Question

M, N and O are partners in a rm sharing profits in the ratio of 3:2:1. Their Balance Sheet as on 31^st December, 2008 was as under:

Balance Sheet as on 31^st December 2008

N retires on 1^st January, 2009 on the following terms:

i) Provision for doubtful debts will be raised by Rs. 1,000. 

ii) Stock will be depreciated by 10% and furniture by 5%. 

iii) There is an outstanding claim for damages of Rs. 1,100 and it is to be provided for in the books. 

iv) Creditors will be written back by Rs. 6,000. 

v) Goodwill of the rm is valued at Rs. 22,000, which is not to be shown in the books of the new firm. 

vi) N is paid in full with the cash brought in by M and O in such a manner that their capitals are in proportion to their profit-sharing ratio 3 : 2. 

Prepare Revaluation Account, Partner’s Capital Account and Balance Sheet of M and O.

Answer 1

Revaluation A/c

Note : If creditors Rs. 6000/- is taken on the credit side of the Revaluation A/c, Revaluation profit will be Rs. 600/-.)

Capital A/c

Particulars	M	N	O	Particulars	M	N	O
To revaluation	5700	3800	1900	By balance b/d	40000	40000	30000
To N's capital	2200		5133	By Gen. Reserve	6000	4000	2000
To goodwill	5000	3333	1667	By M's capital		2200
To cash		44200		By O's capital		5133
To balance c/d	60360		40240	By cash	27260		16940
	73260	51333	48940		73260	51333	48940

Balance Sheet

Note: N’s Share of goodwill = 22000×\(\frac{2}{6}\) = 7333 

New ratio = 3:2, 

Old ratio = 3:2:1 

Gaining ratio = New ratio – old ratio 

M’s gain = \(\frac{3}{5} - \frac{3}{6} = \frac{3}{30}\)

O’s gain = \(\frac{2}{5} - \frac{1}{6} = \frac{7}{30}\)

Calculation of cash to be brought by M and O to pay off N

M's adjusted capital	33100
O's adjusted capital	23300
Cash to  be brought in by M & O (amount to be paid to N)	44200
	100600
New capital of M	100600 \(\times \frac{3}{5}\) = 60360
Less : Adjusted capital	33100
Cash to be brought by M	27260
New Capital of O	100600\(\times\frac{2}{5} = 40240\)
Less : Adjusted capital	23300
Cash to be brought by O	16940