Chapter 5 — Admission of a Partner: Exercise Solutions Guide
Use this page alongside the official Samacheer Kalvi textbook. Attempt each exercise on your own first, then verify your method and answers here. Every numerical answer includes full journal entries and calculations.
How to Use This Page
1. Read the Key Concepts section for a quick theory recap. 2. Try the textbook exercise on paper before checking the solutions below. 3. For numerical problems, follow every step — the method matters more than the final answer. 4. Review Common Mistakes before exams to avoid frequent errors.
Key Concepts (Quick Recap)
- Admission of a Partner: A new partner is admitted with the consent of all existing partners. It results in reconstitution of the firm.
- New Profit-Sharing Ratio: The ratio in which all partners (old and new) share future profits. New Ratio = Old Ratio − Sacrificed Share.
- Sacrificing Ratio: The ratio in which old partners give up their share of profit for the new partner. Sacrificing Ratio = Old Ratio − New Ratio.
- Goodwill on Admission: The new partner brings their share of goodwill, credited to sacrificing partners in their sacrificing ratio.
- Premium Method: New partner brings goodwill in cash; it is credited to sacrificing partners' capital accounts.
- Revaluation Method: Goodwill is raised in the books by crediting old partners' capital accounts in old ratio, then written off after admission.
- Revaluation of Assets and Liabilities: Assets and liabilities are revalued to current values. Profit or loss on revaluation is shared by old partners in their old ratio through a Revaluation Account.
- Accumulated Profits/Losses: Undistributed profits and losses are transferred to old partners' capital accounts in old ratio before admission.
- Adjustment for Reserves: General reserve, contingent reserve etc. are credited to old partners in old ratio.
- Hidden Goodwill: When the new partner's capital contribution and share are known but goodwill is not explicitly given, it can be calculated as: Goodwill = (Total capital based on new partner's share) − (Combined capital of all partners).
I. Choose the Best Answer (MCQs)
1. On admission of a partner, the sacrificing ratio is used to credit: (a) All partners in new ratio (b) All partners in old ratio (c) Sacrificing partners in sacrificing ratio (d) New partner only
Answer(c) Sacrificing partners in sacrificing ratio Explanation: Goodwill brought in by the new partner belongs to the partners who sacrificed their share. Hence it is distributed among them in the sacrificing ratio.
2. Revaluation Account is a: (a) Personal account (b) Real account (c) Nominal account (d) None of these
Answer(c) Nominal account Explanation: Revaluation Account is a nominal account since it is opened to ascertain the profit or loss on revaluation of assets and liabilities. It is transferred to old partners' capital accounts.
3. When the new partner brings goodwill in cash, it is credited to: (a) All partners' capital accounts in new ratio (b) Sacrificing partners' capital accounts in sacrificing ratio (c) Only the senior partner's capital account (d) New partner's capital account
Answer(b) Sacrificing partners' capital accounts in sacrificing ratio Explanation: The premium for goodwill is the price paid by the new partner for the share of profit acquired from the old partners. Hence it belongs to the sacrificing partners.
4. A and B share profits 3:2. C is admitted for 1/5 share. The new ratio is: (a) 12:8:5 (b) 3:2:1 (c) 12:8:10 (d) 4:3:2
Answer(a) 12:8:5 Explanation: C gets 1/5. Remaining 4/5 is shared by A and B in 3:2. A = 4/5 × 3/5 = 12/25, B = 4/5 × 2/5 = 8/25, C = 1/5 = 5/25. New ratio = 12:8:5.
5. Hidden goodwill is calculated as: (a) Total capital × new partner's share (b) (Total capital based on new partner's share) − (Combined capital of all partners) (c) New partner's capital × old ratio (d) Average profit × number of years
Answer(b) (Total capital based on new partner's share) − (Combined capital of all partners) Explanation: The implied total capital of the firm is computed by dividing the new partner's capital by his share. The difference between this total and the actual combined capital is hidden goodwill.
6. Accumulated losses on admission are transferred to: (a) All partners in new ratio (b) Old partners in old ratio (c) New partner only (d) None
Answer(b) Old partners in old ratio Explanation: Accumulated losses arose before the new partner joined. Hence they are borne by old partners only in their old profit-sharing ratio.
