Admission of a partner-Notes

NOTES

CHAPTER 5: Admission of A Partner

Reasons for admission of partner:

To increase the capital of firm- the new partner may bring in more funds into the business.
To make the use of expert knowledge- the incoming partner may possess expert knowledge or technique to be used by the firm.
Avoid competition
For expansion of business

Example 1:

X and Y are partners sharing profit in the ratio of 3 : 2. They admit Z as a new partner for ⅕^th share in profit. Calculate the new profit sharing ratio and sacrificing ratio.

Solution:

Calculation of new profit sharing ratio

Let total profit = 1

New Partner’s share = $\frac{1}{5}$

Remaining share = 1 – $\frac{1}{5}$ = $\frac{4}{5}$

X’s new share = $\frac{3}{5}$ of $\frac{4}{5}$ i.e. $\frac{12}{25}$

Y’s new share = $\frac{2}{5}$ of $\frac{4}{5}$ i.e. $\frac{8}{25}$

Z’s share = $\frac{1}{5}$

The new profit sharing ratio of X, Y and Z is:

$\frac{12}{25} : \frac{8}{25} : \frac{1}{5} = \frac{12 : 8 : 5}{25} = 12 : 8 : 5$

X’s sacrifice = $\frac{3}{5} - \frac{12}{25} = \frac{(15 - 12)}{25} = \frac{3}{25}$

Y’s sacrifice = $\frac{2}{5} - \frac{8}{25} = \frac{(10 - 8)}{25} = \frac{2}{25}$

Sacrificing ratio = 3 : 2

New ratio = 12 : 8 : 5

Example 2:

X and Y are partners sharing profit in the ratio of 5 : 3. Z was admitted as a partner. X surrendered $\frac{1}{5}$ ^th of his share and Y $\frac{1}{3}$ ^rd of his share in favour of Z. Calculate the new profit sharing ratio.

Solution:

X surrenders $\frac{1}{5}$ of his share: $\frac{1}{5}$ ^th of $\frac{5}{8}$ = $\frac{1}{8}$

Y surrenders $\frac{1}{3}$ of his share i.e. = $\frac{1}{3}$ of $\frac{3}{8}$ = $\frac{1}{8}$

So sacrificing ratio of X and Y is $\frac{1}{8}$ : $\frac{1}{8}$ (equal)

X’s new share = $\frac{5}{8} - \frac{1}{8} = \frac{4}{8}$

Y’s new share = $\frac{3}{8} - \frac{1}{8} = \frac{2}{8}$

Z’s new share = $\frac{1}{8} + \frac{1}{8} = \frac{2}{8}$

New profit sharing ratio of X, Y and Z is $\frac{4}{8} : \frac{2}{8} : \frac{2}{8}$ or 4 : 2 : 2 or 2 : 1 : 1.

Sacrificing ratio = 1 : 1

New ratio = 2 : 1 : 1

Example 3:

X, Y and Z are partners sharing profits in the ratio of 2 : 2 : 1. W is admitted as a new partner for ⅙^th share. Z will retain his share. Calculate new profit sharing ratio.

Solution:

Let the total share of the firm = 1

Share of Z and W = $\frac{1}{5} + \frac{1}{6} = \frac{6 + 5}{30} = \frac{11}{30}$

Remaining share = $1 - \frac{11}{30} = \frac{19}{30}$

Example 4:

A and B are sharing profits and losses in the ratio of 7 : 5. They admit Z as new partner who acquires $\frac{1}{12}$ ^th from A and $\frac{1}{6}$ ^th from B as his share. Calculate the new profit sharing ratio and sacrificing ratio.

Solution:

Old profit sharing ratio of A and B is 7 : 5.

Z acquires his share $\frac{1}{12}$ ^th from A and $\frac{1}{6}$ ^th from B.

His total share comes to $\frac{1}{12} + \frac{1}{6} = \frac{1 + 2}{12} = \frac{3}{12}$ .

A’s share after giving $\frac{1}{12}$ ^th share to Z = $\frac{7}{12} - \frac{1}{12} = \frac{6}{12}$

B’s share after giving 1/6th share to Z = $\frac{5}{12} - \frac{1}{6} = \frac{3}{12}$

Hence, the new profit sharing ratio will be 2 : 1 : 1.

