Question

Juliet and Rabani are partners in a firm, sharing profits and losses in the ratio of 3 : 1. On 31st March, 2016, their Balance Sheet was as under:

BALANCE SHEET OF JULIET AND RABANI As at 31st March, 2016
Liabilities	₹	₹	Assets	₹	₹
Sundry Creditors		70,000	Plant and Machinery		1,76,000
General Reserve		30,000	Inventory		26,000
Provident Fund		40,000	Sundry Debtors	57,000	54,000
Capital A/cs		2,00,000	Less: Provision for Doubtful Debts	3,000
Juliet	1,10,000		Cash at Bank		68,000
Rabani	90,000		Profit & Loss A/c		16,000
		3,40,000			3,40,000

Mike was taken as a partner for a `1/4`th share, with effect from 1st April, 2016, subject to the following adjustments:

1. Plant and Machinery was found to be overvalued by ₹ 16,000. It was to be shown in the books at the correct value.
2.  Provision for Doubtful Debts was to be reduced by ₹ 2,000.
3. Creditors included an amount of ₹ 2,000 received as commission from Malini. The necessary adjustment was required to be made.
4. Goodwill of the firm was valued at ₹ 60,000. Mike was to being in cash, his share of goodwill along with his capital of ₹ 1,00,000.
5. Capital Accounts of Juliet and Rabani were to be readjusted in the new profit-sharing arrangement on the basis of Mike’s capital, any surplus to be adjusted through the current account and any deficiency through cash.

You are required to prepare:

1. Revaluation Account,
2. Partner’s Capital Accounts, and
3. Balance Sheet of the reconstituted firm.

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Plant and Machinery A/c		16,000	By Provision for Doubtful Debts A/c		2,000
			By Sundry Creditors A/c		2,000
			By Net Loss transferred to:		12,000
			Juliet’s Capital A/c	9,000
			Rabani’s Capital A/c	3,000
		16,000			16,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	Juliet (₹)	Rabani (₹)	Mike (₹)	Particulars	Juliet (₹)	Rabani (₹)	Mike (₹)
To P&L A/c	12,000	4,000		By Balance b/d	1,10,000	90,000
To Revaluation Loss A/c	9,000	3,000		By General Reserve A/c	22,500	7,500
To Rabani’s Current A/c (Surplus)		19,250		By Premium for Goodwill	11,250	3,750
To Balance c/d	2,25,000	75,000	1,00,000	By Bank A/c (Mike’s Capital)			1,00,000
				By Bank A/c (Juliet brings extra)	1,02,250
	2,46,000	1,01,250	1,00,000		2,46,000	1,01,250	1,00,000

 

Balance Sheet as at April 1, 2016
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		68,000	Plant and Machinery		1,60,000
Provident Fund		40,000	Inventory		26,000
Rabani’s Current A/c		19,250	Sundry Debtors	57,000
Capitals:		4,00,000	Less: Provision for Doubtful Debts	1,000	56,000
Juliet	2,25,000		Cash at Bank		2,85,250
Rabani	75,000
Mike	1,00,000
		5,27,250			5,27,250

Working Note:

Calculate New Profit Sharing Ratio:

Old Ratio of Juliet and Rabani is 3 : 1

Mike is admitted for `1/4` share.

Assuming old partners share the remaining profit in their old ratio:

Remaining Share = `1 - 1/4`

= `3/4`

Juliet’s New Share = `3/4 xx 3/4`

= `9/16`

Rabani’s New Share = `3/4 xx 1/4`

= `3/16`

Mike’s New Share = `1/4`

= `(1 xx 4)/(4 xx 4)`

= `4/16`

New Ratio of Juliet, Rabani and Mike = `9/16 : 3/16 : 4/16` or 9 : 3 : 4

Calculate Sacrificing Ratio:

Juliet’s Sacrifice = `3/4 - 9/16`

= `(3 xx 4)/(4 xx 4) - 9/16`

= `12/16 - 9/16`

= `(12 - 9)/16`

= `3/16`

Rabani’s Sacrifice = `1/4 - 3/16`

= `(1 xx 4)/(4 xx 4) - 3/16`

= `4/16 - 3/16`

= `(4 - 3)/16`

= `1/16`

Sacrificing Ratio = 3 : 1

Goodwill Adjustment:

Firm’s Goodwill valued at ₹ 60,000.

Mike’s Share of Goodwill = `60,000 xx 1/4`

= 15,000

This premium is brought in cash and distributed to Juliet and Rabani in their sacrificing ratio 3 : 1.

Juliet’s share = `15,000 xx 3/4`

= 11,250

Rabani’s share = `15,000 xx 1/4`

= 3,750

Final Cash at Bank Balance:

Cash at Bank = Old Balance + Mike brought (Capital + Premium) + Juliet brought in cash

= 68,000 + 1,15,000 + 1,02,250

= 2,85,250