Commerce

Lecture No.- 01
- For CA Intermediate

Subject Name
Advanced Accounts

• Partnership

Nitin Goel
 PARTNERSHIP ACCOUNTS

TOPIC 1A Dissolution

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 The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Question
P, Q and R are partners sharing profit and losses in the ratio 2:2:1. The partners decided to dissolve the
partnership on 31st March, 2020 when their Balance Sheet was as under
Liabilities Amount Assets Amount
Capital Accounts: Land & Building 90,000
P 40,000 Plant & Machinery 30,000
Q 40,000 Furniture- 17,000
General Reserve 41,000 Investments 10,000
R's Loan A/c 10,000 Book Debts 40,000
Loan from D 80,000 Less: Prov. for bad debts (4,000) 36,000
Trade Creditors 20,000 Stock 24,000
Bills Payable 8,000 Bank 9,000
Outstanding Salary 5,000 Deferred Advertisement Expenses 8,000
Capital withdrawn:R 20,000
2,44,000 2,44,000
The following information is given to you:
(i) Realisation expenses amounted to Rs. 12,000 out of which Rs. 2,000 was borne by P.
(ii) A creditor agreed to takeover furniture of book value Rs. 8,000 at Rs. 7,200. The rest of the creditors
were paid off at a discount of 6.25%.
(iii) The other assets realized as follows:
Furniture - Remaining taken over by R at 90% of book value
Stock - Realised 120% of book value
Book Debts - Rs. 8,000 of debts proved bad, remaining were fully realized
Land & Building - Realised Rs. 1,10,000
Investments - Taken over by P at 15% discount
(iv) For half of his loan, D accepted Plant & Machinery and Rs. 5,000 cash. The remaining amount was
paid at a discount of 10%.
(v) Bills payable were due on an average basis of one month after 31st march, 2020, but they were paid
immediately on 31st March @ 6% discount "per annum".
Prepare the Realisation Account, Bank Account and Partners Capital Accounts..
Solution
REALISATION ACCOUNT
Rs. Rs.
To Land and Building 90,000 By Provision for bad debts 4,000
To Plant & Machinery 30,000 By Loan from D 80,000
To Furniture 17,000 By Creditors 20,000
To Investments 10,000 By Bills payable 8,000
To Book Debts 40,000 By Outstanding salary 5,000
To Stock 24,000 By R’s Capital
To P’s Capital Furniture 8,100 (9,000*.09) 8,100
Real. Expenses 2,000 2,000 By P’s Capital
To Bank Investments 8,500 8,500
Bill payable 7,960 By Bank A/c
D’s Loan (5,000+36,000) 41,000 Stock 28,800
Creditors 12,000 Debtors 32,000
Salary 5,000 Land & Building 1,10,000 1,70,800
Real. Expenses 10,000 75,960
To Profit transferred
P 6,176
Q 6,176
R 3,088 15,440
3,04,440 3,04,440
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 PARTNER’S CAPITAL ACCOUNTS
P Q R P Q R
To Balance b/d - - 20,000 By Balance b/d 40,000 40,000 -
To Deferred Adv 3,200 3,200 1,600 By General 16,400 16,400 8,200
Expenses reserve
To Realisation 8,500 - 8,100 By R’s Loan - - 10,000
A/c
To Bank 52,876 59,376 - By Realisation A/c 2,000 - -
By Realisation A/c 6,176 6,176 3,088
(Profit)
By Bank - - 8,412
64,576 62,576 29,700 64,576 62,576 29,700

BANK ACCOUNT
Rs. Rs.
To Balance b/d 9,000 By Realisation A/c 75,960
To Realisation A/c 1,70,800 By P’s Capital 52,876
To R’s Capital 8,412 By Q’s Capital 59,376
1,88,212 1,88,212
Working Notes:
1. Amount paid to creditors
Rs.
Book Value 20,000
Less: Creditors taking over Furniture (7,200)
12,800
Less: Discount @ 6.25% (800)
12,000
2. Payment to Bills Payable
Rs.
Book Value 8,000
Less: Discount for early payment {8000 x 6% x (1/12)} (40)
7,960
3. Payment to D’s Loan
Rs.
Book value 80,000
50% of Loan adjusted as below:
Plant & Machinery accepted at Book Value (Rs. 5,000
30,000) and Rs. 5,000 in cash
Balance 50% of Loan adjusted as below:
In cash after allowing discount of 10% i.e. Rs. 36,000
40,000 – Rs. 4,000 = Rs. 36,000.
4. Furniture taken over by R
Rs.
Book value 17,000
Less: Furniture of Book Value Rs. 8000 (8,000)
accepted by trade creditors
9,000
Less: 10% of Book Value (900)
8,100

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TOPIC 1B Insolvency of Partner

Question
P, Q, R and S had been carrying on business in partnership sharing profits & losses in the ratio of 4:3:2:1.
They decided to dissolve the partnership on the basis of following Balance Sheet as on 30th April, 2020:
Liabilities Rs. Assets Rs.
Capital Accounts Capital Accounts
P 1,68,000 R 25,000
Q 1,08,000 2,76,000 S 18,000 43,000
General reserve 95,000 Land & building 2,46,000
Capital reserve 25,000 Furniture & fixtures 65,000
Sundry creditors 36,000 Stock 1,00,000
Mortgage loan 1,10,000 Debtors 72,500
Cash in hand 15,500
5,42,000 5,42,000
(i) The other assets realized as follows:
Land & building 2,30,000
Furniture & fixtures 42,000
Stock 72,000
Debtors 65,000
(ii) Expenses of dissolution amounted to Rs. 7,800.
(iii) Further creditors of Rs. 18,000 had to be met.
(iv) R became insolvent and nothing was realized from his private estate.
Applying the principles laid down in Garner Vs. Murray, prepare the Realisation Account, Partners’
Capital Accounts and Cash Account.

