Xii - 2022-23 - Acc - Raipur

KENDRIYA VIDYALAYA SANAGATHAN
RAIPUR REGION
Student support material

(including COMPETENCY BASED QUESTIONS)
CLASS: XII (055)
SUBJECT: ACCOUNTANCY
(2022-23)
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Our Patron
SHRI VINOD KUMAR

(Deputy Commissioner, KVS RO Raipur)
SHRI A. K. MISHRA SMT. BIRAJA MISHRA

(Assistant Commissioner, KVS RO Raipur) (Ex. Assistant Commissioner, KVS RO Raipur)
SUBJECT-COORDINATOR
SHRI E. RANGASWAMY
(Principal KV Rajnandgaon)
RESOURCE - PERSON
(1) Shri G. Shrivastava, PGT Commerce, KV No.1 Raipur (Shift: I)
(2) Shri R. K. Thakur, PGT Commerce, KV BMY Bhilai
(3) Smt. AnubhaSoni, PGT Commerce, KV No. 02 Raipur
(4) Shri M. K. Mishra, PGT Commerce, KV Rajnandgaon
CONTENT TEAM
(1) Shri G Shrivastava, PGT Commerce, KV No. 01 Raipur
(2) Shri M. K. Mishra, PGT Commerce, KV Rajnandgaon
(3) Shri Ambrish Shukla, PGT Commerce KV Mahasamund
(4) Shri Pradeep Sardana, PGT Commerce, KV Dantewada
(5) Shri Shashank Gupta, PGT Commerce, KV Baikunthpur
(6) Shri RadheyShaym, PGT Commerce, KV Khairagarh
(7) Shri Rohit Pandey, PGT Commerce (Contractual) KV Chirmiri
(8) Ms. Priya Shrivastava, PGT Commerce (Contractual) KV Dongargarh
COMPILATION, REVIEW & VETTING BY
Shri G. Shrivastava,
PGT Commerce, KV No. 01 Raipur (Shift: I)
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Accountancy (Code No. 055)
Class-XII (2022-23)
Theory: 80 Marks & Project: 20 Marks 3 Hours
Units Periods Marks
Part A Accounting for Partnership Firms and Companies
Unit 1. Accounting for Partnership Firms 105 36
Unit 2. Accounting for Companies 45 24
150 60
Part B Financial Statement Analysis
Unit 3. Analysis of Financial Statements 30 12
Unit 4. Cash Flow Statement 20 8
50 20
Part C Project Work 20 20
Project work will include:
Project File 4 Marks
Written Test 12 Marks (One Hour)
Viva Voce 4 Marks
Part A: Accounting for Partnership Firms and Companies
Unit 1: Accounting for Partnership Firms
Units/Topics Learning Outcomes
* Partnership: features, Partnership Deed. After going through this Unit, the students will
* Provisions of the Indian Partnership Act 1932in beable to:
the absence of partnership deed. * state the meaning of partnership, partnershipfirm
* Fixed v/s fluctuating capital accounts. and partnership deed.
Preparation of Profit and Loss Appropriation * describe the characteristic features of
account- division of profit among partners, partnership and the contents of partnership deed.
guarantee of profits. * discuss the significance of provision of
* Past adjustments (relating to interest on capital, Partnership Act in the absence of partnershipdeed.
interest on drawing, salary and profit-sharing * differentiate between fixed and fluctuating
ratio). capital, outline the process and develop the
* Goodwill: meaning, nature, factors affectingand understanding and skill of preparation of Profit
methods of valuation - average profit, super profit and Loss Appropriation Account.
and capitalization. * develop the understanding and skill of
Note: Interest on partner's loan is to be treated preparation profit and loss appropriation
as acharge against profits. account involving guarantee of profits.
Goodwill: meaning, factors affecting, need for * develop the understanding and skill of
valuation, methods for calculation (average making past adjustments.
profits,super profits and capitalization) , adjusted * state the meaning, nature and factors affectin
through partners’ capital/ current account or by goodwill
raising and writing off goodwill (AS 26) * develop the understanding and skill of valuation
Accounting for Partnership firms - of goodwill using different methods.
Reconstitution and Dissolution. * state the meaning of sacrificing ratio, gainingratio
* Change in the Profit-Sharing Ratio amongthe and the change in profit sharing ratio among
existing partners - sacrificing ratio, gaining ratio, existing partners.
accounting for revaluation of assets and * develop the understanding of accounting
reassessment of liabilities and treatment of treatment of revaluation assets and reassessment
reserves, accumulated profits and losses. of liabilities and treatment ofreserves and
Preparation of revaluation account and balance accumulated profits by preparing revaluation
sheet. account and balancesheet.
* Admission of a partner - effect of admission * explain the effect of change in profit sharingratio
of a partner on change in the profit-sharing ratio, on admission of a new partner.
treatment of goodwill (as per AS 26), treatment * develop the understanding and skill of treatment of
for revaluation of assets and re-assessment of goodwill as per AS-26, treatmentof revaluation of
liabilities, treatment of reserves, accumulated assets and re-assessment ofliabilities, treatment of
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profits and losses, adjustment of capital accounts reserves and accumulated profits, adjustment of
and preparation of capital, current account and capital accounts and preparation of capital, current
balance sheet. account and balance sheet of the new firm.
* Retirement and death of a partner: effect of * explain the effect of retirement / death of a
retirement / death of a partner on change in profit partner on change in profit sharing ratio.
sharing ratio, treatment of goodwill (as per AS 26), * develop the understanding of accounting
treatment for revaluation of assets and reassessment treatment of goodwill, revaluation of assetsand re-
of liabilities, adjustment of accumulated profits, assessment of liabilities and adjustment of
losses and reserves, adjustment of capital accounts accumulated profits, losses and reserves on
and preparation of capital, current account and retirement / death of a partner and capital
balance sheet. Preparation of loan account of the adjustment.
retiring partner. * develop the skill of calculation of deceased
* Calculation of deceased partner’s share ofprofit partner's share till the time of his death andprepare
till the date of death. Preparation of deceased deceased partner's and executor's account.
partner’s capital account and hisexecutor’s * discuss the preparation of the capital accounts
account. of the remaining partners and thebalance sheet of
* Dissolution of a partnership firm: meaningof the firm after retirement / death of a partner.
dissolution of partnership and partnership firm, * understand the situations under which a
types of dissolution of a firm. Settlement of accounts partnership firm can be dissolved.
- preparation of realization account, and other develop the understanding of preparation of
related accounts: capital accounts of partners and realization account and other related accounts.
cash/bank a/c (excluding piecemeal distribution,
sale to a company and insolvency of partner(s)).
(i) If the realized value of tangible assets is not given itshould be considered as realized at book value
itself.
(ii) If the realized value of intangible assets is not given it should be considered as nil (zero value).
(ii) In case, the realization expenses are borne by a partner, clear indication should be given regarding the
payment thereof.
Unit: 2 Accounting for Companies
Accounting for Share Capital * state the meaning of share and share capital and
Features and types of companies differentiate between equity shares and preference
* Share and share capital: nature and types. shares and different types of share capital.
* Accounting for share capital: issue and allotment * understand the meaning of private placement of
of equity and preferences shares. Public shares and Employee Stock Option Plan.
subscription of shares - over subscription and * explain the accounting treatment of share
under subscription of shares; issue at par and at capital transactions regarding issue of shares.
premium, calls inadvance and arrears (excluding * develop the understanding of accounting
interest), issue of shares for consideration other treatment of forfeiture and re-issue of forfeited
than cash. shares.
* Concept of Private Placement and Employee Stock * describe the presentation of share capital inthe
Option Plan (ESOP), Sweat Equity. balance sheet of the company as per schedule III
* Accounting treatment of forfeiture and re- part I of the Companies Act 2013.
issue of shares. * explain the accounting treatment of different
* Disclosure of share capital in the BalanceSheet categories of transactions related to issue of
of a company. debentures.
Accounting for Debentures * develop the understanding and skill of writing of
* Debentures: Meaning, types, Issue of debentures discount / loss on issue of debentures.
at par, at a premium and at a discount. Issue of * understand the concept of collateral securityand its
debentures for consideration other than cash; Issue presentation in balance sheet.
of debentures with terms of redemption; * develop the skill of calculating interest on
debentures as collateral security-concept, interest debentures and its accounting treatment.
on debentures. Writing off discount /loss on issue state the meaning of redemption ofdebentures.
of debentures.
Note: Discount or loss on issue of debentures to be written off in the year debentures are allotted from
Security Premium Reserve (if it exists) and then fromStatement of Profit and Loss as Financial Cost (AS
16)
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Part B: Financial Statement Analysis
Unit 4: Analysis of Financial Statements
Financial statements of a Company: After going through this Unit, the students will
Meaning, Nature, Uses and importance of beable to:
financialStatement. Statement of Profit and Loss * develop the understanding of major headings and
and Balance Sheet in prescribed form with major sub-headings (as per Schedule III to theCompanies
headings and sub headings (as per Schedule III to Act, 2013) of balance sheet as per the prescribed
the Companies Act,2013) norms / formats.
Note: Exceptional items, extraordinary items * state the meaning, objectives and limitations of
andprofit (loss) from discontinued operations financial statement analysis.
are excluded. * discuss the meaning of different tools of
* Financial Statement Analysis: Meaning, 'financial statements analysis'.
Significance Objectives, importance and * state the meaning, objectives and
limitations. significance of different types of ratios.
* Tools for Financial Statement Analysis: * develop the understanding of computation of
Cash flow analysis, ratio analysis. current ratio and quick ratio.
* Accounting Ratios: Meaning, Objectives, * develop the skill of computation of debt equityratio,
Advantages, classification and computation. total asset to debt ratio, proprietary ratio and interest
* Liquidity Ratios: Current ratio and Quick coverage ratio.
ratio. * develop the skill of computation of inventory
* Solvency Ratios: Debt to Equity Ratio, Total turnover ratio, trade receivables and trade payables
Asset to Debt Ratio, Proprietary Ratio and Interest ratio and working capital turnover ratio and others.
Coverage Ratio. Debt to Capital Employed Ratio. develop the skill of computation of gross profit ratio,
* Activity Ratios: Inventory Turnover Ratio, operating ratio, operating profit ratio, net profit ratio
Trade Receivables Turnover Ratio, Trade and return on investment.
Payables Turnover Ratio, Fixed Asset Turnover
Ratio, Net Asset Turnover Ratio and Working
Capital Turnover Ratio.
* Profitability Ratios: Gross Profit Ratio,
Operating Ratio, Operating Profit Ratio, Net
Profit Ratio and Return on Investment.
Note: Net Profit Ratio is to be calculated on the basis of profit before and after tax.
Unit 5: Cash Flow Statement
Meaning, objectives Benefits, Cash and Cash After going through this Unit, the students
Equivalents, Classification of Activities and will be able to:
preparation (as per AS 3 (Revised) (Indirect Method  state the meaning and objectives of cash
only) flowstatement.
Note:  develop the understanding of preparation of
Adjustments relating to depreciation and Cash Flow Statement using indirect method
amortization, profit or loss on sale of assets as per AS 3 with given adjustments.
includinginvestments, dividend (both final and
interim) and tax.
Bank overdraft and cash credit to be treated as
short term borrowings.
 Current Investments to be taken as
Marketablesecurities unless otherwise
specified.
Note: Previous years’ Proposed Dividend to be given effect, as prescribed in AS-4, Events occurring
after the Balance Sheet date. Current years’ Proposed Dividend will be accounted for in the next year
after it is declaredby the shareholders.
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INDEX
S.NO. TOPIC PAGE NO.
1 SYLLABUS FOR 2022-23 03 to 05
2 Fundamental of Partnership Accounting 07 to 21
3 Accounting for Reconstitution of Partnership: 21 to 61
 Change in profit-sharing ratio
 Admission of a partner
 Retirement and Death of a partner
4 Accounting for Dissolution of a Partnership Firm 62 to 75
5 Accounting for Companies:
 Accounting for Share Capital 76 to 88
 Accounting for Debentures 89 to 99
6 Analysis of Financial Statements of Companies 100 to 108
7 Cash Flow Statement 109 to 120
8 Model Paper – I 121 to 133
9 Model Paper – II 134 to 148
Typology of Questions
R – Remembering
U- Understanding
A – Application
A&E- Analysis & Evaluation
Pattern of Questions
 Competency based questions: MCQ, CCT based, Case study & Source based
 Objective based questions: One sentence, MCQ, fill in the blank, True & False and Assertion &
Reason based question etc.
 Short & Long answer-based questions: as earlier asked
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Fundamentals of Partnership Accounting:
 Partnership: Features, Partnership Deed. Provisions of the Indian Partnership Act 1932 in the
absence of partnership deed.
 Fixed V/s Fluctuating Capital Accounts
 Preparation of Profit & Loss Appropriation Account – division of profits among partners,
guarantee of profits.
 Past Adjustments (relating to interest on capital & drawings, salary, profit-sharing ratio)
 Goodwill: meaning, nature, factors affecting and method of valuation – average profit, super
profit and capitalization.
Partnership: An agreement between two or more than two partners to share profit/loss in the business
to be carried on by all or any of them acting for all, under the terms and condition.
 An agreement
 Two or more than two persons
 Profit/loss-sharing
 A legal business
 Mutual agency between partners
Partnership Deed: An evidence of partnership agreement containing terms & conditions to carry on
business activities. i.e. name & address of partnership firm, nature of business activities, name &
address of partners, rights & duties of partners, profit-sharing ratio etc.
In the absence of Partnership Deed, the following provisions will be applied:
a. Interest on capital will not be allowed to the partners.
b. Interest on drawing will not be charged on the partners.
c. Remunerations will not be allowed to the partners.
d. Interest @ 6% per annum will be allowed, if the partner lends the money to the firm.
e. Profit & Loss will be shared by partners in equal proportion.
The partnership Deed is silent on payment of salary to partners. Sandeep, a partner, has put a claim that
since he manages the business, he should get a monthly salary of 5,000. Is he entitled to the salary?
Ans: No, he is not entitled to the salary because it is not so provided in the Partnership Deed and
according to the Partnership Act, 1932 if the Deed does not provide for payment of salary to partner,
he will not be entitled to it.
Fixed V/s Fluctuating Capitals of partners:
Fixed Capital: The capitals of partners are remaining constant in the life of partnership and will not be
change year after year. There is need to prepare two accounts of partners.
1. Capital Accounts: It contains only the amount of capital contributed by partners.
2. Current Accounts: It contains Drawings made by partners, Interest on drawings, Remunerations of
partners (salary, commission etc.), guarantee of profits, share in profit/loss of partners, interest on
capital etc. Capital Account
Particulars Particulars
To Cash A/c Xxx By balance b/d Xxx
(withdrew excess capital) By Cash A/c Xxx
To balance c/d Xxx (introduced additional capital)
Xxx Xxx
Current Account
To Drawings Xxx By balance b/d Xxx
To Interest on drawings Xxx By General Reserve Xxx
To P/L Suspense A/c Xxx By Interest on Capital Xxx
To Goodwill A/c Xxx By Salary Xxx
(to written off) By Revaluation (share in gain) Xxx
To balance c/d Xxx By P/L Account (share in profit) Xxx
Fluctuating Capital: The amount of capitals of partners will be changed year after year due several
adjustments into capitals of partners i.e. Drawings made by partners, Interest on drawings,
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Remunerations of partners (salary, commission etc.), guarantee of profits, share in profit/loss of
partners, interest on capital etc.
There is need to prepare only one account of partners – ‘Capital Accounts’.
Capital Account
To Cash A/c Xxx By balance b/d Xxx
(withdrew excess capital) By Cash A/c Xxx
To Drawings Xxx (introduced additional capital)
To Interest on drawings Xxx By General Reserve Xxx
To P/L Suspense A/c Xxx By Interest on Capital Xxx
To Goodwill A/c Xxx By Salary Xxx
(to written off) By Revaluation (share in gain) Xxx
To balance c/d Xxx By P/L Account (share in profit) Xxx
Xxx Xxx
Profit and Loss Appropriation Account
At the end of accounting year, the balance of Profit & Loss Account to be allocated between partners
into their profit-sharing ratio. This is to be done with an account is called – Profit & Loss Appropriation
Account.
 An adjustment which was not considered (due to omission) while preparing profit and loss account
then the same has to undertaken through ‘Profit & Loss Adjustment Account’, before to prepare
profit and loss appropriation account.
Profit & Loss Appropriation Account
To Interest on capital Xxx By Profit & Loss A/c Xxx
To Partner’s Salary Xxx (net profits)
To Partner’s Commission Xxx By Interest on drawings Xxx
To Capital a/c (if capitals are fluctuated) Xxx
Current a/c (if capitals are fixed)
Xxx Xxx
Past Adjustment: Any adjustments which was not considered while preparing financial statements of
partnership firm due to omission, it should be consider at the beginning of year with past adjustment
entry is called – Past Adjustment.
Goodwill: Goodwill is a good name, reputation of a firm represents with over and above the actual /
average profit of the firm to normal profits in the same line and size of business firm.
Factors Affecting Goodwill:
 How Efficiency of Management will affect: If the management of a firm is more efficient and
reputed, the value of goodwill in such business will be more as compared to the business where
the management is not efficient.
 How Location will affect: Business, if located at a favorable place results in good sales and
higher value of goodwill.
 How the Contracts will affect: If a firm enters into long-term contracts for sale of its products,
then this will affect profits and goodwill.
Valuation of Goodwill
(i)Average Profit Method (ii) Super Profit Method (iii) Capitalization Method
Average Profit Method – Under this method, goodwill to be valued at few years of purchase value
of average profits of the firm. Goodwill = Average Profits x No. of purchase year
Super Profit Method – Under this method, goodwill to be valued at few years of purchase value of
super profits of the firm. Goodwill = Super Profits x No. of purchase year
Super Profit = Average Profits – Normal Profits
Capitalization Method – Under this method, goodwill can be valued either by capitalization of
average profit or capitalization of super profit.
Capitalization of Average Profit Method:
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Goodwill = Capitalized Value of Business – Net Assets (Capital Employed) of Business
 Capitalized Value of Business = Average Profit X 100 / Normal Rate of Return
 Net Assets (Capital Employed) of Business = Total Assets – Outside Liabilities
Capitalization of Super Profit Method:
Goodwill = Super Profit X 100 / Normal Rate of Return
 Super Profit = Average (Actual) Profits – Normal (Expected) Profits
 Normal Profits = Capital Employed X Normal Rate of Return / 100
Calculation of Interest on Drawings:
Periods for which interest to be calculated as under:
(Number of months left after first draw + Number of months left after last draw)
= -------------------------------------------------------------------------------------------------
2
Timing for Drawings made by partners Periods for interest calculation
Drawn at the beginning of every month for 12 months 6 ½ Months
Drawn at the middle of every month throughout year 6 Months
Drawn at the end of every month for 12 months 5 ½ Months
Drawn at the beginning of every quarter throughout year 7 ½ Months
Drawn at the middle of every quarter throughout year 6 Months
Drawn at the end of every quarter throughout year 4 ½ Months
Drawn at the beginning of every month for 9 months 5 Months
Drawn at the middle of every month for 7 months 3 ½ Months
Drawn at the end of every month for 5 months 2 Months
One Mark Questions: Fundamentals of Partnership Accounting
Q1. In the absence of partnership deed, interest on capital is allowed at the rate of:
a) 6% p.a. simple interest
b) 6% p.a. compound interest
c) 12% simple interest
d) None of the above.
Q2. Rent to a partner is shown in:
a) Dr. side of Profit And Loss Appropriation A/c
b) Cr. side of Profit And Loss Appropriation A/c
c) Dr. side of Profit And Loss A/c
d) Cr. side of Profit And Loss A/c.
Q3. Which of the following items will be shown in Partner’s Capital A/c under Fixed Capital method?
a) Drawings from profits
b) Drawings from capital
c) Interest on drawings
d) All of the above.
Q4. Interest on Partner’s Loan will be credited to:
a) Partner’s Loan A/c
b) Partner’s Capital A/c
c) Profit and Loss A/c
Q5. Which one of the following items is not an appropriation out of profits?
a) Interest on capital
b) Salary to a partner
c) Commission to a partner
d) Interest on partner’s loan.
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Q6. Following are essential elements of a partnership firm except:
a) Atleast two persons
b) There is an agreement between all partners
c) Equal share of profits and losses
d) Partnership agreement is for some lawful business activity.
Q7. Which one of the following is not a right of a partner?
a) Right to inspect the books of the firm
b) Right to take part in the affairs of the company
c) Right to share the profits/losses of the firm
d) Right to receive salary at the end of each month.
Q8. The relation of partner with the firm is that of:
a) An owner
b) An agent
c) An owner and agent both
d) A manager.
Q9 Pick the odd one out:
a) Rent to a partner
b) Manager’s commission
c) Interest on partner’s loan
d) Interest on partner’s capital.
Q10. Can a partner be exempted to share the losses of the firm?
a) Yes
b) No
c) Yes, if partnership deed provides so
d) Never.
Q11. In case of partnership, the act of any partner is:
a) Binding on all partners
b) Binding on that partner only.
c) Binding on all partners except that particular partner
Q12. Interest on capital will be paid to the partners if provided for in the partnership deed but only out
of:
a) Profits
b) Reserves
c) Accumulated profits
d) Goodwill.
Q13. What is the minimum number of partners in a partnership firm?
a) 50
b) 100
c) 2
Q14. Current accounts of partners are maintained under which method?
a) Fluctuating Capital method
b) Fixed Capital method
c) Both of the above
Q15. Limited Liability Partnerships came into existence in India after the enactment of:
a) Indian Partnership Act, 1932
b) Limited Liability Partnership Act, 1932
c) Limited Liability partnership Act, 2008
d) Indian companies Act, 2013.
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CCT Based MCQs
Q16. A and B are partners sharing profits and losses equally. They admitted C as a partner with an
equal share giving him a guarantee of minimum ₹50,000 profit p.a. The profit for the year after C’s
admission was ₹1,20,000. What will be the net amount that will be credited to A’s Capital A/c?
a) ₹50,000
b) ₹40,000
c) ₹35,000
d) ₹80,000.
Q17 If a partner withdraws an equal amount in the beginning of each month for a period of 10 months,
what will be the average period for calculation of Interest on Drawings?
a) 6.5 months
b) 7.5 months
c) 6 months
d) 5.5 months.
Q18. X and Y are partners sharing profits and losses in the ratio of 3:2 with capitals ₹5,00,000 each.
According to partnership deed, interest on capital is allowed @ 10% p.a. The profit for the year is ₹
50,000. What amount will be credited to X and Y in such condition?
a) ₹50,000 to A and B each
b) ₹25,000 to A and B each
c) ₹30,000 to A and ₹20,000 to B
Q19. Manager is entitled to a commission of 10% of the net profits after charging such commission.
The net profit for the year is ₹1,32,000. What will be the amount of manager’s commission?
a) ₹13,200
b) ₹12,000
c) ₹10,000
Q20. P and Q are partners sharing profits and losses in the ratio of 2:1 with capitals ₹1,00,000 and
₹80,000 respectively. The interest on capital has been provided to them @ 8% instead of 10%. In the
rectifying adjustment entry, Q will be:
a) Debited by ₹400
b) Credited by ₹400
c) Debited by ₹1600
d) Credited by ₹1600.
Q21. Akhil and Ravi are partners sharing profits and losses in the ratio of 7:3 with capitals of ₹8,00,000
and ₹6,00,000 respectively. According to partnership deed interest on capital is to be provided @ 8%
p.a. and is to be treated as a charge. Profit for the year is ₹80,000. Choose the correct option:
a) A will be credited by ₹ 64,000 and B will be credited by ₹ 48,000.
b) A will be credited by ₹ 56,000 and B will be credited by ₹ 24,000.
c) A will be credited by ₹ 22,400 and B will be credited by ₹ 9,600.
d) A will be credited by ₹ 41,600 and B will be credited by ₹ 38,400.
Q22. X, Y and Z are partners sharing profits and losses equally. Their capitals on March 31, 2021 are
₹80,000; ₹60,000; ₹40,000 respectively. Their personal assets are worth as follows: X- ₹20,000; Y -
₹15,000 and Z- ₹10,000. The extent of their liability in the firm would be:
a) X- ₹80,000; Y- 60,000; Z- ₹40,000
b) X- ₹20,000; Y- 15,000; Z- ₹10,000
c) X- ₹1,00,000; Y- 75,000; Z- ₹50,000
d) Equal.
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Q23. A and B are partners. B draws a fixed amount at the end of every month. Interest on drawings is
charged @15% p.a. At the end of the year interest on B’s drawings amounted to ₹8,250. Drawings of B
were:
a) ₹12,000 p.m.
b) ₹10,000 p.m.
c) ₹9,000 p.m.
d) ₹8,000 p.m.
Q24. Mohit and Rohit were partners in a firm with capitals of ₹80,000 and ₹40,000 respectively. The
firm earned a profit of ₹30,000 during the year. Mohit's share in the profit will be:
a) Rupees 20000
b) Rupees 15000
c) Rupees 10000
d) Rupees 18000.
Q25. R and S are partners sharing profits in the ratio of 2:1. S has advanced a loan of ₹1,00,000 to the
firm on 1st October, 2020. The net profit earned by the firm for the year ending 31st March, 2021 is ₹
90,000. What amount will be credited to S’s capital account?
a) ₹60,000
b) ₹30,000
c) ₹29,000
d) ₹32,000.
Match the following based MCQs
Q26.
I Interest on Capital A Cr. Side of Profit and Loss Appropriation A/c
II Interest on Drawings B Dr. side of Profit and Loss Appropriation A/c
III Interest on Partner’s Loan C Dr. side of Profit and Loss A/c
a) I-A; II-B; III-C
b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q27.
I Rent paid to a partner A Charge against profits
II Salary paid to a partner B Appropriations out of profits.
III Partner’s Commission
a) I-A; II-B; III-B
b) I-A; II-A; III-B
c) I-A; II-B; III-A
d) I-B; II-A; III-B
Q28.
I Maximum number of partners A 6% p.a.
II Partnership Deed B 50
III Interest on partner’s loan C Written agreement
a) I-A; II-B; III-C
b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q29.
I Drawings in the beginning of each A 4.5
quarter
II Drawings in the beginning of each B 6.5
month
III Drawings in the end of each quarter C 7.5
a) I-A; II-B; III-C
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b) I-B; II-A; III-C
c) I-C; II-B; III-A
d) I-B; II-C; III-A
Q 30. State two circumstances under which the fixed capitals of partners become changed.
Case Study Based Questions
Read the following information carefully and answer the questions that follow:
X and Y are partners in 3:2. Their capital balances as on 1st April 2020 amounting to ₹2,00,000 each.
On 1st February, 2021, X contributed an additional capital of ₹1,00,000. Following are the terms of
deed:
a) Interest on capital @ 6% per annum
b) Interest on drawings @ 8% per annum
c) Salary to X ₹1500 per month
d) Commission to Y @10% on net profit after charging interest on capital, salary and his
commission.
Drawings of the partners were ₹20,000 and ₹30,000 respectively during the year. Net profit earned by
the firm was ₹2,08,000.
Choose the correct option based on the above information:
Q31. What is the amount of Interest on capitals of X and Y:
a) ₹12,000 each
b) ₹12,000 to X and ₹ ₹13,000 to Y
c) ₹13,000 to X and ₹12,000 to Y
Q32. What is the amount of interest on drawings of X and Y:

a) ₹ 1200 and ₹ 1800 respectively
b) ₹ 800 and ₹ 1200 respectively
c) ₹ 1200 and ₹ 800 respectively
d) ₹ 1600 ₹ 2400 respectively
Q33. What is the amount of commission payable to Y?
a) ₹ 15000
b) ₹ 16500
c) ₹ 20800
d) None of these
Q34. What is X's share in the net divisible profit?

a) ₹ 124400
b) ₹ 83600
c) ₹ 91200
d) ₹ 60800
Q35. What will be the closing capital of X after all adjustments?
a) ₹ 422200
b) ₹ 401400
c) ₹ 300000
d) ₹ 423000
Read the following information carefully and answer the questions that follow:
A, B and C were partners sharing profits in the ratio of 1:2:3. Their fixed capitals on 1st April, 2020
were: A ₹3,00,000; B ₹4,50,000 and C ₹10,00,000. Their partnership deed provided the following:
i. A provides his personal office to the firm for business use charging yearly rent of ₹1,50,000.
ii. Interest on capitals @8% p.a. and interest on drawings @ 10% p.a.
iii. A was allowed a salary @ 10,000 per month.
iv. B was allowed a commission of 10% of net profit as shown by Profit and Loss account, after
charging such commission.
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v. C was guaranteed a profit of ₹3,00,000 after making all adjustments.
The net profit for the year ended 31st march, 2021 was ₹10,30,000 before making above
adjustments.
You are informed that A has withdrawn ₹5,000 in the beginning of each month, B has withdrawn
₹5,000 at the end of each month and C has withdrawn ₹ 24,000 in the beginning of each quarter.
Choose the correct option based on the above information:
Q36. A’s rent will be shown in:
a) Profit and loss account
b) Profit and Loss Appropriation account
c) A’s Capital account
Q37. Net profit for the year is:
a) ₹10,30,000
b) ₹11,80,000
c) ₹7,30,000
d) ₹8,80,000
Q38. What will be the divisible profit?
a) ₹5,56,000
b) ₹5,50,000
c) ₹5,52,000
d) ₹5,53,000.
Q39. What will be the total interest on drawings?
a) ₹24,000
b) ₹12,000
c) ₹36,000
d) 48,000.
Q40. What will be the commission of B?
a) ₹8,00,000
b) ₹96,000
c) ₹80,000
d) ₹72,000.
Assertion-Reasoning Based questions
Q41. Assertion (A): In the absence of Partnership deed profits and losses are divided equally among
the partners.
Reason(R): This rule is applicable according to Indian partnership Act, 1932.
a) Both (A) and (R) are true and (R) is the correct explanation of (A)
b) Both (A) and (R) are true and (R) is not the correct explanation of (A)
c) (A) is true, bur (R) is false
d) (A) is false, but (R) is true.
Q42. Assertion (A): Personal properties of a partner may also be used to pay off the firm’s debts.
Reason(R): All partners have limited liability in the firm.
c) (A) is true, but (R) is fals
Q43. Assertion (A): Partnership firm is a form of organisation where two or more persons carry on
business activity on the basis of agreement among them.
Reason(R): The profit or loss arising from the partnership business is shared by the partners in the
agreed ratio.
c) (A) is true, but (R) is false
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Q44. Assertion (A): Maximum number of partners in a partnership firm is 50.
Reason(R): Maximum number of partners in a partnership firm is prescribed in Companies Act,
2013.
Q45. Assertion (A): A partnership deed covers all matters relating to mutual relationship among the
partners.
Reason(R): But in the absence of partnership deed, provisions of the Indian partnership Act, 1932
shall apply for accounting purposes.
Q46. Assertion (A): Rent to partner is not shown in Profit and Loss Appropriation Account.
Reason(R): Rent to a partner is a charge against profit..
Q47. Assertion (A): Interest on Partner’s capital may be shown in Profit and Loss Account.
Reason(R): If Partners treat interest on capital as a charge.
Q48. Assertion (A): Rent payable to partner is credited to Partner’s Capital account.
Reason(R): Rent is payable to partner for letting the firm use his personal property for business.
Q49. Assertion (A): For calculating Interest on Drawings, product method is used.
Reason(R): Partners withdraw different amounts of money at different intervals of time.
Q50. Assertion (A): Guarantee of minimum profit may be given to a partner.
Reason(R): It is compulsory as per Indian Partnership Act, 1932.
ANSWER KEY: Fundamentals of Partnership Accounting

Q.NO. Answer Reason/Hint/Explanation
1 D Interest on Capital is not allowed if there is no partnership deed.
2 C Rent to a partner is a charge against profit.
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3 B Under Fixed Capital method only Withdrawal from capital and Introduction of
Capital are shown in Capital account, all other items are shown in Current
account.
4 A Interest on Partner’s Loan is not shown in Partner’s Capital account, it is credited
in Partner’s Loan A/c.
5 D It is a Charge against profit.
6 C Profits are divided in the ratio decided by partners in partnership deed.
7 D Salary is payable only if it is mentioned in partnership deed.
8 C All the partners are mutual agents of each other and of the firm also and they are
also the owners of the firm.
9 D Interest on Capital is an appropriation out of profits whereas all other items are
charges against profit.
10 C Unless mentioned in the partnership deed, all partners are liable to share the losses
and profits of the firm.
11 A Since all partners are mutual agents of each other and of the company also.
12 A Since Interest on capital is an appropriation out of profits, so it is paid only out of
profits.
13 C As per Indian Partnership Act, 1932, minimum 2 partners are necessary to start a
partnership firm.
14 B Under Fixed Capital method Capital accounts and Current accounts both are
maintained whereas under Fluctuating capital method only capital accounts are
maintained.
15 C Limited Liability Partnership Act was passed in India in the year 2008.
16 C Share of A in profit= 40,000 less Deficiency paid to C=5,000. So net amount
received by A=35,000.
17 D Time left after first drawing=10 months; Time left after last drawing=1 month;
(10+1)/2=5.5
18 B Interest payable to A and B=50,000 each. So the profit will be divided in an equal
ratio between A and B. When appropriations are more than profits then the
available profit is distributed between the partners in the ratio of net amount
payable to them.
19 B 1,32,000*10/110=12,000.
20 B Q will be credited by ₹1,600 (interest@2% to be given to Q) and Q will be
debited by ₹1,200(share of Q in loss to the firm). So, finally Q will be credited by
₹400.
21 D IOC to Akhil= ₹64,000 less share of loss= ₹22,400 (32,000*7/10). Net amount
paid to Akhil= ₹41,600.
IOC to Ravi= ₹48,000 less share of loss= ₹9,600 (32000*3/10). Net amount paid
to Ravi= ₹38,400.
22 B A partner has unlimited liability in the partnership firm. So he has to pay the
amount of capital plus his personal property to pay off the debts of the firm. Since
partners have already paid the amount of capital so now they will have to pay only
their personal assets to the firm in case of loss.
23 B 8,250*(100/15)*(12/5.5) =1,20,000/12= 10,000.
24 B In the absence of partnership Deed, profits are shared equally among the partners.
25 C Net profit of the firm=90,000-3,000(interest on loan) = 87,000. S’s share in
profit=87,000*1/3= 29,000. Only share of profit is credited to Partner’s Capital
a/c, interest on loan is credited to Partner’s Loan A/c.
26 B IOC is transferred to Dr. side of P& L Appropriation A/c; IOD to Cr. Side of P &
L Appropriation A/c and Interest on Partner’s Loan to the Dr. side of P & L A/c.
27 A Rent paid to a partner is a charge against profit; Salary and commission paid to a
partner are both appropriations out of profits.
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28 D Maximum no. of partners is 50 as per Indian Partnership Act, 1932. Partnership
Deed may be an oral or written agreement among partners. Interest on partner’s
loan is allowed @ 6% p.a. in the absence of partnership deed.
29 C Average period for drawings in beginning of each quarter is 7.5; for beginning of
each month is 6.5 and for end of each quarter is 4.5. Formula for calculating
average period = (Time left after first drawing +Time left after last drawing)/2
30 1. When excess capital withdrawn by partners, as per the agreement.
2. When additional capital introduced by partners, as the need of firm.
31 C IOC to X= (2,00,000*6/100)+(1,00,000*6/100*2/12)= 13,000
IOC to Y= 2,00,000*6/100= 12,000
32 B IOD will be calculated for an average period of six months since time of drawings
is not given.
33 A 2,08,000-13,000-12,000(IOC)-18,000(salary)= 1,65,000*10/110= 15,000.
34 C Divisible profit= 2,08,000(N.P.)+800+1,200(IOD)-13,000-12,000(IOC)-
18,000(salary)-15,000(commission)= 1,52,000. Share of X in divisible profit=
1,52,000* 3/5= 91,200
35 B Closing capital of X= 2,00,000(opening capital)+1,00,000(addl.
capital)+13,000(IOC)+18,000(salary)+91,200(profit share)-20,000(drawings)-
800(IOD)= 4,01,400.
36 A Charge against profit is shown in P & L A/c.
37 D 10,30,000-1,50,000(rent to the partner)= 8,80,000
38 B IOD for A= 60,000*10/100*6.5/12=3,250

IOD for B=60,000*10/100*5.5/12=2,750
IOD for C=16,000*10,100*7.5/12=6,000.
Total IOD= 3,250+2,750+6,000= 12,000.
39 C 8,80,000*10/110= 80,000.
40 C 8,80,000(N.P.)+12,000(IOD)-24,000-36,000-80,000(IOC)-80,000(commission)-
1,20,000(salary)= 5,52,000.
41 A In the absence of partnership Deed, profits are shared equally among the partners,
as per the provisions of Indian partnership act, 1932.
42 C All partners have unlimited liability.
43 B Both the statements are two different facts.
44 C Maximum number of partners is 50 according to Indian partnership Act, 1932 and
100 as per Indian Companies Act, 2013.
45 B Both the statements are two different facts.
46 A Charge against profit is shown in P & L account.
47 A Charge against profit is shown in P & L account.

48 D Rent payable to partner is not shown in Capital account; it is shown in Rent
payable account.
49 A Both the statements are true and R is the correct explanation of A.
50 C Guarantee of minimum profit to a partner depends on mutual consent of partners,
it is not compulsory.
THREE / FOUR/SIX MARKS QUESTIONS
X & Y are partners in a firm. X is entitled to a salary of 10,000 p.m. together with a commission
of 10% of Net Profit after charging salaries but before charging any commission. Y is entitled to
a salary of 25,000 p.a. together with a commission of 10% of Net profit after charging salaries
and all commissions. Net Profit after partners’ salaries but before charging any commission for
the year ended 31st March, 2012 was 2,75,000. Show the distribution of profit.
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Sol.: Profit & Loss Appropriation Account
(For the year ended 31st March, 2012)
Particulars Amount in Particulars Amount in
To X’s Salary 1,20,000 By Profit before salary & 4,20,000
To Y’s Salary 25,000 Commission
To X’s Commission 27,500 ( 2,75,000+ 1,20,000+
(10% of 2,75,000) 25,000)
To Y’s Commission 22,500
{( 2,75,000-27,500) x 10 /
110} 2,25,000
To Net Profit transferred to:
X’s Capital A/c 1,12,500
Y’s Capital A/c 1,12,500
4,20,000 4,20,000
A & B are partners sharing profits in proportion of 3:2 with capital of 4,00,000 & 3,00,000
respectively. Interest on capital is agreed @ 5% p.a. B is to be allowed an annual salary of
30,000 which has not been withdrwan. During 2011-12, the profit for the year prior to
calculation of interest on capital but after charging B’s salary amounted to 1,20,000. A Provision
of 5% of this amount is to be made in respect of commission to the Manager. Prepare an account
showing the allocation of profits between partners.
Sol.: Profit & Loss Appropriation Account
To B’s Salary 30,000 By Profit & Loss A/c 1,44,000
To Interest on Capital: 35,000 Net Profit 1,20,000
A 20,000 Add: B’s Salary 30,000
B 15,000 1,50,000
To Net Profit: 79,000 Less: Manager’s
A’s Capital A/c 47,400 Commission 6,000
B’s Capital A/c 31,600 (5% of 1,20,000) 1,44,000
1,44,000 1,44,000
Aman, Chetan and Deepak are partners in a partnership firm sharing profit/loss in the ratio of
3:2:1. The balance of their capitals as on 1st April, 2021 ₹ 5,00,000; ₹ 3,00,000 and ₹ 2,00,000
respectively. They are allowed interest on capital @ 10% p.a. and Chetan allowed salary of ₹ 40,000 per
annum. The profits of the firm for the year ending 31st March, 2022 ₹ 3,20,000.
Aman and Chetan have given guarantee of profits to Deepak that his profits will not be less than the
20% of his capital any year.
You are required to prepare Profit and Loss Appropriation Account from the above information.
Solution: Profit & Loss Appropriation Account
To Chetan’s Salary 40,000 By Profit & Loss A/c 3,20,000

To Interest on Capital: 1,00,000
Aman 50,000
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Chetan 30,000
Deepak 20,000
To Capital A/cs: 1,80,000
Aman’s Capital A/c 90,000
Less: Guarantee to Deeak (6,000)
(transferred to capital A/c) 84,000
Chetan’s Capital A/c 60,000
Less: Guaranttee to Deepak (4,000)
Deepak’s Capital A/c 30,000
Add: Guarantee of profit 10,000
3,20,000 3,20,000
Past Adjustment
(A) Calculation of interest on capital by ascertainment of opening capital of partners:
On March 31, 2008 after the close of books of accounts, the capital accounts of A, B and C stood
at 24000; Rs 20000 and 12000 respectively. The profit for the year 36000 was distributed
equally. Subsequently, it was discovered that interest on capital @ 5% p.a had been omitted. The
profit-sharing ratio was 2:2:1. Pass an adjustment Journal Entry.
Sol.: Adjusted Journal Entry
Date Particulars LF Dr Amount Cr Amount
C's Capital A/c Dr. 5000 ----------
1 To A's Capital A/c --------- 2600
To B’s Capital A/c --------- 2400
(Being capitals adjusted)
Statement showing Calculation of Opening Capital & Interest on Capital
Particulars Partner ‘A” Partner ‘B’ Partner ‘C’
Closing Capitals as on 31/3/2008 24000 20000 12000
Less: Profit already credited 12000 12000 12000
Opening Capital 12000 8000 NIL
Interest on Capital 600 400 NIL
Table showing adjustment of Capital of Partners
Particulars Partner 'A' Partner 'B' Partner 'C'
(A) To be given:
1. Interest on capital 600 400 NIL
2. Share of profits 14000 14000 7000
14600 14400 7000
(B) Already given:
As share of profits 12000 12000 12000
Adjustment to be made 2600 (Cr) 2400 (Cr) 5000 r)
(B) Adjustment entry through Current A/c because there is fixed capital:
X, Y and Z were partners sharing profits in their fixed capital proportion, which was as under:
X – 100000; Y – 200000 and Z – 300000. During the year firm earned a profits of 90000
and it was distributed in equal proportion without providing interest on capital @ 10% p.a. though,
the partners were allowed for the same. Pass an adjustment entry for the above.
Sol: Table showing adjustment of Capital of Partners
Particulars Partner 'X' Partner 'Y' Partner 'Z'
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(A) To be given:
1. Interest on capital 10000 20000 30000
2. Share of profits 5000 10000 15000
15000 30000 45000
(B) Already given:
15000 15000
Adjustment to be made (Dr) - (Cr)
Adjusted Journal Entry
L
Date Particulars F Dr Amount Cr Amount
X's Current A/c Dr. 15000 ----------
1 To Z's Current A/c --------- 15000
(Being partners A/c adjusted)
(C) Past adjustment entry while a partner has guarantee of profit:
X, Y and Z were partners sharing profits in their capital proportion, at the beginning of the year,
which was as under: X – 100000; Y – 200000 and Z – 300000. During the year firm earned
a profit of 90000 and it was distributed in equal proportion without providing the following
terms:
a. Partners were entitled for interest on capital @ 6% p.a.
b. X allowed salary 5000 and Y allowed commission of 4000.
c. Z has guaranty of profits 30000; which may be borne by X and Y in equal proportion.
Pass an adjustment entry for the above.
Sol: Revised Profit & Loss Appropriation Account
Particulars ( ) Particulars ( )
To Interest on Capital 36000 By Profit & Loss A/c 90000
X – 6000
Y – 12000
Z – 18000
To Salary (to X) 5000
To Commission (to Y) 4000
To Capital A/c (share of profits) 45000
X – 7500 – 3750 = 3750
Y – 15000 – 3750 = 11250
Z – 22500 + 7500 = 30000
90000 90000
Table showing adjustment of Capital of Partners

Particulars Partner 'X' Partner 'Y' Partner 'Z'
(A) To be given:
1. Interest on capital 6000 12000 18000
2. Share of profits 3750 11250 30000
3. Salary 5000 --------- ----------
4. Commission -------- 4000 ----------
14750 27250 48000
(B) Already given:
Adjustment to be made 15250 (Dr) 2750 [Dr] 18000 (Cr)
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Adjusted Journal Entry
X's Capital A/c Dr. 15250 ----------
1 Y’s Capital A/c Dr. 2750 - -----------
To Z's Capital A/c -------- 18000
(Being capitals adjusted)
Valuation of Goodwill
(Capitalization Method)
A business has earned average profits of Rs 100000 during the last few years and the normal rate of
return in the similar type of business is 10%. Ascertain the value of goodwill by capitalization method,
given that the value of net assets of the business is Rs 820000.
Solution: (a) Capitalization of Average Profit Method –
Goodwill = Capitalized Value of Business – Net Assets (Capital Employed) of Business
 Capitalized Value of Business = Average Profit X 100 / Normal Rate of Return
= 100000 X 100 / 10 = Rs 1000000
Goodwill = 1000000 – 820000 = Rs 180000
(b) Capitalization of Super Profit Method –
Goodwill = Super Profit X 100 / Normal Rate of Return
 Normal Profits = Capital Employed X Normal Rate of Return / 100
= 820000 X 10 / 100 = Rs 82000
 Super Profit = Average (Actual) Profits – Normal (Expected) Profits
= 100000 – 82000 = Rs 18000
Goodwill = 18000 X 100 / 10 = Rs 180000.
Accounting for Reconstitution of Partnership

Reconstitution of Partnership: When there is any change in the terms & condition of partnership deed is
called – reconstitution of partnership i.e. changes in rights & duties of partners, changes in the nature of
business, changes in the name & address of firm as well as changes in the profit-sharing ratio,
admission of a new person as a new partner, retirement or death of existing partner etc.
There is end of old relations between partners but business will be continued with new agreement.
Accounting point of view, there are four circumstances of reconstitution of partnership under which
accounting treatment is required to take place.
 Change in the profit / loss sharing ratio.
 Admission of a new partner
 Retirement of an existing partner
 Death of an existing partner
Accounting treatments on reconstitution of partnership will be take place as under:
1. Distribution of accumulated profits/losses, reserves, written off of appeared goodwill
(balance of the above will transferred to capital account in their old profit-sharing ratio)
2. Revaluation of assets and reassessment of liabilities to find gain/loss on revaluation
(Gain/loss will be transferred to capital account in their old profit-sharing ratio)
3. Valuation of goodwill and adjustment entry for the same
4. Adjustment of capital of partners as per the new profit-sharing ratio.
Therefore, Accounting treatments for the above first two will be same in all four
circumstances of reconstitution of partnership.
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Sacrificing, Gaining and New Profit-sharing Ratio
Sacrificing Ratio: The ratio in which other or one partner will sacrifice their share in favour to other
partners’ is called sacrificing ratio.
Sacrificing Share of a partner = Old Share – New Share
Gaining Ratio: The ratio in which one or other partner will gain in their share from other partners’ is
called gaining ratio.
Gaining Share of a partner = New Share – Old Share
The circumstances under which sacrificing or gaining ratio is required to find:

1. When it is asked in the question i.e. find the SR or GR as per given information.
2. To make adjustment entry for valued goodwill, if there is change in the profit-sharing ratio
between partners than the earlier profit-sharing ratio.
 Change in profit-sharing ratio and need to adjust valued goodwill
 Admission of partner and profit-sharing proportion between old partners being changed.
 Retirement or death of partner, profit-sharing ratio between remaining partners being
changed than the earlier profit-sharing ratio.
Similarly, need to find new ratio, if there is asked in the question.
Hidden Goodwill
Sometimes the value of goodwill is not given clearly in the question. This hidden goodwill is calculated
with reference to the total existing capital (including the new partner) of the firm; needed capital of the
new firm (to be ascertained on the basis of new partner’s capital & his share in profits).
Goodwill = Needed capital of the firm – Existing capital (including new partner’s capital) of the firm.
(Points to be remembered)
Adjustments Treatment for the items
* P/L A/c (Cr.); Gen. Res.; Unclaimed WCF; etc accumulated profits will transferred
to capital A/cs of old partners in their old profit-sharing ratio.
Profit & Loss A/c Dr. xxx
(01) General Reserve A/c Dr. xxx
Workmen Comp. Fund Dr. xxx
To Old Partner’s Capital A/cs xxx
Several
items of Old * P/L A/c (Dr.); P/L Suspense A/c; existing Goodwill etc accumulated losses will be
Balance charged (debit) to capital A/cs of old partners in their old profit-sharing ratio.
Sheet Old Partner’s Capital A/cs Dr. xxx
To Profit & Loss A/c xxx
To Profit & Loss Suspense A/c xxx
To Goodwill A/c xxx
On Admission
(1) Premium brought in cash by new partner:
Cash A/c Dr. xxx (part of valued G/w)
(02) To Premium xxx
Premium A/c Dr. xxx
Treatment To Old Partner’s Capital A/cs xxx
of Premium (2) Premium did not brought in cash:
/valued (by new partner’s share of valued goodwill)
goodwill Normal Case Case of Capital Adjustment
New Partner’s Capital A/c Dr. xxx New Partner’s Current A/c Dr.
To Old Partner’s Capital A/cs xxx To Old Partner’s Capital A/cs
22 | P a g e
On Retirement/Death
(by retiring/deceased partner’s share of valued goodwill)
Old Partner’s Capital A/cs Dr. xxx (with the gaining part)
To Retired/Deceased Partner’s Capital A/c xxx
To Old Partner’s Capital A/c xxx (with the sacrificing part)
(1) Appreciation of Asset & Decline of Liability
Asset A/cs Dr. xxx (with the appreciated value)
Liability A/cs Dr. xxx (with the decline value)
To Revaluation A/c xxx
(03) (2) Appreciation of Liability & Depreciation of Asset
Revaluation A/c Dr. xxx
To Asset A/cs xxx (with depreciated value)
Revaluation
of Assets & To Liability A/cs xxx (with appreciated value)
Liabilities (3) Gain or Loss on Revaluation
(On gain on revaluation) (On loss on revaluation)
Revaluation A/c Dr. xxx Old Partner’s Capital A/cs Dr. xxx
To Old Partner’s Capital A/cs xxx To Revaluation A/c xxx
There may be the term of reconstitution to adjust the capital of

old/existing partners OR ascertain the capital of new partner –
The 04th step has to follow as under:

On Admission
Ascertainment of New partner’s Adjustment of old partners’ capital
capital 1. Find the adjusted capital (after all
1.Find the adjusted capital (after all adjustments-as above 3 steps) of old
adjustments-as above 3 steps) of partners.
old partners. 2. Find the total capital of new firm (on
2.Find the total capital of new firm the basis of capital of new partner &
(on the basis of adjusted capital share of profit of him/her)
of old partners and their total 3. Find the share of new capital for old
Capital share of profit in the new firm) partners (by taking difference
Adjustments 3.Find the capital of new partner (by between total capital of new firm &
taking difference between total capital of new partner)
capital of new firm and adjusted 4. Find the share of capital for each &
capital of old partners) every old partner (on the basis of new
capital of old partners & profit-
sharing ratio between them)
5. Find the deficiency or surplus capital
of old partner (by comparing between
adjusted capital of each partner with
share of new capital)
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On Retirement / Death
If future profit sharing ratio between continuing partner will be as earlier
Adjustment to be made for Adjustment to be made for
existing capital TARGET capital
1. Find the adjusted capital of them 1. Find the adjusted capital of them
2. Take total of their adjusted 2. Find the share of new capital for
capital as total capital of new each continuing partner (on the
firm and find the share of new basis of Target/fixed capital
capital for each continuing and their profit-sharing ratio.
partner. 3. Find the deficiency or surplus
3. Find the deficiency or surplus capital of them
capital of them
If future profit-sharing ratio between continuing partner will be new
Adjustment to be made for Adjustment to be made for
existing capital TARGET capital
4. Find the adjusted capital of them 4. Find the adjusted capital of them
5. Take total of their adjusted 5. Find the share of new capital for
capital as total capital of new each continuing partner (on the
firm and find the share of new basis of Target/fixed capital and
capital for each continuing their New profit-sharing ratio)
partner (on the basis of new 6. Find the deficiency or surplus
profit-sharing ratio and) capital of them (by comparing
6. Find the deficiency or surplus between adjusted capital & share
capital of them in new capital)
Partnership – Retirement and Death
The sum payable to the retiring/deceased partner includes:
(a) Balance in his capital/current account;

(b) Share in the gain/loss on revaluation of assets & liabilities;
(c) Share of goodwill;
(d) Share in the profits of current year; (from last Balance Sheet date to date of leaving).
(e) Share in the joint life policy;
(f) Interest on capital. Salary, etc. (if applicable) from last Balance Sheet date to date of leaving.
Following adjustments/treatments are needed on retirement/death of a partner:
(On the basis of calculated new profit-sharing ratio and gaining ratio.)
(a) Revaluation of assets and reassessment of liabilities.
(b) Distribution of accumulated profits (losses) and reserves.
(c) Treatment of goodwill (d) Capital adjustment (if any).
How is the account of retiring partner settled?
Retiring Partner’s Capital A/c Dr.

To Cash A/c (if paid in cash)
OR
Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c (if transferred to Loan)
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Circumstances in which gaining ratio are computed –
When a partner retires or dies; and
When there is a change in profit-sharing ratio.
The ‘Gaining Ratio’ is calculated to determine the amount of compensation to be paid by each of
the gaining partner to the outgoing partner.
How is the share of profit of a deceased partner calculated from the date of last balance sheet
to the date of death? Write the accounting treatment on it.
# Share of profits = Average*/Actual*/Estimated* Profit x Periods*/12 x Share in Profit.

* Average/Actual Profit – Average of last few years profits of the firm or last year profits.
* Estimated Profits – Profits of the firm may ascertain on the basis of sales made by firm.
* Periods – Periods from last balance sheet date to date of death, in months.
Profit & Loss Suspense A/c Dr. xxxxx --------

To Deceased Partner’s Capital A/c -------- xxxxx
One Mark Questions

Reconstitution of Partnership: Change in profit-sharing ratio
Understanding
[1] In the case of downward revaluation of an asset, Revaluation Account is ___________.
( Debited)
[2] In case of upward revaluation of a liability, Revaluation Account is ___________. ( Debited ) `
[3] At the time of admission of a partner new profit-sharing ratio is used for sharing future
___________’ ( Profits )
[4] At the time of admission, if claim of Workmen Compensation is more than the Workmen
Compensation Reserve, the amount of Workmen Compensation Reserve and the claim is transferred
to ______________________ account.( Provision for workmen compensation liability )
[5] At the time of admission, if the book value and the market value of investment is same
Investment Fluctuation Reserve is transferred to __________ account of the old partners in their
______________ ratio.( capitals , old )
[6] For the distribution of revaluation profit in case firm is following Fixed Capital Accounts
method is transferred to ________ accounts ( current )
[7] An amount previously written off as bad debt is promised to be paid by the debtor. The promised
amount will not be credited to _________________ Account. ( debtors )
[8] The newly admitted partner brings his / her share of capital for which he will get _______ in
firm. ( Profit share )
Application
[9] Balance sheet prepared after the new Partnership Deed, the assets and liabilities are shown at
__________ if Revaluation Account is prepared.( Revised values )
[10] In valuation of Goodwill, the Weighted Average Profit Method is preferred over average
method when profits are _____________. (Trends )
Multiple Choice Questions
1. Any change in the relationship of existing partners which results in an end of the existing
agreement and enforces making of new agreement is called:
(a) Revaluation of partnership (b) Reconstitution of partnership
(c) Realisation of partnership (d) None of the above
2. The ratio in which a partner surrenders his share in favour of a partner is known as:
(a) New profit-sharing ratio (b) Sacrificing Ratio
(c) Gaining Ratio (d) Capital Ratio
3. The ratio in which a partner receives a rise in his share of profits is known as:
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(a) New Ratio (b) Sacrificing Ratio (c) Capital Ratio (d) Gaining Ratio
4. Reserves and accumulated profits are transferred to partners ' capital accounts at the time of
reconstitution in:
(a) Old profit-sharing ratio (b) Sacrificing Ratio
(c) Gaining ratio (d) New profit-sharing ratio
5. Increase and decrease in the value of assets and liabilities are recorded through:
(a) Partners' Capital Account (b) Revaluation Account
(c) Profit and Loss Appropriation a/c (d) Balance Sheet
6. In which of the following case, revaluation account is debited?
(a) Increase in value of asset (b) Decrease in value of asset
(c) Decrease in value of liability (d) No change in value of assets
7. In which of the following cases, revaluation account is credited?
(a) Decrease in value of liability (b) Increase in value of liability
(c) Decrease in value of asset (d) No change in value of liability
8. Partner's capital account is credited when there is
(a) Profit on revaluation (b) transfer of general reserve
(c) transfer of accumulated profits (d) All of the above
9. Sacrificing ratio is the difference between :
(a) New ratio and old ratio (b) Old ratio and new ratio
(c) New ratio and gaining ratio (d) Old ratio and gaining ratio
10. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They decided to share future
profits equally. Calculate A’s gain or sacrifice
(a) 2/10 (sacrifice) (b) 5/10 (gain) (c) 1/10 (Gain) (d) 1/10 (sacrifice)
11. In case of change in profit-sharing ratio, the gaining partner must compensate the sacrificing
partners by paying the proportional amount of
(a) capital ( b) cash (c) goodwill (d) none of the above
12. In case of change in profit-sharing ratio, the accumulated profits are distributed to the partners in
(a) new ratio (b) old ratio (c) sacrificing ratio (d) equal ratio
13 X, Y and Z are partners sharing profits and losses in the ratio of 5:3:2.They decide to share the
future profits in the ratio of 3:2:1. Workmen compensation reserve appearing in the balance sheet on
the date if no information is available for the same will be:
(a) Distributed among the partners in old profit sharing ratio
(b) Distributed among the partners in new profit sharing ratio
(c) Distributed among the partners in capital ratio
(d)Carried forward to new balance sheet without any adjustment
14. A, B and C were are partners in a firm sharing profits in the ratio of 3:4:1. They decided to share
profits equally w.e.f from 1 .4.2019. On that date the profit and loss account showed the credit
balance of 96,000. instead of closing the profit and loss account, it was decided to record an
adjustment entry reflecting the change in profit sharing ratio. In the journal entry:
(a) Dr. A by 4,000; Dr. B by 16,000; Cr C by 20,000
(b) Cr. A by 4,000; Cr. B by 16,000; Dr C by 20,000
(c) Cr. A by 16,000; Cr. B by 4,000; Dr C by 20,000
(d) Dr. A by 16,000; Dr. B by 4,000; Cr C by 20,000
15. U V and W are partners sharing profits in the ration of 2:3:5. They also decide to record the
effect of the following revaluations and reassessments without affecting the book values of assets
and liabilities by passing a single adjustment entry:
Book Value (Rs) Revised Value (Rs)
Land and Building 3,00,000 3,50,000
Furniture 1,50,000 1,00,000
Sundry Creditors 60,000 20,000
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Outstanding Salaries 10,000 15,000
The single adjustment entry will
(a) Dr. W and Cr. U by 10,500
(b) Dr. U and Cr. W by Rs. 10,500
(c) Dr. V and Cr. U by Rs. 10,500
(d) Dr. W and Cr. V by Rs. 10,500
16 X and Y shared profits and losses in the ratio of 3:2. With effect from 1st April 2019 they
agreed to share profit equally. The Goodwill of the firm was valued at Rs. 60,000. The adjustment
entry will be
(a) Debit Y and credit X with Rs. 6,000
(b) Debit X and credit Y with Rs. 6000
(c) Debit X and credit Y with Rs. 600
(d) Debit bi and credit X with Rs. 600
17 Sacrificing Ratio :
(a) New Ratio – Old Ratio (b) Old Ratio – Gaining Ratio
(c) Old Ratio – New Ratio (d) Gaining Ratio – Old Ratio
18. X Y and Z are partners sharing profit and losses in the ratio of 5: 3 :2. From 1st April 2018 they
decided to share profit and losses equally .The partnership Deed provide that in the event of any
change in the profit sharing ratio the Goodwill should be valued at 2 years purchase of the average
profit of the the preceding five years the profit and loss of the preceding years and 31st March, are
Year 2013-14 2014-15 2015-16 2016-17 2017-18
Profit 70,000 85,000 45,000 35,000 10,000(loss)
Adjustment entry will be
(a) Dr. Y’s Capital a/c Rs.3000, Z’s Capital a/c 12,000, Cr. X’s Capital a/c Rs 15,000.
(b) Dr. Y’s Capital a/c Rs.12,000, Z’s Capital a/c 3,000, Cr. X’s Capital a/c Rs 15,000.
(c) Dr. Z’s Capital a/c Rs.3000, X’s Capital a/c 12,000, Cr. Y’s Capital a/c Rs 15,000.
(d) Dr. Y’s Capital a/c Rs.15,000, Cr. Z’s Capital a/c 12,000, and X’s Capital a/c Rs 3,000.
19. A, B and C are sharing profits and losses in the ratio of 4: 3: 2, decided to share future profits
and losses in the ratio of 2 :3: 4 with effect from 1st April, 2018. An extract of their Balance Sheet
as at 31st March, 2020 is :
Liabilities Amount Assets Amount
Investments Fluctuation Reserve 18,000 Investments (At cost) 2,00,000
Case -1 If there is no additional information.
Case 2. If the market value of investments is Rs. 2,00,000.
Case 3. If the market value of investments is Rs. 1,91,000.
Case 4. If the market value of investments is Rs.2,18,000.
Case 5. If the market value of investments is Rs.1,73,000.
What will the amount credited to partner’s Capital a/c
Ans. Case-1 (A) A 8,000 B, 6000 C,4000
(B) A 6,000 B, 6000 C,6000
(C) A 10,000 B, 4000 C,4000
(D) A 8,000 B, 4000 C,6000
Case -2 (A) A 10,000 B, 6000 C,4000
(B) A 6,000 B, 6000 C,6000
(C) A 8,000 B, 6,000 C,4000
(D) A 8,000 B, 4000 C,6000
Case-3 (A) A 4,000 B, 2000 C,3000
(B) A 4,000 B, 3,000 C,2,000
(C) A 3,000 B, 2000 C,4000
(D) A 2,000 B, 3000 C,4000
Case-4 (A) A 6,000 B, 6000 C,6000
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(B) A 4,000 B, 6000 C,8000
(C) A 4,000 B, 2000 C,3000
(D) A 8,000 B, 6000 C,4000
Case-5 (A) A 4,000 B, 2000 C,3000
(B) A 4,000 B, 3000 C,2000
(C) A 4,000 B, 2000 C,3000
(D) A 4,000 B, 3000 C,5000
20. Match the following items
(i) Goodwill which is acquired by (a) Inherent goodwill
making a payment
(ii) Goodwill location which (b) Purchased goodwill
arises from favourable
(iii) Goodwill which arises due to
efficiency of management
(i) If goodwill is valued at Rs. (a) Rs. 8,00,000
1,20,000 at 4 years purchase
of super profit; normal is 10%
and average profits are Rs.
50,000, capital employed will
be
(ii) (b) Rs. 2,00,000
(c) Rs. 5,00,000
(i) General reserve will be (a) Sacrificing/Gaining Ratio
distributed in
(ii) Advertisement Suspense will (b) Old ratio
be debited to partner’s a/cs in
(iii) Goodwill value will be (c) New ratio
adjusted in
(i) Ratio in which Partners share (a) New profit sharing ratio
profit and loss before
reconstitution of firm
(ii) Ratio in which Partners (b) Gaining ratio
surrender their share of profit
in favour of other partner’s
(iii) Ratio in which all the Partners (c) Sacrificing ratio
share the future profit and
losses
(iv) Ratio in which Partners (d) Old ratio
acquire the share from other
(i) Old ratio – New ratio (a) Gaining ratio
(ii) Goodwill (b) Fixed Assets
(iii) General reserve (c) Credit Balance
(iv) New ratio- Old ratio (d) Sacrificing Ratio
(i) Revaluation A/C is opened (a) At the time of retirement
(ii) Sacrificing ratio (b) At the time of death
(iii) Valuation of goodwill (c) At the time of Admission
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(d) At the time of reconstitution
of partnership firm
26. Which of the following is NOT true in relation to goodwill ?
(A) It is an intangible asset (B) It is fictitious assets
(C) It has a realisable value (D) None of the above
27. When Goodwill is not purchased goodwill account can:
(A) Never be raised in the book (B) Be raised in the book
(C) Be partially raised in the books (D) Be raised as per the agreement of the partners.
28. The goodwill of the firm is NOT affected by;

(A) Location of the firm (B) Reputation of firm
(C) Better customer service (D) None of the above
29. The profit earned by a business over the last 5 years are as follows:
Rs. 12000 Rs. 13000 Rs. 14000 Rs.18000 and 2000 (loss) based on 2 years purchase
of the last 5 years profits, value of goodwill will be .
(A) Rs. 23,600 (B) 22,000 (C) Rs. 1,10,000 (D) Rs.1,18,000.
30. The average profit of a business over the last 5 years amounted to Rs. 60,000. The normal
commercial yield on capital invested in such a business is deemed to be 10% p.a. The net capital
invested in the business is Rs.5,00,000. Amount of goodwill, if it is based on 3 years purchase of
last 5 years super profit will be:
(A) 1,00,000 (B) 1,80,000 (C) 30,000 (D) 1,50,000
31.The following question consist of two statements, one labelled as the ‘Assertion (A)’ and the
other as ‘Reason (R)’. You are to examine these two statements carefully and select the answers
using the code given below:
(a) Both A and R are individually true and R is the correct explanation of A
(b) Both A and R are individually true but R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Assertion (A): In order to compensate a partner for contributing capital to the firm in excess of the
profit-sharing ratio, firm pays such interest on partner’s capital.
Reason (R): Interest on capital is treated a charge against profit.
32. The profits for the previous three years are given below:
2018-2019 Rs.23,000 (including an abnormal gain of Rs.8,000)
2019-2020 Rs.40,000 (after charging an abnormal loss of Rs.12,000)
2020-2021 Rs.38,000 (after writing off bad debts amounting to Rs.6,000)
The amount of goodwill at two years purchase of the average profits of the last three years will be
___________.
(a) Rs.65,000 (b) Rs.70,000 (c) Rs. 68,000 (d) Rs.35,000
33. A and B are partners sharing profits in the ratio of 2 : 3. Their Balance Sheet shows machinery
at Rs. 4,00,000; stock at Rs.80,000 and Debtors at Rs.3,20,000. C is admitted and new profit sharing
ratio is agreed at 6 : 9 : 5. Machinery is revalued at Rs.3,40,000 and a provision is made for doubtful
debts @ 2.5%. A’s share in loss on revaluation amounted to Rs.20,000. Revalued value of stock will
be:
(a) Rs.98,000 (b) Rs. 1,00,000 (c) Rs. 60,000 (d) Rs.62,000
34. Gagandeep, a partner advanced a loan of Rs.60,000 to the firm on 30th November 2020. The
firm incurred a loss of Rs.15,000 during the year ending 31st March, 2021. In the absence of
partnership deed interest a loan allowed to Gagandeep will be
(a) Rs.3,600 (b) Rs.900 (c) Rs. 1,200 (d) Rs. 1,800
35.Vikas and Yogesh were in partnership sharing profits and losses in the ratio of 2 : 1. They
admitted Kunal as a new partner. Kunal brought Rs.1,00,000 as his share of goodwill premium,
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which was entirely credited to Vikas’s capital account. On the date of admission, goodwill of the
firm was valued at Rs.5,00,000. The new profit sharing ratio of Vikas, Yogesh and Kunal will be:
(a) 7 : 5 : 3 (b) 7 : 3 : 5 (c) 5 : 7 : 3 (d) 3 : 5 : 7
36. P, Q and R are partners in a firm. Net profit before appropriations is Rs. 7,87,000. Total
interest on capital and salary to the partners amounted to Rs.40,000 and Rs. 75,000 respectively. P
and Q are entitled to receive a commission @ 6% each on net profit after taking into consideration
interest on capital salaries and all commission. Calculate commission payable to P and Q.
(a) Rs.18,000 each (b) Rs. 40,320 each (c) Rs.36,000 each (d) Rs.24,000 each
37. Charvi and Vaanya were partner sharing Profit and Losses in 3 : 2 with affect from 1st April
2021, they decided to share future profits equally. On that date, following journal entry was passed
by the firm:
Date Particular Lf Debit Amt. Debit
Amt.
Charvi’s Current A/c Dr. 30,000
To Vaanya’s Current A/c 30,000
Which of the following balance was existing in the books of the firm on the date of reconstitution?
(a) Contingency Reserve Rs. 3,00,000
(b) Profit and Loss (Dr.) Balance Rs. 3,00,000
(c) Profit and Loss (Cr.) Balance Rs. 3,00,000
(d) Advertisement Suspense Account Rs.2,00,000.
38. The following question consist of two statements, one labelled as the ‘Assertion (A) ‘and the
other as ‘Reason (R)’. You are to examine these two statements carefully and select the answers
using the code given below:
(a) Both A and R are individually true and R is the correct explanation of A
(b) Both A and R are individually true but R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true.
Assertion (A): It is necessary to show the true position of the firm at the time of admission of a new
partner. Reason (R): The gain or loss on revaluation which is transferred to all the partner’s capital
account in new profit-sharing ratio.
CASE STUDY QUESTIONS
Read the following paragraph and answer the following Question from 1 to 5.
39.Any changes in the relations of partnership will result in the reconstitution of the partnership
firm. All the reserves and surplus will be distributed among the partners into existing profit-sharing
ratio. when it is decided by the partners to make changes in the existing ratio, a separate account is
opened, which is known as profit and loss adjustment or revolution account to make the revaluation
of assets and reassessment of liabilities
With a motive to calculate actual economic benefits.
Q.1 The Need of revaluation of assets and liabilities:
(A) Assets and Liabilities should appear at revised values
(B)Any profit and loss an account of change in values belong to old partners
(C) All unrecorded assets and liabilities get recorded
(D) None of Above
Q.2 Revaluation Account is a:
(A) Real Account (B) Nominal Account
(C) Personal Account (D) None of the Above
Q.3Any change in the relationship of existing partners which results in an end of the existing
agreement and enforces making of new agreement is called:
(a) Revaluation of partnership
(b) Reconstitution of partnership
(c) Realization of partnership
(d) None of the above
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Q.4 In case of change in profit-sharing ratio, the accumulated profits are distributed to the
partners in
(a) new ratio
(b) old ratio
(c) sacrificing ratio
(d) equal ratio
Q.5 Increase and decrease in the value of assets and liabilities are recorded through:
(a) Partners' Capital Account
(b) Revaluation Account
(c) Profit and Loss Appropriation
(d) Balance Sheet
Read the following paragraph and answer the following Question from 1 to 3.
Bhavya and Naman were partner in a firm carrying on a tiffin service in Hyderabad. Bhavya noticed
that a lot of food is left at the end of the day. To avoid wastage, she suggested that it can be
distributed to the needy. Naman wanted that It should be mixed with the food being served the next
day. Naman then give a personal that if his share in the profit increased, he will not mind free
distribution of leftover food. Bhavya happily agreed. So they decided to change their profit sharing
ratio 1:2 with immediate effect. On that date revaluation of assets and reassessment of liability was
carried out that resulted into a gain of Rs. 18,000. On that day at the Goodwill of the firm was
valued at Rs. 1,20,000.
Based on the above information you are required to answer the following questions.
Q.1 sacrificing ratio equal to:
(A) Old ratio minus new ratio
(B)New share minus old share
(C) Old share plus new share
(D) Old share
Q.2 sacrificing /gain of Bhavya and Naman will be
(A) Bhavya sacrifice 1/6 , Naman gains 1/6
(B) Bhavya gains 1/6 , Naman sacrifice 1/6
(C) Only Bhavya gains 1/6
(D) Only Naman sacrifice 1/6
Q.3 at the time of change in profit sharing ratio gaining partner capital account is.............. ….and
sacrificing partner is........................ For the adjustment of goodwill
(A) Credited debited
(B) Debited credited
(C) Increased or decreased
(D) Decreased or increased
Q.4 Pass the journal entry for adjustment of Goodwill.
(A) Naman’s Capital a/c Dr. 1,20,000
To Bhavya’s Capital a/c 1,20,000
(B) Bhavya’s Capital a/c Dr. 60,000
To Naman’s Capital a/c 60,000
(C) Naman’s Capital a/c Dr. 20,000
To Bhavya’s Capital a/c 20,000
(D) Naman’s Capital a/c Dr. 1,00,000
To Bhavya’s Capital a/c 1,00,000
Reconstitution of Partnership: Admission of a Partner
(01)For which of the following situations, the old profit-sharing ratio of partners is used at the time of
admission of a new partner?
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a. When new partner brings only a part of his share of goodwill.
b. When new partner is not able to bring his share of goodwill.
c. When, at the time of admission, goodwill already appears in the balance sheet.
d. When new partner brings his share of goodwill in cash.
(02) Arun and Vijay are partners in a firm sharing profits and losses in the ratio of 5:1.
Balance Sheet (Extract)
liabilities Rs. Assets Rs.
Machinery 40,000
If value of machinery in the balance sheet is undervalued by 20%, then at what value will
machinery be shown in new balance sheet:
(a) 44,000 (b) 48,000 (c) 32,000 (d) 50,000
(03) A and B are partners in a firm having a capital of ₹ 54,000 and ₹ 36,000 respectively. They
admitted C for 1/3rd share in the profits C brought proportionate amount of capital. The Capital
brought in by C would be:
a) ₹ 90,000 b) ₹ 45,000 c) ₹ 5,400 d) ₹ 36,00
(04) Sun and Star were partners in a firm sharing profit in the ratio of 2 : 1. Moon as admitted as a new
partner in the firm. New profit sharing ratio was 3 : 3 : 2. Moon brought the following assets
towards his share of Goodwill and Capital:
Machinery : 2,00,000
Furniture : 1,20,000
Stock : 80,000
Cash : 50,000
If his capital is considered as Rs. 3,80,000 the Goodwill of the firm will be:
a. 70,0000 b. 2,80,000 c. 4,50,000 d. 1,40,000
(05) Sacrificing ratio is used to distribute………….in case admission of partner.
a. Reserves b. Goodwill c. revaluation profit d. Balance in profit and loss account
(06) A and B are in partnership sharing profits and losses in the ratio of 3:2. They admit C into
partnership with 1/5th share which he acquires equally from A and B. Accountant has calculated
new profit sharing ratio as 5:3:2. Is accountant correct?
(07) Can employee provident fund be distributed among old partner in their old ratio at the time of
admission of partner.
a. It can be distributed
b. It can’t be distributed
c. Can be distributed if tax is paid
d. None of the above
(08)Analyses the transaction and identify the effect on the revaluation account.
Two month's salaries @ Rs. 6000 per month was outstanding.
a. Revaluation account is debited by Rs. 12000
b. Revaluation account is credited by Rs. 12000
c. Revaluation account is debited by Rs.6000
d. Revaluation account is credited by Rs. 6000
(09) Assertion (A): At the time of admission, if profit sharing ratio among old partner does not change
then sacrificing ration will be old profit-sharing ratio.
Reason ( R) : Old profit ratio plus new profit sharing ratio is sacrificing ratio:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of
Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
32 | P a g e
(d) Assertion (A) is true, but Reason (R) is false
(10) X and Y share profits in the ratio of 3:2. Z was admitted as a partner who sets 1/5 share. New
profit-sharing ratio, if Z acquires 3/20 from X and 1/20 from Y would be
(a) 9 : 7 : 4 (b) 8 : 8 : 4 (c) 6 : 10 : 4 (d) 10 : 6 : 4
(11) A and B share profits and losses in the ratio of 3 : 1, C is admitted into partnership for 1/4 share.
The sacrificing ratio of A and B is:
(a) equal (b) 3 : 1 (c) 2 : 1 (d) 3 : 2.
(12) At the time of admission of a new partner, general reserve appearing in the old balance sheet is
transferred to:
(a) all partner’s capital account
(b) new partner’s capital account
(c) old partner’s capital account
(d) none of the above
(13) Asha and Nisha are partner’s sharing profit in the ratio of 2:1. Asha’s son Ashish was admitted for
1/4 share of which 1/8 was gifted by Asha to her son. The remaining was contributed by Nisha.
Goodwill of the firm in valued at Rs. 40,000. How much of the goodwill will be credited to the old
partner’s capital account.
(a) Rs. 2,500 each
(b) Rs. 5,000 each
(c) Rs. 20,000 each
(14) A, B and C are partner’s in a firm. If D is admitted as a new partner:
(a) old firm is dissolved
(b) old firm and old partnership is dissolved
(c) old partnership is reconstituted
(d) None of the above.
(15) On the admission of a new partner increase in the value of assets is debited to
(a) Profit and Loss Adjustment account
(b) Assets account
(c) Old partner’s capital account
(16) At the time of admission of a partner, undistributed profits appearing in the balance sheet of the old
firm is transferred to the capital account of:
(a) old partners in old profit sharing ratio
(b) old partners in new profit sharing ratio
(c) all the partner in the new profit sharing ratio.
(17) A, B and C are partners sharing profits in the ratio of 3:2:1. They agree to admit D into the firm. A,
B and C agreed to give1/3rd,1/6th,1/9th share of their profit. The share of Profit of D will be:
(a)1/10 (b)11/54
(c)12/54 (d)13/54
(18) A and B are in partnership sharing profits in the ratio of 3:2. they take C as a new Partner.
Goodwill of the firm is valued at Rs3,00,000 and C brings Rs30,000 as his Share of goodwill In
cash which is entirely credited to the Capital Account of A. New Profit sharing ratio will be:
(a)3:2:1 (b)6:3:1
(c)5:4:1 (d)4:5:1
(19) A and B are partners sharing profit in the ratio of 3 : 2. They admit C as a partner by giving him
1/3 share in future profits. The new ratio will be
(A) 12 : 8 : 5 (B) 8: 12 : 5
(C) 5 : 5 : 12 (D) None of the Above
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(20) A and B are partners sharing profits and losses in the ratio of 7 : 5. They agree to admit C, their
manager, into partnership who is to get 1/6th share in the profits. He acquires this share as 1/24th
from A and 1/8th from B, The new profit sharing ratio will be :
(A) 13 : 7 : 4 (B) 7 : 13 : 4
(C) 7 : 5 : 6 (D) 5 : 7 : 6
(21) A and B are partners in a business sharing profits and losses in the ratio of 7 : 3 respectively. They
admit C as a new partner. A sacrificed 1/7th share of his profit and B sacrificed 1/3rd of his share in
favour of C. The new profit-sharing ratio of A, B and C will be
(A) 3 : 1 : 1 (B) 2 : 1 : 1
(C) 2 : 2 : 1 (D) None of the above
(22) X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership
with 1/5th share in profits which he acquires equally from A and Y. Z brings in ₹40,000 as goodwill
in cash. Goodwill amount will be credited to :
(A) X ₹20,000; Y ₹20,000 (B) X ₹25,000; Y ₹15,000
(C) X ₹24,000; T ₹16,000 (D) X ₹4,000; Y ₹4,000
(23) When a new partner does not bring his share of goodwill in cash, the amount is debited to :
(A) Cash A/c (B) Premium A/c
(C) Current A/c of the new partner (D) Capital A/cs of the old partners
(24) If at the time of admission, some profit and loss account balance appears in the books, it will be
transferred to:
(A) Profit & Loss Adjustment Account
(B) All partners’ Capital Accounts
(C) Old partners’ Capital Accounts
(D) Revaluation Account
(25)In the absence of an express agreement as to who will contribute to new partners’ share of profit, it
is implied that the old partners will contribute:
(A) Equally
(B) In the ratio of their capitals
(C) In their old profit-sharing ratio
(D) In the gaining ratio
(26) A, B, C and D are partners. A and B share 2/3rd of profits equally and C and D share remaining
profits in the ratio of 3 : 2. Find the profit sharing ratio of A, B, C and D.
(A) 5 : 5 : 3 : 2
(B) 7 : 7 : 6 : 4
(C) 2.5 : 2.5 : 8 : 6
(D) 3 : 9 : 8 : 3
(27) Sacrificing ratio is used to distribute in case of admission of a partner :
(A) Reserves
(B) Goodwill
(C) Revaluation Profit
(D) Balance in Profit and Loss Account
(28) X and Y are partners in a firm with capital of ₹1,80,000 and ₹2,00,000. Z was admitted for 1/3rd
share in profits and brings ₹3,40,000 as capital, calculate the amount of goodwill:
(A) ₹2,40,000
(B) ₹1,00,000
(C) ₹1,50,000
(D) ₹3,00,000
(29) Assertion (A): Profit or loss on revaluation account is not transferred to incoming partners’
capital Account
Reason ( R ) : Profit or loss on revaluation at the time of admission of a Partner belongs to Pre-
Admission period hence belong to old partners: Give Answer
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
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Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of
Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
(d) Assertion (A) is true, but Reason (R) is false
(30) Assertion (A): Increase in the value of assets is debited to Revaluation Account
Reason ( R ) : Revaluation account is credited on increase in the value of Plant and Machinery:
(31) At the time of admission of a partner, who decides the share of profit of the new partner out of the
firm’s profit ?
a. Old partner
b. New Partner
c. Sacrificing partner
(32) Amit and Beena were partners in a firm sharing profits and losses in the ratio of 3 : 1. Chaman was
admitted as a new partner for 1/6 th share in the profits. Chaman acquired 2/5 th of his share from
Amit. How much share did Chaman acquire from Beena ?
a. 1/10
b. 2/10
c. 3/5
(33) Vinay and Naman are partners sharing profit in the ratio of 4:1. Their capitals were Rs 90,000 and
Rs. 70,000 respectively. They admitted Prateek for 1/3 share in the profits. Prateek brought `
1,00,000 as his capital. The value of firm's goodwill will be:
a. 40,000
b. 60,000
c. 1,00,000
d. 2,60,000
(34) The ratio in which the partners share the gain or loss on revaluation of assets and liabilities is
a. Sacrificing Ration
b. Old Profit Sharing Ratio
c. New Profit Sharing Ratio
d. Gaining Ratio
Read the following hypothetical text and answer the given questions: Amit and Mahesh were partners in
a fast-food corner sharing profits and losses in ratio 3:2. They sold fast food items across the counter and
did home delivery too. Their initial fixed capital contribution was ₹1,20,000 and ₹80,000 respectively.
At the end of first year their profit was ₹ 1,20,000 before allowing the remuneration of ₹.3,000 per quarter
to Amit and ₹.2,000 per half year to Mahesh. Such a promising performance for first year was
encouraging, therefore, they decided to expand the area of operations. For this purpose, they needed a
delivery van, a few Scotties and an additional person to support. Six months into the accounting year they
decided to admit Sundaram as a new partner and offered him 20% as a share of profits along with monthly
remuneration of ₹ 2,500. Sundaram was asked to introduce ₹1,30,000 for capital and ₹.70,000 for
premium for goodwill. Besides this Sundaram was required to provide Rs.1,00,000 as loan for two years.
Sundaram readily accepted the offer. The terms of the offer were duly executed and he was admitted as a
partner
(35) Remuneration will be transferred to _______________ of Amit and Mahesh at the end of the
accounting period.
a. Capital account. b. Loan account.
c. Current account. d. None of the above.
(36) Upon the admission of Sundaram the sacrifice for providing his share of profits would be
done:
(a) by Amit only.
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(b) by Mahesh only.
(c) by Amit and Mahesh equally.
(d) by Amit and Mahesh in the ratio of 3:2
(37) Sundaram will be entitled to a remuneration of _____________at the end of the year.
Sterling enterprises is a partnership business with Ryan, Williams and Sania as partners engaged in
production and sales of electrical items and equipment. Their capital contributions were Rs.50,00,000,
Rs.50,00,000 and Rs.80,00,000 respectively with the profit the sharing ratio of 5:5:8. As they are now
looking forward to expanding their business, it was decided that they would bring in sufficient cash to
double their respective capitals. This was duly followed by Ryan and Williams but due to unavoidable
reasons Sania could not do so and ultimately it was agreed that to bridge the shortfall in the required
capital a new partner should be admitted who would bring in the amount that Sania could not bring and
that the new partner would get share of profits equal to half of Sania’s share which would be sacrificed
by Sania only. Consequent to this agreement Ejaz was admitted and he brought in the required capital
and Rs.30,00,000 as premium for goodwill. Based on the above information you are required to answer
the following questions.
(38) What will be the new profit-sharing ratio of Ryan, Williams, Sania and Ejaz?
(a) 1:1:1:1 (b) 5:5:8:8
(c) 5:5:4:4 (d) None of the above
(39) What is the amount of capital brought in by the new partner Ejaz?
(a) Rs.50,00,000
(b) Rs.80,00,000
(c) Rs.40,00,000
(d) Rs.30,00,000
(40) What is the value of the goodwill of the firm?
(a) Rs.1,35,00,000
(b) Rs.30,00,000
(c) Rs.1,50,00,000
(d) Cannot be determined from the given data.
(41) When the balance sheet is prepared after the new partnership agreement, the assets and liabilities
are recorded at:
(A) Historical cost (B) Current cost
(C) Realisable value (D) Revalued figures
(42) X and Y are partners sharing profits in the ratio 5:3. They admitted Z for 1/5th profits, for which he
paid ₹60,000 against capital and ₹30,000 against goodwill. Find the capital balance for each partner
taking Z’s capital as base capital.
(A) ₹1,50,000; ₹60,000 and ₹60,000
(B) ₹1,50,000; ₹60,000 and ₹90,000
(C) ₹1,50,000; ₹90,000 and ₹60,000
(D) ₹1,50,000; ₹90,000 and ₹90,000
(43) A and B are partners sharing profits in the ratio of 2 : 3. Their Balance Sheet shows Machinery at
₹2,00,000; Stock at ₹80,000 and Debtors at ₹1,60,000. C is admitted and new profit sharing ratio is
agreed at 6 : 9 : 5. Machinery is revalued at ₹1,40,000 and a provision is made for doubtful debts
@5%. A’s share in loss on revaluation amount to ₹20,000. Revalued value of Stock will be:
(A) ₹62,000
(B) ₹1,00,000
(C) ₹60,000
(D) ₹98,000
(44) A and B are in partnership sharing profits in the ratio of 3 : 2. They take C as a new partner.
Goodwill of the firm is valued at ₹3,00,000 and C brings ₹30,000 as his share of goodwill in cash
which is entirely credited to the Capital Account of A. New profit sharing ratio will be :
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(A) 3 : 2 : 1
(B) 6 : 3 : 1
(C) 5 : 4 : 1
(D) 4 : 5 : 1
ANSWER KEY
Reconstitution of Partnership: Change in Profit-sharing Ratio
Ans. I.(b), 2. (b) 3. (d), 4. (a) 5. (b) 6. (b), 7. (a), 8. (d), 9.. (b), 10. (d), 11.(c), 12. (b) 13,(a)
14( b )15 (b) 16 (a)17(c ) 18(a)
19. Case -1(A) Case-2 (C) Case-3(B) Case-4(D) Case-5 (B)
20.(i) b (ii) a (iii) a
21.(i) b .
22.(i) b (ii) b (iii) a .
23(i) d(ii) C (iii) a (iv) b
24.(i) d (ii) b (iii) c (iv) a ,
25 (i) d (ii) c (iii) d
26.(B) 27 A 28.D 29.B 30.C
31. (c) A is true but R is false
32. (b) Rs.70,000
33. (a) Rs.98,000 34. (c) Rs. 1,200 35. (a) 7 : 5 : 3
36. (c) Rs.36,000 each 37. (b) Profit and Loss (Dr.) Balance Rs. 3,00,000
38. (c) A is true but R is false
CASE STUDY QUESTIONS
39. (1)(B)Any profit and loss an account of change in values belong to old partners
(2)(B) Nominal Account
(3) (b) Reconstitution of partnership
(4) (c) sacrificing ratio
(5) (b) Revaluation Account
40.(1) (A) Old ratio minus new ratio
(2)(A) Bhavya sacrifice 1/6 , Naman gains 1/6.
(3)(B) Debited credited
(4)(C) Naman’s Capital a/c Dr. 20,000
To Bhavya’s Capital a/c 20,000
Reconstitution of Partnership: Admission of a Partner
1 Ans. C.
Hint. As per AS-26 Existing Goodwill has to be written off and will not be shown in the books. Only
purchased goodwill can be shown.
2 Ans. D. 40,000 x 100/80, Value of Machinery is shown at 80% thus now brought to 100%
3 Ans. B , C brought Capital for 1/3rd Profit , Existing Capital of A and B would be considered as 2/3. Actual Capial =
54000+36000= 90,000 which is 2/3, So Total Cap- 90,000*3/2 135000, So C share in Cap = 45,000
4 Ans a.70,000 As Value of all Assets is 4,50,000 out of which 3,80,000 is Capital
5 Ans. B. Goodwill. is always adjusted in gaining and sacrificing share
6 Ans. C. Both the above, because existing partner earned reputation.
7 Ans. B. It can’t be shared as it belong to employees.
8 Ans. A. Revaluation account will be debited as there is increase in the liability
9 Ans. D. Asser5tiion is correct whereas reason is wrong as sacrificing ratio= Old Share- New Share
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10 Ans. A. X & Y old share= 3/5 , 2/5
New share X= 3/5 – 3/20= 12/20 -3 /20 = 9/20
Y= 2/5 – 1/20= 8/20 – 1/20= 7/20
Z = 1/5 = 4/20, Hence New Share= 9 : 7 : 4
11 Ans. B Sacrficing ratio is always equal to old share if new ratio is not given
12 Ans. C , It is undistributred profit and thus belong to old partner.
13 Ans. C Rs. 20,000 each as both Asha and Nisha surrenders equal share in favor of Ashish.
14 Ans. C. Firm get reconstituted during admission, retirement and death of partner. It dissolved only when
partner discontinue their business.
15 Ans. B. Assets A/c, As increase in assets is always debited as per rules of Dr/Cr
16 Ans. A. it belongs to old partners in old profit sharing ratio
17 Ans. D. Share suurendered byA= 3/6 *1/3= 3/18, B= 2/6 *1/6= 2/36 or 1/18, C =1/6 * 1/9 =1/54
D’s Share= 3/18 + 1/18+ 1/54 = 9+ 3+ 1 /54 = 13/54
18 Ans.C. C brings 30,000share as Goodwill which is 1/10 of Goodwill, So he get 1/10th share in the profit.
Entire share is credited to A’s Capital it means only A is having sacrifice.
So, A’s New Share = 3/5 – 1/ 10 =6/10 – 1/10 = 5/10 , B = 2/5 =4/10 , C = 1/10,
New Share = 5 : 4: 1
19 Ans. D. : Let the profit be Rs. 1 , 1/3rd will be given to C, Remaining Share = 2/3 taken by A and B in
their old ratio
A’s new share= 2/3 * 3/5 = 6/15,
B’s new share = 2/3 * 2 /5 =4/15
C’sshare =1/3 = 5/15
20 Ans. A C share = 1/6 of which 1/24th share given by A and 1/8th by B

1/24 + 1/8 = 1/24 +3/24 = 4/24 = 1/6 Check
New Share = Old Share- Surrendered Share A, = 7/12 – 1/24 = 14/24- 1/24 =13 /24
B = 5/12 – 1/8 = 10/24 – 3/24 = 7/24
New Ratio : A, B and C = 13 : 7 : 4
21 Ans : Share of C = Share Surrendered by A + Share Surrendered by B

