Worked Solution
✓ VerifiedGOODWILL VALUATION:
Adjusted Profits (last 5 years):
- 2007-08: ₹10,000
- 2008-09: Loss ₹5,000 adjusted for non-recurring strike loss of ₹10,000 = ₹5,000
- 2009-10: ₹18,000
- 2010-11: ₹27,000
- 2011-12: ₹30,000
Total adjusted profit = ₹90,000
Average profit = ₹90,000 ÷ 5 = ₹18,000
Goodwill = 2 years' purchase × ₹18,000 = ₹36,000
REVALUATION ADJUSTMENTS:
Plant & Machinery loss = ₹1,08,000 − ₹1,02,000 = ₹6,000
Loss distributed in ratio 3:2:1 to P, Q, R respectively.
Reserve Fund (₹60,000) and Goodwill (₹36,000) distributed to partners in their profit-sharing ratio 3:2:1.
PARTNERS' ADJUSTED CAPITAL ACCOUNTS:
P: Capital ₹50,000 + Share of Reserve ₹30,000 − Share of revaluation loss ₹3,000 + Share of goodwill ₹18,000 = ₹95,000
Q: Capital ₹30,000 + Share of Reserve ₹20,000 − Share of revaluation loss ₹2,000 + Share of goodwill ₹12,000 = ₹60,000
R: Capital ₹20,000 + Share of Reserve ₹10,000 − Share of revaluation loss ₹1,000 + Share of goodwill ₹6,000 = ₹35,000
Total capital = ₹1,90,000
SHARE CAPITAL STRUCTURE (Taking Q's capital as basis):
To preserve priority in repayment, minimum capital (R = ₹35,000) is allocated as Preference Shares. Excess is allocated as Equity Shares:
P: Preference Shares ₹35,000 + Equity Shares ₹60,000
Q: Preference Shares ₹35,000 + Equity Shares ₹25,000
R: Preference Shares ₹35,000 + Equity Shares Nil
Total Preference Shares = ₹1,05,000 (10,500 shares @ ₹10 each)
Total Equity Shares = ₹85,000 (8,500 shares @ ₹10 each)
(a) BALANCE SHEET OF PQR PVT. LTD. AS AT 01-04-2012
ASSETS:
Plant & Machinery ₹1,02,000
Fixtures ₹20,000
Stock ₹50,000
Sundry Debtors ₹30,000
Goodwill ₹36,000
Total Assets = ₹2,38,000
LIABILITIES & CAPITAL:
Preference Share Capital (10,500 @ ₹10 each) ₹1,05,000
Equity Share Capital (8,500 @ ₹10 each) ₹85,000
Creditors ₹48,000
Total = ₹2,38,000
(b) PARTNERS' CAPITAL ACCOUNTS (at conversion):
| P | Q | R | |
|---|---|---|---|
| Capital Account (original) | ₹50,000 | ₹30,000 | ₹20,000 |
| Add: Share of Reserve Fund | 30,000 | 20,000 | 10,000 |
| Add: Share of Goodwill | 18,000 | 12,000 | 6,000 |
| Less: Share of revaluation loss | (3,000) | (2,000) | (1,000) |
| Adjusted Capital | ₹95,000 | ₹60,000 | ₹35,000 |
(c) STATEMENT OF FINAL SETTLEMENT (Taking Q's Capital as Basis)
| Particulars | P (₹) | Q (₹) | R (₹) |
|---|---|---|---|
| Adjusted Capital | 95,000 | 60,000 | 35,000 |
| Settled by: | |||
| Preference Shares (₹10 each) | 35,000 | 35,000 | 35,000 |
| Equity Shares (₹10 each) | 60,000 | 25,000 | — |
| Total | ₹95,000 | ₹60,000 | ₹35,000 |
This settlement preserves the profit-sharing ratio (3:2:1) and provides priority in capital repayment through Preference Share capital of ₹35,000 per partner, with remaining capital exposed as ordinary shareholders.
Write it like this
1The skeleton
- Start with goodwill workings, not the Balance Sheet — show each year's adjusted profit in a table and explicitly call out that the ₹10,000 strike loss is 'non-recurring in nature' before adding it back; examiners award a specific step mark for this adjustment and skip candidates who silently fix the number.
- Open a Revaluation Account before touching capital accounts — the P&M loss of ₹6,000 must flow through a formal Revaluation A/c entry first, distributed 3:2:1; jumping straight to adjusted capitals without this step loses the presentation mark.
- Write Partners' Capital Accounts in columnar T-format with every line item labelled — Reserve Fund credit, Goodwill credit, and Revaluation loss debit on separate rows; examiners tick each row independently, so a missing label = a missing tick.
- Explain the share structure logic in one sentence before the numbers — write 'Taking Q's capital (₹60,000) as basis, minimum capital of R (₹35,000) is settled as Preference Shares to preserve repayment priority'; without this sentence the examiner doesn't know you understood the concept, even if your numbers are right.
- Show Goodwill as an asset in the company's Balance Sheet — it came in as part of the purchase consideration; students who compute it correctly but then omit it from the BS lose 2 marks on the very last step.
- End with a one-line reconciliation — state 'Total Preference Share Capital ₹1,05,000 + Total Equity Share Capital ₹85,000 = Total Adjusted Capital ₹1,90,000' to signal completeness and make the examiner's ticking effortless.
2Examiner-rewarded phrases
3Common trap
The single biggest mark-killer here is using the raw loss of ₹5,000 for 2008-09 without adjusting for the ₹10,000 strike loss — that changes your goodwill from ₹36,000 to ₹32,000 and cascades errors into every capital account and the Balance Sheet. Also watch out: many students allocate Preference Shares equal to R's capital but can't explain why — if you can't write that one-sentence logic ('to preserve repayment priority'), you'll lose the theory marks even with correct numbers.