7. When goodwill already exists in the books and a new partner is admitted, the existing goodwill is: (a) Credited to new partner (b) Written off among old partners in old ratio (c) Written off among all partners in new ratio (d) Carried forward as it is
Answer(b) Written off among old partners in old ratio Explanation: Goodwill in the books belongs to the old partners. It is written off by debiting old partners' capital accounts in their old ratio.
8. General Reserve on admission is transferred to: (a) Revaluation Account (b) Old partners' capital accounts in old ratio (c) All partners' capital accounts in new ratio (d) New partner's capital account
Answer(b) Old partners' capital accounts in old ratio Explanation: General reserve is an accumulated profit that belongs to the old partners before admission. Hence it is distributed among old partners in old ratio.
9. Which of the following is debited to Revaluation Account? (a) Increase in the value of an asset (b) Decrease in the value of a liability (c) Decrease in the value of an asset (d) Increase in the value of a liability
Answer(c) Decrease in the value of an asset Explanation: A decrease in asset value is a loss and is debited to the Revaluation Account. Increases in asset values are credited.
10. The balance of Revaluation Account is transferred to: (a) All partners' capital accounts in new ratio (b) Old partners' capital accounts in old ratio (c) Sacrificing partners in sacrificing ratio (d) New partner's capital account
Answer(b) Old partners' capital accounts in old ratio Explanation: Revaluation profit or loss arose before the new partner was admitted, so it is shared by old partners in their old ratio.
II. Fill in the Blanks
1. The ratio in which old partners give up their share of profit for the new partner is called the sacrificing ratio.
2. Sacrificing Ratio = Old Ratio − New Ratio.
3. Goodwill brought in by the new partner is credited to sacrificing partners in their sacrificing ratio.
4. The account opened to record changes in the values of assets and liabilities on admission is called the Revaluation Account.
5. Profit or loss on revaluation is shared by old partners in their old ratio.
6. Accumulated profits and reserves on admission are transferred to old partners' capital accounts in the old ratio.
7. When a new partner brings goodwill in cash, it is debited to Cash/Bank Account and credited to sacrificing partners' capital accounts.
8. The new partner brings capital and goodwill/premium for the share of profit acquired.
9. If the new partner does not bring his share of goodwill in cash, the goodwill is debited to the new partner's capital account.
10. Goodwill already appearing in the books on admission is written off by debiting old partners' capital accounts in old ratio.
III. True or False
1. Sacrificing ratio is always the same as the old ratio. False. Sacrificing ratio equals Old Ratio minus New Ratio, which may differ from the old ratio.
2. A new partner is admitted with the consent of all existing partners. True. Section 31 of the Indian Partnership Act requires consent of all partners for admission.
3. Revaluation profit is shared by all partners including the new partner. False. Revaluation profit is shared only by old partners in their old ratio because it arose before the new partner's admission.
4. Goodwill brought by the new partner is credited to all partners in the new ratio. False. Goodwill is credited to sacrificing partners in the sacrificing ratio, because it compensates them for the share they gave up.
5. On admission, the new partner is entitled to the accumulated profits of the firm. False. Accumulated profits are transferred to old partners' capital accounts in old ratio before the new partner is admitted.
6. The new partner is always liable for the past losses of the firm. False. Past losses are written off against old partners' capital accounts in old ratio; the new partner is not liable for losses that arose before admission.
7. Hidden goodwill can be calculated when the total capital and the new partner's share are known. True. Hidden goodwill = (Implied total capital based on new partner's share) minus (Actual combined capital of all partners).
8. A decrease in the value of a liability is credited to the Revaluation Account. True. A decrease in liability is a gain, so it is credited to the Revaluation Account.
