Change in profit Sharing Ratio Among the Existing Partner

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Questions:

Generic 3

5 x 3 = 15

Give the journal entry to transfer advertisement suspense account to old partners capital accounts, when there is a change in profit accounts when there is a change in profit sharing ratio.

In which ratio is goodwill already existing in the books of account written-off?

Which partner's capital account is debited at the time of adjusting goodwill through capital accounts?

Kumar, Gupta and Kavita were pertners in a firm sharing profits and losses equally. The firm was engaged in the storage and distribution of canned juice and its godowns were located at three different places in the city. Each godowns was being managed individually by kumar, Gupta and Kavita. Because of increase in business activities at the godown managed by Gupta, he had to devote more time. Gupta demanded that his share in the profits of the firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was agreed to be 1:2:1. For this purpose, the goodwill of the firm was valued at two years purchase of the average profits of last five years. The profits of the last five years were as follows:

Year	Profit(Rs)
I	4,00,000
II	4,80,000
III	7,33,000
IV(Loss)	33,000
V	2,20,000

You are required to:

(i) Calculate the goodwill of the firm.

(ii) Pass necessary Journal for the treatment of goodwill on change in profit sharing ratio of Kumar, Gupta and Kavita.

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.

Generic 6

2 x 6 = 12

Siddharth, Saurabh and Nitin are partners in a firm sharing profits and loses in the ratio of 3:4:5 From 1st January 2015,they decide to share profits in the ratio 5:4:3.
As per the terms of the partnership deed,in the event of change in the existing profit sharing ratio.goodwill is to be valued at 2 years purchase of average profits of last years,which were Rs 64,000,Rs 72,000,Rs 65,000 and Rs 82,000 respectively. Pass necessary journal entry to adjust goodwill.Show your workings clearly.

Rajeev,Sanjay and Mohit are partners sharing profits and losses in the ratio of 2:3:5 On 1st April,2015,they decide to change their ratio to 3:3:4 as Rajeev contributes more time to the business

Generic 8

2 x 8 = 16

The balance Sheet of Modi,Gandhi and Yadav who share profits in the ratioof 2:2:1 is given below
Balance Sheet
as at 31st March,2015

Liabilities	Amt(rs)	Assets	Amt(Rs)
Capital A/cs		Goodwill	25,000
Modi 2,00,000		Building	5,50,000
Gandhi 3,00,00		Machinery	1,75,000
Yadav 2,00,000	7,00,000	Furniture and Fittings	20,000
Contingency Reserve	50,000	Debtors	50,000
Workmen Compensation Reserve	75,000	Stock	1,00,000
Sundry Credtors	60,000	Cash	10,000
Outstanding Expenses	10,000	Advertisement Suspense A/c	15,000
	9,45,000		9,45,000

On 1st April,2015, they decide that in (i)Stock is for future, they will share profits in the ratio of 3:2:1, the following adjustments are agreed upon.
(i) Stock is found to be undervalued by 10%.
(ii)Building will be appreciated by Rs 50,000.
(iii)Machinery and furniture and fittings will be depreciated by 5% and 10% respectively.
(iv)Goodwill will be valued at 2 year's purchase of average profits of last 3 years which were Rs 2,00,000, Rs 2,25,000 and Rs 3,75,000 respectively.The profit of Rs 3,75,000 includes profit on sale of machinery Rs 5000.
(vi)Claim on account of workmen compensation is estimated to be Rs 60,000.Prepare revaluation account, partners' capital accounts and the balance sheet of the new firm.

(When assets and liabilities have to be shown in their original values and goodwill is also required to be adjusted)
Z, E and N are partners sharing profits and loses in the ratio of 3:2:1 Their balance sheet as on 31st December 2014
Balance Sheet
as at 31st December,2014

Liabilities	Amt(Rs)	Assets	Amt (rs)
Sundry Creditors	3,00,000	Cash at bank	60,000
Capital A/cs		Sundry Debtors 1,24,000
Z 6,00,000		(---) Provision for Doubtful Debts (4,000)	1,20,000
E 6,00,000		Stock	3,60,000
N 1,00,000	13,00,000	Furniture	60,000
		Plant and Machinery	4,00,000
		Land and Buildings	6,00,000
	16,00,000		16,00,000

The partners agreed that from 1st January,2015,they will share profits and loses in the ratio of 4:4:1 They agreed that
(i) Stock is to be valued at 20 % less
(ii) Provision for doubtful debts to be increased by Rs 3,000
(iii) Furniture is to be depreciated by 20% and plant and machinery by 15%
(iv) Rs 7,000 are outstanding for salaries
(v) Land and buildings are to be valued at Rs 7,00,000
(vi) Goodwill is valued at Rs 90,000
Partners do not want to record the altered values of assets and liabilities in the books.They also decided not to show goodwill in the books.
You are required to pass a single journal entry to give effect to the above.

