Question

The balance sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on Marc h 31.2007

$\text{Balance Sheet}$
$\text{as on March 31,2007}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Bills Payble}& 6,250& \text{Factory Building}& 12,000\\ \text{Sundry Creditors}& 10,000& \text{Debtors}10,500& \\ \text{Reserve Fund}& 2,750& \text{(-) Reserve}\underset{–}{\left(500\right)}& 10,000\\ \text{Capital Accounts}& & \text{Bills Receivable}& 7,000\\ \text{Rajesh}20,000& & \text{Stock}& 15,500\\ \text{Pramod}15,000& & \text{Plant and Machinery}& 11,500\\ \text{Nishant}\underset{–}{15,000}& 50,000& \text{Bank Balance}& 13,000\\ & \overline{\underset{–}{\underset{–}{69,000}}}& & \overline{\underset{–}{\underset{–}{69,000}}}\end{array}$

Pramod retired on the date of Balance Sheet and the follo wing adjustments were made

(a) Stock was valued at 10% less than the book value.

(b) Factory buildings were appreciated by 12%.

(c) Reserve for doubtful debts be created up to 5%.

(d) Reserve for legal charges to be made at 7 265.

(e) The goodwill of the firm be fixed at t 10,000.

(f) The capital of the new firm be fixed at 30,000. The conti nuing partners decide to keep their capitals in the new pro fit sharing ratio of 3 : 2.

Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod's capital account to his loan account.

Answer 1

$\text{Dr}\text{Revaluation Account}\text{Cr}$
$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Stock A/c}& 1,550& \text{Building A/c}& 1,440\\ \text{Reserve for Doubtful Debts A/c}& 25& \text{Loss Transfered to Capital A/c}& \\ \text{Legal Charges A/c}& 265& \text{Rajesh}160& \\ & & \text{Pramod}120& \\ & & \text{Nishant}\underset{–}{120}& 400\\ & \overline{\underset{–}{\underset{–}{1,840}}}& & \overline{\underset{–}{\underset{–}{1,840}}}\end{array}$

$\begin{array}{ccc}& & \\ \text{Dr}& \text{Partner's Capital Account}& \text{Cr}\end{array}\begin{array}{cccccccc}\text{Particulars}& \text{Rajesh}& \text{Pramod}& \text{Nishant}& \text{Particulars}& \text{Rajesh}& \text{Pramod}& \text{Nishant}\\ \text{Revaluation (Loss)}& 160& 120& 120& \text{Balance b/d}& 20,000& 15,000& 15,000\\ \text{Pramod's Capital A/c}& 2,000& & 1,000& \text{Reserve Fund}& 1,100& 825& 825\\ \text{Pramod's Loan A/c}& & 18,705& & \text{Rajesh's Capitsa A/c}& & 2,000& \\ \text{Rajesh Current A/c}& 940& & & \text{Nishant's Capital A/c}& & 1,000& \\ \text{Nishant's Current A/c}& & & 2,705& & & & \\ \text{Balance c/d}& 18,000& & 12,000& & & & \\ & \overline{\underset{–}{21,100}}& \overline{\underset{–}{18,825}}& \overline{\underset{–}{15,825}}& & \overline{\underset{–}{21,100}}& \overline{\underset{–}{18,825}}& \overline{\underset{–}{15,825}}\end{array}$

$\text{Balance Sheet}$
$\text{as on March 31,2007}$
$\begin{array}{ccccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}& \\ \text{Bills Payable}& 6,250& \text{Plant and Machinery}& 11,500& \\ \text{Sundry Creditors}& 10,000& \text{Debtors}10,500& & \\ \text{Reserve for Legal Charges}& 265& \text{(-) Reserve}\underset{–}{\left(525\right)}& 9,975& \\ \text{Pramod's Loan}& 18,705& \text{Bill Receivable}& 7,000& \\ \text{Current Account}& & \text{Stock}15,500& & \\ \text{Rajesh}940& & \text{(-)10\% Depreciation}\underset{–}{(1,550)}& 13,950& \\ \text{Nishant}\underset{–}{2,705}& 3,645& \text{Factory Building}12,000& & \\ \text{Capital Account}& & \text{(+)12\% Appreciation}\underset{–}{1,440}& 13,440& \\ \text{Rajesh}18,000& & \text{Bank Balance}& 13,000& \\ \text{Nishant}\underset{–}{12,000}& 30,000& & & \\ & \overline{\underset{–}{\underset{–}{68,865}}}& & \overline{\underset{–}{\underset{–}{68,865}}}& \end{array}$