Sacrificing ratio:

A’s sacrificed = $\frac{1}{12}$

B’s sacrificed = $\frac{1}{6}$

1 : 2

Treatment of goodwill:

1. When premium of goodwill is paid privately

Example 1:

Q and W are partners in a firm sharing profits and losses in the ratio of 3 : 2. They admit A as a partner for 1/6th share. A paid Rs. 60,000 directly to Q and W as his share of goodwill. Pass the necessary journal entry.

Solution:

No journal entry will be passed as A paid his share of goodwill to Q and W directly i.e. privately outside the firm.

2. When an incoming partner brings his share of goodwill in kind

Example 2:

X and Y are partners in a firm sharing profits in the ratio of 3 : 2. On January 1, 2012, they admit Z as a new partner for 3/13th share in the profits. The new ratio will be 5 : 5 : 3. Z contributes the following assets towards his capital and for his share of goodwill.

Stock Rs. 40,000, debtors Rs.35000, land Rs. 25,000. Plant and machinery 45,000. On the date of admission of Z the goodwill of the firm was valued at Rs. 45,000. On the date of admission of Z, the goodwill was valued at Rs. 3,25,000. Record the necessary journal entries.

Solution:

Date	Particulars	L.F	Dr.	Cr.
2012 Jan 1	Stock A/cDr. Debtors A/cDr. Land A/cDr. Plant and machinery A/cDr. To goodwill A/c To Z’s capital A/c		40,000 35,000 25,000 45,000	75,000 70,000
	Goodwill A/cDr. To X’s capital A/c $(75, 000 \times \frac{14}{15})$ To Y’s capital A/c $(75, 000 \times \frac{1}{15})$		75,000	70,000 5,000

Date

Particulars

L.F

Dr.

Cr.

2012
Jan 1

Stock A/cDr.
Debtors A/cDr.
Land A/cDr.
Plant and machinery A/cDr.
To goodwill A/c
To Z’s capital A/c

40,000
35,000
25,000
45,000

75,000
70,000

Goodwill A/cDr.

To X’s capital A/c $(75, 000 \times \frac{14}{15})$

To Y’s capital A/c $(75, 000 \times \frac{1}{15})$

75,000

70,000

5,000

When the new partner is unable to bring his share of goodwill in cash or kind

Example 3:

X and Y are partners sharing profit in the ratio of 3 : 2. They agree to admit Z for $\frac{1}{5}$ ^th share in future profit. Z brings 5,00,000 as capital and is unable to bring his share of goodwill in cash. The goodwill of the firm is to be valued at Rs. 3,60,000. Pass the necessary journal entries if:

No goodwill exists in the books.
At the time of admission goodwill existed in the books of the firm at 1,60,000

Solution:

Date	Particulars	L.F	Dr.	Cr.
	Bank A/cDr. To Z’s capital Z’s capitalDr. To goodwill Goodwill A/cDr. To X’s capital To Y’s capital X’s capital A/cDr. Y’s capital A/cDr. To goodwill A/c Bank A/cDr. To Z’s capital Z’s capital A/cDr. To goodwill A/c Goodwill A/cDr. To X’s capital To Y’s capital		5,00,000 72,000 72,000 96,000 64,000 5,00,000 7,20,000 7,20,000	5,00,000 72,000 4,32,000 28,800 1,60,000 5,00,000 7,20,000 43,200 28,800

Hidden goodwill

Example:

A and B are sharing profits and losses in the ratio of 3 : 2. They admit C into partnership for $\frac{1}{4}$ ^th share. C brings in cash requisite share of firm goodwill and 20,000 as capital. The goodwill of the firm was valued at 8,000. Goodwill appears in the books at 1,000. Partners withdrew half their share of goodwill. Give necessary entries.

Solution:

Particulars	Debit	Credit
A’s capital A/c $(1000 \times \frac{3}{5})$ Dr. B’s capital A/c $(1000 \times \frac{2}{5})$ Dr. To goodwill A/c	600 400	1,000
Cash A/c Dr. To C’s capital A/c Dr. To goodwill A/c	22,000	20,000 2,000
Goodwill A/c Dr. To A’s capital To B’s capital	2,000	1,200 800
A’s capital A/c Dr. B’s capital A/c Dr. To cash A/c	600 400	1,000