A and B are partners sharing profits and losses in the ratio of 3:1. On Ist April, 2017 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings Rs. 20,000 as for his 1/4 share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio?
Calculation of New Profit Sharing Ratio:
C's Share = 1/4 Remaining Share = 1 - 1/4 = 3/4
A's New Share = 3//4 = 9/16 B's New Share = 3//4 = 3/16 C's Share = 1/4 = 4/16
New Profit Sharing Ratio = 9:3:4
Calculation of Total Capital of Firm:
C brings Rs. 20,000 for 1/4 share Total Capital = 20, = Rs. 80,000
New Capitals of Partners:
A's New Capital = 9/,000 = Rs. 45,000 B's New Capital = 3/,000 = Rs. 15,000 C's Capital = Rs. 20,000
Comparison with Existing Capitals:
| Partner | Existing Capital | New Capital | Difference |
|---|---|---|---|
| A | Rs. 50,000 | Rs. 45,000 | Excess Rs. 5,000 (Withdraw) |
| B | Rs. 12,000 | Rs. 15,000 | Short Rs. 3,000 (Bring in) |
Journal Entries:
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2017 April 1 | Cash/Bank A/c Dr. | 3,000 | ||
| To B's Capital A/c | 3,000 | |||
| (Being capital brought in by B to make his capital proportionate to new ratio) | ||||
| A's Capital A/c Dr. | 5,000 | |||
| To Cash/Bank A/c | 5,000 | |||
| (Being excess capital withdrawn by A) |
Explanation
This question involves adjustment of partners' capitals according to the new profit sharing ratio after admission. The key steps are: (1) Calculate the new profit sharing ratio - since C acquires his share from A and B in their old ratio (3:1), the new ratio becomes 9:3:4; (2) Determine total capital based on C's contribution - Rs. 20,000 represents 1/4 share, so total capital is Rs. 80,000; (3) Calculate new capitals proportionate to new ratio; (4) Compare with existing capitals after adjustments to find who needs to bring in or withdraw cash. A has excess capital of Rs. 5,000 and B has shortage of Rs. 3,000.
Solution Steps
Step 1: Calculate new profit sharing ratio - C gets 1/4, remaining 3/4 shared by A and B in 3:1 ratio, giving new ratio 9:3:4
Step 2: Calculate total capital of firm based on C's capital - Rs. 20, = Rs. 80,000
Step 3: Calculate new capitals - A: 9/,000 = Rs. 45,000; B: 3/,000 = Rs. 15,000
Step 4: Compare existing capitals with new capitals - A has excess Rs. 5,000; B has shortage Rs. 3,000
Step 5: Pass journal entries - B brings Rs. 3,000; A withdraws Rs. 5,000