Question

The Balance Sheet of X, Y and Z who were sharing profits in proportion to their capitals stood as follows at 31st March, 2018:

Liabilities		Amount (₹)	Assets			Amount (₹)
Sundry Creditors		13,800	Cash at Bank			11,000
Capital A/cs:			Sundry Debtors		10,000	25,000
X	45,000		Less: Provision for D. Debts		200	9,800
Y	30,000		Stock			16,000
Z	15,000	90,000	Plant and Machinery			17,000
			Land and Building			50,000
		1,03,800				1,03,800

Y retires on 1st April, 2018 and the following readjustments were agreed upon:
(a) Out of insurance premium which was debited to the Profit and Loss Account , ₹ 1,500 be carried forward as Unexpired Insurance.
(b) The Provision for Doubtful Debts be brought up to 5% o Debtors .
(c) The Land and Building be appreciated by 20%.
(d) A provision of ₹ 4,000 be made in respect of outstanding bills for repairs.
(e) The goodwill of the entire firm be fixed at ₹ 21,600.
Y's share of goodwill be adjusted to that of X and Z whoa re going to share in future profits in the ratio of 3 : 1 .
Pass necessary journal entries and give the Balance Sheet after Y's retirement.

Answer 1

Journal
Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
Revaluation A/c	Dr.		4,300
To Provision for Doubtful Debts A/c				300
To Provision for Outstanding Repair Bills A/c				4,000
(Provisions transferred to Revaluation Account)
Prepaid Insurance A/c	Dr.		1,500
Land and Building A/c	Dr.		10,000
To Revaluation A/c				11,500
(Increase in value of Assets transferred to Revaluation Account)
Revaluation A/c	Dr.		7,200
To X’s Capital A/c				3,600
To Y’s Capital A/c				2,400
To Z’s Capital A/c				1,200
(Revaluation profit distributed among X, Y and Z in their old ratio)
X’s Capital A/c	Dr.		5,400
Z’s Capital A/c	Dr.		1,800
To Y’s Capital A/c				7,200
(Y’s share of goodwill adjusted)
Y’s Capital A/c	Dr.		39,600
To Y’s loan A/c				39,600
(Y’s capital balance after all adjustment transferred to his Loan Account)

Balance Sheet
as on March 31, 2017 (after Y’s Retirement)
Liabilities		Amount Rs	Assets		Amount Rs
Sundry Creditors		13,800	Cash at Bank		11,000
Provision for Outstanding Repair Bills		4,000	Sundry Debtors	10,000
			Less: Provision for Doubtful Debts	(500)	9,500
Y’s Loan		39,600	Stock		16,000
Capital A/cs:			Prepaid Insurance		1,500
X	43,200		Plant and Machinery		17,000
Z	14,400	57,600	Land and Building		60,000
		1,15,000			1,15,000

Working Notes:

WN 1

Revaluation Account
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Provision for Doubtful Debts			Prepaid Insurance	1,500
(500 – 200)		300	Land And Building (50,000 × 20%)	10,000
Provision For Outstanding Repairs Bills		4,000
Profit transferred to:
X’s Capital A/c	3,600
Y’s Capital A/c	2,400
Z’s Capital A/c	1,200	7,200
		11,500		11,500

WN 2

Partners' Capital Accounts

Dr.							Cr.
Particulars	X	Y	Z	Particulars	X	Y		Z
Y’s Capital A/c	5,400		1,800	Balance b/d	45,000	30,000		15,000
				Revaluation A/c	3,600	2,400		1,200
Y’s Loan		39,600		X’s Capital A/c		5,400
Balance c/d	43,200		14,400	Z’s Capital A/c		1,800
	48,600	39,600	16,200		48,600	39,600		16,200

WN 3 Calculation of Ratios



∴ Old Ratio (X, Y and Z) = 3 : 2 : 1

Y retires from the firm.

New Ratio (X and Z) = 3 : 1

Gaining Ratio = New Ratio − Old Ratio



∴ Gaining Ratio = 3 : 1

WN 4 Adjustment of Goodwill

Goodwill of the firm = 21,600

Y’s Share of Goodwill =

This share of goodwill is to be distributed between X and Z in their gaining ratio (i.e. 3 : 1).