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Question
Nem and Khem, sharing profits in the ratio of 3 : 2 admit Prem as a partner with `1/3` share in profits. He had to contribute proportionate capital. They had the following financial position:
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Creditors | 40,000 | Cash at Bank | 5,000 |
| Reserve Fund | 50,000 | Debtors | 60,000 |
| Capitals: | Stock | 35,000 | |
| Nem | 50,000 | Plant and Machinery | 80,000 |
| Khem | 40,000 | ||
| 1,80,000 | 1,80,000 |
They agreed to admit Prem as a partner on the following terms:
- Plant and Machinery to be reduced by 10%.
- Stock to be increased by ₹ 3,000.
- Bad debts provision was to be created at 5%.
- Accrued incomes not appearing in the books ₹ 900.
- Prem was to introduce ₹ 20,000 as a premium for goodwill for a `1/3`rd share of the future profits of the firm.
Prepare Profit and Loss Adjustment Account, Capital Accounts and Balance Sheet of the new firm. Also calculate the new profit-sharing ratio.
Hint: Calculation of Prem’s Capital:
Combined Capital of Nem and Khem for `2/3` share of Profits
= 87,740 + 65,160
= ₹ 1,52,900
Therefore, the total Capital of the new firm will be
= `1,52,900 xx 3/2`
= ₹ 2,29,350
Prem’s Capital for `1/3`rd share = `2,29,350 xx 1/3`
= ₹ 76,450
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Solution
| Dr. | Profit and Loss Adjustment Account | Cr. | |||
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) | Amount (₹) |
| To Plant and Machinery A/c | 8,000 | By Stock A/c | 3,000 | ||
| To Provision for Bad Debts A/c | 3,000 | By Accrued Income A/c | 900 | ||
| To Loss transferred to Capital A/cs: | 7,100 | ||||
| Nem | 4,260 | ||||
| Khem | 2,840 | ||||
| 11,000 | 11,000 | ||||
| Dr. | Partner’s Capital Accounts | Cr. | |||||
| Particulars | Nem (₹) | Khem (₹) | Prem (₹) | Particulars | Nem (₹) | Khem (₹) | Prem (₹) |
| To Revaluation (Loss) | 4,260 | 2,840 | By Balance b/d | 50,000 | 40,000 | ||
| To Balance c/d | 87,740 | 65,160 | 76,450 | By Reserve Fund | 30,000 | 20,000 | |
| By Premium for Goodwill | 12,000 | 8,000 | |||||
| By Cash at Bank | 76,450 | ||||||
| 92,000 | 68,000 | 76,450 | 92,000 | 68,000 | 76,450 | ||
| Balance Sheet | |||
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Creditors | 40,000 | Cash at Bank | 1,01,450 |
| Capitals: | Debtors | 57,000 | |
| Nem | 87,740 | Stock | 38,000 |
| Khem | 65,160 | Plant and Machinery | 72,000 |
| Prem | 76,450 | Accrued Incomes | 900 |
| 2,69,350 | 2,69,350 | ||
Calculate New Profit Sharing Ratio:
The old ratio of Nem and Khem is 3 : 2. Prem is admitted with a `1/3` share.
Remaining share of old partners = `1 - 1/3`
= `2/3`
Nem’s new share = `2/3 xx 3/5`
= `6/15`
Khem’s new share = `2/3 xx 2/5`
= `4/15`
Prem’s new share = `1/3`
= `(1 xx 5)/(3 xx5)`
= `5/15`
The New Profit Sharing Ratio of Nem, Khem, and Prem = `6/15 : 4/15 : 5/15` or 6 : 4 : 5
Working Note:
Prem’s Capital:
Combined Capital of Nem and Khem for `2/3` share of Profits
= 87,740 + 65,160
= ₹ 1,52,900
Total Capital of the new firm:
= `1,52,900 xx 3/2`
= ₹ 2,29,350
Prem’s Capital for `1/3`rd share:
= `2,29,350 xx 1/3`
= ₹ 76,450
Cash at Bank = Premium + Prem’s Capital
= ₹ 5,000 + ₹ 20,000 + ₹ 76,450
= ₹ 1,01,450
