S.Y.B.COM.

SEMESTER - III (CBCS)

ACCOUNTANCY AND
FINANCIAL
MANAGEMENT - III

SUBJECT CODE : UBCOMFSIII.1

 © UNIVERSITY OF MUMBAI
Prof. Suhas Pednekar
Vice-Chancellor,
University of Mumbai,

Prof. Ravindra D. Kulkarni Prof. Prakash Mahanwar

Pro Vice-Chancellor, Director,
University of Mumbai, IDOL, University of Mumbai,

Programme Co-ordinator : Prof. Rajashri Pandit

Assistant Professor in Economic,
Incharge Head Faculty of Commerce,
IDOL, University of Mumbai, Mumbai

Course Co-ordinator : Mr. Vinayak Vijay Joshi

Assistant Professor
IDOL, University of Mumbai, Mumbai

Course Writer : Dr. Madhura Kulkarni

Deputy Director, IDOL,
University of Mumbai

: Dr. Sarswathi Murthy

Associate Professor,
R. J. College, Ghatakopar, Mumbai

: CA Kevin Michale Miranda

Assistant Professor,
St. Andrews College, Bandra, Mumbai

: Dr. Sanchita Roy

Assistant Professor,
Mittal College, Malad, Mumbai

July 2021, Print - 1, ISBN - 978-93-91735-39-5

Published by : Director,
Institute of Distance and Open Learning ,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.

DTP Composed : Ashwini Arts

Vile Parle (E), Mumbai - 400 099.

Printed by :
 CONTENTS
Unit No. Title Page No.

UNIT - I
1 Final Accounts of Partnership Firms - I 1
2. Partnership Final Accounts II 7
3. Partnership Final Accounts III 19

UNIT - II
4. Piecemeal Distribution 76

UNIT - II
5. Amalmagation of Firms I 111

UNIT - IV
6. Conversion / Sale of Partnership Firm into a Ltd. Co. 168


 Syllabus
S.Y.B.Com. Semester III
Elective Courses (EC)
Discipline Specific Elective (DSE) Courses
Accountancy and Financial Management III
Modules at a Glance

Sr. Modules
No.
1. Partnership Final Accounts based on Adjustment of Admission or
Retirement / Death of a Partner during the year
2. Piecemeal Distribution of Cash
3. Amalgamation of Firms
4. Conversion / Sale of a Partnership Firm into a Ltd. Company

Sr. Modules / Units

No.
1. Partnership Final Accounts based on Adjustment of
Admission or Retirement / Death of a Partner during the year
i) Simple final accounts questions to demonstrate the effect on
final Accounts when a partner is admitted during the year or
when partner Retires / dies during the year.
ii) Allocation of gross profit prior to and after admission /
retirement / death when stock on the date of admission /
retirement is not given and apportionment of other expenses
based on time / Sales/other given basis.
iii) Ascertainment of gross profit prior to and after
admission/retirement / death when stock on the date of
admission/retirement is given and apportionment of other
expenses based on time / Sales / other given basis Excluding
Questions where admission / retirement / death takes place in
the same year.
2. Piecemeal Distribution of Cash
i) Excess Capital Method only
ii) Asset taken over by a partner
iii) Treatment of past profits or past losses in the Balance sheet
iv) Contingent liabilities / Realization expenses / amount kept
aside for expenses and adjustment of actual
v) Treatment of secured liabilities
vi) Treatment of preferential liabilities like Govt. dues / labour
dues etc. Excluding : Insolvency of partner and Maximum
Loss Method
 3. Amalgamation of Firms
i) Realization method only
ii) Calculation of purchase consideration
iii) Journal / ledger accounts of old firms
iv) Preparing Balance sheet of new firm
v) Adjustment of goodwill in the new firm
vi) Realignement of capitals in the new firm by current accounts
/ cash or a combination thereof Excluding Common
transactions between the amalgamating firms
4. Conversion / Sale of a Partnership Firm into a Ltd. Company
i) Realisation method only
ii) Calculation of New Purchase consideration, Journal / Ledger
Accounts of old firms. Preparing Balance sheet of new
company

Reference Text :
1. Ashish K. Bhattacharyya – “Financial Accounting for Business
Managers”, Prentice Hall of India Pvt. Ltd.
2. Shashi K. Gupta – “Contemporary Issues in Accounting”, Kalyani
Publishers.
3. R. Narayanaswamy – “Financial Accounting”, Prentice Hall of India,
New Delhi
4. Ashok Sehgal – “Fundamentals of Financial Accounting”, Taxmann’s
Publishers


 1
FINAL ACCOUNTS OF PARTNERSHIP
FIRMS I
Unit Structure:

1.0 Objective
1.1 Introduction
1.2 Partnership Deed
1.3 Partnership Final Account
1.4 Profit and Loss Appropriation Accounts
1.5 Guarantee of Profits to / Or by a Partner
1.6 Joint Life Policy
1.7 Check Progress

1.0 OBJECTIVE OF THE UNIT

After studying the unit the student will be able to :

 Define the meaning of Partnership Deed.
 Transfer the Trial Balance.
 Describe the Accounting Procedure and the treatment to various
adjustments in Final Accounts.
 Calculate the Interest on Capital and Interest on Drawings.
 Solve the practical problems.

1.1 INTRODUCTION

A Partnership is defined by section 4 of the Indian Partnership Act

1932, as “The relation between persons who have agreed to share profits
of business carried on by all or by any of them acting for all: Persons who
have entered into Partnership are individually called as Partners and
collectively called as a firm.

1.1.1 There are three important characteristics of Partnership

1) There should be AGREEMENT between two or more persons.

2) This agreement must be to SHARE the profits of the business.
3) The business must be carried on by all the partners or by any
one of the partner acting for all of them.

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1.2 PARTNERSHIP DEED

We have seen above that Partnership is created by an

AGREEMENT. It is not necessary to have a written agreement. However
written agreement is desirable because it can avoid dispute in future. The
Deed of Partnership is a document in writing which contains the important
terms that the partners have agreed among themselves. The partnership
deed should be properly drafted and stamped as required by Stamp Act.

1.2.1 Partnership deed specific:-

In case of specific Provision in the Partnership deed (which
may be oral or written), the appropriation (or distribution) of Profit is done
accordingly.

1.2.2 Partnership deed is silent (or absence of Partnership deed):-

In this case, following provisions of section 13 of the Indian
Partnership Act, 1932 would be applicable:-
1) Interest on capital - Not Allowed.
2) Interest on capital - Such interest is payable only if allowed by
the partnership deed. Out of profits.
3) Interest on drawings - Not Allowed.
4) Salary to Partners - Not Allowed.
5) Commission to Partners - Not Allowed.
6) Interest on Partners loan - 6% p.a. allowed.
7) Profit/ or Loss SharingRratio - Equal for all Partners (Even if Partner’s
capital may be unequal).

1.3 PARTNERSHIP FINAL ACCOUNTS

Each partner should know the financial performance of the

business for the year. Each partner has unlimited liability and therefore,
he should also know the state of affairs (i.e. Assets and Liabilities) on a
particular date. The accounts of a partnership business are prepared on the
basis of double entry as well as accrual basis. The accounts consider
outstanding expenses, prepaid expenses, outstanding Income, etc. to
determine profit (or loss) during the accounting year.

The final accounts of partnership firm includes:-

1) Trading Account to disclose the Gross Profit (or Gross Loss) during
the accounting year.
2) Profit and Loss Account to disclose Net Profit (or Net Loss) during the
accounting year.
3) Profit and Loss Appropriation Account to disclose the distribution of
Net Profit (or Net Loss) among partners after considering interest on
partners capital, interest on drawing, salary to partners etc. If there is
2
 no appropriation, then the net profit from the Profit and Loss Account
is transferred to Capital.
4) Balance Sheet to disclose the Assets and Liabilities at the end of the
accounting year.
5) Manufacturing Account may be prepared (in addition to Trading
Account) to disclose Cost of Goods produced and other elements of
cost taking figure in Manufacturing Account shows cost of production,
which should be transferred to Trading Account.
6) Partners Capital Accounts are prepared separately and then the closing
balance is transferred to the Balance Sheet. When Partners Capital A/c,
If Partner’s Capital A/c are fixed, it is transferred to Current Account.

1.4 PROFIT AND LOSS APPROPRIATION A/C

This is a special Account prepared in case of only PARTNERSHIP

firm. It shows how the Net profit/Net Loss has been distributed
(Appropriated) amongst Partners.

Note: In case of Partnership firm any remuneration paid or

payable to partners in the form of salary, rent. Interest on capital,
commission etc. is treated as distribution of profit and not as business
expense. Therefore the above expenses if paid or payable to partners shall
not be debited to Profit and Loss Account but shall be debited to Profit and
Loss Appropriation A/c.

Thus this A/c will be debited by:

1) Net Loss (transferred from credit side of Profit & Loss Account)
2) Salaries, Rent, Interest on Capital, Commission etc. to Partners

This A/c will be credited by

1) Net Profit (transferred from the Debit side of Profit & Loss A/c)
2) Interest on Drawing charged to Partners.

The difference in this account will show the Final Net Profit/Loss
which can distributed amongst the partners in their profit sharing ratio.

If the Credit side is heavier-profit to be distributed

If the Debit side is heavier –Loss transferred to Partners Account

1.4.1 INTEREST ON CAPITAL OR SALARY ETC

Interest or Salary is payable only out of the Profit (i.e. on appropriation of

Profit). Therefore,
1) In case of loss, no interest or Salary is allowed.
2) In case if Profit is less than Interest, etc then such interest etc. is
limited to the extent of profit.

3
 However, the partner may decide to waive such intimation (by
specific provision in the partnership deed) that interest, etc. is allowed
even (if there is a loss) then the amount of loss is increased and such
increased (entire) loss is shared by the partner in the profit (and loss)
sharing ratio.

1.4.2 INTEREST ON DRAWINGS

The partner may be charged Interest on the Drawing. So as to

make distribution of profit more equitable, Interest on Drawing is charged
on the different amounts withdrawn on the different dates during the
accounting year. The interest on drawings is calculated by the Product
Method or the Average Due Date Method. Usually, when a partner draws
a fixed amount monthly, then the interest on drawings is calculated as
follows:-

Withdrawals Interest on total Drawings

a) Beginning of each month
(e.g. 1st January ,1st February For 6.5 month
… 1st December
b) Middle of each month (not
given) (e.g. 15th January, 14th For 6 month
February,…. 15th December)
c) End of each month (e.g. 31st
January, 28th February, 31st For 5.5 month
December)

1.5 GUARANTEE OF PROFITS TO/ OR BY A PARTNER

According to the partnership deed, one or few partners are

guaranteed a minimum amount of profit, therefore, such partner would
receive guaranteed (minimum) profit or profit as per profit sharing ratio
which ever is higher.

