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# ​A, B And C Are Partners Sharing Profits and Losses in the Ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2019 Stood as Follows: - CBSE (Arts) Class 12 - Accountancy

ConceptRetirement and Death of a Partner - Calculation of New Profit Sharing Ratio

#### 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, 2019 stood as follows:

 Liabilities Amount (₹) Assets Amount ​(₹) Capital A/cs: Land and Building 3,50,000 A 2,50,000 Machinery 2,40,000 B 2,50,000 Computers 70,000 C 2,00,000 7,00,000 Investments (Market value ₹ 90,000) 1,00,000 General Reserve 60,000 Sundry Debtors 50,000 Investments Fluctuation Reserve 30,000 Cash in Hand 10,000 Sundry Creditors 90,000 Cash at Bank 55,000 Advertisement Suspense 5,000 8,80,000 8,80,000

They decided to share profits equally w.e.f. 1st April, 2019. They also agreed that:
(i) Value of Land and Building be decreased by 5%.
(ii) Value of Machinery be increased by 5%.
(iii) A Provision for Doubtful Debts be created @ 5% on Sundry Debtors.
(iv) A Motor Cycle valued at ₹ 20,000 was unrecorded and is now to be recorded in the books.
(v) Out of Sundry Creditors, ₹ 10,000 is not payable.
(vi) Goodwill is to be valued at 2 years' purchase of last 3 years profits. Profits being for 2018-19 − ₹ 50,000 (Loss); 2017-18 − ₹ 2,50,000 and 2016-17 − ₹ 2,50,000.
(vii) C was to carry out the work for reconstituting the firm at a remuneration (including expenses) of ₹ 5,000. Expenses came to ₹ 3,000.
Pass Journal entries and prepare Revaluation Account.

#### Solution

Journal

 Date Particulars L.F. Debit Amount (₹) Credit Amount (₹) 2019 April 1 General Reserve A/c Dr. 60,000 To A’s Capital A/c 30,000 To B’s Capital A/c 18,000 To C’s Capital A/c 12,000 (Reserve distributed) A’s Capital A/c Dr 2,500 B’s Capital A/c Dr. 1,500 C’s Capital A/c Dr. 1,000 To Advertisement Suspense A/c 5,000 (Advertisement Suspense distributed) Investment Fluctuation Reserve A/c Dr. 30,000 To Investment A/c 10,000 To A’s Capital A/c 10,000 To B’s Capital A/c 6,000 To C’s Capital A/c 4,000 (Investment Fluctuation Reserve distributed) Machinery A/c Dr. 12,000 Motor Cycle  A/c Dr. 20,000 Creditors  A/c Dr. 10,000 To Revaluation A/c 42,000 (Assets revalued) Revaluation A/c 25,000 To Land & Building A/c 17,500 To Provision for Doubtful Debts A/c 2,500 To Bank A/c (Remuneration) 5,000 (Assets revalued) Revaluation A/c 17,000 To A’s Capital A/c 8,500 To B’s Capital A/c 5,100 To C ’s Capital A/c 3,400 (Profit on revaluation transferred to Partners’ Capital A/c) B’s Capital A/c Dr. 10,000 C ’s Capital A/c Dr. 40,000 To A’s Capital A/c 50,000 (Goodwill adjusted)

Revaluation A/c

 Dr. Cr. Particulars Amount (₹) Particulars Amount (₹) Land & Building A/c 17,500 Machinery A/c 12,000 Provision for Doubtful Debts A/c 2,500 Motor Cycle  A/c 20,000 Bank A/c (Remuneration) 5,000 Creditors  A/c 10,000 Profit transferred to: A 8,500 B 5,100 C 3,400 17,000 42,000 42,000

Working Notes:

WN1: Calculation of sacrifice or gain

A : B : C = 5 : 3 : 2 (Old ratio)

A : B : C = 1 : 1 : 1 (new ratio)

sacrificing (or gaining ratio) = old ratio - new ratio

A's share = 5/10 - 1/3 = (15-10)/30 = 5/10 (sacrifice)

B's share = 3/10 - 1/3 = (9-10)/30 = -1/30 (gain)

C's share = 2/10 - 1/3 = (96-10)/30 = -4/30 (gain)

WN2: Valuation of Goodwill

Goodwill = Average profit x No. of years purchase

= 1,50,000 x 2

= Rs 3,00,000

Amount credited to A's apital A/c = 3,00,000 xx 5/30 = "Rs"  50,000

Amount debited to B's capital A/c = 3,00,000 xx 1/30 = "Rs"  10,000

Amount debited to C's capital A/c = 3,00,000 xx 4/30 = "Rs"  40,000

Is there an error in this question or solution?

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Solution ​A, B And C Are Partners Sharing Profits and Losses in the Ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2019 Stood as Follows: Concept: Retirement and Death of a Partner - Calculation of New Profit Sharing Ratio.
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