A, B and C were in partnership sharing profits in proportion to their capitals Their Balancd Sheet on 31-03-2008 was as follows:
LIABILITIES
Creditors: 15,600
Reserve: 6,000
A's Capital: 90,000
B's Capital: 60,000
C's Capital: 30,00
ASSET
Building: 1,00,000
Debtors: 48,000
Stock18,000
Debtors: 20,000
less: Prov for doubtful debts 400 =19,600
Cash 16,000
Total: 2,01,600
On the above date B retired owing to ill health and the following adjustments were agreed upon
- Building be appreciated by 10%
- Provision for doubtful debts to be increased to 5% of debtors
- Machinery be depreciated by 15%
- Goodwill of the firm be valued at Rs 36,000 and be adjusted into Capital Accounts of A and C who will share profits in future in the ratio of 3:1
- A provision be made for outstanding repairs bill of Rs 3,000
- Included in the valued of creditors is Rs 1,800 for an outstanding legal claim, which is not likely to arise.
- Out of the insurance premium paid Rs 2,000 is for the next year. The amount was debited to P&L A/c
- The partners decide to fix the capital of the new firm as Rs 1,20,000 in the profit sharing ratio.
- B to be paid Rs 9,000 in cash and the balance to be transferred to his Loan Account
- Prepare the Revaluation Account, Partners's Capital Accounts and the balance sheet of the nwe firm after B's retirement..
Revaluation Account | ||||
Dr. | Cr. | |||
Particulars | Amount Rs | Particulars | Amount Rs | |
Provision for Doubtful Debts (1,000 – 400) | 600 | Buildings | 10,000 | |
Machinery (48,000 × 15%) | 7,200 | Creditors | 1,800 | |
Provision for outstanding Repair Bill | 3,000 | Prepaid Insurance | 2,000 | |
Profit on Revaluation transferred to: |
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A’s Capital A/c | 1,500 |
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B’s Capital A/c | 1,000 |
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C’s Capital A/c | 500 | 3,000 |
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| 13,800 |
| 13,800 | |
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Partners’ Capital Account | |||||||
Dr. | Cr. | ||||||
Particulars | A | B | C | Particulars | A | B | C |
B’s Capital A/c | 9,000 |
| 3,000 | Balance b/d | 90,000 | 60,000 | 30,000 |
Cash A/c (Payment to B in cash) |
| 9,000 |
| Reserve | 3,000 | 2,000 | 1,000 |
Loan A/c |
| 66,000 |
| Revaluation A/c (Profit) | 1,500 | 1,000 | 500 |
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| A’s Capital A/c (WN2) |
| 9,000 |
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| C’s Capital A/c (WN2) |
| 3,000 |
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Balance c/d (WN3) | 90,000 |
| 30,000 | Cash A/c (WN4) | 4,500 |
| 1,500 |
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| 99,000 | 75,000 | 33,000 |
| 99,000 | 75,000 | 33,000 |
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Balance Sheet | |||||
Liabilities | Amount Rs | Assets | Amount Rs | ||
Creditors (15,600 – 1,800) | 13,800 | Building (1,00,000 + 10,000) | 1,10,000 | ||
Provision for Outstanding Repairs Bill | 3,000 | Machinery (48,000 – 7,200) | 40,800 | ||
Capital A/cs: |
| Stock | 18,000 | ||
A’s Capital A/c | 90,000 |
| Debtors | 20,000 |
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C’s Capital A/c |
30,000 |
1,20,000 | Less: Provision for Doubtful Debts |
(1,000) |
19,000 |
B’s Loan | 66,000 | Cash (WN5) | 13,000 | ||
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| Prepaid Insurance | 2,000 | ||
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| 2,02,800 |
| 2,02,800 | ||
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Note: In the question, there seems to be a typing mistake while writing the items of Balance Sheet as the debtors are mentioned two times. Therefore, debtors of Rs 48,000 is assumed to be Machinery Balance as the adjustment (c) asked to provide depreciation on machinery @ 15%.
Working Notes:
WN1Calculation of Gaining Ratio
Old Ratio (A, B and C) = 3 : 2 : 1
B retires from the firm.
New Ratio (A and C) = 3 : 1
Gaining Ratio = 3 : 1
WN2 Adjustment of Goodwill
Goodwill of the firm = 36,000
WN3 Calculation of New Capital Balance
Capital of the New Firm = 1,20,000
New Profit Sharing Ratio = 3 : 1
WN4 Calculation of Amount to be brought in/paid off to A and C
Adjusted Old Capital of A = Total of Credit Side – Total of Debit Side
= 94,500 – 9,000 = 85,500
Adjusted Old Capital of C = Total of Credit Side – Total of Debit Side
= 31,500 – 3,000 = 28,500
Particulars | A | C |
New Capital Balance | 90,000 | 30,000 |
Old Capital Balance | 85,500 | 28,500 |
Deficit | 4,500 | 1,500 |
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WN5 Ascertainment of Cash Balance in Hand
Cash Account | |||
Dr. | Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs |
Balance b/d | 16,000 | B’s Capital A/c | 9,000 |
A’s Capital A/c | 4,500 | Balance c/d | 13,000 |
C’s Capital A/c | 1,500 |
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| 22,000 |
| 22,000 |
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