Question

The Balance Sheet of X, Y and Z who were sharing profits in the ratio of 5 : 3 : 2 as at 31st March, 2019 is as follows:

Liabilities		₹	Assets	₹
Creditors		50,000	Cash at Bank	40,000
Employees' Provident Fund		10,000	Sundry Debtors	1,00,000
Profit and Loss A/c		85,000	Stock	80,000
Capital A/cs:			Fixed Assets	60,000
X	40,000
Y	62,000
Z	33,000	1,35,000
		2,80,000		2,80,000

    
X retired on 1st April, 2019 and Y and Z decided to share profits in future in the ratio of 3 : 2 respectively.
The other terms on retirement were:
(a) Goodwill of the firm is to be valued at ₹ 80,000.
(b) Fixed Assets are to be depreciated to ₹ 57,500.
(c) Make a Provision for Doubtful Debts at 5% on Debtors.
(d) A liability for claim, included in Creditors for ₹ 10,000, is settled at ₹ 8,000.
The amount to be paid to X by Y and Z in such a way that their Capitals are proportionate to their profit-sharing ratio and leave a balance of ₹ 15,000 in the Bank Account.
Prepare Profit and Loss Adjustment Account and Partners' Capital Accounts.

Answer 1

Revaluation Account

Dr.		Cr.
Particulars	Amount (₹)	Particulars		Amount (₹)
Fixed Assets A/c (60,000 – 57,500)	2,500	Creditors (10,000 – 8,000)		2,000
Provision for Doubtful Debts	5,000	Loss on Revaluation transferred to:
		X	2,750
		Y	1,650
		Z	1,100	5,500
	7,500			7,500

 

Partners’ Capital Accounts

Dr.				Cr.
Particulars	X	Y	Z	Particulars	X	Y	Z
Revaluation A/c (Loss)	2,750	1,650	1,100	Balance b/d	40,000	62,000	33,000
X’s Capital A/c	–	24,000	16,000	Profit & Loss A/c	42,500	25,500	17,000
Balance c/d	1,19,750	61,850	32,900	Y’s Capital A/c	24,000	–	–
				Z’s Capital A/c	16,000	–	–
	1,22,500	87,500	50,000		1,22,500	87,500	50,000
Bank A/c	1,19,750	–	–	Balance b/d	1,19,750	61,850	32,900
Balance c/d	–	1,18,500	79,000	Bank A/c	–	56,650	46,100
	1,19,750	1,18,500	79,000		1,19,750	1,18,500	79,000

 

Working Notes

WN 1 Calculation of Gaining Ratio 

Old Ratio (X, Y and Z) = 5:3:2

New Ratio (Y and Z) = 3:2

Gaining Ratio = New Ratio – Old Ratio

`"Y's share" = 3/5 - 3/10 = 3/10`

`"Z's share" = 2/5 - 2/10 = 2/10`

Hence, gaining ratio is 3 : 2.

WN2 Adjustment of Goodwill

Total Goodwill of the Firm = 80,000

`"X's share in goodwill" = 5/10 xx 80,000`

                                      = `40,000`

To be borne by Gaining partners in their Gaining Ratio i.e. 3:2

`"Y's share" = 40,000 xx 3/5 = 24,000`

`"Z's share" = 40,000 xx 2/5 = 16,000`

WN3 Adjustment of Capital

X’s Capital before adjustment = 1,19,750

Y’s Capital before adjustment = 61,850

Z’s Capital before adjustment = 32,900

`"Total Capital of New Firm"="X's Capital" + "Y's Capital+Z's Capital"+"Closing balance of Bank Account" − "Available Bank Balance"`

            = `1,19,750 + 61,850 + 32,900 + 15,000 − 32,000`

            =`"Rs"1,97,500`

`"New profit sharing Ratio" = 3 : 2`

`"Y's share in new capital" = 3/5 xx 1,97,500 = 1,18,500`

`"Z's share in new capital" = 2/5 xx 1,97,500 = 79,000`
 

Particulars	Y	Z
New Capital Balance	1,18,500	79,000
Adjusted Old Capital Balance	61,850	32,900
Cash brought in by the Partner	56,650	46,100

WN4

Cash at Bank A/c

Dr.		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Balance b/d	40,000	Creditors	8,000
Y’s Capital A/c	56,650	X’s Capital A/c	1,19,750
Z’s Capital A/c	46,100	Balance c/d	15,000
	1,42,750		1,42,750