NCERT Solutions for Class 12 Accountancy Chapter 2: Download in PDF

NCERT Solutions for Class 12 Accountancy Chapter 12: This article consists of appropriate NCERT solutions of Class 12 Accountancy Chapter 2, Reconstitution of a partnership – Admission of a partner. You can download all the stepwise and detailed solutions from the link below.

Chapter 2 of NCERT Accountancy textbook talks about reconstitution of a firm. Why does it take place, what adjustments have to be made when reconstituting a firm, how admission of a partner impacts the profit sharing ratio etc topics are covered under this chapter. Check out important topics from Chapter 2, below.

• Modes of reconstitution of a firm
• Admission of a new partner
• New profit sharing ratio
• Sacrificing ratio
• Goodwill
• Adjustment of profits and revaluation of assets and liabilities
• Adjustment on capital

  Also find:

CBSE Board Exam 2024 Class 12 Accountancy Sample Paper

CBSE Class 12 Accountancy Sample Paper 2023-24 (PDF)

Find below NCERT Solutions of Accountancy Chapter 2:

 Short Answer Questions:

 1.Identify various matters that need adjustments at the time of admission of a new partner.

Ans. Admission of a new partner is primarily done when firm requires additional capital or managerial help or both for the expansion of its business. A new partner can be admitted only on the consent of all the other partners. A firm is reconstituted when admission of a new partner takes place. In the prcoess,  various adjustments has to be made at the admission of a new partner. The adjustments are as follows:

a. Adjustment in profit sharing ratio;

b. Sacrificing ratio;

c. Valuation and adjustment of goodwill;

d. Revaluation of assets and Reassessment of liabilities;

e. Distribution of accumulated profits (reserves); and

f. Adjustment of partners’ capitals.

2.Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

Ans. Whenever a new partner is admitted, he/she acquires their share in profits from old partners. On admission of a new partner, old partner sacrifices a share of their profit in favour of the new partner. If it is not specified as to how new partner will acquire their share from old partners, it is assumed that he/she gets it from them in their profit sharing ratio. In any case, on admission of a new partner, the profit sharing ratio among the old partners will change keeping in view their respective contribution to the profit sharing ratio of the incoming partner. Hence, there is a need to ascertain the new profit sharing ratio among all the partners.

 3.What is sacrificing ratio? Why is it calculated?

Ans. The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called sacrificing ratio. It can be calculated by the formula:

                                               Old share of profit – New share of profit

Also, in order to compensate the loss of old partners in their share, the new partner brings in an additional amount known as premium or goodwill. This is distributed among the partners in a ratio which forgoes their share in favour of the new partner, this share is referred to as sacrificing ratio. It is calculated to compensate the loss of shares of old partner’s by new partner of the firm. It is done by bringing premium and paying the old partners in their sacrificing ratio, as stated earlier.

4.On what occasions sacrificing ratio is used?

Ans. Sacrificing ratio is used when it is mutually decided by partners of the firm to change the profit sharing ratio among the existing partners and when a new partner is introduced in the firm. In addition of the new partner, the amount contributed by new partner, the premium or goodwill, is brought in on the basis of sacrificing ratio of existing partners.

5.If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

Ans. When goodwill already exists in the books and the new partner brings in his share of goodwill in cash, the amount of goodwill has to be written off by transferring the amount to old partner’s capital account in their old profit sharing ratio. The entry in this case would be passed as:

Old Partners Capital A/c

 To goodwill A/c (goodwill written off by transferring it to old partners account in their old profit sharing ratio)

6.Why there is need for the revaluation of assets and liabilities on the admission of a partner?

Ans. Revaluation of assets and liabilities on the admission of a partner is important so that the current amount or existing amount, be it in profit or loss, could be adjusted among old partners in their old sharing ratio, since it belongs to existing partners.

