Question

The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of `6/14 : 5/14 : 3/14` respectively.

 

Liabilites			Amount (Rs)	Assets	Amount (Rs)
Creditors			9,000	Land and Buildings	24,000
Bills Payable			3,000	Furniture	3,500
Capital Accounts				Stock	14,000
	Arun	19,000		Debtors	12,600
	Bablu	16,000		Cash	900
	Chetan	8,000	43,000
			55,000		55,000

They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms:
(a) that Deepak should bring in Rs 4,200 as goodwill and Rs 7,000 as his Capital;
(b) that furniture be depreciated by 12%;
(c) that stock be depreciated by 10% ;
(d) that a Reserve of 5% be created for doubtful debts;
(e) that the value of land and buildings having appreciated be brought upto Rs 31,000;
(f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be.

Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.

Answer 1

Books of Arun, Bablu, Chetan and Deepak Profit and Loss Adjustment Account (Revaluation Account)
Dr.				Cr.
Particulars			Amount Rs		Particulars	Amount Rs
Furniture			420		Land and Buildings	7,000
Stock			1,400
Reserve for Doubtful Debts			630
Profit on revaluation
Profit transferred to
	Arun’s Capital	1,950
	Bablu’s Capital	1,625
	Chetan’s Capital	975	4,550
			7,000			7,000

 

Cash Account
Dr.		Cr.
Particulars	Amount Rs		Particulars	Amount Rs
Balance b/d	900		Arun’s Capital	1,750
Chetan’s Capital	625		Bablu’s Capital	1,625
Deepak’s Capital	7,000		Balance c/d	9,350
Premium for Goodwill	4,200
	12,725			12,725

  

Balance Sheet
Liabilities			Amount (Rs)	Assets		Amount (Rs)
Creditors			9,000	Land and Buildings		31,000
Bills Payable			3,000	Furniture		3,080
Capital Account				Stock		12,600
	Arun	21,000		Debtor	12,600
	Bablu	17,500		Less: Reserve for Doubtful Debt	630	11,970
	Chetan	10,500		Cash		9,350
	Deepak	7,000	56,000
			68,000			68,000

Working Note: 1)

Partner’s Capital Account
Dr.					Cr.
Particulars	Arun	Bablu	Chetan	Deepak	Particulars	Arun	Bablu	Chetan	Deepak
Bank	1,750	1,625			Balance b/d	19,000	16,000	8,000
Balance c/d	21,000	17,500	10,500	7,000	Cash A/c				7,000
					Premium for goodwill	1,800	1,500	900
					Revaluation	1,950	1,625	975
					Bank			625
	22,750	19,125	10,500	7,000		22,750	19,125	10,500	7,000

2) Calculation of New Profit Sharing Ratio

Deepak's Share = `1/8`

Remaining Share = 1 - `1/8` = `7/8`

Arun's New Share = `6/14 xx 7/8 = 42/112`

Bablu's New Share = `5/14 xx 7/8 = 35/112`

Chetan's New Share = `3/14 xx 7/8 = 21/112`

New Profit sharing ratio of Arun, Bablu, Chetan and Deepak

= `42/112 : 35/112 : 21/112 or 42/112 : 35/112 : 21/112 : 14/112`

= 42 : 35 : 21 : 14 or 6 : 5 : 3 : 2

3) Calculation of capital of Arun, Bablu, and Chetan in the new firm
Deepak bring Rs 7,000 for  `1/8` th share of profit.

Hence total capital of the new firm = 7,000 x `8/1` = 56,000

Arun's Capital = 56,000 x `6/16` = 21,000

Bablu's Capital = 56,000 x `5/16` = 17,500

Chetan's Capital = 56,000 x `3/16` = 10,500