Notes And Questions NCERT Class 12 Accountancy Chapter 3 Reconstitution of a Partnership Firm – Admission of a Partner

Please refer to Reconstitution of a Partnership Firm – Admission of a Partner Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Accountancy Reconstitution of a Partnership Firm – Admission of a Partner Notes and Questions

ADMISSION OF A NEW PARTNER

Why a new partner is admitted?
A new partner may be admitted when the firm needs
a. Additional Capital
b. Managerial Help
c. Both

How can a new partner be admitted?
Unless it is otherwise provided in the partnership deed a new part-ner can be admitted only when the existing partners unanimously agree for it.
Two main Rights acquired by a newly admitted partner
1. Right to share the assets of the partnership firm.
2. Right to share the profits of the partnership firm and Right to participate in the business activity

What does a new partner bring to acquire the rights?
To acquire share in the assets and profits of the firm, the partner brings
1. An agreed amount of Capital either in Cash or kind and / or some technical skill
2. Additional amount known as premium of Goodwill

Why is new partner required to bring premium?
This is due to compensate the existing partners for loss of their Share in the Super Profits of the firm. When a person pays for Goodwill, he pays for sacrifice of the profits by old partners.

New profit sharing ratio and sacrificing Ratio
The ratio in which all partners, including new partner will share future profits losses of the firm is known as new profit sharing ra-tio. Sacrificing ratio is the ratio in which old or existing partners forego their share of profit in favour of the new partner.

New Profit Sharing Ratio and Sacrificing Ratio

When share of new partner is given but sacrifice made by old partners is not given
(i) Deduct the new partner’s share from 1
(ii) Divide the remaining share among old partner in old profit shar-ing ratio.
Sacrificing Ratio is same as that of Old Profit Sharing Ratio.

When share of new partner is given and new share of old partner is given
(i) Deduct the new partners’ share from 1
Divide the remaining share among old partner in new profit sharing ratio.
Sacrificing share = Old share – New share

When new partner acquires his share from old partners’ equally or in particular ratio.
(i) Deduct the sacrifice made in favour of new partner from the old share of old partners.
(ii) Share surrendered by old partners is added to calculate new partner share

When existing part-ner retains his origi-nal share on admis-sion of a partner
(i) Deduct the new partners’ share and share of existing partner (who retains his old share) from 1
(ii) Divide the remaining share among old partner in profit sharing ratio.

When Goodwill is Paid Privately
No Entry

When capital and goodwill is brought in cash or cheque by new partner and re-tained in the firm
Cash / Bank A/c Dr.
To new partner’ capital A/c
To premium for goodwill A/c
(Being capital and premium for goodwill brought in)
Premium for Goodwill A/c Dr.
To Sacrificing Partners’ Capital/ Current A/cs
(Being premium for goodwill is distributed among sacrificing partners’ in sacrificing ratio)
Current A/c in case of Fixed capitals

When capital and goodwill is brought in cash or cheque by new partner
Cash/Bank A/c Dr.
To New partners’ Capital A/c
To premium for Goodwill A/c
(Being capital and premium for goodwill brought in)

Partner and With- drawn by sacrificing partners
Premium for Goodwill A/c Dr.
To sacrificing Partners Capital /Current A/cs
(Being premium for goodwill is distributed among sacrificing partners’ in sacrificing ratio)
Sacrificing Partners’ Capital / *Current A/Cs Dr.
To Cash / Bank A/c
(Being withdrawal of premium by the partners)
*Current A/C in case of Fixed capitals

When Goodwill is Brought in Kind
Asset A/c Dr
To New Partners’ Capital A/c
To Premium for Goodwill A/c
To Liabilities A/c
(Being asset contributed as capital and premium for goodwill)
Premium for Goodwill A/c Dr.
To sacrificing Partners’ Capital / Cur rent A/c
(Being premium for goodwill is distributed among sacrificing partners’ in sacrific-ing ratio)
Current A/c in case of Fixed capitals