Long Answer Questions

 1.Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

Ans. Yes, I advise to revalue the assets and liabilities at the time of admission of a partner to ascertain whether the assets of the firm are shown in books and they are at their current values or not. Sometimes, the assets can be overstated or understated. Moreover,  sometimes some assets can go completely unrecorded as well. Thus it is essential to revaluate the assets and liabilities to check whether there has been an increase or decrease in the valuation of assets and liabilities. Also, it is important to settle the valuation so it can be distributed equally among the existing partners, since it belongs to the old partners. New partner should neither get benefit nor sufferings from the old assets and liabilities, since he has no role to play in it. The valuation that arises from increase or decrease in the valuation of assets and liabilities is distributed among the old partners in their old profit sharing ratio. By following ways, entries are made in the book.

a. When there is an increase in the value of assets

Asset A/c                               Dr.

To Revaluation A/c                (Gain)

b. When there is decrease in the value of assets

Revaluation A/c                     Dr.

To Asset A/c                         (Loss)

c. When there is appreciation in amount of liability

Revaluation A/c                     Dr.

To Liability A/c                      (Loss)

d. When there is reduction in amount of liability

Liability A/c                            Dr.

To Revaluation A/c                (Gain)

e. When there is an unrecorded asset

Asset A/c                                Dr.

To Revaluation A/c                (Gain)

f. When there is an unrecorded liability

Revaluation A/c                      Dr.

To Liability A/c                      (Loss)

g. When transfer of gain on Revaluation if credit balance

Revaluation A/c                           Dr.

To Old Partners Capital A/cs     (Old ratio)

(individually)

h. When transferring loss on revaluation

Old partner’s Capital A/cs            Dr.

(Individually)                                (Old ratio)

To Revaluation A/c

2.What is goodwill? What factors affect goodwill?

Ans. A business after a certain time of presence in the market, develops business connections, reputation and good name. In return, companies earn more profits in comparison to new businesses. This monetary value of the reputation of a company in accountancy is referred to as goodwill. It is an intangible asset of a company. In accountancy terms, goodwill can also be defined as “the present value of a firm’s

anticipated excess earnings” or as “the capitalised value attached to the differential profit capacity of a business”. Hence, the company earning super profits can be said to be having goodwill. If a firm is earning normal profits or is incurring losses, then it can’t be said to be having goodwill. It is also one of the special aspects of partnership accounts which requires adjustment at the time of change in profit sharing ratio which primarily takes place because of admission of new member in the partnership, death or retirement of a partner. The process of change in profit sharing ratio is also called as reconstitution of a firm. The following factors affect the value of goodwill:

a. Nature of business– If a business has more production of value added products and has stable demand in the market, then that business is more likely to earn profits and therefore has goodwill.

b. Location– Businesses that are centrally located or are placed in places with heavy traffic, generally are more likely to have goodwill.

c. Efficiency of Management– A well managed firm usually enjoys more productivity and cost efficiency, which in return brings more profits and hence goodwill.

d. Market situation– If a business has monopoly in the market or has limited competition, then it is more likely to earn high profits which ultimately leads to high value of goodwill.

e. Special Advantages– The firm that enjoys special advantages like import licenses, low rate and assured supply of electricity, long-term contracts for supply of materials, well-known collaborators, patents, trademarks, etc. enjoy higher value of goodwill.

3.Explain various methods of valuation of goodwill.

Ans. Valuation of goodwill is important for a company at the time of sale. When it comes to partnership, valuation of goodwill serves to be needful in admission of new partner, death of partner, amalgamation of partnership firms etc. Since, goodwill is an intangible asset, it becomes difficult to calculate it. There are various method to calculate the valuation of goodwill, and every process might differ from each another. There are three important methods of valuation of goodwill. They are:

a. Average Profits Method – In this method, the goodwill is valued at agreed number of ‘years’ purchase of the average profits of the past few years. It comes out of an assumption that a business might not be able to earn profits in the early stage of its operation. Hence, a person entering into a running business must pay a certain amount in the form of goodwill which will be equal to profits he is likely to receive for the first few years. Therefore, it is calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue. For example: if the past average profits of a business works out at Rs. 20,000 and it is expected that such profits are likely to continue for another three years, the value of goodwill will be (Rs. 20,000 × 3) i.e Rs 60,000.