The different types of guarantee arrangements are as follows:-

1) A Partner is given an undertaking that his share in profits (including

salary, interest on capital etc) will not be below a certain amount. Such
guarantee may be given by one partner or by all other remaining partners.
Usually, in such a case in future, when the concerned Partner’s share of
profit exceeds the minimum limits then the excess profit (above minimum
limit) is refunded (to the extent profits overdrawn in the past)

2) A partner guarantees that the profit of the firm would above a certain
figure in such case the profit is lower, then the guarantor partner’s account
is debited and profit and loss Appropriation A/c is credited.

4
3) A partner guarantees that, if particular partner’s share of profit exceeds
a certain amount, then he would suffer to the extent of difference (i.e. to
the extent of profit above certain amount the guarantor partner would
receive less profits).

1.6 JOINT LIFE POLICY

The object of taking life policy on the lives of the partner is to

insure against the chances or disturbance in the business due to death of
any one of the partners. The amount payable to the legal representative of
the deceased partner is paid out of the policy amount received from the
Insurance Company; otherwise, the assets may have to be sold, which may
result in the disturbance to or closure of the business. The firm can take
one Joint Policy on the life of all partners, or otherwise, it may take
separate policies on the life of each partner.

Accounting treatment may be one of the following three ways:-

1.6.1 Premium paid is treated as expense of the firm and debited to

Profit and Loss A/c when amount is received it is credited to Partners
Capital in their profit sharing ratio

1.6.2 When premium paid is treated as assets: - In this case premium

paid is debited to Joint Life Policy A/c. Joint Life Policy A/c is kept at
surrender value, on date of balance-sheet. The balance in Policy A/c in
excess of surrender value is treated as loss and transferred to P & L A/c.
When amount received on surrender of policy or maturity of policy, is
credited to Joint Life Policy A/c. Balance in Joint Life Policy being profit
credited to Partners Capital A/c in their profit sharing ratio.

1.6.3 When premium paid treated as asset and Joint life policy
reserve is maintained. In this case premium paid is debited to Joint Life
Policy A/c at the end of the year Joint Life Policy Reserve is created to the
extent of premium paid by debiting to Profit and Loss A/c and crediting to
Joint life policy reserve a/c. Both Joint Life Policy and Joint Life Policy
Reserve A/c are brought down to surrender value by debiting Joint Life
Policy Reserve A/c crediting Joint Life Policy A/c. At the end of the year
Joint Life Policy is shown on Assets side of the Balance Sheet. Joint Life
Policy Reserve a/c is shown on the Liability side of the Balance Sheet.
On the maturity of the policy or when policy is surrendered following
entries are passed.

When Joint Life Policy premium paid

a) Joint Life Policy A/c ……Dr.
To Bank A/c

b) For transferring to Profit & Loss A/c (equal to premium paid)

Profit & Loss A/c ……Dr.

5
 To Joint Life Policy Reserve A/c
c) For bring balance in Joint life policy to surrender value
Joint Life Policy Reserve A/c ….. Dr.
To Joint Life Policy A/c

Above entries are repeated every year, if joint life policy surrendered or
matured.

On maturity of policy/surrender following entries are passed.

a) Bank A/c …..Dr.
To Joint Life Policy A/c
b) For excess amount received
Joint Life Policy A/c…….Dr
To Joint Life Policy Reserve A/c
c) For transferring Joint life policy Reserves to Partners Capital A/c
in their profit sharing ratio.
Joint Life Policy Reserve A/c…..Dr
To All Partners Capital A/c

1.7 CHECK YOUR PROGRESS:

Define
 Partnership Deed
 Profit and Loss Appropriation Account
 Joint Life Policy
Fill in the Blanks
 Any salary paid or payable to a Partner is treated as
____________________________________
 If Any Commission is paid or payable to a Partner shall be debited
to -------------------------------------------------------------.
 When the Joint Life Policy Premium paid is treated as Expenses of
the firm it is to be debited to -------------------------
 Variable expenses related to sales are to be divided in the -----------
------------------------Ratio.
State whether True or False
 In case of Partnership Firm any Interest paid on Capital of a
Partner is treated as Expenses of the firm.
 In case of Loss, no Interest or Salary is allowed.
 No Interest is to be payable to a New Partner before Admission.


6
 2
PARTNERSHIP FINAL ACCOUNTS II
Unit Structure :

2.0 Objectives
2.1 Adjustment to Final Accounts
2.2 Revaluation Assets and Liabilities on Admission or Retirement of
Partner
2.3 Adjustment Relating to Reserves / Goodwill
2.4 Hidden Adjustments
2.6 Proforma of Final Accounts
2.7 Accounting Procedure

2.0 OBJECTIVES

After studying the unit the students will be able to:

 Understand the adjustments and journal entries and effets of the
adjustments to Final Accounts.
 Revaluate assets and liabilities on admission and retirement of the
partner.
 Understand the adjustments related to Goodwill and Reserves.

2.1 ADJUSTMENT TO FINAL ACCOUNTS

Sr. Adjustment Journal Effect in Effect in

No. Entries Trading or Balance Sheet
P&L A/c or
P&L Adj. A/c
1. Outstanding or Salary/s a/c - Add to the Show on the
Unpaid Dr. expenses, Liability side
expenses e.g. To e.g. salary as Outstanding
Salary Outstanding Salary.
Outstanding. Salary A/c
2. Outstanding Interest Add to the Show on the
Income or Receivable Income on Assets Side as
Income not A/c - Dr. credit side, e.g. Outstanding
received or To Interest from Interest Interest.
Income A/c
Receivable or
Income Earned
but not
7
 received
e.g. Interest due
but not
received.
3 Prepaid Prepaid Deduct from Show on the
Expenses or Insurance A/c that Assets Side as
Expenditure – Dr. expenditure on Prepaid
paid in advance To Insurance debit side e.g. Insurance.
or Unexpired A/c from
Insurance Insurance.
e.g. Prepaid
Insurance.
4 Bad Debts Bad Debts A/c Show on the Deduct from
written off. - Dr. debit side as the Debtors on
To Sundry addition to the Assets Side.
Debtors A/c. bad debts
given in trial
balance.
5 Income Interest Deduct from Show on the
Received in (Income) A/c the Income on Liability Side
Advance, e.g. - Dr. credit side e.g. as Interest
Interest for To Interest from Interest Received in
three months Received in Received. Advance.
Received in Advance.
Advance.
6 Depreciation on Depreciation Show on the Deduct from
Fixed Assets. A/c - Dr. debit side as that assets on
(e.g. To Machinery depreciation the assets side
depreciation on A/c. on machinery. e.g. from
machinery.) machinery.
7 Reserve for Reserve for Show on the Deduct from
Discount on Dis. On Cr. Credit Side. Creditors on
Creditors. A/c-Dr. Liability Side.
To Discount
Received A/c.
8 Provision for Discount Show Deduct from
Discount on Allowed A/c separately on the Debtors.
Debtors. - Dr. the Debit side.
(Calculated at To Provision
given % on the for discount
balance of on Debtors
Debtors after A/c
deducting Bad
Debts and
R.D.D. given in
the
adjustments.)
9 Bills Debtors A/c - Debit Side of Deduct from
8
 Receivable Dr. P & L A/c the Bank A/c
Discounted is To Bank A/c. and Add to the
Dishonoured. Debtors on the
Assets Side
10 Writing off P & L A/c - Deduct from
deferred Dr. that Account
Revenue To on the Assets
Expenditure Preliminary NO IMPACT Side e.g. from
e.g. Write Off Expenses A/c Preliminary
Preliminary Expenses A/c.
Expenses.
11 Bill Receivable Debtors A/c - Deduct from
dishonored is Dr. B/R & Add to
remained to be To Bills NO IMPACT Debtors on the
adjusted. Receivable assets side.
A/c.
12 Sundry Debtors Bad Debts A/c Show on the Deduct from
include a - Dr. Debit Side as the Debtors on
Debtor for To Debtors Bad Debts. the Asset Side.
Dishonor Bill A/c
and half the
amount is
irrecoverable.
13 Goods Drawings A/c Show on the Deduct from
withdrawn by - Dr. credit side of the Capital A/c
the Partner. To Trading Trading A/c. of the Partner
A/c on the Liability
Side.
14 Goods Purchases A/c Add to Add to the
Purchased - Dr. Purchases on Creditors on
remained to be To Creditors Debit side of the Liability
recorded A/c the Trading Side.
though A/c.
included in
stock.
15 Goods sold are Deduct from Deduct from
included in the the Closing the Closing
closing stock as NO ENTRY Stock on the Stock on the
it was not credit side of Assets Side.
delivered. Trading A/c
16 Sale includes At Selling (a) Deduct (a) Deduct
goods sent on Price: from sale on from Debtors
sale or return Sales A/c – credit side of on Assets Side
basis. Dr. Trading A/c at at sales price to
To Debtors selling price to the extent it is
A/c the extent it is not approved
not approved by customers.
At Cost Price: by customers.
9
 Stock with (b) Add to the
Customers (b) Add to the Closing Stock
A/c-Dr. Closing Stock at cost on
To Trading at cost on Assets Side.
A/c credit side of
Trading A/c.
17 Goods Advertisement (a) Show on
distributed as A/c – Dr. the credit side
free samples. To Trading of Trading
A/c A/c.
NO IMPACT
(b) And on the
debit side of
P&L A/c. as
Advertisement.
18 Wages paid for Machinery Deduct from Add to the
installation of A/c Dr. the Wages on Machinery on
Machinery To Wages A/c the debit side the Assets
debited to (Rectification of Trading a/c. Side.
Wages A/c. Entry)
19 Loss of goods Insurance (a) Show on Show on the
by fire and Claim A/c – credit side of Assets Side the
Insurance Dr. Trading A/c amount of
Company Loss by Fire the total loss. claim
Admitted A/c – Dr. Admitted by
Claim. To Trading (b) Show on the Insurance
A/c. debit side of Company.
P&L A/c the
actual loss i.e.
Amt. of goods
lost by fire
Less Amt. Of
claim
Admitted by
the Insurance
Co.
20 Legal charges Property A/c – Deduct from Add to the
paid for Dr. the legal Property
Acquisition of To Legal expenses on acquired on
property Charges A/c debit side of Assets Side.
debited to P&L A/c
Legal Expenses
A/c
21 Interest on Interest on Show on the Add to
Partner’s Capital A/c – debit side of Capital/Current
capital. Dr. P&L A/c on the
To Partners Appropriation Liability Side.
Capital A/c A/c.
10
22 Salary to P&L Show on the Add to the
Partner. Appropriation debit side of Capital/Current
A/c – Dr. P&L A/c of the
To Partners Appropriation Partner.
Capital A/c A/c.
23 Interest on Partners Cap. Show on the Deduct from
Partner’s A/c – Dr. credit side of the Capital.
Drawing To P & L P&L
Appropriation Appropriation
A/c A/c
24 Closing Stock. (a) Stock of (a) Stock of (a) On Assets
Raw Material Raw Material Side.
A/c – Dr. on the credit
Work In side of
Progress A/c – Manufacturing
Dr. A/c
To
Manufacturing (b) Stock of (b) On Assets
A/c Work In Side.
Progress as
(b) Stock of above.
Finished
Goods A/c – (c) Stock of (c) On Assets
Dr. Finished Side.
To Trading Goods on
A/c credit side of
the Trading
A/c.
25 Commission to Managers Show on the Show on the
Manager as % Commission debit side of Liability Side
Net Profit. A/c – Dr. P&L A/c. as Outstanding
To Commission
Outstanding
Comm. A/c
26 Goods received Trading A/c – (a) Show on
as free sample, Dr. the debit side
and included in To P & L A/c of Trading
Closing Stock. A/c.
NO IMPACT
(b) Show on
the credit side
of P & L A/c.

