The Balance Sheet of Mohit and Rohit who shared profits equally, was as follows:
| Balance Sheet as on 31 st March 2021 | ||||
|---|---|---|---|---|
| Liabilities | Amount (₹) | Amount (₹) | Assets | Amount (₹) |
| Bills Payable | 52,000 | Cash | 1,60,000 | |
| Creditors | 48,000 | Stock | 80,000 | |
| Capital Accounts: | 4,80,000 | Plant and Machinery | 1,40,000 | |
| Mohit | 2,00,000 | Debtors | 52,000 | |
| Rohit | 2,80,000 | Furniture | 48,000 | |
| General Reserve | 20,000 | Land and Building | 1,20,000 | |
| 6,00,000 | 6,00,000 | |||
| On 1 | ||||
| st | ||||
| April 2021, Sujit joined the firm as a partner for 1/5th share of future profit on the following terms and conditions: | ||||
| Stock, Plant, and Machinery are to be reduced by 20%. | ||||
| Land and Building is to be valued at ₹ 1,75,000. | ||||
| A provision of 10% is to be created on debtors. | ||||
| Sujit is to bring in ₹ 2,00,000 as capital. | ||||
| Goodwill is valued at ₹ 4,00,000. Sujit is to bring his share of goodwill in cash. | ||||
| Draft the Journal Entries in the books of the firm and show the Profit and Loss Adjustment Account. |
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Start your 14-day free trial to unlock the full solution →Revaluation (P&L Adjustment) shows a profit of ₹5,800, shared equally (₹2,900 each). Sujit's share of goodwill = ₹4,00,000 × 1/5 = ₹80,000 brought in cash along with ₹2,00,000 capital. Goodwill premium and General Reserve are distributed to the old partners Mohit and Rohit in their old (equal) ratio.
Working Note 1 — Profit and Loss Adjustment Account (Revaluation)
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Stock A/c (20% of 80,000) | 16,000 | By Land & Building A/c (1,75,000 − 1,20,000) | 55,000 |
| To Plant & Machinery A/c (20% of 1,40,000) | 28,000 | ||
| To R.D.D. A/c (10% of 52,000) | 5,200 | ||
| To Partners' Capital A/c (Profit): | |||
| Mohit 2,900 | |||
| Rohit 2,900 | 5,800 | ||
| Total | 55,000 | Total | 55,000 |
Profit on revaluation = 55,000 − (16,000 + 28,000 + 5,200) = ₹5,800, shared equally = ₹2,900 each.
Working Note 2 — Sujit's share of goodwill
Goodwill of firm = ₹4,00,000; Sujit's share = 1/5. Share of goodwill = 4,00,000 × 1/5 = ₹80,000, brought in cash.
Working Note 3 — Sacrificing ratio
Old ratio Mohit : Rohit = 1 : 1. Sujit takes 1/5; remaining 4/5 shared equally, so new ratio = Mohit 2/5 : Rohit 2/5 : Sujit 1/5. Sacrifice = Old − New = Mohit (1/2 − 2/5 = 1/10), Rohit (1/2 − 2/5 = 1/10) → sacrificing ratio 1 : 1. So goodwill ₹80,000 is credited ₹40,000 each.
Journal Entries in the books of the firm
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Profit & Loss Adjustment A/c ..... Dr | 49,200 | |
| To Stock A/c | 16,000 | |
| To Plant & Machinery A/c | 28,000 | |
| To R.D.D. A/c | 5,200 | |
| (Being decrease in value of assets and provision on debtors recorded) | ||
| Land & Building A/c ..... Dr | 55,000 | |
| To Profit & Loss Adjustment A/c | 55,000 | |
| (Being increase in value of Land & Building recorded) | ||
| Profit & Loss Adjustment A/c ..... Dr | 5,800 | |
| To Mohit's Capital A/c | 2,900 | |
| To Rohit's Capital A/c | 2,900 | |
| (Being profit on revaluation shared equally) | ||
| General Reserve A/c ..... Dr | 20,000 |
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