Question

A and B are partners in a firm sharing profits and losses in the ratio of 3:2. On 31st March, 2017, their Balance Sheet was as under:

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Creditors}& 70,000& \text{Bank}& 40,000\\ \text{Capital A/cs:}& & \text{Debtors}& 1,20,000\\ A1,50,000& & \text{Stock}& 60,000\\ B\underset{–}{80,000}& 2,30,000& \text{Furniture}& 50,000\\ & & \text{Goodwill}& 30,000\\ & \underset{–}{\overline{3,00,000}}& & \underset{–}{\overline{3,00,000}}\end{array}$

On the above date C is admitted as a partner. A surrendered $\frac{1}{6}th$ of his share and B $\frac{1}{3}rd$ of his share in favour of C. Goodwill is valued at Rs 1,20,000. C brings in only $\frac{1}{2}$ of his share of goodwill in cash and Rs 1,00,000 as his capital. Following adjustments are agreed upon:

(i) Stock is to be reduced to Rs 56,000 and furniture by Rs 5,000.

(ii) There is an unrecorded asset worth Rs 20,000.

(iii) One month's rent of Rs 15,000 is outstanding.

(iv) A creditor for goods purchased for Rs 10,000 had been omitted to be recorded although the goods had been correctly included in stock.

(v) Insurance premium amounting to Rs 8,000 was debited to P & L A/c, of which Rs 2,000 is related to the period after 31st March, 2017.

You are required to prepare Revaluation Account, Partner's Capital Accounts and the Balance Sheet of the new firm. Also calculate the new profit sharing ratio.

Answer 1

Dr. REVALUATION ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Stock A/c}& 4,000& \text{Unrecorded Asset A/c}& 20,000\\ \text{Furniture A/c}& 5,000& \text{Prepaid Insurance A/c}& 2,000\\ \text{Outstanding Rent A/c}& 15,000& \text{Loss transferred to:}& \\ \text{Creditors A/c}& 10,000& \text{A's Capital A/c}7,200& \\ & & \text{B's Capital A/c}\underset{–}{4,800}& 12,000\\ & \underset{–}{\overline{34,000}}& & \underset{–}{\overline{34,000}}\end{array}$

Dr. PARTNER'S CAPITAL ACCOUNTS Cr.

$\begin{array}{cccccccc}\text{Particulars}& A& B& C& \text{Particulars}& A& B& C\\ & Rs& Rs& Rs& & Rs& Rs& Rs\\ \text{Revaluation A/c}& 7,200& 4,800& & \text{Balance b/d}& 1,50,000& 80,000& \\ \text{A's Capital}\text{A/c}& & & 6,000& \text{C's}& & & \\ \text{B's Capital A/c}& & & 8,000& & & & \\ \text{Goodwill}& & & & \text{Capital A/c}& & & \\ \text{A/c(Written}& & & & (3:4)& 6,000& 8,000& \\ \text{off in 3:2)}& 18,000& 12,000& & \text{C's Current}& & & \\ \text{Balance c/d}& 1,36,800& 79,200& 1,00,000& \text{A/c (3:4)}& 6,000& 8,000& \\ & & & & \text{Bank A/c}& & & 1,14,000\\ & \underset{–}{\overline{1,62,000}}& \underset{–}{\overline{96,000}}& \underset{–}{\overline{1,14,000}}& & \underset{–}{\overline{1,62,000}}& \underset{–}{\overline{96,000}}& \underset{–}{\overline{1,14,000}}\end{array}$

BALANCE SHEET as at 1st April, 2017

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Creditors}& 80,000& \text{Bank}& 1,54,000\\ \text{Outstanding Rent}& 15,000& \text{Debtors}& 1,20,000\\ \text{Capital Accounts:}& & \text{Stock}& 56,000\\ A1,36,800& & \text{Furniture}& 45,000\\ B79,200& & \text{Prepaid Insurance}& 2,000\\ C\underset{–}{1,00,000}& 3,16,000& \text{Unrecorded Asset}& 20,000\\ & & \text{C's Current A/c}& 14,000\\ & \underset{–}{\overline{4,11,000}}& & \underset{–}{\overline{4,11,000}}\end{array}$

Working Notes: (i) Calculation of Sacrificing Ratios:

A's old share $=\frac{3}{5}$; A surrenders $\frac{1}{6}th$ of $\frac{3}{5}$ in favour of C.

It means A has surrendered $\frac{1}{6}\times \frac{3}{5}=\frac{1}{10}$

B's old share $=\frac{2}{5};$ B surenders $\frac{1}{3}rd$ of $\frac{2}{5}$ in favour of C;

It means B has surrendered $\frac{1}{3}\times \frac{2}{5}=\frac{2}{15}$

$\therefore$ Sacrificing Ratio $=A\frac{1}{10}:B\frac{2}{15}=\frac{3:4}{30}=3:4$

(ii) Calculation of New Ratios:
A's new share $=\frac{3}{5}-\frac{1}{10}=\frac{6-1}{10}=\frac{5}{10}$

B's new share $=\frac{2}{5}-\frac{2}{15}=\frac{6-2}{15}=\frac{4}{15}$

C's share $=\frac{1}{10}+\frac{2}{15}=\frac{3+4}{30}=\frac{7}{30}$

Hence, the new ratios of A, B and C $=\frac{5}{10}:\frac{4}{15}:\frac{7}{30}=\frac{15:8:7}{30}=15:8:7$

(iii) C's share of Goodwill $=1,20,000\times \frac{7}{30}=Rs28,000.$

Out of this $\frac{1}{2}$ i.e. Rs 14,000 is brought in Cash and the remaining Rs 14,000 is not brought in cash.

Entry for Goodwill:

$\begin{array}{ccc}\text{C's Current A/c}& Dr.& 14,000\\ \text{To A's Capital A/c}& & 6,000\\ \text{To B's Capital A/c}& & 8,000\end{array}$