Change in Profit Sharing Ratio Among the Existing Partner

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Questions:

Generic 3

5 x 3 = 15

In case of change in profit sharing ratio ,how can the gaining partner compensate the sacrificing partner?

State the need for treatment of goodwill on change in profit sharing ratio

Why is it necessary to adjust goodwill at the time of change in profit sharing ratio?

X, Y and Z were sharing profits and losses in the ratio of 5:3:2. They decided to share future profits and losses in the ratio of 2:3:5 with effect from 1.4.2007. They decided to record the effect of the following, without effecting their book values:

(i) Profit and Loss Account (Cr.) Rs.24,000

(ii) Advertisement Suspense Account Rs.12,000

Pass the necessary adjusting entry.

Anita, Asha and Amrit are partners sharing profits in the ratio of 3:2:1 respectively. From 1st January 2010, they decided to share profits in the ratio of 1:3:2. The partnership deed provides that in the event of any change in profit sharing ratio, the goodwill should be valued at three years purchase of the average of five years profits. The profits and losses of the preceding five years are: Profits 2005-Rs 1,20,000; -Rs 3,00,000; 2007-Rs 3,40,000; 2008-Rs 3,80.000; 2009-Rs 1,40,000 (Loss).

Showing the working clearly, give the necessary journal entry to record the above change.

Fill up / 1 Marks

5 x 1 = 5

Why are the 'Reserve and Surplus' distributed at the time of reconstitution of the firm?

Who should compensate to whom in case of a change in profit sharing ratio of existing partners?

Give two circumstances in which sacrifice ratio may be applied.

What is meant by sacrificing partner?

10.

What is meant by change in profit sharing ratio?

Generic 8

2 x 8 = 16

11.

P,Q and R who are presently sharing profits and losses in the ratio of 5:3:2 decide to share future profits and losses in the ratio of 2:3:5 with effect from 1st April,2015.An extract of their balance sheet as at 31st March,2015 is as follows.
Balance Sheet (Extract)
as at 31st March,2015

Liabilities	Amt (Rs)	Assets	Amt (rs)
Sundry Creditors	6,00,000	Land and Building	5,00,000
Outstanding Rent	20,000	Plant and Machinery	2,00,000
		Stock	1,60,000
		Debtors 6,00,000 (-) Provision for Doubtful Debts (20,000)	5,80,000

It is decided that
(i) Land and building be valued at Rs 5,70,000.
(ii) Plant and machinery be depreciated by 15%
(iii) Stock is found overvalued by Rs 76,000
(iv) Provision for doubtful debts is to be made equal to 5% of the debtors.
(v)An item of Rs 60,000 included in sundry creditors is not likely to be claimed.
(vi)Rent of Rs 8,000 is still outstanding.
(vii) Out of the amount of insurance which was debited entirely to profit and loss account Rs 10,000 be carried forward as an unexpired insurance.
(viii)Out of total commission received,Rs 6,000 is to be treated as advance commission.This amount was earlier credited to profit and loss account.
(ix) An unaccounted accured income of Rs 2,000 be provided for.
(x) A debtor whose dues of rs 10,000 were written -off as bad debts paid 80% in full settlement.
Pass the necessary journal entries and prepare revaluation account.

12.

Anat, Gulab and khushbu were partners in a firm sharing profits in the ratio of 5:3:2. From 1st April,2015 they decided to share the profits equally.For this purpose,the goodwill of the firm was valued at Rs 2,40,000 pass necessary journal entry for the treatment of goodwill on change in the profit sharing ratio of Anant, Gulab and khusbu.

Generic 6

2 x 6 = 12

13.

Lalit,Rahul and Sumit are sharing [profits and loses in the ratio 5:3:2 They decided to share future profits and loses in the ratio of 2:3:5 with effect from 1st April,2015.They also decided to record the effect of the following revaluations without affecting the book value of the assets and liabilities by passing a single adjusting entry

Items	Book Figure(Rs)	Revised figure(Rs)
Building	10,00,000	11,00,000
Machinery	5,00,000	4,80,000
Creditors	1,20,000	1,10,000
Outstanding expenses	1,20,000	1,50,000

14.

Anita,Asha and Amrit are partners sharing profits in the ratio of 3:2:1 respectively .From 1st January,2016,they decided to share profits in the ratio of 1:1:1.The partnership deed provided that in the event of any change in profit sharing ratio,the goodwill should be valued at three years'purchase of the average of five years'
The profits and losses of the preceding five years are

Year	Profit
2011	Rs 1,20,000
2012	Rs 3,00,000
2013	Rs 3,40,000
2014	Rs 3,80,000
2015	Loss Rs 1,40,000

Showing the working clearly,give the necessary journal entry to record the above change.

