ADVANCED PARTNERSHIP ACCOUNTS

UNIT 1 : INTRODUCTION TO PARTNERSHIP ACCOUNTS

Question 1 X, Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that : (a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his remuneration, but before charging interest on capital and provision for taxation; (b) Interest is to be provided on capital at 15% per annum; (c) Balance profits after making provision for taxation, is to be shared in the ratio of 1 : 2 : 2 by the three partners. During the year ended 31 st March, 1997 : (i) the net profit before tax and before making any payment to partners amounted to Rs. 6,90,000; (ii) interest on capitals at 15% per annum amounted to : Rs. 60,000 for X; Rs. 1,50,000 for Y Ltd. and Rs. 1,80,000 for Z Ltd. The capitals have remained unchanged during the year; (iii) provision for tax is to be at 40% of total income of the firm. The toal income has been computed at Rs. 1,95,000. You are asked by : (a) the firm to pass closing entries in relation to the above; (b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show the investment in partnership account as it would appear in its ledger; (c) Z Ltd. to show, how the above information will appear in its financial statements for the year; (d) Shri X to show the working, if any, in relation to the above. (20 marks) (IntermediateNov. 1997)

6.2

Accounting

Answer

Journal of partnership firm of Shri X, Y Ltd. and Z Ltd. Closing entries on 31 st March, 1997 Dr.

Profit and loss account To Provision for taxation for A.Y.1997-98 (Being provision made for taxation at 40% on total income of Rs. 1,95,000) Profit and loss appropriation account To Remuneration to X, the working partner To Interest on capitals : X Y Ltd. Z Ltd. (Being interest on capitals provided at 15% per annum and remuneration to working partner X at 15% of net profit after charging his remuneration but before providing for tax and interest on capitals now recorded) Profit and loss appropriation account (Rs. 6,90,000 - Rs.78,000 - Rs.4,80,000) To Capital Accounts : X Y Ltd. Z Ltd. (Being balance profits credited to partners capital accounts in the ratio of 1 : 2 : 2) (b)

Dr. Rs. 78,000

Cr. Rs. 78,000

Dr.

4,80,000

90,000 60,000 1,50,000 1,80,000

Dr.

1,32,000 26,400 52,800 52,800

1997 March 31

Journal entries in the books of Y Ltd. Investment in partnership with Shri X and Z Ltd. To Interest on capital (taxable) To Share to profits (non-taxable) (Being entry to record interest income at 15% p.a. on capital of Rs. 10,00,000 and 2/5 th share of profit in the firm)

Dr. Rs. 2,02,800

Cr. Rs. 1,50,000 52,800

Dr.

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6.3

Interest on capital Share of profits To Profit and Loss A/c (Being incomes transferred to profit and loss account)

Dr. Dr.

1,50,000 52,800

2,02,800

Ledger Investment in partnership with Shri X and Z Ltd. 1996 April 1 1997 March 31 To Balance b/d To Interest income from the firm To Share of profits in the firm By Balance c/d Dr. Rs. 10,00,000 1,50,000 52,800 12,02,800 Cr. Rs. Balance Rs. Dr.10,00,000 Dr. 11,50,000 Dr. 12,02,800

12,02,800 12,02,800

(c)

Extracts from the financial statements of Z Ltd. Revenue statement for the year ended 31 st March, 1997 1996-97 Rs. Operating income: Income from partnership : Interest on capital invested 1,80,000 Share of profit 52,800 2,32,800

1995-96 Rs.

Extracts from schedule of investments attached to and forming part of the balance sheet as at 31st March, 1997. 31.3.1997 Rs. 14,32,800 31.3.1996 Rs. 12,00,000

Investment in partnership with Shri X and Y Ltd. Partners Capitals as on 31 st March Share of profit 1997 1996 1996-97 1995-96 Rs. Rs. X 5,76,400 4,00,000 1/5 1/5 Y Ltd. 12,02,800 10,00,000 2/5 2/5 Z Ltd. 14,32,800 12,00,000 2/5 2/5

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Accounting

Working for capitals : Opening capital Remuneration credited Interest on capital Share in profits (d) Working for remuneration to X, the working partner

X Rs. 4,00,000 90,000 60,000 26,400 5,76,400

Y Ltd. Rs. 10,00,000 1,50,000 52,800 12,02,800

Z Ltd. Rs. 12,00,000 1,80,000 52,800 14,32,800

Rs.6,90,000 15 115

Rs.90,000

Working for capitals of partners (opening of current year and closing of last year) X Y Ltd. Z Ltd. Question 2 Avinash, Basuda Ltd. and Chinmoy Ltd. were in partnership sharing profits and losses in the ratio of 9 : 4 : 2. Basuda Ltd. retired from the partnership on 31 st March, 1998, when the firms balance sheet was as under : Rs. in thousand Rs. Rs. Sundry creditors 600 Cash and bank 284 Capital accounts : Sundry debtors 400 Avinash 2,700 Stock 800 Basuda Ltd. 1,200 Furniture 266 Chinmoy Ltd. 600 4,500 Plant 850 Land and building 2,500 5,100 5,100 Basuda Ltd.s share in goodwill and capital was acquired by Avinash and Chinmoy Ltd. in the ratio of 1 : 3, the continuing partners bringing in the necessary finance to pay off Basuda Ltd. The partnership deed provides that on retirement or admission of a partner, the goodwill of the firm is to be valued at three times the average annual profits of the firm for the four years ended on the date of retirement or admission. The profits of the firm during the four years = Rs.60,000 = Rs.1,50,000 = Rs.1,80,000