11
2.2 REVALUATION ASSETS AND LIABILITIES ON
ADMISSION OR RETIREMENT OF PARTNER

 Increase in value of Assets.

Fixed Assets A/c Dr.

To Revaluation A/c
 Decrease in value of fixed Assets

Revaluation A/c Dr.

To Fixed Assets A/c

 Increase in liabilities ( unrecorded)

Revaluation A/c Dr.

To Sundry Liabilities A/c

 Decrease in Liabilities

Sundry Liabilities A/c Dr.

To Revaluation A/c

 Transferring Revaluation Profit to Old Partners in old ratio.

Revaluation A/c Dr.

To Old Partners Capital A/c

 Transferring Loss on Revaluation to Old Partners Capital A/c

in old ratio

Old Partners’ Capital A/c Dr.

To Revaluation A/c

Note:
i) Revaluation A/c is also known as profit & Loss Adjustment A/c.
ii) Revaluation of Assets etc. may not be included in syllabus.
However not specially excluded also.

2.3 ADJUSTMENT RELATING TO RESERVES /

GOODWILL:

2.3.1 Reserves appearing in Balance Sheet. These reserve belongs to old

partner therefore should be transferred to Old Partners Capital A/c.
General Reserve A/c Dr.
To Old Partners Capital A/c

12
Adjustment relating Goodwill.
Full value of Goodwill is raised and Appears in Balance Sheet.
Goodwill A/c Dr.
To old Partners Capital A/c [in Old Ratio]

2.3.2 Goodwill was raised and written off

(not appearing in Balance Sheet)
Incoming Partners Capital A/c Dr.
To Old Partners Capital A/c
(Credited in Sacrificing Ratio)
(Sacrificing Ratio = Old Ratio – New Ratio)

2.3.3 After admission of New Partner

Goodwill written off
All Partners Capital A/c ….. Dr. [In new P.S.R.]
To Goodwill A/c

2.3.4 Incoming partner bring his share of Goodwill in cash.

a) Cash A/c – Dr.
To Goodwill A/c
b) Goodwill A/c – Dr.
To Old Partners Capital A/c
[in sacrificing ratio]

2.3.5 Goodwill amount paid in Cash by new partner privately

No entry in book of Accounts.

2.4 HIDDEN ADJUSTMENTS:

Sometimes, details given in Trial Balance indicate amount of

expenses or income are to be adjusted.

Sr. Trial Balance on 31.12.13 Adjustment

No.
Particulars Debit Credit a) Bank int. for 6 months
(a) 10% Bank Loan 2,00,000 10% on 2,00,000
[1st July 2012] = 2,00,000 x10% x 6/12
Bank Interest 5,000 = ₹ 10,000
Outstanding Interest
13
 = ₹ 5,000

(b) Salaries 22,000 b) Per Month’s Salary

(11 months) = 22,000/11 = ₹ 2,000
Provide Outstanding
₹ 2,000

(c) 12% Govt. 97,000 c) Amount of interest

Securities = 1,00,000 X 12%
[Face Value – = ₹ 12,000
₹ 1,00,000] Accrued Interest
Interest on = 12,000 – 6,000
Govt. Sec. 6,000 = ₹ 6,000 to be accounted.
Interest on Investment is
always calculated or Face
Value.

(d) Furniture 60,000 Furniture sold at loss of.

(Opening ₹ 7,000 (25,000 – 18,000)
Balance) i) Deduct ₹ 25,000 from
Sale of Furniture
Furniture 18,000 ii) Loss on sale of Furniture
(WDV - ₹ ₹ 7000 Debit to P&L A/c
25,000)

2.6 PROFORMA OF FINAL ACCOUNTS:

2.6.1
Dr. Trading A/c for the year ended…. Cr.

Particulars Rs. Particulars Rs.

To Opening tock X By Sales: Cash X
To Purchases X Credit X
Less Purchase Return X X Less: Sales Return (X) X
To Carriage X By Goods Lost by
To Wages X Fire etc : (at cost) X
To Direct Expenses X By Closing Stock X
To Gross Profit C/d X

XX XX

14
2.6.2
Dr. Profit & Loss A/c for the ended ……. Cr.

Particulars Basis Before After Particulars Basis Before After

Admission Admission Admission Admission

To salaries T X X By Gross S X X
To Insurance T X X Profit T X X
To T X X By Interest T X X
Administrative By Rent
Exp. T X X S X X
To Depreciation S X X By Discount X X
To Commission S X X By Net Loss
To Bad Debts S X X C/d
To Discount S X X
To S X X
Advertisement X X
To Travelling
Exp.
To N.P. C/d.

2.6.3
Dr. Profit & Loss Appropriation A/c the ended ……. Cr.

Particulars Before After Particulars Before After

Admission Admission Admission Admission
To Partner Salaries By G.P.B/fd X X
Old Partner T X X By Interest on
New Partner -- -- X Drawings -- --
To Interest on New Partner - -- X
Capital Old T X X Old Partner T X X
New -- -- X
To Net Profit
Before Admi. Old Ratio x X
After Admi. New Ratio x X
XX XX XX XX

15
2.6.4
BALANCE SHEET AS ON

Liabilities Rs. Rs. Assets Rs. Rs.

Partners Capital A/c Fixed Assets
X X Goodwill X
Y X Other Fixed Assets X
Z X X - Depreciation X X
Partners Current Investment X
Accounts X X Stock X
Z X X S. Debtors X
- New Bad debts (X)
Bank Loans X X
Sundry Creditors X - New R.D.D. (x) X
Bills Payable X
Outstanding Expenses X Bills Receivable X
Income Received in Advance X Cash & Bank Balance x
Y’s Current A/c X
XX XX

2.7 ACCOUNTING PROCEDURE

 When New Partner is admitted on 1st day of the year or on Last day of
the year, usual final A/c should be prepared i.e. division in Profit &
Loss A/c, Profit & Loss Appropriation A/c is not required.
 Similarly in case of Retirement/Death of a partner on 1st day or last
day of the year, there is no need of preparing Profit & Loss A/c and
Profit& Loss Appropriation A/c in columnar form before retirement
and after retirement of partner.
 In both of above cases, it is usual Partnership Final A/c.
 In case of Admission on Retirement or Death of Partner in between the
year - Either prepare Final Accounts on that date to find out Profit or
Loss upto change in partnership i.e. Close the books of Accounts on
that date.
 However it may not be possible to close books of accounts on the date
of Admission or Retirement or Death of the Partner. Partners continue
same books of accounts up to the end of the year. In such case Profit
& Loss A/c as well as Profit and Loss Appropriation A/c are prepared
in columnar form i.e. Before Change in Partnership and After Change
in Partnership then following accounting procedure is followed.
1) Prepare Trading A/c to ascertain Gross Profit.
2) Ascertain Time Ratio i.e. number of months before admission and
after admission of partner.
3) Similarly ascertain Sales Ratio.

16
 These ratios are required to divide various Income and Expenses as
follow:
i Income/Discount Earned/Gross Profit credit to P & L A/c in Sales
Ratio.
ii Interest Earned divide in Time Ratio.
iiiVarious Fixed Expenses divide in Time Ratio e.g. Salaries,
Insurance, Rent, Interest paid, Depreciation etc.
iv Various Variable Expenses related with Sales divide in Sales Ratio
e.g. Carriage Outwards, Bad Debts written off, Advertisement,
Commission, and Depreciation on Delivery Van etc.
4) If details about expenses/income are given for dividing
expenses/income should be considered on e.g. Plant was purchased
after admission, then Depreciation on New Plant should be debited to
II column only (i.e. After Admission] and deducted from Plant in
Balance Sheet.
5) Ascertain Net Profit/Loss separately, (say Before Change and After
Change) and transfer it to Profit and Loss Appropriation A/c.
6) Interests on Capital if any ascertain before Admission/After Admission
of Partner. Debit it to appropriate column and credit to Partners
Capital A/c [no interest is payable to new partner before
admission] same way any Salaries to Partner, etc. account in
respective column.
7) Net Profit before admission transfer to Old Partner in old ratio, a Net
Profit after admission of partner transfer to All partner in New Ratio.
8) Transferee balance in Partner Capital Accounts to Balance Sheet.
9) However in case of Retirement of partner same procedure should be
followed for division of expenses or income. Then Net Profit before
retirement should be ascertained and transferred to Old Partners
Capital Accounts. If Balance in Retiring Partners Capital A/c
transferred to Loan A/c, Retiring Partners Loan A/c may carry interest.
Calculate the Interest and debit it to P & L A/c in II column (i.e. After
Retirement). Net Profit after retirement should be transferred to
Continuing Partners Capital A/c in new profit sharing ratio. Same
procedure should be followed in case of death of partner. However
balance in Capital A/c of Diseased Partner should be transferred to
Executors Loan A/c and shown in the Balance Sheet on Liability Side.

2.8 CHECK YOUR PROGRESS:

A. Fill in the Blanks

1. Wages paid for installation of Machinery must be debited to ____.
2. Reserves appearing in the Balance Sheet belongs to the _______.

