Page No 5.91:

Question 56:

(a) X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. They admit W as partner for 1/6th share. Following is the extract of the Balance Sheet on the date of admission:

Liabilities

Assets

General Reserve
Contingency Reserve
Profit and Loss A/c

36,000

6,000

18,000

Advertisement Suspense A/c

24,000

  Pass necessary Journal entries.
(b) Give the Journal entry to distribute 'Workmen Compensation Reserve' of   ` 72,000 at the time of admission of Z, when there is no claim against it. The firm has two partners X and Y.
(c) Give the Journal entry to distribute 'Workmen Compensation Reserve' of   ` 72,000 at the time of admission of Z, when there is claim of   ` 48,000 against it. The firm has two partners X and Y .
(d) Give the Journal entry to distribute 'Investment Fluctuation Reserve' of   ` 24,000 at the time of admission of Z, when Investment (Market Value   ` 1,10,000) appears at   ` 1,20,000. The firm has two partners X and Y.
(e) Give the Journal entry to distribute 'General Reserve' of   ` 4,800 at the time of admission of Z, when 20% of General Reserve is to be transferred to Investment Fluctuation Reserve. The firm has two partners X and Y .
(f) A, B and C were partners sharing profits and losses in the ratio of 6 : 3 : 1. They decide to take D into partnership with effect from 1st April, 2019. The new profit-sharing ratio between A, B, C and D will be 3 : 3 : 3 : 1. They also decide to record the effect of the following without affecting their book values, by passing a single adjustment entry:

	Book Values `
General Reserve	1,50,000
Contingency Reserve	60,000
Profit and Loss A/c (Cr.)	90,000
Advertisement Suspense A/c (Dr.)	1,20,000

Pass the necessary single adjustment entry, through the Partner's Current Account.

Answer:

Journal
Date	Particulars		L.F.	Debit Amount `	Credit Amount `
2019
April 1	General Reserve A/c	Dr.		36,000
	Contingency Reserve A/c	Dr.		6,000
	Profit & Loss A/c	Dr.		18,000
	To X’s Capital A/c				30,000
	To Y’s Capital A/c				18,000
	To Z’s Capital A/c				12,000
	(Reserves distributed)

	X’s Capital A/c	Dr.		12,000
	Y’s Capital A/c	Dr.		7,200
	Z’s Capital A/c	Dr.		4,800
	To Advertisement Suspense A/c				24,000
	(Advertisement Suspense distributed)

April 1	General Reserve A/c	Dr.		84,000
	To A’s Capital A/c				48,000
	To B’s Capital A/c				36,000
	(General Reserve distributed)

	A’s Capital A/c	Dr		4,800
	B’s Capital A/c	Dr.		3,600
	To Profit & Loss A/c				8,400
	(Profit & Loss A/c distributed)

April 1	Workmen Compensation Reserve A/c	Dr.		72,000
	To X’s Capital A/c				36,000
	To Y’s Capital A/c				36,000
	(Workmen Compensation Reserve distributed)

April 1	Workmen Compensation Reserve A/c	Dr.		72,000
	To Workmen Compensation Claim A/c				48,000
	To X’s Capital A/c				12,000
	To Y’s Capital A/c				12,000
	(Surplus Workmen Compensation Reserve distributed)

April 1	Investment Fluctuation Reserve A/c	Dr.		24,000
	To Investment A/c				10,000
	To X’s Capital A/c				7,000
	To Y’s Capital A/c				7,000
	(Surplus Investment Fluctuation Reserve distributed)

April 1	General Reserve A/c	Dr.		4,800
	To Investment Fluctuation Reserve A/c				960
	To X’s Capital A/c				1,920
	To Y’s Capital A/c				1,920
	(Surplus General Reserve distributed)

April 1	C’s Current A/c	Dr.		36,000
	D’s Current A/c	Dr.		18,000
	To A’s Current A/c				54,000
	(Adjustment entry made)

Working Notes:

WN1: Calculation of Sacrifice or Gain

A :B :C=6:3:1 (Old Ratio)

A :B :C :D:=3:3:3:1 (New Ratio)

Sacrificing (or Gaining) Ratio = Old Ratio - New Ratio

A's share=610−310=6−310=310 (Sacrifice)

B's share=310−310=0

C's share=110−310=1−310=−210 (Gain)

D's share=0−110=−110 (Gain)