100 15
100 15
100 15

= Rs. 4,00,000 = Rs. 10,00,000 = Rs. 12,00,000

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6.5

ended 31st March, 1998 in thousands of rupees were : Rs. 1994-95 450 1995-96 250 1996-97 600 1997-98 700 The deed further provided that goodwill account is not to appear in the books of accounts at all. The continuing partners agreed that with effect from 1 st April, 1998, Ghanashyam, son of Avinash is to be admitted as a partner with 25% share of profit. Avinash gifts to Ghanashyam, by transfer from his capital account, an amount sufficient to cover up 12.5% of capital and goodwill requirement. The balance 12.5% of capital and goodwill requirement is purchased by Ghanashyam from Avinash and Chinmoy Ltd. in the ratio of 2 : 1. The firm asks to you : (i) Prepare a statement showing the continuing partners shares; (ii) Pass journal entries including for bank transactions; and (iii) Prepare the balance sheet of the firm after Ghanashyams admission (20 marks) (IntermediateMay 1998) Answer (i) Statement showing the partners shares Avinash 9 15 1 ( ) 15 10 15
()

Ratio before retirement of Basuda Ltd. Adjustment on retirement New ratio before admission of Ghanashyam On admission of Ghanashyam : Gift by Avinash (12.5/100)

Basuda Ltd. 4 15

Chinmoy Ltd. 2 15 3 ( ) 15 5 15

Ghanashyam

1 8 2 Purchase from Avinash & Chinmoy ( ) Ltd.* 24 11 New ratio 24 * Purchase from Avinash = 2/3 1/8 = 2/24 Purchase from Chinmoy Ltd. = 1/3 1/8 = 1/24

( )

1 24 7 24

1 8 3 ( ) 24 6 24

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Accounting

(ii) 1.

Journal Entries Dr. Dr.

Avinashs capital A/c Chinmoy Ltds capital A/c To Basuda Ltd.s capital A/c (Being purchase by Avinash and Chinmoy Ltd. of goodwill from Basuda Ltd.) 2.

Dr. Rs. 1,00,000 3,00,000

Cr. Rs. 4,00,000

Avinashs capital A/c Dr. To Ghansahyams capital A/c (Being gift made by Avinash to Ghansahyam) Bank A/c To Avinashs capital A/c To Chinmoy Ltds capital A/c To Ghanasahyams capital A/c (Being capital brought in by the partners) Dr.

7,50,000

7,50,000

3.

31,00,000

7,75,000 13,87,500 9,37,500

4.

Basuda Ltds capital A/c Dr. To Bank A/c (Being final payment made to Basuda Ltd. on retirement) Ghanashyams capital A/c To Avinashs capital A/c To Chinmoy Ltds Capital A/c (Being goodwill adjusted on admission) Dr.

16,00,000

16,00,000

5.

1,87,500

1,25,000 62,500

(iii) Liabilities Sundry creditors Capital accounts : Avinash Chinmoy Ltd. Ghanashyam

Balance Sheet as on 1st April, 1998 Amount Assets Rs. 6,00,000 27,50,000 17,50,000 15,00,000 60,00,000 66,00,000 Cash and bank Sundry debtors Stock Furniture Plant Land and building

Amount Rs. 17,84,000 4,00,000 8,00,000 2,66,000 8,50,000 25,00,000 66,00,000

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Working Notes : (Rs. in thousand) (1) Adjustment of Goodwill on Retirement Value of Goodwill Share of Basuda Ltd. = (450 + 250 + 600 + 700) = 1,500 = 1,500 4/15 = 400
1 400 100 (Dr.) 4
4 1,500 15 400 (Cr.)

Adjustment through partners capital accounts Avinash Basuda Ltd. Chinmoy Ltd. : : :

3 400 300 (Dr.) 4

(2) Closing Balances of Capital Accounts Basuda Ltd.s share of capital and goodwill = 1,200 + 400 = 1,600 This represents 4/15 th share of capital and goodwill requirement of the firm. Thus, total capital and goodwill requirement = 1,600
15 4 6,000

Hence, closing capital balances (in new profit sharing ratio of 11 : 7 : 6) should be Avinash Chinmoy Ltd. Ghanashyam : : :
11 6,000 2,750 24 7 6,000 1,750 24 6 6,000 1,500 24 1 1,500 750 2

Gift by Avinash to Ghanashyam :

(Debit to Avinashs capital A/c and credit to Ghanashyams capital A/c) (2) Adjustment of Goodwill on Admission Goodwill of the firm = 1,500
1 1,500 4

Ghanashyams share of goodwill=

= 375

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Accounting

(a) Gift by Avinash

1 375 2

= 187.5 (Included in the gift of 750 see W.N. 2) (b) Purchase from Avinash and Chinmoy Ltd. = 187.5 (in 2 : 1 ratio) Thus, adjustment of goodwill purchased through capital accounts Avinash Chinmoy Ltd. Ghanashyam (3) Amount brought in by Partners Partners Capital Accounts
Avinash Basuda Chinmoy GhanaLtd. Ltd. shyam Rs. Rs. Rs. Rs. To Basuda Ltd. 100 300 To Ghanashyam 750 To Avinash and Chinmoy Ld. To Cash and Bank To Balancd c/d 2,750 1,600 1,750 187.5 1,500 Avinash Basuda Chinmoy GhanaLtd. Ltd. shyam Rs. Rs. Rs. Rs. By Balance b/d 2,700 1,200 600 By Avinash and Chinmoy Ltd. By Cash and Bank (Bal. figure) By Avinash By Ghanashyam 400

: : :

