Question

Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on March 31, 2016 (before Chintan’s admission) was as follows:

Balance Sheet of A and B as on 31.03.2016
Liabilites			Amount (Rs)	Assets	Amount (Rs)
Creditors			8,000	Cash in hand	2,000
Bills payable			4,000	Cash at bank	10,000
General reserve			6,000	Sundry debtors	8,000
Capital accounts:				Stock	10,000
	Azad	50,000		Funiture	5,000
	Babli	32,000	82,000	Machinery	25,000
				Buildings	40,000
			1,00,000		1,00,000

It was agreed that
i) Chintan will bring in Rs 12,000 as his share of goodwill premium.
ii) Buildings were valued at Rs 45,000 and Machinery at Rs 23,000.
iii) A provision for doubtful debts is to be created @ 6% on debtors.
iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.

Answer 1

Books of Azad, Babli and Chintan Journal
Date	Particulars			L.F.	Amount Rs	Amount Rs
2016
Mar. 31	Bank A/c		Dr.		42,000
		To Chintan’s Capital A/c				30,000
		To Premium for Goodwill A/c				12,000
	(Chintan brought Capital and Premium for Goodwill for 1/4 share of profit)
	Premium for Goodwill A/c		Dr.		12,000
		To Azad’s Capital A/c				8,000
		To Babli’s Capital A/c				4,000
	(Goodwill brought by Chintan transferred to old partners capital account in their sacrificing ratio, 2:1)
	General Reserve A/c		Dr.		6,000
		To Azad’s Capital A/c				4,000
		To Babli’s Capital A/c				2,000
	(General reserve distributed between old partners)
	Building A/c		Dr.		5,000
		To Revaluation A/c				5,000
	(Increase in value of Building adjusted)
	Revaluation A/c		Dr.		2,480
		To Machinery A/c				2,000
		To Provision for Doubtful Debt				480
	(Decrease in value of machinery adjusted and Provision for Doubtful Debt created)
	Revaluation A/c		Dr.		2,520
		To Azad is Capital A/c				1,680
		To Babli’s Capital A/c				840
	(Profit on revaluation transferred to Azad and Babli’s Capital Account)
	Azad’s Capital A/c		Dr.		3,680
	To Azad's Current A/c					3,680
	(Excess of Capital transferred to current account)
	Babli’s Capital A/c		Dr.		8,840
		To Babli's Current A/c				8,840
	(Excess of Capital transferred to current account)

  

Revaluation Account
Dr.					Cr.
Particulars				Amount Rs		Particulars	Amount Rs
To Machinery				2,000		Building	5,000
To Provision for Doubtful Debt				480
To Profit transferred to
	Azad’s Capital		1,680
	Babli’s Capital		840	2,520
				5,000			5,000

  

Partner’s Capital Account
Dr.					Cr.
Particulars	Azad	Babli	Chintan	Particulars		Azad	Babli	Chintan
Current A/c	3,680	8,840		Balance b/d		50,000	32,000
Balance c/d	60,000	30,000	30,000	Bank				30,000
				Premium for Goodwill		8,000	4,000
				General Reserve		4,000	2,000
				Revaluation		1,680	840
	63680	38,840	30,000			63680	38,840	30,000

  

Balance Sheet as on December 31, 2006
Liabilities				Amount (Rs)	Assets		Amount (Rs)
Creditors				8,000	Cash in Hand		2,000
Bills Payable				4,000	Cash at Bank		52,000
Current Accounts:					Sundry Debtors	8,000
		Azad	3,680		Less: Provision for Doubtful debt	480	7,520
		Babli	8,840	12,520	Stock		10,000
Capital Accounts:					Furniture		5,000
	Azad		60,000		Machinery		23,000
	Babli		30,000		Building		45,000
	Chintan		30,000	1,20,000
				1,44,520			1,44,520

Working Note:
1) Calculation of New Profit Sharing Ratio

Chintan's Share = `1/4`

Remaining Share of firm = 1 - `1/4` = `3/4`

Azad's New Share = `2/3 xx 3/4 = 6/12`

Babli's New Share = `1/3 xx 3/4 = 3/12`

New Profit sharing ratio of Azad, Babli and Chintan

= `6/12 : 3/12 : 1/4 or 6/12 : 3/12 : 3/12 or 6 : 3 : 3 or 2 : 1 : 1`

2) New Capital of Azad, and Babli

Chintan bring Rs 30,000 for `1/4` share of profit. Hence total capital of a firm = 30,000 × `1/4` = 1,20,000

Azad’s Capital = 1,20,000 x `2/4` = 60,000

Babli’s Capital = 1,20,000 x `1/4` = 30,000