Question

Neha and Tara are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2012, stood as follows:

Liabilities	₹	₹	Assets	₹	₹
Capital Accounts:		18,000	Plant & Machinery		12,000
Neha	8,000		Land and Building		14,000
Tara	10,000		Debtors		19,000
General Reserve		12,000	Stock		6,000
Provision for Doubtful Debts		4,000	Cash		3,000
Workmen’s Compensation Fund		5,000
Creditors		15,000
		54,000			54,000

They agreed to admit prachi into partnership for `1/5`th share of profits on 1st April, 2012, on the following terms:

1. All debtors are to be considered as good and therefore the provision for doubtful debts is to be written back.
2. Value of the land and building is to be written upto ₹ 18,000.
3. Value of the plant and machinery is to be written down by ₹ 2,000.
4. The liability against the Workmen’s Compensation Fund is determined at ₹ 2,000 which is to be paid later in the year.
5. Prachi is to bring in her share of Goodwill of ₹ 10,000 in cash.
6. She will further bring in cash so as to make her capital equal to 20% of the total capital of the new firm: (Show your workings clearly).

You are required to prepare:

1. Revaluation Account.
2. Partners’ Capital Accounts.
3. Balance Sheet of the reconstituted firm.

Hint: Provision for Doubtful Debts will be shown on the Cr. side of Revaluation Account and Debtors will be shown in the Balance Sheet at ₹ 19,000.

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Plant & Machinery		2,000	By Provision for Doubtful Debts		4,000
To Gain on Revaluation transferred to:		6,000	By Land and Building		4,000
Neha’s Capital A/c	3,600
Tara’s Capital A/c	2,400
		8,000			8,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	Neha (₹)	Tara (₹)	Prachi (₹)	Particulars	Neha (₹)	Tara (₹)	Prachi (₹)
To Balance c/d	26,600	22,400	12,250	By Balance b/d	8,000	10,000
				By General Reserve	7,200	4,800
				By Workmen’s Comp. Fund	1,800	1,200
				By Revaluation A/c (Gain)	3,600	2,400
				By Bank A/c (Goodwill)	6,000	4,000
				By Bank A/c (Capital)			12,250
	26,600	22,400	12,250		26,600	22,400	12,250

 

Balance Sheet as at 1st April, 2012
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		15,000	Plant & Machinery		10,000
Workmen’s Compensation Claim		2,000	Land and Building		18,000
Capitals:		61,250	Debtors		19,000
Neha	26,600		Stock		6,000
Tara	22,400		Cash at Bank		25,250
Prachi	12,250
		78,250			78,250

Working Note:

Distribution of Gain on Revaluation:

The gain is distributed between Neha and Tara in their old profit-sharing ratio of 3 : 2.

Neha’s share = `6,000 xx 3/5`

= 3,600

Tara’s share = `6,000 xx 2/5`

= 2,400

Prachi's capital is equal to 20% of the total capital of the new firm.

Calculate the Total Capital of the New Firm:

Combined Adjusted Capital of Neha and Tara = 26,600 + 22,400

= 49,000

This capital is equal to 80% of the new firm’s capital (100% - 20%).

Total Capital of the New Firm = `49,000 xx 100/80`

= 61,250

Calculate the Adjusted Capital of the Old Partners:

Prachi’s Capital = `61,250 xx 20/100`

= 12,250