Question

X and Y are partners sharing profits in the ratio of 2 : 1. Their Balance Sheet as at 31st March, 2019 was:

Liabilities		₹	Assets	₹
Sundry Creditors		25,000	Cash/Bank	5,000
General Reserve		18,000	Sundry Debtors	15,000
Capital A/cs:			Stock	10,000
X	75,000		Investments	8,000
Y	62,000	1,37,000	Printer	5,000
			Fixed Assets	1,37,000
		1,80,000		1,80,000

They admit Z into partnership on the same date on the following terms:
(a) Z brings in ₹ 40,000 as his capital and he is given 1/4th share in profits.
(b) Z brings in ₹ 15,000 for goodwill, half of which is withdrawn by old partners.
(c) Investments are valued at ₹ 10,000. X takes over Investments at this value.
(d) Printer is to be reduced (depreciated) by 20% and Fixed Assets by 10%.
(e) An unrecorded stock of Stationery on 31st March, 2019 is ₹ 1,000.
(f) By bringing in or withdrawing cash, the Capitals of X and Y are to be made proportionate to that of Z on their profit-sharing basis.
Pass Journal entries, prepare Revaluation Account, Capital Accounts and new Balance Sheet of the firm.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019
April 1	Revaluation A/c	Dr.		14,700
	To Typewriter A/c				1,000
	To Fixed Assets A/c				13,700
	(Decrease in value of typewriter and fixed assets transferred to Revaluation Account)
April 1	Stationery A/c	Dr.		1,000
	Investment A/c	Dr.		2,000
	To Revaluation A/c				3,000
	(Increase in stationery and investment transferred to Revaluation Account)
April 1	X’s Capital A/c	Dr.		7,800
	Y’s Capital A/c	Dr.		3,900
	To Revaluation A/c				11,700
	(Revaluation loss transferred to X and Y’s Capital Account in their old ratio)
April 1	Reserve Fund A/c	Dr.		18,000
	To X’s Capital A/c				12,000
	To Y’s Capital A/c				6,000
	(Reserve Fund distributed)
April 1	Cash A/c	Dr.		55,000
	To Z’s Capital A/c				40,000
	To Premium for Goodwill A/c				15,000
	(Z brought capital and share of goodwill)
April 1	Premium for Goodwill A/c	Dr.		15,000
	To X’s Capital A/c				10,000
	To Y’s Capital A/c				5,000
	(Premium for Goodwill distributed between X and Y in their sacrificing ratio i.e 2:1)
April 1	X’s Capital A/c	Dr.		5,000
	Y’s Capital A/c	Dr.		2,500
	To Cash				7,500
	(Half of the Premium for Goodwill withdrawn by X and Y)
April 1	X’s Capital A/c	Dr.		10,000
	To Investments A/c				10,000
	(X took over the Investment)
April 1	Cash A/c	Dr.		4,800
	To X’s Capital A/c				4,800
	(X’ brought cash to make up deficiency in capital)
April 1	Y’s Capital A/c	Dr.		26,600
	To Cash A/c				26,600
	(Y withdrew excess capital after all adjustments)

Cash/Bank Account
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	5,000	X’s Capital (Goodwill)	5,000
Z’s Capital	40,000	Y’s Capital (Goodwill)	2,500
Premium for Goodwill	15,000	Y’s Capital	26,600
X’s Capital	5,800	Balance c/d	31,700
	65,800		65,800

Revaluation Account
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Typewriter (5,000 × 20%)	1,000	Investment	2,000
Fixed Assets (1,37,000 × 10%)	13,700	Stationery	1,000
		Loss transferred to
		X Capital	7,800
		Y Capital	3,900
	14,700		14,700

Partners’ Capital Accounts
Dr.							Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
Revaluation	7,800	3,900		Balance b/d	75,000	62,000
Investment	10,000			Reserve Fund	12,000	6,000
Cash (withdraw of goodwill)	5,000	2,500		Cash			40,000
Balance c/d	74,200	66,600	40,000	Premium for Goodwill	10,000	5,000
	97,000	73,000	40,000		97,000	73,000	40,000
Cash		26,600		Balance b/d	74,200	66,600	40,000
Balance c/d adjusted	80,000	40,000	40,000	Cash	5,800
	80,000	66,600	40,000		80,000	66,600	40,000

Balance Sheet as on March 31, 2019 after Z’s admission
Liabilities		Amount (₹)	Assets	Amount (₹)
Sundry Creditors		25,000	Cash	31,700
Capital A/cs:			Sundry Debtors	15,000
X	80,000		Stock	10,000
Y	40,000		Typewriter (5,000 – 1,000)	4,000
Z	40,000	1,60,000	Fixed Assets (1,37,000 – 13,700)	1,23,300
			Stationery	1,000
		1,85,000		1,85,000

Working Notes:

WN1: Sacrificing Ratio


WN2: Distribution of Revaluation Loss


WN3: Distribution of Premium for Goodwill


WN4: Adjustment of Capital
Total Capital of the firm on the basis of Z’s share

Total Capital of the firm	=	1,60,000
Less: Z’s Capital	=	40,000
Combined Capital of X and Y	=	1,20,000