CA Inter Adv Accounting — Question Paper — May 2017

AS 9 Revenue Recognition requires:

Under AS 9, revenue from sale of goods shall be recognized when: (a) significant risks and rewards of ownership have been transferred to the buyer; (b) the seller has no continuing managerial involvement or effective control; (c) revenue can be reliably measured; and (d) it is probable that economic benefits will flow to the entity.

Analysis of Raj Ltd.'s Treatment:

Raj Ltd.'s accounting is INCORRECT and does not comply with AS 9. The ₹15,00,000 recorded as sales is premature and unjustified. Here's why:

First, the ₹15,00,000 recognized as Sales is improper: The goods worth ₹15,00,000 remain with Raj Ltd. as "ready for dispatch." Since the buyer (Heena Ltd.) has REFUSED acceptance and the goods have not been delivered to the buyer, the significant risks and rewards of ownership have NOT transferred. Revenue cannot be recognized merely because goods are ready for dispatch. Per AS 9, physical dispatch of goods coupled with acceptance by the buyer is essential for revenue recognition.

Second, there is no reasonable certainty of realization: The buyer has explicitly refused to accept goods from month 4 onwards, creating uncertainty about ultimate cash realization. This breach of contract or suspension creates a contingency. AS 9 requires reasonable certainty of ultimate realization in cash or cash equivalents. The buyer's refusal negates this certainty for the undisputed goods.

Third, the accounting conflates payment received with delivery accepted: The ₹30,00,000 advance should be matched ONLY with goods actually delivered and accepted by the buyer. For months 1 and 2, if goods were delivered and accepted, revenue of ₹30,00,000 could have been recognized against this advance. The goods dispatched in month 3 (if any) that were rejected, and the ₹15,00,000 yet to be dispatched, must NOT be recognized as revenue.

Correct Treatment under AS 9:

1. Revenue should be recognized only for goods delivered and accepted: If goods worth ₹30,00,000 (months 1–2) were delivered and accepted by Heena Ltd., this amount should be recognized as revenue and the advance matched against it.

2. Rejected/on-hold goods should NOT be recognized as sales: The goods worth ₹15,00,000 (month 3 onwards) that were refused or remain on hold should NOT be included in sales revenue. These goods remain the asset of Raj Ltd.

3. Treatment of unmatched advance: Any portion of the ₹30,00,000 advance that exceeds accepted goods should continue to be shown as "Advance received against sales" (a liability), not reclassified based on goods merely ready for dispatch.

4. Subsequent resolution: Once the dispute is resolved—either the buyer accepts the goods or the contract is cancelled—appropriate adjustments should be made. If the buyer ultimately refuses, the goods should be adjusted as returned inventory, and the advance should be refunded or adjusted accordingly.

Conclusion: Raj Ltd.'s accounting is incorrect. It violates the fundamental principle of AS 9 by recognizing revenue before significant risks and rewards transfer and without reasonable certainty of realization.

(i) Issue of 9% Preference Shares of PQ Ltd.

P Ltd. has 3,800 preference shares (₹3,80,000 ÷ ₹100) and Q Ltd. has 2,800 preference shares (₹2,80,000 ÷ ₹100). For each old preference share held, PQ Ltd. issues 5 new preference shares of ₹20 each, ₹18 paid up, at a premium of ₹4.

New preference shares issued:
- To P Ltd. preference shareholders: 3,800 × 5 = 19,000 shares
- To Q Ltd. preference shareholders: 2,800 × 5 = 14,000 shares
- Total: 33,000 preference shares

Consideration per share = ₹18 (paid up) + ₹4 (premium) = ₹22.

Journal Entry in PQ Ltd.'s books:

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Liquidator of P Ltd. & Q Ltd. A/c Dr. | 7,26,000 | |
| To 9% Preference Share Capital A/c | | 5,94,000 |
| To Securities Premium A/c | | 1,32,000 |
| *(33,000 shares × ₹18 and × ₹4 respectively)* | | |

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(ii) Issue of Equity Shares of PQ Ltd. (in Exchange)

P Ltd. has 8,200 equity shares (₹8,20,000 ÷ ₹100) and Q Ltd. has 3,200 equity shares (₹3,20,000 ÷ ₹100). For each old equity share held, PQ Ltd. issues 8 new equity shares of ₹20 each, ₹18 paid up, at a premium of ₹4.

