Day 1 Boards Exam MEANING AND DEFINITION OF PARTNERSHIP ip Act, 1932, SEGHOR) as follows: “Partnership is the relation between persons who have agreed to s a business carried on by all or any of them acting for all.” A partnership, thus, is a business relationship among two or more persons to share profits and losses of the business, carried on by all or any of them acting for all, Partnership is defined by Indian Partners! Partners, Firm and Firm Name: The persons who have entered into a partnership with one another individually are called {parti€#s and SGUGSEVEI—ENEa The name under which the business is carried is called |fifm name. Nagdte of Partnership(®) Partnership, from the legal viewpoint, is HOBSISCpaRENSaNGREEY from its partners since the firm’s debts can be paid from private assets of the partners, if the firm is not able to pay its liabilitic However, Partnership is a §SSEM00DUSESSEREEY from the accounting viewpoint. eas eke WSU Le The essential characteristics of partnership are: 1, [WO or More Persons: There must be at least two persons to form a partnership and all such persons must be competent to contract. According to Indian Contract Act, 1872, every person except the following are competent to contract: (0) RESRSTORAABOUAAAITA, oc (b) Persons disqualified by any law. Maximum Number of Partners: The Companies Act, 2013 (Section 464) empowers the Central Government to prescribe number of partners in a firm subject to maximum of QO partners)The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a partnership firm cannot have more than| ner:)A minor can be a partner in the profits of the firm and not in the Tosses. A minor partner on [BRSOming imajOn SHOUIAa cep HO FERISe Ene pAreRSHip AA eee ARTO If he/she does not so decide, he/she becomes liable for all the actions since he/she became partner Agreement: Partnership comes into existence by an agreement, either (BHGA or (OFA It is the basis of relationship among partners, which may be for a particular venture, for a period at will. The written agreement among the partners is known ag ¢ Business: A partnership is established for a bu ness, Y’ Profit Sharing: The agreement between/among the partners should be to share profits and losses of the business. % LOss shavivg is wat _lompulse Business of the narinershin can be carried on bv all the nartners or by anv of them acting fre all the:ana tosses OF the DUsiNEDs: % Lvo2 enn ee é Business of the partnership can be carried on by all the partners or by any of them acting for all the partners. In other words, partners are agents as well as the principals, As an(agerit) he represents other partners and thereby, binds them through his acts, As a(principal) he is bound by the act of other partners. eee a it) 1, Every partner has the right to BSAAGipS@iAHEanageMent of the business. 2. Every partner has the right [{@JBElCORSUIEM! about the business matters. 3, Every partner has the right to [iiSpRGQUTEISOORSIOMMCCOUBEand have a copy of it. 4, Every partner has the right to SHAFS)PROHESJanAMOsses}with others in the agreed ratio. 5. Ifa partner has §UVaAEECIGHA, he has the right to receive interest thereon at an agreed rate of interest. In case the [Fal@JOR ARLES is not agreed, interest is paid at the rate provided in the Indian Partnership Act, 1932, which is| 6. A partner has the right to take decisions in the interest of the business, o 8. After giving notice, a partner has the right to retire from the firm. Ipfortance of Partnership Deed Partnership Deed is an important legal document which defines relationship among the partners. It is important to have written Partnership Deed so that disputes do not arise, In case, they still arise they can be resolved on the basis of Partnership Deed. It is useful because: 1. Itgoverns the rights, duties and liabilities of each partner. 2. (Disputeslasing) if any, among the partners are settled on the basis of Partnership Deed, it being a written agreement. 3. [ERREIESARERMpIDECMMOEMOMEM or where it exists but does not have a clause on a particular matter, the provisions of the Partnership Act, 1932 apply. Is it essential to have a Partnership Deed? It is not essential but is desirable to have a Partnership Deed. In case Partnership Deed does not exist, provisions of the Indian Partnership, Act, 1932 will apply. Provisions Affecting Accounting Treatment in the Absence of Partnership Deed In the absence of a Partnership Deed or where it does not have a clause in respect of the following | matters, the provisions of the Indian Partnership Act, 1932 apply: 1. Sharing of Profits/Losses Profits/Losses are shared al bby the partners. 2. Interest on Capital Interest on capitals RBM (allowed) to partners. 3. Interest on Drawings Interest on drawings RRNA rom partners. 4. Interest on Advance/Loan by aPartner | Interest on loan by partner i paid (allowed) RGSS Interest on loan by partneris ac means interest is paid whether the frm earns 5. Remuneration to Partners Flemuneration (salary, commision et) iB alowed) to anv‘Admission of Partner New pi ss all the partners agree to it. the partne tka partner carries on a USRESERICOMBERHOD ith the fcr leer ns profit from it, the profit earned from such business shall be paid to the However, losses incurred, if any, are borne by him alone SHEN and ca [EERIIBESBEEGI or business connection, the profit so earned shall be paid to the firm For example, a partner the commission so earned shall be paid to the firm 7, Bares an Renard ators ered on Gp Rae Scere soapetn layer itso ee * ik = 4So0 6180 ng profit4and losses eqdplly. Amit and Chaman of & 1,00,000 and & 1,50,000 respectively. It is A nit, Bimal and Chan n are\artners shai ave loans to the firm on Ist October hat interest @ §§@Ipl. will be paid on loan. Books of account of the firm are closed on March every year. Interest on loan is yet to be paid as on 31st March, 2022 <5 [OSGRREIIEREHES in the books of account of the firm and prepare [{SSRUARESUR of the partners Solution: In the Books of Amit, Bimal and Chaman Pana a banca o.