The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015: [Balance Sheet Data Provided] Pramod retired on the date of Balance Sheet and the following adjustments were made: a) Stock is to be reduced by 10%. b) Factory buildings were appreciated by 12%. c) Provision for doubtful debts be created up to 5%. d) Provision for legal charges to be made at Rs. 265. e) The goodwill of the firm be fixed at Rs. 10,000. f) The capital of the new firm be fixed at Rs. 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2. Record journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.
Journal Entries
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2015 | Revaluation A/c | 400 | ||
| Mar 31 | To Stock A/c | 1,550 | ||
| To Provision for Doubtful Debts A/c | 25 | |||
| To Provision for Legal Charges A/c | 265 | |||
| (Being decrease in value of Stock and increase in liabilities recorded) | ||||
| Factory Building A/c | Dr. | 1,440 | ||
| To Revaluation A/c | 1,440 | |||
| (Being appreciation in value of Building recorded) | ||||
| Revaluation A/c | Dr. | 1,040 | ||
| To Revaluation A/c | 1,040 | |||
| (Being loss on revaluation transferred to Partners' Capital A/c) | ||||
| Note: Loss is Rs. 400 distributed in 4:3:3. Rajesh Rs. 160, Pramod Rs. 120, Nishant Rs. 120. | ||||
| General Reserve A/c | Dr. | 2,750 | ||
| To Rajesh's Capital A/c | 1,100 | |||
| To Pramod's Capital A/c | 825 | |||
| To Nishant's Capital A/c | 825 | |||
| (Being General Reserve distributed in old ratio 4:3:3) | ||||
| Rajesh's Capital A/c | Dr. | 2,000 | ||
| Nishant's Capital A/c | Dr. | 1,000 | ||
| To Pramod's Capital A/c | 3,000 | |||
| (Being Pramod's share of goodwill adjusted in gaining ratio 2:1) | ||||
| Pramod's Capital A/c | Dr. | 18,705 | ||
| To Pramod's Loan A/c | 18,705 | |||
| (Being balance due to Pramod transferred to Loan A/c) | ||||
| Rajesh's Capital A/c | Dr. | 940 | ||
| Nishant's Capital A/c | Dr. | 2,705 | ||
| To Bank A/c | 3,645 | |||
| (Being excess capital withdrawn to match new firm capital) |
Partner's Capital Accounts
| Particulars | Rajesh (Rs.) | Pramod (Rs.) | Nishant (Rs.) | Particulars | Rajesh (Rs.) | Pramod (Rs.) | Nishant (Rs.) |
|---|---|---|---|---|---|---|---|
| To Revaluation A/c | 160 | 120 | 120 | By Balance b/d | 20,000 | 15,000 | 15,000 |
| To Goodwill A/c | 2,000 | - | 1,000 | By General Reserve | 1,100 | 825 | 825 |
| To Bank A/c | 940 | - | 2,705 | By Goodwill A/c | - | 3,000 | - |
| To Balance c/d | 18,000 | - | 12,000 | ||||
| To Pramod's Loan A/c | - | 18,705 | - | ||||
| Total | 21,100 | 18,825 | 15,825 | Total | 21,100 | 18,825 | 15,825 |
Balance Sheet of Reconstituted Firm as on March 31, 2015
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Bills Payable | 6,250 | Factory Building (12,000 + 1,440) | 13,440 |
| Sundry Creditors | 10,000 | Debtors | 10,500 |
| Provision for Legal Charges | 265 | Less: Provision for DD | 525 |
| Pramod's Loan | 18,705 | Bills Receivable | 7,000 |
| Capital Accounts: | Stock (15,500 - 1,550) | 13,950 | |
| Rajesh | 18,000 | Plant and Machinery | 11,500 |
| Nishant | 12,000 | Bank Balance (13,000 - 3,645) | 9,355 |
| 30,000 | |||
| Total | 65,220 | Total | 65,220 |
Explanation
The solution involves preparing the Revaluation Account to ascertain the profit or loss on revaluation of assets and liabilities. A loss of Rs. 400 was calculated due to stock depreciation and provision creation, partially offset by building appreciation. The General Reserve was distributed in the old profit-sharing ratio (4:3:3 based on capital proportions). Goodwill was adjusted through the gaining partners' capital accounts in the gaining ratio (2:1). Finally, the continuing partners' capitals were adjusted to match the new firm capital of Rs. 30,000 in their new ratio (3:2), with the excess withdrawn in cash.
Solution Steps
Step 1: Calculate Profit Sharing Ratio. Capitals are Rajesh 20,000, Pramod 15,000, Nishant 15,000. Ratio is 20:15:15 or 4:3:3.
Step 2: Prepare Revaluation Account. Loss = Stock Depreciation (1,550) + Prov for DD (25) + Prov Legal Charges (265) - Building Appreciation (1,440) = Rs. 400.
Step 3: Distribute Revaluation Loss and General Reserve. Loss Rs. 400 and Reserve Rs. 2,750 distributed in 4:3:3 ratio.
Step 4: Adjust Goodwill. Goodwill Rs. 10,000. Pramod's share is 3/10 = Rs. 3,000. Gaining ratio of Rajesh and Nishant is 2:1. Rajesh debited Rs. 2,000, Nishant debited Rs. 1,000.
Step 5: Calculate Pramod's Capital Account balance. Credit side: Opening (15,000) + Reserve (825) + Goodwill (3,000). Debit side: Reval Loss (120). Closing Balance = Rs. 18,705 transferred to Loan A/c.
Step 6: Calculate Continuing Partners' Capital Balances. Rajesh: 20,000 + 1,100 - 2,000 - 160 = Rs. 18,940. Nishant: 15,000 + 825 - 1,000 - 120 = Rs. 14,705.
Step 7: Adjust Capitals to New Firm Capital. Total Capital Rs. 30,000 in 3:2. Rajesh needs Rs. 18,000 (has 18,940, withdraw 940). Nishant needs Rs. 12,000 (has 14,705, withdraw 2,705).
Step 8: Prepare Balance Sheet. Adjust assets/liabilities for revaluation changes. Adjust Bank for withdrawals. Add Pramod's Loan and Legal Charges Provision.