CLASS 12 ACCOUNTANCY NOTES Chapter: Admission of a Partner Notes

🧩 PART 1 — Basics of Reconstitution & Admission

🔷 1. Meaning of Partnership

A partnership is an agreement between two or more persons who agree to:

Carry on business together, and
Share profits and losses.

👉 People involved are called partners
👉 Business is called a partnership firm

🔷 2. Meaning of Reconstitution of Partnership

When there is any change in the agreement between partners, it is called reconstitution of partnership.

👉 The old agreement ends
👉 A new agreement is formed
👉 But the business continues

📌 Important: Firm does NOT close; only relationship changes.

🔷 3. Modes of Reconstitution (Very Important)

A partnership firm is reconstituted in 4 ways:

(1) Admission of a New Partner

A new partner joins the firm
Done when business needs:
- more capital 💰
- better management 👨‍💼

(2) Change in Profit Sharing Ratio

Old partners change how profits are shared
Happens due to change in roles or contribution

(3) Retirement of a Partner

One partner leaves the firm due to:
- old age
- illness
- personal reasons

(4) Death of a Partner

Partnership continues with remaining partners
Deceased partner’s share is settled

🔷 4. Admission of a Partner (Core Concept)

When a new partner is added:

👉 He gets two rights:

Right to share profits
Right over assets of the firm

🔷 5. Why is a New Partner Admitted?

A new partner is admitted for:

Expansion of business 📈
Need for extra capital 💰
Better management skills 👨‍💼
Expertise or goodwill

🔷 6. Basic Rule of Admission

👉 A new partner can be admitted ONLY with consent of all existing partners
(Unless partnership deed says otherwise)

🔷 7. Effects of Admission of Partner

When a new partner enters, these changes occur:

🔸 1. Change in Profit Sharing Ratio

Old partners sacrifice some share for new partner.

🔸 2. Calculation of Sacrificing Ratio

Old partners give up part of their share.

🔸 3. Adjustment of Goodwill

New partner compensates old partners for goodwill.

🔸 4. Revaluation of Assets & Liabilities

Assets and liabilities are updated to current value.

🔸 5. Distribution of Reserves

Old profits/losses shared among old partners.

🔸 6. Adjustment of Capital

Capital may be adjusted according to new ratio.

🔷 8. Key Term Summary

Term	Meaning
Reconstitution	Change in partnership agreement
Admission	Entry of new partner
Sacrifice	Old partner gives up share
Gain	Increase in share
Goodwill	Value of reputation and super profits

🔷 9. Simple Flow of Admission

Old Partners → Agree → New Partner Enters  
        ↓  
New Agreement Formed  
        ↓  
Profit Ratio Changes + Adjustments Done

⚡ Exam Tip

If question asks:
👉 “What happens on admission of partner?”

Write:

New profit ratio changes
Sacrificing ratio arises
Goodwill is adjusted
Assets & liabilities are revalued
Reserves are distributed
Capital is adjusted

PART 2 — GOODWILL (CORE CONCEPT)

🔷 1. Meaning of Goodwill

Goodwill is the value of the reputation of a firm.

👉 It allows a firm to earn extra profits (super profits) compared to normal firms.

Simple meaning:

Goodwill = Extra earning power of a business

🔷 2. Key Features of Goodwill

It is an intangible asset (cannot be seen or touched)
It exists only when firm earns super profits
It increases with reputation
It can be bought or sold only with business

🔷 3. When Goodwill Exists?

Goodwill exists only when:

Firm earns more than normal profit

❌ No goodwill if:

Normal profits OR
Losses

🔷 4. Factors Affecting Goodwill

⭐ (1) Nature of Business

High demand products → high goodwill

⭐ (2) Location

Prime location → more customers → higher goodwill

⭐ (3) Management Efficiency

Good management → cost control → higher profits

⭐ (4) Market Conditions

Monopoly or less competition → high goodwill

⭐ (5) Special Advantages

Brand name, patents, contracts, licences etc.

