Question

​X and Y are partners in a firm sharing profits in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2019 was as follows:

Liabilities		Amount (₹)	Assets		Amount (₹)
Outstanding Rent		13,000	Cash		10,000
Creditors		20,000	Sundry Debtors	80,000
Workmen Compensation Reserve		5,600	Less : Provision for Doubtful Debts	4,000	76,000
Capital A/cs: X	50,000		Stock		20,000
Y	60,000	1,10,000	Profit and Loss A/c		4,000
			Machinery		38,600
		1,48,600			1,48​,600

On 1st April, 2019, they admitted Z as a partner for 1/6th share on the following terms:
(i) Z brings in ₹ 40,000 as his share of Capital but he is unable to bring any amount for Goodwill.
(ii) Claim on account of Workmen Compensation is ₹ 3,000.
(iii) To write off Bad Debts amounted to ₹ 6,000.
(iv) Creditors are to be paid ₹ 2,000 more.
(v) There being a claim against the firm for damages, liabilities to the extent of ₹ 2,000 should be created.
(vi) Outstanding rent be brought down to ₹ 11,200.
(vii) Goodwill is valued at $1^{\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right.}$ years' purchase of the average profits of last 3 years, less ₹ 12,000. Profits for the last 3 years amounted to ₹ 10,000; ₹ 20,000 and ₹ 30,000.
​Pass Journal entries, prepare Partners' Capital Accounts and opening Balance Sheet.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019
April 1	Revaluation A/c	Dr.		2,000
	To Provision for Doubtful Debts A/c				2,000
	(Provision on debtors increased)
April 1	Revaluation A/c	Dr.		2,000
	To Creditors A/c				2,000
	(Creditors increased)
April 1	Revaluation A/c	Dr.		2,000
	To Claim for Damages A/c				2,000
	(Liability increased)
April 1	Outstanding Rent A/c	Dr.		1,800
	To Revaluation A/c				1,800
	(Liability decreased)
April 1	X’s Capital A/c	Dr		2,520
	Y’s Capital A/c	Dr		1,680
	To Revaluation A/c				4,200
	(Loss on revaluation transferred to Partners’ Capital A/c)
April 1	Workmen Compensation Reserve A/c	Dr.		5,600
	To Workmen Compensation Claim A/c				3,000
	To X’s Capital A/c				1,560
	To Y’s Capital A/c				1,040
	(Surplus Workmen Compensation Reserve distributed)
April 1	Bank A/c	Dr		40,000
	To Z’s Capital A/c				40,000
	(Capital brought in cash)
April 1	Z’s Current A/c	Dr.		3,000
	To X’s Capital A/c				1,800
	To Y’s Capital A/c				1,200
	(Goodwill adjusted in the ratio 3:2 )

Partners’ Capital Accounts
Dr.									Cr.
Particulars		X	Y	Z	Particulars	X	Y	Z
Profit & Loss A/c		2,400	1,600		Balance b/d	50,000	60,000
Revaluation A/c		2,520	1,680		Bank A/c			40,000
Balance c/d		48,440	58,960	40,000	Workmen Compensation Reserve	1,560	1,040
					Z's Current A/c	1,800	1,200
		53,360	62,240	40,000		53,360	62,240	40,000

Balance sheet as on 1st April, 2019 after Z’s admission
Liabilities		Amount (₹)	Assets		Amount (₹)
Outstanding Rent		11,200	Cash		50,000
Workmen Compensation Claim		3,000	Stock		20,000
Creditors		22,000	Machinery		38,600
Claim for Damages		2,000	Z ‘s Current A/c		3,000
Capital			Debtors	80,000
X	48,440		Less : Provision for D.D.	6,000	74,000
Y	58,960
Z	40,000	1,47,400
		1,85,600			1,85,600

Working Notes:

WN1: Calculation of Goodwill

$\begin{array}{l}\text{Average Profit =}\frac{10,000+20,000+30,000}{3}=\frac{60,000}{3}=\text{Rs 20,000}\\ \text{Goodwill = Average Profits}\times \text{Number of years' purchase}\\ \text{= (20,000}\times \text{1.5) - 12,000 = 30,000 - 12,000 = Rs 18,000}\end{array}$

WN 2: Calculation of Z’s share of goodwill
$\text{Z's share of goodwill = 18,000}\times \frac{1}{6}=\text{Rs 3,000}$