Solution
REALISATION ACCOUNT
Particulars Amount Particulars Amount
To Land and building 2,46,000 By Sundry creditors 36,000
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 To Furniture & fixtures 65,000 By Mortgage loan 1,10,000
To Stock 1,00,000 By Cash Account
To Debtors 72,500 Land and building 2,30,000
To Cash A/c Stock 72,000
Expenses 7,800 Furniture & Fix. 42,000
Creditors (36,000+18,000) 54,000 Debtors 65,000 4,09,000
Mortgage loan 1,10,000 1,71,800 By Partners’ Capital A/cs (Loss)
P = 40,120 Q = 30,090
R = 20,060 S = 10,030 1,00,300
6,55,300 6,55,300

PARTNER’S CAPITAL ACCOUNTS

Particulars P Q R S Particulars P Q R S
To Bal. b/d - - 25,000 18,000 By Bal. b/d 1,68,000 1,08,000 - -
To Real. A/c 40,120 30,090 20,060 10,030 By General 38,000 28,500 19,000 9,500
(Loss) Reserve
To R’s 12,636 8,424 -- -- By Capital 10,000 7,500 5,000 2,500
Capital A/c Reserve
(Deficiency)
To Cash A/c 2,03,364 1,35,576 - - By Cash A/c 40,120 30,090 - 10,030
(Real. loss)
By P’s 12,636
Capital A/c
By Q’s 8,424
Capital A/c
By Cash A/c 6,000
2,56,120 1,74,090 45,060 28,030 2,56,120 1,74,090 45,060 28,030
Note: P, Q and S brought cash to make good, their share of the loss on realization. However in actual
practice they will not be bringing any cash, only a notional entry will be made.

CASH ACCOUNT
To Balance b/d 15,500 By Realisation A/c: 1,71,800
To Realisation A/c: 4,09,000 By P’s Capital A/c 2,03,364
To P’s Capital A/c 40,120 By Q’s Capital A/c 1,35,576
To Q’s Capital A/c 30,090
To S’s Capital A/c 10,030
To S’s Capital A/c 6,000
5,10,740 5,10,740
Working Note:
As per Garner Vs. Murray rule, solvent partners have to bear the loss due to insolvency of a partner in
their capital ratio. Calculation of Capital Ratio of Solvent Partners
P Q S
Opening capital 1,68,000 1,08,000 (18,000)
Add: General reserve 38,000 28,500 9,500
Capital Reserve 10,000 7,500 2,500
2,16,000 1,44,000 (6,000)
Though S is a solvent partner yet he cannot be called upon to bear loss on account of insolvency of R
because his capital account has a debit balance.
Therefore, capital ratio of P & Q = 216:144 = 3:2
Deficiency of R = Rs. {(25,000 + 20,060) – (19,000 + 5,000)} = Rs.45,060 – Rs.24,000 = Rs.21,060
Deficiency of R will be shared by P & Q in the capital ratio of 3 : 2 i.e.
P = Rs. 21,060 X 3/5 = Rs.12,636 Q = Rs.21,060 X 2/5 = Rs.8,424

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 The copyright of these notes is with C.A. Nitin Goel
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Question
X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance Sheet of the
firm as on 31st March, 2020 is as below:
Liabilities Rs. Assets Rs.
X’ s Capital 60,000 Factory Building 96,640
Y’ s Capital 40,000 Plant & Machinery 65,100
Z’ s Capital 50,000 Trade Receivables 21,600
Y’ s Loan 18,000 Inventories 49,560
Trade Payables 66,000 Cash at Bank 1,100
2,34,000 2,34,000
On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since the
realisation of assets was protracted, they decided to distribute amounts as and when feasible and for this
purpose they appoint Z who was to get as his remuneration 1% of the value of the assets realised other
than cash at bank and 10% of the amount distributed to the partners.
Assets were realised piecemeal as under:
Rs.
I 74,600
II 69,301
III 40,000
IV 28,000
Dissolution expenses were provided for estimated amount of 12,000
The creditors were settled finally for 63,600
You are required to prepare a statement showing distribution of cash amongst the partners by "Highest
Relative Capital Method".