🔷 5. Need for Valuation of Goodwill

Goodwill is calculated when:

Admission of partner
Retirement of partner
Death of partner
Change in profit ratio
Sale of firm

🔷 6. Methods of Valuation of Goodwill

There are 3 main methods:

🔶 METHOD 1: Average Profit Method

Formula:

Goodwill = Average Profit × No. of years purchase

Steps:

Find total profits
Calculate average profit
Multiply by years given

Example idea:

If average profit = 50,000
Years = 3
Goodwill = 1,50,000

🔶 METHOD 2: Super Profit Method ⭐ (VERY IMPORTANT)

Step 1: Normal Profit

Normal Profit = Capital × Normal Rate / 100

Step 2: Super Profit

Super Profit = Actual Average Profit – Normal Profit

Step 3: Goodwill

Goodwill = Super Profit × Years Purchase

Meaning of Super Profit:

👉 Extra profit earned above normal return

🔶 METHOD 3: Capitalisation Method

Two types:

(A) Capitalisation of Average Profit

Formula:

Goodwill = Capitalised Value – Net Assets

Where:

Capitalised Value = Average Profit × 100 / Normal Rate

(B) Capitalisation of Super Profit

Formula:

Goodwill = Super Profit × 100 / Normal Rate

🔷 7. Quick Comparison Table

Method	Basis	Formula
Average Profit	Past profits	Avg Profit × Years
Super Profit	Extra profit	SP × Years
Capitalisation	Capital value	CV – Net Assets

🔷 8. Important Exam Points

✔ Goodwill = Reputation + Super profit power
✔ It is intangible
✔ Only exists in profitable firms
✔ Methods depend on question data
✔ Super Profit method is most commonly used in exams

⚡ Quick Revision Trick

👉 AP method = “Past Profit”
👉 SP method = “Extra Profit”
👉 Capitalisation = “Total Value Method”

🧩 PART 3 — TREATMENT OF GOODWILL + HIDDEN GOODWILL

🔷 1. Treatment of Goodwill on Admission

When a new partner is admitted, he must compensate old partners for goodwill.

This compensation is called:
👉 Premium for Goodwill

🔶 Case 1: Goodwill brought in CASH

Journal Entry:

(i) Cash brought in

Bank A/c Dr
   To New Partner Capital A/c
   To Premium for Goodwill A/c

(ii) Distribution of goodwill

Premium for Goodwill A/c Dr
   To Old Partners Capital A/c (in sacrificing ratio)

🔶 Important Rule:

👉 Goodwill is shared by old partners in sacrificing ratio

🔷 2. If Goodwill is NOT Brought in Cash

Then:

Journal Entry:

New Partner’s Capital/Current A/c Dr
   To Old Partners Capital A/c (Sacrificing Ratio)

🔷 3. If Only PART of Goodwill is Paid

👉 Remaining amount is treated as deficiency

Example:

Required goodwill = 50,000
Paid = 20,000
Remaining = 30,000 (adjusted in capital/current account)

🔷 4. Hidden Goodwill ⭐ (VERY IMPORTANT)

Meaning:

When goodwill is NOT directly given but is included in capital adjustments.

🔶 How to Find Hidden Goodwill?

If capital of new firm is known indirectly:

Formula Idea:

Total Capital = Incoming Partner Capital × Reciprocal of Share

Then:

Goodwill = Total Capital – Actual Capital of Partners

🔶 Simple Concept:

👉 If new partner brings more capital than expected → difference = goodwill

🔷 Example Idea (Conceptual)

C brings ₹60,000 for 1/5 share
Total implied capital = 60,000 × 5 = 3,00,000
Actual total capital = 1,90,000
👉 Difference = 1,10,000 = Hidden goodwill

🔷 5. Treatment of Existing Goodwill in Books

If goodwill already exists:

Step 1: Write off old goodwill

Old Partners Capital A/c Dr
   To Goodwill A/c

(Old ratio)

🔷 6. Why is Goodwill Adjusted?

✔ New partner gets share in profits
✔ Old partners lose part of profit
✔ So compensation is necessary

🔷 7. Key Exam Points

✔ Goodwill = compensation for profit sacrifice
✔ Always distributed in sacrificing ratio
✔ Can be brought in cash or adjusted through capital
✔ Hidden goodwill is indirectly calculated
✔ Old goodwill must be written off on admission

⚡ Quick Memory Trick

👉 “GOODWILL = GIVE OLD OWNERS SHARE”
(G-O-O-D = Good Old Owners Deserve)

🧩 PART 4 — REVALUATION OF ASSETS & LIABILITIES + RESERVES + CAPITAL ADJUSTMENT

🔷 1. Meaning of Revaluation

At the time of admission of a new partner, the assets and liabilities of the firm are rechecked and updated to current value.

👉 This process is called Revaluation

🔷 2. Why Revaluation is done?

