SOLUTIONS TO PARTNERSHIP ASSIGNMENTS 15 N and S are in partnership as equal partners. N, by agreement, retires and his son G joins the firm on the basis that he would get share of profit. The balances in the books of N and S were as follows : Dr. (Rs.) Cr. (Rs.) Goodwill 24,000 – Bank 16,000 – Debtors 6,000 – Stock 52,000 – Creditors – 12,000 N’s Capital – 46,000 S’s Capital – 40,000 98,000 98,000

Goodwill is agreed at Rs. 60,000 and written up accordingly. Sufficient money is to be introduced so as to enable N to be paid off and leave Rs. 8,000 in Bank. S and G are to provide such sum as to make their capitals proportionate to their share of profit. N agrees to contribute from his capital half of the amount G has to provide. Assuming that the agreement was carried out, show the journal entries required and prepare the Balance Sheet of S and G. Solution

Journal Entries S.N. Particulars L.F. Debit Credit Rs. Rs. (i) N’ Capital Account Dr. 12,000 S’ Capital Account Dr. 12,000 To Goodwill Account 24,000 (Being the existing goodwill written off in the ratio of 1 : 1) (ii) S’ Capital Account Dr. 10,000 G’ Capital Account Dr. 20,000 To N’ Capital Account 30,000 (Being the credit given to N for his share of goodwill by debiting the capital accounts of S and G in gaining ratio 1 : 2) (iii) Bank Account Dr. 19,000 N’ Capital Account Dr. 19,000 To G’ Capital Account 38,000 (Being half the amount of G’ share of goodwill and capital to be brought in cash by G and the other half transferred from N’ Capital Account) (iv) N’ Capital Account Dr. 45,000 To Bank Account 45,000 (Amount paid to N on his retirement) (v) Bank Account Dr. 18,000 To S’ Capital Account 18,000 (Cash brought in by S to raise his capital to Rs. 36,000)

WORKING NOTE Capitals of S and G in the New Firm are Equal to the Net Assets Retained Rs. Stock 52,000 Debtors 6,000 Bank 8,000 66,000 Less : Creditors 12,000

54,000 S’ Capital for of Rs. 54,000 36,000 G’ Capital for of Rs. 54,000 18,000

G’ Capital Account Rs. Rs. To N’ Capital Account 20,000 By N’ Capital Account 19,000 To Balance c/d 18,000 By Bank Account 19,000 38,000 38,000

N’ Capital Account Rs. Rs. To Goodwill Account 12,000 By Balance b/d 46,000 To G’ Capital Account 19,000 By S’ Capital To Bank Account (Payment) 45,000 Account (Goodwill) 10,000 By G’ Capital Account (Goodwill) 20,000 76,000 76,000

S’ Capital Account Rs. Rs. To Goodwill Account 12,000 By Balance b/d 40,000 To N’ Capital Account 10,000 By Bank Account 18,000 To Balance c/d 36,000 58,000 58,000

Balance Sheet of S and G As On ..... Liabilities Rs. Assets Rs. Creditors 12,000 Stock 52,000 Capitals : Debtors 6,000 S 36,000 Cash at Bank 8,000 G 18,000 66,000 66,000 21 Solution

Journal Entries

Rs. Rs. Plant and Machinery Account Dr. 5,298 To Profit and Loss Adjustment Account 5,298 (Expenditure on purchase and erection of machinery in 1995 wrongly charged to revenue now capitalised)

Sundry Debtors Account Dr. 1,200 To Profit and Loss Adjustment Account 1,200 (Rent received from tenant wrongly credited to his account as debtor now rectified)

Prepaid Interest Account Dr. 1,200 To Profit and Loss Adjustment Account 1,200 (Interest on 10% Mortgage loan for 1996 charged to profit and loss account of 1995 now rectified)

Profit and Loss Adjustment Account Dr. 6,570 To Provision for Depreciation Account 5,430 To Provision for Doubtful Debts Account 1,140 (Depreciation at 10% on Rs. 54,298 and provision for bad debts @ 5% on Rs. 22,800 debited to adjustment account)

Profit and Loss Adjustment Account Dr. 1,128

To A’s Capital Account 376 To B’s Capital Account 376 To C’s Capital Account 376 (Net profit on adjustment/revaluation transferred to capital accounts)

Goodwill Account Dr. 21,846 To C’s Capital Account 21,846 (Goodwill account raised to the extent of C’s share)

C’s Capital Account

Rs. Rs. Cash Account 17,111 Balance b/d 12,000 C’s Loan Account 17,111 Goodwill 21,846 Profit and Loss Adjustment Account 376 34,222 34,222

Profit and Loss Adjustment Account

Rs. Rs. Provision for depreciation 5,430 Plant and Machinery 5,298 Provision for doubtful debts 1,140 Sundry Debtors 1,200 A’s Capital Account 376 Prepaid Interest 1,200 B’s Capital Account 376 C’s Capital Account 376 7,698 7,698