New equity shares issued in exchange:
- To P Ltd. equity shareholders: 8,200 × 8 = 65,600 shares
- To Q Ltd. equity shareholders: 3,200 × 8 = 25,600 shares
- Total: 91,200 equity shares

Consideration per share = ₹18 + ₹4 = ₹22.

Journal Entry in PQ Ltd.'s books:

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Liquidator of P Ltd. & Q Ltd. A/c Dr. | 20,06,400 | |
| To Equity Share Capital A/c | | 16,41,600 |
| To Securities Premium A/c | | 3,64,800 |
| *(91,200 shares × ₹18 and × ₹4 respectively)* | | |

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(iii) Issue of 8% Debentures of PQ Ltd. to Discharge Old Debentures

P Ltd. has 8% Debentures of ₹2,00,000 and Q Ltd. has 8% Debentures of ₹1,00,000; total ₹3,00,000. PQ Ltd. issues 60 new debentures to fully discharge these. Face value per new debenture = ₹3,00,000 ÷ 60 = ₹5,000 per debenture.

The old debentures are assumed as liabilities when assets and liabilities are taken over, and then separately discharged by issuing new debentures of PQ Ltd.

Journal Entry in PQ Ltd.'s books:

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| 8% Debentures (Assumed) A/c Dr. | 3,00,000 | |
| To 8% Debentures of PQ Ltd. A/c | | 3,00,000 |
| *(60 debentures of ₹5,000 each issued to discharge old debenture holders)* | | |

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(iv) Issue of New Equity Shares for Cash

PQ Ltd. issues 20,000 new equity shares of ₹20 each, ₹18 paid up, at a premium of ₹4 per share, for cash. Cash received per share = ₹18 + ₹4 = ₹22.

Total cash received = 20,000 × ₹22 = ₹4,40,000.

Journal Entry in PQ Ltd.'s books:

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Bank A/c Dr. | 4,40,000 | |
| To Equity Share Capital A/c | | 3,60,000 |
| To Securities Premium A/c | | 80,000 |
| *(20,000 shares × ₹18 and × ₹4 respectively)* | | |

Note: Under AS 14 – Accounting for Amalgamations, the Purchase Consideration comprises only (i) and (ii) above totalling ₹27,32,400. Debentures (iii) are liabilities assumed and not part of purchase consideration. The fresh issue for cash (iv) is a post-amalgamation capital-raising transaction.

Building Fund — Journal Entries for 2016-17 (JRB Engineering College)

Key figures derived before passing entries:

- Interest on Fixed Deposit = 5% × ₹4,50,000 = ₹22,500
- 40% of Development Fees = 40% × ₹16,92,375 = ₹6,76,950
- 70% of old contractors' bill (Opening WIP) = 70% × ₹6,18,750 = ₹4,33,125 (paid 14.4.2016)
- Outstanding old bill (30%) = ₹6,18,750 − ₹4,33,125 = ₹1,85,625 (still payable)
- New extension cost = ₹5,43,750 (fully paid)
- Total building cost transferred = ₹6,18,750 + ₹5,43,750 = ₹11,62,500 ✓

Note on opening position: The Building Fund balance of ₹7,50,000 was represented only by FD and Bank. The WIP of ₹6,18,750 was an asset on the building fund side, funded by an equal opening liability (Contractors A/c ₹6,18,750 — entirely unpaid as of 31.3.2016).

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Journal Entries in the Books of JRB Engineering College for 2016-17

(1) Interest on Fixed Deposit credited to Building Fund:
Dr. Bank A/c (Building Fund) ₹22,500
Cr. Building Fund A/c ₹22,500
*(Being interest @ 5% p.a. on FD of ₹4,50,000 earned and credited to Building Fund)*

(2) Donations received towards Building Fund:
Dr. Bank A/c (Building Fund) ₹4,20,000
Cr. Building Fund A/c ₹4,20,000
*(Being donations collected for building purposes)*

(3) Transfer of 40% of Development Fees to Building Fund:
Dr. Development Fees A/c ₹6,76,950
Cr. Building Fund A/c ₹6,76,950
*(Being 40% of ₹16,92,375 development fees transferred as per decision)*

(4) Payment of 70% of contractors' bill for opening WIP on 14.4.2016:
Dr. Contractors A/c ₹4,33,125
Cr. Bank A/c (Building Fund) ₹4,33,125
*(Being 70% of ₹6,18,750 paid to contractor on 14th April 2016)*

(5) New extension of building completed on 31.12.2016:
Dr. Building Fund in Progress A/c ₹5,43,750
Cr. Contractors A/c ₹5,43,750
*(Being extension of building finalised at ₹5,43,750)*

