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Question

X,Y and Z are equal partners with capitals of Rs.1,500;Rs.1,750 and Rs.2,000 respectively. They agree to admit W into equal partnership upon payment in cash Rs.1,500 for 1/4th share of the goodwill and Rs.1,800 as his capital, both sums to remain in the business. The liabilities of the old firm amounted to Rs.3,000 and the assets, apart from cash, consist of Motors Rs.1,200, Furniture Rs.400, Stock Rs.2,650 and Debtors Rs.3,780. The Motors and Furniture were revalued at Rs.950 and Rs.380 respectively.
Pass Journal entries to give effect to the above arrangement and also show Balance Sheet of the new firm.

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Solution

(i) Calculation of amount of Cash before admission of partner:
Total assets excluding cash= 1200+400+2650+3780= 8030
Total liabilities= 1500+1750+2000+3000= 8250
Therefore, Cash= 8250- 8030
= 220

(ii) JOURNAL
1. Cash a/c... Dr. 3300
To W's Capital a/c 1800
To Premium for goodwill a/c 1500
(Being capital and premium for goodwill brought in by W)
2. Premium for goodwill a/c... Dr. 1500
To X's Capital a/c 500
To Y's Capital a/c 500
To Z's Capital a/c 500
(Being premium for goodwill distributed among the partners in the ratio of 1:1:1)
3. Revaluation a/c... Dr. 270
To Motor Car a/c 250
To Furniture a/c 20
(Being decrease in value of assets transferred to revaluation account)
4. X's Capital a/c.... Dr. 90
Y's Capital a/c.... Dr. 90
Z's Capital a/c.... Dr. 90
To Revaluation a/c 270
(Being loss on revaluation transferred to partner's capital accounts in the ratio of 1:1:1)



(iii) BALANCE SHEET
(After admission of W)
Liabilities Amount
(in Rs.)
Assets Amount
(in Rs.)
Motor Car 950
Capital
- X (1500+500-90)
- Y (1750+500-90)
- Z (2000+500-90)
- W

1910
2160
2410
1800
Furniture 380
Other Liabilities 3000 Stock 2650
Debtors 3780
Cash (220+3300) 3520
TOTAL 11280 TOTAL11280

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