17
3. If the Incoming Partner is bringing his share of Goodwill in Cash the
Journal Entries will be _________.
4. Variable expenses related to sales are to be divided in the _____ ratio.
5. Net Profit/Loss before admission should transferred to the _______
partners in their Old Profit Sharing Ratio.
B. State whether True or False
1. Outstanding Insurance is to be shown on the Assets Side of the
Balance Sheet.
2. When New Partner is admitted on the 1st day of year, division in Profit
and Loss A/c, Profit and Loss Appropriation A/c is required.
3. No Interest is payable to a New Partner before Admission.
4. Net Profit after admission of partner is transferred to all partners in
Old Profit Sharing Ratio.
5. If any Interest is allowed on Retiring Partners Loan A/c such amount
of Interest is to be debited it to P & L A/c in After Retirement column.
C. Show both the effects of following adjustments and give the Journal
Entry.
1. In the Trial Balance Legal Expenses are Rs. 10,000.Legal Charges Rs.
5,000 paid are included in the Legal Expenses.
2. In the Trial Balance there are Purchases of Rs. 2,00,000 which
included purchase of Furniture of Rs. 20,000.
3. Goods costing Rs. 10,000 are lost by fire and Insurance Company
admitted a claim of Rs. 8,000.
4. Trade Expenses accrued but not entered in the books amounted Rs.
2,500.
5. Bills Receivable includes a dishonored bill.



18
 3
PARTNERSHIP FINAL ACCOUNTS III
Unit Structure :

3.0 Objectives
3.1 Illustrations

3.0 OBJECTIVES

After studying the unit students will be able to solve the practical
problems related to Partnership Final Accounts.

3.1 ILLUSTRATIONS

Illustration no. 1 [Admission of Partner]

Trial balance as on 31st December, 2013

Particulars Rs. Dr. Rs. Cr.

Gross Profit 3,00,000
Creditors 75,000
Bills Payable 35,000
Outstanding Expenses 12,000
Interest Received 12,000
A’s Capital 1,00,000
B’s Capital 2,00,000
C’s Capital (admitted 1st May, 2013 2,00,000
Salaries 24,000
Advertisement 60,000
Stock 1,25,000
Debtors 1,75,000
Rent 36,000
Bad Debts 18,000
Cash & Bank Bal. 96,000
Fixed Assets 4,00,000
934000 9,34,000

A & B sharing ratio of 2:1 Admitted C on 1st May, 2013 and

agreed to share P & L in a ratio of 2:1:1. Sales before C admission were
1,00,000 out of total for the year Rs. 5,00,000.
19
Depreciate Fixed Assets @ 10% p.a.
Provide interest on capital 6% p.a. You are required to prepare Final A/c
of the firm.

Solution:
Profit and Loss A/c
Dr. For the year ended 31st December, 2013 Cr.
Particulars 4 mths. 8 mths. Particulars 4 mths. 8mths.
Rs. Rs. Rs. Rs.
To Salaries 8,000 16,000 By Gross Profit 60,000 2,40,000
To Advertisement 12,000 48,000 By Interest 4,000 8,000
To Rent 12,000 Received
To Bad Debts 3,600 14,400
To Dep. On Fixed 13,333 26,667
Assets
To Net Profit (Bal. 15,067 1,18,933
C/d)
64,000 2,48,000 64,000 2,48,000

Profit and Loss Appropriation A/c.

For the year ended 31st December, 2013
Dr. Cr.

Particulars 4 mths. 8 mths. Particulars 4 mths. 8 mths.

To Interest on Capital By Net profit b/d 15,067 1,18,933

A 2,000 4,000
B 4,000 8,000
C -- 8,000
To Net Profit
transferred A & B
In 2:1 ratio. 9,067

To New profit
transferred to A,B
& C in 2:1:1 ratio.
98,933

15,067 1,18,933 15,067 1,18,933

20
 Balance sheet
as on 31st December, 2013
Liabilities
Rs. Rs. Assets Rs. Rs.

Capital A 1,61,511 Closing Stock 1,25,000

B 2,39,756 Debtors 1,75,000
C 2,32,733 6,34,000 Fixed Assets 4,00,000
75,000 Less Dep.
Creditors 35,000 40,000 3,60,000
12,000 Cash and Bank
Bills Payable Bal. 96,000
Outstanding Expenses

7,56,000 7,56,000

Working Note:
Partners Capital A/c
Dr. Cr.
Particulars A B C Particulars A B C

By Bal. B/d 1,00,000 2,00,000 2,00,000

By Interest on

To Bal.C/d 1,61,511 2,39,756 2,32,733 Capital 6,000 12,000 8,000

By Net Profit 6,044 3,023 --

(4 moths)

By Net Profit 49,467 24,733 24,733

(8 moths)

1,61,511 2,39,756 2,32,733 1,61,511 2,39,756 2,32,733

Illustration-2 [Admission of Partner in between the year]

Trial Balance as on 31st December, 2013
Particulars Dr. Cr.
Rs. Rs.
Gross Profit 3,60,000
Salaries 36,000
Rent 12,000
Printing and Stationery 9,000
Bad Debts 18,000
Discount 24,000
Sales Commission 30,000
Sundry Debtors 2,10,000
Sundry Creditors 40,000
Bills Receivable and Bills Payable 1,20,000 35,000
Land and Building 2,00,000
Plant and Machinery 1,50,000
21
 A’s Capital 1,00,000
B’s Capital 1,50,000
C’s Capital [1st July, 2013] 2,00,000
Advertisement 24,000
Bank Fixed Deposits 1,00,000
9,09,000 9,09,000

Adjustments:-
1) A and B sharing profit & losses in the ratio of 2:1 admitted C on 1st
July, 2013 and agreed to share in the ratio of 2:1:2.
2) As per partnership deed (old and New) partners were entitled to
interest on capital @ 6% p.a. A’s remuneration Rs. 12,000 p.a. and C
Rs. 20,000 p.a. w.e.f. 1st July 2013
3) Depreciate land and bldg by 5%. Plant and machinery by 20% p.a.
4) Plant includes, plant worth Rs. 50,000 purchased on 1st July, 2013
5) Fixed Deposits carry interest at 12% p.a. from 1st Oct 2013
6) Sales up 30th June, 2013 amounted to Rs. 2,00,000 out of total sales for
the year 5,00,000.

You are required to prepare P and L A/c, P and L Appropriation

A/c for the year ended 31st December, 2013 and Balance Sheet as on 31st
December, 2013.

Solution:
Profit and Loss A/c
Dr. For the year ended 31st December, 2013 Cr.
Particulars 1 Jan to 1 July to Particulars 1 Jan to 1 July
30 June 31 Dec. 30 June 31 Dec.

To Salaries 18,000 18,000 By Gross Profit 1,44,000 2,16,000

To Rent 6,000 6,000 (2:3 ratio)
To Printing & By Discount 9,600 14,400
Stationery 4,500 4,500 By Interest on __ 3,000
To Bad Debts 7,200 10,800 F.D.
To Sales Commission 12,000 18,000 (from 1st Oct
To Advertisement 9,600 14,400 2001)
To Depreciation On:
Land & Bldg 5,000 5,000
Plant & Machinery 10,000 15,000
To Net Profit c/d 81,300 1,41,700
1,53,600 2,33,400 1,53,600 2,33,400

22
 Profit & Loss Appropriation A/c
Dr. For the year ended 31st December, 2013 Cr.
Particulars 1 Jan to 1 July to Particulars 1 Jan 1 July
30 June 31 Dec. to 31 Dec.
30
June

To Interest on Capital By Net

A 3,000 3,000 Profit b/d 81,300 1,41,700
B 4,500 4,500
C -- 6,000
To Partners Salary
A 6,000 6,000
C -- 10,000
To net profit transferred to Cap.
Upto 30th June A & B in 2:1 67,800 --
From 1st July A, B, C, in 2:1:2 -- 1,12,200
81,300 1,41,700 81300 1,41,700

Balance Sheet
As on 31st December, 2013
Liabilities Rs. Rs. Assets Rs. Rs.

Partners Capital A/c Land & Building 2,00,000

A 2,08,080 Less: Depreciation 10,000 1,90,000
B 2,04,040 Plant and Machinery
C 2,60,880 6,73,000 Less: Depreciation 1,50,000 1,25,000
Sundry Debtors 25,000 2,10,000
Sundry Creditors 40,000 Bills Receivable 1,20,000
Bills Payable 35,000 Bank Fixed Deposits
Add: Interest Accrued 1,00,000 1,03,000
3,000

7,48,000 7,48,000

Partners Capital A/c.

Dr. For the year ended 31st December, 2013 Cr.
A B C Particulars A B C

To Bal. carried to By Bal. B/d 1,00,000 1,50,000

Balance Sheet By Cash & bank -- -- 2,00,000
2,08,080 2,04,040 2,60,880 By Interest on
Capital 6,000 9,000 6,000
By Salaries 12,000 -- 10,000
By Net Profit
upto 30th June
2008 45,200 22,600
from 1st July 44,880 22,440 44,080

2,08,080 2,04,040 2,60,880 2,08,080 2,04,040 2,60,880

23
Illustration 3 [Admission of Partner]
Rana and Balu were partners sharing profits and Losses in the ratio
of 3:2 with effect from 1-10-2013 kaka joins as a third partner. The new
profit sharing ratio was 2:2:1

The following is their trial balance as on 31-3-2014

Particulars Debit Credit

Rs. Rs.

Drawing & Capital - Rana 15,000 3,00,000

- Balu 10,000 2,00,000
- Kaka 5,000 1,50,000
Opening Stock (1-4-2013) 30,000 --
Purchases & Sales 9,00,000 14,00,000
Wages 1,40,000 --
Furniture 2,00,000 --
General Exp. 60,000 --
Selling Exp. 14,000 --
Debtors & Creditors 6,26,000 2,50,000
Cash & Bank Balance 3,50,000 --
Amount brought by kaka (for his share of Goodwill) -- 50,000
23,50,000 23,50,000

Other Information:
(a) Stock on 31-3-2014 was ₹ 1,80,000
(b) Purchases from 1-4-2013 to 30-9-2013 were ₹ 4,00,000.
(c) Sales from 1-4-2013 to 30-9-2013 were ₹ 6,00,000
(d) Wages from 1-4-2013 to 30.09.2013 were ₹ 60,000.
(e) Stock on 30-9-2013 was ₹ 80,000.
(f) Furniture worth ₹ 1,00,000 was Purchased on 1-1-2014.
Write off depreciation on Furniture at 20% p.a.
(g) Interest on Partner’s Capital is to be provided at 12% p.a.
(h) No interest is to be charged on Partner’s Drawings.
You are required to prepare:-
(i) P & L A/c and P & L Appropriation A/c with columns for
(01-4-2013 to 30-9-2013) and (01.10.2013 to 31.03.2014).
(ii) Balance sheet as on 31-03-2014
[M.U. Apr., 03] and

24
Solution:
(In the book of Rana, Balu & Kaka)
Trading and P & L Appropriation A/c.
For the year ended 31-3-2014
Dr. Cr.
1-4-13 1-10-13 1-4-13 1-10-13
Particulars to to Particulars to to
30-9-13 31-3-14 30-9-13 31-3-14

To Opening Stock 30,000 80,000 By Sales 6,00,000 8,00,000

To Purchases 4,00,000 5,00,000 By Closing stock 80,000 1,80,000
To Wages 60,000 80,000
To Gross profit 1,90,000 3,20,000
6,80,000 9,80,000 6,80,000 9,80,000
To General Exp. (2) 30,000 30,000
To Selling Exp. (2) 6,000 8,000 By Gross Profit b/d 1,90,000 3,20,000
To Depre. Furniture (3) 10,000 15,000
To Net Profit c/d 1,44,000 2,67,000
1,90,000 3,20,000 1,90,000 3,20,000

To Interest on Cap.12% By Net Profit b/d 1,44,000 2,67,000

Rana 18,000 18,000
Balu 12,000 12,000
Kaka -- 9,000
To Partners Capital A/cs
Rana (3/5) (2/5) =1,59,600 68,400 91,200
Balu (2/5) (2/5) = 1,36,800 45,600 91,200
Kaka (-) (1/5) = 45,600 -- 45,600
1,44,000 2,67,000 1,44,000 2,67,000

Dr. Partners Capital A/c Cr.

