Question

A and B share the profits of a business in the ratio of 5:3. They admit C, a differently abled person, who is an MBA from Delhi University into the firm for 1/4th share in the profits to be contributed equally by A and B. On the date of admission of C, the Balance Sheet of the firm was as follows:

$\begin{array}{cccc}\text{Caapital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{A's Capital}& 40,000& \text{Machinery}& 30,000\\ \text{B's Capital}& 30,000& \text{Furniture}& 20,000\\ \text{Workmen's Compensation Reserve}& 4,000& \text{Stock}& 15,000\\ \text{Creditors}& 2,000& \text{Debtors}& 15,000\\ \text{Provident Fund}& 10,000& \text{Bank}& 6,000\\ & \underset{–}{\overline{86,000}}& & \underset{–}{\overline{86,000}}\end{array}$

Terms of C's admission were as follows:

(i) C will bring Rs 30,000 for his share of capital and goodwill.

(ii) Goodwill of the firm has been valued at 3 year's purchase of the average super profits of last four years. Average profts of the last four years are Rs 20,000 while the normal profits that can be earned with the capital employed are Rs 12,000.

(iii) Furniture is undervalued by Rs 12,000 and the value of stock is reduced to Rs 13,000. Provident Fund be raised by Rs 1,000. Unrecorded creditors found worth Rs. 6,000.

Prepare Revaluation Account, Partner's Capital Accounts and the new Balance Sheet of A, B and C. Also, identify the values involved in the question.

Answer 1

Dr. REVALUATION A/C Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Stock A/c}& 2,000& \text{Furniture A/c}& 12,000\\ \text{Provident Fund A/c}& 1,000& & \\ \text{Creditors}& 6,000& & \\ \text{Profit transferred to}& & & \\ A1,875& & & \\ B\underset{–}{1,125}& 3,000& & \\ & \underset{–}{\overline{12,000}}& & \underset{–}{\overline{12,000}}\end{array}$

Calculation of Goodwill:

Super Profits = Average Profits - Normal Profits

= Rs 20,000 - Rs 12,000 = Rs 8,000

Goodwill = Super Profits $\times$ No. of years purchased

$=Rs8,000\times 3=Rs24,000$

C brings in his share of goodwill in cash. Therefore, he brings in $Rs24,000\times \frac{1}{4}=Rs6,000$ for goodwill which is included in the total amount of Rs 30,000 brought by him. This amount of Rs 6,000 will be divided between A and B equally, because they have sacrificed in equal proportions.

Dr. CAPITAL ACCOUNTS Cr.

$\begin{array}{cccccccc}\text{Particulars}& A& B& C& \text{Particulars}& A& B& C\\ \text{A's Capital A/c}& & & 3,000& & & & \\ \text{B's Capital A/c}& & & 3,000& & & & \\ \text{Balance c/d}& 47,375& 35,625& 24,000& \text{Balance b/d}& 40,000& 30,000& \\ & & & & \text{Workmen's Compensation}& & & \\ & & & & \text{Reserve A/c}& 2,500& 1,500& \\ ,& & & & \text{Revaluation A/c}& 1,875& 1,125& \\ & & & & \text{Bank A/c}& & & 30,000\\ & & & & \text{C's Capital A/c}& 3,000& 3,000& \\ & \underset{–}{\overline{47,375}}& \underset{–}{\overline{35,625}}& \underset{–}{\overline{30,000}}& & \underset{–}{\overline{47,375}}& \underset{–}{\overline{35,625}}& \underset{–}{\overline{30,000}}\end{array}$

Note 1: Since there is no specific liability related to Workmen's Compnesation Reserve it is divided in old parners in their old profit sharing ratios.

CLOSING BALANCE SHEET

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Creditors}& 8,000& \text{Machinery}& 30,000\\ \text{Provident Fund}& 11,000& \text{Furniture}& 32,000\\ \text{Capital Accounts:}& & \text{Stock}& 13,000\\ A& 47,375& \text{Debtors}& 15,000\\ B& 35,625& \text{Bank}& 36,000\\ C& 24,000& & \\ & \underset{–}{\overline{1,26,000}}& & \underset{–}{\overline{1,26,000}}\end{array}$

Values involved:

(i) Sensitivity towards differently abled persons.

(ii) Social responsibility towards society.