Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2020 was as follows: [Balance Sheet Data Provided] Bajaj retires from the business and the partners agree to the following: a) Freehold premises and stock are to be appreciated by 20% and 15% respectively. b) Machinery and furniture are to be reduced by 10% and 7% respectively. c) Bad Debts reserve is to be increased to Rs. 1,500. d) Goodwill is valued at Rs. 21,000 on Bajaj’s retirement. e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts. Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.
Revaluation Account Dr. Side:
- Machinery: 3,000
- Furniture: 840
- Reserve for Bad Debts: 500
- Profit transferred:
- Narang: 3,480
- Suri: 1,160
- Bajaj: 2,320 Total: 11,300
Cr. Side:
- Freehold Premises: 8,000
- Stock: 3,300 Total: 11,300
Partners' Capital Accounts Narang:
- Opening: 30,000
- Reserve: 6,000
- Revaluation: 3,480
- Goodwill: 5,250 (Dr.)
- Balance c/d: 34,230
- Adjustment (Current A/c): 15,000 (Dr.)
- Final Balance: 49,230
Suri:
- Opening: 30,000
- Reserve: 2,000
- Revaluation: 1,160
- Goodwill: 1,750 (Dr.)
- Balance c/d: 31,410
- Adjustment (Current A/c): 15,000 (Cr.)
- Final Balance: 16,410
Bajaj:
- Opening: 28,000
- Reserve: 4,000
- Revaluation: 2,320
- Goodwill: 7,000 (Cr.)
- Balance c/d (Transfer to Loan A/c): 41,320
Balance Sheet of Reconstituted Firm Liabilities:
- Bills Payable: 12,000
- Sundry Creditors: 18,000
- Bajaj’s Loan: 41,320
- Suri’s Current Account: 15,000
- Capital Accounts:
- Narang: 49,230
- Suri: 16,410 Total: 1,51,960
Assets:
- Freehold Premises: 48,000
- Machinery: 27,000
- Furniture: 11,160
- Stock: 25,300
- Sundry Debtors: 18,500 (20,000 - 1,500)
- Cash: 7,000
- Narang’s Current Account: 15,000 Total: 1,51,960
Explanation
The solution involves preparing the Revaluation Account to distribute the profit from asset appreciation and liability adjustments. The Goodwill is adjusted through the continuing partners' capital accounts in their gaining ratio (3:1). The Reserve is distributed in the old ratio (3:1:2). Finally, the continuing partners' capitals are adjusted to their new profit-sharing ratio (3:1) using their Current Accounts to handle the surplus or deficit.
Solution Steps
Step 1: Calculate Revaluation Profit. Appreciate Freehold Premises by 20% (8,000) and Stock by 15% (3,300). Depreciate Machinery by 10% (3,000) and Furniture by 7% (840). Increase Bad Debts Reserve by 500. Net Profit = 11,300 - 4,340 = 6,960.
Step 2: Distribute Revaluation Profit and Reserve. Profit (6,960) and Reserve (12,000) are distributed in the old ratio 3:1:2. Narang gets 9,480, Suri gets 3,160, Bajaj gets 4,320.
Step 3: Adjust Goodwill. Goodwill (21,000) is valued. Bajaj's share is 7,000. Gaining ratio of Narang and Suri is 3:1. Narang debited 5,250, Suri debited 1,750.
Step 4: Calculate Adjusted Capitals. Narang's adjusted capital is 34,230. Suri's adjusted capital is 31,410. Total Capital = 65,640.
Step 5: Adjust Capitals to New Ratio. New Ratio is 3:1. Narang's New Capital = 49,230. Suri's New Capital = 16,410. Narang has a deficit of 15,000 (debited to Current A/c). Suri has a surplus of 15,000 (credited to Current A/c).
Step 6: Prepare Balance Sheet. Update asset values. Transfer Bajaj's Capital to his Loan Account. Include Current Accounts for Narang (Asset) and Suri (Liability).