Question

Ram, Shyam and Mohan were in partnership sharing profits and losses in the proportions of 3 : 2 : 1. On 1st April, 2011, Shyam retires from the firm. On that date, their Balance Sheet was as follows :

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Trade Creditors}& & 30,000& \text{Cash in hand}& & 90,000\\ \text{Bills Payable}& & 27,000& \text{Debtors}& 1,60,000& \\ \text{Expenses owing}& & 45,000& \text{Less : Provision}& \underset{–}{10,000}& 1,50,000\\ \text{Reserve Fund}& & 1,05,000& \text{Stock}& & 1,20,000\\ \text{Workmen's Compensation}& & & \text{Factory Premises}& & 2,25,000\\ \text{Reserve}& & 48,000& \text{Investments}& & 80,000\\ \text{Capitals :}& & & \text{Loose Tools}& & 40,000\\ \text{Ram}& 2,00,000& & & & \\ \text{Shyam}& 1,50,000& & & & \\ \text{Mohan}& \underset{–}{1,00,000}& \underset{–}{4,50,000}& & & \\ & & \underset{–}{\underset{–}{7,05,000}}& & & \overline{\underset{–}{\underset{–}{7,05,000}}}\end{array}$

The terms were:

(1) Goodwill of the firm to be valued at 2 times of Average Super Profits of last three years. Taking into consideration the risk of the business, normal profits of the firm are estimated at Rs 5,00,000 every year year. But actual profits of last three years ending 31st March were as 2009 : Rs 6,00,000, 2010 : Rs 5,50,000, 2011 : Rs 5,75,000.

(2) Expenses owing to be brought down to Rs 37,500.

(3) Investments are revalued at Rs 72,000. Ram took over investments at this value.

(4) Factory premises is to be revalued at Rs 2,43,000; and Loose tools at Rs 36,000.

(5) Provision for doubtful Debts to be increased by Rs 19,500.

(6) Claim on account of Workmen's Compensation is Rs 18,000.

(7) Shyam be paid Rs 50,000 in cash and balance due to him treated as a loan carrying interest @ 6% per annum.

Show Journal entry for goodwill adjustment, prepare necessary ledger accounts and opening balance sheet of the continuing partners.

Answer 1

JOURNAL ENTRY FOR GOODWILL

$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F.}& \text{Dr.(Rs)}& \text{Cr. (Rs)}\\ & \text{Ram's Capital A/c}& \text{Dr.}& & 37,500& \\ & \text{Mohan's Capital A/c}& \text{Dr.}& & 12,500& \\ & \text{To Shyam's Capital A/c}& & & & 50,000\\ & \text{(Shyam's share of goodwill adjusted to the accounts of}& & & & \\ & \text{continuing partners in their gaining ratio 3 : 1)}& & & & \end{array}$

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

$\begin{array}{ccccc}\text{Particulars}& \text{Rs}& \text{Particulars}& & \text{Rs}\\ \text{Investments}& 8,000& \text{Expenses Owing A/c}& & 7,500\\ \text{Loose Tools}& 4,000& \text{Factory Premises}& & 18,000\\ \text{Provision for doubtful debts}& 19,500& \text{Loss transferred to :}& & \\ & & \text{Ram}& 3,000& \\ & & \text{Shyam}& 2,000& \\ & & \text{Mohan}& \underset{–}{1,000}& 6,000\\ & \underset{–}{\underset{–}{\overline{31,500}}}& & & \underset{–}{\underset{–}{\overline{31,500}}}\end{array}$

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

$\begin{array}{cccccccc}\text{Particulars}& \text{Ram}& \text{Shyam}& \text{Mohan}& \text{Particulars}& \text{Ram}& \text{Shyam}& \text{Mohan}\\ \text{Revaluation}& & & & \text{Balance b/d}& 2,00,000& 1,50,000& 1,00,000\\ \text{A/c}& 3,000& 2,000& 1,000& \text{Reserve fund}& & & \\ \text{Shyam's}& & & & \text{A/c}& 52,500& 35,000& 17,500\\ \text{Capital A/c}& 37,500& -& 12,500& \text{Workmen's}& & & \\ \text{Investment}& & & & \text{Compensation}& & & \\ \text{A/c}& 72,000& -& -& \text{Reserve A/c}& 15,000& 10,000& 5,000\\ \text{Cash A/c}& -& 50,000& -& \text{Ram's}& & & \\ \text{Shyam's loan}& & & & \text{Capital A/c}& & 37,500& \\ \text{A/c}& -& 1,93,000& -& \text{Mohan's}& & & \\ \text{Balance c/d}& 1,55,000& -& 1,09,000& \text{Capital A/c}& & 12,500& \\ & \underset{–}{\underset{–}{\overline{2,67,500}}}& \underset{–}{\underset{–}{\overline{2,45,000}}}& \underset{–}{\underset{–}{\overline{1,22,500}}}& & \underset{–}{\underset{–}{\overline{2,67,500}}}& \underset{–}{\underset{–}{\overline{2,45,000}}}& \underset{–}{\underset{–}{\overline{1,22,500}}}\end{array}$

BALANCE SHEET as at 1st April, 2011

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Trade Creditors}& & 30,000& \text{Cash in hand}& & 40,000\\ \text{Bills Payable}& & 27,000& \text{Debtors}& 1,60,000& \\ \text{Expenses Owing}& & 37,500& \text{Less : Provision}& \underset{–}{29,500}& 1,30,500\\ \text{Liability for Workmen's}& & & \text{Stock}& & 1,20,000\\ \text{Compensation Claim}& & 18,000& \text{Factory Premises}& & 2,43,000\\ \text{Shyam's Loan}& & 1,93,000& \text{Loose Tools}& & 36,000\\ \text{Capitals}& & & & & \\ \text{Ram}& 1,55,000& & & & \\ \text{Shyam}& \underset{–}{1,09,000}& \underset{–}{2,64,000}& & & \\ & & \underset{–}{\underset{–}{5,69,500}}& & & \overline{\underset{–}{\underset{–}{5,69,500}}}\end{array}$

Working Note : Calculation of Goodwill :

Average profits the past three years $=Rs\frac{6,00,000+5,50,000+5,75,000}{3}=Rs5,75,000$

Super profits = Actual Profits - Normal Profits

= Rs 5,75,000 - Rs 5,00,000 = Rs 75,000.

Goodwill at 2 year's purchase of Super Profits =
Rs $75,000\times 2=Rs1,50,000$