Question

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their position as at 31st March 2026 was as follows:

Liabilities	₹	₹	Assets	₹	₹
Sundry Creditors		44,000	Cash in Hand		8,000
Outstanding Expenses		10,000	Cash at Bank		22,000
Capitals:			Debtors	56,000
X	2,80,000		Less: Provision	6,000	50,000
Y	2,80,000		Stock		2,80,000
Z	1,00,000	6,60,000	Machinery		1,54,000
			Building		2,00,000
		7,14,000			7,14,000

It was decided that with effect from 1st April 2026, profit and loss sharing ratio will be 3 : 3 : 1. They agreed on the following terms:

1. Goodwill of the firm be valued at two years' purchase of the average super profits of last three years. Average profits of the last three years are 1,08,000, while the normal profits may be taken at ₹ 66,000.
2. Provision on debtors be reduced by ₹ 2,000.
3. Value of stock be increased by 10% and machinery be valued at ₹ 1,00,000.
4. An item of ₹ 3,000 included in sundry creditors is not likely to be claimed.

Partners do not want to record the altered values of assets and liabilities in the books. Pass an entry to give effect to the above and prepare the revised balance sheet.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	Y's Capital A/c Dr.		8,100
	To X's Capital A/c			4,500
	To Z's Capital A/c			3,600
	(Being adjustment made for goodwill and revaluation consequent upon change in profit-sharing ratio)

 

Revised Balance Sheet as at 1st April, 2026
Liabilities	₹	Assets		₹
Sundry Creditors	44,000	Cash in Hand		8,000
Outstanding Expenses	10,000	Cash at Bank		22,000
Capitals:		Debtors	56,000
X	2,84,500	Less: Provision	6,000	50,000
Y	2,71,900	Stock		2,80,000
Z	1,03,600	Machinery		1,54,000
		Building		2,00,000
Total	7,14,000	Total		7,14,000

Working note:

1. Calculation of Goodwill

Average Profit = ₹ 1,08,000

Normal Profit = ₹ 66,000

Super Profit = Average Profit − Normal Profit

= ₹ 1,08,000 − ₹ 66,000 = ₹ 42,000

Goodwill = Super Profit × 2 years’ purchase

= ₹ 42,000 × 2 = ₹ 84,000

2. Sacrificing and Gaining Ratio

Old Ratio of X, Y and Z = 5 : 3 : 2

New Ratio = 3 : 3 : 1

X:

Old Share = `5/10 = 1/2`

New Share = `3/7`

Sacrifice = `1/2 − 3/7 = 1/14`

Y:

Old Share = `3/10`

New Share = `3/7`

Gain = `3/7 − 3/10 = 9/70`

Z:

Old Share = `2/10 = 1/5`

New Share = `1/7`

Sacrifice = `1/5 − 1/7 = 2/35`

Therefore, sacrificing ratio of X and Z:

`1/14 : 2/35 = 5 : 4`

Goodwill Adjustment

Y's gaining share = `9/70`

Amount payable by Y:

`₹84,000 × 9/70 = ₹10,800`

X's share = `₹10,800 × 5/9 = ₹6,000`

Z's share = `₹10,800 × 4/9 = ₹4,800`

Thus:

Y's Capital A/c Dr. ₹ 10,800

To X's Capital A/c ₹ 6,000

To Z's Capital A/c ₹ 4,800

3. Revaluation of Assets and Liabilities

Since revised values are not to be recorded in the books, the effect is adjusted through partners' capital accounts.

Increase in values/decrease in liabilities:

Provision on Debtors reduced by ₹ 2,000 = Gain ₹ 2,000

Stock increased by 10%:

₹ 2,80,000 × 10% = Gain ₹ 28,000

Creditors not likely to be claimed = Gain ₹ 3,000

Total Gain = ₹ 33,000

Decrease in value:

Machinery:

Book Value = ₹ 1,54,000

Revised Value = ₹ 1,00,000

Loss = ₹ 1,54,000 − ₹ 1,00,000 = ₹ 54,000

Therefore:

Loss on Revaluation = ₹ 54,000 − ₹ 33,000 = ₹ 21,000

4. Adjustment of Revaluation Loss

First, ₹ 21,000 loss is borne in the old ratio 5 : 3 : 2:

X = `₹21,000 × 5/10 = ₹10,500`

Y = `₹21,000 × 3/10 = ₹6,300`

Z = `₹21,000 × 2/10 = ₹4,200`

Then ₹ 21,000 is credited in the new ratio 3 : 3 : 1:

X = `₹21,000 × 3/7 = ₹9,000`

Y = `₹21,000 × 3/7 = ₹9,000`

Z = `₹21,000 × 1/7 = ₹3,000`

Net Revaluation Effect:

X = ₹ 10,500 Dr. − ₹ 9,000 Cr. = ₹ 1,500 Dr.

Y = ₹ 9,000 Cr. − ₹ 6,300 Dr. = ₹ 2,700 Cr.

Z = ₹ 4,200 Dr. − ₹ 3,000 Cr. = ₹ 1,200 Dr.

5. Combined Adjustment Entry

Combining goodwill and revaluation adjustments:

X: ₹ 6,000 Cr. − ₹ 1,500 Dr. = ₹ 4,500 Cr.

Y: ₹ 10,800 Dr. − ₹ 2,700 Cr. = ₹ 8,100 Dr.

Z: ₹ 4,800 Cr. − ₹ 1,200 Dr. = ₹ 3,600 Cr.

6. Revised Capitals

X = ₹ 2,80,000 + ₹ 4,500 = ₹ 2,84,500

Y = ₹ 2,80,000 − ₹ 8,100 = ₹ 2,71,900

Z = ₹ 1,00,000 + ₹ 3,600 = ₹ 1,03,600