| | 25000 | — i) ae Hid 5 get enlasemoen Ney Ghubtd om time Baws > Ghudated om Opening Gop ital CALCULATION OF OPENING CAPITAL Particulars Capital at the end of the year Add: Withdrawal of Capital Less: Additional Capital introduced during the year Capital in the beginning of the year (+) When Capita are flactuatng: CALCULATION OF OPENING CAPITAL Particulars Capital at the end of the year Add: Drawings Against Capital (Withdrawal of Capital) |Capital at the end ofthe year ry ‘Add: Drawings Against Capital (Withdrawal of Capital) = Drawings Against Profit Interest on Drawings is Share of Loss for the year* Less: Additional Capital introduced during the year Partner's Salary/Remuneration a Interest on Capital e Share of Profit for the year* Capital in the beginning of the year AYood [R000 ee 16 (Interest on Capiftl when Proft FP inadequate) Aand B have capitals of % 4,00,000 and & 2,00,000 respectively and interest on capital is to be allowed @ 6% p.a. Their profit-sharing ratio is 2:3 and rot SEES SRAMET Ps epare Profit & Loss Appropriation Account to distribute the profit Solution: Dr. PROFIT & LOSS APPROPRIATION ACCOUNT for the year ended. G. Paces a [aaa To Interston pal [by ProftaLosAc Net PohD 3000 A 20,000: | B 10, |___ 30,000 Working Note:The interest on A's Capital and B's Capital is® 24,000 and ® 12,000 respectively. Thus, total interest on capital is & 36,000. Profit before interest is & 30,000. The interest on capital will be allowed as follows: % 30,000 x 12,000 =% 20,000; B= = 10,000. % 36,000 % 36,000 % 30,000 x % 24,000 Remember: interest on capital is allowed to the extent of available profit only, since interest on capital Ban appropriation of profit. Iva interest on capital ia charge. allowed whether the firm earns profit or incurs Net profit is determined after allowing interest on capital, which is transferred ta Profit @ istration 23 (Transfer of Divisible Profit to General Reserve). X and Y are partners sharing profits and losses in the ratio of 7 : 3. Their Fixed Capital Accounts as at Ist April, 2021 stood at X—® 5,00,000; Y—% 4,00,000. Partners are allowed interest on capital @ 5% p.a, Drawings of X and Y during the year ended 31st March, 2022 were % 72,000 and X 50,000 respectively. Profit for the year before allowing interest on capital and salary to ¥ @% 5,000 per month was ® 8,00,000. GOVSISHMREMNASIBISNFORE to be set aside to nine General Reserve. Cdaahibubsle pat Prepare Profit & Loss Appropriation Account. yg raft © Appr prictions Solution PROFIT & LOSS APPROPRIATION ACCOUNT Or. forthe year ended 31st March, 2022 & Particulars © JPartcuarsz > Interest on Cap SS 8,00,000 Current A/¢ —— 25000 « —— 20000 45,000 > YsSalary A/c (Ys Current Alc) 60,000 > General Reserve A/c 69,500 T ransferredt x tA 4,37,850 nt 87,650 | 6,25,500 8,00,000 |__s00000 unt transferred to General Reserve © Profit Against Profit Basis Drawings Against Capital Drawings Against Profit Where Debited itis debited to Capital Account tis debited to Drawings Account. Effect 5 capital immediately on withdrawal. | it reduces capital when final accounts are prepared and Drawings is transferred to the debit of Partner's Capital Account. Interest on Drawings | It is not considered for calc rest | Its ential tis not considered for calculating interest on capital ES © calculated by Product Method as follows: Interest on Capital 4 5 C ee D=8xc pate Amount ®) | |NOJofMOntnSUBTOSTetMareh2O022) | GREE! Ist May, 2021. —————__1__ 2,000 11 owyewtls 22,000 t August, eal 8 moths, 40,000 0th September, 202 6 mouths 12,000 2 mows 12,000 0 owe 0 000, 86000 Interest on % 86,000 @ 15% p.a. for one month is Ta. 15: a Il. Average Period Method: This 1 anvary, 2022 lar drawings or wlIL Average Period Method: This method is used when there is regular drawings \or when: (a) the and ee The formula for calculating interest on drawings under this method is: Rate of Interest Average Period” Interest on Drawings = {Total Drawings x 100 12 average Period = Months Let ater Fist EST Months Left after Last Drawing Situation 9. When the rate of interest is given without the word/{penanilm (pal) interest 7a is charged without considering the time factor. fustration 31. Calculate interest on A’s drawings @ 10% if he withdrew @ 2,50,000 during the year. Solution: Interest on drawings = % 2,50,000 = 10/100 = 25,000. Normally, interest is calculated on the basis of time amount is Used. peer) - tration 36 eae of Amount of Monthly Drawings). va the amount of RAR SERONEIMGRAWINgS for the year ended 31st March, 2022 in the following cases when the partnership deed provides for interest on drawings @ 10% p.a Z When interest on drawings is & 1,300 and he withdrew a fixed amount in the beginning of each month. (ii) When interest on drawings is % 1,100 and he withdrew a fixed amount at the end of every month. (iii) When interest on drawings is ® 1,200 and he withdrew a fixed amount during the middle of each month. Solution: (i) Let the total drawings during the year = x : oe «Rate of Interest | 6.5% Interest on Drawings = Total Drawings x 99, 7 DOs ead ee Frans rx xx aesInterest on Drawings = "otal Drawings * 99 NE 10 1 31,300 = x* 7 = 100 12 24,000 \ 1 3 71,300 = ** 75 re Haveli _ 246d 13x %1,300= 45 or 13x =%3,12,000 Asai age he , ) PSR is Sy ‘ ' ow 2H grein \ cig ee cfs € : dion pepe si | fake Or owiswion. Doc ay, Si i (Loc + Tov) beet wh BOO | Toe a ww mis ww. C09 = Satey \ ee ; ree | ¥¢ és “oo { Torsk Boe © ie Mee 1 ce rhe Oe \ Do at least |} dQ - \5 Qs on a ape Toc Ge lok ee ISK iw & 5% Gs Tifistration 38. eee RK eH P and Qwere partners in a firm sharing profits equally. Their fixed capitals were & 1,00,000 and % 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate per annum. For the year ended 31st March, 2016, profits of the firm were distributed% 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate oK10% per annum. For the year ended 31st March, 2016, profits of the firm were distributed Pass necessary adjustment entry to rectify the error. (Delhi 2017) 2, Statement Showing the Adjustment for Interest on Capital and its effect: mae E Fn | a r® | «® | O® | Co | ne | oe a 5,000 | 15,000 IL Interest on Capital (WN 1) Il For Sharing the above loss (Equaly) 70,000 7500_|_ 700 |e 7 Bee | some | a 39 (Distribution of Profit in Wrong Ratio), W. ( Goem’) (6ooee) (Boe is Ce Soom Sram Soom X, Yand Z shared profits of € 1,50,000 in the ratio of 2: 2:1 but the Partnership Deed was silent as to the profit-sharing ratio. Pass the necessary adjusting entry. ee ey Solution: ADJUSTING JOURNAL ENTRY | | I Balance to be adjusted (Net effect) Date Particulars LF Dr Ys Capital A/c To Zs Capital Alc r 20,000 (Adjustment entry for Profit distributed in wrong ratio) Loc by, Coes) C4005 ~ (000) (a im 5.3.2 3600 40d, iG eo im Ce GoD stration 44 (Interest on Capital Provided at a Higher fare Tune) aor ‘X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5 : 3: 2. Their fixed capitals were & 3,00,000; % 2,00,000 and % 1,00,000 respectively. For the year ended 31st March, mn eapital was 8a Showing your working notes clearly, pass necessary adjustment Journal entry. nterest on capital was creqiGQRORMEROMON 2. i Solution: ADJUSTMENT ENTRY Date Particulars th] o.@) i) 022 a Tae 3 2 ‘Apa | YS Curren 6 400, | To Zs Current A/c 400 (interest on capital excessive charged, now rectified) | ears Dar closi on SISEMGFER2 SEERA CHAN counts of Eleen, Monsand Ahmad after making adjustments for profits and drawings were % 1,60,000, ® 1,20,000 and 80,000 eee Subsequently, it was discovered that the interest on capital and drawings had been omitted BF Profit for the year ended 31st March, 2014 was % 40,000. ($3) During theyear, Elen and Monu each withdrew a total sum of 24,000in equal instalments in the beginning of each month and Ahmad withdrew a total sum of % 48,000 in equal instalments at the end of each month.t-sharin ar artni 1 1 tifyin Working Notes Mm had @) 5 == x 00% dy Debted > x x (Tan) Toc cr NBNaBIBNSSRENSES fa) (> Breen we Cas) CBDR i (Bsse) 245% FooWorking Notes. gonno in3:2°| eon 0 Guarantee © Parra t Frm QD Firm (otf perous) fe Pau ® Fartwr t>o Paw hurAas: Dencency met by eee Q 10,000 400,000 starts during the year). iffistration 56 (Guarantee of Prof oe Y and Z entered into partnership on (SQ\)UVE2021 0 share Profits and Losses in the > of 3: 2: 1. Ri guaranteed that MB share of profit after charging interest on capitals per annum {G@leROEBEIESS ang] S6)000PI. The capital contributed by X—X 2,00,000, when partnership Y—Z 1,00,000 and Z. 1,00,000. Profit for year ended 31st March, 2022 was & 1,38,000. Prepare Profit & Loss Appropriation Account. (20,000 Soluti PROFIT APPROPRIATION ACCOUNT tn 3H) ee Scrherenessitnercnaae cece eee Particulars eintd ie] z Particulars ie seal z To Interest on Capital Acs (WN 1} By Profit & Loss Al | 38000 x 5000. (Net Prot y 4500 L Z fs NA 18,000 (0 Profit transferred to (WN 2 Sooo x A, xscaptalArcloK-AK + 53.000 12 ¥sCopital arcHOR 40,000 fis gan Zs Capital Ae 20K (TK = 27,000 1,20,000 | 138,000 | Cuarsankee ration 61, Tarun, Mannan id Harman are partners sharing profits in the ratio of 2: 2 : 1. Tarun is per annum. Net Profit for the year ended 31st March, ed minimum profit of € 80,000 opriation Account for the year. PROFIT& LOSS APPROPRIATION ACCOUNT Dr. _ for the year ended 31st March, 2022 &. Particulars % | Particulars cal as To Tarunis Capital A [2009] by Profit toss Ale = a 30,000 | (Net Profit transferred) | By Loss transferred to Capital A/cs (Deficiency): ‘Monn 2000 oman, 1000 | _ 50566) 0,000 Deficiency in Tarun's profit share will be borne by Mannan and Harman in their profit-sharing ratio, ie, 2:1 MaMaanika, Bhavi and Komal are partner i ended 31st March, 2018. P: profits in the ratpf6t CC Sarr OOD for the year necessary Journal entry regarding deficiency borne by Maanika Wottenalien toy id Bhavi and prepare Profit & Lo: 2019) LE] One®) c®) ame gy 32 ee 1 —+— 1,60,000 4,00,000 5 t Guelp 7 a : sanikas Ca 12,00,000 havis Capit $00,000 3 2,00,000 22,00,000 Jay, Vijay and Karan were partners of an architect firm sharing profits in the ratio of 2: 2: 1 reir Partnership Deed provided the followin hly salary of to] 5 Lae Any deficiency arising because of guarantee to Karan will be borne by sheet Defiuew 2S ooo March, 2018{Jay cared fee of 2 1,75,000ind the profits of the firm fhowing your workings clearly prepare Profit & Loss Appropriation Account and the Capital Accounts of Jay, Vijay and Karan for the year ended 31st March, 2018. (CBSE 201 lutioi PRIATION ACCOUN' riculars z Particulars [nae r 7 y Proft Loss Ale Net Prof) ]__15,00,000 it 00|~ 0ysGaprarne Less: Guaranteed (Profit to Karan) Vijay's Capital A/c Less:Guaranteed (Profit to Karan) Karan's Capital A/c ‘Add: Deficiency met by Jay and Vijay_2,67,000{~_5,00,000 15250 [sas MEANING OF GOODWILL Goodwill is the present value of expected future income that is in excess of normal return on the investment in tangible assets or for the excess of price paid for a business as a whole over the book value or over the computed or agreed value of all tangible net assets purchased. 