Question

The Balance Sheet of A, B and C who were sharing profits in proportion to their capitals stood as follows as at 31st March, 2012 :

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Sundry Creditors}& & 6,900& \text{Cash at Bank}& & 5,500\\ \text{Investments Fluctuation Reserve}& & 7,500& \text{Sundry Debtors}& 5,000& \\ \text{Capital Accounts :}& & & \text{Less : Provision}& \underset{–}{\left(100\right)}& 4,900\\ \text{A}& 18,000& & \text{Stock}& & 8,000\\ \text{B}& 13,500& & \text{Investments}& & 11,500\\ \text{C}& \underset{–}{9,000}& \underset{–}{40,500}& \text{Land and Building}& & 25,000\\ & & \underset{–}{\underset{–}{54,900}}& & & \overline{\underset{–}{\underset{–}{54,900}}}\end{array}$

B retired on 1st April, 2012 and the following was agreed upon :

(i) That stock be depreciated by 6%.

(ii) That the Provision for Doubtful Debts be brought up to 5% on Debtors.

(iii) That Land and Buildings be appreciatd by 20%.

(iv) That a provision of Rs 770 be made in respect of outstanding legal charges.

(v) Investments are brought down to Rs 8,500.

(vi) That the Goodwill of the entire firm be fixed at Rs 10,800 and B's share of goodwill be adjusted into the accounts of A and C who are going to share future profits in the ratio of 5 : 3.

(vii) That the entire capital of the firm as newly constituted be fixed at Rs 28,000 between A and C in the proportion of 5 : 3 (actual cash to be brought in or paid off, as the case may be).

Pass Journal entries and show the Balance Sheet after transferring B's share to a separate Account in his name.

Answer 1

JOURNAL ENTRIES

$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F.}& \text{Dr.(Rs)}& \text{Cr. (Rs)}\\ \text{2012}& \text{Revaluation A/c}& \text{Dr.}& & 1,400& \\ \text{April 1}& \text{To Stock A/c}& & & & 480\\ & \text{To Provision for doubtful debts A/c}& & & & 150\\ & \text{To Provision for Leagl Charges}& & & & 770\\ & \underset{–}{\text{(Decrease in the value of assets and increase in liabilities)}}& & & & \\ & \text{Land and Building A/c}& \text{Dr.}& & 5,000& \\ & \text{To Revaluation A/c}& & & & 5,000\\ & \underset{–}{\text{(Increase in the value of assets)}}& & & & \\ & \text{Revaluation A/c}& \text{Dr.}& & 3,600& \\ & \text{To A's Capital A/c}& & & & 1,600\\ & \text{To B's Capital A/c}& & & & 1,200\\ & \text{To C's Capital A/c}& & & & 800\\ & \underset{–}{\text{(Profit on revaluation transferred to partner's capital A/c)}}& & & & \\ & \text{Investments Fluctuation Reserve A/c}& \text{Dr.}& & 7,500& \\ & \text{To Investments A/c}& & & & 3,000\\ & \text{To A's Capital A/c}& & & & 2,000\\ & \text{To B's Capital A/c}& & & & 1,500\\ & \text{To C's Capital A/c}& & & & 1,000\\ & \text{(Decrease in the value of investments met out of}& & & & \\ & \underset{–}{\text{Investments Fluctuation Reserve)}}& & & & \\ & \text{A's Capital A/c}& \text{Dr.}& & 1,950& \\ & \text{C's Capital A/c}& \text{Dr.}& & 1,650& \\ & \text{To B's Capital A/c}& & & & 3,600\\ & \text{(B's share of goodwill adjusted to the accounts of}& & & & \\ & \underset{–}{\text{continuing partners in their gaining ratio 13 : 11)}}& & & & \\ & \text{B's Capital A/c}& \text{Dr.}& & 19,800& \\ & \text{To B's Loan A/c}& & & & 19,800\\ & \underset{–}{\text{(The transfer of B's Capital A/c to B's Loan A/c)}}& & & & \\ & {\text{A's Capital A/c}}^{\left(2\right)}& \text{Dr.}& & 1,650& \\ & \text{To Bank A/c}& & & & 1,650\\ & \text{(The amount returned to A, to bring his capital to profit}& & & & \\ & \text{sharing ratio)}& & & & \\ & \underset{–}{}& & & & \\ & {\text{Bank A/c}}^{\left(3\right)}& \text{Dr.}& & 1,650& \\ & \text{To C's Capital A/c}& & & & 1,650\\ & \text{(The amount returned to A, to bring his capital to}& & & & \\ & \text{profit sharing ratio)}& & & & \end{array}$

