Question

X and Y share profits in the ratio of 5 : 3. Their balance sheet as at 31st March, 2024, was as follows:

Liabilities	₹	Assets	₹	₹
Creditors	15,000	Cash at Bank		5,000
Provident Fund	10,000	Sundry Debtors	20,000	19,400
Workmen’s Compensation Reserve	5,800	Less: Provision	600
Capitals:		Stock		25,000
X	70,000	Fixed Assets		80,000
Y	31,000	Profit & Loss A/c		2,400
	1,31,800			1,31,800

They admit Z into partnership on 1st April, 2024 with `1/8`th share in profits. Z brings ₹ 20,000 as his capital and ₹ 12,000 for goodwill in cash. Z acquires his share entirely from X. Following revaluations are also made:

1. Provident fund is to be increased by ₹ 5,000.
2. Debtors are all good. Therefore, no provision is required on debtors.
3. Stock includes ₹ 3,000 for obsolete items.
4. Creditors are to be paid ₹ 1,000 more.
5. Fixed Assets are to be revalued at ₹ 70,000.

Prepare Journal entries, necessary accounts and a new balance sheet. Also calculate the new profit-sharing ratio.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2024
Apr. 1	Revaluation A/c   ...Dr.		19,000
	To Fixed Assets A/c			10,000
	To Provident Fund A/c			5,000
	To Stock A/c			3,000
	To Creditors A/c			1,000
	(Decrease in the value of assets and increase in liabilities recorded)
Apr. 1	Provision for Doubtful Debts A/c   ...Dr.		600
	To Revaluation A/c			600
	(Provision for doubtful debts no longer required)
Apr. 1	X’s Capital A/c   ...Dr.		11,500
	Y’s Capital A/c   ...Dr.		6,900
	To Revaluation A/c			18,400
	(Loss on revaluation transferred to old partners’ capital accounts in old ratio 5 : 3)
Apr. 1	Cash at Bank A/c   ...Dr.		32,000
	To Z's Capital A/c			20,000
	To Premium for Goodwill A/c			12,000
	(Cash brought in by Z for capital and goodwill)
Apr. 1	Premium for Goodwill A/c   ...Dr.		12,000
	To X’s Capital A/c			12,000
	(Goodwill transferred to X as he is the sacrificing partner)
Apr. 1	Workmen’s Compensation Reserve A/c   ...Dr.		5,800
	To X’s Capital A/c			3,625
	To Y’s Capital A/c			2,175
	(Workmen’s Compensation Reserve distributed in old ratio)
Apr. 1	Profit & Loss A/c   ...Dr.		2,400
	To X’s Capital A/c			1,500
	To Y’s Capital A/c			900
	(Profit & Loss A/c balance distributed in old ratio)

 

Dr.	Partner’s Capital Accounts						Cr.
Particulars	X (₹)	Y (₹)	Z (₹)	Particulars	X (₹)	Y (₹)	Z (₹)
To Revaluation A/c	11,500	6,900		By Balance b/d	70,000	31,000
To Profit & Loss A/c	1,500	900		By Cash A/c			20,000
To Balance c/d	72,625	25,375	20,000	By Premium for Goodwill	12,000
				By Workmen’s Comp. Reserve	3,625	2,175
	85,625	33,175	20,000		85,625	33,175	20,000

 

Balance Sheet as at 1st April, 2024
Balance Sheet	Amount (₹)	Assets	Amount (₹)
Creditors (15,000 + 1,000)	16,000	Cash at Bank (5,000 + 20,000 + 12,000)	37,000
Provident Fund (10,000 + 5,000)	15,000	Sundry Debtors	20,000
Capitals:		Stock (25,000 − 3,000)	22,000
X	72,625	Fixed Assets (80,000 − 10,000)	70,000
Y	25,375
Z	20,000
	1,49,000		1,49,000

Calculate New Profit Sharing Ratio:

Old Ratio of X and Y = 5 : 3

New partner Z gets a `1/8`th share, which he acquires entirely from X.

X’s new share = Old share − Share given to Z

= `5/8 - 1/8`

= `4/8`

Y’s share remains the same = `3/8`

 Z’s share = `1/8`

New Ratio X, Y, and Z = `4/8 : 3/8 : 1/8` or 4 : 3 : 1