WN2: Calculation of Net Effect

General Reserve	1,50,000
Contingency Reserve	60,000
Profit and Loss A/c (Cr.)	90,000
	3,00,000
Less: Advertisement Suspense A/c (Dr.)	1,20,000
	1,80,000

WN 3: Adjustment of Net Effect
Amount credited in A's Current A/c = 1,80,000×310= ` 54,000

Amount debited in C's Current A/c = 1,80,000×210= ` 36,000

Amount debited in D's Current A/c = 1,80,000×110=  ` 18,000

Page No 5.92:

Question 57:

Answer:

Journal
Date	Particulars		L.F.	Debit Amount `	Credit Amount `

	Cash A/c	Dr.		3,3000
	To W’s capital A/c To Premium for Goodwill A/c				1,8000 1,5000
	(Being C’s brought his share of goodwill and capital in cash)

	Premium for Goodwill A/c	Dr.		1,5000
	To X’s Capital A/c To Y’s Capital A/c To Z’s Capital A/c				5000 5000 5000
	(Being A’s share of Goodwill transferred in their sacrificing Ratio)
	Revaluation A/c Dr. To Motor A/c To Furniture A/c (Being decrease in value assets transferred to Revaluation a/c)			2700	2500 200
	X’s Capital A/c Dr. Y’s Capital A/c Dr. Z’s Capital A/c Dr. To Revaluation A/c (Being loss of Revaluation of transferred to old partners capital a/c)			900 900 900	2700

Working notes;

WN-1

Memorandum balance sheet is prepared to find out Cash balance.

Liabilities		`	Assets	`
Liabilities		30,000	Cash balance (Balancing figure)	2200
X's Capital	15,000		Motor	1,2000
Y's Capital Z’s Capital	17,500 20,000	5,250	furniture Stock	4000 2,6500
			Debtors	3,7800
		8,250		8,2500

WN-2

Old ratio of X:Y:Z=1;1;1

W is admitted for ¼ share

Let total profit =1

Remaining profit after W’s admission= 1-1/4=3/4

X=3/4×1/3=3/12

Y=3/4×1/3=3/12

Z=3/4×1/3=3/12

W=1/4×3/3=3/12

Therefore share of X, Y , Z and W=3:3:3:3=1:1:1:1

Sacrificing ratio= old –new

X=1/3-1/4=1/12

Y=1/3-1/4=1/12

Z=1/3-1/4=1/12

Sacrificing ratio of X, Y , Z = 1:1:1

WN-4

Particulars

To Motors A/c

To Furniture A/c

2500

200

By Loss

Capital a/c

X=2700×1/3=900

Y=2700×1/3=900

(In old Ratio)

2700

WN-5

Partners’ Capital a/c

Particulars

To ravaluation a/c

To balance c/d

900

19,100

900

21,600

900

24,100

1,8000

By balance b/d

By Cash a/c

By Premium a/c

15,000

5000

17,500

5000

20,000

5000

18,000

20,000

22,500

25,000

18,000

20,000

22,500

25,000

18,000

Page No 5.92:

Question 58:

A and B are carrying on business in partnership and sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as at 31st March, 2019 stood as:


Liabilities		`	Assets	`
Creditors		11,800	Cash	1,500
A's Capital	51,450		Stock	28,000
B's Capital	36,750	88,200	Debtors	19,500
			Furniture	2,500
			Machinery	48,500


		1,00,000		1,00,000

They admit C into partnership on 1st April, 2019 and give him 1/8th share in future profits on the following terms:
(a) Goodwill of the firm be valued at twice the average of the last three years' profits which amounted to ` 21,000; ` 24,000 and ` 25,560.
(b) C is to bring cash for the amount of his share of goodwill.
(c) C is to bring cash ` 15,000 as his capital.
Pass Journal entries recording these transactions, draw out the Balance Sheet of the new firm and determine new profit-sharing ratio.

