Question

The Balance Sheet of X, Y and Z who were sharing profits in ratio of their capitals stood as follows at 31st March, 2019:

Liabilities		Amount (₹)	Assets			Amount (₹)
Sundry Creditors		13,800	Cash at Bank			11,000
Capital A/cs:			Sundry Debtors		10,000
X	45,000		Less: Provision for Doubtful 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 retired on 1st April, 2019 and the following terms:
(a) Out of the insurance premium debited to Profit and Loss Account, ₹ 1,500 to be carried forward as Prepaid Insurance.
(b) Provision for Doubtful Debts to be brought up to 5% of Sundry Debtors.
(c) Land and Building to be appreciated by 20%.
(d) A provision of ₹ 4,000 be made in respect of outstanding bills for repairs.
(e) Goodwill of the firm was determined at ₹ 21,600.
Y's share of goodwill be adjusted to that of X and Z who will share profits in future in the ratio of 3 : 1.
Pass necessary Journal entries and give the Balance Sheet after Y's retirement.

Answer 1

	Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019 April 1	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)
April 1	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)
April 1	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)
April 1	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)
April 1	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, 2019 (after Y’s Retirement)
Liabilities		Amount (₹)	Assets		Amount (₹)
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 (₹)	Particulars	Amount (₹)
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).