CHAPTER 5
PARTNERSHIP ACCOUNTS –IV
ONE WORD TO ONE SENTENCE QUESTIONS
Q.1. What is
the formula of sacrificing ratio?
Ans. The formula
for the sacrificing ratio is:
Sacrificing
Ratio = Old Ratio - New Ratio
The
sacrificing ratio represents the proportion by which the existing partners'
share in the future profits of the partnership decreases when there is a change
in the profit sharing ratio. It is calculated by subtracting the new profit
sharing ratio from the old profit sharing ratio. The sacrificing ratio
determines the extent of sacrifice made by the existing partners in favor of
the incoming or gaining partner(s).
Q.2. What is
the main condition for admission of partners under the partnership act?
Ans. The
main condition for the admission of partners under the Partnership Act is the
mutual agreement and consent of all existing partners. All existing partners
must agree to admit a new partner into the partnership. This consent is
typically documented through a partnership agreement or an amendment to the
existing partnership agreement. The admission of partners may also be subject
to additional conditions or requirements as specified in the partnership
agreement or relevant laws and regulations.
Q.3. Define new profit sharing ratio in case of
admission of a new partner?
Ans. The
new profit sharing ratio in the case of the admission of a new partner
represents the revised distribution of profits and losses among the partners
after the new partner joins the partnership. It determines the proportion in
which the new partner will share in the future profits and losses of the
partnership with the existing partners. The new profit sharing ratio is agreed
upon by all the partners and is documented in the partnership agreement or in a
separate agreement specifically addressing the terms of the new partner's
admission.
Q.4. Give any
one circumstances in which sacrificing ratio may be applied?
Ans. One
circumstance in which the sacrificing ratio may be applied is when there is a
change in the profit sharing ratio among the existing partners due to the
admission of a new partner. In this case, the sacrificing ratio determines the
extent to which the existing partners' share in the future profits is reduced
in favor of the new partner. The sacrificing ratio helps establish a fair
distribution of profits and reflects the adjustment made by the existing
partners to accommodate the new partner's inclusion in the partnership.
Q.5. In which
ratio, the premium brought in by the new partner as share of good will is
shared by old partners?
Ans. The
premium brought in by the new partner as their share of goodwill is typically
shared by the old partners in their old profit sharing ratio. The old profit
sharing ratio refers to the ratio in which the existing partners were sharing
profits and losses before the admission of the new partner. The premium paid by
the new partner is divided among the existing partners in proportion to their
existing profit sharing ratio, reflecting their entitlement to a portion of the
goodwill.
Q.6. State the
ratio in which old partners share all the accumulated profits, reserves and
losses?
Ans. The
accumulated profits, reserves, and losses of a partnership are typically shared
by the old partners in their old profit sharing ratio. The old profit sharing
ratio refers to the ratio in which the existing partners were sharing profits
and losses before any changes or reconstitution of the partnership. This ratio
determines the proportion in which the old partners divide the accumulated
profits, reserves, and losses among themselves.
Q.7. How would
you deal with good will when new partner brings his share of good will in cash?
Ans. When a new partner brings their share of goodwill in cash, it is
typically recorded in the books of the partnership as follows:
The new
partner's cash contribution representing their share of goodwill is debited to
the "Cash" or "Bank" account, increasing the partnership's
cash assets.
The new
partner's capital account is credited with the same amount, reflecting the
increase in their capital investment and ownership interest in the partnership.
The
existing partners' capital accounts remain unchanged, as they are not directly
affected by the cash contribution for goodwill
It is important
to note that the treatment of goodwill may vary depending on the partnership
agreement and accounting practices followed. Additionally, the allocation and
distribution of goodwill may involve further adjustments or calculations based
on the profit sharing ratio and specific arrangements made among the partners.
Consulting a professional accountant or referring to the partnership agreement
is recommended to ensure accurate accounting treatment of goodwill
contributions.
Q.8. At what
figures, assets and liabilities appear in the books of reconstituted firm in
case ‘’Revaluation Account’’ is prepared?