Share Suurendered by A = 7/10 * 1/7= 7 /70 and B = 3/10 * 1/ 3 = 3/30
C Share = 7/70 +3/30= 21 +21/210 = 42/210 = 2/10 ,
New Share A= 7/10 – 7/70 = 49-7/70= 42/70
B = 3/10-3/30= 9-3 /30= 6/30
A : B : C = 42/70 , 6/30 , 2/10 = 6/10, 3/15 , 1/5 = 18: 6 : 6/30= 3: 1: 1
22
23 Ans . C. Current Account is debited keep capital balance intact.
24 Ans. C.
25 Ans. C. Basic Assumption
26 Ans. A. Let the profit be Rs. 1 Here A and B share 2/3rd profits equally i.e A =1/3 and B= 1/3
Remaining 1/3rd shared by C and D in 3/5 and 2/5th share
C = 1/3 * 3/ 5 =3/15 , D= 1/3 * 2 / 5 = 2/15
Share of A B C and D = 1/3 , 1/3, 3/15 , 2/15 = 5/15, 5/15 , 3/15, 2/15 = 5 : 5 : 3 : 2
27 Ans. C
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28 Ans. : C Amount to brought over capital known as Goodwill
For 1/3rd share Z is required to bring 1/3rd share of total capital
Existing Capital of X and Y = 1,80,000+ 2,00,000 =3,80,000 is equal to = 2/3
So total Capital = 3,80,000 * 3/2 = 5,70,000
Capital of Z = 5,70,000 -3,80,000 = 1,90,000 Whereas Z brings total = 3,40,000
So 1,90,000 for capital Remaining 1,50,000 for Goodwill
29 Ans.: A. Reason as above
30 Ans. :D . As Increase in the value of assets is credited to Revaluation A/c
31 Ans. A. It decided by old partner mutually
32 Ans. : C. Remaining 3/5
33 Ans.: a. Total Capital as per Prateek Capital = 1,00,000 *3/1 = 3,00,000

Actual Capital = 90,000+70,000+1,00,000 =2,60,000
Goodwill = 3,00,000 -2,60,000 = 40,000
34 Ans. B
35 1. Ans. C.
2. Ans. D.
3..( Rs. 15,000)
36 1. What will be the new profit-sharing ratio of Ryan, Williams, Sania and Ejaz?
Ans. C.
2. What is the amount of capital brought in by the new partner Ejaz?
Ans. (b) Rs.80,00,000
3. What is the value of the goodwill of the firm?
Ans. (a) Rs.1,35,00,000
37 Ans. D. Revalued Figures
38 Ans. : C
Z brings 60,000 as Capital for 1/5th share in profit, total capital on the basis of Z capital will be = 60,000 *
5/1 = 3,00,000
Capital of X and Y = 3,00,000 – Z Capital 60,000= 2,40,000 in the ratio of X and Y = 5 : 3
X new Capital = 2,40,000 * 5/ 8 = 1,50,000 and Y Capital = 2,40,000 * 3/8 = 90,000
39 Ans.: Answer: D
Total Loss on Revaluation is 68,000 whereas A share in Loss =20,000 – 2/5
Total Loss= 20,000 * 5/2 = 50,000
Revaluation Effect – Loss on Machinery 60,000 + Provision 8,000 =68,000 Gain must be Rs. 18000 in
stock to bring loss upto 50,000
Stock will have revised value 80,000 +18,000 = 98,000
40 Ans .A 3.Dr Investment fluctuation reserve 18000

Cr. Investment a/c9000,A’s capital a/c 4000, B’s capital 3000, C’s capital 2000
Accounting for Partnership firms – Retirement and death of a partner-
 Effect of retirement / death of a partner on change in profit sharing ratio, treatment of goodwill (AS
26), treatment for revaluation of assets and reassessment of liabilities, adjustment of accumulated
profits and reserves, adjustment of capital a/c and preparation of capital, current a/c balance sheet.
Preparation of loan account of the retiring partner.
 Calculation of deceased partner’s share of profit till the date of death. Preparation of deceased partner's
capital account and his executor's account.
39 | P a g e
T. L. O.:-
 Explain the effect of retirement / death of a partner on change in profit sharing ratio.
 Develop the understanding of accounting treatment of goodwill, revaluation of assets and re-
assessment of liabilities and adjustment of accumulated profits and reserves on retirement / death of
a partner and capital adjustment.
 Develop the skill of calculation of deceased partner's share till the time of his death and prepare
deceased partner's executor's account.
 Discuss the preparation of the capital accounts of the remaining partners and the balance sheet of the
firm after retirement / death of a partner.
RETIREMENT AND DEATH OF A PARTNER

A partner has right to retire from the firm after giving due notice in advance. After retirement anew
partnership comes into existence between the remaining partners. Partner can retire from the firm in the
following circumstances.
(a) With the consent of all the partners
(b) As per the terms of the partnership agreement
(c) By giving a notice in writing to all other partners, if the partnership is at will.
The retirement of a partner is called reconstitution of the partnership firm because the old agreement is
terminated but the firm continues and the new agreement comes into force.
Following accounting treatment required while retiring a partner.
(a) Calculation of a new ratio and gaining/sacrificing ratio (in some cases) ratio.
(b) Treatment of goodwill.
(c) Adjustment of revaluation of assets and reassessment of liabilities.
(d) Adjustment of undistributed reserves and profits and losses A/c.
(e) Capital adjustments and preparation of new balance sheet.
CALCULATION OF NEW RATIO AND GAINING RATIO:
*New ratio = Old share + Acquired share
*Gaining ratio=New ratio – Old ratio
Gaining ratio is calculated to ascertain the amount of goodwill payable to retiring or deceased partner by
the remaining partners
TREATMENT OF GOODWILL:-
The retiring partner share of goodwill is credited to capital account of respective partner and debited to
remaining partners' capital in gaining ratio.
JOURNAL ENTRY:-
Gaining Partner Capital or Current A/c Dr (in Gaining Ratio)
To Retiring or Deceased Partner’s Capital A/c (With the Share of Goodwill)
The existing goodwill (if any) will be written off by Debiting All Partners' Capital account in their Old
Ratio and Crediting the Goodwill A/c.
Old Partners' Capital A/c or Current A/c Dr (in Old Ratio)
To Goodwill A/c (Goodwill existing goodwill)
Special Note: - Goodwill cannot be shown in books unless and until it is purchased by paying some
consideration.(AS-26).
Journal entry for the transfer of profit and loss on revaluation at the time of retirement/death of a
partner.
For Profits:
Revaluation A/c Dr.
To All Partner's Capital A/c (in Old Ratio)
(Being Profit on Revaluation transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
For losses:
All the Partners' Capital A/c Dr. (in Old Ratio)
To Revaluation A/c
(Being loss on Revaluation transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
40 | P a g e
Treatment of undistributed profit at the time of retirement/death of the partner.
The undistributed profits are transferred to all partners' capital account in the old profit sharing ratio.
General Reserve A/c Dr.
Profit& Loss A/c Dr.
To All Partners' Capital A/c (in Old Ratio)
(Being undistributed profits transferred to All Partners' Capital A/c in Old Profit Sharing Ratio )
Treatment of undistributed losses at the time of retirement/death of a partner
The undistributed losses are transferred to all partners' capital accounts in their old profit sharing ratio.
All partners' Capital A/c Dr. (in Old Ratio)
To Profit & Loss A/c
To Advertisement Suspense A/c
To Deferred Revenue A/c
(Being undistributed losses are transferred to All Partners' Capital A/c in Old Profit Sharing Ratio)
Multiple Choice Questions (1 Marks):

Q.1 P, Q and R are partners sharing profits in the ratio of 8:5:3. P retires. Q takes 3/16th share 1
from P and R takes 5/16th share from P. What will be the new profit sharing ratio?
a) 1:1 b) 10:6 c) 9:7 d) 5:3
Q.2. X, Y and Z are partners sharing profits and losses in the ratio of 4:3:2. Y retires and 1
surrenders 1/9th of his share in favour of X and the remaining in favour of Z. The new
profit-sharing ratio will be:
a) 1:8 b) 13:14 c) 8:1 d) 14:13
Q.3. Gaining ratio is used to distribute ------------------ in case of retirement of a partner. 1
a) Goodwill
b) Revaluation Profit or Loss
c) Profit and Loss Account (Credit Balance)
d) Both b and c
Q.4. X, Y and Z are partners in a firm. Y retires and his claim including his capital and his 1
share of goodwill is R. 1,20,000. He is paid partly in cash and partly in kind. A vehicle
at Rs. 60,000 unrecorded in the books of the firm and the balance in cash is given to him
to settle his account. The amount of cash to be paid to Y will be:
a) Rs. 80,000 b) Rs. 60,000 c) Rs. 40,000 d) Rs. 30,000
Q.5. At the time of retirement of a partner, share of retiring partner’s goodwill will be credited 1
to ---------------- Capital Account(s).
a) Remaining Partner(s)
b) Retiring Partner’s
c) Both Sacrificing and Gaining Partner(s)
d) Gaining Partner(s)
Q.6. A and B were partners. They shared profits as A- ½; B- 1/3 and carried to reserve 1/6. 1
B died. The balance of reserve on the date of death was Rs. 30,000. B’s share of reserve
will be:
a) Rs. 10,000
b) Rs. 8,000
c) Rs. 12,000
d) Rs. 9,000
Q.7. If goodwill is already appearing in the books of accounts at the time of retirement, then 1
it should be written off in -------------.
a) New Ratio
b) Gaining Ratio
c) Sacrificing Ratio
d) Old Ratio
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Q.8. As per Section 37 of the Indian Partnership Act, 1932, interest @ ----------- is payable 1
to the retiring partner if full or part of his dues remain unpaid.
a) 9% p.m.
b) 12% p.m.
c) 6% p.m.
d) None of the above
Q.9. “Retiring partner is not liable for firm’s acts after his retirement”. Is the statement True 1
or False?
Q.10. A, B and C were partners. Their partnership deed provided that they were to share profits 1
as; A 26 per cent; B 34 per cent; C 40 per cent ; and that if a partner retires, his capital
should remain in the business for a stated period at a fixed rate of interest, but that the
retiring partner’s share should be credited with an amount for Goodwill, based upon
one and a half year’s average profits, for the five years prior to his death, but be subject
to deduction of 5 per cent from the book debts. C retired, and the profits of the firm for
five years were agreed at Rs. 20,000; Rs. 30,000; Rs. 15,000 (loss); Rs. 5,000 (loss);
and Rs. 45,000 respectively. Book Debts stood at Rs. 90,000.The share of Goodwill to
be credited to C’s Account will be:
a) Rs. 2,700
b) Rs. 6,300
c) Rs. 7,200
d) Rs. 3,600
Q.11. When the balance sheet is prepared after retirement (subsequent to preparation of 1
Revaluation Account), ------------- values are shown in it.
a) Historical
b) Realisable
c) Market
d) Revalued
Q.12. On retirement of a partner, debtors of Rs. 34,000 were shown in the Balance sheet. Out 1
of this Rs. 4,000 became bad. One debtor became insolvent. 70% were recovered from
him out of Rs. 10,000. Full amount is expected from the balance debtors. On account of
this item loss in revaluation account will be:
a) Rs. 10,200
b) Rs. 3,000
c) Rs. 7,000
d) Rs. 4,000
Q.13. If at the time of retirement, there is some unrecorded asset, it will be ------------- to ---- 1
--------- Account.
a) Debited, Revaluation
b) Credited, Revaluation
c) Debited, Goodwill
d) Credited, Partners’ Capital
Q.14. Anil, Bimal and Chetan are partners sharing their profits and losses in the ratio of 1
4:3:2. On 1.7.2013, Chetan retired and on that date the capitals of Anil, Bimal and
Chetan after all necessary adjustments stood at Rs. 75,000, Rs. 65,000 and Rs. 45,000
respectively. Anil and Bimal continued to carry the business for 6 months without
settling Chetan’s account. During the period of six months ending 31st
December,2013, a profit of Rs. 50,000 is earned by the firm. Keeping Chetan’s interest
in mind, the amount payable to Chetan will be:
a) Rs. 1,350
b) Rs. 13,362
c) Rs. 12,162
d) Rs. 1,362
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Q.15. X,Y and Z were partners in a firm sharing profits in ratio of 3:4:1 X retired and new 1
profit sharing ratio between Y and Z will be 5 :4 .On X’s retirement the goodwill of the
firm was valued at ₹̈́ 54,000 .journal entry will be:
A) Y’s capital Dr. 24,000
Z’s capital Dr. 30,000
To X’s capital 54,000
B) Y’s capital Dr. 15,000
Z’s capital Dr. 12,,000
To X’s capital 27000
C) Y’s capital Dr. 12,000
Z’s capital Dr. 15,000
To X’s capital 27,000
D) X’s capitals a/c Dr. 27,000
To Y’s capitals 12,000
To Z’s capitals 15,000
Q.16. Retiring partner is compensated for parting with the firm’s future profits in favour of 1
remaining partners. The remaining partners contribute to such compensation amount in:
a) Gaining Ratio
b) Sacrificing Ratio
c) Capital Ratio
d) Profit Sharing Ratio
Q.17. As per section ------------ of the Indian Partnership Act, a retiring partner becomes 1
entitled to profits after retirement if his dues remain unpaid
a) Section 73
b) Section 26
c) Section 4
d) Section 37
Q.18. At the time of retirement, amount remaining in Investment Fluctuation Reserve after 1
meeting the fall in value of Investment is:
a) Credited in Sacrificing Ratio
b) Credited in New Profit Sharing Ratio
c) Credited in Old Profit Sharing Ratio
d) Credited in Gaining Ratio
Q.19. P, Q and R were partners in a firm in the ratio of 5:4:3. They admit S for 1/7 share. It is 1
agreed that Q would retain his original share. ----------- will be the sacrificing ratio
between P and R.
a) 5:4
b) 1:1
c) 5:3
d) 4:3
Q.20. Gaining Ratio is calculated by deducting 1
a) Sacrificed profit share from new profit share of the partner.
b) Sacrificed profit share from old profit share of the partner.
c) New profit share from old profit share of the partner.
d) Old profit share from new profit share of the partner.
Q.21. Match the following with respect to the treatment of goodwill: 1
i. Change in Profit A Gaining Partners Capital A/c Dr.
Sharing Ratio To Retiring Partners Capital A/c
ii. Admission of a B Gaining Partners Capital A/c Dr.
Partner To Sacrificing Partners Capital A/c
iii. Retirement of a C Premium for Goodwill A/c Dr.
Partner To Sacrificing Partners Capital A/c
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a) i- C, ii-A, iii-B
b) i- A, ii-B, iii-C
c) i- B, ii-A, iii-C
d) i- B, ii-C, iii-A
Q.22. B and C were partners sharing profits in the ratio 2 : 2 : 1, having capital accounts as 1
Rs. 50,000, Rs. 50,000 and Rs. 25,000, respectively. B retired. On that date, balance in
General Reserve was Rs. 15,000. If firm’s Goodwill is valued at Rs. 30,000 and Gain
(profit) on Revaluation is Rs. 7,050, amount payable to B will be:
a) Rs. 50,820
b) Rs. 70,820
c) Rs. 8,820
d) Rs. 9,000
Q.23. A , B and C were partners, B retired from the firm. On the date of his retirement Stock, 1
Sundry Debtors and
Provisions for Doubtful Debts were Rs.50,000, Rs.45,000 and Rs.4,500 respectively.
The partners decided to reduce the value of stock to 90%. The journal entry passed will
be
………….. Dr. Rs. 5,000
To ……………. Rs.5,000
Q.24. State the true statement out of the following: 1
a) Goodwill at the time of retirement of a partner is credited to continuing Partners’
Capital Accounts in their sacrificing ratio.
b) Goodwill at the time of retirement of a partner is credited to continuing Partners’
Capital Accounts in their gaining ratio.
c) Goodwill at the time of retirement of a partner is debited to continuing Partners’
Capital Accounts in their sacrificing ratio.
d) Goodwill at the time of retirement of a partner to the extent of retiring partner’s share
is debited to continuing Partners’ Capital Accounts in their gaining ratio.
Q.25. Match the following with respect to the treatment of goodwill: 1
i. Change in Profit Sharing A. Gaining Partners Capital A/c Dr.
Ratio To Retiring Partners Capital A/c
ii. Admission of a Partner B. Gaining Partners Capital A/c Dr.
To Sacrificing Partners Capital A/c
iii. Retirement of a Partner C. Premium for Goodwill A/c Dr.
To Sacrificing Partners Capital A/c
a) i- C, ii-A, iii-B b) i- A, ii-B, iii-C
c) i- B, ii-A, iii-C d) i- B, ii-C, iii-A
Q.26. Karan, Aman and Girish were Partners with capitals of Rs. 3,00,000; Rs.2,50,000 and 1
Rs.2,00,000 respectively as on 31st March, 2018. Aman died, partners decided to pay
the entire amount to Aman’s Executor but they only had Rs.50,000 cash and rest of the
amount was to be brought in by Karan and Girish in such a way that their future capital
will be equal. Calculate the amount to be brought in by Karan and Girish.
a) Rs.50,000 by Karan and Rs.1,50,000 by Girish
b) Rs.50,000 by Girish and Rs.1,50,000 by Karan
c) Rs.25,000 by Karan and Rs.1,25,000 by Girish
d) Rs.25,000 by Girish and Rs.1,25,000 by Karan
Q.27. Giriija, Yatin and Zubin were partners sharing profits in the ratio 5 : 3 : 2. Zubin died 3
on 1st August, 2022. Amount due to Zubin’s executor after all adjustments was ₹
90,300. The executor was paid ₹ 10,300 in cash immediately and the balance in two
equal annual instalments with interest @ 6% p.a. starting from 31st March, 2024.
Accounts are closed on 31st March each year. Prepare Zubin’s Executors Account till
he is finally paid.
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Q.28. Mohan, Girdhari and Shyam were partners in a firm sharing profits and losses in the 3
ratio of 4:3:2. On 31st March, 2022, Girdhari retired. After making all adjustments on
account of reserves, revaluation of assets and reassessment of liabilities, the balance in
Girdhari’s Capital Account stood at Rs.5,00,000. Mohan and Shyam agreed to pay
Girdhari Rs.5,90,000 in full settlement of his claim.
Calculate the value of goodwill of the firm and pass the necessary journal entry for the
treatment of goodwill on Girdhari’s retirement without raising goodwill account.
Q.29. P, Q and R were partners in a firm sharing profits in 2: 2: 1 ratio. The Partnership Deed 4
provided that on the death of a partner his executors will be entitled to the following:
a. Interest on Capital @ 12% p.a.
b. Interest on Drawings @ 18% pa
c. Salary of Rs.12,000 p.a.
d. Share in the profit of the firm (up to the date of death) on the basis of previous year’s
profit.
P died on 31st May, 2016. His capital was Rs.80,000. He had withdrawn Rs.15,000 and
interest on his drawings was calculated as Rs.1,200. Profit of the firm for the previous
year ended 31st March, 2016 was Rs.30,000.
Prepare P’s Capital Account to be rendered to his executors.
Answer Key:
1. a 2. b 3. a 4. a 5. b 6. c 7. d 8. d 9. False 10. c 11. d 12. c 13. b
14. c 15.c 16. a 17.d 18.c 19.c 20.d
21. d Reason: - Gaining ratio means increase in share. Thus, new profit share will be higher than the old
profit share. Therefore, Gaining Ratio = New Ratio – Old Ratio.
22. b
Reason: Amount payable to B will be Rs. 70,820 calculated as follows:
Balance in Capital Account Rs. 50,000
Share of General Reserve Rs. 6,000
Share of Revaluation Gain (Profit) Rs. 2,820
Share of Goodwill Rs. 12,000
Total Rs. 70,820
23. Fill in the Blank Revaluation A/c, Stock A/c
24. d
Reason: Goodwill is the amount paid by the gaining partner or partners to the sacrificing partner or
partners. The retiring partner sacrifices his share in favour of all or some of the partners who compensate
him by paying goodwill. The share of Goodwill of the retiring partner share is debited to Gaining Partners
in their gaining ratio and crediting Retiring Partner’s Capital Account.
25. d i- B, ii-C, iii-A
26. a
29. Final payment to Executor = 69,400.
Three / Four Marks Questions
A & B were partners sharing profits in 2:1. They agreed to admit C as a new partner for ¼
shares. Find out the new profit-sharing ratio between A, B and C.
Let’s Firm’s profits be 1, C acquired ¼ from this; than remains profits (1 – ¼ = ¾) will be shared by
A & B in their old proportion.
A’s new share will be = 2/3 of ¾ = 6/12 and B’s new share will be = 1/3 of ¾ = 3/12
A’s share = 6/12; B’s share = 3/12 and C’s share = ¼ x 3/3 = 3/12
Thus, New Ratio between A, B and C will be 6:3:3 OR 2:1:1.
 New Profit-sharing Ratio – When new partner gets/acquire his share from the partners’:
A & B were partners sharing profits in 3:2. They agreed to admit C as a new partner for ¼
shares, which he takes from A & B in 2:1 ratio (2/12th from A & 1/12th from B OR A surrendered
45 | P a g e
2/12th shares and B surrendered 1/12th share). Find out the new profit-sharing ratio between A,
B and C.
C will takes 2/3rd of ¼= 2/12th (2/3 X ¼) from A & 1/3rd of ¼ = 1/12th from B.
A’s new share = Old share – Sacrificing share = 3/5 – 2/12 = 26/60
B’s new share = 2/5 – 1/12 = 19/60 and C’s share = ¼ X 15/15 = 15/60.
Hence, new profit-sharing ratio between A, B & C will be 26:19:15.
When goodwill A/c raise in the books of accounts of the firm – EXCEPTIONAL CASE
A Firm purchased a business of Mr. Vijay Kumar for the purchase price of 120000 and takes
over the assets and liabilities having book value of 250000 and 140000 respectively. Pass
necessary journal entry to record the above transaction.
Journal
Date Particulars L F Dr Amount Cr Amount
Assets A/c Dr. 250000 ----------
1 Goodwill A/c Dr. 10000 - ----------
To Liabilities A/c -------- 140000
To Bank A/c --------- 120000
(Being business purchased)
In the next year goodwill A/c shall be written-off.
# Hidden OR Inferred Goodwill: Some times the value of goodwill is not given clearly in the question.
This hidden goodwill is calculated with reference to the total existing capital (including the new partner)
of the firm; needed capital of the new firm (to be ascertained on the basis of new partner’s capital & his
share in profits).
Goodwill = Needed capital of the firm – Existing capital (including new partner’s capital) of the firm.
A and B are partners with capital of 13000 and 9000 respectively. They admit C as partner
with 1/5th share in the profit of the firm. C brings 8000 as his capital. Give journal entries to
record goodwill.
 Goodwill = {(8000 X 5/1) – (13000 + 9000 + 8000)}= 40000 – 30000 = 10000.
Journal
Cash A/c Dr. 8000 ----------
1 To C’s Capital A/c --------- 8000
(Being share of capital brought in cash)
C’s Current / Capital A/c Dr. 2000 ----------
2 To A’s Capital A/c --------- 1000
To B’s Capital A/c --------- 1000
(Being share of goodwill adjusted in sacrificing ratio)
Sacrificing Ratio between A & B is 1:1.
(1): Following is the abstract information of a partnership firm where A, B and C are partners and
sharing profits/losses in the ratio of 3:2:1, as on 31st March, 2020:
Liabilities Amt. in ₹ Assets Amt. in ₹
General Reserve 30,000 Profit & Loss A/c 6,000
Workmen’s Compensation Fund 15,000 Profit & Loss Suspense A/c 3,000
Investment Fluctuation Fund 9,000 Goodwill 12,000
Investments 1,00,000
On the above date –
(a) A, B and C agree to share future profits & losses in the ratio of 5:3:2 ratio
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(b) D admitted as a new partner for 1/4th share in firm’s profit/loss
(c) C retires from the firm OR B dies
Solution: Journal entries
Date Particulars L.F. Dr. Cr.
General Reserve A/c Dr. 30,000
Workmen’s Compensation Fund A/c Dr. 15,000
1 Investment Fluctuation Fund A/c Dr. 9,000
To A/s Capital A/c 27,000
To B’s Capital A/c 18,000
To C’s Capital A/c 9,000
(Being accumulated profits transferred in 3:2:1 ratio)
A’s Capital A/c Dr. 10,500
2 B’s Capital A/c Dr. 7,000
C’s Capital A/c Dr. 3,500
To Profit & Loss A/c (Dr. bal.) 6,000
To Profit & Loss Suspense A/c 3,000
To Goodwill A/c 12,000
(Being accumulated loss transferred & g/w W/Off)
Example (2): Following is the abstract information of a partnership firm where A, B and C are partners
and sharing profits/losses in the ratio of 3:2:1, as on 31st March, 2020:
 There was a claim for workmen’s compensation for ₹ 9,000 and market value of Investments at
₹ 94,000
Workmen’s Compensation Fund A/c (15,000 – 9,000) Dr. 6,000
1 Investment Fluctuation Fund A/c (9,000 – 6,000) Dr. 3,000
To Profit & Loss A/c (Dr. bal.) 6,000
Balance Sheet (After Reconstitution)
General Reserve NIL Profit & Loss A/c NIL
Workmen’s Compensation Fund 9,000 Profit & Loss Suspense A/c NIL
(up to amount of claim) Goodwill NIL
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Investment Fluctuation Fund 6,000 Investments 1,00,000
(up to amount of loss)
 There was a claim for workmen’s compensation for ₹ 18,000 and market value of Investments at
₹ 88,000. On the above date –
1 To B’s Capital A/c 10,000
B’s Capital A/c Dr. 7,000
2 To Profit & Loss A/c (Dr. bal.) 6,000
Revaluation A/c Dr. 6,000
3 To Provision for Workmen Comp. A/c 3,000
To Provision for Investment Fluct. A/c 3,000
(Being claim & loss adjusted by charging)
A/s Capital A/c Dr. 3,000
C’s Capital A/c Dr. 500
To Revaluation A/c 6,000
(Being loss on revaluation transferred in 3:2:1 ratio)
Revaluation Account
Particulars Amt. in ₹ Particulars Amt. in ₹
Provision for Workmen Comp. A/c 3,000 Capital A/c 6,000
Provision for Investment Fluct. A/c 3,000 A 3,000
B 1,500
C 500
General Reserve NIL Profit & Loss A/c NIL
Workmen’s Compensation Fund 15,000 Profit & Loss Suspense A/c NIL
Investment Fluctuation Fund 9,000 Goodwill NIL
Provision for Workmen Comp. 3,000 Investments * 1,00,000
Provision for Investment Fluct. 3,000
* Note: If provision for Investment Fluct. not to be shown on the liabilities side then it will be shown
by subtracting from Investment, on the Asset side.
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Revaluation of assets and reassessment of liabilities (to find gain or loss) and shared between
partners in their profit-sharing ratio. (Old Ratio)
Creditors 75,000 Plant & Machinery 60,000
Building 1,00,000
Furniture 30,000
Stock 40,000
Debtors 50,000
 A creditor of ₹ 35,000 accepted furniture in its full settlement.
 Stock was overvalued at by ₹ 4,000.
 There is a bad debt of ₹ 5,000 and provide 10% for doubtful debts on debtors.
 Building appreciated to ₹ 1,40,000 and Plant & Machinery valued at ₹ 50,000.
 There is an outstanding bill of ₹ 3,500 which to be settled.
Creditor A/c Dr. 35,000
To Furniture A/c 30,000
1 To Revaluation A/c 5,000
(Being creditor settled by taken of furniture and gain)
To Stock A/c 4,000
To Bad Debt A/c 5,000
To Provision for doubtful debts A/c 4,500
2 To Plant & Machinery A/c 10,000
To Provision for Outstanding Bill A/c 3,500
(Being assets & liabilities revalued)
Building A/c Dr. 40,000
(Being asset revalued)
Revaluation A/c {(40,000 + 5,000) – 27,000} Dr. 18,000
4 To A/s Capital A/c 9,000
(Being gain on revaluation transferred in 3:2:1 ratio)
Revaluation Account
Stock 4,000 Creditor 5,000
Bad Debts 5,000 Building 40,000
Provision for doubtful debts 4,500
Plant & Machinery 10,000
Provision for O/s Bill 3,500
Capital A/c 18,000
A 9,000
B 6,000
C 3,000
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45,000 45,000
Provision for doubtful debts 4,500 Plant & Machinery 60,000 50,000
Provision for Outstanding Bill 3,500 Less: Depreciate (10,000)
Building 1,00,000 1,40,000
Add: Appreciate 40,000
Furniture 30,000 NIL
Less: Taken by creditor 30,000
Stock 40,000 36,000
Less: was overvalued 4,000
Debtors 50,000 45,000
Less: Bad Debts 5,000
Debtors 50,000 46,000
Less: Provision for doubtful debts4,000
 There is need to maintain provision for doubtful debts at 10% of debtors.
To Provision for Doubtful Debts A/c 1,000
Debtors 50,000 46,000
Less: Provision for doubtful debts4,000
Stock 30,000
Furniture 15,000
 There is need to maintain provision for doubtful debts at ₹ 3,000.
 1/3rd of Stock was taken over by A at 20% less for Cash and remaining valued at 10% less. 2/3rd
of Furniture was taken by C at ₹ 12,000 and remaining valued at book value.
 ₹ 1,000 is received from a debtor, which was written off in earlier as bad debts.

Cash A/c (10,000 – 2,000) Dr. 8,000
Revaluation A/c (2,000 + 2,000) Dr. 4,000
1 To Stock A/c (10,000 + 2,000) 12,000
(Being 1/3rd of stock taken by A for cash at 20% less and remaining
valued at 10% less)
2 C’s Capital A/c Dr. 12,000
rd
To Furniture A/c (2/3 of 15,000) 10,000
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(Being furniture taken by C at more than the book value)
3 Provision for doubtful debts A/c Dr. 1,000
Cash A/c (bad debt recovery) Dr. 1,000
Revaluation Account
Stock 4,000 C’s Capital A/c 2,000
Cash A/c 2,000
(bad debt recovery)
4,000 4,000
Debtors 50,000 47,000
Less: Prov. for Doubtful Debts (3,000)
Stock 30,000 16,000
Less: 1/3rd Taken by A for cash (10,000)
Less: Depreciated (10% of 20,000) (4,000)
Furniture 15,000 5,000
Less: 2/3rd Taken by C (10,000)
Debtors 50,000 46,000
Less: Provision for doubtful debts (3,000)
 All debtors are good
Provision for doubtful debts A/c Dr. 3,000
2 To A/s Capital A/c 1,500
To C’s Capital A/c 500
(Being gain on revaluation transferred in 3:2:1 ratio)
Revaluation Account
Capital A/c 3,000 Provision for Doubtful Debts 3,000
A 1,500
B 1,000
C 500
3,000 3,000
Liabilities Amt. in ₹ Assets Amt. in
₹
Debtors 50,000 50,000
51 | P a g e
Accounting treatment of valued goodwill
(a) Change in profit-sharing ratio
(b) Admission of a new partner
(c) Retirement / Death of a partner
Accounting treatment of valued goodwill due to change in profit-sharing ratio
Example: Ashok, Bimal and Champak are partners in a firm sharing profit/loss in the ratio of 3:2:1. On
31st March, 2020, they have agreed to share future profit/loss in the ratio of 5:3:2. Goodwill valued at ₹
1,20,000. Pass an adjustment entry for the above.
Solution: Journal entry
Champak’s Capital A/c Dr. 4,000
1 To Bimal’s Capital A/c 4,000
(Being valued goodwill adjusted due to change in ratio)
Gaining Share = New Share – Old Share Sacrificing Share = Old Share – New Share
Ashok’s Gaining share = 5/10 – 3/6 = (30 – 30) / 60 = 0/60 (Not a gainer)
Ashok’s Sacrificing share = 3/6 – 5/10 = (30 – 30) / 60 = 0/60 (Not sacrifice)
Bimal’s Gaining share= 3/10 – 2/6 = (18 – 20) / 60 = - 2/60 (Sacrifice)
OR
Bimal’s Sacrificing share = 2/6 – 3/10 = (20 – 18) / 60 = 2/60 (Sacrifice)
Champak’s Gaining share = 2/10 – 1/6 = (12 – 10) / 60 = + 2/60 (Gainer)
Therefore, adjustment entry will be passed between Bimal and Champak’s capital account for 2/60th of
1,20,000 i.e. for ₹ 4,000.
Accounting treatment of valued goodwill due to Admission of a new partner

There may be two circumstances for the accounting treatment of goodwill:
(a) When new partner brought in cash for his/her share of goodwill
(b) When new partner unable to brought in cash for his/her share of goodwill
When new partner brought in cash for his/her share of goodwill
Example: (1) X and Y are partners in a firm sharing profit/loss in the ratio of 2:1. They agree to admit
Z as a new partner for 1/4th share. Z brought in ₹ 3,00,000 for share of capital and necessary amount of
cash for share of goodwill. Goodwill valued at ₹ 1,20,000.
Pass necessary Journal entries for the above in books of the firm.
Cash A/c Dr. 3,30,000
1 To Z’s Capital A/c 3,00,000
To Premium for goodwill A/c 30,000
(Being cash brings for share of capital & premium for g/w)
Premium for goodwill A/c Dr. 30,000
2 To X’s Capital A/c 20,000
To Y’s Capital A/c 10,000
(Being premium for goodwill transferred in sacrificing ratio)
X and Y withdraw 40% of premium for goodwill from the firm.
Pass necessary Journal entries for the above in books of the firm
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Cash A/c Dr. 3,30,000
X’s Capital A/c Dr. 8,000
3 Y’s Capital A/c Dr. 4,000
To Cash A/c 12,000
(Being 40% of premium for goodwill withdrawn by X and Y)
The new profit-sharing ratio between X, Y and Z will be 3:3:2.
Pass necessary Journal entries for the above in the books of the firm.
Cash A/c Dr. 3,30,000
2 Y’s Capital A/c Dr. 5,000
To X’s Capital A/c 35,000
Capital Account
Particulars X Y Z Particulars X Y Z
X’s Capital A/c 5,000 Cash A/c 3,00,000
Y’s Capital A/c 5,000
Premium for goodwill 30,000
Working: When, there is share has been changed between old partner due to change in profit-sharing
ratio then there is need to find their sacrificing or gaining ratio of old partners.
In the Old profit-sharing ratio – X’s share was 2/3rd (i.e. 66.67%) whereas, in the new profit-sharing
ratio – X’s share is 3/8th (i.e. 37.5%). Therefore, X is sacrifice due to change in ratio.
Similarly, in the old profit-sharing ratio – Y’s share was 1/3rd (i.e. 33.33%) whereas, in the new profit-
sharing ratio – Y’s share is 3/8th (i.e. 37.5%). Therefore, Y is gainer due to change in ratio.
X’s Sacrificing share = 2/3 – 3/8 = (16 – 9) / 24 = 7/24th share
Y’s Gaining share = 3/8 – 1/3 = (9 – 8) / 24 = 1/24th share
th
Hence, X’s capital account will be credited with 7/24 of valued goodwill i.e. for ₹ 35,000 and
Y’s capital account will be debited with 1/24th of valued goodwill i.e. for ₹ 5,000.
Treatment of Hidden Goodwill
cash for share of goodwill. On the date of admission of Z, the balance of capital of X and Y: ₹ 3,20,000
and ₹ 2,80,000 respectively.
Pass necessary Journal entries for the above in books of the firm.
53 | P a g e
Cash A/c Dr. 3,75,000
Working: Hidden Goodwill = Total Capital of New Firm – Total Capital of Existing Firm
Total Capital of New Firm to be calculated on the basis of new partner’s share of capital and share.
Z brought in capital ₹ 3,00,000 for 1/4th share therefore, total capital of a new firm – 4 times of 3,00,000
i.e. = 3,00,000 x 4 = ₹ 12,00,000.
Total Capital of Existing Firm = Total capital of X and Y + Share of capital of Z
= (3,20,000 + 2,80,000) + 3,00,000 = ₹ 9,00,000.
Goodwill of the firm (Hidden Goodwill) = 12,00,000 – 9,00,000 = ₹ 3,00,000.
Hence, Z will be brought in cash for Premium for goodwill = 1/4th of 3,00,000 = ₹ 75,000.
When new partner unable to brought in cash for his/her share of goodwill
Z as a new partner for 1/4th share. Z brought in ₹ 3,00,000 for share of capital.
On admission of Z, goodwill valued at ₹ 1,20,000.
Pass necessary Journal entries for the above in the books of the firm.
Cash A/c Dr. 3,00,000
(Being share of capital brought in by Z)
Z’s Current A/c Dr. 30,000
(Being share for goodwill of Z adjusted in sacrificing ratio)
Capital Account
Cash A/c 3,00,000
Z’s Current A/c 20,000 10,000
Current Account
X’s Capital A/c 20,000
Y’s Capital A/c 10,000
Accounting Treatment of Goodwill on Retirement / Death of a partner
Example: (1) Aman, Bimal and Chetan are partners in a firm sharing profit/loss in the ratio of 3:2:1. On
31st March, 2020, Chetan dies / leave the partnership due to old age. Goodwill of the firm valued at ₹
1,20,000. Pass necessary Journal entry for the above.
2020 Aman’s Capital A/c Dr. 12,000
March Bimal’s Capital A/c Dr. 8,000
31 To Chetan’s Capital A/c 20,000
(Being share of Z adjusted on his death/retirement in GR)
Capital Account
Particulars Aman Bimal Chetan Particulars Aman Bimal Chetan
Chetan’s Capital A/c 12,000 8,000 Aman’s Capital A/c 12,000
Bimal’s Capital A/c 8,000
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Chetan’s share of goodwill (1/6th of 1,20,000) 20,000 be debited to Aman & Bimal in gaining ratio i.e.
3:2.
Calculation of share of profits of Deceased Partner and Accounting treatment
(from the last balance sheet date to date of death)
Profits of deceased partner to be calculated in the following circumstances:
(a) On the basis of previous year or average of last few years profits
(b) On the basis of the proportion between sales turnover in death year with the sales turnover and
profits of the previous year.
Example: (1) Ajay, Bijay and Chetna were partners in a firm for sharing profits/losses in 3:2:1 ratio.
Bijay died on January 1st, 2021. His share of profits for the intervening periods to be calculated on the
basis of average profits of last three years. Profits of the previous three years are 2017-18: ₹ 90,000;
2018-19: ₹ 1,00,000 and 2019-20: ₹ 1,10,000.
Calculate the share of profits of Bijay on his death and make necessary Journal entry for it.
Solution: Journal Entry
2021 Profit and Loss Suspense A/c Dr. 37,500
Jan. To Bijay’s Capital A/c 37,500
01 (Being share of profit allowed on the death of Bijay)
Working: Share of profits of Bijay = Average Profits x Intervening periods x shares of Bijay
Average Profits = (90,000 + 1,00,000 + 1,10,000) / 2 = 3,00,000 / 2 = 1,50,000.
Intervening periods = 9 months (i.e. April 2019 to December 2019); Bijay’s share = 2/6.
Share of profits of Bijay = 1,50,000 x 9/12 x 2/6
= 37,500.
Example: (2) Dinakar, Navita and Vani were partners sharing profits and losses in the ratio of 3:2:1.
Navita died on 30th June, 2017. Her share of profit for the intervening period was based on the sales
during that period, which were ₹ 6,00,000. The rate of profit during the past years had been 10% on
sales. The firm closed its books on 31st March every year.
Calculate Navita’s share of profit. (CBSE 2019)
Solution: Share of profits of Navita = Average Profits x Intervening periods x shares of Navita
Estimated profits of the firm for the year 2017-18 = 10% of 6,00,000 = ₹ 60,000.
Intervening periods = 3 months (from 1st April to 30th June 2017); Navita’s share = 2/6.
Navita’s share of profits = 60,000 x 3/12 x 2/6; = ₹ 5,000.
Example: X, Y and Z were partners in a firm sharing profits and losses in the ratio of 2:2:1. The firm
closes its books on 31st March every year. Y died on 24th June, 2018. On Y’s death goodwill of the firm
was valued at ₹ 1,20,000.
Y’s share in the profits of the firm till the date of death from the last Balance Sheet was to be calculated
on the basis of sales. Sales during the year 2017-18 was ₹ 15,00,000 and profit earned during the year
was ₹ 3,00,000. Sales from 1st April, 2018 to 24th June, 2018 were ₹ 2,00,000. The total amount
payable to Y’s executors on his death was ₹ 1,75,000. This amount was paid to them on 15-7-2018.
CBSE 2020
Pass the necessary journal entries for the above transactions in the books of the firm.
2018 Profit and Loss Suspense A/c Dr. 3,726
June To Bijay’s Capital A/c 3,726
24 (Being share of profit allowed on the death of Y)
June X’s Capital A/c Dr. 24,000
24 Z’s Capital A/c Dr. 24,000
(Being share of goodwill of Y adjusted in gaining ratio)
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Y’s Capital A/c Dr. 1,75,000
June To Y’s Executors A/c 1,75,000
24 (Being payable amount transferred to his executor account)
Y’s Executors A/c Dr. 1,75,000
July To Bank A/c 1,75,000
15 (Being due amount of partner Y was paid to his Executor)
Working: Share of profits of Y = Estimated Profits x Intervening periods x shares of Y
Estimated profits =
= Sales in 2017-18 : Profits in 2017-18 :: Sales from 01st April to 24th June : Profits
= 15,00,000 / 3,00,000 :: 2,00,000 / Estimated Profits
= 2,00,000 / 5 = ₹ 40,000
Intervening periods = (30 + 31 + 24) i.e. 85 days and shares of Y = 2/5th
Share of profits of Y = 40,000 x 85/365 x 2/5 = ₹ 3,726.
Calculation of New Profit-Sharing Ratio, Sacrificing Ratio and Gaining Ratio
Circumstances under which need to find the ‘New Profit-sharing Ratio OR Gaining/Sacrificing Ratio:
(Only in the following situations’, need to calculate the ratio/share of partners)
A. When there is asked to find new ratio/ Gaining or Sacrificing ratio.
B. If there is need to adjust their capital/current account – with valued goodwill (on change in ratio,
admission of a partner and death/retirement of a partner) OR Premium of goodwill (in case of
admission) then we have to calculate the Gaining/Sacrificing Ratio.
C. All partners agreed that the book value of assets and liabilities not to be affected due to gain or loss
on its revaluation, due to change in profit-sharing ratio.
Example: (1) A, B and C are partners in a firm sharing profit and losses in the ratio of 3:2:1. They
agree to share future profit/loss in the ratio of 6:5:4. Who will sacrifice and for which share?
Example: (2) A, B and C are partners sharing profits/losses in equal ratio. A sacrifice 1/5th of his share in
favour to B and C sacrifice 1/6th of his share in favour to A. Find the new profit-sharing ratio between A, B
and C.
Example: (3) X and Y are partners in a firm sharing profits/losses in the ratio of 3:2. They agree to
admit Z as a new partner. New profit-sharing ratio between X, Y and Z is 5:3:2.
Who will sacrifice between X and Y and for which share, on admission of Z?
Example: (4) X, Y Z are partners sharing profits/losses in 3:2:1 ratio. Z retires from the firm. X and Y
agree to share future profits/losses in the ratio of 2:1. Who will gain and for which share, on retirement
of Z.
Example: (5) A, B and C are partners sharing profits/losses in the ratio of 3:2:1. They agree to share
future profits/losses in the ratio of 4:3:2. There was a gain on revaluation of assets and reassessment of
liabilities for ₹ 15,000. Pass necessary adjustment Journal entry for the above, if, they are agreed that
the book value of assets and liabilities should not be affected for gain on revaluation.
Question for 6 and 8 marks asked by CBSE in the previous years
Example: (1) A, B and C are partners in a firm sharing profit or loss in the ratio of 5:3:2. On 31st
March, 2019, their balance sheet shown as under:
Balance Sheet (Before Reconstitution)
Liabilities Amt in ₹ Assets Amt in ₹
Creditors 20,000 Goodwill 12,000
Salary Outstanding 6,000 Plant & Machinery 1,00,000
Bank Loan 50,000 Furniture 40,000
General Reserve 15,000 Investment 50,000
Workmen Compensation Res. 9,000 Stock 30,000
Investment Fluctuation Fund 5,000 Debtors 40,000
Capital Accounts: 2,42,000 Bank balance 75,000
A: 1,22,000
B: 70,000
C: 50,000
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3,47,000 3,47,000
On the above date, they agreed to share future profit or loss in the ratio of 3:2:1 on the basis of
following terms:
1. Plant & Machinery valued at ₹ 90,000; Furniture depreciated by 10%.
2. Stock was overvalued by ₹ 2,000.
3. Provision for doubtful debts to be created by 10%.
4. Investment valued at ₹ 42,000.
5. There was a claim for workmen Compensation for ₹ 6,000.
6. Goodwill valued at ₹ 60,000.
You are required to make necessary Journal entries due to change in the profit-sharing ratio between
partners. OR
Prepare the Revaluation Account, Partners Capital Accounts and Balance Sheet of the reconstituted
firm.
2019 General Reserve A/c Dr. 15,000
March Workmen’s Compensation Reserve A/c (9,000 – 6,000) Dr. 3,000
31 To A’s Capital A/c 9,000
(Being balance of accumulated profits transferred in 5:3:2)
2019 A’s Capital A/c Dr. 6,000
March B’s Capital A/c Dr. 3,600
31 C’s Capital A/c Dr. 2,400
(Being existing goodwill written off in 5:3:2 ratio)
To Plant & Machinery A/c 10,000
To Stock A/c 2,000
To Provision for Doubtful Debts A/c 4,000
To Provision for Investment Fluctuation A/c 3,000
(Being assets revalued on reconstitution of partnership)
B’s Capital A/c Dr. 6,900
(Being loss on revaluation transferred in 5:3:2 ratio)
B’s Capital A/c (2/60th of 60,000) Dr. 2,000
th
To C’s Capital A/c (2/60 of 60,000) 2,000
(Being valued goodwill adjusted in gain/sacrifice share)
Working: B’s gaining share = 2/6 – 3/10 = (20 – 18) / 60 = 2/60 and C sacrifice for 2/60
Valued goodwill be adjusted for 2/60th of 60,000 i.e for ₹ 2,000.
OR
Revaluation Account
Plant & Machinery 10,000 A’s Capital A/c 11,500
Furniture 4,000 B’s Capital A/c 6,900
Stock 2,000 C’s Capital A/c 4,600
Provision for Doubtful Debts 4,000
Provision for Investment Fluctuation 3,000
23,000 23,000
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Capital Account
Particulars A B C Particulars A B C
Goodwill 6,000 3,600 2,400 Balance b/d 1,22,000 70,000 50,000
Revaluation A/c 11,500 6,900 4,600 General Reserve 7,500 4,500 3,000
C’s Capital A/c 2,000 WCR 1,500 900 600
Balance c/d 1,13,500 62,900 48,600 B’s Capital A/c 2,000
1,31,000 75,400 55,600 1,31,000 75,400 55,600
Liabilities Amt in ₹ Assets Amt in ₹
Creditors 20,000 Plant & Machinery 1,00,000 90,000
Salary Outstanding 6,000 Less: Depreciated (10,000)
Bank Loan 50,000 Furniture 40,000 36,000
Workmen Compensation Reserve 6,000 Less: (4,000)
Investment Fluctuation Fund 5,000 Investment 50,000
Provision for Investment Fluct. 3,000 Stock 30,000 28,000
Capital Accounts: 2,25,000 Less: was overvalued (2,000)
A: 1,13,500 Debtors 40,000 36,000
B: 62,900 Less: Prov. for D/D (4,000)
C: 48,600 Bank balance 75,000
3,15,000 3,15,000
Example: (2) X, and Y are partners sharing profits in the ratio of 2:1. On 31st March, 2019, their
Balance Sheet stood as follows: Balance Sheet (As on 31st March, 2019)
Capital A/cs: 6,00,000 Plant & Machinery 1,40,000
X : 3,20,000 Goodwill 60,000
Y : 2,80,000 Furniture 50,000
Creditors 45,000 Building 2,00,000
Workmen’s Compensation Fund 15,000 Stock 60,000
Investment Fluctuation Fund 6,000 Debtors 40,000
Outstanding Expenses 9,000 Investment 50,000
General Reserve 12,000 Bank 50,000
Cash 37,000
6,87,000 6,87,000
On the above date, Z admitted for ¼ shares in the following terms:
1. Z brought in cash ₹ 2,50,000 share of capital and necessary amount in cash for share of
goodwill.
3. Plant & Machinery valued at ₹ 1,30,000 and furniture depreciated by 10%.
4. Stock was undervalued by ₹ 5,000.
5. There is claim for workmen compensation of ₹ 9,000.
6. Building appreciated by ₹ 26,000.
7. A creditor of ₹ 2,000 not likely to claim.
You are required to pass necessary Journal entries OR prepare Revaluation Account and Partners
Capital Accounts.
2019 General Reserve A/c Dr. 12,000
March Workmen’s Compensation Reserve A/c (15,000 – 9,000) Dr. 6,000
31 Investment Fluctuation Fund Dr. 6,000
(Being balance of accumulated profits transferred in 2:1)
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Y’s Capital A/c Dr. 20,000
(Being existing goodwill written off in 2:1 ratio)
Cash A/c Dr. 2,72,500
To Z’s Capital A/c 2,50,000
To Premium for Goodwill A/c 22,500
(Being cash brought in by Z for share of capital & premium)
Premium for Goodwill A/c Dr. 22,500
Being premium of goodwill transferred in sacrificing ratio)
To Plant & Machinery A/c 10,000
(Being loss on revaluation)
Stock A/c Dr. 5,000
(Being gain on revaluation)
(Being gain on revaluation transferred in 2:1 ratio)
OR
Revaluation Account
Furniture A/c 5,000 Stock A/c 5,000
Plant & Machinery A/c 10,000 Building A/c 26,000
Capital A/cs: 18,000 Creditor A/c 2,000
X : 12,000
Y : 6,000
33,000 33,000
Capital Account
Goodwill 40,000 20,000 Balance b/d 3,20,000 2,80,000
Balance c/d 3,23,000 2,81,500 2,50,000 Cash A/c 2,50,000
General Res. 8,000 4,000
WCF 4,000 2,000
IFF 4,000 2,000
Premium for g/w 15,000 7,500
Revaluation A/c 12,000 6,000
3,63,000 3,01,500 2,50,000 3,63,000 3,01,500 2,50,000
Capital A/cs: 8,54,500 Plant & Machinery 1,30,000
X : 3,23,000 Furniture 45,000
Y : 2,81,500 Building 2,26,000
Z : 2,50,000 Stock 65,000
Creditors 43,000 Debtors 40,000
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Workmen’s Compensation Fund 9,000 Investment 50,000
Outstanding Expenses 9,000 Bank 50,000
Cash (37,000 + 2,50,000 + 22,500) 3,09,500
9,15,500 9,15,500
Example: (3) X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3:2:1. Their
Balance Sheet as at 31st March, 2019, was as follows:
Liabilities Amt. in ₹ Assets Amt. in
₹
Capitals: 5,00,000 Machinery 4,70,000
X: 2,00,000 Investments 1,10,000
Y: 1,80,000 Debtors: 1,20,000 1,10,000
Z: 1,20,000 Less: Prov. for D/D 10,000
Workmen’s Compensation Fund 60,000 Stock 1,40,000
Employees’ Provident Fund 1,10,000 Cash 30,000
Creditors 1,90,000
8,60,000 8,60,000
st
On 1 April, 2019, Z retires from the firm on the following terms:
1. Provision for doubtful debts was to be maintained at 10% on debtors.
2. Stock was undervalued by ₹ 10,000.
3. An old customer, whose account was written off as bad, paid ₹ 15,000.
4. 20% of the Investments were taken by X at book value.
5. Claim on account of workmen’s’ compensation amounted to ₹ 70,000.
6. Creditors included a sum of ₹ 27,000 which was not likely to be claimed.
Pass necessary Journal entries on retirement of Z. OR Prepare Revaluation Account, Partners Capital
Accounts, and the Balance Sheet of the reconstituted firm.
Date Particulars L.F. Dr. (`) Cr. (`)
1. Investments A/c 22,000
(Being investments taken by partner)
To Provision for d/d/ A/c 2,000
2. To Provision for WC A/c 10,000
(Being loss on revaluation)
Stock A/c Dr. 10,000
3. Cash A/c Dr. 15,000
(Being gain on revaluation)
4. To X’s Capital A/c 20,000
To Z’s Capital A/c 6,667
(Being gain on revaluation transferred in 3:2:1)
5. X’s Capital A/c Dr. 6,000
Y’s capital A/c Dr. 4,000
(Being share of goodwill adjusted in gaining ratio i.e. 3:2)
6. Z’s Capital A/c Dr. 1,36,667
To Z’s Loan A/c 1,36,667
(Being balance of capital transferred to loan a/c)
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OR
Revaluation Account
Prov. for WC 10,000 Stock 10,000
Prov. for d/d 2,000 Creditor 27,000
Capital A/cs 40,000 Cash A/c 15,000
X 20,000 (Bad debts Recovery)
Y 13,333
Z 6,667
52,000 52,000
Capital Accounts
Z’s Capital 6,000 4,000 Balance b/d 2,00,000 1,80,000 1,20,000
Investments 22,000 X’s Capital 6,000
Z’s Loan A/c 1,36,667 Y’s Capital 4,000
Balance c/d 1,92,000 1,89,333 Revaluation A/c 20,000 13,333 6,667
2,20,000 1,93,333 1,36,667 2,20,000 1,93,333 1,36,667
Balance Sheet (After reconstitution)

