Question

A and B were in partnership, sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, they admit C as a partner on the following terms:

1. That C brings ₹ 1,00,000 as his capital and ₹ 50,000 for goodwill, half of which to be withdrawn by A and B.
2. That the value of land and buildings is to be appreciated by 15 per cent and that of stocks and machinery and fixtures is to be reduced by 7 and 5 per cent, respectively.
3. That provision for doubtful debts be made at 5 per cent.
4. That ₹ 15,000 be provided for an unforeseen liability.
5. That C to be given `1/5`th share and the profit-sharing ratio between A and B to remain the same.
6. That ₹ 11,000 is to be received as commission, hence to be accounted for.

The Balance Sheet of the old partnership as at 31st March, 2024 stood as:

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		3,50,000	Cash in Hand		40,000
Capital Accounts:		6,00,000	Book Debts		2,00,000
A	4,00,000		Stock		1,80,000
B	2,00,000		Machinery & Fixtures		2,00,000
			Land & Building		3,30,000
		9,50,000			9,50,000

Give necessary Journal entries, ledger accounts and the balance sheet of the newly constituted firm.

Hints:

1.	Entry for unforeseen liability:
	Revaluation A/c   ...Dr.		15,000
	To Unforeseen liability A/c			15,000
	(Unforeseen liability will be shown on the liability side of the Balance Sheet)
2.	Entry for Commission:
	Accrued Commission A/c   ...Dr.		11,000
	To Revaluation A/c			11,000
	(Accrued Commission will be shown on the assets side of the Balance Sheet)

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2024
April 1	land and buildings A/c   ...Dr.		49,500
	To Revaluation A/c			49,500
	(The value of land and buildings is to be appreciated by 15%)
April 1	Revaluation A/c   ...Dr.		12,600
	To Stock A/c			12,600
	(Stock decreased by 7%)
April 1	Revaluation A/c   ...Dr.		10,000
	To Machinery & Fixtures			10,000
	(Machinery decreased by 5%)
April 1	Revaluation A/c   ...Dr.		10,000
	To Provision for Doubtful Debts A/c			10,000
	(Provision for doubtful debts @5%)
April 1	Revaluation A/c   ...Dr.		15,000
	To Unforeseen Liability A/c			15,000
	(Provision for unforeseen liability)
April 1	Accrued Commission A/c   ...Dr.		11,000
	To Revaluation A/c			11,000
	(Commission receivable accrued)
April 1	Revaluation A/c   ...Dr.		12,900
	To A’s Capital A/c			9,675
	To B’s Capital A/c			3,225
	(Gain on revaluation transferred to partners’ capitals in 3 : 1 ratio)
April 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
	(C brings capital and goodwill)
April 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
	(Goodwill credited to old partners in 3 : 1 ratio)
April 1	A’s Capital A/c   ...Dr.		18,750
	B’s Capital A/c   ...Dr.		6,250
	To Bank A/c			25,000
	(Half goodwill withdrawn by A and B in old ratio 3 : 1)

 

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Stock		12,600	By Land & Building		49,500
To Machinery & Fixtures		10,000	By Accrued Commission		11,000
To Provision for Doubtful Debts		10,000
To Unforeseen Liability		15,000
To Gain transferred to Partners:		12,900
A	9,675
B	3,225
		60,500			60,500

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Cash	18,750	6,250		By Balance b/d	4,00,000	2,00,000
To Balance c/d	4,28,425	2,09,475	1,00,000	By Revaluation Gain	9,675	3,225
				By Premium for Goodwill	37,500	12,500
				By Capital Introduced			1,00,000
	4,47,175	2,15,725	1,00,000		4,47,175	2,15,725	1,00,000

 

Balance Sheet of A, B & C as on 1 April 2024
Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	3,50,000	Cash in Hand	1,65,000
Unforeseen Liability	15,000	Debtors (₹ 2,00,000 – ₹ 10,000)	1,90,000
A’s Capital	4,28,425	Stock	1,67,400
B’s Capital	2,09,475	Machinery & Fixtures	1,90,000
C’s Capital	1,00,000	Land & Building	3,79,500
		Accrued Commission	11,000
	11,02,900		11,02,900

Working Note:

Total Gains = 49,500 + 11,000

= 60,500

Total Losses = 12,600 + 10,000 + 10,000 + 15,000

= 47,600

Net Gain on Revaluation = ₹ 12,900

Distribute Revaluation Profit:

A = `12,900 xx 3/4`

= 9,675

B = `12,900 xx 1/4`

= 3,225

Note: As the new profit-sharing ratio is not given in the question, it will be presumed that the old profit-sharing ratio will be the sacrificing ratio. i.e., it will be presumed that the partners have sacrificed in their old ratio.