Solution-Class-12-Commerce-Book Keeping and Accountancy-Chapter-3-Reconstitution of Partnership (Admission of Partner)-Maharashtra Board

(a) 12:8:5

(c) Deficit Capital

(a) Revaluation Account

(b) Cash / Bank

(b) Capital

Super Profit Method

Revaluation A/c OR Profit and Loss Adjustment A/c

Goodwill

Old Ratio

Premium Method

Sacrifice Ratio

Normal Profit

Partner's Capital A/c OR Partner's Current A/c

Undistributed Profit OR Accumulated Profit

Sacrifice Ratio

Statement is : True

Reason: According to the partnership terms, a new partner is admitted to increase the capital base and can contribute their share of capital either in Cash or in the form of assets (kind).

Statement is : True

Reason: If a new partner pays their share of goodwill to old partners privately (outside the business), no entry is required to be passed in the books of the firm.

Statement is : False

Reason: At the time of admission, the Sacrifice Ratio is calculated because old partners give up a portion of their profit share for the new partner. Gain ratio is typically calculated during the retirement or death of a partner.

Statement is : False

Reason: Profit or loss on revaluation belongs to the period before the new partner was admitted. Therefore, it is transferred only to the old partners' Capital/Current accounts in their old profit-sharing ratio.

Statement is : True

Reason: Reconstitution involves a change in the form of partnership and the agreement, which leads to a change in the relationship between partners and their share of profits or losses.

Statement is : False

Reason: While a partner may bring goodwill in cash (Premium Method), there is also a Valuation Method where the new partner does not bring his share of goodwill in cash; instead, it is raised in the books of the firm.

Statement is : False

Reason: When goodwill is written off, the Goodwill Account is credited, and the Partners' Capital Accounts are debited.

Statement is : False

Reason: The correct formula for calculating the Sacrifice Ratio is Old Ratio minus New Ratio.

Statement is : True

Reason: One of the primary needs for admitting a new partner is to expand the capital base of the partnership firm.

Statement is : True

Reason: When old partners withdraw the goodwill brought in by a new partner, the entry is to debit the Old Partners' Capital Accounts and credit the Cash/Bank Account.

Odd One: Machinery

Reason: Machinery is an asset that appears on the assets side of the Balance Sheet, while General reserve, Creditors, and Capital are liabilities or capital items that appear on the liabilities side.

Odd One: RDD written off

Reason: RDD (Reserve for Doubtful Debts) being written off (when no longer required) represents a gain and is credited to the Revaluation Account. In contrast, a decrease in furniture, writing off patents (as useless), and an increase in bills payable are all losses that are debited to the Revaluation Account.

Odd One: Fluctuating capital method

Reason: Fluctuating capital method is a system for maintaining partners' capital accounts. The other three—Super profit method, Valuation method, and Average profit method—are all specifically related to the valuation or accounting treatment of goodwill.

Calculation of New Profit Sharing Ratio

• Partners: A and B share equally (1:1). So, A’s old share = 1/2 and B’s old share = 1/2.
• A’s Sacrifice: A surrenders 1/4^th of his share = 1/2 × 1/4 = 1/8.
• B’s Sacrifice: B surrenders 1/5^th of his share = 1/2 × 1/5 = 1/10.
• C’s Share: (A’s Sacrifice + B’s Sacrifice) = 1/8 + 1/10 = (5 + 4) / 40 = 9/40.
• A’s New Share: Old Share - Sacrifice = 1/2 - 1/8 = (4 - 1) / 8 = 3/8. To match denominator 40: 3/8 × 5/5 = 15/40.
• B’s New Share: Old Share - Sacrifice = 1/2 - 1/10 = (5 - 1) / 10 = 4/10. To match denominator 40: 4/10 × 4/4 = 16/40.
• New Profit Sharing Ratio: A: 15/40, B: 16/40, C: 9/40.

Answer: 15 : 16 : 9

Calculation of Sacrifice Ratio for Anika and Radhika

• Partners: Anika and Radhika (Ratio 5:1).
• New Partner: Sanika for 1/5th share.
• Rule: When the share of the new partner is given but the specific sacrifices made by old partners are not mentioned, the old partners are assumed to sacrifice in their old profit-sharing ratio.
• Sacrifice Ratio: The ratio in which old partners sacrifice their share is their old ratio.

Answer: 5 : 1

Calculation of Sacrifice Ratio for Pramod and Vinod

• Formula: Sacrifice Ratio = Old Ratio - New Ratio.
• Old Ratio (Pramod and Vinod): 3:2 (3/5 and 2/5).
• New Ratio (Pramod, Vinod, and Ramesh): 4:3:2 (4/9, 3/9, and 2/9).
• Pramod’s Sacrifice: 3/5 - 4/9 = (27 - 20) / 45 = 7/45.
• Vinod’s Sacrifice: 2/5 - 3/9 = (18 - 15) / 45 = 3/45.
• Sacrifice Ratio: 7/45 : 3/45.

Answer: 7 : 3

• It is a nominal account, also known as the Profit and Loss Adjustment Account, used to record the increase or decrease in the value of assets and liabilities at the time of a partner's admission.
• The resulting gain or loss is transferred to the old partners' Capital or Current accounts in their old profit-sharing ratio.

• Reconstitution refers to a change in the form of partnership and the agreement among partners.
• This leads to a change in the relationship between partners and a change in their respective shares of profits or losses.

A new partner is generally admitted to expand the capital base of the firm and to utilize the skills of that person to improve the overall performance of the business.

• The sacrifice ratio is the proportion in which old partners give up a part of their profit share to accommodate the new partner.
• It is calculated using the formula: Sacrifice Ratio = Old Ratio - New Ratio.

• Raising goodwill occurs under the Valuation Method when a new partner does not bring their share of goodwill in cash.
• The old partners value the firm's goodwill and record it in the books by debiting the Goodwill Account and crediting the Old Partners’ Capital Accounts in their old ratio.

• In this method, goodwill is based on super profit, which is the profit earned over and above the normal profit expected in the industry.
• It is calculated by multiplying the super profit (Average Profit - Normal Profit) by a certain number of years' purchase.

The sacrifice ratio is specifically used for the distribution of goodwill among old partners under the Premium Method, which is when the new partner brings their share of goodwill in cash.

Accumulated profits (such as General Reserve or Reserve Fund) belong to the old partners and are transferred to the credit side of the Old Partners’ Capital or Current accounts in their old profit-sharing ratio.

When a new partner does not bring goodwill in cash and it is raised in the books, the old partners’ capital accounts are credited in their Old Profit Sharing Ratio.

• An excess of debits over credits indicates a Loss on Revaluation.
• This occurs when the total decrease in asset values and increase in liabilities is greater than the total increase in asset values and decrease in liabilities.

[Average Profit] = \(\frac{Total\,profit}{No\,of\,years}\)

Normal Profit = [Capital employed] × \(\frac{NRR}{100}\)

Stock shown in Balance Sheet → Stock undervalued by 20% → Cost of Stock

   [₹ 1,60,000]                             [₹ 40,000]                          [₹ 2,00,000]