2 187.5 125 (Cr.) 3 1 187.5 62.5 (Cr.) 3 1 375 187.5 (Dr.) 2

3,600

1,600

2,050 1,687.5

775 125 3,600

1,600

1,387.5 937.5 750 62.5 2,050 1,687.5

(4) Cash and Bank Amount given Amount brought in by partners Less : Payment to Basuda Ltd. Net increase = Rs. 1,500 (Equivalent to the value of goodwill) 284 3,100 3,384 1,600 1,784

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6.9

Question 3 A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The Balance Sheet of the firm, as at 31 st March, 1998 was as under : Liabilities Capital Accounts : A B C Reserve Creditors 48,000 64,000 48,000 1,60,000 20,000 40,000 2,20,000 2,20,000 Rs. Assets Fixed Assets Current Assets : Stock Debtors Cash and Bank 30,000 60,000 30,000 1,20,000 Rs. 1,00,000

The firm had taken a Joint Life Policy for Rs. 1,00,000; the premium periodically paid was charged to Profit and Loss Account. Partner C died on 30th September, 1998. It was agreed between the surviving partners and the legal representatives of C that : (i) Goodwill of the firm will be taken at Rs. 60,000. (ii) Fixed Assets will be written down by Rs. 20,000. (iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on 31st March, 1998. Policy money was received and the legal heirs were paid off. The profits for the year ended 31st March, 1999, after charging depreciation of Rs. 10,000 (depreciation upto 30th September was agreed to be Rs. 6,000) were Rs. 48,000. Partners Drawings Accounts showed balances as under : A Rs. 18,000 (drawn evenly over the year) B Rs. 24,000 (drawn evenly over the year) C (up-to-date of death) Rs. 20,000 On the basis of the above figures, please indicate the entitlement of the legal heirs of C, assuming that they had not been paid anything other then the share in the Joint Life Policy. (13 marks) (IntermediateNov. 2000) Answer Computation of entitlement of legal heirs of C (1) Profits for the half year ended 31 st March, 1999 Profits for the year ended Add : Depreciation Profits before depreciation 31 st March, 1999 (after depreciation) Rs. 48,000 10,000 58,000

6.10

Accounting

Profits for the first half (assumed : evenly spread) Less : Depreciation for the first half Profits for the first half year (after depreciation) Profits for the second half (i.e., 1 st October, 1998 to 31 st March, 1999) Less : Depreciation for the second half Profits for the second half year (after depreciation) (2) Capital Accounts of Partners as on 30 th September, 1998
Dr. A Rs. To Fixed Assets (loss on revaluation) To Drawings To C Executors A/c To Balance c/d B Rs. C Rs. A Rs. By Balance b/d 48,000 By Reserve 6,000 By Goodwill 18,000 By P & L Appropriation A/c (Interest on Rs. 48,000 @ 25% for 6 months) 72,000 B Rs. 64,000 8,000 24,000

29,000 6,000 23,000 29,000 4,000 25,000

Cr. C Rs. 48,000 6,000 18,000

6,000 9,000 57,000

8,000 12,000 76,000

6,000 20,000 52,000

72,000

96,000

78,000

96,000

6,000 78,000

(3) Application of Section 37 of the Partnership Act Legal heirs of C have not been paid anything other than the share in joint life policy. The amount due to the deceased partner carries interest at the mutually agreed upon rate. In the absence of any agreement, the representatives of the deceased partner can receive at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to the deceased partner. Thus, the representatives of C can opt for Either, (i) Interest on Rs. 52,000 for 6 months @ 6% p.a. = Rs. 1,560 Or (ii) Profit earned out of unsettled capital (in the second half year ended 31 st March, 1999)

Rs. 25,000

57,000

52,000 76,000

52,000

Rs. 7,027 (approx.)

In the above case, it would be rational to assume that the legal heirs would opt for Rs. 7,027.

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6.11

(4) Amount due to legal heirs of C Balance in Cs Executors account Amount of profit earned out of unsettled capital [calculated in (3)] Amount due Question 4

Rs. 52,000 7,027 59,027

A, B and C were partners, sharing Profits and Losses in the ratio of 5 : 3 : 2 respectively. On 31st March, 2000 their Balance Sheet stood as follows : Liabilities As capital Bs capital Cs capital Creditors Rs. 7,79,000 7,07,800 6,86,200 4,91,000 26,64,000 Assets Plant and Machinery Furniture and Fittings Stock Debtors Cash at Bank Rs. 13,62,000 2,36,000 7,02,000 1,91,000 1,73,000 26,64,000

On 31st July, 2000 A died. According to partnership deed, on the death of a partner, the capital account of the deceased partner was to be credited with : (i) his share of profit for the relevant part of the year of death calculated on the basis of profit earned during the immediately preceding accounting year, and

(ii) his share of goodwill Goodwill was to be valued at two years purchase of the average profits of immediately preceding three accounting years. The profits, as per books of account were as follows : Rs. For accounting year ended 31 st March, 1998 For accounting year ended 31 st March, 1999 For accounting year ended 31 st March, 2000 3,29,000 3,46,000 3,78,000

However, while going through the books of account on As death, it came to light that Rs. 30,000 worth of wages were spent on installation of a new machinery, but the same was not capitalized; the machinery was put into operation on 1 st October, 1999. Depreciation was provided on the machinery @ 20% per annum. On 1st October, 2000 As son D was admitted into partnership with immediate effect on the following terms : (a) D would get one-fourth share in the profit of the firm, while the relative profit sharing ratio between B and C would remain unchanged. (b) The final balance of As capital account would be credited to Ds capital account