When Goodwill is not Brought in Full or Part by the New Partner (In case Goodwill is not Raised)
Cash / Bank A/c Dr.
To new Partners’ Capital A/c
To Premium for Goodwill A/c (with share of goodwill brought in)
(Being capital and premium for good- will brought in)
Premium for Goodwill A/c (with paid share of goodwill) Dr.
Incoming partners’ Current A/c (with unpaid share of goodwill) Dr.
To sacrificing partners’ Capital / Current A/cs
(Being premium for goodwill is distributed among sacrificing partners in sacri-ficing ratio)
Sacrificing partners current A/c in case of Fixed capital

When Goodwill is Raised and Writ-ten Off (In case Goodwill is Brought in Part By the New Partner
Cash / Bank A/c
To New Partners’ Capital A/c
To Premium for Goodwill A/c
(Being capitals premium for goodwill brought in)

When Existing Goodwill is writ-ten off
Old Partner’s Capital / *Current A/c Dr
To Goodwill A/c
(Being goodwill written off among old partner’s in old ratio)
*Current A/c in case of Fixed capitals

Treatment of Reserves,Accumulated Profits and Losses
Accumulated profits include credit balance of P and L A/c, General Reserves, Reserve Fund, Workmen Compensation Reserves, Investment Fluctuation Reserve etc.
(A) When question is silent of when accumulated profits of losses are to be distributed or when accumulated profits or losses are not to be shown in new balance sheet
Contingency Reserve A/c Dr.
Reserve A/c Dr.
P and L A/c (Cr. Balance) Dr.
Workmen Compensation Reserve A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To Old Partners’ Capital / Current A/cs
(Being reserves and accumulated profits transferred to old partners in old ratio)

Accumulated Losses include debit balance of P and L A/c, Deferred Revenue Expenditure i.e., Advertisement Suspense A/c.
Old Partners’ Capital / Current A/Cs Dr.
To P and L A/c (Dr. balance)
To Deferred Revenue Expenditure A/c
(Being accumulated losses transferred to old partners in old ratio) Current A/c in case of Fixed capitals.

Treatment of Reserves, Accumulated Profits and Losses
Accumulated profits include credit balance of P and L A/c, General Reserves, Reserve Fund, Workmen Compensation Reserves, Invest-ment Fluctuation Reserve etc.

(A) When question is silent of when accumulated profits of losses are to be distributed or when accumulated profits or losses are not to be shown in new balance sheet
Contingency Reserve A/c Dr.
Reserve A/c Dr.
P&L A/c(Cr. Balance) Dr.
Workmen Compensation Reserve A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To Old Partners’ Capital / Current A/cs
(Being reserves and accumulated profits transferred to old partners in old ratio)

Accumulated Losses include debit balance of P and L A/c, De-ferred Revenue Expenditure i.e., Advertisement Suspense A/c.
Old Partners’ Capital / Current A/Cs   Dr.
To P and L A/c                                  (Dr. balance)

Treatment of Workmen Compensation Reserve

Case 1.
When there is no Claim
Workmen Compensation Reserve A/c Dr.
To Old Partners’ Capital / Current A/cs

Case 2.
WCC= WCR (equal)
Workmen Compensation Reserve A/c Dr
To Provision for Workmen Compensation Claim A/c

Case 3.
WCC < WCR (less)
Workmen Compensation Reserve A/c Dr.
To Provision for Workmen Compensation Claim A/c
To Old Partners’ Capital / Current A/cs

Case 4.
WCC > WCR (more)
Workmen Compensation Reserve A/ c Dr.
Revaluation A/c Dr
To Provision for Workmen Compensation Claim A/c
To Old Partners’ Capital / Current A/cs
To Revaluation A/c

Revaluation of Assets and Reassessment of Liabilities
It is a nominal account and prepared to revalue assets and reassess liabilities.
(A) When Revised Values of Assets and Liabilities are to be Recorded Revalua-tion A/c is prepared and Profit/Loss of revaluation is distributed among old partners’ in old ratio

