Question by CA (Dr.) G.S.GREWAL, Series – 5

True/False

  1. The claim of Workmen Compensation is less than Workmen Compensation Reserve at the time of admission of a partner. The difference is Workmen Compensation Reserve and claim will be transferred to Capital Accounts of the old partners in their old profit sharing ratio.

Fill in the Blank

  1. If book value and the market value of investment is same, Investment Fluctuation Reserve at the time of Admission of a Partner, is distributed among _______________ in their _____________________.

Multiple Choice Question

  1. A, B and C are partners sharing profits and losses in the ratio 6 : 3 : 3, they agreed to take D, as new partner with 1/8th Share of profits. The new profit sharing ratio will be:

(a)    14 : 7 : 7 : 4

(b)    1 : 1 : 1 : 1

(c)    12 : 27 : 36 : 42

(d)    12 : 36 : 27 : 42.

Answer Series – 5

  1. Partner’s Capital, Old Profit Sharing
  1. True

Reason: If claim is more than reserve then for the deficit Revaluation Account is debited.

  1. (a)

Reason: – As D is admitted for a share of 1/8th, therefore the remaining share of 7/8th will be shared by the old partner’s, in the ratio 6 : 3 : 3, and the new ratio will be 14 : 7 : 7 : 4.

Question Series – 8

  1. Gaining partner always compensates Sacrificing Partner.
  1. At the time of admission of partner, A new partner brings capital and goodwill to get share in future _______ in the firm.
  1. A and B are sharing profits and losses in the ratio 5 : 3. They admitted C as a partner and gave him 1/5th share of the profits. He acquired his share equally from A and B. New profit sharing ratio will be:

(a)    5 : 6 : 3

(b)    2 : 4 : 6

(c)    21 : 11 : 8

(d)    18 : 24 : 38.

Answer Series – 8

  1. False

Reason: Partnership is governed by the agreement among the partners. Partners may agree not to receive compensation for sacrificing their shares in profits.

In the event Sacrificing Partners decide not to take compensation for the sacrificed share, Gaining Partner or Partners will not compensate the Sacrificing Partner or Partners. Thus, it not always that Gaining Partner or Partners compensate the Sacrificing Partners.

  1. Profits
  1. (c)

Reason: As C is admitted for a share of 1/5th (or 2/10th), which he takes 1/10th from A and 1/10th from B. Therefore remaining shares of A and B will be 21/40 (5/8 – 1/10) and 11/40 (3/8 – 1/10) respectively. The new ratio will be 21 : 11 : 8.

Question Series – 10

  1. All partners consent is required to admit a new partner.
  1. Reserve appearing in the Balance Sheet will be divided among partners during admission in _______ ratio.
  1. A and B are sharing profits and losses in the ratio 3 : 2. They admitted C as a new partner to give him 2/10th share in the profit. The new profit sharing ratio will be:

(a)    12 : 8 : 5

(b)    3 : 2 : 2

(c)    3 : 2 : 5

(d)    2 : 1 : 2.

Answer Series – 10

  1. True

Reason: A partner can be admitted into partnership if the Partnership Deed exists and it has a clause for admission of a partner. In other case, The Partnership Act, 1932 prescribes that a partner can be admitted into Partnership with the consent of all the partners.

  1. Old Profit Sharing
  1. (a)

Reason: As C is admitted for a share of 2/10th, therefore the remaining share of 4/5th will be shared by the old partner’s, in their Old Profit-Sharing ratio i.e., 3 : 2,Thus,  the new ratio will be 12 :8 : 5.

Question Series – 18

  1. Admission of a Partner means Reconstitution of a firm as existing agreement comes to an end and a new agreement comes into effect because of the Admission of a Partner.
  1. When existing goodwill is written off at the time of admission of new partner, it is transferred among old partners in ________.
  1. If Capitals are maintained on Fixed Capitals Basis, Undistributed profits, Profit and Loss Account, General Reserve etc. are transferred to:

(a)    Partner’s Fixed Capital A/c

(b)    Partner’s Current A/c

(c)    Revaluation A/c

(d)    Profit and Loss Adjustment A/c

Answer Series – 18

  1. True

Reason: Reconstitution of firm takes place when there is a change in Profit-Sharing Ratio, Admission, Retirement or Death of a Partner because new terms are agreed among partners and fresh Partnership Deed is entered. As a result, old Partnership comes to an end and new agreement comes into effect.

