Question

The following is the Balance Sheet of A and B as at 31st March, 2014 who share profits in the ratio of 2:1.

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Bank Overdraft}& 15,000& \text{Sundry Debtors}40,000& \\ \text{Reserve Fund}& 12,000& \text{Less:Provision}\underset{–}{3,600}& 36,400\\ \text{Sundry Creditors}& 20,000& \text{Stock}& 20,000\\ \text{Capitals:}A& 40,000& \text{Building}& 25,000\\ B& 30,000& \text{Patents}& 2,000\\ & & \text{Machinery}& 33,600\\ & \underset{–}{\overline{1,17,000}}& & \underset{–}{\overline{1,17,000}}\end{array}$

They admitted C into partnership on 1st April, 2014. New profit sharing ratio is agreed as $\frac{3}{2}:\frac{2}{6}:\frac{1}{6}$. C brings in proportionate capital after the following adjustments:

(1) C brings in Rs 10,000 in cash as his share of Goodwill.

(2) Provision for doubtful debts is to reduced by Rs 2,000

(3) There is an old typewriter valued Rs 2,600. It does not appear in the books of the firm. It is now to be recorded.

(4) Patents are valueless.

(5) 2% discount is to be received from creditors.

Prepare Revaluation A/c, Capital A/cs and the opening Balance Sheet.

Answer 1

Dr. REVALUATION ACCOUNT Cr.

$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Patents A/c}& 2,000& \text{Provision for Doubtful Debts A/c}& 2,000\\ \text{Profit transerred to:}& & \text{Typewriter A/c}& 2,600\\ A& 2,000& \text{Provision for Discount on}& \\ B& 1,000& \text{Creditors}& 400\\ & \underset{–}{\overline{5,000}}& & \underset{–}{\overline{5,000}}\end{array}$

Dr. CAPITAL ACCOUNT Cr.

$\begin{array}{cccccccc}\text{Particulars}& A& B& C& \text{Particulars}& A& B& C\\ & Rs& Rs& Rs& & Rs& Rs& Rs\\ \text{A's Capital A/c}& & & 10,000& & & & \\ \text{Bal.c/d}& 60,000& 35,000& 9,000& \text{Bal.b/d}& 40,000& 30,000& \\ & & & & \text{Reserve Fund}& 8,000& 4,000& \\ & & & & \text{Revaluation}& 2,000& 1,000& \\ & & & & \text{C's Capital}& & & \\ & & & & & & & \\ & & & & \text{Bank A/c}& & & 19,000\\ & \underset{–}{\overline{60,000}}& \underset{–}{\overline{35,000}}& \underset{–}{\overline{19,000}}& & \underset{–}{\overline{60,000}}& \underset{–}{\overline{35,000}}& \underset{–}{\overline{19,000}}\end{array}$

BALNACE SHEET

as at 1st April, 2014

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Sundry Creditors}20,000& & \text{Bank}& 14,000\\ \text{Less: Provision}\underset{–}{400}& 19,600& \text{Sundry Debtors}40,000& \\ \text{Capitals:}& & \text{Less: Provision}\underset{–}{1,600}& 38,400\\ A& 60,000& \text{Stock}& 20,000\\ B& 35,000& \text{Building}& 25,000\\ C& 19,000& \text{Machinery}& 33,600\\ & & \text{Typewriter}& 2,600\\ & \underset{–}{\overline{1,33,600}}& & \underset{–}{\overline{1,33,600}}\end{array}$

Hints:(1) Sacrifice Ratio = Old Ratio - New Ratio

Sacrifice by A = Old $\frac{2}{3}$ - New $\frac{3}{6}=\frac{1}{6}$

Sacrifice by B = Old $\frac{1}{3}$ - New $\frac{2}{6}=0$

Since B has not made any sacrifice, the entire amount of premium for goodwill brought in by C will be credited to A.

(2) C's Capital is not given in the question, He will bring in capital proportionate to his share of profits. C is given

$\frac{1}{6}th$ share of profits, balance $\frac{5}{6}th$ share is shared by A and B. Total capital of A and B after all adjustments is Rs 60,000 +Rs 35,000 = Rs 95,000.

Thus for $\frac{5}{6}th$ share of profits the Capital =95,000

Then the total Capital of the Fim $=95,000\times \frac{6}{5}=Rs1,14,000$

$\therefore$ C's Capital for $\frac{1}{6}th$ share of profits $=1,14,000\times \frac{1}{6}=Rs19,000$

(3) Calculation of Balance at Bank:

$\begin{array}{cc}\text{Amount of Cash brought in by C as goodwill}=& 10,000\\ \text{Amount of Cash brought in by C as capital}=& \underset{–}{19,000}\\ & 29,000\\ \text{(-)Bank Overdraft}& 15,000\\ \text{Balance at Bank}& \underset{–}{\overline{14,000}}\end{array}$