Question

X and Y were partners sharing profits and losses in the ratio of 2 : 1 respectively. The following was their balance sheet as at 31st March, 2024:

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	80,000	Machinery	5,00,000
Outstanding Expenses	20,000	Stock	4,00,000
X’s Capital	7,20,000	Debtors	3,50,000
Y’s Capital	4,80,000	Prepaid Expenses	10,000
		Bank Balance	40,000
	13,00,000		13,00,000

On 1st April, 2024, Z was admitted to the firm on the following terms:

1. Z would provide ₹ 5,00,000 as his capital and pay ₹ 30,000 as goodwill for his one-third share in future profits.
2. X, Y and Z would share profits equally.
3. Assets are to be revalued as:
   Stock at 20% less; Debtors ₹ 3,20,000; Machinery ₹ 4,50,000; Prepaid Expenses - Nil.
4. Outstanding Expenses were estimated at ₹ 40,000.
5.  A credit purchase of goods for ₹ 30,000 had been omitted from the books, although the goods have been included in stock.
6. Creditors include a contingent liability of ₹ 50,000, which has been decided by the court at ₹ 40,000.
7. Capital accounts of old partners would be adjusted in the profit-sharing ratio on the basis of Z’s capital by bringing in or taking out cash.

Pass necessary journal entries and prepare partners’ capital accounts and the balance sheet of the new firm.

Hints:

1. Credit purchase will be shown on the Debit of Revaluation Ale and will also be added in Creditors.
2. ₹ 10,000 in respect of contingent liability will be shown on the Cr. of the Revaluation A/c and will also be deducted from Creditors.

Answer 1

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		5,30,000
	To Z’s Capital A/c			5,00,000
	To Goodwill (Premium) A/c			30,000
	(Capital and premium for goodwill brought in by Z)
	Premium for Goodwill A/c   ...Dr.		30,000
	To X’s Capital A/c			20,000
	To Y’s Capital A/c			10,000
	(Goodwill distributed to old partners in sacrificing ratio of 2 : 1)
	Premium for Goodwill A/c   ...Dr.		30,000
	To X’s Capital A/c			30,000
	(Goodwill distributed to X, the sacrificing partner)
	Revaluation A/c   ...Dr.		2,40,000
	To Stock A/c			80,000
	To Debtors A/c			30,000
	To Machinery A/c			70,000
	To Prepaid Expenses A/c			10,000
	To Outstanding Expenses A/c   ...Dr.			20,000
	To Creditors A/c			30,000
	(Assets revalued and liabilities reassessed)
	Creditors A/c   ...Dr.		10,000
	To Revaluation A/c			10,000
	(Reduction in contingent liability)
	X’s Capital A/c   ...Dr.		1,40,000
	Y’s Capital A/c   ...Dr.		70,000
	To Revaluation A/c			2,10,000
	(Loss on revaluation transferred to partners’ capital accounts in old ratio)
	X’s Capital A/c   ...Dr.		1,10,000
	To Bank A/c			1,10,000
	(Excess capital withdrawn by X)
	Bank A/c   ...Dr.		90,000
	To Y’s Capital A/c			90,000
	(Deficit capital brought in by Y)

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	X (₹)	Y (₹)	Z (₹)	Particulars	X (₹)	Y (₹)	Z (₹)
To Revaluation A/c	1,40,000	70,000		By Balance b/d	7,20,000	4,80,000
To Bank A/c	1,10,000			By Bank A/c  (Z’s Capital)			5,00,000
To Balance c/d	5,00,000	5,00,000	5,00,000	By Bank A/c (Y’s contribution)		90,000
				By Goodwill (Premium) A/c	30,000
	7,50,000	5,70,000	5,00,000		7,50,000	5,70,000	5,00,000

 

Balance Sheet as at 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors	80,000	1,00,000	Machinery		4,50,000
Add: Omitted Purchase	30,000
Less: Contingent Liability	10,000
Outstanding Expenses		40,000	Stock		3,20,000
Capitals:		15,00,000	Debtors		3,20,000
X	5,00,000		Prepaid Expenses		Nil
Y	5,00,000		Bank Balance		5,50,000
Z	5,00,000
		16,40,000			16,40,000

Working Note:

Calculation of Sacrificing Ratio:

Old Ratio of X and Y = 2 : 1

New Ratio of X, Y and Z = 1 : 1 : 1

Sacrificing Ratio = Old Ratio − New Ratio

X = `2/3 -1/3`

= `1/3`

Y = `1/3 - 1/3`

= 0

Calculations for Adjustments:

X’s balance before adjustment = Opening Balance + Goodwill − Loss on Revaluation

= 7,20,000 + 30,000 − 1,40,000

= ₹ 6,10,000

New required capital = ₹ 5,00,000.

X needs to withdraw = 6,10,000 − 5,00,000

= ₹ 1,10,000

Y’s balance before adjustment = Opening Balance + Goodwill − Loss on Revaluation

= 4,80,000 + 0 − 70,000

= ₹ 4,10,000

New required capital = ₹ 5,00,000.

X needs to withdraw = 5,00,000 − 4,10,000

= ₹ 90,000

Bank Balance = Original Bank Balance + Z’s capital + goodwill + Y’s contribution − X’s withdrawal

= 40,000 + 5,00,000 + 30,000 + 90,000 − 1,10,000

= 5,50,000

Calculation of Loss on Revaluation:

Losses:

1. Stock at 20% less:

= `4,00,000 xx 20/100`

= 80,000

2. Debtors Revalued at ₹ 3,20,000:

= 3,50,000 − 3,20,000

= ₹ 30,000

Prepaid Expenses (Nil) = ₹ 10,000

Outstanding Expenses Estimated at ₹ 40,000:

= 40,000 − 20,000

= ₹ 20,000

Credit Purchase omitted = ₹ 30,000

Machinery Revalued at ₹ 4,50,000:

= 5,00,000 − 4,50,000

= ₹ 50,000

Total Losses = ₹ 80,000 + ₹ 30,000 + ₹ 10,000 + ₹ 20,000 + ₹ 30,000 + ₹ 50,000

= ₹ 2,20,000

Gains:

Contingent Liability Reduced by ₹ 10,000 = 50,000 − 40,000

= 10,000

Net Loss on Revaluation = 2,20,000 − ₹10,000

= ₹ 2,10,000

Distribution of Loss:

X’s share = `2,10,000 xx 2/3`

= 1,40,000

Y’s share = `2,10,000 xx 1/3`

= 70,000