Balance Sheet of A & B On 1 January 1996

Liabilities Rs. Assets Rs. Sundry Creditors 16,600 Cash in hand 1,200 10% Mortgage Loan 12,000 Debtors 22,800 C’s Loan (at 15%) 17,111 Less : Provision for A’s Capital Account 42,531.50 doubtful debts 1,140 21,660 B’s Capital Account 34,131.50 76,663 Stock 22,800 Prepaid interest 1,200 Furniture 4,800 Plant and Machinery (at cost) 54,298 Less : Provision for Depreciation 5,430 48,868 Goodwill 21,846 1,22,374 1,22,374

Working Note Rs. C’s share of goodwill has been calculated as follows : Total Profits for 1994, 1995 and 1996 (given) 57,840 Add : Adjustments after rectification of errors (5,298 + 1,200 + 1,200) in 1995 Profits only) 7,698 65,538 21,846 Average profits = (65,538 / 3) 3 Year’s Purchase = 21,846 x 3 65,538 C’s share 1/3 of 65,538 21,846

40 Following is the Balance Sheet on 31 March 2005 of M/s A, B and C who share profits in the ratio of 4 : 2 : 1 respectively : Liabilities Rs. Assets Rs. Capital Account : Goodwill 10,000 A 30,000 Stock 15,000 B 20,000 Sundry Debtors 11,000 C 15,000 65,000 Land & Buildings 20,000 Sundry Creditors 15,000 Plant & Machinery 26,500 Bills Payable 3,000 Motor Vehicle 10,000 General Reserve 10,500 Cash 1,000 93,500 93,500

On the above date, A retired and the following arrangements were agreed upon : (a) Goodwill of the firm is to be valued at Rs. 24,000. (b) The assets and liabilities are to be valued as under : Stock Rs. 12,000, Sundry Debtors Rs. 10,500, Land and Building Rs.

22,600, Plant and Machinery Rs. 25,000 and Sundry Creditors Rs. 14,000.

(c) B and C were to introduce Rs. 20,000 and Rs. 5,000 respectively into the business and Rs. 16,200 was to be paid immediately and balance in three equal instalments together with interest at 9% p.a.

(d) B and C agreed not to retain goodwill in books. Give Journal entries to record the above transactions, the Balance Sheet of the firm after A’s retirement and A’s Loan Account until it is paid off. [C.A. (Foundation) Modified] Solution

Journal Entries S.N. Particulars L.F. Debit Credit Rs. Rs. (i) A’ Capital Account Dr. 5,714 B’ Capital Account Dr. 2,857 C’ Capital Account Dr. 1,429 To Goodwill Account 10,000 (Being the writing off the existing goodwill in the ratio of 4 : 2 : 1) (ii) B’ Capital Account Dr. 9,143 C’ Capital Account Dr. 4,571 To A’ Capital Account 13,714 (A’ share of goodwill adjusted in the capital accounts of B and C in the gaining ratio) (iii) Revaluation Account Dr. 5,000 To Stock 3,000 To Provision for Doubtful debts 500 To Plant & Machinery Account 1,500 (Being decrease in the value of assets) (iv) Land & Building Account Dr. 2,600 Sundry Creditors Account Dr. 1,000 To Revaluation Account 3,600 (Being gain on revaluation of land and building and sundry creditors) (v) A’s Capital Account Dr. 800 B’s Capital Account Dr. 400 C’s Capital Account Dr. 200 To Revaluation Account 1,400 (Being net loss on revaluation of assets and liabilities transferred to the Capital Accounts of all partners)

(vi) General Reserve Account Dr. 10,500 To A’s Capital Account 6,000 To B’s Capital Account 3,000 To C’s Capital Account 1,500 (Being reserve distributed) (vii) Cash Account Dr. 25,000 To B’s Capital Account 20,000 To C’s Capital Account 5,000 (Being additional Capital brought in by B and C) (viii) A’s Capital Account Dr. 43,200 To Cash Account 16,200 To A’s Loan Account 27,000 (Being Rs. 16,200 immediately paid to A and the balance due to him i.e., Rs. 27,000 transferred to his loan Account)

Balance Sheet of B and C As At 31 March 2005

Liabilities Rs. Assets Rs. Capital Accounts Cash 9,800 B 30,600 Stock (15,000 – 3,000) 12,000 C 15,300 Sundry Debtors 11,000 Sundry Creditors 14,000 Less : Provision 500 10,500 (15,000 – 1,000) Land & Building 22,600 Bill Payable 3,000 (20,000 + 2,600) A’s Loan 27,000 Plant & Machinery 25,000 (26,500 – 1,500) Motor Vehicle 10,000 89,900 89,900

A’s Loan Account Date Particulars Amount Date Particulars Amount 31.3.05 Balance c/d 27,000 31.3.05 A’s Capital Account 27,000 31.3.06 Cash Account 11,430 1.4.05 Balance b/d 27,000 (9,000 + 2,430) 31.3.06 Interest Account 2,430 31.3.06 Balance c/d 18,000 (27,000 × 9/100) 29,430 29,430 31.3.07 Cash Account 10,620 1.4.06 Balance b/d 18,000 (9,000 + 1,620) 31.3.07 Interest Account 1,620 Balance c/d 9,000 (18,000 × 9/100) 19,620 19,620 31.3.08 Cash Account 9,810 1.4.07 Balance b/d 9,000 (9,000 + 810) 31.3.08 Interest Account 810 (9,000 × 9/100) 9,810 9,810 Note : It is presumed that instalments are paid yearly.

