A, B, and C are partners in a firm sharing profits in the ratio of 3:2:1. A retires from his firm. Retirement is made on the following terms: (a) Goodwill of the firm to be valued... A, B, and C are partners in a firm sharing profits in the ratio of 3:2:1. A retires from his firm. Retirement is made on the following terms: (a) Goodwill of the firm to be valued at ₹48,000. (b) Building has appreciated by 10%, stock depreciated by 10%. (c) A will be paid through Bank. After using the Bank balance, if required, necessary loan may be obtained from Bank. (d) The new profit-sharing ratio of B and C is decided to be 5:1. Give the necessary ledger accounts and the Balance Sheet of B and C.
Understand the Problem
The question is asking for the preparation of necessary ledger accounts and the balance sheet after a partner retires, along with adjustments for goodwill, asset appreciation, and the change in profit-sharing ratio.
Answer
B's final capital amount is ₹140,417 and C's is ₹28,083. Balance sheet reflects these changes post-adjustments.
Answer for screen readers
The ledger accounts and new balance sheet reflect:
- B's Share: ₹140,417
- C's Share: ₹28,083
Steps to Solve
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Determine Total Goodwill and Asset Adjustments
The goodwill of the firm is valued at ₹48,000. The building appreciates by 10%, and the stock depreciates by 10%.
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Goodwill adjustment: $$ \text{Goodwill} = ₹48,000 $$
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Building adjustment: $$ \text{Building} = ₹45,000 \times 10% = ₹4,500 \quad (\text{Appreciation}) $$ $$ \text{New value of Building} = ₹45,000 + ₹4,500 = ₹49,500 $$
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Stock adjustment: $$ \text{Stock} = ₹40,000 \times 10% = ₹4,000 \quad (\text{Depreciation}) $$ $$ \text{New value of Stock} = ₹40,000 - ₹4,000 = ₹36,000 $$
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Calculate the New Capital After Retirement
Since A retires, we need to settle A's capital account, including the adjustments for goodwill and assets.
Original Capitals:
- A: ₹50,000
- B: ₹40,000
- C: ₹30,000
Total adjusted assets' value: $$ \text{Total Assets} = ₹38,000 + ₹14,000 + ₹10,000 + ₹49,500 + ₹36,000 + ₹25,000 = ₹172,500 $$
New total capital after all adjustments: $$ \text{Total new capital} = \text{New Goodwill} + \text{Adjusted Assets} - \text{Liabilities} $$ Total liabilities = ₹30,000 + ₹7,000 + ₹12,000 + ₹3,000 = ₹52,000 $$ \text{Total new capital} = ₹48,000 + ₹172,500 - ₹52,000 = ₹168,500 $$
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Calculate B and C's New Capital
The new profit-sharing ratio of B and C is decided to be 5:1. We will now distribute the new capital accordingly.
Total parts in the new ratio = 5 + 1 = 6
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B's new share: $$ \text{B's Share} = \frac{5}{6} \times ₹168,500 = ₹140,417 $$
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C's new share: $$ \text{C's Share} = \frac{1}{6} \times ₹168,500 = ₹28,083 $$
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Prepare Ledger Accounts for A, B, and C
B's Ledger:
- Debit B: ₹140,417
- Credit B: Old Capital - ₹40,000
C's Ledger:
- Debit C: ₹28,083
- Credit C: Old Capital - ₹30,000
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Balance Sheet of B and C
Prepare the new balance sheet reflecting the changes.
- Total Assets = ₹172,500 (after adjustments)
- Liabilities unchanged
- New capital accounts for B and C reflect their new shares after A's retirement.
The ledger accounts and new balance sheet reflect:
- B's Share: ₹140,417
- C's Share: ₹28,083
More Information
This adjustment process ensures that A's share is settled, goodwill is accounted, and the assets are correctly valued based on appreciation and depreciation. The new partnership structure is clearly documented.
Tips
- Not adjusting asset values properly (i.e., forgetting depreciation/appreciation).
- Incorrectly calculating new shares in the partnership.
- Failing to consider all liabilities and assets when preparing the new balance sheet.
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