ADJUSTMENT OF CAPITAL
Adjustment of Old Partners’ Capital on the basis of new Partners’ Capital
Step 1. Calculate total Capital of the firm on the basis of New Partners’ Capital:
Total Capital of the firm=𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐨𝐟 𝐭𝐡𝐞 𝐍𝐞𝐰 𝐏𝐚𝐫𝐭𝐧𝐞𝐫 𝐒𝐡𝐚𝐫𝐞 𝐨𝐟 𝐩𝐫𝐨𝐟𝐢𝐭 𝐨𝐟 𝐍𝐞𝐰 𝐏𝐚𝐫𝐭𝐧𝐞𝐫
Step 2. Determine New Capital of each Partner by dividing the Total Capital in new profit sharing ratio.
Step 3. Ascertain Present Capital of the Old Partners’ after all adjustments
Step 4. Find Surplus / Deficit—
Surplus = Present Capital > New Capital
Deficit = Present Capital < New Capital
Step 5. In case of Surplus (Present Capital > New Capital)
Concerned partners’ Capital A/c Dr.
To Bank / Cash A/c
To Concerned Partners’ Current A/c
In case of Deficit (Present Capital < New Capital)
Bank / Cash A/c Dr.
Concerned Partners’ Current A/c Dr.
To Concerned Partners’ Capital A/c

(ii) Adjustment of New Partners’ Capital on the basis of Old Partners’ Capital

Step 1. Determine Total Adjusted Capital of the Old Partners’ after all adjustments

Step 2. Calculate Total Capital of the new firm on the basis of Old Partner’s after all adjustment:

Total Capital of the new firm =Total Adjusted Capital  of Old Partner’s / Total share of Old Partner’s

Step 3. Determine Capital of New Partner by multiplying the total capital by Share of New Partner.

Multiple Choice Questions/Objective type Questions:

Question. Which of the following is not the reconstitution of partnership?
a) Admission of a partner
b) Dissolution of Partnership
c) Change in Profit Sharing Ratio
d) Retirement of a partner

Question. On the admission of a new partner:
a) Old partnership is dissolved
b) Both old partnership and firm are dissolved
c) Old firm is dissolved
d) None of the above

Question. Sacrificing ratio is used to distribute ——————— in case of admission of a partner.
a) Goodwill
b) Revaluation Profit or Loss
c) Profit and Loss Account (Credit Balance)
d) Both b and c

Question. A and B are partners sharing profit and losses in ratio of 5:3. C is admitted for 1/4th share. On the date of reconstitution, the debtors stood at Rs 40,000, bill receivable stood at Rs. 10,000 and the provision for doubtful debts appeared at Rs. 4000. A bill receivable, of Rs 10,000 which was discounted from the bank, earlier has been reported to be dishonored. The firm has sold, the debtor so arising to a debt collection agency at a loss of 40%. If bad debts now have arisen for Rs 6,000 and firm decides to maintain provisions at same rate as before then amount of Provision to be debited to Revaluation Account would be:
a) Rs 4,400
b) Rs 4,000
c) Rs 3,400
d) None of the above

Question. Heena and Sudha share Profit & Loss equally. Their capitals were Rs.1,20,000 and Rs. 80,000 respec-tively. There was also a balance of Rs. 60,000 in General reserve and revaluation gain amounted to Rs. 15,000. They admit friend Teena with 1/5 share. Teena brings Rs.90,000 as capital. Calculate the amount of goodwill of the firm.
a) Rs.85,000
b) Rs.1,00,000
c) Rs.20,000
d) None of the above

Question. Which of the following is not true with respect to Admission of a partner?
a) A new partner can be admitted if it is agreed in the partnership deed.
b) If all the partners agree, a new partner can be admitted.
c) A new partner has to bring relatively higher capital as compared to the existing partners
d) A new partner gets right in the assets of the firm

Question. As per ———– , only purchased goodwill can be shown in the Balance Sheet.
a) AS 37
b) AS 26
c) Section 37
d) AS 37

Question. A, and B are partners sharing profits in the ratio of 2:3. Their balance sheet shows machinery at ₹ 2,00,000; stock ₹ 80,000, and debtors at ₹ 1,60,000. C is admitted and the new profit sharing ratio is 6:9:5. Machinery is revalued at ₹ 1,40,000 and a provision is made for doubtful debts @5%. A’s share in loss on revaluation amount to ₹ 20,000. Revalued value of stock will be:
a) ₹62,000
b) ₹1,00,000
c) ₹60,000
d) ₹98,000

Question. At the time of admission of a partner, Employees Provident Fund is:
a) Distributed to partners in the old profit sharing ratio
b) Distributed to partners in the new profit sharing ratio
c) Adjusted through gaining ratio
d) None of the above

