Admission with equal sacrifice and an excess capital contribution
Meera and Nithin share profits 3:2 and have capitals of ₹3,00,000 and ₹2,00,000. On 31 March 2025 they admit Omar for 1/5 share; the new ratio is 5:3:2. Omar brings ₹1,50,000 as capital and ₹60,000 as goodwill. Before admission: building is revalued up by ₹50,000; stock down by ₹12,000; a provision for doubtful debts of ₹8,000 is created; investments are up by ₹5,000; an unrecorded liability of ₹15,000 is recorded. A workmen compensation reserve of ₹25,000 exists and an equal claim is expected. Meera and Nithin had omitted interest on capital for two years, but they agree not to reopen old accounts. Omar's capital is to be proportionate to the adjusted combined capital of Meera and Nithin after revaluation and goodwill. The accountant credited the entire goodwill to Meera because she is senior and transferred the revaluation profit in the old ratio.
1. Compute the sacrificing ratio and show the correct distribution of Omar's goodwill. Why is Meera's treatment wrong?
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Old ratio Meera:Nithin = 3:2 = 6:4. New ratio = 5:3:2.
Sacrifice:
- Meera: 6/10 − 5/10 = 1/10
- Nithin: 4/10 − 3/10 = 1/10
Sacrificing ratio = 1:1, not Meera alone. Goodwill brought by Omar for 1/5 share is ₹60,000, so the firm’s goodwill is ₹60,000 × 5 = ₹3,00,000. The ₹60,000 premium is credited to the sacrificing partners in their sacrifice ratio:
- Meera: ₹30,000
- Nithin: ₹30,000
Crediting the entire ₹60,000 to Meera is wrong because Nithin also sacrificed 1/10 of the profit. Meera would be over-credited by ₹30,000 and Nithin under-credited by ₹30,000. The correct entry is: Omar’s Capital/Current A/c Dr ₹60,000; To Meera’s Capital A/c ₹30,000; To Nithin’s Capital A/c ₹30,000.
2. Prepare the Revaluation Account and partners' capital accounts. Compute Omar's proportionate capital.
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Revaluation Account
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Stock | 12,000 | By Building | 50,000 |
| To Provision for doubtful debts | 8,000 | By Investments | 5,000 |
| To Unrecorded liability | 15,000 | ||
| To Profit on revaluation | 20,000 | ||
| Total | 55,000 | Total | 55,000 |
Revaluation profit ₹20,000 shared old ratio 3:2: Meera ₹12,000; Nithin ₹8,000.
Capital Accounts
| Particulars | Meera | Nithin | Omar |
|---|---|---|---|
| Opening capital | 3,00,000 | 2,00,000 | - |
| Revaluation profit | 12,000 | 8,000 | - |
| Goodwill | 30,000 | 30,000 | - |
| Adjusted capital | 3,42,000 | 2,38,000 | - |
| Combined adjusted capital | 5,80,000 | ||
| Omar’s 1/5 proportionate capital | 1,45,000 |
Omar’s proportionate capital = ₹5,80,000 × 5/4 × 1/5 = ₹1,45,000. The workmen compensation reserve of ₹25,000 is exactly matched by the expected claim, so it is used to settle the claim and does not increase partners’ capitals.
3. Omar brings ₹1,50,000. How should the excess be treated? What is the effect of the omitted interest on capital?
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Omar’s proportionate capital is ₹1,45,000, but he brings ₹1,50,000. The excess ₹5,000 should be credited to Omar’s Current Account (or treated as a loan/advance if the deed so provides), not to goodwill and not to the old partners. Goodwill is separately agreed at ₹60,000 for his 1/5 share and has already been credited to Meera and Nithin in their sacrificing ratio. Crediting the excess to capital would alter the agreed profit-sharing structure and make Omar’s capital disproportionate.
The omitted interest on capital for two years is a prior-period omission. Since Meera and Nithin have agreed not to reopen old accounts, no adjustment entry is passed at admission. If it were reopened, interest would be credited to the partners’ capital/current accounts and the corresponding appropriation would reduce the earlier profits available to them; the net effect would redistribute capital among the old partners. That is precisely why the agreement not to reopen matters.