Ans. In the
books of a reconstituted firm when a "Revaluation Account" is
prepared, the assets and liabilities are adjusted to their fair or market values.
The revaluation account captures the changes in the values of assets and
liabilities due to the reconstitution. The adjusted figures of assets and
liabilities, reflecting their new values, are then incorporated into the
balance sheet of the reconstituted firm. This ensures that the balance sheet
reflects the updated financial position of the firm after the reconstitution.
Q.9. Give the
journal entry when new partner does not bring his share of good will in cash?
Ans. When a
new partner does not bring their share of goodwill in cash but instead, the
existing partners agree to adjust their capital accounts, the journal entry
would be as follows:
Increase the
Capital Account of the new partner:
Debit the
New Partner's Capital Account, increasing their capital share.
Adjust the
Capital Accounts of the existing partners:
Credit the
Capital Accounts of the existing partners in their old profit sharing ratio,
reducing their capital share.
Record the
amount of goodwill:
Debit or
credit the Goodwill Account to reflect the value of goodwill based on the
agreed-upon amount.
It's
important to note that the specific amounts and accounts used in the journal
entry may vary depending on the partnership agreement and the agreed-upon
valuation of goodwill. Consulting with a professional accountant is recommended
to ensure accurate recording of the transaction.
Q.10. Name the
ratio in which the old partners surrender their share of profit in favour of
the new partner?
Ans. The
ratio in which the old partners surrender their share of profit in favor of the
new partner is known as the sacrificing ratio. The sacrificing ratio determines
the extent to which the existing partners' share in the future profits of the
partnership decreases in order to accommodate the new partner. It reflects the
adjustment made by the existing partners to allocate a portion of their profits
to the new partner.
Q.11. AS per
accounting standard-26, What type of goodwill can recorded in the books of
accounts?
Ans. According
to Accounting Standard (AS) 26, only purchased goodwill can be recorded in the
books of accounts. Purchased goodwill refers to the excess amount paid for the
acquisition of a business over its net assets' fair value. It arises when one
business acquires another and pays a premium to gain advantages such as brand
value, customer base, or market presence. AS 26 prohibits the recognition of
self-generated or internally generated goodwill, as it cannot be reliably
measured or separately identified. Therefore, only purchased goodwill is
recognized and recorded in the books of accounts under AS 26.
Q.12. If at the
time of admission of a new partner, good will appears in the old balance
sheet,how it will be treated?
Ans. If
goodwill appears in the old balance sheet at the time of the admission of a new
partner, it is typically transferred to the existing partners' capital
accounts. The existing partners' capital accounts are adjusted to include their
share of the goodwill. The amount of goodwill is distributed among the existing
partners in their old profit sharing ratio, reflecting their entitlement to the
goodwill based on their existing ownership interests in the partnership. This
adjustment ensures that the goodwill is appropriately allocated among the
partners and reflected in their respective capital accounts.
Q.13. Can the
new partner be required to bring any amount by way of good will when good will
appears in the books at its proper value?
Ans. if
goodwill already appears in the books at its proper value, the new partner may
not be required to bring any additional amount by way of goodwill. The existing
goodwill value is already accounted for, and the new partner's admission is
based on the existing financial position of the partnership. In such a case,
the new partner would contribute capital according to the agreed-upon terms of
their admission, but no specific amount would be allocated towards goodwill as
it has already been recognized at its proper value in the books of the
partnership.
Q.14. Unless
given otherwise, What will be the ratio of sacrifice?
Ans. Unless
given otherwise, the ratio of sacrifice is generally assumed to be equal to the
sacrificing ratio. The sacrificing ratio represents the proportion by which the
existing partners' share in the future profits of the partnership decreases
when there is a change in the profit sharing ratio. In the absence of any
specific instructions or agreement, it is typically understood that the
sacrificing ratio and the ratio of sacrifice will be the same, implying an
equal sacrifice made by the existing partners in favor of the new partner or a
change in profit sharing arrangement.
Q.15. Why do
you determine new profit sharing ratio for old partners when a new partner is
admitted?
