Question

Following is the Balance Sheet of Aruna, Karuna and Varuna as at 31st March, 2009, who have agreed to share profits and losses in proportion of their capitals.

Balance Sheet of Aruna, Karuna and Varuna
as at 31st March, 2009
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Capitals:}& & \text{Land and Building}& 2,00,000\\ \text{Aruna}2,00,000& & \text{Machinery}& 3,00,000\\ \text{Karuna}3,00,000& & \text{Closing Stock}& 1,00,000\\ \text{Varuna}\underset{–}{2,00,000}& 7,00,000& \text{Sundry Debtors}1,10,000& \\ \text{General Reserve}& 35,000& \text{Less:Provision for}& \\ \text{Workmen Compensation Reserve}& 15,000& \text{Doubtful debts}\underset{–}{(10,000)}& 1,00,000\\ \text{Sundry Creditors}& \underset{–}{50,000}& \text{Cash at Bank}& \underset{–}{1,00,000}\\ & \underset{–}{8,00,000}& & \underset{–}{8,00,000}\end{array}$

On 31st March, 2009 Aruna desired to retire from the firm and the remaining partners decided to carry on the business. It was agreed to ravalue the assets and re-assess the liabilities on the following basis :

(i) Land and building to be appreciated by 30%

(ii) Machinery be depreciated by 20%.

(iii) There were bad debts of Rs 17,000.

(iv) The claim on account of workmen's compensation was estimated at Rs 8,000.

(v) Goodwill of the firm was valued at Rs 1,40,000 and Aruna's share of Goodwill be adjusted against the Capital Accounts of the continuing partners Karuna and Varuna who have decided to share future profits in the ratio of 4 : 3 respectively.

(vi) Capital of the new firm in total will be the same as before the retirement of Aruna and will be in the new profit sharing ratio of the continuing partners.

(vii) Amount due to Aruna be settled by paying Rs 50,000 in cash and the balance by transferring to her loan account which will be paid later on.

Prepare Revaluation Account, Capital Accounts of partners and Balance Sheet of time firm after Aruna's retirement.

Answer 1

$\begin{array}{ccccccc}\text{Dr}& & & & \text{REVALUATION ACCOUNT}& & \text{Cr}\end{array}$
$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Machinery A/c}& 60,000& \text{Land and Building A/c}& 60,000\\ \text{Bad Debts A/c (Note 1)}& 7,000& \text{Loss transferred to:}& \\ & & \text{Aruna's Capital A/c}2,000& \\ & & \text{Karuna's Capital A/c}3,000& \\ & & \text{Varuna's Capital A/c}\underset{–}{2,000}& \underset{–}{7,000}\\ & \overline{\underset{–}{\underset{–}{67,000}}}& & \underset{–}{\underset{–}{67,000}}\end{array}$

$\begin{array}{ccccccccc}\text{Dr}& & & & \text{PARTNER'S CAPITAL ACCOUNTS}& & & & \text{Cr}\end{array}$

$\begin{array}{cccccccc}\text{Particulars}& \text{Aruna}& \text{Karuna}& \text{Varuna}& \text{Particular}& \text{Aruna}& \text{Karuna}& \text{Varuna}\\ & \text{Rs}& \text{Rs}& \text{Rs}& & \text{Rs}& \text{Rs}& \text{Rs}\\ \text{Revalution}& & & & \text{Balance b/d}& 2,00,000& 3,00,000& 2,00,000\\ \text{A/c (Loss)}& 2,000& 3,000& 2,000& \text{General}& & & \\ \text{To Aruna's}& & & & \text{Reserve}& 10,000& 15,000& 10,000\\ \text{Capital A/c}& & & & \text{Workmen}& & & \\ \text{(Goodwill)}& & 20,000& 20,000& \text{Compensation}& & & \\ \text{Bank A/c}& 50,000& -& -& \text{Reserve}& 2,000& 3,000& 2,000\\ \text{Aruna's}& & & & \text{Karuna's}& & & \\ \text{Loan A/c}& 2,00,000& -& -& \text{Capital A/c}& 20,000& -& -\\ \text{Balance c/d}& -& 2,95,000& 1,90,000& \text{Varuna's}& & & \\ & & & & \text{Capital A/c}& 20,000& -& -\\ & \overline{\underset{–}{2,52,000}}& \overline{\underset{–}{3,18,000}}& \overline{\underset{–}{2,12,000}}& & \overline{\underset{–}{2,52,000}}& \overline{\underset{–}{3,18,000}}& \overline{\underset{–}{2,12,000}}\\ \text{Balance c/d}& & & & \text{Balance b/d}& & 2,95,000& 1,90,000\\ \text{(Note 3)}& & 4,00,000& 3,00,000& \text{Bank A/c}& & & \\ & & & & \text{(Bal.Fig.)}& & \underset{–}{1,05,000}& 1,10,000\\ & & \overline{\underset{–}{\underset{–}{4,00,000}}}& \overline{\underset{–}{\underset{–}{3,00,000}}}& & & \overline{\underset{–}{\underset{–}{4,00,000}}}& \overline{\underset{–}{\underset{–}{3,00,000}}}\end{array}$

