Vijay, Ajay and Mohan are friends. They passed B. Com. (Hons) from Delhi University in June, 2016. They decided to start the business of computer hardware. On 1st of August, 2016, they introduced the capital of Rs. 50,000, Rs. 30,000 and Rs. 20,000 respectively and started the business in partnership at Delhi. The profit sharing ratio decided between there was 4:2:1. The business was running successfully. But on 1st February, 2017, due to certain unavoidable circumstances and family circumstances, Ajay decided to settle in Pune and decided to retire from the partnership on 31st March, 2017; with the consent of partners, Ajay retires as on 31st March, 2017, the position of assets and liabilities are as follows: [Balance Sheet Data Provided] On the date of retirement, the following adjustments were to be made:
- Firm’s goodwill was valued at Rs. 1,48,000.
- Assets and Liabilities are to be valued as under: Stock Rs. 72,000; Land and Buildings Rs. 1,35,600; Debtors Rs. 63,000; Machinery Rs. 1,50,000; Creditors Rs. 84,000.
- Vijay to bring Rs. 1,20,000 and Mohan Rs. 30,000 as additional capital.
- Ajay was to be paid Rs. 97,200 in cash and the balance of his Capital Account to be transferred to his Loan Account. Work out the amount due to Ajay and state as to how will you settle his account?
Revaluation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Stock A/c | 18,000 | By Land and Buildings A/c | 15,600 |
| To Debtors A/c | 3,000 | By Creditors A/c | 6,000 |
| To Machinery A/c | 9,000 | ||
| By Loss transferred to: | |||
| - Vijay's Capital (4/7) | 4,800 | ||
| - Ajay's Capital (2/7) | 2,400 | ||
| - Mohan's Capital (1/7) | 1,200 | ||
| Total | 30,000 | Total | 30,000 |
Partners' Capital Accounts
| Particulars | Vijay (Rs.) | Ajay (Rs.) | Mohan (Rs.) |
|---|---|---|---|
| To Revaluation A/c (Loss) | 4,800 | 2,400 | 1,200 |
| To Goodwill A/c (written off) | 32,000 | 16,000 | 8,000 |
| To Ajay's Capital A/c (Goodwill) | 33,829 | - | 8,457 |
| To Cash/Bank A/c | - | 97,200 | - |
| To Ajay's Loan A/c | - | 58,686 | - |
| To Balance c/d | 2,53,371 | - | 1,18,343 |
| Total | 3,24,000 | 1,74,286 | 1,36,000 |
| By Balance b/d | 1,80,000 | 1,20,000 | 1,00,000 |
| By General Reserve | 24,000 | 12,000 | 6,000 |
| By Cash/Bank A/c | 1,20,000 | - | 30,000 |
| By Vijay's Capital A/c | - | 33,829 | - |
| By Mohan's Capital A/c | - | 8,457 | - |
| Total | 3,24,000 | 1,74,286 | 1,36,000 |
Amount Due to Ajay: Rs. 1,74,286
Settlement of Ajay's Account:
- Cash Paid: Rs. 97,200
- Transferred to Ajay's Loan Account: Rs. 58,686
Balance Sheet of Reconstituted Firm
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Creditors | 84,000 | Land and Buildings | 1,35,600 |
| Bills Payable | 12,000 | Machinery | 1,50,000 |
| Ajay's Loan A/c | 58,686 | Motor Van | 31,000 |
| Vijay's Capital | 2,53,371 | Stock | 72,000 |
| Mohan's Capital | 1,18,343 | Debtors | 63,000 |
| Cash at Bank | 74,800 | ||
| Total | 5,26,400 | Total | 5,26,400 |
Explanation
This question tests the student's understanding of retirement of a partner. The key steps include: (1) Preparing Revaluation Account to account for changes in asset/liability values, resulting in a loss of Rs. 8,400 distributed in 4:2:1 ratio; (2) Writing off existing goodwill of Rs. 56,000 in old ratio; (3) Crediting Ajay's share of new goodwill (Rs. 1,48,/7 = Rs. 42,286) and debiting remaining partners in gaining ratio 4:1; (4) Distributing General Reserve in old ratio; (5) Adding additional capital brought by continuing partners; (6) Settling Ajay's account partly by cash and partly by transfer to Loan Account. The gaining ratio is calculated as 4:1 since Vijay gains 8/35 and Mohan gains 2/35 when Ajay retires.
Solution Steps
Step 1: Calculate Revaluation Loss - Stock (18,000) + Debtors (3,000) + Machinery (9,000) - Land & Buildings (15,600) - Creditors (6,000) = Loss of Rs. 8,400 distributed as Rs. 4,800, Rs. 2,400, Rs. 1,200 to Vijay, Ajay, Mohan respectively.
Step 2: Write off existing Goodwill of Rs. 56,000 in ratio 4:2:1 as Rs. 32,000, Rs. 16,000, Rs. 8,000 respectively.
Step 3: Calculate Ajay's share in new goodwill: Rs. 1,48,/7 = Rs. 42,286. Debit to Vijay (4/5) = Rs. 33,829 and Mohan (1/5) = Rs. 8,457.
Step 4: Distribute General Reserve Rs. 42,000 in ratio 4:2:1 as Rs. 24,000, Rs. 12,000, Rs. 6,000.
Step 5: Calculate Ajay's closing capital: 1,20,000 + 12,000 + 42,286 - 2,400 - 16,000 = Rs. 1,55,886. After cash payment of Rs. 97,200, Loan Account = Rs. 58,686.
Step 6: Calculate new Cash at Bank: 22,000 + 1,20,000 + 30,000 - 97,200 = Rs. 74,800.