b. Super profits Method- As mentioned in the previous process, there is a basic assumption that a business might not be able to earn profits in the first few years of its operation, thus a person who purchases existing business has to pay in the form of goodwill, a sum which might be equal to the amount of profit he is likely to receive in the first few years. But it is also argued that the buyer’s real benefit does not lie in the total profits, rather it is limited to such amounts that are in excess of the normal return on capital employed in similar business. Hence, it is considered to calculate goodwill on the basis of excess profit and not actual profit.  The excess of actual profit over normal profit is termed as super profit.

 Normal profit= Firm’s Capital Normal rate of return/100  where firm’s capital includes partner’s capital, reserves and surplus but excludes fictitious assets and goodwill. The steps used under this method are as follows:

• Calculate the average profit,
• Calculate the normal profit on the firm’s capital on the basis of the normal rate of return,
• Calculate the super profits by deducting normal profit from the average profits, and
• Calculate goodwill by multiplying the super profits by the given number of years’ purchase.

For example: Suppose an existing firm earns Rs. 18,000 on the capital of Rs. 1,50,000 and the normal rate of return is 10%. The Normal profits will work out at Rs. 15,000 (1,50,000 × 10/100). The super profits in this case will be Rs. 3,000 (Rs. 18,000 – 15,000). The goodwill under the super profit method is ascertained by multiplying the super profits by certain number of years’ purchase. If, in the above example, it is expected that the benefit of super profits is likely to be available for 5 years in future, the goodwill will be valued at Rs. 15,000 (3,000 × 5).

c. Capitalisation Method- Under this method, goodwill can be calculated by either capitalising the average profits or by capitalising the super profits.

• Capitalisation of average profits– the value of goodwill is calculated by deducting the actual firm’s capital in the business from the capitalized value of the average profits on the basis of normal rate of return. This involves the following steps:

(i) Ascertain the average profits based on the past few years’ performance.

(ii) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalised value of average profits as follows:

Average Profits 100/Normal Rate of Return

(iii) Ascertain the actual firm’s capital (net assets) by deducting outside liabilities from the total assets (excluding goodwill and fictitious assets).

Firms’ Capital = Total Assets (excluding goodwill) – Outside Liabilities ;where outside liabilities include both long term and short term liabilities.

(iv) Compute the value of goodwill by deducting net assets from the capitalised value of average profits, i.e. (ii) – (iii).

• Capitalisation of Super Profits: Goodwill can also be calculated by capitalising the super profit directly. Under this method there is no need to work out the capitalised value of average profits. It involves the following steps.

(i) Calculate capital of the firm, which is equal to total assets (excluding goodwill and fictitious assets) minus outside liabilities.

(ii) Calculate normal profits on capital employed.

(iii) Calculate average profit for past years, as specified.

(iv) Calculate super profits by deducting normal profits from average profits.

(v) Multiply the super profits by the required rate of return multiplier, that is,

Goodwill = Super Profits 100 Normal Rate of Return

It can also be said that goodwill is the capitalised value of super profits. The amount of goodwill calculated by this method would be the same as calculated by capitalising the average profits. For example: the average profits are Rs. 1,00,000 and the normal profits are Rs. 82,000 (10% of Rs. 8,20,000), the super profits worked out as Rs. 18,000 (Rs. 1,00,000 – Rs. 82,000), the goodwill will be calculated as follows.