Because:

Old balance sheet may have outdated values
New partner should not benefit or suffer from old values
Profit/loss on revaluation belongs ONLY to old partners

🔷 3. Revaluation Account (VERY IMPORTANT)

👉 It is a nominal account
👉 It shows profit or loss due to revaluation

🔶 Rule of Revaluation Account

Credit side (GAIN):

Increase in assets
Decrease in liabilities
Unrecorded assets

Debit side (LOSS):

Decrease in assets
Increase in liabilities
Unrecorded liabilities

🔷 4. Journal Entries for Revaluation

(1) Increase in asset

Asset A/c Dr
   To Revaluation A/c

(2) Decrease in asset

Revaluation A/c Dr
   To Asset A/c

(3) Increase in liability

Revaluation A/c Dr
   To Liability A/c

(4) Decrease in liability

Liability A/c Dr
   To Revaluation A/c

🔷 5. Transfer of Revaluation Profit/Loss

If PROFIT (credit balance):

Revaluation A/c Dr
   To Old Partners Capital A/c (old ratio)

If LOSS (debit balance):

Old Partners Capital A/c Dr
   To Revaluation A/c

🔷 6. Accumulated Profits & Losses

These include:

General Reserve
Profit & Loss A/c balance
Accumulated profits/losses

🔶 Treatment:

👉 Old profits belong ONLY to old partners

Journal Entry:

Reserve / P&L A/c Dr
   To Old Partners Capital A/c (old ratio)

❌ Accumulated Loss:

Old Partners Capital A/c Dr
   To P&L A/c

🔷 7. Capital Adjustment (VERY IMPORTANT)

After admission, capital may need adjustment to match new profit ratio.

Methods:

🔶 (1) Adjust through Cash

Partner brings extra cash or withdraws cash

🔶 (2) Adjust through Current Account

Used in fluctuating capital system

🔷 8. If Capital is Fixed

👉 Use Capital Accounts + Current Accounts

🔷 9. If Capital is Adjusted as per New Ratio

Steps:

Find total capital required
Divide in new ratio
Compare with actual capital
Adjust difference

🔷 10. Simple Flow of Revaluation

Revaluation of Assets/Liabilities
        ↓
Profit or Loss Found
        ↓
Transferred to Old Partners
        ↓
Capital Adjustments Done

🔷 11. Key Exam Points

✔ Revaluation is done at admission
✔ Only old partners share profit/loss
✔ Revaluation account is temporary
✔ New partner does NOT share revaluation profit/loss
✔ Capital adjustment ensures fairness

⚡ Quick Revision Trick

👉 “OLD CHANGES ONLY OLD SHARE”

(O = Old partners only)

🧩 PART 5 — FINAL REVISION + JOURNAL ENTRIES SHEET (EXAM READY)

🔷 1. FULL CHAPTER FLOW (MOST IMPORTANT)

When a new partner is admitted, the steps are:

Admission of Partner
      ↓
Goodwill Adjustment
      ↓
Revaluation of Assets & Liabilities
      ↓
Transfer of Reserves/Accumulated Profits
      ↓
Capital Adjustment
      ↓
New Profit Sharing Ratio Finalised

🔷 2. ALL IMPORTANT JOURNAL ENTRIES (ONE PLACE)

🔶 (A) Goodwill (Premium) Entry

When goodwill is brought in cash:

Bank A/c Dr
   To New Partner Capital A/c
   To Premium for Goodwill A/c

Distribution of goodwill:

Premium for Goodwill A/c Dr
   To Old Partners Capital A/c (Sacrificing Ratio)

🔶 (B) Revaluation Entries

Increase in asset:

Asset A/c Dr
   To Revaluation A/c

Decrease in asset:

Revaluation A/c Dr
   To Asset A/c

Transfer profit:

Revaluation A/c Dr
   To Old Partners Capital A/c

Transfer loss:

Old Partners Capital A/c Dr
   To Revaluation A/c

🔶 (C) Reserves / Accumulated Profits

Reserve / P&L A/c Dr
   To Old Partners Capital A/c (Old Ratio)

🔶 (D) Accumulated Loss

Old Partners Capital A/c Dr
   To Profit & Loss A/c

🔶 (E) Goodwill Not Brought in Cash

New Partner Current A/c Dr
   To Old Partners Capital A/c (Sacrificing Ratio)

🔶 (F) Existing Goodwill Written Off

Old Partners Capital A/c Dr (Old Ratio)
   To Goodwill A/c

🔷 3. QUICK FORMULAS SHEET

🔶 Profit Sharing Ratio

👉 Given ratio or derived after admission

🔶 Sacrificing Ratio

Sacrifice = Old Share – New Share

🔶 Goodwill Methods

Average Profit:

