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Question
Karan and Arjun were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 31st March, 2024, their Balance Sheet was as follows:
| Balance Sheet of Karan and Arjun as at 31st March, 2024 | |||||
|---|---|---|---|---|---|
| Liabilities | Amount (₹) | Amount (₹) | Assets | Amount (₹) | Amount (₹) |
| Capitals: | Machinery | 4,00,000 | |||
| Karan | 5,00,000 | Furniture | 2,00,000 | ||
| Arjun | 5,00,000 | 10,00,000 | Debtors | 4,00,000 | |
| General Reserve | 1,50,000 | Less: Provision for Doubtful Debts | 50,000 | 3,50,000 | |
| Workmen's Compensation Reserve | 1,50,000 | Stock | 1,50,000 | ||
| Cash | 2,00,000 | ||||
| Total | 13,00,000 | Total | 13,00,000 | ||
On 1st April, 2024, Nakul was admitted into the partnership for 1/4th share in the profits of the firm on the following terms:
- Nakul brought ₹ 4,00,000 as his capital and his share of goodwill premium in cash. Goodwill of the firm was valued at ₹ 2,00,000.
- Furniture was valued at ₹ 2,50,000.
- A provision for doubtful debts @ 10% is to be maintained on debtors.
- The liability against Workmen's Compensation Reserve was estimated at ₹ 1,20,000.
- After the above adjustments, the capitals of Karan and Arjun were to be adjusted taking Nakul's capital as the base. Excess or shortage in the capital accounts of Karan and Arjun was to be adjusted by opening current accounts.
Prepare Revaluation Account and Partners' Capital Accounts.
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Solution
| Revaluation Account | ||||
|---|---|---|---|---|
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) |
| To Profit transferred to Capital A/cs: | By Furniture A/c (₹ 2,50,000 − ₹ 2,00,000) | 50,000 | ||
| – Karan (₹ 60,000 × 3/5) | 36,000 | By Provision for Doubtful Debts A/c | 10,000 | |
| – Arjun (₹ 60,000 × 2/5) | 24,000 | 60,000 | ||
| Total | 60,000 | Total | 60,000 | |
| Partners' Capital Accounts | |||||||
|---|---|---|---|---|---|---|---|
| Particulars | Karan (₹) | Arjun (₹) | Nakul (₹) | Particulars | Karan (₹) | Arjun (₹) | Nakul (₹) |
| To Arjun’s Current A/c (Excess) | - | 1,36,000 | - | By Balance b/d | 5,00,000 | 5,00,000 | - |
| To Balance c/d (New Targets) | 7,20,000 | 4,80,000 | 4,00,000 | By General Reserve (3 : 2) | 90,000 | 60,000 | - |
| By Workmen’s Compensation Reserve | 18,000 | 12,000 | - | ||||
| By Premium for Goodwill | 30,000 | 20,000 | - | ||||
| By Revaluation A/c (Profit) | 36,000 | 24,000 | - | ||||
| By Cash A/c | - | - | 4,00,000 | ||||
| By Karan’s Current A/c (Deficit) | 46,000 | - | - | ||||
| Total | 7,20,000 | 6,16,000 | 4,00,000 | Total | 7,20,000 | 6,16,000 | 4,00,000 |
Working note:
A. New Profit-Sharing Ratio & Capital Targets
Nakul's Share = `1/4`
Total Capital of the Firm (based on Nakul's capital) = `4,00,000 xx 4/1 = 16,00,000`
Remaining Profit Share = `1 - 1/4 = 3/4`
Karan's New Share = `3/5 xx 3/4 = 9/20` → Required Capital: `16,00,000 xx 9/20 = 7,20,000`
Arjun's New Share = `2/5 xx 3/4 = 6/20` → Required Capital: `16,00,000 xx 6/20 = 4,80,000`
Karan's Adjusted Capital: 5,00,000 + 90,000 + 18,000 + 30,000 + 36,000 = ₹ 6,74,000
Required capital is ₹ 7,20,000.
Shortage (Debit to Current A/c): 7,20,000 − 6,74,000 = ₹ 46,000
Arjun's Adjusted Capital: 5,00,000 + 60,000 + 12,000 + 20,000 + 24,000 = ₹ 6,16,000
Required capital is ₹ 4,80,000.
Excess (Credit to Current A/c): 6,16,000 − 4,80,000 = ₹ 1,36,000
