Question

X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 1 : 2. On 31st March, 2018, their Balance Sheet was:
Z retires from the business and the partners agree to the following:
(a) Freehold Premises and Stock are to be appreciated by 20% and 15% respectively.
(b) Machinery and Furniture are to be depreciated by 10% and 7% respectively.
(c) Provision for Doubtful Debts is to be increased to ₹ 1,500.
(d) Goodwill of the firm is valued at ₹ 21,000 on Z’s retirement.
(e) The continuing partners have decided to adjust their capitals in their new profit-sharing ratio after retirement of Z. Surplus/deficit, if any, in their Capital Accounts will be adjusted through Current Accounts.
Prepare necessary Ledger Accounts and draw the Balance Sheet of the reconstituted firm.

Answer 1

This share of goodwill is to be distributed between X and Y in their gaining ratio (i.e. 3 : 1).

Explanation:

Calculation of Profit Sharing Ratio

Old Ratio (X, Y and Z) = 3 : 1 : 2

Z retires from the firm.

∴ New Ratio (X and Y) = 3 : 1 and

Gaining Ratio = 3 : 1

Adjustment of Goodwill

Goodwill of the firm = Rs 21,000

Z’s Share of Goodwill =  21,000 ×$\frac{2}{6}$ =Rs.7,000

This share of goodwill is to be distributed between X and Y in their gaining ratio (i.e. 3 : 1).

X's Share =Rs.7,000×$\frac{3}{4}$ =Rs.5,250

Y's Share =Rs.7,000×$\frac{1`}{4}$=Rs.1,750

Adjustment of Partners’ Capital after Z’s Retirement

Combined Capital of X and Y after all adjustments = 34,230 + 21,410 = Rs. 55,640

New Ratio = 3 : 1

X's New Capital =55,650×$\frac{3}{4}$ =Rs.41,730

Y's New Capital = 55,650×$\frac{1}{4}$ =Rs.13,910