Question

Leena, Madan and Naresh were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 3. On 31st March, 2015, their Balance Sheet was as follows :

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Trade Creditors}& & 1,60,000& \text{Land and Building}& & 10,00,000\\ \text{Bank Overdraft}& & 44,000& \text{Machinery}& & 5,00,000\\ \text{Long-term Debts}& & 4,00,000& \text{Furniture}& & 7,00,000\\ \text{Employee's Provident Fund}& & 76,000& \text{Investments}& & 2,00,000\\ \text{Capitals:}& \text{Leena 12,50,000}& & \text{Closing stock}& & 8,00,000\\ & \text{Madan 8,00,000}& & \text{Sundry Debtors}& & 4,00,000\\ & \text{Naresh}\underset{–}{10,50,000}& 31,00,000& \text{Bank}& & 80,000\\ & & & \text{Deferred Advertisement}& & \\ & & & \text{Expenditure}& & 1,00,000\\ & & \overline{\underset{–}{\underset{–}{37,80,000}}}& & & \overline{\underset{–}{\underset{–}{37,80,000}}}\end{array}$

On 31st March, 2015, Madan retired from the firm and the remaining partners decided to carry on the business. It was decided to revalue assets and liabilities as under :

(i) Land and Building be appreciated by Rs 2,40,000 and Machinery be depreciated by 10%.

(ii) 50% of Investments were taken over by the retiring partner at book value.

(iii) An old customer Mohit whose account was written off as bad debt has promised to pay Rs 7,000 in settlement of his full debt of Rs 10,000.

(iv) Provision for Doubtful Debts was to be made at 5% on debtors.

(v) Closing Stock will be valued at market price which is Rs 1,00,000 less than the book value.

(vi) Goodwill of the firm be valued at Rs 5,60,000 and Madan's share of goodwill be adjusted in the accounts of Leena and Naresh. Leena and Naresh decided to share future profits and losses in the ratio of 3 : 2.

(vii) The total capital of the new firm will be Rs 32,00,000 which will be in the proportion of the profit-sharing ratio of Leena and Naresh.

(viii) Amount due to Madan was settled by accepting a Bill of Exchange in his favour payable after 4 months.

Prepare Revaluation Account, Partner's Capital Accounts and Balance Sheet of the firm after Madan's retirement.

Answer 1

$\begin{array}{ccccccccccc}\text{Dr}& & & & & & & \text{REVALUATION ACCOUNT}& & & \text{Cr}\end{array}$

$\begin{array}{cccccc}\text{Particulars}& & \text{Rs}& \text{Particulars}& & \text{Rs}\\ \text{Machinery A/c}& & 50,000& \text{Land and Building A/c}& & 2,40,000\\ \text{Closing Stock A/c}& & 1,00,000& {\text{Mohit's A/c}}^{\left(1\right)}& & 7,000\\ \text{Provision for Doubtful Debts}& & & & & \\ \text{A/c (5\% on Rs 4,07,000)}& & 20,350& & & \\ \text{Profit on Revaluation}& & & & & \\ \text{transferred to :}& & & & & \\ \text{Leena's Capital A/c}& 21,900& & & & \\ \text{Madan's Capital A/c}& 21,900& & & & \\ \text{Naresh's Capital A/c}& \underset{–}{32,850}& 76,650& & & \\ & & \overline{\underset{–}{\underset{–}{2,47,000}}}& & & \overline{\underset{–}{\underset{–}{2,47,000}}}\end{array}$

$\begin{array}{ccccccccccccc}\text{Dr}& & & & & & \text{PARTNERS' CAPITAL ACCOUNTS}& & & & & & \text{Cr}\end{array}$