Multiple Choice Question

7 x 1 = 7

10.

The purpose of revaluation account is to ascertain the

(a)

Reassessment

(b)

None

(c)

Both A and B

(d)

Revaluation Profit/Loss

11.

What adjustments are required when existing partners decide to change their profit sharing ratio:

(a)

Reserves

(b)

Accumulated profits

(c)

All

(d)

Goodwill

12.

Who is a sacrificing partner :

(a)

Whose share has decrease as a result of change

(b)

Whose share has increase as well as decrease as a result of change

(c)

Whose share has does not get affected as a result of change

(d)

Whose share has increase as a result of change

13.

Any change in the relations of partners without affecting the existing of partnership firm is called ____

(a)

Reassessment

(b)

Retirement

(c)

Revaluation

(d)

Reconstitution

14.

On the reconstitution of a firm change in the value of assets is called ________

(a)

Revaluation of assets

(b)

Reassessment of assets

(c)

Devaluation of assets

(d)

Reassessment of liabilities

15.

What is the meaning of change in the profit sharing ratio:

(a)

In which all partner including the deceased partner executor partner share future profit and loss

(b)

Purchase of shares of profit by one partner form another partner

(c)

In which all partner including the retired partner share future profit and loss

(d)

In which all partner including the new partner share future profit and loss

16.

Which of the following is responsible for the Reconstitution of Partnership?

(a)

Retirement of an existing partner

(b)

Change in existing profit sharing ratio

(c)

Death of a partner

(d)

All of these

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Answers Key:

Generic 3

5 x 3 = 15

Old partners Capital/Current A/c (In old ratio) Dr
To Advertisement Suspense A/c

Goodwill alredy existing in the books is written-off in old ratio.

Gaining partner's capital account is debited at the time of adjusting goodwill through capital accounts.

(i) Goodwill of the firm Rs.7,20,000,i.e., Rs.18,00,000/5X2

(ii) Dr.Gupta's Capital A/c Rs.1,20,000, Cr.Kumar's Capital A/c and Kavita's Capital A/c Rs.60,000 each.

[Hint: Guta's gain \(\frac { 2 }{ 12 } \) , Kumar's and Kavita's sacrifice \(\frac { 1 }{ 12 } \) each.].

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).

Generic 6

2 x 6 = 12

Debit Siddharth's capital account and Credit Nitin's capital account with Rs 17,687.5.

At that date,goodwill appears in the books at Rs 1,25,000 pass necessary journal entries ,showing adjustment of goodwill ,if goodwill is valued at Rs 2,00,000 Also identify the value communicated by the firm.

Generic 8

2 x 8 = 16

Profit on revaluation = Rs 46,750; Value of good will=Rs 5,30,000; Blance of capital accounts: Modi=Rs 1,75,700, Gandhi=Rs 3,64,033, Yadav=Rs 2,32,017; Balance sheet total=Rs 9,51,750

Calculation of net effect of revaluation

Loss due to decrease in the value of stock	(72,000)
Loss due to increase in the value of provision for doubtful debts	(3,000)
Loss due to decrease in the value of furniture	(12,000)
Loss due to decrease in the value of plant and machinery	(60,000)
Loss due to unrecorded liability (i.e. outstanding salary)	(7,000)
	(1,54,000)
Profit due to increase in the value of land and buildings	1,00,000
Loss on revaluation	(54,000)
Adjustment	36,000

Calculation of sacrificing/(gaining) share
Old ratio Z,E and N =3:2:1
New ratio of Z, E and N=4:4:1
Sacrificing/(Gaining) share=Old share - New share
Z=\(\frac { 3 }{ 6 } -\frac { 4 }{ 9 } =\frac { 9-8 }{ 18 } =\frac { 1 }{ 18 } \) Sacrifice
E= \(\frac { 2 }{ 6 } -\frac { 4 }{ 9 } =\frac { 6-8 }{ 18 } =\left( \frac { 2 }{ 18 } \right) \)
N=\(\frac { 1 }{ 6 } -\frac { 1 }{ 9 } =\frac { 3-2 }{ 18 } =\frac { 1 }{ 8 } \) Sacrifice
Calculation of the proportionate amount
For Z(Sacrificing partner)=36,000X\(\frac { 2 }{ 18 } =Rs 4,000\) (Dr)
For N (sacrificing partner)=36,000X\(\frac { 1 }{ 18 } =Rs 2,000\) (Cr)

Journal

Date	Particulars		Amt (Dr)	Amt(Cr)
2015
Jan 1	E's Capital A/c	Dr	4,000
	To Z's Capital A/c			2,000
	To N's Capital A/c			2,000
	(Being the adjustment for revaluation of assets and liabilitiesand for reserves,profits and goodwill on change in profit sharing ratio)