Question 62 of 64advanced🔧 ApplyNumerical8 marks

The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of 6/14:5/14:3/14 respectively. [Balance Sheet Table Provided]. They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms: (a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful debts: (e) that the value of land and buildings having appreciated be brought upto Rs. 31,000; (f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be. Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.

Correct Answer

Working Notes:

  1. Calculation of New Profit Sharing Ratio: Deepak's Share = 1/8. Remaining Share = 1 - 1/8 = 7/8. Old Ratio (Arun : Bablu : Chetan) = 6/14 : 5/14 : 3/14 or 6:5:3. Since old partners continue to share in their old proportion: Arun's New Share = 7/8×68 \times 6/14 = 3/8 (or 6/16). Bablu's New Share = 7/8×58 \times 5/14 = 5/16. Chetan's New Share = 7/8×38 \times 3/14 = 3/16. Deepak's Share = 1/8 = 2/16. New Ratio (Arun : Bablu : Chetan : Deepak) = 6 : 5 : 3 : 2.

  2. Treatment of Goodwill: Goodwill brought in by Deepak = Rs. 4,200. Sacrificing Ratio = Old Ratio = 6 : 5 : 3. Arun's Share = 4,200×6200 \times 6/14 = Rs. 1,800. Bablu's Share = 4,200×5200 \times 5/14 = Rs. 1,500. Chetan's Share = 4,200×3200 \times 3/14 = Rs. 900.

  3. Adjustment of Capitals: Deepak's Capital for 1/8 share = Rs. 7,000. Total Capital of the New Firm = 7,000×8000 \times 8 = Rs. 56,000. New Capital Allocation based on New Ratio (6:5:3:2): Arun = 56,000×6000 \times 6/16 = Rs. 21,000. Bablu = 56,000×5000 \times 5/16 = Rs. 17,500. Chetan = 56,000×3000 \times 3/16 = Rs. 10,500.

REVALUATION ACCOUNT

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Furniture A/c (3,500×12500 \times 12%)420By Land & Buildings A/c (31,000 - 24,000)7,000
To Stock A/c (14,000×10000 \times 10%)1,400
To Provision for Doubtful Debts A/c (12,600×5600 \times 5%)630
To Profit on Revaluation transferred to:
Arun (4,550×6550 \times 6/14)1,950
Bablu (4,550×5550 \times 5/14)1,625
Chetan (4,550×3550 \times 3/14)975
Total7,000Total7,000

PARTNERS' CAPITAL ACCOUNTS

ParticularsArun (Rs.)Bablu (Rs.)Chetan (Rs.)Deepak (Rs.)ParticularsArun (Rs.)Bablu (Rs.)Chetan (Rs.)Deepak (Rs.)
To Bank A/c (Withdrawal)1,7501,625--By Balance b/d19,00016,0008,000-
To Balance c/d21,00017,50010,5007,000By Premium for Goodwill1,8001,500900-
By Revaluation A/c (Profit)1,9501,625975-
By Bank A/c (Capital)---7,000
By Bank A/c (Deficiency)--625-
Total22,75019,12510,5007,000Total22,75019,12510,5007,000

CASH ACCOUNT

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Balance b/d900By Arun's Capital A/c1,750
To Deepak's Capital A/c7,000By Bablu's Capital A/c1,625
To Premium for Goodwill A/c4,200By Balance c/d9,350
To Chetan's Capital A/c625
Total12,725Total12,725

BALANCE SHEET OF THE NEW FIRM

LiabilitiesAmount (Rs.)AssetsAmount (Rs.)
Creditors9,000Land & Buildings31,000
Bills Payable3,000Furniture (3,500 - 420)3,080
Capital Accounts:Stock (14,000 - 1,400)12,600
Arun21,000Debtors12,600
Bablu17,500Less: Provision for DD(630)
Chetan10,500Cash9,350
Deepak7,000
Total68,000Total68,000
Exercise: Questions for Practice | Q: 33 | (Page 57)
For More Understanding

Explanation

The solution begins by calculating the new profit-sharing ratio based on Deepak's share and the agreement that old partners maintain their proportion. The Revaluation Account is prepared to adjust asset values, resulting in a gain of Rs. 4,550, which is distributed in the old ratio. Goodwill is distributed in the sacrificing ratio (old ratio). Partners' Capital Accounts are adjusted based on Deepak's capital contribution (determining the total capital base), leading to Arun and Bablu withdrawing surplus and Chetan bringing in a deficit. Finally, the Cash Account and the Opening Balance Sheet are tallied to verify accuracy.

Solution Steps

  1. Step 1: Determine New Ratio. Deepak's share is 1/8. Remaining is 7/8. Old partners share remaining in ratio 6:5:3. New Ratio = 6/16 : 5/16 : 3/16 : 2/16 or 6:5:3:2.

  2. Step 2: Prepare Revaluation Account. Credit Land/Buildings with appreciation (31,000 - 24,000 = 7,000). Debit Furniture (12% of 3,500 = 420), Stock (10% of 14,000 = 1,400), and Provision for DD (5% of 12,600 = 630). Net Gain = 4,550.

  3. Step 3: Distribute Revaluation Gain. Gain of 4,550 distributed in old ratio (6:5:3). Arun: 1,950; Bablu: 1,625; Chetan: 975.

  4. Step 4: Adjust Partners' Capitals. Total Firm Capital based on Deepak's share = 7,000×8000 \times 8 = 56,000. Calculate new capitals based on New Ratio (6:5:3:2). Arun: 21,000; Bablu: 17,500; Chetan: 10,500.

  5. Step 5: Calculate Cash Adjustments. Arun withdraws 1,750 surplus. Bablu withdraws 1,625 surplus. Chetan brings in 625 deficit.

  6. Step 6: Prepare Final Balance Sheet. Total Liabilities and Assets match at Rs. 68,000.

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