6.12

Accounting

(c) An adjustment would be made in the Capital Accounts for Ds share of goodwill. The basis of valuation of firms goodwill would be the same as was adopted at the time of the death of his father. On 31st March, 2001 the Profit and Loss Account of the firm showed that the firm had earned a profit of Rs. 4,16,000 for the year. The respective drawings accounts showed that while B and C had withdrawn Rs. 60,000 each during the year, Ds drawings totalled Rs. 30,000. The Drawings Accounts are closed at the end of the year by transfer to respective capital accounts. You are required to : (i) Prepare a statement showing distribution of profits for the accounting year ended 31 st March, 2001; and

(ii) Pass journal entries for all the transactions relating to death of the partner. Ds admission into partnership, and at the end of the year relating to transfer of Drawings Accounts and distribution of profit for the year. (20 marks) (IntermediateMay 2001) Answer (i) Statement Showing distribution of profits for the accounting year ended 31 st March, 2001 Rs. Net profit for the year ended 31.03.2001 As share (Profit distributed to deceased partner A & his executor) (a) Profit for 4 months (1.4.2000 31.7.2000) (W.N.1 ) (b) Application of Sec. 37 (1.8.2000 30.9.2000) (W. N. 5) Bs share (a) Profit for 4 months (1.4.2000 31.7.2000) (W. N. 3) (b) Profit for 2 months (1.8.2000 30.9.2000) (W. N. 6) (c) Profit for 6 months (1.10.2000 31.3.2001) (W. N. 10) Cs share (a) Profit for 4 months (1.4.2000 31.7.2000) (W. N. 3) (b) Profit for 2 months (1.8.2000 30.9.2000) (W. N. 6) (c) Profit for 6 months (1.10.2000 31.3.2001) (W. N. 10) Ds share (a) Profit for 6 months (1.10.2000 31.3.2001) (W. N. 10) Rs. 4,16,000

67,500 28,021 42,700 24,787 93,600 28,467 16,525 62,400 52,000

95,521

1,61,087

1,07,392 52,000 4,16,000

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6.13

(ii) Year 2000 July 31

Journal Entries Dr. Rs. 27,000 Cr. Rs. 13,500 8,100 5,400

Oct. 1

Machinery A/c To As Capital A/c To Bs Capital A/c To Cs Capital A/c (Wages spent on installation of new machinery capitalised and credited to partners capital accounts after providing depreciation for six months ended 31 st March, 2000) Profit and Loss Suspense A/c To As Capital A/c (As share of profit for four months as calculated in W. N. 1 credited to his capital account) Goodwill A/c To As Capital A/c To Bs Capital A/c To Cs Capital A/c (Goodwill raised in the books and credited to partners in the old profit sharing ratio 5 : 3 : 2) As Capital A/c To As Executors A/c (Balance due to A transferred to his executors account) Profit & Loss Suspense A/c To As Executors A/c (Profit earned out of the unsettled capital credited to As executors account as per W. N. 5) As Executors A/c To Ds Capital A/c (Final balance of As executors account transferred to Ds capital account)

Dr

Dr.

67,500 67,500

Dr.

7,20,000 3,60,000 2,16,000 1,44,000

Dr.

12,20,000 12,20,000

Dr.

28,021 28,021

Dr.

12,48,021 12,48,021

6.14

Accounting

Bs Capital A/c Cs Capital A/c Ds Capital A/c To Goodwill (Goodwill written off and debited to partners in the new profit sharing ratio 9 : 6 : 5) March 31 Bs Capital A/c Cs Capital A/c Ds Capital A/c To Bs Drawings A/c To Cs Drawings A/c To Ds Drawings A/c (Drawings debited to partners capital accounts) March 31 Profit and Loss Appropriation A/c To Profit and loss suspense A/c (Rs. 67,500 + 28,021) To Bs Capital A/c To Cs Capital A/c To Ds Capital A/c (Division of profits as shown in statement of distribution of profits and balance of profit & loss suspense account transferred to profit and loss appropriation account) Working Notes : As share in profit for the period of 1 st April, 2000 to 31st July, 2000 is to be calculated on the basis of profit earned during the immediately previous accounting year i.e. year ended on 31 st March, 2000

Dr. Dr. Dr.

3,24,000 2,16,000 1,80,000 7,20,000

Dr. Dr. Dr.

60,000 60,000 30,000 60,000 60,000 30,000

Dr.

4,16,000 95,521 1,61,087 1,07,392 52,000

(1) Computation of As share in profit for the period 1.4.2000 31.7.2000

Rs. Profit for the year ended 31st March, 2000 Add : Capital expenditure of wages spent on installation of new machinery, treated as revenue expenditure 3,78,000 30,000 4,08,000

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6.15

Less : Depreciation on Rs. 30,000 (being the value of machinery @ 20% p.a. for 6 months) 3,000 st March, 2000 Correct profit for the year ended 31 4,05,000 4 Profit for 4 months on the basis of last years profit = Rs. 4,05,000 1,35,000 12 As share in profit = 1,35,000 (2) Valuation of Goodwill Profit for the year ended 31st March, 1998 Profit for the year ended 31st March, 1999 Profit for the year ended 31st March, 2000 Total Profit Average Profit = Rs.
10,80,000 3 Rs. 3,60,000 5 10 67,500

Rs. 3,29,000 3,46,000 4,05,000 10,80,000

Goodwill (two years purchase) = Rs. 3,60,000 2 = Rs. 7,20,000 (3) Distribution of profit for 4 months ended 31 st July, 2000 Rs. Net Profit (Rs. 4,16,000 As share (W. N. 1) Bs share (Rs. 71,167 Cs share (Rs. 71,167 (4)
3 ) 5 2 ) 5
B Rs. 20,000 9,54,600 C Rs. A Rs. B Rs.

