cash 1,800 Sundry Creditors 12,800 Stock 23,600 Capitals Accounts: Sundry debtors 25,000 Pujari 40,000 Less: PDD 5,000 20,000 Purohit 30,000 70,000 Furniture 4,000 Buildings 40,000 89,400 89,400 On 01.04.2017, they admit Pandit as a new partner and offered him 1/4 th share in the profit on the following terms: a) He should bring in Rs. 30,000 as capital and Rs. 18,000 towards goodwill (As per AS-26). b) Half of the goodwill should be withdrawn by the old partners. c) Stock and furniture to be depreciated by 10% each. d) PDD is reduced by Rs 3,000. Prepare: i) Revaluation Account ii) Partners' Capital Account iii) New Balance Sheet of the firm. (Ans: Profit on Revaluation Account Rs. 240, Capital Account: Pujari – Rs. 44,620, Purohit – Rs. 34,620, Pandit – Rs. 30,000, Cash Account Rs. 40,800, Balance Sheet total Rs. 1,28,640) 13. Arati and Bharati are partners in a firm sharing profits and losses in the ratio of 3:2. Their Balance Sheet as on 31.03.2017 stood as follows: Balance Sheet as on 31.03.2017 Liabilities Rs Assets Rs Bills Payable 14,000 Cash 15,000 Creditors 16,000 Buildings 25,000 Patents 6,000 Capitals: Machinery 35,000 Arati 50,000 Debtors 20,000 Bharati 25,000 75,000 Less: Provisions 600 19,400 Stock 4,600 105,000 105,000 On 01.04.2017, Jayanti is admitted into the partnership on the following terms: a) Jayanti Pays Rs.20,000 as capital. The Goodwill of the firm is valued at Rs.20,000 (As per AS-26) and Goodwill Account should not remain in books. b) Buildings are appreciated by Rs.5,000 and machinery is depreciated by 20%. 18 c) Provision for doubtful debts is increased by Rs. 1,000. d) The new profit sharing ratio between the partners is 5:3:2. Prepare: i) Revaluation Account ii) Partners' Capital Accounts iii) Balance Sheet of the firm after admission. (Ans: Loss on Revaluation Account Rs. 3,000, Partners Capital Account balance: Arti - Rs. 50,200, Bharati – Rs. 25,800, Jayanti Rs. 16,000, Cash Account Rs. 35,000, Balance Sheet total Rs. 1,22,000) 14. Gouri and Ganesh are partners in a firm sharing profit equally. Following is their Balance Sheet as on 31.03.2017. Balance Sheet as on 31.03.2017 Liabilities AssetsRs Rs Creditors 20,000 Cash in Hand 7,000 Bills Payable Stock 4,000 25,000 General Reserve Buildings 6,000 40,000 Capitals: Debtors 17,000 Gouri 80,000 Less: PDD 1,500 15,500 Ganesh 40,000 Furniture 14,500 Patents 30,000 Plant & Machinery 18,000 150,000 150,000 On 01.04.2017, Shiva is admitted into partnership on the following terms: a) Shiva should bring Rs. 25,000 as capital. b) Goodwill of the firm is valued at Rs. 14,000. c) Stock is to be increased by 8%. d) Provision for doubtful debts is increased to Rs. 2,600. e) Capital accounts of partners are to be adjusted in their new profit sharing ratio 3:3:1, based on Shiva's capital (Adjustments to be made in cash). Prepare: i) Revaluation Account. ii) Partners' Capital Account iii) Balance sheet of the new firm. (Ans: Profit on Revaluation Account Rs. 900, Capital Account balance: Gouri – Rs. 69,000, Ganesh – Rs. 69,000, Shiva – Rs. 23,000, Balance Sheet total Rs. 1,85,000) **************************************** Chapter - 4 Retirement of a partner (1+6x2+12) marks Meaning of Retirement of partner: A partner is said to be retired from a firm, when his relation with the firm as a partner comes to an end. Gain Ratio / Benefit Ratio / Share Gained: It is the ratio in which remaining partners gain or acquire the share of retiring partner on his retirement. Gain Ratio = New Ratio – Old Ratio Difference between Sacrifice Ratio and Gain Ratio: Basis Sacrifice Ratio Gain Ratio 1. Time It is calculated at the time of admission of a It is calculated at the time of retirement of a partner partner 2. Effect It is the ratio which decreases the old It is the ratio which increases remaining partners share of profit partner’s share of profit. New Profit Sharing Ratio: It is the ratio in which the remaining partners share their future profits after the retirement of any partner. 19  New Ratio = Old Ratio + Gained Ratio Purposes of calculating New Profit sharing ratio: a. To share the future profits of the firm. b. To adjust the remaining partners’ capital. Death of a Partner: Format of Deceased Partners capital Account: Dr Cr Date Particulars J.F. Amount Date Particulars J.F. Amount (Rs.) (Rs.) To Balance b/d(debit balance) xxx By balance b/d(credit balance) xxx To deceased partners drawings A/c xxx By revaluation A/c(profit on xxx To interest on deceased partners xxx revaluation) drawings A/c By Profit & Loss A/c(share in xxx To Revaluation A/c(loss on profit) revaluation) xxx By interest on capital A/c xxx To Profit & Loss A/c(share in loss) xxx By salary / commission A/c xxx To deceased partners executors By goodwill A/c(deceased xxx A/c(final balance transferred) xxx partners share) By Profit & Loss A/c(share of xxx accurate profit) xxxx xxxx Format of Deceased Partners Executors Account: Dr Cr Date Particulars J.F. Amount Date Particulars J.F. Amount (Rs.) (Rs.) To Cash / Bank A/c (if xxx By Deceased partners’ xxx paid immediately) capital A/c(balance in To Balance c/d xxx deceased partners’ capital A/c) xxxx xxxx Problems: 1. A, B and C were partners sharing profits and losses in the ratio 5/10, 3/10 and 2/10 respectively. B retires from the business. The new profit sharing ratio between A and C is 3/5 and 2/5. Calculate gain ratio of A and C. 2. M, N and O are partners sharing profits and losses in the ratio 4:3:2. N retires from the firm. His share is gained by M and O as 2/9 and 1/9. Calculate New profit sharing ratio of M and O. 3. Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows: 20  Books of Pankaj, Naresh and Saurabh Balance Sheet as on March 31, 2018 Liabilities Amount Assets Amount General Reserve 12,000 Bank 7,600 Sundry Creditors 15,000 Debtors 6,000 Bills Payable 12,000 Less: PDD 400 5,600 Outstanding Salary 2,200 Stock 9,000 Provision for Legal Damages 6,000 Furniture 41,000 Capitals : Premises 80,000 Pankaj 46,000 Naresh 30,000 Saurabh 20,000 96,000 1, 43,200 1, 43,200 Additional Information: (a) Premises have been appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made at 5% on debtors. Further, provision for legal damages is to be made for RS. 1,200 and furniture to be brought up to RS. 45,000. (b) Goodwill of the firm be valued at RS.42,000 and the same be written off immediately. (c) RS. 26,000 from Naresh's Capital Account be transferred to his Loan Account and balance be paid through bank If required, necessary loan may be obtained from Bank. (d) New profit sharing ratio of Pankaj and Saurabh is decided to be 5 : 1. Give the Revaluation A/c, Capital Accounts and Balance Sheet of the firm after Naresh's Retirement. 4. X. Y and Z were partners sharing profits and losses in the ratio of 2 : 2 : 1 respectively. Their Balance Sheet as on 31.3.2018 was as under. Balance Sheet as on 31.03.2018 Liabilities Amount Assets Amount Creditors 35,500 Cash at Bank 20,000 Reserves Fund 20,000 Debtors 40,000 Profit & Loss A/c 2,500 Less R.B.D. 2,000 38,000 Capital A/c Stock 20,000 X 50,000 Machinery 20,000 Y 30,000 Furniture 10,000 Z 20,000 1,00,000 Buildings 50,000 Total 1,58,000 Total 1,58,000 Z retired on 1.4.2018 from the business. The following adjustment is to be made: (a) Stock to be increased by 20%. (b) Maintain P.B.D at 10% on debtors. (c) Depreciate machinery and furniture by 10% each. (d) Buildings are be revalued at RS. 60.000 (e) Goodwill to the extent of retiring partners share is created at RS.15,000. Prepare: Revaluation Account, Partners Capital Accounts and Balance Sheet as on 1.4.2018. 21 22  6.Ramesh, Prakash and Suresh were partners in a firm sharing profits and losses in the ratio of 5:3:2. On 31st March 2017, their Balance Sheet was as under Balance Sheet as on 31.3.2017 Liabilities RS. Assets RS. Creditors, 14,000 Cash 8,000 Reserve Fund 6,000 Debtors 11,000 Capitals: Patents 11,000 Ramesh 30,000 Stock 10,000 Prakash 25,000 Machinery 50,000 Suresh 15,000 70,000 90,000 90,000 Ramesh died on 30th Sept 2017. It was agreed between his executors and the surviving partners that: (a) Goodwill to be valued at two and half years purchase of the average profits of the previous four years which were: 2013-14 RS.12, 000, 2014-15 RS. 20,000, 2015-16 RS.13,000 and 2016-17 RS.15, 000, (b) Share in the profit from the date of last Balance Sheet till to the date of death to be calculated on the basis of last year's profit. (c) Interest on capital to be allowed at 12% p.a. (d) Share in the Revaluation Account balance, his share is RS. 5, 000(Cr). Prepare: Ramesh's Capital Account. 7. Akash, Anil and Adarsh are the partners sharing profits and losses in the ratio of 3:2:1, Their capitals as on 01.04.2017 were RS. 70,000, RS. 90,000 and RS. 60,000 respectively. Akash died on 31.12.2017 and the Partnership Deed provided the following: (a) Interest on Akash's Capital at 8% p.a (b) Akash's salary RS. 2,000 p.m (c) His share of accrued profit up to the date of death based on previous year's profit. Firms profit for 2016-17 RS. 24,000 (d) His share of Goodwill RS. 12,000. Ascertain the amount payable to Akash's Executor by preparing Akash's Capital A/c 8. Girish, Mahesh and Varun were sharing profits and losses in the ratio of 6:3:2 respectively. Their capitals on 01.04.2017 stood at RS. 60,000, RS. 30,000 and RS. 20,000 respectively. On 30th Sept 2017 Varun died. The goodwill of the deceased partner's share is RS. 10,000. The deceased partner's share in accrued profit up to the date of his death is RS. 4,200. Varun's commission is RS. 600 p.m. His drawings up to the date of death amounted to RS. 8, 000. Interest on capital at 10% p.a. Prepare: Varun's Capital Account ************************************ Chapter – 5 Dissolution of Partnership firm (1+2+12) marks Dissolution of Partnership: It means some of the partners terminate their connections with the firm and the remaining partners of the firm continue the business of the firm under the same firm’s name under an agreement. 23 Dissolution of Partnership firm: According to Section 39 of the partnership Act 1932,the dissolution of partnership between all the partnersof a firm is called the dissolution of the firm. Modes of Dissolution:  Dissolution by agreement  Compulsory dissolution  On the happening of certain contingencies  Dissolution by notice  Dissolution by the court Steps in dissolution of firm: 1. Realisation of assets and payment of liabilities of the firm 2. Settlement of partners account Accounts to be prepared at the time of Dissolution of the firm: 1. Realisation account 2. Partners’ capital Account 3. Cash or Bank Account Realisation Account: It is an account prepared at the time of dissolution of a firm to ascertain the profit or loss on realisation of assets and payment of liabilities. Dr Realisation Account Cr Particulars Amount Particulars Amount (Rs.) (Rs.) To Assets A/c (book value) xxx By Liability A/c (book value) xxx To Cash/Bank A/c xxx By Cash/Bank A/c (sale of xxx (payment of liabilities & unrecorded assets) liabilities) By Partner’s capital account xxx To Cash/Bank A/c xxx (assets taken by the partner) (payment of realisation expenses) By All partners’ capital A/c xxx To Partner’s capital account (liability xxx (Loss on realisation) taken over by the partner) To All Partners capital A/c (profit on xxx realisation) Total xxxxx Total xxxxx Dr Partners capital Account Cr Particulars Amount Particulars Amount (Rs.) (Rs.) To Balance b/d xxx By Balance b/d xxx To Profit & Loss A/c xxx By Realisation A/c (profit on xxx To Realisation A/c (Asset xxx realisation) taken over) By Reserves xxx To Realisation A/c (loss on xxx By Realisation A/c (liability taken xxx realisation) over) To Cash / Bank A/c (final xxx By Cash / Bank A/c xxx balance paid) Total xxxxx Total xxxxx 24 Dr Cash / Bank Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) To Balance b/d xxx By Realisation A/c (liabilities xxx To Realisation A/c (Assets xxx paid) realised) By Realisation A/c (realisation xxx expenses paid) By Partners loan A/c xxx By Partners capital A/c (final xxx claims paid off) Total xxxxx Total xxxxx Problems: 1. Suvarna and Sunanda are partners sharing profits and losses equally.Their Balance Sheet as on 31. 