Question

Mr. Rajeev and Mr. Sanjeev were in partnership, sharing profit and losses in the proportion of 3:1 respectively. Their Balance Sheet as on 31st March, 2020 was as follows:

Balance Sheet as on 31st March. 2020
Liabilities	Amt. (₹)	Assets	Amt. (₹)
Capital:	1,80,000	Building	1,80,000
Mr. Rajeev		Stock	1,20,000
Mr. Sanjeev	1,50,000	Debtors	93,000
General Reserve	12,000	Cash	12,000
Sundry Creditors	63,000
	4,05,000		4,05,000

Mr. Mahesh is admitted as a partner in the firm on the following terms:

1. Mahesh shall have `1/4`th share in profit of the firm.
2. He shall bring in cash ₹ 1,20,000 as his capital and ₹ 60,000 as his share of goodwill.
3. Building overvalued by ₹ 24,000 and the stock is undervalued by 25% in the books.
4. Provide reserves for the doubtful debts ₹ 2,400 on debtors.

You are required to prepare: Revaluation Account, Capital Account of partners and Balance Sheet of the firm after admission of Mr. Mahesh.

Answer 1

In the books of Partnership Firm
Dr.	Revaluation A/c				Cr.
Particulars	Amt. (₹)	Amt. (₹)	Particulars	Amt. (₹)	Amt. (₹)
To Building A/c (Overvaluation)		24,000	By Stock A/c (Increase in value)		40,000
To R.D.P. A/c (Newly created)		2,400
To Partners' Capital A/cs: (Profit)
Rajeev	10,200
Sanjeev	3,400	13,600
		40,000			40,000

 

Dr.	Partner's Capital Accounts						Cr.
Particulars	Rajeev (₹)	Sanjeev (₹)	Mahesh (₹)	Particulars	Rajeev (₹)	Sanjeev (₹)	Mahesh (₹)
				By Balance b/d	1,80,000	1,50,000	-
				By General Reserve (Transfer)	9,000	3,000	-
				By Cash A/c (Capital)	-	-	1,20,000
				By Goodwill A/c (Distributed)	45,000	15,000	-
To Balance c/d	2,44,200	1,71,400	1,20,000	By Revaluation A/c (Profit)	10,200	3,400	-
	2,44,200	1,71,400	1,20,000		2,44,200	1,71,400	1,20,000

 

New Balance Sheet as on 1st April, 2020
Liabilities	Amt. (₹)	Amt. (₹)	Assets	Amt. (₹)	Amt. (₹)
Partners Capital A/cs:			Building	1,80,000	1,56,000
Rajeev	2,44,200	5,35,600	Less: Overvaluation	24,000
Sanjeev	1,71,400		Stock	1,20,000	1,60,000
Mahesh	1,20,000		Add Undervaluation:	40,000
			Debtors	93,000	90,600
			Less: R.D.D.	2,400
			Cash		1,92,000
		5,98,600			5,98,600

 

Working Notes:

1. Revised value of Building = (Book Value) − Overvaluation = 1,80,000 − 24,000 = ₹ 1,56,000
   Decrease in the value of building = 1,80,000 − 1,56,000 = ₹ 24,000
   
2. Revised value of Stock = (Book Value) × Undervaluation = 1,20,000 `xx(100/100-25) = 1,20,000 xx 100/75` = ₹ 1,60,000
   Increase in the value of stock = Revised value − Book value = 1,60,000 − 1,20,000 − 40,000
3. Distribution of Goodwill between old partners:
   Mr. Rajeev = Goodwill × Old Ratio = 60,000 × `3/4` = ₹ 45,000
   Mr. sanjeev = 60,000 × `1/4` = ₹ 15,000
4. Cash balance at the end = 12,000 + 1,20,000 + 60,000 = ₹ 1,92,000