Admission of Tanvir: Sacrifice, Revaluation and a Dissenting Partner
M/s Doaba Textiles is a partnership firm of Karamjit Singh and Simranjit Kaur, sharing profits in the ratio 3 : 1, with capitals of ₹3,00,000 and ₹2,00,000. On 1 April 2024 they admit Tanvir Ahmed for a 1/5 share. Tanvir brings ₹2,50,000 as capital and his share of goodwill in cash. Goodwill of the firm is valued at ₹2,00,000. Before admission the following were noted: stock carried at ₹90,000 was found to be undervalued by ₹15,000; machinery standing at ₹1,20,000 was revalued at ₹1,00,000; debtors of ₹80,000 required a provision for doubtful debts @ 5%; and a supplier's bill of ₹8,000 for carriage inward remained unrecorded. Karamjit argues that Tanvir must bear a share of the revaluation loss, because the new firm will be using the revalued (lower) machinery. Simranjit is unsure whether the goodwill should now appear as an asset in the firm's balance sheet.
1. Compute the new profit-sharing ratio and the sacrificing ratio, and show the treatment of goodwill on Tanvir's admission.
Read the worked answer
New ratio. Tanvir takes 1/5, leaving 4/5 for the old partners in their old ratio 3 : 1.
Karamjit = 4/5 × 3/4 = 3/5; Simranjit = 4/5 × 1/4 = 1/5; Tanvir = 1/5.
New ratio = 3 : 1 : 1
Sacrificing ratio = Old share − New share
Karamjit = 3/4 − 3/5 = 15/20 − 12/20 = 3/20
Simranjit = 1/4 − 1/5 = 5/20 − 4/20 = 1/20
Sacrificing ratio = 3 : 1 (the same as the old ratio, because the new partner's share is carved out proportionately).
Goodwill. Tanvir's share of goodwill = 2,00,000 × 1/5 = ₹40,000, which he brings in cash. It is credited to the sacrificing partners, not retained by the firm:
- Karamjit: 40,000 × 3/4 = ₹30,000
- Simranjit: 40,000 × 1/4 = ₹10,000
Journal entry
Bank A/c Dr 40,000 To Karamjit's Capital A/c 30,000 To Simranjit's Capital A/c 10,000
Reasoning. Goodwill is paid for the share of future profits surrendered by the old partners, so the compensation must follow the sacrificing ratio. Using the old ratio here happens to give the same answer, but that is a coincidence of this data - in a case where the new share is not carved out proportionately, the two ratios differ and the sacrificing ratio must be used.
2. Prepare the Revaluation Account and show the partners' capital accounts on Tanvir's admission.
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Revaluation Account
| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Machinery A/c (1,20,000 − 1,00,000) | 20,000 | By Stock A/c | 15,000 |
| To Provision for Doubtful Debts (5% of 80,000) | 4,000 | ||
| To Outstanding Carriage Inward | 8,000 | ||
| To Loss on Revaluation transferred: Karamjit 12,750; Simranjit 4,250 | 17,000 | ||
| Total | 49,000 | Total | 49,000 |
Partners' Capital Accounts
| Particulars | Karamjit | Simranjit | Tanvir |
|---|---|---|---|
| Balance b/d | 3,00,000 | 2,00,000 | - |
| Less: Revaluation loss | (12,750) | (4,250) | - |
| Add: Goodwill brought in | 30,000 | 10,000 | - |
| Add: Cash brought as capital | - | - | 2,50,000 |
| Closing balance | 3,17,250 | 2,05,750 | 2,50,000 |
Notes on treatment. The ₹8,000 unrecorded bill is a liability that existed before admission, so it is a loss on revaluation and not a charge of the new firm. The provision for doubtful debts is created on the old debtors figure of ₹80,000. The revaluation loss is borne by the old partners in the old ratio 3 : 1 because it relates to a period before Tanvir joined. No goodwill account appears in the balance sheet - the cash brought by Tanvir is credited to the old partners' capital accounts and goodwill is thus absorbed.
3. Karamjit argues that Tanvir must share the ₹17,000 revaluation loss because the new firm will use the revalued machinery. Decide, giving reasons, and state whether goodwill should be shown as an asset.
Read the worked answer
Karamjit's argument is incorrect on both counts.
1. Who bears the revaluation loss. A revaluation on admission is a restatement of the existing assets and liabilities of the old firm. The fall in the value of the machinery and the rise in the provision for doubtful debts happened while Karamjit and Simranjit alone were the owners; Tanvir has no claim on, or obligation for, that period. The loss of ₹17,000 is therefore written off against the old partners in the old ratio 3 : 1 - Karamjit ₹12,750 and Simranjit ₹4,250. Tanvir's capital account is untouched by it. The same logic means a revaluation profit would also go to the old partners only.
2. Why the argument feels plausible but fails. It is true that the new firm will use the machinery at its reduced value, but that is precisely the point of revaluing before admitting the new partner: the new firm starts with the corrected figures, so Tanvir's ₹2,50,000 is matched by assets at their true worth. Charging him part of the loss would, in effect, make him pay twice.
3. Goodwill in the balance sheet. Goodwill should not be shown as an asset. Under AS 26 / AS 10, internally generated goodwill cannot be recognised. It is raised only to measure the compensation and is immediately written off against the sacrificing partners' capital accounts; Tanvir's cash brings in ₹40,000 which is credited to Karamjit and Simranjit. Showing goodwill as an asset would overstate the firm's resources and would have to be written off later at the expense of all partners, including Tanvir, penalising the very partner who paid for it.