Question

Azad and Babli are partners in a firm sharing profits & losses in the ratio of 2 :1. Chintan is admitted in to the firm with $\frac{1}{4}$ Share in profits. Chintan will bring in 30,000 as his capital and :ttie Capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on December 31, 2006 (Before Chintan's admission) was as follows

$\text{Balance Sheet of A and B}$
$\text{as on 31.12.2016}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Creditors}& 8,000& \text{Cash in hand}& 2,000\\ \text{Bills Payable}& 4,000& \text{Cash at bank}& 10,000\\ \text{General Reserve}& 6,000& \text{Sundry Debtors}& 8,000\\ \text{Capital Accounts}& & \text{Stock}& 10,000\\ \text{Azad}50,000& & \text{Furniture}& 5,000\\ \text{Babli}\underset{–}{32,000}& 82,000& \text{Machinery}& 25,000\\ & & \text{Buildings}& 40,000\\ & \overline{\underset{–}{\underset{–}{1,00,000}}}& & \overline{\underset{–}{\underset{–}{1,00,000}}}\end{array}$

It was agreed that :

(i) Chintan will bring in Rs. 12,000 as his share of good will premium.

(ii) Buildings were valued at Rs. 45,000 and machinery at Rs. 23,000.

(iii) A provision for doubtful debts is to be created @ 6% on debtors.

(iv) The capital accounts of Mad and Babb are to be adjusted by opening current accounts.

Record necessary journal entries, show necessary ledger accounts and prepare the balance sheet after admission.

Answer 1

$\text{Journal Entries}$
$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Amt.(Cr)}& \text{Amt.(Cr)}\\ \text{(i)}& \text{General Reserve A/c}\text{Dr}& & 6,000& \\ & \text{To Azad's Capital A/c}& & & 4,000\\ & \text{To Babli's Capital A/c}& & & 2,000\\ & \text{(General reserve written of among old partners in old ratio.)}& & & \\ & \underset{–}{}& & & \\ \text{(ii)}& \text{Revaluation A/c}\text{Dr}& & 2,480& \\ & \text{To Machinery A/c}& & & 2,000\\ & \text{To Provision for doubtfull Debts A/c}& & & 480\\ & \text{(Decrease in value of asset and provision created for doubtful debts.)}& & & \\ & \underset{–}{}& & & \\ \text{(iii)}& \text{Building A/c}\text{Dr}& & 5,000& \\ & \text{To Revaluation A/c}& & & 5,000\\ & \text{(Increase in value of buildings)}& & & \\ & \underset{–}{}& & & \\ \text{(iv)}& \text{Revaluation A/c}\text{Dr}& & 2,520& \\ & \text{To Azad's Capital A/c}& & & 1,680\\ & \text{To Babli's Capital A/c}& & & 840\\ & \text{(Profit on revaluation distributed among old partners.)}& & & \\ & \underset{–}{}& & & \\ \text{(v)}& \text{Cash A/c}\text{Dr}& & 42,000& \\ & \text{To Chintan's Capital A/c}& & & 42,000\\ & \text{(Amount of capital and goodwill brought in by Chintan.)}& & & \\ & \underset{–}{}& & & \\ \text{(vi)}& \text{Chintan's Capital A/c}\text{Dr}& & 12,000& \\ & \text{To Azad's Capital A/c}& & & 8,000\\ & \text{To Babli's A/c}& & & 4,000\\ & \text{(Premium distributed among old partners in sacrificing ratio.)}& & & \\ & \underset{–}{}& & & \\ \text{(vii)}& \text{Azad's Capital A/c}\text{Dr}& & 3,680& \\ & \text{To Azad's Current A/c}& & & 3,680\\ & \text{(Excess of capital transferred for partners current account.)}& & & \\ & \underset{–}{}& & & \\ \text{(viii)}& \text{Babli's Capital A/c}\text{Dr}& & 8,840& \\ & \text{To Bubli's Current A/c}& & & 8,840\\ & \text{(Excess of capital transferred to partners current account.)}& & & \\ & \underset{–}{}& & & \end{array}$

