Question

Following was the Balance Sheet of A and B who were sharing profits in the ratio of 2 : 1 as at 31st March, 2018:
They agree to admit C into the partnership on the following terms:
(a) C was to bring in ₹ 7,500 as his capital and ₹ 3,000 as goodwill for 1/4th share in the firm.
(b) Values of the Stock and Plant and Machinery were to be reduced by 5%.
(c) A Provision for Doubtful Debts was to be created in respect of Sundry Debtor ₹ 375.
(d) Building Account was to be appreciated by 10%.
Pass necessary journal entries to give effect to the arrangements. Prepare Profit and Loss Adjustment Account (or Revaluation Account), Capital Accounts and Balance Sheet of the new firm.

Answer 1

The necessary journal entries are given below:

Explanation:

Sacrificing Ratio A and B =2: 1

Distribution of Premium for Goodwill ( in sacrificing ratio)

A's Goodwill

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

B's Goodwill

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

Distribution of Profit from Profit and Loss Adjustment Account (in old ratio)

$A^{\prime} S=750 \times \frac{2}{3}=500$

$B^{\prime} s=750 \times \frac{1}{3}=250$

Thus, A and B's profit from Profit and Loss Adjustment Account will be Rs. 500 and Rs. 250 respectively.