Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on March 31, 2016 was as follows: [Balance Sheet Table Provided]. It was agreed that: i) The value of Land and Building be increased by Rs. 15,000. ii) The value of plant be increased by 10,000. iii) Goodwill of the firm be valued at Rs. 20,000. iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm. Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission.
Journal Entries
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2016 | Revaluation A/c Dr. | 25,000 | ||
| Mar 31 | To Land and Building A/c | 15,000 | ||
| To Plant A/c | 10,000 | |||
| (Being increase in value of assets recorded) | ||||
| Land and Building A/c Dr. | 15,000 | |||
| Plant A/c Dr. | 10,000 | |||
| To Revaluation A/c | 25,000 | |||
| (Being revaluation of assets adjusted) | ||||
| Revaluation A/c Dr. | 25,000 | |||
| To Ashish's Capital A/c | 15,000 | |||
| To Dutta's Capital A/c | 10,000 | |||
| (Being profit on revaluation transferred to partners) | ||||
| Cash A/c Dr. | 40,000 | |||
| To Vimal's Capital A/c | 36,000 | |||
| To Premium for Goodwill A/c | 4,000 | |||
| (Being capital and goodwill brought by Vimal) | ||||
| Premium for Goodwill A/c Dr. | 4,000 | |||
| To Ashish's Capital A/c | 2,400 | |||
| To Dutta's Capital A/c | 1,600 | |||
| (Being premium for goodwill distributed in sacrificing ratio) |
Balance Sheet of Ashish, Dutta and Vimal as on March 31, 2016
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Creditors | 15,000 | Land and Building | 50,000 |
| Bills Payable | 10,000 | (35,000 + 15,000) | |
| Capital A/c: | Plant | 55,000 | |
| Ashish | 97,400 | (45,000 + 10,000) | |
| Dutta | 46,600 | Debtors | 22,000 |
| Vimal | 36,000 | Less: Provision | 2,000 |
| Stock | 35,000 | ||
| Cash | 45,000 | ||
| (5,000 + 40,000) | |||
| Total | 2,05,000 | Total | 2,05,000 |
Working Notes:
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Revaluation Profit: Increase in Land & Building (15,000) + Increase in Plant (10,000) = Rs. 25,000. Distribution (3:2): Ashish = 15,000; Dutta = 10,000.
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Goodwill Adjustment: Goodwill of firm = Rs. 20,000. Vimal's Share (1/5) = Rs. 4,000. Distribution of Premium (3:2): Ashish = 2,400; Dutta = 1,600.
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Vimal's Capital Calculation: Adjusted Capital of Ashish = 80,000 + 15,000 (Rev) + 2,400 (Goodwill) = Rs. 97,400. Adjusted Capital of Dutta = 35,000 + 10,000 (Rev) + 1,600 (Goodwill) = Rs. 46,600. Total Adjusted Capital of Old Partners = 97,400 + 46,600 = Rs. 1,44,000. This represents 4/5 share of the total capital. Total Capital of New Firm = 1,44,000 × (5/4) = Rs. 1,80,000. Vimal's Capital (1/5 share) = 1,80,000 × (1/5) = Rs. 36,000.
Explanation
The solution follows the standard accounting treatment for the admission of a partner. First, the increase in asset values is recorded in the Revaluation Account, and the resulting profit is transferred to the old partners' capital accounts in their profit-sharing ratio (3:2). Second, regarding goodwill, since Vimal acquires a 1/5 share, he is responsible for 1/5 of the firm's goodwill (Rs. 4,000). This amount is treated as premium for goodwill, distributed to the old partners in their sacrificing ratio (which is the same as the old ratio 3:2). Finally, Vimal's capital is calculated based on the new firm's total capital. The old partners' adjusted capital (including revaluation profit and premium) represents their remaining share (4/5). By extrapolating this figure, Vimal's required capital contribution is determined.
Solution Steps
Step 1: Calculate Revaluation Profit. Increase in Land & Building (Rs. 15,000) + Increase in Plant (Rs. 10,000) = Rs. 25,000. Distribute to Ashish (Rs. 15,000) and Dutta (Rs. 10,000).
Step 2: Calculate Goodwill Premium. Firm's Goodwill is Rs. 20,000. Vimal's share is 1/5 of 20,000 = Rs. 4,000. Distribute to Ashish (Rs. 2,400) and Dutta (Rs. 1,600).
Step 3: Calculate Adjusted Capitals of Old Partners. Ashish: 80,000 + 15,000 + 2,400 = Rs. 97,400. Dutta: 35,000 + 10,000 + 1,600 = Rs. 46,600. Total = Rs. 1,44,000.
Step 4: Calculate Vimal's Capital. The sum of old partners' adjusted capitals (Rs. 1,44,000) represents 4/5th of the new firm's total capital. Total Capital = 1,44,/4 = Rs. 1,80,000. Vimal's Capital = 1/5 of 1,80,000 = Rs. 36,000.
Step 5: Prepare Balance Sheet. Total Liabilities = Creditors + Bills Payable + Partners' Capitals = 15,000 + 10,000 + 1,80,000 = Rs. 2,05,000. Total Assets = Revalued Assets + Cash (5,000 + 36,000 + 4,000) = Rs. 2,05,000.