Particulars Rana Balu Kaka Particulars Rana Balu Kaka
Rs. Rs. Rs.

To Drawings 15,000 10,000 5,000 By Balance b/d 3,00,000 2,00,000 --

To Balance 5,30,600 3,50,800 1,99,600 By Bank (1) -- -- 1,50,000
C/d (Bal. fig) By Interest (1) 36,000 24,000 9,000
(d)
By Goodwill 50,000 -- --
By P & L Appr. 1,59,600 1,36,800 45,600
5,45,600 3,60,800 2,04,600 5,45,600 3,60,800 2,04,600

Balance Sheet as on 31-3-2014

Liabilities Rs. Assets Rs.

Partners Capital Furniture 2,00,000

Rana 5,30,600 Less: Dep. 25,000 1,75,000
Balu 3,50,800 Debtors 6,26,000
Kaka 1,99,600 10,81,000 Stock 1,80,000
Creditors 2,50,000 Cash & Bank 3,50,000
13,31,000 13,31,000
25
Note :- (1) Sacrifice Ratio (Old Partners)
Profit-Share Ratio Rana Balu Kaka

(a) Old 3 : 2

3 2
i.e.    
5 5
(b) New 2 : 2 : 1

2 2 1

i.e.      
5 5 5
1 1
(c) Sacrifice = (a) – (b)  
5 5

(d) Therefore, Kaka has to pay Rana on account of Goodwill no entry is

Passed, since Interest on Capital is calculated on Rs. 1, 50,000 kaka
for 6 months

(2) Allocation of Expenses Basis

(a) General Expenses TIME
(b) Selling Expenses SALES

(3) Depreciation on Furniture

Depreciation @ 20% p.a.

Furniture A/c Rs Upto 1-10-13 After 1-10-13 Total

Opening Bal. (1-04-13) (Bal. fig) 1,00,000 10,000* 10,000* 20,000*
Addition 1-1-09 1,00,000 -- 5,000** 5,000**
Closing Bal. (31-3-14) 2,00,000 10,000* 15,000 25,000

26
Illustration : 4
[Admission of Partner]

The following is the Trial Balance of a firm as on 31st December, 2013.

Debit Rs. Credit Rs.

Purchases 1,56,000 Capital A/c:
Return Inward 2,400 Sonu 30,000
Stock 24,000 Kalu 30,000
Drawings: Motu 30,000
Sonu 12,000 Sales 2,94,000
Kalu 12,000 Return Outward 2,000
Motu 12,000 R.D.D. 8,800
Salary 27,000 Bank Loan 20,000
Off. Exp. 16,500 Creditors 76,500
Bad Debts 2,100 Bills payable 8,700
Carriage Inwards 4,500
Carriage Outwards 6,750
Debtors 1,00,000
Bills Receivables 3,250
Bank Balance 8,000
Cash Balance 2,500
Investment 25,000
Premises 50,000
machinery 36,000
5,00,000 5,00,000

On 1st July 2013 Sonu retired and the following adjustments were agreed
upon:
a) Goodwill of Rs. 90,000/- was brought into the books of accounts.
b) Furniture worth Rs. 20,000/- was purchased on 31-3-2013 but the
invoice was not recorded in the books.
c) Balance in sonu account after making all adjustments was to be
transferred to his Loan account carrying interest @ 16%.
d) Closing stock was valued at Rs. 42,000/-.
e) Depreciate Machinery by 10%, Premises by 5% and Furniture by 5%
p.a.
f) Provide interest on capital at 10% p.a. Prepare Trading and Profit and
Loss Account for the year ended 31-12-2013 and a Balance sheet as on
that date.
[Modified M.U. Apr.,05]

27
Solution : (In the Books of Sonu, Kalu, & Motu)
Trading, P & L and P & L Appropriation. A/c
Dr. for the year ended 31st Dec. 2013 Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 24,000 By Sales 2,94,000
To Purchases 1,56,000 Less: Returns (2,400) 2,91,600
Less: Returns (2,000) 1,54,000 By Closing Stock 42,000
To Carriage Inward 4,500
To GP c/d 1,51,100

3,33,600 3,33,600
To Salary 27,000 By Gross Profit 1,51,100
To Office Expenses 16,500
To Bad Debts 2,100
To Carriage Outward 6,750
To Deprecation
Machinery 3,600
Premises 2,500
Furniture 750 6,850
To Net Profit 91,900
1,51,100 1,51,100

HY1 HY2 HY1 HY2

Rs. Rs. Rs. Rs.
To Interest on Capital By Net Profit
Sonu 1,500= 1,500 -- (91,900 X ½) 45,950 45,950
Kalu 3,000= 1,500 1,500
Motu 3,000= 1,500 1,500

To Interest A’s Loan- 5066

(63,317 x 16% x 6 mths)
To Net Profit
Transfer to Capital A/cs.
A 13,817= 13,818
B 32,758= 13,816 18,942
C 32,758= 13,816 18,942

45,950 45,950 45,950 45,950

i) Half year, HY1 = 1st Jan. 2013 to 30 June 2013.

HY2 = 1st July 13 to 31st December, 2013.
ii) It is assumed that monthly sales were uniform throughout the year.
Balance Sheet As on 31st Dec., 2013

28
 Liabilities Rs. Rs. Assets Rs. Rs.
Bank Loan 20,000 Cash 2,500
Creditors 76,500 Bank 8,000
Add: Purchase of 20,000 96,500 Debtors 1,00,000
Furniture Less: R.D.D 8,800 91,200
8,700 B/R 3,250
Bill payable 63,318 Closing stock 42,000
5,066 68,384 Investment 25,000
Sonu’s Loan A/c
Premises 50,000
Add: O/s Interest
83,758 Less:
83,758 1,67,516 Depreciation (2,500) 47,500
Capitals:
Machinery 36,000
Kalu
Less:
Depreciation (3,600) 32,400
Motu
Furniture 20,000
Less:
Depreciation (750) 19,250

Goodwill 90,000
3,61,100 3,61,100

Capitals A/c
Dr. Cr.
Particulars Sonu Balu Kaka Particulars Sonu Balu Kaka
To Drawing 12,000 12,000 12,000 By Balance b/d 30,000 30,000 30,000
To Loan A/c 63,318 83,758 83,758
By Goodwill 30,000 30,000 30,000

By Int. on 1,500 3,000 3,000

capital
By P/L A/c 13,818 32,758 32,758

75,318 95,758 95,758 75,318 95,758 95,758

Illustration – 5 [Admission of a partner]

A and B were partners in business sharing profit and losses, A two-
third and B one-third. Interest on Fixed Capital was credited @ 5% p.a.
No. interest was charged on drawings. Accounts were made upto 31st
March of each year.

On January 1, 2014 C was admitted as partner and from that date

all P and L were to be shared, A six-tenth B three-tenth, C one-tenth.
Before ascertaining the partners shares of P and L C was to be credited
with a salary at the rate of Rs. 6000 p.a. Provisions regarding interest on
capital and drawings remained unaltered.

It was agreed that C’s total share of profits including his salary and
interest on capital, should be guaranteed by A at minimum rate of Rs.
15000 p.a. Any apportionment of profit for a particular period should be
made as to gross profit on the basis of sales and as to expenses, with the
expectation of general expenses on the basis of time.

The Trial Balance extracted from the books on 31st March 14 was
as follows-

29
 Particulars Dr. Cr.

Capital Account: A 48,000

B 24,000
C (cash paid in Jan 1st, 2014) 8,000
Current Account: A 30,000
B 15,000
C 3,000
Delivery Van at cost 10,000
Pro. For Dep. thereon at 31st March, 2014 4,000
Furniture and Fittings at cost 24,000
Pro. For Dep. thereon at 31st March, 2014 3,000
Sales (Nine months, to Dec 31st) Rs. 2,40,000/- 3,36,000
Purchases 2,22,000
Stock March 31st 2013 48,000
General Exp. (9 months To Dec. 2013 Rs. 4,550) 10,400
Salaries 24,000
Heating and Lighting 2,200
Rent and Rates 9,600
Creditors 15,000
Debtors 20,000
Balance at Bank 19,800

4,38,000 4,38,000

On 31st March, 2014 the stock was valued at Rs. 47000, rates paid
in advance amounted to Rs. 600; Rs. 800 is to be provided for electricity
consumed to that date.

Included in the sundry debtors was an amount of Rs. 6000 for

goods invoiced on sale or return on 1st February 2014 which were still
unsold on 31st March 2014. The cost of these goods which were not
included in the stock was Rs. 3000.

Depreciation is to be provided @ 20% p.a., on the cost of the

delivery van at 2 ½ % p.a., on the cost of furniture and fittings.

You are required to prepare:-

(a) Trading and P and L A/c for the year ended 31st March 2014 and
(b) Balance Sheet as on that date: Ignore Taxation.

30
Solution:-
M/s A, B and C
Trading and P and L Account for the year ended
31st March 2014
Dr. Cr.
Particulars Rs. Particulars Rs. Rs.
Amt. Amt. Amt.

To Opening Stock 48,000 By Sales 3,30,000

To Purchases 2,22,000 By Stock in hand: 47,000
To Gross Profit c/d 1,10,000 With Customer 3,000 50,000
3,80,000 3,80,000

Upto Dec. 1st Jan 14 Upto Dec. 1st Jan.

