Question by CA (Dr.) G.S.GREWAL, Series – 2

Fill in the Blanks

1. The ratio in which one or more partners of the firm forego i.e., sacrifice their share of profits in favour of one or more partners of the firm is called ___________________.

True / False

1. Sudhir and Bhuwan are partners in a firm sharing profits in the ratio of 3:2. They decided to share future profit equally. On the date of change in profit sharing ratio, Profit and Loss Account  has a debit balance of ₹ 50,000. It will be adjusted in Partners Capital Accounts by passing the following Journal Entry:

Sudhir’s Capital A/c                                     …Dr. 30,000

Bhuwan’s Capital A/c                                   …Dr. 20,000

To Profit and Loss A/c                                                     50,000.

Multiple Choice Questions

1. Gaining Ratio is calculated by deducting

(a)    Sacrificed profit share from new profit share of the partner.

(b)    Sacrificed profit share from old profit share of the partner.

(c)    New profit share from old profit share of the partner.

(d)    Old profit share from new profit share of the partner.

1. Sacrificing Ratio
1. True

Reason: Profit and Loss Account (Dr.) is shown on the Assets side of Balance Sheet and is an accumulated loss distributed among old partners in old profit sharing ratio.

Sudhir’s Share = ₹ 50,000 X 3/5 = ₹ 30,000

Bhuwan’s Share = ₹ 50,000 X 2/5 = ₹ 20,000.

1. (d)

Reason: – Gaining ratio means increase in share. Thus, new profit share will be higher than the old profit share. Therefore, Gaining Ratio = New Ratio – Old Ratio.

Question Series – 7

1. At the time of change in profit sharing ratio the combined shares of all partners remains unchanged.
1. The ratio in which one or more partners of the firm forego i.e., sacrifice their share of profits in favour of one or more partners of the firm is called _______________.
1. Goodwill is accounted in the books if

(a)    It is a Purchased Goodwill

(b)    It is a Self Generated Goodwill

(c)    It is decided to be accounted by the Partners

(d)    Its amount is paid by the Gaining Partner

1. True

Reason: At the time of Change in Profit Sharing Ratio the combined shares of all partners remains unchanged because their share may change but their total share remains same.

1. Sacrificing Ratio
1. (a)

Reason:- According to AS-26, Intangible Assets, if any consideration is paid for Goodwill (Purchased Goodwill) it be accounted in the books otherwise it is not to be accounted. Thus, Self-generated Goodwill is not accounted. It is open to the partners to decide whether Self-generated Goodwill is to be accounted or not. Similarly, amount brought by Gaining Partner is settlement of his account.

Question Series – 12

1. Any change in the relationship of existing partners which results in an end of the existing agreement and brings into effect a new agreement is _______________
1. In the event of change in Profit-sharing ratio, General Reserve existing in the Balance Sheet is transferred to Capital Accounts of partners in their Old Profit Sharing Ratio.
1. X and Y shared profits and losses in the ratio of 3:2 with effect from 1st April, 2019; they decided to share profits equally. Goodwill of the firm was valued at ₹60,000. The adjustment entry for Goodwill will be:

(a)    Dr. Y’s Capital A/c and Cr. X’s Capital A/c with ₹6,000.

(b)    Dr. X’s Capital A/c and Cr. Y’s Capital A/c with ₹6,000.

(c)    Dr. X’s Capital A/c and Cr. Y’s Capital A/c with ₹600.

(d)    Dr. Y’s Capital A/c and Cr. X’s Capital A/c with ₹600.

1. Reconstitution of Partnership

Reason: Any change in existing agreement of partnership is reconstitution of the firm. As a result, existing agreement comes to an end and new agreement comes into existence but the firm continues.

1. True

Reason: General Revenue existing in the Balance Sheet is transferred to Capital Accounts of partners in old profit-sharing ratio because it is set aside out of the profits earned by the firm the profit sharing ratio had changed. Had these profits distributed and not set aside to General Reserve each partner would have received credit in their old profit sharing ratio.

1. (a)

Reason                                                                          X                          Y

Old profit-sharing ratio                                                3                            2

New profit-sharing ratio                                               1                           1

Change in profit-sharing ratio                            = 3/5 – 1/2   2/5 – 1/2

=  6 – 5/10      4 – 5/10

= 1/10 (Sacrificing)       -1/10 (Gain)

Value of Goodwill of the firm                              = ₹60,000

Y’s share = ₹60,000 × 1/10 = ₹6,000

X’s share = ₹60,000 × 1/10 = ₹6,000.