Solution
Statement showing distribution of cash amongst the partners
(Under Higher Relative Capital method)
Particulars Amount Trade Y’s loan Capital A/cs
Available Payables X Y Z
Balance due 66,000 18,000 60,000 40,000 50,000
1st Installment (including) cash
and bank balances 75,700
(1,100+74,600)
Less: Dissolution Expenses (12,000)
provided for
63,700
Less: Z’s remuneration of (746)
1% on assets realized
(74,600 x 1%)
62,954
Less: Payment to Trade
Payables (62,954) (62,954) - - - -
Balance Due - 3,046 18,000 60,000 40,000 50,000
2nd Installment 69,301
Less: Z’s remuneration of (693)
1% on assets realized
(69,301 x 1%)
68,608
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Less: Payment to Trade
Payables (646) (646)
Transferred to Realisation A/c 2,400
Less: Repayment of Y’s Loan (18,000) (18,000)
Amount available for
distribution to partners 49,962
Less: Z’s remuneration of
10% of the amount
distributed to partners (4,542)
(49,962 x 10/110)
Balance to be distributed
to partners 45,420
Less: Payment to Z towards
relative higher capital (W.N. 1) (2,000) (2,000)
43,420 48,000
Less: Payment to X & Z. in 5:4
towards excess capital (W.N.1) (18,000) (10,000) (8,000)
Balance Due 25,420 50,000 40,000 40,000
Less: Paid to X, Y & Z in 5:4:4 (25,420) (9,778) (7,821) (7,821)
Balance Due 40,222 32,179 32,179
3rd Installment 40,000
Less: Z’s remuneration of
1% on assets realized
(40,000 x 1%) (400)
Amount available for 39,600
distribution to partners
Less: Z’s remuneration of
10% of the amount
distributed to partners (3,600)
(39,600 x 10/110)
Balance to be distributed 36,000
to partners
Less: Paid to X, Y & Z in 5:4:4 (36,000) (13,846) (11,077) (11,077)
Balance Due 26,376 21,102 21,102
4th Installment 28,000
Less: Z’s remuneration of
1% on assets realized
(28,000 x 1%) (280)
Amount available for 27,720
distribution to partners
Less: Z’s remuneration of
10% of the amount
distributed to partners (2,520)
(27,720 x 10/110)
Balance to be distributed 25,200
to partners
Less: Paid to X, Y & Z in 5:4:4 (25,200) (9,692) (7,754) (7,754)
Loss Suffered by partners 16,684 13,348 13,348

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Working Notes 1:
Highest Relative Capital Method
X Y Z
Balance (i) 60,000 40,000 50,000
Profit sharing ratio (ii) 5 4 4
Capital profit sharing ratio 12,000 10,000 12,500
Capital taking Y’s capital (iii) 50,000 40,000 40,000
Excess capital (iv) = (i) –(iii) 10,000 Nil 10,000
Profit sharing ratio 5 4
Capital profit sharing ratio 2,000 2,500
Capital taking X’s capital (v) 10,000 8,000
Excess capital (vi) = (iv) –(v) Nil 2,000
Therefore, firstly Rs.2,000 is to be paid to Z, then X and Z to be paid in proportion of 5:4 upto Rs. 18,000
to bring the capital of all partners X, Y and Z in proportion to their profit sharing ratio. Thereafter,
balance available will be paid in the profit sharing ratio 5:4:4 to all partners viz X, Y and Z

Question
The following is Balance Sheet of A, B, C on 31st Dec, 2020 when they decided to dissolve partnership:
Liabilities Rs. Assets Rs.
Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts :
A 15,000
B 18,000
C 9,000
49,000 49,000
The assets realised the following sums in instalments:
Rs.
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100
(includes saving in expenses 100)
34,000
The expenses of realisation were expected to be Rs. 500 but ultimately amounted to Rs. 400 only. Show
how at each stage the cash received should be distributed between partners. They share profits in the
ratio of 2:2:1. Show by Maximum Loss Method.

Solution
Statement showing distribution of cash amongst the partners
(Under Maximum Loss method)
Particulars Amount Creditors A’s loan Capital A/cs
Available A B C
Balance due 2,000 5,000 15,000 18,000 9,000
1st Installment (including) cash
and bank balances 1,500
(500+1000)

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 Less: Dissolution Expenses (500)
provided for
1,000
Less: Payment to Creditors (1,000) (1,000) - - - -
Balance Due - 1,000 5,000 15,000 18,000 9,000
2nd Installment 3,000
Less: Payment to Creditors (1,000) (1,000)
Less: Repayment of A’s Loan (2,000) (2,000)
Balance Due - - 3,000 15,000 18,000 9,000
3 Installment
rd
3,900
Less: Repayment of A’s Loan (3,000) (3,000)
Less: Distribution as per (900) (600) (300)
W.N.1
Balance Due - - - 15,000 17,400 8,700
4th Installment 6,000
Less: Distribution as per (6,000) (960) (3,360) (1,680)
W.N.2
Balance Due - - - 14,040 14,040 7,020
5th Installment 20,100
Less: Distribution as per (20,100) (8,040) (8,040) (4,020)
W.N.3
Loss suffered/Amount - - - 6,000 6,000 3,000
Unpaid

W.N.1: Calculation to determine the mode of distribution of Rs.900

Total A B C
Balance 42,000 15,000 18,000 9,000
Less: Maximum Possible loss shared in PSR (41,100) (16,440) (16,440) (8,220)
+900 -1,440 +1,560 +780
Deficiency of A’s capital written off against (960) (480)
those of B and C in the ratio of their capital,
18,000 : 9,000 (Garner vs. Murray)
Manner in which the first Rs.900 should be + 600 + 300
distributed

W.N.2: Distribution of Rs.6,000

Balance 41,100 15,000 17,400 8,700
Less: Maximum Possible loss shared in PSR (35,100) (14,040) (14,040) (7,020)
Balance available and to be distributed 6,000 960 3,360 1,680

W.N.3: Distribution of Rs. 20,100

Balance 35,100 14,040 14,040 7,020
Less: Maximum Possible loss shared in PSR (15,000) (6,000) (6,000) (3,000)
Manner of distribution of Rs.20,100 20,100 8,040 8,040 4,020