Question. If at the time of admission if there is some unrecorded liability, it will be to –Account.
a) Debited, Revaluation
b) Credited, Revaluation
c) Debited, Goodwill
d) Credited, Partners’ Capital

Question. At the time of admission of a new partner, the balance of Workmen Compensation Reserve will be transferred to:
a) Old partners in the old profit sharing ratio
b) Sacrificing partners in the sacrificing ratio
c) Revaluation Account
d) All partners in the new profit sharing ratio

Question. The firm of P, Q and R with profit sharing ratio of 6:3:1, had the balance in General Reserve Account amounting Rs. 1,80,000. S joined as a new partner and the new profit sharing ratio was decided to be 3:3:3:1. Partners decide to keep the General Reserve unchanged in the books of accounts. The effect will be:
a) P will be credited by Rs. 54,000
b) P will be debited by Rs. 54,000
c) P will be credited by Rs. 36.000
d) P will be credited by Rs. 36,000

Question. Which statement is true with respect to AS-26?
a) Purchased goodwill can be shown in the Balance Sheet
b) Revalued goodwill can be shown in the Balance Sheet
c) Both purchased goodwill and revalued can be shown in the Balance Sheet
d) None of the above

Question. Premium brought by newly admitted partner should be:
a) Credited to sacrificing partners
b) Credited to all partners in the new profit sharing ratio
c) Credited to old partners in the old profit sharing ratio
d) Credited to only gaining partners

Question. Sacrificing ratio is calculated because:
a) Profit shown by Revaluation Account can be credited to sacrificing partners
b) Goodwill brought in by the incoming partner can be credited to the new partner
c) Goodwill brought in by the incoming partner can be credited to the sacrificing partners
d) Both a and c

SHORT ANSWER TYPE-QUESTIONS

Question. Himanshu and Naman share profits & losses equally. Their capitals were Rs.1,20,000 and Rs. 80,000 respectively. There was also a balance of Rs. 60,000 in General reserve and revaluation gain amounted to Rs. 15,000. They admit friend Ashish with 1/5 share. Ashish brings Rs.90,000 as capital. Calculate the amount of goodwill of the firm.
Answer.Rs. 85,000

Question. Yash and Manan are partners sharing profits in the ratio of2:1. They admit Kushagra into partnership for 25% share of profit. Kushagra acquired the share from old partners in the ratio of 3:2. Calculate the new profit sharing ratio.
Answer.31:14:15

Question. On what occasions does the need for valuation of goodwill arise?
Answer.Need of valuation of goodwill arises on the following occasions:-
(i) Change in profit sharing ratio of existing partners.
(ii) Admission of a partner.
(iii) Retirement of a partner.
(iv) Death of a partner.

Question. Why is it necessary to revalue assets and reassess liabilities at the time of admission of new partner?
Answer.It is necessary to revalue assets and reassess liabilities at the time of admission of new partners as if assets and liabilities are overstated or understated in the books then its benefits or loss should not affect the near partner.

Question. The capital of a firm of Arpit and Prajwal is Rs. 10,00,000. The market rate of return is 15% and the goodwill of the firm has been valued Rs. 1,80,000 at two years purchase of super profits. Find the average profits of the firm.
Answer.(i) Super profit = Value of goodwill /Number of years purchase
= 180000/2
= 90000
(ii) Normal Profit = Capital employed X Normal rate of return /100
= 1000000 X 15/ 100
= 150000
(iii) Average Profit = Normal Profit + Super profit
= 150000 + 90000
= 240000

Question. A and B were partners sharing profits in the ratio of 3:2. A surrenders 1/6th of his share and B surren-ders 1/4th of his share in favour of C, a new partner. What is the new ratio and the sacrificing ratio.
Answer.
Old ratio = A: B = 3:2
A surrender = 3/5 X 1/6 = 3/30 =1/10
B surrender = 2/5 X 1/4 = 1/10
A’s new share = 3/5 – 1/10 = 5/10
B’s new share = 2/5 – 1/10 = 3/10
C’s new share = 1/10 +1/10 = 2/10
New ratio = 5/10, 3/10, 2/10 OR 5:3:2
Sacrificing Ration = Old ratio – New ratio
A = 3/5 – 5/10 = 1/10
B = 2/5 – 3/10 = 1/10
Sacrificing ratio = 1:1

