Given below is the Balance Sheet of A and B, who are carrying on partnership business as on March 31, 2017. A and B share profits in the ratio of 2:1.
Balance Sheet of A and B as at March 31, 2017
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Bills Payable | 10,000 | Cash in Hand | 10,000 |
| Sundry Creditors | 58,000 | Cash at Bank | 40,000 |
| Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 |
| Capital A | 1,80,000 | Stock | 40,000 |
| Capital B | 1,50,000 | Plant and Machinery | 1,00,000 |
| Building | 1,50,000 | ||
| Total | 4,00,000 | Total | 4,00,000 |
C is admitted as a partner on the date of the balance sheet on the following terms:
- C will bring in ₹1,00,000 as his capital and ₹60,000 as his share of goodwill for 1/4 share in profits.
- Plant is to be appreciated to ₹1,20,000 and the value of buildings is to be appreciated by 10%.
- Stock is found overvalued by ₹4,000.
- A provision for doubtful debts is to be created at 5% of debtors.
- Creditors were unrecorded to the extend of ₹1,000.
Record revaluation Account, partners' capital accounts, and the Balance Sheet of the constituted firm after admission of the new partner.
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Start your 14-day free trial to unlock the full solution →Revaluation yields a ₹27,000 profit (A ₹18,000 : B ₹9,000, old 2:1). C's ₹60,000 goodwill goes to A ₹40,000 : B ₹20,000. Final capitals A ₹2,38,000, B ₹1,79,000, C ₹1,00,000; the reconstituted Balance Sheet totals ₹5,88,000.
Concept
On admission, assets and liabilities are restated to fair value through a Revaluation Account so that the incoming partner neither gains from hidden reserves nor bears past losses. Its net balance — a ₹27,000 profit here — is shared by the old partners in their old ratio (2:1). The ₹60,000 premium C pays for goodwill compensates the sacrificing partners, and because A and B surrender C's 1/4 share in their existing 2:1 proportion, the sacrificing ratio is also 2:1. This is a classic NCERT Class 12 Accountancy revaluation-and-goodwill problem on admission of a partner.
Working Notes
- Goodwill: ₹60,000 credited to A and B in 2:1 → A ₹40,000, B ₹20,000.
- Revaluation gains: Plant ₹1,20,000 − ₹1,00,000 = ₹20,000; Building 10% of ₹1,50,000 = ₹15,000.
- Revaluation losses: Stock overvalued ₹4,000; Provision for doubtful debts 5% of ₹60,000 = ₹3,000; unrecorded Creditors ₹1,000.
- Net profit: gains ₹35,000 − losses ₹8,000 = ₹27,000 → A ₹18,000, B ₹9,000.
- Cash at Bank: ₹40,000 + ₹1,00,000 capital + ₹60,000 goodwill = ₹2,00,000.
Solution
Revaluation Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Stock in Hand | 4,000 | By Plant and Machinery | 20,000 |
| To Provision for Doubtful Debts | 3,000 | By Buildings | 15,000 |
| To Creditors (unrecorded) | 1,000 | ||
| To Profit transferred — A's Capital | 18,000 | ||
| To Profit transferred — B's Capital | 9,000 | ||
| Total | 35,000 | Total | 35,000 |
Partners' Capital Accounts
| Date | Particulars | A (₹) | B (₹) | C (₹) | Date | Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|---|---|---|---|---|---|
| 2017 Mar 31 | Balance c/d | 2,38,000 | 1,79,000 | 1,00,000 | 2017 Mar 31 | Balance b/d | 1,80,000 | 1,50,000 | — |
| Bank | — | — | 1,00,000 | ||||||
| Goodwill | 40,000 | 20,000 | — | ||||||
| Revaluation (Profit) | 18,000 | 9,000 | — | ||||||
| Total | 2,38,000 | 1,79,000 | 1,00,000 | Total | 2,38,000 | 1,79,000 | 1,00,000 |
Balance Sheet of A, B and C as on March 31, 2017 (after C's admission)
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Bills Payable | 10,000 | Cash in Hand | 10,000 |
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