(6) Payment of contractors' bill for new extension (fully met):
Dr. Contractors A/c ₹5,43,750
Cr. Bank A/c (Building Fund) ₹5,43,750
*(Being contractors' bill for extension fully paid)*

(7) Transfer of completed building to asset account:
Dr. Building A/c ₹11,62,500
Cr. Building Fund in Progress A/c ₹11,62,500
*(Being cost of completed building ₹11,62,500 transferred from WIP to Building A/c)*

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Trial Balance of Building Fund as on 31st March 2017

| Account | Dr (₹) | Cr (₹) |
|---|---|---|
| Fixed Deposit A/c (5% p.a.) | 4,50,000 | — |
| Bank A/c (Building Fund) | 4,42,575 | — |
| Building A/c (completed) | 11,62,500 | — |
| Building Fund A/c | — | 18,69,450 |
| Contractors A/c (30% old WIP outstanding) | — | 1,85,625 |
| Total | 20,55,075 | 20,55,075 |

The Trial Balance tallies at ₹20,55,075 on both sides.

Simple Interest Method — Interest Calculation on Current Account between A and B

Under the Simple Interest Method, interest is calculated by finding the running balance after each transaction, multiplying by the number of days for which that balance is held (the product), summing all products, and applying the interest formula.

Step 1: Running Balance in B's Account (in A's Books)

A debit balance means B owes A (A has given credit to B).

| Date | Transaction | Amount (₹) | Balance (₹) |
|---|---|---|---|
| 1.1.2017 | Opening Balance | — | 1,00,000 Dr |
| 10.1.2017 | Sold goods to B | +2,00,000 | 3,00,000 Dr |
| 15.1.2017 | Cash received from B | −2,00,000 | 1,00,000 Dr |
| 13.2.2017 | Sold goods to B | +2,00,000 | 3,00,000 Dr |
| 1.3.2017 | Cash received from B | −1,00,000 | 2,00,000 Dr |
| 31.3.2017 | Closing | — | — |

Step 2: Calculate Products (Balance × Days)

All balances are Dr throughout, so there is no Cr product — the net product is entirely debit.

Total Dr Product = ₹1,61,00,000

Step 3: Calculate Interest

Interest = (Sum of Dr Products × Rate) / (365 × 100)
= (1,61,00,000 × 10) / (365 × 100)
= 16,10,00,000 / 36,500
= ₹4,410.96 ≈ ₹4,411

Conclusion: Since the net product balance is a debit balance (i.e., B's account shows a debit in A's books throughout), B owes interest to A of ₹4,411 at 10% p.a. for the three months ending 31st March 2017.

Trading Account of ABC Enterprises for the year ended 31st March, 2017

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Opening Stock | 80,000 | By Sales (WN 3) | 6,18,750 |
| To Purchases (WN 2) | 4,60,000 | By Goods used for Advertising (at cost) | 5,000 |
| To Freight | 30,000 | By Closing Stock | 70,000 |
| To Gross Profit c/d | 1,23,750 | | |
| Total | 6,93,750 | Total | 6,93,750 |

Profit & Loss Account for the year ended 31st March, 2017

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Expenses — Salaries etc. (WN 7) | 92,000 | By Gross Profit b/d | 1,23,750 |
| To Discount Allowed | 15,000 | By Discount Received | 8,000 |
| To Depreciation on Furniture (WN 8) | 6,500 | By Miscellaneous Receipts | 5,000 |
| To Discount on Bills Discounted (WN 6) | 18,750 | By Interest on Investments (WN 9) | 600 |
| To Advertisement (goods at cost) | 5,000 | By Net Loss (to Capital A/c) | 2,355 |
| To Provision for Doubtful Debts (WN 10) | 2,455 | | |
| Total | 1,39,705 | Total | 1,39,705 |

Balance Sheet of ABC Enterprises as at 31st March, 2017

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital (WN 1, 11): | | Furniture (Cost ₹70,000 − Dep ₹6,500) | 63,500 |
| Opening Capital | 1,88,000 | Investment at cost (WN 9) | 19,000 |
| Add: Capital Introduced (WN 5) | 23,000 | Closing Stock | 70,000 |
| Less: Drawings | (70,000) | Sundry Debtors (WN 4): 1,22,750 | |
| Less: Net Loss | (2,355) | Less: Provision for DD (WN 10): (2,455) | 1,20,295 |
| | 1,38,645 | Interest Accrued on Investments | 600 |
| Sundry Creditors | 1,50,000 | Prepaid Expenses | 7,000 |
| Outstanding Expenses | 18,000 | Cash in Hand & Bank Balance | 26,250 |
| Total | 3,06,645 | Total | 3,06,645 |

Key determinations: Sales of ₹6,18,750 are derived by working backwards from Purchases (via Creditors A/c) using the 20% GP on sales ratio. Closing Debtors of ₹1,22,750 are derived from the Debtors ledger. The cash book shortfall of ₹23,000 is treated as capital introduced per instruction (f). Net Loss for the year = ₹2,355.

