Question

Gautam and Rahul are partners in a firm, sharing profits and losses in the ratio of 2 : 3. Their Balance Sheet as at 31st March, 2014, was as follows:

Balance Sheet as at 31st March, 2014
Liabilities	₹	₹	Assets	₹	₹
Sundry Creditors		5,000	Goodwill		10,000
Bills Payable		15,000	Furniture		25,000
General Reserve		10,000	Stock		15,000
Capital A/cs:		70,000	Sundry Debtors	12,000	10,000
Gautam	30,000		Less: Provision for Doubtful Debts	2,000
Rahul	40,000		Cash in hand		40,000
		1,00,000			1,00,000

Karim was to be taken as a partner with effect from 1st April, 2014, on the following terms:

1. The new profit-sharing ratio of Gautam, Rahul and Karim would be 5 : 3 : 2.
2. Provision for Doubtful Debts would be raised to 20% of debtors.
3. Karim would bring in cash, his share of capital of ₹ 40,000 and his share of goodwill valued at ₹ 10,000.
4. Gautam would take over the furniture at ₹ 22,000.

You are required to:

1. Pass journal entries at the time of Karim’s admission.
2. Prepare the Balance Sheet of the reconstituted firm.

Hint:

Gautam gains `1/10` share and Rahul sacrifices `3/10` share; Amount of compensation for goodwill to be made by Gautam to Rahul ₹ 5,000.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2014
April 1	Revaluation A/c  ...Dr.		3,400
	To Provision for doubtful debts A/c			400
	To Furniture A/c			3,000
	(Assets and liabilities revalued)
April 1	Gautam’s Capital A/c   ...Dr.		1,360
	Rahul’s Capital A/c   ...Dr.		2,040
	To Revaluation A/c			3,400
	(Loss on revaluation distributed old partners)
April 1	Gautam’s Capital A/c   ...Dr.		22,000
	To Furniture A/c			22,000
	(Furniture taken Gautam)
April 1	General Reserve A/c   ...Dr.		10,000
	To Gautam’s Capital A/c			4,000
	To Rahul’s Capital A/c			6,000
	(General Reserve transferred old partner’s Capital account)
April 1	Gautam’s Capital A/c   ...Dr.		4,000
	Rahul’s Capital A/c   ...Dr.		6,000
	To Goodwill A/c			10,000
	(Goodwill written off from the Capital accounts of the old partners in the old ratio)
April 1	Cash A/c   ...Dr.		50,000
	Karim’s Capital A/c    ...Dr.			40,000
	To Goodwill A/c			10,000
	(Capital and goodwill brought in cash)
April 1	Gautam’s Capital A/c   ...Dr.		5,000
	Goodwill A/c  ...Dr.		10,000
	To Rahul’s Capital A/c			15,000
	(Rahul compensated for sacrifice of `3/10` share of profit)

 

Balance Sheet
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		5,000	Stock		15,000
Bills Payable		15,000	Cash in hand		90,000
Capital:		94,000	Sundry Debtors	12,000	9,600
Gautam	1,640		Less: Provision for Doubtful Debts	2,400
Rahul	52,960
Kairm	40,000
		1,14,600			1,14,600

Working Note:

Old Ratio Galitam and Rahul 2 : 3

New Ratio Gautam, Rahul and Kabir = 5 : 3 : 2

Sacrificing and Gaining Ratio:

Gautam’s Share = `2/5 - 5/10`

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

= `4/10 - 5/10`

= `1/10` (Gain)

Gautam’s Share = `3/5 - 3/10`

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

= `6/10 - 3/10`

= `3/10` (Sacrifice)

Kabir’s Share = `2/10`

Value of Goodwill of Firm = `10,000 xx 10/2`

= ₹ 50,000

Compensation paid B = `50,000 xx 1/10`

= ₹ 5000