$\text{Dr}\text{Reavaluation Account}\text{Cr}$
$\begin{array}{cccc}\text{Pariculars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Machinery A/c}& 2,000& \text{Building A/c}& 5,000\\ \text{Provision for Doubtful Debts A/c}& 480& & \\ \text{Transfer of profit on}& & & \\ \text{Revaluation account}& & & \\ \text{Azad}1,680& & & \\ \text{Babli}\underset{–}{840}& 2,520& & \\ & \overline{\underset{–}{\underset{–}{5,000}}}& & \overline{\underset{–}{\underset{–}{5,000}}}\end{array}$

$\text{Dr}\text{Partner's Capital Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Particulars}& \text{Azad}& \text{Babli}& \text{Chintan}& \text{Particulars}& \text{Azad}& \text{Babli}& \text{Chintan}\\ \text{Current A/c}& 3,680& 8,840& & \text{Balance b/d}& 50,000& 32,000& \\ \text{Azad's A/c}& & & 8,000& \text{General Reserve}& 4,000& 2,000& \\ \text{Babli's A/c}& & & 4,000& \text{Profit on Revaluation}& 1,680& 840& \\ \text{Balance c/d}& 60,000& 30,000& 30,000& \text{Cash A/c}& & & 40,000\\ & & & & \text{Chintan's A/c}& 8,000& 4,000& \\ & \overline{\underset{–}{63,680}}& \overline{\underset{–}{38,840}}& \overline{\underset{–}{30,000}}& & \overline{\underset{–}{63,680}}& \overline{\underset{–}{38,840}}& \overline{\underset{–}{30,000}}\end{array}$

$\text{Balance Sheet of Azad, Babli and Chintan}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Sundry Creditors}& 8,000& \text{Cash in hand}& 44,000\\ \text{Bills Payable}& 4,000& \text{Cash at bank}& 10,000\\ \text{Partner's Current Account}& & \text{Sundry Debtors}8,000& \\ \text{Azad}3,680& & \text{(-)Provision for}& \\ \text{Babli}\underset{–}{8,840}& 12,520& \text{Doubtful Debts}\underset{–}{\left(480\right)}& 7,520\\ \text{Capital}& & \text{Stock}& 10,000\\ \text{Azad}60,000& & \text{Furniture}& 5,000\\ \text{Babli}30,000& & \text{Machinery}& 23,000\\ \text{Chintan}\underset{–}{30,000}& 1,20,000& \text{Building}& 45,000\\ & \overline{\underset{–}{\underset{–}{1,44,520}}}& & \overline{\underset{–}{\underset{–}{1,44,520}}}\end{array}$

Note : Calculate new profit sharing ratio. Then, calcula te full capital of firm on basis of new partners, capital and finally new capital of existing partners.

Capital of Chintan = 30,000

His share = $\frac{1}{4}$

Total capital of the firm = $30,000\times \frac{4}{1}=1,20,000$

New profit sharing ratio =

Chintan's ratio = $\frac{1}{4}$

Remaining ratio = $1-\frac{1}{4}=\frac{3}{4}$

Azad's new share = $\frac{3}{4}\times \frac{2}{3}=\frac{6}{12}$

Babli's new share = $\frac{3}{4}\times \frac{1}{3}=\frac{3}{12}$

Chintan's new share = $\frac{1}{4}\times \frac{3}{3}=\frac{3}{12}$

New profit sharing ratio = $\frac{6}{12}:\frac{3}{12}:\frac{3}{12}:2:1:1$

or Azad's capital = $1,20,000\times \frac{2}{4}=60,000$

Babli's Capital = $1,20,000\times \frac{1}{4}=30,000$

Chintan's Capital = $1,20,000\times \frac{1}{4}=30,000$