  1. Old Profit Sharing Ratio

Reason:- Existing Goodwill is written off among old partners in their old profit-sharing ratio because it is an intangible asset coming into existence before the admission of the partner and new partner compensates the sacrificing partner by paying Goodwill.

  1. (b)

Reason: – Where the capital accounts of partners are maintained following Fixed Capital Accounts method, two accounts are maintained for each partner i.e. Capital account and Current account. Capital account is credited or debited with the permanent increase or decrease in capitals of the partners. All other credits and debits are shown in the Current accounts. Thus, the undistributed profits, General Reserve etc. will be transferred to Partners’ Current Accounts.

Question Series – 24

  1. Unrecorded Assets or Liabilities are transferred to Partner’s Capital Accounts.
  1. Goodwill brought by the incoming partner is distributed among the old partners in their_____.
  1. A and B are sharing profits and losses in the ratio of 3 : 2. They admitted C as a partner for 1/3rd share in the profits of the firm. The new profit sharing ratio will be:

(a) 6 : 4 : 5

(b) 3 : 2 : 2

(c) 3 : 2 : 5

(d) 5 : 2 : 3

Answer Series – 24

  1. False

Reason: Unrecorded assets and liabilities are credited and debited respectively in Revaluation Account and resulting gain (profit) or loss is credited / debited to Partners Capital Accounts.

Correct Statement: Unrecorded asset is credited in Revaluation Account and unrecorded liability is debited. Resulting gain (profit) or loss is transferred to Partners Capital Accounts.

  1. Sacrificing Ratio

Reason: Old partners sacrifice their share of profit in favour of incoming partner. Therefore, Incoming Partner compensates the sacrificing partners in their sacrificing ratio.

  1. (a)

Reason: When the sacrificing ratio is not given, it is presumed that the partners have sacrificed in their profit sharing ratio. In this case the sacrificing ratio will be 3 : 2. Sacrificing ratio will be deducted from the Old profit – sharing ratio to arrive at the new profit – sharing ratio. New profit – sharing ratio is calculated as follows:

A B C

Old Profit – Sharing Ratio 3/5 2/5 –

Less: Sacrificing Ratio 3/5th of 1/3rd 2/5th of 1/3rd                –

Or 1/5th or 3/15th 2/15th

New Profit – Sharing Ratio 2/5 (3/5 – 1/5) 4/15 (2/5 – 2 /15) 1/3

Or 6/15 4/15 5/15

6 :4 :5

Question Series – 25

  1. Old profit sharing ratio plus new profit sharing ratio is sacrificing ratio.
  1. Raj is admitted in a firm for 1/4th share in the profits for which he brings ₹30,000 as goodwill. It will be credited to the Old Partners Capital Accounts in their ________.
  1. A and B are sharing profits and losses in the ratio of 3 : 2. They admit C as partner for 1/3rd share in the profits. He takes this share 3/5th from A and 2/5th from B. New profit sharing ratio will be:

(a) 5 : 6 : 3

(b) 2 : 4 : 6

(c) 6 : 4 : 5

(d) 18 : 24 : 38

Answer Series – 25

  1. False

Reason: Sacrificing Ratio is the ratio which is given by the old partners to the new partner. Thus, new profit – sharing ratio is lesser that the old profit – sharing ratio. Thus, Sacrificing Ratio will be Old Profit – sharing Ratio less New Profit – Sharing Ratio.