Goodwill = Avg Profit × Years Purchase

Super Profit:

Goodwill = Super Profit × Years Purchase

Super Profit:

Super Profit = Actual Profit – Normal Profit

Normal Profit:

Normal Profit = Capital × Rate / 100

🔷 4. MOST IMPORTANT THEORY QUESTIONS

✔ What is reconstitution of partnership?
✔ Why is goodwill required?
✔ What is sacrificing ratio?
✔ Why is revaluation done?
✔ Treatment of accumulated profits
✔ Meaning of goodwill

🔷 5. EXAM-FRIENDLY SHORT NOTES

✔ Admission = change in partnership
✔ New partner gets profit share + assets share
✔ Old partners sacrifice profit
✔ Goodwill compensates sacrifice
✔ Revaluation ensures fair asset value
✔ Reserves belong to old partners only

🔷 6. ONE-LINE REVISION (SUPER FAST)

👉 Admission = New partner joins
👉 Goodwill = Compensation for profit sacrifice
👉 Revaluation = Update asset values
👉 Sacrificing ratio = Loss of profit share
👉 Capital adjustment = Final balancing step

If you remember only this:

👉 Admission = Goodwill + Revaluation + Capital Adjustment
👉 Old partners = sacrifice + gain reserves
👉 New partner = pays goodwill + gets share

QUESTION BANK

PART 1: MCQs (Concept Based)

A. Multiple Choice Questions (MCQs)

1. Reconstitution of a partnership firm means:

(a) Closing down the business
(b) Change in partnership agreement
(c) Sale of assets
(d) Conversion into company

Answer: (b) Change in partnership agreement

2. When a new partner joins a firm, it is called:

(a) Retirement
(b) Dissolution
(c) Admission
(d) Insolvency

Answer: (c) Admission

3. A new partner can be admitted with the consent of:

(a) Any one partner
(b) Majority partners
(c) All existing partners
(d) New partner only

Answer: (c) All existing partners

4. The person who joins an existing partnership firm is called:

(a) Retiring partner
(b) Incoming partner
(c) Nominal partner
(d) Sleeping partner

Answer: (b) Incoming partner

5. On admission of a partner, the old partners:

(a) Gain profit share
(b) Sacrifice profit share
(c) Lose capital
(d) Dissolve firm

Answer: (b) Sacrifice profit share

6. The ratio in which old partners sacrifice their profit share is called:

(a) New ratio
(b) Gaining ratio
(c) Sacrificing ratio
(d) Capital ratio

Answer: (c) Sacrificing ratio

7. Sacrificing ratio is calculated as:

(a) New share – Old share
(b) Old share – New share
(c) Old share + New share
(d) New share × Old share

Answer: (b) Old share – New share

8. Goodwill is:

(a) Tangible asset
(b) Current asset
(c) Intangible asset
(d) Fictitious asset

Answer: (c) Intangible asset

9. Goodwill represents:

(a) Cash balance
(b) Reputation of business
(c) Liability of firm
(d) Capital of partner

Answer: (b) Reputation of business

10. Goodwill exists when a firm earns:

(a) Normal profit
(b) Loss
(c) Super profit
(d) No profit

Answer: (c) Super profit

11. Which of the following affects goodwill?

(a) Location of business
(b) Management efficiency
(c) Market condition
(d) All of these

Answer: (d) All of these

12. Goodwill is valued at the time of:

(a) Admission of partner
(b) Retirement of partner
(c) Change in ratio
(d) All of these

Answer: (d) All of these

13. Under average profit method:

Goodwill =

(a) Average Profit × Years Purchase
(b) Capital × Rate
(c) Super Profit × Capital
(d) Profit ÷ Capital

Answer: (a) Average Profit × Years Purchase

14. Super profit is:

(a) Normal Profit – Actual Profit
(b) Actual Profit – Normal Profit
(c) Capital – Profit
(d) Profit + Capital

Answer: (b) Actual Profit – Normal Profit

15. Normal profit is calculated using:

(a) Capital × Normal Rate /100
(b) Profit × Capital
(c) Capital ÷ Rate
(d) Asset × Liability

Answer: (a) Capital × Normal Rate /100

16. Goodwill under super profit method is:

(a) Super Profit × Years Purchase
(b) Average Profit × Capital
(c) Capital × Rate
(d) Profit ÷ Years