Question. Aarti and Bharti are partners sharing profits in the ratio of 5:3. They admit Shital for 1/4th share and agree to share between them in the ratio of 2:1 in future. Calculate new and sacrificing ratio.
Answer.Old ratio = 5:3
Shital = 1/4th Share
Let the profit be Rs. 1
Remaining profit = 1-1/4 =3/4
Arti : Babita = 2:1
Arti’s share = 3/4 X 2/3 = 1/2
Babita’s Share = 3/4 X 1/3 = 1/4
New Ratio = 1/2, 1/4, 1/4 Or 2:1:1
Sacrificing ratio = Old ratio – New ratio
Arti’s sacrifies = 5/8 – 2/4 = 1/8
Babita’s Sacrifies = 3/8 – 1/4 = 1/8
Sacrificing Ratio = 1:1

Question. X and Y are partners sharing profits in the ratio of 5:4. They admit Z in the firm for 1/3rd profit, which he takes 2/9th from X and 1/9th from Y and brings Rs. 1500 as premium. Pass the necessary Journal entries on Z’s admission.
Answer.Cash A/C Dr. 1500
To premium A/C 1500
(cash brought in by Z for his share of goodwill)
Premium A/C Dr. 1500
To X’s capital A/C 1000
To Y’s Capital A/C 500
(Goodwill distributed among sacrificing partners in the ratio of 2:1.)

Question. A and B are partners sharing profits equally. They admit C into partnership, C paying only Rs. 1000 for premium out of his share of premium of Rs. 1800 for 1/4th share of profit. Goodwill account appears in the books at Rs. 6000. All the partners have decided that goodwill should not appear in the new firms books.
Answer.

Question. X, Y and Z are sharing profits and losses in the ratio of 5:3:2. They decide to share future profits and losses in the ratio of 2:3:5 with effect from 1st April, 2002. They also decide to record the effect of the reserves without affecting their book figures, by passing a single adjusting entry.
                                                               Book Figure
General Reserve                                   Rs. 40,000
Profit and loss A/C (Cr)                       Rs. 10,000
Advertisement Suspense A/C (Dr)      Rs. 20,000
Pass the necessary single adjusting entry.
Answer.

LONG ANSWER TYPE QUESTIONS

Question. Rajat and Ravi are partners in a firm sharing profits and losses in the ratio of 7:3. Their bal-ance sheet as on 31st March, 2017 is as follows:

On 1st April 2017, they admit Rohan on the following terms: Goodwill is valued at Rs.40,000 and Rohan is to bring in the necessary amount in cash as premium for goodwill and Rs.60,000 as capital for 1/4th share in profits. Stock is to reduced by 40% and furniture is to reduced to 40%.Capitals of the partners shall be proportionate to their profit sharing ratio taking Rohan’s Capital as base. Ad-justments of capitals to be made by cash. You are required to prepare revaluation account and part-ner’s capital accounts.
Answer.

Question. A and B were partners in a Firm sharing profits in the ratio 3:2. They admitted C as a new partner for 1/6th share in the profits. C was to brings Rs.40000 as his capital and the Capitals of A and B were to be adjusted on the basis of C’s Capital having regard to profit sharing ratio. The balance sheet of A and B as on 31.3.2006 was as follows:

The other terms of agreement on C’s admission were as follows:
1. C will bring Rs.12000 as his share of Goodwill.
2. Building will be valued at Rs.185000 and Machinery at Rs.40000
3. A provision of 6% will be credited on Debtors for Bad Debts.
4. Capital Accounts of A and B will be adjusted by opening current accounts
Prepare Revaluation Account, Partner’s Capital Account and the Balance Sheet of A, B, and C.
Answer.Revaluation loss to A—Rs.11424
to B—Rs.7616
Capital A/cs A —Rs.120000
B—-Rs.80000
C—–Rs.40000 Balance sheet total —Rs.342960

Question. Sun & Moon are partners in a firm sharing profits in the ratio of 2:1. Star is admitted into the firm with 1/4th share in profit. He will bring in Rs 1,20,000 as capital and capitals of Sun & Moon are to be adjusted in the profit sharing ratio. Their balance sheet as on 31st March 2009 was as follows

Other terms of agreement are as under
i) Star will bring in Rs 48,000 as his share of goodwill
ii) Building was valued at Rs 1,80,000 & Machinery at Rs 92,000
iii) A provision for bad debts is to be created at 6% on debtors
iv) The capital accounts of sun & Moon are to be adjusted by opening current accounts
Prepare revaluation account, capital account & balance sheet of the new firm.
Answer.

