Partners S and T share profits in the ratio 5:4. A new partner U is to be admitted. The firm’s net assets before admission are Rs. 9,00,000. The assets are revalued: the building increases by Rs. 30,000 and the machinery decreases by Rs. 10,000. The goodwill to be transferred to U is Rs. 36,000 in the partners’ old profit sharing ratio. Compute the total amount that will be credited to the firm's books as a result of U’s admission (i.e., the sum of the goodwill transferred and the revaluation reserve).
Answer
Rs. 56,000
The correct answer is Rs. 56,000 — Total credit to the firm's books = revaluation reserve + goodwill transferred = 20,000 + 36,000 = 56,000.
Step-by-step solution
- Calculate net change in assets: building +30,000, machinery –10,000, net +20,000. This is the revaluation reserve credit.
- Goodwill to U is Rs. 36,000 (sum of goodwill transferred from S and T).
- Total credit to the firm's books = revaluation reserve + goodwill transferred = 20,000 + 36,000 = 56,000.
Common mistake: Forgetting to add the goodwill amount to the revaluation reserve
Concept tested: Credit to firm’s books on admission
Published · How this solution was prepared and checked
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