IV. Match the Following
1. Sacrificing Ratio → Old Ratio minus New Ratio 2. Revaluation Account → Nominal account for change in asset/liability values 3. Goodwill Premium → Credited to sacrificing partners in sacrificing ratio 4. Accumulated Profits → Transferred to old partners in old ratio 5. New Ratio → Old Ratio minus Sacrificed Share 6. Hidden Goodwill → Difference between implied total capital and actual capital
Answer
| Column A | Column B |
|---|
| Sacrificing Ratio | Old Ratio − New Ratio |
| Revaluation Account | Nominal Account |
| Goodwill Premium | Credited to sacrificing partners |
| Accumulated Profits | Credited to old partners in old ratio |
| New Profit-Sharing Ratio | Old share minus Sacrificed share |
| Hidden Goodwill | Implied capital minus Actual capital |
V. Answer Briefly
1. What is the sacrificing ratio? How is it different from the new profit-sharing ratio?
Answer
The sacrificing ratio is the ratio in which the existing partners give up their share of profit in favour of the newly admitted partner. It is calculated as: Sacrificing Ratio = Old Ratio − New Ratio. The new profit-sharing ratio is the ratio in which all partners (old and new) share future profits. The key difference is that the sacrificing ratio relates only to the old partners and measures what they gave up, while the new ratio includes all partners and determines how future profits will be divided.
2. Why is the Revaluation Account prepared on the admission of a partner?
Answer
The Revaluation Account is prepared to bring the assets and liabilities to their current market values at the time of admission. This ensures that the new partner does not suffer from any overvalued assets or benefit from undervalued assets. The profit or loss arising from revaluation is shared by old partners in their old ratio, as these changes relate to the period before the new partner joined.
3. Give two differences between the Premium Method and the Revaluation Method of goodwill treatment.
Answer
| Basis | Premium Method | Revaluation Method | |---|---|---| | When used | When the new partner brings goodwill in cash | When the new partner cannot bring goodwill in cash | | Entry for goodwill | Cash/Bank A/c Dr.; To Sacrificing Partners' Capital A/c | New Partner's Capital A/c Dr.; To Sacrificing Partners' Capital A/c |
4. What happens to accumulated profits and losses on admission of a partner?
Answer
Accumulated profits (General Reserve, P&L Account credit balance, etc.) are transferred to old partners' capital accounts in their old ratio. Accumulated losses (P&L debit balance, deferred revenue expenditure, etc.) are also written off against old partners' capital accounts in their old ratio. The new partner does not share in these because they relate to the period before admission.
5. How is hidden goodwill calculated? Give an example.
Answer
Hidden goodwill is calculated when the new partner's capital contribution and profit share are known but goodwill is not explicitly stated. The formula is: Total implied capital of the firm = (New partner's capital / New partner's share). Then, Hidden Goodwill = Total implied capital − Combined actual capital of all partners. Example: A and B have capitals of ₹60,000 and ₹40,000 sharing profits 3:2. C is admitted for 1/4 share and brings ₹30,000. Implied total capital = 30,000 × 4/1 = ₹1,20,000. Combined actual capital = 60,000 + 40,000 + 30,000 = ₹1,30,000. Since actual capital exceeds implied capital, there is no hidden goodwill in this case (the firm is overcapitalized).
6. List the adjustments required on the admission of a partner.
Answer
The following adjustments are required on admission: 1. Determination of new profit-sharing ratio and sacrificing ratio 2. Treatment of goodwill (premium or revaluation method) 3. Revaluation of assets and liabilities 4. Distribution of accumulated profits and reserves 5. Adjustment of capital accounts (if required) 6. Writing off existing goodwill, if any, in the books
7. What journal entry is passed when a new partner brings goodwill in cash?
Answer
Cash/Bank Account Dr. (amount of goodwill brought in) To Sacrificing Partners' Capital Accounts (in sacrificing ratio) This entry debits the cash received and credits the sacrificing partners since the goodwill compensates them for their sacrifice.
8. What is the effect of admitting a new partner on the liability side of the Balance Sheet?
Answer
On admission of a new partner, the following changes appear on the liability side: - The new partner's capital is added. - Accumulated profits are distributed to old partners (reducing the reserve). - Revaluation of liabilities (increase/decrease) is reflected. - Goodwill, if brought in cash, increases the bank balance on the asset side, while the sacrificing partners' capitals increase on the liability side.
