Question

A, B and C were in partnership sharing profits in proportion to their capitals. Their Balance Sheet as at 31-3-2018 was as follows:

Liabilities	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors	15,600	Cash		16,000
Reserve	6,000	Debtors	20,000	19,600
A’s Capital	90,000	Less: Provision for doubtful debts	400
B’s Capital	60,000	Stock		18,000
C’s Capital	30,000	Machinery		48,000
		Buildings		1,00,000
	2,01,600			2,01,600

On the above date B retired owing to ill health and the following adjustments were agreed upon:

1. Buildings be appreciated by 10%.
2. Provision for bad and doubtful debts be increased to 5% on debtors.
3. Machinery be depreciated by 15%.
4. Goodwill of the firm be valued at ₹ 36,000 and be adjusted into the Capital Accounts of A and C who will share profits in future in the ratio of 3 : 1.
5. A provision be made for outstanding repairs bill of ₹ 3,000.
6. Included in the value of creditors is ₹ 1,800 for an outstanding legal claim, which is not likely to arise.
7. Out of the insurance premium paid ₹ 2,000 is for the next year. The amount was debited to P & L A/c.
8. The partners decide to fix the capital of the new firm as ₹ 1,20,000 in the profit sharing ratio.
9. B to be paid ₹ 9,000 in cash and the balance to be transferred to his Loan Account.

Prepare the Revaluation Account, Partner’s Capital Accounts and the Balance Sheet of the new firm after B’s retirement.

Answer 1

Dr.	Revaluation A/c			Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Provision for doubtful debts A/c		600	By Buildings A/c	10,000
To Machinery A/c		7,200	By Creditors A/c	1,800
To Provision for outstanding repairs A/c		3,000	By Prepaid Insurance A/c	2,000
To Profit t/f to capital A/cs:		3,000
A	1,500
B	1,000
C	500
		13,800		13,800

 

Dr.	Partners’ Capital Account						Cr.
Particulars	A	B	C	Particulars	A	B	C
To B’s Capital A/c	9,000	-	3,000	By Balance b/d	90,000	60,000	30,000
To Cash A/c	-	9,000	-	By Revaluation Profit A/c	1,500	1,000	500
To B’s Loan A/c	-	66,000	-	By A’s Capital A/c	-	9,000	-
To Balance c/d	90,000	-	30,000	By C’s Capital A/c	-	3,000	-
				By Reserve A/c	3,000	2,000	1,000
				By Cash A/c (Bal. fig.)	4,500	-	1,500
	99,000	75,000	33,000		99,000	75,000	33,000

 

Balance Sheet of A and C
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Provision for outstanding repairs		3,000	Cash		13,000
Creditors		13,800	Debtors	20,000	19,000
B’s Loan A/c		66,000	Less: Provision for doubtful debts	1,000
Capitals A/cs:		1,20,000	Stock		18,000
A	90,000		Prepaid Insurance		2,000
C	30,000		Machinery	48,000	40,800
			Less: Depreciation	7,200
			Buildings		1,10,000
		2,02,800			2,02,800

Working notes:

(i) Gaining ratio = New Ratio – Old Ratio 

A = `3/4-3/6=(9-6)/12=3/12`

B = `1/4-1/6=(3-2)/12=1/12`

Gaining Ratio = 3 : 1

(ii) Firm Capital = ₹ 1,20,000

A = `1,20,000xx3/4` = ₹ 90,000

C = `1,20,000xx1/4` = ₹ 30,000

(iii) Goodwill of the firm = 36,000

B’s share of goodwill = `36,000xx2/6`

= ₹ 12,000