Question

A and B are partners sharing profits and losses in the ratio of 3:1. On I^st Apr. 2017 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings Rs 20,000 as for his 1/4 share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at Rs 50,000 for A and Rs 12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio?

Answer 1

Books of A, B and C Journal
Date	Particulars			L.F.	Amount Rs	Amount Rs
2017
Apr. 01	A’s Capital A/c		Dr.		5,000
		To Cash A/c				5,000
	(Excess capital withdrawn by A)
	Cash A/c		Dr.		3,000
		To B’s Capital A/c				3,000
	(Capital brought in by B to make in proportion to the profit sharing)

1) Calculation of New Profit sharing Ratio

C's Share = `1/4`
Remaining share = 1 - `1/4` = `3/4`

A's new share = `3/4 xx 3/4 = 9/16`

B's new share = `1/4 xx 3/4 = 3/16`

`{ "C's  share" = 1/4 xx 4/4 = 4/16}`

New Profit sharing ratio of A, B and C will be 9:3:4

2) New Capital of A and B.

C bring Rs 20,000 for 1/4^th share of profit in the new firm.

Thus, total capital of firm on the basis of C’s share
= 20,000 x `4/1` = 80,000 

A's Capital = `9/16` x 80,000 = 45,000

Thus, A will withdraw = 50,000 - 45,000 = 5,000

B's Capital = `3/16` x 80,000 = 15,000

Thus, B’s will bring 15,000 − 12,000 = 3,000