Question

On 1st April 2024, A and B, sharing profits in the ratio of 7 : 5 admit C for a `1/5`th share in profits, which he acquires equally from A and B. On this date, Profit & Loss Account showed a credit balance of ₹ 45,000. Partners do not want to distribute the profit but prefer to record it by passing an adjustment entry. You are required to give the journal entry.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	C’s Current A/c   ...Dr.		9,000
	To A’s Capital A/c			4,500
	To B’s Capital A/c			4,500
	(Adjustment for undistributed profit)

Working Note:

Calculate the Sacrificing Ratio:

Old Ratio of A and B = `7/12 : 5/12`

C’s Share = `1/5`

C acquires his share equally from A and B:

C acquires from A = `1/5 xx 1/2`

= `1/10`

C acquires from B = `1/5 xx 1/2`

= `1/10`

The sacrificed shares of A and B are `1/10` each.

Therefore, the sacrificing ratio = `1/10 : 1/10` or 1 : 1

 Calculate the Adjustment Amount for Each Partner:

Sacrifice by A = `45,000 xx 1/10`

= 4,500

Sacrifice by B = `45,000 xx 1/10`

= 4,500

Gain by C = `45,000 xx 1/5`

= 9,000

The adjustment can be calculated using the sacrificing ratio. In this case, C gains ₹ 9,000, and this amount is shared between the sacrificing partners A and B in their sacrificing ratio of 1∶1.

A’s Credit = `9,000 xx 1/2`

= 4,500

B’s Credit = `9,000 xx 1/2`

= 4,500