Question

On 31st March, 2018 , The Balance Sheet of A , B and C who were sharing profits and losses in proportion to their capitals stood as:

Liabilities		Amount (₹)	Assets		Amount (₹)
Creditors		10,800	Cash at Bank		13,000
Bills Payable		5,000	Debtors	10,000
Capital A/cs:			Less: Provision for D. Debts	200	9,800
A	45,000		Stock		9,000
B	30,000		Machinery		24,000
C	15,000	90,000	Freehold Premises		50,000
		1,05,800			1,05,800

B retires and following readjustments of assets and liabilities have been agreed upon before ascertainment of the amount payable to B :
(a) Out of the amount of insurance premium which was debited to Profit and Loss Account, ₹ 1,000 be carried forward for Unexpired insurance.
(b) Freehold Premises be appreciated by 10%.
(c) Provision for Doubtful Debts is brought up to 5% on Debtors.
(d) Machinery be depreciated by 5%.
(e) Liability for Workmen Compensation to the extent of ₹ 1,500 would be created.
(f) That the goodwill of the entire firm be fixed at ₹ 18,000 and B's share of the same be adjusted into the accounts of A and C who are going to share future profits in the proportion of 3/4th and 1/4th respectively.
(g) Total capital of the firm as newly constituted be fixed at ₹ 60,000 between A and C in the proportion of 3/4th and 1/4th after passing entries in their accounts for adjustments , i.e., actual cash to be paid or to be brought in by continuing partners as the case may be .
(h) B be paid ₹ 5,000 in cash and the balance be transferred to his Loan Account.
Prepare Capital Accounts of Partners and the Balance Sheet of the firm of A and C .

Answer 1

Revaluation Account
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Provision for Douibtful Debts (500 – 200)		300	Prepaid Insurance	1,000
Machinery (24,000 × 5%)		1,200	Freehold Premises	5,000
Outstanding Workmen’s Compensation		1,500	(50,000 × 10%)
Profit transferred to:
A’s Capital A/c	1,500
B’s Capital A/c	1,000
C’s Capital A/c	500	3,000
		6,000		6,000

Partners’ Capital Account
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
B’s Capital A/c (Goodwill)	4,500		1,500	Balance b/d	45,000	30,000	15,000
Bank A/c		5,000		Revaluation A/c (Profit)	1,500	1,000	500
B’s Loan A/c		32,000		A’s Capital A/c (Goodwill)		4,500
Balance c/d	42,000		14,000	C’s Capital A/c (Goodwill)		1,500
	46,500	37,000	15,500		46,500	37,000	15,500
				Balance b/d	42,000		14,000
Balance c/d (WN 3)	45,000		15,000	Cash A/c	3,000		1,000
	45,000		15,000		45,000		15,000

Balance Sheet
as on March 31, 2018 (after B’s retirement)
Liabilities		Amount Rs	Assets		Amount Rs
Creditors		10,800	Cash at Bank		12,000
Bills Payable		5,000	Debtors	10,000
Outstanding Workmen Compensation		1,500	Less: Provision for Doubtful Debts	(500)	9,500
B’s Loan		32,000	Stock		9,000
Capital A/cs:			Machinery (24,000 – 1,200)		22,800
A	45,000		Freehold Premises (50,000 + 5,000)		55,000
C	15,000	60,000	Prepaid Insurance		1,000
		1,09,300			1,09,300

Bank Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Balance b/d	13,000	B’s Capital A/c	5,000
A’s Capital A/c	3,000	Balance c/d	12,000
C’s Capital A/c	1,000
	17,000		17,000

Working Notes:

WN 1 Calculation of Profit Sharing Ratio



B retires from the firm.

∴ New Ratio (A and C) = 3 : 1 and

Gaining Ratio = 3 : 1

WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 18,000

B’s Share of Goodwill =

This share of goodwill is to be distributed between A and C in their gaining ratio (i.e. 3 : 1).



WN 3 Adjustment of Partners’ Capital after B’s Retirement

Total Capital of the New Firm (after B’s retirement) = Rs 60,000

New Ratio = 3 : 1