Question

On 31st March, 2022 the Balance Sheet of M/s A, B and C sharing profits and losses in proportion to their fixed capitals stood as follows:

Liabilities	₹	₹	Assets	₹	₹
Creditors		1,08,000	Cash at Bank		80,000
General Reserve		1,80,000	Debtors	1,00,000
Capital A/cs			Less: Provision	2,000	98,000
A	3,60,000		Stock		90,000
B	2,40,000		Machinery		2,40,000
C	1,20,000	7,20,000	Land and Buildings		5,00,000
		10,08,000			10,08,000

On 1st April, 2022, B wants to retire from the firm and remaining partners decide to carry on. The following re-adjustments of assets and liabilities have been agreed upon before the ascertainment of the amount payable to B:

1. that, out of the Fire Insurance Premium paid during 2021-22, ₹ 10,000 be carried forward as unexpired.
2. that the land and buildings be appreciated by 10%.
3. that provision for doubtful debts be brought upto 5% on debtors.
4. that the machinery be depreciated by 5%.
5. that a provision for ₹ 15,000 be made in respect of an outstanding bill for repairs.
6. that the goodwill of the entire firm be at ₹ 1,80,000 and B's share of the same adjusted in the A/cs of A and C who share future profits in the proportion of 3/4th and 1/4th respectively; and
7. that B be paid ₹ 50,000 in cash and the balance be transferred to his Loan A/c.

Prepare Revaluation A/c, Partner's Current Accounts, Capital Accounts and the Balance Sheet of the firm of A and C.

Answer 1

Revaluation Account
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Provision for Doubtful Debts (New provision 5% of ₹ 1,00,000 = ₹ 5,000; Increase = ₹ 5,000 − ₹ 2,000)		3,000	By Unexpired Insurance Premium	10,000
To Machinery (Depreciation 5% of ₹ 2,40,000)		12,000	By Land and Buildings (Appreciation 10% of ₹ 5,00,000)	50,000
To Provision for Outstanding Bill for Repairs		15,000
To Gain on Revaluation transferred to Current Accounts:
A's Share (3/6):	15,000
B's Share (2/6):	10,000
C's Share (1/6):	5,000	30,000
Total		60,000	Total	60,000

 

Partners' Current Accounts
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To B's Current A/c (Goodwill)	45,000	-	15,000	By General Reserve (3 : 2 : 1)	90,000	60,000	30,000
To B's Capital A/c (Transfer)	-	1,30,000	-	By Revaluation A/c (Gain)	15,000	10,000	5,000
To Balance c/d	60,000	-	20,000	By A's & C's Current A/c (Goodwill)	-	60,000	-
Total	1,05,000	1,30,000	35,000	Total	1,05,000	1,30,000	35,000

 

Partners' Capital Accounts
Dr. Particulars	A (₹)	B (₹)	C (₹)	Cr. Particulars	A (₹)	B (₹)	C (₹)
To Bank A/c	-	50,000	-	By Balance b/d	3,60,000	2,40,000	1,20,000
To B's Loan A/c	-	3,20,000	-	By B's Current A/c (Transfer)	-	1,30,000	-
To Balance c/d	3,60,000	-	1,20,000
Total	3,60,000	3,70,000	1,20,000	Total	3,60,000	3,70,000	1,20,000

 

Balance Sheet of the New Firm (as of 1st April, 2022)
Liabilities	Amount (₹)	Assets	Amount (₹)
Capital Accounts:	3,60,000	Cash at Bank (₹80,000 − ₹50,000 paid to B)	30,000
A	1,20,000	Sundry Debtors	1,00,000
C		Less: New Provision (5%)	(5,000)
Current Accounts:	60,000	Sundry Debtors (Net)	95,000
A	20,000	Stock	1,50,000
C		Machinery (₹ 2,40,000 − ₹ 12,000)	2,28,000
B's Loan Account	3,20,000	Land & Buildings (₹ 5,00,000 + ₹ 50,000)	5,50,000
Sundry Creditors	1,08,000	Unexpired Fire Insurance	10,000
Outstanding Bill for Repairs	15,000
Total	10,03,000	Total	10,03,000

Working note:

Old Profit-Sharing Ratio: Proportionate to fixed capitals:

A : B : C = 3,60,000 : 2,40,000 : 1,20,000 = 3 : 2 : 1

New Profit-Sharing Ratio: Given directly as 3 : 1 (or `3/4 : 1/4`).

Gaining Ratio: Gaining Share = New Share − Old Share

A's Gain = `3/4 - 3/6 = (9 - 6)/12 = 3/12`

C's Gain = `1/4 - 1/6 = (3 - 2)/12 = 1/12`

Gaining Ratio (A : C) = 3 : 1

Goodwill Adjustment:

Total Firm Goodwill = 1,80,000

B's Retiring Share of Goodwill = `1,80,000 xx 2/6 = 60,000`

Debited to A = `60,000 xx 3/4 = 45,000`

Debited to C = `60,000 xx 1/4 = 15,000`