Question

X, Y and Z are partners in a firm sharing profits and losses equally. The balance sheet of the firm as at 31st March, 2024 stood as follows:

Liabilities	₹	₹	Assets	₹
Creditors		1,09,000	Cash in Hand and Cash at Bank	86,000
General Reserve		60,000	Debtors	2,00,000
Provident Fund		20,000	Stock	1,00,000
Capitals		7,00,000	Investments (at cost)	50,000
X	3,00,000		Freehold Property	4,00,000
Y	2,00,000		Trade Marks	20,000
Z	2,00,000		Goodwill	33,000
		8,89,000		8,89,000

Z retires on 1st April, 2024 subject to the following adjustments:

1. Freehold Property be valued at ₹ 5,80,000.
2. Investments be valued at ₹ 47,000; and stocks be valued at ₹ 94,000;
3. A provision of 5% be made for doubtful debts.
4. Trade Marks are valueless.
5. An item of ₹ 12,000 included in creditors is not likely to be claimed.
6. Goodwill be valued at one year's purchase of the average profit of the past three years. Profits ending 31st March were 2022 ₹ 1,20,000; 2023 ₹ 1,00,000 and 2024 ₹ 95,000.

Pass journal entries, give capital accounts and the balance sheet of the remaining partners.

Answer 1

Journal entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
(i)	Revaluation A/c       ...Dr.		29,000
	To Investments A/c			3,000
	To Stock A/c			6,000
	To Trade Marks A/c			20,000
	(Being value of assets decreased)
(ii)	Revaluation A/c    ...Dr.		10,000
	To Provision for Doubtful Debts A/c			10,000
	(Being provision made for doubtful debts of ₹ 10,000)
(iii)	Freehold A/c          ...Dr.		1,80,000
	Creditors A/c          ...Dr.		12,000
	To Revaluation A/c			1,92,000
	(Being value of asset increased and creditors decreased)
(iv)	Revaluation A/c     ...Dr.		1,53,000
	To X’ Capital A/c			51,000
	To Y’ Capital A/c			51,000
	To Z’ Capital A/c			51,000
	(Being revaluation profit t/f to capital A/cs in old ratio i.e., 1 : 1 : 1 on Z’s retirement)
(v)	General Reserve A/c     ...Dr.		60,000
	To X’ Capital A/c			20,000
	To Y’ Capital A/c			20,000
	To Z’ Capital A/c			20,000
	(Being General Reserve t/f to capital A/cs in old ratio i.e., 1 : 1 : 1 on Z’s retirement)
(vi)	X’ Capital A/c       ...Dr.		11,000
	Y’ Capital A/c       ...Dr.		11,000
	Z’ Capital A/c       ...Dr.		11,000
	To Goodwill A/c			33,000
	(Being old goodwill written off in old ratio i.e., 1 : 1 : 1 on Z’s retirement)
(vii)	X’ Capital A/c       ...Dr.		17,500
	Y’ Capital A/c       ...Dr.		17,500
	To Z’ Capital A/c			35,000
	(Being Z's share of goodwill debited to the gaining partners in their gaining ratio of 1 : 1)

 

Dr.	Partner’s capital A/c						Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
To Goodwill A/c	11,000	11,000	11,000	By bal. b/d	3,00,000	2,00,000	2,00,000
To Z’s capital A/c	17,500	17,500	-	By General reserve A/c	20,000	20,000	20,000
To Z’s Loan A/c	-	-	2,95,000	By Revaluation A/c - profit	51,000	51,000	51,000
To bal. c/d	3,42,500	2,42,500	-	By X’s capital A/c	-	-	17,500
				By Y’s capital A/c	-	-	17,500
	3,71,000	2,71,000	3,06,000		3,71,000	2,71,000	3,06,000

 

Balance sheet
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors	1,09,000	97,000	Cash in hand & at bank		86,000
Less: not to be paid	12,000		Debtors	2,00,000	1,90,000
Provident fund		20,000	Less: Provision for doubtful debts	10,000
Z’s loan		2,95,000	Stock	1,00,000	94,000
Capitals:		5,85,000	Less: decreased	6,000
X	3,42,500		Investment	50,000	47,000
Y	2,42,500		Less: decreased	3,000
			Freehold property	4,00,000	5,80,000
			Add: Increased	1,80,000
		9,97,000			9,97,000

Working Notes:

1.

Dr.	Revaluation A/c			Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Investment A/c		3,000	By Freehold A/c	1,80,000
To stock A/c		6,000	By Creditors A/c	12,000
To Provision for doubtful debts A/c		10,000
To Trade Marks A/c		20,000
To profit t/f to capital A/cs
X	51,000
Y	51,000
Z	51,000	1,53,000
		1,92,000		1,92,000

2. Old ratio of X, Y & Z = 1 : 1 : 1

Z retires 

New ratio of X & Y = 1 : 1 

Gaining ratio =  New ratio (i.e., 1 : 1)

3. Calculation of goodwill of the firm

Average profit = `(1,20,000+1,00,000+95,000)/3`

= `(3,15,000)/3`

= ₹ 1,05,000

Goodwill = Average Profit × No. of years purchase

= 1,05,000 × 1

= ₹ 1,05,000

Z's share of Goodwill = `1,05,000xx1/3`

= ₹ 35,000