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Question
Naresh, Dhruv and Azeem are partners sharing profits in the ratio of 5:3:7.
Naresh retires from the firm. Dhruv and Azeem decided to share profits in the ratio of 2:3.
The adjusted capital accounts of Dhruv and Azeem at the time of Naresh’s retirement showed the balances of ₹ 33,000 and ₹ 70,500 respectively.
The total amount to be paid to Naresh is ₹ 90,500 which is paid in cash immediately by the firm, the cash being contributed by Dhruv and Azeem in such a way that their capitals become proportionate to their new profit-sharing ratio and the firm maintains a minimum cash balance of ₹ 5,000 from its existing balance of ₹ 20,000.
You are required to pass journal entries to record:
- Payment made to the retiring partner
- Cash brought in by the remaining partners to pay off the retiring partner
Solution
Journal Entries
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| Naresh's Capital A/c Dr. To Cash A/c (Being cash paid) |
90,500 | 90,500 | ||
| Cash A/c Dr. To Dhruv's Capital A/c To Azeem's Capital A/c (Being cash brought in) |
75,500 | 38,600 36,900 |
Working Note:
(A) Calculation of Total Capital of the firm after Naresh's retirement:
(i) Balances of Capital A/c of Dhruv and Azeem after all adjustments:
| (a) Dhruv | 33,000 | 1,03,500 |
| (b) Azeem | 70,500 |
(ii) Shortage of cash to be brought in by Dhruv and Azeem in order to make payment to Naresh = 75,500*
Total Capital of New firm [Dhruv and Azeem (i) + (ii)] = 1,79,000
*Shortage of cash = Amount Payable to Naresh - Existing cash + Minimum cash
= 90,500 - 20,000 + 5,000 = 75,500*
(B) Calculation of cash to be brought in (Paid off) by Dhruv and Azeem:
| Dhruv (₹) | Azeem (₹) | ||
| (a) | New capital (1,79,000 in the ratio 2 : 3) | 71,600 | 1,07,400 |
| (b) | Existing Capital Amount to be brought in [Paid off (a - b)] |
33,000 | 70,500 |
| 38,600 | 36,900 |
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