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.

Answer 1

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

WN3: Adjustment of Goodwill

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`