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A, B And C Are Partners in a Firm, Sharing Profits and Losses As A 1/3, B 1/2 And C 1/6 Respectively. the Balance Sheet of the Firm as at 31st March, 2019 Was: - Accountancy

Numerical

A, B and C are partners in a firm, sharing profits and losses as A 1/3, B 1/2 and C 1/6 respectively. The Balance Sheet of the firm as at 31st March, 2019 was:

Liabilities Assets
Capital A/cs:   Building 50,000
A 30,000   Plant and Machinery 40,000
B 40,000   Furniture 10,000
C     25,000  95,000 Stock    25,000
General Reserve   16,000 Debtors                18,000  
Sundry Creditors   25,000 Less: Provision for Doubtful Debts 500 17,500
Loan Payable 15,000 Cash in Hand 8,500
  1,51,000   1,51,000

 ​C retires on 1st April, 2019 subject to the following adjustments:
(a) Goodwill of the firm be valued at ₹ 24,000. C's share of goodwill be adjusted into the accounts of A and B who are going to share in future in the ratio of 3 : 2.
(b) Plant and Machinery to be reduced by 10% and Furniture by 5%.
(c) Stock to be appreciated by 15% and Building by 10%.
(d) Provision for Doubtful Debts to be raised to ₹ 2,000.
Pass Journal entries to record the above transactions in the books of the firm and show the Profit and Loss Adjustment Account, Capital Account of C and the Balance Sheet of the firm after C's retirement.

 

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Solution

Journal

Date

Particulars

L.F.

Debit

Amount

(₹)

Credit

Amount

(₹)

2019
Apr.1


Profit and Loss Adjustment A/c


Dr.

 


6,000

 

 

To Plant and Machinery A/c

 

 

4,000

 

To Provision for Doubtful Debts A/c

 

 

1,500

 

To Furniture A/c

 

 

500

 

(Decrease in value of Assets and provision for doubtful debts transferred to Profit and Loss Adjustment Account)

 

 

 

Apr.1

Stock A/c

Dr.

 

3,750

 

 

Factory Building A/c

Dr.

 

5,000

 

 

To Profit and Loss Adjustment A/c

 

 

8,750

 

( Increase in value of Assets transferred to Profit and Loss Adjustment Account)

 

 

 

Apr.1

Profit and Loss Adjustment A/c

Dr.

 

2,750

 

 

To A’s Capital A/c

 

 

917

 

To B’s Capital A/c

 

 

1,375

 

To C’s Capital A/c

 

 

458

 

(Profit distributed among A, B and C in their old ratio)

 

 

 

Apr.1

A’s Capital A/c

Dr.

 

6,400

 

 

To B’s Capital A/c

 

 

2,400

 

To C’s Capital A/c

 

 

4,000

 

(C’s share of goodwill and B’s gain in goodwill adjusted)

 

 

 

Apr.1

C’s Capital A/c

Dr.

 

32,125

 

 

To C’s Loan A/c

 

 

32,125

 

(C’s capital balance after all adjustment transferred to his Loan Account)

 

 

 

Apr.1

Reserve Fund A/c

Dr.

 

16,000

 

 

To A’s Capital A/c

 

 

5,333

 

To B’s Capital A/c

 

 

8,000

 

To C’s Capital A/c

 

 

2,667

 

(Reserve Fund distributed among partners in their old ratio)

 

 

 

 

Profit and Loss Adjustment Account

Dr.

 

         Cr.

Particulars

Amount

(₹)

Particulars

Amount

(₹)

Plant and Machinery

 

Stock (25,000 × 15%)

3,750

(40,000 × 10%)

4,000

Factory Building (50,000 × 10%)

5,000

Furniture (10,000 × 5%))

500

 

 

Provision for Doubtful Debts

 

 

 

(2,000 – 500)

1,500

 

 

Profit transferred to:

 

 

 

A’s Capital A/c

917

 

 

 

B’s Capital A/c

1,375

 

 

 

C’s Capital A/c

458

2,750

 

 

 

8,750

 

8,750

 

Partners’ Capital Accounts

Dr.

 

Cr.

Particulars

A

B

C

Particulars

A

B

C

B’s Capital A/c (Goodwill)

2,400

 

 

Balance b/d

30,000

40,000

25,000

C’s Capital A/c (Goodwill)

4,000

 

 

Reserve Fund

5,333

8,000

2,667

C’s Loan A/c

 

 

32,125

Revaluation A/c (Profit)

917

1,375

458

Balance c/d

29,850

51,775

 

A’s Capital A/c (Goodwill)

 

2,400

4,000

 

36,250

51,775

32,125

 

36,250

51,775

32,125

 

Balance Sheet

as on March 31, 2019 (after C’s Retirement)

Liabilities

Amounts

(₹)

Assets

Amounts

(₹)

Sundry Creditors

25,000

Factory Building

55,000

Loan Payable

15,000

Plant and Machinery

36,000

C’s Loan

32,125

Furniture

9,500

Capital A/cs:

 

Stock

28,750

A

29,850

 

Debtors

18,000

 

B

51,775

81,625

Less: Provision for Doubtful Debts

(2,000)

16,000

 

 

Cash in Hand

8,500

 

1,53,750

 

1,53,750


Working Notes:

WN 1 Calculation of Gaining Ratio

Old Ratio (A, B and C) =  or 2 : 3 : 1

C retires from the firm.

New Ratio (A and B) = 3: 2

Gaining RatioNew Ratio − Old Ratio

WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 24,000

C’s Share of Goodwill = `24,000 xx 1/6 = "Rs" 4,000`

`"A's Gain goodwill" = 24,000 xx 8/30 = "Rs" 6,400`

`"B's sacrifice in goodwill" = 24,000 xx 3/30 = "Rs" 2,400`

 

Partners’ Capital Accounts

Dr.

 

       Cr.

Particulars

A

B

C

Particulars

A

B

C

C’s Capital A/c (Goodwill)

1,600

2,400

 

Balance b/d

30,000

40,000

25,000

 

 

 

 

Reserve Fund

5,333

8,000

2,667

B’s Loan A/c

 

 

32,125

Revaluation A/c (Profit)

917

1,375

458

Balance c/d

34,650

46,975

 

A’s Capital A/c (Goodwill)

 

 

4,000

 

36,250

49,375

32,125

 

36,250

49,375

32,125


Working Notes:

WN 1 Calculation of Gaining Ratio

Old Ratio (A, B and C) = `1/3 : 1/ 2 : 1/6` or 2 : 3 : 1

C retires from the firm.

New Ratio (A and B) = 2: 3

Gaining RatioNew Ratio − Old Ratio

`"A's share" = 2/5 - 2/6 = (12 -10)/30 = 2/30` (sacrifice)

`"B's share" = 3/5 - 3/6 = (18-15)/30 = 3/30` (sacrifice) 

sacrificing ratio `2 : 3`


WN 2 Adjustment of Goodwill

Goodwill of the firm = Rs 24,000

C’s Share of Goodwill = `24,000 xx 1/6 = "Rs" 4,000`

`"A's sacrifice in goodwill" = 4,000 xx 2/5 = "Rs" 1,600`

`"B's sacrifice in Goodwill" = 4,000 xx 3/5 = "Rs" 2,400`

Concept: Retirement and Death of a Partner - Gaining Ratio
  Is there an error in this question or solution?
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APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 6 Retirement/Death of a Partner
Exercise | Q 34 | Page 83
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