WORKING NOTES Revaluation Account

Rs. Rs. Stock 3,000 Land & Building 2,600 Provision for Doubtful Debts 500 Sundry Creditors 1,000 Plant & Machinery 1,500 Loss transferred to Capital Accounts : A 800 B 400 C 200

5,000 5,000

A’s Capital Account Rs. Rs. Revaluation Account (Loss) 800 Balance b/d 30,000 Goodwill Account 5,714 General Reserve 6,000 Cash Account 16,200 B’ Capital Account 9,143 A’s Loan Account 27,000 C’ Capital Account 4,571 49,714 49,714

B’s Capital Account Rs. Rs. Revaluation Account (Loss) 400 Balance b/d 20,000 Goodwill Account 2,857 General Reserve 3,000 A’ Capital Account 9,143 Cash Account 20,000 Balance c/d 30,600 43,000 43,000

C’s Capital Account Rs. Rs. Goodwill Account 1,429 Balance b/d 15,000 Revaluation Account (Loss) 200 General Reserve 1,500 A’ Capital Account 4,571 Cash Account 5,000 Balance c/d 15,300 21,500 21,500

Cash Account Rs. Rs. Balance b/d 1,000 A’s Capital Account 16,200 B’s Capital Account 20,000 Balance c/d 9,800 C’s Capital Account 5,000   26,000    26,000 

41 

A, B and C were partners sharing profits in the ratio of 3 : 2 : 1 and their balance sheet on 31 December 2005 was as follows : Rs. Rs. Bills payable 75,600 Cash in hand 2,500 Creditors 1,23,000 Cash in Bank 9,600 General Reserve 30,000 Bills Receivable 33,000 Capitals : Debtors 74,500 A 1,00,000 Stock 1,24,700 B 60,000 Investments 1,04,300 C 40,000 Buildings 80,000 4,28,600 4,28,600

B died on 28 February 2006 and according to partnership agreement his legal representative is entitled to be paid as follows : (a) The capital to his credit at the time of his death and interest upto the time of his death at 6% p.a. (b) His appropriate share of general reserve. (c) His share of profit for the period based on the figure for profit of the previous year. (d) Goodwill according to his share of profits to be calculated by taking twice the amount of the average profits of the last

three years. The profits of the three years were : 2003—Rs. 78,000; 2004—Rs. 90,000 and 2005—Rs. 96,000 (e) Investments were sold for Rs. 1,60,000 and B’s legal representative was paid off. Write the account of B Solution (i) Calculation of Gaining Ratio (New Ratio – Old Ratio) A’ new ratio = ; old ratio = Gain = – = = C’ new ratio = ; old ratio Gain = – = = Gaining ratio = : = 3 : 1 (ii) Since Goodwill Account cannot be raised for internally generated goodwill, B’ share of goodwill will be debited to

A and C in the ratio of 3 : 1 (iii) Share of Profit of B Rs. Profits for 2005 96,000 Profits for two months of 2006 Rs. 96,000 ÷ 6 16,000 B’s share of Rs. 16,000 5,333 (iv) Share of Goodwill Total profits for 2003, 2004 and 2005 = 78,000 + 90,000 + 96,000 = 2,64,000. Average profits = 2,64,000 ÷ 3 = 88,000 Two year’s purchase = 88,000 × 2 = 1,76,000 B’s share of goodwill according to his share of profit i.e. of 1,76,000

= 58,667 (App.) B’ Capital Account

Rs. Rs. To B’ Executor’ Account 1,34,600 By Balance b/d 60,000 By Interest on Capital 600 (for two months) By General Reserve 10,000 By Profit 5,333 By A’ Capital Account 39,111 By C’ Capital Account 19,556 1,34,600 1,34,600

B’ Executor’ Account Rs. Rs. To Bank Account 1,34,600 By B’ Capital Account 1,34,600

42 M/s X and Co. is a partnership firm with the partners A, B and C sharing Profits and Losses in the ratio of 3 : 2 : 5. The Balance Sheet of the firm as on 30 June 2001 was as under :

Balance Sheet of X and Co. as on 30.06.2001 Liabilities Rs. Assets Rs. A’s Capital Account 1,04,000 Land 1,00,000 B’s Capital Account 76,000 Building 2,00,000 C’s Capital Account 1,40,000 Plant and Machinery 3,80,000 Long term Loan 4,00,000 Investments 22,000 Bank overdraft 44,000 Stock 1,16,000 Trade Creditors 1,93,000 Sundry Debtors 1,39,000 9,57,000 9,57,000 It was mutually agreed that B will retire from partnership and in his place D will be admitted as a partner with effect from 1 July, 2001. For this purpose, the following adjustments are to be made : (a) Goodwill of the firm is to be valued at Rs. 2 lakh due to the firm’s locational advantage but the same will not appear as an

asset in the books of the reconstituted firm. (b) Buildings and Plant and Machinery are to be valued at 90% and 85% of the respective Balance Sheet values. Investments

are to be taken over by the retiring partner at Rs. 25,000. Sundry Debtors are considered good only 90% of Balance Sheet figure. Balance to be considered Bad.

(c) In the reconstituted firm, the total Capital will be Rs. 3 lakh, which will be contributed by A, C and D in their new profit sharing ratio, which is 3 : 4 : 3.