Ans. The
determination of a new profit sharing ratio for the old partners when a new
partner is admitted is necessary to reflect the changes in the partnership's
ownership and the distribution of profits and losses.
When a new
partner joins the partnership, their inclusion affects the existing partners'
entitlement to the profits. The old partners may need to adjust their profit
sharing ratio to accommodate the new partner's share. This adjustment ensures a
fair distribution of profits and aligns with the new partner's capital
contribution and expected contribution to the partnership's operations.
By
determining a new profit sharing ratio, the partnership acknowledges the
changes in ownership and responsibilities and establishes a revised framework
for sharing profits and losses among all partners, old and new.
Q.16. What is
sacrificing ratio?
Ans. The
sacrificing ratio is the ratio in which the existing partners in a partnership
agree to reduce their share of future profits to accommodate the admission of a
new partner or a change in the profit sharing arrangement. It determines the
extent to which the existing partners sacrifice or give up their share of
profits in favor of the new partner. The sacrificing ratio reflects the
adjustment made by the existing partners to allocate a portion of their profits
to the new partner and is based on mutual agreement and negotiations among the
partners involved.
VERY SHORT ANSWER TYPE QUESTIONS
Q.1. What do
you understand by admission of a partner?
Ans. The
admission of a partner refers to the process of including a new member into an
existing partnership. It occurs when a new individual or entity joins the
partnership, contributing capital, skills, or other resources to the business.
The admission of a partner changes the ownership structure and the rights and
responsibilities within the partnership. It typically involves negotiations,
adjustments in profit sharing ratios, and the potential revaluation of assets
and liabilities to reflect the new partner's inclusion. The admission of a
partner is governed by the partnership agreement and relevant legal and financial
considerations.
Q.2. What is
sacrificing ratio?
Ans. The
sacrificing ratio refers to the ratio in which existing partners in a
partnership agree to reduce their share of future profits in favor of a new
partner or to accommodate a change in profit sharing arrangements. It
determines the extent to which the existing partners sacrifice or give up their
share of profits to accommodate the new partner. The sacrificing ratio is
determined through mutual agreement and negotiation among the partners involved
and reflects the adjustments made to ensure a fair distribution of profits in
light of the changes in the partnership's composition.
Q.3. How
sacrificing ratio is calculated?
Ans. The
sacrificing ratio is calculated by comparing the existing profit sharing ratio
with the new profit sharing ratio after the admission of a new partner or a
change in profit sharing arrangement. The sacrificing ratio determines the
proportionate reduction in the existing partners' share of profits.
To calculate
the sacrificing ratio, follow these steps:
Determine
the existing profit sharing ratio among the partners before the change. This
ratio is typically based on their initial capital contributions or any previous
agreements.
Determine
the new profit sharing ratio that will be in effect after the admission of the
new partner or the change in profit sharing arrangement. This ratio is based on
factors such as the new partner's capital contribution, skills, or any revised
agreements.
Calculate
the difference between the existing profit sharing ratio and the new profit sharing
ratio for each partner.
Express the
difference as a ratio by simplifying the values, if necessary. This ratio represents
the sacrificing ratio.
For
example, if the existing profit sharing ratio is 3:2:1 and the new profit
sharing ratio after the change is 4:3:2, the sacrificing ratio would be 1:1:1.
This means that each existing partner sacrifices one unit of their share of
profits to accommodate the new partner or the revised profit sharing
arrangement.
Q.4. What
adjustments are required to be made at the time of admission of a new partner?
Ans. Several
adjustments are typically made at the time of admission of a new partner in a
partnership. These adjustments ensure that the partnership's accounts and
financial position accurately reflect the new partner's inclusion. The common
adjustments include:
Revaluation of assets and
liabilities: The assets and
liabilities of the partnership are revalued to their fair market values. Any
increase or decrease in the values is recorded in the books of accounts. The
revaluation helps adjust the partnership's capital and reserves based on the
new partner's capital contribution.
Calculation of goodwill: If the new partner brings in capital more or
less than their entitlement based on the partnership's net assets, goodwill is
calculated. Goodwill represents the value of the firm's reputation, customer
base, or other intangible assets. The calculation considers the new partner's
capital and the agreed valuation of the partnership.
