Question

A and B are in partnership sharing profits and losses in the proportion of 2/3rd and 1/3rd respectively. Their Balance Sheet as at 31st March, 2018 was: Cash ₹ 1,000; Sundry Debtors ₹ 15,000; Stock ₹ 22,000; Plant and Machinery ₹ 4,000; Sundry Creditors ₹ 2,000; Bank Overdraft ₹ 15,000; A’s Capital ₹ 15,000; B’s Capital ₹ 10,000.
On 1st April, 2018 they admitted into partnership on the following terms:
(a) C to purchase one-quarter of the goodwill for ₹ 3,000 and provide ₹ 10,000 as capital. C brings in necessary cash for goodwill and capital.
(b) Profits and Losses are to be shared in the proportion of one-half to A, one-quarter to B and one quarter to C.
(c) Plant and Machinery is to be reduced by 10% and ₹ 500 are to be provided for estimated Bad Debts. Stock is to be taken at a valuation of ₹ 24,940.
(d) By bringing in or withdrawing cash the capitals of A and B are to be made proportionate to that of C on their profit-sharing basis.
Prepare necessary Ledger Accounts in the books of the firm relating to the above arrangement and submit the opening Balance Sheet of the new firm.

Answer 1

The opening Balance Sheet of the new firm and the necessary Ledger Accounts are prepared below:

Explanation:

Sacrificing Ratio:

Old Ratio $(A \text { and } B)=2: 1$

New Ratio

$(\mathrm{A}, \mathrm{B} \text { and } \mathrm{C}) \frac{1}{2}: \frac{1}{4}: \frac{1}{4}=\frac{2: 1: 1}{4}=2: 1: 1$

Sacrificing Ratio = Old Ratio - New Ratio

A's Sacrificing Ratio

$=\frac{2}{3}-\frac{2}{4}=\frac{8-6}{12}=\frac{2}{12}$

B's Sacrificing Ratio

$=\frac{1}{3}-\frac{1}{4}=\frac{4-3}{12}=\frac{1}{12}$

Sacrificing Ratio 2: 1

Distribution of premium for Goodwill

A's premium for Goodwill

$=3,000 \times \frac{2}{3}=2,000$

B's premium for Goodwill

$=3,000 \times \frac{1}{3}=1,000$

Distribution of Revaluation profit

$A^{\prime} s=2,040 \times \frac{2}{3}=1,360$

$B^{\prime} s=2,040 \times \frac{1}{3}=680$

Adjustment of Capitals (New Ratio)

Total Capital of the firm

$=10,000 \times \frac{4}{1}=40,000$

A's share Of capital

$=40,000 \times \frac{2}{4}=20,000$

B's Capital

$=40,000 \times \frac{1}{4}=10,000$

C's Capital

$=40,000 \times \frac{1}{4}=10,000$