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TOPIC 3 Sale of Business to Company or Conversion of Firm into Company

BOOKS OF FIRM

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 BOOKS OF COMPANY
1. Record the acquisition of business from Firm
Business Purchase A/c Dr. (with the Purchase Consideration)
To M/s Firm A/c

2. Taking over Assets & Liabilities of Firm

Assets A/c Dr. (Individually at taken over value)
Goodwill A/c Dr. (Difference)
To Liabilities A/c (Individually at taken over value)
To Business Purchase A/c (with the Purchase Consideration)
To Capital Reserve A/c (Difference)

3. Making Payment to Firm

M/s Firm A/c Dr.
Discount on issue of debentures A/c Dr.
To Equity share capital
To Preference share capital
To Debentures
To Securities Premium
To Bank A/c

4. Record Reimbursement of Realisation expenses of the Firm

Goodwill/Capital Reserve A/c Dr.
To Bank A/c

5. Eliminate unrealized profit included in the unsold stock/ stock reserve

Goodwill/Capital Reserve A/c Dr.
To Stock A/c

6. Elimination of Inter-company/firm owing

Liability A/c Dr.
To Asset A/c
i.e.
Creditors A/c Dr. OR Bills Payable A/c Dr.
To Debtors A/c To Bills Receivable A/c
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Question
Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet of the firm
is as follows:
Liabilities Rs. Assets Rs.
Fixed Capital Fixed Assets 45,000
Yash 50,000 Investments 15,000
Tanish 20,000 Current Assets
Ruchika 10,000 80,000 Stock 10,000
Current Account: Debtors 27,500
Yash 6,000 Cash & Bank 12,500 50,000
Ruchika 4,000 10,000 Current Account:
Unsecured Loans 15,000 Tanish 10,000
Current Liabilities 15,000
1,20,000 1,20,000
On 1st April, 2020 all the partners agreed to form a new company YTR Pvt. Ltd., which shall take over
the firm as going concern including goodwill, but excluding cash and bank balances.
The following matters were also agreed upon:
a) Goodwill shall be valued at 3 years’ purchase of super profits.
b) Actual profit for the purpose of goodwill valuation will be Rs. 20,000.
c) The normal rate of return will be 17.50% per annum of Fixed Capital.
d) All other Assets and Liabilities will be taken over at book value.
e) The purchase consideration will be paid partly in share of Rs. 1 each and partly in cash. Yash and
Tanish to acquire interest in new company in the ratio of 3:2 at face value. Ruchika agreed to retire
after taking her share in cash.
f) Realisation expenses amounted to Rs. 5,000.
Prepare Realisation Account, Cash and Bank Account, YTR Private Limited Account and Capital
Accounts of the partners

Solution
REALISATION ACCOUNT
Rs Rs
To Sundry assets By Unsecured loans 15,000
Fixed assets 45,000 By Current liabilities 15,000
Investments 15,000 By YTR(P)Ltd. (WN-2) 85,500
Stock 10,000
Debtors 27,500 97,500
To bank a/c 5,000
(Realisation expenses
To Profit on realisation
transferred to
Yash 6,500 13000
Tanish 4,333
Ruchika 2,167
1,15,500 1,15,500

CASH AND BANK ACCOUNT

Rs Rs
To Balance b/d 12,500 By Realisation A/c 5,000
To YTR(P)Ltd. 8,667 By Ruchika capital A/c 16,167
(balancing figure )
21,167 21,167

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 YTR(P)Ltd.
Rs. Rs.
To Realisation a/c 85,500 By Cash and Bank a/c 8,667
By equity shares in YTR (P)Ltd 76,833
(balancing figure)
85,500 85,500

PARTNERS CAPITAL ACCOUNTS

Yash Tanish Ruchika Yash Tanish Ruchika
To Current A/c - 10,000 - By Balance b/d 50,000 20,000 10,000
To Cash & bank - - 16,167 By Current A/c 6,000 - 4,000
A/c
To Equity Shares 46,100 30,733 By Realisation A/c 6,500 4,333 2,167
in YTR (P) Ltd.
(in 3:2)
ToTanish’s capital 16,400 - By Yash’s capital 16,400
A/c adjustment A/c adjustment
62,500 40,733 16,167 62,500 40,733 16,167
Working Notes:
Calculation of Goodwill
Rs.
Actual profits 20,000
Less: Normal rate of return @ 17.5% of fixed capital worth Rs.80,000 14,000
Super profits 6,000
Goodwill valued at 3 years’ purchase 18,000

Calculation of Purchase Consideration

Rs.
Total value of assets as per Balance Sheet 1,20,000
Less: Cash and Bank Balances 12,500
Current account 10,000
97,500
Add: Goodwill 18,000
1,15,500
Less: Liabilities taken over
Unsecured load 15,000
Current Liabilities 15,000
Purchase Consideration 85,500