1 places him in the position of being able to —Dicksee “When a man pays for goodwill, he pays for something earn more than he would be able to do by his own unaided efforts. “Goodvvill may be said to be that element arising from the reputation, connections or other adoantages d by a business which enables it to earn greater profits than the returns normally to be expected 2 —Spicer and Pegler possess on capital represented by the net tangible assets employed in the business. CHARACTERISTICS OR FEATURES OF GOODWILL The characteristics or features of goodwill are: 1. Itisan i.e,, it does not have physical existence, and has a value, ie., it $0 2. It does not have an existence separate from that of an enterprise. Thus, normally it has realisable value when business or a part of business is sold. 3. Ithelps in Sain RIBHEE BORE, 4, It is an attractive force which brings in customers more frequently to the place of business, 5. It comes into existence due to various factors such as locational advantages, favourable contracts, brands, trademarks, patents, market reputation, etc. 6. Value of| In the context of partnership, it is the value of share of profit sacrificed by the sacrificing partner. a err e a peste foc cane ia nae cen eee ES ai rartered Accountants of India has defined NEED FOR VALUING GOODWILL iaNEED FOR VALUING GOODWILL The need for valuation of goodwill arises: 1. When there is a change in the profit-sharing ratio. 2. When a new partner is admitted. 3, When a partner retires or dies. +4. When partnershipififiiaisis6ld as a going concern. 75, When two Or SRO ints aire »6. When a partnership firm is(@OnVerted into a company. FACTORS AFFECTING THE VALUE OF GOODWILL | Goodwill is affected by the factors which increase the earning capacity of the firm, These ai If the management is experienced, capable and competent, the firm will earn higher profits as compared to other firms If the business is located at a favourable place, resulting in increased customer walk-in and, therefore, increased sale and increased profit. | (BUIFAVOUFABTe|ContFAcEs: Sometimes, a firm has long-term contracts for sale and purchase of 4. | 6. Access to Supplies: When supplies of materials are diffic ‘goods at favourable prices. This will also affect profits and goodwill of the firm. Longer Establishment of Business: Business established for long are likely to have extensive (broader) customer base resulting in higher sale and profit. As a result, it will have higher value of goodwill. jormally, patents are necessary for the manufacture or production of certain types of articles. A firm which possesses the necessary patents will have a better value for its goodwill. t to get, there will be a high value of goodwill for a firm which has good arrangements for getting regular supplies (PAGER IF a firm enjoys good reputation for the quality of its products, there will be a ready sale and the value of its goodwill, therefore, will be high. Market Situation: If a firm is in a business wherein demand for the products dealt in is higher than the supply, it will lead to lower capital requirement and higher profit, It will, thus, increase the value of its goodwill, Risks Associated with Business: If the risks faced by the business are lesser than normal, the business will have higher value for goodwill. Nature of Busine: if the business of a firm is of the nature where the products dealt in are in high demand although not short in supply, the profit will be higher. It will, thus, increase the value of its goodwill. |. Past Performances: The firms earning higher profits year after year, will have better value for goodwill as compared to firms earning lesser profits or incurring losses with similar amount of capital employed.tor goodwill as compared to firms earning lesser profits or incurring losses)with similar amount of capital employed. 12. Other Factors: (a) After sale services, (b) Good customer relations, and (c) Good labour relations, etc. SSIFICATION OF GOODWILL Goodwill is of two types: AS 6 1. Purchased Goodwill/and Qterded in Books 2. Self-generated Goodwill or Non-purchased Goodwill. aero Not ded in Rooks - © () Simple Average Profit Method © Simp Under this method, normal profits of the business for the specified number of years are determined. Normal profits aré totalled and average profit is determined. The Average profit is multiplied by the number of years’ purchase (such as 1, 2, 3, etc) to determine the value of goodwill of the business, In the form of formula, itis Normal Profit (also termed Future Mai itainable Profit) the past year’s profit for the following: (i) non-business profits and/or losses; (ii) abnormal gains (profits) and los (iii) capital expenditure being accounted as revenue expenses; (iv) revenue expenses being accounted as capital expenditure; (v) revenue expenses not having been accounted; and (vi) errors committed in the past. “This method is based on the assumption that profit of a newly started business will not match. the profit of an established firm or enterprise during the initial years ofits operation. Hence, who purchases a running business pays goodwill for being in a position to eam profit in the jal years of business. is determined for each year adjusting 8) ® What is meant by number of years’ Purchase?! Number of yea Add: purchase means the number of years fo ss) of Past Year (Before Adjustment) (Given): Abnormal Losses (e.g., Loss by fire, Loss by theft, etc.) (ii) Loss on Sale of Fixed Assets (Since it is not a normal business activity) (iii) Overvaluation of Opening Stock or Undervaluation of Closing Stock (ince it would have reduced the profit) tA ALE(iii) Overvaluation ot Opening Stock or Undervaiuation oF wiosing >t0CK) a (Since it would have reduced the profit) i (iv) Non-recurring Expenses (Such expenses are not expected in future) ) lhoen (e.g, Purchase of Machinery wrongly debited to Purchases Account) Less: (i) Abnormal