4 ) 12

1,38,667 67,500 42,700 28,467

Partners Capital Accounts as on 31 st July, 2000

A Rs. C Rs.

To Drawings To As Executors A/c To Balance c/d

12,20,000

12,20,000

9,74,600

20,000 By Balance b/d 7,79,000 7,07,800 6,86,200 8,44,067 By Plant & Machinery 13,500 8,100 5,400 By Goodwill 3,60,000 2,16,000 1,44,000 By Share in Profit (W. N. 3) 67,500 42,700 28,467 8,64,067 12,20,000 9,74,600 8,64,067

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Accounting

(5) Application of section 37 of the Partnership Act Either (i) Interest of Rs. 12,20,000 Or (ii) Profit earned out of unsettled capital Rs. 4,16,000 2
12 Rs. 12,20,000 Rs. (12,20,000 9,54,600 8,44,067) Rs. 28,021 (approx.)

6 2 = Rs. 12,200 100 12

In the absence of specific agreement amongst partners on the above subject matter, the representatives of the deceased partner can receive at their option, interest at the rate of 6% p.a. or share of profit earned for the amount due to the deceased partner. In the above case, it would be rational to assume that As representatives would opt for Rs. 28,021. (6) Distribution of profit for 2 months ended 31 st Oct, 2000 Rs. Net profit (Rs. 4,16,000
2 ) 12

69,333 28,021

As executors share (W. N. 5) Bs share Cs share (7) To Ds Capital A/c (Rs. 41,312 (Rs. 41,312
3 ) 5 2 ) 5

24,787 16,525

As Executors Account Rs. 12,48,021 12,48,021 (8) Dr. By As capital A/c By Share in profit (W. N. 6) Partners Capital Accounts (1 st August, 2000 to 30 th Sept., 2000) B C B Rs. To Drawings To Balance c/d 10,000 9,69,387 9,79,387 Rs. 10,000 8,50,592 8,60,592 By Balancd b/d By P & L A/c Rs. 9,54,600 24,787 9,79,387 Rs. 12,20,000 28,021 12,48,021 C Rs. 8,44,067 16,525 8,60,592

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6.17

(9) Computation of new profit sharing ratio between B, C & D D is admitted for share Bs new ratio Cs new ratio Ds new ratio New profit sharing ratio = 3/4 3/5 = 3/4 2/5 = 5/20 =9:6:5 Rs. Net profit (Rs. 4,16,000 Bs share (Rs. 2,08,000 Cs share (Rs. 2,08,000 Ds share (Rs. 2,08,000 (11)
6 ) 12 9 ) 20 6 ) 20 5 ) 20
D Rs. B Rs. C Rs.

= 9/20 = 6/20

(10) Distribution of profit for 6 months ended 31 st March, 2001

2,08,000 93,600 62,400 52,000

Partners Capital Accounts as on 31 st March, 2001

B Rs. C Rs. D Rs.

To Goodwill To Drawings To Balance c/d

3,24,000 30,000 7,08,987 10,62,987

2,16,000 1,80,000 30,000 30,000 6,66,992 10,90,021 9,12,992 13,00,021

By Balance b/d 9,69,387 8,50,592 By As Executors A/c 12,48,021 By Share of profit (W. N. 10) 93,600 62,400 52,000 10,62,987 9,12,992 13,00,021

Notes:
1.

It is assumed that profit was earned uniformly throughout the year. Although notional profit was calculated for the first four months, it is to be transferred from the current years profit (as calculated in working note 3). The question requires that As share of profit for this period is to be calculated on the basis of profit earned during year ended 31st March. 2000. The balance amount after calculating his share has been credited to B and C in ratio 3 : 2. It is assumed that drawings were made evenly throughout the year. However, single entry has been given at year end in the main solution relating to transfer of drawings and distribution of profit but the Partners capital accounts shown in the working notes include the entries of drawings and distribution of profit of respective dates within the year.

2.

6.18

Accounting

Question 5 M/s Neptune & Co.s Balance Sheet as at 31 st March, 2001:

Liabilities Bank overdraft (State Bank) Sundry Creditors Capital Accounts : Mr. A Balance as per last B/S Add : Profits for the year Less : Drawings Mr. B Balance as per last B/s Add : Profit for the year Less : Drawings Rs. 54,000 1,56,000 Assets Cash at Bank of India Sundry Debtors Stock Motor Cars cost as per last B/S Less : Depreciation till date Machinery : Cost as per last B/S Less : Depreciation till date Land and Building Rs. 800 2,80,000 1,00,000 1,60,000 54,000 1,06,000 3,00,000 1,40,000

4,02,000 95,400 4,97,400 40,000 2,00,000 95,400 2,95,400 76,000

4,57,400

1,60,000 2,40,000

2,19,400 8,86,800

8,86,800

You have examined the foregoing Draft of the Balance Sheet and have ascertained that the following adjustments are required to be carried out : (i) Land and Buildings are shown at cost less Rs. 60,000 being the proceeds of the sale during the year of premises costing Rs. 70,000. (ii) Machinery having a net book value of Rs. 4,300 had been scrapped during the year. The original cost was Rs. 12,300. (iii) Rs. 2,000 paid for the Licence fees for the year ending 30 th September, 2001 had been written off. (iv) Debts amounting to Rs. 10,420 were considered to be bad and further debts amounting to Rs. 5,400 were considered doubtful and required 100% provision. Provision for doubtful debts had previously been made for Rs. 10,000. (v) An item in the Inventory was valued at Rs. 37,400, but had a realisable value of Rs. 26,000 only. Scrap Material having a value of Rs. 6,600 had been omitted from the stock valuation. (vi) The cashier had misappropriated Rs. 700. (vii) The cash-book for the year ending 31 st March, 2001 included payments amounting to Rs. 6,924, the cheques having been made out, but not despatched to suppliers until April 2001. (viii) Interest is to be allowed on the Partners opening Capital Account balances less drawings during the year at 9%. You are required to prepare : (a) Profit & Loss Adjustment Account for the year. (b) Capital Accounts of the Partners. (16 marks) (IntermediateNov. 2001)

