Question

X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2018 was as follows:

Liabilities		Amount (₹)	Assets		Amount (₹)
Sundry Creditors		18,000	Goodwill		12,000
Investments Fluctuation Reserve		7,000	Patents		52,000
Workmen Compensation Reserve		7,000	Machinery		62,400
Capital A/cs:			Investment		6,000
X	1,35,000		Stock		20,000
Y	95,000		Sundry Debtors	24,000
Z	74,000	3,04,000	Less: Provision for Doubtful Debts	4,000	20,000
			Loan to Z		1,000
			Cash at Bank		600
			Profit and Loss A/c		1,50,000
			Z's Drawings		12,000
		3,36,000			3,36,000

Z died on 1st April, 2018, X and Y decide to share future profits and losses in ratio of 3 : 5. It was agreed that:
(i) Goodwill of the firm be valued $2^{\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right.}$ years' purchase of average of four completed years' profits which were: 2014-15$—$₹ 1,00,000; 2015-16$—$₹ 80,000; 2016-17$—$₹ 82,000.
(ii) Stock is undervalued by ₹ 14,000 and machinery is overvalued by ₹ 13,600.
(iii) All debtors are good. A debtor whose dues of ₹ 400 were written off as bad debts paid 50% in full settlement.
(iv) Out of the amount of insurance premium debited to Profit and Loss Account, ₹ 2,200 be carried forward as prepaid insurance premium.
(v) ₹ 1,000 included in Sundry Creditors is not likely to arise.
(vi) A claim of ₹ 1,000 on account of Workmen Compensation to be provided for.
(vii) Investment be sold for ₹ 8,200 and a sum of ₹ 11,200 be paid to executors of Z immediately. The balance to be paid in four equal half-yearly instalments together with interest @ 8% p.a. at half year rest.
Show Revaluation Account, Capital Accounts of Partners and the Balance Sheet of the new firm.

Answer 1

Revaluation Account
Dr.						Cr.
Particulars			Amount Rs	Particulars	Amount Rs
Machinery			13,600	Creditors	1,000
Profit transferred to:				Stock	14,000
X		5,000		Provision for Doubtful Debts	4,000
Y		3,000		Investment	2,200
Z		2,000	10,000	Bad Debts Recovered	200
				Prepaid Insurance	2,200
			23,600		23,600

Partners’ Capital Accounts
Dr.								Cr.
Particulars		X	Y	Z	Particulars	X	Y		Z
Goodwill		6,000	3,600	2,400	Balance b/d	1,35,000	95,000		74,000
Drawings				12,000	Revaluation	5,000	3,000		2,000
Profit & Loss A/c		75,000	45,000	30,000	IFR	3,500	2,100		1,400
X’s Capital A/c			8,750		Y’s Capital A/c	8,750			14,000
Z ’s Capital A/c			14,000		WCR	3,000	1,800		1,200
Loan to Z				1,000
Z’s Executors A/c				47,200
Balance c/d		74,250	30,550
		1,55,250	1,01,900	92,600		1,55,250	1,01,900		92,600

Z’s Executors Account
Dr.					Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Bank A/c		11,200	Z’s Capital A/c	47,200
Z’s Executors Loan Account		36,000
		57,000		57,000

Balance sheet as on April 01, 2018 after Z’s death
Liabilities		Amount Rs	Assets	Amount Rs
Creditors		17,000	Patents	52,000
Z’s Executors Loan A/c		36,000	Machinery	48,800
Workmen Compensation Claim		1,000	Stock	34,000
Capital A/cs:			Debtors	24,000
X	74,250		Prepaid Insurance	2,200
Y	30,550	1,04,800
Bank Overdraft (600 + 8,200-11,200 + 200)		2,200
		1,61,000		1,61,000

Working Notes:

WN1: Calculation of Gaining Ratio and Share of Goodwill

$\begin{array}{l}\text{Gaining Ratio = New Ratio - Old Ratio}\\ \text{X's gain}=\frac{3}{8}-\frac{5}{10}=-\frac{5}{40}\text{(Sacrifice)}\\ \text{Y's gain}=\frac{5}{8}-\frac{3}{10}=\frac{13}{40}\\ \text{Z's share of goodwill=70,000}\times \frac{2}{10}=\text{Rs 14,000}\\ \text{X's share of goodwill=70,000}\times \frac{5}{40}=\text{Rs 8,750}\end{array}$
WN2: Calculation of Goodwill

$$\begin{gathered} \begin{array}{l}\text{Goodwill}=\text{Average Profit}\times \text{No. of years' Purchase}\\ =28\text{,000}\times 2.\text{5}=\text{Rs 70,000}\end{array} \\ \begin{array}{l}\text{Average Profit}=\frac{\text{Total Profits of past years given}}{\text{Number of years}}\\ =\frac{1,00,000+80,000+82,000-1,50,000}{4}=\text{Rs 28,000}\end{array} \end{gathered}$$