Gains (e,g., Gain (Profit) on Sale of Fixed Assets) isis) ~~ (ii) Overvaluation of Closing Stock or undervaluation of Opening Stock («) (As it would have increased the profit) oe (iii) Non-recurring Incomes (Such incomes are not expected in future) () (iv) Income from Non-trade Investments (As it is not related to normal business activities) 4 wi (v) Management Cost (Partners’ Remuneration) if it is not deducted () (As it is the value of their services to be paid in future years) (op fature expense ke Hasire premium’ @ Adjusted Profit (Future Maintainable Profit) for the year. —————————> 99 (ae 5 (Average Profit Method whien Adjustments are Made) poets moltatoe Simran purchased Anita’s business on Ist April, 2022. It was agreed to value goodwill at /if8e) of average normal profit of the last four years. Pera of Anita's business for the last four years were: Year Ended z t 31st March, 2019 31st March, 2022 Following further facts are identified from the books of account 1. During the year ended 31st March, 2019, an asset was sold 2. During the year ended 31st March, 2020, a machine was, ‘was written off as loss in Profit & Loss Account 3. During the year ended 31st March 2007, firm's assets were not insured due to oversight. Insurance premium being ® 10,000, Tt is a regular expense, incurred every year. Calculate the value of goodwill. Solution: CALCULATION OF NORMAL PROFIT — pet ineMtett it) 10 must Be alee oT Total Normal Profit _ 6,60,000 Number of Years Average Profit =‘Total Normal Profit %/6/60;000 Average Profit = -X. imber of Years 4 & 165,000) Goodwill = Average Profit x Number of Years’ Purchase ; =°81,65,000 «3 =84,95,000, yes Note: Insurance premium towards insuring assetsisareqular/recuring expense. Therefore its deducted from the profit for the year ended 31st March, 2021. : mae 6 (Average Profit Method when Adjustments are Made). eb ste Om, Shanti and Namo are partners sharing profits and losses equally. They agree to admit Dev for equal share. For this purpose, goodwill is to be valued at FOURYEARS PUFEHASE of average ive yoarsPOTTS Tor the past five years were: On Ist April, 2021, 5 cycles costing} ‘and were wrongly| relling DERE Pepesintion ‘on cyclesfvas to be charged @ 25% p.a. Calculate value of goodwill. C E(asd) Zoom Ace \evem = \Yoevn [Ro 000) ow Ro, oy (Som) BK WORK HoK (105000) GW = Gm + wor + Irv + yoo . _ 18807 @® Goodwill = Weighted Average Profit x Number of Years’ Purchase; Reason or Justification for using Weighted Average Profit Past profits show the trend of financial performance which is the trend of profits. Profits by an enterprise in recent years is more relevant as compared to earlier years. Therefore, more | weightage should be given to recent profits which is followed under the method. Weighted Average Profit Method is considered better as compared to Simple Average Profit Method as it gives more weightage to the profits of recent years. This| lustration 8. of a firm for the last five years were: profit after assigning weights 1, 2, 3 4“and 5 31st March, 2018, 2019, 2020, 2021 and 2022. Solutic CALCULATION OF WEIGHTED AVERAGE PROFIT iiied normal eturn apital e ‘ed in the firm to carry on business. It e the value of goodwill. Capital employed may be calculated from the Liabilities Side Approach Assets Side Approach: Note 2 spec TRADE INVESTMENTS AND NON-TRADE INVESTMENTS Trade Investments s i Non-trade investments eeu revenue by investing surpls fui and,which they decided to take average of last5 years profits. The profits for the last fiveyears’ eae | Year ended’ z ea a am 31st March, 2018 ——— 2,00,000 (Including gain of & 25,000 from sale of fixed asset); Rss. 31st March, 2019. —— 1,70,000 (Including abnormal loss of & 50,000"), qui 31st March, 2020 2,10,000; 31st March, 2021 2,30,000; 31st March, 2022 2,50,000. Capital employed in the firm is ® 15,00,000 and normal rate of return in similar business is 10%. Calculate value of goodwill. Solution: 1 CALCULATION OF ACTUAL NORMAL PROFIT _, _ Total Normal Profit — 2 10,85,000 217,00) Actual Average Profit = Soper of Years SB 2,17,000) 2. Calculation of Normal Profit: Capital Employed = % 15,00,000 Normal Rate of Return = 10% 3. Calculation of Super Profit: = %2,17,000 ~ F 1,50,000 = & 67,000. 4. Value of Goodwill: = % 67,000 «3 = % 2,01,000. * &tration 15 (Calculation of Average Profit). M/s Hi-Tech India has assets of & 5,00,000 whereas liabilities are: Partners’ Capitals —% 3,50,000, General Reserve— 60,000 and Sundry Creditors— 90,000. If normal rate of return is 10% and goodwill of the firm is valued at & 90,000 at 2 years’ purchase of super profit find average — profit of the Solution: ‘Goodwill = Super Profit = Number of Years’ Purchase se % 90,000 = Super Profit « 2 iy 790,000 Super Profit = = 45,000 Capital Employed = Assets ~ Outside Liabilities (Creditors) = %5,00,000 — & 90,000 -I0}000) Or = Partners’ Capitals + General Reserve = %3,50,000 + 60,000 = 4,10,000 Normal Rate of Return = 10% Nona Prot =es10000% 2° e4000 1} Suinor Profit = Averaoe Profit — Normal Profit(ie Super Profit = Average Profit - Normal Profit Average Profit = Super Profit + Normal Profit = €45,000 + 41,000 £886,000) Under this method, goodzill is calculated by deducting capital employed (ise, Net Assets as on the date of valuation) in the business from the capitalised value of average profit on the basis of Normal Rate determined by capitalising average profit earned of Return. Capitalised value of the busines: at the normal rate of profit. For calculating goodwill under this method, the steps are as follows: (SRP Calculate average normal profit. [Sf@PI2E Calculate capitalised value of the firm by using the formula given below: Average Profit x 100 Normal Rate of Retum (Profit) If a firm earns a profit of * 