Advanced Partnership Accounts

6.19

Answer (a) M/s Neptune & Co. Profit and Loss Adjustment Account for the year ended 31 st March, 2001
Rs. To Land & Building (Loss on sale To Machinery (Loss on scrapping)4,300 To Provision for Doubtful Debts (Working note) To Stock Adjustment (Fall in the Market value) To Cas (Misappropriated) To Interest on Capital Mr. A Mr. B To Profit transferred to Capital Accounts: Mr. A Mr. B 61,220 61,220 1,98,400 1,22,440 1,98,400 32,580 11,160 43,740 700 11,400 By Prepaid expenses (Licence fee) By Stock Adjustment (items omitted) 6,600 1,000 5,820 10,000 By Partners Capital Accounts : Mr. A Mr. B 95,400 95,400 1,90,800 Rs.

(b)

Partners Capital Accounts As on 31st March, 2001

Mr. A 31.3.2001 To Drawings To Profit & Loss Adjustment Account To Balance c/d 95,400 4,55,800 95,400 1,96,380 Rs. 40,000 Mr. B Rs. 76,000 31.3.2000 By Balance b/d 31.3.2001 By Profit & Loss A/c By Profit & Loss Adjustment A/c: Interest on capital Profit for the year 5,91,200 3,67,780 5,91,200 32,580 61,220 3,67,780 11,160 61,220 95,400 95,400 Mr. A Rs. 4,02,000 Mr. B Rs. 2,00,000

6.20

Accounting

Working Notes : (1) Provision for doubtful debts charged to profit and loss adjustment account Provision for Doubtful Debts Accounts Rs. To Bad Debts To Balance c/d (required) 10,420 5,400 15,820 (2) Interest on Capitals Mr. A Mr. B Note : Rs. 3,62,000 9% p.a. = Rs. 32,580 Rs. 1,24,000 9% p.a. = Rs. 11,160 Misappropriation by cashier may be debited to cashier also. In that case, Rs. 700 will not be debited to Profit and Loss Adjustment Account and profit transferred to partners will be Rs. 1,23,140. By Balance b/d By Profit & Loss Adjustment A/c (balancing figure) 5,820 15,820 Rs. 10,000

Question 6 Manish, Jatin and Paresh were partners sharing Profits/ Losses in the ratio of Manish 40 percent, Jatin 35 percent, and Paresh 25 percent. The draft Balance Sheet of the partnership as on 31st December, 2001 was as follows :
Sundry Creditors Bills payable Loan from Jatin Current Accounts : Manish Jatin Paresh Capital Accounts : Manish Jatin Paresh 90,000 50,000 30,000 1,70,000 2,64,000 2,64,000 12,000 8,000 6,000 26,000 Rs. 30,000 8,000 30,000 Cash on hand and at Bank Stock Sundry Debtors Less : Provision for Doubtful Debts Plant and Machinery (at cost) Less : Depreciation Premises (at cost) 80,000 28,000 52,000 75,000 6,000 28,000 34,000 Rs. 67,000 42,000

Jatin retired on 31st December, 2001. Manish and Paresh continued in partnership sharing Profits/ Losses in the ratio of Manish 60 percent and Paresh 40 percent. 50 percent of Jatins Loan was repaid on 1.1.2002 and it was agreed that of the amount then remaining due to him a sum of Rs. 80,000 should remain as loan to partnership and the balance to be carried

Advanced Partnership Accounts

6.21

forward as ordinary trading liability. The following adjustments were agreed to be made to the above mentioned Balance Sheet: (i) Rs. 10,000 should be written off from the premises. (ii) Plant and Machinery was revalued at Rs. 58,000. (iii) Provision for doubtful debts to be increased by Rs. 1,200 (iv) Rs. 5,000 due to creditors for expenses had been omitted from the books of account. (v) Rs. 4,000 to be written off on stocks. (vi) Provide Rs. 1,200 for professional charges in connection with revaluation. As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be valued at an amount equal to one years purchase of the average profits of the preceding three years on the date of retirement. Before determining the said average profits a notional amount of Rs. 80,000 should be charged for remuneration to partners. The necessary profits before charging such remuneration were: Year ending 30.12.1999 Year ending 31.12.2000 Year ending 31.12.2001 Rs. 1,44,000 Rs. 1,68,000 Rs. 1,88,200 (As per draft accounts)

It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2001 be recomputed after charging the loss on revaluation in respect of premises and stock, the unprovided expenses (except professional expenses) and increase in the provision for doubtful debts. The continuing partners decided to eliminate goodwill account from their books. You are required to prepare: (i) Revaluation Account: (ii) Capital Accounts (merging current accounts therein): (iii) Jatins Accounts showing balance due to him; and (iv) Balance Sheet of Manish and Paresh as at 1 st January, 2002. (16 marks) (IntermediateMay 2002) Answer (i) Revaluation Account
Rs 10,000 1,200 5,000 4,000 By Plant and Machinery By Loss on revaluation transferred to Capital Accounts: Manish (40%) 6,160 Jatin (35%) 5,390 Paresh (25%) 3,850 Rs. 6,000

