Question

Following is the Balance Sheet of A, B and C who share profits and losses of the business in the ratio of 3:2:1.

BALANCE SHEET

as at 31st March, 2016

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Capital A/cs:}& & \text{Furniture}& 95,000\\ A1,20,000& & \text{Business Premises}& 2,05,000\\ B1,20,000& & \text{Stock-in-Trade}& 40,000\\ C\underset{–}{1,20,000}& 3,60,000& \text{Debtors}& 28,000\\ \text{Sundry Creditors}& 20,000& \text{Cash at Bank}& 15,000\\ \text{Outstanding Salaries and Wages}& 7,200& \text{Cash in Hand}& 4,200\\ & \underset{–}{\overline{3,87,200}}& & \underset{–}{\overline{3,87,200}}\end{array}$

On 1st April, 2016, they admit D as partner on the following conditions:

(i) D will bring Rs 1,20,000 as his Capital and also Rs 30,000 as Goodwill premium for a quarter of the share in the future profit/loss of the firm.

(ii) The values of the fixed assets and business premises of the firm will be increased by 10% before the admission of D.

(iii) The future profits and losses of the firm will be shared equally by the partners.

Show Journal entries, Revaluation Account, Partner's Capital Accounts and the opening Balance Sheet of the new firm to include the above-mentioned transactions assuming that the conditions were duly satisfied.

Answer 1

Books of A, B, C and D

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F.}& \text{Dr.(Rs)}& \text{Cr. (Rs)}\\ 2016& & & & \\ \text{April 1}& \text{Furniture A/c}Dr.& & 9,500& \\ & \text{Business Premises A/c}Dr.& & 20,500& \\ & \text{To Revaluation A/c}& & & 30,000\\ & \text{(Increase in the value of assets)}& & & \\ & \underset{–}{}& & & \\ & \text{Revaluation A/c}Dr.& & 30,000& \\ & \text{To A's Capital A/c}& & & 15,000\\ & \text{To B's Capital A/c}& & & 10,000\\ & \text{To C's Capital A/c}& & & 5,000\\ & \text{(Transfer of profit on revaluation in the ratio of 3:2:1)}& & & \\ & \underset{–}{}& & & \\ & \text{Bank A/c}Dr.& & 1,50,000& \\ & \text{To D's Capital A/c}& & & 1,20,000\\ & \text{To Premium of Goodwill A/c}& & & 30,000\\ & \text{(Amount brought in by D for capital and premium for}& & & \\ & \text{goodwill)}& & & \\ & \underset{–}{}& & & \\ & \text{Premium for Goodwill A/c}Dr.& & 30,000& \\ & \text{To A's Capital A/c}& & & 22,500\\ & \text{To B's Capital A/c}& & & 7,500\\ & \text{(Premium for goodwill brought in by D credited to A}& & & \\ & \text{and B in their sacrificing ratio of 3:1)}& & & \\ & \underset{–}{}& & & \\ & \text{C's Capital A/c}Dr.& & 10,000& \\ & \text{To A's Capital A/c}& & & 7,500\\ & \text{To B's Capital A/c}& & & 2,500\\ & \text{(Adjustment for goodwill for acquiring}\frac{1}{12}th\text{share}& & & \\ & \text{by C from A and B in their sacrificing ratio of 3:1)}& & & \end{array}$

Dr. REVALUATION ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Profit on revaluation}& & \text{Furniture A/c}& 9,500\\ \text{transferred to:}& & \text{Business Premises A/c}& 20,500\\ \text{A's Capital A/c}15,000& & & \\ \text{B's Capital A/c}10,000& & & \\ \text{C's Capital A/c}\underset{–}{5,000}& 30,000& & \\ & \underset{–}{\overline{30,000}}& & \underset{–}{\overline{30,000}}\end{array}$

Dr. CAPITAL ACCOUNT Cr.

$\begin{array}{ccccccccccc}\text{Particulars}& A& B& C& D& \text{Particulars}& A& B& C& D& \\ & Rs& Rs& Rs& Rs& & Rs& Rs& Rs& Rs& \\ \text{A's Capital}& & & & & \text{Bal.b/d}& 1,20,000& 1,20,000& 1,20,000& -& \\ A/c& -& -& 7,500& 22,500& -& & & & & \\ \text{B's Capital}& & & & & \text{Revaluation A/c}& & & & & \\ & -& -& 2,500& 7,500& & & & & & \\ \text{Bal.}& & & & & \text{(profit)}& 15,000& 10,000& 5,000& -& \\ c/d& 1,65,000& 1,40,000& 1,15,000& 1,20,000& \text{Bank A/c}& -& -& -& 1,50,000& \\ & & & & & \text{D's Capital A/c}& 22,500& 7,500& -& -& \\ & & & & & \text{C's}& & & & & \\ & & & & & \text{Capital A/c}& 7,500& 2,500& -& -& \\ & \underset{–}{\overline{1,65,000}}& \underset{–}{\overline{1,40,000}}& \underset{–}{\overline{1,25,000}}& \underset{–}{\overline{1,50,000}}& & \underset{–}{\overline{1,65,000}}& \underset{–}{\overline{1,40,000}}& \underset{–}{\overline{1,25,000}}& \underset{–}{\overline{1,50,000}}& \end{array}$

BALANCE SHEET

as at 1st April, 2016

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Capital Accounts:}& & \text{Business Premises}& 2,25,500\\ A1,65,000& & \text{Furniture}& 1,04,500\\ B1,40,000& & \text{Stock-in-Trade}& 40,000\\ C1,15,000& & \text{Debtors}& 28,000\\ D\underset{–}{1,20,000}& 5,40,000& \text{Cash at Bank}& 1,65,000\\ \text{Sundry Creditors}& 20,000& \text{Cash in hand}& 4,200\\ \text{Outstanding Salaries and Wages}& 7,200& & \\ & \underset{–}{\overline{5,67,200}}& & \underset{–}{\overline{5,67,200}}\end{array}$

Working Notes:

(i) Old Ratio of A,B and C = 3 : 2 : 1

New Ratio of A,B, C and $D=\frac{1}{4}:\frac{1}{4}:\frac{1}{4}:\frac{1}{4}$

Sacrifice or Gain:

$A=\frac{3}{6}-\frac{1}{4}=\frac{6-3}{12}=\frac{3}{12}\text{(Sacrifice)}$

$B=\frac{2}{6}-\frac{1}{4}=\frac{4-3}{12}=\frac{1}{12}\text{(Sacrifice)}$

$C=\frac{1}{6}-\frac{1}{4}=\frac{2-3}{12}=\frac{1}{12}\text{(Gain)}$

(ii) Entire amount of premium for goodwill paid by D will be credited to A and B in their sacrificng ratio of 3:1

(iii) In addition, C will compensate A and B for acquiring $\frac{1}{12}th$ share on the basis of premium paid by D. The amount of compensation will be.

Value of whole of firm's goodwill $=Rs30,000\times \frac{4}{1}=Rs1,20,000$

Compensation paid by C $=Rs1,20,000\times \frac{1}{12}=Rs10,000$