16,000 annually and firms normally earn 10%, the total capitalised value of the firm will be % 1,60,000 (i.e., % 16,000 x 100/10). (SHEP! Determine the value of Net Assets, on the date of valuation of goodwill. Net Assets = All Assets (other than goodwill, non-trade investments and fictitious assets) at their current values minus outside liabilities. (RBBB Goodwill = Capitalised Value of the Business (as per Step 2) - Net Assets (as per Step 3). Capi telinobon if Super pape = Super matt XX [oO Go “ee Pap aa GE 21. oe A business has earned average profit of & 1,00,000 during the last few years and the normal rate of return in similar business is{10%) Find out the value of Goodwill by: (i) Capitalisation of Super Profit Method; and (ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profit. Capitalised Value of the Business = Assets of the business were % 10,00,000 and its external liabilities € 1,80,000. (Delhi 2011) Solution: CE = B2o000 .. NP = 82,000 As per Capitalisation of Super Profit Methog> wil Normal Rate of Return ~ 10 % 1,80,000. (ii)_As per Super Profit Method: Goodwill = Super Profit « Number of Years’ Purchase = 18,000 x3 - Working Notes: 1 Capital Employed = Assets ~ External Liabilities = © 10.00.000 ~ 8 1.80.000 = % 820.000.srernnry rmvene 1. Capital Employed = Assets ~ External Liabilities = %10,00,000 - & 1,80,000 = % 8,20,000, , amit 2 Normal Profit = Capital Employed x NormalRateof ture =%8,20,000 x =%82000. 3 Super Profit = Average Profit - Normal Profit ane = © 1,00,000 - & 82,000 = & 18,000. i ee a Oe LG aU The existing partners may agree to share profits and losses in a ratio that is different from the earlier reed profit-sharing ratio. As a result of change in the profit-sharing ratio among partners, eh eG id * Going | Sexnfing heh = old - Nev a Say (Ive ee Illysfration 1. “mit and Sumit are partners in a firm sharing profits in the ratio off@ilill It was decided by them to share profitsiaqually ‘wef, Ist April, 2022. Calculate the Sacrificing and Gaining Ratio. Solution: New Profit-sharing Ratio = 1: 1. Calculation of Sacrificed/(Gained) Profit Share of Each Partner: Sacrificed Profit Share Note: Positive difference means’Sacrfice’as old profit share is more than new profit share, Negative difference ‘means ‘Gain as old profit share is less than new profit share. Tred of Goodwill E xishug Now nating 4 Ju Pap & x Going P lap TT GW — xx To Gaewfiuy P ap **% Gw — x To Seopa P ap x err J-2) WER be A000 age ati th lop don a 3) WER & Voos To WL —— 4Som KP Gp — ks wok By 0000 ee To WoL Vow I ie 7 To WOL ‘lowe " var on“se p. tar = oe To Revaluation = __| (CT) is shovo as UIABITY BS ‘Gaurav, Souray and ae sharing profits and future profits and losses in the ratio of 2: 3: 4 wit of their Balance Sheet as at 31st March, 2022 is: Show the accounting treatment under the following, i : When market value of investme When market value of investmer When market value of investmen When market value of investment ) am) LER RB 18000 To P- (ap —— |Bo00 (old Radio) 3) VER & (So00 to Iwvt —— %00d Te be Cap —_ {wo 4) (ER W i300 Te P ap —— 13000 \nveshwud BW. (Booo To Reval ———— [000 Revad U 1300 To & (ap ——— [8000 Jalfh, IgEwe Lowe 5) @bFA & 13000 Reval + & ooo a o In boo Ee Not fo Disturb Free ae Bu x q i f Gap vy Te? (ap — ae > TP Seciay # Gp Nd te distur 0 Ge B xx Coce b lap By To Ace lew — Te Gauy P Cap —¥* Cold Radio) Cad lustration 10. X, Y and Z are partners sharing, profits and losses in the rati to share future profits and losses in the ratio of 2 : Following is the extract of their Balance Sheet as at 31st |April 1(/] General Reserve Alc Or 75000 Workmen Compensation Reserve A/c Or 12500 or eee or. | 37,500 x To X's Capital Ac 62500 we To Y's Capital A/c | 37,500 To Z's Capital Ac | 25000 (Transfer of Reserves and accumulated Profits to old partners | in their old profit-sharing ratio) = ap [rrcoae S hslaeneea To. Advertisement Suspense Alc (Transfer of balance of Advertisement Suspense Account to old partners in their old profit hating ratio) 50,000 Upshetion 13. Karim, Saleem and Rahim are sharing profits and losses in the ratio of SINGIN They decide to share profits and losses in the ratio of MBEMBwith effect from Ist April, 2022. They also decide to record the effect of the following without affecting their book values, by passing an adjustment entry VN Book Values () ‘General Reserve 1,50,000 + Contingency Reserv 25,000 eee 5110 * Advertisement Suspense A/c (Dr.) 1,00,000(-) Solution: Calculation of Net Effect of Accumulated Profits, Losses and Rese z General Reserve 1,50,000 Contingency Reserve 25,000 Profit & Loss A/c (Cr.) 75,000 2,50,000 Less: Advertisement Suspense A/c (Dr.) 1,00,000 eve [Fe 50.000 x Calculation of Sacrificed/(Gained) Profit Share of eac artner Karim Saleem Rahim (i) Old Profit Share 5/10 3/10 2/10 (i) New Profit Share 10 3/10 5/10 (i) Sacrificed(Gained) Profit Share (0) ~ (i) GG Gacritice) mc R Y 4so00 TK Cnariman af Revaluation Accaunt “S000Te K ————_ "S000 Specimen of Revaluation Account De. shu *Only one will appear at a time, ‘ 5 Whoraton 16. y im ‘A, Band Care sharing profits and lossesin the ratio ofS888@! They decided to and losses in the ratio of ARMIES with effect from 1st April, 2022. They’ of the assets and liabilities byfpassing an Adjustment Entry: Book Values (®) Land and Building ————————_5,00,000 Plant and Machinery —————————_2,50,000 Sundry Creditors 60,000 Outstanding Expenses — 60,000 Pass necessary Solution: Step 1. Calculation of Net Effect of Revaluation: z bg (j) Increase in value of Land and Building (ii) Decrease in amount of Sundry Creditors (iii) Decrease in value of Plant and Machinery (iv) Increase in the amount of Outstanding Expenses Gain (Profit) on Revaluation —> Step 2. Calculation of Sacrificed/(Gained) Profit