VI. Answer in Detail
1. A and B are partners sharing profits in the ratio 3:2. C is admitted for 1/5 share. C brings ₹50,000 as capital and ₹10,000 as goodwill. Pass necessary journal entries and calculate the new ratio.
Answer
Calculation of New Ratio: C's share = 1/5; Remaining share = 1 − 1/5 = 4/5 A's new share = 4/5 × 3/5 = 12/25 B's new share = 4/5 × 2/5 = 8/25 C's share = 1/5 = 5/25 New Ratio = 12:8:5 Sacrificing Ratio = Old Ratio − New Ratio A's sacrifice = 3/5 − 12/25 = 15/25 − 12/25 = 3/25 B's sacrifice = 2/5 − 8/25 = 10/25 − 8/25 = 2/25 Sacrificing Ratio = 3:2 (same as old ratio since C takes share proportionally) Journal Entries: | Date | Particulars | L.F. | Debit (₹) | Credit (₹) | |---|---|---|---|---| | | Cash A/c Dr. | | 60,000 | | | | To C's Capital A/c | | | 50,000 | | | To A's Capital A/c | | | 6,000 | | | To B's Capital A/c | | | 4,000 | | | (Being capital and goodwill brought by C; goodwill credited to sacrificing partners in 3:2) | | | |
2. A and B are partners sharing profits 3:2. Their Balance Sheet shows: Land & Building ₹1,00,000 (book value); Creditors ₹30,000. On admission of C for 1/5 share, Land & Building is revalued at ₹1,20,000 and Creditors are found to be ₹28,000. Pass revaluation entries and show the Revaluation Account.
Answer
Revaluation Account | Particulars | ₹ | Particulars | ₹ | |---|---|---|---| | | | To Land & Building (increase) | 20,000 | | To Creditors (decrease) | 2,000 | | | | To Profit on revaluation: | | | | | A (3/5) | 13,200 | | | | B (2/5) | 8,800 | | | | Total | 24,000 | Total | 24,000 | Actually, the Revaluation Account credits increases and debits decreases: Revaluation Account (Dr. side = debits, Cr. side = credits) | Debit (Losses/Decreases) | ₹ | Credit (Gains/Increases) | ₹ | |---|---|---|---| | Profit transferred: | | Land & Building (increase) | 20,000 | | A's Capital A/c (3/5) | 13,200 | Creditors (decrease) | 2,000 | | B's Capital A/c (2/5) | 8,800 | | | | Total | 22,000 | Total | 22,000 | Journal Entries: | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | Land & Building A/c Dr. | 20,000 | | | To Revaluation A/c | | 20,000 | | (Being increase in value of Land & Building on revaluation) | | | | Revaluation A/c Dr. | 2,000 | | | To Creditors A/c | | 2,000 | | (Being decrease in creditors on revaluation — correction: Actually, decrease in liability is a gain, so Creditors Dr., To Revaluation) | | | Correction — decrease in liability is a gain: | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | Land & Building A/c Dr. | 20,000 | | | To Revaluation A/c | | 20,000 | | Creditors A/c Dr. | 2,000 | | | To Revaluation A/c | | 2,000 | | Revaluation A/c Dr. | 22,000 | | | To A's Capital A/c | | 13,200 | | To B's Capital A/c | | 8,800 |
3. A and B share profits 2:1. C is admitted for 1/4 share, half of which he acquires from A and half from B. Goodwill of the firm is valued at ₹60,000. C brings the necessary cash for goodwill. Pass journal entries under the Premium Method.
