Question

A, B and C are partners in a firm sharing profits in the ratio of 2:3:4. On 31st March 2019,

A retires and B and C decided to share future profits in the ratio of 2:1.

Following balances appeared in their books on this date:

Rs.

Profit and Loss (Dr.) 72,000

Employee's Provident Fund 1,50,000

Workmen Compensation Reserve 45,000

General Reserve 1,20,000

It is agreed that (i) workmen Compensation Reserve is no more required, and

ii) 25% of the General Reserve is to be transferred to Investment Fluctuation Reserve.

Pass journal entries for the adjustment of these items on A's retirement.​

Answer 1

Explanation:

C's share of profit is (1,57,500*1/7) 22,500. So,the deficiency of (37,500-22,500) i.e 15,000 is to be borne by A and B in the ratio of 4:2.

Journal Entries are:-

Profit and Loss A/c Dr. 1,57,500

To Profit and Loss appropriation A/c 1,57,500

(Being profit transferred to P&L appropriation account)

Profit and Loss Appropriation A/c Dr. 1,57,500

To A's capital A/c 90,000

To B's capital A/c 45,000

To C's capital A/c 22,500

(Being actual distribution of profit)

A's capital A/c Dr. 10,000

B's capital A/c Dr. 5000

To C's capital A/c 15,000

(Being deficiency of C,contributed by A and B)

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars Amount Particulars Amount

To A's capital A/c 90,000

Less:C's deficiency (10,000)

To B's capital A/c 45,000

Less: C's deficiency (5000)

To C's capital A/c 22,500

Add: share from

A&B 15,000

1,57,500 By Net profit 1,57,500

Total 1,57,500 Total 1,57,500

Answer 2

Necessary Journal Entries for the adjustment of these items on A's retirement are as follows: -

• Profit and Loss  A/c                           Dr.                72000

                           To A's capital A/c                                             16000

                           To B's capital A/c                                             24000

                           To C's capital A/c                                             32000

                 (Being actual distribution of loss)

• Workmen Compensation Reserve A/c   Dr.           45,000

                           To A's capital A/c                                               10,000

                           To B's capital A/c                                               15,000

                           To C's capital A/c                                              20,000

         (being workmen compensation reserve distributed)

• Investment Fluctuation Reserve A/c      Dr.           30,000

                            To A's capital A/c                                              6667

                            To B's capital A/c                                             10000

                            To C's capital A/c                                             13333

          (being Investment Fluctuation Reserve distributed)

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