(d) The surplus funds, if any, will be used for repaying bank overdraft. (e) The amount due to retiring partner shall be transferred to his Loan Account. You are required to prepare (i) Revaluation Account (ii) Partners’ Capital Accounts (iii) Bank Account and (iv) Balance Sheet of the reconstituted firm as on 1st July, 2001. (15 marks) [C.A. (Foundation) May, 2002]

Solution (i) Revaluation Account 2001 Rs. 2001 Rs. July 1 July 1 Building 20,000 Investments 3,000 Plant and machinery 57,000 (25,000 – 22,000) Bad debts 13,900 Partners’ capital accounts Loss on revaluation : A (3/10) 26,370 B (2/10) 17,580 C (5/10) 43,950 87,900 90,900 90,900 (ii) Partners’ Capital Accounts

A B C D A B C Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Revaluation Account 26,370 17,580 43,950 – Balance b/d 1,04,000 76,000 1,40,000B’s Capital Account (Goodwill) 40,000 D’s Capital Account – 40,000 20,000C’ Capital Account (Goodwill) 20,000 (Goodwill) Investments Account 25,000 Bank Account 12,370 – 3,950 1,50B’s Loan Account 73,420 Balance c/d (Goodwill) 90,000 – 1,20,000 90,000 1,16,370 1,16,000 1,63,950 1,50,000 1,16,370 1,16,000 1,63,950 1,50

REVISE YOUR POINTS (iii) Bank Account

Rs. Rs. A’s Capital Account 12,370 Balance b/d (overdraft) 44,000 C’s Capital Account 3,950 Balance c/d 1,22,320 D’s Capital Account 1,50,000 1,66,320 1,66,320

(iv) Balance Sheet of M/s X and Co. As At 1 July, 2001 Liabilities Rs. Assets Rs. Capital accounts : Land 1,00,000 A 90,000 Building 2,00,000 B 1,20,000 Less : Depreciation 20,000 1,80,000 C 90,000 3,00,000 Plant and machinery 3,80,000 Long term loan 4,00,000 Less : Depreciation 57,000 3,23,000 B’s loan account 73,420 Stock 1,16,000 Trade creditors 1,93,000 Debtors 1,39,000 Less : Bad debts 13,900 1,25,100 Cash at bank 1,22,320 9,66,420 9,66,420

WORKING NOTES (i) Adjustment of Goodwill Goodwill of the firm is valued at Rs. 2 lakhs Sacrificing ratio : A – = 0 B – 0 = C – = Hence, sacrificing ratio of B and C is 2 : 1. A has not sacrificed any share in profits after retirement of B and

admission of D in his place. Adjustment of D’s share of goodwill through existing partners’ capital accounts in the profit sacrificing ratio : Rs. B : Rs. 60,000 × = 40,000 C : Rs. 60,000 × = 20,000 60,000 (ii) Capital of partners in the reconstituted firm Rs. Total capital of the reconstituted firm (given) 3,00,000 A (3/10) 90,000 B (4/10) 1,20,000 C (3/10) 90,000

44 

Solution S.N. Particulars Debit Credit Rs. Rs. (i) Bank Account Dr. 15,000 To Joint Life Policy Account 15,000 (Being the amount received from the insurance company) (ii) Joint Life Policy Account Dr. 13,000 To A’s Capital Account 6,500 To B’s Capital Account 3,250 To C’s Capital Account 3,250 (Being the balance [15,000 – 2,000] in joint life policy account transferred to the capital accounts in the profit sharing ratio) (iii) A’ Capital Account Dr. 1,500 B’ Capital Account Dr. 750 C’ Capital Account Dr. 750 To Goodwill Account 3,000 (Being the existing goodwill written off on the death of A) (iv) B’ Capital Account Dr. 3,000 C’ Capital Account Dr. 3,000 To A’ Capital Account 6,000 (A’ share of goodwill [2/4 of Rs. 12,000] debited to B’ and C’ capital accounts in their gaining ratio) (v) A’ Capital Account Dr. 21,000 To A’ Executor’ Account 21,000 (Being the amount payable to A’ executors.) (vi) Bank Account Dr. 8,000 To B’ Capital Account 3,000 To C’ Capital Account 5,000 (Being the necessary cash to pay A’ executors) (vii) A’ Executors Account Dr. 21,000 To Bank Account 21,000 (Being the amount payable to A’ executors)

A’ Capital Account Rs. Rs. To Goodwill Account 1,500 By Balance b/d 10,000 To A’ Executors Account 21,000 By B’ Capital Account 3,000 (Goodwill) By C’ Capital Account 3,000 (Goodwill) By Joint Life Policy Account 6,500 22,500 22,500

B’ Capital Account Rs. Rs. To Goodwill Account 750 By Balance b/d 6,000 To A’ Capital Account 3,000 By Joint Life Policy Account 3,250 (Goodwill) By Bank Account 3,000 To Balance c/d 8,500

12,250 12,250

C’ Capital Account Rs. Rs. To Goodwill Account 750 By Balance b/d 4,000 To A’ Capital Account 3,000 By Joint Life Policy Account 3,250 (Goodwill) By Bank Account 5,000 To Balance c/d 8,500 12,250 12,250