To Premises To Provision for Doubtful Debts To Outstanding Expenses To Stocks To Provision for Professional Charges1,200

21,400

15,400 21,400

6.22

Accounting

(ii)

Capital Accounts of Partners

Manish Rs. To Revalutation A/c (loss) 6,160 Jatin Rs. 5,390 Paresh Rs. 3,850 32,000 By Balance b/d By Current A/c Manish Rs. 12,000 Jatin Rs. 8,000 Paresh Rs. 30,000 6,000 20,000

90,000 50,000

To Goodwill (written off in 48,000 new Profit sharing ratio) To Personal A/c (Balance 80,610 transferred) To Balance c/d 79,840 1,34,000 86,000

20,150 56,000

By Goodwill 32,000 28,000 (old profit sharing) 1,34,000 86,000

56,000

(iii)
To Bank Account (50% of old loan) To Loan Account (transferred) To Balance c/d

Jatins Personal Account

Rs. 15,000 80,000 15,610 1,10,610 1,10,610 By Capital Accounts (Balance transferred) By Loan Account (old loan) 30,000 Rs. 80,610

(iv)
Liabilities Capital Accounts Manish Paresh Jatins Loan A/c Current Liabilities and Provisions Bills Payable Sundry Creditors (30,000+5,000) Jatins dues Provision for Professional charges

Balance Sheet of Manish and Paresh as on 1st January, 2002

Rs. 79,840 20,150 99,990 80,000 Assets Fixed Assets Plant and Machinery Less: Depreciation Premises Less: Written off Current Assets 8,000 35,000 15,610 1,200 59,810 2,39,800 Cash in hand & at Bank (67,00015,000) Sundry Debtors Less: Provision for doubtful debts Stock in trade 7,200 26,800 38,000 2,39,800 34,000 52,000 86,000 28,000 75,000 10,000 65,000 58,000 Rs.

Advanced Partnership Accounts

6.23

Working Notes : (1) Profit for the Year ending 31st December, 2001 As per draft accounts Less: Premises written off Provision for Doubtful debts Outstanding Expenses Stock (2) Valuation of Goodwill Profit for the year ending 31 st Dec.2001 (adjusted) Profit for the year ending 31 st Dec. 2000 Profit for the year ending 31 st Dec. 1999 Average Profits before partners salaries Less: Partnerss Salaries (notional) Super Profit and Goodwill (one years purchase) Question 7 Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was decided that Robert would retire on 31.3.2005 and in his place Richard would be admitted as a partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1. Balance Sheet of Ram, Rahim and Robert as at 31.3.2005: Liabilities Capital Accounts: Ram Rahim Robert General Reserve Sundry Creditors Loan from Richard Rs. Assets Cash in hand 1,00,000 Cash in Bank 1,50,000 Sundry Debtors 2,00,000 Stock in Trade 2,00,000 Plant & Machinery 8,00,000 Land & Building 2,00,000 Rs. 20,000 1,00,000 5,00,000 2,00,000 3,00,000 5,30,000 ________ 16,50,000 10,000 1,200 5,000 4,000 Rs. 1,88,200

20,200 1,68,000 1,68,000 1,68,000 1,44,000 4,80,000 1,60,000 80,000 80,000

16,50,000 Retirement of Robert and admission of Richard is on the following terms: (a) Plant & Machinery to be depreciated by Rs. 30,000. (b) Land and Building to be valued at Rs. 6,00,000. (c) Stock to be valued at 95% of book value. (d) Provision for doubtful debts @ 10% to be provided on debtors. (e) General Reserve to be apportioned amongst Ram, Rahim and Robert.

6.24

Accounting

(f)

The firms goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The relevant figures are: Year ended 31.3.2002 Year ended 31.3.2003 Year ended 31.3.2004 Profit Rs. 50,000 Profit Rs. 60,000 Profit Rs. 55,000

(g) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and the balance will be settled immediately. (h) Richards capital should be equal to 50% of the combined capital of Ram and Rahim. Prepare: (i) Capital accounts of the partners; and (16 Marks) (PE-II Nov. 2005) (ii) Balance Sheet of the reconstituted firm. Answer Partners Capital Accounts
Dr. Ram Rs. To Revaluation A/c (W.N. 1) Loan from Robert A/c Bank Balance c/d 2,45,000 2,55,000 To 55,000 2,37,000 2,43,000 36,667 2,62,000 18,333 By By Balance b/d Loan A/c transfer Bank 2,45,000 2,37,000 10,000 Rahim Rs. 6,000 Robert Rs. 4,000 Richard Rs. By Balance b/d General reserve Goodwill (W.N. 2) Ram Rs. 1,00,000 Rahim Rs. 1,50,000 Robert Rs. 2,00,000 Cr. Richard Rs.

To To To

2,00,000 58,000

By By

1,00,000 55,000 _______ 2,55,000 2,45,000

60,000 33,000 _______ 2,43,000 2,37,000

40,000 22,000 _______ 2,62,000 _______

Goodwill

2,00,000

To

Balance c/d

1,90,000 2,45,000

2,00,333 2,37,000

1,95,167 2,13,500

By

13,500 2,13,500

As per para 36 of AS 10, Accounting for Fixed Assets, goodwill should be recorded in the books only when some consideration in money or moneys worth has been paid for it. Therefore, the goodwill raised at the time of retirement of Robert is to be written off in new ratio among remaining partners including new partner Richard.

