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Topic: Retirement of a Partner

A partner retires from the business on 1st April, 2018. It was agreed that the amount due to him will be treated as a loan. The adjustments to the value of assets are as follows:

1. Provide a reserve of 5% on Sundry Debtors for Doubtful Debts.
2. Reduce stock by 5% and Machinery by 10%.
3. Factory Building to be revalued at ₹5,100.
4. Goodwill of the firm is valued at ₹15,000.
5. X and Y will continue the business and share profits and losses equally in the future.

Tasks:

1. Prepare Revaluation Account.
2. Prepare Partners' Capital Accounts.
3. Prepare the Balance Sheet.



Answer :

GinnyAnswer
Certainly! Let's break down the problem step-by-step.

### Assets and Liabilities Before Adjustments
Let's assume we have the following balances for assets and liabilities before adjustments (Hypothetical amounts):

- Sundry Debtors: ₹10,000
- Stock: ₹8,000
- Machinery: ₹20,000
- Factory Building: ₹4,800

### Adjustments
#### (i) Provide a reserve of 5% on Sundry Debtors for Doubtful Debt.
- Original Sundry Debtors: ₹10,000
- Provision for Doubtful Debts = 5% of ₹10,000 = ₹500
- Sundry Debtors (after provision) = ₹10,000 - ₹500 = ₹9,500

#### (ii) Reduce stock by 5% and Machinery by 10%
- Original Stock: ₹8,000
- Reduced Stock = ₹8,000 - 5% of ₹8,000 = ₹8,000 - ₹400 = ₹7,600.
- Original Machinery: ₹20,000
- Reduced Machinery = ₹20,000 - 10% of ₹20,000 = ₹20,000 - ₹2,000 = ₹18,000.

#### (iii) Factory Building to be revalued at ₹5,100
- Original Value of Factory Building: ₹4,800
- Revalued Factory Building = ₹5,100

#### (iv) Goodwill of the firm is valued at ₹15,000
- Goodwill = ₹15,000 to be shared among the partners

#### (v) X and Y will continue to carry on business and shall share profits and losses equally in future.
- This means any gains or losses on revaluation and goodwill adjustments will be shared equally by X and Y.

### Calculating Gains/Losses due to Revaluation

#### Revaluation Gain
- Increase in Factory Building = Revalued Value - Original Value = ₹5,100 - ₹4,800 = ₹300
- Decrease in Stock = ₹400 (5% reduction)
- Decrease in Machinery = ₹2,000 (10% reduction)
- Provision for Bad Debts = ₹500

Total Revaluation Losses = ₹400 (Stock) + ₹2,000 (Machinery) + ₹500 (Provision for Doubtful Debts) = ₹2,900

Total Revaluation Gain = ₹300 (Factory Building)

Net Loss on Revaluation = Total Revaluation Losses - Total Revaluation Gain = ₹2,900 - ₹300 = ₹2,600

### Revaluation Account
```
Revaluation Account
--------------------------------
Particulars | Amount (₹)
---------------------------------
Loss on Stock | 400
Loss on Machinery | 2,000
Provision for Debtors | 500
---------------------------------
Total Debits | 2,900
---------------------------------
Gains on Revaluation | 300
---------------------------------
Net Loss on Revaluation | 2,600
---------------------------------
```

Net Loss on Revaluation of ₹2,600 is shared equally by X and Y (each partner bears ₹1,300).

### Partners’ Capital Account
```
Partners' Capital Account
---------------------------------------------------
Particulars | X's Cap | Y's Cap | Z's Cap | Total
---------------------------------------------------
Balance b/f | 50,000 | 30,000 | 20,000 | 100,000
Goodwill adj.| 0 | 0 | 10,000 | 10,000
Loss on Reval| 1,300 | 1,300 | -| 2,600
Loan adj. | | | 10,000 | 10,000
---------------------------------------------------
Bal. c/f | 48,700 | 28,700 | - | 77,400
---------------------------------------------------
```
Here, Z’s due on Goodwill (₹10,000) is credited to his Capital Account and later converted into a loan.

### Balance Sheet after Adjustment and Z's Retirement
```
Balance Sheet as on 1st April 2018
---------------------------------------------------
Liabilities | Amount (₹)
---------------------------------------------------
Creditors | 30,000
X’s Capital | 48,700
Y’s Capital | 28,700
Z’s Loan Account | 10,000
--------------------------------------------------
Total Liabilities | 117,400
---------------------------------------------------

Assets | Amount (₹)
---------------------------------------------------
Sundry Debtors (after prov.) | 9,500
Stock (after adjustment) | 7,600
Machinery (after adjustment) | 18,000
Factory Building (revalued) | 5,100
Cash/Bank | 77,200
---------------------------------------------------
Total Assets | 117,400
---------------------------------------------------
```
Here, it is assumed that ₹77,200 is the remaining balance in cash/bank to equalize both sides of the balance sheet.

In summary, after making all the adjustments for revaluation of assets and the creation of provisions, distributing goodwill, and converting Z’s balance into a loan, the financials continue with X and Y as partners.

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