Pre-Incorporation Period: 1 April 2016 to 31 May 2016 = 2 months
Post-Incorporation Period: 1 June 2016 to 31 March 2017 = 10 months
Time Ratio = 2 : 10 = 1 : 5

Sales Ratio Calculation: Total sales = ₹18,00,000; Sales April–September = ₹6,00,000 (uniform sales assumed). Pre-incorporation sales (April–May) = 2/6 × ₹6,00,000 = ₹2,00,000. Post-incorporation sales = ₹18,00,000 − ₹2,00,000 = ₹16,00,000.
Sales Ratio = 2,00,000 : 16,00,000 = 1 : 8

Basis of Allocation of Each Item:
- Gross Profit: Sales ratio (1:8) — GR value is constant, so GP follows sales.
- Salary: Time ratio (1:5) — accrues with time.
- Interest on Debentures: Entirely post-incorporation — debentures are a company instrument, not a partnership liability.
- Sales Commission: Sales ratio (1:8) — directly linked to sales.
- Bad Debts (gross ₹63,000): Sales ratio (1:8) — relates to sales transactions. Note: Gross bad debts = ₹49,000 (net per P&L) + ₹14,000 recovered = ₹63,000.
- Bad Debts Recovered ₹14,000: Entirely pre-incorporation — relates to a pre-incorporation sale, hence credited to pre-incorporation profit.
- Depreciation on existing assets (₹18,000): Time ratio (1:5).
- Depreciation on new assets (₹1,250): Entirely post-incorporation — assets acquired post-incorporation.
- Rent — base rent (₹22,000): Time ratio (1:5) — ₹36,400 total less additional ₹14,400 (₹2,400 × 6 months Oct–Mar) = ₹22,000 for original premises.
- Additional Rent (₹14,400): Entirely post-incorporation (Oct 2016 to Mar 2017).
- Audit Fees: Entirely post-incorporation — statutory audit applies only to companies.

Statement of Pre and Post Incorporation Profit for the year ended 31 March 2017

| Particulars | Basis | Pre-Inc (₹) | Post-Inc (₹) | Total (₹) |
|---|---|---:|---:|---:|
| Gross Profit | Sales 1:8 | 50,000 | 4,00,000 | 4,50,000 |
| Add: Bad Debts Recovered | Pre only | 14,000 | — | 14,000 |
| Total Income (A) | | 64,000 | 4,00,000 | 4,64,000 |
| Less: Salary | Time 1:5 | 24,000 | 1,20,000 | 1,44,000 |
| Less: Interest on Debentures | Post only | — | 36,000 | 36,000 |
| Less: Sales Commission | Sales 1:8 | 2,000 | 16,000 | 18,000 |
| Less: Bad Debts (Gross) | Sales 1:8 | 7,000 | 56,000 | 63,000 |
| Less: Depreciation | Mixed | 3,000 | 16,250 | 19,250 |
| Less: Rent | Mixed | 3,667 | 32,733 | 36,400 |
| Less: Audit Fees | Post only | — | 12,000 | 12,000 |
| Total Expenses (B) | | 39,667 | 2,88,983 | 3,28,650 |
| Net Profit (A − B) | | 24,333 | 1,11,017 | 1,35,350 |

Pre-incorporation profit of ₹24,333 is a Capital Profit and must be transferred to Capital Reserve (not distributable as dividend). Post-incorporation profit of ₹1,11,017 is Revenue Profit, available for appropriation.

*Note: The question states Net Profit as ₹1,33,350; however, the given P&L items total ₹3,14,650 (expenses) against Gross Profit of ₹4,50,000, implying NP = ₹1,35,350. The discrepancy of ₹2,000 is a typographical error in the question data; the allocation is presented using the mathematically consistent figure.*

Investment Account of Akash Ltd. — Shares in X Limited
For the year ended 31st March 2017

(Governed by AS 13 — Accounting for Investments)

Since the investment is classified as a current investment, it is valued at the lower of cost or fair value (market value) as per AS 13 (Revised).

