Question

The following was the balance sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of $\frac{6}{14}:\frac{5}{14}:\frac{3}{14}$ respectively.

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Creditors}& 9,000& \text{Land and Building}& 24,000\\ \text{Bills Payable}& 3,000& \text{Furniture}& 3,500\\ \text{Capital Accounts}& & \text{Stock}& 14,000\\ \text{Arun}19,000& & \text{Debtors}& 12,600\\ \text{Bablu}16,000& & \text{Cash}& 900\\ \text{Chetan}\underset{–}{8,000}& 43,000& & \\ & \overline{\underset{–}{\underset{–}{55,000}}}& & \overline{\underset{–}{\underset{–}{55,000}}}\end{array}$

They agreed to take Deepak into partnership and give him a share of $\frac{1}{8}$ on the following terms

(a) that Deepak should bring in Rs.4,200 as goodwill and Rs. 7,000 as his capital;

(b) that furniture be depreciated by 12% ;

(c) that stock be depreciated by 10%;

(d) that a reserve of 5% be created for doubtful debts;

(e) that the value of land and buildings having apprec iated be brought upto Rs. 31,000 ;

(f) that after making the adjustments, the Capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak's capital to his share in the business i.e., actual cash to be paid off to or brought in by the old partners as the case may be.

Prepare cash account, profit and loss adjustment account. (revaluation account) and the opening balance sheet of the new firm.

Answer 1

$\text{Dr}\text{Revaluation Account}\text{Cr}$
$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Furniture A/c}& 420& \text{Land and Building A/c}& 7,000\\ \text{Stock A/c}& 1,400& & \\ \text{Reserve for Bad Debts A/c}& 630& & \\ \text{Profit on Revaluation}& & & \\ \text{Transferred to Capital A/c:}& & & \\ \text{Arun}1,950& & & \\ \text{Bablu}1,625& & & \\ \text{Chetan}\underset{–}{975}& 4,550& & \\ & \overline{\underset{–}{\underset{–}{7,000}}}& & \overline{\underset{–}{\underset{–}{7,000}}}\end{array}$

$\text{Dr}\text{Partner's Capital Account}\text{Cr}$
$\begin{array}{cccccccccc}\text{Particulars}& \text{Arun}& \text{Bablu}& \text{Chetan}& \text{Deepak}& \text{Particulars}& \text{A}& \text{B}& \text{C}& \text{Deepak}\\ \text{Bank (Balancing figure)}& 1,750& 1,625& & & \text{Balance b/d}& 19,000& 16,000& 8,000& \\ \text{Arun's Capital A/c}& & & & 1,800& \text{Bank}& & & & 11,200\\ \text{Bablu's Capital A/c}& & & & 1,500& \text{Deepak's Capital A/c}& 1,800& 1,500& 900& \\ \text{Chetan's Capital A/c}& & & & 900& \text{Profit on Revaluation}& 1,950& 1,625& 975& \\ \text{Balance c/d}& 21,000& 17,500& 10,500& 7,000& \text{Bank (Balancing Figure)}& & & 625& \\ & \overline{\underset{–}{22,750}}& \overline{\underset{–}{19,125}}& \overline{\underset{–}{10,500}}& \overline{\underset{–}{11,200}}& & \overline{\underset{–}{22,750}}& \overline{\underset{–}{19,125}}& \overline{\underset{–}{10,500}}& \overline{\underset{–}{11,200}}\\ & & & & & \text{Balance b/d}& 21,000& 17,500& 10,500& 7,000\end{array}$

Note :Firstly, calculate total capital of firm through Deepak's capital and his share in profit. Then, calculate capital of each partner as per new profit sharing ratio. Finally, use this capital as balance c/d in capital account and close the accounts. The difference, if any, will be cash withdrawn or deposit by the partner.

$\text{Dr}\text{Cash Account}\text{Cr}$
$\begin{array}{cccc}\text{Particulars}& \text{Amt. (Rs)}& \text{Particulars}& \text{Amt. (Rs)}\\ \text{Balance b/d}& 900& \text{Arun's Capital A/c}& 1,750\\ \text{Deepak's Capital A/c}& 11,200& \text{Bablu's Capital A/c}& 1,625\\ \text{Chetan's Capital A/c}& 625& \text{Balance c/d}& 9,350\\ & & & \\ & \overline{\underset{–}{\underset{–}{12,725}}}& & \overline{\underset{–}{\underset{–}{12,725}}}\end{array}$

$\text{Balance Sheet (New Firm)}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Creditors}& 9,000& \text{Land and Building}& 31,000\\ \text{Bills Payable}& 3,000& \text{Furniture}& 3,080\\ \text{Capital Accounts}& & \text{Stock}& 12,600\\ \text{Arun}21,000& & \text{Debtors}12,600& \\ \text{Bablu}17,500& & \text{(-)Reserve}\underset{–}{\left(630\right)}& 11,970\\ \text{Chetan}10,500& & \text{Cash in hand}& 9,350\\ \text{Deepak}\underset{–}{7,000}& 56,000& & \\ & \overline{\underset{–}{\underset{–}{68,000}}}& & \overline{\underset{–}{\underset{–}{68,000}}}\end{array}$

Let total profit be 1.

Deepak's share = $\frac{1}{8}$

Remaining profit = $1-\frac{1}{8}=\frac{7}{8}$

Arun's new share = $\frac{7}{8}\times \frac{6}{14}=\frac{6}{16}$

Bablu's new share = $\frac{7}{8}\times \frac{5}{14}=\frac{5}{16}$

Chetan's new share = $\frac{7}{8}\times \frac{3}{14}=\frac{3}{16}$

Deepak's share = $\frac{1}{8}\times \frac{2}{2}=\frac{2}{16}$

Therefore, New profit sharing ratio = 6 :5 : 3 : 2

Total capital of the new firm = $7,000\times \frac{8}{1}=56,000$

Arun's capital = $56,000\times \frac{6}{16}=21,000$

Bablu's capital = $56,000\times \frac{5}{16}=17,500$

Chetan's capital = $56,000\times \frac{3}{16}=10,500$

Deepak's capital = 7,000