CMA Intermediate · Financial Accounting

Amalgamation of Partnership Firms: formula sheet

Full chapter guide

Key formulas

Revaluation profit or loss: Revaluation result = Increase in assets + Decrease in liabilities − Decrease in assets − Increase in liabilities; A positive result is a profit. Share it among the old partners of that firm in their old ratio.
Capital of a partner after revaluation: Adjusted capital = Old capital ± Share of revaluation result ± Share of reserves and accumulated profits or losses; Reserves and accumulated profits belong to old partners in the old ratio. Accumulated losses reduce capital.
Net assets taken over: Net assets taken over = Revalued assets taken over − Liabilities taken over; This equals the total of partners' adjusted capitals of that firm, if all assets and liabilities are taken over.
Capital adjustment: Cash to bring in or withdraw = Agreed capital − Adjusted capital; A positive figure means the partner brings in cash. A negative figure means the partner withdraws cash.
Agreed capital in the new firm: Capital of a partner = Total agreed capital × Partner's share in new profit sharing ratio; Use this when the agreement fixes total capital and wants capitals in the profit sharing ratio.
Revaluation Account treatment: Debit: decrease in assets, increase in liabilities, unrecorded liabilities. Credit: increase in assets, decrease in liabilities, unrecorded assets.; The balancing figure is profit or loss on revaluation.
Sharing of revaluation result: Profit or loss on revaluation is shared in the OLD profit-sharing ratio of that firm.; Never use the new firm's ratio for this.
Goodwill adjustment (not in books): Dr Goodwill A/c, Cr Old partners' Capital A/cs (old ratio); then Dr New partners' Capital A/cs (new ratio), Cr Goodwill A/c, if goodwill is not to appear in new books.; Apply only if the agreement or question says so.
Adjusted capital: Adjusted capital = Old capital + Share of reserves and accumulated profits − Share of accumulated losses ± Share of revaluation profit or loss ± Goodwill adjustment; Consider drawings, interest and fresh capital only if given.
Net assets check: Revised assets − Revised liabilities = Total adjusted capitals; Use it to verify your work.
Adjusted capital of an old partner: Old capital ± share of revaluation profit or loss ± other adjustments (goodwill, reserves); Share the revaluation result in the old firm's old profit-sharing ratio.
Net assets taken over: Assets taken over at agreed values − Liabilities taken over at agreed values; This is the amount due from the new firm. It should equal the total of adjusted capitals.
Check of agreement: Σ Adjusted capitals of the old firm = Net assets taken over; If the two differ, you have missed a revaluation, reserve or an asset or liability left behind.
Closing entry in the old firm (transfer): Realisation A/c Dr, To Assets (at agreed values); Liabilities Dr, To Realisation A/c; New Firm A/c Dr, To Realisation A/c (net amount); Partners' Capital A/c Dr, To New Firm A/c; Asset accounts are first brought to agreed values through the Revaluation Account. The account balances then become nil. Use the exact entries your question format asks for.
Opening entry in the new firm: Assets Dr (agreed values); To Liabilities; To Partners' Capital A/cs; One compound entry per old firm is acceptable when assets and liabilities are few.
Balance sheet of new firm: Σ Capitals + Σ Liabilities = Σ Assets, each combined across the old firms; Add like items from both firms at the agreed values.
Purchase consideration (net assets method): Purchase consideration = Agreed value of assets taken over − Liabilities taken over; Use agreed values. Include only the assets and liabilities the buyer actually takes over.
Inter-firm debts: Amount owed by one firm to the other is deducted from the debtors (or bills receivable) of one firm and from the creditors (or bills payable) of the other firm; The combined firm then shows neither balance. In the purchase consideration, an amount due from the buyer is not an asset taken over, and an amount the firm sold owes to the buyer is not taken over as a liability. The buyer's own books cancel the matching balance. Never leave a firm owing itself.
Required capital of a partner: Required capital = Agreed total capital of new firm × Partner's share in new profit-sharing ratio; If total capital is not given, it is often fixed on the basis of one partner's capital and that partner's share.
Capital adjustment: Excess or shortfall = Actual capital after adjustments − Required capital; Excess: withdraw cash or credit current account. Shortfall: bring cash or debit current account.
Revaluation effect on capital: Adjusted capital = Old capital ± Share of revaluation profit or loss ± Share of goodwill and reserves; Share revaluation results in the old profit-sharing ratio of each firm.

Quick revision

Amalgamation of firms means two or more firms combine into a new firm under an agreement.
Revalue assets and liabilities in each old firm's books before closing them.
Revaluation profit or loss is shared by the old partners in their old profit-sharing ratio.
Items not taken over by the new firm stay with the old firm and are settled separately.
Old firm's books are closed by transferring balances to partners' capital accounts.
The new firm records assets and liabilities taken over at the agreed values.
Purchase consideration depends on the agreement, so read its terms before calculating.
Partners' capitals in the new firm may be fixed in an agreed ratio.
Compare required capital with actual capital to find the excess or shortfall.
Settle the difference by cash or current account, as the question states.
Check that the new firm's balance sheet balances.

Common mistakes

Mixing up amalgamation with conversion into a company. Fix: Ask what the result is. If it is a partnership firm with capital accounts, it is amalgamation. If it is a company issuing shares, it is conversion.
Sharing revaluation profit or loss in the new ratio. Fix: Revalue in the old firm's books and share the result in that firm's old ratio. The new ratio applies only to future profits of the new firm.
Putting an increase in a liability on the credit side of the Revaluation Account. Fix: Liabilities behave oppositely. An increase in a liability is a loss, so debit it.
Sharing revaluation profit in the new ratio. Fix: Revaluation, reserves and goodwill credits go in the old ratio of that firm. Only a goodwill write-off in the new books uses the new ratio.
Using old book values in the new firm's books instead of agreed values. Fix: Always take the agreed values from the terms. The new firm records only these.
Sharing the revaluation profit in the new firm's ratio. Fix: Revaluation happens in the old firm's books, so use that firm's old ratio. The new ratio is only for the new firm's future profits.
Using book values instead of agreed values for assets and liabilities. Fix: Read the agreement. Where a different value is given, use it. Book values apply only when no other value is stated.
Leaving inter-firm debts in the net assets. Fix: Scan both balance sheets for amounts due to or from the other firm. Deduct the amount from the debtors of one firm and from the creditors of the other, so the combined firm shows neither.

Exam tips

Read the amalgamation agreement twice and mark the valuation, ratio and capital terms before writing anything.
In MCQs, check whether the question describes a partnership firm result or a company with shares, since this separates amalgamation from conversion.
For written answers, show the Revaluation Account, capital table and opening Balance Sheet separately, because step marks are given for each part.
Always prove your answer by checking that net assets equal total capital and that the Balance Sheet tallies.
Write the old ratio next to every revaluation or reserve split. It shows the examiner you used the right ratio.
Draw a two-column check at the end: revised assets minus revised liabilities against the sum of adjusted capitals. It catches most errors in a minute.
Write each firm's Revaluation Account separately. Combined working loses step marks when the ratios differ.
Show the profit-sharing ratio used beside every transfer so the examiner can award method marks even if a figure slips.