WORKING NOTES (i) Calculation of Goodwill Average profit for four years : Rs. (Rs. 6,000 + Rs. 7,500 + Rs. 9,000 + Rs. 9,500)/4 8,000 Goodwill at times of Average Profit 12,000 A’ share of goodwill = (ii) Calculation of gain on Joint Life Policy Rs. Amount received from Insurance Company 15,000 Less : Book value of Policy 2,000 Net Gain 13,000 (iii) Calculation of Cash brought in by B and C Rs. Amount payable to A’s Executors 21,000 Add : Desired Cash in hand 3,000 24,000 Less : Amount received from Insurance Company 15,000 Amount in hand (Existing) 1,000 16,000 Amount required (to be provided by B and C) 8,000 B’s Capital after adjustment of Goodwill and Policy (6,000 + 3,250 – 750 – 3,000) 5,500 C’s Capital after adjustment of Goodwill and policy (4,000 + 3,250 – 750 – 3,000) 3,500 Cash to be provided by B and C 8,000 Total Capital of B and C 17,000 Share of ‘B’ (1/2 of total Capital) 8,500 Less : Capital already in business 5,500 Cash to be introduced by B 3,000 Share of ‘C’ (1/2 of total Capital) 8,500 Less : Capital already in business 3,500 Cash to be introduced by ‘C’ 5,000

45 

Solution A’s Capital Account

20..... Rs. 20..... Rs. 31 March To Drawings 3,500 March 31 By Balance b/d 20,000 To A’s Executor’s By Joint Life Policy Account 34,113 Account 8,125 By B’ Capital Account 5,445 By C’ Capital Account 2,722 By Interest on Capital 300 By Profit and Loss Account 1,021 37,613 37,613

WORKING NOTES A’s share of profit Total Profits of 3 years = Rs. 24,500 Average 24,500 ÷ 3 = Rs. 8,116.67 Profit for 3 months = = 2,041.67 A’s Share = of 2,041.67 = Rs. 1,020.83 or 1,021 Calculation of Goodwill Average Profits = Rs. 8,116.67 Two years’ purchase = 2 × 8,116.67 A’s share = × × 8,166.67 = 8,166,67 or 8,167 A’s share of Policy Rs. A’s policy 10,000 of B’s and C’s policy : 6,250 16,250 A’s share of Rs. 16,250 = Rs. 8,125

47 

Answer Computation of entitlement of legal heirs of C

(1) Profits for the half year ended 31st March, 1999 Rs. Profits for the year ended 31st March, 1999 (after depreciation) 48,000 Add : Depreciation 10,000 Profits before depreciation 58,000 Profits for the first half (assumed : evenly spread) 29,000 Less : Depreciation for the first half 6,000 Profits for the first half year (after depreciation) 23,000 Profits for the second half (i.e., 1st October, 1998 to 31st March, 1999) 29,000 Less : Depreciation for the second half 4,000 Profits for the second half year (after depreciation) 25,000

(2) Capital Accounts of Partners as on 30th September, 1998 Dr. Cr. A B C A B C Rs. Rs. Rs. Rs. Rs. Rs. To Fixed Assets By Balance b/d 48,000 64,000 48,000 (loss on By Reserve 6,000 8,000 6,000 revaluation) 6,000 8,000 6,000 By Goodwill 18,000 24,000 18,000 To Drawings 9,000 12,000 20,000 By P & L Appro- To C Executor’s A/c 52,000 priation A/c To Balance c/d 57,000 76,000 – (Interest on Rs. 48,000 @ 25% for 6 months) — — 6,000 72,000 96,000 78,000 72,000 96,000 78,000

(3) Application of Section 37 of the Partnership Act

Legal heirs of C have not been paid anything other than the share in joint life policy. The amount due to the deceased partner carries interest at the mutually agreed upon rate. In the absence of any agreement, the representatives of the deceased partner can receive at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to the deceased partner. Thus, the representatives of C can opt for Either, (i) Interest on Rs. 52,000 for 6 months @ 6% p.a. = Rs. 1,560

Or (ii) Profit earned out of unsettled capital (in the second half year ended 31st March, 1999)

(approx.) 7,027 Rs.52,00076,00057,000

52,00025,000 .Rs =++

×

In the above case, it would be rational to assume that the legal heirs would opt for Rs. 7,027.

(4) Amount due to legal heirs of C Rs.

Balance in C’s Executor’s account 52,000 Amount of profit earned out of unsettled capital [calculated in (3)] 7,027 Amount due 59,027  

 

48 

Answer (i) Revaluation Account

Rs Rs. To Premises 10,000 By Plant and Machinery 6,000 To Provision for Doubtful Debts 1,200 By Loss on revaluation transferred To Outstanding Expenses 5,000 to Capital Accounts: To Stocks 4,000 Manish (40%) 6,160 To Provision for Professional Charges1,200 Jatin (35%) 5,390 Paresh (25%) 3,850 15,400 21,400 21,400

(ii) Capital Accounts of Partners Manish Jatin Paresh Manish Jatin Paresh

Rs. Rs. Rs. Rs. Rs. Rs. To Revalutation A/c (loss) 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000 To Goodwill (written off in 48,000 – 32,000 By Current A/c 12,000 8,000 6,000 new Profit sharing ratio)