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 The copyright of these notes is with C.A. Nitin Goel
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Question Inter May 2019 (20 Marks)
The following is the Balance Sheet of Messers Red and Black as on 31st March 2019:
Liabilities ₹ Assets ₹
Red’s Capital 80,000 Buildings 1,00,000
Black’s Capital 1,00,000 1,80,000 Stock 60,000
Red’s Loan 20,000 Debtors 40,000
General Reserve 20,000 Investment
Creditors 40,000 6% Debentures in Cool Ltd. 40,000
Cash 20,000
2,60,000 2,60,000
It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st April 2019.
He is required to contribute cash towards goodwill and ₹ 20,000 towards capital.
The following further information is furnished:
(i) The partners Red and Black shared the profits in the ratio 3:2.
(ii) Mr. Red was receiving a salary of ₹ 1,000 p.m. from the very inception of the firm in addition to
share of profit.
(iii) The future profit ratio between Red, Black and White will be 3:1:1. Mr. Red will not get any salary
after the admission of Mr. White.
(iv)
a. The goodwill of the firm shall be determined on the basis of 2 years’ purchase of the average profits
from business of the last 5 years. The particulars of the profits are as under :
₹
Year ended 31-03-15 Profit 40,000
Year ended 31-03-16 Loss 20,000
Year ended 31-03-17 Profit 40,000
Year ended 31-03-18 Profit 50,000
Year ended 31-03-19 Profit 60,000
The above profits and losses are after charging the salary of Mr. Red. The profit of the year ended
31st March 2015 included an extraneous profit of ₹ 60,000 and the loss of the year ended 31st
March 2016 was on account of loss by strike to the extent of ₹ 40,000.
b. It was agreed that the value of the goodwill of the firm should not appear in the books of the firm.
(v) The trading profit for the year ended 31st March, 2020 was ₹ 80,000 before depreciation.
(vi) Each partner had drawn ₹ 2,000 per month as drawing during the year 2019-20.
(vii) The value of the other assets and liabilities as on 31st March, 2020 were as under:
Building (before depreciation) 1,20,000
Stock 80,000
Debtors Nil
Investment 40,000
Creditors Nil
(viii) Interest was @ 6% per annum on Red's loan was not paid during the year.
(ix) Interest on Debenture was received during the year.
(x) Depreciation is to be provided @ 5% on Closing Balance of Building.
(xi) Partners applied for conversion of the firm into a private Limited Company i.e. RBW Private
Limited. Certificate received on 1.4.2020.
They decided to convert Capital accounts of the partners into share capital, in the ratio of 3: 1: 1 (on the
basis of total Capital as on 31.3.2020). If necessary, partners have to subscribe to fresh capital or
withdraw.

You are required to prepare:

(1) Profit & Loss Account for the year ended 31st March, 2020 in the books of M/s Red and Black.
(2) Balance Sheet as on 1st April, 2020 in the books of RBW Private Limited.

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Solution
Profit and Loss Account for the year ending on 31st March, 2020
₹ ₹
To Depreciation of Building 6,000 By Trading Profit 80,000
To Interest on Red’s loan 1,200 By Interest on Investment 2,400
To Net Profit to:
Red’s Capital A/c 45,120
Black’s Capital A/c 15,040
White’s Capital A/c 15,040 75,200
82,400 82,400
Balance Sheet of the RBW Pvt. Ltd. as on 1st April, 2020
Note No. Amount
Equity and Liabilities
Shareholders’ funds
Share capital 2,39,040
Non Current liabilities
Long term borrowings 1 21,200
Total 2,60,240
II. Assets
Non-current Assets
Property, Plant & Equipment & Intangible Assets
Property, Plant & Equipment 2 1,14,000
Non-current investments 40,000
Current Assets
Inventories 80,000
Cash and cash equivalents 26,240
2,60,240
Notes to Accounts
1. Short term borrowings
Loan from Red 21,200
2. Property, Plant & Equipment
Building 1,14,000
Working Notes:
1. Calculation of goodwill
2015 2016 2017 2018 2019
Profits/(Loss) 40,000 (20,000) 40,000 50,000 60,000
Adjustment for extraneous profit of 2015 (60,000) 40,000 - - -
and abnormal loss of 2016
(20,000) 20,000 40,000 50,000 60,000
Add: Remuneration of Red 12,000 12,000 12,000 12,000 12,000
(8,000) 32,000 52,000 62,000 72,000
Less: Debenture Interest being (2,400) (2,400) (2,400) (2,400) (2,400)
nonoperating income
(10,400) 29,600 49,600 59,600 69,600
Total profit from 2016 to 2019 2,08,400
Less: Loss for 2015 (10,400)
1,98,000
Average Profit 39,600
Goodwill equal to 2 years purchase 79,200
Contribution from White for 1/5 share 15,840
*Investments are assumed to be non-trading investments
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2. Adjustment for goodwill
To be raised in old Ratio To be written off in new ratio Difference
Red 47,520 47,520 Nil
Black 31,680 15,840 15,840 Cr.
White 15,840 15,840 Dr.

3. Partner’s Capital Accounts

Red Black White Red Black White
To Drawings 24,000 24,000 24,000 By Balance b/d 80,000 1,00,000 --
To Black 15,840 By General Reserve 12,000 8,000 --
To Balance c/d 1,13,120 1,14,880 11,040 By White - 15,840 --
By Bank -- -- 35,840
By Profit& LossA/c 45,120 15,040 15,040
1,37,120 1,38,880 50,880 1,37,120 1,38,880 50,880

4. Balance Sheet of the firm as on 31st March, 2020

Liabilities ₹ ₹ Assets ₹ ₹
Red’s Capital 1,13,120 Land & Building 1,20,000
Black’s Capital 1,14,880 Less; Depreciation (6,000) 1,14,000
White’s Capital 11,040 Investments 40,000
Red’s Loan 20,000 Stock in trade 80,000
Add: Interest due 1,200 21,200 Cash (W.N. 6) 26,240
2,60,240 2,60,240