3. 2018 was as follows : Balance Sheet as on 31. 3. 2018 Liabilities RS. Assets RS. Bills Payable 10000 Cash at Bank 15,000 Creditors 50,000 Debtors 55,000 Sunanda's loan 25,000 Less: P.B.D. 3,000 52,000 Reserve fund 15,000 Stock 40,000 Capitals: Furniture 15,000 Suvarna 60,000 Machinery 25,000 Sunanda 80,000 1,40,000 Buildings 81,000 Profit and Loss A/c 12,000 2,40,000 2,40,000 On the above date the firm was dissolved. The following information is available: a) The assets realised as follows: Debtors RS.52,000,Stock RS.39,000,Machinery RS.24,000,Buildings Rs.75,000 and Furniture RS.13000. b) Creditors and Bills payable were paid @ 5% discount. c) Dissolution expenses amounted to RS. 4000. Prepare: i) Realisation Account ii) Partners' Capital Accounts and iii) Bank Account. 2. The following is the Balance Sheet of Disha,Diya and Deepa as on 31.3.2018: Balance Sheet as on 31. 3. 2018 Liabilities RS. Assets RS. Creditors 15,000 Cash 6,500 Bills payable 1,800 Debtors 8,600 Reserve Fund 6,000 Investments 10,000 Capitals: Stock 13,700 25  Disha 22,000 Furniture 5,100 Diya 12,000 Buildings 22,900 Deepa 10,000 66,800 66,800 It was decided to dissolve the partnership firm and the details available are: a) Disha took over buildings at RS. 27,750. b) Deepa took over bills payable at book value. c) The other assets realised as under: Debtors RS. 8,000, Investments RS. 8,950, Stock RS. 4,500. d)Realisation expenses amounted to RS. 600. Prepare : i) Realisation Account ii) Partners' Capital Accounts and iii) Cash Account. 3. Arun, Kiran and Arjun were partners sharing profits and losses equally.Their Balance Sheet as on 31. 3. 2018 was as follows : Balance Sheet as on 31. 3.2018 Liabilities RS. Asset RS. Sundry Creditors 12,000 Cash at bank 6,000 Bank Loan 24,000 Bills Receivable 6,000 Arun's loan 22,000 Debtors 25,000 Reserve fund 12,000 Stock 20,000 Capitals : Arun 40,000 Investments 8,000 Kiran 30,000 Furniture 10,000 Arjun 20,000 Buildings 85,000 1,60,000 1,60,000 On the above date the firm was dissolved. The following information is available: a) The assets were realised as follows : Bills receivable RS. 5,000, Debtors RS. 23,500, Stock RS. 18,000 and Buildings RS. 95,000. b) Investments were taken by Kiran at RS. 10,000 and Furniture was taken over by Arjun at RS. 8,000. c) All the liabilities were paid in full. d) Dissolution expenses amount to RS. 2,500. Prepare: i) Realisation Account ii) Partners' Capital Accounts and iii) Bank Account. 4. Mohan, Nagaraju and Prakash are partners sharing profits and losses in the ratio of 4:3:2. Their Balance sheet as on 31. 3. 2018 was as follows : Balance Sheet as on 31. 3. 2018 Liabilities RS. Assets RS. Creditors 25,000 Cash 9,000 Bills Payable 17,000 Debtors 27,000 Prakash's Loan 10,000 Stock 15,000 Reserve Fund 18,000 Investments 5,000 26 Capitals : Mohan 30,000 Furniture 14,000 Nagaraj 20,000 Buildings 40,000 Prakash 10,000 Goodwill 20,000 1,30,000 1,30,000 On the above date the firm was dissolved and following information is available. a) The assets realised as follows : Debtors realised 10% less than the book value, Investments realised 20% more than the book value, Buildings realised RS. 60,000, Stock realised RS. 12,000 and Furniture sold for RS. 15,000. b) Goodwill is taken over by Mohan at RS. 15,000 c) Creditors and Bills payable are settled at discount of 5% each. d. Realisation expenses RS. 2,000. Prepare : i) Realisation Account ii) Capital Accounts of Partners and iii) Cash Account. 5. Anil, and Sunil were partners in a Firm. Their Balance Sheet as on 31.3.2018was as follows: Balance Sheet as on 31.3.2018 Liabilities RS. Assets RS. Creditors 10,000 Cash 5,000 Bills Payable 6,000 Debtors 15,000 Bank O/D 4,000 Stock 18,000 Mrs. Sunil's Loan 5,000 Furniture 12,000 Profit & Loss A/c 8,000 Machinery 20,000 Capitals: Buildings 50,000 Anil 52,000 Goodwill 10,000 Sunil 45,000 1,30,000 1,30,000 On the above date, they decided to wind up the firm. The following information is available: (a) Debtors realised less 10%, stock realised 10% more and building realised RS. 62,000. Vehicle which was unrecorded realised RS. 4,000 (b) Furniture was taken over by Anil at a valuation of RS. 9,000. (c) Creditors to be settled at 10% less and interest on Bank O/D due RS. 500 also to be paid off. (d) Mr.Sunil took over his wife's loan (e) Dissolution expenses amounted to RS. 3,000. Prepare: 1. Realisation A/c 2. Partners’ Capital Accounts and 3. Cash A/c. ****************************** 27  CHAPTER - 2 ACCOUNTING FOR PARTNERSHIP: BASIC CONCEPTS Section A: One mark questions: I. Fill in the blank questions: 1. Section........of Indian Partnership Act,1932 defines Partnership. Ans. 4 1. A partnership has no separate...........entity. Ans. Legal 2. In order to form a partnership, there should be at least..........persons. Ans. 2 4. Partnership is the result of..........between two or more persons to do business and share its profits and losses. Ans. Agreement 5.It is preferred that the partners have a.............agreement. Ans. Written 6.The agreement should be to carry on some............business. Ans. Lawful 7.Each partner carrying on the business is the principal as well as the........ for all other partners. Ans. Agent 8.The liability of a partner for his acts is....... Ans. Unlimited 9. In the absence of Partnership Deed Interest on