Workmen Compensation Fund 60,000 Investments 1,10,000 88,000
Prov. for Workmen Comp. 10,000 Less: Taken by X (22,000)
Employees Provident Fund 1,10,000 Debtors 1,08,000
Creditors 1,90,000 1,63,000 1,20,000
Less: Not likely to claim (27,000) Less; Prov. for d/d (12,000)
Capital A/cs: Machinery 4,70,000
X 1,92,000 3,81,333 Stock 1,40,000 1,50,000
Y 1,89,333 Add: Undervalued 10,000
Z’s Loan A/c 1,36,667 Cash 30,000 45,000
Add: Bad debts Rec. 15,000
8,61,000 8,61,000
Do your-self
(1) Furkan, Tanmay and Barkat were partners in a firm sharing profits in the ratio of 3:2:1. The firm closes
its books on 31st March every year. Tanmay died on 31st July, 2019. His executor was entitled to: (i)
His capital ₹ 8,00,000 and his share of goodwill which was valued for the firm at ₹96,000. (ii) His share
of profit as per partnership agreement, which was to be calculated on the basis of average profit of last 3
years. Average profits of the last 3 years were ₹ 78,000. (iii) Tanmay’s executors were paid ₹ 95,000 by
cheque at the time of his death and the balance was transferred to his executor’s loan account. Pass the
necessary journal entries in the books of the firm, on Tanmay’s death, for the above transactions
(2) Manu, Sonu and Tony were partners in a firm sharing profits in the ratio of 5:3:2. The firm closes its
books on 31st March every year. Manu died on 31st July, 2019. His executor is entitled to: (i) His
capital ₹ 4,00,000 and his share of goodwill. Goodwill of the firm was valued at ₹ 96,000. (ii) His share
of profit till the date of his death which will be calculated on the basis of average profits of last 3 years.
(iii) Average profits of last 3 years were ₹ 78,000. (iv) Interest on capital @ 6% p.a. (v) His drawings till
the date of death were ₹ 21,000. Prepare Manu’s Capital Account to be rendered to his executors.
(3) Yadu, Vidu and Radhu were partners in a firm sharing profits in the ratio of 4:3:3. Their fixed capitals
on 1 st April, 2018 were ₹ 9,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. On 1 st November, 2018,
Yadu gave a loan of ₹ 80,000 to the firm. As per the partnership agreement: (i) The partners were
entitled to an interest on capital @ 6% p.a. (ii) Interest on partners’ drawings was to be charged @ 8%
p.a. The firm earned profits of ₹ 2,53,000 (after interest on Yadu’s loan) during the year 2018  19.
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Partners’ drawings for the year amounted to Yadu: ₹ 80,000, Vidu: ₹ 70,000 and Radhu: ₹ 50,000.
Prepare Profit and Loss Appropriation Account for the year ending 31st March, 2019.
(4) Aif, Tee and Bee were partners in a firm sharing profits in the ratio of 3:2:1. The firm closes its books on
31st March every year. Tee died on 31st May, 2019. It was agreed that the deceased partner’s executors
will be entitled to: (i) His capital, which was ₹ 8,00,000. (ii) His share of profit till the date of death to
be calculated on the basis of average profits of last 3 years. The average profits for last three years were
₹ 72,000. (iii) His share of goodwill. Goodwill of the firm was valued at ₹ 1,08,000. (iv) ₹ 40,000 was
paid to his executor immediately and the balance was paid in two equal half-yearly instalments along
with interest @ 6% p.a. from the date of death. Prepare Tee’s Capital Account to be presented to his
executors on the date of death
(5) Yash and Karan were partners in an interior designer firm. Their fixed capitals were
₹ 6,00,000 and ₹ 4,00,000 respectively. There were credit balances in their current accounts of
₹4,00,000 and ₹ 5,00,000 respectively. The firm had a balance of ₹ 1,00,000 in General Reserve. The
firm did not have any liability. They admitted Radhika into partnership for 1/4th share in the profits of
the firm. The average profits of the firm for the last five years were
₹ 5,00,000. Calculate the value of goodwill of the firm by capitalization of average profits method. The
normal rate of return in the business is 10%.
(6) Samiksha, Ash and Divya were partners in a firm sharing profits and losses in the ratio of
5:3: 2. With effect from 1st April, 2019, they agreed to share future profits and losses in the ratio of
2:5:3. Their Balance Sheet showed a debit balance of ₹ 50,000 in the Profit and Loss Account and a
balance of ₹ 40,000 in the Investment Fluctuation Fund. For this purpose, it was agreed that: (i)
Goodwill of the firm be valued at ₹ 3,00,000. (ii) Investments of book value of ₹ 5,00,000 be valued at ₹
4,80,000. Pass the necessary journal entries to record the above transactions in the books of the firm.
(7) The capital accounts of Alka and Archana showed credit balances of ₹ 4,00,000 and ₹ 3,00,000
respectively, after taking into account drawings and net profit of ₹ 2,00,000. The drawings of the
partners during the year 2018  19 were: (i) Alka withdrew ₹ 10,000 at the end of each quarter. (ii)
Archana’s drawings were: 31st May, 2018 ₹ 8,000; 1st November, 2018 ₹ 7,000;
1st February, 2019 ₹ 5,000. Calculate interest on partners’ capitals @ 10% p.a. and interest on partners’
drawings @ 6% p.a. for the year ended 31st March, 2019.
(8) X, Y Z were partners in a firm sharing profits & losses in the ratio of 3:2:1. Their books are closed on
March 31st, every year. Z retired from the firm on September 30th, 2019. The claims of Z to be settled
on the following terms:
a. Goodwill valued at ₹ 1,20,000.
b. There is gain on revaluation of assets & liabilities 12,000.
c. Z’s share of capital i.e. 6,00,000.
d. His share of profit up to his date of retirement on the basis of previous year profits. The profit of the
previous year was 90,000.
e. Amount payable to Z was transferred to his loan account.
Pass necessary Journal entries and show the workings clearly.
Partnership – Dissolution of Firm
Dissolution of Partnership: A Partnership (Agreement) gets terminated in case of Change in
existing profit-sharing ratio among partners; Admission of a new partner; Retirement of a partner;
Death of a partner; Insolvency of a partner; Completion of the venture; Expiry of the period of
partnership.
Dissolution of Partnership Firm: The dissolution of a firm implies the discontinuance of
partnership business and separation of economic relations between the partners.
On dissolution of the firm, the firm closes its business altogether and realizes all its assets and
pays all its liabilities.
Dissolution of the Firm takes place in any of the following ways:
1. Dissolution by Agreement: with the Consent of all partners OR accordance with a Contract
between the partners.
2. Compulsory Dissolution: when all or all, except one partner, become insolvent OR
business becomes illegal OR some event has taken place which makes it unlawful for the
partners to carry on the business.
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3. On the happening of certain Contingencies: expiry of the term OR completion of venture
OR term of death of a partner OR adjudication of a partner as an insolvent.
4. Dissolution by Notice: partnership at will – when any one of the partner gives a notice.
5. Dissolution by Court: At the suit of a partner, the court may order for dissolution of the
firm – when a partner becomes insane OR a partner becomes permanently incapable of
performing his duties as a partner OR a partner is guilty of misconduct which is likely to
adversely affect the firm OR any ground, the court regards for dissolution of the firm.
Following steps to be taken for the closing of books of accounts for Partnership Firm:
(A) Closing of books
(a) Closing all assets Accounts (Except cash/bank and Profit & Loss Dr., Partner’s Current A/c,
Partner’s Loan A/c Dr. balance) by transferring to ‘Realization Account.
Profit & Loss A/c (Dr.), Partner’s Current Accounts and Partner’s Loan A/c (Dr.) closed by
transferring to Partner’s Capital A/cs
(b) Closing all third-party liabilities (Creditors, Bank Loan, Bank overdraft, Partner’s Mr./Mrs.
/Brother/Sister’s Loan A/c) by transferring to “Realization Account”.
First Party Liability – Partner’s Capital and their other claims
Second Party Liability – Partner’s Loan A/c
Third Party Liabilities - Creditors, Bank Loan, Bank overdraft, Partner’s Mr./Mrs.
/Brother/Sister’s Loan A/c, outstanding expenses, received in advance etc.
(c) Partners’ Capital Account and Partner’s Loan Account (Cr.) will not to be closed at this time,
it will be closed after payment to them BUT before to pay them, third party liabilities should
be settled
What are the sequence to settle the liabilities of the firm on dissolution?
(1) Third party liabilities to be settled at the first
(2) Second party liability i.e. Partner’s Loan A/c (Cr.) to be settled after first party
(3) At the last, Partners claims i.e. credit balance of capital will be settled.
(B) Realizing Assets by
(a) Sale of assets in the market either directly by the firm OR through Broker
(b) Taken over by a partner, to partly settle their claim
(c) Taken over by a creditor, to partly settle their claim
(C) Payment to all the liabilities
(a) Third party (including realization expense and Brokerage commission)
(b) Second party
(c) Claim of the partners for their balance of capital
Once, partners’ claim is settled then all the books become closed and the accounting process for
dissolution of the firm become end.
Settlement of Accounts (as per Partnership Act 1932 Section – 48)
1. Treatment of Losses: Losses, including deficiencies of capital, shall be paid –
a) First, out of profits,
b) Next, out of capital of partners, and
c) Lastly, if necessary, by the partners individually in their profits sharing ratio.
2. Application of Assets: The assets of the firm, including any sum contributed by the partners to
make up deficiencies of capital, shall be applied in the following manner order:
a) Payment of third party’s debts of the firm,
b) Payment to partner’s dues, other than their capital (i.e. partner’s loans),
c) Payment to partners proportionately on account of their capitals,
d) The residue, if any, shall be divided among the partners in their profit sharing ratio.
Private property of any partner shall be applied first in payment of his private debts and the surplus, if
any, may be utilized for the payment of the firm’s debts, in case the firm’s liabilities exceed to the firm’s
assets.
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REALIZATION ACCOUNT
The Realization Account is prepared to record the transactions relating to sale & realization of assets and
settlement of creditors.
Any profit or loss arising act of this process is shared by partners in their profit-sharing ratio.
Accounting Treatment on Dissolution
Transaction Journal Entry
1 To Transfer of Assets Realization A/c Dr.
(Except Cash & Bank balance and To Land& Building A/c
Profit & Los A/c Dr.) To Machinery A/c
To Debtors A/c etc.
2 To Transfer of Liabilities Creditors A/c Dr.
(Except Capitals, Partner’s Loan Bank Loan A/c Dr.
and Profit & Loss A/c Cr.) Provision for Doubtful Debts Dr.
Partner’s Mrs./Mr. Loan A/c Dr.
To Realization A/c
When there is ask to show journal entries from the given information than you need to pass journal entries
(Except the above entries) as under:
3 To Transfer Accumulated Profits General Reserve A/c Dr.
W C F A/c Dr. (Unclaimed part of WCF)
Profit & Loss A/c Dr. (If Cr. Balance is there)
To Partner’s Capitals A/c
4 To Transfer Accumulated Losses Partner’s Capitals A/c Dr.
To Profit & Loss A/c (If Dr. balance is there)
To Profit & Loss Suspense A/c
5 To Realize from sale of Recorded Bank A/c Dr.
& Unrecorded Assets To Realization A/c
6 To Take over asset by a Partner Partner’s Capital A/c Dr.
To Realization A/c
7 To Take over asset by a Creditors NO ENTRY WILL BE PASSED
8 To Take over liability by a Partner Realization A/c Dr.
To Partner’s Capital A/c
9 To Settle Recorded/Unrecorded Realization A/c Dr.
Liabilities by payment To Bank A/c
10 To close Partners’ Current A/c Partner’s Current A/c Dr.
(If Credit balance) To partner’s Capital A/c
To close Partners’ Current A/c Partner’s Capital A/c Dr.
(If Debit balance) To Partner’s Current A/c
11 Realization Expense Realization A/c Dr.
(Paid by firm) To Bank A/c
12 Realization Expense Realization A/c Dr.
(Paid by a Partner) To Partner’s Capital A/c
13 When a partner agreed to undertake dissolution work on remuneration.
(a) For agreed remuneration to such Realization A/c Dr.
partner To Partner’s Capital A/c
(b) If payment made by Firm Partner’s Capital A/c Dr.
To Bank A/c
(c) If the partner himself pays No any entry will be passed
realization expenses (privately)
Gain or Loss on Realization Realization A/c Dr.
14 transfer to Capital A/c To Partners’ Capital A/c
Partners’ Capital A/c Dr.
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To Realization A/c
15 To pay Partner’s Loan Partner’s Loan A/c Dr.
To Bank A/c
16 For Settlement of Partners’ Capital Account
(a) If there is Debit Balance Bank A/c Dr.
To Partner’s Capital A/c
(b) If there is Credit Balance Partner’s Capital A/c Dr.
To Bank A/c
One Mark Questions
Q.1. New ratio is not to be calculated on:
a. Admission of a partner
b. retirement of a partner
c. death of a partner
d. dissolution of a partnership
Q.2. At the time of dissolution of partnership an unrecorded asset taken by X a partner is debited
to:
a. X capital account
b. realisation account
c. cash account
d. none of the above
Q.3. On firm's dissolution which of the following account is prepared at the last?
a. Realisation account
b. partners capital account
c. cash account partners
d. loan account
Q.4. On dissolution of a firm fictitious assets are transferred to:
a. credit side of partners capital account
b. debit side of realisation account
c. debit side of partners capital account
d. credit side of realisation account
Q.5. On dissolution of a firm in which ratio profit and loss on realisation is distributed among the
partners:
a. capital ratio
b. profit sharing ratio
c. equally
d. in the ratio of amount due to each partner.
Q.6. On dissolution of the firm amount received from sale of unrecorded asset is credited to :
a. partner’s capital account:
b. profit and loss account
c. cash account
d. realisation account
Q.7. Realisation account is a :
a. personal account
b. real account
c. nominal account
d. none of the above.
Q.8. At the time of firm's dissolution credit balance of profit and loss account is credited to :
a. realisation account
b. partners capital account
c. cash account
d. profit and loss account.
Q.9. On dissolution of a firm Goodwill appearing in the balance sheet is transferred to:
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a. capital account of partners
b. cash account
c. debit side of realisation account
d. credit side of realisation account.
Q.10. On dissolution the balance of partners capital account appearing on the credit side of the
balance sheet is transferred to :
a. debit side of realisation account
b. credit side of realisation account
d. credit side of partners capital account.
Q.11. AB and C are partners. The firm had given a loan of Rs20,000 to B. They decided to dissolve
the firm. In the event of dissolution, the loan will be settled by transferring it to the:
b. transferring it to the credit side of realisation account
c. transfer it to the debit side of B's capital account
d. B paying A and C privately.
Q.12. In case of dissolution, total creditors of the firm were Rs40,000; creditors worth Rs10000
were given a piece of furniture costing Rs8000 in full and final settlement. Remaining
creditors allowed a discount of 10%. What will be the amount with which cash will be credited
in the realisation account for payment to creditors:
a. 28,000
b. 27,000
c. 20,000
d. 25,000
Q.13. In case of dissolution A one of the partner was paid only RS5000 for his loan to the firm
which amounted to Rs5500. Rs 500 will be recorded in which account and on which side:
a. Realisation account credit side correct
b. Realisation account debit side
c. loan account debit side
d. A's capital account credit side.
Q.14. Section 41 of partnership act 1932 deals with dissolution of a firm
a. by mutual agreement
b. compulsory dissolution correct
c. by notice
d. by order of court.
Q.15. Settlement of accounts in case of dissolution of partnership is dealt with which section of
partnership act 1932?
a. Section 45
b. section 46
c. section 47
d. section 48
Q.16. In case of dissolution of partnership there was no workmen compensation fund and firm had
to pay Rs3000 as compensation to workers where will be this Rs3000 recorded in the books
of accounts?
b. credit side of realisation account
c. debit side ofpartners capital account
d. credit side of partners capital account.
Q.17. Court may order dissolution of partnership firm
a. when a partner has become of unsound mind
b. when a partner is permanently incapacitated
c. when a partner is found guilty of misconduct
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d. all of the above.
Q.18. Which of the following is paid first in case of dissolution of partnership firm?
a. Realisation expenses
b. External liabilities
c. Secured loan
d. Partner’s loan
Q.19. At the time of dissolution total assets are worth Rs3,00,000 and external liabilities are worth
Rs1,20,000. If assets realised 120% and realisation expenses paid were Rs4,000, then
profit/loss on realisation will be:
a. Profit Rs60,000
b. Loss Rs60,000
c. Loss Rs56,000
d. Profit Rs56,000
Q.20. When realisation expenses are to be borne by a partner, actual realisation expense is credited
to:
a. Partners capital a/c
b. Cash a/c
c. Realisation a/c
Q.21. In which condition a partnership firm is deemed to be dissolved?
a. On a partner’s admission
b. On retirement of a partner
c. On expiry of the period of partnership
d. On loss in partnership
Q.22. FILL IN THE BLANKS:
1. At the time of admission partnership firm is dissolved if business is _____________.
2. All the accounts are settled among partners and creditors at the time of ______________of
a business.
3. First of all____________ of the firms will be settled out of sources of the business.
4. Admission of a partner is termination of _____________and not a dissolution of
____________ .
5. Court may also dissolve a firm, if a partner ______________a suit, that one of the partners
is of___________ mind.
6. Partners are liable to settle the account of accounts payable even from their
___________sources, if they are solvent.
7. ______________of partner will be paid off, before the settlement of partner's capital.
8. If all partners mutually decide for the dissolution, it will be dissolution of the__________
Q.23. Match the following:
Account opened to find profit/loss on sale of Realisation profit
Assets and settlement of liabilities.
Credit balance in the realisation account. Realisation
Conversion of assets into cash on dissolution of firm. Realisation a/c
Liability likely to arise in future on happening Contingent liability
of certain events.
Expenses incurred on dissolution of a firm. Realisation expenses
Q.24. Assertion (A) : Dissolution expenses paid by the firm on behalf of a partner is recorded on
the debit side of realisation account.
Reason (R) : Such expenses are a Non-business expense.
(A) Both Assertion (A) and Reason (R) are True and Reason (R) is correct explanation of
Assertion.
(B) Both Assertion (A) and Reason (R) are True and Reason (R) is not correct explanation
of Assertion.
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(C) Assertion (A) is true, Reason (R) is false.
(D) Assertion (A) is false, Reason (R) is true.
Q.25. Assertion (A) : A firm is dissolved compulsorily when all the partners or all but one partner,
become insolvent.
Reason (R) : Dissolution of partnership and dissolution of firm both are the same.
Assertion.
of Assertion.
Q.26. Assertion (A) : On dissolution of firm, partners loan is transferred to realisation account.
Reason (R) : Partners loan is an internal liability.
Assertion.
of Assertion.
Q.27. Assertion (A) : Realisation account is prepared at the time of dissolution of partnership.
Reason (R) : Realisation account records the cash release from sale of assets and amount paid
to external liabilities.
Assertion.
of Assertion.
Q.28. On the basis of the following case, answer the question number 1 to 4:
Ravi, Rakesh and Raman were partners in a firm sharing in 2:2:1. On 31st March 2021, they
decided to dissolve the firm. On the date following was their position:
Balance Sheet(as on 31.3.2021)
Liabilities ` Assets `
Creditors 50,000 Cash at bank 20,000
Ravi 1,10,000 S. Debtors 1,50,000
Rakesh 90,000 Less: Provision 10,000 1,40,000
Raman 70,000 2,70,000 Stock 60,000
Fixed Assets 1,00,000
3,20,000 3,20,000
The assets and liabilities of settled as follows:
(i) One of the creditors for `20,000 agreed to accept half of the stock in full settlement.
Balance of the creditors were paid at a discount of 5%.
(ii) Remaining half of the stock was sold in the market at a profit of 33 %.
(iii) All other assets realised at rupees `2,00,000.
(iv) Raman was appointed to look after all the dissolution procedure and hence, he was
allowed a remuneration of 15% on the cash realised to from sale of assets.
1. What is the amount paid to creditors at the time of dissolution?
(A) `48,500
(B) `30,000
(C) `58,500
(D) `28,500
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2. State the amount realised from sale of stock.
(A) `33,333
(B) `40,000
(C) `30,000
(D) `33,000
3. What is the amount of remuneration payable to Raman?
(A) `36,000
(B) `30,000
(C) `6,000
(D) `37,500
4. What is the amount of gain or loss on realisation?
(A) `76,000 Gain
(B) `76,000 Loss
(C) `74,500 Gain
(D) `74,500 Loss
Q.29. On the basis of the following case, answer the question number 5 to 8:
X and Y were partners in a firm in equal ratio. Following was their balance sheet as on 31st
March 2021:
Balance Sheet
(as on 31.3.2021)
Liabilities ` Assets `
Provision for DD 5,000 Cash at Bank 15,000
Creditors 45,000 S. Debtors 80,000
Mrs. Y’s Loan 25,000 Stock 50,000
Capitals: Machinery 75,000
X 1,00,000 Profit & Loss A/C 20,000
Y 65,000 1,65,000
2,40,000 2,40,000
They dissolve the firm on the above date and following agreements were decided upon:
(i) X took over a part of the stock at `18,000 being 10% less than its book value.
Balance of the stock was taken over by Y at 75% of its book value less `2,500.
(ii) One of the creditors of `20,000 agreed to accept a part of machine at an agreed
valuation of `25,000 being 25% more than its book value. Balance of the creditors
were paid in full.
(iii) Balance of the machine and the debtors were realised at `1,00,000.
1. State the amount at which stock was taken over by Y:
(A) `30,000
(B) `22,500
(C) `20,000
(D) `24,000
2. What is the book value of the machine which was taken over by one of the creditors?
(A) `20,000
(B) `25,000
(C) `31,500
(D) None of the above
3. State the treatment of balance in profit and loss account appears on the asset side.
(A) Transfer to the credit side of partners’ capital account
(B) Transfer to the debit side of partners’ capital account
(C) Transfer to the credit side of realisation account
(D) Transferred to the debit side of realisation account
4. State the total amount paid to various external liabilities at the time of dissolution.
(A) `25,000
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(B) `55,000
(C) `50,000
(D) `20,000
ANSWERS: 1.D 2.A 3. C 4.C 5.B 6.D 7.C 8.B 9. C 10.D 11. C 12. B 13. A 14. B
15. D 16. A 17. D 18. A 19. D 20. D 21. C
Fill in the blanks:
1. Discontinued; 2. Dissolution; 3.liabilities; 4. Agreement,firm ; 5.files, unsound; 6. personal ; 7. Loan
8. Firm
24. (D)Assertion (A) is false, Reason (R) is true.
25. (C)Assertion (A) is true, Reason (R) is false.
28. 1. (D) 28,500 2. (B) 40,000 3. (A) 36,000 4. (D) 74,500 Loss
29. 1. (C)20,000 2. (A) 20,000 3. (B)Transfer to the debit side of partners’ capital account
4. (C) 55,000
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An illustration for the placement of Balance Sheet items into its respective ledgers to
close the books of accounts on dissolution of a partnership firm.
Balance Sheet (As on March 31st 2016) 5:3:2
Liabilities ( ) Assets ( )
Creditors 30,000 Buildings 1,40,000
Bills Payable 30,000 Machinery 40,000
Bank Loan 1,20,000 Stock 1,60,000
Sonia’s Husband’s Loan 1,30,000 Bills Receivable 1,20,000
Investment Fluctuation Fund 2,000 Furniture 80,000
Workmen Compensation Fund 15,000 Debtors 40,000
Bank Overdraft 5,000 Goodwill 15,000
Provision for doubtful debts 4,000 Investments 20,000
Rohit’s Loan 20,000 Udit’s Current A/c 10,000
General Reserve 80,000 Cash at Bank 60,000
Profit & Loss A/c 5,000
Sonia’s Current A/c 10,000
Capitals: 2,34,000
Sonia 60,000
Rohit 80,000
Udit 94,000
6,81,000 6,81,000
Realization Account
Particulars ( ) Particulars ( )
Buildings 1,40,000 Creditors 30,000
Machinery 40,000 Bills Payable 30,000
Stock 1,60,000 Bank Loan 1,20,000
Bills Receivable 1,20,000 Sonia’s Husband’s Loan 1,30,000
Furniture 80,000 Investment Fluctuation Fund 2,000
Debtors 40,000 Workmen Compensation Fund 15,000
Goodwill 15,000 Bank Overdraft 5,000
Investments 20,000 Provision for doubtful debts 4,000
Capital Account
Particulars Sonia Rohit Udit Particulars Sonia Rohit Udit
Current A/c ---- ---- 10,000 Balance b/d 60,000 80,000 94,000
General Reserve 40,000 24,000 16,000
Profit & Loss A/c 2,500 1,500 1,000
Current A/c 10,000 ----- -----
** Bank Account will be opened with 60,000 & to be closed while settled the capitals of partners.
** Rohit’s Loan Account will be opened with 20,000 to be closed after payment, after the
payment to third party liabilities.
Three / Four / Six Marks Questions
Question: From the following information of a dissolved firm, pass necessary journal entries:
(a) Realization expense incurred ₹ 12,000. OR Realization expense incurred ₹ 12,000 paid by firm.
(b) Realization expense incurred ₹ 9,000 paid a partner ‘Rakesh’.
(c) All partners are agreed that realization expense to be occurred ₹ 15,000 and the process of
dissolution to be accomplished by a partner Raghav for which consent amount for expense to be
transferred into his capital account.
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(d) Realization expense to be borne by a partner Raghav for which ₹ 15,000 already transferred to his
capital account. Actual expense incurred ₹ 13,000 paid by partner.
(e) Realization expense to be borne by a partner Raghav for which ₹ 15,000 already transferred to his
capital account. Actual expense incurred ₹ 13,000 paid by the firm.
(f) Realization expense ₹ 14,000 paid a partner Manoj privately.
Solution: Journal Entries
Date Particulars Dr. Amount Cr. Amount
(a) Realization A/c Dr. 12,000
To Bank A/c 12,000
(Being dissolution expense paid)
Realization A/c Dr. 9,000
(b) To Rakesh’s Capital A/c 9,000
(Being dissolution expense paid by partner)
(c) To Raghav’s Capital A/c 15,000
(Being realization expense to be borne by partner)
(d) NO Entry
Raghav’s Capital A/c Dr. 13,000
(e) To Bank A/c 13,000
(Being expense was borne by partner & paid by firm)
(f) NO Entry
Question: Make necessary Journal entries for a dissolved firm, from the following information:
(a) A creditor of ₹ 15,000 took over stock (book value ₹ 18,000) in their full settlement.
(b) A creditor of ₹ 15,000 took over stock (book value ₹ 18,000) at ₹ 13,000.
(c) A creditor of ₹ 15,000 took over stock (book value ₹ 18,000) at ₹ 16,000.
(d) Out of the total creditors ₹ 45,000; of which one creditor of ₹ 15,000 took over stock (book
value ₹ 18,000) in their full settlement.
Date Particulars Dr. Cr.
Amount Amount
(a) No Entry
(b) Realization A/c Dr. 2,000

To Bank A/c 2,000
(Being remaining claim of creditor paid)
(c) Bank A/c Dr. 1,000
To Realization A/c 1,000
(Being received from creditor for asset taken at the value exceed
to his claim)
(d) To Bank A/c 30,000
(Being remaining creditors paid)
Question: P and Q were partners in a firm sharing profits in the ratio of 3:2. On 31.03.2021 their
Balance Sheet was as follows:
Liabilities Amount Assets Amount
Capitals: 1,50,000 Goodwill 80,000
P: 80,000 Land & Building 80,000
Q: 70,000 Stock 60,000
Creditors 50,000 Debtors 40,000
Workmen Compensation Fund 80,000 Bank 20,000
2,80,000 2,80,000
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The firm was dissolved on 01.04.2021 and the assets & liabilities were settled as follows:
(a) Creditors agreed to take over Land & Building at a valuation of their full claim.
(b) Stock was taken over by Q at 50,000 for cash.
(c) Bad debts proved 5,000.
(d) Goodwill was found valueless.
(e) Workmen compensation claim was 80,000.
Pass necessary Journal Entries for dissolution of the firm.
Solution: Journals
Date Particulars LF Dr.( ) Cr.( )
2021 Creditors A/c Dr. 50,000 --------
Ap. Workmen Compensation Fund Dr. 80,000 --------
01 To Realization A/c ------- 1,30,000
(Being liabilities transferred)
Realization A/c Dr. 2,60,000 --------
To Goodwill ------- 80,000
To Land & Building ------- 80,000
To Stock ------- 60,000
To Debtors ------- 40,000
(Being assets transferred)
Bank A/c (50,000 + 35,000) Dr. 85,000 --------
To Realization A/c --------- 85,000
(Being realized from assets)
Realization A/c Dr. 80,000 --------
To Bank A/c -------- 80,000
(being Workmen compensation claims paid off)
P’s Capital A/c Dr. 75,000 ---------
Q’s Capital A/c Dr. 50,000 ---------
To Realization A/c ------- 1,25,000
(Being loss on dissolution transferred)
P’s Capital A/c Dr. 5,000 --------
Q’s Capital A/c Dr. 20,000 --------
To Bank A/c --------- 25,000
(Being balance of partner’s capital paid off)
Question: You are to prepare necessary ledgers on the dissolution of firm from the above case.
Realization Account
Particulars Amt. in Rs Particulars Amt. in Rs
Goodwill 80,000 Creditors 50,000
Land & Building 80,000 Workmen Compensation Fund 80,000
Stock 60,000 Bank A/c: 85,000
Debtors 40,000 Stock 50,000
Bank A/c: 80,000 Debtors 35,000
WCC 80,000 Capital A/cs: (3:2) LOSS 1,25,000
P 75,000
Q 50,000
3,40,000 3,40,000
Capital Account
Particulars P Q Particulars P Q
Realization A/c 75,000 50,000 Balance b/d 80,000 70,000
Bank A/c 5,000 20,000
80,000 70,000 80,000 70,000
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Bank Account
Balance b/d 20,000 Realization A/c 80,000
Realization A/c (50,000 + 35,000) 85,000 Capital A/cs: 25,000
P 5,000
Q 20,000
1,05,000 1,05,000
01. In case of dissolution, pass Journal entries for the following circumstances: (any four) (4)
(a) Furniture of 90,000 was sold for 80,000 by auction and auctioneer’s commission amounted
to 5,000.
(b) A partner, Deeraj’s Loan A/c of 25,000 was paid.
(c) A bill receivable of 6,000 under discount was dishonoured as the acceptor had become
insolvent and hence the bill had to be met by the firm.
(d) Out of the Stock of 1,20,000; Kiran (a partner) took over 1/3 of the stock at a discount of 25%
and 50% of remaining stock was took over by a Creditor of 30,000 in full settlement of his
claim. Balance amount of stock realized at 25,000.
(e) A creditor of 25,000 took over an unrecorded asset (valued at 45,000) at 30,000.
Solution:
(a) Bank A/c (80,000 – 5,000) Dr. 75,000
(b) Deeraj’s Loan A/c Dr. 25,000
To Bank A/c 25,000
(c) Realization A/c Dr. 6,000
To Bank A/c 6,000
(d) Kiran’s Capital A/c Dr. 30,000
Bank A?c Dr. 25,000
(e) Bank A/c (30,000 – 25,000) Dr. 5,000
02. Satyam and Shivam were partners in a firm sharing profits and losses in the ratio of 3:2. On 31st
March, 2019 they decide to dissolve the firm. On that date, they furnished the following balance of
their firm:
Creditors: 45,000 and Debtors: 60,000; Workmen’s Compensation Fund: 40,000; Satyam’s
Current A/c (Cr.): 65,000 and Shivam Current A/c (Dr.): 20,000; Stock: 85,000; Furniture:
1,00,000; Machinery: 1,30,000. The balance of Capitals- Satyam: 2,00,000 & Shivam:
1,00,000 and bank balance 55,000.
Additional Information:
(a) Satyam took over 25,000 of the stock at 20,000 for cash and remaining stock was sold for
55,000. Furniture realized at 80,000.
(b) An unrecorded Investment was sold for 20,000. Machinery was sold at a 1,00,000.
(c) Debtors realized at 55,000. There was an outstanding bill for legal charges of 15,000 which
were paid.
You are required to prepare Realization Account, Partners Capital Account and Bank Account
from the above information.
Solution: Realization Account
Debtors 60,000 Creditors 45,000
Stock 85,000 WCF 40,000
Furniture 1,00,000 Bank A/c: 3,30,000
Machinery 1,30,000 Stock 75,000
Bank A/c: 60,000 Furniture 80,000
Creditors 45,000 U/R Investment 20,000
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O/s Legal Charges 15,000 Machinery 1,00,000
Debtors 55,000
Capital A/cs: 20,000
Satyam 12,000
Shivam 8,000
4,35,000 4,35,000
Capital Account
Particulars Satyam Shivam Particulars Satyam Shivam
Current A/c 20,000 Balance b/d 2,00,000 1,00,000
Realization A/c 12,000 8,000 Current A/c 65,000
Bank A/c 2,53,000 72,000
2,65,000 1,00,000 2,65,000 1,00,000
Bank Account
Balance b/d 55,000 Realization A/c 60,000
Realization A/c 3,30,000 Satyam’s Capital A/c 2,53,000
Shivam’s Capital A/c 72,000
3,85,000 3,85,000
03. In case of dissolution of a firm, pass necessary Journal entries for the following: (6)
(a) An outstanding bill for repairs and renewal 3,000. There was a balance of Employees
Provident Fund of 25,000 and a contingent liability for 2,000.
(b) Akash a partner agrees to pay off his wife loan 10,000.
(c) General Reserve of 12,000; Profit & Loss Account (Cr.) of 9,000 given on the liabilities
side of balance sheet. There were three partners A, B and C sharing profits in 3:2:1 ratio.
(d) Profit & Loss Suspense Account of 1,000; Profit & Loss Account (Dr.) of 9,000 given on
the assets side of balance sheet. There were two partners X and Y, sharing profit in 2:3 ratios.
(e) Chetan, a partner has Current Account (Dr.) of 6,000 and Ravi, a partner has Current Account
(Cr.) of 4,000.
Solution:
(a) Realization A/c Dr. 30,000
To Bank A/c 30,000
(b) Realization A/c Dr. 10,000
To Akash’s Capital A/c 10,000
(c) General Reserve A/c Dr. 12,000
Profit & Loss A/c Dr. 9,000
To A’s Capital A/c 10,500
(d) Chetan’s Capital A/c Dr. 6,000
To Chetan’s Current A/c 6,000
Ravi’s Current A/c Dr. 4,000
To Ravi’s Capital A/c 4,000
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
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Accounting for Companies – Share Capital
Meaning of Company
Company - A joint stock company is an artificial person, created by law, having separate entity distinct
from its members with a perpetual succession and a common seal.
Characteristics or Features of a Company
(i) Artificial person
(ii) Voluntary association
(iii) Created by law
(iv) Capital divisible into transferable shares
(v) Limited liability
(vi) Perpetual succession
(vii) Common seal
(viii) Separate legal entity from its members (ix) May sue or be sued
Kinds of Companies
Private company is one which by its Articles of Association:
(i) Restricts the right to transfer its shares, if any.
(ii) Except in One Person Company, limits the number of its members excluding its present and
past employee members to 200; If any share is held jointly by two or more persons, they
shall be treated as a single member.
(iii) Prohibits any invitation to the public to subscribe for any securities of the
company.
(iv) The minimum number of members required to form a private company is two.
The name of a private company ends with the words, ‘Private Limited ‘.
Public company- As per Section 2 (7) of Companies Act, 2013, public company is a company which
(i) is not a private company.
(ii) has a minimum paid-up capital as may be prescribed.
(iii) is a private company, which is a subsidiary of a public company.
(iv) A Public Company must have a minimum of 7 members and there is no restriction on the
maximum number though.
(v) A public limited company should have at least 3 directors but not more than 15 directors.
The name of a public company ends with the word, ‘Limited‘.
One-person company is a company which has only one person as a member. It is a company
incorporated as a private company which has only one member. Rule 3 of the Companies
(Incorporation) Rules, 2014 provides that:
(i) Only a natural person being an Indian citizen and resident in India can form one-person
company or can be nominee for the sole member of one-person company.
(ii) One person can form only one ‘one-person company’ or become nominee of one such
company.
(iii) It cannot be formed for charitable purpose.
(iv) It cannot carry out non-banking financial investment activities including investment in
securities of anybody corporate.
(v) Its paid-up share capital is not more than Rs 50 lakhs.
(vi) Its average annual turnover should not exceed Rs 2 crores.
Share
According to Section 2 (84) of the Companies Act, 2013, share means a share in the share capital of a
company and includes stock. The capital of company is divided into a number of equal units. Each unit
is called a share. A company may divide its capital into share of Rs. 100, Rs. 50, Rs. 10, Rs. 5 or even
Rs.1 each.
Types of Shares
Preference shares: According to Section 43 (b) of the Companies Act, 2013, preference shares are
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the shares which carry the following two preferential rights:
(i) Preferential right of dividend.
(ii) Return of capital on the winding up of the company before that of equity shares. Holders
of preference shares are called preference shareholders.
Equity shares: According to Section 43(a) of the Companies Act 2013, equity share is that share which
is not a preference share. Equity shares are the most commonly issued class of shares which carry the
maximum ‘risks and rewards’ of the business.
The risks being losing part or all of the value of shares if the business incurs losses, the rewards
being payment of higher dividends and appreciation in the market value.
Share Capital- It is that part of the capital of a company, which is represented by the total nominal
value of shares, which it has issued.
Types OR Classes of Preference Shares
(a) With Reference to Dividend:
1. Cumulative Preference shares: Cumulative preference shares are those preference shares, the
holders of which are entitled to receive arrears of dividend before any dividend is paid on equity shares.
2. Non-cumulative Preference shares: Non-cumulative preference shares are those preference share,
the holders of which do not have the right to receive arrear of divided. If no dividend is declared in any
year due to any reason. Such shareholders get nothing, nor they can claim unpaid dividend in any
subsequent years.
(b) With Reference to Participation
1. Participating preference shares: Such shares, in addition to the fixed preference dividend, carry a
right to participate in the surplus profit, if any, after providing dividend at a stipulated rate to equity
shareholders.
2. Non-Participating preference shares: Such shares get only a fixed rate of dividend every year and
do not have a right to participate in the surplus profit.
(c) With Reference to Convertibility