  1. Sacrificing Ratio
  1. (c)

Reason: C takes 3/5th and 2/5th share from A and B respectively. Thus, sacrifice by A and B is 3/5th of 1/3rd and 2/5th of 1/3rd respectively. Sacrificing ratio will be deducted from the Old profit share to arrive at the new profit – sharing ratio. New profit – sharing ratio is calculated as follows:

A B C

Old Profit – Sharing Ratio 3/5 2/5 –

Less: Sacrificing Ratio 3/5th of 1/3rd 2/5th of 1/3rd                 –

Or 1/5th or 3/15th 2/15th

New Profit – Sharing Ratio 2/5 (3/5 – 1/5) 4/15 (2/5 – 2 /15) 1/3

Or 6/15 4/15 5/15

6 :4 :5

Question Series – 33

  1. Decrease in liabilities at the time of admission of a partner is credited to Revaluation Account.
  1. At the time of admission of a partner the balance of Profit and Loss Account is transferred to the capital account of _______ in their ______ ratio.
  1. X is admitted into the partnership for 1/4th share. Total capital of the firm is ₹ 4,50,000, the amount that X will bring in

(a) ₹ 1,50,000

(b) ₹ 1,20,000

(c) ₹ 1,12,500

(d) ₹ 1,00,000

Answer Series – 33

  1.  True

Reason: Decrease in liabilities is a gain (profit) for the firm. Following the rule ‘Credit all Incomes and Gains’, Revaluation Account is credited.

  1. Old Partners, Old Profit-Sharing Ratio
  1. (b)

Reason: Existing capital of the firm is ₹ 4,50,000, being 3/4th in the new firm. Therefore, total capital of the new firm will be ₹ 6,00,000 (₹ 4,50,000 x 4/3). X’s share in the new firm is 1/4th, thus capital of X will ₹ 1,50,000.

Question Series – 37

  1. Raj is admitted in a firm for 1/4th share in the profits for which he brings ₹ 30,000 as goodwill. It will be taken by the old partners in gaining ratio.

      2. A and B are partners sharing profits in the ratio of 7 : 3. C is admitted for 3/7th share in profits. If the new   profit sharing ratio is 14 : 6 : 5, sacrificing ratio will be _____.

  1. X and Y are partners sharing profits and losses in the ratio 3 : 2, Z was admitted for the 1/5th share he brings ₹ 150,000, as his capital. If capitals are to be proportionate to profit – sharing ratio, the respective capitals of the partners will be:

(a) ₹ 3,00,000 : 3,00,000 : 1,50,000

(b) ₹ 3,60,000 : 2,40,000 : 1,50,000

(c) ₹ 1,50,000 : 1,50,000 : 1,50,000

(d) ₹ 1,50,000 : 2,00,000 : 4,00,000

Answer Series – 37

  1.  False

Reason:- It is a principle that Gaining Partner or Partners compensate the Sacrificing Partner or Partners. Therefore, Gaining Partner or Partners will compensate the Sacrificing Partner or Partners.

Correct Statement: Raj is admitted in a firm for 1/4th share in the profits for which he brings ₹ 30,000 as Goodwill. It will be taken by the old partners in their Sacrificing Partners.

  1. 7 : 3
  1.  (b)

Reason: Z has brought in ₹ 150,000 as capital for his 1/5th share in profits. Thus, total capital of the firm will be ₹ 750,000 (₹ 150,000 x 5 / 1). New profit – sharing ratio is 12 : 8 : 5 calculated as follows:

New profit – sharing ratio X = 4/5 x 3/5 = 12/ 25

Y = 4/5 x 2/5 = 8/25

Z = 1/5 or 5/25 (Given)

Therefore, capitals of X and Y will be ₹ 360,000 and ₹ 240,000 respectively (₹ 750,000 x 12 / 25 for X and ₹ 750,000 x 8 / 25 for Y).

Question Series – 38

  1. Capital Account of the partners will be credited for Writing off goodwill.
  1. The amount brought by an incoming partner besides the capital at the time of his admission is ______.
  1. Current Accounts of the partners are opened:-

(a) When capital are fluctuating

(b) When capital are fixed

(c) When fresh capital is introduced

(d) Whether Capitals are fluctuating or fixed

Answer Series – 38

  1.  False

Reason:- Goodwill has a debit balance and so does the loss in case of debit balance in the Profit and Loss Account. Goodwill when written off or loss when distributed, Capital Account of the partners will be debited. Profit on revaluation of assets or reassessment of liabilities will have credit balance, which will be credited to the Capital Accounts.

