Question

On 31-3-2024 the Balance Sheet of W and R, who shared profits in 3 : 2 ratio was as follows:

Liabilities	₹	₹	Assets	₹	₹
Creditors		20,000	Cash		5,000
Profit and Loss Account		15,000	Sundry Debtors	20,000
Capital Accounts:		70,000	Less: Provision	700	19,300
W	40,000		Stock		25,000
R	30,000		Plant and Machinery		35,000
			Patents		20,700
		1,05,000			1,05,000

On 1st April, 2024 B was admitted as a partner on the following conditions:

1. B will get `4/15`th share of profits.
2. B had to bring ₹ 30,000 as his capital, to which amount other Partners capitals shall have to be adjusted.
3. He would pay cash for his share of goodwill, which would be based on `2 1/2` years’ purchase of average profits of the past 4 years.
4. The assets would be revalued as under:
   Sundry debtors at book value, less 5% provision for bad debts. Stock at ₹ 20,000, Plant and Machinery at ₹ 40,000.
5. The profits of the firm for the years 2021, 2022, and 2023 were ₹ 20,000, ₹ 14,000, and 17,000, respectively.

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

Hint:

Average Profits = `(20,000 + 14,000 + 17,000 + 15,000  "(Given in Balance Sheet)")/4`

= ₹ 16,500

Value of Goodwill = `16,500 xx 2 1/2`

= ₹ 41,250

B’s Share in Goodwill = `41,250 xx 4/15`

= ₹ 11,000

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Stock A/c		5,000	By Plant and Machinery A/c		5,000
To Provision for Bad Debts A/c		300	To Loss transferred to:		300
			W’s Capital A/c	180
			R’s Capital A/c	120
		5,300			5,300

 

Dr.	Partner’s Capital Accounts						Cr.
Particulars	W (₹)	R (₹)	B (₹)	Particulars	W (₹)	R (₹)	B (₹)
To Revaluation Loss A/c	180	120		By Balance b/d	40,000	30,000
To Cash A/c (Withdrawals)	5,920	7,280		By Profit and Loss A/c	9,000	6,000
To Balance c/d	49,500	33,000	30,000	By B’s Capital A/c (Goodwill)	6,600	4,400
				By Cash A/c (Capital)			30,000
	55,600	40,400	30,000		55,600	40,400	30,000

 

New Firm’s Balance Sheet as at 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		20,000	Cash		32,800
Capital Accounts:		1,12,500	Sundry Debtors	20,000	19,000
W	49,500		Less: Provision for Bad Debts	1,000
R	33,000		Stock		20,000
B	30,000		Plant and Machinery		40,000
			Patents		20,700
		1,32,500			1,32,500

Working Note:

Calculation of Goodwill:

Total Profits = 20,000 + 14,000 + 17,000 + 15,000

= 66,000

Average Profits = `"Total Profits"/"Number of years"`

= `66,000/4`

= 16,500

Goodwill is valued at 2.5 years’ purchase of average profits.

Value of Goodwill = Average Profits × 2.5

= 16,500 × 2.5

= 41,250

B’s share is `4/15`th of the total goodwill.

B’s Share of Goodwill = `41.250 xx 4/15`

= 11,000

Calculation of New Ratio:

The old ratio of W and R is 3 : 2.

Remaining Share = `1 - 4/15`

= `11/15`

W’s New Share = `11/15 xx 3/5`

= `33/75`

R’s New Share = `11/15 xx 2/5`

= `22/75`

B’s New Share = `11/15 xx 4/5`

= `20/75`

New Ratio of W, R, and B = `33/75 : 22/75 : 20/75` or 33 : 22 : 20

Calculation of Sacrificing Ratio:

Sacrificing Ratio = Old Ratio − New Ratio

W’s Sacrifice = `3/5 - 33/75`

= `(3 xx 15)/(5 xx 15) - 33/75`

= `45/75 - 33/75`

= `(45 - 33)/75`

= `12/75`

R’s Sacrifice = `2/5 - 22/75`

= `(2 xx 15)/(5 xx 15) - 22/75`

= `30/75 - 22/75`

= `(30 - 22)/75`

= `8/75`

Sacrificing Ratio of W, R, and B = `12/75 : 8/75` or 3 : 2

The sacrificing ratio is the same as the old ratio. Therefore, B's share of goodwill, ₹ 11,000 will be distributed to W and R in the ratio of 3 : 2.

W’s share of goodwill = `11,000 xx 3/5`

= 6,600

R’s share of goodwill = `11,000 xx 2/5`

= 4,400