Question

A and B are partners in a firm sharing profits and losses in the ratio of 4 : 1, their Balance Sheet as at 3 lst March, 2022 is as follows:

Liabilities	₹	₹	Assets	₹	₹
Capital A/cs:		90,000	Furniture		20,000
A	25,000		Stock		40,000
B	65,000		Bills receivable		10,000
Reserve		20,000	Debtors		30,000
Creditors		25,000	Cash at Bank		40,000
Bills Payable		5,000
		1,40,000			1,40,000

They agreed to take C as a partner with effect from 1st April, 2022 on the following terms:

1. A, B and C will share profits and losses in the ratio of 5 : 3 : 2.
2. C will bring ₹ 20,000 as a premium for goodwill and ₹ 30,000 as capital.
3. Half of the Reserve is to be withdrawn by the partners.
4. The assets will be revalued as follows:
   

   	₹
   Furniture	30,000
   Stock	39,500
   Debtors	28,500

5. A creditor for ₹ 12,000 has agreed to forgo his claim by ₹ 2,000.
6. After making the above adjustments, the Capital Accounts of A and B should be adjusted on the basis of C’s capital by bringing cash or withdrawing cash, as the case may be.

Pass necessary Journal entries and prepare the Balance Sheet of the new firm.

Hints:

1. Reserve of ₹ 20,000 will be credited to the Capital Accounts of A and B in the ratio of 4 : 1. Thereafter, A and B will withdraw cash through their Capital Accounts ₹ 8,000 and ₹ 2,000 respectively.
2. Creditors will appear in the Balance Sheet at ₹ 23,000.
3. A sacrifices `3/10` whereas B gains `1/10`. Hence, B will compensate A for goodwill. The amount of compensation (based on the premium for goodwill brought in by C) will be ₹ 10,000.
4. Capitals of A and B after all adjustments are arrived at ₹ 71,000 and ₹ 59,000 respectively whereas their adjusted capitals based on C’s capital should be ₹ 75,000 and ₹ 45,000. Hence, A brings in ₹ 4,000 and B withdraws ₹ 14,000.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		50,000
	To C’s Capital A/c			30,000
	To Premium for Goodwill A/c			20,000
	(Capital and premium for goodwill brought in by C)
	Premium for Goodwill A/c   ...Dr.		20,000
	B’s Capital A/c		10,000
	To A’s Capital A/c			30,000
	(Being C’s premium and B's compensation credited to sacrificing partner A)
	Reserve A/c   ...Dr.		20,000
	To A’s Capital A/c			16,000
	To B’s Capital A/c			4,000
	(General reserve distributed to A and B in 4 : 1 ratio)
	A’s Capital A/c   ...Dr.		8,000
	B’s Capital A/c   ...Dr.		2,000
	To Bank A/c			10,000
	(Half of the reserve withdrawn by partners as cash)
	Furniture A/c   ...Dr.		10,000
	To Revaluation A/c			10,000
	(Increase in value of furniture recorded)
	Revaluation A/c   ...Dr.		2,000
	To Stock A/c			500
	To Debtors A/c			1,500
	(Decrease in value of stock and debtors recorded)
	Sundry Creditors A/c   ...Dr.		2,000
	To Revaluation A/c			2,000
	(Reduction in amount payable to a creditor recorded)
	Revaluation A/c   ...Dr.		10,000
	To A’s Capital A/c			8,000
	To B’s Capital A/c			2,000
	(Profit on revaluation transferred to A and B in 4 : 1 ratio)
	Bank A/c   ...Dr.		4,000
	To A’s Capital A/c			4,000
	(Deficiency in A’s adjusted capital brought in cash.)
	B’s Capital A/c   ...Dr.		14,000
	To Bank A/c			14,000
	(Surplus in B’s adjusted capital withdrawn in cash)

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To B’s Capital A/c		10,000		By Balance b/d	25,000	65,000
To Bank A/c (Reserve W/D)	8,000	2,000		By Bank A/c (Capital)			30,000
To Bank A/c (Surplus W/D)		14,000		By Premium for Goodwill	20,000
To Balance c/d	75,000	45,000	30,000	By Reserve A/c	16,000	4,000
				By Revaluation Profit	8,000	2,000
				By B’s Capital A/c	10,000
				By Bank A/c	4,000
	83,000	71,000	30,000		83,000	71,000	30,000

 

Balance Sheet of A, B and C as at April 1, 2022
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		23,000	Furniture (20,000 + 10,000)		30,000
Bills Payable		5,000	Stock (40,000 − 500)		39,500
Capitals:		1,50,000	Bills Receivable		10,000
A	75,000		Debtors (30,000 − 1,500)		28,500
B	45,000		Cash at Bank		70,000
C	30,000
		1,78,000			1,78,000

Working Notes:

Calculate Sacrificing/Gaining Ratio:

Sacrifice/Gain = Old Share − New Share

A’s Sacrifice/Gain = `4/5 - 5/10`

= `(4 xx 2)/(5 xx 2) - 5/10`

= `8/10 - 5/10`

= `3/10` (Sacrifice)

A’s Sacrifice/Gain = `1/5 - 3/10`

= `(1 xx 2)/(5 xx 2) - 3/10`

= `2/10 - 3/10`

= `-1/10` (Gain)

Goodwill Adjustment:

C brings ₹ 20,000 as Premium for Goodwill for his `2/10` share.

This premium should be shared by sacrificing partners. Since B gains `1/10` a share, B must compensate A for his share of goodwill.

Total Firm’s Goodwill = `20,000 xx 10/2`

= 1,00,000

Amount to be credited to A = C’s Premium + B’s Compensation

= `20,000 + 1,00,000 xx 1/10`

= 20,000 + 10,000

= 30,000