Anita, Bina and Chitra: goodwill and revaluation on admission
Anita and Bina run a trading partnership, sharing profits 3:2, with capitals of ₹3,00,000 and ₹2,00,000. On 31 March 2025 they admit Chitra for a 1/5 share. Goodwill is agreed at ₹1,50,000. Chitra brings ₹2,50,000 in cash, which includes her share of goodwill. Before admission the balance sheet shows machinery ₹4,00,000 (revalued at ₹4,60,000), stock ₹1,20,000 (revalued at ₹1,05,000), investments ₹1,50,000 (revalued at ₹1,90,000), and debtors ₹1,60,000 against which a provision of ₹8,000 already exists; a 5% provision is considered adequate after revaluation. An unrecorded electricity creditor of ₹25,000 is admitted by the partners. Anita argues that because Chitra is paying cash for goodwill, the goodwill account should also be raised to ₹1,50,000 and then written off. Bina fears the revaluation loss on stock should be shared by all three partners because the revaluation is happening 'at the time of admission'. The deed is silent.
1. Pass the necessary journal entries and prepare the partners' capital accounts.
Read the worked answer
Sacrificing ratio = old ratio 3:2 (only old partners sacrifice). Chitra's premium = 1/5 × ₹1,50,000 = ₹30,000 → Anita ₹18,000, Bina ₹12,000.
Revaluation account:
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Stock | 15,000 | By Machinery | 60,000 |
| To Outstanding electricity | 25,000 | By Investments | 40,000 |
| To Profit transferred: Anita 36,000, Bina 24,000 | 60,000 | ||
| Total | 1,00,000 | Total | 1,00,000 |
Provision for doubtful debts: 5% of ₹1,60,000 = ₹8,000, equal to the existing provision - no adjustment.
Entries:
- Bank A/c Dr 2,50,000; To Chitra's Capital A/c 2,20,000; To Premium for Goodwill A/c 30,000
- Premium for Goodwill A/c Dr 30,000; To Anita's Capital A/c 18,000; To Bina's Capital A/c 12,000
- Machinery A/c Dr 60,000; Investments A/c Dr 40,000; To Revaluation A/c 80,000
- Revaluation A/c Dr 15,000; To Stock A/c 15,000
- Revaluation A/c Dr 25,000; To Outstanding Electricity Expenses A/c 25,000
- Revaluation A/c Dr 60,000; To Anita's Capital A/c 36,000; To Bina's Capital A/c 24,000
Capital accounts: Anita ₹3,00,000 + 36,000 + 18,000 = ₹3,54,000; Bina ₹2,00,000 + 24,000 + 12,000 = ₹2,36,000; Chitra ₹2,20,000. Total ₹8,10,000.
2. Settle both partners' doubts: should goodwill be raised and written off, and who bears the revaluation gains and losses?
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Anita's point - no. Raising goodwill to ₹1,50,000 and writing it off would credit ₹1,50,000 to the old partners in 3:2 and debit it in the new ratio 3:2:1, i.e. A +90,000 −75,000 = +15,000; B +60,000 −50,000 = +10,000; C −25,000. The premium method gives A +18,000 and B +12,000 instead. The two are not equivalent here, because Chitra has actually paid ₹30,000 in cash. Doing both would count the same goodwill twice: once as cash received and once as a self-created intangible.
The correct rule is: when the incoming partner brings his share of goodwill in cash, only the cash premium is recorded and credited to the sacrificing partners - goodwill never appears as an asset. Raising and writing off goodwill is the alternative used when the partner brings no premium, and even then only because it is the only way to adjust capitals. A self-generated goodwill account would also flatter the balance sheet, which is why AS 10 excludes it.
Bina's point - also no. Gains and losses on revaluation are borne by the partners who owned the assets at the date of revaluation. Chitra was not a partner when the stock was bought or the electricity bill incurred; charging her 1/5 would transfer ₹3,000 of the stock loss and ₹5,000 of the unrecorded liability to a stranger, inflating the old partners' capitals. Hence the whole ₹60,000 net gain goes to Anita and Bina in 3:2. The fact that revaluation happens at admission does not change the ownership of the pre-admission result; the only correction is that if the deed provided otherwise, the deed would prevail.
3. Assess whether Chitra's ₹2,50,000 contribution is consistent with a 1/5 share, and advise on the treatment of any excess.
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Test the capital against the old partners' adjusted capitals. After revaluation and goodwill, Anita holds ₹3,54,000 and Bina ₹2,36,000 - together ₹5,90,000, which represents the remaining 4/5. On a proportionate-capital basis:
- Firm capital after admission = 5,90,000 × 5/4 = ₹7,37,500
- Chitra's required 1/5 = ₹1,47,500
She is bringing ₹2,20,000 as capital, i.e. ₹72,500 more than proportionate. Her actual share of the ₹8,10,000 total is 2,20,000 ÷ 8,10,000 = 27.16%, not 20%. So her capital and her profit share do not match.
Three defensible treatments, all requiring the deed to be amended:
- Credit the excess to Chitra's Loan/Current A/c - cleanest, and does not disturb the profit-sharing ratio.
- Ask the old partners to bring in additional capital to restore the 3:2:1 relationship. To make 2,20,000 represent 1/5, total capital must be ₹11,00,000, so Anita needs ₹4,40,000 and Bina ₹2,93,333 - an unlikely cure.
- Re-negotiate Chitra's profit share upward to match her capital.
Her share of goodwill is unaffected by this: ₹30,000 is already the correct premium for 1/5. Record the excess as a loan/current account, disclose the basis of capital fixation in a note, and advise the partners to write the capital clause into the deed - silence on this point is what created the dispute.