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Difficulty: HardAdmission of a New Partner

Folake and Uche are partners sharing profits and losses in the ratio of 5:35:3. Their capital balances prior to adjustments are ₦250,000\text{₦}250,000 and ₦150,000\text{₦}150,000 respectively. They agree to admit Chinedu into the partnership for a 15\frac{1}{5} share of future profits. On admission, equipment is revalued upward by ₦32,000\text{₦}32,000 and a provision for doubtful debts of ₦8,000\text{₦}8,000 is created. Goodwill is valued at ₦80,000\text{₦}80,000, raised in the old profit-sharing ratio, and immediately written off in the new profit-sharing ratio. What is the closing capital account balance of Folake after all adjustments?

  1. A
    ₦265,000
  2. B
    ₦272,000
  3. ₦275,000Answer
  4. D
    ₦280,000

Answer

The closing capital account balance of Folake after all adjustments is ₦275,000.
The correct answer is ₦275,000. Folake's opening capital of ₦250,000 is increased by her 5/8 share of the net revaluation gain of ₦24,000 (which equals ₦15,000) and her net credit from the goodwill adjustment of ₦10,000 (₦50,000 credit in old ratio minus ₦40,000 debit in new ratio).

Step-by-Step Solution

1
Calculate the net profit on revaluation of assets and liabilities.
Net revaluation profit = ₦32,000−₦8,000=₦24,000\text{₦}32,000 - \text{₦}8,000 = \text{₦}24,000.
Revaluation gains increase capital while provisions reduce the gain.
2
Share the net revaluation profit between existing partners in their old profit-sharing ratio (5:35:3).
Folake's share = 58×₦24,000=₦15,000\frac{5}{8} \times \text{₦}24,000 = \text{₦}15,000.
Revaluation gains accrued prior to admission belong exclusively to old partners in their old ratio.
3
Determine the new profit-sharing ratio.
Chinedu's share = 15=210\frac{1}{5} = \frac{2}{10}. Remaining share for Folake and Uche = 1−15=451 - \frac{1}{5} = \frac{4}{5}. Folake's new share = 58×45=510\frac{5}{8} \times \frac{4}{5} = \frac{5}{10}. Uche's new share = 38×45=310\frac{3}{8} \times \frac{4}{5} = \frac{3}{10}. New ratio = 5:3:25:3:2.
Old partners share the remaining profit share proportionally to their old ratio.
4
Calculate goodwill raised in the old ratio and written off in the new ratio for Folake.
Goodwill credited to Folake (old ratio 5/85/8) = 58×₦80,000=₦50,000\frac{5}{8} \times \text{₦}80,000 = \text{₦}50,000. Goodwill debited to Folake (new ratio 5/105/10) = 510×₦80,000=₦40,000\frac{5}{10} \times \text{₦}80,000 = \text{₦}40,000. Net goodwill credit = ₦50,000−₦40,000=₦10,000\text{₦}50,000 - \text{₦}40,000 = \text{₦}10,000.
Goodwill created is credited to old partners in old ratio and debited to all partners in new ratio when written off.
5
Compute Folake's adjusted closing capital balance.
Opening Capital (₦250,000\text{₦}250,000) + Revaluation Share (₦15,000\text{₦}15,000) + Net Goodwill Credit (₦10,000\text{₦}10,000) = ₦275,000\text{₦}275,000.
Summing the initial balance and all capital adjustments yields the final capital balance.

Key Concept

Accounting treatment of revaluation and goodwill upon admission of a new partner
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Admission of a New Partner

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