Question

On March 31, 2003, the balance sheet of Pawan, Qatir and Ram, who were sharing profits in proportion to their capitals stood as follows :

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amount}& \text{Assets}& \text{Amount}\\ & \text{Rs}& & \text{Rs}\\ \text{Bills Payable}& 8,000& \text{Land and Buildings}& 50,000\\ \text{Creditors}& 12,000& \text{Cash at Bank}& 30,000\\ \text{General Reserve}& 6,000& \text{Debtors}10,000& \\ \text{Capitals:}& & \text{Less: Provision for}& \\ \text{Pawan}30,000& & \text{Doubtful debts}\underset{–}{200}& 9,800\\ \text{Qatir}30,000& & \text{Stock}& 14,000\\ \text{Ram}\underset{–}{15,000}& 75,000& \text{Machinery}& 8,200\\ \text{Employee's P.F}& 17,000& \text{Profit and Loss}& 6,000\\ & \overline{\underset{–}{\underset{–}{1,18,000}}}& & \overline{\underset{–}{\underset{–}{1,18,000}}}\end{array}$

Qatir retires and the following readjustments of the assets and liabilities have been agreed upon before the ascertainment of the amount payable to Qatir :

(i) That out of the amount of insurance which was debited entrirely to profit and loss account, Rs 1,292 be carried forward as unexpired insurance.

(ii) That the land and building be appreciated by 10%.

(iii) That the provision for doubtful debts be brought upto 5% on debtors.

(iv) That machinery be depreciated by 6%.

(v) That a provision of Rs 1,500 be made in respect of any outstanding bill for printing and stationery.

(vi) That the goodwill of the firm will be valued at Rs 18,000.

(vii) That the entire capital of the firm as newly constituted be fixed at Rs 60,000 between Pawan and Ram in the proportion of three-fourth and one-fourth after passing entries in their accounts for adjustment, i.e., actual cash to be paid off or to be brought in by the continuing partners as the case may be.

(viii) That Qatir be paid Rs 5,000 in cash and the balance be transferred to his loan account payable in two equal annual instalments along with interest @8% p.a.

Prepare necessary accounts and the balance sheet of the firm of Pawan and Ram. Also prepare Qatir's loan till it is finally settled.

Answer 1

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

$\begin{array}{ccccc}\text{Particulars}& & \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Provision for Doubtful Debts A/c}& & 300& \text{Unexpired Insurance A/c}& 1,292\\ \text{Machinery A/c}& & 492& \text{Land and Buildings A/c}& 5,000\\ \text{Provision for Outstanding Bill}& & & & \\ \text{for Printing and Stationery A/c}& & 1,500& & \\ \text{Profit transferred to:}& & & & \\ \text{Pawan}\left(\frac{2}{5}\right)& 1,600& & & \\ \text{Qatir}\left(\frac{2}{5}\right)& 1,600& & & \\ \text{Ram}\left(\frac{1}{5}\right)& \underset{–}{800}& 4,000& & \\ & & \overline{\underset{–}{\underset{–}{6,292}}}& & \overline{\underset{–}{\underset{–}{6,292}}}\end{array}$

