On 31st March, 2024, the Balance Sheet of A, B and C who were sharing profits and losses in proportion to their capitals stood as: Liabilities: Creditors 10,800, Outstanding Expens... On 31st March, 2024, the Balance Sheet of A, B and C who were sharing profits and losses in proportion to their capitals stood as: Liabilities: Creditors 10,800, Outstanding Expenses 5,000, Capital A/cs: A 45,000, B 30,000, C 15,000. Assets: Cash at Bank 13,000, Debtors 10,000 less: Provision for Doubtful Debts 200, Stock 9,000, Machinery 24,000, Freehold Premises 50,000. B retired on 1st April, 2024 and following adjustments were agreed: (a) Out of the amount of insurance premium debited to Profit & Loss Account, 1,000 be carried forward as prepaid Insurance. (b) Freehold Premises be appreciated by 10%. (c) Provision for Doubtful Debts is brought up to 5% on Debtors. (d) Machinery be reduced by 5%. (e) Liability for Workmen Compensation to the extent of 1,500 would be created. (f) Goodwill of the firm be fixed at 18,000 and B's share of the same be adjusted into the Capital Accounts of A and C who will share future profits in the ratio of 3/4th and 1/4th. (g) Total capital of the firm as newly constituted to be fixed at 60,000 between A and C in proportion of 3/4th and 1/4th. (h) B be paid 5,000 in cash and the balance be transferred to his Loan Account. Prepare Capital Accounts of partners and the Balance Sheet of the firm of A and C. Read more

Steps to Solve

1. Identify Adjustments to the Accounts

The first step involves determining the various adjustments to be made to the Capital Accounts and Balance Sheet based on the provided facts.

2. Adjust for Prepaid Insurance

The insurance premium amounting to ₹1,000 should be treated as prepaid insurance. This decreases expenses and will be recorded in the assets.

3. Appreciate Freehold Premises

Freehold Premises should be appreciated by 10%. Calculate the new value: $$ \text{New Value} = 50,000 + 0.10 \times 50,000 = 55,000 $$

4. Adjust Provision for Doubtful Debts

Provision for Doubtful Debts must be increased to 5% of Debtors. Calculate the new provision: $$ \text{New Provision} = 10,000 \times 0.05 = 500 $$ Since the current provision is ₹200, the adjustment will be: $$ \text{Adjustment} = 500 - 200 = 300 $$

5. Reduce Machinery Value

Machinery's value is to be reduced by 5%: $$ \text{New Machinery Value} = 9,000 - (0.05 \times 9,000) = 8,550 $$

6. Calculate Workmen's Compensation Liability

Liability for Workmen Compensation needs to be recorded as ₹1,500 in the liabilities section of the Balance Sheet.

7. Calculate Goodwill and Adjust Capital Accounts

Goodwill is fixed at ₹18,000. Adjust B's share based on the new profit-sharing ratio:

• A's Share = 3/4 of ₹18,000 = ₹13,500
• C's Share = 1/4 of ₹18,000 = ₹4,500

8. Determine New Capital Structure

The new total capital is fixed at ₹60,000 divided between A and C in the ratio of 3:1 (after adjustments). Check the adjusted capitals and bring new balances into account to ensure that B is compensated correctly.

9. Calculate Payout to Partner B

Partner B will receive ₹5,000 in cash, and the remaining amount will be recorded in his Loan Account.

10. Prepare Final Capital Accounts and Balance Sheet

Based on the adjustments, prepare the Capital Accounts for A and C and the final Balance Sheet after considering all mentioned adjustments.