Adjustment of accumulated profits and
losses: The accumulated profits and losses
are divided or allocated among the partners based on their profit sharing
ratios. Any undistributed profits or losses are adjusted to reflect the new
partner's inclusion.
Capital adjustment: The capital accounts of the existing partners
are adjusted to account for the new partner's capital contribution and any
changes in their respective profit sharing ratios. This ensures that the
capital balances reflect the revised ownership interests and profit sharing
arrangements.
These
adjustments help establish a new financial structure that incorporates the new
partner and ensures that the partnership's accounts accurately represent the
changes in ownership and profit sharing.
Q.5. A and B
are partner. C is admitted for ¼ share. What is the ratio in which A and b
will?
Ans. If A
and B are partners, and C is admitted for a 1/4 share, the new profit sharing
ratio among A and B needs to be determined.
Since C is
admitted for a 1/4 share, A and B will share the remaining 3/4 (1 - 1/4) among
themselves. To find the ratio, the fraction is divided equally between A and B.
So, the
ratio in which A and B will share the profits would be 3/8 for A and 3/8 for B.
Q.6. Give two
circumstances in which sacrificing ratio may be applied?
Ans. The sacrificing ratio may be applied in the following two circumstances:
Admission of a new partner: When a new partner is admitted to an existing
partnership, the existing partners may agree to sacrifice a portion of their
share in the profits to accommodate the new partner. The sacrificing ratio determines
the extent of the sacrifice made by the existing partners.
Change in profit sharing ratio: If there is a change in the profit sharing
ratio among the existing partners, they may agree to sacrifice a portion of
their individual shares to adjust the distribution of profits. The sacrificing
ratio helps determine the proportionate reduction in the existing partners'
shares to align with the new profit sharing arrangement.
Q.7. Define new
profit sharing ratio?
Ans. The
new profit sharing ratio refers to the revised distribution of profits among
the partners in a partnership after a change or reconstitution of the
partnership. It specifies the proportion in which the partners will share the
profits generated by the partnership's activities.
The new profit
sharing ratio is determined based on various factors such as the capital
contributions, efforts, skills, experience, and responsibilities of each
partner. It reflects the agreed-upon arrangement among the partners regarding
the distribution of profits and aligns with the changes in the partnership
structure.
The new
profit sharing ratio is typically expressed as a fraction or ratio, indicating
the share of profits allocated to each partner. It ensures fairness and equity
in the distribution of profits according to the contributions and terms agreed
upon by the partners.
Q.8. What is
revaluation account?
Ans. Revaluation
account is a nominal account created in the books of a partnership during a
revaluation process. It is used to record the adjustments made to the values of
assets, liabilities, and capital accounts when there is a change in the
partnership's profit sharing ratio or admission/retirement of a partner.
The purpose
of the revaluation account is to reflect the updated values of assets and liabilities
based on their fair market values. The revaluation process involves assessing
the assets and liabilities and adjusting their values to reflect their current
worth. Any increase or decrease in the values is recorded in the revaluation
account.
The revaluation
account helps in maintaining the accuracy of the partnership's financial
statements and ensures that the partnership's capital accounts and profit
sharing ratios are adjusted accordingly. It also provides transparency
regarding the changes in asset and liability values and their impact on the
partners' capital interests.
At the end
of the revaluation process, the balance in the revaluation account is either
transferred to the partners' capital accounts or distributed among them
according to the agreed terms or profit sharing ratios.
Q.9. What
entries are recorded in the firm’ s books when the amount of good will is
brought in cash?
Ans. When
the amount of goodwill is brought in cash by a partner, the following entries
are recorded in the firm's books:
Cash Account (Debit): The cash brought in by the partner as their
share of goodwill is debited to the Cash account, increasing the cash balance.
Goodwill Account (Credit): The Goodwill account is credited with the
amount of cash brought in as goodwill by the partner. This records the increase
in the value of goodwill in the partnership.
