Question

The balance sheet of Medha and Radha who share profit and loss in the ratio 3: 1 is as follows:

Balance Sheet as on 31 March 2018
Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	80,000	Cash	78,000
Bills Payable	20,000	Sundry debtors	64,000
Bank overdraft	20,000	Stock	40,000
Capital A/c:		Plant and Machinery	60,000
Medha	1,20,000	Furniture	22,000
Radha	40,000	Land and Building	32,000
General reserve	16,000
	2,96,000		2,96,000

 They decided to admit Krutika on 1^st April 2018 on the following terms:

1. Krutika is taken as partner on 1^st April 2017. She will pay 40,000 as her capital for 1/5th share in future profits and Rs. 2,500 as goodwill.
2. A 5% provision for bad and doubtful debt be created on debtors.
3. Furniture be depreciated by 20%.
4. Stocks be appreciated by 5% and plant and machinery by 20%.
5. The Capital accounts of all partners be adjusted in their new profit sharing ratio by adjusting the amount through current account.
6. The new profit sharing ratio will be 3/5:1/5:1/5 respectively.

You are required to prepare profit and loss adjustment A/c, Partner’s Capital A/c, Balance Sheet of the new firm.

Answer 1

Dr.	Profit and Loss Adjustment Account								Cr.
Particulars			Amount (₹)	Amount (₹)	Particulars		Amount (₹)	Amount (₹)
To R.D.D. A/c				3,200	By Stock A/c			2,000
To Depreciation A/c – Furniture				4,400	By Plant and Machinery A/c			12,000
T Profit on Revaluation Transferred to Partners’ Capital Accounts:
Medha			4,800
Radha			1,600	6,400
				14,000				14,000

 

Dr.	Partners’ Capital Account								Cr.
Particulars		Medha (₹)	Radha (₹)	Krutika (₹)	Particulars	Medha (₹)	Radha (₹)	Krutika (₹)
To Partners’ loan A/c		18,675	6,225	−	By Balance b/d	1,20,000	40,000	−
To Balance c/d		1,20,000	40,000	40,000	By Bank A/c	−	−	40,000
					By Goodwill A/c	1,875	625	−
					By General Reserve	12,000	4,000	−
					By Revaluation A/c	4,800	1,600	−
		1,38,675	46,225	40,000		1,38,675	46,225	40,000

 

Balance Sheet as on 1st April 2018
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital A/c:			Cash		1,20,500
Medha	1,20,000	2,00,000	Sundry Debtors	64,000	60,800
Radha	40,000		Less: R.D.D	3,200
Krutika	40,000		Stock	40,000	42,000
Sundry Creditors		80,000	Add: Appreciation	2,000
Bills Payable		20,000	Plant and Machinery	60,000	72,000
Bank Overdraft		20,000	Add: Appreciation	12,000
Partners’ Current A/c			Furniture	22,000	17,600
Medha	18,675	24,900	Less: Depreciation	4,400
Radha	6,225		Land and Building		32,000
		3,44,900			3,44,900

Working Notes:

(1) Total capital of the firm = (Reciprocal of New Partner’s Profit Sharing ratio) × (Capital contributed by new partner)

= (Reciprocal of  `1/5`) × 40,000

= 5 × 40,000

= ₹ 2,00,000

Medha’s closing capital balance = `3/5` × 2,00,000

= ₹ 1,20,000

Radha’s closing capital balance = `1/5` × 2,00,000

= ₹ 40,000

(2) General reserve is distributed among old partners in their old profit and loss ratio.

(3) Cash Balance: 78,000 + 40,000 + 2,500

= ₹ 1,20,500 [Amount brought in by new partner.]