112 About Financial Accounting: Volume 2 respectively. (The total of the individual profit-sharing portions of Da Silva and Ehlers is 5 (2+3 = 5)). This means that the individual previous profit-sharing ratio of Da Silva was 2/5, and that of Ehlers, 3/5. The calculation of the new profit-sharing ratios of Da Silva and Ehlers can be formulat- ed as follows: Individual previous profit-sharing ratio minus Profit-sharing ratio of new partner times Da Silva 2/5 Ehlers 3/5 X (1/5 (1/5 Ratio acc 116 to which the new partner's profit share is relinquished 2/5) 3/5) According to the above, the new profit-sharing ratios of Da Silva and Ehlers are: Da Silva = 2/5 - (1/5 2/5) = 2/5 - 2/25* = 10/25* - 2/25 = 8/25 The denominators of 2/5 and 2/25 are not equal. Before the subtraction, the ratio with the smaller denom- inator, 1.0. 2/5, is adjusted to have the same denominator as 2/25: 2 x 5 5 x 5 10 25 Ehlers = 3/5 - (1/5 3/5) = 3/5 - 3/25 = 15/25 - 3/25 = 12/25 Frasier's profit share is given as 1/5 = 5/25. Therefore, the profit-sharing ratio of Da Silva, Ehlers and Frasier is 8:12:5 respectively. Note that the sum of the individual profit-sharing ratios of all the partners of a partner- ship pertains to the entire partnership, and therefore always adds up to one. For ex- ample, in the above case of Da Silva, Ehlers and Frasier, the sum of their individual profit-sharing ratios is equal to: 8/25 + 12/25 +5/25 = 25/25 = 1 Example 3.4 Calculation of a new profit-sharing ratio where the previous partners equally relinquished a profit share to a new partner Da Silva and Ehlers were in a partnership with a profit-sharing ratio of 2:3 respectively. They formed a new partnership by admitting Frasier. Frasier obtained a 1/5 share in the profits/losses of the new partnership. Da Silva and Ehlers agreed to relinquish the 1/5 share to Frasier equally. Required: Calculate the profit-sharing ratio of the partners of the new partnership (that is of Da Silva, Ehlers and Frasier). Solution: Da Silva and Ehlers agreed to relinquish Frasier's profit share equally. In other words, the ratio according to which they decided to relinquish Frasier's profit share is 1:1 (that is 1/2 for Da Silva and 1/2 for Ehlers). Da Silva and Ehlers therefore each relinquished the 1/5 profit share of Frasier by decreasing both their profit shares with 1/10 (1/5 1/2).