The entry would look like this:
Cash
Account Dr
To Goodwill
Account
It's
important to note that the specific accounts used may vary depending on the
partnership's accounting practices and chart of accounts. Additionally, other
entries related to the partner's capital account, profit sharing ratios, and
any necessary adjustments may also be recorded to reflect the new partner's
inclusion and the impact on the firm's financial position.
Q.12. State any
two reasons for the preparation of ‘’Revaluation Account’’ on the admission
partner?
Ans. The preparation of a Revaluation Account on the admission of a partner
serves two main purposes:
Adjustment of asset and liability
values: The Revaluation Account helps in
adjusting the values of assets and liabilities to their current fair market
values. When a new partner is admitted, it is necessary to revalue the
partnership's assets and liabilities to reflect their true worth. This ensures
that the new partner enters the partnership with accurate capital contributions
and that the partnership's financial statements present a more realistic
picture of the partnership's financial position.
Determination of the new partner's
capital: The Revaluation Account assists in
determining the new partner's capital in the partnership. By revaluing the
assets and liabilities, any increase or decrease in their values is recorded in
the Revaluation Account. The resulting balance in the Revaluation Account is
then transferred to the new partner's capital account, reflecting their share
of the partnership's assets or liabilities. This helps establish the new
partner's capital stake in the partnership and facilitates the equitable distribution
of profits and losses.
Overall,
the preparation of a Revaluation Account on the admission of a partner ensures
the accuracy of the partnership's financial statements, facilitates the
adjustment of asset and liability values, and enables the determination of the
new partner's capital in the partnership.
Q.13. What is
memorandum revaluation account?
Ans. The
Memorandum Revaluation Account is a temporary account used in the process of
revaluing assets and liabilities during a change in the profit sharing ratio or
the admission or retirement of a partner in a partnership. It is not a part of
the regular books of accounts and does not affect the partners' capital accounts
or the financial statements.
The
Memorandum Revaluation Account is used to record the adjustments made to the
values of assets and liabilities based on their fair market values. It serves
as a working account to keep track of the changes in the values of individual
assets and liabilities.
The purpose
of the Memorandum Revaluation Account is to provide a summary of the
adjustments made during the revaluation process. It helps partners understand
the changes in asset and liability values and their impact on the partnership's
financial position without directly affecting the capital accounts.
Once the necessary
adjustments are recorded in the Memorandum Revaluation Account, the resulting
balances are typically transferred to the partners' capital accounts or the
appropriate nominal accounts. The Memorandum Revaluation Account itself is
eventually closed, and its balance is eliminated.
In summary,
the Memorandum Revaluation Account is a temporary account used to facilitate
the revaluation process and provide a record of the adjustments made to asset
and liability values. It does not have a direct impact on the partners' capital
accounts or the financial statements.
Q.14. Give
any two differences between revaluation account and memorandum revaluation
account?
Ans. Purpose: The
main difference between the Revaluation Account and the Memorandum Revaluation
Account lies in their purpose and usage. The Revaluation Account is a permanent
account that is created in the books of accounts to record the adjustments made
to the values of assets and liabilities during a revaluation process. It
affects the partners' capital accounts and is reflected in the financial
statements. On the other hand, the Memorandum Revaluation Account is a
temporary account used for internal calculations and record-keeping purposes.
It helps in tracking the adjustments made during the revaluation process but
does not directly impact the partners' capital accounts or the financial
statements.
Impact on Capital Accounts: Another difference is the effect on the
partners' capital accounts. In the case of the Revaluation Account, the
adjustments recorded in the account directly impact the partners' capital
accounts. The changes in asset and liability values are transferred to the
respective partners' capital accounts, resulting in an adjustment of their
capital balances. In contrast, the Memorandum Revaluation Account does not
affect the partners' capital accounts. It is a working account used to keep
track of the adjustments but does not have a direct impact on the capital
balances of the partners.
In summary,
the Revaluation Account is a permanent account that reflects the adjustments
made during a revaluation process and affects the partners' capital accounts
and financial statements. The Memorandum Revaluation Account is a temporary
account used for internal calculations and does not directly impact the
partners' capital accounts or the financial statements.
