Question

A and B are partners sharing profits in the ratio of 3 : 1. They admitted C as a partner by giving him 1/4th share of profits which he acquired from A and B in the ratio of 2 : 1. C brings in ₹ 1,00,000 as Capital and ₹ 36,000 as goodwill in cash. At the time of admission of C, general reserve appeared in their balance sheet at ₹ 50,000.

Following revaluation are also made:

1. Value of Plant is to be reduced by ₹ 10,000.
2. Bad Debts Provision is to be reduced from ₹ 4,000 to ₹ 3,000.
3. ₹ 2,000 Out of total Creditors of ₹ 20,000 are not to be paid.
4. There is an outstanding bill for repairs for ₹ 1,200.

Pass necessary journal entries and prepare a Revaluation Account. Also calculate the new profit sharing ratios.

Answer 1

1. Calculation of New Profit Sharing Ratio & Sacrificing Ratio

Individual Sacrifice

C's Share: `1/4`

C acquires his share from A and B in the ratio of 2 : 1:

A's Sacrifice: `1/4 xx 2/3 = 2/12`

B's Sacrifice: `1/4 xx 1/3 = 1/12`

Sacrificing Ratio (A : B): 2 : 1

New Profit Sharing Ratio

Formula: New Share = Old Share − Sacrificed Share

A's New Share: `3/4 - 2/12 = (9 - 2)/12 = 7/12`

B's New Share: `1/4 - 1/12 = (3 - 1)/12 = 2/12`

C's New Share: `1/4 = 3/12`

New Profit Sharing Ratio (A : B : C): 7 : 2 : 3

2.

Revaluation Account
Particulars	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Plant A/c (Reduction)	10,000	By Provision for Bad Debts A/c (4k − 3k)		1,000
To Outstanding Repairs Bill A/c	1,200	By Sundry Creditors A/c (Written off)		2,000
		By Loss transferred to Capital A/cs:
		A's Capital A/c (3/4)	6,150
		B's Capital A/c (1/4)	2,050	8,200
Total	11,200	Total		11,200

3.

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Cash/Bank A/c   ...Dr.		1,36,000
	To C's Capital A/c			1,00,000
	To Premium for Goodwill A/c			36,000
	(Being capital and premium for goodwill brought in cash by C)
2.	Premium for Goodwill A/c   ...Dr.		36,000
	To A's Capital A/c			24,000
	To B's Capital A/c			12,000
	(Being premium distributed in the sacrificing ratio of 2 : 1)
3.	General Reserve A/c   ...Dr.		50,000
	To A's Capital A/c			37,500
	To B's Capital A/c			12,500
	(Being accumulated reserves distributed in old ratio of 3 : 1)
4.	Revaluation A/c   ...Dr.		11,200
	To Plant A/c			10,000
	To Outstanding Repairs Bill A/c			1,200
	(Being decrease in assets and creation of unrecorded liability)
5.	Provision for Bad Debts A/c   ...Dr.		1,000
	Sundry Creditors A/c   ...Dr.		2,000
	To Revaluation A/c			3,000
	(Being decrease in provisions and liabilities credited to revaluation)
6.	A's Capital A/c   ...Dr.		6,150
	B's Capital A/c   ...Dr.		2,050
	To Revaluation A/c			8,200
	(Being revaluation loss shared by old partners in old ratio of 3 : 1)