A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows: [Balance Sheet Table Provided]. On April 1, 2017, C was admitted into partnership on the following terms: (a) That C pays Rs. 10,000 as his capital. (b) That C pays Rs. 5,000 for goodwill. Half of this sum is to be withdrawn by A and B. (c) That stock and fixtures be reduced by 10% and a 5%, provision for doubtful debts be created on Sundry Debtors and Bills Receivable. (d) That the value of land and buildings be appreciated by 20%. (e) There being a claim against the firm for damages, a liability to the extent of Rs. 1,000 should be created. (f) An item of Rs. 650 included in sundry creditors is not likely to be claimed and hence should be written back. Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.
Journal Entries in the Books of Firm
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2017 | Revaluation A/c ... Dr. | 4,000 | ||
| April 1 | To Stock A/c | 2,000 | ||
| To Fixtures A/c | 50 | |||
| To Provision for Doubtful Debts A/c | 950 | |||
| To Claim for Damages A/c | 1,000 | |||
| (Being decrease in value of assets and increase in liabilities recorded) | ||||
| Land & Building A/c ... Dr. | 5,000 | |||
| Sundry Creditors A/c ... Dr. | 650 | |||
| To Revaluation A/c | 5,650 | |||
| (Being appreciation in value of assets and decrease in creditors recorded) | ||||
| Revaluation A/c ... Dr. | 1,650 | |||
| To A's Capital A/c | 1,237.5 | |||
| To B's Capital A/c | 412.5 | |||
| (Being profit on revaluation transferred to partners' capital accounts in 3:1 ratio) | ||||
| Reserve Fund A/c ... Dr. | 4,000 | |||
| To A's Capital A/c | 3,000 | |||
| To B's Capital A/c | 1,000 | |||
| (Being reserve fund transferred to partners' capital accounts in 3:1 ratio) | ||||
| Bank A/c ... Dr. | 15,000 | |||
| To C's Capital A/c | 10,000 | |||
| To Premium for Goodwill A/c | 5,000 | |||
| (Being capital and goodwill brought in by new partner C) | ||||
| Premium for Goodwill A/c ... Dr. | 5,000 | |||
| To A's Capital A/c | 3,750 | |||
| To B's Capital A/c | 1,250 | |||
| (Being goodwill distributed in sacrificing ratio 3:1) | ||||
| A's Capital A/c ... Dr. | 1,875 | |||
| B's Capital A/c ... Dr. | 625 | |||
| To Bank A/c | 2,500 | |||
| (Being half of the goodwill amount withdrawn by old partners) |
New Balance Sheet of A, B and C as at April 1, 2017
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Sundry Creditors | 40,850 | Cash at Bank | 39,000 |
| Claim for Damages | 1,000 | Bills Receivable | 3,000 |
| Capital Accounts: | Less: Provision (5%) | 150 | |
| A | 36,112.5 | 2,850 | |
| B | 18,037.5 | Sundry Debtors | 16,000 |
| C | 10,000 | Less: Provision (5%) | 800 |
| 15,200 | |||
| Stock | 18,000 | ||
| Fixtures | 950 | ||
| Land & Building | 30,000 | ||
| 1,06,000 | 1,06,000 |
Explanation
The solution involves passing journal entries for revaluation of assets and liabilities, distribution of reserve fund, admission of the new partner, and treatment of goodwill. The Revaluation Account calculates the profit or loss on changes in asset/liability values. The Reserve Fund is distributed to old partners in their old ratio (3:1). Goodwill brought in by C is distributed to old partners in the sacrificing ratio (which remains 3:1 as the profit sharing ratio hasn't changed), and half is withdrawn. Finally, a new Balance Sheet is prepared reflecting the adjusted values and the new partner's capital.
Solution Steps
Step 1: Calculate Revaluation Profit/Loss. Debits: Stock (2,000) + Fixtures (50) + Provision on Debtors (800) + Provision on B/R (150) + Claim (1,000) = 4,000. Credits: Land & Building (5,000) + Creditors (650) = 5,650. Net Profit = 1,650.
Step 2: Distribute Revaluation Profit and Reserve Fund. Profit (1,650) and Reserve (4,000) are distributed in the old ratio 3/4 and 1/4. A gets 1,237.5 + 3,000 = 4,237.5. B gets 412.5 + 1,000 = 1,412.5.
Step 3: Adjust Goodwill. C brings Rs. 5,000. Distributed to A (3,750) and B (1,250). Half withdrawn: A withdraws 1,875 and B withdraws 625.
Step 4: Calculate Partners' Capitals. A: 30,000 + 4,237.5 (from step 2) + 3,750 - 1,875 = 36,112.5. B: 16,000 + 1,412.5 (from step 2) + 1,250 - 625 = 18,037.5. C: 10,000.
Step 5: Calculate New Bank Balance. Opening (26,500) + C's Capital (10,000) + Goodwill (5,000) - Withdrawals (2,500) = 39,000.
Step 6: Prepare New Balance Sheet. Adjust assets/liabilities per revaluation. Stock (18,000), Fixtures (950), Land (30,000). Deduct provisions from Debtors (15,200) and B/R (2,850). Creditors (40,850), Claim (1,000).