Q.a. The Balance Sheet of A and B sharing profits and losses in the ratio of 3:1 is given below:
BALANCE SHEET of A and B
Liabilities (₹): A's capital 6,000; B's capital 2,000; Creditors 1,000; Workmen's Compensation Fund 2,000; Reserve 4,000; Employees Provident Fund 1,000. Total 16,000.
Assets (₹): Bank 1,000; Debtors 6,000; Stock 3,000; Investment 5,000; Goodwill 1,000. Total 16,000.
C was admitted for ⅖th share in future profits on the following terms:
Prepare the Revaluation A/C, Partners' Capital A/C and the Balance Sheet of the new firm.
Or
b. The following is the Balance Sheet of X and Y as on 31.3.2020: Balance Sheet of X and Y as on 31st March, 2020
Liabilities (₹): Creditors & Bills Payable 38,000; Loan from Mrs.X 5,000; Loan from Mrs.Y 10,000; Workmen's Compensation Reserve 10,000; Fixed Assets Replacement Reserve 1,000; X's Capital 10,000; Y's Capital 10,000. Total 84,000.
Assets (₹): Cash & Bank Balance 8,500; Stock 5,000; Investments 10,000; Debtors 20,000 Less: Provision 2,000 = 18,000; Fixed Assets 39,000; Profit & Loss A/C 3,000; Advertisement Suspense A/C 500. Total 84,000. The firm was dissolved on the same date and the following transactions took place:
Prepare Realisation Account, Cash & Bank Account and Partner's Capital Account.
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Start your 14-day free trial to unlock the full solution →Both alternatives are solved in full below — (a) admission of C, (b) dissolution of X & Y's firm.
(a) Admission of C (assuming, as the question gives no other information, that A and B continue to share the remaining profit between themselves in their old ratio 3:1):
C is admitted for 2/5th share, so the remaining 3/5th share continues to be shared by A and B in their old ratio 3:1 → A's new share = 3/5×3/4 = 9/20; B's new share = 3/5×1/4 = 3/20; C's share = 8/20. New ratio A:B:C = 9:3:8. Sacrificing ratio of A:B works out to the same 3:1 as the old ratio (since both continue in proportion).
Revaluation Account (only item: fall in value of Investment from ₹5,000 to ₹4,500 = loss of ₹500, shared by A and B in old ratio 3:1 → A ₹375, B ₹125):
Dr. To Investment A/c 500 | Cr. By Loss transferred to A's Capital 375, to B's Capital 125. Total 500 = 500.
Workmen's Compensation Fund ₹2,000, actual claim only ₹1,000 → excess ₹1,000 belongs to old partners (old ratio 3:1 → A ₹750, B ₹250); the claim amount ₹1,000 becomes a liability 'Provision for Workmen's Compensation Claim' in the new Balance Sheet.
Existing Goodwill ₹1,000 in the old books is written off in old ratio 3:1 (A ₹750, B ₹250), since 'goodwill is not to appear in the new firm at all'.
C's premium for goodwill ₹2,000 (brought in cash) is credited directly to A and B in the sacrificing ratio 3:1 (A ₹1,500, B ₹500) — again because goodwill is not to remain in the books.
Reserve ₹4,000 (a free reserve) is distributed to A and B in old ratio 3:1 (A ₹3,000, B ₹1,000).
C brings ₹8,000 as capital (separately from the ₹2,000 goodwill premium) — both in cash/bank.
Partners' Capital Accounts:
- A: Opening 6,000 + Reserve 3,000 + W.C.Fund excess 750 + Goodwill premium 1,500 − Goodwill written off 750 − Revaluation loss 375 = ₹10,125
- B: Opening 2,000 + Reserve 1,000 + W.C.Fund excess 250 + Goodwill premium 500 − Goodwill written off 250 − Revaluation loss 125 = ₹3,375
- C: brings in ₹8,000 as capital
Bank Account: Opening 1,000 + C's capital 8,000 + C's premium 2,000 = ₹11,000
Balance Sheet of A, B and C (new firm):
Liabilities: Creditors 1,000; Provision for Workmen's Compensation Claim 1,000; Employees' Provident Fund 1,000; Capitals — A 10,125, B 3,375, C 8,000 (total 21,500). Total = ₹24,500
Assets: Bank 11,000; Debtors 6,000; Stock 3,000; Investments (revalued) 4,500. Total = ₹24,500 ✓ Balanced.
(b) Dissolution of X & Y's firm (as the question does not state a profit-sharing ratio and capitals are equal, X and Y are assumed to share profits/losses EQUALLY — noted honestly as an assumption):
P&L A/c (debit balance, ₹3,000) and Advertisement Suspense A/c (₹500) are accumulated losses — written off directly to partners' capital in equal shares: X ₹1,750, Y ₹1,750 (not routed through Realisation A/c).
Workmen's Compensation Reserve ₹10,000 and Fixed Assets Replacement Reserve ₹1,000 (free reserves, no claim stated) are distributed equally: X ₹5,500, Y ₹5,500.
Realisation Account — all assets (except cash/bank) transferred at book value (Dr.): Stock 5,000, Investments 10,000, Debtors 20,000, Fixed Assets 39,000 (total 74,000); all external liabilities/provisions transferred (Cr.): Provision for Doubtful Debts 2,000, Creditors & Bills Payable 38,000, Loan from Mrs. X 5,000, Loan from Mrs. Y 10,000 (total 55,000).
Then the actual settlements:
- X pays off Mrs. X's Loan personally: Realisation Dr 5,000 / X's Capital Cr 5,000.
- Loan from Mrs. Y (not otherwise specified) is assumed repaid in cash at book value: Realisation Dr 10,000 / Bank Cr 10,000.
- Creditors & Bills Payable ₹38,000 paid at 6% discount for 1 month = 38,000×6%×1/12=₹190 discount → paid ₹37,810: Realisation Dr 37,810 / Bank Cr 37,810.
- X takes stock (₹5,000 book value) at 20% discount = ₹4,000: X's Capital Dr 4,000 / Realisation Cr 4,000.
- Y takes half the investment (₹5,000 book value) at 10% discount = ₹4,500: Y's Capital Dr 4,500 / Realisation Cr 4,500.
- Remaining half of investment realised for ₹4,500 (as given): Bank Dr 4,500 / Realisation Cr 4,500. …
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