Question

Raj and Rashmi shared profits and losses in the ratio of 3: 2 respectively. Their Balance Sheet as on 31^st March 2020 was as under:

Balance sheet as on 31^st March, 2020

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	90,000	Cash at Bank	1,500
General Reserve	60,000	Sundry Debtors	1,33,500
Capital:		Stock	51,000
Raj	2,16,000	Investment	72,000
Rashmi	1,44,000	Plant	1,80,000
		Building	72,000
	5,10,000		5,10,000

They admit Hiren into partnership on 1-4-2020. The terms being that:

(1) He shall have to bring in ₹ 1,20,000 as his Capital for 1/4 share in future profits. 

(2) Value of Goodwill of the firm is to be fixed at the average profits for the last three years.

The Profit were:

2016 - 17	₹ 96,000
2017 - 18	₹ 1,62,000
2018 - 19	₹ 1,47,000

Hiren is unable to bring the value of the Goodwill in cash. It is decided to raise the Goodwill in the books of accounts.

(3) Reserve for doubtful debts is to be created at ₹ 3,000.

(4) Closing stock is valued at ₹ 45,000.

(5) Plant and Building is to be depreciated by 5%.

Prepare Profit and Loss Adjustment A/c, Capital Accounts of Partners and Balance Sheet of the new firm.

Answer 1

In the books of the Partnership firm

Dr.	Profit and Loss Adjustment Account						Cr.
Particulars			Amount (₹)	Particulars		Amount (₹)
To R.D.D. (New) A/c			3,000	By Loss on Revaluation Transferred to Partner's Capital A/cs:
To Stock A/c			6,000	Raj	12,960
To Depreciation A/cs:				Rashmi	8,640	21,600
Plant		9,000
Building		3,600	12,600
			21,600			21,600

 

Dr.	Partner's Capital Accounts						Cr.
Particulars	Raj (₹)	Rashmi (₹)	Hiren (₹)	Particulars	Raj (₹)	Rashmi (₹)	Hiren (₹)
To Profit and Loss Adjustment A/c (Loss)	12,960	8,640	-	By Balance b/d	2,16,000	1,44,000	-
To Balance c/d	3,20,040	2,13,360	1,20,000	By Cash/Bank A/c	-	-	1,20,000
				By Goodwill A/c	81,000	54,000	-
				By General Reserve A/c	36,000	24,000	-
	3,33,000	2,22,000	1,20,000		3,33,000	2,22,000	1,20,000

 

Balance Sheet as on 1st April, 2020
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital A/c:			Cash		1,21,500
Raj	3,20,040		Sundry Debtors	1,33,500
Rashmi	2,13,360		Less: R.D.D. (New)	3,000	1,30,500
Hiren	1,20,000	6,53,400	Stock	51,000
Sundry Creditors		90,000	Less: Value decreases	6,000	45,000
			Investments		72,000
			Plant	1,80,000
			Less: Depreciation	9,000	1,71,000
			Building	72,000
			Less: Depreciation	3,600	68,400
			Goodwill		1,35,000
		7,43,400			7,43,400

Working Notes:

(1) Average Profit = `"Total Profit"/"No. of years"`

`= (96000 + 162000 + 147000)/3`

= ₹ 1,35,000

∴ Goodwill value = ₹ 1,35,000

Raj's share in Goodwill = ₹ 81,000 (1,35,000 × `3/5`)

Rashmi's share in Goodwill = ₹ 54,000 (1,35,000 × `2/5`)

(2) Hiren is not able to bring share in goodwill and it is decided to raise the goodwill in the book.

Therefore, Goodwill is recorded in the Asset side ₹ 1,35,000.