Balance Sheet of the firm after Aruna's Retirement
as at 31st March, 2009

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amount}& \text{Assets}& \text{Amount}\\ & \text{Rs}& & \text{Rs}\\ \text{Capitals:}& & \text{Land and Building}& 2,60,000\\ \text{Karuna}4,00,000& & \text{Machinery}& 2,40,000\\ \text{Varuna}\underset{–}{3,00,000}& 7,00,000& \text{Closing Stock}& 1,00,000\\ \text{Aruna's Loan A/c}& 2,00,000& \text{Sundry Debtors}& 93,000\\ \text{Workmen Compensaton Claim}& 8,000& \text{Cash at Bank (Note 4)}& 2,65,000\\ \text{Sundry Creditors}& 50,000& & \\ & \overline{\underset{–}{\underset{–}{9,58,000}}}& & \overline{\underset{–}{9,58,000}}\end{array}$

Working Notes :

1. Entries for Bad Debts :

Bad Debts A/c Dr. 17,000
To Sundry Debtors 17,000
_____________________________

Provision for Doubtful Debts A/c Dr. 10,000
Revaluation A/c Dr. 7,000
To Bad Debts A/c 17,000
_______________________________

2. (i) Aruna's share of Goodwill = $Rs1,40,000\times \frac{2}{7}=Rs40,000$

It will be debited to Karuna and Varuna in their gaining ratio.

(ii) Karuna's Gain $=\frac{4}{7}-\frac{3}{7}=\frac{1}{7}$

Varuna's Gain $=\frac{3}{7}-\frac{2}{7}=\frac{1}{7}$

Gainig Ratio of Karuna and Varuna $=\frac{1}{7}:\frac{1}{7}$ or 1 : 1

(iii) Karuna's contribution for Aruna's Goodwill = Rs $40,000\times \frac{1}{2}=Rs20,000$

Varuna's contribution for Aruna's Goodwill = Rs $40,000\times \frac{1}{2}=Rs20,000$

3. Total Capital of the firm before the retirement of Aruna as per the Opening Balance Sheet = Rs 2,00,000 + 3,00,000 + Rs 2,00,000 = Rs 7,00,000

Karuna's capital in the New Firm $=Rs7,00,000\times \frac{4}{7}=Rs4,00,000$

Varuna's capital in the New Firm $=Rs7,00,000\times \frac{3}{7}=Rs3,00,000$

4. $\begin{array}{ccccccc}\text{Dr}& & & \text{BANK ACCOUNT}& & & \text{Cr}\end{array}$
$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Balance b/d}& 1,00,000& \text{Aruna's Capital A/c}& \text{50,000}\\ \text{Karuna's Capital A/c}& 1,05,000& \text{Balance c/d}& 2,65,000\\ \text{Varuna's Capital A/c}& \underset{–}{1,10,000}& & \\ & \underset{–}{\underset{–}{3,15,000}}& & \overline{\underset{–}{\underset{–}{3,15,000}}}\end{array}$