31st 2013 31st Mar. 31st 2013 14
Rs. 14 Rs. 31st
Rs. Mar. 14
Rs.
To Salaries 18,000 6,000 By Gross 80,000 30,000
To General Exps. 4,550 5,850 Profit
To Heating and Lighting 2,250 750 (240:90)
To Rent and Rates
To Depreciation on:- 6,750 2,250
Delivery Van
Furniture & fixtures 1,500 500
To Net Profit c/d 450 150
46,500 14,500

80,000 30,000 80,000 30,000

To Interest on Capital:- By Net 46,500 14,500
A profit b/d
B 1,800 600
C 900 300
To Salary to artners C 100
To Profit:- 1,500
2 6
A /3 /10
1 3
B /3 /10
1 29,200 7,200
C - /10
14,600 3,600
1,200

46,500 14,500 46,500 14,500

Note : Rs. 6000 goods with customer on approval basis have been
deducted both sales and debtors.

31
 Balance Sheet as at 31st March, 2014

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Account:- Fixed Assets:
A 48,000 Delivery Van cost
B 24,000 Less: Depreciation 10,000
C 8,000 4,000
80,000
6,000
Current Account:- Furniture and
A 7,850 Fixtures cost
B 4,400 Less: Depreciation
C 750 Current Assets: 20,400
13,000
Stock in hand with 24,000
customer
Debtor 3,600 50,000
Cash at Bank
Prepaid Rates 14,000
Creditors 15,000 19,800
Expenses Unpaid 800 600

108800 108800

Partners Current Account

Dr. Cr.
Particulars A B C Particulars A B C

To Drawings 30,000 15,000 3,000 By Interest 2,400 1,200 100

To Partner c By Salary 1,500
(to Make up 950 By Net Profit 29,200 14,600 --
Rs. 3750 for Upto 31-12-
Mths) 2014
To Balance By Net Profit 7,200 3,600 1,200
C/d After Jan 1st
By C/A’s A/c
7,850 4,400 750 950

38,800 19,400 3,750 38,800 19,400 3,750

Illustration – 6 [final A/c of professional firm]

Dr. Gandhi and Dr Gujar were partners (sharing P and L in 3:2

ratio). On 1-10-2013 they admitted Dr. Jani as a partner. Dr. Jani brings
Rs. 40000 as Goodwill for his 1/5th share.
The trial balance on 31-12-2013 was as follows:-
32
 Particulars Dr. Cr.

Drawings and Capital

Dr. Gandhi 15,000 60,000
Dr. Gujar 10,000 40,000
Jani (Goodwill brought on 1-10-2013) 40,000
Client’s deposits received 10,000
Equipments and furniture 1,80,000
Office and administration expenses 72,000
Rent 21,000
Salaries 40,000
Cash and Bank 1,02,000
Fees earned 3,00,000
Provisions against out standings fees) 1-1- 50,000
2013)
Outstanding Fees (on 31-12-2013) 60,000

5,00,000 5,00,000

Adjustments:-
1) Provide 10% depreciation on Equipment and Furniture.
2) The business has handled 50% more work in each of the months of
the last quarter compared with the previous months.
3) Outstanding Fees 31-12-2013 includes Rs. 45000 for fees to be
collected for the period in the last quarter of 2013. All outstanding
fees should be provided.
4) Rent has been increased by Rs. 500 p.m. from 1-7-2013
5) A clerk was appointed at Rs. 1000 p.m. from 1-9-2013
Prepare Final accounts for the year ended 31st December 2013

Solution:-
In the books of Dr. Gandhi, Dr. Gujar and Dr. Jani
Profit and Loss A/c.
For the year ended 31st December 2013
Dr. Cr.
Particulars Upto After Particulars Upto After
30-9 1-10 30-9 1-10

To Office and 54,000 18,000 By Fees earned (notes 2,00000 1,00,000

Administration 3)

To Rent (Note 1) 15,000 6,000 By Provision for

outstanding fees
To salaries (Note 2) 28,000 12,000 (1.1.2013 Rs. 500000
Less : (31-12-2012 35,000
To Depreciation on Rs. 15000
equipments 13,500 4,500 (15000=60000-
45000)
And furniture
45,000

33
To Provision for
outstanding fees

To Partners Capital
A/c (profit) (bal.
Fig.)
74,700 6,960
Dr. Gandhi (3/5 &
12/25) 49,800 4,640

Dr. Gujar (2/5 &

8/25)
2,900
Dr. Jani 5/25

2,35,000 1,00,000 2,35,000 1,00,000

Balance Sheet as at 31st December, 2013

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Equipment & 1,80,000
Account:- Furniture
Dr. Gandhi 1,50,660 Less:
Dr. Gujar 1,00,440 Depreciation (18,000) 1,62,000
Dr. Jani 2,900 2,54,000 Cash & Bank 1,02,000
Client Deposit Outstanding Fees
Received 10,000 Less: Provision 60,000
(60,000) --
2,64,000 2,64,000

Working Note:
Partners Capital A/c
Dr. Cr.
Particulars Gandhi Gujar Jani Particulars Gandhi Gujar Jani

To Drawings 15000 10000 By Bal. B/d 60000 40000 40000

To Goodwill 40000 By Goodwill 24000 16000
To Balance c/d 150660 100400 2900 By Profit 81600 54440 2990
(bal. Fig.)

165660 110440 42900 165660 110440 42990

(1) Rent 21,000

Less: Increased (500 x 6 mths 3,000
----------
Rent (without increase 18,000
======

34
 Therefore, Rent= 18000/12 Rs. 1500 per Mth.
(a) Rent (from 1-1-2013 to 1-9-2008)
1-1-2008 to 30-6-2013 (1500 x 6 mths.) 9,000
1-7-2013 to 30-9-2013 (2000 * 3 mths.) 6,000
-----------
Total 15,000
=======
(b) Rent (from 1-10-2013 to 31-12-2013
(2000* 3 mths.) 6,000
=======
(2) Salaries
Salaries 40,000
Less: Clerk appointed (1000 x 4 mths.) 4,000
Salaries (without appointment) 36,000
=====
Therefore, Salaries = Rs. 36000/12=Rs. 3000 per mth.

(a) Salaries (from 1-1-2013 to 30-9-2013)

1-1-2013 to 31-8-2013 (3000 x 8 mths.) 24,000
1-9-2013 to 30-9-2013 (4000 x 1 mths.) 4,000
-----------
Total 28,000
======

(b) Salaries (from 1-10-2013 to 31-12-2013) -----------

1-10-2013 to 31-12-2013 (4000 x 3 mths.) 12,000
=======

(3) Fees Earned

Lets assume, average monthly work in first three quarters
be 2x per month. Therefore, average monthly work in last
Quarter = 3x per months.
Work (01-01-2013 to 30-9-2013) = 2x for 9 mths. = 18x
Work (01-10-2013 to 31-12-2013) = 3x for 3 mths. = 9x
Therefore, Work upto 30-9-2013 and after 01-10-2013 is in
2:1.
(4) Goodwill Adjustment
As the new profit sharing ratio is not specified, the sacrifice
by old partners (Gandhi and Gujar) is in old profit sharing ratio
(i.e. 3:2). The entry passed is
Jani’s capital A/c……………Dr. 40,000
To Gandhi capital A/c 24,000
To Gujar Capital A/c 16,000
(5) New profit sharing ratio
(a) Partner Gandhi = 3/5 of (1-1/5) = 12/25
(b) Partner Gujar = 2/5 of (1-1/5) = 8/25
(c) Partner Jani = 1/5 = 5/25
Therefore, Gandhi : Gujar: Jani: 12:8:5
35
Illustration – 7 [Admission of A partner in between the year]
M/s Kunal & Co. having Deepak and Ram (sharing profits and
losses in 2:1) decided to admit Amit, as partner from 1-1-2014. The new
profit-sharing of the partner was Deepak: six-tenth; Ram : three-tenth; and
Amit: One-tenth.

According to the partnership deed, interest @ 10% p.a., is payable

on fixed capital: No interest was charged on drawings. The capital should
be prepared on 31st March each year Deepak and Ram admitted Amit on
following terms and conditions:-

(1) Amit should get salary of Rs. 9000 p.a.

(2) Amit’s share of profits (including salary and interest on capital
should be guaranteed by Deepak at a minimum of Rs. 16000 p.a.,
from the date of admission.
(3) Apportionment of expenses should be made on the basis average
sales, except from miscellaneous expenses and administrative
expenses.
(4) Goodwill of the firm was valued at Rs. 100000 and it should be
raised in the books.

The Trial balance on 31st March, 2014 was as follows:-

Particulars Dr. Cr.

Rs. Rs.
Current and Capital Accounts:
Deepak 60000 96000
Ram 30000 48000
Amit (Capital Brought on 14-2-2014) 6000 16000
Cost and Provision for Depreciation
On Office furniture 20000 8000
On Delivery Vans 48000 18000
Purchases and Sales 400000 610000
Debtors and Creditors 60000 20000
Stock on 1-4-2013 90000
Miscellaneous expenses (upto 31st December Rs. 20000
11900)
Rent, Rates and Taxes 44000
Carriage outward 17000
Cash & Bank 11000
Goodwill 10000
816000 816000

In addition following information is to be considered:-

1) Stock on 31-3-2014 Rs. 34000.
2) Rent, Rates and Taxes outstanding on 31-3-2014 Rs. 4000.
3) Carriage outward paid in advance on 31-3-2014 Rs. 2000.

36
4) Sales and Debtors includes goods sent on “sales or return” basis on 01-
03-14 of Rs. 25000 (Cost Rs. 15000) On 31-3-14.
(i) 50% of goods accepted by customers.
(ii) 10% of goods no intimation from customer but period
of approval expired on 25th March 2014.
(iii)Balance goods, period of approval not expired.
5) Average monthly sales for the months of January, March, May to July,
September to December were half, compared to average monthly sales
of the remaining months.
6) On 31-3-2014 partners decided that partners fixed capital should be in
8 (Deepak); 4 (Ram); 1 (Amit). For this purpose, Amit’s capital
should be considered as base. The shortfall in case on Ram, should be
adjusted through introduction of cash by Ram. However shortfall of
Deepak should be transferred to his current a/c. The necessary cash
was brought by Ram on 31-3-2014 for which no entry was passed.
7) Provide 10% depreciation on Office furniture and on delivery vans.
Prepare Trading and Profit and Loss Account for the year ended
31st March, 2014 and the Balance Sheet on that date.

Solution :

In the books of Kumar and Co. Trading Account

for the year ended 31st March, 2014

Dr. Cr.
Particulars AMT. Particulars Amt.

To Opening Stock 90000 By Sales 610000

To Purchases 400000 Less: Sales or Return 10000 600000
To Gross Profit (bal. 150000 By Closing Stock 34000
Fig.) Add: Sales or Return 6000 40000
at cost

640000 640000

37
 Profit and Loss A/c
Dr. For the year ended 31st March 2014 Cr.
Particulars Upto 31-12 After 1-1 Particulars Upto 31-12 After 1-1
Rs. Rs. Rs. Rs.

