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Published on: 05/03/2019
Change in profit Sharing Ratio Among the Existing Partner Important Questions
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Questions + Answers key
Take MCQ Accountancy Test
1.
State the need for treatment of goodwill on change in profit sharing ratio
2.
Why is it necessary to adjust goodwill at the time of change in profit sharing ratio?
3.
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.
4.
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.
5.
Anant, Gulab and Khushbu were partners in a firm sharing profits in the ratio of 5:3:2. From 1.4.2014, 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 Khushbu.
6.
Who should compensate to whom in case of a change in profit sharing ratio of existing partners?
7.
Give two circumstances in which sacrifice ratio may be applied.
8.
What is meant by sacrificing partner?
9.
What is meant by change in profit sharing ratio?
10.
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.
11.
The balance sheet of Raj,Rohit and Rohan who are sharing profits in the ratio of 2:3:1, as at 31st March,2015 is given below
Balance sheet
as at March,2015
| Liabilities | Amt(Rs) | Assets | Amt(rs) |
|---|---|---|---|
| Capital A/cs | Goodwill | 24,000 | |
| Raj 20,000 | Land and Building | 5,00,000 | |
| Rahul 4,00,000 | Investments(Market value Rs 92,0000) | 1,00,000 | |
| Rohan 6,00,000 | 12,00,000 | Stock | 1,60,000 |
| Workmen Compensation Reserve | 40,000 | Debtors | 6,00,000 |
| Investment Fluctuation Reserve | 20,000 | Bank | 5,92,000 |
| Provision for Doubtful Debts | 20,000 | Advertisement Suspenses A/c | 24,000 |
| Sundry Creditors | 6,00,000 | ||
| Employees Provident Fund | 1,20,000 | ||
| 20,00,000 | 20,00,000 |
Raj,Rahul and Rohan decide to alter their profit sharing ratio as 3:2:1 from 31st April 2015.
(i) Goodwill is to be valued at 2 years purchase of average of last three completed years The profits were-------Year 1 Rs 96,000 year II Rs 1,86,000 year III Rs 2,76,000.
(ii)Land and building was found undervalued by Rs 40,000 and stock was found overvalued by Rs 76,000.
(iii)Provision for doubtful debts is to be made equal to 5% of the debtors.
(iv) Claim on account of workmen compensation is Rs 16,000.
(v) 10% of the sundry creditors be written back as no longer payable.
(vi) 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.
Prepare the necessary ledger accounts and the balance sheet.
12.
Ram,Raj and Rohan and partners sharing profits and loses in the ratio of 4:3:2 They decide to share the future profits and losses in the ratio 2:3:4 with effect from 1st April ,2014 An extract of their balance sheet as at 31st March,2015 is as under.
Balance Sheet (An extract)
as at 31st March,2015
| Liabilities | Amt (Rs) | Assets | Amt (Rs) |
| Workmen Compensation Reser | 45,000 |
Show the accounting treatment under the following alternative cases.
(i)If there is no other information
(ii)If a claim on account of workmen's compensation is estimated at Rs 22,500
(iii) If a claim on account of workmen's compensation is estimated at Rs 48,500
13.
Kumar,Gupta and Kavita were partners in a firm sharing profits and loses 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 godown 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 entry for the treatment of goodwill on change in profit sharing ratio of Kumar, Gupta and Kavita.
14.
A,B and C are sharing profits and losses in the ratio of 5:3:2 They decide to share future profits and losses in the ratio 2:3:5 with effect from 1st April,2015.They also decide to record the effect of the following without affecting their book figures by passing a single adjusting entry.
| Particulars | Book Figure(Rs) |
|---|---|
| General reserve | 60,000 |
| Contigencies reserve | 10,000 |
| Profit and loss A/c (Cr) | 30,000 |
| Advertisement suspense A/c (Dr) | 40,000 |
15.