Answer: (a) Super Profit × Years Purchase

17. Capitalisation method is based on:

(a) Capital value
(b) Cash value
(c) Stock value
(d) Market value only

Answer: (a) Capital value

18. Revaluation account is prepared to record:

(a) Cash transactions
(b) Changes in assets and liabilities
(c) Partner salary
(d) Drawings

Answer: (b) Changes in assets and liabilities

19. Increase in asset value is:

(a) Debit to Revaluation A/c
(b) Credit to Revaluation A/c
(c) Debit to Capital A/c
(d) Credit to Cash A/c

Answer: (b) Credit to Revaluation A/c

20. Decrease in asset value is:

(a) Credit to Revaluation A/c
(b) Debit to Revaluation A/c
(c) Credit to Capital A/c
(d) Debit to Bank A/c

Answer: (b) Debit to Revaluation A/c

21. Profit on revaluation is transferred to:

(a) New partner only
(b) Old partners in old ratio
(c) All partners in new ratio
(d) Creditors

Answer: (b) Old partners in old ratio

22. Accumulated profits are transferred to:

(a) New partner
(b) Old partners
(c) Creditors
(d) Bank

Answer: (b) Old partners

23. Premium for goodwill brought by new partner is distributed in:

(a) Old ratio
(b) New ratio
(c) Sacrificing ratio
(d) Capital ratio

Answer: (c) Sacrificing ratio

24. Hidden goodwill is calculated when:

(a) Goodwill is already given
(b) Goodwill is not directly given
(c) Firm has losses
(d) Partner retires

Answer: (b) Goodwill is not directly given

25. New partner does not share:

(a) Future profits
(b) Future losses
(c) Past accumulated profits
(d) Business assets

Answer: (c) Past accumulated profits

Numerical MCQs

26. A and B share profits in 3:2 ratio. C is admitted for 1/5 share. Remaining profit is shared by A and B in old ratio. New ratio is:

(a) 3:2:1
(b) 12:8:5
(c) 5:3:2
(d) 4:3:1

Answer: (b) 12:8:5

27. Old profit share = 5/8 and new profit share = 4/7. Sacrifice is:

(a) 3/56
(b) 5/56
(c) 8/56
(d) 7/56

Answer: (a) 3/56

28. Average profit = ₹40,000 and goodwill is valued at 3 years purchase. Goodwill equals:

(a) ₹40,000
(b) ₹80,000
(c) ₹1,20,000
(d) ₹1,60,000

Answer: (c) ₹1,20,000

29. Capital = ₹5,00,000, normal rate = 10%. Normal profit is:

(a) ₹50,000
(b) ₹5,000
(c) ₹10,000
(d) ₹55,000

Answer: (a) ₹50,000

30. Average profit ₹70,000 and normal profit ₹50,000. Super profit is:

(a) ₹10,000
(b) ₹20,000
(c) ₹30,000
(d) ₹1,20,000

Answer: Past

21. The process of updating assets and liabilities at current values is called ________.

Answer: Revaluation

22. A decrease in liability results in a ________ in Revaluation Account.

Answer: Gain

23. An increase in liability results in a ________ in Revaluation Account.

Answer: Loss

24. Capitalisation method of goodwill is based on the value of ________.

Answer: Capital

25. Premium for goodwill is a compensation paid to ________ partners.

Answer: Sacrificing

Assertion: General Reserve is transferred to old partners’ capital accounts.
Reason: It was earned before admission of the new partner.

Answer: A

A. Match the Following

1.

Column A	Column B
1. Admission of Partner	a. Profit sharing change
2. Goodwill	b. Intangible asset
3. Revaluation Account	c. Change in assets and liabilities
4. Sacrificing Ratio	d. Old partners give up share

Answer:

Column A	Correct Match
Admission of Partner	Change in partnership
Goodwill	Intangible asset
Revaluation Account	Change in assets and liabilities
Sacrificing Ratio	Old partners give up share

2.

Column A	Column B
Average Profit Method	a. Actual Profit – Normal Profit
Super Profit Method	b. Average Profit × Years Purchase
Normal Profit	c. Capital × Rate / 100
Hidden Goodwill	d. Not directly given

Answer:

Column A	Correct Match
Average Profit Method	Average Profit × Years Purchase
Super Profit Method	Actual Profit – Normal Profit
Normal Profit	Capital × Rate / 100
Hidden Goodwill	Not directly given

3.