CalculationC's share = 1/4 C acquires from A = 1/4 × 1/2 = 1/8 C acquires from B = 1/4 × 1/2 = 1/8 New Ratio: A = 2/3 − 1/8 = 16/24 − 3/24 = 13/24 B = 1/3 − 1/8 = 8/24 − 3/24 = 5/24 C = 1/4 = 6/24 New Ratio = 13:5:6 Sacrificing Ratio: A sacrifices = 1/8; B sacrifices = 1/8 Sacrificing Ratio = 1:1 Goodwill = ₹60,000; C's share of goodwill = 60,000 × 1/4 = ₹15,000 Journal Entries (Premium Method): | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | Cash A/c Dr. | 15,000 | | | To A's Capital A/c | | 7,500 | | To B's Capital A/c | | 7,500 | | (Being goodwill brought by C and credited to sacrificing partners in 1:1) | | |
4. Explain the treatment of goodwill under the Revaluation Method with a worked example.
Answer
Under the Revaluation Method, goodwill is first raised in the books by crediting old partners' capital accounts in the old ratio, and then written off by debiting all partners' capital accounts (including the new partner) in the new ratio. This method is used when the new partner does not bring goodwill in cash. Example: A and B share profits 3:2. Goodwill of the firm is valued at ₹50,000. C is admitted for 1/5 share. Goodwill is to be treated under the Revaluation Method. Step 1 — Raise goodwill: | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | Goodwill A/c Dr. | 50,000 | | | To A's Capital A/c (3/5) | | 30,000 | | To B's Capital A/c (2/5) | | 20,000 | | (Being goodwill raised and credited to old partners in old ratio 3:2) | | | Step 2 — Write off goodwill among all partners in new ratio (12:8:5): | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | A's Capital A/c (12/25) Dr. | 24,000 | | | B's Capital A/c (8/25) Dr. | 16,000 | | | C's Capital A/c (5/25) Dr. | 10,000 | | | To Goodwill A/c | | 50,000 | | (Being goodwill written off among all partners in new ratio 12:8:5) | | | Net effect on old partners: A gets ₹30,000 − ₹24,000 = ₹6,000 (net credit) B gets ₹20,000 − ₹16,000 = ₹4,000 (net credit) C pays ₹10,000 (debit) Net effect = ₹10,000, which is C's share of goodwill (1/5 × 50,000).
5. A and B are partners sharing 3:2 with capitals ₹90,000 and ₹60,000 respectively. Their Balance Sheet shows General Reserve ₹20,000 and Profit & Loss A/c (Cr.) ₹10,000. C is admitted for 1/5 share and brings ₹50,000 as capital. Goodwill of the firm is valued at ₹40,000. C brings his share of goodwill in cash. Pass all necessary journal entries.
Answer
Calculations: New Ratio: C gets 1/5; Remaining 4/5 in 3:2 A = 4/5 × 3/5 = 12/25; B = 4/5 × 2/5 = 8/25; C = 5/25 New Ratio = 12:8:5 Sacrificing Ratio = 3:2 C's share of goodwill = 40,000 × 1/5 = ₹8,000 Journal Entries: | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | General Reserve A/c Dr. | 20,000 | | | Profit & Loss A/c Dr. | 10,000 | | | To A's Capital A/c (3/5) | | 18,000 | | To B's Capital A/c (2/5) | | 12,000 | | (Being accumulated profits transferred to old partners in old ratio) | | | | Cash A/c Dr. | 58,000 | | | To C's Capital A/c | | 50,000 | | To A's Capital A/c (3/5) | | 4,800 | | To B's Capital A/c (2/5) | | 3,200 | | (Being capital ₹50,000 and goodwill ₹8,000 brought by C; goodwill credited to sacrificing partners) | | |
6. Explain the steps involved in the admission of a partner with a complete illustration covering revaluation, goodwill, and capital adjustment.