Share: (i) Old Profit Share New Profit Share (iii) Sacrificed/(Gained) Profit Share (i — ii) 5/103 or Sacrifice (Gain) Step 3. Calculation of Proportionate Amount of Share of Gain (Profit) on Revaluation: A’s Sacrificed Share = 3/10 = % 30,000 = & 9,000; C's Gained Share = 3/10 x & 30,000 = % 9,000.A’s Sacrificed Share = 3/10 x % 30,000 = & 9,000, Gained Share = 3/10 x Cc % 30,000 = & 9,000 ® ooo ooo =A » *Féotration 19 (Adjustment of Capital through Cash) P, Q, Rand S were partners in a firm sharing profits in the ratio of II On Ist April, 2016, their Balance Sheet was as follows: BALANCE SHEET OF P, Q, R AND Sas on Tst Ap re et z Tavis z Capital Ns 7270000 , 2,0,000 Current Asets 530000 Q 300000 a 400.000 5 5.00000 | 1400000 Sundry Creditors 230,000 | ren Compensation Reserve, ——t—9 1.70000 | pean 7300000] profits SURI For this purpose, From the above date, partners decided seal the goodwill of the firm was valued at {2200008 WER, QB 200d 2 ws vi 100 Reval 30000 2 ——— partners also agreed for the following: inst Workmen Compensation Reserve was estimated| ‘or paying cash as the case may be. reconstituted firm. ~~ a Solution a : REVALUATION ACCOUNT ata T_ [Pericvas To Workmen Compensation aime | 30/000 | By Loss on Revaluation transferredto ® 2.00000 = ,7,000 Ps Capital A 3000 5 Capital Nc 12,000 Capital A 6000 SsCapital Ne 3000 | __ 30000 300 |nce d= 000] 3,54,500] 400,000] 5,13,500 270,000 c 5 30,000 0 8,00,000 Working Notes: [ a. i ae FE r 4 10 - 1/4 = 2/40 Gain Sacrifice Gain Sacrifice Ws -2 Capita BrSanus (PERERES) = fal Capitat Divide T Gpital im New Ratio Heaton 28 RS dV were partners in a firm sharing profits in the ratio of 4:3: 2:1, On April, 2016, their Balance Sheet was as follow x « Asset 2,00,000PARTNERS’ CAPITAL ACCOUNTS 5a 1st Apri, 2016ADMISSION OF A PARTNER ‘Admission of a partner is reconstitution of the firm because with the admission of a partner, existing partnership deed or agreement ends and new agreement among all the partners (including incoming or new partner) comes into force. Capital contribution by the new partner, his share in profits and other conditions are agreed upon. According to [S€@H@R13II of the Indian Partnership Act, 1932, a person can be admitted as a partner: a aes (i) if itis so agreed in the Partnership Deed, or (ii) in the absence of the agreement, if BINJER@|PaHRERS|aB to admit the partner. After admission, the new partner gets following two rights 1. Right to share future profits of the firm, and 2. Right to share in the assets of the firm. ‘At the same time, he becomes liable for any liability of the business incurred after admission and any loss incurred by the firm. * The new or incoming partner receives share in future profits equal to the sacrifice of profit share or shares by existing partner or partners of the firm, New or incoming partner compensates all those partners who sacrifice their profit shares in his or her favour. The amount new partner pays for their sacrfce is calle SSSR RRTERoReooRmamN (P FG >) O New Rios / Sacrfivivg Radio Fee Bharat and Bhushan are partners in a firm sharing profits and losses in the ratio of 5 : 3. They admit Bhagat for 1/5th share in profits. Calculate the new profit-sharing ratio of the partners when: “Bhagat gets his share equally from the old partners; 7 Bhagat gets his share from Bharat and Bhushan in the ratio of: 5) GAT Bhagat gets his share from Bharat alone; and Bhagat gets his share from Bharat 5/40 and from Bhushan 3/40. 5 x Brot SG) Grusan — By v Difference Between '1/4th «one-fourth (1/Ath) of share means that the partner has given 1/4th share © ‘example, Y's share of profits is 2/5 and he sacrifices 1/4th of his share in he sacrifices 2/20th (i.e, AIMMBG98) share and his new share of profit will be 6‘© One-tourtn (1/4th) of share means that the partner nas given 1/4th share ‘of his/ner'share”ot pron For example, Y's share of profits is 2/5 and he sacrifices 1/4th of his share in favour of new partner. It means, he sacrifices 2/20th ( share and his new share of prof will be 6/20 (ie, 2/5 ~ 2/20) ‘© One-fourth (1/4th) from share means that the partner has sacrificed 1/4th share out of his/her profit. For ‘example, Y's share of profit is 2/5 and he gives from his share 1/4th share in favour of new partner. It means, he sacrifices 1/4th share and his new share of profit will be 3/20 (i.e, 2/5 IA hii X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into the partnership, who gets 1/4th of his shar < and 3/16th share RGB Y. Calculate the new profit-sharing ratio and sacrificing ratio. =a Solution: Since Z gets 1/4th of his share from_X, it means he gets 3/4th (i.e, 1 — 1/4th) of Gon his share from Y. |r SUARATBRERBIORZ) = 3/16 (Roce Z's Profit Share = 3/16 = 4/3 Calculation of New Profit Share: Share acquired by Z from X = 1/4 x 1/4 = fH) from 5 SHB = (48 — 5)/80 -(43/80) /5 X’s New Profit Share = 3/ Y's New Profit Share = Z's Profit Share = 1/4 Thus, New Profit-sharing Ratio of X, Y and Z = 43/80 : 17/80 : 20/80 or{@G0008 Sacrificing Ratio of X and Y = 1/16 : 3/16 or 1:3. @ Coodwitl /PEG (214 Marks) WE 20 (When Premium for Goodwill is brought in Cash) A and B are partners in a firm sharing profits in the ratio of MMi On 1st April, 2022, their capitals were % 4,00,000 and % 2,00,000 respectively. On that date, they admitted C as a partner for 1/Sth share in profits. New profit-sharing ratio of A, B and C is to be SIN C brought in % 1,00,000 as his capital and % 21,000 as his share of premium for Goodwill. Pass Journal entries and show Capital Accounts of all the Partners, Solution: JOURNAL Date | Particulars i Be Le] pee | cee 2022 | i Mod. 1) Cashienk Nise 1,21,000 To Premium for Goodwill A/c 21,000 To C's Capital A/c 1,00,000 | (Amount brought in by Cas his capital