To Personal A/c (Balance 80,610 By Goodwill 32,000 28,000 20,000 transferred) – (old profit sharing) To Balance c/d 79,840 20,150 1,34,000 86,000 56,000 1,34,000 86,000 56,000

(iii) Jatin’s Personal Account

Rs. Rs. To Bank Account 15,000 By Capital Accounts 80,610 (50% of old loan) (Balance transferred) To Loan Account 80,000 By Loan Account 30,000 (transferred) (old loan) To Balance c/d 15,610 1,10,610 1,10,610

(iv) Balance Sheet of Manish and Paresh as on 1st January, 2002

Liabilities Rs. Assets Rs. Capital Accounts Fixed Assets

Manish 79,840 Plant and Machinery 86,000 Paresh 20,150 99,990 Less: Depreciation 28,000 58,000 Jatin’s Loan A/c 80,000 Premises 75,000 Current Liabilities Less: Written off 10,000 65,000 and Provisions Current Assets Bills Payable 8,000 Cash in hand & at Bank Sundry Creditors 35,000 (67,000–15,000) 52,000 (30,000+5,000) Sundry Debtors 34,000 Jatin’s dues 15,610 Less: Provision for Provision for doubtful debts 7,200 26,800 Professional charges 1,200 59,810 Stock in trade 38,000

2,39,800 2,39,800

Working Notes : (1) Profit for the Year ending 31st December, 2001 Rs. As per draft accounts 1,88,200 Less: Premises written off 10,000 Provision for Doubtful debts 1,200 Outstanding Expenses 5,000 Stock 4,000 20,200 1,68,000 (2) Valuation of Goodwill Profit for the year ending 31st Dec.2001 (adjusted) 1,68,000 Profit for the year ending 31st Dec. 2000 1,68,000 Profit for the year ending 31st Dec. 1999 1,44,000 4,80,000 Average Profits before partners’ salaries 1,60,000 Less: Partners’s Salaries (notional) 80,000 Super Profit and Goodwill (one year’s purchase) 80,000

49 

a) Journal of Partnership Firm of Shri X, Y Ltd. and Z Ltd. Closing Entries on 31 March, 1997 Dr. Cr. Rs. Rs. Profit and Loss Account Dr. 78,000 To Provision for Taxation for A.Y. 1987-98 78,000 (Being provision made for taxation at 40% on total income of Rs. 1,95,000)

Profit and loss Appropriation Account Dr. 4,80,000 To Remuneration to X, the Working Partner 90,000 To Interest on Capitals : X 60,000 Y Ltd. 1,50,000 Z Ltd. 1,80,000 (Being interest on capital provided at 15% per annum and remuneration to working partner X at 15% of net profit after chargings his remuneration but before providing for tax and interest on capitals now recorded)

Profit and loss Appropriation Account Dr. 1,32,000 (Rs. 6,90,000–Rs. 78,000- Rs. 4,80,000) To Capital Accounts : X 26,400 Y Ltd. 52,800 Z Ltd. 52,800 (Being balance profits credited to partners’ capital accounts in the ratio of 1 : 2 : 2) (b) Journal Entries in the Books of Y Ltd. 1997 Dr. Dr. March 31 Rs. Rs. Investment in Partnership with Shri X and Z Ltd. Dr. 2,02,800 To Interest on Capital (taxable) 1,50,000 To Share of Profits (non-taxable) 52,800 (Being entry to record interest income at 15% p.a. on capital of Rs. 10,00,000 and 2/5th share of profits in the firm).

Interest on Capital Dr. 1,50,000 Share of Profits Dr. 52,800 To Profit and Loss Account 2,02,800 (Being incomes trasferred to profit and loss account)

Ledger Investment in Partnership with Shri X and Z Ltd.

1996 Dr. Cr. Balance Rs. Rs. Rs. April 1 To Balance b/d 10,00,000 – Dr.10,00,000 1997 March 31 To Interest Income From the Firm 1,50,000 – Dr. 11,50,000 To Share of Profits in the Firm 52,800 – Dr. 12,02,800

By Balance c/d – 12,02,800 12,02,800 12,02,800 (c) Extracts From the Financial Statements of Z Ltd. Revenue Statement For the Year Ended 31 March, 1997 1996-97 1995-96 Rs. Rs. Operating income : Income from Partnership : Interest on Capital Invested 1,80,000 Share of Profits 52,800 2,32,800 Extracts from Schedule of Investments Attached to and Forming part of the Balance Sheet As At 31 March, 1997 31.3.1997 31.3.1996 Rs. Rs. Investment in Partnership with Shri X and Y Ltd 14,32,800 12,00,000 Partners Capital As On Share of Profits 31 March, 1996-1997 1995-96 1997 1996 Rs. Rs. X 5,76,400 4,00,000 1/5 1/5 Y Ltd. 12,02,800 10,00,000 2/5 2/5 Z Ltd. 14,32,800 12,00,000 2,5 2/5

Working for Capitals : X Y Ltd. Z Ltd. Rs. Rs. Rs. Opening capital 4,00,000 10,00,000 12,00,000 Remuneration credited 90,000 – – Interest on capital 60,000 1,50,000 1,80,000 Share in profits 26,400 52,800 52,800 5,76,400 12,02,800 14,32,800

