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Question
A and B are partners sharing profits in the ratio of 7 : 5. Their Balance Sheet as at 31st December, 2023 was as follows:
| Liabilities | ₹ | ₹ | Assets | ₹ | ₹ |
| Sundry Creditors | 75,000 | Building | 6,00,000 | ||
| General Reserve | 1,50,000 | Stock | 1,80,000 | ||
| Workmen Compensation Reserve | 40,000 | Investments (Market Value ₹ 90,000) |
1,00,000 | ||
| Investment Fluctuation Reserve | 35,000 | Sundry Debtors | 1,50,000 | 1,35,000 | |
| Capital Accounts: | 9,00,000 | Less: Provision for Doubtful Debts | 15,000 | ||
| A | 5,00,000 | Cash at Bank | 1,45,000 | ||
| B | 4,00,000 | Advertisement Expenditure | 40,000 | ||
| 12,00,000 | 12,00,000 |
They admit C as a partner. A sacrifices `1/7`th of his share and B sacrifices `1/6`th from his share in favour of C.
Following terms are agreed upon:
- Goodwill is valued at ₹ 2,40,000. C brings ₹ 2,00,000 as capital and his share of goodwill in cash.
- Ravi, an old customer whose account was written off as bad, has promised to pay ₹ 12,000 in full settlement of his account of ₹ 15,000.
- Provision for doubtful debts to be reduced by ₹ 10,000.
- Claim on account of Workmen Compensation is ₹ 25,000.
- Stock is overvalued by 20% and the building is undervalued by 25%.
- After adjusting the claim of Workmen Compensation from the Workmen Compensation reserve and the difference between the book value and market value of investments from the Investment Fluctuation Reserve, the remaining balance of such reserves, along with all accumulated profits/losses, is to appear in the Balance Sheet of the new firm.
Prepare the Revaluation Account, Partner’s Capital Accounts and the reconstituted Balance Sheet.
Hints:
(i) Sacrifice Ratio 1 : 2; New Ratio 2 : 1 : 1.
(ii)
| Entry for promise by an old customer: | |||
| Sundry Debtors A/c ...Dr. | 12,000 | ||
| To Revaluation A/c | 12,000 | ||
(iii)
| Adjustment to be made for Accumulated Profits/Losses: | ₹ |
| General Reserve | 1,50,000 |
| Workmen Compensation Reserve | 15,000 |
| Add: Investment Fluctuation Reserve | 25,000 |
| 1,90,000 | |
| Less: Advertisement Expenditure | 40,000 |
| 1,50,000 |
| C’s Current A/c ...Dr. `(1/4 "of" ₹ 1,50,000)` |
37,500 | ||
| To A’s Capital A/c `(1/3 "of" ₹ 37,500)` |
12,500 | ||
| To B’s Capital A/c `(2/3 "of" ₹ 37,500)` |
25,000 |
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Solution
| Dr. | Revaluation Account |
Cr. | |||
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) |
Amount (₹) |
| To Stock A/c | 30,000 | By Provision for Doubtful Debts A/c | 10,000 | ||
| To Gain on Revaluation transferred to: | 1,92,000 | By Building A/c | 2,00,000 | ||
| A’s Capital A/c | 1,12,000 | By Ravi’s A/c | 12,000 | ||
| B’s Capital A/c | 80,000 | ||||
| 2,22,000 | 2,22,000 | ||||
| Dr. | Partners’ Capital Accounts | Cr. | |||||
| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) |
| To Balance c/d | 6,44,500 | 5,45,000 | 2,00,000 | By Balance b/d | 5,00,000 | 4,00,000 | |
| By Revaluation A/c | 1,12,000 | 80,000 | |||||
| By Premium for Goodwill | 20,000 | 40,000 | |||||
| By Bank A/c | 2,00,000 | ||||||
| By C’s current A/c | 12,500 | 25,000 | |||||
| 6,44,500 | 5,45,000 | 2,00,000 | 6,44,500 | 5,45,000 | 2,00,000 | ||
| Balance Sheet as on 1st Jan 2024 | |||||
| Liabilities | Amount (₹) | Amount (₹) | Assets | Amount (₹) | Amount (₹) |
| Sundry Creditors | 75,000 | Building | 8,00,000 | ||
| General Reserve | 1,50,000 | Stock | 1,50,000 | ||
| Workmen Compensation Claim | 25,000 | Investments | 90,000 | ||
| Workmen Compensation Reserve (40,000 − 25,000) |
15,000 | Sundry Debtors | 1,50,000 | 1,45,000 | |
| Investment Fluctuation Reserve | 25,000 | Less: Provision for Doubtful Debts (15,000 − 10,000) |
5,000 | ||
| Capital Accounts: | 13,89,500 | Cash at Bank | 4,17,000 | ||
| A | 6,44,500 | Advertisement Expenditure | 40,000 | ||
| B | 5,45,000 | C’s Current A/c | 37,500 | ||
| C | 2,00,000 | ||||
| 16,79,500 | 16,79,500 | ||||
Working Note:
Calculation of New Profit Sharing Ratio and Sacrificing Ratio:
The old profit-sharing ratio of A and B is 7 : 5
A sacrifices `1/7`th of his share:
A’s sacrifice = `1/7 xx 7/12`
= `7/84`
= `1/12`
B’s Sacrifice = `1/6`
= `(1 xx 2)/(6 xx 2)`
= `2/12`
Sacrificing Ratio of A and B `1/12 : 2/12` or 1 : 2
C’s Share = A’s Sacrifice + B’s Sacrifice
= `1/12 + 2/12`
= `3/12`
A’s New Share = `7/12 - 1/12`
= `6/12`
B’s New Share = `5/12 - 2/12`
= `3/12`
New Profit Sharing Ratio A, B, and C = `6/12 : 3/12 : 3/12` or 6 : 3 : 3 or 2 : 1 : 1
Calculation of Goodwill:
C’s share of Goodwill (Premium) = `2,40,000 xx 3/12`
= 60,000
This premium is distributed to sacrificing partners in their Sacrificing Ratio of 1 : 2.
A = `60,000 xx 1/3`
= 20,000
B = `60,000 xx 2/3`
= 40,000
