Question

O, R and S were partners in a firm sharing profit in the ratio of 3:2:1 On 1.4.2014 their Balance Sheet was as follows:

Liabilities	Amount RS	Assets	Amount Rs
Capital Accounts        O      1,75,000        R      1,50,000        S      1,25,000 Current Accounts       O    4,000       S    6,000 General Reserve Profit and Loss Accounts Creditors Bills Payable	4,50,000     10,000 15,000 7,000 80,000 45,000	R’s Current Accounts Land and Building Plant and Machinery Furniture Investment Bills Receivables Sundry Debtors Stock Bank	7,000 1,75,000 67,500 80,000 36,500 17,000 43,500 1,37,000 43,500
	6,07,000		6,07,000

On the above date, H was admitted on the following terms:
(i) H will bring Rs 50,000 as his capital and will get 116 th share in the profits.
(ii) He will bring necessary cash for his share of goodwill premium. The goodwill of the firm was
valued at Rs 90,000.
(iii) The new profits sharing ratio will be 2:2:1:1.
(iv) A liability of Rs 7,004 will be created against bills receivables discounted.
(v) The value of stock, furniture and investments is reduced by 20% whereas the value of land and building and plant and machinery will be appreciated by 20% and 10% respectively.
(vi) The Capital accounts of the partners will be adjusted on the basis of H's Capital through their
current accounts.
Prepare Revaluation Account and Partner's Current Accounts and Capital Accounts.

Answer 1

Revaluation Account
Dr.			Cr.
Particulars	Rs	Particulars	Rs
To Stock A/c To Furniture A/c To Investment A/c To Liability against Bills Receivables discounted A/c	27,400 16,000 7,300   7,004	By Land and Building A/c By Plant and Machinery A/c By Loss transferred to A/c       O        7,977       R        5,318       S        2,659	35,000 6,750       15,954
	57,704		57,704

 

Partner’s Current Account
Dr.							Cr.
Particulars	O	R	S	Particulars	O	R	S
To Balance b/d		7,000		By Balance b/d	4,000		6,000
To Revaluation A/c (Loss)	7,977	5,318	2,659	By General Reserve A/c	7,500	5,000	2,500
				By Profit and Loss A/c	3,500	2,333	1,167
				By Premium for Goodwill A/c	15,000
To Balance c/d	97,023	45,015	82,008	By Capital A/c	75,000	50,000	75,000
	1,05,000	57,333	84,667		1,05,000	57,333	84,667

 

Partner’s Capital Account
Dr.									Cr.
Particulars	O	R	S	H	Particulars	O	R	S	H
To Current A/c	75,000	50,000	75,000	-	By Balance b/d	1,75,000	1,50,000	1,25,000	-
To Balance c/d	1,00,000	1,00,000	50,000	50,000	By Cash A/c				50,000
	1,75,000	1,50,000	1,25,000	50,000		1,75,000	1,50,000	1,25,000	50,000

Working Notes:

WN 1 Calculation of Sacrificing Ratio
Old Ratio = 3:2:1
New Ratio = 2:2:1:1
Sacrificing Ratio = Old Ratio – New Ratio

) = `3/6 - 2/6 = 1/6`

R = '2/6 - 2/6` = Nil

S = `1/6 - 1/6` = Nil

Here, the only O has sacrificed his `1/6` th share

WN 2 Distribution of Goodwill

H's Share of Goodwill = `90000 xx 1/6= 15000`

As the only O has sacrificed his share, therefore, he will get = 15,000.

WN3 Adjustment of Capital
Total Capital of the firm = H’s Capital x Reciprocal of her share

`= 50000 xx 6/1 = 300000`

New Profit Sharing Ratio = 2:2:1:1

O's New Capital = `300000 xx 2/6 = 100000`

R's New Capital = `300000 xx 2/6 = 100000`

S's New Capital = `300000 xx 1/6 = 50000`

H's New Capital = `300000 xx 1/6 = 50000`