Column A	Column B
Increase in Asset	a. Debit Revaluation A/c
Decrease in Asset	b. Credit Revaluation A/c
Increase in Liability	c. Loss
Decrease in Liability	d. Gain

Answer:

Column A	Correct Match
Increase in Asset	Credit Revaluation A/c
Decrease in Asset	Debit Revaluation A/c
Increase in Liability	Loss
Decrease in Liability	Gain

4.

Column A	Column B
New Partner	a. Receives profit share
Old Partner	b. Sacrifices profit share
Goodwill	c. Reputation
Reserve	d. Past profit

Answer:

Column A	Correct Match
New Partner	Receives profit share
Old Partner	Sacrifices profit share
Goodwill	Reputation
Reserve	Past profit

5.

Column A	Column B
Revaluation Profit	a. Old Ratio
Goodwill Distribution	b. Sacrificing Ratio
Accumulated Profit	c. Old Partners
Admission	d. Reconstitution

Answer:

Column A	Correct Match
Revaluation Profit	Old Ratio
Goodwill Distribution	Sacrificing Ratio
Accumulated Profit	Old Partners
Admission	Reconstitution

B. One Word / One Term Answers

1. What is the entry of a new partner into an existing firm called?

Answer: Admission

2. What is the reputation value of a firm called?

Answer: Goodwill

3. Which ratio shows the share given up by old partners?

Answer: Sacrificing Ratio

4. Which account records change in assets and liabilities?

Answer: Revaluation Account

5. Which type of asset is goodwill?

Answer: Intangible Asset

6. Profit earned above normal profit is called:

Answer: Super Profit

7. The ratio after admission is called:

Answer: New Profit Sharing Ratio

8. Profit earned before admission belongs to:

Answer: Old Partners

9. Goodwill calculated without direct information is called:

Answer: Hidden Goodwill

10. Account prepared to adjust old assets and liabilities:

Answer: Revaluation Account

11. Compensation paid for sacrificing profit share:

Answer: Goodwill

12. Partner joining the firm is called:

Answer: Incoming Partner

13. Method where goodwill = Average Profit × Years Purchase:

Answer: Average Profit Method

14. Method based on normal return on capital:

Answer: Capitalisation Method

15. Ratio used for transferring revaluation profit:

Answer: Old Ratio

C. Very Short Answer Questions (1–2 Marks)

1. What is meant by admission of a partner?

Answer:
Admission means the entry of a new person into an existing partnership firm with the consent of all existing partners.

2. Why is goodwill adjusted at the time of admission?

Answer:
Because the new partner gets a share in future profits, and old partners sacrifice their profit share.

3. What is sacrificing ratio?

Answer:
Sacrificing ratio is the ratio in which old partners give up their profit share in favour of the new partner.

Formula:

Old Share – New Share

4. What is goodwill?

Answer:
Goodwill is the value of the reputation of a business that helps it earn higher profits.

5. Why is revaluation account prepared?

Answer:
It is prepared to record changes in the value of assets and liabilities at the time of admission.

6. Who gets the profit on revaluation?

Answer:
Old partners receive the profit on revaluation in their old profit-sharing ratio.

7. Does a new partner get past profits?

Answer:
No, past profits belong only to old partners.

8. What is hidden goodwill?

Answer:
Hidden goodwill is the goodwill value calculated indirectly when it is not given in the question.

9. What happens when an asset increases in value?

Answer:
The increase is credited to Revaluation Account.

10. In which ratio is goodwill distributed?

Answer:
Goodwill is distributed among old partners in sacrificing ratio.

D. Short Answer Questions (3 Marks)

1. Explain the effects of admission of a partner.

Answer:

Admission results in:

Change in profit-sharing ratio
Calculation of sacrificing ratio
Adjustment of goodwill
Revaluation of assets and liabilities
Distribution of reserves
Adjustment of capitals

2. Explain any three factors affecting goodwill.

Answer:

Location: A good location increases customer attraction.
Management: Efficient management increases profits.
Market Position: Strong reputation increases goodwill.

3. Why are accumulated profits distributed among old partners?

Answer:

Accumulated profits were earned before admission of the new partner. Therefore, they belong only to old partners and are distributed in the old ratio.

4. Explain the treatment of goodwill when a new partner brings goodwill in cash.

Answer:

Cash received is credited to new partner’s capital and goodwill account.
Goodwill is transferred to old partners’ capital accounts in sacrificing ratio.

