Adjustment of capital on the basis of new profit sharing ratio

Adjustment of capital on the basis of new profit sharing ratio

Sometimes, it may be agreed by the partners that their capitals in the reconstituted firm be in the proportion of their new profit sharing ratio. There can be two situations.

The new partner may be required to bring proportionate capital for his share of profit. New partner’s capital is calculated on the basis of the capital of the reconstituted firm or on the basis of combined capitals of the old partners for their share of profit.

The old partners may be required to make their capital in proportion to their new profit sharing ratio. Old partners’ capital is calculated on the basis of the capital brought by the new partner for his share of profit. The deficiency or excess in the old partners’ capital account may be adjusted through the current accounts or cash may be brought in or withdrawn by the partners.

Comprehensive problems

Illustration 24

Vetri and Ranjit are partners, sharing profits in the ratio of 3:2. Their balance sheet as on 31^st December 2017 is as under:

On 1.1.2018, they admit Suriya into their firm as a partner on the following arrangements.

(i) Suriya brings ₹ 10,000 as capital for 1/4 share of profit.

(ii) Stock to be depreciated by 10%

(iii) Debtors to be revalued at ₹ 7,500.

(iv) Furniture to be revalued at ₹ 40,000.

(v) There is an outstanding wages of ₹ 4,500 not yet recorded.

Prepare revaluation account, partners’ capital account and the balance sheet of the firm after admission.

Solution

Illustration 25

The balance sheet of Rekha and Mary on 31st March 2018 is as follows:

They share the profits and losses in the ratio of 3:1.They agreed to admit Kavitha into the partnership firm for 1/4 share of profit which she gets entirely from Rekha.

Following are the conditions:

i.            Kavitha has to bring ₹ 20,000 as capital. Her share of goodwill is valued at 4,000. She could not bring cash towards goodwill.

ii.            Depreciate buildings by 10%

iii.            Stock to be revalued at ₹ 6,000

iv.            Create provision for doubtful debts at 5% on debtors

Prepare necessary ledger accounts and the balance sheet after admission.

Solution

Illustration 26

Ameer and Raja are partners sharing profits in the ratio of 3:2. Their balance sheet is shown as under on 31.12.2018.

Rohit is admitted as a new partner who introduces a capital of ₹ 30,000 for his 1/5 share in future profits. He brings ₹ 10,000 for his share of goodwill.

Following revaluations are made:

i.            Stock is to be appreciated to ₹ 14,000

ii.            Furniture is to be depreciated by 5%

iii.            Machinery is to be revalued at ₹ 80,000

Prepare the necessary ledger accounts and the balance sheet after the admission.

Solution

*Note: Since the sacrificing ratio is not given and the new partner’s share is given, it is assumed that the old profit sharing ratio (3:2) is the sacrificing ratio and the new partner’s share of goodwill is distributed to the old partners accordingly.

Illustration 27

Veena and Pearl are partners in a firm sharing profits and losses in the ratio of 2:1. Their balance sheet as on 31st March, 2018 is as follows:

Deri is admitted on 1.4.2018 subject to the following conditions:

a)     The new profit sharing ratio among Veena, Pearl and Deri is 5:3:2.

b)    Deri has to bring a capital of ₹ 30,000

c)     Stock to be depreciated by 20%

d)    Anticipated claim on workmen compensation fund is ₹ 1,000

e)     Unrecorded investment of ₹ 11,000 has to be brought into books

f)      The goodwill of the firm is valued at ₹ 30,000 and Deri brought cash for his share of goodwill. The existing partners withdraw the entire amount brought by Deri towards goodwill.

Prepare the necessary ledger accounts and balance sheet after admission.

Solution

* Goodwill of the firm is ₹ 30,000

Deri’s share of goodwill = 30,000 × 2/10 = ₹ 6,000

It is to be distributed to Veena and Pearl in their sacrificing ratio of 5:1