Answered

Aryan and Adya were partners in a firm sharing profits and losses in the ratio of 3 : 1. Their Balance Sheet on $31^{\text{st}}$ March, 2024 was as follows:



\begin{table}

\captionsetup{labelformat=empty}

\caption{Balance sheet of Aryan and Adya as at $31^{\text{st}}$ March, 2024}


Liabilities
\begin{tabular}[t]{l}
Amount

(₹)
& Assets &


Amount

(₹)
\\

\hline Capitals : & & Machinery & 3,90,000 \\

\hline Aryan 3,20,000 & & Furniture & 80,000 \\

\hline Adya 2,40,000 & 5,60,000 & Debtors 90,000 & \\

\hline Workmen's & & Less : provision for & \\

\hline Compensation Reserve & 20,000 & doubtful debts 1,000 & 89,000 \\

\hline Bank loan & 60,000 & Stock & 77,000 \\

\hline Creditors & 48,000 & Cash & 32,000 \\

\hline & & \multirow[t]{2}{*}{Profit \& Loss Account} & 20,000 \\

\hline & 6,88,000 & & 6,88,000 \\

\hline

\end{tabular}

\end{table}



Dev was admitted into the firm on $1^{\text{st}}$ April, 2024 for $1/5^{\text{th}}$ share in the profits of the firm on the following terms:

(i) Dev will bring capital proportionate to his share in the profits of the firm.

(ii) Goodwill of the firm was valued at ₹ 2,00,000 and Dev will bring his share of goodwill premium in cash.

(iii) Machinery was revalued at ₹ 4,50,000.

(iv) A provision for doubtful debts was to be created at $5\%$ on debtors.

(v) A liability of ₹ 3,500 included in creditors was not likely to arise.



Prepare Revaluation Account and Partners' Capital Accounts on Dev's admission.

Verified Answer :

  • Calculate the revaluation profit of \(₹ 60,000\) and distribute it to the old partners.
  • Distribute the existing reserves and P&L balance to the partners' capital accounts.
  • Calculate the adjusted capital of the old partners as \(₹ 6,60,000\) and determine the total capital of the firm as \(₹ 8,25,000\).
  • Determine Dev's required capital contribution as \(₹ 1,65,000\) to maintain the proportionate capital ratio.

Final Balances: \(\text{Aryan} = \boxed{₹ 3,95,000}, \text{Adya} = \boxed{₹ 2,65,000}, \text{Dev} = \boxed{₹ 1,65,000}\).

Explanation

  1. Revaluation Account Preparation

First, we analyze the impact of the revaluation adjustments and prepare the Revaluation Account.

  1. Machinery was increased from ₹ 3,90,000 to ₹ 4,50,000, resulting in a gain of ₹ 60,000.
  2. A liability of ₹ 3,500 was no longer required to be paid, resulting in a gain of ₹ 3,500.
  3. A provision for doubtful debts at 5% of debtors (90,000 * 0.05 = ₹ 4,500) must be created. Since there was already a provision of ₹ 1,000, the additional provision required is ₹ 3,500.

The net profit on revaluation is: ₹ 60,000 (Machinery) + ₹ 3,500 (Creditors) - ₹ 3,500 (Provision) = ₹ 60,000.
This profit is distributed to Aryan and Adya in their old profit-sharing ratio of 3:1.
Aryan's share: \(60,000 \times \frac{3}{4} = ₹ 45,000\).
Adya's share: \(60,000 \times \frac{1}{4} = ₹ 15,000\).

  1. Adjustment of Partners' Capital Accounts

Next, we adjust the Partners' Capital Accounts before calculating Dev's capital contribution.

  • Starting balances: Aryan ₹ 3,20,000, Adya ₹ 2,40,000.
  • Distribution of Workmen's Compensation Reserve (₹ 20,000): Aryan gets ₹ 15,000, Adya gets ₹ 5,000.
  • Distribution of Profit & Loss Account debit balance (₹ 20,000): Aryan's share is ₹ 15,000, Adya's share is ₹ 5,000 (debited).
  • Goodwill Premium brought by Dev: Total goodwill is ₹ 2,00,000, Dev's share is \(\frac{1}{5} \times 2,00,000 = ₹ 40,000\). This is credited to Aryan and Adya in their sacrificing ratio (3:1): Aryan ₹ 30,000, Adya ₹ 10,000.
  • Revaluation profit credited: Aryan ₹ 45,000, Adya ₹ 15,000.

Adjusted capital balances before Dev's admission:
Aryan: \(3,20,000 + 15,000 - 15,000 + 45,000 + 30,000 = ₹ 3,95,000\).
Adya: \(2,40,000 + 5,000 - 5,000 + 15,000 + 10,000 = ₹ 2,65,000\).
Total adjusted capital of old partners: \(3,95,000 + 2,65,000 = ₹ 6,60,000\).

  1. Determination of Dev's Capital and Final Balances

Finally, we determine the total capital of the new firm to calculate Dev's proportionate share.
The combined adjusted capital of Aryan and Adya represents \(\frac{4}{5}\) of the total firm's capital (since Dev's share is \(\frac{1}{5}\)).
Total Capital: \(\frac{6,60,000}{4/5} = 6,60,000 \times \frac{5}{4} = ₹ 8,25,000\).
Dev's required capital: \(\frac{1}{5} \times 8,25,000 = ₹ 1,65,000\).
The final balances in the Partners' Capital Accounts will be: Aryan ₹ 3,95,000, Adya ₹ 2,65,000, and Dev ₹ 1,65,000.

Examples

In business accounting, the admission of a new partner often requires the revaluation of assets and liabilities to ensure that the new partner neither gains from previous appreciation nor suffers from previous depreciation. By adjusting capital accounts proportionally to the new profit-sharing ratio, businesses can maintain equity and fairness among partners, ensuring that each partner's investment accurately reflects their stake in the firm's future profits. This process is fundamental in maintaining transparent financial partnerships and equitable capital management.