5. Cash Balance as on 31.3.2020

₹ ₹
Cash trading profit 80,000
Add: Debentures Interest 2,400
Add: Decrease in Debtors Balance 40,000
1,22,400
Less: Increase in Stock 20,000
Less: Decrease in Creditors 40,000 (60,000)
62,400
Add: Opening cash balance 20,000
Add: Cash brought in by White 35,840
Less: Drawings 72,000
Less: Additions to Building 20,000 (92,000)
Closing cash balance 26,240

6. Distribution of shares – Conversion into Company

Capital: Red
1,13,120
Black
1,14,880
White
11,040
Share Capital 2,39,040
Distribution of shares: Red (3/5) 1,43,424
Black (1/5) 47,808
White (1/5) 47,808
Red should subscribe shares of ₹ 30,304 (₹ 1,43,424 – ₹ 1,13,120) and White should subscribe shares of ₹
36,768 (₹ 47,808 less 11,040). Black withdraws ₹ 67,072 (₹ 47,808 – ₹ 1,14,880).

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Question
‘S’ and ‘T’ were carrying on business as equal partner. Their Balance Sheet as on 31st March, 2020:
Liabilities Rs. Assets Rs.
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business were carried on till 30th September, 2020. S and T both withdrew in
equal amounts half the amount of profits made during the current period of 6 months after 10% per
annum had been written off on building and plant and 5% per annum written off on furniture. During
the current period of 6 months, creditors were reduced by Rs. 50,000, Bills payable by Rs. 11,500 and
Bank overdraft by Rs. 75,000. The Joint Life policy was surrendered for Rs. 47,500 on 30th September,
2020. Stock was valued at Rs. 3,17,000 and debtors at Rs. 3,25,000 on 30th September, 2020. The other
items remained the same as on 31st March, 2020.
On 30th September, 2020 the firm sold its business to ST Ltd. The value of goodwill was estimated at
Rs. 5,40,000 and the remaining assets were valued on the basis of the Balance Sheet as on 30th
September, 2020. The ST Ltd. paid the purchase consideration in equity shares of Rs. 10 each. You are
required to prepare a Realization Account and Capital accounts of the partners

Solution
REALISATION ACCOUNT
Particulars Rs. Particulars Rs.
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Shares in ST Ltd. (W.N.3) 18,80,000
Building 8,64,500
Furniture 73,125
To Profit:
S 2,70,000
T 2,70,000
22,83,500 22,83,500

PARTNERS’ CAPITAL ACCOUNTS

Date Particulars S T Date Particulars S T
2020 2020
April 1 To cash Drawings 20,000 20,000 April 1 By Balance 6,40,000 6,60,000
W.N. 2) b/d
Sept. 30 To shares in ST 9,30,000 9,50,000 Sept. 30 By Profit 40,000 40,000
Ltd. (W.N. 2)
By Realisation 2,70,000 2,70,000
A/c (Profit)
9,50,000 9,70,000 9,50,000 9,70,000

Working Notes:
(1) Ascertainment of total capital:
Balance Sheet as at 30th September, 2020
Liabilities Rs. Assets Rs.
Sundry creditors 2,77,500 Building 9,10,000
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 Bills payable 51,000 Less: Depreciation (45,500) 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (Bal. fig.) 13,40,000 Less: Depreciation (8,625) 1,63,875
Furniture 75,000
Less: Depreciation (1,875) 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500
(2) Profit earned during six months to 30 September, 2020
Total capital (of S and T) on 30th September, 2020 (W.N. 1) 13,40,000
Capital on 1st April, 2020
S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is Rs.40,000 X 2 = Rs.80,000 (shared
equally by partners S and T). Half of the profits, has been withdrawn by both the partners equally i.e.
drawings Rs.40,000 (Rs.80,000 X ½) withdrawn by S and T in 1 : 1 (i.e. Rs.20,000 each).

(3) Purchase consideration:

Total Assets (W.N. 1) 17,43,500
Add: Goodwill 5,40,000
22,83,500
Less: Liabilities (2,77,500 + 51,000 + 75,000) (4,03,500)
Purchase consideration 18,80,000
Note: Solution is given on basis that reduction in bank overdraft is after surrender of Joint life policy

Question
X, Y and Z were in partnership sharing profits and losses 3:2:1. There was no provision in the agreement
for interest on capital or drawings.
X died on 31.3.2019 and on that date, the partners' balance were as under:
Capital Account: X - ₹ 60,000, Y - ₹ 40,000, Z - ₹ 20,000.
Current Account: X - ₹ 40,000 (Cr.), Y - ₹ 30,000 (Cr.), Z - ₹ 10,000 (Dr.)
By the partnership agreement, the sum due to X's estate was required to be paid within a period of 3
years, and minimum installment of ₹ 30,000 each were to be paid, the first such installment falling due
immediately after death and the subsequent installments at half-yearly intervals. Interest @ 6% p.a. was
to be credited half yearly. In ascertaining his share, goodwill (not recorded in the books) was to be valued
at ₹ 90,000 and the assets, excluding the Joint Endowment Policy (mentioned below), were valued at ₹
60,000 in excess of the book values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets. The
Joint Assurance Policy shown in the books at ₹ 40,000 matured on 1.4.2019, realizing ₹ 52,000;
payments of ₹ 30,000 each were made to X's Executors on 1.4.2019, 30.9.2019 and 31.3.2020. Y and Z
continued trading on the same terms as previously and the· net profit for the year ending 31.3.2020
(before charging the interest due to X's estate) amounted to -- ₹ 52,000. During that period, the partners'
drawings were Y - ₹ 15,000; and Z ₹ 8,000.
On 1.4.2020, the partnership was dissolved and an offer to purchase the business as a going concern for ₹
1,80,000 was accepted on that day. A cheque for that sum was received on 30.6.2020.
The balance due to X's estate, including interest, was paid on 30.6.2020 and on that day, Y and Z
received the sums due to them.
You are required to write-up the Partners’ Capital and Current Accounts from 1.4.2019 to 30.6.2020.
Show also the account of the executors of X.