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Answers Key:

Generic 3

5 x 3 = 15

Gaining partner compensate the sacrificing partner by paying him proportionate share of goodwill

Whenever there is a change in profit sharing ratio,the gaining partner (i.e.,the partner whose share has increased as a result of change ) is required to compensate the sacrificing partner (i.e.. the partner whose share has decreased as a result of change)

X's Sacrifice 3/10 and Z's gain 3/10; Total Effective Profit RS.12,000 (Rs.24,000-Rs.12,000); Dr.Z's Capital A/c, Cr.X's Capital A/c by Rs.3,600 (i.e., Rs.12,000X3/10).

Anita's sacrifice 2/6; Asha's gain and Amrit's gain 1/6 each; Dr. Asha's Capital and Amrit's Capital Rs. 1,00,000 each i.e., RS 6,00,000X1/6; Cr.Anita's Capital Rs.2,00,000, i.e., Rs.6,00,000X2/6.

[Hint: Value of goodwill=Rs.\(10,00,000\div 5\times 3\) =Rs.6,00,000.]

Fill up / 1 Marks

5 x 1 = 5

()
As 'Reserve and Surplus' belong to the old partners in their old profit sharing ratio, therefore, these are distributed at the time of reconstitution of the firm.

()
The gaining partners should compensate the losing partners unless otherwise agreed upon.

()
(i) At the time of admission of a partner (ii) Change in profit sharing ratio among the existing partners.

()
The partner whose share of profit has been reduced due to change in profit sharing ratio is called sacrificing partner.

10.

()
Change in the profit sharing ratio means that one partner is purchasing from another a share of profit which previously belonged to the former.

Generic 8

2 x 8 = 16

11.

Journal

Date	Particulars		Amt(dr)	Amt(Cr)
2015
Apr 1	Land and Building A/c	Dr	70,000
	To Revaluation A/c (Being the increase in value of land and building recorded)			70,000
	Revaluation A/c	Dr	30,000
	To plant and Machinery A/c (Being the decrease in value of plant and machinery recorded)			30,000
	Revaluation A/c	Dr	76,000
	To stock A/c (Being the decrease in value of stock recorded)			76,000
	Revaluation A/c (Rs 30,000) - Rs 20,000	Dr	10,000
	To provision for Doubtful Debts A/c (Being the short provision now created)			10,000
	Sundry Creditors	Dr	60,000
	To Revaluation A/c (Being the decrease in the amount of creditors recorded)			60,000
	Revaluation A/c	Dr	8,000
	To Outstanding Rent A/c (Being the outstanding rent recorded)			8,000
	Prepaid Insurance	Dr	10,000
	To Revaluation A/c (Being the prepaid insurance recorded)			10,000
	Revaluation A/c	Dr	6,000
	To Commission Received in Advance A/c (Being the commission received in advance recorded)			6,000
	Accured Income A/c	Dr	2,000
	To Revaluation A/c (Being the accrued income recorded)			2,000
	Bad Debts Recovered A/c	Dr	8,000
	To Revaluation A/c			8,000
	Revaluation A/c	Dr	20,000
	To P'S Capital A/c			10,000
	To Q's capital A/c			6,000
	To R's Capital A/c (Being the transfer of profit on revaluation to old partner's capital accounts in their old profit sharing ratio)			4,00

Revaluation Account
Dr Cr

Particulars	Amt(Rs)	Particulars	Amt (rs)
To Plant and Machinery A/c	30,000	By Land and Building A/c	70,000
To Stock A/c	76,000	By Sundry Creditors	60,000
To Provision Received in Advance A/c	10,000	By Prepaid Insurance A/c	10,000
To Outstanding Rent A/c	8,000	By Accrued Income A/c	2,000
To Profit on Revaluation Transferred to P's Capital A/c 10,000
Q's Capital A/c 6,000
R's Capital 4,000	20,000
	1,50,000		1,50,000

12.

Date	Particulars	Amt (Dr)	Amt (Cr)
2015
Apr 1	Gulab's Capital A/c Dr	8,000
	Khushbu's Capital A/c Dr	32,000
	To Anant's Capital A/c (Being share of goodwill adjusted on change in profit sharing ratio)		40,000

Generic 6

2 x 6 = 12

13.

Profit on revaluation=Rs 60,000; Debit Sumit's capital account and Credit Lalit's capital account with Rs 18,000 Sumit gains and Lalit's capital account with Rs 18,000;Sumit gains and Lalit sacrifices 3/10 share

14.

Amrit gains and Anita sacrifices 1/6 share, Debit Amrit's capital account and Credit Anita's capital account with Rs 1,00,000.