1. Convertible preference shares: are those preference shares which have the right/option to be
converted into equity shares.
2. Non-convertible preference shares: are those preference shares which do not have the right/option
to be converted into Equity shares.
(d) With Reference to Redemption
1. Redeemable preference shares: are those preference shares the amount of which can be redeemed
by the company at the time specified for their repayment or earlier.
2. Irredeemable preference shares: are those preference shares the amount of which cannot be
refunded by the company unless the company is wound up. Now a company cannot issue irredeemable
preference shares.
Issue of shares:
Shares may be issued in any of the following ways:
1. For Cash: By Private Placement of shares
2. For Cash : By Public Subscription of shares
3. For consideration other than cash.
Private Placement of shares- When a company, rather than issuing shares to general public, issues its
shares to its promoters, their friends, relatives, shareholders of group companies mutual funds, NRIs,
financial institutions like LIC, UTI, etc. Such shares cannot be resold by their holders within a period of
3 years, called lock-in period.
Sweat Equity shares- Sweat shares are issued by a company to its employees or directors at a price
lower than market price, or for consideration other than cash for intellectual property or know-how. Such
shares cannot be resold by their holders within a period of 3 years, called lock-in period.
Employees Stock Option Plan(ESOP)- Employees stock option plan means the option (right and not
an obligation) given to the whole time directors, officers and employees right to purchase or subscribe
77 | P a g e
at a future date, the securities offered by the Company at a pre-determined price, which usually is lower
than the market price. The employees may or may not exercise the option. Lock in period in this case is
one year from the date of allotment.
Kinds of Share Capital
(i) Authorised share capital: According to Section 2(8) of Companies Act, 2013, ‘authorised capital’
or ‘nominal capital’ means such capital as is authorised by the memorandum of a company to be the
maximum amount of share capital of a company.
(ii) Issued capital: According to Section 2(50) of the Companies Act, 2013, issued capital means such
capital as the company issues from time to time for subscription.
(iii) Subscribed capital: According to Section 2(86) of the Companies Act, 2013, ‘subscribed capital’
means such part of the capital which is for the time being subscribed by the members of a company.
(a) Subscribed and fully paid-up: Shares are said to be ‘subscribed and fully paid-up’
when the entire nominal (face) value is called and also paid-up by the shareholders.
(b) Subscribed but not fully paid-up: Shares are said to be ‘subscribed but not fully
paid up’ when
⮚ the company has called-up the entire nominal (face) value of the share but has not
received it.
⮚ the company has not called-up the entire nominal (face) value of share.
(iv) Called-up capital: According to Section 2(15) of the Companies Act, 2013, ‘called-up capital’
means such part of the capital, which has been called for payment. Thus, it means the amount of
nominal (face) value called-up by the company to be paid by the shareholders towards the share
capital.
(v) Paid-up share capital: According to Section 2(64) of the Companies Act, 2013, ‘paid-up share
capital’ or ‘share capital paid-up’ means the amount that the shareholder has paid and the company has
received against the amount ‘called up‘ against the shares towards share capital.
(vi) Reserve Capital: It is that portion of uncalled share capital which shall not be capable of being
called up except in the event and for the purpose of the company being wound up.
Capital Reserve: ‘Capital reserve’ is the reserve which is not free for distribution as dividend. It is
mandatory to create capital reserve in case of capital profits earned by the company. Reserves which are
created out of capital profits are not readily available for distribution as dividend among the shareholders,
e.g. premium on issue of shares of debentures, profits on re-issue of shares, profits prior to incorporation,
premium on redemption of debentures.
Minimum Subscription: It is the amount stated in the prospectus as the minimum amount that must be
subscribed. Unless the sum payable on application for the sum so stated (minimum subscription) has
been paid to and received by the company by cheque or other instruments, security cannot be allotted.
It must be 90% of the issued capital.
Accounting Treatment of Issue of Shares
1. Terms of Issue of Shares
(i) Issue of shares at par: When shares are issued at their face value, the shares are said to
have been issued at par. i.e. issue price and face value are same.
(ii) Issue of shares at premium: When shares are issued at a value that is higher than the face
value of the shares, the shares are said to have been issued at premium, i.e. issue price is
more than face value.
2. Utilisation of Securities Premium Reserve: Section 52 (2) of the Companies Act, 2013 restrict the
use of the amount received as premium on securities for the following purposes:
(i) In purchasing its own shares (buy back) (Section 77A).
(ii) Issuing fully paid bonus shares to the members (Section 78).
(iii) Writing-off preliminary expenses of the company (Section 78).
(iv) Writing-off the expenses of, or the commission paid or discount allowed on any issue
of securities or debentures of the company (Section 78).
(v) Providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company (Section 78).
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3. Accounting Treatment for Issue of Shares for Cash
(i) On Receipt of Application money
Bank A/c Dr. (With application money received)
To Share Application A/c (Number of shares applied x Application money per share)
(ii) On Acceptance of Application

Share Application A/c Dr. (with application money due on shares allotted)
To Share Capital A/c (Number of shares allotted x Application money per share)
(iii) On Making Allotment Money Due

(a) At par
Share Allotment A/c Dr. (With allotment money due)
To Share Capital A/c (Number of shares allotted x Allotment money per share)
(b) At Premium
Share Allotment A/C Dr. (With Total Amount due)
To Share Capital A/c (with allotment money due)
To Securities Premium Reserve A/c (with premium money due)
(iv) On Receipt of Allotment Money
Bank A/c Dr. (With allotment money received)
To Share Allotment A/c
(v) On making First Call

Share First Call A/c Dr. (with first call amount due)
To Share capital A/c (Number of shares allotted x First Call money per share)
(vi) On receipt of the First call money
Bank A/c Dr. (With amount received for first call)
To Share First Call A/c
(v) On making Second and Final Call
Share Second and Final Call A/c Dr. (with Second and Final call amount due)
To Share capital A/c (Number of shares allotted x Second and Final Call money per share)
(vi) On receipt of the Second and Final call money
Bank A/c Dr. (With amount received for Second and Final call)
To Share Second and Final Call A/c
4. Full Subscription of Shares: When the number of shares applied for, is equal to the number of
shares offered for subscription, the shares are said to be fully subscribed.
5. Over-Subscription of Shares: When the number of shares applied for, is more than the number of
shares offered for subscription, the shares are said to be oversubscribed. Allotment of shares cannot be
made to all the applicants in full.
In case of over-subscription, following three alternatives are available
(i) Rejection of applications
(ii) Partial or pro-rata allotment
(iii) Combination of pro-rata allotment and rejection
Journal entry in case of Over Subscription:
In case of cover subscription, ii entry will be as follows:
Share Application A/c Dr. (with application money received)
To Share Capital A/c (with application money due on issued shares)
To Share Allotment A/c (with excess application money related to shares allotted on pro-rata basis)
To Bank A/c (with money to be returned for rejected applications)
6. Under Subscription of Shares: When the number of shares applied for, is less than the number of
shares offered to the public, the shares are said to be under-subscribed.
7. Issue of Shares for Consideration other than Cash
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I. Issue of Shares to Vendors
In this regard, the purchase of assets and issue of shares are to be treated as two separate
transactions.
(i) (a) When Assets are Purchased
Assets A/c (Individually) Dr
To Vendor
(Being assets purchased from———-)
(b) When running business is purchased
Sundry Assets A/c Dr
Goodwill A/c* Dr
To Sundry Liabilities A/c To Vendor
To Capital Reserve A/c*
(Being business purchased from vendor for purchase consideration of Rs——-)
NOTE ‘Vendor’ is credited with purchase consideration payable to him
*Either goodwill or capital Reserve will come.
(ii) On Issue of Shares
(a) At Par
Vendor A/c Dr
To Share Capital A/c
(Being….shares issued to….@...)
(b) At Premium
Vendor A/c…….. Dr
To Securities Premium Reserve A/c
(Being …..Shares issued to …..@... including securities premium reserve…)
II. Issue of Shares to Promoters
Formation Expenses/ Incorporation Exp. Dr
(Being … share of Rs … each issued to promoters of the company)
III. Issue of Shares to Underwriters
(i) Making Underwriting Expenses Due
Underwriting Expenses A/c Dr
To Underwriters A/c
(Being underwriting commission due)
(ii) Issuing Shares to Underwriters
Underwriters A/c Dr
(Being …shares issued @…….per share to underwriters)
8. Calls-in-arrears: When one or more shareholders fail to pay their dues at the time of allotment or
call, it is technically called calls-in-arrears.
Table F of the Companies Act, 2013, provides for the payment of interest on calls-in-arrears at
a rate not exceeding 10% per annum.
9. Calls-in-advance: The part of the whole amount received from the shareholders before the call is
made, is called calls-in-advance. This amount is shown on the liabilities side of the balance sheet as a
separate item under the head ‘share capital‘ but is not added to the amount of paid-up capital. Table F
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of the Companies Act, 2013, provides for the payment of interest on calls-in-advance at a rate not
exceeding 12% per annum.
Note: Interest on calls-in-arrears and interest on calls-in-advance are not in syllabus.
10. Forfeiture of Shares
Forfeiture of shares means cancellation of shares and seizure of the amount already received
from defaulting shareholders.
(i) Forfeiture of Shares Originally Issued at Par
Share Capital A/c Dr (Called-up money)
To Forfeited Shares A/c (Paid-up money)
To Share Unpaid Calls A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of…….shares for non-payment of call of….per share)
(ii) Forfeiture of Shares Originally Issued at Premium and Premium was Received
To Share Allotment A/c (Unpaid money excluding premium)
(Being forfeiture of … shares for non-payment of allotment and call of_ per share)
(iii) Forfeiture of Shares Originally Issued at Premium and Premium was not Received
Securities Premium Reserve A/c Dr (Unpaid premium)
To Share Allotment A/c (Unpaid money including premium)
(Being forfeiture of …… shares for non-payment of allotment and call of ……per share)
11. Re-issue of Shares
The directors can either cancel or re-issue the forfeited shares. Shares forfeited can be re-issued
at par, at premium or at a discount (shown as a loss to be debited in share forfeited A/c)
In case, they are re-issued at par, accounting entry will be
Bank A/c Dr
(Being …..shares reissued at….)
Maximum Permissible Discount:
In case, shares are re-issued at a discount, the amount of discount allowed on the re-issue of forfeited
shares must not exceed the amount forfeited on re-issued shares.
The discount allowed on re-issue of forfeited shares should be debited to the ‘share
forfeiture account’. The journal entry will be
Bank A/c Dr [With the amount received on re-issue]
*Share Forfeiture A/c Dr [With the discount allowed on re-issue]
To Share Capital A/c [With the amount credited as paid-up]
(Being ….shares reissued at ….)
*It is calculated as Number of Shares Re-issued x (Paid-up Value – Re-issue Price Per Share)
If the forfeited shares are re-issued at a price higher than that paid-up, the excess is
credited to securities premium reserve account. The journal entry will be
Bank A/c Dr
To Securities Premium Reserve A/c
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(Being ….. shares issued …..)
Transfer of Balance in Forfeited Share Account

Forfeited Shares A/c Dr
To Capital Reserve A/c
(Being balance of share forfeiture account transferred to capital reserve account)
One Marks Questions
Accounting for Companies- Issue of Shares
Q. Questions Marks
Pawan Ltd. was registered with a Capital of Rs. 5,00,000 divided into shares of Rs. 10
each. It purchased a Building from Y for Rs. 2,00,000 and issued fully paid shares to Y for
purchase consideration. It invited applications for the balance 30,000 shares payable as
under:
Rs. 3 per share on Application; Rs. 3 per share on Allotment; Rs. 2 per share on First Call,
and Rs. 2 on Final Call.
Ashok, who had been allotted 500 shares, failed to pay both the Calls. His
shares were forfeited and reissued at Rs. 9 per share to Hari, as fully paid up.
Give answers to the following questions on the basis of above information:
1 What will be the nominal capital in the above case: 1

A. 50,000 B. 5,00,000 C. 50,00,000 D. none of these
2 In the entry for Purchase of Building, Goodwill A/c will be debited by: 1
A. 10,000 B. 1,00,000 C. 50,000 D. none of these
3 What will be the entry for Issue of shares to Y Ltd.? 1
4 What amount will be received at the time of First Call? 1

A. 60,000 B. 90,000 C. 59,000 D. 54,000
5 What amount will be debited to Calls in Arrears A/c at the time of Final Call? 1
A. 500 B. 1,000 C. 2,000 D. 5,000
6 What amount will be debited to the bank account at the time of Reissue? 1
A. 5,000 B.4,500 C. 10,000 D. none of these.
7 What amount will be transferred to the Share Forfeiture A/C at the time of Forfeiture of 1
shares?
A. 5,000 B. 30,000 C. 50,000 D. 3,000
8 What amount will be debited in Share Forfeiture A/c at the time of Reissue of forfeited 1
shares?
A. 1,000 B.500 C. 50,000 D. none of these.
X Ltd. invited applications for 20,000 shares of Rs. 10 each payable as under:
Rs. 3 per share on application, Rs.3 per share on Allotment, Rs. 2 per share on First Call;
and Rs. 2 per share on Final Call.
Final Call was not made by the company. An applicant who had been allotted 100
shares failed to pay Allotment and First Call money due from him. His shares were
forfeited after the First Call and 70 shares were re-issued at 8.50 per share.
Give answers to the following questions on the basis of above information:
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9 What will be the Subscribed and fully paid up Capital? 1
A. 2,00,000 B. 20,000 C. 1,60,000 D. none of these.
10 What will be the Subscribed but not fully paid up Capital? 1

A. 2,00,000 B. 1,90,900 C. 1,59,760 D. 1,59,200.
11 What will be the balance in Share Forfeiture A/c after the reissue? 1
A. 90 B. 300 C. 210 D. none of these.
12 What amount will be transferred to the Capital Reserve account? 1

A. 210 B. 140 C. 540 D. 560
13 Which account will be used in the journal entry of Reissue of shares? 1

A. Share Forfeiture A/c B. Capital Reserve A/c
C. Securities Premium Reserve A/c D. All of these.
14 XYZ Ltd. forfeited 200 equity shares of Rs. 10 each on which the company has called Rs. 1
9 per share, for the non-payment of allotment money of Rs. 4 per share. On forfeiture, the
amount debited to share capital A/c will be:
(a) Rs.1,000 (b) Rs. 800 (c) Rs. 200 (d) Rs. 1,800
15 Black Ltd. had issued 5,000 equity shares of Rs. 10 each at par. The application money 1
was Rs. 3 per share and the public applied for 7,500 shares. Pro rata allotment was made.
Sohan applied for 450 shares. The amount carried forward towards the sum due on
allotment will be:
(a) Rs. 1,350 (b) Rs. 900 (c) Rs. 450 (d) Rs. 4,500
16 On a share of Rs. 20 issued at a premium of Rs. 3, full nominal amount has been called-up 1
and Rs. 16 is received, share capital A/c will be credited by:
(a) Rs. 20 (b) Rs. 23 (c) Rs. 16 (d) Rs. 3
17 Assertion: Call-in-advance account has a nil balance. 1

Reason: Calls-in-advance is credited in the entry when it is received and debited in the
entry when is supposed to be received.
(a) Assertion is true but reason is false.
(b) Reason is true but Assertion is false.
(c) Both the Assertion and Reason are true.
(d) Both the Assertion and Reason are false.
18 Assertion: X ltd. forfeited 2,000 equity shares of ` 10 each on which it had received ` 1
10,000. The company can reissue these forfeited shares at ` 4 per share.
Reason: Forfeited shares cannot be issued at discount more than the amount received on
these shares.
(a) Assertion and reason both are incorrect.
(b) Assertion and reason both are correct.
(c) Assertion is correct but the reason is incorrect.
(d) Assertion is incorrect but the reason is correct.
19 Which of the following statement relates to Reserve Capital‘? 1

(a) It is a part of uncalled capital of the company.
(b) It cannot be used in the lifetime of the company.
(c) It is called only on the liquidation of the company.
(d) All of the above.
20. The Earth Ltd. invited applications for 35,000 shares of Rs. 10 each and received 1
applications for 40,000 shares along with the application money Rs. 4 per share. Which of
the following alternatives can be followed?
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(1) Refund of excess application money and full allotment to the rest of the applicants.
(2) Not to allot any share to some applicants, Full allotment to some applicants and pro
rata allotment to rest of the applicants.
(3) Not to allot any shares to some applicants and pro rata allotment to rest of the
applicants.
(4) Make pro rata allotment to all the applicants and adjust the excess amount received
towards call money.
(a) Only (1)
(b) Both (1) and (3)
(c) Only (2)
3- and 4-marks questions
21. A Ltd. makes an issue of 10,000 equity shares of Rs.100 each at a premium of 5%, 3
payable as follows:
On application and allotment- Rs.50
On first call- Rs.30
On second & Final call- Rs.25
Members holding 400 shares did not pay the second call and the shares are duly
forfeited, 300 of which are re-issued as fully paid at Rs.80 per share. Pass journal entries
for forfeiture and reissue of forfeited shares.
Answer:
A. Equity Share capital A/c Dr. 40,000
To Calls in arrears A/c 10,000
To Share Forfeiture A/c 30,000
(Being shares forfeited for non-payment of second and final call)
B. Bank A/c Dr. 24,000

Share Forfeiture A/c Dr. 6,000
To Equity Share capital A/c 30,000
(Being 300 Shares reissued at Rs. 80 per share as fully paid up)
C. Share Forfeiture A/c Dr. 18,000

To Capital reserve A/c 18,000
(Being balance of share forfeiture of reissued shares transferred to capital reserve)
22 Sajag Ltd. has an authorised capital of Rs. 20,00,000 divided into equity shares of Rs. 10 3
each. The company invited applications for issuing 60,000 shares. Applications for 58,000
shares were received. All calls were made and were duly received except the final call of
Rs. 3 per share on 2,000 shares. These shares
were forfeited.
(i) Present the share capital in the Balance Sheet of the company as per Schedule - III of
the Companies Act, 2013.
(ii) Also prepare ‘Notes to Accounts’ for the same.
Answer: Share Capital = Rs. 5,74,000
23 NK Ltd., a truck manufacturing company, is registered with an authorised capital of Rs. 3

1,00,00,000 divided into equity shares of Rs. 100 each. The subscribed and paid up capital
of the company is Rs. 50,00,000. The company decided to open technical schools in the
Jhalawar district of Rajasthan to train the specially abled children of the area. It is planning
to provide them employment in its various production units and industries in the
neighborhood area.
To meet the capital expenditure requirements of the project, the company offered 20,000
shares to the public for subscription. The shares were fully subscribed and paid.
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Present the share capital in the Balance Sheet of the company as per the provisions of
Schedule III of the
Companies Act, 2013.
Answer: Share Capital = Rs. 70,00,000.
24 Prakhar Ltd. forfeited 2,000 shares of Rs.10 each, fully called up, on which they had 4
received only Rs.14,000. 50 of the forfeited shares were reissued for Rs. 9 per share fully
paid up.
Pass necessary journal entries for forfeiture and re-issue of shares. Also prepare share
forfeited account.
Answer:
(1) Share Capital A/c Dr. 20,000
To Forfeited Shares A/c 14,000
To Calls in arrear A/c 6,000
(2,000 shares of Rs. 10 each forfeited for non payment of Rs.6,000)
(2) Bank A/c Dr. 450

Forfeited Shares A/c Dr. 50
To Share Capital A/c 500
(50 of the forfeited shares reissued for Rs. 9 per share)
(3) Forfeited Shares A/c Dr. 300

To Capital Reserve A/c 300
(Gain on reissue of shares transferred to capital reserve A/c)
(4) Balance in Share Forfeited A/c = 13,650.
25 X Ltd. was formed with a capital of Rs. 10,00,000 divided into shares of Rs. 10 each. It 4
offered 90% shares. 40% amount was payable on application, 20% on allotment and
balance on final call. The applicants paid Rs. 3,60,000 on application and Rs. 1,69,000 on
allotment. Final call had not been made as yet.
Calculate the following from the above mentioned details :
(i) Authorised Capital;
(ii) Issued Capital;
(iii) Subscribed Capital;
(iv) Called-up Capital;
(v) Paid-up Capital;
(vi) Calls-in-Arrears.
Answer:
(i) Authorised Capital = 10,00,000
(ii) Issued Capital = 90,000 Shares @ 10 each 9,00,000
(iii) Subscribed Capital= 90,000 Shares @ 10 each 9,00,000
(iv) Called-up Capital= 90,000 Shares @ 6 each 5,40,000
(v) Paid-up Capital=
Application money 3,60,000
Add: Allotment money 1,69,000 5,29,000
(vi) Calls-in-Arrears= 11,000
26 Pass necessary Journal Entries for the following transactions in the books of Rajan Ltd. : 4
Rajan Ltd. purchased a running business from Vikas Ltd. for a sum of Rs. 2,50,000
payable as Rs. 2,20,000 in fully paid equity shares of Rs. 10 each and balance by a bank
draft. The assets and liabilities consisted of the following :
Plant and Machinery Rs. 90,000; Building Rs. 90,000; Sundry Debtors Rs. 30,000; Stock
Rs. 50,000; Cash Rs. 20,000; Sundry Creditors Rs. 20,000.
Answer:
(1) Plant & Machinery A/c Dr. 90,000
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Sundry Debtors A/c Dr. 30,000
Stock A/c Dr. 50,000
Cash A/c Dr. 20,000
To Sundry Creditors A/c 20,000
To Vikas Ltd. 2,50,000
To Capital Reserve A/c 10,000
(Being business purchased)
(2) Vikas Ltd. Dr. 2,50,000

To Equity Share Capital A/c 2,20,000
To Bank A/c 30,000
(Being shares issued and draft given)
6 marks questions
27 Fill in the blank spaces in the Journal Entries given below : 6

Date Particulars L.F. Dr. Amount Cr. Amount
Share Capital A/c Dr. 1
________2_____________ Dr. --------3-----
To Share Allotment A/c ---4-----
To Share First Call A/c ----5----
(Being 1,000 shares of Rs.10 each Rs. 8
called-up issued at a premium of Rs. 2 per
share forfeited for non-payment of
allotment of Rs. 5 per share including
premium and first call of Rs. 2 per share)
Bank A/c Dr. 9,800

To Share Capital A/c ----6-----
To___________7_________________ ----8-----
(Being 700 shares re-issued @ Rs. 14 per
share fully paid-up)
Share Forfeiture A/c Dr. -----9----
To Capital Reserve A/c ----10----
(Being gain on re-issue of forfeited shares
transferred to capital reserve)
Answer:
1. 8,000
2. Securities Premium Reserve A/c
3. 2,000
4. 5,000
5. 2,000
6. 7,000
7. Securities Premium Reserve A/c
8. 2,800
9. 2,100
10. 2,100
28 ZX Limited invited applications for issuing 5,00,000 Equity shares of Rs. 10 each payable 6
at a premium of Rs.10 each payable with Final call. Amount per share was payable as
follows :
On Application Rs. 2
On Allotment Rs. 3
On First Call Rs. 2
On Second & Final Call Balance
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Applications for 8,00,000 shares were received. Applications for 50,000 shares were
rejected and the application money was refunded. Allotment was made to the remaining
applicants as follows :
Category Number of Shares Applied Number of Shares Allotted
I 2,00,000 1,50,000
II 5,50,000 3,50,000
Excess application money received with applications was adjusted against amount due on
allotment. Balance, if any, was adjusted towards future calls. Govind, a shareholder
belonging to category I, to whom 1,500 shares were allotted, paid his entire share money
with allotment. Manohar belonging to category II, who had applied for 11,000 shares
failed to pay 'Second & Final Call money'. Assuming that the company maintains "Calls in
Advance Account" and "Calls in Arrears Account", pass necessary Journal entries for the
above transactions in the books of ZX Limited.
Answer:
Date Particulars L.F. Dr. Amount Cr. Amount
Bank Account Dr. 16,00,000
To Equity Share Application Account 16,00,000
(Application money received)
Equity Share Application Account Dr. 16,00,000
To Equity Share Capital Account 10,00,000
To Equity Share Allotment Account 5,00,000
To Bank Account 1,00,000
(Application money transferred to Equity
share Capital Account, Equity Share
Allotment Account and remaining amount
refunded)
Equity Share Allotment Account Dr. 15,00,000
(Allotment money due on 5,00,000 equity
shares @ Rs. 3 each)
Bank A/c Dr. 10,22,500
To Equity Share Allotment A/c 10,00,000
To Calls in Advance A/c 22,500
(Allotment money received along with
Calls in Advance on 1,500 Shares)
Equity Share First Call Account Dr. 10,00,000

(First Call money due on 5,00,000 equity
shares @ Rs. 2 each)
Bank A/c Dr. 9,97,000
Calls in Advance A/c Dr. 3,000
To Equity Share First Call A/ct 10,00,000
(First call money received)
Equity Share Final Call A/c Dr. 65,00,000
To Securities Premium Reserve A/c 50,00,000
(Final Call money due on 5,00,000 equity
shares @ Rs.13 each
including premium of Rs. 10 each.)
Bank A/c Dr. 63,89,500

Calls in Advance A/c Dr. 19,500
Call in Arrears A/c Dr. 91,000
To Equity Share Final call A/c 65,00,000
(Final call money received)
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Answers to Objective Type Questions:
1. B. 5,00,000
2. D. none of these
3. Y Ltd. Dr. 2,00,000
(Being Equity shares issued for purchase of Building)
4. C. 59,000
5. B. 1,000
6. B.4,500
7. D. 3,000
8. B.500
9. D. none of these.
10. C. 1,59,760
11. A. 90
12. A. 210
13. C. Securities Premium Reserve A/c
14. Answer/Explanation: (d) Rs. 1,800
Reason: Called up value = no of shares issued *called up value of share = 200*9= Rs.
1,800
15. Answer/Explanation: (c) 450
Amount adjusted will be:
Applied shares=450; allotted shares=300 Excess paid to be adjusted on allotment = (450-
300)*3=450
16. Answer/Explanation: (a) Rs. 20
If the full amount has been called, share capital will be credited by the nominal amount
since Securities Premium Reserve is credited separately.
17. Answer/Explanation: (c) Both the Assertion and Reason are true.
Since calls-in-advance is credited when it is received and debited when it is due so (c)
option is correct.
18. Answer/Explanation: (d) Assertion is incorrect but the reason is correct.
19. Answer/Explanation: (d) All of the above.
All the above given points are features of Reserve Capital.
20. Answer/Explanation: (d) All of the above.
Since all these options can be used by the company individually or in combination.
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Accounting for Companies: Issue of Debentures
(Issue of Debentures)
Debentures: It is an acknowledgment of debt of a company, issued to raise loan capital under the
terms & conditions i.e. rate of interest, maturity periods etc. It is a charged against assets of the
company.
Accounting Treatment of Debentures
Redemption
ISSUE
At Par At 4% Premium
(1) Bank A/c Dr. 100 (1) Bank A/c Dr. 100
To _% Deb. Appl. & Allot A/c 100 To _% Deb. Appl. & Allot A/c 100
(2) Deb. Appl. & Allot A/c Dr. 100 (2) Deb. Appl. & Allot A/c Dr. 100
To _% Debenture A/c 100 Loss on Issue A/c Dr. 4
Issue At
To Premium on Redemption 4
Par
To _% Debenture A/c 100
(Face Value
(1) _% Debenture A/c Dr. 100 (1) _% Debenture A/c Dr. 100
100)
To Debenture Holders A/c 100 Premium on Redemption A/c Dr. 4
To Debenture Holders A/c 104
(2) Debenture Holders A/c Dr. 100 (2) Denture Holders A/c Dr. 104
To Bank A/c 100 To Bank A/c 104
To securities Premium A/c 5 Loss on Issue A/c Dr. 4
To _% Debenture A/c 100 To Premium on Redemption 4
Issue At 5% To securities Premium A/c 5
Premium To _% Debenture A/c 100
(2) Denture Holders A/c Dr. 100 (2) Denture Holders A/c Dr. 104
Discount on Issue A/c Dr. 3 Loss on Issue A/c Dr. 7
To _% Debenture A/c 100 (Discount 3 + Prem. On Red. 4)
Issue At 3% To Premium on Redemption 4
Discount To _% Debenture A/c 100
(2) Denture Holders A/c Dr. 100 (2) Denture Holders A/c Dr. 104
When a company called all face value along with application: Following entries has to pass:
ON ISSUE ON REDEMPTION
1 Bank A/c Dr. 1 Debenture A/c Dr.
To Debenture Application & Allotment A/c To Debenture holders A/c
2 Debenture Application & Allotment A/c Dr. 2 Debenture holders A/c Dr.
To Debenture A/c To Bank A/c
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Types of Debentures
Secured Debentures: Secured debentures refer to those debentures where a charge is created on the
assets of the company for the purpose of payment in case of default.
Irredeemable Debentures: These debentures are repayable on the winding-up of a company or on
the expiry of a long period.
Convertible Debentures: Debentures which are convertible into equity shares or in any other
security either at the option of the company or the debenture holders are called convertible
debentures.
Non-Convertible Debentures: The debentures which cannot be converted into shares or in any
other securities are called non- convertible debentures.
Zero Coupon Rate Debentures: These debentures do not carry a specific rate of interest.
Bearer Debentures: Bearer debentures are the debentures which can be transferred by way of
delivery and the company does not keep any record of the debentures.
Debentures issued as Collateral Security:
Issue of debentures by a company against to Bank Loan as security, other than the primary security is
called issue of debentures as collateral security.
If the company wants to make necessary journal entry to do so:
Debenture Suspense A/c Dr.
To ---% Debenture A/c
One Marks Questions
Rose bond Ltd. is in the business of manufacturing electrical water pumps. It decided to
install some Godrej refrigerators and microwave ovens in the company for providing
facilities to its employees as the company is located in the remote area. It named its
welfare scheme as “Employees Relief.” On 1st April 2021 the purchase price of
electrical appliances was paid by issuing 6% debentures. Debentures of Rs. 20,00,000
were issued at a premium of 10% for this purpose.
In another case, the company agreed to issue 9% debentures of 100 each at Rs 120 to the
vendors for the purchase of machinery worth Rs 1,25,000.
Read the above information carefully and answer the following questions.
1 Which of the following will be debited by Rs. 22,00,000 for issue of debentures for the
purchase of electrical appliances for Rose Bind Ltd.
(a) 6% Debentures A/c (b) Rose Bond Ltd. (c) Godrej Ltd. (d) Both (a) and (b)
Ans. (c)
2 The number of 9% debentures issued by the company would be :
(a) 1,250 (b) 1,200 (c) 1,041 (d) 2,080
Ans. (c)
Fashionable Fabrics Ltd. has decided to start a new showroom. The Finance Manager of
the company has estimated the capital requirements at Rs. 12,50,000 . The company has
arranged Rs. 5,00,000 from the internal sources to start the showroom.
It has also decided to call the unpaid amount of Rs 3 per share on its 10,000 equity
shares. The requirement of the remaining capital was fulfilled by raising a loan from
Bank of India payable after five years. 8% debentures of Rs 100 each were issued for
1.5 times more amount than that of loan as collateral security.
The management raised the following questions:
3. What is meant by ‘Issue of debentures as collateral security’?
Ans. Issue of Debentures as collateral security means issuing debentures as an
additional security that may be offered against the loan in addition to principle security.
4. What will be the total requirement of the loan raised by the company ?
Ans. The company’s total requirements for the loan will be calculated as follows:
= Total Funds Requirements –( Funds arranged from the internal sources+ unpaid
calls, called-up now)
= Rs. 12,50,000 –(Rs 5,00,000+ Rs 30,000)
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= Rs. 12,50,000 – Rs. 5,30,000 = Rs 7,20,000.
5. What will be the total number of debentures issued by the company?
Ans. Debentures issued as collateral security are of nominal value, 10,800, 8%
debentures of Rs 100 each of Rs. 10,80,000.
6. Is the company liable to paythe interest on these debentures?
Ans. No, the company is not liable to pay the interest on these debentures because
debentures are issued as collateral security.
7. How debentures will be shown in the financial statements of the company when
company has recorded the issue of debentures by passing a journal entry in the books of
company?
Ans. The debentures issued as collateral security will be shown as follows in the
financial statements of the company (in notes to accounts under sub head Long-term
Borrowings)
Rs. Rs.
Loan from Bank Of India 7,20,000
8% debentures 10,80,000
Less : Debentures Suspense Account 10,80,000Nil
(Issued as collateral security) 7,20,000
8. How will you classify the loan raised as per the schedule III of the Company Act, 2013?
Ans. The loan raised by the company will be shown as Long-term Borrowings under
head Non-current Liabilities in the Balance Sheet.
On 1st April, 2021 Bhawani Ltd. issued 5,000, 10% Debentures of Rs 100 each at a
discount of 10% redeemable at 5% premium after 5 years. On the same date Bhawani
Ltd.entered into the following transactions also.
It purchased business of Swami Ltd. by taking over sundry assets of Rs 4,50,000 and
sundry liabilities of Rs. 70,000 for the purchase consideration of Rs. 4,80,000. It paid
the purchase consideration by issuing 10% Debentures at 4% discount.
Bhawani Ltd. borrowed a loan of Rs. 80,000 from SBI for 5 years and issued 10%
Debentures of Rs. 1,00,000 to bank as a collateral security.
The interest on debentures is paid half yearly on 30th September and 31St March every
year. The company has sufficient balance in its Securities Premium Reserve Account at
the year end and it has decided to write off loss on issue of debentures from Securities
Premium Reserve Account.
Read above information and answer the following questions:
9. State the circumstances when debentures are issued for consideration other than cash.
Ans. Issue of debentures for purchase of assets to the vendor, (ii) Issue of debentures
for purchase of business of a company, (iii) Issue of sweat equity
10. Is Bhawani Ltd. correct in issuing debentures at a discount?
Ans. Bhawani Ltd. can easily issue debentures at discount as the Companies Act 2013
does not restrict issue of debentures at discount. However, it cannot issue shares at
discount as section 53 of the Companies Act, 2013 lays down some restrictions on the
issue of shares at discount.
11. Pass journal entry for the takeover of business of Swami Ltd. by Bhawani Ltd.
Ans.
April 1 Sundry Assets A/c Dr. 4,50,000
Goodwill A/c (Balancing figure) Dr. 1,00,000
To Sundry Liabilities A/c 70,000
To swami Ltd. 4,80,000
(Being assets and liabilities of Swami
Ltd. taken over for a consideration of Rs
4,80,000)
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12. How will you write off the loss on issue of debentures?
Ans. ‘Loss on issue of debentures’ will be written off from the Securities Premium
Reserve the company has sufficient balance in securities premium reserve account.
13. Which journal entry will be passed to write off ‘discount/loss on issue of debentures’?
Ans.
Date Particulars LF Dr. Cr.
Securities Premium Reserve A/c Dr. 95,000
To Loss on issue of Debentures A/c 95,000
(Being loss on issue of debentures written
off from securities premium reserve i.e.,
Rs. 75,000+ Rs. 20,000= Rs. 95,000)
14. Calculate the interest on the debentures that will be due on 30th September, 2021.
Ans.
Working notes:
Interest will be charged on: = 50,000
5,000, 10% debentures of Rs. 100 each issued for cash for the year
5,000, 10% debentures of Rs. 100 each issued for consideration
Other than cash for the year = 50,000
Total Interest for the year = 1,00,000
Total interest for the half year(6 months) = Rs. 50,000
On 1st April 2021, Shiksha ltd. issued 3,000, 12% Debentures of Rs. 100 each at par
redeemable at a premium of 7%. The debentures were to be redeemed at the end of the
third year.
On the basis of the above information, resolve the following issues.
15. Can the company write off the ‘Loss on Issue of Debentures’ over the period of 3 years?
Ans. No, because according to Accounting Standard 16, Borrowing cost requires that
the loss on issue of debentures be written off in the same year in which it is incurred.
16. From which source, the loss on issue of debentures will be written off?
Ans. In the absence of any information about Securities Premium Reserve, loss on issue
of debentures is written off from Statement of Profit and Loss.
17. How will you prepare the Loss on issue of Debentures Account?
Ans.
Date Particulars Amount Date Particulars Amount
2021 To premium on 21,000 2022 By statement of 21,000
April 1 redemption of Mar. 31 Profit and loss
debentures A/c
21,000 21,000
18. Under which sub-head and head, the amount of ‘Premium Payable on Redemption of
Debentures’ is shown in the balance sheet?
Ans. Premium Payable on redemption of debentures is shown as’ other non-current
liability’ under Non-current Liability in Equity and liabilities part of Balance Sheet.
19. Q Debenture holders are:
a) Owners of the company
b) Debtors of the company
c) Creditors of the company
d) Promoters of the company
Ans. c)
20. Debentures represent the:
a) Long term borrowing of the company
b) The investment of equity share holder
c) Directors share in a company
d) Short term borrowing of the company
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Ans. a)
21. Zero coupon bonds are issued:
a) At zero interest rate
b) With specified rate of interest
c) Without specified rate of interest
d) None of these
Ans. c)
22. Interest payable on debenture is:
a) An appropriation of profit of the company
b) A charge against profit of the company
c) Transferred to sinking fund investment account
d) Transferred to general reserve
Ans. b)
23. Debenture holder is entitled to:
a) Fixed dividend
b) Share in profits
c) Voting rights in the company
d) Interest at the fixed rate
Ans. d)
24. O On liquidation of company, principal amount of debentures is returned:
a) First of all
b) Last of all
c) Before equity capital
d) After equity capital
Ans. c)
25. Which of the following is not a characteristic of bearer debentures?
a) They are treated as negotiable instruments.
b) Their transfer requires a deed of transfer.
c) They are transferable by mere delivery.
d) The interest on it is paid to the holder irrespective of identify.
Ans. b)
26. Which of the following statements is false?
a) At maturity, debenture holders get back their money
b) Debentures can be forfeited for non-payment of call money
c) In company’s balance sheet, debentures are shown under the head long term
borrowings
d) Interest on debentures is a charge against profits
Ans. b)
27. Which of the followings statements is false
a) A company can issue redeemable debentures
b) A company can issue debentures with voting rights
c) A company can issue convertible debentures
d) A company can buy its own debentures and shares
Ans. b)
28. The debentures whose principal amount is not repayable by the company during its life
time, but the payment is made only at the time of liquidation of the company, such
debentures are called:
a) Bearer debentures
b) Redeemable debentures
c) Irredeemable debentures
d) Non-convertible debentures
Ans. c)
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29. Debentures application account is in the nature of
a) Real account
b) Personal account
c) Nominal account
Ans. b)
30. Discount on issue of debentures is in the nature of
a) Revenue loss
b) Capital loss
c) Deferred revenue expenditure
Ans. b)
31. Premium received on issue of debentures may be utilized for
a) For writing off discount allowed on issue of shares
b) For writing off premium allowed on redemption of debentures
c) For writing off preliminary expenses
d) All of the above
Ans. d)
32. A’ Limited purchase the assets from ‘B’ Limited for Rs.5,40,000. ‘A’ Limited issued
10% debentures of Rs. 100 each at 10% discount against the payment. The number of
debentures received by ‘B’ Limited will be:
a) Rs.54000
b) Rs. 5400
c) Rs. 60000
Ans. d)
33. A’ Limited purchase the assets from ‘B’ Limited for Rs.5,40,000 . ‘A’ Limited issued
10% debentures of Rs.100 each at 20% primium against the payment. The number of
debentures received by ‘B’ Limited will be
a) Rs. 4500
b) Rs. 5400
c) Rs. 45000
d) Rs. 6000
Ans. a)
34. ‘A’ Limited purchase the assets for ‘B’ Limited for Rs.8,10,000 . ‘A’ Limited issued
10% debentures of Rs. 100 each at 10% discount against the payment. The number of
debentures received by ‘B’ Limited will be
a) Rs. 8100
b) Rs. 9000
c) Rs. 90000
d) Rs. None of the above
Ans. b)
35. Debentures of a company can be issued:
a) For cash
b) For consideration other cash than cash
c) As a collateral security
d) Any of the above
Ans. d)
36. On issue of debentures as a collateral security, which account I created?
a) Debentures accounts
b) Bank loan account
c) Debentures holding accounts
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d) Debentures suspense account
Ans. a)
37. Debentures issued as collateral security will be debited to:
a) Bank account
b) Debentures suspense account
c) Debentures account
d) Bank loan accounts
Ans. b)
38. When debentures of Rs.1,00,000 are issued as collateral security against a loan of Rs.
1,50,000, the entry for issue of debentures will be:
a) Credit debentures Rs. 1,50,000 and debit bank A/c Rs.1,50,000
b) Debit debentures suspense A/c Rs.1,00,000 and credit bank A/c Rs. 1,00,000
c) Debit debentures suspense A/c Rs. 1,00,000 and credit debentures A/c Rs.
1,00,000
d) Debit cash A/c Rs. 1,50,000 and Credit Bank A/c Rs. 1,50,000
Ans. c)
39. Interest on debentures issued as a collateral security is paid on:
a) Nominal value of debentures
b) No interest is paid
c) Face value of debentures
d) Paid up value of debentures
Ans. b)
40. When debentures are to redeemed at premium an extra entry has to be made at the time
of issue of debentures, which A/c should be created in this entry?
a) Loss on issue of debentures A/c
b) Debentures redemption premium A/c
c) Bank A/c
d) Debentures holder’s A/c
Ans. a)
41. Premium on redemption of debentures account is:
a) Personal account
b) Real account
c) Nominal account
d) All of the above
Ans. a)
42. . X Ltd. Acquired assets of Rs.20 lakhs and took over creditors of Rs.20 thousand from
X Ltd. Issued 8% debentures of Rs.200 each at a discount of Rs.10% as purchase
consideration. Number of debentures issued will be:
a) Rs. 11000
b) Rs. 9000
c) Rs. 10000
d) Rs. 10100
Ans. a)
43. X Ltd. Purchase a building for Rs. 60,00,000 payable as 20% in cash and balance by
allotment of 8% debentures of Rs.500 each at a premium of 20% number of debentures
issued will be:
a) Rs. 9600
b) Rs. 12000
c) Rs.8000
d) Rs.10000
Ans. b)
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44. Sunrise Ltd. Purchase a building for Rs. 5,00,000 payable as 15% in cash and balance
by allotment of 9% debentures o Rs.100 each at a premium of 25% number of
debentures issued will be:
a) Rs. 4250
b) Rs. 4000
c) Rs. 5000
d) Rs.3400
Ans. d)
45. If vendors are issued of Rs. 80,000 in consideration of net assets of Rs. 100,000 the
balance of Rs.20,000 will be credited to:
a) Statement of profit & loss
b) Goodwill account
c) General reserve account
d) Capital reserve account
Ans. d)
46. If vendors are issued debentures of Rs. 4,40,000 in consideration of assets of Rs.
5,00,000 and liabilities of Rs.1,00,000 the balance of Rs. 40,000 will be debited to:
a) General reserve account
b) Capital reserve account
c) Goodwill account
d) Statement of profit & loss
Ans. c)
47. A Ltd. Issued 1,000 10% debentures of Rs.100 each at a premium of 5%. What will be
the total amount of interest for one year?
a) Rs.10,500
b) Rs.42,000
c) Rs.40,000
d) Rs.25,000
Ans. b)
48. On 1st april 2021 sunrise limited issued 5,000 8% debentures of Rs.100 each at a
discount of 5%. What will be the total amount of interest for the year ending 31st march
2022?
a) Rs. 38,000
b) Rs. 42,000
c) Rs. 40,000
d) Rs. 25,000
Ans. c)
49. Globe Ltd issue 20,000 9% debentures of Rs.100 each at a distance of 5% redeemable at
the end of 5 years at a premium of 6%. For what amount loss on issue of debentures
account will be debited?
a) Rs. 1,00,000
b) Rs. 1,20,000
c) Rs. 2,80,000
d) Rs. 2,20,000
Ans. d)
50. Issued 5000 12% debentures of Rs.100 each at discount of 2% redeemable at a premium
of 5% in such case:
a) Loss on issue will be credited by Rs.10,000
b) Loss on issue will be debited by Rs.35,000
c) Premium on redemption will be debited by Rs.25,000
d) Premium n redemption will be credited by Rs.35,000
Ans. b)
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51. Issued 4,000 12% debentures of Rs.100 each at premium of 4% redeemable at a
premium of 10% in such case:
a) Loss on issue will be debited by Rs. 24,000
b) Loss on issue will be debited by Rs. 56,000
c) Loss on issue will be debited Rs.40,000
d) Premium on redemption will be credited by Rs.24,000
Ans. c)
52. When debentures are to redeemed at a premium an extra entry has to be made at the
time of issue of debentures which A/c should be debited in this entry?
a) Loss on issues of debentures A/c
b) Debenture redemption premium A/c
c) Bank A/c
d) Debentures holder’s A/c
Ans. a)
53. Issued 10,000 8% debentures of Rs.100 each at a premium of 3% redeemable at a
premium of 5% in such case
a) Loss on issue will be debited by Rs.20,000
b) Loss on issue will be debited by Rs. 80,000
c) Loss on issue will be debited by Rs. 50,000
d) Premium on redemption will be credited by Rs.20,000
Ans. c)
54. Which of the following statement is false?
a) Debenture is a form of public borrowing .
b) It is customary to prefix debentures with the agreed rate of interest .
c) Debenture interest is charge against profits
d) The issue price and redemption value of debentures cannot differ.
Ans. d)
55. The principal amount of debentures will be repaid by the company either at the end of a
specified period or by installments during the life time of the company. Such types of
debentures are called:
a) Redeemable debentures
b) Irredeemable debentures
c) Convertible debentures
d) Bearer debentures
Ans. a)
Three / Four Marks Questions
1. From the following information of X Ltd, make necessary journal entries for the issue of
debentures:
(a) 6,000; 10% debentures of ₹ 100 each issued at discount of 10% to be redeemed after two years
at 5% premium.
(b) 10,000; 15% debentures of ₹ 50 each issued at 20% premium to be redeemed after three years
at par.
(c) 12,000; 20% debentures of ₹ 10 each issued to be redeemed after 18 months at 10% premium.
Solution: Journal entries in the books of X Ltd
Date Particulars L.F. Dr. (₹) Cr. (₹)
(a) 1 Bank A/c (6,000 x 90) Dr. 5,40,000
To 10% Debentures Appl. & Allot. A/c 5,40,000
(Being application money received for debentures)

