The Balance Sheet of A, B and C who were sharing the profits in proportion to their capitals stood as on March 31, 2017. [Balance Sheet Data Provided] B retired on the date of Balance Sheet and the following adjustments were to be made: (a) Stock was depreciated by 10%. (b) Factory building was appreciated by 12%. (c) Provision for doubtful debts to be created up to 5%. (d) Provision for legal charges to be made at Rs.265. (e) The goodwill of the firm to be fixed at Rs.10,000. (f) The capital of the new firm to be fixed at Rs.30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2. Work out the final balances in capital accounts of the firm, and the amounts to be brought in and/or withdrawn by A and C to make their capitals proportionate to then new profit sharing ratio.
Revaluation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| Stock (Depreciation 10%) | 1,550 | Land and Building (Appreciation 12%) | 1,440 |
| Provision for Doubtful Debts | 25 | ||
| Provision for Legal Charges | 265 | ||
| Loss on Revaluation: | |||
| A's Capital (4/10) | 160 | ||
| B's Capital (3/10) | 120 | ||
| C's Capital (3/10) | 120 | ||
| Total | 1,840 | Total | 1,840 |
Partners' Capital Accounts
| Particulars | A (Rs.) | B (Rs.) | C (Rs.) | Particulars | A (Rs.) | B (Rs.) | C (Rs.) |
|---|---|---|---|---|---|---|---|
| Revaluation (Loss) | 160 | 120 | 120 | Balance b/d | 20,000 | 15,000 | 15,000 |
| B's Capital (Goodwill) | 2,000 | 1,000 | General Reserve | 1,100 | 825 | 825 | |
| Balance c/d | 18,940 | 14,705 | B's Capital (Goodwill) | 3,000 | |||
| B's Capital (Final) | 18,705 | ||||||
| 21,100 | 18,825 | 15,825 | 21,100 | 18,825 | 15,825 |
Calculation of Amounts to be Withdrawn
New total capital = Rs. 30,000 New profit sharing ratio (A : C) = 3 : 2
A's new capital = 30,/5 = Rs. 18,000 C's new capital = 30,/5 = Rs. 12,000
A's existing capital after adjustments = Rs. 18,940 A needs to withdraw = 18,940 - 18,000 = Rs. 940
C's existing capital after adjustments = Rs. 14,705 C needs to withdraw = 14,705 - 12,000 = Rs. 2,705
Final Balances in Capital Accounts:
- A's Capital: Rs. 18,000
- C's Capital: Rs. 12,000
- B's Capital (to be paid): Rs. 18,705
Explanation
This problem involves retirement of partner B with multiple adjustments. The profit sharing ratio is in proportion to capitals (4:3:3). The gaining ratio for A and C is calculated as 2:1 based on the difference between new ratio (3:2) and old ratio shares. Loss on revaluation of Rs. 400 is distributed in the old ratio. B's share of goodwill (Rs. 3,000) is adjusted through continuing partners' capital accounts in gaining ratio. General Reserve is distributed in old ratio. The final capital accounts show A at Rs. 18,940 and C at Rs. 14,705, which need adjustment to match the new firm capital of Rs. 30,000 in ratio 3:2.
Solution Steps
Step 1: Calculate profit sharing ratio from capitals - A:B:C = 20,000:15,000:15,000 = 4:3:3
Step 2: Prepare Revaluation Account - Loss = (1,550 + 25 + 265) - 1,440 = Rs. 400, distributed as A:160, B:120, C:120
Step 3: Calculate gaining ratio - A's gain = 3/5 - 4/10 = 2/10, C's gain = 2/5 - 3/10 = 1/10, Ratio = 2:1
Step 4: Adjust goodwill - B's share = 10,/10 = Rs. 3,000, distributed to A (Rs. 2,000) and C (Rs. 1,000) in gaining ratio 2:1
Step 5: Distribute General Reserve Rs. 2,750 in ratio 4:3:3 as A:1,100, B:825, C:825
Step 6: Calculate adjusted capitals - A: 20,000 + 1,100 - 160 - 2,000 = 18,940; B: 15,000 + 825 + 3,000 - 120 = 18,705; C: 15,000 + 825 - 120 - 1,000 = 14,705
Step 7: Calculate new capitals - Total Rs. 30,000 in ratio 3:2 gives A: 18,000 and C: 12,000
Step 8: Calculate withdrawals - A withdraws 940 (18,940 - 18,000), C withdraws 2,705 (14,705 - 12,000)