To Misc. Exp 11,900 8,100 By Gross Profit b/d 1,10,000 40,000

To Rent, Rates & 36,000 12,000 (sales)
Taxes
(44000 + 4000)
To Carriage 11,000 4,000
Outward
(170000-2000)
(sales)
To Dep. On 900 300
Furniture (time)
To Dep. On 2,200 800
Delivery Van
(sales)
To Net Profit (bal. 48,000 14,800
Fig.)

Total Rs.

To Salary By Net Profit b/d

(9000*3/12)
To Interest on
Capital:
@ 10% on 96000
1,10,000 40,000 1,10,000 40,000
@ 10% on 48000
@ 10% on 16000
for 1.5 mths.
(from 14-2-2014) -- 2,250 48,000 14,800
To Partners Capital
A/c (profit)
Deepak( 2/3 and
note 4)
Ram 1/3 and 7,200 2,400
3/10)
Amit (-) and 3,600 1,200
note 4
-- 200
Total Rs.

24,800 4,575

12,400 2,625

-- 1,550

48,000 14,800 48,000 14,800

38
 Partners Current Accounts
Particulars Deepak Ram Amit Particulars Deepak Ram Amit

To Bal. B/d 60000 30000 6000 By Goodwill 60000 30000

To Deepak’s (2:1) [note 6]
Capital By Salary 2250
Account (note By Interest on 9600 4800 200
5). 32000 -- -- Capital
To Bal. C/d 6975 19825 By Profit 29375 15025 1550
By Bal. C/d 2000

Total Rs. Total Rs.

98975 49825 6000 98975 49825 6000

Balance Sheet
As on 31st March 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Partners Capital Office Furniture 20000
A/c Less: Pro. For Dep. 9200 10800
Deepak 128000 (note 3)
Ram 64000 Delivery Vans 48000
Amit 16000 208000 Less: Pro. For Dep. 21000 27000
Partners Current (note 3)
A/c Debtors 60000
Deepak Less: Sales of Return 10000 50000
Ram Cash and Bank
26800
6975 Add: Brought by
Creditors 19825 Ram 11000 27000
20000
Outstanding Rent, Goodwill 16000
4000
Rates and Taxes Add: Raised
Stock 100000
Add: sales or Return 10000
Carriage-outward 90000 40000
paid in adv. 34000
Partners Current A/c 2000
6000
Amit
2000

258800 258800

39
Working Note:-
1) Sale or Return Goods:
(a) 50% of the goods accepted by the customer and 10% of the goods
for which no intimation is received but period of approval has
expired should be considered as a sale. These goods are already
include in sales and debtors & therefore no adjustment entry is
required for 60% of the goods.
(b) Balance 40% (i.e. 100%-50%-10%) goods, for which period of
approval is not expired cannot be considered as sale. Therefore
(i) Cancel sales (i.e. less from sales and less from debtors) =
40% for Rs. 25000=Rs. 10000
(ii) Include in closing stock = 40% of 15000 (cost) = Rs. 6000
(i.e., at cost and market value, whichever is less).

2) Sales ratio:
Let us assume sales for remaining months=2x each.
Sales for specified months = x each.
Sales from 1-4-2008 to 31-12-2008 (9 months)
Apr May Jun July Aug Sep Oct Nov Dec Total
2x +x +x +2x +x +x +x +x +x =11x
Sales from 1-1-2009 to 31-3-2009 (3 months)
Jan Feb Mar Total
X +2x +x =4x
Therefore, Sales 9 months : months :11:4.

(3) Depreciation :
Method of depreciation is not specified and therefore dep. is
provided on reducing balance method.
Particulars Off.Fumit. Delivery van

Cost 20,000 48,000

Less: Pro For Dep. (1-4-2013) 8,000 18,000
W.D.V. 12,000 30,000
Less: Depreciation @ 10% 1,200 3,000

W.D.V. on 31-3-2014 10,800 27,000

(4) Gurantee of Profit (by Deepak to Amit)

Gurantee (for 3 months i.e, 01-01-2013 to 31-03-2013)
Total amount receivable by Amit
Salary (9000 x 3/12) 2250
Add: Interest on capital (on Rs. 16000 @ 10% from
14.2.2009 200
Add: Profit [1/10 of (14800-6050)] 875
3325
Add: Shortfall to be borne by Deepak (Bal.Fig) 675
40
 Total amount receivable by Amit 4000

Therefore, Total profit Amit=875+675=Rs. 1550.

Profit of Deepak:
Profits [6/10 of (14800-6050)] 5250
Less: Shortfall of Amit 675

Total profit of Deepak 4575

(5) Fixed capital adjustments:

Fixed capital of Amit 16000
Therefore, Fixed capital of Deepak (16000x8/1) 128000
Therefore, Fixed capital of Ram (16000x4/1) 64000
(a) Shortfall of Deepak
Shortfall of Rs. 32000 (i.e, 128000-96000) should be
debited to Deepak’s current account.
(b) Shortfall of Ram
Shortfall of Rs. 16000(i.e., 64000-48000) should be
brought in cash by Ram.
Therefore, cash balance increased by Rs. 16000

(6) The Journal Entry to raise Goodwill is

Goodwill A/c ------- Dr. 90000
To Deepak’s Current A/c (⅔) 60000
To Rams Current A/c (⅓) 30000

Illustration : 8
Following is the Trial Balance of a firm as on 31st Dec. 2013
Debit Rs. Credit Rs.
Drawing : X 15,000 Capita’s X 24,000
Y 7,500 Y 12,000
Z 1,500 Z (including Goodwill) 5,000
Furniture 10,500 Sales 1,80,000
Purchases 1,10,000 Creditors 13,500
Stock 25,000
General Expenses 5,200
Salary 12,000
Rent & Rates 5,900
Debtors 31,000
Bank 10,900
2,34,500 2,34,500

Adjustments:
1) X and Y were partners sharing profits and losses equally.
2) Mr. Z was admitted to the partnership on 1st July, 2013.
3) On 31st December, 2013 stock was valued at Rs. 23,500.
4) Rent & Taxes paid in advance Rs. 900.
41
5) General Exp. Were outstanding Rs. 750.
6) Depreciate Furniture @ 10% p.a.
7) Share of Goodwill of new partner was valued at Rs. 1,000 on 1st
July, 2013 and is yet to be adjusted
8) Interest on capital to be charged at the rate of 10% p.a.
You are required to prepare Trading, Profit and Loss Account for
the year ended on 31st December, 2013 and Balance sheet as of
that date.
[Modified, M.U. Oct., 08]
Solution :
(In the Books of X, Y, Z)
Trading and Profit and Loss A/c.
For the year ended 31st Dec., 2013
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening Stock 25,000 By Sales 1,80,000
To Purchases 1,10,000 By Closing Stock 23,500
To Gross Profit c/d 68,500
2,03,500 2,03,500

To General Expenses 5,200 By Gross Profit

Add: Outstanding 750 68,500
To Salary 5,950
To Rent & Taxes 5,900 12,000
Less: Prepaid 900
To Depreciate Furniture 5,000
@ 10% p.a
To Net Profit (full year) 1,050
44,500

68,500 68,500

Dr. P & L Appropriation A/c (Year 2013) Cr.

Jan- July- Jan- July-

June Dec June Dec
Rs. Rs. Rs. Rs.
To Interest on Capital By P & L 22,250 22,250
A/cs. (50% of 44,500
A (full year) 1,200 1,200 each)
B (full year) 600 600 [N.P. B/d]
C (6 months) 200

To Balance Profit 10,225 6,750

A 10,225 6,750
B -- 6,750
C
(b) 20,450 20,250

42
 22,250 22,250
(a)+(b)
= 19,375 22,250 22,250
Interest + Profit = 18,175
A (11,425 + 7,950) = 6,950
B (10,825 + 7,350)
C ( Nil + 6,950)
44,500 44,500

Partners Capital A/c

Dr. Cr.
Particulars A B C Particulars A B C
RS. Rs. Rs. Rs. Rs. Rs.
To Drawing 15,000 7,500 1,500 By Balance b/d 24,000 12,000 5,000
To Goodwill -- -- 1,000 By Goodwill 500 500 --
To Balance C/d 28,875 23,175 9,450 By P & L Appro. 19,375 18,175 6,950
43,875 30,675 11,950 43,875 30,675 11,950

Balance Sheet of A, B, & C

As at 31st Dec., 2013
Liabilities Rs. Assets Rs.
Capitals: Furniture 10,500
A 28,875 Less: Deprn. (1,050) 9,450
B 23,175 Prepaid Rent 900
C 9,450 61,500 Debtors 31,000
Outstanding Exp. 750 Bank 10,900
Sundry Creditors 13,500 Closing Stock 23,500

75,750 75,750

Note :
In the absence of any information / Instruction, it is assumed that
(a) Profit Sharing Ratio before and after Admission of C as a partner is
equal
(b) Interest on Drawings is to be ignored.
(c) Sales and other expenses were uniform throughout year.

ILLUSTRATIONS: 9 [Admission of partner, when stock on date of

admission given]

A, B were sharing in the ratio of 3:2 admitted C as on 1st Oct. 2013 for 1/6
share

43
Trial Balance as on 31st March 2014 was as under.

Particulars Dr. Rs. Cr. Rs.

Capital A/c
A 2,00,000
B 1,50,000
C (1.10.2013) 2,00,000
Stock (01.04.13) 40,000
Purchases (upto 30.09.13 Rs. 1,00,000] 250,000
Sales (upto 30.09.13 Rs. 250000) 595000
Salaries 20,000
Rent 30,000
Insurance (for the year 30.06.14) 12,000
Bills Receivable 2,00,000
Sundry Debtors / Sundry Creditors 1,10,000 40,000
Plant and machinery 4,00,000
Wages [upto 30.13.08 Rs. 20,000] 50,000
Commission [2% on sales] 6000
Land & Building 1,50,000
Cash on bank 28000
General Reserve (1.04.13) -- 1,50,000
Bank overdraft --
Office Expenses 54000 15,000

13,50,000 13,50,000

You are given following information

1) Stock as on 30th Sept. 13 Rs. 60,000 and as on 31.03.14 Rs.
125000
2) Depreciate Land &Building @5% p.a. and Plant & Machinery
@20% p.a.
3) Plant includes, Plant costing Rs. 2, 00,000 purchased on 1st Jan.
2014.
4) Salaries to Partner A-Rs.24, 000 p.a. & C Rs. 1,000 p.m.
5) Rent was increased by Rs. 2,000 p.m. from 01.10.13.
6) C’s Capital includes Rs. 40,000 brought in as his share in
Goodwill.
7) Fixed Capital of Partners should be Rs. 6,00,000 in their
Profit/Loss sharing ration.
Prepare final Accounts of the firm.