advance from Partner will be charged @.......... percentage per annum. Ans. 6 10. Under............Method, the capitals of the partners shall remain fixed. Ans. Fixed capital 11. Under Fluctuating Capital Method, the partners capital account balances.............from time to time. Ans. Fluctuates 12. Profit and Loss Appropriation Account is merely an extension of........Account of firm. Ans. Profit and Loss A/c 13. Profit and Loss Appropriation Account Dr To...........................account. (Transferring int. on capital to P/L Appropriation a/c). Ans. Interest on capital 28  14.................................Account Dr To Salary to Partners account (Transferring partners salary to P/L Appropriation a/c) Ans. Profit and Loss Appropriation A/c 15. P/L Appropriation A/c Dr To Partners Capital /Current A/c. (......................................................) Ans. Profit transferred to Partners capital / current A/c 16. When fixed amounts is withdrawn at the end of every month, interest on the total amount for the year ending is calculated for..............months. Ans. 5.5 17. Under fluctuating capital method, all the transactions relating to partners are directly recorded in the.................accounts. Ans. Partners capital A/c 15. Under fixed capital method, the amount of capital remains........... Ans. Fixed 19. Under fixed capital method, all the transactions relating to a partner are recorded in a separate account called..............Account. Ans. Partners current A/c 20. There is not much difference in the final accounts of a sole proprietary concern and that of a............ Ans. Partnership firms II. Multiple Choice Questions: 1. The agreement between the partner should be in: a) Oral b) Written c) Oral or Written d) None of the above 2. Partnership deeds contains; a) Name of firm b) Name and address of the partners c) Profit and loss sharing ratio d) All of the above 3. If any partner has advanced some money to the firm beyond the amount of his capital, he shall be entitled to get interest on the amount at the rate of: a) 5% p.a. b) 6% p.a. c) 8% p.a. d) None of the above 29  4. Interest on capital is generally provided for in that situations when: a) The partners contribute unequal amounts of capital but share profits equally. b) The capital contribution is same but profit sharing is unequal c) Both the situations above. d) None of the above. 5. When fixed amount is withdrawn on the first day of every month, interest on total amount for the year ending will be calculated for: a) 2 &1/ 2 months b) 4 &1/ 2 months c) 6 &1/ 2 months d) None of the above 6. When varying amounts are withdrawn at different intervals, the int. is calculated using: a) Simple Method b) Average Method c) Product Method d) None of the above 7. Adjustment for correction of omission and commission can be made: a) Profit and loss Adjustment account b) Directly in the Capital Accounts of concerned partners c) Both the situations above. d) None of the above 8. In order to form a Partnership there should be at least: a) One person b) Two persons c) Seven persons d) None of the above 9. The business of a partnership concern may be carried on by: a) All the partners b) Any of them acting for all c) All Partners or any of them acting for all d) None of the above 10. The agreement between Partners must be to share: a) Profits b) Losses c) Profits and losses d) None of the above 11. The liability of a Partner for acts of the firm is: a) Limited b) Unlimited c) Both the above. d) None of the above 30  12. The partnership Deed should be properly drafted and prepared as per the provisions of the: a) Partnership Act. b) Stamp Act c) Companies Act d) None of the above 13. The clauses of Partnership Deed can be altered with the consent of: a) Two Partners b) Ten Partners c) Twenty Partners d) All the Partners III. True or False Questions: 1. The agreement between partners must be in writing. Ans. False 2. The clauses of partnership deed can be altered with the consent of all the Partners. Ans. True 3. If the partnership deed is silent about the profit sharing ratio, the profit and loss of the firm is to be shared equally. Ans. True 4. A partner is entitled to claim interest at the rate of 10% p.a. on the amount of capital contributed by him, if there is no agreement in the firm. Ans. False 5. In the absence of Partnership Deed, no partner is entitled to get salary. Ans. True 6. Under fixed capital method the Partner's Capital Accounts will always show a credit balance. Ans. True 7. Under Fixed Capital Method the Partners' Capital Accounts will always show a debit balance. Ans. False 8. P/L Appropriation A/c shows how the profits are appropriated among the partners. Ans. True 9. When fixed amount is withdrawn during the middle of every month, interest on total amount is calculated for 6 months. Ans. True 10. If there is loss, no interest on capital is to be paid to partners, even if there is a provision in Partnership Deed. Ans. True 11. Accounting treatment for Partnership is similar to that of a sole Proprietorship Business. 31  Ans. True 12. There are two methods by which the capital accounts of partners can be maintained. Ans. True 13. Profit and Loss appropriation account is merely an extension of the Profit and Loss Account of a firm. Ans. True 14. Interest on partners capital is debited to Partners' Capital Accounts. Ans. False 15. In case of Guarantee of profit to a partner, assurance may be given by only one partner. Ans. True IV. Very Short Answer Questions: 1. Who is a Partner? Ans. Persons who have entered into partnership with one another are individually called as Partners 2. What do you mean by Partnership Firm? Ans. Partnership Firm is one type of business organization where two or more persons come together and carry on a joint business and share the profits of it. 3. State any one features of Partnership. Ans. Sharing profits and losses 4. What is the minimum number of partners in a firm? Ans. 2 5. Name any one contents of Partnership Deed. Ans. Names and Addresses of all partners 6. Name any one method of maintaining capital accounts of Partners. Ans. Fixed capital method 7. Name any one final accounts of partnership firm. Ans. Trading and Profit and Loss A/c 8. How do you distribute profit or loss among the partners in the absence of partnership deed? Ans. Equally 9.Why the Profit and Loss Appropriation account is prepared? Ans. It is prepared to show how the profits are distributed among the partners after making necessary adjustments. 