Question

In: Accounting

Balqees and Zawan were partners sharing the profits and losses of their partnership firm “ Best...

Balqees and Zawan were partners sharing the profits and losses of their partnership firm “ Best
traders ” in the ratio of 5:6. As the duo were struggling with managing the ever increasing
financial needs of their business and hence they decided to admit Hana in their partnership firm.
Hana, a rich lady was drawn in to induce funds in the cash strapped business. She agreed to
participate in the struggling venture demanding a 5/12 share in profits, which was agreed by
Balqees and Zawan
You are requested to explain in detail as to how the reconstitution of the firm would
take place considering each and every necessary adjustment including calculation
wherever applicable.

Expert Solution

Balqees' original share in profit = 5/11

Zawan's original share in proft = 6/11

Hana's share in profit after she joined the firm = 5/12

Balqees' and Zawan's combined share in profit after Hana joined = 1 - 5/12 = 7/12

Balqees' new share in proftit = combined share in profit of old partners x Balqees' old share in profit

= 7/12 x 5/11 = 35/132

Zawan's new share in profit = 7/12 x 6/11 = 42/132

Bringing the Base of Hana's share equal to Balqees and Zawan's = 5/12 x 11/11 = 55/132.

So the new share of Balqees, Zawan and Hana in the firm is 35:42:55

Balqees' sacrificing ratio = old profit sharing ratio = new profit sharing ratio

= 5/11 - 35/132 = 25/132

Zawan's sacrificing ratio = 6/11- 42/132 = 30/132

therefore, Balqees and Zawan sacrificed their profits in the firm in the ratio of 25:30 that is 5:6

If Hana brings her share of goodwill into the firm in the form of cash this entry will be passed

Cash dr

To Hana's capital

To goodwill

The goodwill will then be transferred to the old partner's accounts in their sacrificing ratio

Goodwill dr

To Balqees' capital

To Zawan's capital

If the old partners wish they can withdraw the whole or part of the goodwill by debiting their capital accounts.

If Hana doesnt bring her share of the goodwill then goodwill will be created by debiting the old partner's account to the amount of Hana's hare in goodwill in their sacrificing ratio.

Please like the solution if satisfied and drop a comment in case of any doubts.

Thankyou

ekkarill92 answered 1 year ago

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