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Question
A and B share the profits of a business in the ratio of 5 : 3. They admit C into the firm for a `1/4`th share in the profits to be contributed equally by A and B. On the date of admission of C, the Balance Sheet of the firm was as follows:
| Liabilities | ₹ | Assets | ₹ |
| A’s Capital | 3,00,000 | Machinery | 2,60,000 |
| B’s Capital | 2,00,000 | Furniture | 1,60,000 |
| Workmen’s Compensation Reserve | 40,000 | Stock | 1,20,000 |
| Bank Loan | 1,20,000 | Debtors | 80,000 |
| Creditors | 15,000 | Bank | 60,000 |
| Outstanding Expenses | 5,000 | ||
| 6,80,000 | 6,80,000 |
Terms of C’s admission were as follows:
- C will bring ₹ 3,30,000 for his share of capital and goodwill.
- Goodwill of the firm has been valued at 4 years’ purchase of the average super profits of the last three years. Average profits of the last three years are ₹ 2,20,000 while the normal profits that can be earned with the capital employed are ₹ 1,40,000.
- Furniture is to be appreciated by ₹ 60,000 and the value of stock is to be reduced by ₹ 20,000.
- Outstanding Expenses will be paid off.
Prepare Revaluation Account, Partners’ Capital Accounts and the new Balance Sheet of A, B and C.
Ledger
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Solution
| Dr. |
Revaluation Account
|
Cr. | |||
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) | Amount (₹) |
| To Stock A/c | 20,000 | By Furniture A/c | 60,000 | ||
| To Gain on Revaluation transferred to: | 40,000 | ||||
| A’s Capital A/c | 25,000 | ||||
| B’s Capital A/c | 15,000 | ||||
| 60,000 | 60,000 | ||||
| Dr. | Partners’ Capital Accounts | Cr. | |||||
| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) |
| To Balance c/d | 3,90,000 | 2,70,000 | 2,50,000 | By Balance b/d | 3,00,000 | 2,00,000 | |
| By Revaluation A/c | 25,000 | 15,000 | |||||
| By Workmen’s Comp. Reserve | 25,000 | 15,000 | |||||
| By Bank A/c | 2,50,000 | ||||||
| By Premium for Goodwill A/c | 40,000 | 40,000 | |||||
| 3,90,000 | 2,70,000 | 2,50,000 | 3,90,000 | 2,70,000 | 2,50,000 | ||
| New Balance Sheet of A, B, and C | |||||
| Liabilities | Amount (₹) | Amount (₹) | Assets | Amount (₹) | Amount (₹) |
| Bank Loan | 1,20,000 | Machinery | 2,60,000 | ||
| Creditors | 15,000 | Furniture (₹ 1,60,000 + ₹ 60,000) |
2,20,000 | ||
| Capital Accounts: | 9,10,000 | Stock (₹ 1,20,000 − ₹ 20,000) |
1,00,000 | ||
| A | 3,90,000 | Debtors | 80,000 | ||
| B | 2,70,000 | Bank | 3,85,000 | ||
| C | 2,50,000 | ||||
| 10,45,000 | 10,45,000 | ||||
Working Notes:
1. Sacrificing Ratio:
C’s share is `1/4`, contributed equally by A and B.
A’s sacrifice = `1/4 xx 1/2`
= `1/8`
B’s sacrifice = `1/4 xx 1/2`
= `1/8`
Sacrificing Ratio A and B = `1/8 : 1/8` or 1 : 1
New Profit-Sharing Ratio:
A’s new share = `5/8 - 1/8`
= `4/8`
= `2/4`
B’s new share = `3/8 - 1/8`
= `2/8`
= `1/4`
C’s new share = `1/4`
= `(1 xx 2)/(4 xx 2)`
= `2/8`
= `1/4`
New Ratio of A, B, and C = `2/4 : 1/4 : 1/4` or 2 : 1 : 1
Valuation of Goodwill:
Super Profits = Average Profits − Normal Profits
= 2,20,000 − 1,40,000
= 80,000
Firm’s Goodwill = Super Profits × 4 years’ purchase
= 80,000 × 4
= 3,20,000
C’s share of Goodwill = `3,20,000 xx 1/4`
= 80,000
Amount for C’s Capital = Amount brought by C − Amount for Goodwill
= 3,30,000 − 80,000
= 2,50,000
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