Question

Ashok and Biju were partners sharing profits and losses in the ratio of 3 : 1 respectively. The following was their balance sheet as at 31st March, 2024:

Liabilities	Amount ₹	Assets	Amount ₹
Creditors	1,20,000	Sundry Debtors	2,00,000
Bank Overdraft	1,50,000	Stock	2,20,000
Ashok's Capital	1,50,000	Furniture	40,000
Biju's Capital	1,00,000	Machinery	60,000
	5,20,000		5,20,000

On 1st April, 2024, Chandra was admitted to the firm on the following terms:

1. Chandra would provide ₹ 1,00,000 as a capital and pay ₹ 20,000 as goodwill for his one-third share in future profits.
2. Ashok, Biju and Chandra would share profits equally.
3. Machinery would be reduced by 10% and ₹ 5,000 would be provided for bad debts. Stock would be valued at ₹ 2,49,400.
4. Capital accounts of old partners would be adjusted in the profit sharing ratio on the basis of Chandra's capital by bringing in or taking out cash.

Pass necessary journal entries and prepare partner's capital accounts and balance sheet of the new firm.

Hint: Ashok sacrifices `5/12`; Biju Gains `1/12`.

Chandra's `1/3` share of goodwill = ₹ 20,000. Hence, total goodwill = ₹ 20,000 × 3 = ₹ 60,000. Biju has to compensate `1/12` of 60,000 i.e., 5,000 to Ashok by way of goodwill.

Entry for Goodwill:

Premium for Goodwill A/c   ...Dr.	20,000
Biju's Capital A/c   ...Dr.	5,000
To Ashok's Capital A/с		25,000

Answer 1

Revaluation Account
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c (10% of 60k)		6,000	By Stock A/c (2,49,400 − 2,20,000)	29,400
To Provision for Bad Debts A/c		5,000
To Profit transferred to Capital A/cs:
Ashok's Capital (3/4)	13,800
Biju's Capital (1/4)	4,600	18,400
Total		29,400	Total	29,400

 

Partners' Capital Accounts
Particulars	Ashok (₹)	Biju (₹)	Chandra (₹)	Particulars	Ashok (₹)	Biju (₹)	Chandra (₹)
To Ashok's Capital	-	5,000	-	By Balance b/d	1,50,000	1,00,000	-
To Bank A/c (Withdrawal)	88,800	-	-	By Bank A/c (Capital)	-	-	1,00,000
				By Premium for GW	20,000	-	-
				By Biju's Capital	5,000	-	-
				By Revaluation Profit	13,800	4,600	-
				By Bank A/c (Cash in)	-	400	-
To Balance c/d	1,00,000	1,00,000	1,00,000
Total	1,88,800	1,05,000	1,00,000	Total	1,88,800	1,05,000	1,00,000

 

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2024
Apr 01	Bank A/c   ...Dr.		1,20,400
	To Chandra's Capital A/c			1,00,000
	To Premium for Goodwill A/c			20,000
	To Biju's Capital A/c			400
	(Being cash brought by Chandra & Biju)
Apr 01	Premium for Goodwill A/c   ...Dr.		20,000
	Biju's Capital A/c   ...Dr.		5,000
	To Ashok's Capital A/c			25,000
	(Being goodwill premium adjusted into Ashok's capital account)
Apr 01	Stock A/c   ...Dr.		29,400
	To Revaluation A/c			29,400
	(Being stock revalued upwards)
Apr 01	Revaluation A/c   ...Dr.		11,000
	To Machinery A/c			6,000
	To Provision for Bad Debts A/c			5,000
	(Being assets revalued downwards)
Apr 01	Revaluation A/c   ...Dr.		18,400
	To Ashok's Capital A/c			13,800
	To Biju's Capital A/c			4,600
	(Being profit on revaluation distributed to old partners)
Apr 01	Ashok's Capital A/c   ...Dr.		88,800
	To Bank A/c			88,800
	(Being excess capital withdrawn by Ashok)

 

Balance Sheet of the New Firm as on 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		1,20,000	Sundry Debtors	2,00,000
Bank Overdraft		1,18,400	Less: Provision	(5,00,000)	1,95,000
Capital Accounts:			Stock		2,49,400
Ashok:	1,00,000		Furniture		40,000
Biju:	1,00,000		Machinery (60,000 − 6,000)		54,000
Chandra:	1,00,000	3,00,000
Total		5,38,400	Total		5,38,400

Working note:

A. Calculation of Sacrificing Ratio & Goodwill Adjustment

Old Ratio (Ashok : Biju) = 3 : 1

New Ratio (Ashok : Biju : Chandra) = 1 : 1 : 1

Sacrifice = Old Share − New Share

Ashok's Sacrifice: `3/4 - 1/3 = (9 - 4)/12 = 5/12 "(Sacrifice)"`

Biju's Sacrifice: `1/4 - 1/3 = (3 - 4)/12 = -1/12 "(Gain)"`

Since Biju is gaining, he must compensate Ashok for his share of the gain:

Total Goodwill of the firm = `20,000 xx 3/1 = 60,000`

Biju's compensation to Ashok = `60,000 xx 1/12 = 5,000`

Total Premium credited to Ashok: 20,000 (from Chandra) + 5,000 (from Biju) = 25,000

B. Capital Adjustments

Chandra's Capital for `1/3`rd share = ₹ 1,00,000

Total Capital of the new firm = 1,00,000 × 3 = 3,00,000

New Capital Requirement (1 : 1 : 1): Ashok = ₹1,00,000 | Biju = ₹1,00,000 | Chandra = ₹1,00,000

Particulars	Ashok (₹)	Biju (₹)
Opening Capital Balance	1,50,000	1,00,000
Add: Revaluation Profit	13,800	4,600
Add/(Less): Goodwill Adjustment	25,000	(5,000)
Adjusted Capital	1,88,800	99,600
New Required Capital	1,00,000	1,00,000
Cash to be Withdrawn/(Brought in)	88,800 (Withdrawal)	(400) (Brought in)