Question Series – 17

1. A and B were partners in a firm sharing profits or losses in the ratio of 3 : 5. With effect from 1st April, 2019, they decided to share profits or losses equally. Due to the change in profit sharing ratio, A’s sacrifice will be 1/8.
1. If profit-sharing ratio changes, Investments Fluctuation Reserve is _________________ by the amount of fall in value of investments.
1. Change in the relationship of existing partners which results coming to an end in agreement and a new agreement coming into effect is:

(a)    Revaluation of Partnership

(b)    Reconstitution of Partnership

(c)    Realisation of Partnership

(d)    Dissolution of Firm

1. False

Reason:                                                                                  A                 B

Old Ratio                                                                   3           5

New Ratio                                                                 1           1

Change in Profit sharing Ratio                            =           3/8 – 1/2        5/8 – 1/2

=             3 – 4/8        5 – 4/8

=        -1/8 (Gain)     1/8 (Sacrifice)

1. Debited

Reason:- If profit-sharing ratio changes, Investments Fluctuation Revenue is debited by the amount of fall in value of investments because it is a specific reserve set aside to meet this loss.

1. (b)

Reason: – Reconstitution of partnership means change in the relationship of existing partners. As the existing agreement has come to an end, and new agreement has come into effect, it is change in partnership i.e., reconstitution of partnership.

Question Series – 36

1. In the event of change in Profit-sharing ratio, General Revenue existing in the Balance Sheet is transferred to Capital Accounts of partners in their Old Profit-Sharing Ratio.
1. If profit-sharing ratio changes and market value of investment is more than Book value, Investment Fluctuation Reserve appearing in the Balance Sheet is transferred to ___________ of partners in their old profit sharing ratio.
1. Neha and Nisha shared Profits and Losses in the ratio of 5:4. With effect from 1st April, 2019 they decided to share profits equally. The goodwill of the firm was valued at ₹36,000. The necessary single adjustment entry will be:

(a) Dr. Nisha’s Capital A/c and Cr. Neha’s Capital A/c with ₹2,000

(b) Dr. Neha’s Capital A/c and Cr. Nisha’s Capital A/c with ₹2,000

(c) Dr. Neha’s Capital A/c and Cr. Nisha’s Capital A/c with ₹200

(d) Dr. Nisha’s Capital A/c and Cr. Neha’s Capital A/c with ₹200

1. True

Reason: General Revenue existing in the Balance Sheet is transferred to Capital Accounts of partners in old profit-sharing ratio as it is from the effort of the partners before the reconstitution of partnership firm.

1. Capital Account
1. (a)

Reason: –

Neha         Nisha

Old profit-sharing ratio 5:4

New profit-sharing ratio 1:1

Change in profit-sharing ratio = 5/9 – 1/2       4/9 – 1/2

= 10 – 9/18         8 – 9/18

=    1/18 (Sacrificing)        -1/18 (Gain)

Goodwill of the firm = ₹36,000

Neha’s Share = ₹36,000 × 1/18 = ₹2,000

Nisha’s Share = ₹2,000

Question – Series 69

1. A and B were partners in a firm sharing profits or losses equally. With effect from 1st April, 2019 they decided to share profits and losses in the ratio of 4 : 3. Due to the change in profit sharing ratio. B’s sacrifice will be 1/14.
1. If the profit sharing ratio among A, B and C 3:2:1 is changed to 1:2:3, then the partner(s), whose share will be unaffected is/are ____________.
1. Journal entry passed for recording an unrecorded asset at the time of reconstitution of partnership is:

(a) Revaluation A/c …Dr.

To Asset (Unrecorded) A/c

(b) Asset (Unrecorded) A/c …Dr.

To Cash A/c

(c) Cash A/c …Dr.

To Asset (Unrecorded) A/c

(d) Asset (Unrecorded) A/c …Dr.

To Revaluation A/c

1. True

Reason:                                                        A               B

Old Ratio                                           1                 1

New Ratio                                         4                 3

Change in Profit sharing Ratio =           1/2 – 4/7       1/2 – 3/7

=   7 – 8/14       7 – 6/14

=    -1/14 (Gain)     1/14 (Sacrifice)

B’s sacrifice = 1/14

1. B
2. (d)

Reason: – Unrecorded Asset means increase in the value of asset since increase in asset is debited, Asset (Unrecorded) will be debited. Revaluation A/c will be credited because it is a gain (profit) for the firm.