Question

A and B are partners sharing profits in the ratio of 3 : 2 . They admit C as a new partner from 1st April, 2018 . They have decided to share future profits in the ratio of 4 : 3 : 3 . The Balance Sheet as at 31st March, 2018 is given below:

Liabilities		₹	Assets			₹
A's Capital	1,76,000		Goodwill			34,00
B's Capital	2,54,000	4,30,000	Land and Building			60,000
Workmen Compensation Reserve		20,000	Investment ( Market value ₹ 45,000)			50,000
Investments Fluctuation Reserve		10,000	Debtors		​1,00,000
Employee's Provident Fund		34,000	Less: Provision for D.D		10,000	90,000
C's Loan		3,00,000	Stock			3,00,000
			Bank Balance			2,50,000
			Advertising Suspense A/c			10,000
		7,94,000				7,94,000

Terms of C's admission are as follows:(i) C contributes proportionate capital and 60% of his share of goodwill in cash.(ii) Goodwill is to be valued at 2 years' purchase of super profit of last three completed years. Profits for the years ended 31st March were:2016long dash₹ 4,80,000; 2017long dash​₹ 9,30,000; 2018long dash​₹ 13,80,000.The normal profit is ​₹ 5,30,000 with same amount of capital invested in similar industry.(iii) Land and Building was found undervalued by ​₹ 1,00,000.(iv) Stock was found undervalued by ​₹ 31,000.(v) Provision for Doubtful Debts is to be made equal to 5% of the debtors(vi) Claim on account of Workmen Compensation is ​₹ 11,000 .Prepare Revaluation Account , Partners' Capital Accounts and Balance Sheet .

Answer 1

Revaluation Account
Dr.						Cr.
Particulars			Amount Rs	Particulars	Amount Rs
Stock			31,000	Land & Building	1,00,000
Profit transferred to:				Provision for Doubtful Debts	5,000
A’s Capital A/c		44,400
B’s Capital A/c		29,600	74,000
			1,05,000		1,05,000

Partners’ Capital Accounts
Dr.									Cr.
Particulars		A	B	C	Particulars	A	B	C
Goodwill		20,400	13,600		Balance b/d	1,76,000	2,54,000
Advertisement Suspense A/c		6,000	4,000		Bank A/c			3,06,000
Balance c/d		3,62,400	3,51,600	3,06,000	Premium for Goodwill A/c	96,000	48,000
					C’s Current A/c	64,000	32,000
					Revaluation A/c	44,400	29,600
					IFR	3,000	2,000
					WCR	5,400	3,600
		3,88,800	3,69,200	3,06,000		3,88,800	3,69,200	3,06,000

Bank Account
Dr.					Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Balance b/d		2,50,000	Balance c/d	7,00,000
C’s Capital		3,06,000
Premium for Goodwill		1,44,000
		7,00,000		7,00,000

Balance Sheet as on 1st April, 2018 after C’s admission
Liabilities		Amount Rs	Assets		Amount Rs
Workmen Compensation Reserve		11,000	Land & Building		1,60,000
Employees Provident Fund		34,000	Bank A/c		7,00,000
C ‘s Loan		3,00,000	Investment		45,000
Capital			Stock		2,69,000
A	3,62,400		C ‘s Current A/c		96,000
B	3,51,600		Debtors	1,00,000
C	3,06,000	10,20,000	Less : Provision for Doubtful Debts	5,000	95,000
		13,65,000			13,65,000

Working Notes:

WN1: Calculation of Sacrifice or Gain

$\begin{array}{l}\text{A\hspace{0.17em}:B}=3:2\text{\hspace{0.17em}(Old Ratio)}\\ \text{A\hspace{0.17em}:B\hspace{0.17em}:C}=4:3\text{\hspace{0.17em}:3\hspace{0.17em}(New Ratio)}\\ \text{Sacrificing (or Gaining) Ratio = Old Ratio - New Ratio}\\ \text{A's share}=\frac{3}{5}-\frac{4}{10}=\frac{6-4}{10}=\frac{2}{10}\\ \text{B's share}=\frac{2}{5}-\frac{3}{10}=\frac{4-3}{10}=\frac{1}{10}\\ \text{A:B}=2:1\end{array}$

WN:2 Calculation of Goodwill

$$\begin{gathered} \begin{array}{l}\text{Goodwill}=\text{Super Profit}\times \text{No. of Years' Purchase}\\ =\text{4,00,000}\times 2=\text{Rs 8,00,000}\\ \text{C's share of Goodwill=8,00,000}\times \frac{3}{10}=\text{Rs 2,40,000}\\ \text{Goodwill brought in cash = 2,40,000}\times \frac{60}{100}\text{= Rs 1,44,000}\end{array} \\ \begin{array}{l}\text{Average Profit}=\frac{\text{Total Profits of past years given}}{\text{Number of Years}}\\ =\frac{27,90,000}{3}=\text{Rs 9,30,000}\\ \text{Normal Profit}=\text{Capital Employed}\times \frac{\text{Normal Rate of Return}}{100}\\ =\text{Rs 5,30,000}\\ \text{Super Profit}=\text{Average Profit}-\text{Normal Profit}\\ =\text{9,30,000}-\text{5,30,000}=\text{Rs 4,00,000}\end{array} \end{gathered}$$

WN:3 Calculation of C’s Capital
$\begin{array}{l}\text{Combined Capital A and B's Capital for}\frac{7}{10}\text{th}=\text{3,62,400 + 3,51,600 = Rs 7,14,000}\\ \text{So, C's Capital = 7,14,000}\times \frac{10}{7}\times \frac{3}{10}=\text{Rs 3,06,000}\end{array}$