10. At what rate Interest on advances by Partners is to be paid as per Partnership Act? Ans. 6% 11. When interest is charged on partners drawings? Ans. Interest is charged on partners drawing only if the partnership so provides for it. 32 12. When Partners Current Accounts are prepared in partnership firms? Ans. Partners current A/cs are prepared in partnership firms when partners capital accounts are maintained under fixed capital method. 13. State any one special aspect of partnership accounts. Ans. Maintenance of partners capital accounts 14.When the Current Accounts of Partners are opened? Ans. Current A/cs of Partners are opened in Fixed Capital Method. 15. Under fluctuating capital method, how many accounts are maintained for each partner? Ans. One account 16. State any one feature of fluctuating capital method. Ans. Each partner has only one capital account under this method. 17. State any one situation in which provision of payment of interest on capital to partner is made. Ans: If firm had earned profit and agreement had the provision of interest on capital. 18.Find out Interest at 8% p.a. on capital of Rs. 50,000 for 9 months. Ans. Interest on capital = 50,000x8/100x9/12= Rs. 3,000 19. Which is the suitable method for calculation of Interest on drawings, when fixed amount is withdrawn every month? Ans. Average period method 20.Give one example for past adjustment? Ans. Errors in recording transactions Section B: Two Marks questions: 1. What is Partnership? Ans. When two or more persons join hands to set up a business and share its profits and losses, they are said to be in partnership. 2. Define Partnership? Ans. The Indian Partnership Act defines Partnership as “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.” 3. State any two features of Partnership. Ans. (1) Two or more persons (2) Agreement 4. What is Partnership Deed? Ans. The written document which contains the terms of agreement of partnership is called partnership deed. 5.What are the methods of maintaining capital account of partners? Ans. Fixed capital method and Fluctuating capital method 6.What is fixed capital method? 33  Ans. Under fixed capital method the capitals of the partners remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per the agreement among the partners. 7.What is fluctuating capital method? Ans. It is a capital method in which the capitals of partners fluctuate (change) from year to year. 8.State any two differences between fixed and fluctuating capital methods. Ans. Basis Fixed capital method Fluctuating capital method (a) No. of accounts Under this method, Under this method, only partners capital a/c and partners capital a/c is current a/c are maintained maintained (b) Adjustments All adjustments like All adjustments like drawings, salary, interest drawings, salary, on capital etc are made in interest on capital etc current a/c are made in capital a/c 9.What do you mean by Profit and Loss Appropriation Account? Ans. It is an account which shows the distribution of profits of the firm among the partners 10.What is guarantee of profit to a partner? Ans. Guarantee of profit to a partner means giving assurance of certain minimum amount by way of his share of profits of the firm. 11.What do you mean by past adjustments? Ans. Past Adjustments refer to making necessary rectifications for omissions or commissions noticed after preparation of final accounts. 12. State any two final accounts of a Partnership firm. Ans. Trading and profit and loss account and Profit and Loss Appropriation account 13. In the absences of partnership deed, specify the rules relating to the followings: a) Sharing of profit and losses --- Partners have equal share in the profits and losses of the firm b) Interest on partners capital ----- Partners are not having the right for interest on their capital balances 14. State the rules relating to the followings in the absence of Partnership Deed: a) Interest on drawings --- No interest is to be charged on the drawings made by the partners. b) Interest on advances from Partners – Partner has the right to get an interest on the amount at 6% p.a. 15. Name any two methods for calculation of Interest on drawings. Ans. Direct method and Product method. 16. When the Interest on drawings is generally provided to partners? 34  Ans. Interest is charged on partners drawing only if the partnership so provides for it. 17. How do you close Profit and Loss Appropriation Account in Partnership? Ans. By transferring profit or loss to partners capital account 18. State any two special aspects of Partnership Accounts. Ans. (a) Maintenance of partners capital account (b) Distribution of profit and loss among the partners 19. Name any two contents of Partnership Deed. Ans. (a) Names and addresses of the firm. (b) Names and addresses of all partners CHAPTER-3. RECONSTITUTION OF A PARTNERSHIP FIRM-ADMISSION OF A PARTNER Section A: One Mark Questions I. Fill In The Blanks: 1.............. ratio is used to distribute accumulated profits and losses at the time of admission of a new partner. Ans. Old 2. Profit or loss on revaluation is shared among the old partners in...........ratio Ans. Old 3.Old ratio - New ratio =............ Ans. Sacrifice ratio 4. Accumulated losses are transferred to the capital accounts of the old partners at the time of admission in their.......... ratio. Ans. Old 5. General reserve is to be transferred to............... accounts at the time of admission of a new partner. Ans. Capital 6. Goodwill brought in by new partner in cash is to be distributed among old partners in.............. ratio. Ans. Old/ Sacrifice 7. If the amount brought by new partner is more than his share in capital ,the excess is known as......... Ans. Hidden Goodwill 35  8............. Account is debited for the increase in the value of an asset. Ans. Asset 9. Unrecorded asset is to be credited to......... account. Ans. Revaluation 10. A and B are partners sharing profits &losses equally with capitals of Rs. 45,000 each. C is admitted for 1/3rd share and he brings in Rs. 60, 000 as his capital. Hidden Goodwill is Rs......... Ans. Rs. 30,000 11. Due to change in profit sharing ratio, some partners will gain in future profits while others will....... Ans. Lose 12. Goodwill is an......... asset. Ans. Intangible 13............. account is credited for cash brought in by new partner for his share of goodwill. Ans. Goodwill 14........... ratio is required for sharing future profits and also for adjustment of capitals. Ans. New profit sharing II. Multiple Choice Questions: 1. At the time of admission of a new partner, general reserve appearing in the old balance sheet is transferred to: a) All Partners Capital Account b) New Partner's Capital Account c) Old Partners Capital Account d) None of the above 2. A, B and C are partners in a firm. If D is admitted as a new partner: a) Old firm is dissolved b) Old firm and old partnership are dissolved c) Old partnership is reconstituted d) None of the above 3. On the admission of a new partner, increase in the value of asset is credited to: a) Profit and Loss Adjustment (Revaluation) Account b) Asset Account c) Old Partners Capital Account d) None of the above 36  4. At the time of admission of a partner, undistributed profits appeared in the balance sheet of the old firm is transferred to the capital accounts of: a) Old partners in old profit sharing ratio b) Old partners in new profit sharing ratio c) All the partners in new profit sharing ratio d) None of the above 5. If new partner brings cash for his share of goodwill, goodwill is transferred to Old Partners' Capital Account in: a) Sacrificing ratio b) Old profit sharing ratio c) New profit-sharing ratio d) None of the above 6. Which of the following are treated as reconstitution of a Partnership Firm? a) Admission of a partner b) Change in profit sharing ratio c) Retirement of a partner d) All the above 7. Profit or Loss on revaluation is shared among the partners in the: a) Old profit sharing ratio b) New profit sharing ratio c) Capital ratio d) Equal ratio 8. Assets and Liabilities are recorded in Balance Sheet after the admission of a partner at: a) Original value b) Revalued value c) Realisable value d) None of the above 9. On the admission of a new partner, the increase in the value of an asset is credited to: a) Revaluation Account b) Asset Account c) Old partners' Capital Account d) None of the above 10. Old Profit Sharing Ratio - New Profit Sharing Ratio is = a) Sacrificing ratio b) Gaining ratio c) Both the above d) None of the above 11. In the absence of an agreement to the contrary, it is implied that old partners will contribute to new partner's share of profit in the ratio of: a) Capital b) Old profit sharing ratio c) Sacrificing ratio d) Equally 37  12. The balance of reserves and other accumulated profits at the time of admission of a new partner are transferred to: a) All partners in the new ratio b) Old partners in the new ratio c) Old partners in the old ratio d) Old partners in the sacrificing ratio 13. Goodwill raised in books at the time of admission of partner will be written off in: a) Old profit sharing ratio b) New profit sharing ratio c) Sacrificing ratio d) None of the above 14. Revaluation Account is debited for the: a) increase in provision for doubtful debts b) increase in the value of building c) decrease in the amount of creditors d) transfer of loss on revaluation 15. A and B are partners sharing profits in the ratio of 3:1. C is admitted into partnership for 1/4th share. The sacrificing ratio of A and B will be: a) Equal b) 3:1 c) 2:1 d) 3:2 III. True or False Type Questions: 1. Goodwill brought in cash by new partner is distributed among old partner in their Sacrificing ratio. Ans. True 2. In case of admission of a partner, profit or loss on revaluation is transferred to Old Partners' Capital Accounts. Ans. True 3. Accumulated profit is transferred to all partners' capital Accounts including new partner. Ans. False 4. The debit balance of Profit and Loss Account shown in the assets side of the Balance Sheet will be debited to Old Partners Capital Accounts. Ans. True 5.Increase in the value of an asset is credited to Revaluation Account Ans. True 6.The traditional name of Revaluation A/c' is 'Profit and Loss Adjustment A/c'. Ans. True 38  7.Goodwill is an intangible asset. Ans. True 8.Decrease in the value of liability is debited to Revaluation Account. Ans. False 9. Sacrifice ratio is required to distribute the cash brought by new partner among old partners for his share of goodwill. Ans. True 10.Share sacrificed = Old share - New share. Ans. True Very Short Answer Type: 1. What is Partnership? Ans. It 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. What do you mean by reconstitution of a Partnership Firm? Ans. It refers to any change in the existing agreement of partnership firm. 3. State any one reason for admission of a new partner. Ans. When the firm needs additional capital 4. State any one right acquired by a newly admitted partner. Ans. Right to share the assets of the partnership firm 5. Why the NPSR is required at the time of admission of a partner? Ans. NPSR is required to share the future profits or losses. 