Question

Naresh, Dhruv and Azeem are partners sharing profits in the ratio of 5:3:7.

Naresh retires from the firm. Dhruv and Azeem decided to share profits in the ratio of 2:3.

The adjusted capital accounts of Dhruv and Azeem at the time of Naresh’s retirement showed the balances of ₹ 33,000 and ₹ 70,500 respectively.

The total amount to be paid to Naresh is ₹ 90,500 which is paid in cash immediately by the firm, the cash being contributed by Dhruv and Azeem in such a way that their capitals become proportionate to their new profit-sharing ratio and the firm maintains a minimum cash balance of ₹ 5,000 from its existing balance of ₹ 20,000.

You are required to pass journal entries to record:

• Payment made to the retiring partner
• Cash brought in by the remaining partners to pay off the retiring partner

Answer 1

Journal Entries

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Naresh's Capital A/c      Dr.     To Cash A/c (Being cash paid)		90,500	90,500
	Cash A/c      Dr.     To Dhruv's Capital A/c     To Azeem's Capital A/c (Being cash brought in)		75,500	38,600 36,900

Working Note:

(A) Calculation of Total Capital of the firm after Naresh's retirement:

(i) Balances of Capital A/c of Dhruv and Azeem after all adjustments:

(a) Dhruv	33,000	1,03,500
(b) Azeem	70,500

(ii) Shortage of cash to be brought in by Dhruv and Azeem in order to make payment to Naresh = 75,500*

Total Capital of New firm [Dhruv and Azeem (i) + (ii)] = 1,79,000

*Shortage of cash = Amount Payable to Naresh - Existing cash + Minimum cash

= 90,500 - 20,000 + 5,000 = 75,500*

(B) Calculation of cash to be brought in (Paid off) by Dhruv and Azeem:

		Dhruv (₹)	Azeem (₹)
(a)	New capital (1,79,000 in the ratio 2 : 3)	71,600	1,07,400
(b)	Existing Capital Amount to be brought in [Paid off (a - b)]	33,000	70,500
		38,600	36,900