Question

Nem and Khem, sharing profits in the ratio of 3 : 2 admit Prem as a partner with `1/3` share in profits. He had to contribute proportionate capital. They had the following financial position:

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	40,000	Cash at Bank	5,000
Reserve Fund	50,000	Debtors	60,000
Capitals:		Stock	35,000
Nem	50,000	Plant and Machinery	80,000
Khem	40,000
	1,80,000		1,80,000

They agreed to admit Prem as a partner on the following terms:

1. Plant and Machinery to be reduced by 10%.
2. Stock to be increased by ₹ 3,000.
3. Bad debts provision was to be created at 5%.
4. Accrued incomes not appearing in the books ₹ 900.
5. Prem was to introduce ₹ 20,000 as a premium for goodwill for a `1/3`rd share of the future profits of the firm.

Prepare Profit and Loss Adjustment Account, Capital Accounts and Balance Sheet of the new firm. Also calculate the new profit-sharing ratio.

Hint: Calculation of Prem’s Capital:

Combined Capital of Nem and Khem for `2/3` share of Profits

= 87,740 + 65,160

= ₹ 1,52,900

Therefore, the total Capital of the new firm will be

= `1,52,900 xx 3/2`

= ₹ 2,29,350

Prem’s Capital for `1/3`rd share = `2,29,350 xx 1/3`

= ₹ 76,450

Answer 1

Dr.	Profit and Loss Adjustment Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Plant and Machinery A/c		8,000	By Stock A/c		3,000
To Provision for Bad Debts A/c		3,000	By Accrued Income A/c		900
			To Loss transferred to Capital A/cs:		7,100
			Nem	4,260
			Khem	2,840
		11,000			11,000

 

Dr.	Partner’s Capital Accounts						Cr.
Particulars	Nem (₹)	Khem (₹)	Prem (₹)	Particulars	Nem (₹)	Khem (₹)	Prem (₹)
To Revaluation (Loss)	4,260	2,840		By Balance b/d	50,000	40,000
To Balance c/d	87,740	65,160	76,450	By Reserve Fund	30,000	20,000
				By Premium for Goodwill	12,000	8,000
				By Cash at Bank			76,450
	92,000	68,000	76,450		92,000	68,000	76,450

 

Balance Sheet
Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	40,000	Cash at Bank	1,01,450
Capitals:		Debtors	57,000
Nem	87,740	Stock	38,000
Khem	65,160	Plant and Machinery	72,000
Prem	76,450	Accrued Incomes	900
	2,69,350		2,69,350

Calculate New Profit Sharing Ratio:

The old ratio of Nem and Khem is 3 : 2. Prem is admitted with a `1/3` share.

Remaining share of old partners = `1 - 1/3`

= `2/3`

Nem’s new share = `2/3 xx 3/5`

= `6/15`

Khem’s new share = `2/3 xx 2/5`

= `4/15`

Prem’s new share = `1/3`

= `(1 xx 5)/(3 xx5)`

= `5/15`

The New Profit Sharing Ratio of Nem, Khem, and Prem = `6/15 : 4/15 : 5/15` or 6 : 4 : 5

Working Note:

Prem’s Capital:

Combined Capital of Nem and Khem for `2/3` share of Profits

= 87,740 + 65,160

= ₹ 1,52,900

Total Capital of the new firm:

= `1,52,900 xx 3/2`

= ₹ 2,29,350

Prem’s Capital for `1/3`rd share:

= `2,29,350 xx 1/3`

= ₹ 76,450

Cash at Bank = Premium + Prem’s Capital 

= ₹ 5,000 + ₹ 20,000 + ₹ 76,450

= ₹ 1,01,450