Question

P and Q are partners sharing profits and losses in the ratio of 60 : 40. The firm's Balance Sheet as at 31.3.2024 was as follows:

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	45,000	Land and Building	1,50,000
Outstanding Liabilities	15,000	Investments	30,000
Profit & Loss A/c	20,000	Stock	1,20,000
Capitals:		Debtors	60,000
P	1,80,000	Bank	20,000
Q	1,20,000
	3,80,000		3,80,000

R was admitted as a partner from 1.4.2024 on the following terms:

1. R will be entitled to 40% of the profits. The new profit-sharing ratio of P, Q and R will be 35 : 25 : 40.
2. R will bring in cash ₹ 2,00,000 as capital. It is agreed that goodwill shall be valued on the basis of capitalisation at 8% of the normal average profits of the last three years, which were as follows:
   For the year ended 31.3.2022 Loss ₹ 80,000 (including a loss of ₹ 60,000 due to theft).
   For the year ended 31 .3.2023 Profit ₹ 76,000 (including a speculative profit of ₹ 1,00,000).
   For the year ended 31.3 .2024 Profit ₹ 1,40,000
3. Since R is unable to bring his share of goodwill in cash, it is decided that his current account will be debited from his share of goodwill.
4. A reduction of ₹ 5,000 should be made from the stock in respect of old and unsalable items.
5. There is an additional liability of ₹ 10,000 being outstanding salary payable to employees of the firm. This liability is not included in the outstanding liabilities stated in the above balance sheet.
6. Investments are worthless.
7. A bill for ₹ 2,000 for electric charges has been omitted and is to be accounted for.
8. Capitals are to be adjusted according to the profit-sharing ratio, taking R’s Capital as base, any excess or deficiency to be adjusted in cash.

Prepare journal entries, capital accounts and the opening Balance Sheet of the new firm.

Hint: R’s Current A/c will be debited by his share of Goodwill ₹ 32,000 and P and Q will be credited in their sacrificing ratio of 5 : 3.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		2,00,000
	To R’s Capital A/c			2,00,000
	(Capital brought in by R)
	Profit & Loss A/c   ...Dr.		20,000
	To P’s Capital A/c			12,000
	To Q’s Capital A/c			8,000
	(Distribution of accumulated profits in the old ratio)
	R’s Current A/c		32,000
	To P’s Capital A/c			20,000
	To Q’s Capital A/c			12,000
	(R’s share of goodwill credited to P and Q in their sacrificing ratio)
	Revaluation A/c   ...Dr.		47,000
	To Stock A/c			5,000
	To Outstanding Salary A/c			10,000
	To Investments A/c			30,000
	To Outstanding Electric Charges A/c			2,000
	(Revaluation of assets and liabilities)
	P’s Capital A/c   ...Dr.		28,200
	Q’s Capital A/c   ...Dr.		18,800
	To Revaluation A/c			47,000
	(Revaluation loss transferred to partners’ capital accounts)
	P’s Capital A/c   ...Dr.		8,800
	To Bank A/c			8,800
	(Excess capital withdrawn by P)
	Bank A/c		3,800
	To Q’s Capital A/c			3,800
	(Deficiency in capital brought in by Q)

 

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Stock A/c		5,000	By Loss on Revaluation transferred to:
To Outstanding Liabilities A/c		10,000	P’s Capital A/c	28,200
To Investments A/c		30,000	Q’s Capital A/c	18,800	47,000
To Electric Charges A/c		2,000
		47,000			47,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	P (₹)	Q (₹)	R (₹)	Particulars	P (₹)	Q (₹)	R (₹)
To Bank A/c	8,800			By Balance b/d	1,80,000	1,20,000
To Revaluation A/c (Loss)	28,200	18,800		By R’s Current A/c (Goodwill)	20,000	12,000
To Balance c/d (Adjusted)	1,75,000	1,25,000	2,00,000	By Bank A/c (Capital brought in)			2,00,000
				By Profit & Loss A/c	12,000	8,000
				By Bank A/c (Cash brought in)		3,800
	2,12,000	1,43,800	2,00,000		2,12,000	1,43,800	2,00,000

 

Balance Sheet
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		45,000	Land and Building		1,50,000
Outstanding Liabilities		15,000	Stock		1,15,000
Outstanding Salary		10,000	Debtors		60,000
Outstanding Electric Charges		2,000	Bank		2,15,000
Capitals:		5,00,000	R’s Current A/c		32,000
P	1,75,000
Q	1,25,000
R	2,00,000
		5,72,000			5,72,000

Working Note:

Calculation of  Goodwill:

Adjusted Profits:

For the year ended 31.3.2022: Loss ₹ 80,000 (including an abnormal loss of ₹ 60,000 due to theft).

Adjusted Profit = − 80,000 + 60,000

= − 20,000

For the year ended 31.3.2023: Profit ₹ 76,000 (including a speculative profit of ₹ 1,00,000).

Adjusted Profit = 76,000 − 1,00,000

= − 24,000

For the year ended 31.3.2024: Profit ₹ 1,40,000.

Adjusted Profit = 1,40,000

Average Profit = `(− 20,000 − 24,000 + 1,40,000)/3`

= `(96,000)/3`

= 32,000

Value of Goodwill:

Capitalised Value of the firm

= `"Average Profit" xx 100/"Normal Rate of Return"`

= `32,000 xx 100/8`

= 4,00,000

Total Assets = 1,50,000 + 30,000 + 1,20,000 + 60,000 + 20,000

= 3,80,000

Outside Liabilities = 45,000 + 15,000

= 60,000

Capital Employed = 3,80,000 − 60,000

= `3,20,000`

Goodwill = Capitalised Value − Capital Employed

= 4,00,000 − 3,20,000

= 80,000

R’s Share of Goodwill = `80,000 x 4/10`

= 32,000

Calculate Sacrificing Ratio:

Old Ratio of P and Q = 60 : 40

P = `60/100`

= `3/5`

Q = `40/100`

= `2/5`

New Ratio of P, Q, and R = `35/100 : 25/100 : 40/100`

= `7/20 : 5/20 : 8/20`

P’s Sacrifice = `3/5 - 7/20`

= `(3 xx 4)/(5 xx 4) - 7/20`

= `12/20 - 7/20`

= `(12 - 7)/20`

= `5/20`

Q’s Sacrifice = `2/5 - 5/20`

= `(2 xx 4)/(5 xx 4) - 5/20`

= `8/20 - 5/20`

= `(8 - 5)/20`

= `3/20`

Sacrificing Ratio  of P and Q = `5/20 : 3/20` or 5 : 3