Answer
Steps in Admission of a Partner: 1. Determine the new profit-sharing ratio and sacrificing ratio. 2. Pass entries for goodwill (Premium or Revaluation Method). 3. Revalue assets and liabilities through the Revaluation Account. 4. Transfer accumulated profits and losses to old partners in the old ratio. 5. Write off existing goodwill in the books (if any) among old partners. 6. Bring in the new partner's capital. 7. Adjust capitals if necessary (based on the new partner's capital proportion). Illustration: A and B share profits 5:3. Their Balance Sheet as on 31.12.2024 is: | Liabilities | ₹ | Assets | ₹ | |---|---|---|---| | Creditors | 20,000 | Cash | 10,000 | | General Reserve | 16,000 | Debtors | 30,000 | | A's Capital | 60,000 | Stock | 20,000 | | B's Capital | 40,000 | Machinery | 60,000 | | | 1,36,000 | | 1,20,000 | (Note: Total assets should equal total liabilities. Let us assume: Cash 10,000 + Debtors 30,000 + Stock 20,000 + Machinery 60,000 = 1,20,000. Adjusting: Add Land 16,000 to match 1,36,000.) C is admitted for 1/4 share on the following terms: (i) C brings ₹40,000 as capital and his share of goodwill in cash. Goodwill is valued at ₹32,000. (ii) Stock is revalued at ₹22,000 and Machinery at ₹56,000. (iii) General Reserve is to be transferred to old partners' capital accounts. Step 1 — New Ratio and Sacrificing Ratio: C = 1/4; Remaining = 3/4 in 5:3 A = 3/4 × 5/8 = 15/32; B = 3/4 × 3/8 = 9/32; C = 8/32 New Ratio = 15:9:8 Sacrificing Ratio = 5:3 (since C takes proportionally from both) Step 2 — Goodwill: C's share = 32,000 × 1/4 = ₹8,000 Step 3 — Revaluation: Stock increase: 22,000 − 20,000 = ₹2,000 Machinery decrease: 60,000 − 56,000 = ₹4,000 Net loss on revaluation = 4,000 − 2,000 = ₹2,000 A's share = 2,000 × 5/8 = ₹1,250; B's share = 2,000 × 3/8 = ₹750 Journal Entries: | Particulars | Debit (₹) | Credit (₹) | |---|---|---| | Cash A/c Dr. | 48,000 | | | To C's Capital A/c | | 40,000 | | To A's Capital A/c (5/8) | | 5,000 | | To B's Capital A/c (3/8) | | 3,000 | | (Being capital and goodwill brought by C) | | | | General Reserve A/c Dr. | 16,000 | | | To A's Capital A/c | | 10,000 | | To B's Capital A/c | | 6,000 | | (Being general reserve distributed to old partners) | | | | Stock A/c Dr. | 2,000 | | | To Revaluation A/c | | 2,000 | | (Being increase in stock value on revaluation) | | | | Revaluation A/c Dr. | 4,000 | | | To Machinery A/c | | 4,000 | | (Being decrease in machinery value on revaluation) | | | | A's Capital A/c Dr. | 1,250 | | | B's Capital A/c Dr. | 750 | | | To Revaluation A/c | | 2,000 | | (Being loss on revaluation transferred to old partners) | | |
Common Mistakes to Avoid
1. Confusing sacrificing ratio with new ratio — Always calculate sacrificing ratio as Old Ratio minus New Ratio, not the other way around.
2. Crediting goodwill to all partners — Goodwill brought by the new partner belongs only to the sacrificing partners, not all partners.
3. Sharing revaluation profit/loss with the new partner — The new partner was not part of the firm when assets and liabilities changed in value; revaluation belongs to old partners only.
4. Forgetting to transfer accumulated profits — General Reserve, Profit & Loss credit balance, etc. must be distributed to old partners before the new partner is entitled to share.
5. Not adjusting for existing goodwill — If goodwill already appears in the books, it must be written off among old partners in old ratio before raising new goodwill.
6. Wrong calculation of new ratio — When the new partner acquires a share from old partners in a specific ratio, the new ratio must be calculated carefully: New Share = Old Share minus Sacrificed Share for each old partner.
Exam Checklist
- [ ] Can you calculate the new profit-sharing ratio when a new partner is admitted for a specific share?
- [ ] Can you determine the sacrificing ratio correctly (Old Ratio − New Ratio)?
- [ ] Can you pass journal entries for goodwill under both the Premium Method and the Revaluation Method?
- [ ] Can you prepare the Revaluation Account with proper debit and credit entries?
- [ ] Can you distribute accumulated profits, reserves, and losses to old partners in the old ratio?
- [ ] Can you calculate hidden goodwill when total capital and share are given?
- [ ] Can you prepare the Balance Sheet after admission with all adjustments?
- [ ] Can you handle cases where the new partner acquires share from old partners in a specific ratio (not proportionally)?
