Question

The Balance Sheet of A and B as at 31st March, 2024 is given below:

Liabilities	₹	Assets	₹
A’s Capital	60,000	Freehold Property	20,000
B’s Capital	30,000	Furniture	6,000
General Reserve	24,000	Stock	12,000
Creditors	16,000	Debtors	80,000
		Cash	12,000
	1,30,000		1,30,000

A and B share profits and losses in the ratio of 2 : 1. On 1st April, 2024 they agree to admit P into the firm subject to the following terms and conditions:

1. P will bring in ₹ 21,000 of which ₹ 9,000 will be treated as his share of Goodwill to be retained in the business.
2. P will be entitled to `1/4` share of the profits of the firm.
3. 50% of the General Reserve is to remain as a provision for bad and doubtful debts.
4. Furniture is to be depreciated by 5%.
5. Stock is to be revalued at ₹ 10,500.

Prepare the Revaluation Account, Capital Accounts and Opening Balance Sheet of the new firm.

Hint: Entry for General Reserve will be:

General Reserve A/c   ...Dr.	24,000
To Provision for bad & doubtful debts A/c		12,000
To A’s Capital A/c		8,000
To B’s Capital A/c		4,000

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Furniture A/c		300	By Loss transferred to:		1,800
To Stock A/c		1,500	A	1,200
			B	600
		1,800			1,800

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	P (₹)	Particulars	A (₹)	B (₹)	P (₹)
To Revaluation A/c	1,200	600		By Balance b/d	60,000	30,000
To Balance c/d	72,800	36,400	12,000	By General Reserve A/c	8,000	4,000
				By Cash A/c (Capital)			12,000
				By Cash A/c (Goodwill)	6,000	3,000
	74,000	37,000	12,000		74,000	37,000	12,000

 

Balance Sheet of the new firm
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital A/c		1,21,200	Freehold Property		20,000
A	72,800		Furniture	6,000
B	36,400		Less: depreciation by 5%.	300	5,700
P	12,000		Stock		10,500
Creditors		16,000	Debtors		80,000
Provision for bad & doubtful debts		12,000	Cash		33,000
		1,49,200			1,49,200

Working Note:

P’s Capital: P brings in ₹ 21,000, of which ₹ 9,000 is for goodwill. The remainder is his capital.

P’s Capital = 21,000 − 9,000

= 12,000

Distribution of Goodwill:

P's share of goodwill, ₹ 9,000 is distributed to A and B in their sacrificing ratio, which is the same as their old ratio of 2 : 1.

A’s share = `9,000 xx 2/3`

= 6,000

B’s share = `9,000 xx 1/3`

= 3,000

Distribution of General Reserve:

The hint shows the General Reserve of ₹ 24,000 is used to create a provision of ₹ 12,000 and the remaining ₹ 12,000 is distributed to partners in the 2 : 1 ratio.

A’s share = `12,000 xx 2/3`

= 8,000

B’s share = `12,000 xx 1/3`

= 4,000

Cash Balance = `12,000 + 21,000`

= 33,000

Note: The total of the Balance Sheet ₹ 1,49,200 differs from the total given in the answer key of the question, ₹ 1,37,200. The total provided in the answer key appears to be incorrect, as it does not include the new Provision for bad and doubtful debts of ₹ 12,000.