Question

A and B are partners sharing profits in the ratio of 2 : 1. The following items appeared in their Balance Sheet as at 31st March, 2024:

A’s Capital ₹ 48,000; B’s Capital ₹ 30,000; Creditors ₹ 15,000; Bank balance ₹ 5,000; Debtors ₹ 20,000; Machinery ₹ 36,000; Stock ₹ 44,000.

They admit C into partnership on 1st April, 2024, with a `1/6`th share in profits, which he acquires equally from A and B. He brings in ₹ 20,000 as his capital and ₹ 18,000 as goodwill in cash.

The following revaluations were made:

1. 5% provision be made for doubtful debts on Debtors and a provision of 2% be made on Debtors and Creditors for discount.
2.  ₹ 1,000 are prepaid for insurance.
3. ₹ 5,000 are outstanding for salaries.
4. ₹ 1,480 for accrued income are to be shown in the books.
5. Investments for ₹ 6,000 have been omitted to be recorded in the books.

A and B decide to have their capitals in proportion to their share in profits, based on C’s share. Any excess of capital was to be withdrawn and deficit to be paid in Cash.

Prepare the partner’s capital accounts and give the new balance sheet of the firm.

Hint: The following balance sheet will be prepared first of all to calculate the missing figure, i.e., profit or loss:

Liabilities	Amount (₹)	Assets	Amount (₹)
A’s Capital	48,000	Bank Balance	5,000
B’s Capital	30,000	Debtors	20,000
Creditors	15,000	Machinery	36,000
P & L A/c (Balancing figure)	12,000	Stock	44,000
	1,05,000		1,05,000

Answer 1

Dr.	Revaluation Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Provision for Doubtful Debts A/c		1,000	By Provision for Discount on Creditors A/c		300
To Provision for Discount on Debtors A/c		380	By Prepaid Insurance A/c		1,000
To Outstanding Salaries A/c		5,000	By Accrued Income A/c		1,480
To Profit transferred to Capital A/cs:		2,400	By Investments A/c		6,000
A	1,600
B	800
		8,780			8,780

 

Dr.	Partner’s Capital Accounts						Cr.
Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Drawings A/c		13,800		By Balance b/d	48,000	30,000
To Balance c/d	70,000	30,000	20,000	By Profit & Loss A/c	8,000	4,000
				By Revaluation A/c	1,600	800
				By Goodwill A/c	9,000	9,000
				By Bank A/c			20,000
				By Bank A/c (Contribution)	3,400
	70,000	43,800	20,000		70,000	43,800	20,000

 

New Balance Sheet as at 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors	15,000	14,700	Bank Balance		32,600
Less: Provision for Discount	300		Debtors	20,000	18,620
Outstanding Salaries		5,000	Less: Provision for Doubtful Debts 5%	1,000
Capitals:		1,20,000		19,000
A	70,000		Less: Provision for Discount 2%	380
B	30,000		Machinery		36,000
C	20,000		Stock		44,000
			Prepaid Insurance		1,000
			Accrued Income		1,480
			Investments		6,000
		1,39,700			1,39,700

Working Note:

1. Calculation of New Profit-Sharing Ratio:

A and B’s Sacrifice = C acquires his `1/6` share equally from A and B

A’s sacrifice = `1/6 xx 1/2`

= `1/12`

B’s sacrifice = `1/6 xx 1/2`

= `1/12`

A’s New Share = `2/3 - 1/12`

= `(2 xx 4)/(3 xx 4) - 1/12`

= `8/12 - 1/12`

= `(8 - 1)/12`

= `7/12`

B’s New Share = `1/3 - 1/12`

= `(1 xx 4)/(3 xx 4) - 1/12`

= `4/12 - 1/12`

= `(4 - 1)/12`

= `3/12`

C’s New Share = `1/6`

= `(1 xx 2)/(6 xx 2)`

= `2/12`

The new profit-sharing ratio of A, B, and C = `7/12 : 3/12 : 2/12` or 7 : 3 : 2

For the proportional capital, the new shares of A and B,

2. Distribution of Profit & Loss A/c: 

The P&L A/c of ₹ 12,000 from the hint balance sheet is distributed in the old ratio of 2 : 1

A’s share = `12,000 xx 2/3`

= 8,000

B’s share = `12,000 xx 1/3`

= 4,000

3. Goodwill ₹ 18,000 is distributed equally between A and B

A’s share = `18,000 xx 1/2`

= 9,000

B’s share = `18,000 xx 1/2`

= 9,000

4. Proportional Capital:

The new total capital is determined based on C’s share.

Firm’s Total Capital = C’s Capital × Reciprocal of C’s Share

= `20,000 xx 6/1`

= 1,20,000

A’s new capital = `1,20,000 xx 7/12`

= 70,000

B’s new capital = `1,20,000 xx 3/12`

= 30,000

A’s existing credit balance = 48,000 + 8,000 + 9,000 + 1,600

= 66,600

= 70,000 − 66,600

= 3,400

B’s existing credit balance = 30,000 + 4,000 + 9,000 + 800

= 43,800

= 43,800 − 30,000 

= 13,800

5. Bank Balance = Old balance + C’s capital + C’s goodwill + A’s contribution − B’s withdrawal

= 5,000 + 20,000 + 18,000 + 3,400 − 13,800

= 32,600