(d) Working for Remuneration of X, the Working Partner

Rs. 6,90,000 × 15 = Rs. 90,000 115 Working for capital of partners (opening of current year and closing of last year)

100 X = Rs. 60,000 × ——— = Rs. 4,00,000 15

100 Y Ltd. = Rs. 1,50,000 × ——— = Rs. 10,00,000 15

100 Z Ltd. = Rs. 1,80,000 × ——— = Rs. 12,00,000

 

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Solution I Statement Showing the Partners’s Shares Avinash Basuda Ltd. Chinmoy Ltd. Ghanashyam 9 4 2 Ratio before retirement of Basuda Ltd — — — 15 15 15 1 3 Adjustment on retirement (+) — — (+) — 15 15 10 5 New ratio before admission of Ghanashyam — — 15 15 On admission of Ghanashyam : 1 1 Gift by Avinash (12.5/100) (–) — — 8 8 2 1 3 Purchase from Avinash & Chinmoy Ltd.* (–)— (–) — (+) — 24 24 24 11 7 6 New ratio — — — 24 24 24

*Purchase from Avinash = 2/3 × 1/8 =2/24 Purchase from Chinmoy Ltd. = 1/3 × 1/8 = 1/24

II Journal Entries Dr. Cr. Rs. Rs. 1. Avinash’s Capital Account Dr. 1,00,000 Chinmoy Ltd.’s Capital Account Dr. 3,00,000 To Basuda Ltd.’ Capital Account 4,00,000 (Being purchase by Avinash and chinmoy Ltd. of goodwill from Basuda Ltd.) 2. Avinash’s Capital Account Dr. 7,50,000 To Ghanashyam’s Capital Account 7,50,000 (Being gift made by Avinash to Ghanashyam) 3. Bank Account Dr. 31,00,000 To Avinash’s Capital Account 7,75,000 To Chinmoy Ltd.’s Capital Account 13,87,500 To Ghanashyam’s Capital 9,37,500 (Being capital brought in by the partners) 4. Basuda Ltd.’s Capital Account Dr. 16,00,000 To Bank Account Dr. 16,00,000 (Being final payment made to Basuda Ltd. on retirement) 5. Ghanashyam’s Capital Account Dr. 1,87,500 1,25,000 To Avinash’s Capital Account 62,500 To Chinmoy Ltd.’s Capital Account (Being goodwill adjusted on admission)

(iii) Balance Sheet As On 1 April 1998 Liabilities Assets Rs. Rs. Sundry Creditors 6,00,000 Cash and Bank 17,84,000 Capital Account : Sundry Debtors 4,00,000 Avinash 27,50,000 Stock 8,00,000 Chinmoy Ltd. 17,50,000 Furniture 2,66,000 Ghanashyam 15,00,000 60,00,000 Plant 8,50,000 Land and building 25,00,000 66,00,000 66,00,000

Working Notes 1. Adjustment of Goodwill on Retirement (Rs. in thousands)

Value of Goodwill = (450+250+600+700) × 3/4 = 1500 Share of Basuda Ltd. = 1,500 × 4/5 = 400 Adjustment through partners’s capital accounts 1 Avinash : — × 400 = 100 (Dr.) 4

4 Basuda Ltd. : — × 1500 = 400 (Cr.) 15

3 Chinmoy Ltd. : — × 400 = 300 (Dr.) 4

2. Closing Balance of Capital Accounts Basuda Ltd.’s share of capital and goodwill = 1,200 + 400 = 1,600 This represents 4/15th share of capital and goodwill requirement of the firm.

15 Thus, total capital and goodwill requirement = 1,600 × — = 6,000 4 Hence, closing capital balances (in new profit sharing ratio of 11 : 7 : 6) should be:

11 Avinash : — × 6,000 = 2,750 24

7 Basuda Ltd. : — × 6,000 = 1,750 24

6 Chinmoy Ltd. : — × 6,000 = 1,500 24

1 Gift by Avinash to Ghanashyam : — × 1,500 =750 2 (Debit to Avinash’s Capital A/c and Credit to Ghanshyam’s Capital A/c) 3. Adjustment of Goodwill on Admission Goodwill of the firm = 1500 1 Ghanashyam’s share of goodwill = — × 1,500 4

= 375

1 (a) Gift by Avinash = — × 375

2 = 187.5 (included in the gift of 750 - See Working Note 2) (b) Purchase from Avinash and Chinmoy Ltd. = 187.5 (in 2 : 1 ratio) Thus, adjustment of goodwill purchased through capital accounts

2 Avinash : — × 187.5 = 125 (Dr.) 3

1 Basuda Ltd. : — × 187.5 = 62.5 (Cr.) 3

1 Chinmoy Ltd. : — × 375 = 187.5 (Dr.) 2

4. Amount brought in by Partners Partners’ Capital Accounts

Avinash Basuda Chinmoy Ghana- Avinash Basuda Chinmoy Ghana- Ltd. Ltd. shyam Ltd. Ltd. shyam Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Basuda Ltd 100 — 300 — Balance b/d 2,700 1,200 600 — Ghanashyam 750 — — — Avinash Avinash and Chinmoy Chinmoy Ltd — — — 187.5 Ltd. — 400 — — Cash & Bank — 1,600 — — Cash and Balance c/d 2,750 — 1,750 1,500 Bank (Bal. Figure) 775 037.50 Avinash — — 1387.50 750.00 Ghanashyam 125 — 62.5 — 3,600 1,600 2,050 1,687.5 3,600 1,600 2,050 1,687.5

5. Cash and Bank Amount given 284 Amount brought in by partners 3,100

3,384 Less : Payment to Basuda Ltd. 1,600

1,784 Net increase = 1,500 (Equivalent to the value of goodwill)

 

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Answer Partners’ Capital Accounts

Dr. Cr.

