Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. [Balance Sheet Table Provided]. C is admitted as a partner on the date of the balance sheet on the following terms: (i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for 1/4 share in the profits. (ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%. (iii) Stock is found over valued by Rs. 4,000. (iv) A provision for bad and doubtful debts is to be created at 5% of debtors. (v) Creditors were unrecorded to the extent of Rs. 1,000. Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.
Journal Entries in the Books of A and B
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2016 | Plant A/c Dr. | 20,000 | ||
| Dec 31 | Building A/c Dr. | 15,000 | ||
| To Revaluation A/c | 35,000 | |||
| (Being appreciation in the value of assets) | ||||
| Revaluation A/c Dr. | 8,000 | |||
| To Stock A/c | 4,000 | |||
| To Provision for Doubtful Debts A/c | 3,000 | |||
| To Creditors A/c | 1,000 | |||
| (Being decrease in value of assets and increase in liabilities) | ||||
| Revaluation A/c Dr. | 27,000 | |||
| To A's Capital A/c | 18,000 | |||
| To B's Capital A/c | 9,000 | |||
| (Being profit on revaluation transferred to partners' capital accounts) | ||||
| Cash at Bank A/c Dr. | 1,60,000 | |||
| To C's Capital A/c | 1,00,000 | |||
| To Premium for Goodwill A/c | 60,000 | |||
| (Being capital and goodwill brought in by C) | ||||
| Premium for Goodwill A/c Dr. | 60,000 | |||
| To A's Capital A/c | 40,000 | |||
| To B's Capital A/c | 20,000 | |||
| (Being goodwill distributed in sacrificing ratio 2:1) |
Revaluation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Stock A/c | 4,000 | By Plant A/c | 20,000 |
| To Provision for Doubtful Debts A/c | 3,000 | By Building A/c | 15,000 |
| To Creditors A/c | 1,000 | ||
| To Profit transferred to: | |||
| A's Capital A/c | 18,000 | ||
| B's Capital A/c | 9,000 | ||
| Total | 35,000 | Total | 35,000 |
Partners' Capital Accounts
| Particulars | A (Rs.) | B (Rs.) | C (Rs.) | Particulars | A (Rs.) | B (Rs.) | C (Rs.) |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 2,38,000 | 1,79,000 | 1,00,000 | By Balance b/d | 1,80,000 | 1,50,000 | - |
| By Revaluation A/c | 18,000 | 9,000 | - | ||||
| By Bank A/c | - | - | 1,00,000 | ||||
| By Premium for Goodwill A/c | 40,000 | 20,000 | - | ||||
| Total | 2,38,000 | 1,79,000 | 1,00,000 | Total | 2,38,000 | 1,79,000 | 1,00,000 |
Balance Sheet of A, B and C as at 31.12.2016
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Bills Payable | 10,000 | Cash in Hand | 10,000 |
| Sundry Creditors | 59,000 | Cash at Bank (40,000 + 1,60,000) | 2,00,000 |
| Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 |
| Capital Accounts: | Less: Provision for D/D | 3,000 | |
| A | 2,38,000 | Stock | 36,000 |
| B | 1,79,000 | Plant | 1,20,000 |
| C | 1,00,000 | Building | 1,65,000 |
| Total | 5,88,000 | Total | 5,88,000 |
Note: Creditors increased by Rs. 1,000 (unrecorded). Stock decreased by Rs. 4,000. Plant appreciated to Rs. 1,20,000. Building appreciated by 10% (Rs. 15,000). Provision on Debtors is 5% of Rs. 60,000.
Explanation
The solution involves adjusting the assets and liabilities through the Revaluation Account to reflect their true market values upon the admission of partner C. The profit from revaluation is distributed to the old partners (A and B) in their old profit-sharing ratio (2:1). C's contribution of capital and goodwill increases the bank balance and the partners' capital accounts. The goodwill is credited to the old partners in their sacrificing ratio, which is assumed to be the old ratio in the absence of a new agreement. Finally, the Balance Sheet is tallied by incorporating all adjustments.
Solution Steps
Step 1: Calculate Revaluation profit/loss. Plant appreciated by Rs. 20,000 (1,20,000 - 1,00,000) and Building by Rs. 15,000 (10% of 1,50,000). Total Gain = Rs. 35,000. Losses/Increases: Stock Rs. 4,000, Provision Rs. 3,000 (5% of 60,000), Unrecorded Creditors Rs. 1,000. Total Loss = Rs. 8,000. Net Gain = Rs. 27,000.
Step 2: Distribute Revaluation Gain. A gets 2/3 of 27,000 = Rs. 18,000. B gets 1/3 of 27,000 = Rs. 9,000.
Step 3: Distribute Goodwill. Premium of Rs. 60,000 distributed in sacrificing ratio (2:1). A gets Rs. 40,000, B gets Rs. 20,000.
Step 4: Prepare Partners' Capital Accounts. A's closing balance = 1,80,000 + 18,000 + 40,000 = Rs. 2,38,000. B's closing balance = 1,50,000 + 9,000 + 20,000 = Rs. 1,79,000. C's opening balance = Rs. 1,00,000.
Step 5: Prepare Balance Sheet. Adjust assets/liabilities values. Creditors = 58,000 + 1,000. Bank = 40,000 + 1,60,000. Debtors = 60,000 - 3,000. Stock = 40,000 - 4,000. Plant = 1,20,000. Building = 1,65,000. Total matches at Rs. 5,88,000.