Question 25 of 64intermediate🔧 ApplyLong Answer5 marks

If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

Correct Answer

When partners agree that their capitals should be proportionate to the new profit sharing ratio, the new capital of each partner is worked out using the following methods:

Method 1 - Using New Partner's Capital as Base: When the capital of the new partner is given, it is used as a base for calculating the new capitals of the old partners. For example, if a new partner C brings ₹40,000 for 1/4th share, the total capital of the firm would be ₹40,000×4000 \times 4 = ₹1,60,000. The new capitals of old partners A and B would be calculated based on their new profit sharing ratio.

Method 2 - When Total Capital is Specified: When the total capital of the firm is clearly specified, each partner's capital (including the new partner's capital) is calculated on the basis of his share in profits.

Adjustments to be Made: The capitals thus ascertained are compared with their old capitals after all adjustments relating to goodwill, reserves and revaluation of assets and liabilities have been made. The partner whose capital falls short will bring in the necessary amount to cover the shortage, and the partner who has a surplus will withdraw the excess amount.

Alternatively, subject to agreement among the partners, surplus or deficiency in each old partner's capital accounts can be taken care of by transfer to their respective current accounts.

Exercise: Questions for Practice | Q: 4 | (Page 51)
For More Understanding

Explanation

This answer covers both methods mentioned in the textbook context for determining new capitals proportionate to profit sharing ratio. It explains the adjustment process including bringing in shortage, withdrawing surplus, or transferring to current accounts. The example demonstrates the calculation using the new partner's capital as base.

Solution Steps

  1. Step 1: Determine the new profit sharing ratio after admission

  2. Step 2: Calculate total capital based on new partner's capital (Method 1) or use specified total capital (Method 2)

  3. Step 3: Calculate each partner's new capital based on their share in profits

  4. Step 4: Compare new capitals with old capitals after all adjustments

  5. Step 5: Adjust deficiency by bringing in amount or surplus by withdrawal/transfer to current account

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