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

$\begin{array}{cccccccc}\text{Particulars}& \text{Pawan}& \text{Qatir}& \text{Ram}& \text{Particulars}& \text{Pawan}& \text{Qatir}& \text{Ram}\\ & \text{(Rs.)}& \text{(Rs.)}& \text{(Rs.)}& & \text{(Rs.)}& \text{(Rs.)}& \text{(Rs.)}\\ \text{Profit}\&\text{Loss}& & & & \text{Balance b/d}& 30,000& 30,000& 15,000\\ \text{A/c}& 2,400& 2,400& 1,200& \text{General}& & & \\ \text{Qatir's Capital}& & & & \text{Reserve A/c}& 2,400& 2,400& 1,200\\ \text{A/c (Goodwill)}& 4,800& -& 2,400& \text{Revaluation}& & & \\ \text{Balance c/d}& 26,800& 38,800& 13,400& \text{A/c}& 1,600& 1,600& 800\\ & & & & \text{Pawan's}& & & \\ & & & & \text{Capital A/c}& -& 4,800& -\\ & & & & \text{Ram's Capital}& & & \\ & & & & \text{A/c}& -& 2,400& -\\ & \overline{\underset{–}{\underset{–}{34,000}}}& \overline{\underset{–}{\underset{–}{41,200}}}& \overline{\underset{–}{\underset{–}{17,000}}}& & \overline{\underset{–}{\underset{–}{34,000}}}& \overline{\underset{–}{\underset{–}{41,200}}}& \overline{\underset{–}{\underset{–}{17,000}}}\\ \text{Bank A/c}& & 5,000& & \text{Balance b/d}& 26,800& 38,800& 13,400\\ \text{Qatir Loan}& & & & \text{Bank A/c}& 18,200& -& 1,600\\ \text{A/c}& & 33,800& & & & & \\ \text{Balance c/d}& 45,000& -& 15,000& & & & \\ & \overline{\underset{–}{\underset{–}{45,000}}}& \overline{\underset{–}{\underset{–}{38,800}}}& \overline{\underset{–}{\underset{–}{15,000}}}& & \overline{\underset{–}{\underset{–}{45,000}}}& \overline{\underset{–}{\underset{–}{38,800}}}& \overline{\underset{–}{\underset{–}{15,000}}}\end{array}$

BALANCE SHEET (After Qatir's Retirement)
as at April 1, 2013
$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Bills Payable}& & 8,000& \text{Cash at Bank}& & 44,800\\ \text{Creditors}& & 12,000& \text{Debtors}& 10,000& \\ \text{Outstanding bill for printing and}& & & \text{Less : Provision}& \underset{–}{500}& 9,500\\ \text{stationery}& & 1,500& \text{Stock}& & 14,000\\ \text{Employee's P.F.}& & 17,000& \text{Unexpired Insurance}& & 1,292\\ \text{Qatir's Loan}& & 33,800& \text{Machinery}& & 7,708\\ \text{Capital :}& & & \text{Land and Buildings}& & 55,000\\ \text{Pawan}& 45,000& & & & \\ \text{Ram}& \underset{–}{15,000}& 60,000& & & \\ & & \overline{\underset{–}{\underset{–}{1,32,300}}}& & & \overline{\underset{–}{\underset{–}{1,32,300}}}\end{array}$

Note : $\frac{3}{4}:\frac{1}{4}$ is not the new profit sharing ratio. Only the capital of the new firm amounting to Rs 60,000 is to be adjusted in this ratio.

$\begin{array}{ccccccc}\text{Dr}& & & & \text{QATIR'S LOAN ACCOUNT}& & \text{Cr}\end{array}$

$\begin{array}{cccccc}\text{Date}& \text{Particulars}& \text{Rs}& \text{Date}& \text{Particulars}& \text{Rs}\\ \text{2014}& & & 2013& & \\ \text{31st March}& \text{Bank A/c}& & \text{1st April}& \text{Qatir's Capital A/c}& 33,800\\ & (16,900+2,704)& 19,604& 2014& & \\ \text{31st March}& \text{Balance c/d}& 16,900& \text{31 st March}& \text{Interest on}& \\ & & & & \text{Rs 33,800}@8\%p.a.& 2,704\\ & & \overline{\underset{–}{\underset{–}{36,504}}}& & & \overline{\underset{–}{\underset{–}{36,504}}}\\ 2015& & & 2014& & \\ \text{31 st March}& \text{Bank A/c}& 18,252& \text{1st April}& \text{Balance b/d}& 16,900\\ & & & 2015& & \\ & & & \text{31st March}& \text{Interest on}& \\ & & & & Rs16,900@8\%p.a.& 1,352\\ & & \overline{\underset{–}{\underset{–}{18,252}}}& & & \overline{\underset{–}{\underset{–}{18,252}}}\end{array}$