Question

A and B are partners sharing profits and losses in the ratio of 3:1. On 1st Jan, 2007, they admitted C as a new partner for $\frac{1}{4}$ share in the profits of the firm. C brings Rs. 20,000 as for his $\frac{1}{4}$ share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities etc has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is agreed that partner's capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio.

Answer 1

New profit sharing ratio and total capital of firm will be calculated on basis of new partners share in profit and his capital.

Total share = 1

C's Share = $\frac{1}{4}$

Remaining share of A and B = $1-\frac{1}{4}=\frac{3}{4}$

A's New share = $\frac{3}{4}\times \frac{3}{4}=\frac{9}{16}$

B's New share = $\frac{3}{4}\times \frac{1}{4}=\frac{3}{16}$

C's New share = $\frac{1}{4}\times \frac{4}{4}=\frac{4}{16}$

Thus, new profit sharing ratio = $\frac{9}{16}:\frac{3}{16}:\frac{4}{16}$

or 9 : 3 :4

C's Capital = 20,000

His share =$\frac{1}{4}$

Hence, Capital of firm = $20,000\times \frac{4}{1}=80,000$

and Capital of A = $80,000\times \frac{9}{16}=45,000$

B = $80,000\times \frac{3}{16}=15,000$

C = $80,000\times \frac{4}{16}=20,000$

A's Capital after all adjustments = 50,000 (given in question)

A's capital required = 45,000

Therefore, he withdraws = 5,000

B's Capital after all adjustments = 12,000

B's capital required = 15,000

Therefore, he deposits = 3,000

$\text{Journal Entries}$
$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Amt.(Cr)}& \text{Amt.(Cr)}\\ \text{(i)}& \text{A's Capital A/c}\text{Dr}& & 5,000& \\ & \text{To Cash A/c}& & & 5,000\\ & \text{(Excess capital withdrawn)}& & & \\ & \underset{–}{}& & & \\ \text{(ii)}& \text{Cash A/c}\text{Dr}& & 3,000& \\ & \text{To B's Capital A/c}& & & 3,000\\ & \text{(Deficiency in capital deposited in cash)}& & & \end{array}$