(a) 2 10% Debentures Appl. & Allot. A/c Dr. 5,40,000
Loss on Issue of debenture A/c (60,000 + 30,000) Dr. 90,000
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To 10% Debenture A/c (6,000 x 100) 6,00,000
To Premium on Redemption A/c 30,000
(Being 10% debentures issued)
(b) 1 Bank A/c (10,000 x 60) Dr. 6,00,000
(b) 2 15% Debentures Appl. & Allot. A/c Dr. 6,00,000
To 15% Debenture A/c (10,000 x 50) 5,00,000
To Securities Premium Reserve A/c (10,000 x 10) 1,00,000
(c) 1 Bank A/c (12,000 x 10) Dr. 1,20,000
(c) 2 20% Debentures Appl. & Allot. A/c Dr. 1,20,000
Loss on Issue of Debenture A/c (12,000 x1) Dr. 12,000
To 20% Debenture A/c (12,000 x10) 1,20,000
To Premium on Redemption A/c (12,000 x1) 12,000
2. State the meaning for issue of debentures as collateral security. Show the journal entry, if the
company wants to take into accounts for this issue of debentures.
Solution: Issue of Debentures as Collateral Securities: Issue of debentures by a company as secondary
security other than the primary security against the bank loan is called, issue of debentures as ‘Collateral
Security’.
When record the issue of such debentures in the books of company –
Debenture Suspense A/c Dr. xxxx ------ (Shown on the Assets side)
To Debentures A/c ------ xxxx (Shown on the Liabilities side)
(being issue of debentures as collateral security)
3. Maneesh Ltd took over assets of 9,40,000 and liabilities of 1,40,000 0f Ram Ltd at an agreed
value of Rs 7,80,000. Maneesh Ltd paid to Ram Ltd by issue of 9% Debentures of 100 each at a
premium of 20%. Pass necessary journal entries to record the above transactions in the books of
Maneesh Ltd.
Solution: Journals
Date Particulars (Dr.) (Cr.)
1 Assets A/c Dr. 9,40,000 -------
To Liabilities A/c -------- 1,40,000
To Ram Ltd. A/c -------- 7,80,000
To Capital Reserve A/c -------- 20,000
(being business purchased)
2 Ram Ltd. Dr. 7,80,000 --------
To 9% Debenture A/c --------- 6,50,000
To Securities Premium A/c --------- 1,30,000
(Being 6,500, 9% debentures of 100 each issued at 20%
premium for purchase consideration)
Workings: Amount to be paid to Y Ltd. 7,80,000
No. of debentures to be issued = -------------------------------- = ----------- = 6,500 Debentures.
Face Value of Deb. + Premium 120
4. Maneesh Ltd took over assets of 9,40,000 and liabilities of 1,40,000 0f Ram Ltd at an agreed
value of 9,00,000. Maneesh Ltd paid to Ram Ltd by issue of 9% Debentures of 100 each at a
premium of 20%. Pass necessary journal entries to record the above transactions in the books of
Maneesh Ltd.
Solution: Journals
Date Particulars (Dr.) (Cr.)
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1 Assets A/c Dr. 9,40,000 -------
Goodwill A/c Dr. 1,00,000 -------
To Liabilities A/c -------- 1,40,000
To Ram Ltd. A/c -------- 9,00,000
(being business purchased)
2 Ram Ltd. Dr. 9,00,000 --------
To 9% Debenture A/c --------- 7,50,000
To Securities Premium A/c --------- 1,50,000
(Being 7,500, 9% debentures of 100 each issued at 20%
premium for purchase consideration)
Workings: Amount to be paid to Y Ltd. 9,00,000
No. of debentures to be issued = ------------------------------ = ----------- = 7,500 Debentures.
Face Value of Deb. + Premium 120
5. AB Ltd issued 12,000; 15% debentures of ₹ 100 each at 5% discount, to be redeemed after three
years at 10% premium.
There was a balance of securities premium reserve ₹ 1,50,000.
You are required to pass necessary journal entries for the issue of debentures and writing off of
loss on issue of debenture account.
1 Bank A/c (12,000 x 95) Dr. 11,40,000
2 15% Debentures Appl. & Allot. A/c Dr. 11,40,000
Loss on issue of debenture A/c (60,000 + 1,20,000) Dr. 1,80,000
To 15% Debenture A/c (12,000 x 100) 12,00,000
To Premium on redemption A/c (12,000 x 5) 60,000
3 Securities Premium Reserve A/c Dr. 1,50,000
Statement of Profit & Loss A/c Dr. 30,000
To Loss on issue of debenture A/c 1,80,000
(Bing loss issue of debentures written off)
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ANALYSIS OF FINANCIAL STATEMENTS
(A) Financial Statements of a Company
(01) List the items which are shown under heading ‘Current Liabilities & Provision’ as per the
Companies Act 2013.
Ans.: (a) Short term borrowings (b) Trade payables (c) Other current liabilities (d) Short term
provisions.
(02) List the major headings on the assets/liabilities side of the Balance Sheet of a company as per the
Companies Act 2013
Ans.:
EQUITY & LIABILITIES
(1) Shareholders’ Funds
(2) Non – current liabilities
(3) Current liabilities
ASSETS
(1) Non-Current Assets
(2) Current Assets
(03) State any three items which are shown under the heading ‘Reserves & Surplus’ in the Balance
Sheet of a company as per the Companies Act, 2013.
Ans.: (i) Capital Reserve
(ii) Securities Premium (Reserve)
(iii) Capital Redemption Reserve.
(iv) Debenture Redemption Reserve
(v) Revaluation Reserve
(vi) Share Options Outstanding Account
(vii) Other reserves (a) General/Tax/Subsidy Reserve/Amalgamation Reserve
(viii) Surplus i.e., balance in Statement of Profit and Loss.
In case the final balance of the Statement of profit and loss shows a debit balance the
same should be shown as deduction from the totals of reserves.
(04) State the major headings under which the following items will be put as per the Companies Act
12013:
Ans.:
S.N. Name of item Sub-Head Major Head
01 Sundry Creditor Trade Payables Current Liabilities
02 Provision for Tax Short-term Provision Current Liabilities
03 Unclaimed Dividend Short-term Provision Current Liabilities
04 Loose Tools Inventories Current Assets
05 Securities Premium Reserve & Surplus Share holder’s Fund
06 Goodwill Fixed Assets Non-current Assets
07 Long-term Investment Non-current Investments Non-current Assets
08 Unpaid Dividend Other Current Liabilities Current Liabilities
09 Motor Car Fixed Assets Non-current Assets
10 Discount on issue Other Long-term Liabilities Non-current Laibilities
Expected Questions:
(05) List the items which are presented under the major head “Current Assets” as per the Companies
Act 2013.
Solution:
The items which are presented under the major head „Current Assets‟ as per the Companies Act
2013, are given below:
(a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents
(e) Short-term loans and advances. (f) Other current assets.
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(06) List the different items which are presented under the major head. „Non-current Assets‟ as per the
Companies Act 2013.
Solution:
Non-Current Assets
(a) Fixed Assets
(i) Tangible assets
(ii) Intangible assets
(b) Non-current investments
(c) Long term loans and advances
(d) Other non-current assets.
(07) Under what heads and sub-heads the following items will appear in the Balance sheet of a
company:
(i) Computer Software
(ii) Share Forfeiture Account
(iii) Security deposit for telephones
(iv) Employees Earned leave payable on retirement
(v) Proposed dividend
(vi) Profit & Loss Account (Dr.)
Solution:
S.N. Name of item Sub-Head Major Head
01 Computer Software Fixed Assets Non-current Assets
02 Share Forfeiture Account Share Capital Shareholder’s Fund
03 Security deposit for telephones Long-term loans & advances Non-current Assets
04 Employees Earned leave payable Long-term provisions Non-current
on retirement Liabilities
05 Proposed Dividend Short-term Provision Current Liabilities
06 Profit & Loss Account (Dr.) Reserve & Surplus Shareholders Fund
(B) Financial Statement Analysis: Objectives and Limitations
(01) Briefly explain the interest of investors and management in the analysis of financial statements.
Ans.: Investors are interested in analyzing financial statements to assess the safety of their
investment & ensuring of returns regularly. Management is interested in analyzing financial
statements to know the performance of business as a whole (profitability) and short-term &
long-term solvency position of the business firm.
(02) Explain the meaning of analysis of financial statements.
Ans.: Analysis of financial statements is a systematic process for the critical examination of
financial information contained in the financial statements in order to understand and make
decisions regarding the operations in the firm. OR
Analysis of financial statements is a systematic process of identifying the financial strengths
and weaknesses of the firm by establishing relationship between the items of the Balance
Sheet and Income Statement.
(03) Explain briefly any three limitations of analysis of financial statements.
Ans.: (a) Limitations of Financial Statements: as influence of accounting concepts, disclosure
of only monetary facts etc.
(b) Not Free from Bias: personal judgment & discretion of the account and management.
I Ignores Price level Changes: fails to disclose current worth of the enterprise as the financial
statements are merely historical facts.
(d) Window Dressing: manipulation of accounts to conceal vital facts and presentation of the
financial statements so as to show a position better than what it actually is.
(04) What is the importance of Financial Statement Analysis?
Ans.: (a) Assessing the Profitability (b) Judging the Efficiency (c) Judging the Liquidity
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(05) State one limitation of Financial Statement Analysis.
Ans.: As the answer of question no. 03.
(06) State the significance of Analysis of Financial Statements to the ‘Lenders/Creditors/Managers’.
(07) What is Horizontal Analysis? / What is Vertical Analysis?
Ans.: Horizontal analysis shows comparison of financial data for several years against a
chosen year. Example – Comparative financial statements.
Vertical analysis is made to review and analyze the financial statements of one particular year
only. Example – Ratio Analysis
(08) State how qualitative aspects are ignored in Financial Statement Analysis?
Ans.: Financial statements produces the performance & position of a firm in monetary terms
only and excluded the things which cannot be expressed or recorded in monetary terms like
quality of management, quality of labour force, public relations etc.
(09) State one objective of Financial Statement Analysis.
(10) How is ‘window dressing’ a limitation of Financial Statement Analysis?
Ans.: As the answer of question no. 03 (d).
Expected Questions:
(11) What is Intra-firm Analysis?
Ans.: A comparison of financial variables of a firm over a period of time. In other words,
comparison of one year of performance with previous years’ performance is called intra-firm
comparison.
(12) What is Inter-firm Analysis?
Ans.: It analyses and compares financial variables of two or more firms to determine the
competitive position of these firms.
One Mark Questions
1 Which category of ratios measures how well the facilities at the disposal of the concern are
being utilized?
2 Assertion (A): Proposed dividend for the current year is a contingent liability.
Reason (R): Proposed dividend for the current year is not recorded in the books of account.
(a) Both A & R are true & R is the correct explanation of A.
(b) Both A & R are true & R is not the correct explanation of A.
(c) A is true but R is false.
(d) R is true but A is false.
Case Study: Following are the information of some items of Ajay Ltd. for the year 2022:
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Preliminary Expenses 2,40,000 Motor Vehicles 4,75,000

Goodwill 30,000 Stock in trade 1,40,000
Discount on issue of Debentures 20,000 Provision for tax 1,35,000
10% Debentures 2,00,000 Cash at bank 1,20,000
Bills receivable 16,000 Loose tools 12,000
Based on the above information you are required to answer the following questions.
(Q. 3 to Q.6)
3 Which of the following items is shown under the head ‘Current Assets‘ while preparing
company‘s Balance Sheet as per Schedule III of Company Act 2013?
(a) Motor Vehicles, Stock in trade, Provision for tax, Cash at bank, Loose tools
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(b) Bills receivable, Stock in trade, Provision for tax, Cash at bank, Loose tools
(c) Bills receivable, Stock in trade, Cash at bank, Loose tools
(d) Stock in trade, Provision for tax, Cash at bank, Loose tools, Preliminary Expenses.
4 Which of the following items is shown under the head ‘Non-Current Assets ‘while
preparing company’s Balance Sheet as per Schedule III of Company Act 2013?
(a) Motor Vehicles, Stock in trade, Goodwill, Cash at bank, Loose tools
(b) Bills receivable, Goodwill, Motor Vehicles, Loose tools
(c) Goodwill, Motor Vehicles, Loose tools
(d) Goodwill, Motor Vehicles
5 Loose tools are shown under the sub head _________ of the Balance Sheet as per Revised
Schedule III of Companies Act, 2013.
(a) Fixed Assets (b) Other Current Assets
(c) Inventories (d) Stocks
6 Goodwill is shown under the sub head _________ of the Balance Sheet as per Revised
Schedule III of Companies Act, 2013.
(a) Fixed Assets (b) Non-Current Assets
(c) Intangible Assets (d) Tangible Assets
7 Which of the following is not a limitation of analysis of financial statements?

(a) Window Dressing (b) Price level changes ignored
(c) Subjectivity (d) Intra-firm comparison possible
8 Financial Analysis becomes useless because it __________.

(a) Measures the profitability (b) Measures the solvency
(c) Lacks qualitative analysis (d) Makes a comparative study
Case Study: Following are the information of some items of Bahadur Ltd. for the year 2022:
Particulars Amount (Rs.) Particulars Amount (Rs.)
Preliminary Expenses 2,40,000 Motor Vehicles 4,75,000

Goodwill 30,000 Stock in trade 1,40,000
Discount on issue of 20,000 Provision for tax 1,35,000
Debentures Cash at bank 1,20,000
10% Debentures 2,00,000 Loose tools 12,000
Bills receivable 16,000
Based on the above information you are required to answer the following questions. (Q.9 to
Q.12)
9 How much amount is shown under the head ‘Current Assets‘ while preparing company‘s
Balance Sheet as per Schedule III of Company Act 2013?
(a) Rs. 8,82,000
(b) Rs. 4,23,000
(c) Rs. 2,88,000
(d) Rs. 6,47,000.
10 How much amount is related to the sub head ‘Reserves & Surplus’ of the Balance Sheet as
per Revised Schedule III of Companies Act, 2013.
(a) Rs. 2,60,000 (b) Rs. 3,95,000
(c) Rs. 20,000 (d) Rs. 2,40,000
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11 How much amount is shown under the head ‘Non-Current Assets‘ while preparing
company‘s Balance Sheet as per Schedule III of Company Act 2013?
a) Rs. 8,82,000 (b) Rs. 5,33,000
(c) Rs. 5,17,000 (d) Rs. 5,05,000
12 How much amount is shown under the Sub-head ‘Inventories‘ while preparing company‘s
Balance Sheet as per Schedule III of Company Act 2013?
(a) Rs. 1,50,000 (b) Rs. 1,52,000
(c) Rs. 2,88,000 (d) Rs. 3,47,000
13 Assertion (A): Horizontal analysis is also known as static analysis.

Reason (R): Static analysis is made to review & analyse the financial statements of one year
only.
(a) Both A& R are true & R is the correct explanation of A.
(b) Both A& R are true & R is not the correct explanation of A.
(c) A is true but R is false.
(d) R is true but A is false.
14 Which analysis is considered as dynamic?

(a) Horizontal Analysis (b) Vertical Analysis
(c) Internal Analysis (d) External Analysis
15 Sale of services is a part of ____________ .

(a) Other income (b) Other expenses
(c) Finance of cost (d) Revenue from operations
16 Balance sheet of a company is required to be prepared as per the format given in

(A) Schedule III Part II (B) Schedule III Part I
(C) Schedule III Part III (D) Schedule II Part I.
17 Which of the following is not required to be prepared under the Companies Act
(A) Statement of Profit and Loss (B) Balance Sheet
(C) Report of Director’s and Auditor’s (D) Funds Flow Statement
18 As per Companies Act, the Balance Sheet of a company is required to be presented in

……………
(a) Horizontal Form (b) Vertical Form
(c) Either Horizontal or Vertical Form (d) Neither of the above
19 Analysis of Financial Statement is significant

(a) For creditors (b) For Managers
(c) For employees (d) All the above
Answers to Objective Type Questions:
1. Activity Ratios or Turnover Ratios
2. (b) Both A& R are true & R is not the correct explanation of A.
Hint: Because it is subject to the approval by the shareholders, who may reduce the amount of dividend to be
paid.
3. (c) Bills receivable, Stock in trade, Cash at bank, Loose tools
4. (d) Goodwill, Motor Vehicles
5. (c) Inventories
6. (a) Fixed Assets
7. (d) Intra-firm comparison possible
8. (c) Lacks qualitative analysis
9. (c) Rs. 2,88,000
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10. Rs. 2,60,000
11. Rs. 5,05,000.
12. Rs. 1,52,000.
13. (d) R is true but A is false.
Hint: Horizontal analysis is known as dynamic analysis.
14. (a) Horizontal Analysis
15. (d) Revenue from operations
16. (B) Schedule III Part I
17. (C) Report of Director’s and Auditor’s
18. (b) Vertical Form
19. (d) All the above
Analysis of Financial Statements
CASH FLOW ANALYSIS

Cash flow analysis is the study of the changes in the financial position of a business enterprise during a
given period on the basis of cash.
In other words, it studies the changes in the cash position of a business enterprise between two balance-
sheet dates.
Its main aim is to maintain an adequate cash flow for the business, and to provide the basis for cash
flow management.
Cash flow analysis is a method of analyzing the financing, investing, and operating activities of a
company. The primary document used in cash flow analysis is the cash flow statement.
RATIO ANALYSIS
Accounting ratio shows the relationship between two accounting figures.
Ratio analysis is the process of computing and presenting the relationships between the items in the
financial statement.
It is an important tool of financial analysis, because it helps to study the financial performance and
position of a concern.
Ratios show strengths and weaknesses of the business.
Ratio Analysis has been widely used as a tool for analyzing the performance of the company over the
years.
Trend of the ratios indicates whether the company is moving in the right direction or not.
♫ Current ratio is 2:1. State whether ratio will improve, decline or no change if a creditor of
5,000 has been paid.
Ans. & Hints: Assumed as the Current Assets is 20,000 & Current Liabilities 10,000.
Payment to creditor of Rs 5,000 will reduce the current assets and current liabilities too.
Therefore, the proportion between them will be 15,000 : 5,000. Thus, the new Current ratio
will be 3:1. Hence, Current Ratio will be Improve.
HINTS
(1) Only Numerator increased or only Denominator decreased than ratio will improve.
(2) Only Numerator decreased or only Denominator increased than ratio will decline.
(3) Numerator and Denominator increased with same figures, ratio will decline.
(4) Numerator and Denominator decreased with same figures, ratio will improve.
Current Assets are Numerator & Current Liabilities are Denominator in Current
Ratio.
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Ratios Analysis: Formulas & Significance
Current Ratio: This ratio shows short-term financial position of the firm. Higher the
Current Assets ratio shows greater short-term solvency but a very higher ratio shows
Current Liabilities idleness of working capital. Standard (ideal) ratio is 2:1.
Liquid/Quick Ratio: This ratio is based on those current assets which are highly liquid.
Quick Assets Higher the Liquid/Quick/Acid-Test ratio better the short-term
Current Liabilities financial position of the firm. Standard ratio is 1:1.
Debt-Equity Ratio: This ratio judges the long-term financial position & soundness of long-
Long-term Debt term financial policies of the firm. Lower the ratio provides higher
Equity/Shareholders Fund degree of protection to lender. Standard Ratio – 2:1.
Equity = Paid-up sh.capital+Pref.Sh.Cap.+Reserves – Fict.Assets
Total Asset to Debt Ratio: This ratio measures the safety margin available to the suppliers of
Total Assets long-term debts.
Lon-Term Debts
Proprietary Ratio This ratio shows the extent to which the total assets have been financed
Shareholder Funds X 100 by the proprietor. Higher the ratio, greater the satisfaction for lenders
Total Assets and creditors. Standard Ratio – 2:1.
Stock Turnover Ratio: This ratio measures how fast the stock is moving through the firm and
Cost of Goods Sold generating sales. Higher the ratio, the more efficient management of
Average Stock inventories and vice-versa. It is expressed in times.
Receivable Turnover ratio: This ratio indicates economy and efficiency in the collection of
Net Credit Sales amount due from debtors. Higher the ratio, better it is since it indicates
Average Accts Receivables that debts are being collected more quickly.
Payable Turnover Ratio: It indicates the number of times the creditors are turned over in relation
Net Credit Purchases to purchases. A higher turnover ratio or shorter payment period shows
Average Payable the availability of less credit or yearly payments.
Working Capital This ratio shows the number of times the working capital has been
Turnover: employed in the process of carrying on of business. Higher the ratio,
COGS / Net Sales better the efficiency in the utilization of working capital.
Net working Capital If, COGS & Net Sales both are given than COGS should be used.
COGS=Cost of Goods Sold
Fixed Assets Turnover: A higher ratio indicates efficient utilization of fixed assets and vice-
Net Sales versa. Net Fixed Assets = Fixed Assets – Depreciation.
Net Fixed Assets
Gross Profit Ratio; This ratio indicates the relationship between gross profits and net
Gross Profit X 100 sales. Higher ratio shows low cost of goods sold.
Net Sales
Operating Ratio: This ratio is calculated to judge the operational efficiency of the
COGS + Operating Exp. business. A decline in the ratio, is better because it would leave a high
X 100 margin, which means more profits.
Net Sales
Net Profit Ratio: It indicates overall efficiency of the business. Higher the ratio, better
Net Profit X 100 the business.
Net Sales
Return on Investment: It judges the overall performance of the business. It measures, how
(Capital Employed) efficiently the sources entrusted to the business are used.
PBIT & D X 100 Capital Employed = Share Capital + Reserves + Long-Term Loans –
Capital Employed Fictitious Assets – Non-operating Assets. OR
= Fixed Assets + Investments + Working Capital.
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(01) The Current Ratio of a company is 3:1. State with reason whether the payment of Rs 20,000 to the
creditors will increase, decrease or not change the ratio.
Ans.: The Current Ratio will increase due to payment to the creditors, current assets and
current liabilities will be reduced by the same amount.
(02) Quick Ratio of a company is 3:1. State with reason whether the ratio will improve, decline or not
change on payment of dividend by the company.
Ans.: Quick Ratio will improve as both liquid assets and current liabilities will decrease by
the same amount.
(03) The Stock Turnover Ratio of a company is 3 times. State, giving reason, whether the ratio
improves, decline or does not change because of increase in the value of closing stock by Rs 5,000.
Ans.: Stock Turnover Ratio will decline because the amount of average stock will increase
but cost of goods sold will remain same.
(04) The GP Ratio of a company is 50%. State with reason whether the decrease in rent received by Rs
15,000 will increase, decrease or not change the ratio.
Ans.: Decrease in rent received will not change the gross profit ratio because rent received
neither effects the gross profit or the net sales.
(05) The Quick ratio of a company is 1:1. State giving reasons, (for any four) which of the following
would improve, reduce or not change the ratio?
(a) Purchase of machinery for cash
(b) Purchase of goods on credit
(c) Sale of furniture at cost
(d) Sale of goods at a profit
(e) Redemption of debentures at a premium
(a) Decrease. As Quick assets decreased but current liabilities remain unchanged.
(b) Decrease. As current liabilities increased but quick assets remain unchanged.
(c) Improve. As Quick assets increased but current liabilities remain unchanged.
(d) Improve. As Quick assets increased but current liabilities remain unchanged.
(e) Decrease. As Quick assets decreased but current liabilities remain unchanged.
(06) The Debt-Equity ratio of a company is 0.8:1. State whether the long-term loan obtained by the
company will improve, decline or not change the ratio.
Ans.: Debt-Equity Ratio will improve as the long-term debts will increase but total
shareholders’ funds remain unchanged.
(07) What will be the operating profit ratio, if operating ratio is 83.64%?
Ans.: Operating Profit Ratio = 100 – 83.64 = 16.36 %
(08) OM Ltd has Current Ratio is 3.5:1 and Quick Ratio is 2:1. If the excess of Current Assets over the
Quick Assets as represented by Stock is 1,50,000.
Calculate Current Assets and Current Liabilities.
Ans.:
Let’s Current Liabilities be X, therefore, Current Assets = 3.5X and Quick Assets = 2X
Stock = Current Assets – Quick Assets;
1,50,000 = 3.5X – 2X; 1.5X = 1,50,000; X = 1,00,000
Current Assets = 3.5 X 1,00,000 = 3,50,000; Current Liabilities = 1,00,000.
(09) (a) A business has a Current ratio of 3:1 and a Quick ratio of 1.2:1. If the Working capital is
1,80,000, calculate the total current liabilities value of stock.
Ans.:
Let’s Current Liabilities be X, therefore, Current Assets = 3X and Quick Assets = 1.2X
Working Capital = Current Assets – Current Liabilities
1,80,000 = 3X – X; 2X = 1,80,000; X = 90,000 i.e. current liabilities
Current Assets = 2,70,000; Quick Assets = 1,08,000; Stock = Current Asset –
Quick Assets
Stock = 2,70,000 – 1,08,000 = 1,62,000.
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(b) From the given information calculate the Stock turnover ratio: Sales 2,00,000; GP 25% on
cost; Stock at the beginning is 1/3 of the stock at the end which was 30% of Sales.
Ans.:
Cost = X; Gross Profit = 25% on X; GP = X/4
Sales = Cost + Gross Profit; 2,00,000 = X + X/4; 2,00,000 = 5X/4; 5X = 8,00,000; X(Cost)
=1,60,000.
Stock at the end = 30% on Sales; = 60,000; Opening Stock = 1/3 of 60,000 = 20,000
Average Stock = (60,000 + 20,000) / 2 = 40,000
Stock Turnover Ratio = Cost of goods sold / Average Stock
STR = 1,60,000 / 40,000 = 4 Times.
(10) Assuming that the debt-Equity ratio is 2. State giving reasons whether this ratio would increase,
decrease or remain unchanged in the following cases (Any four):
(a) Purchase of fixed asset on a credit of 2 months.
(b) Purchase of fixed asset on a long-term deferred payment basis.
(c) Issue of new shares for cash.
(d) Issue of bonus shares.
(e) Sale of fixed asset at a loss of 3,000.
Solution:
(a) No change. Neither equity nor the debts are affected.
(b) Increase. As the debts are increasing.
(c) Decrease. As Shareholders’ Funds will increase.
(d) No change. Neither the total long-term debt nor the total shareholders’ funds are affected.
(e) No change. Shareholders’ funds are decreased by loss but LT debts remain unchanged.
(11) (a) Net profit after interest but before Tax 1,40,000. 15% long term debts 4,00,000, Share
holders funds 2,40,000; Tax Rate 50%. Calculate Return on Capital Employed (Investment)
ROI = Net Profits before Interest, Tax & Dividend / Capital Employed X 100
NPBI&T = 1,40,000 + 60,000 = 2,00,000
Capital Employed = Shareholders’ funds + Lon-term Debts + Reserve & Surplus
= 2,40,000 + 4,00,000 + (1,40,000 – 70,000 Tax) = 6,40,000 + 70,000 =
7,10,000.
Return on Investment = 2,00,000 / 7,10,000 X 100; = 28.17 %.
(b) Opening Stock 60,000; Closing Stock 1,00,000; Stock turn over ratio 8 times; Selling price
25% above cost. Calculate the Gross Profit Ratio.
Gross Profit Ratio = Gross Profit / Net Sales X 100; Gross Profit = Sales – Cost of goods sold
Average Stock = Opening stock + Closing stock / 2; = 60,000 + 1,00,000 / 2 = 80,000
8 = Cost of goods sold / 80,000; Cost of goods sold = 6,40,000
Selling price 25% above cost, therefore Gross profit = 25% of 6,40,000 = 1,60,000
Selling Price = 6,40,000 + 1,60,000 = 8,00,000.
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Cash Flow Statement
Cash flow statement is a part of financial statements which is required to prepare by companies as per
Accounting Standard – 3 and provisions of the Companies Act.
The statement of cash flow shows inflows and outflows of the cash and cash equivalents of an
enterprise over a period of time from various activities of an enterprise.
This information is useful in providing users of financial statements with a basis to assess the ability of
the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash
flows.
Cash Flow Statement to be prepared as per AS-3:
(A) Cash Flow from Operating Activities
(B) Cash Flow from Investing Activities
(C) Cash Flow from Financing Activities
Cash Flow – Cash flow from business activities either inwards the business or outwards from the
business.
Flow of cash towards the business from its activities is called – Inflow of Cash.
Flow of cash outwards from the busines with its activities is called – Outflow of cash.
Cash flow statement shows inflows (receipts) and outflows (payments) of cash and cash equivalents of
an enterprise during a specified period of time.
Objectives:
(A) To provide information about cash flow from operating, investing and financing activities
during a specific period.
(B) To provides the information about the direction of flow of cash from one activity to another.
(C) To enables the users to assess the ability of the enterprise to generate cash and cash
equivalents.
1. Operating Activity is the principal revenue producing activity of the enterprise,
2. Financing Activity is that activity which changes the size & composition of owner’s
capital & borrowing of the enterprise
3. Investing Activity include the acquisition and disposal of long-term assets.
Cash Flow from Operating Activity has four important sections as –
(a) Net profit before tax & dividend
(b) Adjustments for Non-Cash and Non-Operating charges, losses / Incomes, gains
(c) Adjustments for changes in Working Capital
(d) Tax paid during an accounting period
Sample Format for Cash Flow from Operating Activity
Statement showing computation of Cash Flow from Operating Activities (Indirect Method)
Note No. ----------
Net Profits before Tax & Dividend (1)
Adjustment for Non-Cash & Non-Operating Items: (2) ---------
Add: Depreciation ---------
Add: Transfer to General Reserve ---------
Add: Goodwill Written Off --------
Add: Loss on sale of Fixed Asset (-------) ---------
Less: Gain on sale of Fixed Asset ----------
Operating Profit before change in working capital ---------
Adjustment for working capital changes: (3) ---------
Add: Increase in Current Liabilities (Inflow) ---------
Add: Decrease in Current Assets (Inflow) (--------)
Less: Increase in Current Assets (Outflow) (--------)
Less: Decrease in Current Liabilities (Outflow) ----------
(--------)
Less: Income Tax Paid (4) --------------
Net Cash flow From Operating Activities
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(1) Net Profit before tax and dividend
Net Profit (Difference of two years Reserves & Surplus) + provided Tax + Provided Dividend
(2) Adjustments for Non-Cash and Non-Operating charges, losses / Incomes, gains
 Add: Those non-cash & non-operating items which is charged while preparing statement
of profit & loss account but for which there was no flow of cash –
>> Depreciation on fixed tangible assets
>> Amortization on fixed Intangible assets
>> Loss on sale of fixed assets
>> Interest paid on borrowings
>> Transfer to General Reserve
 Less: Those non-cash & non-operating incomes, gains which were taken into account
while preparing statement of profit & loss account but for which there was no flow of cash
–
>> Gain on sale of fixed assets
>> Interest, Dividend received on Investments
(3) Adjustments for changes in Working Capital
Working Capital = Current Asset – Current Liabilities
Flow of cash due to change in working capital is not counted while preparing statement of profit &
loss account, therefore, cash flow due to changes in working capital during an accounting period must
be considered while preparing Cash Flow from Operating Activity.
** The balance Creditors at the beginning of year was 22,000 and at the end of year 12,000.
>>> 10,000 paid to creditors during an accounting year is called “Out Flow of Cash”
Therefore, if Current Liabilities has been decreased are called – out flow of cash; and Current Liabilities
has been increased are called – In Flow of Cash
** The balance of Stock at the beginning of year was 45,000 and at the end of year 20,000.
>>> 25,000 decrease in stock due to sale and amount of cash received is called “In-Flow”
Therefore, if Current Assets has been decreased are called – In-Flow of Cash; and Current Assets has
been increased are called – Out-Flow of Cash.
Changes in Working Capital Current Assets Current Liabilities
Increase Out-Flow of Cash In-Flow of Cash
Decrease In-Flow of Cash Out-Flow of Cash
(4) Tax paid during an accounting period
Cash Flow from Financing Activities
(1) Issue of shares -------------------------- : In-Flow of Cash
(2) Issue of Debentures ----------------------- : In-Flow of Cash
(3) Borrowing long term Loans ------------------- : In-Flow of Cash
(4) Interest paid on Debentures, Loans ----------- : Out-Flow of Cash
(5) Dividend paid to shareholders ---------------- : Out-Flow of Cash
(6) Redemption / Re-Payment of Debentures / Loans - : Out-Flow of Cash
Cash Flow from Investing Activities
(1) Purchase of Fixed Assets-------------------- : Out-Flow of Cash
(2) Investment made to outside ----------------- : Out-Flow of Cash
(3) Investment Sold ---------------- : In-Flow of Cash
(4) Old Fixed Asset (Tangible) Sold -------------- : In-Flow of Cash
(5) Interest, Dividend received --------------- : In-Flow of Cash
Cash Flow Statement
(A) Cash Flow from Operating Activities XXXX
(B) Cash Flow from Financing Activities XXXX
(C) Cash Flow from Investing Activities XXXX
Cash Inflow during year from business activities XXXX
Add: Opening Cash & Cash Equivalents XXXX
Closing Cash & Cash Equivalents XXXX
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One Mark Questions
Question 1. Issue of shares in consideration of purchase of plant and machinery results into :
(a) Inflow of Cash (b) Outflow of Cash
(c) Neither Inflow nor Outflow (d) None of these
Answer: (c) Neither Inflow nor Outflow
Question 2. Under which type of activity will you classify ‘sale of shares of another company’ while
preparing the cash flow statement?
Answer: ‘Sale of shares of another company’ will be classified under Investing Activity while preparing the
cash flow statement.
Question 3.
If net profit is ₹ 50,000 after writing off goodwill ₹ 10,000 then the cash flow from operating activities will
be:
(a) ₹ 60,000 (b) ₹ 40,000 (c) ₹ 50,000 (d) ₹ 30,000
Answer: (a) ₹ 60,000
Question 4.
If net profit is ₹ 35,000 after writing off good will ₹ 6,000 and loss on sale of furniture ₹ 1,000, cash flow
from operating activities will be :
(a) ₹ 35,000 (b) ₹ 42,000 (c) ₹ 29,000 (d) ₹ 28,000
Answer: (b) ₹ 42,000
Question 6.
Cash from operating activities will decrease due to :
(a) Increase in Current Assets (b) Decrease in Current Liabilities
(c) Neither of the two (d) Both (a) and (b)
Answer: (d) Both (a) and (b)
Question 8.
While calculating operating profit which will be added to net profit:
(a) Interest received (b) Profit on sale of Asset
(c) Increase in General Reserve (d) Refund of Tax
Answer: (c) Increase in General Reserve
Question 9.
While calculating cash flow from operating netivities which will be deducted ?
(a) Increase in Creditors (b) Increase in Debtors
(c) Decrease in Debtors (d) Decrease in Prepaid Expenses
Answer: (b) Increase in Debtors
Question 10.
While calculating cash flow from operating activities, which will be added ?
(a) Increase in Stock (b) Increase in Creditors
(c) Decrease in Bills Payable (d) Increase in Debtors
Answer: (b) Increase in Creditors
Question 11.
An example of Cash Flow from Investing Activities :
(a) Cash Sales (b) Issue of Shares
(c) Payment of cash for purchase of machinery (d) Payment of Dividend
Answer: (c) Payment of cash for purchase of machinery
Question 12.
An example of Cash Flows from Financing Activity is :
(a) Sale of goods (b) Sale of Investment
(c) Cash receipts from issue of shares (d) Interest received
Answer: (c) Cash receipts from issue of shares
Question 13.
How will you treat payment of ‘Interest of Debentures’ while preparing a Cash Flow Statement ?
(a) Cash Flow from Operating Activities (b) Cash Flow from Investing Activities
(c) Cash Flow from Financing Activities (d) Cash Equivalents
Answer: (c) Cash Flow from Financing Activities
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Question 14.
Where will you show purchase of goodwill in Cash Flow Statement:
(c) Cash Flow from Financing Activities (d) Cash Equivalent
Answer: (b) Cash Flow from Investing Activities
Question 15.
Interest received by a finance company is classified under which kind of activity while preparing a Cash
Flow Statement ?
(a) Cash Flow from Operating Activities (b) Investing Activities
(c) Financing Activities (d) Cash Equivalent
Answer: (a) Cash Flow from Operating Activities
Question 16.
Which of the following item is considered as cash equivalents:
(a) Bank Overdraft (b) Bills Receivable
(c) Debtors (d) Short-term Investment
Answer: (a) Bank Overdraft
Question 17.
Which of the following item is not considered as cash equivalents ?
(a) Bank Overdraft (b) Commercial Papers
(c) Treasury Bills (d) Investment
Answer: (d) Investment
Question 18.
Cash payment to employees is a Cash Flow from:
(a) Operating Activities (b) Investing Activities
(c) Finance Activities (d) All the above
Answer: (a) Operating Activities
Question 19.
Which of the following is not a Cash in Flow ?
(a) Sale of Fixed Asset (b) Purchase of Fixed Asset
(c) Issue of Debentures (d) Sale of Goods for Cash
Answer: (b) Purchase of Fixed Asset
Question 20.
In cash flow statement, the item of ‘Interest’ is shown in:
(a) Operating Activities (b) Investing Activities
(c) Financial Activities (d) In both (d) & (c)
Answer: (d) In both (d) & (c)
Question 21.
Which of the following is not a Cash Outflow:
(a) Increase in Creditors (b) Increase in Debtors
(c) Increase in Stock (d) Increase in prepaid expenses
Answer: (a) Increase in Creditors
Question 22.
Cash from operation is equal to :
(a) Net Profit + Increase in Current Assets
(b) Net Profit + Decrease in Current Liabilities
(c) Operating Profit + Adjustment of Current Assets and Current Liabilities
(d) All of the above
Answer: (b) Net Profit + Decrease in Current Liabilities
Question 23. Income tax refund is a cash of:
(a) Source (b) Application (c) Both (a) & (b) (d) None of these
Answer: (a) Source
Question 24. Cash Flow Statement in based upon:
(a) Cash basis of accounting (b) Accrual basis of accounting
(c) (a) and (b) both (d) None of these
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Answer: (a) Cash basis of accounting
Question 25.
Cash Flow Statement is related to:
(a) AS-3 (b) AS-6 (c) AS-9 (d) AS-12
Answer: (b) AS-6
Question 26.
Cash Flow Statement is prepared from:
(a) Balance Sheet (b) Profit & Loss Account
(c) Additional Information (d) All of these
Answer: (d) All of these
Question 27.
Following Is included in Cash Flow from Operating Activities:
(a) Royalties, Fees, Commission (b) Purchase of Debentures
(c) Purchase of Machinery (d) issue of Shares
Answer: (a) Royalties, Fees, Commission
Question 28.
Following are included in cash equivalent:
(a) Treasury Bill (b) Trade Bill
(c) Bank Deposits of Short Maturity Period (d) All of above
Answer: (d) All of above
Question 29.
Claims received from Insurance Companies are treated as:
(c) Cash Flow from Financing Activities (d) None of these
Answer: (a) Cash Flow from Operating Activities
Question 30.
Which activity comes under ‘Operating Activities’ ?
(a) Purchase of Land (b) Issue of Debentures
(c) Proceeds from Issuance of Equity Shares (d) Cash Sales
Answer: (d) Cash Sales
Question 31.
Which of the following is not a cash inflow ?
(a) Decrease in Debtors (b) Issue of Debentures
(c) Decrease in Creditors (d) None of these
Answer: (c) Decrease in Creditors
Question 32.
Which one of following is not a non-cash item ?
(a) Cash Sales (b) Goodwill written off
(c) Depreciation (d) Provision of Bad Debts
Answer: (a) Cash Sales
Question 33.
Cash flow statement according to AS-3 is mandatory to:
(a) All enterprises (b) Companies listed on a stock exchange
(c) Enterprises having turnover expending 50 Rs crore (d) (b) & (c) both
Answer: (d) (b) & (c) both
Question 34.
Decrease in Current Asset is……….in operating profit
(a) Subtracted (b) Added (c) Divided (d) Multiplied
Answer: (b) Added
Question 35.
Following are true about cash equivalent:
(a) More Liquid Short-term Investment (b) Minimum risk
(c) Maturity of 3 months or less than 3 months (d) All the above
Answer: (d) All the above
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Question 36.
Which of the following activity comes under Financial Activities ?
(a) Receipts from issuance of Equity Shares (b) Cash Sales
(c) Bank Overdraft (d) Purchase of Debentures
Answer: (a) Receipts from issuance of Equity Shares
Question 37.
An analysis of cash flow is useful for..—------planning.
(a) Short-term (b) Long-term
(c) Medium-term (d) Very Long-period
Answer: (a) Short-term
Question 38.
Which calculating cash flow from operating activities which is added net profit ?
(a) Increase in Stock (b) Decrease in Stock
(c) Increase in Debtors (d) Decrease in Creditors
Answer: (b) Decrease in Stock
Question 39.
Which of the following is not the source of Cash?
(a) Purchase of Fixed Assets (b) Funds from Operations
(c) Issue of Debentures (d) Sale of Fixed Assets
Answer: (a) Purchase of Fixed Assets
Question 40.
While calculating profit from operating activities, which will be added back to net profit:
(a) Goodwill Written off (b) Depreciation
(c) Loss on Sale of Fixed Assets (d) All the Above
Answer: (d) All the Above
Question 41.
Profit during the year ₹ 20,000. During the year, there was increase in stock by ₹ 9,000 and decrease in
debentures of ₹ 5,000. What is the amount of cash from operating activities ?
(a) ₹ 6,000 (b) ₹ 16,000 (c) ₹ 24,000 (d) ₹ 34,000
Answer: (b) ₹ 16,000
Question 42. Given:
Net Profit during the year ₹ 1,00,000
Debtors in the beginning the year of ₹ 30,000
Debtors at the end of the year ₹ 36,000
What is the amount of cash from operating activities ?
(a) ₹ 30,000 (b) ₹ 94,000 (c) ₹ 1,06,000 (d) ₹ 1,66,000
Answer: (b) ₹ 94,000
Question 43.
Net Profit during the year ₹ 30,000. Creditors in the beginning ₹ 24,000 and
Creditors at the end ₹ 16,000
What is the amount of cash from operating activities :
(a) ₹ 30,000 (b) ₹ 34,000 (c) ₹ 22,000 (d) ₹ 40,000
Answer: (c) ₹ 22,000
Question 44.
Redemption of Debentures/Preference shares results into:
(a) Source of fund (b) Use Or application of fund
(c) No flow of fund (d) No flow of cash
Answer: (b) Use Or application of fund
Question 45. Which of the following is not an example of cash outflows?
(a) Repayment of loans (b) Decrease in creditors
(c) Issue of debentures (d) None of these
Answer: (c) Issue of debentures
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Three/Four/Six Marks Questions
Question (1) X Ltd, made a profit of 1,00,000 after considering the following items:
(a) Depreciation on fixed assets 20,000
(b) (b) Writing off preliminary expenses 10,000.
(c) Loss on sale of furniture 1,000.
(d) Provision for taxation 1,60,000.
(e) Transfer to General Reserve 14,000.
(f) Profit on sale of machinery 6,000.
Items 31/03/2007 ( ) 31/03/2008 ( )
Debtors Out-flow 24,000 30,000
Creditors In-flow 20,000 30,000
Bills Receivable In-Flow 20,000 17,000
Bills Payable Out-flow 16,000 12,000
Prepaid Expenses Out-flow 400 600
Solution: Calculation of Cash Flow from Operating Activities
Particulars ( )
Net Profit before Tax 2,74,000
Net Profit 1,00,000
Provision for Taxation 1,60,000
Transfer to General Reserve 40,000
Adjustment for:
Add: Depreciation on Fixed Assets 20,000
Witting off Preliminary Expenses 10,000
Loss on Sale of Furniture 1,000
Less: Profit on Sale of Machinery (6,000)
Operating Profit before Working Capital Changes 2,99,000
Add: Increase in Creditors (Inflow of cash)
Decrease in Bills Receivable (Inflow) 10,000
Less: Increase in Debtors (Outflow) 3,000
Decrease in Bills Payable (Outflow) (6,000)
Increase in Prepaid Expenses (Outflow) (4,000)
Net Cash Flow from Operating Activities (200) 3,01,800
3,01,800
Net Flow of Cash = Inflow of Cash – Outflow of Cash
Question (2) From the following summarized balance sheets of a company, calculate cash flow from operating
activities: Particulars 31.3.2019 ( ) 31.3.2020 ( )
I. Equity and Liabilities
Share holder’s funds:
Equity Share Capital 1,00,000 1,00,000
Reserves & Surplus (Profit & Loss Balance) 30,000 60,000
Non Current Liabilities:
6% Debentures 60,000 80,000
Current Liabilities:
Creditors 30,000 35,000
Bills Payable 30,000 10,000
Other Current Liabilities 40,000 45,000
Total 2,90,000 3,30,000
II. Assets
Non Current Assets: Fixed assets 1,50,000 1,90,000
Non Current Investments 40,000 30,000
Current Assets
Stock 40,000 30,000
Debtors 40,000 45,000
Cash 20,000 35,000
Total 2,90,000 3,30,000
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Additional Informations:
(1) A piece of machinery costing ₹ 5,000, on which depreciation of 2,000 had been charged was sold for
1,000. Depreciation charged during the year was 17,000.
(2) New debentures have been issued on 1st August, 2019.
Solution: Calculation of Cash Flow from Operating Activities
Particulars ( )
(A) Cash Flow from Operating Activities: 30,000
Net Profit before Tax & Dividend
Net Profit 30,000
Adjustment for: (Non-Cash / Non-Operating)
Add: Interest on Debenture @ 6% 4,400
Loss on sale of Machinery 2,000
Depreciation 17,000 23,400
Operating Profit before Working Capital Changes 53,400
Add:
Increase in Creditors 5,000
Increase in other liabilities 5,000
Decrease in Stock 10,000 20,000
Less:
Decrease Bills Payable 20,000
Increase in Debtors 5,000 (25,000) (5,000)
48,400
Less: Tax paid during year NIL
Net Cash Flow from Operating Activities 48,400
(B) Cash Flow from Investing Activities:
(1) Investments sold 10,000
(2) Machinery purchased (60,000)
(3) Old Machinery sold 1,000
(C) Cash Flow from Financing Activities: (49,000)
(1) Issue of Debentures 20,000
(2) Interest paid on debentures (4,400) 15,600
Cash Flow / Used from/in business activities during the year 15,000
Add: Opening Cash & Cash Equivalents 20,000
Closing Cash & Cash Equivalents 35,000
Balance of Debenture 60,000 become increase on 1st August 2019, therefore interest to be claculated
on 60,000 for the period of 04 months and on 80,000 interest to be claculated for 08 months. (1,200 +
3,200 = 4,400)
Machinery Account
Particulars Amt. in Particulars Amt. in
To Balance b/d (3,000 + 1,47,000) 1,50,000 Bank A/c investing: Inflow 1,000
To Bank A/c investing: outflow 60,000 Loss on sale A/c Operating:add 2,000
(Balancing figure as purchase) Depreciation A/c Operating: add 17,000
By Balance c/d 1,90,000
2,10,000 2,10,000
Bank A/c Dr. 1,000
Loss on sale A/c Dr. 2,000
To Machinery A/c 3,000
Sale and Purchase of Non-Current Fixed (Tangible) Assets

