Sunday, 6 January 2013
Topic to be tested:
Learning objectives:
Discussion question:
Mr. Asim and Mr. Rehan are equal partners in Zaman Bros. with reference to capital and profit sharing. Recently, they have decided to admit Mr. Talha in the firm for one-third share against his capital contribution in cash of Rs. 200,000. Total capital of the firm before his admission is Rs. 440,000. Mr. Talha is hesitant to invest Rs. 200,000 in the business. He has argued that as per his investigations, some amount of account receivable seems irrecoverable and inventories and other short period investments seem to be unable to recover their book value in the fair market. He is of the opinion to provide for these amounts being as expected future losses in the recent year’s accounts of the firm. But, Mr. Asim and Mr. Rehan have denied this argument as they thought to have been provided fairly against such losses in the accounts. Yet, after a long discussion, they agreed to admit Mr. Talha against his capital of Rs. 160,000 with no other change. Furthermore, it is mutually decided that in the new firm, capital as well as the profit sharing ratio of all the partners would be equal.
Required:
Discuss the accounting treatment in the new firm’s books on the admission of Mr. Talha - if the capital difference is charged to the old partners. Also suggest the probability of recognizing goodwill in the new firm’s accounts with valid arguments.
- “Accounting for “Admission of a partner” in a partnership firm”
Learning objectives:
- To learn about valuable knowledge regarding the accounting treatment on admission of a new partner in partnership firm.
Discussion question:
Mr. Asim and Mr. Rehan are equal partners in Zaman Bros. with reference to capital and profit sharing. Recently, they have decided to admit Mr. Talha in the firm for one-third share against his capital contribution in cash of Rs. 200,000. Total capital of the firm before his admission is Rs. 440,000. Mr. Talha is hesitant to invest Rs. 200,000 in the business. He has argued that as per his investigations, some amount of account receivable seems irrecoverable and inventories and other short period investments seem to be unable to recover their book value in the fair market. He is of the opinion to provide for these amounts being as expected future losses in the recent year’s accounts of the firm. But, Mr. Asim and Mr. Rehan have denied this argument as they thought to have been provided fairly against such losses in the accounts. Yet, after a long discussion, they agreed to admit Mr. Talha against his capital of Rs. 160,000 with no other change. Furthermore, it is mutually decided that in the new firm, capital as well as the profit sharing ratio of all the partners would be equal.
Required:
Discuss the accounting treatment in the new firm’s books on the admission of Mr. Talha - if the capital difference is charged to the old partners. Also suggest the probability of recognizing goodwill in the new firm’s accounts with valid arguments.
