Question

Atul and Amit are partners sharing profits in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2019 is as follows:

Liabilities		Amount (₹)	Assets		Amount (₹)
Capital A/cs:			Plant and Machinery		1,80,000
Atul	1,00,000		Furniture		30,000
Amit	1,00,000	2,00,000	Computer		10,000
Current A/cs:			Stock		40,000
Atul	70,000		Debtors		50,000
Amit	50,000	1,20,000	Bills Receivable		10,000
Creditors		40,000	Cash		10,000
Bills Payable		10,000	Bank		40,000
		3,70,000			3,70,000

​Abhay is admitted as a partner for 1/4th share on 1st April, 2019 on the following terms:
(a) Abhay is to bring ₹ 65,000 as capital after adjusting amount due to him included in creditors and his share of Goodwill.
(b) ₹ 10,000 included in creditors is payable to Abhay which is to be transferred to his Capital Account.
(c) Furniture is to reduced by ₹ 3,000 and Plant and Machinery is to be increased to ₹ 1,98,000.
(d) Stock is overvalued by ₹ 4,000.
(e) A Provision for Doubtful Debts is to be created @ 5%.
(f) Goodwill is to be valued at 2 years' purchase of average profit for four years. Profits of four years ended 31st March were as follows: 2018-19 − ₹ 25,000, 2017-18 − ₹ 10,000, 2016-17 − ₹ 2,500, and 2015-16 − ₹ 2,500.
Pass the Journal entries for the above arrangement.

Answer 1

In the books of the Atul, Amit and Abhay Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019
April 01	Creditors A/c	Dr.		10,000
	To Abhay’s Capital A/c				10,000
	(Being amount due to Abhay transferred to his Capital A/c)
	Cash A/c	Dr.		60,000
	To Abhay’s Capital A/c				55,000
	To Premium for Goodwill A/c (WN1)				5,000
	(Being Capital and goodwill paid by the new partner)
	Premium for Goodwill A/c	Dr.		5,000
	To Atul’s Capital A/c				3,000
	To Amit’s Capital A/c				2,000
	(Being premium for goodwill adjusted in 3:2)
	Revaluation A/c	Dr.		9,500
	To Furniture A/c				3,000
	To Stock A/c				4,000
	To Provision for Doubtful Debts A/c				2,500
	(Being assets revalued and liabilities reassessed)
	Plant & Machinery A/c	Dr.		18,000
	To Revaluation A/c				18,000
	(Being appreciation in plant & machinery provided for)
	Revaluation A/c (WN2)	Dr.		8,500
	To Atul’s Capital A/c				5,100
	To Amit’s Capital A/c				3,400
	(Being revaluation profit transferred to partner’s capital A/c)

Working Notes:

1. Calculation of Goodwill brought in by Abhay:

Average Profits	=	(Normal profits from 31st March, 2016 to 31st March, 2019)/2
	=	₹ (25,000 + 10,000 + 2,500 + 2,500)/4= ₹ 10,000
Goodwill	=	Average Profits × No. of years of Purchase
	=	₹(10,000 × 2) = ₹ 20,000
Goodwill brought in by Abhay	=	₹(20,000 × 1/4) = ₹ 5,000

2. Calculation of Revaluation Profit/Loss:
Debit side total = ₹ (3,000 + 4,000 + 2,500) = ₹ 9,500 Credit side total= ₹ 18,000 Gain on Revaluation = ₹ (18,000 – 9,500) = ₹ 8,500