Rs. 18,000 × 100/10 = Rs 1,80,000

4.If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

Ans. Capital for the new firm can be calculated either on the basis of new Partner’s capital and his profit sharing ratio or on the basis of existing partner’s capital account balances.

a. Adjustment of existing partner’s capital on the basis of the capital of the new partner: If new partner’s capital is given, the entire capital of the new firm will be decided on the basis of new partner’s capital and his profit sharing ratio. The capital of other partners is calculated by dividing the total capital as per his profit sharing ratio. After adjustment, if existing partner’s balance exceeds his new capital amount, then the excess amount is transferred to the credit of his current account. If the balance is less than the new capital amount, then the partner brings the short amount or transfers to the debit of his current account.

b. When new partner’s capital is calculated on the basis of capital of the new firm: Sometimes, new partner’s capital is not mentioned, he/she has to bring an amount according to his/her share of profit. In such cases, new partner’s capital is calculated on the basis of adjusted capital of the existing partners. New capital’s calculation for each partner can be done in following ways:

c. When capital of new partner is given: Following steps are used in this case.

Step 1: The total capital of the new firm is calculated on the basis of new partner’s share of capital.

Step 2: The new capital of each partner is calculated by dividing the total capital of the firm by their individual new profit share.

Step 3: After posting all adjustments and items in the Partners’ Capital Account, calculate credit minus debit side of the old Partner’s Capital Account.

Step 4: The new capital ascertained in the step 2 is written as Balance c/d on the credit side of the Partner’s capital account.

Step 5: If the amount in step 2 exceeds the capital amount calculated in step 3, then it is called as ‘Deficit’ and the difference amount is to be brought in by the old partners. On contrary, if the amount in step 2(new capital) is lesser than the amount in step 3(old capital), then it is termed as ‘ Surplus’ and the amount is returned to the old partners.

For example: A and B are partners sharing profit and loss equally. They agree to admit C for 1/3^rd share in profit. C brings Rs 50,000 as capital. The old capitals of A and B are Rs 60,000 and Rs 40,000, respectively, at the time admission of C.

Then, by following the above steps, calculation would be done as:

Step 1: C= 50,000 x 3/1 = Rs 1,50,000

Step 2: Now, A’s capital would be

1,50,000 x 1/3 = Rs 50,000

 B’s share in new firm = 1,50,000 x 1/3 = Rs 50,000

Step 3:

d. When total capital of the new firm is given:

Following steps are followed in this case:

Step 1: Ascertain the total capital of the old partners (post adjustments)

Step 2: Ascertain the total capital of the new firm by multiplying the total of old capitals of the old partners with reciprocal of total share of old partners. That is,

Total capital of new firm= total capital of the old

Partners x reciprocal of the combined new share of the old partners

Step 3: Calculate the new capital of each partner on the basis of total capital. That is, multiplying the total capital by the new profit sharing ratio individually for all the partners(including new partner)

For example: X and Y are partners in a firm sharing profit and loss equally. They agree to admit Z for 1/3^rd share in profit and decided to share future profit and loss equally. X’s capital is Rs 2,00,000 and Y’s capital is Rs 1,50,000. Z brings sufficient capital for his share in profit.

Step 1: Total capital of old partners= Rs 2,00,000 + Rs 1,50,000 = Rs 3,50,000

Step 2: Total capital of new firm= 3,50,000 x 3/2 = Rs 5,25,000

Step 3: Calculation of new capital of each partner

X’s new capital = 5,25,000 x 1/3 = Rs 1,75,000

Y’s new capital = 5,25,000 x 1/3 = Rs 1,75,000

Z’s new capital = 5,25,000 x 1/3 = Rs 1,75,000

5.Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.

Ans.  If new partner does not bring goodwill in cash, then the goodwill not brought by him will be debited to current account of new partner while sacrificing partner’s capital accounts will be credited with respective shares.  Two possibilities exist when goodwill is not brought by the partner:

a.Goodwill does not exist in the books– sacrificing partners are credited with their share of goodwill and new partner is debited by the amount of goodwill not brought by him. The journal entry in this case is :

Incoming (New) Partners Current A/c                                        Dr.

