Question

The Balance Sheet of Mohit and Rohit who shared profits equally, was as follows:

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Bills Payable		52,000	Cash	1,60,000
Creditors		48,000	Stock	80,000
Capital Accounts:		4,80,000	Plant and Machinery	1,40,000
Mohit	2,00,000		Debtors	52,000
Rohit	2,80,000		Furniture	48,000
General Reserve		20,000	Land and Building	1,20,000
		6,00,000		6,00,000

On 1st April 2021, Sujit joined the firm as a partner for 1/5th share of future profit on the following terms and conditions:

1. Stock, Plant, and Machinery are to be reduced by 20%.
2. Land and Building is to be valued at ₹ 1,75,000.
3. A provision of 10% is to be created on debtors.
4. Sujit is to bring in ₹ 2,00,000 as capital.
5. Goodwill is valued at ₹ 4,00,000. Sujit is to bring his share of goodwill in cash.

Draft the Journal Entries in the books of the firm and show the Profit and Loss Adjustment Account.

Answer 1

Journal Entries in the Books of the Firm
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2021
April 1	Profit and Loss Adjustment A/c   ...Dr.		49,200	-
	To Stock A/c		-	16,000
	To Plant and Machinery A/c		-	28,000
	To Provision for Doubtful Debts A/c		-	5,200
	(Being decrease in the value of assets and a provision created)
April 1	Land and Building A/c   ...Dr.		55,000	-
	To Profit and Loss Adjustment A/c		-	55,000
	(Being increase in the value of Land and Building)
April 1	Profit and Loss Adjustment A/c   ...Dr.		5,800	-
	To Mohit’s Capital A/c		-	2,900
	To Rohit’s Capital A/c		-	2,900
	(Being profit on revaluation distributed equally)
April 1	General Reserve A/c   ...Dr.		20,000	-
	To Mohit’s Capital A/c		-	10,000
	To Rohit’s Capital A/c		-	10,000
	(Being general reserve distributed in the old ratio)
April 1	Cash A/c   ...Dr.		2,80,000	-
	To Sujit’s Capital A/c		-	2,00,000
	To Premium for Goodwill A/c		-	80,000
	(Being capital and share of goodwill `(4,00,000 xx 1/5)` brought in)
April 1	Premium for Goodwill A/c   ...Dr.		80,000	-
	To Mohit’s Capital A/c		-	40,000
	To Rohit’s Capital A/c		-	40,000
	(Being goodwill shared by old partners in the sacrifice ratio)

 

Dr.	Profit and Loss Adjustment Account			Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Stock A/c		16,000	By Land and Building A/c (1,75,000 − 1,20,000)	55,000
To Plant & Machinery A/c		28,000
To Provision for Doubtful Debts		5,200
To Profit on Revaluation transferred to:
Mohit’s Capital A/c	2,900	5,800
Rohit’s Capital A/c	2,900
		55,000		55,000