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Solution
Partner’s Current Accounts
Particulars X Y Z Particulars X Y Z
31.3.2019 31.3.2019
To Balanced b/d - - 10,000 By Balance b/d 40,000 30,000 -
To X’s Current A/c - 30,000 15,000 By Y’s Current A/c 30,000 - -
– goodwill – Goodwill
To X’s current A/c - 20,000 10,000 By Z’s current A/c 15,000 - -
– Revaluation Profit – goodwill
To X’s capital A/c 1,21,000 -- - By Y’s current A/c 20,000 - -
–Transfer – Revaluation profit
By Z’s Current A/c 10,000
– Revaluation profit
By Joint assurance 6,000 4,000 2,000
policy
-- -- -- By Balance c/d -- 16,000 33,000

1,21,000 50,000 35,000 1,21,000 50,000 35,000

1.4.19 31.3.20
To Balance b/d 16,000 33,000 By Profit & loss App. A/c 29,136 14,568
31.3.20 By Balance c/d 1,864 26,432
To Drawings A/c 15,000 8,000
31,000 41,000 31,000 41,000
1.4.20 1.4.20
To Balance b/d 1,864 26,432 By Realisation A/c profit 31,674 15,837
To Y’s Capital A/c – Transfer 29,810 -- By Z’s Capital A/c – transfer - 10,595
31,674 26,432 31,674 26,432

Partners’ Capital Accounts

Particulars X Y Z Particulars X Y Z
31.3.2019 ₹ ₹ ₹ 31.3.2019 ₹ ₹ ₹
To X’s Executors 1,81,000 --- --- By Balance b/d 60,000 40,000 20,000
A/c
To Balance c/d -- 40,000 20,000 By X’s Current A/c 1,21,000 -- --
1,81,000 40,000 20,000 1,81,000 40,000 20,000
31.3.20 1.4.20
To Z’s current A/c - 10,595 By Balance b/d 40,000 20,000
transfer
30.6.20 1.4.20
To Bank A/c 69,810 9,405 By Y’s current A/c 29,810 --
– transfer
69,810 20,000 69,810 20,000

X’s Executor’s Account

Date Particulars ₹ Date Particulars ₹
01.4.2019 To Bank A/c 30,000 31.3.2019 By X’s Capital A/c 1,81,000
31.3.2019 To Balance c/d 1,51,000
1,81,000 1,81,000
30.9.2019 To Bank A/c 30,000 01.4.2019 By Balance b/d 1,51,000
30.9.2019 To Balance c/d 1,25,530 30.9.2019 By Interest A/c 4,530
1,55,530 1,55,530
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 31.3.2020 To Bank A/c 30,000 1.10.2019 By Balance b/d 1,25,530
31.3.2020 To Balance c/d 99,296 31.3.2020 By Interest A/c 3,766
1,29,296 1,29,296
30.6.2020 To Bank A/c 1,00,785 01.4.2020 By Balance b/d 99,296
30.6.2020 By Interest A/c 1,489
1,00,785 1,00,785

Working Notes:
Adjustment in regard to Goodwill
Particulars X Y Z
Share of goodwill before death 45,000 30,000 15,000
Share of goodwill after death -- 60,000 30,000
Gain ( + ) Sacrifice ( - ) (45,000) 30,000 15,000
Cr. Dr. Dr.
Adjustment in regard to revaluation of assets
Particulars X Y Z
Share of profit on revaluation credited to 30,000 20,000 10,000
all the partners
Debited to the continuing partners -- 40,000 20,000
(30,000) 20,000 10,000
Cr. Dr. Dr.
Ascertainment of profit for the year ended 31.3.20
₹ ₹
Profit before charging interest on balance due to X’s executors 52,000
Less: Interest payable to X’s executors:
From 1.04.19 to 30.09.19 4,530
From 1.10.19 to 31.03.20 3,766 (8,296)
Balance of profit to be shared by Y and Z in 2:1 43,704

Ascertainment of Sundry Assets as on 31.3.2020

Liabilities ₹ Assets ₹
Capital Account – Y 40,000 Sundry Assets (Balancing figure) 1,31,000
Capital Account – Z 20,000 Partners Current A/c – Y 1,864
X’s Executors A/c 99,296 Partner’s Current A/c - Z 26,432
1,59,296 1,59,296

Realisation Account
₹ ₹
To Sundry Assets A/c 1,31,000 By Bank A/c 1,80,000
(Purchase consideration)
To Interest A/c – X’s Executors 1,489
To Partner’s Capital A/c – Y 31,674
To Partner’s Capital A/c – Z 15,837
1,80,000 1,80,000