Advanced Partnership Accounts

6.25

Liabilities Capital Accounts: Ram Rahim Richard Sundry Creditors Loan from Robert Working Notes: (1) To To To

Balance Sheet as at 31.3.2005 after the admission of Richard Rs. Assets Land and Building 1,90,000 Plant and Machinery 2,00,333 Stock 1,95,167 Debtors 8,00,000 Cash at Bank (W.N. 3) 2,00,000 Cash in hand 15,85,500 Revaluation Account Rs.

Rs. 6,00,000 2,70,000 1,90,000 4,50,000 55,500 20,000 15,85,500

Rs. Land and Building Partners Capital A/cs: Ram Rahim Robert 10,000 6,000 4,000 20,000 90,000 50,000 60,000 55,000 1,65,000 70,000

Plant and Machinery Stock Debtors

30,000 By 10,000 By 50,000 ______

(2) Calculation of Goodwill:

90,000

Profit for the year ended 31.3.2002 Profit for the year ended 31.3.2003 Profit for the year ended 31.3.2004
1,65,000 Rs. 55,000 3

Average profit

Goodwill = Rs. 55,000 (3) To To Balance b/d Richards Capital A/c Bank Account

2 years = Rs. 1,10,000. Rs. 1,00,000 By 13,500 By 1,13,500 Roberts Capital A/c Balance c/d Rs. 58,000 55,500 1,13,500

6.26

Accounting

Question 8 The following was the Balance Sheet of A and B, who were sharing profits and losses in the ratio of 2:1 on 31.12.2006: Liabilities Capital Accounts A B Reserve fund Sundry creditors Bills payable Rs. Assets Plant and machinery 10,00,000 Building 5,00,000 Sundry debtors 9,00,000 Stock 4,00,000 Cash 1,00,000 29,00,000 Rs. 12,00,000 9,00,000 3,00,000 4,00,000 1,00,000

29,00,000 They agreed to admit C into the partnership on the following terms: (i) The goodwill of the firm was fixed at Rs.1,05,000. (ii) That the value of stock and plant and machinery were to be reduced by 10%. (iii) That a provision of 5% was to be created for doubtful debts. (iv) That the building account was to be appreciated by 20%. (v) There was an unrecorded liability of Rs.10,000.

(vi) Investments worth Rs.20,000 (Not mentioned in the Balance Sheet) were taken into account. (vii) That the value of reserve fund, the values of liabilities and the values of assets other than cash are not to be altered. (viii) C was to be given one-fourth share in the profit and was to bring capital equal to his share of profit after all adjustments. Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance Sheet of the newly reconstituted firm. (16 Marks) (PE II, Nov. 2007) Answer Memorandum Revaluation Account To To To To To Stock Plant & machinery Provision for doubtful debts Unrecorded liability Profit transferred to Partners Capital A/cs (in old ratio) Rs. 40,000 By 1,20,000 By 15,000 10,000 Building Investments Rs. 1,80,000 20,000

Advanced Partnership Accounts

6.27

A = 10,000 B = 5,000 To To Building Investments

15,000 2,00,000 1,80,000 By 20,000 By By By By

2,00,000
A To To To To To Loss on Revaluation Reserve Fund A (W.N.3) B (W.N.3) Balance c/d (Refer W.N.2) 7,500 B 3,750 C 3,750 By 2,25,000 By 17,500 By 8,750 By By

Stock Plant & machinery Provision for doubtful debts Unrecorded liability Loss transferred to Partners Capital A/cs (in new ratio) A = 7,500 B = 3,750 C = 3,750

2,00,000 40,000 1,20,000 15,000 10,000

15,000 2,00,000
B C -

Partners Capital Accounts

A Balance b/d Reserve Fund C (W.N.3) Profit on Revaluation Cash (Bal. Fig.) 16,27,500 8,13,750 10,00,000 5,00,000 6,00,000 3,00,000 17,500 10,000 8,750 5,000 8,40,000 8,40,000

4,50,000 2,25,000 -

11,70,000 5,85,000 16,27,500 8,13,750

5,85,000 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006 Liabilities Capital Accounts A B C Reserve Fund Sundry Creditors Bills Payable Working Notes: 1. Calculation of new profit and loss sharing ratio C will get 1/4 th share in the new profit sharing ratio. Therefore, remaining share will be 1-1/4 =3/4 Rs. Assets Plant & Machinery 11,70,000 Building 5,85,000 Sundry Debtors 5,85,000 Stock 9,00,000 Cash (1,00,000 + 8,40,000) 4,00,000 1,00,000 37,40,000 Rs. 12,00,000 9,00,000 3,00,000 4,00,000 9,40,000

37,40,000

6.28

Accounting

Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2 Share of B will be 3/4 x 1/3 = 1/4 New ratio will be A:B:C 1/2 : 1/4 : 1/4 2 : 1: 1 2. Calculation of closing capital of C Closing capitals of A & B after all adjustments are: A = Rs.11,70,000 B = Rs. 5,85,000 Since Bs capital is less than As capital, therefore Bs capital is taken as base. Hence, Cs closing capital should be Rs.5,85,000 i.e. at par with B (as per new profit and loss sharing ratio) 3. Adjustment entry for goodwill Partners A B C Goodwill as per old ratio 70,000 35,000 1,05,000 Adjustment entry will be: Cs Capital A/c To As Capital A/c To Bs Capital A/c Dr. 26,250 17,500 8,750 Goodwill as per new ratio 52,500 26,250 26,250 1,05,000 Effect + 17,500 + 8,750 26,250 26,250 26,250

As per para 36 of AS 10, Accounting for fixed Assets, goodwill should be recorded in the books only when some consideration in money or moneys worth has been paid for it. Therefore, the goodwill raised at the time of admission of C is to be written off in new ratio among all partners including new partner, C.