Question

Following was the Balance Sheet of A and B who were sharing profits in the ratio of 2 : 1 as at 31st March, 2019:

Liabilities		₹	Assets	₹
Capital A/cs:			Building	25,000
A	15,000		Plant and Machinery	17,500
B	10,000	25,000	Stock	10,000
Sundry Creditors		32,950	Sundry Debtors	4,850
			Cash in Hand	600
		57,950		57,950

They admit C into partnership on the following terms:
(a) C was to bring ₹ 7,500 as his capital and ₹ 3,000 as goodwill for 1/4th share in the firm.
(b) Values of the Stock and Plant and Machinery were to be reduced by 5%.
(c) A Provision for Doubtful Debts was to be created in respect of Sundry Debtor ₹ 375.
(d) Building was to be appreciated by 10%.
Pass necessary Journal entries to give effect to the arrangements. Prepare Profit and Loss Adjustment Account (or Revaluation Account), Partners' Capital Accounts and Balance Sheet of the new firm.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
	Profit and Loss Adjustment A/c	Dr.		1,750
	To Stock A/c				500
	To Plant and Machinery A/c				875
	To Reserve for Doubtful Debts A/c				375
	(Decrease in stock and Plant and creation of Reserve for Doubtful Debt transferred to Profit and Loss Adjustment Account)
	Building A/c	Dr.		2,500
	To Profit and Loss Adjustment A/c				2,500
	(Increase in value of Building of transferred to Profit and loss Adjustment Accounts)
	Profit and Loss Adjustment A/c			750
	To A’s Capital A/c				500
	To B’s Capital A/c				250
	(Profit on revaluation of asset and liabilities distributed between A and B in their old ratio)
	Cash A/c	Dr.		10,500
	To C’s Capital A/c				7,500
	To Premium for Goodwill A/c				3,000
	(C brought capital and share of goodwill)
	Premium for Goodwill A/c	Dr.		3,000
	To A’s Capital A/c				2,000
	To B’s Capital A/c				1,000
	(Premium for Goodwill distributed between A and B in their sacrificing ratio i.e 2:1)

Profit and Loss Adjustment Account
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Stock	500
Plant and Machinery	875	Building	2,500
Reserve for Doubtful Debts	375
Profit transferred to
A Capital	500
B Capital	250
	2,500		2,500

Partners’ Capital Accounts
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
				Balance b/d	15,000	10,000
				Cash			7,500
				Premium for Goodwill	2,000	1,000
Balance c/d	17,500	11,250	7,500	Profit and Loss Adjustment (Profit)	500	250
	17,500	11,250	7,500		17,500	11,250	7,500

Balance Sheet as on March 31, 2016 after admission of C
Liabilities		Amount (₹)	Assets		Amounts (₹)
Capital Accounts:			Building (25,000 + 2,500)		27,500
A	17,500		Plant and Machinery (17,500 – 875)		16,625
B	11,250		Stock (10,000 – 500)		9,500
C	7,500	36,250
Sundry Creditors		32,950	Sundry Debtors	4,850
			Less: Provision for D. Debts	375	4,475
			Cash in Hand (600 + 10,500)		11,100
		69,200			69,200

Working Notes:

WN1


WN2
Distribution of Premium for Goodwill (in sacrificing ratio)


WN3
Distribution of Profit from Profit and loss Adjustment Account (in old ratio)