Key Workings Before the Account:

Opening holding: 4,000 shares @ ₹15 (book value) = ₹60,000.

Purchase (1st Sept 2016): 1,000 shares at face value ₹10 + ₹4 premium = ₹14 per share → ₹14,000. Cumulative: 5,000 shares, ₹74,000.

Bonus Issue (30th Sept 2016): 2 bonus shares for every 5 held → 5,000 × 2/5 = 2,000 bonus shares. No cost is assigned to bonus shares; they merely reduce the average cost. Cumulative: 7,000 shares, ₹74,000.

Rights Issue (1st Dec 2016): 2 rights for every 7 shares held → 7,000 × 2/7 = 2,000 rights entitlement. Issue price = ₹10 + 25% premium = ₹12.50 per share. Akash Ltd. exercised 50% of entitlement = 1,000 shares subscribed at ₹12,500. Remaining 1,000 rights sold @ ₹8 each = ₹8,000 — credited to Investment Account (reduces cost), per AS 13 treatment for rights renounced. Cumulative shares: 8,000; Net cost pool: ₹74,000 + ₹12,500 − ₹8,000 = ₹78,500.

Average Cost per Share = ₹78,500 ÷ 8,000 = ₹9.8125 per share.

Dividend (received 20th Jan 2017 for year ended 31st Mar 2016): For the original 4,000 shares this is post-acquisition dividend → credited to P&L A/c (income). For 1,000 shares purchased 1st Sept 2016, this is pre-acquisition dividend → should reduce cost; however, since the dividend rate/amount is not specified in the question, it is not incorporated in the account.

Sale (1st Feb 2017): Half of 8,000 = 4,000 shares sold at ₹10 + ₹4 = ₹14 per share → proceeds = ₹56,000. Cost of shares sold = 4,000 × ₹9.8125 = ₹39,250. Profit on sale = ₹16,750 (transferred to P&L A/c).

Closing Balance: 4,000 shares; cost = ₹39,250.

Valuation on 31st March 2017 (Current Investment — AS 13):
Cost = ₹9.8125 × 4,000 = ₹39,250; Market value = ₹13 × 4,000 = ₹52,000.
Lower of cost or market = ₹39,250 (valued at cost).

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Investment Account (Dr.)

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 1.4.2016 | Balance b/d | 4,000 | 60,000 |
| 1.9.2016 | Bank A/c (Purchase) | 1,000 | 14,000 |
| 30.9.2016 | Bonus Shares (No cost) | 2,000 | — |
| 1.12.2016 | Bank A/c (Rights subscribed) | 1,000 | 12,500 |
| 1.2.2017 | P&L A/c (Profit on sale) | — | 16,750 |
| Total | | 8,000 | 1,03,250 |

Investment Account (Cr.)

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 1.12.2016 | Bank A/c (Rights sold) | — | 8,000 |
| 1.2.2017 | Bank A/c (Shares sold) | 4,000 | 56,000 |
| 31.3.2017 | Balance c/d | 4,000 | 39,250 |
| Total | | 4,000 | 1,03,250 |

Value of shares held on 31st March 2017 = ₹39,250 (being lower of cost ₹39,250 and market value ₹52,000, under AS 13 for current investments).

Partnership — Death of Ram on 31st July, 2016

When a partner dies mid-year, the amount payable to his legal estate is calculated under three heads as specified in the partnership deed. The relevant period from last Balance Sheet date (31st March, 2016) to date of death (31st July, 2016) is 4 months.

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(i) Capital and Current Account Balance at end of last financial year

As per the Balance Sheet dated 31st March, 2016:

- Ram's Capital Account (Cr): ₹2,70,000
- Ram's Current Account (Cr): ₹4,200

Total amount due under this head = ₹2,74,200

These balances are carried forward as the opening position in Ram's executor's account. The Current Account balance is a credit balance, indicating amount owed to Ram.

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(ii) Share of Profit for the relevant part of the year of death (1 April 2016 to 31 July 2016)

Since actual profits for the year 2015–16 are not yet finalised at the time of death, the profit for the part-year is estimated on the basis of average profits of the preceding three completed accounting years.

Average Profit = (₹86,700 + ₹1,43,200 + ₹1,07,600) ÷ 3 = ₹1,12,500

Profit attributable to 4 months (April to July 2016):
= ₹1,12,500 × 4/12 = ₹37,500

Ram's share (1/3 of ₹37,500) = ₹12,500

Amount due to Ram's estate under this head = ₹12,500

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(iii) Share of Goodwill

As per the deed, goodwill = 2 years' purchase of average profits of preceding three accounting years.

