Accountancy Test - 3

The correct answer is SACRIFICING RATIO.

• The ratio in which the old partners are surrendering their share of profits in favor of the new or incoming partner is called the 'Sacrificing Ratio'.
• The formula for finding the Sacrificing Ratio is:
  • Sacrificing Ratio = Old Share of profit - New Share of profit

Additional Information

• Gaining Ratio is the ratio in which the retiring/deceased partner agrees to sacrifice his share of profit in favor of existing partners.
• The formula for finding the Gaining Ratio is:
  • Gaining Ratio = New Share of profit - Old Share of profit
• Profit-Sharing Ratio: It is the ratio in which all partners including the incoming partner share the future profits and losses in an agreed term.

The correct answer is ALL OF THE ABOVE.

Key Points

• When the existing partners of a firm allow a new person to become a partner in the firm, it is called admission of a partner.
• The matters that require adjustment at the time of admission of a new partner will be:

1. Adjustment in the Profit-sharing ratio.
2. Adjustment for Goodwill.
3. Adjustment of Profits/Losses arising from the Revaluation of Assets and Reassessment of Liabilities.
4. Adjustment of Accumulated Profits, Losses, and Reserves.
5. Adjustment of Capital.

The correct answer is REVALUATION A/C AND BALANCE SHEET.

• "Unrecorded asset" is to be recorded on the 'credit side' and "unrecorded liability" is to be recorded on the 'debit side' in the Revaluation A/C.
• "Unrecorded asset" is then recorded on the 'Assets side' and "unrecorded liability" on the 'Liability side' of the Balance Sheet.
• Unrecorded asset is the asset which is not recorded in the books of accounts i.e., missing from the records but having existence in the firm. As being a nature of asset, it is a recorded in the Balance Sheet on the Asset side and considered as an increase in the value of firm's assets, thus recorded as a profit in the Revaluation a/c.
• Unrecorded liability is the liability which is missing i.e., not recorded in the books of account but having existence in the firm. As being a nature of liability, it is a recorded in the Balance Sheet on the Liability side and considered as an increase in the value of firm's liability, thus recorded as a loss in the Revaluation a/c.

Additional Information

• Balance Sheet: It is the summary of the financial balances of an individual firm consisting all the available assets and liabilities of the firm; showing their financial position to the users.
  • Assets- Anything (whether physical or not) that is holding any value in the market in terms of cash and which is owns by the company or any person.
  • Liability- An amount which is borrowed by any individual or a person and to be repaid after a specified period of time.
• Revaluation A/c: It is the account where transactions related to revaluation of assets and reassessment of liabilities are to be recorded, after admission of a partner or retirement/death of a partner to ascertained the profit of loss on revaluation.

The correct answer is 12 : 13

Important Points

Old ratio (A, B and C) = 1/5 : 1/3 : 7/15 

Therefore, A : B : C = 3/15 : 5/15 : 7/15 

C retires and his share is taken up by A and B in the ratio of 3 : 2

Share of C = 7/15

Share of C taken by A = (7/15) × (3/5) = 7/25

Share of C taken by B = (7/15) × (2/5) = 14/75

New ratio = Old ratio + Share taken from C

The correct answer is 1 : 1.

Old ratio of the partners = A : B : C 

                                          = 2 : 2 : 1

As we know that C retired and nothing much information regarding the distribution of C's share is given in the question. So, C's share is now then removed from the firm's profit-sharing ratio.

As we removed C's share of profit, we left with only A's share of profit and B's share of profit.

New ratio of remaining partners = A : B

                                                   = 2 : 2

                                                        OR

                                                  = 1 : 1

Therefore, the new profit-sharing after C's retirement will be 1 : 1 respectively.

Key Points

• New Ratio is the ratio at which a firm's profits/losses will be shared among the partners after "Admission of a partner" or "Retirement/Death of a partner".

The correct answer is OLD PARTNERS' CAPITAL A/C.

