Question

A and B are partners in a firm sharing profits and losses as 5 : 3. The position of the firm as at 31st March, 2024 was as follows:

Liabilities	₹	₹	Assets	₹	₹
Capital Accounts:		50,000	Plant and Machinery		40,000
A	30,000		Stock		30,000
B	20,000		Sundry Debtors		20,000
Sundry Creditors		15,000	Bills Receivable		10,000
Bank Overdraft		42,500	Cash at Bank		7,500
		1,07,500			1,07,500

On 1st April, 2024 C joins them on the condition that he will share `3/4`th of the future profits, the balance of profits being shared by A and B as 5 : 3. He introduces ₹ 40,000 by way of capital and a further ₹ 4,000 by way of premium for goodwill. He also provides a loan to the firm to pay off the bank overdraft. A and B agree to depreciate Plant by 10% and to raise a provision against Sundry Debtors @ 5%.

You are asked to journalise the entries in the books of the firm and show the resultant Balance Sheet. How will the partners share future profits?

Hint: Instead of Bank Overdraft, C’s Loan A/c will be shown on the liabilities side of the opening Balance Sheet. Following entry will be passed for it:

Bank Overdraft A/c   ...Dr.	42,500
To C’s Loan A/c		42,500

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		44,000
	To C’s Capital A/c			40,000
	To Premium for Goodwill A/c			4,000
	(Capital and premium for goodwill brought in by C)
	Bank Overdraft A/c   ...Dr.		42,500
	To C’s Loan A/c			42,500
	(Being bank overdraft paid off with a loan from C)
	Revaluation A/c   ...Dr.		5,000
	To Plant and Machinery A/c			4,000
	To Provision for Sundry Debtors A/c			1,000
	(Depreciation on plant and provision for doubtful debts made)
	A’s Capital A/c   ...Dr.		3,125
	B’s Capital A/c   ...Dr.		1,875
	To Revaluation A/c			5,000
	(Revaluation loss transferred to old partners’ capital accounts in old ratio of 5 : 3)
	Premium for Goodwill A/c   ...Dr.		4,000
	To A’s Capital A/c			2,500
	To B’s Capital A/c			1,500
	(Premium for goodwill distributed to old partners in a sacrifice ratio of 5 : 3)

 

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Plant and Machinery A/c		4,000	By Revaluation Loss transferred to:
To Provision for Sundry Debtors A/c		1,000	A’s Capital A/c	3,125
			B’s Capital A/c	1,875	5,000
		5,000			5,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Revaluation Loss	3,125	1,875		By Balance b/d	30,000	20,000
To Balance c/d	29,375	19,625	40,000	By Bank A/c			40,000
				By Premium for Goodwill	2,500	1,500
	29,375	19,625	40,000		29,375	19,625	40,000

 

New Balance Sheet as at 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		15,000	Plant and Machinery		36,000
C’s Loan A/c		42,500	Stock		30,000
Capitals:		89,000	Sundry Debtors	20,000	19,000
A	29,375		Less: Provision for Doubtful Debts	1,000
B	19,625		Bills Receivable		10,000
C	40,000		Cash at Bank		51,500
		1,46,500			1,46,500

Working Notes:

1. Calculate New Profit-Sharing Ratio:

C’s share = `3/4`

Remaining share for A and B = `1 - 3/4`

= `1/4`

A’s new share = `1/4 xx 5/8`

= `5/32`

B’s new share = `1/4 xx 3/8`

= `3/32`

C’s new share = `3/4`

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

= `24/32`

New Profit-Sharing Ratio of A, B, and C = `5/32 : 3/32 : 24/32`

2. Calculate Sacrifice ratio:

A’s Sacrifice = `5/8 - 5/32`

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

= `20/32 - 5/32`

= `(20 - 5)/32`

= `15/32`

B’s Sacrifice = `3/8 - 3/32`

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

= `12/32 - 3/32`

= `(12 - 3)/32`

= `9/32`

Sacrifice ratio of A and  B = `15/32 : 9/32` or 15 : 9 or 5 : 3

3. Distribution of Goodwill Premium:

C brings ₹ 4,000 for goodwill. This is distributed to the old partners in the sacrificing ratio 5 : 3.

A’s share = `4,000 xx 5/8`

= 2,500

B’s share = `4,000 xx 3/8`

= 1,500