Question

A, B and C were partners sharing profits and losses in 3 : 4 : 2. The following is the Balance Sheet of A, B and C as at 31st March, 2022:

Liabilities	₹	₹	Assets	₹
Creditors		75,000	Fixed Assets	3,20,000
Profit and Loss A/c:			Stock	1,40,000
Opening Balance	18,000		Debtors	1,13,000
Profit for the Year	72,000	90,000	Cash at Bank	1,80,000
Capital Accounts:			Advertisement Suspense	27,000
A	2,00,000
B	2,50,000
C	1,65,000	6,15,000
		7,80,000		7,80,000

Owing to falling health B retired on 30th June, 2022. It is agreed that:

1. The retiring partner shall be paid his share of profit in proportion to the period he served as a partner in the year of retirement. For this purpose, profit of the immediately preceding year will be taken as base.
2. The retiring partner will be entitled to his share of goodwill calculated at 3 times of the four year’s average profits. The profits for the year ending 31st March 2019, 2020 and 2021 were ₹ 32,000, ₹ 60,000 and ₹ 52,000 respectively.
3. Capital accounts of A and C will be readjusted by bringing in or paying out cash so that their capitals become in the new profit sharing ratio. ₹ 1,58,000 from B’s Capital Account will be paid in cash and the balance will be transferred to his Loan Account.

Prepare Journal entries, Capital Accounts and a Balance Sheet as at that date.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr.	Cr.
2022
June 30	Profit and Loss A/c        ...Dr.		90,000	-
	To A’s Capital A/c		-	30,000
	To B’s Capital A/c		-	40,000
	To C’s Capital A/c		-	20,000
	(Being Reserves distributed among the partners)
	A’s Capital A/c         ...Dr.		5,250	-
	C’s Capital A/c        ...Dr.		2,750	-
	To B’s Capital A/c		-	8,000
	(Being B’s share of estimated profit up to the date of his retirement credited to him and debited to A and C in the gaining ratio of 21: 11)
	A’s Capital A/c         ...Dr.		47,250	-
	C’s Capital A/c        ...Dr.		24,750	-
	To B’s Capital A/c		-	72,000
	(Being B’s share of goodwill debited to the Capital Accounts of A and C in the gaining ratio of 21 : 11)
	B’s Capital A/c         ...Dr.		3,70,000	-
	To Bank A/c		-	1,58,000
	To B’s loan A/c		-	2,12,000
	(Being Amount due to B transferred partly paid off and rest transferred to his Loan Account)
	C’s Capital A/c         ...Dr.		37,000	-
	To Bank A/c		-	37,000
	(Being Surplus capital withdrawn by C)
	Bank A/c         ...Dr.		22,500	-
	To A’s Capital A/c		-	22,500
	(Being Deficit of capital brought in by A)

 

Dr.	Partners’ Capital A/c						Cr.
Particulars	A	B	C	Particulars	A	B	C
To B’s Capital A/c	5,250	-	2,750	By Balance b/d	2,00,000	2,50,000	1,65,000
To B’s Capital A/c	47,250	-	24,750	By Profit & Loss A/c	30,000	40,000	20,000
To Bank A/c	-	1,58,000	37,500	By A’s Capital A/c	-	5,250	-
To B’s Loan A/c	-	2,12,000	-	By C’s Capital A/c	-	2,750	-
To Balance c/d	2,00,000	-	1,20,000	By A’s Capital A/c	-	47,250	-
				By C’s Capital A/c	-	24,750	-
				By Bank A/c	22,500	-	-
	2,52,500	3,70,000	1,85,000		2,52,500	3,70,000	1,85,000
To Balance c/d	2,00,000	-	1,20,000	By Balance b/d	1,68,500	-	88,500
				By Bank A/c	31,500	-	31,500
	2,00,000	-	1,20,000		2,00,000		1,20,000

 

Balance Sheet of 30th June 2022
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Creditors		75,000	Fixed Assets	3,20,000
B’s Loan		2,12,000	Stock	1,40,000
Capital Accounts:		3,20,000	Debtors	1,13,000
A	2,00,000		Cash at Bank	7,000
C	1,20,000		Advertisement Suspense	27,000
		6,07,000		6,07,000

Working notes: 

(i) Calculation of B’s profit upto date of retirement

`72,000xx3/12xx4/9`

= ₹ 8,000

(ii) Calculation of B’s share of goodwill:

Average profit = `(32,000+60,000+52,000+72,000)/4`  

= ₹ 54,000

Value of Goodwill = 54,000 × 3

= ₹ 1,62,000

B’s share of goodwill = `1,62,000xx4/9`

= ₹ 72,000

(iii) Calculation of Bank balance

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
1.4.22	To balance b/d	1,80,000	30.6.22	By A’s Capital A/c	1,58,000
30.6.22	To A’s Capital A/c	22,500	30.6.22	By C’s Capital A/c	37,500
			30.6.22	By balance c/d	7,000
		2,02,500			2,02,500