• "Revaluation A/c" is the account in which revaluation of assets and reassessment of liabilities is to be done to ascertain the revaluation profit/loss.
• "Old Partners' Capital A/c" is the account in which distribution of accumulated profits/losses, reserves & surplus, revaluation profit/loss, etc., and transactions related between the firm and the existing partners are to be recorded.
• "General Reserve" is the amount set aside out of profits for no specific purpose. It is available for any future contingency or expansion of the business. It is also known as "Contingency Reserve". Its purpose is to strengthen the financial position of the business. 
• When the existing partners of a firm allow a new person to become a partner in the firm, it is called admission of a partner.

Additional Information

At the time of admission of a partner, the entry for transferring General Reserve to Old partners' Capital A/C will be:

 General Reserve A/c          Dr.

        To Old Partners' Capital A/c

(Being amount of general reserve is transferred to old partners' capital a/c in the old ratio) 

The correct answer is Rs. 100000.

Key Points

Goodwill Valuation: 

A well-established firm earns a good name in the market, builds trust with the customers, and also has more business connections as compared to a newly set up business. Thus, the monetary value of this advantage that a buyer is ready to pay is termed, Goodwill.

Capitalization Method:

Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the capitalized value of the average profits on the basis of the normal rate of return.

Formula: 

1. Goodwill = Super Profits x (100/ Normal Rate of Return)
2. Super Profit = Average Profit – Normal Profit
3. Normal Profit = Capital employed x Normal Rate of Return/100

Important Points

Given Information:

1. Capital employed = Rs. 150000
2. Average Profit = Rs. 50,000
3. The normal rate of profits = 20%

Working Note:

1. Normal Profit = Capital employed x Normal Rate of Return/100 = 150000x 20/100 =  30,000
2. Super Profit = Average Profit – Normal Profit = 50,000 – 30,000 = 20,000
3. Goodwill = Super Profit x (100/ Normal Rate of Return) =  20000 x 100/20 = 100000.

Therefore, Capital employed in a business is Rs. 150000.profits are Rs. 50000/-and the normal rate of profits is 20%. The amount of goodwill as per the capitalization method would be Rs. 100000

Explanation:

X and Y share profits and losses in the ratio of 2 : 1.

Z as a partner and the new profit sharing ratio will be 3 : 2 : 1.

Z is admitted for 1/6th share of profit (1/3+2+1 = 1/6)

Z's contribution of Rs. 4500 consists of 1/6^th share of goodwill only.

Therefore, total value of firm's goodwill = 4500 x 6 = Rs. 27,000. 

The correct answer is OLD RATIO.

• Old Ratio is the ratio at which firm's profits/losses is to be shared among the partners before "Admission of a partner" or "Retirement/Death of a partner".
• New Ratio is the ratio at which firm's profits/losses will be shared among the partners after "Admission of a partner" or "Retirement/Death of a partner".
• Gaining Ratio is the ratio in which retiring/deceased partner is agree to sacrifice his share of profit in favour of existing partners.
• Sacrificing Ratio is the ratio in which the old (existing) partners including the incoming partner share the future profits and losses.

Key Points

• Profit on revaluation of assets and reassessment of liabilities is to be calculated in the Revaluation A/c. 

The correct answer is PREMIUM FOR GOODWILL.

• Calculation of sacrificing ratio is necessary when the new partner will bring in 'premium for goodwill' in cash because it is then distributed among all the sacrificing partners at the time of passing adjustment entries.
• ​When the amount of goodwill is brought in by a new or incoming partner into the firm at the time of his admission, it is termed as a premium for goodwill.
• At the time of his admission, he also brings some amount of capital along with the premium for goodwill into the firm.

Key Points

• "Goodwill" is an intangible asset/rights that are associated with the purchase of one company by another. It represents assets that are not separately identifiable.
• "Capital" is the owner's equity that means the amount of cash invested by the owner or partner into his business while entering into a business domain.