Question

Following is the Balance Sheet of A and B, who shared Profits and Losses in the ratio of 2 : 1, as at 1st April, 2019:

BALANCE SHEET OF A AND B as on 1st April, 2019
Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/cs:			Land ad Building	2,90,000
A	3,00,000		Furniture	80,000
B	2,00,000	5,00,000	Stock	2,40,000
Reserve		1,50,000	Debtors	1,50,000
Creditors		2,00,000	Bank	60,000
			Cash	30,000
		8,50,000		8,50,000

On the above date, the partners changed their profit-sharing ratio to 3 : 2. For this purpose, the goodwill of the firm was valued at ₹ 3,00,000. The partners also agreed for the following:
(a) The value of Land and Building will be ₹ 5,00,000;
(b) Reserve is to be maintained at ₹ 3,00,000.
(c) The total capital of the partners in the new firm will be ₹ 6,00,000, which will be shared by the partners in their new profit-sharing ratio.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of the reconstituted firm.

Answer 1

Revaluation Account
Dr.			Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Revaluation Profit			Land and Building	2,10,000
A’s Capital A/c	1,40,000
B’s Capital A/c	70,000	2,10,000
		2,10,000		2,10,000

Partners’ Capital Accounts
Particulars	A	B	Particulars	A	B
Reserve	1,80,000	1,20,000	Balance b/d	3,00,000	2,00,000
Cash A/c (bal.fig.)	20,000		Reserve	1,00,000	50,000
A’s Capital		20,000	B’s Capital A/c	20,000
Balance c/d	3,60,000	2,40,000	Revaluation A/c	1,40,000	70,000
			Cash A/c (bal.fig.)		60,000
	5,60,000	3,80,000		5,60,000	3,80,000

Balance Sheet
Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/c			Land and Building	5,00,000
A	3,60,000		Furniture	80,000
B	2,40,000	6,00,000	Stock	2,40,000
Reserve		3,00,000	Debtors	1,50,000
Creditors		2,00,000	Bank	60,000
			Cash (30,000 + 60,000 – 20,000)	70,000
		11,00,000		11,00,000

Working Notes

WN1: Calculation of New Capital

$$\begin{gathered} \mathrm{A}=6,00,000\times \frac{3}{5}=3,60,000 \\ \mathrm{B}=6,00,000\times \frac{2}{5}=2,40,000 \end{gathered}$$

WN2: Calculation of Gaining/Sacrificing Ratio& Adjustment for Goodwill

$$\begin{gathered} \mathrm{Old}\mathrm{Ratio}\mathrm{New}\mathrm{Ratio} \\ 2:13:2 \\ \mathrm{Sacrificing}\mathrm{Ratio}=\mathrm{Old}\mathrm{Ratio}-\mathrm{New}\mathrm{Ratio} \\ \mathrm{Sacrificing}\mathrm{Ratio}\mathrm{of}\mathrm{A}=\frac{2}{3}-\frac{3}{5}=\frac{1}{15}\left(\mathrm{sacrificing}\right) \\ \mathrm{Sacrificing}\mathrm{Ratio}\mathrm{of}\mathrm{B}=\frac{1}{3}-\frac{2}{5}=-\frac{1}{15}\left(\mathrm{gaining}\right) \\ \mathrm{A}\text{'}\mathrm{s}\mathrm{Sacrifice}=3,00,000\times \frac{1}{15}=20,000 \\ \mathrm{B}\text{'}\mathrm{s}\mathrm{Gain}=3,00,000\times \frac{1}{15}=20,000 \end{gathered}$$

Adjustment for Goodwill

B’s Capital A/c	Dr.		20,000
To A’s Capital A/c				20,000
(B will compensate A to the extent of his gain)