Question

X and Y are partners in a firm, sharing profits and losses in the ratio of 5 : 3. On 31st March, 2021, their Balance Sheet was as under: Liablities Amount (₹) Amount (₹) Assets Amount (₹) Amount (₹) Creditors   40,000 Bank   6,000 Provident Fund   10,000 Debtors   1,80,000 Workmen’s Compensation Reserve   50,000 Stock   1,40,000 Capital A/cs:   5,00,000 Premises   2,50,000 X 3,00,000 Advertisement Expenses   24,000 Y 2,00,000           6,00,000     6,00,000 On 1st April, 2021, Z is admitted as a partner. X surrenders `1/4`th of his share and Y `1/3`rd of his share in favour of Z. Goodwill is valued at ₹ 1,60,000. Z brings in only `3/5` of his share of goodwill in cash and ₹ 1,20,000 as his capital. The following terms are agreed upon: Premises are to be increased to ₹ 2,75,000. Stock includes obsolete stock of ₹ 40,000, which is expected to realise only 10% of its value. Creditors proved at ₹ 45,000, one bill for goods purchased having been omitted from the books. Outstanding rent amounted to ₹ 5,000 and prepaid salaries ₹ 3,000 Liability on account of the provident fund was only ₹ 8,000 Liability for Workmen’s Compensation Claim was ₹ 34,000

On the basis of the above information, you are required to answer the following questions:

1. Loss/Gain on Revaluation will be:
   1. Nil
   2. Gain ₹ 16,000
   3. Loss ₹ 12,000
   4. Loss ₹ 16,000
2. Goodwill will be:
   1. Credited to X ₹ 88,889 and Y ₹ 71,111
   2. Credited to X ₹ 25,000 and Y ₹ 20 000
   3. Credited to X ₹ 15,000 and Y ₹ 12,000
   4. Credited to X ₹ 28,125 and Y ₹ 16,875
3. Balance of X’s Capital Account will be:
   1. ₹ 2,95,000
   2. ₹ 3,10,000
   3. ₹ 3,20,000
   4. ₹ 3,00,000
4. Balance of Y’s Capital Account will be:
   1. ₹ 1,99,000
   2. ₹ 2,03,000
   3. ₹ 2,17,000
   4. ₹ 2,11,000

Answer 1

1. D. Loss ₹ 16,000
2. B. Credited to X ₹ 25,000 and Y ₹ 20 000
3. B. ₹ 3,10,000
4. D. ₹ 2,11,000

Explanation:

1.

Dr.	REVALUATION ACCOUNT				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Stock		36,000	By Premises		25,000
To Creditors		5,000	By Prepaid Salaries		3,000
To Outstanding Rent		5,000	By Provident Fund		2,000
			By Revaluation Loss transferred to:		16,000
			X’s Capital A/c	10,000
			Y’s Capital A/c	6,000
		46,000			46,000

2.

Calculation of Sacrificing Ratios:

X’s old share `5/8`, X surrenders `1/4`th of `5/8` in favour of Z

X has surrendered `1/4 xx 5/8`

= `5/32`

Y’s old share `3/8`, Y surrenders`1/3`rd of `3/8` in favour of Z

Y has surrendered `1/3 xx 3/8`

= `3/32`

= `1/8`

Sacrificing Ratio of X and Y = `5/32 : 1/8`

To simplify Y, use a common denominator of 32:

Y’s Sacrifice = `1/8`

= `(1 xx 4)/(8 xx 4)`

= `4/32`

The Sacrificing Ratio of X and Y = `5/32 : 4/32` or 5 : 4

Calculation of New Ratio:

X’s new share = `5/8 - 5/32`

= `(5 xx 4)/(8 xx 4) - 5/32`

= `20/32 - 5/32`

= `15/32`

Y’s new share = `3/8 - 4/32`

= `(3 xx 4)/(8 xx 4) - 4/32`

= `12/32 - 4/32`

= `8/32`

X’s new share = `5/32 + 4/32`

= `9/32`

Hence, The New Ratio of X, Y, and Z = `15/32 : 8/32 : 9/32` or 15 : 8 : 9

Z’s share of Goodwill = `1,60,000 xx 9/32`

= 45,000

Out of this `3/5`, i.e., `45,000 xx 3/5` = ₹ 27,000, is brought in cash, and the remaining ₹ 18,000 is not brought in cash.

X’s share of Goodwill = `45,000 xx 5/9`

= 25,000

Y’s share of Goodwill = `45,000 xx 4/9`

= 20,000

3. and 4.

Dr.	PARTNER’S CAPITAL ACCOUNTS						Cr.
Particulars	X (₹)	Y (₹)	Z (₹)	Particulars	X (₹)	Y (₹)	Z (₹)
To Revaluation	10,000	6,000		By Balance b/d	3,00,000	2,00,000
To Advertisement Exp	15,000	9,000		By Workmen’s Compensation Reserve	10,000	6,000
To Balance c/d	3,10,000	2,11,000	1,20,000	By Premium for Goodwill (5 : 4)	15,000	12,000
				By Z’s Current A/c (5 : 4)	10,000	8,000
				By Bank A/c			1,20,000
	3,35,000	2,26,000	1,20,000		3,35,000	2,26,000	1,20,000