Question

The Balance Sheet of X, Y and Z who were sharing profits in the ratio of 5 : 3 : 2 as at 31st March, 2019 is as follows:

Liabilities		₹	Assets	₹
Creditors		50,000	Cash at Bank	40,000
Employees' Provident Fund		10,000	Sundry Debtors	1,00,000
Profit and Loss A/c		85,000	Stock	80,000
Capital A/cs:			Fixed Assets	60,000
X	40,000
Y	62,000
Z	33,000	1,35,000
		2,80,000		2,80,000

X retired on 1st April, 2019 and Y and Z decided to share profits in future in the ratio of 3 : 2 respectively.
The other terms on retirement were:
(a) Goodwill of the firm is to be valued at ₹ 80,000.
(b) Fixed Assets are to be depreciated to ₹ 57,500.
(c) Make a Provision for Doubtful Debts at 5% on Debtors.
(d) A liability for claim, included in Creditors for ₹ 10,000, is settled at ₹ 8,000.
The amount to be paid to X by Y and Z in such a way that their Capitals are proportionate to their profit-sharing ratio and leave a balance of ₹ 15,000 in the Bank Account.
Prepare Profit and Loss Adjustment Account and Partners' Capital Accounts.

Answer 1

Revaluation Account
Dr.		Cr.
Particulars	Amount (₹)	Particulars		Amount (₹)
Fixed Assets A/c (60,000 – 57,500)	2,500	Creditors (10,000 – 8,000)		2,000
Provision for Doubtful Debts	5,000	Loss on Revaluation transferred to:
		X	2,750
		Y	1,650
		Z	1,100	5,500
	7,500			7,500

Partners’ Capital Accounts
Dr.				Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
Revaluation A/c (Loss)	2,750	1,650	1,100	Balance b/d	40,000	62,000	33,000
X’s Capital A/c	–	24,000	16,000	Profit & Loss A/c	42,500	25,500	17,000
Balance c/d	1,19,750	61,850	32,900	Y’s Capital A/c	24,000	–	–
				Z’s Capital A/c	16,000	–	–
	1,22,500	87,500	50,000		1,22,500	87,500	50,000
Bank A/c	1,19,750	–	–	Balance b/d	1,19,750	61,850	32,900
Balance c/d	–	1,18,500	79,000	Bank A/c	–	56,650	46,100
	1,19,750	1,18,500	79,000		1,19,750	1,18,500	79,000

Working Notes

WN 1 Calculation of Gaining Ratio

Old Ratio (X, Y and Z) = 5:3:2

New Ratio (Y and Z) = 3:2

Gaining Ratio = New Ratio – Old Ratio

Hence, gaining ratio is 3 : 2.

WN2 Adjustment of Goodwill

Total Goodwill of the Firm = 80,000

To be borne by Gaining partners in their Gaining Ratio i.e. 3:2








WN3 Adjustment of Capital

X’s Capital before adjustment = 1,19,750

Y’s Capital before adjustment = 61,850

Z’s Capital before adjustment = 32,900

$\begin{array}{lll}\mathrm{Total}\mathrm{Capital}\mathrm{of}\mathrm{New}\mathrm{Firm}& =& \mathrm{X}\text{'}\mathrm{s}\mathrm{Capital}+\mathrm{Y}\text{'}\mathrm{s}\mathrm{Capital}+\mathrm{Z}\text{'}\mathrm{s}\mathrm{Capital}+\mathrm{Closing}\mathrm{balance}\mathrm{of}\mathrm{Bank}\mathrm{Account}-\mathrm{Available}\mathrm{Bank}\mathrm{Balance}\\ & =& 1,19,750+61,850+32,900+15,000-32,000\\ & =& \mathrm{Rs}1,97,500\end{array}$

Particulars	Y	Z
New Capital Balance	1,18,500	79,000
Adjusted Old Capital Balance	61,850	32,900
Cash brought in by the Partner	56,650	46,100

WN4

Cash at Bank A/c
Dr.		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	40,000	Creditors	8,000
Y’s Capital A/c	56,650	X’s Capital A/c	1,19,750
Z’s Capital A/c	46,100	Balance c/d	15,000
	1,42,750		1,42,750