Question

Following is the Balance Sheet of Kusum, Sneh and Usha as on 31st March, 2019, who have agreed to share profits and losses in proportion of their capitals:

Liabilities		₹	Assets		₹
Capital A/cs:			Land and Building		4,00,000
Kusum	4,00,000		Machinery		6,00,000
Sneh	6,00,000		Closing Stock		2,00,000
Usha	4,00,000	14,00,000	Sundry Debtors	2,20,000
Employees' Provident Fund		70,000	Less: Provision for Doubtful Debts	20,000
Workmen Compensation Reserve		30,000	Cash at Bank		2,00,000
Sundry Creditors		1,00,000			2,00,000
		16,00,000			16,00,000

On 1st April, 2019, Kusum retired from the firm and the remaining partners decided to carry on the business. It was agreed to revalue the assets and reassess the liabilities on that date, on the following basis:
(a) Land and Building be appreciated by 30%.
(b) Machinery be depreciated by 30%.
(c) There were Bad Debts of ₹ 35,000.
(d) The claim against Workmen Compensation Reserve was estimated at ₹ 15,000.
(e) Goodwill of the firm was valued at ₹ 2,80,000 and Kusum's share of goodwill was adjusted against the Capital Accounts of the continuing partners Sneh and Usha who have decided to share future profits in the ratio of 3 : 4 respectively.
(f) Capital of the new firm in total will be the same as before the retirement of Kusum and will be in the new profit-sharing ratio of the continuing partners.
(g) Amount due to Kusum be settled by paying ₹ 1,00,000 in cash and balance by transferring to her Loan Account which will be paid later on.
Prepare Revaluation Account, Capital Accounts of Partners and Balance Sheet of the new firm after Kusum's retirement.

Answer 1

Revaluation Account

Dr.		Cr.
Particulars	Amount (₹)	Particulars		Amount (₹)
Machinery A/c	1,80,000	Land and Building A/c		1,20,000
Bad Debts A/c (35,000 – 20,000)	15,000	Loss on Revaluation transferred to:
		Kusum	21,429
		Sneh	32,142
		Usha	21,429	75,000
	1,95,000			1,95,000

 

Partners’ Capital Account

Dr.				Cr.
Particulars	Kusum	Sneh	Usha	Particulars	Kusum	Sneh	Usha
Revaluation A/c (Loss)	21,429	32,142	21,429	Balance b/d	4,00,000	6,00,000	4,00,000
Usha’s Capital A/c	–	–	80,000	Workmen Compensation Fund	4,286	6,428	4,286
Bank A/c	1,00,000	–	–	Usha’s Capital A/c	80,000	–	–
Kusum’s Loan A/c	3,62,857	–	–
Balance c/d	–	5,74,286	3,02,857
	4,84,286	6,06,428	4,04,286		4,84,286	6,06,428	4,04,286
Balance c/d	–	6,00,000	8,00,000	Balance b/d	–	5,74,286	3,02,857
				Bank A/c (WN3)	–	25,714	4,97,143
	–	6,00,000	8,00,000		–	6,00,000	8,00,000

 

Balance Sheet

as at March 31, 2019

Liabilities		Amount (₹)	Assets	Amount (₹)
Creditors		1,00,000	Land & Building	5,20,000
Employee’s Provident Fund		70,000	Machinery (6,00,000 – 1,80,000)	4,20,000
Workmen’s Compensation Claim		15,000	Stock	2,00,000
Kusum’s Loan		3,62,857	Sundry Debtors (2,20,000 – 35,000)	1,85,000
Capital A/c :			Bank	6,22,857
Sneh	6,00,000
Usha	8,00,000	14,00,000
		19,47,857		19,47,857

 

Working Notes

WN 1 Calculation of Gaining Ratio 

Old Ratio (Kusum, Sneh and Usha) = 2:3:2

New Ratio (Sneh and Usha) = 3:4

Gaining Ratio = New Ratio – Old Ratio

`"Sneh's share" = 3/7 - 3/7 = "Nil"`

`"Usha's share"= 4/7 - 2/7 = 2/7`

WN2 Adjustment of Goodwill

Total Goodwill of the Firm = 2,80,000

`"Kusum's share in Goodwill" = 2/7 xx 2,80,000`

                                               = `80,000`

It is to be adjusted by the Gaining partners i.e. only by Usha

WN3 Adjustment of Capital

Total Capital of firm before kusums Retirement = `14,00,000`

`"New Profit sharing Ratio" = 3 : 4`

`"sneh's new capital" = 3/7 xx 14,00,000 = 6,00,000`

`"usha's new capital" = 4/7 xx 14,00,000 = 8,00,000`

Particulars	Sneh	Usha
New Capital Balance	6,00,000	8,00,000
Adjusted Old Capital Balance	5,74,286	3,02,857
Cash brought in by the Partner	25,714	4,97,143

WN4

Cash at Bank A/c

Dr.		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	2,00,000	Kusum’s Capital A/c	1,00,000
Sneh’s Capital A/c	25,714	Balance c/d	6,22,857
Usha’s Capital A/c	4,97,143
	7,22,857		7,22,857