PART 4: Numerical MCQs + Case Study Based Questions (CBSE Pattern)

A. Numerical MCQs

1. A and B share profits in the ratio of 3:2. C is admitted for 1/5 share. The new partner’s share is acquired from A and B in their old ratio. The new ratio will be:

(a) 3:2:1
(b) 12:8:5
(c) 5:3:2
(d) 4:3:1

Solution:

C’s share = 1/5

Remaining share = 4/5

A’s new share = 3/5 × 4/5 = 12/25

B’s new share = 2/5 × 4/5 = 8/25

C = 1/5 = 5/25

Answer: (b) 12:8:5

2. X and Y share profits in the ratio of 5:3. Z is admitted for 1/4 share. Z’s share is taken equally from X and Y. Sacrificing ratio will be:

(a) 5:3
(b) 1:1
(c) 3:5
(d) 2:1

Answer: (b) 1:1

3. A partner’s old share is 4/7 and new share is 2/7. His sacrifice is:

(a) 1/7
(b) 2/7
(c) 3/7
(d) 6/7

Solution:

Sacrifice = Old share – New share

= 4/7 – 2/7

= 2/7

Answer: (b) 2/7

GOODWILL BASED MCQs

4. Average profit of a firm is ₹80,000. Goodwill is valued at 3 years purchase. Goodwill will be:

(a) ₹80,000
(b) ₹1,60,000
(c) ₹2,40,000
(d) ₹3,20,000

Solution:

Goodwill = Average Profit × Years Purchase

= 80,000 × 3

= ₹2,40,000

Answer: (c) ₹2,40,000

5. Average profit is ₹1,00,000. Capital employed is ₹8,00,000 and normal rate of return is 10%. Super profit is:

(a) ₹10,000
(b) ₹20,000
(c) ₹40,000
(d) ₹80,000

Solution:

Normal Profit:

= 8,00,000 × 10/100

= ₹80,000

Super Profit:

= 1,00,000 – 80,000

= ₹20,000

Answer: (b) ₹20,000

6. Super profit is ₹50,000 and years purchase is 4. Goodwill is:

(a) ₹50,000
(b) ₹1,00,000
(c) ₹2,00,000
(d) ₹2,50,000

Answer: (c) ₹2,00,000

7. Capital employed is ₹10,00,000 and normal rate of return is 12%. Normal profit equals:

(a) ₹12,000
(b) ₹1,20,000
(c) ₹10,000
(d) ₹2,00,000

Answer: (b) ₹1,20,000

HIDDEN GOODWILL MCQs

8. A new partner brings ₹60,000 for 1/3 share. Total implied capital of the firm is:

(a) ₹1,20,000
(b) ₹1,80,000
(c) ₹2,40,000
(d) ₹3,00,000

Solution:

Total Capital = 60,000 × 3

= ₹1,80,000

Answer: (b) ₹1,80,000

9. Total implied capital is ₹5,00,000 and actual capital is ₹4,00,000. Hidden goodwill is:

(a) ₹50,000
(b) ₹1,00,000
(c) ₹4,00,000
(d) ₹5,00,000

Answer: (b) ₹1,00,000

REVALUATION BASED MCQs

10. Increase in the value of machinery is:

(a) Debit to Machinery A/c
(b) Credit to Machinery A/c
(c) Debit to Revaluation A/c
(d) Credit to Cash A/c

Answer: (a) Debit to Machinery A/c

11. Decrease in stock value is recorded as:

(a) Stock A/c Dr
(b) Revaluation A/c Dr
(c) Cash A/c Dr
(d) Capital A/c Dr

Answer: (b) Revaluation A/c Dr

12. Profit on revaluation is transferred to:

(a) New partner capital
(b) Old partners capital in old ratio
(c) All partners in new ratio
(d) Bank account

Answer: (b) Old partners capital in old ratio

B. Case Study Based Questions

Case Study 1

A and B are partners sharing profits in the ratio of 3:2. They admit C for 1/5 share. C brings ₹50,000 as capital and ₹10,000 as goodwill.

