Question

On 31st March, 2019, the Balance Sheet of A, B and C who were sharing profits and losses in proportion to their capitals stood as:

Liabilities		Amount (₹)	Assets		Amount (₹)
Creditors		10,800	Cash at Bank		13,000
Bills Payable		5,000	Debtors	10,000
Capital A/cs:			Less: Provision for Doubtful Debts	200	9,800
A	45,000		Stock		9,000
B	30,000		Machinery		24,000
C	15,000	90,000	Freehold Premises		50,000
		1,05,800			1,05,800

B retired and following adjustments were agreed to determine the amount payable to B:
(a) Out of the amount of insurance premium debited to Profit and Loss Account, ₹ 1,000 be carried forward as prepaid Insurance.
(b) Freehold Premises be appreciated by 10%.
(c) Provision for Doubtful Debts is brought up to 5% on Debtors.
(d) Machinery be reduced by 5%.
(e) Liability for Workmen Compensation to the extent of ₹ 1,500 would be created.
(f) Goodwill of the firm be fixed at ₹ 18,000 and B's share of the same be adjusted into the accounts of A and C who will share future profits in the ratio of 3/4th and 1/4th.
(g) Total capital of the firm as newly constituted be fixed at ₹ 60,000 between A and C in the proportion of 3/4th and 1/4th after passing entries in their accounts for adjustments, i.e., actual cash to be paid or to be brought in by continuing partners as the case may be.
(h) B be paid ₹ 5,000 in cash and the balance be transferred to his Loan Account.
Prepare Capital Accounts of Partners and the Balance Sheet of the firm of A and C. 

Answer 1

Revaluation Account

Dr.				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
Provision for Douibtful Debts (500 – 200)		300	Prepaid Insurance	1,000
Machinery (24,000 × 5%)		1,200	Freehold Premises	5,000
Outstanding Workmen’s Compensation		1,500	(50,000 × 10%)
Profit transferred to:
A’s Capital A/c	1,500
B’s Capital A/c	1,000
C’s Capital A/c	500	3,000
		6,000		6,000

 

Partners’ Capital Account

Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
B’s Capital A/c (Goodwill)	4,500		1,500	Balance b/d	45,000	30,000	15,000
Bank A/c		5,000		Revaluation A/c (Profit)	1,500	1,000	500
B’s Loan A/c		32,000		A’s Capital A/c (Goodwill)		4,500
Balance c/d	42,000		14,000	C’s Capital A/c (Goodwill)		1,500
	46,500	37,000	15,500		46,500	37,000	15,500
				Balance b/d	42,000		14,000
Balance c/d (WN 3)	45,000		15,000	Cash A/c	3,000		1,000
	45,000		15,000		45,000		15,000

 

 Balance Sheet

as on March 31, 2019 (after B’s retirement)

Liabilities		Amount (₹)	Assets		Amount (₹)
Creditors		10,800	Cash at Bank		12,000
Bills Payable		5,000	Debtors	10,000
Outstanding Workmen Compensation		1,500	Less: Provision for Doubtful Debts	(500)	9,500
B’s Loan		32,000	Stock		9,000
Capital A/cs:			Machinery (24,000 – 1,200)		22,800
A	45,000		Freehold Premises (50,000 + 5,000)		55,000
C	15,000	60,000	Prepaid Insurance		1,000
		1,09,300			1,09,300

 

Bank Account

Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	13,000	B’s Capital A/c	5,000
A’s Capital A/c	3,000	Balance c/d	12,000
C’s Capital A/c	1,000
	17,000		17,000

Working Notes: 

WN 1 Calculation of Profit Sharing Ratio

`"Capital"    "A"                             "B"                          "C"`    

              `45,000   :   30,000  :  15,000`

`"Old Ratio"   3       :       2      :       1`

B retires from the firm.

∴ New Ratio (A and C) = 3 : 1 and

Gaining Ratio = 3 : 1

WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 18,000

B’s Share of Goodwill = `18,000 xx 2/6 = "Rs" 6,000`

This share of goodwill is to be distributed between A and C in their gaining ratio (i.e. 3 : 1).

`"A's share" = 6,000 xx 3/4 = "Rs" 4,500`

`"C's share" = 6,000 xx 1/4 = "Rs" 1,500`

WN 3 Adjustment of Partners’ Capital after B’s Retirement

Total Capital of the New Firm (after B’s retirement) = Rs 60,000

New Ratio = 3 : 1

`"A's New Capital" = 60,000 xx 3/4 = "Rs" 45,000`

`"C's New Capital" = 60,000 xx 1/4 = "Rs" 15,000`