Question

A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows:

Balance Sheet of A and B as on March 31, 2016
Liabilites		Amount (Rs)	Assets	Amount (Rs)
Sundry creditors		41,500	Cash at Bank	26,500
Reserve fund		4,000	Bills Receivable	3,000
Capital Accounts			Debtors	16,000
	A	30,000	Stock	20,000
	B	16,000	Fixtures	1,000
			Land & Building	25,000
		91,500		91,500

On April 1,2017, C was admitted into partnership on the following terms:

1. That C pays Rs 10,000 as his capital.
2. That C pays Rs 5,000 for goodwill. Half of this sum is to be withdrawn by A and B.
3. That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be created on Sundry Debtors and Bills Receivable.
4. That the value of land and buildings be appreciated by 20%.
5. There being a claim against the firm for damages, a liability to the extent of Rs 1,000 should be created.
6. An item of Rs 650 included in sundry creditors is not likely to be claimed and hence should be written back.

Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.

Answer 1

Books of A, B and C Journal
Date	Particulars				L.F.	Amount Rs	Amount Rs
2017
Apr. 01	Bank A/c		Dr.			15,000
		To C’s Capital A/c					10,000
		To Premium for Goodwill A/c					5,000
	(Capital and Premium for goodwill brought by C for 1/5 th share)
Apr. 01	Premium for Goodwill A/c					5,000
		To A’s Capital A/c					3,750
		To B’s Capital A/c					1,250
	(Amount of goodwill brought by C is transferred to old partners’ capital account in their sacrificing ratio, 3:1)
Apr. 01	A’s Capital A/c			Dr.		1,875
	B’s Capital A/c			Dr.		625
		To Bank A/c					2,500
	(Half of amount  withdrawn by old partners)
Apr. 01	Revaluation A/c			Dr.		4,050
		To Stock A/c					2,000
		To Fixture A/c					100
		To Provision for doubtful Debts on Debtors A/c					800
		To provision for doubtful Debts on Bills Receivable A/c					150
		To Claim for Damages A/c					1,000
	(Assets and liabilities are revalued)
Apr. 01	Land and Building A/c			Dr.		5,000
	Sundry Creditors A/c					650
		To Revaluation A/c					5,650
	(Asset and liability are revalued)
Apr. 01	Revaluation A/c			Dr.		1,600
		To A’s Capital A/c					1,200
		To B’s Capital A/c					400
	(Profit on Revaluation transferred to old partners’ capital)
Apr. 01	Reserve Fund A/c			Dr.		4,000
		To A’s Capital A/c					3,000
		To B’s Capital A/c					1,000
	(Reserve Fund distributed among old partners)

  

Balance Sheet as on January 01, 2007
Liabilities			Amount (Rs)	Assets		Amount (Rs)
Sundry Creditors			40,850	Cash at Bank		39,000
Claim for Damages			1,000	Bills Receivable	3,000	2,850
	A	36,075	64,100	Less: Provision	150
	B	18,025		Debtors	16,000	15,200
	C	10,000		Less: Provision	800
				Stock		18,000
				Fixtures		900
				Land and Building		30,000
			1,05,950			1,05,950

 Working Note: 1)

Partners’ Capital Account
Dr.					Cr.
Particulars	A	B	C	Particulars		A	B	C
Bank	1,875	625		Balance b/d		30,000	16,000
Balance c/d	36,075	18,025	10,000	Bank				10,000
				Premium for Goodwill		3,750	1,250
				Revaluation		1,200	400
				Reserve Fund		3,000	1,000
	37,950	18,650	10,000			37,950	18,650	10,000

 2)

Bank Account
Dr.		Cr.
Particulars	Amount Rs	Particulars		Amount Rs
Balance b/d	26,500	A’s Capital A/c		1,875
C’s Capital A/c	10,000	B’s Capital A/c		625
Premium for Goodwill	5,000	Balance c/d		39,000
	41,500			41,500

  3)  Sacrificing ratio = Old Ratio − New Ratio
A's Sacrificing Share = `3/4 - 3/5 = [ 12 -9 ]/20 = 3/20`

B' Sacrificing Share = `1/4 - 1/5 = [ 5 -4 ]/20 = 1/20`

Note: Assuming that ratio between A and B has not change hence sacrificing ratio should be same as old ratio.