Question

A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2024 was as follows:

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Sundry Creditors		29,000	Goodwill	24,000
Provision for Doubtful Debts		5,000	Debtors	80,000
Capitals:		3,06,000	Investments	30,000
A	1,40,000		Land & Building	1,42,000
B	90,000		Machinery	50,000
C	76,000		Patents	4,000
			Cash at Bank	10,000
		3,40,000		3,40,000

C retired on 1st April, 2024 as per the following conditions:

1. Goodwill of the firm is to be valued at three years purchase of the average profits of the last five years which were ₹ 20,000; ₹ 12,000; ₹ 30,000; ₹ 6,000 (loss) and ₹ 34,000 respectively.
2. Machinery is to be reduced to ₹ 40,000 and patents are valueless.
3. There is no need of any provision for doubtful debts.
4. An unclaimed liability of ₹ 2,000 is to be written off.
5. Out of the total insurance premium paid, ₹ 1,000 be treated as pre-paid.
6. Investments are revalued at ₹ 16,000 and these are taken by C at this value.

Entire sum payable to C is to be brought in by A and B in such a way so as to make their capitals proportionate to their new profit sharing ratio which is 2 : 1.

Prepare Revaluation Account, Capital Accounts and the opening Balance Sheet of A and B.

Answer 1

Dr.	Revaluation A/c			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Machinery A/c	10,000	By Provision for Doubtful Debts A/c		5,000
To Patent	4,000	By Unclaimed liability		2,000
To Investments	14,000	By Prepaid insurance		1,000
		By Loss t/f to capital A/cs:		20,000
		A	10,000
		B	6,000
		C	4,000
	28,000			28,000

 

Dr.	Partner’s capital A/c						Cr.
Particulars	A	B	C	Particulars	A	B	C
To Revaluation A/c - Loss	10,000	6,000	4,000	By Balance b/d	1,40,000	90,000	76,000
To C’s Capital A/c	9,000	1,800	-	By A’s Capital A/c	-	-	9,000
To Goodwill A/c	12,000	7,200	4,800	By B’s Capital A/c	-	-	1,800
To Investments A/c	-	-	16,000
To Bank A/c	-	-	62,000
To Balance c/d	1,09,000	75,000	-
	1,40,000	90,000	86,800		1,40,000	90,000	86,800
				By Balance b/d	1,09,000	75,000	-
To Balance c/d	1,64,000	82,000	-	By Bank A/c	55,000	7,000	-
	1,64,000	82,000	-		1,64,000	82,000	-

 

Balance sheet of A & B
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	29,000	27,000	Debtors	80,000
Less: unclaimed liability	2,000		Land & Building	1,42,000
Capitals A/cs:		2,46,000	Machinery	40,000
A	1,64,000		Cash at Bank	10,000
B	82,000		Prepaid Insurance	1,000
		2,73,000		2,73,000

Working Notes:

(i) Gaining Ratio = New ratio – Old Ratio

A = `2/3-5/10=(20-15)/30=5/30`

B = `1/3-3/10=(10-9)/30=1/30`

Gaining Ratio = 5 : 1

(ii) Average Profit = `(20,000 + 12,000 + 30,000 - 6,000 + 34,000)/5`

= `(90,000)/5`

= ₹ 18,000

Goodwill of the firm = 18,000 × 3 

= ₹ 54,000

C’s share of Goodwill = ₹ 10,800

A = `10,800xx5/6` = ₹ 9,000

B = `10,800xx1/6` = ₹ 1,800