Question

A, B and C are partners sharing profits and losses in the ratio of 2 : 2 : 1. From 1st April, 2023 they decided to share future profits and losses equally.

Following balances appeared in their books:

	₹
Profit and Loss A/c (Cr.)	20,000
Advertisement Suspense A/c (Dr.)	15,000
Workmen Compensation Reserve	60,000

It was agreed that:

1. Goodwill should be valued at two years' purchase of super profits. Firm's average profits are ₹ 75,000. Capital invested in the business is ₹ 6,00,000 and normal rate of return is 10%.
2. Furniture (book value of ₹ 50,000) be reduced to ₹ 30,000.
3. Computers (book value of ₹ 40,000) be reduced by ₹ 10,000.
4. Claim on account of Workmen's Compensation amounted to ₹ 50,000.
5. Investments (book value of ₹ 30,000) were revalued at ₹ 25,000.

Pass necessary journal entries for the above.

Answer 1

Journal Entries
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
1.	C’s Capital A/c   ...Dr.		4,000
	To A’s Capital A/c			2,000
	To B’s Capital A/c			2,000
	(Being goodwill adjusted among partners due to change in profit-sharing ratio.)
2.	Profit & Loss A/c   ...Dr.		20,000
	To Advertisement Suspense A/c			15,000
	To A’s Capital A/c			2,000
	To B’s Capital A/c			2,000
	To C’s Capital A/c			1,000
	(Being credit balance of P&L A/c and Advertisement Suspense A/c adjusted among partners in old ratio.)
3.	Workmen Compensation Reserve A/c   ...Dr.		60,000
	To Provision for Workmen Compensation A/c			50,000
	To A’s Capital A/c			4,000
	To B’s Capital A/c			4,000
	To C’s Capital A/c			2,000
	(Being workmen compensation claim provided and balance reserve distributed among partners in old ratio.)
4.	Revaluation A/c   ...Dr.		35,000
	To Furniture A/c			20,000
	To Computers A/c			10,000
	To Investments A/c			5,000
	(Being decrease in values of assets recorded.)
5.	A’s Capital A/c   ...Dr.		14,000
	B’s Capital A/c   ...Dr.		14,000
	C’s Capital A/c   ...Dr.		7,000
	To Revaluation A/c			35,000
	(Being loss on revaluation transferred to partners in old ratio.)

Working note:

1. Goodwill

Normal Profit:

₹ 6,00,000 × 10% = ₹ 60,000

Super Profit:

₹ 75,000 − ₹ 60,000 = ₹ 15,000

Goodwill:

₹ 15,000 × 2 = ₹ 30,000

Old ratio = 2 : 2 : 1

New ratio = 1 : 1 : 1

A sacrifices:

`2/5 - 1/3 = 1/15`

B sacrifices:

`2/5 - 1/3 = 1/15`

C gains:

`1/3 - 1/5 = 2/15`

Hence:

`A = ₹ 30,000 × 1/51 ​= ₹ 2,000`

`B = ₹ 2,000, C = ₹ 4,000`

2. P&L and Advertisement Suspense

Net accumulated profit:

₹ 20,000 − ₹ 15,000 = ₹ 5,000

Distributed in old ratio 2 : 2 : 1:

A = ₹ 2,000, B = ₹ 2,000, C = ₹ 1,000

3. Workmen Compensation Reserve

Reserve = ₹ 60,000

Claim = ₹ 50,000

Balance:

₹ 60,000 − ₹ 50,000 = ₹ 10,000

Distributed in old ratio:

A = ₹ 4,000, B = ₹ 4,000, C = ₹ 2,000

4. Revaluation Loss

Furniture loss:

₹ 50,000 − ₹ 30,000 = ₹ 20,000

Computers loss:

₹ 10,000

Investments loss:

₹ 30,000 − ₹ 25,000 = ₹ 5,000

Total:

₹ 20,000 + ₹ 10,000 + ₹ 5,000 = ₹ 35,000

Distributed in old ratio 2 : 2 : 1

A = ₹ 14,000, B = ₹ 14,000, C = ₹ 7,000