Change in Profit Sharing Ratio of Partners Test - 5

Calculation of gain or sacrifice:

Formula : Old Share – New Share

AK = 2/4 – 3/6 = No Sacrifice/ No Gain

BK = 1/4 – 2/6 = 1/12 Gain

CK = 1/4 - 1/6 = 1/12 Sacrifice

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

Adjustment of goodwill in gain and sacrificing ratio:

Formula : Old Share – New Share

P = 5/10 – 1/3 = 5/30 Sacrifice

Q = 3/10 – 1/3 = 1/30 Gain

R = 2/10 - 1/3 = 4/30 Gain

Calculation of sacrificing share:

Formula = Old ratio – New ratio

VK = 1/3 – 5/10 = 5/30 Gain

Mk = 1/3 – 3/10 = 1/30 Sacrifice

JK = 1/3 – 2/10 = 4/30 Sacrifice

Change in Ratio:

Old Ratio = 1:1:1

New Ratio = 1:2:2

Sacrifice or Gain of partners:

P = 1/3 – 1/5 = 2/15

Q = 1/3 – 2/5 = 1/15 Gain

R = 1/3 – 2/5 = 1/15 Gain

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.

Calculation of new ratio:

Let the profit be = 1

Remaining profit after M’s share = 1 – 1/3 = 2/3

Now divide this remaining profit in X, Y and Z to find out the new ratio

From the given items in the questions, General reserve is the only item which should not be debited to the partners’ capital account. General reserve will be credited to the partners in their old profit sharing ratio.

Calculation of gain or sacrificing ratio:

Formula : Old Share – New Share

A = 5/10 – 1/3 = 5/30 Sacrifice

B = 3/10 – 1/3 = 1/30 Gain

C = 2/10 - 1/3 = 4/30 Gain

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.

Adjustment of goodwill amount at the time of change in profit sharing ratio:

Old Ratio = 3:2

New Ratio = 1:1

Ram’s Sacrifice = 3/5 – 1/2 = 1/15

Rohit’s Gain = 2/5 – 1/2 = 1/15

Rohit’s Gain of goodwill amount = 30,000 × 1/10 = 3,000

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/c 20,000

Adjustment of loss at the time of change in profit sharing ratio:

Old Ratio = 8:4:2 OR 4:2:1

New Ratio = 4:2:2 OR 2:1:1

Formula = Old – New ratio

X’s Sacrifice 2/28; Y’s Sacrifice 1/28 and Z’s Gain 3/28.

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.

Calculation of gain or sacrifice:

Formula : Old Share – New Share

X = 5/10 – 1/3 = 1/6 Sacrifice

Y = 4/10 – 1/3 = 1/15 Sacrifice

Z = 1/10 - 1/3 = 7/30 Gain

Adjustment of Goodwill at the time change in profit sharing ratio:

Formula : Old Share – New Share 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 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

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.

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.

Calculation of gain or sacrifice:

Formula : Old Share – New Share

X = 4/9 – 3/5 = 7/45 Gain

Y = 3/9 – 1/5 = 6/45 Sacrifice

Z = 2/9 - 1/5 = 1/45 Sacrifice

When there is no decrease in the value of investment, in such a case partners may distribute the investment fluctuation reserve in their old profit sharing ratio.

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).

Calculation of gain or sacrifice:

Formula : Old Share – New Share

P = 1/2 – 4/7 = 1/14 Gain

Q = 1/2 – 3/7 = 1/14 Sacrifice

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.

There is an increase in the value of building Rs.25,000 (1,25,000 – 1,00,000). This change should be recorded in the credit side of revaluation account at the time of preparation of revaluation account.