Ram Rahim Robert Richard Ram Rahim Robert Richard

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

To Revaluation A/c (W.N. 1)

10,000 6,000 4,000 − By Balance b/d

1,00,000 1,50,000 2,00,000 −

To Loan from Robert A/c

2,00,000 By General reserve

1,00,000 60,000 40,000 −

To Bank 58,000 By Goodwill (W.N. 2)

55,000 33,000 22,000 −

To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______

2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 −

To Goodwill∗ 55,000 36,667 − 18,333 By Balance b/d

2,45,000 2,37,000 − −

By Loan A/c − transfer

− − − 2,00,000

To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500

2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500

Balance Sheet as at 31.3.2005 after the admission of Richard

Liabilities Rs. Assets Rs. Capital Accounts: Land and Building 6,00,000 Ram 1,90,000 Plant and Machinery 2,70,000 Rahim 2,00,333 Stock 1,90,000 Richard 1,95,167 Debtors 4,50,000 Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500 Loan from Robert 2,00,000 Cash in hand 20,000 15,85,500 15,85,500 Working Notes: (1) Revaluation Account

                                                            ∗ As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of retirement of Robert is to be written off in new ratio among remaining partners including new partner – Richard.

Rs. Rs. To Plant and Machinery 30,000 By Land and Building 70,000 To Stock 10,000 By Partners Capital A/cs: To Debtors 50,000 Ram 10,000 Rahim 6,000 ______ Robert 4,000 20,000 90,000 90,000 (2) Calculation of Goodwill:

Profit for the year ended 31.3.2002 50,000 Profit for the year ended 31.3.2003 60,000 Profit for the year ended 31.3.2004 55,000 1,65,000

55,000 Rs. 3

1,65,000 profit Average ==

Goodwill = Rs. 55,000 × 2 years = Rs. 1,10,000. (3) Bank Account Rs. Rs. To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000 To Richard’s Capital A/c 13,500 By Balance c/d 55,500 1,13,500 1,13,500

 

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Answer

MemorandumRevaluationAccount Rs. Rs. To Stock 40,000 By Building 1,80,000 To Plant & machinery 1,20,000 By Investments 20,000 To Provision for doubtful debts 15,000 To Unrecorded liability 10,000 To Profit transferred to Partners’

Capital A/cs (in old ratio)

A = 10,000 B = 5,000

15,000

2,00,000 2,00,000 To Building 1,80,000 By Stock 40,000 To Investments 20,000 By Plant & machinery 1,20,000 By Provision for doubtful debts 15,000 By Unrecorded liability 10,000 By Loss transferred to Partners’

Capital A/cs (in new ratio)

A = 7,500 B = 3,750 C = 3,750 15,000 2,00,000 2,00,000

Partners’ Capital Accounts A B C A B C

To Loss on Revaluation

7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -

To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve Fund 6,00,000 3,00,000 -

To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -

To B (W.N.3) - - 8,750 By Profit on Revaluation

10,000 5,000

To Balance c/d (Refer W.N.2)

11,70,000

5,85,000

5,85,000

By Cash (Bal. Fig.)

8,40,000

16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006

Liabilities Rs. Assets Rs.

Capital Accounts Plant & Machinery 12,00,000 A 11,70,000 Building 9,00,000 B 5,85,000 Sundry Debtors 3,00,000 C 5,85,000 Stock 4,00,000 Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000 Sundry Creditors 4,00,000 Bills Payable 1,00,000 37,40,000 37,40,000

Working Notes: 1. Calculation of new profit and loss sharing ratio

C will get 1/4 th share in the new profit sharing ratio. Therefore, remaining share will be 1-1/4 =3/4 Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2 Share of B will be 3/4 x 1/3 = 1/4 New ratio will be A : B : C 1/2 : 1/4 : 1/4 2 : 1: 1

2. Calculation of closing capital of C Closing capitals of A & B after all adjustments are:

A = Rs.11,70,000 B = Rs. 5,85,000

Since B’s capital is less than A’s capital, therefore B’s capital is taken as base. Hence, C’s closing capital should be Rs.5,85,000 i.e. at par with B (as per new profit and loss sharing

ratio) 3. Adjustment entry for goodwill∗

Partners Goodwill as per old ratio Goodwill as per new ratio Effect

A 70,000 52,500 + 17,500 - B 35,000 26,250 + 8,750 - C - 26,250 - -26,250 1,05,000 1,05,000 26,250 26,250

Adjustment entry will be:

                                                            ∗ As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of admission of C is to be written off in new ratio among all partners including new partner, C.

C’s Capital A/c Dr. 26,250 To A’s Capital A/c 17,500 To B’s Capital A/c 8,750

 

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