Answer:

Journal
Date	Particulars		L.F.	Debit Amount `	Credit Amount `
2019 Apr.1	Cash A/c	Dr.		20,880
	To C’s Capital A/c				15,000
	To Premium for Goodwill A/c				5,880
	(C brought capital and share of goodwill)

	Premium for Goodwill A/c	Dr.		5,880
	To A’s Capital A/c				3,528
	To B’s Capital A/c				2,352
	(Premium for Goodwill distributed between A and B in sacrificing ratio i.e. 3:1)

Partners’ Capital Account
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
				Balance b/d	51,450	36,750
				Cash			15,000
Balance c/d	54,978	39,102	15,000	Premium for Goodwill	3,528	2,352
	54,978	39,102	15,000		54,978	39,102	15,000

Balance Sheet after Admission of C
Liabilities		Amount `	Assets	Amount `
Capital:			Cash (1,500 + 20,880)	22,380
A	54,978		Stock	28,000
B	39,102		Debtors	19,500
C	15,000	1,09,080	Furniture	2,500
Creditors		11,800	Machinery	48,500
		1,20,880		1,20,880

Calculation of New Profit Sharing Ratio

	A		B
Old ratio=	3	:	2

C is admitted for 1/8 share of profit
Let combined share of all partners after admission of C be = 1
Combined share of A and B after C’s admission = 1 − C’s share
=1-1/8

=7/8

New ratio= old ratio × combined share of X and Y

A’s	=3/5×7/8
	=21/40
B’s	=2/5×7/8
	=14/40

	X		Y		Z
New profit sharing ratio=	21/40	:	14/40	:	1/8
=	21/40	:	14/40	:	5/40
=	21	:	14	:	5

Working Note-

WN1
Calculation of goodwill

Average profit =21,000+25,000+25,560/3=23,520

Goodwill= Average profit × no. of purchases years’

Goodwill= 23,520×2 =47,040

C‘s of goodwill=47,040×1/8 =5,880

WN2
Distribution of premium of goodwill

A will get =5,880×3/5=3528

B will get =5,880×2/5=2352

Page No 5.93:

Question 59:

Following was the Balance Sheet of A and B who were sharing profits in the ratio of 2 : 1 as at 31st March, 2019:


Liabilities		`	Assets	`
Capital A/cs:			Building	25,000
A	15,000		Plant and Machinery	17,500
B	10,000	25,000	Stock	10,000
Sundry Creditors		32,950	Sundry Debtors	4,850
			Cash in Hand	600


		57,950		57,950

They admit C into partnership on the following terms:
(a) C was to bring ` 7,500 as his capital and ` 3,000 as goodwill for 1/4th share in the firm.
(b) Values of the Stock and Plant and Machinery were to be reduced by 5%.
(c) A Provision for Doubtful Debts was to be created in respect of Sundry Debtor ` 375.
(d) Building was to be appreciated by 10%.
Pass necessary Journal entries to give effect to the arrangements. Prepare Profit and Loss Adjustment Account (or Revaluation Account), Partners' Capital Accounts and Balance Sheet of the new firm.

Answer:

Journal
Date	Particulars		L.F.	Debit Amount `	Credit Amount `

	Profit and Loss Adjustment A/c	Dr.		1,750
	To Stock A/c				500
	To Plant and Machinery A/c				875
	To Reserve for Doubtful Debts A/c				375
	(Decrease in stock and Plant and creation of Reserve for Doubtful Debt transferred to Profit and Loss Adjustment Account)

	Building A/c	Dr.		2,500
	To Profit and Loss Adjustment A/c				2,500
	(Increase in value of Building of transferred to Profit and loss Adjustment Accounts)

	Profit and Loss Adjustment A/c			750
	To A’s Capital A/c				500
	To B’s Capital A/c				250
	(Profit on revaluation of asset and liabilities distributed between A and B in their old ratio)

	Cash A/c	Dr.		10,500
	To C’s Capital A/c				7,500
	To Premium for Goodwill A/c				3,000
	(C brought capital and share of goodwill)

	Premium for Goodwill A/c	Dr.		3,000
	To A’s Capital A/c				2,000
	To B’s Capital A/c				1,000
	(Premium for Goodwill distributed between A and B in their sacrificing ratio i.e 2:1)

Profit and Loss Adjustment Account
Dr.			Cr.
Particulars	Amount `	Particulars	Amount `
Stock	500
Plant and Machinery	875	Building	2,500
Reserve for Doubtful Debts	375
Profit transferred to
A Capital	500
B Capital	250
	2,500		2,500

Partners’ Capital Accounts
Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
				Balance b/d	15,000	10,000
				Cash			7,500
				Premium for Goodwill	2,000	1,000
Balance c/d	17,500	11,250	7,500	Profit and Loss Adjustment (Profit)	500	250
	17,500	11,250	7,500		17,500	11,250	7,500

Balance Sheet as on March 31, 2016 after admission of C
Liabilities		Amount `	Assets		Amounts `