Archie,Betty and Veronica are partners sharing profits in the ratio of 3:2:1 With effect from 1st April 2015 they decide to share profits in the ratio of 2:2:1 Their balance sheet as at 31st March,2015
| Liabilities | Amt(Rs) | Assets | Amt (Rs) | |
|---|---|---|---|---|
| Creditors | 1,00,000 | Cash | 62,000 | |
| Outstanding Expenses | 12,000 | Debtors | 50,000 | |
| Capital A/cs | Stock | 75,000 | ||
| Archie | 3,75,000 | Plant and macheinery | 3,25,000 | |
| Betty | 2,25,000 | Land and building | 4,00,000 | |
| Vernoica | 2,00,0000 | 8,00,000 | ||
| 9,12,000 | 9,12,000 | |||
For the above purpose ,it was agreed that
(a) Plant and machinery should be written down by Rs 25,000.
(b)Stock is found overvalued by 10% It was decided to reduce its value accordingly
(c)Land and building has to be appreciated by 25%.(d)Creditors amounting to be Rs 5,500 are not likely to claim their amount.
(d)Creditors amounting to Rs 5,500 are not likely to claim their account.
(e) Goodwill at the time of reconstitution, is to be valued at 3 years purchase of average profits of last five years,which were Rs 22,500.
You are required to give effect to the above adjustments.
(i) By opening revaluation account
(ii) By passing a single adjustment entry
16.
Chintu,Montoo and Shitu are patterns in a business sharing profits in the ratio of 3:4:2. From 1st January,2015,they decide to share profits equally.Goodwill was valued at Rs 90,000, as on the date Pass journal entry to give effect to the above adjustment.
1.
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)
2.
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)
3.
(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.].
4.
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).
5.
( )
Gulab's gain 1/30, Khushbu's gain 4/30 and Anant's sacrifice 5/30 Dr.Gulab's capital A/c by Rs.8000 and Khushbu's capital by Rs.32,000, Cr anant's capital by Rs.40,000.
6.
( )
The gaining partners should compensate the losing partners unless otherwise agreed upon.
7.
( )
(i) At the time of admission of a partner (ii) Change in profit sharing ratio among the existing partners.
8.
( )
The partner whose share of profit has been reduced due to change in profit sharing ratio is called sacrificing partner.
9.
( )
Change in the profit sharing ratio means that one partner is purchasing from another a share of profit which previously belonged to the former.
10.
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
11.
Dr Revaluation Account Cr
| Particulars | Amt(Rs) | Particulars | Amt(rs) |
|---|---|---|---|
| To Stock A/c | 76,000 | By Land and Building A/c | 40,000 |
| To Provision for Doubtful Debts A/c | 10,000 | BySundry CreditorsA/c | 60,000 |
| To Provision on Revaluation Transfered to | By Prepaid Insurance A/c | 10,000 | |
| Raj's Capital A/c 8,000 | |||
| Rahul's Capital A/c 12,000 | |||
| Rohan's Capital A/c 4,000 | 24,000 | ||
| 1,10,000 | 1,10,000 |
Dr Partner's Capital Account Cr
| Particulars | Raj(Rs) | Rahul (Rs) | Rohan(Rs) | Particulars | Raj(Rs) | Rahul(Rs) | Rohan(Rs) |
|---|---|---|---|---|---|---|---|
| To Goodwill A/c | 8,000 | 12,000 | 4,000 | By Balance b/d | 2,00,000 | 4,00,000 | 6,00,000 |
| To Rahul's Capital A/c | 62,000 | -------- | -------- | By Raj's Capital A/c | ---------- | 62,000 | -------- |
| To Advertisement | By Revaluation A/c | 8,000 | 12,000 | 4,000 | |||
| Suspense A/c | 8,000 | 12,000 | 4,000 | By Workmen | |||
| To Balance c/d | 1,42,000 | 4,68,000 | 6,02,000 | Compensation | |||
| Reserve A/c | 8,000 | 12,000 | 4,000 | ||||
| By Investment Fluctuation | |||||||
| Reserve A/c | 4,000 | 6,000 | 2,000 | ||||
| 2,20,000 | 4,92,000 | 6,10,000 | 2,20,000 | 4,92,000 | 6,10,000 |
Balance Sheet
as at 1st April,2015
| Liabilities | Amt(Rs) | Assets | Amt(Rs) |
|---|---|---|---|
| Capital A/cs | Land and Building | 5,40,000 | |
| Raj 1,42,000 | Investments | 92,000 | |
| Rahul 4,68,000 | Stock | 84,000 | |
| Rohan 6,02,000 | 12,12,000 | Debtors 6,00,000 | |
| Sundry Creditors | 5,40,000 | (---)Provision for Doubtful Debts (30,000) | 5,70,000 |
| Workmen Compensation Claim | 16,000 | Bank | 5,92,000 |
| Employees Provident Fund | 1,20,000 | Prepaid Insurance | 10,000 |
| 18,88,000 | 18,88,000 |
12.
