A, B and Care partners in a firm, sharing profits and losses in the ratio of 5:3:2. They admit D into the firm on 1st April, 2016, when their balance sheet was as follows:
Assets
Land and Building 3,00,000 Plant and Machinery 1,50,000 Furniture 40,000 Stock 52,000 Debtors Less : Provision for doubtful debts 120058800
Cash at Bank C's Capital : Overdrawn
5,42,000
Liabilities Partner's Capitals
A
B
General Reserve
sundry Creditors
The following terms were agreed upon:
(i) The new profit sharing ratio should be 4:3:1:2.
1,50,000 30,000 70,000
13,200 20,000 5,42,000
60,000
(ii) Goodwill of the firm is to be valued at 4 year's purchase of the average super-profits of the last three years. Average profits of the last three years are 760,000, while the normal profits that can be earned with the capital employed are 36,000.
(iii) D will bring in 1,00,000 as capital.
(iv) D could bring in only rd of his share of goodwill in cash.
(v) Plant and machinery is to be valued at 3120000 ; Provision for doubtful debts is to be maintained at 5%; value of Land and Building has appreciated by 25%; furniture has depreciated by 10%.
(vi) An unprovided contingent liability of 4,000 for damages has matured for payment.
Prepare necessary journal entries, Capital Accounts and the opening Balance Sheet of the new firm
Answers
Answer:
B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2019 stood as follows:
Liabilities
Amount
(₹)
Assets
Amount
(₹)
Capital A/cs: Land and Building 3,50,000
A 2,50,000 Machinery 2,40,000
B 2,50,000 Computers 70,000
C 2,00,000 7,00,000 Investments (Market value ₹ 90,000) 1,00,000
General Reserve 60,000 Sundry Debtors 50,000
Investments Fluctuation Reserve 30,000 Cash in Hand 10,000
Sundry Creditors 90,000 Cash at Bank 55,000
Advertisement Suspense 5,000
8,80,000 8,80,000
They decided to share profits equally w.e.f. 1st April, 2019. They also agreed that:
(i) Value of Land and Building be decreased by 5%.
(ii) Value of Machinery be increased by 5%.
(iii) A Provision for Doubtful Debts be created @ 5% on Sundry Debtors.
(iv) A Motor Cycle valued at ₹ 20,000 was unrecorded and is now to be recorded in the books.
(v) Out of Sundry Creditors, ₹ 10,000 is not payable.
(vi) Goodwill is to be valued at 2 years' purchase of last 3 years profits. Profits being for 2018-19 − ₹ 50,000 (Loss); 2017-18 − ₹ 2,50,000 and 2016-17 − ₹ 2,50,000.
(vii) C was to carry out the work for reconstituting the firm at a remuneration (including expenses) of ₹ 5,000. Expenses came to ₹ 3,000.
Pass Journal entries and prepare Revaluation Account.
Solution
Journal
Date
Particulars
L.F.
Debit
Amount
(₹)
Credit
Amount
(₹)
2019
April 1
General Reserve A/c
Dr.
60,000
To A’s Capital A/c
30,000
To B’s Capital A/c
18,000
To C’s Capital A/c
12,000
(Reserve distributed)
A’s Capital A/c
Dr
2,500
B’s Capital A/c
Dr.
1,500
C’s Capital A/c
Dr.
1,000
To Advertisement Suspense A/c
5,000
(Advertisement Suspense distributed)
Investment Fluctuation Reserve A/c
Dr.
30,000
To Investment A/c
10,000
To A’s Capital A/c
10,000
To B’s Capital A/c
6,000
To C’s Capital A/c
4,000
(Investment Fluctuation Reserve distributed)
Machinery A/c
Dr.
12,000
Motor Cycle A/c
Dr.
20,000
Creditors A/c
Dr.
10,000
To Revaluation A/c
42,000
(Assets revalued)
Revaluation A/c
25,000
To Land & Building A/c
17,500
To Provision for Doubtful Debts A/c
2,500
To Bank A/c (Remuneration)
5,000
(Assets revalued)
Revaluation A/c
17,000
To A’s Capital A/c
8,500
To B’s Capital A/c
5,100
To C ’s Capital A/c
3,400
(Profit on revaluation transferred to Partners’ Capital A/c)
B’s Capital A/c
Dr.
10,000
C ’s Capital A/c
Dr.
40,000
To A’s Capital A/c
50,000
(Goodwill adjusted)
Revaluation A/c
Dr.
Cr.
Particulars
Amount
(₹)
Particulars
Amount
(₹)
Land & Building A/c
17,500
Machinery A/c
12,000
Provision for Doubtful Debts A/c
2,500
Motor Cycle A/c
20,000
Bank A/c (Remuneration)
5,000
Creditors A/c
10,000
Profit transferred to:
A
8,500
B
5,100
C
3,400
17,000
42,000
42,000
Working Notes:
WN1: Calculation of sacrifice or gain