Question

Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2 , 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2007 was as follows:

Books of Suri, Narang and Bajaj Balance Sheet as on April 1, 2007
Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		12,000	Freehold Premises		40,000
Sundry Creditors		18,000	Machinery		30,000
Reserves		12,000	Furniture		12,000
Capital Accounts:			Stock		22,000
Narang	30,000		Sundry Debtors	20,000
Suri	30,000*		Less: Reserve	1,000	19,000
Bajaj	28,000	88,000	for Bad Debt
			Cash		7,000
		1,30,000			1,30,000

Bajaj retires from the business and the partners agree to the following:

a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.

b) Machinery and furniture are to be depreciated by 10% and 7% respectively.

c) Bad Debts reserve is to be increased to Rs 1,500.

d) Goodwill is valued at Rs 21,000 on Bajaj’s retirement.

e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.

Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

*In the given Question Suri’s Capital is Rs 30,000 instead of Rs 20,000.

Answer 1

Revaluation Account
Dr.			Cr.
Particulars		Amount Rs		Particulars	Amount Rs
Machinery		3,000		Freehold Properties	8,000
Furniture		840		Stock	3,300
Reserve for Bad debts		500
Capitals:
Narang	3,480
Suri	1,160
Bajaj	2,320	6,960
		11,300			11,300

Partners’ Capital Account
Dr.					Cr.
Particulars	Narang	Suri	Bajaj	Particulars		Narang	Suri	Bajaj
Bajaj’s Capital A/c	5,250	1,750		Balance b/d		30,000	30,000	28,000
Bajaj's Loan			41,320	Reserves		6,000	2,000	4,000
				Revaluation (Profit)		3,480	1,160	2,320
Balance c/d	34,230	31,410		Narang’s Capital A/c				5,250
				Suri’s Capital A/c				1,750
	39,480	33,160	41,320			39,480	33,160	41,320
Suri's Current A/c		15,000		Balance b/d		34,230	31,410
				Narang's Current A/c		15,000
Balance c/d	49,230	16,410
	49,230	31,410				49,230	31,410

Balance Sheet as on April 01, 2007
Liabilities		Amount Rs	Assets			Amount Rs
Bills Payable		12,000	Free hold Premises			48,000
Sundry Creditors		18,000	Machinery			27,000
Bajaj’s Loan		41,320	Furniture			11,160
Suri’s Current		15,000	Stock			25,300
Capital Account:			Sundry Debtors		20,000
Narang	49,230		Less: Reserve for Bad Debt		1,500	18,500
Suri	16,410	65,640	Cash			7,000
			Narang’s Current Account			15,000
		1,51,960				1,51,960

Working Notes:

1. Bajaj Share in Goodwill = Total Goodwill of the firm ´ Retiring Partner’s Share =

2. Gaining Ratio = New Ratio – Old Ratio

Gaining Ratio between Narang and Suri = 3:1

3. Calculation of New Capitals of the existing partners.

Balance in Narang’s Capital	=	34,230
Balance in Suri’s Capital	=	31,410
Total Capital of the New firm after revaluation of assets and
liabilities and adjustment of Goodwill and Reserves	=	Rs 65,640

Based on new profit sharing ratio of 3:1

NOTE:

i. In the given Question Suri’s Capital is Rs 30,000 instead of Rs 20,000.

ii. Due to insufficient balance in Bajaj’s Capital Account, the amount due to Bajaj is transferred to his Loan Account.