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

$\begin{array}{cccccccc}\text{Particulars}& \text{A}& \text{B}& \text{C}& \text{Particulars}& \text{A}& \text{B}& \text{C}\\ & \text{(Rs)}& \text{(Rs)}& \text{(Rs)}& & \text{(Rs)}& \text{(Rs)}& \text{(Rs)}\\ \text{B's Capital}& & & & \text{Balance b/d}& 18,000& 13,500& 9,000\\ \text{A/c}& 1,950& -& 1,650& \text{Revaluation}& & & \\ \text{(Goodwill)}& & & -& \text{A/c}& 1,600& 1,200& 800\\ \text{B's Loan A/c}& -& 19,800& & \text{Investment}& & & \\ \text{Balance c/d}& 19,650& -& 9,150& \text{Fluctuation}& & & \\ & & & & \text{Reserve A/c}& 2,000& 1,500& 1,000\\ & & & & \text{A's Capital}& & & \\ & & & & \text{A/c (Goodwill)}& -& 1,950& -\\ & & & & \text{C's Capital}& & & \\ & & & & \text{A/c (Goodwill)}& -& 1,650& -\\ & \overline{\underset{–}{\underset{–}{21,600}}}& \overline{\underset{–}{\underset{–}{19,800}}}& \overline{\underset{–}{\underset{–}{10,800}}}& & \overline{\underset{–}{\underset{–}{21,600}}}& \overline{\underset{–}{\underset{–}{19,800}}}& \overline{\underset{–}{\underset{–}{10,800}}}\\ \text{Bank A/c}& & & & \text{Balance b/d}& 19,650& -& 9,150\\ \text{(Balancing figure)}& 1,650& -& -& \text{Bank A/c}& -& -& 1,650\\ \text{Balance c/d}& 18,000& -& 10,800& \text{(Balancing figure)}& & & \\ & \overline{\underset{–}{\underset{–}{19,650}}}& \overline{\underset{–}{\underset{–}{-}}}& \overline{\underset{–}{\underset{–}{10,500}}}& & \overline{\underset{–}{\underset{–}{19,650}}}& \overline{\underset{–}{\underset{–}{-}}}& \overline{\underset{–}{\underset{–}{10,500}}}\end{array}$

BALANCE SHEET (After B's Retirement) as at 1st April, 2012

$\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& & \text{Rs}\\ \text{Sundry Creditors}& & 6,900& {\text{Cash at Bank}}^{\left(4\right)}& & 5,500\\ \text{Outstanding Legal Charges}& & 770& \text{Sundry Debtors}& 5,000& \\ \text{B's Loan}& & 19,800& \text{Less : Provision}& \underset{–}{\left(250\right)}& 4,750\\ \text{Capital Accounts :}& & & \text{Stock}& & 7,520\\ \text{A}& 18,000& & \text{Investments}& & 8,500\\ \text{C}& \underset{–}{10,800}& \underset{–}{28,800}& \text{Land and Building}& & 30,000\\ & & \underset{–}{\underset{–}{56,270}}& & & \overline{\underset{–}{\underset{–}{56,270}}}\end{array}$

Working Notes :

(1) Calculation of Gaining Ratio on B's retirement :

Gaining Ratio = New Ratio = Old Ratio

A Gains $=\frac{5}{8}-\frac{4}{9}=\frac{45-32}{72}=\frac{13}{72}$

C Gains $=\frac{3}{8}-\frac{2}{9}=\frac{27-16}{72}=\frac{11}{72}$

Hence, Gaining Ratio between A and C $=\frac{13}{72}:\frac{11}{72}$ or 13 : 11

(2) Adjustment of Capitals according to new profit sharing ratio:

Total Capital of the new firm = Rs 28,800

Therefore, A's Capital in the new firm should be $\frac{5}{8}th$ of Rs 28,800 = Rs 18,000

A's existing capital = Rs 19,650

Hence, A will be returned $=\overline{\underset{–}{Rs1,650}}$

(3) C's capital in the new firm should be $\frac{3}{8}th$ of Rs 28,800 = Rs 10,800

C's existing capital = Rs 9,150

Hence, C will bring in $=\overline{\underset{–}{Rs1,650}}$

(4) Calculation of Bank Balance is as follows :

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

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Balance b/d}& 5,500& \text{A's Capital A/c}& 1,650\\ \text{C's Capital A/c}& 1,650& \text{Balance c/d}& 5,500\\ & \underset{–}{\overline{\underset{–}{7,150}}}& & \underset{–}{\overline{\underset{–}{7,150}}}\end{array}$