Q.A, B and C were partners in a firm sharing profits and losses in the ratio of 5:3:2 respectively. A died on 28th February 2022. The Balance Sheet on that date was as follows:
Liabilities (₹): A's capital 12,000; B's capital 16,000; C's capital 12,000; Contingency Reserve 12,000; Creditors 20,000; Employees Provident Fund 2,000. Total 74,000.
Assets (₹): Goodwill 6,000; Machinery 35,000; Furniture 6,000; Stock 9,000; Debtors 15,000; Cash 3,000. Total 74,000.
On A's death, the assets and liabilities were revalued as follows:
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Start your 14-day free trial to unlock the full solution →A's death triggers: (i) a Revaluation Account showing a net LOSS of ₹5,500, shared 5:3:2; (ii) existing goodwill (₹6,000) written off in the old ratio, and A's share of the revalued goodwill (₹21,000) credited to him by debiting B and C in their gaining ratio 3:2; (iii) Contingency Reserve (₹12,000) distributed in the old ratio; and (iv) A's final capital balance of ₹22,750 transferred to his Executor's Account. The resulting Balance Sheet of B and C totals ₹77,500.
1) Revaluation Account
Dr. side: To Provision for Doubtful Debts (10% of 15,000) ₹1,500; To Provision for Taxation ₹15,000. Total Dr. = ₹16,500
Cr. side: By Machinery A/c (45,000 − 35,000) ₹10,000; By Furniture A/c (7,000 − 6,000) ₹1,000; By Loss transferred to Capital A/cs — A (5/10) ₹2,750, B (3/10) ₹1,650, C (2/10) ₹1,100 = ₹5,500. Total Cr. = ₹16,500
Net loss on revaluation = ₹16,500 − ₹11,000 = ₹5,500, shared by A, B, C in the OLD ratio 5:3:2 (A ₹2,750, B ₹1,650, C ₹1,100) — revaluation happens in the old ratio because it relates to the period before A's death.
2) Goodwill treatment
- Existing goodwill of ₹6,000 (already in the books) is written off first, in the old ratio 5:3:2: A ₹3,000, B ₹1,800, C ₹1,200 (debited to their Capital A/cs).
- Goodwill of the firm is now revalued at ₹21,000 on A's death. A's share (5/10) = ₹10,500, which must be credited to A and recovered from the remaining partners B and C in their gaining ratio. Since B and C continue to share profits between themselves in their old mutual ratio (3:2), their gaining ratio is 3:2.
- B pays: 10,500 × 3/5 = ₹6,300
- C pays: 10,500 × 2/5 = ₹4,200
B's Capital A/c Dr. 6,300
C's Capital A/c Dr. 4,200
To A's Capital A/c 10,500
3) Contingency Reserve (₹12,000) — a free reserve, distributed to ALL partners in the old ratio 5:3:2: A ₹6,000, B ₹3,600, C ₹2,400.
4) Partners' Capital Accounts
| Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|
| Balance b/d | 12,000 | 16,000 | 12,000 |
| Add: Contingency Reserve | 6,000 | 3,600 | 2,400 |
| Add: Goodwill compensation | 10,500 | — | — |
| Less: Existing goodwill written off | (3,000) | (1,800) | (1,200) |
| Less: Share of revaluation loss | (2,750) | (1,650) | (1,100) |
| Less: Goodwill compensation paid | — | (6,300) | (4,200) |
| Balance c/d | 22,750 | 9,850 | 7,900 |
| … |
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