Question

P and Q were partners in a firm sharing profits in the ratio of 4 : 3. On 1st April, 2021, they admitted R as a new partner for 1/4th share in the profits of the firm. On the date of R’s admission, the Balance Sheet of P and Q showed a General Reserve of ₹ 2,80,000 and an Advertisement Suspense Account of ₹ 1,40,000. The following was agreed upon, on R’s admission: R’s share of goodwill is agreed at ₹ 70,000, of which he is to bring half in cash. New profit-sharing ratio is agreed at 2 : 1 : 1.

On the basis of the above information, you are required to answer the following question:

In respect of the Advertisement Suspense Account:

Options

• Dr. P’s Capital A/c by ₹ 80,000 and Q’s Capital A/c by ₹ 60,000

• Dr. P’s Capital A/c by ₹ 40,000 and Q’s Capital A/c by ₹ 1,00,000

• Dr. P’s Capital A/c by ₹ 70,000; Q’s Capital A/c by ₹ 35 000, and R’s Capital A/c by ₹ 35,000

• Dr. R’s Capital A/c by ₹ 35,000

Answer 1

Dr. P’s Capital A/c by ₹ 80,000 and Q’s Capital A/c by ₹ 60,000

Explanation:

An Advertisement Suspense Account is a fictitious asset that is entirely written off to the old partners’ capital accounts in their old profit-sharing ratio upon the admission of a new partner.

Distribution Calculation (Write-off):

P’s Share = `1,40,000 xx 4/7`

= 80,000

Q’s Share = `1,40,000 xx 3/7`

= 60,000