Question

A and B share profits in the proportions of $\frac{3}{4}$ and $\frac{1}{4}$. Their balance sheet on Dec 31, 2016 was as follows.

$\text{Balance Sheet of A and B}$
$\text{as on December 31, 2006}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Sundry Creditors}& 41,500& \text{Cash at Bank}& 26,500\\ \text{Reserve Fund}& 4,000& \text{Bills receivable}& 3,000\\ \text{Capital Accounts}& & \text{Debtors}& 16,000\\ \text{A}& 30,000& \text{Stock}& 20,000\\ \text{B}& 16,000& \text{Fixtures}& 1,000\\ & & \text{Land and Building}& 25,000\\ & \overline{\underset{–}{91,500}}& & \overline{\underset{–}{91,500}}\end{array}$

On Jan 1, 2007, C was admitted into partnership on the following terms

(a) That C pays Rs. 10.000 as his capital.

(b) That C pays Rs 5,000 for goodwill. Half of this sum is to be withdrawn by A and B.

(c) That stock and fixtures be reduced, by 10% and 5%, provision for doubtful debts be created on sundry debtors and bills receivable.

(d) That the value of land and building be appreciated by 20%.

(e) There being a claim against the firm for damages, a liability to the extent of Rs. 1,000 should be created.

(f) An item of Rs. 650 included in sundry creditors is not likely to be claimed and hence, should be written back.

Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new balance sheet on the admission of C.

Answer 1

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F}& \text{Amt.(Cr)}& \text{Amt.(Cr)}\\ \text{(i)}& \text{Reserve Fund A/c}& Dr& & 4,000& \\ & \text{To A's Capital A/c}& & & & \text{3,000}\\ & \text{To B's Capital A/c}& & & & \text{1,000}\\ & \text{(Transfer of reserve fund to old partners in old ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{(ii)}& \text{Revaluation A/c}& Dr& & 4,050& \\ & \text{To Stock A/c}& & & & \text{2,000}\\ & \text{To Fixture A/c}& & & & \text{1,00}\\ & \text{To Provision for doubtful debtsA/c}& & & & \text{800}\\ & \text{To Liability for Damages A/c}& & & & \text{1,000}\\ & \text{To Bills Receivable A/c}& & & & \text{150}\\ & \text{(Reduction of assets and provisions and liability adjusted)}& & & & \\ & \underset{–}{}& & & & \\ \text{(iii)}& \text{Land and Building A/c}& Dr& & 5,000& \\ & \text{Sundry Creditors A/c}& Dr& & 650& \\ & \text{To Revaluation A/c}& & & & \text{5,650}\\ & \text{(Increase in value of land and building and creditors adjusted)}& & & & \\ & \underset{–}{}& & & & \\ \text{(iv)}& \text{Revaluation A/c}& Dr& & 1,600& \\ & \text{To A's Capital A/c}& & & & \text{1,200}\\ & \text{To B's Capital A/c}& & & & \text{400}\\ & \text{(Profit on revaluation credited to old partners in old ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{(v)}& \text{Bank A/c}& Dr& & 15,000& \\ & \text{To C's Capital A/c}& & & & \text{15,000}\\ & \text{(Capital Rs. 10,000 and goodwill Rs. 5,000 paid in cash by new partner)}& & & & \\ & \underset{–}{}& & & & \\ \text{(vi)}& \text{C's Capital A/c}& Dr& & 5,000& \\ & \text{To A's Capital A/c}& & & & \text{3,750}\\ & \text{To B's Capital A/c}& & & & \text{1,250}\\ & \text{(Goodwill distributed among old partners in sacrificing ratio.)}& & & & \\ & \underset{–}{}& & & & \\ \text{(vii)}& \text{A's Capital A/c}& Dr& & 1,875& \\ & \text{B's Capital A/c}& Dr& & 625& \\ & \text{To Bank A/c}& & & & \text{2,500}\\ & \text{(Half the amount of goodwill withdrawn in cash)}& & & & \\ & \underset{–}{}& & & & \end{array}$

$\text{Dr}\text{Revaluation Account}\text{Cr}$
$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Stock A/c}& 2,000& \text{Land and Building A/c}& 5,000\\ \text{Fixture A/c}& 100& \text{Sundry Creditors A/c}& 650\\ \text{Provision for Doubtful Debts A/c}& 800& & \\ \text{Provision on Bills ReceivableA/c}& 150& & \\ \text{Liability for DamageA/c}& 1,000& & \\ \text{Profit on Revaluation Account Transfered to:}& & & \\ \text{A's Capital A/c}1,200& & & \\ \text{B's Capital A/c}\underset{–}{400}& 1,600& & \\ & \overline{\underset{–}{\underset{–}{5,650}}}& & \overline{\underset{–}{\underset{–}{5,650}}}\end{array}$

$\text{Dr}\text{Partner's Capital Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Particulars}& \text{A}& \text{B}& \text{C}& \text{Particulars}& \text{A}& \text{B}& \text{C}\\ \text{A's Capital A/c}& & & 3,750& & & & \\ \text{B's Capital A/c}& & & 1,250& & & & \\ \text{Bank A/c}& 1,875& 625& & \text{Balance b/d}& 30,000& 16,000& \\ \text{(Goodwill withdrawn)}& & & & \text{Reserve A/c}& 3,000& 1,000& \\ \text{Balance b/d}& 36,075& 18,025& 10,000& \text{Profit on Revaluation}& 1,200& 400& \\ & & & & \text{Bank A/c}& & & 15,000\\ & & & & \text{C's Capital A/c}& 3,750& 1,250& \\ & \overline{\underset{–}{37,950}}& \overline{\underset{–}{18,650}}& \overline{\underset{–}{15,000}}& & \overline{\underset{–}{37,950}}& \overline{\underset{–}{18,650}}& \overline{\underset{–}{15,000}}\end{array}$

$\text{Balance Sheet of A, B and C}$
$\text{as on December 31, 2016}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Sundry Creditors}& 40,850& \text{Cash at Bank}& 39,000\\ \text{Liability for Damage}& 1,000& \text{Bills receivable}3,000& \\ \text{Capital Account}& & \text{(-)Provision}\underset{–}{\left(150\right)}& 2,850\\ \text{A}36,075& & \text{Debtors}16,000& \\ \text{B}18,025& & \text{(-)Provision}\underset{–}{\left(800\right)}& 15,200\\ \text{C}\underset{–}{10,000}& 64,100& \text{Stock}& 18,000\\ & & \text{Fixture}& 900\\ & & \text{Land and Building}& 30,000\\ & \overline{\underset{–}{1,05,950}}& & \overline{\underset{–}{1,05,950}}\end{array}$

Working Note

$\text{Dr}\text{Cash at Bank Account}\text{Cr}$
$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Balance b/d}& 26,500& \text{A's Capital}& 1,875\\ \text{C's Capital}& 15,000& \text{B's Capital}& 625\\ & & \text{Balance c/d}& 39,000\\ & \overline{\underset{–}{41,500}}& & \overline{\underset{–}{41,500}}\end{array}$

Note : Write off's and revaluation is to be done before entry of admission otherwise new partner becomes entitled for share in such items.