Question. Badal and Bijli were partners in a firm sharing profits in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2019 was as follows :
Balance Sheet of Badal and Bijli as at 31st March, 2019

Raina was admitted on the above date as a new partner for 1/6TH share in the profits of the firm. The terms of agreement were as follows :
(i) Raina will bring Rs. 40,000 as her capital and capitals of Badal and Bijli will be adjusted on the basis of Raina’s capital by opening current ac-counts.
(ii) Raina will bring her share of goodwill premium for Rs.12,000 in cash.
(iii) The building was overvalued by Rs. 15,000 and stock by Rs. 3,000.
(iv) A provision of 10% was to be created on debtors for bad debts.
Prepare the Revaluation Account and Current and Capital Accounts of Badal, Bijli and Raina.
Answer.

Question. Sanjana and Alok were partners in a firm sharing profits and losses in the ratio 3 : 2. On 31st March, 2018 their Balance Sheet was as follows :

On 1st April, 2018, they admitted Nidhi as a new partner for 1/4th share in the profits on the following terms :
(a) Goodwill of the firm was valued at ` 4,00,000 and Nidhi brought the necessary amount in cash for her share of goodwill premium, half of which was withdrawn by the old partners.
(b) Stock was to be increased by 20% and furniture was to be reduced to 90%.
(c) Investments were to be valued at ` 3,00,000. Alok took over investments at this value.
(d) Nidhi brought ` 3,00,000 as her capital and the capitals of Sanjana and Alok were adjusted in the new profit sharing ratio.
Prepare Revaluation Account, Partners Capital Accounts and the Balance Sheet of the re-constituted firm on Nidhi’s admission.
Answer.Revaluation profit- Sanjana:24000 Alok:16000;Capital Balances -Sanjana:540000, Alok:360000,Nidhi:300000; Balance sheet Total-12,60,000
Sanjana will take Rs.50000 and Alok will bring Rs.200000

Question.Q31. C and D are partners in a firm sharing profits in the ratio of 4 : 1. On 31.3.2016, their Balance Sheet was as follows :

On the above date, E was admitted for 1/4th share in the profits on the following terms :
E will bring Rs. 1,00,000 as his capital and Rs. 20,000 for his share of goodwill premium, half of which will be withdrawn by C and D.
(i) Debtors Rs. 2,000 will be written off as bad debts and a provision of 4% will be created on debtors for bad and doubtful debts.
(ii) Stock will be reduced by Rs. 2,000, furniture will be depreciated by Rs. 4,000 and 10% depreciation will be charged on plant and machinery.
(iii) Investments of Rs. 7,000 not shown in the Balance Sheet will be taken into account.
(iv) There was an outstanding repairs bill of Rs. 2,300 which will be recorded in the books.
Pass necessary journal entries for the above transactions in the books of the firm on E’s admission.
Answer.

Question. Om, Ram and Shanti were partners in a firm sharing profits in the ratio of
3 : 2 : 1. On 1st April, 2014 their Balance Sheet was as follows :

On the above date Hanuman was admitted on the following terms :
(i) He will bring Rs. 1,00,000 for his capital and will get 1/10th share in the profits.
(ii) He will bring necessary cash for his share of goodwill premium. The goodwill of the firm was valued at Rs. 3,00,000.
(iii) A liability of Rs. 18,000 will be created against bills receivables discounted.
(iv) The value of stock and furniture will be reduced by 20%.
(v) The value of land and building will be increased by 10%.
(vi) Capital accounts of the partners will be adjusted on the basis of Hanuman’s capital in their profitsharing ratio by opening current accounts.
Prepare Revaluation Account and Partners’ Capital Accounts.
Answer.