Question

A, B and C are partners in a firm, sharing profits and losses as A 1/3, B 1/2 and C 1/6 respectively. The Balance Sheet of the firm as at 31st March, 2018 was:

Liabilities		₹	Assets		₹
Capital A/cs:			Factory Building		50,000
A	30,000		Plant ad Machinery		40,000
B	40,000		Furniture		10,000
C	25,000	95,000	Stock		25,000
General Reserve		16,000	Debtors	18,000
Sundry Creditors		25,000	Less: Prov. for Doubtful Debts	500	17,00
			Cash in Hand		8,500
		1,51,000			1,51,000

​C retires on 1st April, 2018 subject to the following adjustments:

(a) Goodwill of the firm be valued at ₹ 24,000. C's share of goodwill be adjusted into the account of A and B who are going to share in future in the ratio of 3 : 2 .
(b) Plant and Machinery to be depreciated by 10% and Furniture by 5%.
(c) Stock to be appreciated by 15% and Factory Building by 10%.
(d) Provision for Doubtful Debts to be raised to ₹ 2,000.
You are required to pass journal entries to record the above transactions in the books of the firm and show the Profit and Loss Adjustment Account , Capital Account of C and the Balance Sheet of the firm after C's retirement.

Answer 1

Journal
Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
Profit and Loss Adjustment A/c	Dr.		6,000
To Plant and Machinery A/c				4,000
To Provision for Doubtful Debts A/c				1,500
To Furniture A/c				500
(Decrease in value of Assets and provision for doubtful debts transferred to Profit and Loss Adjustment Account)
Stock A/c	Dr.		3,750
Factory Building A/c	Dr.		5,000
To Profit and Loss Adjustment A/c				8,750
( Increase in value of Assets transferred to Profit and Loss Adjustment Account)
Profit and Loss Adjustment A/c	Dr.		2,750
To A’s Capital A/c				917
To B’s Capital A/c				1,375
To C’s Capital A/c				458
(Profit distributed among A, B and C in their old ratio)
A’s Capital A/c	Dr.		6,400
To B’s Capital A/c				2,400
To C’s Capital A/c				4,000
(C’s share of goodwill and B’s gain in goodwill adjusted)
C’s Capital A/c	Dr.		32,125
To C’s Loan A/c				32,125
(C’s capital balance after all adjustment transferred to his Loan Account)
Reserve Fund A/c	Dr.		16,000
To A’s Capital A/c				5,333
To B’s Capital A/c				8,000
To C’s Capital A/c				2,667
(Reserve Fund distributed among partners in their old ratio)

Profit and Loss Adjustment Account
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Plant and Machinery			Stock (25,000 × 15%)	3,750
(40,000 × 10%)		4,000	Factory Building (50,000 × 10%)	5,000
Furniture (10,000 × 5%))		500
Provision for Doubtful Debts
(2,000 – 500)		1,500
Profit transferred to:
A’s Capital A/c	917
B’s Capital A/c	1,375
C’s Capital A/c	458	2,750
		8,750		8,750

Partners’ Capital Accounts
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
B’s Capital A/c (Goodwill)	2,400			Balance b/d	30,000	40,000	25,000
C’s Capital A/c (Goodwill)	4,000			Reserve Fund	5,333	8,000	2,667
C’s Loan A/c			32,125	Revaluation A/c (Profit)	917	1,375	458
Balance c/d	29,850	51,775		A’s Capital A/c (Goodwill)		2,400	4,000
	36,250	51,775	32,125		36,250	51,775	32,125

Balance Sheet
as on March 31, 2017 (after C’s Retirement)
Liabilities		Amounts Rs	Assets		Amounts Rs
Sundry Creditors		25,000	Factory Building		55,000
Loan Payable		15,000	Plant and Machinery		36,000
C’s Loan		32,125	Furniture		9,500
Capital A/cs:			Stock		28,750
A	29,850		Debtors	18,000
B	51,775	81,625	Less: Provision for Doubtful Debts	(2,000)	16,000
			Cash in Hand		8,500
		1,53,750			1,53,750

Working Notes:

WN 1 Calculation of Gaining Ratio

Old Ratio (A, B and C) = or 2 : 3 : 1

C retires from the firm.

New Ratio (A and B) = 3: 2

Gaining RatioNew Ratio − Old Ratio



WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 24,000

C’s Share of Goodwill =

Partners’ Capital Accounts
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
C’s Capital A/c (Goodwill)	1,600	2,400		Balance b/d	30,000	40,000	25,000
				Reserve Fund	5,333	8,000	2,667
B’s Loan A/c			32,125	Revaluation A/c (Profit)	917	1,375	458
Balance c/d	34,650	46,975		A’s Capital A/c (Goodwill)			4,000
	36,250	49,375	32,125		36,250	49,375	32,125

Working Notes:

WN 1 Calculation of Gaining Ratio

Old Ratio (A, B and C) = or 2 : 3 : 1

C retires from the firm.

New Ratio (A and B) = 2: 3

Gaining RatioNew Ratio − Old Ratio



WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 24,000

C’s Share of Goodwill =