Q.15. What are
the circumstances when there is a need for revaluation of assets and
liabilities?
Ans. There are several circumstances when a revaluation of assets and
liabilities may be required. Some of these circumstances include:
Change in Partnership: When there is a change in the partnership, such
as admission or retirement of a partner, it is necessary to revalue the assets
and liabilities to determine their current fair market values. This ensures
that the new partner's capital contribution or the retiring partner's capital
withdrawal is based on the updated values of the partnership's assets and
liabilities.
Dissolution of Partnership: In the event of a partnership
dissolution, the assets and liabilities may need to be revalued to determine
their realizable values for the purpose of distribution among the partners.
This ensures that the partners receive their fair share based on the current
values of the assets and liabilities.
Significant Changes in Market
Conditions:
If there are
significant changes in market conditions that affect the value of the
partnership's assets and liabilities, a revaluation may be necessary. This
could include changes in property values, investment values, or changes in the
economic environment that impact the value of the partnership's assets and
liabilities.
Compliance with Accounting Standards: In some cases, accounting standards or
regulatory requirements may mandate the periodic revaluation of assets and
liabilities. This ensures that the financial statements present a true and fair
view of the partnership's financial position based on the updated values of the
assets and liabilities.
Revaluation
of assets and liabilities is essential to reflect their current values, align
the partnership's financial statements with the economic reality, and ensure
fairness in capital contributions, withdrawals, or distribution of assets among
the partners.
Q.16. When does
the need for memorandum revaluation account arise?
Ans. The need for a Memorandum Revaluation Account arises in the following
circumstances:
Admission or Retirement of a Partner: When there is a change in the profit sharing
ratio due to the admission or retirement of a partner, the values of assets and
liabilities need to be revalued. The Memorandum Revaluation Account is used to
record these adjustments temporarily, allowing for the determination of the new
profit sharing ratio and the calculation of gains or losses.
Change in Profit Sharing Ratio: If there is a change in the profit sharing
ratio among the existing partners, the values of assets and liabilities may
need to be revalued. The Memorandum Revaluation Account is utilized to capture
the adjustments made to the values of assets and liabilities without directly
affecting the partners' capital accounts.
The
Memorandum Revaluation Account serves as a working account during these
situations, enabling the partners to track and reconcile the changes in asset
and liability values. It is a temporary account that facilitates the
revaluation process and helps in determining the necessary adjustments to be
made, such as the transfer of gains or losses to the partners' capital
accounts.
Once the
adjustments are finalized, the balances in the Memorandum Revaluation Account
are typically transferred to the appropriate capital accounts or nominal
accounts, and the account itself is closed. It provides a clear record of the
revaluation adjustments made during the partnership's reconstitution process
without affecting the final capital balances or financial statements.
SHORT ANSWER TYPE QUESTIONS
Q.1. What are
the main objectives behind admission of a new partner?
Ans. The main objectives behind the admission of a new partner in a
partnership firm are:
Increase in Capital: One of the primary objectives is to bring in
additional capital to the partnership firm. By admitting a new partner, the
firm can access new funds, which can be used for business expansion, investment
in assets, working capital requirements, or any other growth-related
initiatives. The new partner's capital contribution strengthens the financial
position of the firm and enhances its capacity to undertake larger projects or
pursue new opportunities.
Sharing of Profits and Losses: Another objective is to distribute the profits
and losses of the partnership among a larger group of partners. With the
admission of a new partner, the profit sharing ratio is revised, allowing for a
more equitable distribution of profits and losses based on the partners'
agreed-upon sharing arrangement. This can help align the partnership's reward
structure with the contributions and efforts of the partners, fostering a sense
of fairness and motivation within the firm.
Enhancing Skills, Expertise, and
Resources:
The admission of a new
partner may bring in additional skills, expertise, and resources that can
benefit the partnership firm. The new partner may possess specialized
knowledge, experience, or contacts in a specific industry or area of business,
which can contribute to the firm's growth and competitiveness. By leveraging
the diverse capabilities of the new partner, the partnership can enhance its
overall capabilities and seize new business opportunities.