Case (A): AB Ltd had the following balance as at 31st March, 2019 and as at 31st March, 2020 as under
– (Amt. in ) Amt. in
Machinery A/c 1,50,000 1,90,000
** A piece of machinery costing 5,000 (depreciation thereon 2,000) sold at 1,000.
** Depreciation made on Machinery during the year was 17,000.
You are required to show the above information in the Cash Flow Statement.
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Solution: Cash Flow Statement
Amount Amount in ₹
(A) Cash Flow from Operating Activities:
Net Profit before Tax & Dividend XXXX
Add: Non-Cash/Operating charges 19,000
(1) Loss on sale of machinery 2,000
(2) Depreciation 17,000
(B) Cash Flow from Financing Activities:
(C) Cash Flow from Investing Activites:
(1) Sale of machinery 1,000
(2) Purchase of machinery (60,000)
Machinery Account
Particulars Amt. in Particulars Amt. in
To Balance b/d (3,000 + 1,50,000 Bank A/c investing: Inflow 1,000
1,47,000) 60,000 Loss on sale A/c 2,000
To Bank A/c investing: outflow Operating:add 17,000
(Balancing figure as purchase) Depreciation A/c Operating: 1,90,000
add
By Balance c/d
2,10,000 2,10,000
Bank A/c Dr. 1,000
Loss on sale A/c Dr. 2,000
To Machinery A/c 3,000
st st
Case (B): AB Ltd had the following balance as at 31 March, 2019 and as at 31 March, 2020 as under
–
Machinery A/c 1,50,000 1,90,000
Provision for Depreciation A/c 30,000 35,000
** A piece of machinery costing 5,000 (depreciation thereon 2,000) sold at 1,000.
*** Depreciation on Machinery made during the year 7,000.
Solution: Machinery Account
Particulars Amt in Particulars Amt in
To Balance b/d (Original 1,50,000 Provision for Depreciation A/c 2,000
Cost) 45,000 Bank A/c investing: Inflow 1,000
To Bank A/c investing: Loss on sale A/c 2,000
outflow Operating:add 1,90,000
(Balancing figure as By Balance c/d (Original Cost)
purchase)
1,95,000 1,95,000
Provision for Depreciation Account
Particulars Amt in Particulars Amt in
Machinery A/c 2,000 Balance b/d 30,000
Depreciation A/c 7,000
(Depreciation of the year as
Balance c/d 35,000 balancing figure)
37,000 37,000
1. Sale of Machinery by 1,000 is an OUT FLOW of cash Under Investing Activities

2. Purchase of Machinery by 45,000 is an Out-Flow of Cash under Investing Activities
3. Depreciation on Machinery for the year 7,000 is non-cash charged, Add to Operating Activities
for adjustment
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4. Loss on sale of asset by 2,000 is non-operating charges, Add to Operating Activities for
Adjustment
Que. From the following information of Nova Ltd, calculate the cash flow from Investing activities:
Particulars 31.03.2019 ( ) 31.03.2018 ( )
Machinery (At Cost) 5,00,000 3,00,000
Accumulated Depreciation on Machinery 1,00,000 80,000
Goodwill 1,50,000 1,00,000
Land 70,000 1,00,000
Additional Information: During the year, a machine costing 50,000 on which the accumulated
depreciation was 35,000, was sold for 12,000.
Solution: Machinery Account
Balance b/d 3,00,000 Provision for Depreciation A/c 35,000
Bank A/c (Purchase as 2,50,000 Bank A/c 12,000
balancing figure) Loss on sale A/c 3,000
Balance c/d 5,00,000
5,50,000 5,50,000
Provision for Depreciation Account
Machinery A/c (transfer entry 35,000 Balance b/d 80,000
for accu. dep. on sold asset) Depreciation A/c (depreciation of 55,000
Balance c/d 1,00,000 the current year as balancing figure)
1,35,000 1,35,000
Cash Flow from Investing Activity
(1) Sale of Machinery 12,000
(2) Purchase of Machinery (2,50,000)
(3) Purchase of Goodwill (50,000)
(4) Sale of Land 30,000
Que. The profit of Jova Ltd for the year ended 31st March, 2019 after appropriation was 2,50,000.
S. No. Particulars Amount ( )
1. Depreciation on Machinery 20,000
2. Goodwill written off 9,000
3. Loss on sale of Furniture 2,000
4. Transfer to General Reserve 22,500
The following was the position of Current Assets and Current Liabilities as at 31st March 2018 and 2019:
Particulars 31.03.2018 ( ) 31.03.2019 ( )
Income received in advance 8,000 --------------
Inventories 12,000 8,000
Calculate the Cash flow from operating activities.
Solution: Cash Flow from Operating Activities
Particulars Amount in
Net profit before Tax & Dividend: 2,72,500
Net Profit 2,50,000
Add: Transfer to General Reserve 22,500
Add: Depreciation on Machinery 20,000
Add: Written-off Goodwill 9,000
Add: Loss on Sale of Machinery 2,000 31,000 31,000
Cash flow before changes in working Capital 3,03,500
Adjustment for Changes in Working-Capital
Add: Decrease in Inventories 4,000
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Less: Increase in Income received in advance (8,000) (4,000) (4,000)
Net Cash Generated (Flow) from Operating Activities during the year 2,99,500
Question: Adjustment of Provision for Tax and Dividend in Cash Flow Statement
Case A: Particulars 31.03.2019 31.03.2020
Provision for Tax 22,000 30,000
Adjustment: …………………………………
Solution:
(1) Tax paid during year for the provided amount of tax in the previous year i.e. 2018-19
22,000.
Therefore, it is a case of Out-Flow of Cash under operating activity, it will be subtracted at the end step.
(2) 30,000 provided tax in the year 2019-20 (current year) is charged to statement of
profit & loss Account BUT no flow of cash as it was not paid in the current year and it
will be paid in the year 2020-21.
Therefore, it is Non-Cash charge and added back to Net Profit for making Net Profit before Tax &
Dividend.
Case B: Particulars 31.03.2019 31.03.2020
Adjustment: Tax paid during year 2019-20 ₹ 35,000 OR Provision for Tax made in the year 2019-20 ₹
43,000.
Provision for Tax Account
To Bank A/c 35,000 By Balance b/d 22,000
By Statement of Profit & Loss A/c 43,000
(Provided tax in the year 2019-20
To Balance c/d 30,000 as balancing figure)
65,000 65,000
(1) 43,000 added back to Net Profit to make it as Net Profit before Tax under Operating Activity
(2) 35,000 paid Tax, it is an Out Flow of Cash. Therefore, it will be subtracted at the end under
Operating Activity.
Proposed Dividend As per AS-4, Contingencies and Events Occurring after the Balance Sheet Date,
Proposed dividend is shown in the Notes to Accounts. It will be shown as contingent liability since it
becomes a liability after it is declared (approved) by the shareholders. It will be accounted in the books
of account after it is declared (approved) by the shareholders in the Annual General Meeting.
Since, previous year's Proposed Dividend will be declared (approved) in the current year; previous year's
Proposed Dividend will be accounted as dividend payable. Also, declared dividend is paid within 30 days
of its declaration therefore; it will be paid within the same financial year.
Briefly, proposed dividend of previous year after declaration (approved) by the shareholders will be
debited to surplus i.e., Balance in Statement of Profit and Loss.
While preparing cash flow statement, previous year's proposed dividend will be added to Net Profit under
operating activities and will be shown under financial activity as out-flow of cash.
Question: (9) From the following information, how do you show the calculated amount of dividend and
Tax into the Cash Flow Statement?
Particulars (2019-20) (2020-21)

Proposed Dividend 30,000 45,000
Adjustment: Interim dividend paid ₹ 20,000.
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Solution: ₹ 50,000 also paid in the year 2020-21 which is out-flow of cash under Financing activities.
Provision for Tax: ₹ 50,000 tax paid in the year 2020-21 and ₹ 70,000 provision for tax charged in
statement of profit & loss account in the year 2020-21 which is non-cash charge. Therefore, 70,000 added
to Net Profit and at the end of Cash Flow from Operating Activities - ₹ 50,000 subtracted.
Proposed Dividend: ₹ 30,000 will be charged in the year of 2020-21 of statement of profit & loss. It is a
non-operating charged And dividend will be paid at the approved amount which also ₹ 30,000 in the year
2020-21.
Cash Flow Statement
(A) Cash Flow from Operating
a. Net Profit XXX XXX
Add: Non-Cash charge
Provision for Tax 2020-21 70,000
Add: Non-Operating charge
Proposed Dividend (30,000 + 20,000) 50,000
1,20,000
Less: Tax paid (50,000)
(B) Cash Flow from Financing

Payment of Dividend (30,000 + 20,000) (50,000)
(C) Cash Flow from Investing
****Remember ------------------
Trading and Manufacturing Bank, Financing
S.N. Particulars Enterprises Enterprises
1 Interest Paid: Out-Flow Financing Operating
2 Dividend Paid: Out-Flow Financing Financing
3 Interest Received: In-Flow Investing Operating
4 Dividend Received: In- Investing Operating
Flow
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KENDRIYA VIDYALAYA SANGATHAN, RAIPUR REGION
BLUE PRINT
Model Paper 2022-23
CLASS: XII
SUBJECT: ACCOUNTANCY (055)
S.No. Name of unit 1 mark 3 marks 4 marks 6 marks TOTAL
1. Accounting for 11 3 1 2 36
Partnership Firms
2. Accounting for 5 1 1 2 24
Companies
3. Analysis of Financial 2 2 1 0 12
Statements
4. Cash Flow Statement 2 0 0 1 8
TOTAL 80
INTERNAL 7 2 1 2
CHOICE

Model Paper 2022-23
CLASS: XII
TIME: 3 Hours Max Marks: 80
General Instructions:
1. This question paper contains 34 questions. All questions are compulsory.
2. This question paper is divided into two parts, Part A and B.
3. Part – A is compulsory for all candidates.
4. Part- B has two options i.e. (i) Analysis of Financial Statements and (ii)
Computerised Accounting. Students must attempt only one of the given options.
5. Question nos. 1 to 16 and 27 to 30 carry 1 marks each.
6. Question nos. 17 to 20, 31 and 32 carry 3 marks each.
7. Question nos. 21, 22 and 33 carry 4 marks each.
8. Question nos. 23 to 26 and 34 carry 6 marks each.
9. There is no overall choice. However, an internal choice has been provided in 7
questions of one mark, 2 questions of three marks, 1 question of four marks and 2
questions of six marks.
PART A- ACCOUNTING FOR PARTNERSHIP FIRMS AND COMPANY ACCOUNTS
1. B and C were partners sharing profits in the ratio of 3:2. They admitted D as a new partner for 1/5th 1
share in the profits. D brought ₹.15,000 as goodwill which was distributed between B and C as
₹.10,000 and ₹.5,000 respectively. Find out the new ratio of B, C and D.
(a) 3:2:1
(b) 6:4:3
(c) 5:4:3
(d) 7:5:3.
2. A, B and C are partners in the ratio of 5 : 3 : 2. Before B‘s salary of ₹. 17,000 firm‘s profit is ₹. 1
97,000. How much in total B will receive from the firm?
(A) ₹. 17,000
(B) ₹. 40,000
(C) ₹. 24,000
(D) ₹. 41,000
3. Amount of money not received out of called up capital is : 12
a) Added to share capital
b) Subtracted from share capital
c) Shown as current liabilities
d) Shown as current asset
OR
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T Ltd had allotted 20,000 shares to the applicants of 24,000 shares on pro rata basis. The amount
payable on application is ₹. 2. Manoranjan applied for 450 shares. The number of shares allotted
and the amount carried forward for adjustment against allotment money due from him is:
a) 150 shares,₹.375
b) 375 shares,₹.150
c) 400 shares,₹.100
d) 300 shares,₹.300
4. Under ---------- Method, goodwill is the excess of capitalized value of business over actual 1
capital employed.
OR
Which of the following statement is false regarding Purchased Goodwill?
a) It arises on purchase of a business or any assets
b) As per Accounting Standard 26 (Intangible Assets), it is not recorded in the books of accounts
because consideration in money or money‘s worth has not been paid for it.
c) It is shown in the Balance Sheet as an asset.
d) It is amortized (i.e. depreciated) over its useful economic life.
5. On dissolution of a firm fictitious assets are transferred to: 1

a. credit side of partners capital account
b. debit side of realisation account
d. credit side of realisation account
6. A company forfeited 4,000 shares of ₹.10 each on which application money of ₹. 3 has been 1
paid. Out of these 2,000 shares were reissued as fully paid up and ₹ 2,000 has been transferred
to capital reserve. Calculate the rate at which these shares were reissued.
a. ₹10 Per share
b. ₹ 9 Per share
c. ₹11 Per share
d. ₹8 Per share
OR
Interest payable on debentures is:
a) An appropriation of profits of the company
b) A charge against profits of the company
c) Transferred to sinking fund investment account
d) Transferred to general reserve.
7. Black Ltd. had issued 5,000 equity shares of ₹. 10 each at par. The application money was ₹. 3 per 1
share and the public applied for 7,500 shares. Pro rata allotment was made. Sohan applied for 450
shares. The amount carried forward towards the sum due on allotment will be:
(a) ₹. 1,350
(b) ₹. 900
(c) ₹. 450
(d) ₹. 4,500
8. Anish and Kunal are partners in a firm sharing profits and losses equally 1
Balance Sheet (Extract)
Liabilities ₹. Assets ₹.
Machinery 60,000
If value of machinery in the balance sheet is overvalued by 20%, then at what value will
machinery be shown in new balance sheet:
(a) ₹ 44,000 (b) ₹ 48,000 (c) ₹ 72,000 (d) ₹ 50,000
OR
Assertion: Goodwill is an intangible asset since it has no physical existence and cannot be seen
or touched.
Reasoning: It is internally generated over a long period of time.
a) Both (A) and (R) are true and (R) is the correct explanation of (A).
b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
c) (A)is true, but (R) is false
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d) (A)is false, but (R) is true
9. A, B and C are partners in a firm sharing profits and losses in the ratio of 2:2:1. On March, 31, 1
2019 C died. Accounts are closed on December 31st every year. The sales for the year 2018 were
₹. 6, 00,000 and the profits were ₹ 60,000. The sales for the period from January 1, 2019 to March
31st 2019 were ₹.2, 00,000. An amount of ₹ ___will be given to his executors as his share of profits
till the date of death.
10. At the time of retirement, amount remaining in Investment Fluctuation Reserve after meeting the 1
fall in value of Investment is:
a) Credited in Sacrificing Ratio
b) Credited in New Profit Sharing Ratio
c) Credited in Old Profit Sharing Ratio
d) Credited in Gaining Ratio
11. Which account is opened to transfer deceased partner’s share of profit to his capital account 1
a) P&L Adjustment account
b) P&L Appropriation account
c) P&L Suspense account
12. Which of the following statement relates to Reserve Capital‘? 1
(a) It is a part of uncalled capital of the company.
(b) It cannot be used in the lifetime of the company.
(c) It is called only on the liquidation of the company.
13. On 1st April 2022, P Ltd. issued 20,000 12% Debentures of ₹. 100 each at certain discount and 1
redeemable at a premium of 7%. If there was a balance of ₹. 2,00,000 in Securities Premium
Reserve and ₹. 40,000 were debited to Statement of Profit and Loss to write off the Loss on Issue
of Debentures, then calculate the rate of discount at which these debentures were issued.
(a) 5% (b) 7% (c) 10% (d) none of these.
14. Partner's capital account is credited when there is 1
a) Profit on revaluation
b) transfer of general reserve
c) transfer of accumulated profits
d) All of the above
OR
In case of partnership the act of any partner is :
b) Binding on that partner only
c) Binding on all partners except that particular partner
Rakesh and Vijay were partners with capitals of ₹. 1,20,000 and ₹. 1,60,000 respectively. On 1st
April, 2010 they admitted Neeraj as a partner. Rakesh and Vijay surrendered half of their
respective shares in favour of Neeraj. Neeraj brings his capital ₹. 2,00,000 and his share of
goodwill in cash. Goodwill of the firm is valued at ₹. 3,60,000 on admission of Neeraj.
On that date the creditors of Rakesh and Vijay were ₹. 60,000 and Bank Overdraft was ₹. 15,000.
Their assets apart from cash included Stock ₹. 10,000; Debtors ₹. 40,000; Plant ₹. 80,000 and
Building ₹. 2,00,000.
On the basis of above information, answer questions 15 and 16.
15. What would be the amount of cash balance in firm before admission of Neeraj? 1
(A) ₹. 25,000
(B) ₹. 1,00,000
(C) ₹. 3,55,000
(D) ₹. 75,000
16. Neeraj would bring ₹. ……………………….. as his share of goodwill. 1
(A) ₹. 3,60,000
(B) ₹. 90,000
(C) ₹. 50,000
(D) ₹. 80,000
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17. Dinakar, Navita and Vani were partners sharing profits and losses in the ratio of 3:2:1. Navita died 3
on 30th June, 2017. Her share of profit for the intervening period was based on the sales during
that period, which were ₹ 6,00,000. The rate of profit during the past years had been 10% on sales.
The firm closed its books on 31st March every year.
Calculate Navita’s share of profit.
18. Jyoti and Riya started a partnership firm with capitals of ₹ 1,00,000 and ₹ 50,000 on 1st April 2019 3
for this. Jyoti expressed her willingness to admit Neema as a partner without capital. Riya agrees
to this. The terms of partnership were as follows:
(i) Jyoti, Riya and Neena will share profits in the ratio of 2:2:1.
(ii) Interest on Capital will be provided @ 6% p.a.
Due to shortage of Capital, Jyoti contributed ₹ 25,000 on 30th September 2019 and Riya
contributed ₹ 10,000 on 1st January 2020 as additional Capital. The profit of the firm for the year
ended 31st March 2020 was ₹ 1, 68,900.
Prepare the Profit and Loss Appropriation account for the year ended 31st March 2020.
OR
Rakesh, Mukesh and Mahesh were partners sharing profits in the ratio of 3:3:2. The partnership
provided for the following:
(i) Salary of ₹ 2000 per quarter to Rakesh and Mukesh.
(ii) Mahesh was entitled to a commission of ₹. 8,000.
(iii) Mukesh was guaranteed a profit of ₹ 50,000 p.a.
The profit of the firm for the year ended 31st March 2020 was ₹ 1,19,000 which was distributed
among Rakesh, Mukesh and Mahesh in the ratio of 2:2:1 without taking into consideration the
provisions of partnership deed. Pass necessary rectifying entry for the above adjustments in the
books of the firm. Show your workings clearly
19. Pass necessary Journal Entries for the issue of Debentures in the following cases : 3
(i) ₹ 30,000, 12% Debentures of ₹ 100 each issued at a discount of 5% redeemable at par.
(ii) ₹60,000, 12% Debentures of ₹ 100 each issued at a discount of 5% redeemable at ₹ 105
OR
X Ltd purchased a Machinery of ₹ 3,00,000 from Y Ltd; immediately paid by Promissory Note of
₹ 30,000 and balance by issue of 9% Debenture of ₹ 100 each at 10% discount.
Pass necessary Journal entries in the books of X Ltd. for the above transactions.
20. Alka and Bela started business in partnership on 1st Jan 2020 and contributed ₹ 1,00,000 and ₹ 3
80,000 respectively for capital the term of partnership deed are as follows:-
(i) Interest on capital and drawing @10% and 12% respectively.
(ii) Alka to get a monthly salary of ₹ 2,000 and Bela to get commission of ₹10,000 p.a
(iii) Profit and loss to be shared in the ratio of their capital.
The profit for the year was ₹ 1, 30,030 before making the above adjustments. The drawings during
the year were ₹ 20,000 and ₹ 16,000 of Alka and Bela respectively. Prepare Profit and Loss
appropriation Account assuming capitals are fixed for the year ended 31-12-2020.
21. The authorized capital of Mars Ltd. is ₹.50,00,000 divided into equity shares of ₹.10 each. The 4
company invited applications for 2,00,000 shares. The issue was fully subscribed. All calls were
made and were duly received except the final call of ₹.2 per share on 5,000 shares. 2,500 shares
on which final call was not received were forfeited. Show how Share Capital will appear in the
balance sheet of the company as per Schedule III of the Companies Act ,2013, also prepare Notes
to Accounts.
22. Ishu and Nishu are partners share profits and losses in the ratio of 3:2. They have decided to 4
dissolve the firm. Assets and external liabilities have been transferred to Realisation A/c. Pass the
Journal entries to effect the following:
a) Ishu’s loan Loan of ₹. 20,000 was settled at ₹. 18,000.
b) Ishu was to bear all expenses of realisation for which she is given a commission of ₹600.
c) Machinery worth ₹. 5,000 was taken over by Nishu at ₹4,700.
d) Deferred Advertisement Expenditure A/c appeared in the books ₹10,000.
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23. (A) C India Ltd. purchased machinery from B India Ltd. Payment to B India Ltd. was made as 6
follows :
(i) By issuing 10,000 equity shares of ₹ 10 each at a premium of 20%.

(ii) By issuing 1000, 9% debentures of ₹ 100 each at a discount of 5%.
(iii) Balance by giving a bank draft of ₹ 37,000.
Pass necessary journal entries in the books of C India Ltd. for the purchase of machinery and
payment to B India Ltd. ( 3 marks)
(B) On April 1, 2019 Z Ltd. issued, 10,000, 8% Debentures of ₹ 100 each at premium of 5%, to
be redeemable at a premium of 10%, after 5 years. The entire amount was payable on application.
The issue was oversubscribed to the extent of 10,000 debentures and the allotment was made
proportionately to all the applicants. The securities premium amount has not been utilized for any
other purpose during the year. Give journal entries for the issue of debenture. (3marks).
24. Vinay and Madan were partners sharing profits in the ratio of 2:1. On 1st April 2019, They 6
admitted Sunil, a retired army officer who had lost his legs while servicing in army, as a new
partner for 1/4 share in profits. Sunil will bring 60,000 for Goodwill and ₹ 50,000 as capital, At
the time of admission of Sunil the Balance Sheet Vinay and Madan was as under :-
Liabilities Amount Assets Amount (₹)
(₹)
Capital accounts Plant 66,000
Vinay 7,0000 Furniture 30,000
Madan 60,000 1,30,000 Investment 40,000
Stock 46,000
General Reserve 18,000 Debtors 38,000
Bank Loan 18,000 Less PBD- 4,000 34,000
Creditors 72,000 Cash 22,000
Total 2,38,000 Total 2,38,000
It was decided to
(i) Reduce the value of stock by ₹.10, 000.
(ii) Plant to be valued at ₹ 80,000.
(iii) An amount of ₹.3,000 included in creditors was not payable.
(iv) Half of the investment were taken over by Vinay and remaining were valued at
₹.25,000.
Prepare revaluation account and partners’ capital account.
OR
The balance sheet of Dhoni, Kohli and Ganguli who were sharing profit in the ratio of
3:3:4 respectively, as on 31st March 2020 was as under:-
Liabilities Amount (₹) Assets Amount (₹)
Capital Accounts Goodwill 18,000
Dhoni 10,000 Stock 14,500
Kohli 12,000 Machinery 9,000
Ganguli 4,000 26,000 Sundry Debtors 16,000
General Reserve 11,000 Land and Building 16,000
Employees provident fund 7,000 Bank 25,500
Loan 24,000 Advertisement
Trade Creditors 30,000 suspense A/C 5,000
Workmen compensation reserve 6,000
Total 1,04,000 Total 1,04,000
It was agreed that Dhoni shall retire on 1st April 2020 as per the following conditions:-
(a) Goodwill of the firm is to be valued at three years' purchase of the average of annual
profits of the last four yeas. The profits for the preceding four years were ₹.30,000;
₹.80,000; ₹.12,000; ₹.14,000; no goodwill account is to be raised.
(b) Stock is agreed to be valued at ₹ 13,500.
(c) Land and Building are to be revalued at ₹ 24,000 and machinery at ₹ 60,000.
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(d) Provision for doubtful debts at 5% on sundry debtors is to be created.
(e) An unclaimed liability included in creditors of ₹ 400 is to be written back.
Prepare Revaluation Account and Partners' capital account.
25. R Ltd has been registered with an authorized capital of ₹ 2,00,000 divided into 2000 shares of ₹ 6
100 each of which 1000 shares were offered for public subscription at a premium of ₹ 50 per
share payable as under: Application- ₹ 30; Allotment ₹ 70(including premium); First call ₹ 20;
final call ₹ 30. Applications were received for 2000 shares of which application for 500 shares
were rejected. The rest of the applications were allotted 1000 shares on pro-rata basis. Excess
application money was transferred to share allotment account.
All money was duly received except from Mohan, holder of 200 shares, who failed to pay
allotment money and first call money. His shares were later on forfeited and re issued to Hari at ₹
60 per share as ₹ 70 paid up. Final call is not yet made. Record journal entries.
OR
(a) N Ltd .issued 2,000 shares of Rs100 each. All the money was received except on 200
shares on which only Rs 90 were received. These shares were forfeited and out of the
forfeited shares 100 shares were reissued at Rs 80 each as fully paid up. Pass necessary
journal entries for the forfeiture and reissue of shares. (4marks)
(b) Complete the following Entries: (2 marks)
Date Particulars Debit Credit
i Share capital A/c Dr -----------
To calls- in – arrears A/c ----------
To Share Forfeiture A/c ----------
(Being the forfeiture of 1000 shares of Rs10 each ,Rs8
Called up, on which allotment money of Rs2 and First
Call of Rs3 has not been received)
ii Bank A/c Dr 11,000
To Share Capital A/c 10,000
To Securities Premium reserve A/c 1,000
(Being reissue of 1000 forfeited shares fully paid up at
Rs11 per share)
Iii Share Forfeiture A/c Dr -----------
To Capital reserve A/c ------------
(Being gain on forfeiture and reissue of shares
transferred to Capital reserve Account)
26. A, B and C were partners. B died on 30th June, 2021. Under the partnership agreement the executor 6
of B was entitled to:
(a) Amount standing to the credit of his capital a/c ₹. 30,000.
(b) Interst on his capital ₹. 375.
(c) His share of goodwill ₹. 21,000.
(d) His share of profit till the date of death ₹. 2,625.
B’s executor was paid ₹. 20,400 on 1st July 2021 and the balance in four equal annual
installments starting from 30th June, 2022 with interest as per Section 37 of Indian Partnership
Act, 1932. Prepare B’s Executor’s account till it is finally paid.
Part – B
(Analysis of Financial statements)
27. Balance Sheet (Extract) 1
Equity and liabilities 31-3-2019(₹) 31-3-2020(₹)
10% Debentures 2,00,000 1,60,000
Interest on debentures is paid on half yearly basis on 30th September and 31st March each year.
Debentures were redeemed on 30th September 2019.
How much amount (related to above information) will be shown in Financing Activity for Cash
Flow Statement prepared on 31st March 2020?
a) Outflow ₹ 40,000.
b) Inflow ₹ 42,000.
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c) Outflow ₹ 58,000.
d) Outflow ₹ 64,000
OR
Determining operating efficiency and profitability is an objective of financial analysis. T/F
28. What will be the Current ratio of a company whose Net Working Capital is Equal to current 1
liability?
29. Which of the following transactions would result in neither cash inflow nor outflow of cash and 1
cash equivalents?
a. Issue of share capital
b. Issue of bonus shares
c. Redemption of debentures
d. Trade receivables realized.
OR
Give an example of the activity which remains a financing activity for all types of organisations
whether Financial organization or Non- financial organization.
30. Goods sold on credit will increase an ideal current ratio. T/F. 1
31. Classify the following items under major heads and Sub-head (if any) in the balance Sheet of a 3
Company as per schedule III of the Companies act 2013.
(i) Loose Tools
(ii) Current maturities of Long term debts
(iii) Provision for Pension of employees
(iv) Unclaimed Dividend
(v) Marketable securities
(vi) Prepaid Insurance.
32. Briefly explain the significance of “Analysis of Financial Statements” to 3
(a) The Finance Manager
(b) To Trade Payables.
33. Calculate Total Assets to Debt Ratio from the following Information: 4
Capital Employed ₹ 40,00,000
Shareholder’s Fund ₹ 24,00,000
Current Liabilities ₹ 4,80,000
OR
On the basis off the following information, calculate:
(i) Debt-Equity Ratio and
(ii) Working Capital Turnover Ratio.
Information:
Net Revenue from Operations 60,00,000
Cost of Revenue from Operations 45,00,000
Other Current Assets 11,00,000
Current Liabilities 4,00,000
Paid Up Share Capital 6,00,000
6% Debentures 3,00,000
9% Loan 1,00,000
Debenture Redemption reserve 2,00,000
Closing Inventory 1,00,000
34. Prepare a cash flow statement from the following balance sheet: 6
Particulars Note No. 31.03.2020 (₹.) 31.03.2019 (₹)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a)Share Capital 6,00,000 5,00,000
(b) Reserve and Surplus 1 4,00,000 2,00,000
2. Current Liabilities
Trade payables 2,80,000 1,80,000
Total 12,80,000 8,80,000
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II. Assets
1. Non current assets:
(a)Fixed assets
( i)Plant and machinery 5,00,000 3,00,000
2. Current assets:
a)Inventories 1,00,000 1,50,000
b)Trade receivables 6,00,000 4,00,000
c)Cash and cash equivalents 80,000 30,000
Total 12,80,000 8,80,000
Notes to accounts:
Particulars 31-03-2020 (₹.) 31-03-2019 (₹.)
1. Reserve and Surplus:
Surplus (Balance in statement of Profit and Loss) 4,00,000 2,00,000
Additional information:
i) An old machinery having book value of ₹ 50,000 was sold for ₹ 60,000.
ii) Depreciation provided on machinery during the year was Rs 30,000.

Model Paper 2022-23
CLASS: XII (MARKING SCHEME)
TIME: 3 Hours Max – Marks: 80
PART A- ACCOUNTING FOR NOT FOR PROFIT ORGANISATIONS, PARTNERSHIP FIRMS AND COMPANY
ACCOUNTS
1. (d) 7:5:3. 1
2. (d) ₹. 41,000 1
3. (b) Subtracted from share capital 1
OR
(b) 375 shares, ₹.150
4. Capitalisation of average profit 1
OR
b) It is amortized (i.e. depreciated) over its useful economic life
5. c) debit side of partners’ capital account 1
6. d) ₹ 8 Per share 1
OR
b) A charge against profits of the company
7. Answer/Explanation: (c) 450 1

Amount adjusted will be:
Applied shares=450; allotted shares=300 Excess paid to be adjusted on allotment = (450- 300)*3=450
8. (d) ₹ 50,000 1
OR
(b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
9. ₹ 4,000. 1
10 c) Credited in Old Profit Sharing Ratio 1
11. (c) P&L Suspense account 1
12. (d) All of the above. 1
13. (a) 5%. 1
14. d) All of the above 1
OR
15. a) 25,000 1
16. (b) ₹. 90,000 1
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17. Share of profits of Navita = Average Profits x Intervening periods x shares of Navita 3
Estimated profits of the firm for the year 2017-18 = 10% of 6,00,000 = ₹ 60,000.
Intervening periods = 3 months (from 1st April to 30th June 2017);
Navita’s share = 2/6.
Navita’s share of profit = 60,000 x 3/12 x 2/6 = ₹ 5,000.
18. IOC- Jyoti- 6,750; Riya- 5,150 3
Share of profit- Jyoti- 62,800; Riya- 62,800; Neena- 31,400.
OR
Ramesh Capital a/c Dr. 9,600
Mukesh Capital a/c Dr. 800
To Mahesh’s Capital a/c 10,400
19. 3
(i) Bank A/c Dr. 28,500
To 12% Debentures Application and Allotment A/c 28,500
12% Debentures Application and Allotment A/c Dr. 28,500

Loss on Issue of debentures A/c Dr. 1,500
To 12% Debentures A/c 30,000
(ii) Bank A/c Dr. 57,000

To 12% Debentures Application and Allotment A/c 57,000
12% Debentures Application and Allotment A/c Dr. 57,000

Loss on Issue of debentures A/c Dr. 6,000
To 12% Debentures A/c 60,000
To Premium on Redemption of Debentures A/c 3,000
OR
Journal Entries
Date Particulars L.F Dr. (₹) Cr. (₹)
.
1 Machinery A/c Dr. 3,00,000
To Promissory note A/c 30,000
To Y Ltd. 2,70,000
2 Y Ltd. Dr. 2,70,000

Discount on Issue of Debentures A/c Dr. 30,000
To 9% Debentures A/c 3,00,000
3 Statement of Profit & Loss Dr. 30,000

To Discount on Issue of Debentures A/c 30,000
No. of debentures issued = Amount to be paid / Face Value – Discount = 2,70,000 / 90 = 3,000.
20. Int on drawings =( 1200+960) 1 mark 3
Int on capital = (10,000+8,000) 1 mark
A’s salary = 24,000 ½ mark
B’s commission = 10,000
Profit distributed to Alka ₹ 44,550 and Bela ₹ 35,640 ½ mark
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21. 4
22. Journal Entries 4

a) Ishu’s Loan A/c …. Dr. 20,000
To Realisation A/c 2,000
To Bank/Cash A/c 18,000
b) Realisation A/c …. Dr. 600
To Ishu’s Capital A/c 600
c) Nishu’s Capital A/c …. Dr. 4,700
To Realisation A/c 4,700
d) Ishu’s Capital A/c …. Dr. 6,000
Nishu’s Capital A/c …. Dr. 4,000
To Deferred Adv. Exp. A/c 10,000
(1*4)=4 marks
23. A. 6
(i) Machinery A/c Dr. 2,52,000
To B Ltd. 2,52,000
(ii) B Ltd. Dr. 2,52,000

Loss on Issue of Debentures A/c Dr. 5,000
To Equity share Capital a/c 1,00,000
To Securities Premium Reserve A/c 20,000
To Bank A/c 37,000
(iii) Securities Premium Reserve A/c Dr. 5,000

To Loss on Issue of Debentures A/c 5,000
B.
(i) Bank A/c Dr. 21,00,000
To 8% Debentures Application and Allotment A/c 21,00,000
(ii) 8% Debentures Application and Allotment A/c Dr. 21,00,000

Loss on Issue of Debentures A/c Dr. 1,00,000
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To Premium on redemption of debentures A/c 1,00,000
To Bank a/c 10,50,000
(iii) Securities Premium Reserve A/c Dr. 50,000

Statement of profit & Loss Dr. 50,000
To Loss on Issue of Debentures A/c 1,00,000
24. Partners’ Capital Account 6
Vinay Madan Sunil Vinay Madan Sunil
To Investment 20,000 Bal b/d 70000 60000
G/R 12000 6000
G/W Prem 40000 20000
To Bal c/d 1,10,000 90,000 50000 Rev.profit 8000 4000
cash 50000
1,30,000 90,000 50000 1,30,000 90,000 50000
Revaluation Account
To Stock 10,000 By Plant 14,000
To partners’ Capital By Creditors 3,000
Vinay- 8,000
Madan 4,000 12,000 By Investment 5,000
22,000 22,000
Revaluation account -3 marks
Partners’ capital account – 3 marks
OR
Profit on Revaluation account – 57,600
Dhoni’s Loan a/c- 38,800
Kohli’s Capital A/c- 2,914(Dr.)
Ganguli’s Capital A/c- 15,886 (Dr.)
25. 6
Date Particulars Debit₹ Credit₹
(i) Bank A/C Dr 60,000
To Share application A/C 60,000
(being application money received on 2,000 shares@30) (1/2 Mk)
(ii) Share application A/C Dr 60,000
To Share Capital A/C 30,000
To Share allotment A/C 15,000
To Bank A/C 15,000
(being application money transferred to share capital , (1MK)
excess money transferred to share allotment and money
returned on rejected on 500 shares)
(iii) Share allotment A/C Dr 70,000
To Securities Premium A/C 50,000
(being allotment money made due) (1/2Mk)
(iv) Bank A/C Dr 44,000
Calls-in –arrears A/C Dr 11,000
To Share allotment A/C 55,000
(being allotment money received except on 200 shares) (1Mk)
(v) Share first call A/C Dr 20,000
To Share capital A/C 20,000
(being first call money made due) (½ Mk)
(vi) Bank A/C Dr 16,000
Calls-in-arrears A/C Dr 4,000
To Share first call A/C 20,000
(being first call money received) (1Mk)
(vii) Share capital A/C Dr 14,000
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Securities Premium A/C Dr 10,000
Calls-in- arrears A/C 15,000
Share forfeited A/C 9,000
(Being 200 shares forfeited) (1 ½ Mk)
OR
(a)
Date Particulars Debit (₹) Credit (₹)
(i) Share capital A/C Dr 20,000
Calls-in- arrears A/C 2,000
Share forfeited A/C 18,000
(Being 200 shares forfeited) (1 Mk)
(ii) Bank A/C Dr 8,000
Share forfeited A/C Dr 2,000
Share Capital A/C 10000
(being 100 shares being re-issued @80 as fully (1Mk)
paid)
(iii) Share forfeited A/C Dr 7,000
To Capital Reserve A/C 7,000
(being gain on forfeiture and reissue tfd to capital (1 Mk)
reserve)
Capital Reserve = 18,000 x 100/200 = 9,000(sh.ff credit)

Less: sh.ff Dr = 2,000
Capital Reserve = 7,000 (1Mk)
(b)
Dat Particulars Debit₹ Credit₹
e
(i) Share capital A/C Dr 8,000
To Calls-in- arrears A/C 5,000
To Share forfeited A/C 3,000
(Being the forfeiture of 1000 shares of Rs10 each ,Rs8 (1 Mk)
Called up, on which allotment money of Rs2 and First
Call of Rs3 has not been received)
(ii) Bank A/C Dr 11,000
To Securities Premium A/C 1,000
(Being reissue of 1000 forfeited shares fully paid up at
Rs11 per share)
(iii) Share forfeited A/C Dr 3,000
To Capital Reserve A/C 3,000
(Being gain on forfeiture and reissue of shares (1 Mk)
transferred to Capital reserve Account)
26. Amount transferred to B’s executor’s Loan A/c on 30 June, 2021= ₹. 60,000 6
Amount Paid on 01 July, 2021= ₹. 20,400
Amount Paid on 30 June, 2022= ₹. 12,400
Amount Paid on 30 June, 2025= ₹. 10,600.
27. C. Outflow ₹ 58,000 1
OR
True
28 2:1 1
29. b. Issue of bonus shares 1
OR
Interest paid
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30. False. 1
31. Items Major Heading Sub-heading 3
(i) Loose Tools Current Assets Inventories
(ii) Current maturities of Long Current Liabilities Other Current Liabilities
term debts
(iii) Provision for Pension of Non-Current Liabilities Long term Provisions
employees
(iv) Unclaimed Dividend Current Liabilities Other Current Liabilities
(v) Marketable securities Current assets Cash and cash Equivalents
(vi) Prepaid Insurance. Current assets Other Current assets
32. Correct explanation 3
33. Answer: 4
Total Assets to Debt Ratio = Total Assets / Debt or Long term Debts
Capital Employed = Shareholder’s Funds + Long term Debts
40,00,000 = 24,00,000 = Long Term Debts
Long Term Debts = 16,00,000
Total Assets = Shareholder’s Funds + Long term Debts + Current Liabilities
= 24,00,000 + 16,00,000 + 4,80,000
= 44,80,000
Total Assets to Debt Ratio =44,80,000 / 16,00,000 = 2.8.: 1.
OR
Debt-Equity ratio= 0.5 : 1
Working Capital turnover Ratio = 7.5 times.
34. Cash Flow Statement 6

Particulars Amount(₹) Amount(₹)
I. Cash flow from operating activities:
Net profit before tax (4,00,000-2,00,000) 2,00,000
Adjustment for non cash and non operating items:
Depreciation 30,000
Profit on sale of machinery (10,000) 20,000
Operating profit before working capital changes 2,20,000
Change in current assets and current liabilities:
Decrease in inventories 50,000
Increase in trade receivable (2,00,000)
Increase in trade payables 1,00,000 (50,000)
Net cash inflow from operating activities 1,70,000
II. Cash flow from investing activities:
Sale of plant 60,000
Purchase of plant (2,80,000)
Net cash used in investing activities (2,20,000)
III. Cash flow from financing activities:
Issue of share capital 1,00,000
Net cash inflow from financing activities 1,00,000
IV.Net increase in cash and cash equivalents 50,000
V. Opening cash and cash equivalents 30,000
VI. Closing cash and cash equivalents 80,000
Working Note
Plant and Machinery Account
Particulars Amount Particulars Amount
To Balance b/d 3,00,000 By Bank A/c(Sale) 60,000
To Statement of P/L(Profit) 10,000 By Depreciation A/c 30,000
To Bank A/c(Purchase) 2,80,000 By Balance c/d 5,00,000
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5,90,000 5,90,000
Cash used in Operating Activities 2 Marks

Cash used in Investing Activities 2 Marks
Cash from Financing Activities 2 Marks
KENDRIYA VIDYALAYA SANGATHA, RAIPUR REGION

SAMPLE QUESTION PAPER 2022-23 SET: II
CLASS: XII
Time Allowed: 03 Hours Max. Marks: 80
(A) This question paper contains 34 questions. All questions are compulsory.
(B) This question paper is divided into two parts – A and B.
(C) Question 1 to 16 and 27 to 30 carries 1 mark each. Question 17 to 20 and 31 to 32 carries 3 marks
each. Question 21, 22 and 33 carries 4 marks each. Question 23 to 26 and 34 carries 6 marks each.
(D) There is no overall choice. However, an internal choice has been provided in 7 questions of 1 mark,
2 questions of three marks, 1 question of four marks and 2 questions of six marks.
(E) One part of all questions should be attempted at one place.
(F) Before attempt to the questions, read carefully.
Q.N. Questions M
01 Akash and Babita are partners in a firm sharing profits and losses in the ratio of 3:2. 1
Chetna admitted for as a new partner. Chetna is unable to bring her share of goodwill in
cash. Goodwill valued at ₹ 1,50,000. The new profit-sharing ratio between Akash, Babita
and Chetna is 2:2:1. Which of the following journal entry is correct for the adjustment of
valued goodwill?
(a) Chetna’s Capital A/c Dr. 1,50,000 (b) Chetna’s Current A/c Dr. 1,50,000
To Akash’s Capital A/c 90,000 To Akash’s Capital A/c 90,000
To Babita’s Capital A/c 60,000 To Babita’s Capital A/c 60,000
(c) Chetna’s Current A/c Dr. 30,000 (d) Chetna’s Current A/c Dr. 30,000
To Akash’s Capital A/c 18,000 To Akash’s Capital A/c 30,000
To Babita’s Capital A/c 12,000
02 (A) Assertion: Manager’s commission provided to profit & loss appropriation A/c. 1
(R) Reason: Manager’s commission is a charge against to profits.
(a) (A) is correct but (R) is wrong.
(b) Both (A) and (R) are correct, but (R) is not the correct explanation of (A)
(c) (A) is not correct and (R) is correct.
(d) Both (A) and (R) are correct and (R) is the correct explanation of (A)
03 A share of ₹ 100 each, issued at ₹ 20 premium out of which ₹ 115 called (including 1
premium) and paid. Directors of the company decides that the remaining to be called in
the liquidation of company. The ‘reserve capital’ of the company is ₹ -------
(a) Zero (b) 15 (c) 20 (d) 5
OR
While issuing ------------- type of debentures, company does not allow fixed rate of
interest to its debenture holders.
(a)Un-secured Debentures (b) Zero Coupon Debentures
(c) Non-Redeemable Debentures (d) Secured Debentures
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04 Aman, Balwant and Chirag are partners in a firm sharing profits and losses in the ratio of 1
2:2:1. On 1st April 2022, they agreed to share future profits and losses in equal proportion.
On the above date, their balance sheet showed the following balances:
Profit & Loss (Debit) ₹ 6,000

