Question

Following is the Balance Sheet of X and Y as at 31st March, 2019. Z is admitted as a partner on that date when the position of X and Y was:

Liabilities		₹	Assets			₹
X's Capital	10,000		Cash in Hand			9,000
Y's Capital	8,000	18,000	Debtors			11,000
Creditors		12,000	Stock			12,000
General Reserve		16,000	Building			8,000
Workmen Compensation Reserve		4,000	Machinery			10,000
		50,000				50,000

X and Y share profits in the proportion of 3 : 2. The following terms of admission are agreed upon:
(a) Revaluation of assets: Building ₹ 18,000; Stock ₹ 16,000.
(b) The liability on Workmen Compensation Reserve is determined at ₹ 2,000.
(c) Z brought in as his share of goodwill ₹ 10,000 in cash.
(d) Z was to bring in further cash as would make his capital equal to 20% of the combined capital of X and Y after above revaluation and adjustments are carried out.
(e) The further profit-sharing proportions were: X−2/5th, Y−2/5th and Z−1/5th.
Prepare new Balance Sheet of the firm and Capital Accounts of the Partners.

Answer 1

Revaluation Account
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Profit transferred to		Building (18,000 – 8,000)	10,000
X Capital	8,400	Stock (16,000 – 12,000)	4,000
Y Capital	5,600
	14,000		14,000

Partners’ Capital Accounts
Dr.							Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
				Balance b/d	10,000	8,000
				General Reserve	9,600	6,400
				Workmen’s Compensation Fund	1,200	800
Balance c/d	39,200	20,800		Revaluation (Profit)	8,400	5,600
				Premium for Goodwill	10,000
	39,200	20,800			39,200	20,800
				Balance b/d	39,200	20,800
				Cash			12,000
Balance c/d	39,200	20,800	12,000
	39,200	20,800	12,000		39,200	20,800	12,000

Balance Sheet as on March 31, 2019 after Z’s admission
Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/cs:			Cash in Hand	31,000
X	39,200		Debtors	11,000
Y	20,800		Stock	16,000
Z	12,000	72,000	Building	18,000
Creditors		12,000	Machinery	10,000
Outstanding Workmen’s Compensation Claim		2,000
		86,000		86,000

Working Notes

WN1: Sacrificing Ratio

Only X is sacrificing 1/5 portion of profit in favour of Z. Therefore, amount of Premium for Goodwill will be taken by X only.

WN2: Treatment of Workmen Compensation Fund

Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
Workmen’s Compensation Fund A/c	Dr.		4,000
To Outstanding Workmen’s Compensation Claim A/c				2,000
To X’s Capital A/c	Dr.			1,200
To Y’s Capital A/c				800
(Outstanding Workmen’s Compensation charged from the fund and remaining fund transferred to partner’s capital in their old ratio)

WN3: Calculation of Z’s Capital
Combined Capital of X and Y after all adjustments = 39,200 + 20,800 = Rs 60,000
Z’s Capital

WN4: Calculation of Cash Balance

Cash Account
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	9,000
Z’s Capital	12,000
Premium for Goodwill	10,000	Balance c/d	31,000
	31,000		31,000