Admission of Chandni: Revaluation Losses, Goodwill in Cash and a Capital Shortfall
Asha and Bina have run M/s Roshni Traders, a fabric wholesaler, sharing profits 3:2. Their capital accounts on 31 March 2024 stood at ₹4,60,000 and ₹3,10,000, and the firm had a General Reserve of ₹60,000. On 1 April 2024 they admitted Chandni for a 1/4 share. Chandni brought ₹2,40,000 as her capital and ₹80,000 in cash for her share of goodwill; the partners have decided that no goodwill account will be carried in the books. Before the admission was recorded, the following were found: stock included items carried at ₹40,000 above their net realisable value; a repair bill of ₹25,000 had been debited to Plant and Machinery instead of to Repairs; and a supplier's bill for ₹15,000 for goods received in February 2024 was still unrecorded. Bina objects that she personally opposed the purchase that gave rise to the unrecorded bill and should not bear any part of that ₹15,000; Chandni argues that since she is joining now, none of these adjustments should touch her.
1. Compute the new profit-sharing ratio and the sacrificing ratio, and pass the journal entries for goodwill, given that the firm does not want a goodwill account in its books.
Read the worked answer
New ratio. Chandni takes 1/4 = 5/20. The remaining 15/20 is divided between Asha and Bina in their old 3:2: Asha = 3/5 × 15/20 = 9/20; Bina = 2/5 × 15/20 = 6/20; Chandni = 5/20. New ratio = 9 : 6 : 5.
Sacrificing ratio. Old share − new share: Asha = 12/20 − 9/20 = 3/20; Bina = 8/20 − 6/20 = 2/20 → 3 : 2, i.e. the same as the old ratio because Chandni's share was carved out of the existing shares proportionately.
Goodwill. Cash of ₹80,000 is for a 1/4 share, so the firm's goodwill is 80,000 × 4 = ₹3,20,000. The partners who gave up the share must receive it: Asha: 3,20,000 × 3/20 = ₹48,000; Bina: 3,20,000 × 2/20 = ₹32,000. (Check: 3,20,000 × 3/5 of the 1/4 = same figures.)
| Entry | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr | 3,20,000 | |
| To Chandni's Capital A/c | 2,40,000 | |
| To Premium for Goodwill A/c | 80,000 | |
| Premium for Goodwill A/c Dr | 80,000 | |
| To Asha's Capital A/c | 48,000 | |
| To Bina's Capital A/c | 32,000 |
Because no goodwill account is to be carried, the goodwill account is never raised; only the cash actually paid is routed to the sacrificing partners, and the Premium for Goodwill account is closed the same day. Chandni's capital is credited only with her ₹2,40,000 - she pays for goodwill but gains no goodwill asset.
2. Prepare the Revaluation Account, compute the adjusted capitals of Asha and Bina, and determine the capital Chandni ought to have brought. State the shortfall or excess and its treatment.
Read the worked answer
Revaluation Account
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Stock (written down to NRV) | 40,000 | By Loss transferred: | |
| To Plant & Machinery (repair wrongly capitalised) | 25,000 | Asha 3/5 - 48,000 | |
| To Creditors (unrecorded bill) | 15,000 | Bina 2/5 - 32,000 | |
| 80,000 | 80,000 |
Every item is a pre-admission event, so the whole ₹80,000 falls on the old partners in the old ratio 3:2. Chandni is not touched by it - she is buying into the firm as it now stands.
Adjusted capitals (before goodwill)
| Asha ₹ | Bina ₹ | |
|---|---|---|
| Balance b/d | 4,60,000 | 3,10,000 |
| Add: General Reserve 3:2 | 36,000 | 24,000 |
| Less: Revaluation loss | (48,000) | (32,000) |
| Adjusted capital | 4,48,000 | 3,02,000 |
Total = ₹7,50,000, which is the capital of the 3/4 group. If 3/4 of the firm's capital is ₹7,50,000, the whole is ₹10,00,000 and Chandni's 1/4 is ₹2,50,000.
She brought ₹2,40,000, so she is short by ₹10,000. Treatment: either she brings ₹10,000 in cash (Bank Dr, To Chandni's Capital), or her capital stays ₹2,40,000 and the firm accepts that her share of the total capital is slightly less than 1/4, in which case the old partners' capitals should be reduced to bring the ratio back to 9:6:5.
Two points to flag: the goodwill of ₹80,000 is excluded from this computation, because it compensates the old partners for sacrificed profit and is not part of the operating capital (including it would raise Chandni's requirement to about ₹2,76,667). And Bina's objection changes nothing - a partner's personal dissent at the time of purchase does not shift a firm liability onto the other partners; the deed here is silent, so the old ratio governs.
3. Bina refuses to accept any part of the ₹15,000 unrecorded creditor, and Chandni insists the revaluation should not affect her capital. Advise the partners, giving the accounting reason for the allocation.
Read the worked answer
Allocation follows the period, not the person. The ₹15,000 bill relates to goods received in February 2024, i.e. it is a cost of the period during which Asha and Bina alone were entitled to the profits. The matching principle therefore requires it to be borne by them in the ratio in which they shared profits for that period - 3 : 2. The fact that Bina voted against the purchase is an internal governance matter; a partnership is bound by acts done in the ordinary course of business, and nothing in the deed permits a partner to opt out of firm liabilities. If Asha and Bina want a different split, they need a specific written agreement, and it would still not bind the outside supplier.
Chandni is correct in substance. Revaluation adjustments trace to pre-admission events, so she takes no part of the ₹80,000 loss. But her reasoning is incomplete: she is not insulated from the consequences. The adjusted capital base of ₹7,50,000 fixes her proportionate capital at ₹2,50,000, and she has brought ₹2,40,000. She must therefore bring ₹10,000, or accept a smaller share of the firm's capital than 1/4.
Practical step:- record the unrecorded creditor at once, before the admission is entered in the books;
- restate the capital accounts as computed (Asha ₹4,48,000, Bina ₹3,02,000);
- obtain Chandni's ₹10,000 or record a formal note on the capital ratio;
- record in the deed a clause on how pre-admission liabilities and unrecorded items are to be allocated, so that the next admission does not repeat this dispute.