Question

N, S and G were partners in a firm sharing profits and losses in the ratio of 2 : 3 : 5. On 31st March, 2016 their Balance Sheet was as under:

Liabilities		Amount (₹)	Assets			Amount (₹)
Creditors		1,65,000	Cash			1,20,000
General Reserve		90,000	Debtors		1,35,000
Capitals:			Less: Provision		15,000	1,20,000
N	2,25,000		Stock			1,50,000
S	3,75,000		Machinery			4,50,000
G	4,50,000	10,50,000	Patents			90,000
			Building			3,00,000
			Profit and Loss Account			75,000
		13,05,000				13,05,000

G retired on the above date and it was agreed that:
(a) Debtors of ₹ 6,000 will be written off as bad debts and a provision of 5% on debtors for bad and doubtful debts will be maintained.
(b) Patents will be completely written off and stock, machinery and building will be depreciated by 5%.
(c) An unrecorded creditor of ₹ 30,000 will be taken into account.
(d) N and S will share the future profits in 2 : 3 ratio.
(e) Goodwill of the firm on G's retirement was valued at ₹ 90,000.
Pass necessary Journal entries for the above transactions in the books of the firm on G's retirement.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
	General Reserve A/c	Dr.		90,000
	To N’s Capital A/c				18,000
	To S’s Capital A/c				27,000
	To G’s Capital A/c				45,000
	(Balance in reserve distributed among all partners in old ratio)
	N’s Capital A/c	Dr.		15,000
	S’s Capital A/c	Dr.		22,500
	G’s Capital A/c	Dr.		37,500
	To Profit & Loss A/c				75,000
	(Debit balance P&L A/c written off among all partners in old ratio)
	N’s Capital A/c	Dr.		18,000
	S’s Capital A/c	Dr.		27,000
	To G’s Capital A/c				45,000
	(Goodwill adjusted in gaining ratio)
	Revaluation A/c	Dr.		1,65,000
	To Patent A/c				90,000
	To Stock A/c				7,500
	To Machinery A/c				22,500
	To Building A/c				15,000
	To Creditors A/c				30,000
	(Decrease in assets and increase in liabilities debited to Revaluation A/c)
	Provision for Doubtful Debts A/c	Dr.		2,550
	To Revaluation A/c				2,550
	(Excess provision written back)
	N’s Capital A/c	Dr.		32,490
	S’s Capital A/c	Dr.		48,735
	G’s Capital A/c	Dr.		81,225
	To Revaluation A/c				1,62,450
	(Loss on revaluation debited to partners’ capital accounts in old ratio)
	G’s Capital A/c	Dr.		4,21,275
	To G’s Loan A/c				4,21,275
	(Amount due to G transferred to his loan A/c)

Working Notes:

WN1: Calculation of G’s Share of Goodwill

$\begin{array}{l}\mathrm{G}\text{'}\mathrm{s}\mathrm{share}=\mathrm{Firm}\text{'}s\mathrm{Goodwill}\times \mathrm{G}\text{'}\mathrm{s}\mathrm{Profit}\mathrm{Share}\\ \mathrm{G}\text{'}\mathrm{s}\mathrm{share}=90,000\times \frac{5}{10}=45,000(\mathrm{to}\mathrm{be}\mathrm{borne}\mathrm{by}\mathrm{gaining}\mathrm{partners}\mathrm{in}\mathrm{gaining}\mathrm{ratio})\end{array}$

WN2: Calculation of Gaining Ratio
Gaining Ratio = New Ratio − Old Ratio
$$\begin{gathered} \begin{array}{l}\mathrm{N}\text{'}\mathrm{s}\mathrm{gain}=\frac{2}{5}-\frac{2}{10}=\frac{2}{10}\\ \mathrm{S}\text{'}\mathrm{s}\mathrm{gain}=\frac{3}{5}-\frac{3}{10}=\frac{3}{10}\\ \mathrm{Gaining}\mathrm{Ratio}=2:3\end{array} \\ \mathrm{N}\text{'}\mathrm{s}\mathrm{share}=45,000\times \frac{2}{5}=18,000 \\ \mathrm{S}\text{'}\mathrm{s}\mathrm{share}=45,000\times \frac{3}{5}=27,000 \end{gathered}$$

WN2: Calculation of Excess/Deficit Provision for Doubtful Debts

$\begin{array}{l}\mathrm{Required}\mathrm{Provision}\left(@5\%\right)=\left(1,35,000-6,000\right)\times \frac{5}{100}=6,450\\ \mathrm{Existing}\mathrm{Provision}\left(\mathrm{after}\mathrm{writing}\mathrm{bad}-\mathrm{debts}\right)=\; 9,000\\ \mathrm{Excess}\mathrm{Provision}\left(\mathrm{to}\mathrm{be}\mathrm{written}\mathrm{back}\right)=2,550\left(9,000-6,450\right)\end{array}$

WN3: Calculation of G’s Loan Balance
Amount due to G = Opening Capital + Credits – Debits

= 4,50,000 + (45,000 + 45,000) – (37,500 + 81,225)
= Rs 4,21,275