Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet was as follows: [Balance Sheet Data Provided] The terms were: a) Goodwill of the firm was valued at Rs. 13,500. b) Expenses owing to be brought down to Rs. 3,750. c) Machinery and Loose Tools are to be valued at 10% less than their book value. d) Factory premises are to be revalued at Rs. 24,300. Prepare:
- Revaluation account
- Partner’s capital accounts and
- Balance sheet of the firm after retirement of Sheela.
1. Revaluation Account
Dr. Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Machinery A/c | 800 | By Expenses Owing A/c | 750 |
| To Loose Tools A/c | 400 | By Factory Premises A/c | 1,800 |
| To Profit on Revaluation transferred to: | |||
| Radha’s Capital A/c | 675 | ||
| Sheela’s Capital A/c | 450 | ||
| Meena’s Capital A/c | 225 | ||
| 1,350 | 1,350 |
2. Partners’ Capital Accounts
Dr. Cr.
| Particulars | Radha (Rs.) | Sheela (Rs.) | Meena (Rs.) | Particulars | Radha (Rs.) | Sheela (Rs.) | Meena (Rs.) |
|---|---|---|---|---|---|---|---|
| To Sheela’s Capital A/c (Goodwill) | 3,375 | - | 1,125 | By Balance b/d | 15,000 | 15,000 | 15,000 |
| To Sheela’s Loan A/c | - | 24,450 | - | By General Reserve A/c | 6,750 | 4,500 | 2,250 |
| To Balance c/d | 19,050 | - | 16,350 | By Revaluation A/c (Profit) | 675 | 450 | 225 |
| By Radha’s Capital A/c (Goodwill) | - | 3,375 | - | ||||
| By Meena’s Capital A/c (Goodwill) | - | 1,125 | - | ||||
| Total | 22,425 | 24,450 | 17,475 | Total | 22,425 | 24,450 | 17,475 |
3. Balance Sheet of the Reconstituted Firm as on April 1, 2019
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Trade Creditors | 3,000 | Cash-in-Hand | 1,500 |
| Bills Payable | 4,500 | Cash at Bank | 7,500 |
| Expenses Owing (4,500 - 750) | 3,750 | Debtors | 15,000 |
| Sheela’s Loan A/c | 24,450 | Stock | 12,000 |
| Capital Accounts: | Factory Premises (22,500 + 1,800) | 24,300 | |
| Radha | 19,050 | Machinery (8,000 - 800) | 7,200 |
| Meena | 16,350 | Loose Tools (4,000 - 400) | 3,600 |
| 71,100 | 71,100 |
Explanation
The solution involves adjusting the assets and liabilities through the Revaluation Account. The profit arising from revaluation (Rs. 1,350) is distributed among all partners in their old profit-sharing ratio (3:2:1). The General Reserve is also distributed in the old ratio. Goodwill (Rs. 13,500) is adjusted through the Capital Accounts of the continuing partners (Radha and Meena) in their gaining ratio. Since no new ratio is given, the gaining ratio is assumed to be the same as their old ratio relative to each other (3:1). Sheela's share of goodwill (Rs. 4,500) is credited to her capital account and debited to Radha and Meena. Her final capital balance is transferred to a Loan Account.
Solution Steps
Step 1: Calculate Revaluation Profit. Expenses Owing reduced by Rs. 750 (Credit), Factory Premises increased by Rs. 1,800 (Credit). Machinery decreased by Rs. 800 (Debit), Loose Tools decreased by Rs. 400 (Debit). Net Profit = (750 + 1,800) - (800 + 400) = Rs. 1,350.
Step 2: Distribute Profit and Reserve. Profit (1,350) and General Reserve (13,500) are distributed in 3:2:1 ratio. Radha gets 3/6, Sheela gets 2/6, Meena gets 1/6.
Step 3: Adjust Goodwill. Firm's Goodwill = 13,500. Sheela's share = 13,500 * (2/6) = 4,500. Gaining Ratio of Radha and Meena is 3:1. Radha debited 4,500 * (3/4) = 3,375. Meena debited 4,500 * (1/4) = 1,125.
Step 4: Prepare Capital Accounts. Credit side: Opening balance, Share of Reserve, Share of Revaluation Profit, Goodwill credit. Debit side: Goodwill debit (for continuing partners), Transfer to Loan A/c (for retiring partner).
Step 5: Prepare Balance Sheet. Update asset values (Factory Premises, Machinery, Loose Tools) and liability (Expenses Owing). Replace Sheela's Capital with Sheela's Loan. Total matches at Rs. 71,100.