Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on March 31, 2016 (before Chintan’s admission) was as follows: [Balance Sheet Table Provided]. It was agreed that: i) Chintan will bring in Rs. 12,000 as his share of goodwill premium. ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000. iii) A provision for doubtful debts is to be created @ 6% on debtors. iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts. Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.
1. Journal Entries
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 1. | Revaluation A/c Dr. | 2,480 | ||
| To Machinery A/c | 2,000 | |||
| To Provision for Doubtful Debts A/c | 480 | |||
| (Being decrease in value of Machinery and provision created on debtors) | ||||
| 2. | Buildings A/c Dr. | 5,000 | ||
| To Revaluation A/c | 5,000 | |||
| (Being increase in value of Buildings) | ||||
| 3. | Revaluation A/c Dr. | 2,520 | ||
| To Azad's Capital A/c | 1,680 | |||
| To Babli's Capital A/c | 840 | |||
| (Being profit on revaluation transferred to partners in 2:1) | ||||
| 4. | General Reserve A/c Dr. | 6,000 | ||
| To Azad's Capital A/c | 4,000 | |||
| To Babli's Capital A/c | 2,000 | |||
| (Being General Reserve distributed in old ratio) | ||||
| 5. | Cash at Bank A/c Dr. | 42,000 | ||
| To Chintan's Capital A/c | 30,000 | |||
| To Premium for Goodwill A/c | 12,000 | |||
| (Being Capital and Goodwill brought in by new partner) | ||||
| 6. | Premium for Goodwill A/c Dr. | 12,000 | ||
| To Azad's Capital A/c | 8,000 | |||
| To Babli's Capital A/c | 4,000 | |||
| (Being goodwill distributed in sacrificing ratio 2:1) | ||||
| 7. | Azad's Capital A/c Dr. | 3,680 | ||
| To Azad's Current A/c | 3,680 | |||
| (Being surplus capital transferred to Current A/c) | ||||
| 8. | Babli's Capital A/c Dr. | 8,840 | ||
| To Babli's Current A/c | 8,840 | |||
| (Being surplus capital transferred to Current A/c) |
2. Revaluation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Machinery | 2,000 | By Buildings | 5,000 |
| To Provision for Doubtful Debts | 480 | ||
| To Profit on Revaluation: | |||
| Azad's Capital (2/3) | 1,680 | ||
| Babli's Capital (1/3) | 840 | ||
| Total | 5,000 | Total | 5,000 |
3. Partners' Capital Accounts
| Particulars | Azad (Rs.) | Babli (Rs.) | Chintan (Rs.) | Particulars | Azad (Rs.) | Babli (Rs.) | Chintan (Rs.) |
|---|---|---|---|---|---|---|---|
| To Azad's Current A/c | 3,680 | 8,840 | - | By Balance b/d | 50,000 | 32,000 | - |
| To Babli's Current A/c | - | - | - | By General Reserve | 4,000 | 2,000 | - |
| To Balance c/d | 60,000 | 30,000 | 30,000 | By Revaluation | 1,680 | 840 | - |
| By Premium for Goodwill | 8,000 | 4,000 | - | ||||
| By Cash/Bank | - | - | 30,000 | ||||
| Total | 63,680 | 38,840 | 30,000 | Total | 63,680 | 38,840 | 30,000 |
Note: Total Capital of the firm is Rs. 1,20,000 based on Chintan's share (1/4 of 1,20,000 = 30,000). Azad's New Capital = 1,20,000 * 2/4 = 60,000. Babli's New Capital = 1,20,000 * 1/4 = 30,000. Surplus amounts are transferred to Current Accounts.
4. Balance Sheet of the New Firm as on March 31, 2016
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Creditors | 8,000 | Cash at Bank (10,000 + 2,000 + 42,000) | 54,000 |
| Bills Payable | 4,000 | Sundry Debtors | 8,000 |
| Capital Accounts: | Less: Provision for D.D. (6%) | 480 | |
| Azad | 60,000 | Stock | 10,000 |
| Babli | 30,000 | Furniture | 5,000 |
| Chintan | 30,000 | Machinery (25,000 - 2,000) | 23,000 |
| Current Accounts: | Buildings (40,000 + 5,000) | 45,000 | |
| Azad | 3,680 | ||
| Babli | 8,840 | ||
| Total | 1,44,520 | Total | 1,44,520 |
Explanation
This solution follows the standard procedure for the admission of a partner. First, the Revaluation Account is prepared to adjust asset values and create provisions, calculating a gain of Rs. 2,520. Second, the Partners' Capital Accounts are adjusted by distributing the accumulated profits (General Reserve) and the Revaluation gain. Third, the new profit-sharing ratio determines the allocation of the premium for goodwill. Finally, the total capital of the firm is derived from the new partner's capital contribution, and the old partners' capital accounts are adjusted to reflect this new ratio by transferring surplus to their Current Accounts.
Solution Steps
Step 1: Calculate Revaluation Profit. Buildings appreciated by Rs. 5,000; Machinery depreciated by Rs. 2,000; Provision for Doubtful Debts created at Rs. 480. Net Gain = 5,000 - 2,480 = Rs. 2,520.
Step 2: Distribute Revaluation Gain and General Reserve. Revaluation Gain (Rs. 2,520) and General Reserve (Rs. 6,000) are distributed to Azad and Babli in their old ratio (2:1).
Step 3: Calculate New Profit Sharing Ratio. Chintan gets 1/4 share. Remaining share is 3/4. Azad gets 3/4 * 2/3 = 2/4. Babli gets 3/4 * 1/3 = 1/4. New Ratio is 2:1:1.
Step 4: Calculate Total Capital and Adjust Partners' Capitals. Based on Chintan's capital (Rs. 30,000 for 1/4 share), Total Capital = Rs. 1,20,000. Azad's adjusted capital = 1,20,000 * 2/4 = Rs. 60,000. Babli's adjusted capital = 1,20,000 * 1/4 = Rs. 30,000.
Step 5: Prepare Balance Sheet. Adjust assets/liabilities as per revaluation. Add Chintan's capital and goodwill to Cash/Bank. Show Current Accounts for the surplus capital of old partners.