Question

P, Q and R were in partnership, sharing profit in the proportions of 2 : 2 : 1. Their Balance Sheet as at 31st March, 2024 was as follows:

Liabilities	₹	₹	Assets	₹	₹
Creditors		80,000	Building		4,10,000
Capitals:		7,40,000	Machinery		1,50,000
P	3,00,000		Debtors	1,20,000	1,12,000
Q	2,80,000		Less: Provision	8,000
R	1,60,000		Stock		1,18,000
			Cash and Bank		30,000
		8,20,000			8,20,000

They admit S into partnership, who brings in ₹ 2,00,000 as his capital and a further ₹ 40,000 for his share of goodwill. He was given a `1/5`th share of profits, the old partners sharing the balance in the proportions of 5 : 3 : 2.

Building is to be appreciated by 20% and Machinery is to be depreciated by 10%. Sundry Debtors are worth ₹ 1,10,000. A liability of ₹ 5,000 for outstanding expenses has been omitted to be recorded in the books.

You are required to pass journal entries and prepare the opening balance sheet of the new firm.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Building A/c   ...Dr.		82,000
	To Revaluation A/c			82,000
	(Building appreciated by 20%)
	Revaluation A/c   ...Dr.		15,000
	To Machinery A/c			15,000
	(Machinery depreciated by 10%)
	Revaluation A/c   ...Dr.		2,000
	To Debtors A/c			2,000
	(Debtors revalued downward)
	Revaluation A/c   ...Dr.		5,000
	To Outstanding Expenses A/c			5,000
	(Omitted outstanding expenses now provided)
	Revaluation A/c   ...Dr.		60,000
	To P’s Capital A/c			24,000
	To Q’s Capital A/c			24,000
	To R’s Capital A/c			12,000
	(Profit on revaluation transferred to old partners’ capital accounts in old ratio 2 : 2 : 1)
	Bank A/c   ...Dr.		2,40,000
	To S’s Capital A/c			2,00,000
	To Premium for Goodwill A/c			40,000
	(Capital and goodwill brought in cash by new partner S)
	Premium for Goodwill A/c   ...Dr.		40,000
	To Q’s Capital A/c			32,000
	To R’s Capital A/c			8,000
	(Goodwill distributed between sacrificing partners Q and R in 4 : 1 ratio)

 

Balance Sheet As on 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		80,000	Building		4,92,000
Outstanding Expenses		5,000	Machinery		1,35,000
Capital:		10,40,000	Debtors		1,10,000
P	3,24,000		Stock		1,18,000
Q	3,36,000		Cash and Bank		2,70,000
R	1,80,000
S	2,00,000
		11,25,000			11,25,000

Working Note:

1. Building appreciated by 20% = `4,10,000 xx 20/100`

= 82,000

Building = 4,10,000 + 82,000

= 4,92,000

2. Machinery decreased by 10% = `1,50,000 xx 10/100`

= 15,000

Machinery = 1,50,000 − 15,000

= 1,35,000

Debtors reduced to ₹1,10,000 from ₹1,12,000

= 1,12,000 − 1,10,000

= 2,000

Outstanding Expenses = 5,000

Gain on Revaluation = 82,000 − 15,000 − 2,000 − 5,000

= 60,000

New Profit-Sharing Ratio P, Q, R, and S:

Given: P : Q : R = 5 : 3 : 2 : S = `1/5`

S = `1 - 1/5`

= `4/5`

P = `5/10 xx 4/5`

= `20/50`

= `2/5`

Q = `3/10 xx 4/5`

= `12/50`

= `6/25`

R = `2/10 xx 4/5`

= `8/50`

= `4/25`

S = `1/5`

= `(1 xx 5)/(5 xx 5)`

= `5/25`

Calculate Sacrificing Ratio:

Sacrificing Ratio =  Old Share – New Share

p = `2/5 - 2/5`

= 0

Q = `2/5 - 6/25`

= `(2 xx 5)/(5 xx 5) - 6/25`

= `10/25 - 6/25`

= `4/25` 

R = `1/5 - 4/25`

= `(1 xx 5)/(5 xx 5) - 4/25`

= `5/25 - 4/25`

= `1/25`

Sacrificing Ratio of Q and R = 4 : 1