Question

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet as at March 31, 2025 was as follows:

Liabilities	₹	Assets	₹
Sundry Creditors	4,15,000	Cash at Bank	2,65,000
Reserve Fund	40,000	Bills Receivable	30,000
Capital Accounts:		Debtors	1,60,000
A	3,00,000	Stock	2,00,000
B	1,60,000	Fixtures	10,000
		Land and Buildings	2,50,000
	9,15,000		9,15,000

On April 1, 2025, C was admitted into partnership for 1/4th share on the following terms:

1. That C pays ₹ 1,00,000 as his capital.
2. That C pays ₹ 50,000 for goodwill. Half of this sum is to be withdrawn by A and B.
3. That stock and fixtures be reduced by 10% and a 5% provision for doubtful debts be created on Sundry Debtors and Bills Receivable.
4. That the value of land and buildings be appreciated by 20%.
5. There being a claim against the firm for damages, a liability to the extent of ₹ 10,000 should be created.
6. An item of ₹ 6,500 included in sundry creditors is not likely to be claimed and hence should be written back.

Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of Mr. C.

Answer 1

Journal entries
Date	Particualrs	L.F.	Debit (₹)	Credit (₹)
2025
Apr 1	Bank A/c   ...Dr.		1,50,000
	To C's Capital A/c			1,00,000
	To Premium for Goodwill A/c			50,000
	(Being capital and premium for goodwill brought in cash by C)
Apr 1	Premium for Goodwill A/c   ...Dr.		50,000
	To A's Capital A/c			37,500
	To B's Capital A/c			12,500
	(Being premium for goodwill distributed between A and B in their sacrificing ratio of 3 : 1)
Apr 1	A's Capital A/c   ...Dr.		18,750
	B's Capital A/c   ...Dr.		6,250
	To Bank A/c			25,000
	(Being half of the premium for goodwill withdrawn by old partners)
Apr 1	Reserve Fund A/c   ...Dr.		40,000
	To A's Capital A/c			30,000
	To B's Capital A/c			10,000
	(Being accumulated reserve fund distributed between old partners in their old profit sharing ratio of 3 : 1)
Apr 1	Revaluation A/c   ...Dr.		40,500
	To Stock A/c			20,000
	To Stock A/c			1,000
	To Provision for Doubtful Debts A/c			9,500
	To Provision for Doubtful Debts A/c			10,000
	(Being reduction in assets and creation of provisions/liabilities recorded)
Apr 1	Land and Buildings A/c   ...Dr.		50,000
	Sundry Creditors A/c   ...Dr.		6,500
	To Revaluation A/c			56,500
	(Being appreciation in land value and reduction in creditors recorded)
Apr 1	Revaluation A/c   ...Dr.		16,000
	To A's Capital A/c			12,000
	To B's Capital A/c			4,000
	(Being profit on revaluation transferred to old partners' capital accounts in their old ratio)

 

Balance Sheet of the New Firm (As at April 1, 2025)
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors (4,15,000 − 6,500)		4,08,500	Cash at Bank		3,90,000
Liability for Damages		10,000	Bills Receivables	30,000
Capital Accounts:			Less: Provision @ 5%	(1,500)	28,500
A:	3,60,750		Sundry Debtors	1,60,000
B:	1,80,250		Less: Provision @ 5%	(8,000)	1,52,000
C:	1,00,000	6,41,000	Stock (2,00,000 − 1,000)		1,80,000
			Fixtures (10,000 - 1,000)		9,000
			Land and Building (2,50,000 + 50,000)		3,00,000
Total		10,59,500	Total		10,59,500

Working note:

1. Revaluation Profit calculation:

Total Credit (Gains) = 50,000 (Land) + 6,500 (Creditors) = 56,500

Total Debit (Losses) = 20,000 (Stock) + 1,000 (Fixtures) + 9,500 (Provisions) + 10,000 (Damages) = 40,500

Net Gain = 56,500 − 40,500 = 16,000

2. Partners' Capital Account Balances:

A = 3,00,000 (Old) + 37,500 (Goodwill) - 18,750 (Withdrawn) + 30,000 (Reserve) + 12,000 (Reval Profit) = 3,60,750

B = 1,60,000 (Old) + 12,500 (Goodwill) − 6,250 (Withdrawn) + 10,000 (Reserve) + 4,000 (Reval Profit) = 1,80,250

C = 1,00,000

3. Bank Balance Reconciliation:

Final Balance = 2,65,000 (Opening) + 1,00,000 (Capital) + 50,000 (Goodwill) − 25,000 (Withdrawn) = 3,90,000