To Sacrificing Partners Capital A/c (individually)

(Account of goodwill not brought in by new partner)

b.Goodwill exists in the books- If goodwill appears in the book then it will be written-off by debiting old partners ‘capital accounts in their old profit sharing ratio. Thereafter new value of goodwill will be given effect by crediting sacrificing partners’ capital accounts and debiting new partners’ current account. The journal entries will be as under :-

(i) When the value of goodwill appears in the books and is written off

Partners capital A/c (old)                                        Dr. (In profit sharing ratio)

To Goodwill A/c

(Goodwill appearing in the books written-off)

(ii) For new value of goodwill :-

Incoming partners’ current A/c.                               Dr.

To Sacrificing partners capital A/c.                          [In sacrificing ratio)

(individually

6.Explain various methods for the treatment of goodwill on the admission of a new partner?

Ans. There are namely two methods for treatment of goodwill on the admission of a new partner. They are stated as below:

a. Premium method- This method is used when new partner pays his/her goodwill in cash. Mentioning a few situations under this method for better understanding.

• When partner privately pays his/her share of goodwill to the old partners. No entry has to be passed in the journal in this case, since the goodwill has been privately paid.
• When new partner brings his/her share of goodwill in cash and it is retained in the business.

Accounting Entries

• For premium or goodwill brought in case by the new partner

• For transferring of new partner’s goodwill among the old partners, i.e. if goodwill is retained in the business.

• If the new partner’s share of goodwill is withdrawn by the old partner, then’

• If the new partner partly brings his/her share of goodwill
• For bringing goodwill in cash

• For transferring of goodwill to the old partners

b.Revaluation Method– It is used when the new partner couldn’t bring goodwill in cash.

7.How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?

Ans. Admission of a new partner leads to reconstitution of the form, change in the profit sharing ratio of the firm. Various adjustments has to be made in this situation. Adjustment of accumulated profits and losses is also one of the factor that needs adjustment. A firm may have accumulated profits. All these are distributed among old partners in the old profit sharing ratio, since new partner is not entitled to this profit. These accumulated profits are generally present in the form of general reserves, reserves and/or Profit/ Loss Account. These are then distributed among the partners by transferring it to their capital current accounts in old profit sharing ratio. Similarly, there might be accumulated losses in the form of debit balance of profit and loss account and/or deferred revenue expenditure appearing in the balance sheet of the firm, these are also transferred to the old partner’s capital accounts. An example for understanding the journal entry in this regard is as follows:

Rajinder and Surender are partners in a firm sharing profits in the ratio of 4:1. On April 15, 2017 they admit Narender as a new partner. On that date there was a balance of Rs. 20,000 in general reserve and a debit balance of Rs. 10,000 in the profit and loss account of the firm. The journal entry would be passed as written below:

8. At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.

Ans. After revaluation of the firm, assets and liabilities appear at the current market values in the balance sheet of the reconstituted firm. The diagram below explains it.

Example: A and B shares profit and loss in the ratio 2:1  

Balance sheet of A and B as on March 31 ,2017

C is admitted as a partner on the date of the balance sheet on the following terms:

• C will bring in Rs 1,00,000 as his capital and Rs 60,000 as his share of goodwill for 1/4 share in profits.
• Plant is to be appreciated to Rs 1,20,000 and the value of buildings is to be appreciated by 10%.
• Stock is found overvalued by Rs 4,000.
• A provision for doubtful debts is to be created at 5% of debtors.
• Creditors were unrecorded to the extend of Rs 1,000.
• Record revaluation Account, partners’ capital accounts, and the Balance Sheet of the constituted firm after admission of the new partner.                                      

   Solution:                                                      

                           Books of A and B Revaluation Account

                   Partner’s capital account

            Balance sheet of A, B, C as on April 01, 2016

 To find further NCERT solutions, click on the link below:

  Download NCERT Solutions for Class 12 Accountancy Chapter 2

 Also Read:

CBSE Class 12 Syllabus 2023-24 (All Subjects)

CBSE Class 12 Sample Papers 2023-24 (All Subjects)

NCERT Books for Class 12 (All Subjects)

NCERT Solutions for Class 12 (All Subjects)