Question

A and B are partners sharing profits in the ratio of 3 : 2. They admit C as a new partner from 1st April, 2019. They have decided to share future profits in the ratio of 4 : 3 : 3. The Balance Sheet as at 31st March, 2019 is given below:

Liabilities		₹	Assets			₹
A's Capital	1,76,000		Goodwill			34,000
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 Doubtful Debts		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:
2017 − ₹ 4,80,000; 2018 − ​₹ 9,30,000; 2019 − ​₹ 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 overvalued 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 (₹)	Particulars	Amount (₹)
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 (₹)	Particulars	Amount (₹)
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, 2019 after C’s admission
Liabilities		Amount (₹)	Assets		Amount (₹)
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
$\begin{array}{l}\text{Combined Capital A and B's Capital for}\frac{7}{10}\text{th}=\text{3,62,400 + 3,51,600 = Rs 7,14,000}\\ \text{So, C's Capital = 7,14,000}\times \frac{10}{7}\times \frac{3}{10}=\text{Rs 3,06,000}\end{array}$