Correct Statement:- Capital Account of the partners will be credited for Writing off goodwill.

  1. Premium for goodwill
  1. (b)

Reason: Capital accounts of partners can be maintained following either Fixed Capital Accounts Method or Fluctuating Accounts Capital Method. If Fixed Capital Accounts Method is followed, two accounts are opened for each partner i.e. Capital Account and Current Account. Entries relating to additional capital being introduced and capital withdrawn are posted into the Fixed Capital a/c, while other entries such as salary, interest, profit or loss distribution etc. are posted to Current Account.

Question Series – 44

  1. Revaluation Account is debited to transfer gain(profit) on Revaluation to old Partners’ Capital Accounts in their old profit sharing ratio.
  1. The amount earlier written off as bad debt now received is Revaluation Account is credited to _______.
  1. X is admitted into the partnership for 1/4th share. Total capital of the firm is ₹ 4,50,000, the amount that X will bring in

(a)     ₹ 1,50,000

(b)     ₹ 1,20,000

(c)     ₹ 1,12,500

(d)     ₹ 1,00,000

Answer Series – 44

  1. True

Reason: Revaluation Account is closed by transferring the balance in the account to the Capital Accounts of the partners. Excess of total of credit side over the total of debit side is gain (profit) to the firm. Therefore, Revaluation Account is debited by the amount of gain (profit). Since, the gain (profit) is due to the old partners, old partners’ Capital Accounts are credited in their old profit sharing ratio.

  1. Revaluation Account
  1. (a)

Reason: Existing capital of the firm is ₹ 4,50,000, being 3/4th in the new firm. Therefore, total capital of the new firm will be ₹ 6,00,000 (₹ 4,50,000 x 4/3). X’s share in the new firm is 1/4th, thus capital of X will ₹ 1,50,000.

Question – Series 81

  1. Newly admitted partner does not have the right on the assets of the firm. .
  2. Revaluation Account is _____ to post (transfer) increase in Provision for Doubtful Debts.
  3. A, B and C are sharing profits and losses in the ratio of 3 : 2 : 1, D is admitted in the firm for 1/7th share of profit which he takes from A. New profit sharing ratio will be:

(a)     15 : 14 : 7 : 6

(b)     15 : 14 : 6 : 7

(c)     14 : 15 : 7 : 6

(d)     15 : 7 : 14 : 6

Answer – Series 81

  1. False

Reason: Newly admitted partner has right in the assets from the date he or she becomes partner.

  1. debited
  2. (a)

D takes his share from A. Therefore, A’s share will reduce by 1/7th (the share takes by D) and shares of remaining partners will remain unchanged. The new profit sharing ratio will be 15 : 14 : 7 : 6 calculated as follows:

          A       B       C       D

Old Profit Sharing Ratio                              3        2        1        –

Less: Sacrificing Ratio                          1/7th        –        –

New Profit Sharing Ratio                    15/42 (3/6th – 1/7)        2/6     1/6     1/7

Or                                                          15/42      14/42 7/42   6/42

                                                                     15    14      7        6

Question – Series 88

  1. At the time of admission of a partner, Revaluation Account is credited on increase in the value of Plant and Machinery.
  2. The amount earlier written off as bad debt now received is ______ to Revaluation Account.
  3. If X pays ₹ 1,50,000 as his share of goodwill to Y (privately), an existing partner, the treatment will be:

(a)     Goodwill Account will be debited by ₹ 1,50,000

(b)     Goodwill Account be debited by ₹ 6,00,000

(c)     Goodwill Account be credited by ₹ 1,50,000

(d)     No entry will be passed.

Answer – Series 88

  1. True

Reason: Asset (Plant and Machinery) has a debit balance and therefore any increase in its value is debited to it. Since, it is a gain (profit) because of increase value of Plant and Machinery. It is credited to Revaluation Account.

  1. Credited
  2. (d)

Reason: If goodwill is paid privately, it is not recorded in the books of account of the firm.

