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Question
Ratan, Anmol and Heera are partners with equal share in profits. Ratan retires on 1st April, 2026. Anmol and Heera agreed to share future profits in the ratio of 5 : 4. Following is the Balance Sheet extract on that date.
| BALANCE SHEET (EXTRACT) OF RATAN, ANMOL AND HEERA as at 1st April, 2026 |
|||||
| Liabilities | ₹ | ₹ | Assets | ₹ | ₹ |
| Workmen Compensation Reserve | 40,000 | Stock | 44,000 | ||
| Employees Provident Fund | 10,000 | Debtors | 8,000 | ||
| Capital A/cs: | Less: Provision for Doubtful Debts | 5,000 | 75,000 | ||
| Ratan | 1,56,000 | Investments | 1,50,000 | ||
| Anmol | 1,70,000 | ||||
| Heera | 1,60,000 | 4,86,000 | |||
Additional Information:
- There was a claim of Workmen Compensation for ₹ 46,000
- Stock was found overvalued by 10%.
- Bad debts amounted to ₹ 7,000 and remaining debtors are good.
- Ratan was given Investments and 50% of the stock in full settlement.
Pass necessary journal entries on the date of Ratan's retirement.
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Solution
| Journal Entries | ||||
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| 2026 | ||||
| Apr 1 | Workmen Compensation Reserve A/c ...Dr. | 40,000 | ||
| Revaluation A/c ...Dr. | 6,000 | |||
| To Provision for Workmen Compensation Claim A/c | 46,000 | |||
| (Being claim provision created and excess liability charged to revaluation) | ||||
| Apr 1 | Revaluation A/c ...Dr. | 6,000 | ||
| To Stock A/c | 4,000 | |||
| To Provision for Doubtful Debts A/c | 2,000 | |||
| (Being decrease in stock value and additional provision for bad debts recorded) | ||||
| Apr 1 | Provision for Doubtful Debts A/c ...Dr. | 7,000 | ||
| To Debtors A/c | 7,000 | |||
| (Being bad debts of ₹7,000 written off using total accumulated provision) | ||||
| Apr 1 | Ratan's Capital A/c ...Dr. | 4,000 | ||
| Anmol's Capital A/c ...Dr. | 4,000 | |||
| Heera's Capital A/c ...Dr. | 4,000 | |||
| To Revaluation A/c | 12,000 | |||
| (Being loss on revaluation distributed equally among partners) | ||||
| Apr 1 | Anmol's Capital A/c ...Dr. | 12,000 | ||
| Heera's Capital A/c ...Dr. | 6,000 | |||
| To Ratan's Capital A/c | 18,000 | |||
| (Being Ratan's share of hidden goodwill compensated by continuing partners in 2 : 1) | ||||
| Apr 1 | Ratan's Capital A/c ...Dr | 1,70,000 | ||
| To Investments A/c | 1,50,000 | |||
| To Stock A/c | 20,000 | |||
| (Being Ratan's final balance of ₹ 1,70,000 settled by transferring investments and 50% stock) | ||||
Working Note:
A. Revaluation of Assets and Liabilities
Workmen Compensation Claim: Excess claim over reserve = ₹ 46,000 − ₹ 40,000 = ₹ 6,000 (Loss)
Stock Overvaluation: Correct Value = `(44,000)/(110%) = 40,000` Decrease in value = ₹ 4,000 (Loss)
Bad Debts: Total bad debts = ₹ 7,000. Adjusted against old provision of ₹ 5,000, leaving an excess loss of ₹ 2,000 (Loss)
Total Revaluation Loss: ₹ 6,000 + ₹ 4,000 + ₹ 2,000 = ₹ 12,000
Share of Revaluation Loss (Equal ratio): ₹ 4,000 each to Ratan, Anmol, and Heera.
B. Calculation of Ratan's Hidden Goodwill
Ratan's Opening Capital: ₹ 1,56,000
Less: Share of Revaluation Loss: (₹ 4,000)
Ratan's Adjusted Capital: ₹ 1,52,000
Value of Assets given in full settlement:
Investments: ₹ 1,50,000
50% of Stock (at revised value of ₹ 40,000): ₹ 20,000
Total Settlement Value: ₹ 1,70,000
Ratan's Share of Hidden Goodwill: ₹ 1,70,000 − ₹ 1,52,000 = ₹ 18,000
C. Gaining Ratio Adjustment
Gaining Share = New Share − Old Share
Anmol's Gain: `5/9 - 1/3 = 2/9`
Heera's Gain: `4/9 - 1/3 = 1/9`
Gaining Ratio: 2 : 1
Goodwill Contribution:
Anmol's pays: `18,000 xx 2/3 = ₹ 12,000`
Heera pays: `18,000 xx 1/3 = ₹ 6,000`
