Question 57 of 64intermediate🔧 ApplyNumerical4 marks

Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. In April 2017 they admitted Om as a new partner. On the date of Om’s admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000 in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of these items on Om’s admission. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.

Correct Answer

Journal Entries in the Books of Leela, Meeta and Om

DateParticularsL.F.Debit Amount (Rs.)Credit Amount (Rs.)
April 2017General Reserve A/c Dr.16,000
To Leela's Capital A/c10,000
To Meeta's Capital A/c6,000
(Being General Reserve distributed among old partners in their old ratio)
Profit and Loss A/c Dr.24,000
To Leela's Capital A/c15,000
To Meeta's Capital A/c9,000
(Being Profit and Loss Account balance distributed among old partners in their old ratio)

Working Notes:

Distribution of General Reserve (Rs. 16,000):

  • Leela's Share = 16,000×5000 \times 5/8 = Rs. 10,000
  • Meeta's Share = 16,000×3000 \times 3/8 = Rs. 6,000

Distribution of Profit & Loss Account (Rs. 24,000):

  • Leela's Share = 24,000×5000 \times 5/8 = Rs. 15,000
  • Meeta's Share = 24,000×3000 \times 3/8 = Rs. 9,000
Exercise: Questions for Practice | Q: 28 | (Page 56)
For More Understanding

Explanation

On admission of a new partner, accumulated profits (General Reserve and P&L credit balance) are distributed among OLD partners in their OLD profit sharing ratio because these profits were earned before the new partner joined. The old ratio of Leela and Meeta is 5:3. The new ratio of 5:3:2 is not relevant for this distribution as Om was not a partner when these profits were accumulated. Reference: Illustration 22 in the textbook context shows similar treatment where General Reserve is transferred to old partners' capital accounts in their profit sharing ratio.

Solution Steps

  1. Step 1: Identify that accumulated profits (General Reserve and P&L Credit balance) must be distributed among old partners only in their old ratio.

  2. Step 2: Calculate distribution of General Reserve (Rs. 16,000) in ratio 5:3: Leela = 16,000×5000 \times 5/8 = Rs. 10,000; Meeta = 16,000×3000 \times 3/8 = Rs. 6,000.

  3. Step 3: Calculate distribution of P&L Account (Rs. 24,000) in ratio 5:3: Leela = 24,000×5000 \times 5/8 = Rs. 15,000; Meeta = 24,000×3000 \times 3/8 = Rs. 9,000.

  4. Step 4: Pass journal entries debiting General Reserve A/c and P&L A/c, and crediting old partners' capital accounts.

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