A and B were partners in a firm and sharing profit and loss in the ratio of 3:2. Their Balance sheet as on 31 December 2022 was as follows:
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital A/c's: A 30,000, B 25,000 | 55,000 | Plant & Machinery | 50,000 |
| Creditors | 25,000 | Inventory | 20,000 |
| Bills Payables | 20,000 | Debtors 20,000 Less: Provision for doubtful debts 5,000 | 15,000 |
| General Reserve | 5,000 | Cash | 20,000 |
| Total | 1,05,000 | Total | 1,05,000 |
On 1st January 2023 they decided to admit C as a new partner for 1/4th share in the profits of the firm on the following terms:
- C brought ₹ 20,000 as his capital and ₹ 10,000 as his share of goodwill.
- Plant & Machinery was valued at ₹ 55,000 and inventory at ₹ 18,000.
- Provision for doubtful debts will be at ₹ 3,750. Prepare Revaluation Account and Partners' Capital Account on the basis of above information.
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Start your 14-day free trial to unlock the full solution →The Revaluation Account shows a profit of ₹4,250 (shared 3:2), and after adding General Reserve and C's goodwill premium, the final capitals are A ₹41,550, B ₹32,700, C ₹20,000.
Revaluation adjustments:
- Plant & Machinery revalued UP from ₹50,000 to ₹55,000 → gain of ₹5,000
- Inventory revalued DOWN from ₹20,000 to ₹18,000 → loss of ₹2,000
- Provision for Doubtful Debts reduced from ₹5,000 to ₹3,750 → gain of ₹1,250 (less provision needed means a gain)
Revaluation Account
| Dr. | Amount (₹) | Cr. | Amount (₹) |
|---|---|---|---|
| To Inventory A/c (Decrease in value) | 2,000 | By Plant & Machinery A/c (Increase in value) | 5,000 |
| To Profit transferred to: A (3/5×4,250) 2,550; B (2/5×4,250) 1,700 | 4,250 | By Provision for Doubtful Debts A/c (Decrease in provision) | 1,250 |
| Total | 6,250 | Total | 6,250 |
Revaluation Profit = 6,250 − 2,000 = ₹4,250, shared by A:B in old ratio 3:2 → A = ₹2,550; B = ₹1,700
Goodwill brought in by C: C pays ₹10,000 as his share of goodwill in cash, in addition to his capital of ₹20,000. Since no new profit-sharing ratio among A and B is specified beyond C's 1/4 share, A and B continue to share the remaining 3/4 in their old ratio, i.e., the sacrificing ratio is the same as the old ratio, 3:2. So the ₹10,000 goodwill is credited to A and B in 3:2 → A = ₹6,000; B = ₹4,000.
Partners' Capital Accounts
| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|---|---|---|---|
| To Balance c/d | 41,550 | 32,700 | 20,000 | By Balance b/d | 30,000 | 25,000 | — |
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