Question

A and B are partners sharing profits in the ratio of 3 : 2. Their Balance Sheet stood as under as at 31st August, 2024:

Liabilities	₹	₹	Assets	₹	₹
Creditors		2,50,000	Bank		72,000
Outstanding Rent		10,000	Debtors	2,00,000	1,88,000
Capital Accounts:		8,00,000	Less: Provision	12,000
A	5,00,000		Stock		2,50,000
B	3,00,000		Machinery		1,50,000
			Buildings		4,00,000
		10,60,000			10,60,000

On that date C is admitted as a partner. A sacrifices `1/3` of his share and B `1/10` from his share in favour of C. Following terms are agreed upon:

1. Goodwill is valued at ₹ 1,50,000. C is to bring in his share of goodwill in cash.
2. Provision for Doubtful Debts is to be 5% of debtors.
3. Outstanding rent amounted to ₹ 25,000 and prepaid insurance to ₹ 13,000.
4. Building is to be increased to ₹ 5,00,000 and Stock by ₹ 25,000.
5. C is to contribute ₹ 3,50,000 as his capital.

Prepare the Revaluation Account, Partner’s Capital Accounts and the Balance Sheet of the new firm.

Answer 1

Dr.	Prepare Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Outstanding Rent A/c		15,000	By Provision for Doubtful Debts A/c		2,000
To Profit transferred to:		1,25,000	By Prepaid Insurance A/c		13,000
A’s Capital A/c	75,000		By Buildings A/c		1,00,000
B’s Capital A/c	50,000		By Stock A/c		25,000
		1,40,000			1,40,000

 

Dr.	Prepare Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Balance c/d	6,05,000	3,65,000	3,50,000	By Balance b/d	5,00,000	3,00,000
				By Bank A/c			3,50,000
				By Premium for Goodwill A/c	30,000	15,000
				By Revaluation Profit	75,000	50,000
	6,05,000	3,65,000	3,50,000		6,05,000	3,65,000	3,50,000

 

Balance Sheet as at 31st August, 2024
Liabilities	Amount  (₹)	Amount  (₹)	Assets	Amount  (₹)	Amount  (₹)
Creditors		2,50,000	Bank		4,67,000
Outstanding Rent		25,000	Debtors	2,00,000	1,90,000
Capital Accounts:		13,20,000	Less: Provision	10,000
A	6,05,000		Stock		2,75,000
B	3,65,000		Machinery		1,50,000
C	3,50,000		Buildings		5,00,000
			Prepaid Insurance		13,000
		15,95,000			15,95,000

Working Note:

Calculation of Sacrificing Ratio:

A’s sacrifice = `1/3 xx 3/5`

= `3/15`

= `1/5`

B’s sacrifice = `1/10`

A’s sacrifice = `1/5`

= `(1 xx 2)/(5 xx 2)`

= `2/10`

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

Calculation of New Profit-Sharing Ratio:

C’s Share = A’s sacrifice + B’s sacrifice

= `2/10 + 1/10`

= `3/10`

A’s New Share = `3/5 - 2/10`

= `(3 xx 2)/(5 xx 2) - 2/10`

= `6/10 - 2/10`

= `4/10`

B’s New Share = `2/5 - 1/10`

= `(2 xx 2)/(5 xx 2) - 1/10`

= `4/10 - 1/10`

= `3/10`

New Profit-Sharing Ratio A, B, and C = `4/10 : 3/10 : 3/10` or 4 : 3 : 3

C’s Share of Goodwill = `1,50,000 xx 3/10`

= 45,000

Distribution of Goodwill:

A’s Share = `45,000 xx 2/3`

= 30,000

B’s Share = `45,000 xx 1/3`

= 15,000