Question – Series 104

  1. Raj is admitted in a firm as a partner for 1/4th share in the profits for which he brings ₹ 30,000 as goodwill. It will be taken by the old partners in gaining ratio.
  2. A and B are partners sharing profits in the ratio of 7 : 3. C is admitted as a partner for 3/7th share in profit. If the new profit sharing ratio of the partners is 14 : 6 : 5, sacrificing ratio will be _______.
  3. A and B are partners sharing profits and losses in the ratio of 3 : 2. Their capitals are ₹ 30,000 and ₹ 20,000 respectively. On 31st March 2019, there is balance of General Reserve of ₹ 10,000. On 1st April, 2019 C was admitted for 1/3rd share who also brings ₹ 6,000 as share of goodwill. On the date of his admission, furniture was reduced by ₹ 1,000, Provision for Doubtful Debts increased by ₹ 1,000 and there is an appreciation of ₹ 4,000 in stocks. Old partners decide that C’s capital should be in accordance with his share of profit and capital of old partner’s. Total capital of the firm after admission of C will be:

(a)     ₹ 1,20,000

(b)     ₹ 1,02,000

(c)     ₹ 1,30,000

(d)     ₹ 1,10,000

Answer – Series 104

  1. False

Reason: It is a principle that Gaining Partner or Partners compensate the Sacrificing Partner or Partners. Therefore, Gaining Partner or Partners will compensate the Sacrificing Partner or Partners. 2. 7 : 3

  1. (b)

Reason: Capitals of A and B after adjustment for Reserves, Revaluation Profit and Share in Goodwill will be ₹ 68,000, calculated as follows:

Existing Capitals of A and B (Combined)                                          ₹ 50,000

Add:  General Reserve Distributed                                                   ₹ 10,000

Profit on Revaluation (₹ 4,000 – ₹ 1,000 – ₹ 1,000)                 ₹   2,000

Goodwill Brought in by C                                                         ₹   6,000

Total           ₹ 68,000

Capital of ₹ 68,000 is 2/3rd of total capital of the firm. Thus, total capital of the firm

= ₹ 68,000 x 3/2 = ₹ 102,000.

Question – Series 105

  1. Newly admitted partner does not have the right on the assets of the firm.
  2. The amount earlier written off as bad debt now received is credited to ____ on admission of a partner.
  3. X and Y are partners sharing profits in the ratio of 3 : 2, and capitals as ₹ 100,000 and ₹ 50,000 respectively, after adjustments. Z is admitted for 1/5th share in profits, The amount Z will contribute as capital will be:

(a)     ₹50,000

(b)     ₹35,000

(c)     ₹37,500

(d)     ₹60,000

Answer –  Series 105

  1. False

Reason: Newly admitted partner has right in the assets from the date he or she becomes partner.

  1. Revaluation Account
  2. (c)

Reason: Remaining share (after 1/5th share of Z) is 4/5th and the capital for 4/5th share is ₹ 150,000. Total capital of the firm will be ₹ 187,500 (₹ 150,000 x 5/4), and Z’s share will be ₹37,500 (₹ 187,500 – ₹ 150,000).

Question – Series 119

  1. Admission of a partner means reconstitution of a firm as existing agreement comes to an end and a new agreement comes into effect because of the admission of a partner..
  2. Partners’ Capital Account is _______ to transfer to gain (profit) of Revaluation Account.
  3. Profit or Loss on revaluation of assets and reassessment liabilities is transferred to Partner’s Capital Accounts in their:

(a)     Fixed Capital Ratio

(b)     Equal Ratio

(c)      Old Profit Sharing Ratio

(d)     Gaining Ratio

Answer – Series 119

  1. True

Reason: Reconstitution of firm happens when there is a change in profit-sharing ratio, admission retirement or death because new terms are agreed among partners and fresh Partnership Deed is entered. As a result, old partnership comes to on end and new agreement comes into effect.

  1. Credited
  2. (c)

Reason: Profits or losses on the revaluation of assets and reassessment of liabilities is transferred to old Partner’s Capital Account in their old profit sharing ratio because the profit or loss arising out of revaluation relates to the period of the old partnership i.e., before the admission of the new partner. Thus, they will share the profit or loss in their old profit sharing ratio i.e. the ratio before the admission of the new partner.

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