Question

A and B are partners sharing profits in the ratio of 2 : 3. Their balance sheet as at 31st March, 2024 was as follows:

Liabilities	₹	₹	Assets	₹	₹
Bank Overdraft		32,000	Cash in Hand		3,000
Creditors		25,000	Cash at Bank		12,000
P & L Account		10,000	Debtors	40,000	35,000
Capitals:		2,05,000	Less: Provision	5,000
A	1,00,000		Furniture		40,000
B	1,05,000		Building		80,000
			Machinery		1,00,000
			Investments		2,000
		2,72,000			2,72,000

On 1st April, 2024 they admitted C for a `1/5` share in profits, which he acquires wholly from B. The other terms of agreement were:

1. Goodwill of the firm was to be valued at two years’ purchase of the average of the last 3 years’ profits. The profits for the last 3 years were ₹ 58,000, ₹ 66,000, and ₹ 56,000 respectively.
2. Provision for Doubtful debts was found in excess by ₹ 2,000.
3. Buildings were found undervalued by ₹ 20,000 and furniture overvalued by ₹ 5,000.
4. ₹ 5,000 for damages claimed by a customer had been disputed by the firm. It was agreed at ₹ 2,000 by a compromise between the customer and the firm.
5. C was to bring in ₹ 60,000 as his capital and the necessary amount for his share of goodwill.
6. Capitals of A and B were to be adjusted in the new profit-sharing ratio by opening necessary current accounts.

Prepare journal entries, capital accounts and the opening balance sheet.

Hint: No entry will be passed for ₹ 5,000. Only the following entry will be passed in respect of damages:

Revaluation A/c   ...Dr.	2,000
To Damages Payable A/c		2,000

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Debit (₹)
	Bank A/c   ...Dr.		84,000
	To C’s Capital A/c			60,000
	To Premium for Goodwill A/c			24,000
	(Capital and goodwill brought in by C)
	Premium for Goodwill A/c   ...Dr.		24,000
	To B’s Capital A/c			24,000
	(C’s share of goodwill credited to B's Capital A/c)
	Profit & Loss A/c   ...Dr.		10,000
	To A’s Capital A/c			4,000
	To B’s Capital A/c			6,000
	(Accumulated profits distributed to old partners in old ratio 2 : 3)
	Provision for Doubtful Debts A/c   ...Dr.		2,000
	Building A/c   ...Ac		20,000
	To Revaluation A/c			22,000
	(Increase in value of assets and decrease in liability recorded)
	Revaluation A/c   ...Dr.		5,000
	To Furniture A/c			5,000
	(Decrease in value of furniture recorded)
	Revaluation A/c   ...Dr.		2,000
	To Damages Payable A/c			2,000
	(Unrecorded liability for damages recorded)
	Revaluation A/c   ...Dr.		15,000
	To A’s Capital A/c			6,000
	To B’s Capital A/c			9,000
	(Profit on revaluation transferred to A and B in 2:3 ratio)
	A’s Current A/c   ...Dr.		10,000
	To A’s Capital A/c			10,000
	(Surplus capital of A adjusted through current account)
	B’s Capital A/c   ...Dr.		24,000
	To B’s Current A/c			24,000
	(Deficit capital of B adjusted through current account)

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To B’s Current A/c (Deficit)		24,000		By Balance b/d	1,00,000	1,05,000
To Balance c/d	1,20,000	1,20,000	60,000	By Bank A/c			60,000
				By P&L A/c (Accum. Profit)	4,000	6,000
				By Premium for Goodwill A/c		24,000
				By Revaluation A/c (Profit)	6,000	9,000
				By A’s Current A/c (Surplus)	10,000
	1,20,000	1,44,000	60,000		1,20,000	1,44,000	60,000

 

Balance Sheet of A, B and C as at April 1, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		25,000	Cash in Hand		3,000
Damages Payable		2,000	Cash at Bank	12,000	64,000
Capital A/c:		3,00,000	Add: C’s Capital/Goodwill	84,000
A	1,20,000		Less: Bank Overdraft	32,000
B	1,20,000		Debtors	40,000	37,000
C	60,000		Less: Provision	3,000
B’s Current A/c		24,000	Furniture		35,000
			Building		1,00,000
			Machinery		1,00,000
			Investments		2,000
			A’s Current A/c		10,000
		3,51,000			3,51,000