Question

A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. Their Balance Sheet as on 31st March, 2018 is given below:

Liabilities		₹	Assets	₹
Capital A/cs:			Building	18,00,000
A	11,00,000		Investments	4,00,000
B	11,40,000		Stock	6,00,000
C	7,60,000	30,00,000	Debtors	10,00,000
Workmen Compensation Reserve		10,00,000	Cash and Bank	6,00,000
Creditors		2,00,000
Employees' Provident Fund		2,00,000
		44,00,000		44,00,000

C retires on 30th June, 2018 and it was mutually agreed that:
(a) Building be valued at ₹ 22,00,000.
(b) Investments to be valued at ₹ 3,00,000.
(c) Stock be taken at ₹ 8,00,000.
(d) Goodwill of the firm be valued at two years' purchase of the average profit of the past five years.
(e) C's share of profits up to the date of retirement be calculated on the basis of average profit of the preceding three years.
The profits of the preceding five years were as under:

Year	2013-14	2014-15	2015-16	2016-17	2017-18
Profits (₹)	4,00,000	5,00,000	6,00,000	8,00,000	7,00,000

(f) Amount payable to C to be transferred to his Loan Account carrying interest @ 10% p.a.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet as at 30th June, 2018.

Answer 1

Revaluation Account
Dr.						Cr.
Particulars			Amount Rs	Particulars	Amount Rs
Investments			1,00,000	Building	4,00,000
Profit transferred to				Stock	2,00,000
A’s Capital A/c		2,50,000
B’s Capital A/c		1,50,000
C’s Capital A/c		1,00,000	5,00,000
			6,00,000		6,00,000

Partners’ Capital Accounts
Dr.									Cr.
Particulars		A	B	C	Particulars	A	B	C
C’s Capital A/c		1,50,000	90,000		Balance b/d	11,00,000	11,40,000	7,60,000
C’s Loan A/c				13,35,000	Revaluation A/c	2,50,000	1,50,000	1,00,000
Balance c/d		17,00,000	15,00,000		A’s Capital A/c			1,50,000
					B’s Capital A/c			90,000
					Workmen Compensation Reserve A/c*	5,00,000	3,00,000	2,00,000
					P & L Suspense A/c			35,000
		18,50,000	15,90,000	13,35,000		18,50,000	15,90,000	13,35,000

Balance Sheet as at June 30, 2018 after C’s retirement
Liabilities		Amount Rs	Assets	Amount Rs
Creditors		2,00,000	Building	22,00,000
Employees’ Provident Fund		2,00,000	Investments	3,00,000
C’s Loan A/c		13,35,000	Stock	8,00,000
Capital Accounts:			Debtors	10,00,000
A	17,00,000		Cash and Bank	6,00,000
B	15,00,000	32,00,000	P&L Suspense Account	35,000
		49,35,000		49,35,000

$$\begin{gathered} \mathbf{Working}\mathbf{}\mathbf{Notes}: \\ 1.\mathrm{Calculation}\mathrm{of}\mathrm{Goodwill} \\ \mathrm{Average}\mathrm{Profit}=\frac{4,00,000+5,00,000+6,00,000+8,00,000+7,00,000}{5}=6,00,000 \\ \mathrm{Goodwill}=2\mathrm{years}\text{'}\mathrm{purchase}\mathrm{of}\mathrm{average}\mathrm{profit} \\ =2\times 6,00,000=12,00,000 \\ \mathrm{C}\text{'}\mathrm{s}\mathrm{share}\mathrm{of}\mathrm{Goodwill}=12,00,000\times \frac{2}{10}=2,40,000 \\ \mathrm{This}\mathrm{amount}\mathrm{would}\mathrm{be}\mathrm{adjusted}\mathrm{through}\mathrm{A}\mathrm{and}\mathrm{B}\text{'}\mathrm{s}\mathrm{Capital}\mathrm{Accounts}\mathrm{in}\mathrm{their}\mathrm{gaining}\mathrm{ratio},5:3. \\ 2.\mathrm{Calculation}\mathrm{of}\mathrm{C}\text{'}\mathrm{s}\mathrm{share}\mathrm{of}\mathrm{Profit} \\ \left(\mathrm{a}\right)\mathrm{Average}\mathrm{profit}(\mathrm{last}3\mathrm{years})=\frac{6,00,000+8,00,000+7,00,000}{3}=\frac{21,00,000}{3}=\mathrm{Rs}7,00,000 \\ \left(\mathrm{b}\right)\mathrm{Profit}(\mathrm{from}\mathrm{April}01,2017\mathrm{to}30\mathrm{th}\mathrm{June},2017)=7,00,000\times \frac{3}{12}=1,75,000 \\ \left(\mathrm{c}\right)\mathrm{C}\text{'}\mathrm{s}\mathrm{Share}\mathrm{in}\mathrm{Profits}=\mathrm{Rs}1,75,000\times \frac{2}{10}=35,000 \end{gathered}$$