Question

The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015:
                      Books of Rajesh, Pramod and Nishant
                       Balance Sheet as on March 31, 2015

Liabilities		Amt (Rs.)	Assets		Amt (Rs.)
Bills Payable		6,250	Factory Building		12,000
Sundry Creditors		10,000	Debtors	10,500
Reserve Fund		2,750	Less: Reserve	500	10,000
Capital Accounts:			Bills Receivable		7,000
Rajesh	20,000		Stock		15,500
Pramod	15,000		Plant and Machinery		11,500
Nishant	15,000	50,000	Bank Balance		13,000
		69,000			69,000

Pramod retired on the date of Balance Sheet and the following adjustments were made:
a) Stock was valued at 10% less than the book value.
b) Factory buildings were appreciated by 12%.
c) Reserve for doubtful debtsbecreated up to 5%.
d) Reserve for legal charges to be made at Rs 265.
e) The goodwill of the firmbefixed at Rs 10,000.
f) The capital of the new firmbefixed at Rs 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.
Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

Answer 1

Journal Entries

Date	Particulars		L.F.	Amt (Rs.)	Amt (Rs.)
2015 Mar.31	Revaluation A/c     To Stock A/c    To Reserve for Doubtful         Debts A/c     To Reserve for Legal                Charges A/c  (Assets and Liabilities are revalued)	Dr		1,840	1,550     25   265
Mar. 31	Factory Building A/c   To Revaluation A/c ( Factory Building appreciated)	Dr		1,440	1,440
Mar. 31	Rajesh’s Capital A/c      Pramod’s Capital A/c Nishant’s Capital A/c       To Revaluation A/c (Loss on Revaluation adjusted to Partners’ Capital Account)	Dr Dr Dr		160 120 120	400
Mar. 31	Rajesh’s Capital A/c Nishant’s Capital A/c     To Pramod Capital’s A/c (Pramod’s share of goodwill adjusted to Rajesh’s and Nishant’s Capital Account in their gaining ratio)	Dr Dr		2,000 1,000	3,000
Mar. 31	Reserve Fund A/c    To Rajesh’s Capital A/c    To Pramod’s CapitalA/c    To Nishant’s Capital A/c   (Reserve Fund distributed all the partners)	Dr		2,750	1,100 825 825
Mar. 31	Pramod’s Capital A/c        To Pramod’s Loan A/c (Pramod’s Capital transferred to his Loan Account)	Dr		18,705	18,705
Mar. 31	Rajesh’s Capital A/c Nishant’s Capital A/c   To Rajesh’s Current A/c   To Nishant’s Current A/c (Excess in Capital Account is transferred to Current Account)			940 2,705	940 2,705

                                       Parters’ Capital Account
Dr.                                                                                             Cr.

Particulars	Rajesh	Pramod	Nishant		Particulars	Rajesh	Pramod	Nishant
Revaluation (Loss)	160	120	120		Balance b/d	20,000	15,000	15,000
Pramod’s Capital A/c	2,000		1,000		Reserve Fund	1,100	825	825
Pramod’s Loan A/c		18,705			Rajesh’s Capital A/c		2,000
Rajesh's Current A/c	940				Nishant’s Capital A/c		1,000
Nishant's Current A/c			2,705
Balance c/d	18,000		12,000
	21,100	18,825	15,825			21,100	18,825	15,825

Balance Sheet as on March 31, 2015

Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Current Account:			Stock	15,500
Rajesh	940		Less: 10% Depreciation	(1,550)	13,950
Nishant	2,705	3,645
Capital Account:			Factory Building	12,000	13,440
Rajesh	18,000		Add: 12% Appreciation	1,440
Nishant	12,000	30,000	Bank Balance		13,000
		68,865			68,865

Working Notes:
1) Pramod’s share of goodwill
= Total goodwill of the firm × Retiring Partner’s Share
= 10,000 x `3/10` = Rs. 3,000

2) Gaining Ratio = New Ratio − Old Ratio

Rajesh's Gaining Share = `3/5 - 4/10 = [ 6 - 4]/10 = 2/10`

Nishant Gaining Share = `2/5 - 3/10 = [ 4 -3]/10 = 1/10`

Gaining Ratio between Rajesh and Nishant = 2:1

NOTE : In the above solution, in order to adjust the capital of remaining partners in the new firm according to their new profit sharing ratio, the surplus or the deficit of Capital Account is transferred to their Current Account. But, in order to match the answer with that of given in the book, the surplus or the deficit amount of the Partners' Capital Account, will either be withdrawn or brought in by the old partners. This treatment will be shown in the Partners’ Capital itself and no need to transfer the surplus or deficit capital balance to their Current Accounts. The following Journal entry is passed to record the withdrawal of surplus capital by the partners.
If existing partners withdraw their excess capital
Journal entry

Rajesh’s Capital A/c                      Dr.         940
Nishant’s Capital A/c                    Dr.       2,705
          To Bank A/c                                                  3,645
(Surplus Capital withdrawn)

                          Balance Sheet as on March 31, 2015

Liabilities		Amount Rs	Assets		Amount Rs
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Capital:			Stock	15,500
Rajesh	18,000		Less: 10% Depreciation	(1,550)	13,950
Nishant	12,000	30,000
			Factory Building	12,000
			Add: 12% Appreciation	1,440	13,440
			Bank Balance		9,355
		65,220			65,220