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Do It Yourself · Q1
Q.

Vijay, Ajay and Mohan started a computer-hardware business in partnership, introducing capitals of ₹50,000, ₹30,000 and ₹20,000 respectively, sharing profits in the ratio 4 : 2 : 1. On March 31, 2017, Ajay retires and the position of assets and liabilities is as follows:

LiabilitiesAmount (₹)AssetsAmount (₹)
Capital Accounts:Goodwill56,000
Vijay1,80,000Land and Buildings1,20,000
Ajay1,20,000Machinery1,59,000
Mohan1,00,000Motor Van31,000
Bills Payable12,000Stock90,000
General Reserve42,000Debtors66,000
Creditors90,000Cash at bank22,000
Total5,44,000Total5,44,000

On the date of retirement the following adjustments were to be made:

  1. Firm's goodwill was valued at ₹1,48,000.
  2. Assets and liabilities are to be valued as under: Stock ₹72,000; Land and Buildings ₹1,35,600; Debtors ₹63,000; Machinery ₹1,50,000; Creditors ₹84,000.
  3. Vijay to bring ₹1,20,000 and Mohan ₹30,000 as additional capital.
  4. Ajay was to be paid ₹97,200 in cash and the balance of his Capital Account transferred to his Loan Account.

Work out the amount due to Ajay and state how you will settle his account.

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Ajay's capital of ₹1,20,000 is adjusted for the goodwill write-off (−₹16,000), his reserve share (+₹12,000), his revaluation loss (−₹2,400) and his share of the firm's goodwill (+₹42,285.71), giving ₹1,55,885.71 due. He is paid ₹97,200 in cash and the remaining ₹58,685.71 goes to his Loan Account.

Working Notes

1. Existing goodwill ₹56,000 is written off among all partners in the old ratio 4 : 2 : 1: Vijay ₹32,000, Ajay ₹16,000, Mohan ₹8,000.

2. Revaluation: losses — Stock ₹18,000, Debtors ₹3,000, Machinery ₹9,000; gains — Land & Buildings ₹15,600, Creditors ₹6,000. Net loss = ₹30,000 − ₹21,600 = ₹8,400 (4 : 2 : 1 → Vijay ₹4,800, Ajay ₹2,400, Mohan ₹1,200).

3. General Reserve ₹42,000 (4 : 2 : 1): Vijay ₹24,000, Ajay ₹12,000, Mohan ₹6,000.

4. Goodwill of the firm ₹1,48,000; Ajay's share = 2/7 × ₹1,48,000 = ₹42,285.71, borne by Vijay and Mohan in their gaining ratio (old mutual 4 : 1) — Vijay ₹33,828.57 and Mohan ₹8,457.14.

Ajay's Capital Account

ParticularsAmount (₹)ParticularsAmount (₹)
To Goodwill A/c (write-off)16,000By Balance b/d1,20,000
To Revaluation A/c (loss)2,400By General Reserve12,000
To Cash A/c97,200By Vijay's Capital A/c (goodwill)33,828.57
To Ajay's Loan A/c58,685.71By Mohan's Capital A/c (goodwill)8,457.14
Total1,74,285.71Total1,74,285.71

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