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ \text{2007}& & & & & \\ \text{Mar 31}& \text{Revaluation A/c}& \text{Dr}& & 1,840& \\ & \text{To Stock A/c}& & & & 1,550\\ & \text{To Reserve for Doubtful Debts A/c}& & & & 25\\ & \text{To Reserve for Legal Charges A/c}& & & & 265\\ & \text{(Assets and liabilities are revaluled)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Factory Building A/c}& \text{Dr}& & 1,440& \\ & \text{To Revaluation A/c}& & & & 1,440\\ & \text{(Factory building appreciated)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Rajesh's Capital A/c}& \text{Dr}& & 160& \\ & \text{Pramod's Capital A/c}& \text{Dr}& & 120& \\ & \text{Nishant's Capital A/c}& \text{Dr}& & 120& \\ & \text{To Revaluation A/c}& & & & 400\\ & \text{(Loss on revaluation adjusted to partner's}& & & & \\ & \text{capital account)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Rajesh's Capital A/c}& \text{Dr}& & 2,000& \\ & \text{Nishant's Capital A/c}& \text{Dr}& & 1,000& \\ & \text{To Pramod's Capital A/c}& & & & 3,000\\ & \text{(Pramod's share of goodwill adjusted to}& & & & \\ & \text{Rajesh's and Nishant's capital account in their}& & & & \\ & \text{gaining ratio.)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Reserve Fund A/c}& \text{Dr}& & 2,750& \\ & \text{To Rajesh's Capital A/c}& & & & 1,100\\ & \text{To Pramod's Capital A/c}& & & & 825\\ & \text{To Nishant's Capital A/c}& & & & 825\\ & \text{(Reserve fund distributed all the partners.)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Pramod's Capital A/c}& \text{Dr}& & 18,705& \\ & \text{To Pramod's Loan A/c}& & & & 18,705\\ & \text{(Pramod's capital transfered to his loan}& & & & \\ & \text{account.)}& & & & \\ & \underset{–}{}& & & & \\ \text{Mar 31}& \text{Rajesh's Capital A/c}& \text{Dr}& & 940& \\ & \text{Nishant's Capital A/c}& \text{Dr}& & 2,705& \\ & \text{To Rajesh's Current A/c}& & & & 940\\ & \text{To Nishant's Current A/c}& & & & 2,705\\ & \text{(Reserve fund distributed all the partners.)}& & & & \end{array}$

Working Note :

Pramod's share in Goodwill = $=10,000\times \frac{3}{10}=3,000$

Gaining Ratio=

Rajesh's gain = $\frac{3}{5}-\frac{4}{10}=\frac{6-4}{10}=\frac{2}{10}$

Nishant's gain = $\frac{2}{5}-\frac{3}{10}=\frac{4-3}{10}=\frac{1}{10}$

or 2 : 1

Contribution of remaining partner's for goodwill of retiring partner

Rajesh = $3,000\times \frac{2}{3}=2,000$

Nishant = $3,000\times \frac{1}{3}=1,000$

Note :

(i) According to point (f) of the question the capital of remai ning partner's should be? 18,000 and Rs. 12,000 respectively as the firms capital is fixed at Rs. 30,000 and their share of profit is 3 : 2.

$\text{Journal Entry for Withdrawal of Excess in Capital}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ & \text{Rajesh's CapitalA/c}& \text{Dr}& & 940& \\ & \text{Nishant's Capital A/c}& \text{Dr}& & 2,705& \\ & \text{To Bank A/c}& & & & 3,645\\ & \text{(Excess capital adjusted through current account of partners)}& & & & \end{array}$