| Date | Particulars | LF | Amt(Dr) | Amt(Cr) |
|---|---|---|---|---|
| 2015 | ||||
| Apr1 | ||||
| (i) | Workmen Compensation Reserve A/c Dr | 45,000 | ||
| To Ram's capital | 20,000 | |||
| To Raj's Capital A/c | 15,000 | |||
| To Rohan's Capital A/c | 10,000 | |||
| (Being the transfer of surplus workmen compensation reserve to partners capital accounts in their old profit sharing ratio) | ||||
| (ii) | Wormen Compensation Reserve A/c Dr | 45,000 | ||
| To Provisions for Workmen Compensation Claim A/c | 22,500 | |||
| To Ram's Capital A/c | 10,000 | |||
| To Raj;s Capital A/c | 7,500 | |||
| To Rohan's Capital A/c | 5,000 | |||
| (Being the transfer of surplus workmen Compensation reserve to partners capital accounts in their old profit sharing ratio) | ||||
| (iii) | Workmen Compensation Reserve A/c Dr | 45,000 | ||
| Revaluation A/c To provision for Workmen Compensation Claim A/c |
4,500 | |||
| (Being the transfer of loss on revaluation to partner's capital accounts in their old profit sharing ratio) |
13.
(i) Calculation of Goodwill of the firm
Average profits =\(\frac { 4,00,000+4,80,000+7,33,000-33,000+2,20,000 }{ 5 } \)
\(=\frac { 18,00,000 }{ 5 } =Rs3,60,000\)
Goodwill=Average profitsxNumber of years purchase
=3,60,000x2=Rs 7,20,000
(ii) JOURNAL
| Date | Particulars | LF | Amt (Cr) | Amt (Cr) |
|---|---|---|---|---|
| Gupta's Capital A/c Dr | 1,20,000 | |||
| To Kumar's Capital A/c | 60,000 | |||
| To Kavita's Capital A/c (Being recording of Gupta's shares of goodwill on change in profit sharing ratio) |
60,000 |
Calculation of sacrifice or Gain of each partner
Sacrificing ratio=Old share - New share
Kumar \(=\frac { 1 }{ 3 } -\frac { 1 }{ 4 } =\frac { 4-3 }{ 12 } =\frac { 1 }{ 12 } \) Sacrifice
Gupta \(=\frac { 1 }{ 3 } -\frac { 2 }{ 4 } =\frac { 4-6 }{ 12 } =\left( \frac { 2 }{ 12 } \right) \) Gain
Kavita \(=\frac { 1 }{ 3 } -\frac { 1 }{ 4 } =\frac { 4-3 }{ 12 } =\frac { 1 }{ 12 } \)
Gupta will pay for goodwill \(=7,20,000x\frac { 2 }{ 12 } Rs1,20,000\)
14.
C gains A sacrifices 3/10 share.Debit C and Credit A with Rs 18,000.
15.
(i) Profit on revaluation = Rs 73,000
(ii) Betty and Veronica's gaining ratio=2:1 Debit Betty and Vernoica with Rs 9,367 and Rs 4,683 respectively and Credit Archie with Rs14,050.
16.
Debit Shitu's capital account and Credit Montoo's capital account with Rs 10,000
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