Capital Accounts:			Building (25,000 + 2,500)		27,500
A	17,500		Plant and Machinery (17,500 – 875)		16,625
B	11,250		Stock (10,000 – 500)		9,500
C	7,500	36,250
Sundry Creditors		32,950	Sundry Debtors	4,850
			Less: Provision for D. Debts	375	4,475
			Cash in Hand (600 + 10,500)		11,100
		69,200			69,200

Working Notes:

WN1

	A	B
Sacrificing ratio	2 :	1

WN2
Distribution of Premium for Goodwill (in sacrificing ratio)
A will get =3,000×2/3=2,000

B will get =3,000×1/3=1,000

WN3
Distribution of Profit from Profit and loss Adjustment Account (in old ratio)

A will get =750×2/3=500

B will get =750×1/3=250

Page No 5.93:

Question 60:

Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31st March, 2019. A and B share profits and losses in the ratio of 2 : 1.

BALANCE SHEET OF A AND B as at 31st March, 2019
Liabilities		`	Assets	`
Bills Payable		10,000	Cash in Hand	10,000
Creditors		58,000	Cash at Bank	40,000
Outstanding Expenses		2,000	Sundry Debtors	60,000
Capital A/cs:			Stock	40,000
A	1,80,000		Plant	1,00,000
B	1,50,000	3,30,000	Building	1,50,000
		4,00,000		4,00,000

C is admitted as a partner on 1st April, 2019 on the following terms:
(a) C will bring   ` 1,00,000 as his capital and   ` 60,000 as his share of goodwill for 1/4th share in the profits.
(b) Plant is to be appreciated to   ` 1,20,000 and the value of building is to be appreciated by 10%.
(c) Stock is found overvalued by   ` 4,000.
(d) A provision for doubtful debts is to be created at 5% of sundry debtors.
(e) Creditors were unrecorded to the extent of   ` 1,000.
Pass the necessary Journal entries, prepare the Revaluation Account and Partners' Capital Accounts, and show the Balance Sheet after the admission of C.

Answer:

Journal
Date	Particulars		L.F.	Amount `	Amount `
2019	Bank A/c	Dr.		1,60,000
Mar 31	To C’s Capital A/c				1,00,000
	To Premium for Goodwill A/c				60,000
	(Capital and premium for goodwill brought by C for 1/4 share)

	Premium for Goodwill A/c	Dr.		60,000
	To A’s Capital A/c				40,000
	To B’s Capital A/c				20,000
	(Premium for Goodwill brought transferred to old partners’ capital account in their sacrificing ratio)
	Plant A/c	Dr.		20,000
	Building A/c	Dr.		15,000
	To Revaluation A/c				35,000
	(Increase in value of assets)

	Revaluation A/c	Dr.		8,000
	To Stock				4,000
	To Provision for Doubtful Debts A/c				3,000
	To Creditors A/c (Unrecorded)				1,000
	(Assets and liabilities revalued)

	Revaluation A/c	Dr.		27,000
	To A’s Capital A/c				18,000
	To B’s Capital A/c				9,000
	(Profit on revaluation transferred to old partners)

Revaluation Account
Dr.					Cr.
Particulars		Amount `	Particulars	Amount `
Stock		4,000	Plant	20,000
Provision for Doubtful Debts		3,000	Building	15,000
Creditors (Unrecorded)		1,000
Revaluation Profit
A’s Capital	18,000
B’s Capital	9,000	27,000
		35,000		35,000

Partners’ Capital Account
Dr.								Cr.
Particulars	A	B	C	Particulars	A	B	C
Balance c/d	2,38,000	1,79,000	1,00,000	Balance b/d	1,80,000	1,50,000
				Bank			1,00,000
				Premium for Goodwill	40,000	20,000
				Revaluation	18,000	9,000

	2,38,000	1,79,000	1,00,000		2,38,000	1,79,000	1,00,000

Balance Sheet as on March 31, 2019
Liabilities		Amount `	Assets		Amount `
Bills Payable		10,000	Cash in Hand		10,000
Creditors		59,000	Cash at Bank		2,00,000
Outstanding Expenses		2,000	Sundry Debtors	60,000
Capital:			Less: Provision for Doubtful Debt	3,000	57,000
A	2,38,000		Stock		36,000
B	1,79,000		Plant		1,20,000
C	1,00,000	5,17,000	Building		1,65,000
		5,88,000			5,88,000

Note: Since no information is given about the share of sacrifice, it is assumed that the old partners are sacrificing in their old profit sharing ratio.