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Q. 94. [tex]$P$[/tex] and [tex]$Q$[/tex] are partners sharing profits in the ratio of [tex]$3: 2$[/tex]. Following is their Balance Sheet as at 31st March, 2024:

| Liabilities | ₹ | Assets | ₹ |
|----------------------------------|-----------|---------------------------------------------|--------------|
| Sundry Creditors | 1,45,000 | Land and Building | 9,50,000 |
| General Reserve | 1,80,000 | Stock | 2,00,000 |
| Workmen Compensation Reserve | 1,80,000 | Investments (Market Value ₹ 1,00,000) | 1,20,000 |
| Investment Fluctuation Reserve | 25,000 | Cash at Bank | 2,70,000 |
| Capital Accounts: | | Advertisement Suspense A/c | 10,000 |
| P | 8,00,000 | | |
| Q | 4,00,000 | | |
| | 16,00,000 | | 16,00,000 |

On 1st April, 2024, they agreed to take [tex]$R$[/tex] as a partner on the following terms:

1. [tex]$P$[/tex] sacrifices [tex]$\frac{1}{4}$[/tex] of his share and [tex]$Q$[/tex] sacrifices [tex]$\frac{1}{20}$[/tex] from his share in favour of [tex]$R$[/tex].
2. Goodwill of the firm is valued at ₹ 2,00,000.
3. [tex]$R$[/tex] brings ₹ 2,50,000 as his capital but brings only 60% of his share of goodwill in cash.
4. Land and Building is undervalued by ₹ 50,000 and stock is overvalued by ₹ 40,000.
5. Claim on account of Workmen Compensation is ₹ 40,000.
6. There is an unrecorded asset worth ₹ 30,000 and Provision for Doubtful Debts is to be reduced to ₹ 20,000.
7. Expenses debited in the Profit & Loss Account include a sum of ₹ 25,000 paid for [tex]$P$[/tex]'s personal life insurance policy.
8. General Reserve is to appear at its original figure in the Balance Sheet of the new firm.

Prepare Revaluation Account, Partner's Capital Accounts, and Balance Sheet of the new firm.



Answer :

GinnyAnswer
### Step 1: Revaluation Account Adjustments

First, we adjust for the revaluation:

1. Land and Building: Undervalued by ₹ 50,000, so we add it to the assets.
2. Stock: Overvalued by ₹ 40,000, so we deduct it from the assets.
3. Claim on account of Workmen Compensation: ₹ 40,000 needs to be provided.
4. Unrecorded asset: Needs to be recorded at ₹ 30,000.

Total revaluation adjustment = ₹ 50,000 (Land and Building) - ₹ 40,000 (Stock) - ₹ 40,000 (Workmen Compensation) + ₹ 30,000 (Unrecorded Asset)
= ₹ 80,000

### Step 2: Goodwill Calculation

Goodwill of the firm is ₹ 2,00,000. [tex]\(R\)[/tex] is to bring his share of goodwill.

The new profit-sharing ratio is to be determined based on the given sacrifices:
1. [tex]\(P\)[/tex] sacrifices [tex]\(\frac{1}{4}\)[/tex] of his share.
Original ratio [tex]\(=\frac{3}{5}\)[/tex]
Sacrifice = [tex]\(\frac{3}{5} \frac{1}{4} = \frac{3}{20}\)[/tex].

2. [tex]\(Q\)[/tex] sacrifices [tex]\(\frac{1}{20}\)[/tex] of his share.
Original ratio [tex]\(=\frac{2}{5}\)[/tex]
Sacrifice = [tex]\(\frac{2}{5} \frac{1}{20} = \frac{2}{100} = \frac{1}{50}\)[/tex].

[tex]\(R\)[/tex]'s share of the profits > [tex]\( \frac{1}{5}\)[/tex] = [tex]\(3/20 + 1/50 = \frac{15}{100} + \frac{2}{100} = \frac{17}{100}\)[/tex] or [tex]\(\frac{1}{6}\)[/tex].

Goodwill to be brought by [tex]\(R\)[/tex] = [tex]\(\frac{1}{6} \times ₹ 2,00,000\)[/tex]
= ₹ 1,20,000.

Since [tex]\(R\)[/tex] brings only 60% of ₹ 1,20,000 in cash:
Cash brought for goodwill = 0.60 x ₹ 1,20,000
= ₹ 72,000.

### Step 3: Calculation of New Capitals

1. Partner [tex]\(P\)[/tex] Capital Adjustment:
Partner [tex]\(P\)[/tex] had ₹ 8,00,000 and has to adjust for goodwill and revaluation.
New capital of [tex]\(P\)[/tex] = ₹ 8,00,000 - [tex]\(\frac{3}{20} \times ₹ 1,20,000\)[/tex] = ₹ 8,00,000 - ₹ 24,000 = ₹ 7,76,000.

2. Partner [tex]\(Q\)[/tex] Capital Adjustment:
Partner [tex]\(Q\)[/tex] had ₹ 4,00,000 and has to adjust for goodwill and revaluation.
New capital of [tex]\(Q\)[/tex] = ₹ 4,00,000 - [tex]\(\frac{1}{50} \times ₹ 1,20,000\)[/tex] = ₹ 4,00,000 - ₹ 8,000 = ₹ 3,92,000.

3. Partner [tex]\(R\)[/tex] Capital Adjustment:
Partner [tex]\(R\)[/tex] brings ₹ 2,50,000 in cash plus goodwill. Thus,
New capital of [tex]\(R\)[/tex] = ₹ 2,50,000 + ₹ 72,000 = ₹ 3,22,000.

4. Net Adjusted Capital after Revaluation:
Total = [tex]\(P\)[/tex]'s capital + [tex]\(Q\)[/tex]'s Capital + [tex]\(R\)[/tex]'s Capital + Total Revaluation
= ₹ 7,76,000 + ₹ 3,92,000 + ₹ 3,22,000 + ₹ 80,000
= ₹ 15,70,000.

### Step 4: New Balance Sheet as of 1st April 2024

Liabilities Side:

| Liabilities | Amount (₹) |
|----------------------------------|-------------|
| Sundry Creditors | ₹ 1,45,000 |
| General Reserve | ₹ 1,80,000 |
| Workmen Compensation Reserve | ₹ 1,80,000 |
| Investment Fluctuation Reserve | ₹ 25,000 |
| Capital Accounts: | |
| - [tex]\(P\)[/tex] | ₹ 7,76,000 |
| - [tex]\(Q\)[/tex] | ₹ 3,92,000 |
| - [tex]\(R\)[/tex] | ₹ 3,22,000 |
| Total Liabilities | ₹ 19,20,000|

Assets Side:

| Assets | Amount (₹) |
|----------------------------------|------------|
| Land and Building | ₹ 10,00,000 |
| Stock | ₹ 1,60,000 |
| Investments | ₹ 1,20,000 |
| Debtor's Provision Reductions | ₹ 25,000 |
| Unrecorded Asset | ₹ 30,000 |
| Cash at Bank | ₹ 1,00,000 |
| Adv Suspense A/c | ₹ 10,000 |
| Total Assets | ₹ 14,35,000|

Here is your new Balance Sheet ready for the new firm including [tex]\(R\)[/tex] on 1st April, 2024.