Preceding three completed years (prior to death on 31.07.2016, i.e., the three finalized years):
- Year ended 31.03.2013: ₹86,700
- Year ended 31.03.2014: ₹1,43,200
- Year ended 31.03.2015: ₹1,07,600

Average Profit = ₹3,37,500 ÷ 3 = ₹1,12,500

Firm's Goodwill = 2 × ₹1,12,500 = ₹2,25,000

Ram's share (1/3) = ₹2,25,000 × 1/3 = ₹75,000

Amount due to Ram's estate under this head = ₹75,000

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Total Amount Payable to Ram's Estate:

| Particulars | ₹ |
|---|---|
| Capital Account | 2,70,000 |
| Current Account | 4,200 |
| Share of Profit (4 months) | 12,500 |
| Share of Goodwill | 75,000 |
| Total | 3,61,700 |

Note on Missing Data: This question appears to be the concluding part of a multi-part problem. The original capital account balances of Ram, Shyam and Laxman, the original profit-sharing ratio, and the goodwill valuation are not provided in the question as stated. Without these figures, the numerical balance sheet cannot be fully prepared. The methodology is presented below so that the approach is clear for exam purposes.

Key Events to Account for (31st July → 1st August 2016):

Step 1 — Position at 31st July 2016
Total Assets = Building ₹4,50,000 + Stock ₹33,000 + Plant & Machinery ₹97,700 + Sundry Debtors ₹66,000 + Furniture & Fittings ₹66,700 + Cash at Bank ₹1,01,100 = ₹8,14,500
Less: Sundry Creditors ₹29,400
Net Assets = ₹7,85,100 — this equals the aggregate capital of all partners.

Step 2 — Ram's Death (31st July 2016)
On death, Ram's Capital Account balance is transferred to Ram's Executor's Account. Ram's share of goodwill (per agreed valuation) is also credited to Ram's Executor's Account, debiting the surviving partners (Shyam and Laxman) in their old gaining ratio. Ram's drawings of ₹60,000 are deducted. Since no goodwill is to remain in the books, any goodwill account created is immediately written off by debiting the new partners (Shyam, Laxman, Shankar) in their new profit-sharing ratio.

Step 3 — First Instalment to Ram's Executor (1st August 2016)
Ram's total entitlement is divided into three equal instalments. The first instalment is paid on 1st August 2016 (day after death). This reduces Cash at Bank and reduces Ram's Executor's Account. The remaining 2/3rd balance of Ram's Executor's Account appears as a liability in the Balance Sheet.

Step 4 — Admission of Shankar (1st August 2016)
Shankar, Ram's son, is admitted as a new partner. He brings in ₹1,20,000 as capital (debits Cash at Bank) and pays a premium for goodwill based on the existing valuation for his 1/8th share (debits Cash at Bank). The goodwill premium is credited to Shyam and Laxman in their sacrifice ratio (the ratio in which they give up their shares to Shankar). Since no goodwill account is to remain, the goodwill premium received in cash is simply retained as cash — no accounting entry in the goodwill account is required (cash premium method).

New Profit-Sharing Ratio: Shyam : Laxman : Shankar = 2 : 2 : 1 (i.e., 2/5, 2/5, 1/5 — treating the /8 denominators as relative fractions totalling 5/8, interpreted as a 2:2:1 ratio).

Balance Sheet Format as at 1st August 2016:

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Shyam's Capital | xx | Building | 4,50,000 |
| Laxman's Capital | xx | Plant & Machinery | 97,700 |
| Shankar's Capital | 1,20,000 | Furniture & Fittings | 66,700 |
| Ram's Executor A/c (2/3rd) | xx | Stock | 33,000 |
| Sundry Creditors | 29,400 | Sundry Debtors | 66,000 |
| | | Cash at Bank | xx |

Cash at Bank is adjusted as: Opening ₹1,01,100 + Shankar's capital ₹1,20,000 + Goodwill premium from Shankar – First instalment to Ram's Executor.

Important Principle: Since no goodwill account is to remain in the books, the goodwill premium paid by Shankar in cash is credited directly to the accounts of sacrificing partners (Shyam and Laxman). No Goodwill Account is opened. Ram's share of goodwill at the time of death is also settled through his Executor's Account (not through a permanent goodwill account).