Question

A and B are partners and the profit is divided as follows: $\frac{1}{2}$ to $A;\frac{1}{3}$ to B and $\frac{1}{6}$ carried to a Reserve Account. They admit C as a partner on 1st April, 2017 at which date the Balance Sheet of the firm was as under:

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Creditors}& 1,60,000& \text{Cash at Bank}& 20,000\\ \text{Outstanding Expenses}& 12,000& \text{Debtors}& 2,20,000\\ \text{Reserve}& 90,000& \text{Stock}& 1,80,000\\ \text{Capital A/cs:}& & \text{Plant and Machinery}& 1,50,000\\ A3,18,000& & \text{Buildings}& 2,00,000\\ B\underset{–}{2,00,000}& 5,18,000& \text{Advertisement Expenditure}& 10,000\\ & \underset{–}{\overline{7,80,000}}& & \underset{–}{\overline{7,80,000}}\end{array}$

Following terms were agreed upon :

(i) Stock is undervalued by 10%.

(ii) Depreciation of Rs 30,000 had been omitted on plant and machinery for the year ended 31st March, 2017.

(iii) Creditors include a contingent liability of Rs 50,000 which has been decided by the Court at Rs 43,000.

(iv) In respect of debtors, the following debts proved bad or doubtful : Rs 15,000 due from Ram - bad to the full extent;

Rs 20,000 due from Shyam - insolvent, estate expected to pay only 40%.

(v) Goodwill of the firm is valued at Rs 60,000. However, C is unable to bring his share of goodwill in cash.

(vi) C is given $\frac{1}{5}th$ share of profits which he acquires equally from A and B. C is to bring in capital proportionate to his share of profits in the firm.

(vii) The partners decide that 5% of profit of each year be given to a N.G.O. (Non-Government Organisation) which is working for cleanliness drive in the area.

You are required to prepare revaluation account

Answer 1

Profit Sharing Ratio of A and $B=\frac{1}{2}:\frac{1}{3}=\frac{3:2}{6}=3:2$

Dr. REVALUATION ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Plant and Machinery A/c}& 30,000& \text{Stock (Note 1)}& 20,000\\ \text{Debtors A/c (Bad Debts)}& 15,000& \text{Creditors A/c}& 7,000\\ \text{Provision for Doubtful Debts A/c}& 12,000& \text{Loss transferred to:}& \\ & & \text{A's Capital A/c}18,000& \\ & & \text{B's Capital A/c}\underset{–}{12,000}& 30,000\\ & \underset{–}{\overline{57,000}}& & \underset{–}{\overline{57,000}}\end{array}$