Question 32 of 38advanced🔧 ApplyNumerical10 marks

Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was as follows: [Balance Sheet Data Provided] Brijesh retired on March 31, 2020 on the following terms: (i) Goodwill of the firm was valued at Rs. 70,000 and was not to appear in the books. (ii) Bad debts amounting to Rs. 2,000 were to be written off. (iii) Patents were considered as valueless. Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

Correct Answer

REVALUATION ACCOUNT

Dr. Side:

  • Bad Debts written off: Rs. 2,000
  • Patents (valueless): Rs. 9,000
  • Loss on Revaluation transferred to Partners: Rs. 11,000

Cr. Side: Nil

Total: Rs. 11,000

Loss distributed in ratio 2:2:1:

  • Digvijay: Rs. 4,400
  • Brijesh: Rs. 4,400
  • Parakaram: Rs. 2,200

PARTNERS' CAPITAL ACCOUNTS

Digvijay:

  • Opening Balance: Rs. 82,000 (Cr.)
  • Add: Reserve Share (2/5×185 \times 18,500): Rs. 7,400
  • Less: Revaluation Loss: Rs. 4,400
  • Less: Goodwill Contribution (2/3×283 \times 28,000): Rs. 18,667
  • Closing Balance: Rs. 66,333

Brijesh:

  • Opening Balance: Rs. 60,000 (Cr.)
  • Add: Reserve Share: Rs. 7,400
  • Add: Goodwill Compensation: Rs. 28,000
  • Less: Revaluation Loss: Rs. 4,400
  • Closing Balance (transferred to Loan A/c): Rs. 91,000

Parakaram:

  • Opening Balance: Rs. 75,500 (Cr.)
  • Add: Reserve Share (1/5×185 \times 18,500): Rs. 3,700
  • Less: Revaluation Loss: Rs. 2,200
  • Less: Goodwill Contribution (1/3×283 \times 28,000): Rs. 9,333
  • Closing Balance: Rs. 67,667

BALANCE SHEET as on March 31, 2020

Liabilities:

  • Creditors: Rs. 49,000
  • Digvijay's Capital: Rs. 66,333
  • Parakaram's Capital: Rs. 67,667
  • Brijesh's Loan: Rs. 91,000
  • Total: Rs. 2,74,000

Assets:

  • Cash: Rs. 8,000
  • Debtors (19,000 - 2,000): Rs. 17,000
  • Stock: Rs. 42,000
  • Buildings: Rs. 2,07,000
  • Patents: Nil
  • Total: Rs. 2,74,000
Exercise: Questions for Practice | Q: 5 | (Page 43)
For More Understanding

Explanation

This question tests the student's understanding of retirement of a partner. The key adjustments include: (1) Revaluation of assets where bad debts of Rs. 2,000 are written off and patents of Rs. 9,000 become valueless, resulting in a loss of Rs. 11,000 distributed in 2:2:1 ratio. (2) Goodwill of Rs. 70,000 is valued but not shown in books - Brijesh's share (2/5×705 \times 70,000 = Rs. 28,000) is compensated by continuing partners in gaining ratio 2:1. (3) Reserves of Rs. 18,500 are distributed among all partners in old ratio 2:2:1. The gaining ratio is calculated as 2:1 since Digvijay and Parakaram share future profits in their mutual ratio of 2:1.

Solution Steps

  1. Step 1: Calculate Revaluation Loss - Bad Debts Rs. 2,000 + Patents Rs. 9,000 = Rs. 11,000. Distribute in ratio 2:2:1.

  2. Step 2: Calculate Gaining Ratio - New ratio (Digvijay:Parakaram) = 2:1. Gaining ratio = (2/3-2/5):(1/3-1/5) = 4/15:2/15 = 2:1.

  3. Step 3: Calculate Goodwill Compensation - Brijesh's share = 70,000×2000 \times 2/5 = Rs. 28,000. Digvijay contributes 28,000×2000 \times 2/3 = Rs. 18,667. Parakaram contributes 28,000×1000 \times 1/3 = Rs. 9,333.

  4. Step 4: Distribute Reserves - Rs. 18,500 in ratio 2:2:1. Digvijay: Rs. 7,400, Brijesh: Rs. 7,400, Parakaram: Rs. 3,700.

  5. Step 5: Prepare Capital Accounts and Balance Sheet. Brijesh's closing balance of Rs. 91,000 is transferred to his Loan Account.

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