Sharing of Management
Responsibilities: With the admission
of a new partner, the management responsibilities of the partnership can be
shared among a larger group. This helps in relieving the existing partners from
an excessive workload and allows for a more effective division of
responsibilities and decision-making. The new partner can bring fresh
perspectives, ideas, and managerial skills, contributing to the overall
efficiency and effectiveness of the partnership's operations.
By
fulfilling these objectives, the admission of a new partner can lead to the growth,
development, and long-term sustainability of the partnership firm.
Q.2 What
adjustments are required to be done on admission of a new partner?
Ans. Several
adjustments are required to be made on the admission of a new partner to ensure
a smooth transition and accurate reflection of the new partner's rights and
obligations. The adjustments include:
Revaluation of Assets and
Liabilities: The values of
assets and liabilities in the firm's books need to be revalued to reflect their
current market values. Any appreciation or depreciation in the values of assets
and liabilities is recorded, and the resulting gains or losses are adjusted in the
partners' capital accounts.
Calculation of Goodwill: If the new partner is admitted for a share of
goodwill, the amount of goodwill needs to be calculated. The existing partners'
share of goodwill is revalued, and the difference between the new partner's
share of goodwill and the revalued existing partner's share is treated as goodwill
brought in by the new partner.
Adjustment of Accumulated Profits and
Losses: The accumulated profits and losses
of the partnership need to be adjusted based on the new profit sharing ratio.
Any undistributed profits or losses from previous periods are apportioned among
the partners according to their revised profit sharing ratios.
Adjustment of Capitals: The capital accounts of the partners are
adjusted to reflect the new partner's capital contribution. The new partner's
capital is credited to their capital account, while the existing partners'
capital accounts are adjusted based on their revised profit sharing ratios.
Sharing of Reserves and Accumulated
Profits: The reserves and accumulated profits
of the partnership are distributed or adjusted among the partners based on
their revised profit sharing ratios. This ensures that each partner's
entitlement to reserves and accumulated profits is aligned with their new share
in the partnership.
These
adjustments help establish the rights and obligations of the new partner and
ensure that the partnership's financial statements accurately reflect the
changes resulting from the admission. It also maintains the equitable
distribution of profits, losses, and assets among the partners based on their
agreed-upon sharing arrangement.
Q.3. What is
the difference between revaluation account and memorandum revaluation account?
Ans. The main differences between a revaluation account and a
memorandum revaluation account are as follows:
Purpose:
Revaluation Account: A revaluation account is prepared
to record the adjustments made to the values of assets, liabilities, and
capital accounts of the existing partners during a reconstitution of the
partnership. It reflects the changes in the values of assets and liabilities due
to revaluation.
Memorandum Revaluation Account: A memorandum revaluation account is used to
record the adjustments made to the values of assets and liabilities when there
is a change in the profit sharing ratio or admission/retirement of a partner.
It serves as a working paper or internal record to facilitate the calculations
and subsequent adjustments, but it does not appear in the firm's final
financial statements.
Nature of
Account:
Revaluation Account: A revaluation account is a nominal account
because it is used to determine gains or losses resulting from the revaluation
of assets and liabilities. The net balance of the revaluation account is
transferred to the capital accounts of the partners.
Memorandum Revaluation Account: A memorandum revaluation account is a temporary
account that does not have any impact on the firm's final accounts. It is not
used to determine gains or losses but rather serves as a tool for internal
calculations and adjustments.
Presentation
in Financial Statements:
Revaluation Account: The balance of the revaluation
account is ultimately transferred to the capital accounts of the partners. It
appears in the balance sheet as part of the partners' capital accounts,
reflecting the adjusted values of their respective capital contributions.
Memorandum Revaluation Account: The memorandum revaluation account is not
presented in the financial statements of the partnership. It is used internally
to facilitate the calculations and adjustments related to changes in the profit
sharing ratio or admission/retirement of partners.
