Question

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 :

$\begin{array}{ccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Sundry Creditors}& & 10,000& \text{Cash}& 2,000\\ \text{Employee's Provident Fund}& & 5,000& \text{Sundry Debtors}& 8,000\\ \text{Reserve Fund}& & 6,000& \text{Stock}& 40,000\\ \text{Workmen's Compensation}& & & \text{Furniture}& 13,000\\ \text{Reserve}& & 2,000& \text{Patents}& 4,000\\ \text{Capitals :}& & & \text{Building}& 60,000\\ A& 50,000& & \text{Goodwill}& 6,000\\ B& 35,000& & & \\ C& \underset{–}{25,000}& \underset{–}{1,10,000}& & \\ & & \underset{–}{1,33,000}& & \overline{\underset{–}{1,33,000}}\end{array}$

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.

Answer 1

JOURNAL ENTRIES


$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F.}& \text{Dr.(Rs)}& \text{Cr. (Rs)}\\ 2011& & & & & \\ \text{April 1}& \text{Reserve Fund A/c}& \text{Dr.}& & 6,000& \\ & \text{To A's Capital A/c}& & & & 3,000\\ & \text{To B's Capital A/c}& & & & 1,800\\ & \text{To C's Capital A/c}& & & & 1,200\\ & \text{(The transfer of reserve fund to partner's capital accounts}& & & & \\ & \underset{–}{\text{in their old profit sharing ratio)}}& & & & \\ & \text{Workmen's Compensation Reserve A/c}& \text{Dr.}& & 2,000& \\ & \text{To A's Capital A/c}& & & & 1,000\\ & \text{To B's Capital A/c}& & & & 600\\ & \text{To C's Capital A/c}& & & & 400\\ & \text{(The transfer of Workmen's Compensation Reserve to}& & & & \\ & \underset{–}{\text{Partner's Capital A/cs in their old profit sharing ratio)}}& & & & \\ & \text{Revaluation A/c}& \text{Dr.}& & 6,400& \\ & \text{To Provision for Doubtful Debts A/c}& & & & 400\\ & \text{To Patents A/c}& & & & 4,000\\ & \text{To Sundry Creditors A/c}& & & & 2,000\\ & \text{(Decrease in the value of assets and increase in}& & & & \\ & \underset{–}{\text{Creditors)}}& & & & \\ & \text{Stock A/c}& \text{Dr.}& & 4,000& \\ & \text{Building A/c}& \text{Dr.}& & 12,000& \\ & \text{To Revaluation A/c}& & & & 16,000\\ & \underset{–}{\text{(Increase in the value of Assets)}}& & & & \\ & \text{Revaluation A/c}& \text{Dr.}& 9,600& & \\ & \text{To A's Capital A/c}& & & & 4,800\\ & \text{To B's Capital A/c}& & & & 2,880\\ & \text{To C's Capital A/c}& & & & 1,920\\ & \underset{–}{\text{(Profit on revaluation transferred to partner's Capital A/c)}}& & & & \\ & \text{A's Capital A/c}& \text{Dr.}& & 3,000& \\ & \text{B's Capital A/c}& \text{Dr.}& & 1,800& \\ & \text{C's Capital A/c}& \text{Dr.}& & 1,200& \\ & \text{To Goodwill A/c}& & & & 6,000\\ & \underset{–}{\text{(Goodwill appearing in the books written off on C's retirement)}}& & & & \\ & \text{A's Capital A/c}& \text{Dr.}& & 2,500& \\ & \text{B's Capital A/c}& \text{Dr.}& & 1,500& \\ & \text{To C's Capital A/c}& & & & 4,000\\ & \text{(C's share of Goodwill adjusted to the accounts of}& & & & \\ & \underset{–}{\text{continuing partners in their gaining ratio 5 : 3)}}& & & & \\ & \text{C's Capital A/c}& \text{Dr.}& & 31,320& \\ & \text{To C's Loan A/c}& & & & 31,320\\ & \text{(The Balance of C's Capital A/c transferred to C's loan}& & & & \\ & \text{A/c)}& & & & \end{array}$

$\begin{array}{cccccccc}\text{Dr}& & & & & \text{REVALUATION ACCOUNT}& & \text{Cr}\end{array}$

$\begin{array}{ccccc}\text{Particulars}& & \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Provision for Doubtful Debts}& & & \text{Stock A/c}& 4,000\\ \text{A/c}& & 400& \text{Buildings A/c}& 12,000\\ \text{Patents A/c}& & 4,000& & \\ \text{Sundry Creditors A/c}& & 2,000& & \\ \text{Profit transferred to}& & & & \\ A& 4,800& & & \\ B& 2,880& & & \\ C& \underset{–}{1,920}& 9,600& & \\ & & \overline{\underset{–}{16,000}}& & \overline{\underset{–}{16,000}}\end{array}$

$\begin{array}{ccccccccccccccccc}\text{Dr}& & & & & & & \text{CAPITAL ACCOUNTS}& & & & & & & & & \text{Cr}\end{array}$

$\begin{array}{cccccccc}\text{Particulars}& \text{A}& \text{B}& \text{C}& \text{Particulars}& \text{A}& \text{B}& \text{C}\\ \text{Goodwill A/c}& 3,000& 1,800& 1,200& \text{Balance b/d}& 50,000& 35,000& 25,000\\ \text{C's Capital A/c}& 2,500& 1,500& & \text{Reserve Fund A/c}& 3,000& 1,800& 1,200\\ \text{C's Loan A/c}& & & 31,320& \text{Workmen's}& & & \\ \text{Balance c/d}& 53,300& 36,980& & \text{Compensation Reserve A/c}& 1,000& 600& 400\\ & & & & \text{Revaluation A/c}& 4,800& 2,880& 1,920\\ & & & & \text{A's Capital A/c}& & & 2,500\\ & & & & \text{B's Capital A/c}& & & 1,500\\ & \underset{–}{\overline{\underset{–}{58,800}}}& \underset{–}{\overline{\underset{–}{40,280}}}& \underset{–}{\overline{\underset{–}{32,520}}}& & \underset{–}{\overline{\underset{–}{58,800}}}& \underset{–}{\overline{\underset{–}{40,280}}}& \underset{–}{\overline{\underset{–}{32,520}}}\end{array}$

BALANCE SHEET OF NEW FIRM (of A and B)

as at 1st April. 2011

$\begin{array}{cccccc}\text{Liabilities}& & \text{Rs}& & \text{Assets}& \text{Rs}\\ \text{Sundry Creditors}& & 12,000& \text{Cash}& & 2,000\\ \text{C's Loan}& & 31,320& \text{Sundry Debtors}& 8,000& \\ \text{Employee's Provident Fund}& & 5,000& \text{Less : Provision for}& & \\ \text{Capitals :}& & & \text{Doubtful debts}& \underset{–}{\left(400\right)}& 7,600\\ A& 53,300& & \text{Stock}& & 44,000\\ B& \underset{–}{36,980}& 90,280& \text{Furnitre}& & 13,000\\ & & & \text{Buildings}& & 72,000\\ & & \underset{–}{\underset{–}{\overline{1,38,600}}}& & & \underset{–}{\underset{–}{\overline{1,38,600}}}\end{array}$

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 $=Rs\frac{40,000}{4}=Rs10,000$

Goodwill $=10,000\times 2=Rs20,000$

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.