6. What is Goodwill? Ans. It is the value of the reputation of a firm in respects of the profits expected in future over and above the normal profits. 7.State any one factor affecting the value of goodwill. Ans. Nature of business 8.What is normal profit? Ans. Normal profit means normal return on capital employed 9.State any one method of valuation of goodwill. Ans. Average profits method 10.. Give the formula for sacrifice ratio Ans. Sacrifice ratio = Old ratio - New ratio 11.Which account is to be debited to record the increase in the value of an asset? Ans. Asset a/c 12.. What is Revaluation Account? Ans. It is an account prepared to record the increase / decrease in the value of assets and liabilities and to find out profit or loss on revaluation. 13.. What account will be credited when there is a loss on revaluation? Ans. Revaluation a/c 14.What account will be debited when the cash is brought by a new partner for his share of goodwill? Ans. Cash a/c 15.What is hidden goodwill? 39 Ans. Hidden goodwill refers to the difference between total required capital and actual capital of all partners. Section B: Two Marks Questions: 1. When the goodwill is distributed among old partners in the sacrificing ratio? Ans. When goodwill is brought in cash by new partner, it is distributed in sacrificing ratio 2. State any two methods of valuation of goodwill. Ans. Average profits method and super profits method 4. State any two rights acquired by a new partner. Ans. (a) Right to share the assets of the partnership firm (b) Right to share the profits of the partnership firm 4. What do you mean by hidden goodwill? Ans. It is the value of goodwill not given at the time of admission of a new partner. 6. Pass the journal entry to write off the goodwill raised to the extent of full value. Ans. All partners capital a/c Dr To Goodwill a/c [Being goodwill written off] 6. State any two matters which need adjustments in the books of the firm at the time of admission of a new partner. Ans. (a) Revaluation of assets and liabilities (b) Goodwill and its treatment 7. What is sacrifice ratio? Ans. The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called Sacrifice ratio 8.Why the sacrifice ratio is calculated? Ans. It is calculated in order to distribute the goodwill brought by the new partner in the form of cash. 9. What is the need for the revaluation of assets and liabilities on the admission of a partner? Ans. To ascertain the true position of the business. 10. State any two reasons for admitting a new partner. Ans. (a) When firm requires additional capital (b) Managerial help 11. How do you close revaluation account when there is a profit? Ans. Revaluation a/c Dr To Partners capital a/c (Being profit on revaluation transferred to Partners capital A/c) 12. State any two factors which determine the goodwill of the firm. Ans. (a) Nature of business (b) Location 40  13. What is average profit method of valuation of goodwill? Ans. Average profit method is a method of valuating goodwill, where average profit is multiplied with the agreed number of years purchase to ascertain goodwill. 14. Goodwill of the firm valued at two years purchase of the average profit of last four years. The total profits for last four years are Rs.40,000. Calculate the goodwill of the firm. Ans. Average profit = 40,000/4 = Rs. 10,000 Goodwill = 10,000x2= Rs. 20,000 15. Pass the journal entry for increase in the value of building on the admission of a partner. Ans. Building a/c Dr To Revaluation a/c (Being Increase in the value of building) 1. Pass the journal entry for decrease in the value of a liability Ans. Liability a/c Dr To Revaluation a/c Ans. (Being decrease in the value of liability) CHAPTER - 4 (A) RETIREMENT OF A PARTNER Section A: One Mark Questions I. Fill in the blanks: 1................ ratio is used to distribute accumulated profits and losses at the time of retirement of a partner. Ans. Old 2. Profit or loss on revaluation is shared among the partners in.............ratio on retirement of a partner. Ans. Old 3. New ratio - Old ratio =........... Ans. Gain ratio 4. Accumulated losses are transferred to the Capital Accounts of the partners at the time of retirement in their........... ratio. Ans. Old 5. General reserve is to be transferred to............. Accounts at the time of retirement of a partner. Ans. All the partners capital 6. Goodwill raised to the extent of retiring partner's share only is to be debited to continuing partners capital accounts in.......... ratio. Ans. Gain 41  7. In the absence of any instruction Retiring Partner's Capital A/c is closed by transferring its balance to.............. A/c Ans. Retiring partners loan 8............... ratio is used for adjustment of continuing partners capitals. Ans. New 9. X, Y and Z are the partners sharing profits and losses in the ratio of 3:2:1.If Y retires, the new ratio of X and Z will be........ Ans. 3:1 10. Share gained is calculated by deducting........... share from the New Share. Ans. Old 11. The ratio in which the remaining partners will share future profits after retirement is called........... ratio. Ans. New Ratio 12. The balance in the retiring partner's loan A/c is shown on the.............side of the B/S till the last installment is paid. Ans. Liabilities 13. The amount paid to the Retiring Partner in excess of what is due to him is called.......... goodwill. Ans. Hidden 14. In the absence of any agreement as the disposed of amount due to Retiring Partner, Sec.......a. of the Indian Partnership Act, 1932 is applicable. Ans. 37 15. If goodwill already appears in the books, if will be written off by debiting...................... A/c in their OPSR. Ans. All Partners capital II. Multiple Choice Questions: 1. Abhishek, Rajat and Vivek are partners sharing profits in the ratio of 5:3:2. If Vivek retires, the New Profit-Sharing Ratio between Abhishek and Rajat will be- (a) 3:2 (b) 5:3 (c) 5:2 (d) None of the above 2. The old profit sharing ratio among Rajender, Satish and Tejpal were 2:2:1.The New Profit Sharing Ratio after Satish's retirement is 3:2. The gaining ratio is- (a) 3:2 (b) 2:1 (c) 1:1 (d) 2:2 42 3. Anand, Bahadur and Chander are partners. sharing profit equally. On Chander's retirement, his share is acquired by Anand and Bahadur in the ratio of 3:2. The New Profit Sharing Ratio between Anand and Bahadur will be: (a) 8:7 (b) 4:5 (c) 3:2 (d) 2:3 4. In the absence of any information regarding the acquisition of share in the profit of the retiring/deceased partner by the remaining partners, it is assumed that they will acquire his/her share: - (a) Old Profit Sharing Ratio (b) New Profit Sharing Ratio (c) Equal Ratio (d) None of the above 5. On retirement/death of a partner, the Retiring/Deceased Partner's Capital Account will be credited with: (a) his/her share of goodwill. (b) goodwill of the firm. (c) shares of goodwill of remaining partners (d) none of the above. 6. Govind, Hari and Pratap are partners. On retirement of Govind, the goodwill already appears in the Balance Sheet at RS. 24,000. The goodwill will be written- off by debiting: (a) All Partners' Capital Accounts in their old profit sharing ratio. (b) Remaining Partners' Capital Accounts in their new profit sharing ratio. (c) Retiring Partners' Capital Accounts from his share of goodwill. (d) none of the above. 7. Chaman, Raman and Suman are partners sharing profits in the ratio of 5:3:2.Raman retires, the new profit-sharing ratio between Chaman and Suman will be 1:1. The goodwill of the firm is valued at RS. 1,00,000 Raman's share of goodwill will be adjusted by: (a) debiting Chaman's Capital Account and Suman's Capital Account with RS. 15,000 each. (b) debiting Chaman's Capital Account and Suman's Capital Account with RS. 21,429 and 8,571 respectively. (c) debiting only Suman's Capital Account with RS. 30,000. (d) debiting Raman's Capital Account with RS. 30,000. 8. On retirement/death of a partner, the remaining partner(s) who have gained due to change in profit sharing ratio should compensate the: (a) retiring partners only. 43  (b) remaining partners (who have sacrificed) as well as retiring partners. (c) remaining partners only (who have sacrificed). (d) none of the above. III. True or False Type Questions: 1. Profit or loss on revaluation is transferred to All Partners' Capital Accounts in case of retirement of a partner. Ans. True 2. Accumulated profit is transferred to Continuing Partners Capital Accounts. Ans. False 3. Adjustment of partners' capitals of the remaining partners is to be made in the New Ratio. Ans. True 4.New Share = Old share + share sacrificed. Ans. False 5. Share gained is computed by deducting Old share from the New Share. Ans. True 6.Increase in the value of asset is debited to Revaluation Account. Ans. False 7. Gain ratio is used to adjust the goodwill raised to the extent of retiring partner share only. Ans. True 8. Full value of goodwill raised on retirement is credited to All Partners Capital Accounts including retiring partner in their old ratio. Ans. True 9. Sec 37 of the Indian Partnership Act, 1932 states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his money. Ans. True IV. Very Short Answer Questions: 1. What do you mean by retirement of a partner? Ans. A partner is said to be retired from a firm, when his relation with the firm as a partner comes to an end. 2. Give the formula for calculating Gain Ratio. Ans. Gain ratio = New ratio – Old ratio. 3. Why the Gain Ratio is required on retirement of a partner? Ans. It is required for the purpose of writing off the goodwill created to the extent of retiring partners share against the capital accounts of the remaining partners. 44 4. Why the New Ratio is required on retirement of a partner? Ans. (a) To share the future profits of the firm 5. Give the formula for calculation of new profit-sharing ratio on retirement of a partner. Ans. New ratio = Old ratio + Gain ratio 5. What do you mean by Hidden Goodwill? Ans. It is the value of goodwill not given at the time of admission of a new partner. 7. Portion gained= New Share – Old Share Section B: Two Marks Questions 1. Mention any two circumstances for retirement of a partner. Ans. (a) old age (b) Illness 2. What is Gain Ratio? Ans. It is the ratio in which the remaining partners gain or acquire the share of retiring partner on his retirement. 6. State any two differences between sacrificing ratio and gaining ratio. Ans. Basis Sacrifice ratio Gain ratio (1) Time It is calculated at the It is calculated at the time of admission of a time of retirement of a partner partner (2) Effect It is the ratio which It is the ratio which decreases the old increases the partners share of profit remaining partners share of profit 5. State any two purposes of calculating new profit-sharing ratio. Ans. (a) To share the future profits of the firm (b) To write off firm’s goodwill 5. Name two methods of treatment of goodwill? Ans. Average profits method and super profits method 6. How do you close the Revaluation Account on retirement of a partner? Ans. Revaluation A/c is closed by transferring the balancing figure to All Partner’s capital A/c 7. Pass the journal entry for adjusting retiring partners share of goodwill when no goodwill is raised. Ans. Remaining partner’s capital A/c Dr To Retiring partner’s capital A/c [Being retiring partners share of goodwill adjusted] 8. Mention any two modes of payment on settlement of Retiring Partner's Capital Account. Ans. (a) Full payment of cash immediately 45  (b) If shortage of funds, amount due to retiring partner transferred