Question

Vimal and Nirmal are partners sharing profits in the ratio of 3 : 2. Following was the position of their business as at 31st March, 2024:

Liabilities	₹	Assets	₹
Sundry Creditors	20,000	Cash	14,000
Capital Accounts:		Debtors	18,000
Vimal	60,000	Plant & Machinery	50,000
Ninnal	32,000	Stock	40,000
Profit & Loss A/c	20,000	Goodwill	10,000
	1,32,000		1,32,000

On 1st April, 2024, Kailash agrees to join the business on the following terms and conditions:

1. He will introduce ₹ 40,000 as his capital and pay ₹ 20,000 to the existing partners for his share of goodwill.
2. The new profit-sharing ratio will be 2 : 1 : 1 respectively for Vimal, Nirmal and Kailash.
3. A revaluation of assets will be made by reducing plant and machinery to ₹ 35,000 and stock by 10%. Provision of ₹ 1,000 is to be created for bad and doubtful debts.

Pass journal entries for the above arrangements and give the balance sheet of the newly constituted firm. Also specify the sacrificing ratio.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2024
April 1	Revaluation A/c   ...Dr.		20,000
	To Plant & Machinery A/c			15,000
	To Stock A/c			4,000
	To Provision for Bad Debts A/c			1,000
	(Revaluation of assets and creation of provision)
April 1	Vimal’s Capital A/c   ...Dr.		12,000
	Nirmal’s Capital A/c   ...Dr.		8,000
	To Revaluation A/c			20,000
	(Loss on revaluation transferred to old partners’ capital accounts)
April 1	Cash A/c   ...Dr.		60,000
	To Kailash’s Capital A/c			40,000
	To Premium for Goodwill A/c			20,000
	(Cash brought in by Kailash for capital and goodwill)
April 1	Premium for Goodwill A/c   ...Dr.		20,000
	To Vimal’s Capital A/c			8,000
	To Nirmal’s Capital A/c			12,000
	(Goodwill distributed to old partners in their sacrificing ratio of 2 : 3)
April 1	Vimal’s Capital A/c   ...Dr.		12,000
	Nirmal’s Capital A/c   ...Dr.		8,000
	To Profit & Loss A/c			20,000
	(Existing profit and loss account balance distributed to old partners)
April 1	Cash A/c   ...Dr.		10,000
	To Goodwill A/c			10,000
	(The existing goodwill written off)

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	Vimal (₹)	Nirmal (₹)	Kailash (₹)	Particulars	Vimal (₹)	Nirmal (₹)	Kailash (₹)
To Revaluation A/c (loss)	12,000	8,000		By Balance b/d	60,000	32,000
To Goodwill A/c	6,000	4,000		By Cash A/c			40,000
To Balance c/d	62,000	40,000	40,000	By Premium for Goodwill A/c	8,000	12,000
				By Profit & Loss A/c	12,000	8,000
	80,000	52,000	40,000		80,000	52,000	40,000

 

Balance Sheet as at 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Sundry Creditors		20,000	Cash		74,000
Capital Accounts:		1,42,000	Debtors	18,000	17,000
Vimal	62,000		Less: Provision	1,000
Nirmal	40,000		Plant & Machinery		35,000
Kailash	40,000		Stock		36,000
		1,62,000			1,62,000

Working Note:

Calculate the Sacrificing Ratio:

Sacrifice = Old Share − New Share

Vimal’s Sacrifice = `3/5 - 2/4`

= `(3 xx 4)/(5 xx 4) - (2 xx 5)/(4 xx 5)`

= `12/20 - 10/20`

= `(12 - 10)/20`

= `2/20`

Nirmal’s Sacrifice = `2/5 - 1/4`

= `(2 xx 4)/(5 xx 4) - (1 xx 5)/(4 xx 5)`

= `8/20 - 5/20`

= `(8 - 5)/20`

= `3/20`

Sacrifice Ratio = `2/20 : 3/20` or 2 : 3

Note: The existing goodwill of ₹ 10,000 and the Profit & Loss A/c balance of ₹ 20,000 from the old balance sheet are distributed to the old partners in their old ratio of 3 : 2. Goodwill of ₹ 10,000 is written off from the old partners’ capital accounts. The P & L A/c balance of ₹ 20,000 is also distributed.

Vimal’s share of profit and loss = `20,000 xx 3/5`

= 12,000

Nirmal’s share of profit and loss = `20,000 xx 2/5`

= 8,000

Vimal’s share of Goodwill = `10,000 xx 3/5`

= 6,000

Nirmal’s share of profit and loss = `10,000 xx 2/5`

= 4,000

Cash balance calculation:

Cash = Initial Cash + Kailash’s capital + Kailash’s premium for goodwill

= 14,000 + 40,000 + 20,000

= 74,000

Revaluation of assets:

Plant & Machinery = 50,000 − 15,000

= 35,000

Stock =  `40,000 xx 10/100`

= 4,000

= 40,000 − 4,000

= 36,000

Provision for Bad & Doubtful Debts =  36,000 − 35,000

= ₹ 1,000