Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2020. [Balance Sheet Data Provided] The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2020 and his share in the business is to be calculated as per the following terms of revaluation of assets and liabilities: Stock, Rs.20,000; Office furniture, Rs.14,250; Plant and Machinery Rs.23,530; Land and Building Rs.20,000. A provision of Rs.1,700 to be created for doubtful debts. The goodwill of the firm is valued at Rs.9,000. The continuing partners agreed to pay Rs.16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as loan. Prepare Revaluation account, capital accounts, and Balance Sheet of the reconstituted firm.
1. Revaluation Account
Dr. for the year ended April 1, 2020
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| Office Furniture | 4,000 | Stock | 1,900 |
| Land and Building | 6,000 | Plant and Machinery | 3,300 |
| Provision for Doubtful Debts | 1,700 | ||
| Loss transferred to: | |||
| Jain | 3,250 | ||
| Gupta | 1,950 | ||
| Malik | 1,300 | ||
| Total | 18,200 | Total | 18,200 |
2. Partners' Capital Accounts
Dr. for the year ended April 1, 2020
| Particulars | Jain (Rs.) | Gupta (Rs.) | Malik (Rs.) | Particulars | Jain (Rs.) | Gupta (Rs.) | Malik (Rs.) |
|---|---|---|---|---|---|---|---|
| Revaluation (Loss) | 3,250 | 1,950 | 1,300 | Balance b/d | 40,000 | 60,000 | 20,000 |
| Goodwill | 1,125 | 675 | - | P&L A/c | 8,375 | 5,025 | 3,350 |
| Cash | - | - | 16,500 | Goodwill | - | - | 1,800 |
| Malik's Loan A/c | - | - | 7,350 | Cash | 9,900 | 6,600 | - |
| Balance c/d | 53,900 | 69,000 | - | ||||
| Total | 58,275 | 71,625 | 25,150 | Total | 58,275 | 71,625 | 25,150 |
3. Balance Sheet of Reconstituted Firm as on April 1, 2020
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Sundry Creditors | 19,800 | Land and Building | 20,000 |
| Telephone bills Outstanding | 300 | Bonds | 14,370 |
| Accounts Payable | 8,950 | Cash at Bank | 5,500 |
| Malik's Loan | 7,350 | Bills Receivable | 23,450 |
| Capitals: | Sundry Debtors | 26,700 | |
| Jain | 53,900 | Less: Provision | 1,700 |
| Gupta | 69,000 | Stock | 20,000 |
| Office Furniture | 14,250 | ||
| Plant and Machinery | 23,530 | ||
| Computers | 13,200 | ||
| Total | 1,59,300 | Total | 1,59,300 |
Working Notes:
- Cash Account Adjustment: Cash balance remains Rs. 5,500. Partners contributed Rs. 16,500 (Jain Rs. 9,900 + Gupta Rs. 6,600) and Rs. 16,500 was paid to Malik, resulting in no net change.
- Goodwill Adjustment: Goodwill (Rs. 9,000) written off in gaining ratio (5:3). Jain debited by Rs. 1,125 and Gupta by Rs. 675. Malik credited by Rs. 1,800.
- Revaluation Loss: Distributed in old ratio (5:3:2).
Explanation
The solution involves preparing the Revaluation Account to ascertain the profit or loss on revaluation of assets and liabilities. The loss calculated is Rs. 6,500. Partners' Capital Accounts are prepared to adjust for the Profit & Loss balance, goodwill, revaluation loss, and the cash transaction. The continuing partners (Jain and Gupta) bring in cash to pay Malik, but since the amount brought in equals the amount paid, the Cash balance remains unchanged. Malik's remaining balance is transferred to a Loan Account. Finally, the Balance Sheet of the new firm is prepared reflecting the revalued assets, provision for doubtful debts, and the new capital balances.
Solution Steps
Step 1: Prepare Revaluation Account. Debit side includes loss on Office Furniture (Rs. 4,000), Land & Building (Rs. 6,000), and Provision for Doubtful Debts (Rs. 1,700). Credit side includes gain on Stock (Rs. 1,900) and Plant & Machinery (Rs. 3,300). Net Loss is Rs. 6,500.
Step 2: Distribute Revaluation Loss and P&L Balance. Revaluation Loss (Rs. 6,500) and P&L credit (Rs. 16,750) are distributed in the old profit-sharing ratio 5:3:2.
Step 3: Adjust Goodwill. Goodwill (Rs. 9,000) is adjusted in the gaining ratio of continuing partners (5:3). Jain debited by Rs. 1,125, Gupta by Rs. 675; Malik credited by Rs. 1,800.
Step 4: Prepare Partners' Capital Accounts. Credit side includes opening balance, P&L share, Goodwill credit (Malik), and Cash brought in (Jain Rs. 9,900, Gupta Rs. 6,600). Debit side includes Revaluation loss, Goodwill debit, Cash paid to Malik (Rs. 16,500), and transfer to Loan (Malik Rs. 7,350).
Step 5: Prepare Balance Sheet. Update assets to revalued figures. Adjust Debtors for Provision. Show Malik's balance as Loan. Total matches at Rs. 1,59,300.