A, B and C were partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 1st April, 2011 was as follows :

Capital and LiabilitiesRsAssetsRsSundry Creditors10,000Cash2,000Employee's Provident Fund5,000Sundry Debtors8,000Reserve Fund6,000Stock40,000Workmen's CompensationFurniture13,000Reserve2,000Patents4,000Capitals :Building60,000A50,000Goodwill6,000B35,000C25,000––––––1,10,000––––––––1,33,000––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯1,33,000––––––––

C retires on above date and the partners agreed that :

(1) Goodwill is to be valued at two year's purchase of the average profits of last four years. Profits for the years ending 31st March were : 2008 : Rs 14,400, 2009 : Rs 20,000, 2010 : Rs 10,000 (Loss), 2011 : Rs 15,600.

(2) 5% provision for doubtful debts to be made on debtors.

(3) Stock be appreciated by 10%.

(4) Patents are valueless.

(5) Buildings be appreciated by 20%.

(6) Sundry Creditors to be paid Rs 2,000 more than the book value.

Pass Journal entries and prepare Revaluation Account, Capital Accounts and the Balance Sheet of the new firm.


                                           JOURNAL ENTRIES

DateParticularsL.F.Dr.(Rs)Cr. (Rs)2011April 1Reserve Fund A/cDr.6,000    To A's Capital A/c3,000    To B's Capital A/c1,800    To C's Capital A/c1,200(The transfer of reserve fund to partner's capital accountsin their old profit sharing ratio)                        –––––––––––––––––––––––––––––––––––––––––––––––Workmen's Compensation Reserve A/cDr.2,000    To A's Capital A/c1,000    To B's Capital A/c600    To C's Capital A/c400(The transfer of Workmen's Compensation Reserve toPartner's Capital A/cs in their old profit sharing ratio)–––––––––––––––––––––––––––––––––––––––––––––––––––––––––Revaluation A/cDr.6,400    To Provision for Doubtful Debts A/c400    To Patents A/c4,000    To Sundry Creditors A/c2,000(Decrease in the value of assets and increase inCreditors)                                                    ––––––––––––––––––––––––––––––––––––––––––Stock A/cDr.4,000Building A/cDr.12,000    To Revaluation A/c16,000(Increase in the value of Assets)––––––––––––––––––––––––––––––––Revaluation A/cDr.9,600    To A's Capital A/c4,800    To B's Capital A/c2,880    To C's Capital A/c1,920(Profit on revaluation transferred to partner's Capital A/c)––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––A's Capital A/cDr.3,000B's Capital A/cDr.1,800C's Capital A/cDr.1,200    To Goodwill A/c6,000(Goodwill appearing in the books written off on C's retirement)––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––A's Capital A/cDr.2,500B's Capital A/cDr.1,500    To C's Capital A/c4,000(C's share of Goodwill adjusted to the accounts ofcontinuing partners in their gaining ratio 5 : 3)––––––––––––––––––––––––––––––––––––––––––––––––C's Capital A/cDr.31,320    To C's Loan A/c31,320(The Balance of C's Capital A/c transferred to C's loanA/c)

Dr                     REVALUATION ACCOUNT                     Cr

ParticularsRsParticularsRsProvision for Doubtful DebtsStock A/c4,000A/c400Buildings A/c12,000Patents A/c4,000Sundry Creditors A/c2,000Profit transferred toA4,800B2,880C1,920––––9,600¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯16,000––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯16,000––––––

Dr                        CAPITAL ACCOUNTS                               Cr

ParticularsABCParticularsABCGoodwill A/c3,0001,8001,200Balance b/d50,00035,00025,000C's Capital A/c2,5001,500Reserve Fund A/c3,0001,8001,200C's Loan A/c31,320Workmen'sBalance c/d53,30036,980Compensation Reserve A/c1,000600400Revaluation A/c4,8002,8801,920A's Capital A/c2,500B's Capital A/c1,500¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯58,800––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯40,280––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯32,520––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯58,800––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯40,280––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯32,520––––––––––––

                                                    BALANCE SHEET OF NEW FIRM (of A and B)

                                                                      as at 1st April. 2011

LiabilitiesRsAssetsRsSundry Creditors12,000Cash2,000C's Loan31,320Sundry Debtors8,000Employee's Provident Fund5,000Less : Provision forCapitals :Doubtful debts(400)––––7,600A53,300Stock44,000B36,980––––––90,280Furnitre13,000Buildings72,000¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯1,38,600––––––––––––––––¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯1,38,600––––––––––––––––

Working Notes : 1. Calculation of Goodwill : Total profits of the last four years

= Rs 14,400 + Rs 20,000  - Rs 10,000 + Rs 15,600 = Rs 40,000

Average Profit  =Rs40,0004=Rs 10,000

Goodwill =10,000×2=Rs 20,000

2. In the absence of any information, the retiring partner's balance of Capital Account is transferred to his Loan Account.

3. Amount of Employee's Provident Fund belongs to the employees of the Firm. It will be paid to them on their retirement, hence it cannot be transferred to the Capital Accounts of partners.

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