Question

Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3 : 2 : 1. Naresh retired from the firm due to his illness. On that date the balance sheet of the firm was as follws :

Books of Pankaj, Naresh and Saurabh
BALANCE SHEET
as at March 31, 2007

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{General Reserve}& & 12,000& \text{Bank}& & 7,600\\ \text{Sundry Creditors}& & 15,000& \text{Debtors}& 6,000& \\ \text{Bills Payable}& & 12,000& \text{Less : Provision for}& & \\ \text{Outstanding Salary}& & 2,200& \text{Doubtful Debts}& \underset{–}{400}& 5,600\\ \text{Provision for Legal Damages}& & 6,000& \text{Stock}& & 9,000\\ \text{Capitals :}& & & \text{Furniture}& & 41,000\\ \text{Pankaj}& 46,000& & \text{Premises}& & 80,000\\ \text{Naresh}& 30,000& & & & \\ \text{Saurabh}& \underset{–}{20,000}& 96,000& & & \\ & & \overline{\underset{–}{\underset{–}{1,43,200}}}& & & \overline{\underset{–}{\underset{–}{1,43,200}}}\end{array}$

Additional Information :

(i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further provision for legal damages is to be made for Rs 1,200 and furniture to be brought up to Rs 45,000.

(ii) Goodwill of the firm be valued at Rs 42,000.

(iii) Rs 26,000 from Naresh's Capital account be transferred to his loan account bearing interest @ 12% p.a. and balance be paid through bank; if required, necessary loan may be obtained from Bank.

(iv) New profit sharing ratio of Pankaj and Saurabh is decided to be 5 : 1.

(v) Naresh decided that every year interest on his loan shall be used for educating a girl child from poor family.

Give necessary ledger accounts and balance sheet of the firm after Naresh's retirement. Identify the values conveyed by Naresh.

Answer 1

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

$\begin{array}{ccccc}\text{Particulars}& & \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Stock}& & 900& \text{Premises}& 16,000\\ \text{Provision for Legal Damges}& & 1,200& \text{Provision for Doubtful Debts}& 100\\ \text{Profit transferred to:}& & & \text{Furniture}& 4,000\\ \text{Pankaj}& 9,000& & & \\ \text{Naresh}& 6,000& & & \\ \text{Saurabh}& \underset{–}{3,000}& \underset{–}{18,000}& & \\ & & \underset{–}{\underset{–}{20,100}}& & \overline{\underset{–}{\underset{–}{20,100}}}\end{array}$

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

$\begin{array}{cccccccc}\text{Particulars}& \text{Pankaj}& \text{Naresh}& \text{Saurabh}& \text{Particulars}& \text{Pankaj}& \text{Naresh}& \text{Saurabh}\\ \text{Naresh}& & & & \text{Balance b/d}& 46,000& 30,000& 20,000\\ \text{Capital A/c}& & & & \text{General Reserve}& 6,000& 4,000& 2,000\\ \text{(Goodwill)}& 14,000& & & \text{Revaluation}& 9,000& 6,000& 3,000\\ \text{Naresh's}& & & & \text{Pankaj Capital}& & & \\ \text{Loan A/c}& & 26,000& & \text{A/c(Goodwill)}& & 14,000& \\ {\text{Bank A/c}}^{\left(2\right)}& & 28,000& & & & & \\ \text{Balance c/d}& 47,000& & 25,000& & & & \\ & \overline{\underset{–}{\underset{–}{61,000}}}& \overline{\underset{–}{\underset{–}{54,000}}}& \overline{\underset{–}{\underset{–}{25,000}}}& & \overline{\underset{–}{\underset{–}{61,000}}}& \overline{\underset{–}{\underset{–}{54,000}}}& \overline{\underset{–}{\underset{–}{25,000}}}\end{array}$

BALANCE SHEET

as at March 31, 2007

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Bank Loan (See Note 2)}& & 20,400& \text{Debtors}& 6,000& \\ \text{Sundry Creditors}& & 15,000& \text{Less : Provision for}& & \\ \text{Bills Payable}& & 12,000& \text{Doubtful Debts}& \underset{–}{300}& 5,700\\ \text{Outstanding Salary}& & 2,200& \text{Stock}& & 8,100\\ \text{Provision for Legal Damages}& & 7,200& \text{Furniture}& & 45,000\\ \text{Naresh's Loan A/c}& & 26,000& \text{Premises}& & 96,000\\ \text{Capitals :}& & & & & \\ \text{Pankaj}& 47,000& & & & \\ \text{Saurabh}& \underset{–}{25,000}& 72,000& & & \\ & & \overline{\underset{–}{\underset{–}{1,54,800}}}& & & \overline{\underset{–}{\underset{–}{1,54,800}}}\end{array}$

Working Notes :

(1) Calculation of Gaining Ratio for Adjustment of Goodwill :

Gaining Ratio = New Ratio - Old Ratio

Gaining Ratio of Pankaj $=\frac{5}{6}-\frac{3}{6}=\frac{2}{6}$

Gaining Ratio of Saurabh $=\frac{1}{6}-\frac{1}{6}=0$

Hence, Naresh's share of Goodwill Rs 14,000 (i.e., $42,000\times \frac{2}{6}$) will be debited entirely to Pankaj Capital A/c, as he alone has gained on the retirement of Naresh. Entry will be :

Pankaj Capital A/c Dr. 14,000

To Naresh Capital A/c 14,000

(2) Bank Loan is calculated as under : Rs

Bank balance as per Balance Sheet 7,600

Amount required to pay off the balance of Naresh Capital Account in full

(as per Naresh Capital A/c) $\underset{–}{28,000}$

Loan obtained from Bank $\underset{–}{\underset{–}{20,400}}$

Values Conveyed :

(i) Concern for girl child:

(ii) Spirit of Charity; and

(iii) Fulfilling responsibility towards society.