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Question

A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2 . Their Balance Sheet as at 31st March, 2017 stood as follows:

Liabilities

Assets

Capital A/cs:

Land and Building

3,50,000

A

2,50,000

Machinery

2,40,000
B 2,50,000 Computers 70,000

C

2,00,000

7,00,000

Investments(Market value ₹ 90,000)

1,00,000

General Reserve

60,000

Sundry Debtors

50,000
Investments Fluctuation Reserve 30,000 Cash in Hand 10,000
Sundry Creditors 90,000 Advertisement Suspense 5,000

8,80,000

8,80,000


They decided to share profits equally w.e.f. 1st April, 2017. They also agreed that:
(i) Value of Land and Building be decreased by 5% .
(ii) Value of Machinery be increased. by 5%.
(iii) A Provision for Doubtful Debts be created @ 5% on Sundry Debtors.
(iv) A Motor Cycle valued at ₹ 20,000 was unrecorded and is now to be recorded in the books.
(v) Out of Sundry Creditors, ₹ 10,000 is not payable.
(vi) Goodwill is to be valued at 2 years' purchase of last 3 years profits . Profits being for 2016-17₹ 50,000 (Loss); 2015-16₹2,50,000 and 2014-15₹ 2,50,000.
(vii) C was to carry out the work for reconstituting the firm at a remuneration ( including expenses) of ₹ 5,000. Expenses came to ₹ 3,000.
Pass journal entries and prepare Revaluation Account.

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Solution

Journal

Date

Particulars

L.F.

Debit

Amount

(Rs)

Credit

Amount

(Rs)

General Reserve A/c

Dr.

60,000

To A’s Capital A/c

30,000

To B’s Capital A/c

18,000

To C’s Capital A/c

12,000

(Reserve distributed)

A’s Capital A/c

Dr

2,500

B’s Capital A/c

Dr.

1,500

C’s Capital A/c

Dr.

1,000

To Advertisement Suspense A/c

5,000

(Advertisement Suspense distributed)

Investment Fluctuation Reserve A/c

Dr.

30,000

To Investment A/c

10,000

To A’s Capital A/c

10,000

To B’s Capital A/c

6,000

To C’s Capital A/c

4,000

(Investment Fluctuation Reserve distributed)

Machinery A/c

Dr.

12,000

Motor Cycle A/c

Dr.

20,000

Creditors A/c

Dr.

10,000

To Revaluation A/c

42,000

(Assets revalued)

Revaluation A/c

25,000

To Land & Building A/c

17,500

To Provision for Doubtful Debts A/c

2,500

To Bank A/c (Remuneration)

5,000

(Assets revalued)

Revaluation A/c

17,000

To A’s Capital A/c

8,500

To B’s Capital A/c

5,100

To C ’s Capital A/c

3,400

(Profit on revaluation transferred to Partners’ Capital A/c)

B’s Capital A/c

Dr.

10,000

C ’s Capital A/c

Dr.

40,000

To A’s Capital A/c

50,000

(Goodwill adjusted)

Revaluation A/c

Dr.

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Land & Building A/c

17,500

Machinery A/c

12,000

Provision for Doubtful Debts A/c

2,500

Motor Cycle A/c

20,000

Bank A/c (Remuneration)

5,000

Creditors A/c

10,000

Profit transferred to:

A

8,500

B

5,100

C

3,400

17,000

42,000

42,000

Working Notes:

WN1: Calculation of sacrifice or gain

A:B:C=5:3:2(Old Ratio)A:B:C=1:1:1(New Ratio)Sacrificing (or Gaining Ratio) = Old Ratio - New RatioA's share=51013=151030=530(Sacrifice)B's share=31013=91030=130(Gain)C's share=21013=61030=430(Gain)


WN2: Valuation of Goodwill

Goodwill=Average Profit×No. of years' Purchase =1,50,000×2=Rs 3,00,000

WN3: Adjustment of Goodwill
Amount credited to A's Capital A/c=3,00,000×530=Rs 50,000Amount debited to B's Capital A/c=3,00,000×130=Rs 10,000Amount debited to C's Capital A/c=3,00,000×430=Rs 40,000



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