Question

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.

 

Answer 1

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`