In summary,
a revaluation account is prepared during a reconstitution of the partnership to
record adjustments to the values of assets, liabilities, and capital accounts,
while a memorandum revaluation account is a working paper used to assist with
internal calculations and adjustments but does not appear in the firm's
financial statements.
Q.4. How are
the capitals of old partners are adjusted on the basis of new partner’ s
capital?Explain with an example?
Ans. When a
new partner is admitted to a partnership, the capitals of the existing partners
need to be adjusted to accommodate the new partner's capital contribution. This
adjustment is based on the agreed profit sharing ratio among the partners. The
formula for adjusting the capitals is:
New Capital
= Old Capital + Share of New Partner - Sacrifice/Share of Old Partners
Here's an
example to illustrate the adjustment of capitals:
Suppose a
partnership consists of two existing partners, A and B, and they admit a new
partner, C. The agreed profit sharing ratio is 2:2:1, respectively.
The capital
accounts of the partners before the admission are as follows:
Partner A:
$50,000
Partner B:
$40,000
The new
partner, C, brings in a capital of $30,000.
Step 1: Calculate the total capital
after the admission:
Total
Capital = Capital of A + Capital of B + Capital of C
Total
Capital = $50,000 + $40,000 + $30,000
Total
Capital = $120,000
Step 2: Calculate the new capitals of
the existing partners based on the profit sharing ratio:
Capital of
A = (Profit Sharing Ratio of A / Total Profit Sharing Ratio) x Total Capital
Capital of
A = (2 / 5) x $120,000
Capital of
A = $48,000
Capital of
B = (Profit Sharing Ratio of B / Total Profit Sharing Ratio) x Total Capital
Capital of
B = (2 / 5) x $120,000
Capital of
B = $48,000
Step 3: Adjust the capitals based on
the new partner's capital and the sacrifices of the existing partners:
Capital of
A = Old Capital of A + Share of New Partner - Sacrifice of A
Capital of
A = $50,000 + ($30,000 x 2/5) - $48,000
Capital of
A = $50,000 + $12,000 - $48,000
Capital of
A = $14,000
Capital of
B = Old Capital of B + Share of New Partner - Sacrifice of B
Capital of
B = $40,000 + ($30,000 x 2/5) - $48,000
Capital of
B = $40,000 + $12,000 - $48,000
Capital of
B = $4,000
After the
adjustment, the new capital accounts of the partners will be:
Partner A:
$14,000
Partner B:
$4,000
Partner C:
$30,000
This
adjustment ensures that the total capital of the partnership remains unchanged
and the new partner's capital is accounted for in accordance with the agreed
profit sharing ratio among the partners.
Q.5. Discuss
the treatment of good will according to accounting standard No.26?
Ans. Accounting
Standard (AS) 26, titled "Intangible Assets," provides guidance on
the treatment of goodwill in financial statements. According to AS 26, goodwill
is considered an intangible asset that arises from factors such as reputation,
customer relationships, brand value, and business connections.
Treatment of
Goodwill:
Recognition: Goodwill is recognized in the financial
statements only when it is acquired through a business combination. It is
recorded as an asset and measured as the excess of the consideration
transferred over the net identifiable assets acquired.
Initial Measurement: Goodwill is initially measured at cost, which
includes the fair value of consideration transferred, any non-controlling
interest in the acquiree, and the fair value of any equity instruments issued
as consideration.
Subsequent Measurement: After initial recognition, goodwill is not
amortized. Instead, it is subject to impairment testing at least annually or
whenever there is an indication of impairment. If the carrying amount of
goodwill exceeds its recoverable amount, an impairment loss is recognized.
Presentation: Goodwill is presented as a separate line item
in the balance sheet, typically within the category of intangible assets. It is
disclosed separately, providing information about its nature, accounting
policy, and any impairment losses recognized.
It's
important to note that Accounting Standard No. 26 provides specific guidelines
for the treatment of goodwill, and companies are required to comply with these
guidelines when preparing their financial statements. The standard ensures
consistency and transparency in reporting goodwill to enhance the relevance and
reliability of financial information for stakeholders.
