Question

A and B are partners sharing profits and losses in the ratio of 3 : 2. On April 1, 2024, their Balance Sheet was as follows:

Liabilities	₹	₹	Assets	₹	₹
Sundry Creditors		51,000	Goodwill		15,000
Workmen Compensation Reserve		4,000	Plant		75,000
Capitals:		2,20,000	Patents		8,000
A	1,00,000		Stock		80,000
B	1,20,000		Debtors		62,000
			Cash		20,000
			Profit & Loss Account		15,000
		2,75,000			2,75,000

On this date they agree to admit C on the following terms:

1. C will be entitled to a `3/10` share in the profits, which he acquires `1/5` from A and `1/10` from B. He will bring in ₹ 60,000 as his capital.
2. Goodwill of the firm was valued at ₹ 40,000.
3. Plant is valued at ₹ 60,000 and Stock at ₹ 70,000.
4. Claim on account of Workmen’s Compensation is ₹ 6,000.
5. Patents should be written off.
6. Investments of ₹ 5,000 which did not appear in the books, should be duly recorded.
7. B is to withdraw ₹ 20,000 in cash.

Give journal entries and the Balance Sheet of the new firm.

Hints:

1. Goodwill already appearing in the assets will be written off between the old partners in their old ratio.
2. Following entry will be passed in respect of Workmen Compensation:
   

   Workmen Compensation Reserve A/c   ...Dr.	4,000
   Revaluation A/c   ...Dr.	2,000
   To Liability for Workmen Compensation Claim A/c		6,000

   Liability for Workmen Compensation Claim will appear on the liabilities side of the Balance Sheet at  ₹ 6,000.

Note: C’s Current Ale has been debited from his share of goodwill.

Answer 1

Journal Entries
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	A’s Capital A/c   ...Dr.		9,000
	B’s Capital A/c   ...Dr.		6,000
	To Goodwill A/c			15,000
	(Existing goodwill written off)
	Workmen Compensation Reserve A/c   ...Dr.		4,000
	Revaluation A/c   ...Dr.		2,000
	To Liability for Workmen’s Compensation Claim A/c			6,000
	(Claim for Workmen’s Compensation recorded)
	Revaluation A/c   ...Dr.		33,000
	To Plant A/c			15,000
	To Stock A/c			10,000
	To Patents A/c			8,000
	(Assets revalued downwards)
	Investments A/c   ...Dr.		5,000
	To Revaluation A/c			5,000
	(Unrecorded investments recorded)
	A's Capital A/c   ...Dr.		18,000
	B’s Capital A/c   ...Dr.		12,000
	(Loss on revaluation distributed to old partners)			30,000
	Cash A/c   ...Dr.		60,000
	To C’s Capital A/c			60,000
	(Capital brought in by C)
	C’s Current A/c   ...Dr.		12,000
	To A’s Capital A/c			8,000
	To B’s Capital A/c			4,000
	(C’s share of goodwill credited to old partners)
	B’s Capital A/c   ...Dr.		20,000
	To Cash A/c			20,000
	(Cash withdrawn by B)
	A’s Capital A/c   ...Dr.		9,000
	B’s Capital A/c   ...Dr.		6,000
	To Profit & Loss A/c			15,000
	(Profit and loss account debit balance written off)

 

Dr.	Revaluation Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Workmen’s Compensation Reserve A/c	2,000	By Investments A/c	5,000
To Plant A/c	15,000	By Loss transferred to:
To Stock A/c	10,000	A’s Capital A/c	18,000
To Patents A/c	8,000	B’s Capital A/c	12,000
	35,000		35,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Goodwill A/c	9,000	6,000		By Balance b/d	1,00,000	1,20,000
To Revaluation A/c	18,000	12,000		By Cash A/c			60,000
To P & L A/c	9,000	6,000		By C’s Current A/c	8,000	4,000
To Cash A/c		20,000
To Balance c/d	72,000	80,000	60,000
	1,08,000	1,24,000	60,000		1,08,000	1,24,000	60,000

 

Balance Sheet of the New Firm as at April 1, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		51,000	Plant		60,000
Workmen’s Comp. Claim		6,000	Stock		70,000
Capitals:		2,12,000	Debtors		62,000
A	72,000		Investments		5,000
B	80,000		Cash		60,000
C	60,000		C’s Current A/c		12,000
		2,69,000			2,69,000

Working note:

Calculation of Sacrificing Ratio:

Sacrifice by A = `1/5`

Sacrifice by B = `1/10`

To find a common denominator.

Sacrifice by A = `(1 xx 2)/(5 xx 2)`

= `2/10`

Sacrificing Ratio of A and B = `2/10 : 1/10` or  2 : 1