The balance sheet of A,B and C who were sharing profits and losses in the ratio fo therir capitals stood as follows on 31st December, 2005

LIABILITIES

Sundry Creditors: 6,900

Capital Accounts:

A= 20,000

B=15,000

C= 10,000

Total: 51,900

ASSETS

Cash at Banks: 5,500

Sundry Debtors: 5,000

less: provison: 100 =4,900

Stock 8,000

Plant and Machinery: 8,500

Land and Building: 25,000

Total: 51,900

B retires on the above date and the following was agreed upon:

  • That stock be depreciated by 6%
  • That the provision on doubtful debts be brought up to 5% on Debtors.
  • That land and building be appreciated by 20%
  • That a provision of Rs 770 be made in respect of outstanding legal charges.
  • That the goodwill of the entire firm be fised at Rs 10,800 and B's share of goodwill be adjusted into the accounts of A and C who are going to share future pprofits in the ratio of 5:3 (No goodwill account is to be raised)
  • That the entire capital of the firm as newly constituted be fixed at Rs 28,000 between A and C in the proportion of 5:3 (actual cash to be brought in or paid off, as the case may be)

Pass necessary journal entries and show capital Accounts of the partners after transferring B's share to a separate loan account in his name and prepare a Balance Sheet of A and C.

Journal

 

Date

Particulars

L.F.

Debit

Amount

Rs

Credit Amount

Rs

 

Revaluation A/c

Dr.

 

1,400

 

 

To Stock A/c

 

 

 

480

 

To Provision for doubtful debt A/c (250 - 100)

 

 

 

150

 

To Provision for Outstanding Legal Charges A/c

 

 

 

770

 

(Stock depreciated @6% ; Provision for doubtful debt increased by Rs 150 and Liability of Provision for Outstanding legal charges was created)

 

 

 

 

 

 

 

 

 

 

 

Land and Building A/c

Dr.

 

5,000

 

 

To Revaluation A/c

 

 

 

5,000

 

(Land and Building appreciated @ 20%)

 

 

 

 

 

 

 

 

 

 

 

Revaluation A/c

Dr.

 

3,600

 

 

To A’s Capital A/c

 

 

 

1,600

 

To B’s Capital A/c

 

 

 

1,200

 

To C’s Capital A/c

 

 

 

800

 

(Being profits on revaluation distributed in old ratio 4:3:2)

 

 

 

 

 

 

 

 

 

 

 

A’s Capital A/c

Dr.

 

1,950

 

 

C’s Capital A/c

Dr.

 

1,650

 

 

To B’s Capital A/c

 

 

 

3,600

 

(Being goodwill adjusted)

 

 

 

 

 

 

 

 

 

 

 

Bank A/c

Dr.

 

1,350

 

 

To C’s Capital A/c

 

 

 

1,350

 

(Being Cash brought in by the Partner)

 

 

 

 

 

 

 

 

 

 

 

A’s Capital A/c

Dr.

 

2,150

 

 

To Bank A/c

 

 

 

2,150

 

(Being payment made to the Partner)

 

 

 

 

 

 

 

 

 

 

       

 

 

Revaluation Account

Dr.

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Stock A/c

480

Land and Building A/c

5,000

Provision for Doubtful Debts A/c

150

 

 

Provision for Outstanding Legal Charges A/c

770

 

 

To Profit on Revaluation transferred to:

 

 

 

A

1,600

 

 

 

B

1,200

 

 

 

C

800

3,600

 

 

 

5,000

 

5,000

 

 

 

 

 

Partners’ Capital Account

Dr.

Cr.

Particulars

A

B

C

Particulars

A

B

C

B’s Loan A/c

 

19,800

 

Balance b/d

20,000

15,000

10,000

B’s Capital A/c

1,950

 

1,650

Revaluation A/c (Profit)

1,600

1,200

800

Balance c/d

19,650

 

9,150

A’s Capital A/c

 

1,950

 

 

 

 

 

C’s Capital A/c

 

1,650

 

 

21,600

19,800

10,800

 

21,600

19,800

10,800

Bank A/c

2,150

  •  
  •  

Balance b/d

19,650

  •  

9,150

Balance c/d

17,500

 

10,500

Bank A/c

  •  
  •  

1,350

 

19,650

  •  

10,500

 

19,650

  •  

10,500

 

 

 

 

 

 

 

 

 

Balance Sheet (after B’s retirement)

as at 31st December, 2005

Liabilities

Amount

Rs

Assets

Amount

Rs

Creditors

6,900

Land and Building (25,000 + 5,000)

30,000

Provision for Outstanding Legal Charges

770

Plant and Machinery

8,500

B’s Loan

19,800

Debtors

5,000

 

Capital A/c :

 

Less: Provision for doubtful debt

(250)

4,750

A

17,500

 

Stock

7,520

C

10,500

28,000

Cash at Bank (5,500 + 1,350 – 2,150)

4,700

 

55,470

 

55,470

 

 

 

 

 

Working Notes

 

WN 1 Calculation of Gaining Ratio 

Old Ratio (A, B and C) = 20,000 :15,000 :10,000

  4:3:2

New Ratio (A and C) = 5:3

Gaining Ratio = New Ratio – Old Ratio

 

Gaining Ratio = 13:11

 

WN2 Adjustment of Goodwill

Total Goodwill of the Firm = 10,800

It is to be borne by Gaining partners in their Gaining Ratio i.e. 13:11

A’s Share =

C’s Share =

 

WN3 Adjustment of Capital

Total Capital of New firm is fixed at Rs 28,000

Particulars

A

C

New Capital Balance

17,500

10,500

Adjusted Old Capital Balance

19,650

9,150

Cash paid/brought in by the partner

(2,150)

1,350

 

 

 

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