and 1/Sth share of good) April 1 Premium for Goodwill Alc — 21,000 To AsCapital Ac \ as 7,000 To B'sCapital A/c Q 14000 (Premium for goodwill brought in by C transferred to |WGtration 21As Sacrifice = 4-2-2; gs sacrifice = 3-2=1, sacrificing Ratio = 2/7 : 1/7 or 23 Wenieae aria ") ved ultstfation 28 (Premium brought in Kind) X and Y are partners in a firm sharing profits in the ratio of On ist April, 2022 they admit Z as a partner for 3/13th share in the profits. New 1 Z contributed the following assets to his capital and his share for premium for good Stock % 80,000; Debtors % 1,20,000; Land 7 2,00,000; Plant and Machinery % 1,20,000. On the date of admission of Z, goodwill of the firm was valued at % 10,40,000. X and Y [NNN Vass necessary Journal entries in the books of the firm on Z’s admission Solution NAL Date Particulars Lp] o® 2022 q | April 1 Stock Ale r.| 180,000 Debtors A/c -Dr.} | 1,20,000 Land Ale Dr. | 2,00,000 Plant and Machinery ic ——————..p.] | 1,20,000 To Z'sCapital Ac [280,000 To Premium for Goodwill A/c (WN 1) 2400000 (sets contd Zens viisicn apie nds | [scale eodtil etn | Api. 1 Premium for Goodwill Ac Dr} | 240,000 © To X's Capital Ac R 240,000 14/15) - 2.24000 To Y's Capital Ac (%2,40,000 1/15) 16,000 (Goodwill premium transferred to the Capital Accounts of X and Y | on 2s admission in their sacrificing ratio) (WN 2) April 1 [5 Capital A/c Or | 224 Ys Capital A/c Dr. | 16) To Bank Alc | 2,40,000 Ns se Saamifiy Radio Tn tustration 31 (When New or Incom X and Y are partners sharing profits and losses in the ratio of Goodwill of the firm is valued at & 50,000, ZIBHRGSIOOMOEREBHAR of goodwill and % 200,000 as his capital through cheque £000 TAT © Yoo agterar partner for 1/5th share. Z gets his share from X and Y in the ratio of Pass the necessary Journal entries. PEG = 10,000 Solu on: JOURNAL Date | Particulars i [pece A Oe J od Raho Y's Capital Alc To Goodwill Ac (Existing goodwill writen off in the old ratio) 20000 2), Beiter TTT ne Er 200.000Existing goodwill written off in the old ratio) | ©, [exes To Zs Capital A/c To Premium for Goodwill A/c (% 50,000 x 1/5 x 60/100) ] 7 Arnount brought in by Z for his shar of good and capital Pal (FF | eenimtor end ne (50,000 1/5) ~€ 6000) a To xsCaptal Nc (10.000%2/5) —— |) Te CHIEN. donoiehaes aunty Rad (Meese (Share of Z in goodwill credited to X and ¥ in their sacrificing ratio) 6000 Note: Z brings only & 6,000 as goodwill out of his total share of & 10,000 (ie, 1/Sth of % 50,000), So, deficiency of £4,000 (i, ® 10,000 - & 6,000) will be met out of his Current Account ® tion 34 (Hidden Goodwill). Hemant and Nishant were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were % 1,60,000 and % 1,00,000 respectively. They admitted Somesh on Ist April, 2013 as a new pa er for in the future profits. Somesh brought Calculate the value_of goodwi OF The fry and record necessary Journal(entries for the above transactions on Somesh’s admission. (Ar 2014) Solution: @ z Based on Somesh’s share, the[Total Capital]of the New Firm 6,00,000 z TERI Capital of Hemant ———— _ 1.000 Capital of Somesh ——————> 120000 Gs0,000) Value of Goodwill of the firm 0 2,20,000 Thus, Somesh’s share of Goodwill = % 2,20,000 « 1/5 = % 44,000. C Ca ) JOURNAL Date Particulars up] Oe] Ge) 2013 Aptil__1 | Bank A/c Dr. 120,000 = | To Someshis Capital Aic 120,000 {Amount brought in by Somesh as his capital) | Te ema cptl al a To Nshun’scaptalne —b Sacwfng oko {ir eae 17600 (Share of Somesh in goodwill credited to Hemant and Nishant in Ee their sacrificing ratio, ie, 3: 2) | April 1 Revaduaton de C= FRCD LOCRLED IFR(-D [and and Buildingcr Note: ted of a® Adjustment itl © * Ahustration 58 (CHpials{Of OM IPARESAMISFEA 07 the Basis of Capital of the Incoming Partner). X and Y are partners in a firm sharing pus in thefffo of 3: 2. The remaining capitals of X and Y after adjustments eat and 60,000)respectively. They admit Z as a partner on his contribution of §§85)000)as capital for [ijBtlijshare of profits to be acquired equally from both X and Y. The Capital Accounts of the old partners are to be adjusted on the basis of the proportion of Z’s Capital to his share in the business. Calculate the amount offactual cash ko be paid off or brought in by the old partners for the purpose. Solution: x y aerate reer 3/5 2s (b) Profit Share transferred to Z 110 110 (0 New Profit Share (a - b) 5/10 3no (d) New Profit-sharing Ratio of XY and Z= 5/10: 3/10: 1/5 = 5 (ii) Calculation of Total Capital of the Reconstituted Firm: © [oateapitar the frm = Capital ofthe new partner x Reciprocal of share of prof ofthe new partner 35,000 x 5/1 = ¥ 175,000 ee (iii) Calculation of New Capitals of All Parhners s New Cop S00 HART SESE) mt om ©3500, (iv) Calculation of Cash to be Brought in/(Paid off) by Old Partners: x®@ y@) 0) New Capt osm gaa (b) Exi Capitals 80,000 60,000 (©) Cash to be Brought in/(Paid off) (a - b) é i ae Sat les Te * Gsh ae 64 Old Partners) on the Basis of the Capitals of the X and Y are in partn®xghip sharing profits and losses in the ratio of 3 : 2. The capitals of X and Y after adjustment Ye % 80,000 and % 60,000 respectively. They admit Z as a third to acquire a 1/Sth share of total capital of the new firm equally from both the partners X and Y. Calculate capital to be brought in by Z. Also, calculate new profit-sharing ratio of the partners in the new firm, partner who is to contribute Solution: esis oll profit 1, 25 hare = 75; RSH Tana - 1. Calculation of Z's Capital on the Basis of X’s Capital and Y's Capital: Step 1. Adjusted combined capital of X and Y = % 80,000 + © 60,000 Step 2. Calculation of Total Capital of the Reconstituted Firm: Total capitals % 1,40,000 « 5/4 ©7500. ® aprocal of combined new share of X and YPermian REET {on ROR REVALUATION ACCOUNT