$\begin{array}{cccccccc}\text{Particulars}& \text{Leena}& \text{Madan}& \text{Naresh}& \text{Particulars}& \text{Leena}& \text{Madan}& \text{Naresh}\\ & \text{Rs}& \text{Rs}& \text{Rs}& & \text{Rs}& \text{Rs}& \text{Rs}\\ \text{Deferred}& & & & \text{Balance b/d}& 12,50,000& 8,00,000& 10,50,000\\ \text{Advertisement}& & & & \text{Revaluation}& & & \\ \text{Expenditure}& & & & \text{A/c (Profit)}& 21,900& 21,900& 32,850\\ \text{A/c}& 28,571& 28,571& 42,858& \text{Leena's}& & & \\ \text{Madan's}& & & & {\text{Capital A/c}}^{\left(2\right)}& & 1,60,000& 16,000\\ {\text{Capital A/c}}^{\left(2\right)}& 1,60,000& -& -& & & & \\ \text{Naresh's}& & & & & & & \\ {\text{Capital A/c}}^{\left(2\right)}& 16,000& -& -& & & & \\ \text{Invest}& & & & & & & \\ \text{ments A/c}& -& 1,00,000& -& & & & \\ \text{Bills}& & & & & & & \\ \text{Payable A/c}& -& 8,53,329& -& & & & \\ \text{Bal. c/d}& 10,67,329& & 10,55,992& & & & \\ & \overline{\underset{–}{\underset{–}{12,71,900}}}& \overline{\underset{–}{\underset{–}{9,81,900}}}& \overline{\underset{–}{\underset{–}{10,98,850}}}& & \overline{\underset{–}{\underset{–}{12,71,900}}}& \overline{\underset{–}{\underset{–}{9,81,900}}}& \overline{\underset{–}{\underset{–}{10,98,850}}}\\ \text{Bal. c/d}& 19,20,000& & 12,80,000& \text{Balance b/d}& 10,67,329& & 10,55,992\\ & & & & \text{Bank A/c}& & & \\ & & & & \text{(Bal. Fig.)}& 8,52,671& & 2,24,008\\ & \overline{\underset{–}{\underset{–}{19,20,000}}}& & \overline{\underset{–}{\underset{–}{12,80,000}}}& & \overline{\underset{–}{\underset{–}{19,20,000}}}& & \overline{\underset{–}{\underset{–}{12,80,000}}}\end{array}$

BALANCE SHEET

as at 1st April, 2015

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Trade Creditors}& & 1,60,000& \text{Land and Building}& & 12,40,000\\ \text{Bank Overdraft}& & 44,000& \text{Machinery}& & 4,50,000\\ \text{Bills Payable}& & 8,53,329& \text{Furniture}& & 7,00,000\\ \text{Long - term Debts}& & 4,00,000& \text{Closing Stock}& & 7,00,000\\ \text{Employees Provident Fund}& & 76,000& \text{Investments}& & 1,00,000\\ \text{Capitals :}& \text{Leena}19,20,000& & \text{Sundry Debtors}& 4,07,000& \\ & \text{Naresh}\underset{–}{12,80,000}& 32,00,000& \text{Less : Provision for}& & \\ & & & \text{Doubtful Debts}& \underset{–}{20,350}& 3,86,650\\ & & & \text{Bank (Working Note 4)}& & 11,56,679\\ & & \overline{\underset{–}{\underset{–}{47,33,329}}}& & & \overline{\underset{–}{\underset{–}{47,33,329}}}\end{array}$

Working Notes :

(1) Mohit, who has promised to pay Rs 7,000 will be treated as a Debtor just like other debtors of the business because most of the business transactions are conducted on the basis of faith.

(2) Calculation of Gaining Ratio :

Gaining Ratio = New Share - Old Share

Leena's Gain = $\frac{3}{5}-\frac{2}{7}=\frac{21-10}{35}=\frac{11}{35}$ (Gain)

Naresh's Gain $=\frac{2}{5}-\frac{3}{7}=\frac{14-15}{35}=\frac{1}{35}$ (Sacrifice)

As Leena is the only gaining partner, she will compensate not only the retiring partner (Madan) but also the sacrificing partner (Naresh).

Entry for Goodwill :

Leena's Capital A/c $(5,60,000\times \frac{11}{35})$ Dr. 1,76,000

To Madan's Capital A/c $(5,60,000\times \frac{2}{7}or\frac{10}{35})$ 1,60,000

To Naresh's Capital A/c $(5,60,000\times \frac{1}{35})$ 16,000

(3) Capitals of the Partners in the New Firm :

Leena's Capital $(32,00,000\times \frac{3}{5})$ $=Rs19,20,000$

Naresh's Capital $(32,00,000\times \frac{2}{5})$ $=Rs12,80,000$

(4)

$\begin{array}{ccccccc}\text{Dr}& & & & \text{BANK ACCOUNTS}& & \text{Cr}\end{array}$

$\begin{array}{cccc}\text{Particulars}& \text{Amount}& \text{Particulars}& \text{Amount}\\ \text{Balance b/d}& 80,000& \text{Balance c/d}& 11,56,679\\ \text{Leena's Capital A/c}& 8,52,671& & \\ \text{Naresh's Capital A/c}& 2,24,008& & \\ & \underset{–}{\underset{–}{\overline{11,56,679}}}& & \underset{–}{\underset{–}{\overline{11,56,679}}}\end{array}$