Question

K, L and M were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 31-3-2021 the Balance Sheet of the firm was as follows:

Liabilities	₹	Assets	₹	₹
Creditors	30,000	Bank		20,000
K's Capital	40,000	Debtors	16,000
L's Capital	36,000	Less: Provision for Bad Debts	2,000	14,000
M's Capital	32,000	Building		1,00,400
		Profit and Loss Account		3,600
	1,38,000			1,38,000

L retired from the firm on the following terms:

1. The new profit sharing ratio between K and M will be 2 : 1.
2. Goodwill of the firm is valued at ₹ 72,000.
3. Provision for bad debts is to be made at the rate of 10% on debtors.
4. Creditors of ₹ 4,000 will not be claimed.

Prepare Revaluation Account, Partner's Capital Accounts and Balance Sheet of K and M after L's retirement.

Answer 1

Revaluation Account
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Profit transferred to Capital A/cs:			By Provision for Bad Debts A/c (Reduction: 2,000 − 1,600)	400
K (5/10)	2,200		By Creditors A/c (Written off)	4,000
L (3/10)	1,320
M (2/10)	880	4,400
Total		4,400	Total	4,400

 

Partners' Capital Accounts
Particulars	K (₹)	L (₹)	M (₹)	Particulars	K (₹)	L (₹)	M (₹)
To Profit & Loss A/c (Loss)	1,800	1,080	720	By Balance b/d	40,000	36,000	32,000
To L's Capital A/c (Goodwill)	12,000	-	9,600	By Revaluation A/c (Profit)	2,200	1,320	880
To L's Loan A/c	-	57,840	-	By K's Capital A/c (Goodwill)	-	12000	-
To Balance c/d	28,400	-	22,560	By M's Capital A/c (Goodwill)	-	9,600	-
	42,200	58,920	32,880		42,200	58,920	32,880

 

Balance Sheet of K and M (as on 1st April, 2021)
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors (30,000 − 4,000)		26,000	Bank		20,000
L's Loan Account		57,840	Debtors	16,000
Capital Accounts:			Less: Provision for Bad debts	1,600	14,400
K	28,400		Building		1,00,400
M	22,560	50,960
Total		1,34,800	Total		1,34,800

Working note:

1. Gaining Ratio

Old Ratio = 5 : 3 : 2

New Ratio = 2 : 1

K's Gain = `2/3 - 5/10 = (20 - 15)/30 = 5/30`

M's Gain = `1/3 - 2/10 = (10 - 6)/30 = 4/30`

Gaining Ratio = 5 : 4

2. Goodwill Treatment

L's share of Goodwill = `72,000 xx 3/10 = 21,600`

Contributed by K = `21,600 xx 5/9 = 12,000`

Contributed by M = `21,600 xx 4/9 = 9,600`

3. Write-off of Existing Losses

The Profit & Loss Account balance on the asset side (₹ 3,600) represents an accumulated loss. It is debited to all partners in their old profit-sharing ratio (5 : 3 : 2).