Answer the following:

1. C’s goodwill amount will be credited to:

(a) C’s Capital Account
(b) A and B Capital Accounts
(c) Bank Account
(d) Revaluation Account

Answer: (b)

2. A and B will receive goodwill in:

(a) New ratio
(b) Old ratio
(c) Sacrificing ratio
(d) Equal ratio

Answer: (c)

3. The entry for goodwill received is:

(a)
Bank A/c Dr
To C Capital A/c

(b)
Premium for Goodwill A/c Dr
To A and B Capital A/c

(d)
Goodwill A/c Dr
To Bank A/c

Answer: (b)

Case Study 2

P and Q are partners. They admit R. On admission:

Stock increases by ₹10,000
Machinery decreases by ₹5,000

1. Increase in stock will be:

(a) Debit Revaluation
(b) Credit Revaluation
(c) Debit Capital
(d) Credit Bank

Answer: (b)

2. Decrease in machinery will be:

(a) Credit Revaluation
(b) Debit Revaluation
(c) Credit Capital
(d) Debit Bank

Answer: (b)

3. Revaluation profit/loss belongs to:

(a) R only
(b) P and Q only
(c) All partners
(d) Creditors

Answer: (b)

Case Study 3

M and N have a General Reserve of ₹40,000 before admission of O.

1. General Reserve will be transferred to:

(a) O’s Capital Account
(b) M and N Capital Accounts
(c) Bank Account
(d) Revaluation Account

Answer: (b)

2. The ratio used will be:

(a) New ratio
(b) Sacrificing ratio
(c) Old ratio
(d) Capital ratio

Answer: (c)

Mixed MCQs + Case Study + Assertion–Reason + Answer Key

Answer: (b)

SECTION B — ASSERTION AND REASON

Q1.

Assertion: A new partner does not get a share in accumulated profits.

Reason: Accumulated profits were earned before his admission.

Answer:

(A) Both Assertion and Reason are true and Reason is the correct explanation.

Q2.

Assertion: Goodwill is an intangible asset.

Reason: It has no physical existence.

Answer:

(A)

Q3.

Assertion: Revaluation profit is distributed among all partners.

Reason: Revaluation is done at the time of admission.

Answer:

(D) Assertion is false but Reason is true.

Q4.

Assertion: Sacrificing ratio is important for goodwill adjustment.

Reason: Old partners compensate each other for their loss of profit share.

Answer:

(A)

Q5.

Assertion: New partner contributes capital to the firm.

Reason: He receives a share in future profits.

Answer:

(A)

SECTION C — CASE STUDY QUESTIONS

Case Study 1

A and B are partners sharing profits in the ratio 3:2. They admit C for 1/5 share. C brings ₹40,000 capital and ₹8,000 goodwill.

Questions:

1. C’s share of goodwill is:

(a) ₹4,000
(b) ₹8,000
(c) ₹12,000
(d) ₹40,000

Answer: (b)

2. Goodwill will be distributed between A and B in:

(a) 3:2
(b) 2:3
(c) 1:1
(d) New ratio

Answer: (a) (if sacrifice is in old ratio)

3. The journal entry for goodwill distribution is:

(a)

Premium for Goodwill A/c Dr
To A’s Capital A/c
To B’s Capital A/c

(b)

A’s Capital A/c Dr
To Premium A/c

(c)

Cash A/c Dr
To Goodwill A/c

(d)

Goodwill A/c Dr
To Bank A/c

Answer: (a)

Case Study 2

P and Q have assets of ₹5,00,000. On admission of R:

Stock increases by ₹20,000
Machinery decreases by ₹15,000
Outstanding expense ₹5,000 is created

1. Total gain/loss on revaluation:

Increase:
₹20,000

Loss:
₹15,000 + ₹5,000

Net Profit/Loss:

₹20,000 – ₹20,000 = Nil

Answer: No profit or loss

2. Stock increase is recorded by:

Answer:
Stock A/c Dr
To Revaluation A/c

3. Outstanding expense creation is:

Answer:
Revaluation A/c Dr
To Outstanding Expense A/c

SECTION D — SHORT ANSWER REVISION QUESTIONS

1. Define goodwill.

Answer:
Goodwill is the value of the reputation of a business that helps it earn higher profits than normal firms.

2. Write the formula of sacrificing ratio.

Answer:

Sacrificing Ratio:

Old Ratio – New Ratio

3. Write two reasons for admission of a partner.

Answer:

Need for additional capital
Need for better management skills

4. Why is revaluation done?

Answer:
Revaluation is done to bring assets and liabilities to their current values before admission of a new partner.

5. Who shares revaluation profit?

Answer:
Old partners share revaluation profit in their old profit-sharing ratio.

SECTION E — LAST MINUTE REVISION TABLE

Topic	Important Rule
Admission	Change in partnership
New Partner	Gets future profit share
Old Partners	Sacrifice profit share
Goodwill	Distributed in sacrificing ratio
Revaluation Profit	Old ratio
Reserve	Old partners only
Hidden Goodwill	Implied capital method
Sacrificing Ratio	Old share – New share