Accounting Treatment of Existing Goodwill Archives

4. ADMISSION OF A PARTNER According to Section 31 of Indian Partnership Act, 1932, New Partner shall be admitted in the Firm only when all existing partners agree to admission of new partner or it is agreed otherwise by partners in Partnership Deed. Change in Profit Sharing Ratio Change in Profit Sharing Ratio takes place at the time of Reconstitution of Firm. In this chapter Admission of new Partner will lead to change in Profit Sharing Ratio of a Partner in existing firm. Since, New or Incoming Partner acquires his/her share from old Partners; therefore, we need to determine New Profit Sharing Ratio and also Sacrificing Ratio. New Profit Sharing Ratio New Profit Sharing Ratio is the ratio in which all Partners, including new Partner, share future profits and losses of the Firm. New Partner acquires share from Old Partners through different ways. There are different cases related to acquisition of Shares by New Partner from Old Partners Case 1. When New or Incoming Partner acquires his share from Old or Existing Partners in their Old Profit Sharing Ratio: Situation I. When Profit Share of New Partner is given, but sacrifice made by Old Partners are not given: NPSR is calculated as follows: Subtract New Partner’s Ratio from 1 and Divide remaining share among Old Partners in their OPSR. Example: A & B Profit Sharing Ratio is 2:3. New Partner C enters into Partnership for 1/5th Share. In this case NPSR will be calculated as follows: 1 – 1/5 = 4/5 New Ratio of A = 4/5 × 2/5 =8/25 New Ratio of B = 4/5 × 3/5 =12/25 Ratio of C = 1/5 = 1/5 ×5/5 = 5/25 So, NPSR of A: B: C = 8:12:5 Ratio of Old Partners remain same as is evident from example A:B = 8:12 = 2:3 Situation II. When Share of New Partner is given and also New Profit Sharing Ratio of Old Partner is given. Subtract New Partner’s Ratio from 1 and Divide remaining share among Old Partners in their NPSR. Example: New Partner C enters into Partnership for 1/5th Share. Future Profit Sharing Ratio or NPSR of A & B is 2:3. In this case NPSR will be calculated as follows: 1 – 1/5 = 4/5 New Ratio of A = 4/5 × 2/5 =8/25 New Ratio of B = 4/5 × 3/5 =12/25 Ratio of C = 1/5 = 1/5 ×5/5 = 5/25 So, NPSR of A: B: C = 8:12:5 Situation III. When New or Incoming Partner acquires his share from old or existing Partners equally. Deduct sacrifice made by old Partner to get NPSR of each Old Partner. Example: New Partner C enters into Partnership for 1/5th Share, which he took equally from A & B. Old Profit Sharing Ratio of A & B is 2:3. In this case NPSR will be calculated as follows: Share Surrendered by A= 1/2 × 1/5 = 1/10 Share Surrendered by B= 1/2 × 1/5 = 1/10 New Ratio of A = 2/5 – 1/10 = 3/10 New Ratio of B = 3/5 – 1/10= 5/10 Ratio of C = 1/5 = 1/5 ×2/2 = 2/210 So, NPSR of A: B: C = 3:5:2 Case 2. When New or Incoming Partner acquires his shares from Old or Existing Partners in a particular ratio Deduct sacrifice made by old Partner to get NPSR of each Old Partner. Example: New Partner C enters into Partnership for 1/5th Share, which he took from A & B in the ratio of 2:3. Old Profit Sharing Ratio of A & B is 2:1. In this case NPSR will be calculated as follows: Share Surrendered by A= 2/5 × 1/5 = 2/25 Share Surrendered by B= 3/5 × 1/5 = 3/25 New Ratio of A = 2/3 – 2/25 = 44/75 New Ratio of B = 1/3 – 3/25= 16/75 Ratio of C = 1/5 = 1/5 ×15/15 = 15/75 So, NPSR of A: B: C = 44:16:15

Class 12 Accounts

Admission Of Partner

Accounting Treatment of existing goodwill & Hidden Goodwill, calculation of new profit sharing ratio in different cases, New Partner

By admin, 2 yearsJune 22, 2022 ago

Class 12 Accounts

Change in Profit Sharing Ratio

Investment Fluctuation Reserve Reconstitution of the Firm Sacrificing Ratio & Gaining Ratio Accounting Treatment of Goodwill Accounting Treatment of Reserves & Accumulated Profits or Losses

By admin, 2 yearsJune 22, 2022 ago