Question

A and B are partners sharing profits in the ratio of 3 : 1. Their Balance Sheet as at 31st March, 2023, was as under:

Balance Sheet as at 31st March, 2023
Liabilities	₹	₹	Assets	₹	₹
Sundry Creditors		40,000	Plant & Machinery		3,80,000
Capital Accounts:		10,00,000	Building		4,20,000
A	6,00,000		Stock		84,000
B	4,00,000		Debtors	1,40,000
			Less: Prov. for Doubtful Debts	10,000	1,30,000
			Cash		26,000
		10,40,000			10,40,000

On 1st April, 2023, C is admitted as a new partner on the following terms:

1. Partners will share the profits in equal proportion.
2. C to bring in ₹ 7,60,000 as his capital but would be unable to bring his share of goodwill in cash.
3. The value of the goodwill of the firm is to be calculated on the basis of C’s share in the profits and the capital contributed by him.
4. Building is undervalued by 30% and Stock is overvalued by 20%.
5. There were outstanding expenses amounting to ₹ 6,000.

You are required to prepare:

1. Revaluation Account.
2. Partners’ Capital Accounts.

Hint:

Entry for Goodwill:
C’s Current A/c   ...Dr.		1,20,000
B’s Capital A/c   ...Dr.		30,000
To A’s Capital A/c			1,50,000

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Stock		14,000	By Building		1,80,000
To Outstanding Expenses		6,000	By Stock A/c		40,000
To Gain on Revaluation transferred to:		1,60,000
A’ Capital A/c	1,20,000
B’ Capital A/c	40,000
		1,80,000			1,80,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To B’s Capital A/c		30,000		By Balance b/d	6,00,000	4,00,000
To Balance c/d	8,70,000	4,10,000	7,60,000	By Cash A/c			7,60,000
				By Revaluation A/c	1,20,000	40,000
				By C’s Current A/c	1,20,000
				By B’s Capital A/c	30,000
	8,70,000	4,40,000	7,60,000		8,70,000	4,40,000	7,60,000

Working Note:

Calculation of Revaluation Gain:

The building is undervalued by 30%. This means the book value of ₹ 4,20,000 is 70% of its correct value.

Correct Value = `4,20,000 xx 100/70`

= 6,00,000

Increase in Value (Gain) = 6,00,000 − 4,20,000

= 1,80,000

The stock is overvalued by 20%. This means the book value of ₹ 84,000 is 120% of its correct value.

Correct Value = `84,000 xx 100/120`

= 70,000

Decrease in Value (Loss) = 84,000 − 70,000

= 14,000

Outstanding Expenses = 6,000

Total Gain on Revaluation = 1,80,000 − 14,000 − 6,000

= 1,60,000

Distribution of Revaluation Gain to the old partners A and B in their old profit-sharing ratio of 3 : 1.

A’s Share = `1,60,000 xx 3/4`

= 1,20,000

B’s Share = `1,60,000 xx 1/4`

= 40,000

Calculation of Hidden Goodwill:

Total Capital = ₹ 10,00,000 + ₹ 1,60,000 + ₹ 7,60,000

= ₹ 19,20,000

Implied Value of Firm (based on C’s capital) = 7,60,000

Since the new ratio is equal, C’s share is `1/3`.

Implied Value = 7,60,000 × 3

= ₹ 22,80,000

Hidden Goodwill = Implied Value − Total Capital

= 22,80,000 − 19,20,000

= 3,60,000

Calculation of Sacrificing Ratio:

Old Ratio of A and B = 3 : 1

New Ratio of A, B and C = 1 : 1 : 1

Sacrifice/Gain = Old Share − New Share

A = `3/4 - 1/3`

= `(3 xx 3)/(4 xx 3) - (1 xx 4)/(3 xx 4)`

= `9/12 - 4/12`

= `(9 - 4)/12`

= `5/12` (Sacrifice)

B = `1/4 - 1/3`

= `(1 xx 3)/(4 xx 3) - (1 xx 4)/(3 xx 4)`

= `3/12 - 4/12`

= `(3 - 4)/12`

= `(-1)/12` (Gain)

The sacrificing ratio is the ratio of A’s sacrifice to B’s gain, which is 5 ∶ 1.

Adjustment of Goodwill:

C’s share of goodwill = `3,60,000 xx 1/3`

= 1,20,000

B’s share of goodwill = `3,60,000 xx 1/12`

= 30,000