Question

The Balance Sheet of X, Y and Z who were sharing profit in proportion of capitals is as follows:

Liabilities	₹	Assets	₹	₹
Sundry Creditors	7,000	Cash at Bank		15,600
Capital A/cs:		S. Debtors	5,000
X	25,000	Less: Provision	100	4,900
Y	20,000	Stock		10,000
Z	15,000	Plant and Machinery		11,500
		Land and Building		25,000
	67,000			67,000

Y retires and the following adjustment of the assets and liabilities have been made before the ascertainment of the amount payable by the firm to Y:

1. That the stock be depreciated by 5%.
2. That the provision for doubtful debts be increased to 5% on debtors.
3. That the land and building be appreciated by 20%.
4. That a provision of ₹ 750 be made in respect of outstanding legal charges.
5. That the Goodwill of the entire firm be fixed at ₹ 16,200 and Y's share of the same be adjusted into the Accounts of X and Z.
6. That X and Z decide to share future profits of the firm in equal proportion.
7. That the entire capital of the new firm is fixed at ₹ 48,000 between X and Z in equal proportions. For the purpose, actual cash is to be brought in or paid off.

You are required to prepare the Revaluation Account, Partner's Capital Accounts, Bank account and revised balance sheet after Y's retirement. Also indicate the gaining ratio.

Answer 1

Revaluation Account
Particulars	Amount (₹)	Amount (₹)	Cr. Particulars	Amount (₹)
To Stock (5% of 10,000)		500	By Land and Building (20% of 25,000)	5,000
To Provision for Doubtful Debts (New provision 250 − Old provision 100)		150
To Provision for Outstanding Legal Charges		750
To Gain on Revaluation transferred to:
X's Capital A/c (5/12)	1,500
Y's Capital A/c (4/12)	1,200
Z's Capital A/c (3/12)	900	3,600
Total		5,000	Total	5,000

 

Partners' Capital Accounts
Dr. Particulars	X (₹)	Y (₹)	Z (₹)	Cr. Particulars	X (₹)	Y (₹)	Z (₹)
To Y's Capital A/c (Goodwill)	1,350	-	4,050	By Balance b/d	25,000	20,000	15,000
To Y's Loan A/c (Transfer)	-	26,600	-	By Revaluation A/c (Gain)	1,500	1,200	900
To Bank A/c (Cash withdrawn)	1,150	-	-	By X's & Z's Capital A/cs	-	5,400	-
To Balance c/d (Fixed New Cap.)	24,000	-	24,000	By Bank A/c (Cash brought in)	-	-	12,150
Total	26,500	26,600	28,050	Total	26,500	26,600	28,050

 

Cash at Bank Account
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	15,600	By X's Capital A/c (Withdrawal)	1,150
To Z's Capital A/c (Cash brought in)	12,150	By Balance c/d	26,600
Total	27,750	Total	27,750

 

Revised Balance Sheet of the New Firm
Liabilities	Amount (₹)	Assets		Amount (₹)
Capital Accounts:		Cash at Bank		26,000
X	24,000	Sundry Debtors	5,000
Z	24,000	Less: Provision (5%)	250	4,750
Y's Loan Account	26,600	Stock (10,000 − 500)		9,500
Sundry Creditors	7,000	Plant and Machinery		11,500
Outstanding Legal Charges	750	Land and Building (25,000 + 5,000)		30,000
Total	82,350	Total		82,350

Working note:

Old Profit-Sharing Ratio: In proportion to capitals:

X : Y : Z = 25000 : 20,000 : 1500 = 5 : 4 : 3 

New Profit-Sharing Ratio: Given directly as equal proportion = 1 : 1

Gaining Ratio: Gaining Share = New Share − Old Share

X's Gain = `1/2 - 5/12 = (6 - 5)/12 = 1/12`

Z's Gain = `1/2 - 3/12 = (6 - 3)/12 = 3/12`

Gaining Ratio (X : Z) = 1 : 3

Goodwill Adjustment:

Total Firm Goodwill = 16,200

Y's Share of Goodwill = `16,200 xx 4/12 = 5,400`

Debited to X = `5,400 xx 1/4 = 1,350`

Debited to Z = `5,400 xx 3/4 = 4,050`