Workmen’s Compensation Fund ₹ 30,000.
Claim for workmen’s compensation₹ 9,000
Partners have decided to make an adjustment entry for not to affect the book value of
above balances.
Which of the following adjustment entry is correct for accounting treatment?
(a) Aman’s Capital A/c Credited by 1,000 (b) Balwant’s Capital A/c Credited by 1,000
(c) Chirag’s Capital A/c Debited by 2,000 (d) All of the above
OR
X, Y and Z are partners in a firm sharing profits and losses in the ratio of 3:2:1 with fixed
capitals of ₹ 5,00,000; ₹ 4,00,000 and ₹ 3,00,000 respectively. They were allowed interest
on capital @ 5% p.a. For the year ending 31st March, 2022, profits of the firm were
₹ 48,000. Which of the following Journal entry is correct for the allocation of profits
between partners?
(a) Profit & Loss App. A/c Dr. 48,000 (b) Profit & Loss App. A/c Dr. 48,000
To X’s Capital A/c 24,000 To X’s Capital A/c 20,000
To Y’s Capital A/c 16,000 To Y’s Capital A/c 16,000
To Y’s Capital A/c 8,000 To Z’s Capital A/c 12,000
(c) Profit & Loss App. A/c Dr. 48,000 (d) None of the above
05 Anita and Babita are partners sharing profits and losses in the ratio of 2:1. The balance of 1
their fixed capitals as on 31st March, 2022 were ₹ 3,20,000 and 1,80,000 respectively.
Their drawings for the year were ₹ 30,000 and ₹ 20,000 respectively and profits for the
year ended 31st March, 2022 ₹ 1,80,000.
As per Partnership Deed, they are also allowed for interest on capital @ 10% p.a.
The interest on capital for Anita and Babita will be --------- and -------- respectively.
(a) ₹ 23,000 and ₹ 14,000 (b) ₹ 20,000 and ₹ 12,000
(c) ₹ 32,000 and 18,000 (d) ₹ 35,000 and 20,000
06 Diamond Tech Ltd issued 3,00,000, 12% debentures of ₹ 100 each at 10% discount and to 1
be redeemed after 18 months at 15% premium. At the time of writing off loss on issue of
debentures, the balance in securities premium reserve account ₹ 60,00,000. Which of the
following amount to be debited to statement of profit & loss account?
(a) 15,00,000 (b) 30,00,000 (c) 45,00,000 (d) 60,00,000
OR
A FMCG company issued 1,00,000, 15% debentures of ₹ 100 each at certain rate of
premium and were to be redeemed at 20% premium. The balance of securities premium
reserve become nil after writing off loss on issue of debenture as well as charging
₹ 5,00,000 to statement of profit & loss account.
At what rate of premium, these debentures were issued?
(a) 5% (b) 10% (c) 15% (d) 20%
07 Aditi Ltd inviting to public to subscribe their savings towards the 2,00,000 shares of ₹ 10 1
each payable ₹ 4 on application per share, ₹ 5 on allotment per share and the balance in
first & final call. Public had applied for certain number of shares and application money
was received.
Which of the following received application money, restrict to the company to proceed
for allotment of shares, as per SEBI guidelines?
(a) ₹ 6,80,000 (b) ₹ 7,40,000 (c) ₹ 18,00,000 (d) None of the above
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08 Amar, Akber and Anthony are partners in a firm sharing profits & losses in their capital 1
proportion. The balance of their fixed capital is ₹ 3,00,000; ₹ 2,00,000 and ₹ 1,00,000
respectively. Anthony decides to retire from the firm due to old age, on 31st March, 2022.
On that date, the following balances are appeared in the firm’s book:
General Reserve ₹ 45,000 and Workmen’s Compensation Fund ₹ 60,000.
There is a claim for workmen’s compensation ₹ 45,000.
Goodwill of the firm valued on the retirement of Anthony ₹ 1,20,000.
The amount to be paid to Anthony on his retirement is ₹ ------------. (fill in the blank)
OR
X, Y and Z are partners in a firm. They did not have any written agreement. The balance
of their capitals as on 1st April, 2021 were ₹ 4,50,000; ₹ 3,20,000 and ₹ 1,30,000
respectively. Z was managed whole business on behalf of X and Y.
The profits of the firm for the year ending 31st March, 2022 ₹ 2,40,000.
At the time of allocation of profits, they have the following conflicts:
1. X has claimed for interest on capital @ 10% p.a.
2. Y has claimed for sharing of profits in their capital proportion.
3. Z has claimed for salary @ ₹ 5,000 per month.
The total amount will be credited to X’s capital account ₹ -----------. (fill in the blank)
Read the following hypothetical situation, answer question No. 9 and 10.
P and Q are partners in a partnership firm with fixed capitals of ₹ 3,00,000 and ₹ 2,00,000
respectively. The firm allowed commission to P at 10% on net profit after charging such
commission. Partners are also allowed interest on capital @ 10% p.a.
Profit & Loss Appropriation Account
Particulars Amt. (₹) Particulars Amt. (₹)
To Interest on Capital A/c 50,000 By Profit & Loss A/c 1,10,000
P: 30,000
Q: 20,000
To P’s Capital A/c ---------
(Commission @ 10%)
To Capital A/cs:
(Share of profits transferred)
P: --------
Q: --------
1,10,000 1,10,000
09 P’s commission will be: 1
(a) ₹ 11,000 (b) ₹ 10,000 (c) ₹ 6,000 (d) None of the above
10 Q’s share of profit will be: 1
(a) ₹ 55,000 (b) ₹ 24,500 (c) ₹ 19,600 (d) ₹ 25,000
11 Choose the correct sequence of the following in the context of settlement of liabilities on 1
dissolution of a firm:
(i) Payment of realization expense
(ii) Payment of partner’s claim
(iii) Payment of partner’s loan lent to the firm
(a) (i); (ii); (iii) (b) (ii); (i); (iii)
(c) (iii); (i); (ii) (d) (i); (iii); (ii)
12 A company forfeited 12,000 shares of ₹ 10 each for the non-payment of allotment ₹ 4 per 1
share and first & final call money ₹ 2 per share. Out of the forfeited shares, only 9,000
shares were re-issued @ ₹ 7 per share fully paid. What is the maximum amount of
discount that the company can allow at the time of re-issue of the remaining 3,000 shares?
(a) ₹ 9,000 (b) ₹ 10,000 (c) ₹ 12,000 (d) ₹ 15,000
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13 As per Section 52 of the Companies Act 2013, Securities Premium Reserve cannot be 1
utilized for ----
(a) Writing off capital losses
(b) Issue of fully paid bonus shares
(c) Writing off discount on issue of securities
(d) Writing off preliminary expenses
14 A, B and C are partners in a firm sharing profit in ratio of 5:3:2. They agree to admit D as 1
a new partner for 1/4th share. D brought in cash ₹ 45,000 for premium of goodwill and
necessary amount of cash for his share of capital.
On the date of D’s admission, the balance of capitals of A, B and C (after distribution of
accumulate profit/loss & writing off appeared goodwill, adjustment for goodwill premium
and gain on revaluation of assets & reassessment of liabilities) ₹ 4,20,000; ₹ 3,00,000 and
₹ 1,80,000 respectively.
The share of capital of D which he has to brought in cash is ₹ -----------. (fill in the blank)
15 A partner draws a fixed amount at the middle of each quarter. Interest on drawings is 1
charged @ 10% p.a. At the end of year, interest on partner’s drawings amounts to ₹ 5,000.
Quarterly drawings of partner were:
(a) ₹ 1,00,000 (b) ₹ 25,000
(c) ₹ 75,000 (d) ₹ 50,000
OR
A partner withdrew ₹ 1,20,000 throughout the year. Interest on drawings was charged as
₹ 6,000. What is the rate of interest on drawings charged?
(a) 5% (b) 6% (c) 8% (d) 10%
16 A dissolved firm provides the following information: 1
Partner’s Mrs Loan ₹ 25,000; Creditors ₹ 75,000; Partners capital ₹ 1,80,000 and cash
balance ₹ 45,000. Amount realized from sale of assets ₹ 1,80,000.
Loss on dissolution will be ₹ -------------------. (fill in the blank)
17 Amar, Akber and Anthony are partners in a firm sharing profit in equal proportion. On 30th June,
2021, Akber died. His profit for the year of death to be calculated on the basis of sales turnover
and profit of the firm. The profit for the year ending 2020-21 ₹ 1,20,000 and sales turnover for the
same year was ₹ 4,80,000. The sales turnover from 1st April, 2021 to 30th June 2021 is ₹ 1,20,000.
Find out the share of profit of deceased partner and pass necessary journal entry for it.
18 Ajay and Balbir formed a partnership firm on 1st October, 2021 to share profits and losses
in the capital proportion. Their fixed capitals are --- ₹ 1,80,000 and ₹ 1,20,000
respectively. Interest on capital allowed @ 10% p.a. Profit for the year ended 31st March,
2022 was ₹ 75,000. Ajay guaranteed that Balbir’s share of profit after charging interest on
capital, would not be less than ₹ 50,000 p.a.
Prepare Profit and Loss Appropriation Account.
OR
Shubham, Mangalam and Murthy were partners in a firm. Their capitals were ₹ 3,00,000;
₹ 2,00,000 and ₹ 1,00,000 respectively as on 1st April, 2021. As per partnership deed,
interest on capitals allowed @ 10% p.a. Profits of the firm, for the year ended 31st March,
2022 ₹ 45,000 distributed between partners without providing for interest on capitals.
Pass an adjustment entry and show the workings clearly.
19 AB Ltd take over the business of PK Ltd by taking over of assets of ₹ 9,80,000 and
liabilities of ₹ 1,50,000. AB Ltd issued 80,000, 12% debentures of ₹ 10 each to PK Ltd
which to be redeemed at 10% premium.
Pass necessary journal entries in the books of AB Ltd.
OR
Royal Agro Ltd purchased the business of Ultra Agro Private Ltd by taking over the
following: Sundry Assets ₹ 7,60,000 and Liabilities ₹ 3,20,000.
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Royal Agro Ltd agreed to pay purchase consideration value by accepting a bill of ₹
2,00,000 for three months and the balance by issue of 2,500 shares of ₹ 100 each at 10%
premium.
Pass necessary journal entries for the purchase of Ultra Agro Ltd and settlement of
purchase consideration value. Show your working clearly.
20 A, B and C are partners in a firm sharing profits and losses in the ratio of 5:3:2. On 1st
April, 2022, they agree to share future profits / losses in equal ratio. For this purpose,
goodwill valued by capitalization of super profit method. On the date of reconstitution,
capital employed in the firm ₹ 3,60,000 and average profits of the firm ₹ 72,000. The
normal rate of return in the similar line of business is 15%.
Make necessary journal entry for the above information and show your working clearly.
21 New arena Ltd was registered with an authorised capital of ₹ 5,00,00,000 divided in
5,00,000 shares of ₹ 100 each. The company issued 1,50,000 shares to public at 20%
premium payable ₹ 40 per share on application (including premium); ₹ 70 per share on
allotment. Public had applied for all issued number of shares.
All dues on allotment was received except on 15,000 shares. These shares were forfeited
and of which, 10,000 shares were re-issued at ₹ 12,00,000 fully paid.
You are required to prepare the Balance Sheet of the company as per Schedule III of
Companies Act, 2013, showing share capital balance and also prepare Notes to Accounts.
22 Anamika, Animesh and Anjali were partners in a firm since 2018. On 31st March, 2022,
due to suffering a loss from three years, they decide to dissolved the partnership firm.
Anamika appointed as to accomplish the process of dissolution and for which an agreed
amount ₹ 25,000 credited to her capital account. Anamika transferred all assets (excluding
cash balance) and third party’s liabilities to realization account. She observed the
following information:
(a) A creditor of ₹ 45,000 took over unrecorded furniture estimated value ₹ 60,000 at
₹ 50,000.
(b) Anamika agree to settle his husband’s loan of ₹ 30,000.
(c) Realization expense ₹ 20,000 paid by firm.
(d) Anjali took over stock (book value ₹ 32,000) at ₹ 27,000 for cash.
Pass necessary journal entries for points (a) to (d).
23 Golden Sky Ltd was registered with an authorised capital of 5,00,000 equity shares of ₹
100 each. The company issued 2,00,000 shares for public subscription at 20% premium
payable as under:
On Application : ₹ 40 per share
On Allotment : ₹ balance (including premium)
Public had applied for 3,00,000 shares. Pro-rata allotment was made to 2,50,000 share
applicants and remaining applicants were sent letter of regret.
Mr. Rahul holding 15,000 shares failed to pay allotment money and his shares were
forfeited. Out of these forfeited shares, 9,000 shares were re-issued at ₹ 80 per share fully
paid. Pass necessary journal entries in the books of the Golden Sky Ltd.
OR
Pass necessary journal entries for forfeiture and re-issue of shares, from the following
cases:
(a) Akasha Air Ltd forfeited 9,000 shares of ₹ 10 each of Raghav, who had applied
12,000 shares for non-payment of allotment money ₹ 6 (including premium of ₹ 1
per share) and first & final call of ₹ 3 per share. Out of these forfeited shares, only
6,000 shares were re-issued at ₹ 75,000 fully paid.
(b) Lotus Infra Ltd forfeited 6,000 shares of ₹ 100 each for the non-payment of
allotment money ₹ 50 per share. First & final call of ₹ 30 was not yet made. Out of
the forfeited shares, 4,000 shares were re-issued at ₹ 60 per share for ₹ 70 per
share.
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24 Mamta and Ranjita were partners in a firm sharing profits and losses in the ratio of 2:1.
Their balance sheet as on 31st March, 2022 was as follows:
Balance Sheet (as at 31.03.2022)
Capital Accounts: 6,00,000 Building 2,60,000
Mamta : 4,00,000 Machinery 1,80,000
Ranjita : 2,00,000 Stock 1,10,000
General Reserve 60,000 Debtors 1,40,000
Workmen’s Compensation Fund 30,000 Cash in hand 75,000
Creditors 75,000
7,65,000 7,65,000
Sanjana was admitted for 1/4th share on the following terms:
(a) She will bring ₹ 2,00,000 as her share of capital and ₹ 30,000 as premium of
goodwill.
(b) Building was appreciated to ₹ 3,00,000 and Machinery depreciated by ₹ 30,000.
(c) Make a provision for doubtful debtors for ₹ 19,000.
(d) Capitals of Mamta and Ranjita will be adjusted on the basis of Sanjana’s share and
her capital. In the case of surplus or deficit capitals of Mamta and Ranjita,
adjustments to be made by brought in or withdraw through cash.
Prepare:
1. Revaluation Account
2. Partners’ Capital Account.
OR
A, B and C were partners in a firm sharing profits in equal proportion. Their balance sheet
stood at March 31st, 2022 as under:
Balance Sheet (as on 31.03.2022)
Creditors 30,000 Cash balance 10,000
Bank Loan 60,000 Stock 1,20,000
Capital A/cs: 3,00,000 Debtors 75,000 60,000
A 1,00,000 Less: Prov. for bad debts (15,000)
B 1,00,000 Buildings 1,85,000
C 1,00,000 Goodwill 15,000
3,90,000 3,90,000
A retired on the above-mentioned date on the following terms:
(a) Building to be appreciated by ₹ 15,000.
(b) All debtors are good.
(c) Goodwill of the firm valued at 30,000.
(d) ₹ 50,000 was to be paid immediately to A and the balance in his capital account to
be transferred to his Loan Account carrying interest @ 6% p.a.
(e) Remaining partners decided to maintain their capital in equal proportion and
adjustment for deficit or surplus capital to be made by opening of their Current
Account.
Prepare:
1. Revaluation Account
2. Capital Accounts of partners.
25 Mukund, Madhav and Gajodhar were partners in a firm sharing profits and losses in 3:2:1
ratio. Gajodhar died on 30th June, 2020. As per the terms of partnership deed, the
executor’s of Gahodhar is entitled for the following:
(a) Balance of capital of deceased partner on the last balance sheet i.e. ₹ 1,20,000.
(b) Share in valued goodwill i.e. ₹ 9,000.
(c) Share in General Reserve ₹ 12,000.
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(d) Share in profits (from last balance sheet date to date of death) ₹ 6,000.
(e) Share in Gain on revaluation ₹ 3,000.
₹ 50,000 immediately paid to the executor’s of Gajodhar and the balance to be paid in two
equal instalments together with interest @ 10% p.a. Financial year followed by the firm.
Prepare:
1. Gajodhar’s Capital Account
2. Executor’s Account, till the payment of final instalment.
26 The Directors of Surya Ltd decided to enter into the production of health products as it
has more demand in the market. The required amount of fund to be arranged from issue of
shares as well as borrowing from market.
Therefore, the company issued 15,000; 5% debentures of ₹ 100 each for the meeting of
necessary fund in its new project. The debenture was issued at 10% discount on 1st April,
2021 and to be redeemed after three year at 20% premium.
You are required to:
a. Pass necessary journal entries for the issue of debentures.
b. Pass necessary journal entries on March 31st 2022 assuming interest is payable on
30th September and 31st March every year.
c. Prepare – ‘Loss on Issue of Debentures Account’ assuming there was existing
balance of Securities Premium Reserve Account of ₹ 3,50,000.
Part B: Analysis of Financial Statements
27 Financial statements are prepared on certain assumptions (pre-requisites) known as -------.
(a) Provision of Companies Act, 2013 (b) Accounting Standards
(c) Practices, based on fundamental truth (d) Basis of Accounting
OR
Which one of the following is correct?
(i) Liquidity and Solvency Ratios is called financial ratio.
(ii) If operating ratio is 75% then operating profit ratio will be 25%.
(iii) Higher EPS will not be attracted for investments in the share capital.
(a) All are correct (b) (i) and (iii) are correct
(c) Only (ii) and (iii) are correct (d) Only (i) and (ii) are correct
28 A company provide the following:
Net profit after interest but before tax ₹ 20,00,000.
10% Debentures of ₹ 1,00,00,000.
Tax Rate: 40%
Which one of the following is correct Interest Coverage Ratio for company?
(a) 2 times (b) 3 times (c) 4 times (d) 2.5 times
29 Sale of old Machinery at ₹ 35,000 (gain on sale ₹ 5,000) will be recorded in Cash Flow
Statement in which of the following manner?
(a) 35,000 added under operating activities (b) 5,000 subtracted under operating
as extraordinary item and 35,000 activities as extraordinary item and 5,000
subtracted from operating activities also. added to Investing activities also.
(c) 5,000 subtracted under operating (d) 35,000 subtracted under operating
activities as extraordinary item and 35,000 activities and 35,000 added to Investing
added to Investing activities also. activities also.
OR
There was a balance in securities premium reserve account ₹ 3,00,000 and loss on issue of
debenture ₹ 4,50,000. How would you deal this information while preparing cash flow
statement?
(a) 3,00,000 added under operating (b) Added 4,50,000 under operating
activities as loss on issue of debentures activities as loss on issue of debentures
written off. written off
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(c) Added 7,50,000 under operating (d) 1,50,000 added under operating
activities as loss on issue of debentures activities as loss on issue of debentures
written off. written off.
30 From the following information, find the inflow of cash by sale of furniture:
31st March, 2022 31st March, 2021
Furniture ₹ 3,00,000 ₹ 4,00,000
1. Depreciation for the year 2021-22 on furniture was ₹ 60,000
2. Purchase of furniture during the year 2021-22 ₹ 80,000.
3. Part of furniture sold at a loss of ₹ 15,000.
(a) ₹ 1,80,000 (b) ₹ 1,20,000 (c) ₹ 1,05,000 (d) 1,00,000
31 Classify the following items under Major heads and Sub-heads (if any) in the Balance
Sheet of a Company as per schedule III of the Companies Act 2013:
(a) Share Forfeiture Account
(b) Securities Premium Reserve
(c) Computer Designs
(d) Provision for Tax
(e) Employees Provident Fund
(f) Income received in advance
32 Alfa Ltd and Gama Ltd following manipulation of data in accounting information to hide
the vital information and to show good pictures about the company.
Identify the limitation of analysis of financial statements for true comparison between two
firms’ performance and position. Also explain in brief any two other limitations apart
from the identified from the above information.
33 Calculate: (1) Return on Investment and (2) Inventory Turnover Ratio; from the following
Net profit after interest but before Tax ₹ 1,40,000. 15% long term debts ₹ 4,00,000, Share
holders funds ₹ 2,40,000; Tax Rate 50%.
Sales ₹ 2,00,000; GP 25% on cost; Stock at the beginning is 1/3 of the stock at the end
which was 30% of Sales.
OR
Assuming that the debt-Equity ratio is 2. State giving reasons whether this ratio would
increase, decrease or remain unchanged in the following cases
(f) Purchase of fixed asset on a credit of 2 months.
(g) Purchase of fixed asset on a long-term deferred payment basis.
(h) Issue of new shares for cash.
(i) Issue of bonus shares.
34 Read the following information of AB Ltd and answer the given questions on the basis of
the same:
Balance Sheet (as on 31.03.2021)
Particulars 2021-22 (₹) 2020-21 (₹)
I Equity & Liabilities
1. Shareholders’ Funds
(a) Share Capital 7,00,000 5,00,000
(b) Reserve & Surplus 4,20,000 2,50,000
2. Non-Current Liabilities
Long-term Loan @ 10% 50,000 1,00,000
3. Current Liabilities
(a) Trade Payables 45,000 50,000
(b) Other Current Liabilities 7,000 5,000
(c) Short-term Provisions 50,000 30,000
Total 12,72,000 9,35,000
141 | P a g e
II Assets:
1. Non-Current Assets
(a) Fixed Assets
Tangible Assets 5,00,000 5,00,000
Intangible Assets 95,000 1,00,000
(b) Non-Current Investments 1,00,000 ----------
2. Current Assets
(a) Inventories 1,30,000 50,000
(b) Trade Receivables 1,20,000 80,000
(c) Cash & Cash Equivalents 3,27,000 2,05,000
Total 12,72,000 9,35,000
Notes to Accounts:
Particulars 31.03.2022 31.03.2021
1. Short-Term Provisions
2. Fixed Assets
(a) Tangible
Equipments 2,30,000 2,00,000
Furniture 2,70,000 3,00,000
(b) Intangible
Patents 95,000 1,00,000
During the year equipment costing ₹ 80,000 was purchased. Loss on sale of equipment
amounted to ₹ 5,000.
Depreciation charged on equipment and furniture ₹ 15,000 and ₹ 3,000 respectively.
Loan ₹ 50,000 was paid on 31st March, 2022.
Proposed Dividend for the year 2020-21 was ₹ 50,000.
You are required to:
1. Calculate Net Profit before tax and extraordinary items
2. Calculate Operating profit before changes in working capital
3. Calculate Cash flow from operating activities
4. Calculate Cash flow from Investing activities
5. Calculate Cash flow from Financing activities
KENDRIYA VIDYALAYA SANGATHA, RAIPUR REGION
MARKING SCHEME QUESTION PAPER 2022-23
CLASS: XII
Time Allowed: 03 Hours Max. Marks: 80
(G) This question paper contains 34 questions. All questions are compulsory.
(H) This question paper is divided into two parts – A and B.
(I) Question 1 to 16 and 27 to 30 carries 1 mark each. Question 17 to 20 and 31 to 32 carries 3 marks each. Question 21, 22 and
33 carries 4 marks each. Question 23 to 26 and 34 carries 6 marks each.
(J) There is no overall choice. However, an internal choice has been provided in 7 questions of 1 mark, 2 questions of three
marks, 1 question of four marks and 2 questions of six marks.
01 (d) Chetna’s Current A/c Dr. 30,000 1
To Akash’s Capital A/c 30,000
02 (A) is not correct and (R) is correct. 1
03 (d)5 OR (b) Zero Coupon Debentures 1
04 (d) All of the above OR (d) None of the above 1
05 (c) ₹ 32,000 and 18,000 1
06 (a) 15,00,000 OR(c) 15% 1
07 (a)₹ 6,80,000 1
08 1,30,000 OR 80,000 1
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09 P’s commission will be: 1
(a) ₹ 11,000 (b) ₹ 10,000 (c) ₹ 6,000 (d) None of the above
10 Q’s share of profit will be: 1
(a) ₹ 55,000 (b) ₹ 24,500 (c) ₹ 19,600 (d) ₹ 25,000
11 (d) (i); (iii); (ii) 1
12 (c) ₹ 12,000 1
13 (e) Writing off capital losses 1
14 3,00,000 1
15 (b) ₹ 25,000 OR (d) 10% 1
16 ₹ 55,000 1
17 Share of profit of Akber = [Profit 2020-21 : Sales 2020-21 :: profit 2021-22 : Sales 2021-22] x 1/3 2
= [1,20,000 : 4,80,000 :: Profit for 3 months : 1,20,000] x 1/3 +
= [30,000] x 1/3 = ₹ 10,000. 1
Profit & Loss Suspense A/c Dr. 10,000
To Akber’s Capital A/c 10,000
18 Profit & Loss App. Account ½
Particulars ₹ Particulars ₹ x
Interest on capital: 15,000 Profit & Loss A/c 75,000 6
Ajay : 9,000 =
Balbir : 6,000 3
Partners’ Current A/cs:
Ajay : 36,000 35,000
Less: Guarantee of profit (1,000)
Balbir : 24,000 25,000
Add: Guarantee of profit 1,000 1
75,000 75,000 ½
OR +
Murthy’s Capital A/c Dr. 7,500 1
To Shubham’s Capital A/c 7,500 ½
Working: Shubham Mangalam Murthy
(A) Amount to be credited 22,500 15,000 7,500
(B) Amount wrongly credited 15,000 15,000 15,000
Adjustment to be made 7,500 (Cr.) -------- 7,500 (Dr.)
19 Sundry Assets A/c Dr. 9,80,000
Goodwill A/c Dr. 50,000
To Liabilities A/c 1,50,000 1
To PK Ltd {(80,000 x 10) + 80,000} 8,80,000 ½
(Being business of PK Ltd purchased) +
1
PK Ltd Dr. 8,80,000 ½
Loss on Issue of Debenture A/c Dr. 80,000
To 12% Debenture A/c 8,00,000
To Premium on Redemption A/c 80,000
(Being debentures issued for the purchase consideration)
OR
(a) Sundry Assets A/c Dr. 7,60,000
Goodwill A/c Dr. 35,000 1
To Liabilities 3,20,000 X
To Bills Payable A/c 2,00,000 3
To Ultra Agro Ltd 2,75,000 =
(Being business purchased by taking over of assets & liabilities) 3
(b) Ultra Agro Ltd Dr. 2,75,000
To Share Capital A/c 2,50,000
(Being issued 2,500 share @ ₹ 100 each at 10% premium for purchase consideration)
Working Note: Business Value of Ultra Agro Ltd = 7,60,000 – 3,20,000 = ₹ 4,40,000.
Purchase consideration value:
(1) Bills Payable 2,00,000
(2) Issued shares 2,500 @ ₹ 100 each at 10% premium 2,75,000
{(2,500 x 100) + (10% of 2,50,000)} 4,75,000
Purchase consideration value is more than the business value due to acquiring goodwill of Ultra Agro Ltd by
paying ₹ 35,000 (i.e. 4,75,000 – 4,40,000
20 B’s Capital A/c Dr. 4,000 1
C’s Capital A/c Dr. 16,000 +
To A’s Capital A/c 20,000 2
143 | P a g e
=
SS of A = 5/10 – 1/3 = (15-10)/30 = 5/30; GS of B = 1/3 – 3/10 = (10-9)/30 = 1/30 3
GS of C = 1/3 – 2/10 = (10-6)/30 = 4/30
G/ w = (SP x 100) / 15; SP = 72,000 – 54,000 = 18,000;
g/w = (18,000 x 100) / 15 = 1,20,000.
21 Balance Sheet
Particulars Notes to Amt. in ₹
Accounts 1
I Shareholders’ Fund:
1. Share Capital 1,46,50,000
2. Reserve & Surplus 35,00,000
Notes to Accounts:
Particulars Amt. in ₹ Amt. in ₹ 1
Authorised Capital: 5,00,00,000
5,00,000 shares of ₹ 100 each
Issued Capital: 1,50,00,000
1,50,000 shares of ₹ 100 each at 20% premium
Subscribed Capital: 1,50,00,000 1
1,50,000 shares of ₹ 100 each at 20% premium
Paid up Capital:
1,50,000 shares of ₹ 100 each at 20% premium 1,50,00,000
Less: Share Forfeited (5,000 x 100) (5,00,000) 1,45,00,000
Add: Share Forfeiture A/c (5,000 x 30) 1,50,000 1
1,46,50,000
Reserve & Surplus:
1. Securities Premium Reserve A/c 32,00,000
(1,50,000 x 20) + 2,00,000
2. Capital Reserve 3,00,000
Share forfeiture amount on 10,000 shares 3,00,000
Less: Adjusted for loss on re-issue NIL 35,00,000
22 (a) Bank A/c Dr. 5,000
To Realization A/c 5,000 1
(b) Realization A/c Dr. 30,000 X
To Anamika’s Capital A/c 30,000 4
(c) Anamika’s Capital A/c Dr. 20,000 =
To Bank A/c 20,000 4
(d) Bank A/c Dr. 27,000
Journal entries
Date Particulars L.F. Dr.₹ Cr. ₹
23 Bank A/c (3,00,000 x 40) Dr. 1,20,00,000
1 To Share Application A/c 1,20,00,000
(Being share application received)
Share Application A/c Dr. 1,20,00,000
2 To Share Capital A/c (2,00,000 x 40) 80,00,000
To Share Allotment A/c (50,000 x 40) 20,00,000
To Bank A/c (50,000 x 40) 20,00,000
(Being appl. money tra., adj. and refunded)
Share Allotment A/c (2,00,000 x 80)Dr. 1,60,00,000
3 To Share Capital A/c (2,00,000 x 60) 1,20,00,000
To Securities Premium Reserve A/c 40,00,000
(Being share allotment money due)
Bank A/c (1,40,00,000 – 10,80,000) Dr. 1,29,20,000
4 Calls-in-arrears A/c Dr. 10,80,000
To Share Allotment A/c 1,40,00,000
(Being allot money received with exception)
Share Capital A/c (15,000 x 100) Dr. 15,00,000
5 Securities Premium Reserve A/c Dr. 3,00,000
To Calls-in-arrears A/c 10,80,000
To Share Forfeiture A/c 7,20,000
(Being shares forfeited due to failed on allot)
Bank A/c (9,000 x 80) Dr. 7,20,000
6 Share Forfeiture A/c Dr. 1,80,000
To Share Capital A/c (9,000 x 100) 9,00,000
(Being forfeited shares re-issued)
144 | P a g e
Share Forfeiture A/c Dr. 2,52,000
7 To Capital Reserve A/c 2,52,000
(Being balance transferred)
Calls-in-arrears on 15,000 shares:
Allotment due (15,000 x 80) 12,00,000
Less: Excess application money
[{(15,000 x 30) / 25} – 15,000] x 40 = (18,000 – 15,000) x 40 (1,20,000)
Due but not received on allotment 10,80,000
Capital Reserve:
Share forfeiture amount on 15,000 shares 7,20,000
Share forfeiture amount on 9,000 shares = (7,20,000 x 9 ) / 15 = 4,32,000
Less: Adjusted loss on re-issue of shares (9,000 x 20) (1,80,000)
Share forfeiture A/c transferred to Capital Reserve 2,52,000
OR
Journal entries
Share Capital A/c (9,000 x 10) Dr. 90,000
1 Securities Premium Reserve A/c (9,000 x 1) Dr. 9,000
To Calls-in-arrears A/c * (48,000 + 27,000) 75,000
(Being shares forfeited due to non-payment of allot & calls)
2 Bank A/c Dr. 75,000
To Share Capital A/c (6,000 x 10) 60,000
3 Share Forfeiture A/c Dr. 16,000
To Capital Reserve A/c ** 16,000
(Being balance of share forfeited money transferred)
* Calls-in-arrears on allotment:
Allotment due (9,000 x 6) 54,000
Less: Excess Application money [{12,000 – 9,000} x 2] (6,000) 48,000 *
** Capital Reserve
Share forfeited money on 9,000 shares 24,000
Share Forfeited money on 6,000 shares = (24,000 x 6) / 9 16,000
Less: Adjusted for loss on re-issue of shares NIL
Transferred to Capital Reserve = 16,000
Journal entries
Share Capital A/c (6,000 x 70) Dr. 4,20,000
1 To Calls-in-arrears A/c (6,000 x 50) 3,00,000
To Share Forfeiture A/c 1,20,000
(Being shares forfeited due to non-payment of allot & calls)
2 Bank A/c (4,000 x 60) Dr. 2,40,000
Share Forfeiture A/c Dr. 40,000
To Share Capital A/c (4,000 x 70) 2,80,000
Share Forfeiture A/c (4,000 x 10) Dr. 40,000
To Capital Reserve A/c 40,000
(Being balance of share forfeited money transferred)
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24 Revaluation Account
Particulars ₹ Particulars ₹
Machinery 30,000 Buildings 40,000
Provision for doubtful debts 19,000 Capital A/cs: 9,000
Mamta 6,000
Ranjita 3,000
49,000 49,000
Capital Account
Particulars Mamta Ranjita Sanjana Particulars Mamta Ranjita Sanjana
Revaluation A/c 6,000 3,000 Balance b/d 4,00,000 2,00,000
Cash A/c 74,000 27,000 General Reserve 40,000 20,000
Balance c/d 4,00,000 2,00,000 2,00,000 WCF 20,000 10,000
Cash A/c 2,00,000
Premium of G/w 20,000 10,000
4,80,000 2,30,000 2,00,000 4,80,000 2,30,000 2,00,000
Total capital of the firm = 4 times of 2,00,000 = 8,00,000
Mamta&Ranjita’s new capital = 8,00,000 – 2,00,000 = 6,00,000. It should be in 2:1 ratio.
Mamta adjusted capital 4,74,000 and Ranjita’s adjusted capital 2,27,000
Mamta and Ranjit have excess capital of 74,000 and 27,000 respectively
Excess capital to be adjusted by cash.
OR
Revaluation Account
Capital A/cs: 30,000 Buildings 15,000
A 10,000 Provision for d/d 15,000
B 10,000
C 10,000
30,000 30,0000
Capital Account
Particulars A B C Particulars A B C
Goodwill A/c 5,000 5,000 5,000 Balance b/d 1,00,000 1,00,000 1,00,000
A’s Capital A/c 5,000 5,000 B’s Capital A/c 5,000
Cash A/c 50,000 C’s Capital A/c 5,000
Balance c/d 1,50,000 1,50,000 Revaluation A/c 10,000 10,000 10,000
Current A/c 50,000 50,0000
1,20,000 1,60,000 1,60,000 1,20,000 1,60,000 1,60,000
25 Gajodhar’s Account
Cash A/c 50,000 Balance b/d 1,20,000
Gajodhar’s Loan A/c 1,00,000 Mukund’s Capital A/c 5,400
Madhav’s Capital A/c 3,600
General Reserve 12,000
Profit & Loss Suspense A/c 6,000
Revaluation A/c 3,000
1,50,000 1,50,000
Gajodhar’ Loan A/c
Date Particulars Amt. in ₹ Date Particulars Amt. in ₹
2021 March 31 Balance c/d 2020June 30 Capital A/c 1,00,000
2021 March 31 Interest (9 months) 7,500
1,07,500 1,07,500
2021 June 30 Cash A/c 60,000 2021 April 01 Balance b/d 1,07,500
(50,000 + 10,000) 2021 June 30 Interest (3 months) 2,500
2022 March 31 Balance c/d 53,750 2022 March 31 Interest (9 months) 3,750
1,13,750 1,13,750
2022 June 30 Cash A/c 55,000 2022 April 01 Balance b/d 53,750
(50,000 + 5,000) 2022 June 30 Interest (3 months) 1,250
55,000 55,000
26 (a) Journal Entries for Issue of Debentures
Date Particulars Dr. Amt. Cr. Amt.
2021 Bank A/c (15,000 x 90) Dr. 13,50,000
Ap. 01 To 5% Deb. Appl. & Allot A/c 13,50,000
(Being appl. Received for debentures)
5% Deb. App. & Allot. A/c Dr. 13,50,000
Loss on issue of Debenture A/c Dr. 4,50,000
146 | P a g e
To 5% Debenture A/c (15,000 x 100) 15,00,000
To Premium on Redemption A/c 3,00,000
(Being 5% Debentures allotted)
(b) Journal entries for Interest on Debentures
Date Particulars Dr. Amt. Cr. Amt.
2021 Interest on Debenture A/c Dr. 37,500
Sept 30 To Debenture holders A/c 37,500
(Being interest due for six months)
Debenture holders A/c Dr. 37,500
To Bank A/c 37,500
(Being interest paid)
2022 Interest on Debenture A/c Dr. 37,500
March To Debenture holders A/c 37,500
31 (Being interest due for six months)
Debenture holders A/c Dr. 37,500
To Bank A/c 37,500
(Being interest paid)
Statement of Profit & Loss A/c Dr. 75,000
To Interest on Debenture A/c 75,000
(Being interest on debentures charged)
(c) Loss on Issue of Debenture Account
Date Particulars Amt. Date Particulars Amt.
2021 5% Debenture A/c 1,50,000 2022 Securities Premium Reserve A/c 3,00,000
Apr. Premium on 3,00,000 March Statement of Profit & Loss A/c
01 Redemption 31 1,50,000
4,50,000 4,50,000
Part B: Analysis of Financial Statements
27 (c) Practices, based on fundamental truth OR
(d) Only (i) and (ii) are correct
28 (b) 3 times
29 (c) 5,000 subtracted under operating activities as extraordinary item and 35,000 added to Investing activities also.
OR
(d) 1,50,000 added under operating activities as loss on issue of debentures written off.
30 (c) ₹ 1,05,000
31 Classify the following items under Major heads and Sub-heads (if any) in the Balance Sheet of a Company as per
schedule III of the Companies Act 2013:
(g) Share Forfeiture Account
(h) Securities Premium Reserve
(i) Computer Designs
(j) Provision for Tax
(k) Employees Provident Fund
(l) Income received in advance
32 Window Dressing.
Two Other Limitations (Any two of the following, with suitable explanation) (a) Limitations of Accounting Data (b)
Ignores Price-level Changes (c) Ignore Qualitative or Non-monetary Aspects (d) Forecasting
33 (1) Return on Investment
ROI = Net Profits before Interest, Tax & Dividend / Capital Employed X 100
NPBI&T = 1,40,000 + 60,000 = 2,00,000
Capital Employed = Shareholders’ funds + Lon-term Debts + Reserve & Surplus
= 2,40,000 + 4,00,000 + (1,40,000 – 70,000 Tax) = 6,40,000 + 70,000 = 7,10,000.
Return on Investment = 2,00,000 / 7,10,000 X 100; = 28.17 %.
(2) Inventory Turnover Ratio:
Cost = X; Gross Profit = 25% on X; GP = X/4
Sales = Cost + Gross Profit; 2,00,000 = X + X/4; 2,00,000 = 5X/4; 5X = 8,00,000; X(Cost) =1,60,000.
Stock at the end = 30% on Sales; = 60,000; Opening Stock = 1/3 of 60,000 = 20,000
Average Stock = (60,000 + 20,000) / 2 = 40,000
STR = 1,60,000 / 40,000 = 4 Times.
OR
(a) No change. Neither equity nor the debts are affected.
(b) Increase. As the debts are increasing.
(c) Decrease. As Shareholders’ Funds will increase.
(d) No change. Neither the total long-term debt nor the total shareholders’ funds are affected.
147 | P a g e
34 6. Calculate Net Profit before tax and extraordinary items
Profits of 2021-22 as per Statement of Profit & Loss 1,70,000
Add: Provision for Tax charged in 2021-22 50,000
Add: Proposed Dividend for the year 2020-21 50,000
Net Profit before tax & extraordinary items 2,70,000
7. Calculate Operating profit before changes in working capital
Net profit before tax & extraordinary items 2,70,000
Add: Non-Cash and No-Operating Charges:
(a) Amortization of Patents 5,000
(b) Loss on sale of Equipment 5,000
(c) Depreciation on Equipment & Furniture 18,000
(d) Interest on Long-term Loan 10,000 38,000
Operating Profit before changes in Working Capital 3,08,000
8. Calculate Cash flow from operating activities
Operating profit before changes in working capital 3,08,000
Add: Increase in other current liabilities 2,000
Less: Decrease in Trade Payables (5,000)
Increase in Trade Receivables (40,000)
Increase in Inventories (80,000) (1,23,000)
1,85,000
Less: Income Tax paid (30,000)
Cash Flow from Operating Activities 1,55,000
9. Calculate Cash flow from Investing activities
a. Purchase of Equipment (80,000)
b. Investment made (1,00,000)
c. Sale of Equipment 30,000
d. Sale of Furniture 27,000
Cash Flow from Investing Activities (1,23,000)
Equipment A/c
Balance b/d 2,00,000 Depreciation 15,000
Bank A/c 80,000 Bank A/c 30,000
Statement of P&L A/c 5,000
2,80,000 2,80,000
Furniture A/c
Balance b/d 3,00,000 Depreciation 3,000
Bank A/c 27,000
3,00,000 3,00,000
10. Calculate Cash flow from Financing activities
a. Issue of Share Capital 2,00,000
b. Repayment of Long-term Loan (50,000)
c. Interest paid (10,000)
d. Dividend paid (50,000)
Cash Flow from Financing Activities 90,000
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KENDRIYA VIDYALAYA SANAGATHAN

Student support material

SHRI VINOD KUMAR

SHRI A. K. MISHRA SMT. BIRAJA MISHRA

Q32. What is the amount of interest on drawings of X and Y:

Q34. What is X's share in the net divisible profit?

ANSWER KEY: Fundamentals of Partnership Accounting

38 B IOD for A= 60,000*10/100*6.5/12=3,250

47 A Charge against profit is shown in P & L account.

To Chetan’s Salary 40,000 By Profit & Loss A/c 3,20,000

Table showing adjustment of Capital of Partners

Accounting for Reconstitution of Partnership

The circumstances under which sacrificing or gaining ratio is required to find:

There may be the term of reconstitution to adjust the capital of

The 04th step has to follow as under:

Partnership – Retirement and Death

The sum payable to the retiring/deceased partner includes:

(a) Balance in his capital/current account;

Following adjustments/treatments are needed on retirement/death of a partner:

How is the account of retiring partner settled?

Retiring Partner’s Capital A/c Dr.

# Share of profits = Average*/Actual*/Estimated* Profit x Periods*/12 x Share in Profit.

Profit & Loss Suspense A/c Dr. xxxxx --------

One Mark Questions

28. The goodwill of the firm is NOT affected by;

liabilities Rs. Assets Rs.

5 Ans. B. Goodwill. is always adjusted in gaining and sacrificing share

6 Ans. C. Both the above, because existing partner earned reputation.

7 Ans. B. It can’t be shared as it belong to employees.

8 Ans. A. Revaluation account will be debited as there is increase in the liability

12 Ans. C , It is undistributred profit and thus belong to old partner.

16 Ans. A. it belongs to old partners in old profit sharing ratio

20 Ans. A C share = 1/6 of which 1/24th share given by A and 1/8th by B

21 Ans : Share of C = Share Surrendered by A + Share Surrendered by B

23 Ans . C. Current Account is debited keep capital balance intact.

25 Ans. C. Basic Assumption

29 Ans.: A. Reason as above

30 Ans. :D . As Increase in the value of assets is credited to Revaluation A/c

31 Ans. A. It decided by old partner mutually

32 Ans. : C. Remaining 3/5

33 Ans.: a. Total Capital as per Prateek Capital = 1,00,000 *3/1 = 3,00,000

37 Ans. D. Revalued Figures

40 Ans .A 3.Dr Investment fluctuation reserve 18000

RETIREMENT AND DEATH OF A PARTNER

Multiple Choice Questions (1 Marks):

Solution: Journal entries

Accounting treatment of valued goodwill due to Admission of a new partner

Balance Sheet (After reconstitution)

(b) Realization A/c Dr. 2,000

(c) With Reference to Convertibility

(ii) On Acceptance of Application

(iii) On Making Allotment Money Due

(v) On making First Call

Transfer of Balance in Forfeited Share Account

1 What will be the nominal capital in the above case: 1

3 What will be the entry for Issue of shares to Y Ltd.? 1

4 What amount will be received at the time of First Call? 1

10 What will be the Subscribed but not fully paid up Capital? 1

12 What amount will be transferred to the Capital Reserve account? 1

38 B IOD for A= 60,00010/1006.5/12=3,250

# Share of profits = Average/Actual/Estimated* Profit x Periods*/12 x Share in Profit.