Question

A and B are in partnership sharing profits and losses in the proportion of three-fourths and one-fourth, respectively. Their Balance Sheet as at 31st March, 2022 was as follows:

Liabilities	₹	Assets	₹
Sundry Creditors	1,20,000	Cash	10,000
Bank Overdraft	1,50,000	Sundry Debtors	2,50,000
A’s Capital	1,50,000	Stock	2,20,000
B’s Capital	1,00,000	Plant and Machinery	40,000
	5,20,000		5,20,000

On 1st April, 2022 they admitted C into partnership on the following terms:

1. C to purchase one-third of the goodwill for ₹ 20,000 and provide ₹ 1,00,000 as capital.
2. Future profits and losses are to be shared by A, Band C equally.
3. Plant and Machinery is to be reduced by 10% and ₹ 5,000 is to be provided for estimated bad debts. Stock is to be taken at a valuation of ₹ 2,49,400.
4. By bringing in or withdrawing cash, the capitals of A and B are to be made proportionate to that of Con on their profit-sharing basis.

Set out entries relating to the above arrangement in the firm’s Journal, give the partners’ Capital Accounts in tabular form and submit the opening Balance Sheet of the new firm.

Hint: A sacrifices `5/12`; B gains `1/12`. B will also compensate A for acquiring a `1/12` share. Amount of compensation on the basis of the premium paid by C will be ₹ 5,000.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c  ...Dr.		1,00,000
	To C’s Capital A/c			1,00,000
	(Capital brought in by C)
	Bank A/c   ...Dr.		20,000
	To Premium for Goodwill A/c			20,000
	(Premium for goodwill brought in by C)
	Premium for Goodwill A/c   ...Dr.		20,000
	B’s Capital A/c   ...Dr.		5,000
	To A’s Capital A/c			25,000
	(C’s premium and B’s compensation for goodwill credited to sacrificing partner A)
	Plant and Machinery A/c   ...Dr.		4,000
	Provision for Bad Debts A/c   ...Dr.		5,000
	To Revaluation A/c			9,000
	(Decrease in value of Plant and Machinery and Provision for Bad Debts made)
	Stock A/c   ...Dr.
	To Revaluation A/c		29,400
	(Increase in value of Stock recorded)			29,400
	A’s Capital A/c   ...Dr.		15,000
	B’s Capital A/c		5,400
	To Revaluation A/c			20,400
	(Gain on revaluation transferred to A and B in 3 : 1 ratio)

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To B’s Capital A/c		5,000		By Balance b/d	1,50,000	1,00,000
To Bank A/c (Withdrawal of Surplus)	90,300	100		By Bank A/c (Capital)			1,00,000
To Balance c/d	1,00,000	1,00,000	1,00,000	By Premium for Goodwill	20,000
				By Revaluation Profit	15,300	5,100
				By B’s Capital A/c (Goodwill Adj)	5,000
	1,90,300	1,05,100	1,00,000		1,90,300	1,05,100	1,00,000

 

Balance Sheet of the New Firm as at April 1, 2022
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		1,20,000	Cash		39,600
Bank Overdraft		1,50,000	Sundry Debtors	2,50,000	2,45,000
Capitals:		3,00,000	Less: Prov. for Bad Debts	5,000
A	1,00,000		Stock		2,49,400
B	1,00,000		Plant and Machinery	40,000	36,000
C	1,00,000		Less: 10% Dep.	4,000
		5,70,000			5,70,000

Working Notes:

Calculation of Gaining/Sacrificing Ratio:

Sacrifice/Gain = Old Share − New Share

A’s Sacrifice/Gain = `3/4 - 1/3`

= `(3 xx 3)/(4 xx 3) - (1 xx 4)/(3 xx 4)`

= `9/12 - 4/12`

= `(9 - 4)/12`

= `5/12` (Sacrifice)

B’s Sacrifice/Gain = `1/4 - 1/3`

= `(1 xx 3)/(4 xx 3) - (1 xx 4)/(3 xx 4)`

= `3/12 - 4/12`

= `(3 - 4)/12`

= `-1/12` (Gain)

C’s share is `1/3` which he brings in.

Goodwill Adjustment: 

Total goodwill implied by C’s premium of ₹ 20,000 for a `1/3` share is 20,000 × 3 = 60,000. This is the basis for adjusting B’s gain. B must compensate A for acquiring A’s share of goodwill value.

Amount B compensates A = `60,000 xx 1/2`

= 5,000

A receives C’s premium + B’s compensation

= 20,000 + 5,000

= 25,000

B receives no premium but pays A ₹ 5,000 through capital adjustment.