Bank Account
₹ ₹
To Purchase consideration 1,80,000 By X’s Executors A/c 1,00,785
By Y 69,810
By Z 9,405
1,80,000 1,80,000

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Question
A & B are partners in AB & Co. sharing Profit/Loss in the ratio of 3:2 and B & C are partners in BC &
Co. sharing Profit/Loss in the ratio of 2: 1 carrying on same type of business. On 1st April, 2020, A, B &
C decide to form a new Partnership Firm ABC & Co. by amalgamating AB & Co. and BC & Co. A, B
& C will share Profit/Loss in the ratio of 3:2:1 in ABC & Co.
Their Balance Sheets on 1st April, 2020 were as under:
Liabilities AB & Co. BC & Co. Assets AB & Co. BC & Co.
Capitals Buildings 20,000 10,000
A 66,000 - Plant & Machinery 21,000 29,000
B 67,000 50,000 Vehicles 15,000 5,000
C - 48,000 Furniture 4,000 7,500
Reserves 10,000 5,000 Stock 50,500 19,500
Sundry Creditors Sundry Debtors
Others 41,000 38,000 Others 43,500 37,000
BC & Co. 15,000 - AB & Co. - 15,000
XYZ & Co. - 9,000 XYZ & Co. 25,000 -
Cash at Bank 15,000 18,000
Cash in hand 5,000 9,000
1,99,000 1,50,000 1,99,000 1,50,000
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Following are the terms for the amalgamation:
(a) Goodwill will be valued at Rs. 25,000 for AB & Co. and Rs. 18,000 for BC & Co. But same will not
appear in the books of the new firm.
(b) Building was taken over as follows:
• Building of AB & Co. was valued with upward revision of Rs. 12,000
• Building of BC & Co. valued at Rs. 17,000.
(c) Plant & Machinery to be taken over with downward valuation by Rs. 2,000 of AB & Co. and with
new value of Rs. 32,000 of BC & Co.
(d) Value of vehicles to be taken over was reduced by Rs. 5,000 of AB & Co. and reduced to Rs. 2,000 of
BC & Co.
(e) Provision for doubtful debts has to be carried forward at Rs. 2,000 in respect of debtors of AB & Co.
and Rs. 1,000 in respect of BC & Co
(f) Excess/Deficit Capitals for partners taking A's Capital as base with reference to share in profits are to
be transferred to Current Accounts.
You are required to prepare Balance Sheet of the new firm and Capital Accounts of the partners in the
books of old firm.
Solution
Balance Sheet of M/s ABC & Co. as at 1st April, 2020
Liabilities Rs. Assets Rs.
Capital: Building
A 67,300 (32,000+17,000) 49,000
B 44,867 Plant & Machinery
C 22,433 1,34,600 (19,000 + 32,000) 51,000
Current Acc: Vehicle (10,000+2,000) 12,000
B 92,333 Furniture (4,000+7,500) 11,500
C 28,067 1,20,400 Stock in trade (50,500 + 19,500) 70,000
Sundry creditor Sundry debtors
(41,000 + 38,000) 79,000 (80,500+16,000) 93,500
Less: PDD (2,000+1,000)
Bank balance (15,000+18,000)
33,000
Cash in hand (5,000+9,000) 14,000
3,34,000 3,34,000
Partners’ Capital Accounts in the books of AB & Co.
Particulars A B Particulars A B
To Capital A/cs – 73,800 72,200 By Balance b/d 66,000 67,000
M/s ABC & Co.
By Reserve (3:2) 6,000 4,000
By Profit on Revaluation 1,800 1,200
A/c (W.N.)
73,800 72,200 73,800 72,200

Partner’s Capital Accounts in the books of BC & Co.

Particulars B C Particulars B C
To Capital A/cs 57,333 51,667 By Balance b/d 50,000 48,000
M/s ABC & Co.
By Reserve (2:1) 3,333 1,667
By Profit on Revaluation 4,000 2,000
(W.N.)
57,333 51,667 57,333 51,667

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Working Notes:
Revaluation Profits/Loss
Particulars AB & Co. BC & Co.
Building 12,000 7,000
Plant & Machinery (2,000) 3,000
Vehicle (5,000) (3,000)
Provision for Doubtful Debts (2,000) (1,000)
3,000 6,000
A 1,800 -
B 1,200 4,000
C - 2,000

Adjustment for raising and writing off of goodwill

Raised in old profit sharing Total Written off in Difference
ratio new ratio
AB & Co. BC & Co.
3:2 2:1 3:2:1
Rs. Rs. Rs. Rs. Rs.
A 15,000 -- 15,000 Cr. 21,500 Dr. 6,500 Dr.
B 10,000 12,000 22,000 Cr. 14,333 Dr. 7,667 Cr.
C - 6,000 6,000 Cr. 7,167 Dr. 1,167 Dr.
25,000 18,000 43,000 43,000 Nil

Computation of Capital Adjustments

A B C Total
Balance transferred from AB & Co. 73,800 72,200 1,46,000
Balance transferred from BC & Co. 57,333 51,667 1,09,000
Goodwill adjustment (6,500) 7,667 (1,167) Nil
Existing capital 67,300 1,37,200 50,500 2,55,000
Total Capital in the ratio of 3:2:1 taking A’s 67,300 44,867 22,433
Capital as base
Amount to be transfer to current accounts - 92,333 28,067

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