Advanced financial accounting - Lecture 18: Partnership

Advanced Financial
Accounting
FIN-611
Mian Ahmad Farhan
Lecture-18
Partnership


Admission of Partners (Issues)
1. Change of profit sharing ratio
2. Revaluation of assets and liabilities or
revaluation of Net Assets
3. Calculation of goodwill
4. Accounting treatment of goodwill


Journal Entries
1.

Introduction of capital by new partner in term of cash:

Cash Account
xxx
Partner’s Capital Account
2.

xxx

Introduction of capital in shape of assets:

Stocks

xxx
Furniture
xxx
Machinery
xxx
Partner’s Capital Account

xxx


Change in Profit Sharing ratio


1. Interest on capital
2. Partner’s salary
3. Profit sharing ratio


QUESTION
Old partner’s profit sharing ratio
A 3/5
B 2/5
C entered as a new partner. He will get 1/6 profit share.
Required:
What will be the new profit sharing ratio?


Solution
Shares of A & B:
Balance share = 1- 1/6 = 5/6

A’s Share = 3/5 = 5/6 x 3/5 = 3/6
B’s Share = 2/5 = 5/6 x 3/6 = 2/6
C’s Share = 1/6
New profit sharing ratio:
3/6 : 2/6 : 1/6
3:2:1


Question
A and B’s share = 3: 2
C’s Share
=¼
Share of A & B:
=1ẳ=ắ
A = ắ x 3/5 = 9/20
B = ắ x 2/5 = 6/20
C = ¼ x 5/5 = 5/20
9/20 : 6/20 : 5/20
9:6:5


A & B profit sharing ratio= 3:2
Offer to C = ¼
Balance for A & B = 1 – ¼ = ¾
A’s share = ¾ x ½ = 3/8
B’s share = ắ x ẵ = 3/8
A :
B
:
C

3/8
3/8
ẳ
Cs share = ẳ x 2/2 = 2/8
New profit sharing ratio
A :
B
:
C
3
2
2


Sacrifice Ratio


Old ratio
A’s old ratio = 3/5
B’s old ratio = 2/3
New ratio
A 3/8
B 3/8
C 2/8


A’s sacrifice ratio
Old ratio – New ratio
3/5 – 3/8
24-15

= 9
40
B’s sacrifice ratio
Old ratio – New ratio
2/5 – 3/8
16-15
= 1
40
Sacrifice ratio = 9:1


Admission of New Partner
(Revaluation of Assets & Liabilities)


Revaluation
1.
2.
3.

No change in the value
Increase in the value
Decrease in the value


Revaluation
Increase in assets
Assets A/c xxx
Revaluation A/c xxx
Decrease in assets

Revaluation A/c xxx
Assets A/c xxx
Increase in liabilities
Revaluation A/c xxx
Liabilities A/c xxx
Decrease in liabilities
Liabilities A/c xxx
Revaluation A/c xxx


Revaluation
Increase in assets Rs. 10,000
Decrease in assets Rs. 2,000
Increase in liabilities Rs. 3,000
Increase in liabilities Rs. 500
Increase in assets
Assets A/c 10,000
Revaluation A/c 10,000
Decrease in assets
Revaluation A/c 2,000
Assets A/c xxx 2,000
Increase in liabilities
Revaluation A/c 3,000
Liabilities A/c 3,000
Decrease in liabilities
Liabilities A/c 500
Revaluation A/c 500


Revaluation Account

Particulars

Amount

Particulars

Amount

Assets (Dec.)
Liabilities (Inc.)
Balance

2,000
3,000
5,500

Assets (Inc.)
Liabilities(Dec.)

10,000
5,00

10,500

10,500


A & B old ratio = 3:2
A’s share = 5,500 x 3/5 = 3,300

B’s share = 5,500 x 2/5 = 2,200
Accounting Entry
Revaluation A/c 5,500
Old partner’s capital A/c 5,500
(Old sharing ratio)


Goodwill Calculation


Average Purchase Method


Goodwill is three times of the average profit of previous five
years.
Average profit = 100 / 5 = 20
Goodwill = 20 x 3 = 60