Question 1

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Geeta and Sita are partners in a firm sharing-profits in the ratio of 3 : 2. They decide to share future profits equally. For this purpose the goodwill of the firm has been valued at Rs. 50,000. Record necessary adjustment entry for the same.

SOLUTION

Adjutment of goodwill amount at the time of change in profit sharing ratio:
Old Ratio = 3:2 and New Ratio 1:1
Geeta’s Sacrifice = 3/5 – 1/2 = 1/10
Sita’s Gain = 2/5 – 1/2 = 1/10
Share in goodwill = 50,000 × 1/10 = 5,000

Question 2

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X, Y and Z are partners in a firm sharing profits in 3 : 2 : 1 ratio. They decided to share profits equally with effect from April 1, 2003. For this purpose, the goodwill of the firm has been valued at Rs. 3,00,000. Calculate the amount of gain or sacrifice of each partner.

SOLUTION

Adjustment of goodwill at the time of change in profit sharing ratio:
Old Ratio 3:2:1 and New Ratio 1:1:1
X = 3/6 – 1/3 = 1/6 Sacrifice
Y = 2/6 – 1/3 = No Sacrifice/No Gain
Z = 1/6 – 1/3 = 1/6 Gain
Adjustment of goodwill = X’s Share = 3,00,000 × 1/6 = 50,000

Question 3

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E, F and G are partners sharing profits in 7 : 6 : 5 ratio. Their fixed capitals are Rs, 70,000, Rs. 40,000 and Rs. 80,000 respectively. It is now decided that the total capital of the firm should be Rs. 3,60,000 and should be in the profit sharing ratio of the partners. Calculate the amount of capital to be contributed by the individual partners.

SOLUTION

Adjutsment of capital of partners:
Old Capitals = 70,000; 40,000 and 80,000
New Capitals = 1,40,000; 1,20,000 and 1,00,000 (3,60,000 in 7:6:5 ratio)
E’s capital A/c 70,000
F’s capital A/c 80,000
G’s capital A/c20,000

Question 4

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Which of the following is transferred to the partners capital account?

SOLUTION

General Reserve given in the balance sheet will be credited to the old partners in their old profit sharing ratio. While other items i.e. land and building, loan and creditors are shown in the balance sheet and any change in their value will be shown in the revaluation account.

Question 5

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Which of the following is written off by the old partners?

SOLUTION

At the time of reconstitution of a partnership firm all accumulated profits and reserves are written off by the old partners in their old profit sharing ratio. Partners will write off preliminary expenses and advertisement suspense. Patents are not part of reserves and profits.

Question 6

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Which of the following is not transferred to partners capital account?

SOLUTION

Employees provident fund is not a free reserve. Partners cannot distribute employees provident fund. Partners can distribute only free reserves and accumulated profits at the time of reconstitution of a partnership firm. In the above question partners will distribute all reserves and retained earnings except employees provident fund.

Question 7

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General Reserve cannot be ______

SOLUTION

General reserve is a free reserve created out of the profits. It can be distributed by the partners at the end (if not used). But it cannot be sold because it is a part of profit kept aside for contingencies. Old partners will distribute it in their old ratio (if not utilised during the year).

Question 8

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The reserves and accumulated profits and losses are transferred to Partner’s capital account in their _____ ratio

SOLUTION

At the time of reconstitution of a partnership firm some undistributed profits and reserves may exist. These undistributed profits and reserves belong to the existing partners who were the members of the firm before its reconstitution. Such undistributed profits and reserves are, therefore, distributed among the partners in their old profit sharing ratio.

Question 9

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______ is a kind of reserve created for payment of compensation in case of accident.

SOLUTION

Sometimes a business firm create a compensation reserve, so that in case of any accident, firm can pay the compensation amount, this reserve is known as workmen compensation reserve. It is created out of the profits. Free reserve will be distributed by the partners in their old profit sharing ratio.

Question 10

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Investment Fluctuation Reserve is one kind of reserve created for adjustment of

SOLUTION

The main purpose of creating investment fluctuation reserve is to meet the deficiency of investment value (if any). Partners can distribute this reserve only after meeting the requirement of this reserve.
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