44
Solutions:
In the books of M/s A, B, C, & Co.
Trading A/c Profit & Loss A/c for the year ended 31st March 2014
Dr. Cr.
Particular 1.4.13 to 1.10.13 Particulars 1.4.13 1.10.08
30.9.13 (6 to to to
m) I 31.3.14 30.9.13 31.3.14
II (6 m) I II (6 m)

To Opening stock 40000 60000 By Sales 250000 345000

To Purchases 1,00,000 150000 By closing stock 60000 125000
To Wages 20000 30000
To Gross profit 150000 230000
310000 470000 310000 470000
To Salaries 10000 10000 By Gross Profit 150000 230000
To Rent 12000 18000 B/d
To Insurance 3000 6000
To Commission 5000 6900
To Office Expenses 27000 27000
To Depreciation
Land &Bldg.
plant & Machinery 3750 3750
To Net Profit b/d 20000 30000
69250 128350
150000 230000 150000 230000
st
Profit & Loss Appropriation A/c for the year ended 31 March 14
Dr.. Cr.
Particulars I II Particular I II

To Partners By N.P. B/fd. 69,250 128350

Salaries A 12000 12000
C -- 6000
To N.P. transfer
to A & B in 3:2 57250 -
ratio
To N.P. transfer
to A,B,C in 3:2:1 - 110350
ratio
69250 128350 69250 128350

Partner’s Capital A/c

Dr.. Cr.
Particulars A B C Particulars A B C
To Goodwill -- -- 40000 By Bal. B/d 200000 150000 200000
To Partners By Gen. Res. 90000 60000 --
Current A/c 127525 85683 84392 By Salaries 24000 -- 6000
(Bal. fig.) By Goodwill 24000 16000 --
To Bal C/fd 300000 200000 100000 By N. Profit Upto
30/6/08
A, B in 3:2 from 1 34350 22960 --
Oct. to A, B, C in
3:2:1 55175 36783 18392

427525 285683 224392 427525 285683 224392

45
Working Notes:
1) New P.S. Ratio: C was admitted for 1/6 share
1 6 1 5
Bal. 1- /6 = = /6 to old partners
6
Partners in old ratio
3 5 2 5 5 1
A = /5 x /6 b= /5 x /6 C = /5 x /6
= 15 = 10 =5
A: B: C = 3: 2: 1
Balance Sheet as on 31st March 2014
Liabilities Rs. Rs. Assets Rs. Rs.

Partners Capital Land & Building 150000

A 300000 Dep. (7520) 142500
B 200000 Plant & Machinery 400000
C 100000 600000 Less: Dep. 50000 350000
Partners C/A Sundry Debtors 110000
A 127525 Bills Receivable 200000
B 85683 Closing stock 125000
C 84392 297600 Prepaid Insurance 3000
Sundry creditors 40000 Cash 28000
Bank O.D. 15000
Commission 5900
Payable
958500 958500

2) Rent Rs. 30,000 I II

Increase Rs. 2,000 p.m. from 01.01.13
2,000 x 3 -- 6000
Bal. Rent (30,000-6,000)
= 24000 in Time Ratio 6m, 6m, 12000 12000
12000 18000
3) Insurance Rs. 12,000 p.a. from 1st July 13 to 30th June 14. i.e.
Rs.1000 p.m.
I 01 July 13 to 30 Sept. 13 i.e 3 months = 1,000 x 3 = 3,000
st
II 10 Oct. 13 to 31 Mar. 14 i.e. 6 months = 1,000 x 6 = 6,000
9,000
st th
Prepaid from 1 April to 30 June 14 3000

4) Commission on sales @ 2% Rs.

I Commission = 2,50,000 x 2% = 5,000
II Commission= 3,45,000 x 2% = 6,900
11,900
Less paid (given in Trial Balance) 6,000
Outstanding com. Payable 5,900

46
5) Dep. On plant machinery @ 20% p.a.
i) On new plant purchased on 1.10.13 I II
2,00,000 x 20% x 3/12 10,000
ii) Bal Plant [400000 – 200000]
200000 x 20% = 40000 in
Time Ratio 20,000 20,000
Total Depreciation 20,000 30,000
6) Closing Stock on 30/06/13 Rs. 60,000 becomes Opening Stock on
01.07.13.

Illustration : 10 [ retirement of partner in between the year]

X, Y & Z sharing in the ratio of 5:3:2 X retired on 1st Oct. 2013 B & C
continue business sharing equally.

Following Balances are as on 31st Dec. 2013

Particulars Dr. Cr.
Rs. Rs.
Opening Stock 40000
Sales 600000
Discount 9000
Purchases 260000
Wages 20000
Salaries 24000
Rent 10000
Bad Debts 15000
Insurance 4000
Sundry Expenses 10000
Capiral’s AIC’s:
X’s 200000
Y’s 150000
Z’s 100000
Land & Building 200000
Plant & Machinery 150000
Building Under construction 326000
1059000 1059000

Adjustments:
1) Outstanding Salary Rs. 4000 & outstanding Rent Rs. 2000 to be
provided.
2) Sales upto X’s retirement amounted Rs. 400000.
3) As per Partnership deed:
a] Provide interest on capital @ 6% p.a
b] Partners salary x’s Rs. 20000 p.a. & z’s Rs. 500 per mth.
c] X was entitled for commission of 1% on net sales.
4) Closing Stock on 31st Dec. 13 valued at Rs. 50000.
5) Depreciate Land & Building by 5% & Plant & Machinery 10%
p.a.

47
6) Balance due to Z on his retirement to be transferred to his loan a/c
carrying interest at 12% p.a.
Ascertain balance payable to Mr. A on 31 Dec. 2013.
Prepare Trading, P & L A/c for the year ended 31st Dec. 2013 &
Balance Sheet as on 31st Dec. 2013.

Trading a/c
For the year ended 31st Dec. 2013
Dr. Cr.
Particulars AMT. AMT. Particulars AMT. AMT.
To Opening Stock 40000 By Sales 600000
To Purchases 260000
To Wages 20000
To Gross Profit c/d 330000 By Closing Stock 50000

650000 650000

Profit & Loss A/C.

For the year ended 31st Dec. 2013.
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Salaries (24000+ 21000 7000 By Gross Profit o/d 220000 110000
O/S-4000) (in sales ratio 2 1)
To Rent (10000+ O/S 9000 3000 By Discount 6000 3000
2000)
To Bad Debts 10000 5000
To Insurance 3000 1000
To Sundry Expenses 7500 2500
To Depreciation on:
Building 7500 2500
Plant & Machinery 11250 3750
To Interest on Loan -- 8535
(@ 12% p.a. on
Rs.284500) 3 mth.
To Net Profit c/d 156750 79715

2,26,000 1,13,000 2,26,000 1,13,000

Profit & Loss Appropriation A/c.

for the year ended 31st December, 2013
Dr. Cr.
Particulars 9 mth. 3 mth. Particulars 9 mth. 3 mth.
To Interest on Capital By Net Profit bid 156750 79715
X 9000 --
Y 6750 2250
Z 4500 1500
To Partners Salary:
X 15000 --
Z 4500 1500

To A’s Commission --
To Net Profit Transferred to

48
A,B,C in 5:3:2 ratio
B & C equally 4000 74465

113000

156750 79715 156750 79715

Balance Sheet
As on 31st Dec. 2013
Liabilities AMT AMT. Assets AMT. AMT.

Partners capital A/c: Land & Bldg. 200000

Y 230132 Less: Depreciation 10000 190000
Z 171833 401965 Bldg. Under 326000
construction
Z’s loan :
Bal. transferred from capital Plant & Machinery 150000
Add. O/s Interest for 3 months 284500 293035
Less: Depreciation 15000 135000
O/s Rent 2000
O/s Salary 8535 4000 Closing Stock 50000

701000 701000

Partners Capital A/c

Dr. Cr.
Particulars X Y Z Particulars X Y Z
To X Loan a/c By Bal. B/d 200000 150000 100000
(Bal By Interest on 9000 9000 6000
Transferred) 284500 -- Capital 6000
By Salaries 15000
By Commission 4000
To Bal. B/d -- 230132 171833 By Net Profit 56500 33900 22600
(Upto Sep)
By Net Profit -- 37232 37233
(1 Oct to 31 Dec.)

284500 230132 171833 284500 230132 171833

Working Notes:-

1] Time ratio ABC partners 1st Jan. 2013 to 31st Sep. 2013 = 9
months.
B & C partners 1st Oct. to 31st Dec. 2013 = 3 months.
Therefore time ratio = 3:1.
2] Sales ratio from 1st Jan. 2013 to 30th Sep. 2013 Rs. 400000.
Sales from 1st Oct. 2013 to 31st Dec. 2013 Rs. 200000
Therefore Sales ratio = 2:1.
3] Salaries, rent, insurance, depreciation, sundry exp., are allocated on
time basis as these are related with time.

49
4] Gross Profit, discount received, bad debts allocated on sales basis
as these are related with turnover.

Illustration: 11 [Death of a Partner]

The Partnership agreement of T & Z provides that
(a) Profit & losses shall be shared equally.
(b) Interest at 5% p.a., shall be allowed on capital but no interest is to
be charged on drawings.
(c) On the death of one of the partner:
[1] The survivor shall pay out the interest of the deceased
partner & purchase his share.
[2] The value of the Goodwill shall be the profits of the
proceeding three years.
[3] The assets are to be taken on the date of death at their
value. T died on 1st April 2014.
The stock on 31.3.13 was valued at Rs. 28740.
The following trial balance was extracted from the books as on 31st March
2014.
Particulars Dr. Cr.
Rs. Rs.
T’s Capital 40000
Z’s Capital 20000
T’s Drawings 4500
Z’s Drawings 3500
Salaries 7550
Rent & Rates 2630
Purchases 114700
Stock (1.04.13) 27490
Traveler’s Commission & Expenses 5800
Wages 16360
Sales 163840
Sales Return 490
Sundry Debtors 26400
Cash at Bank 5520
Furniture & Fixtures 2000
Sundry Creditors. 18000
General Expenses 3750
Discount 350
Plant & Machinery 21500
2,42,190 2,42,190

The profits of the preceding three completed years to 30th Sep. were Rs.
15000. Rs. 20000 and Rs. 13000 respectively.

Prepare Trading & P & L A/c & Balance Sheet as at 31st March
2014 & a statement showing the amount payable to the Executors of T
50
Solution
M/s T & Z
Trading and P & L Account for the year ended 31st March 2014.
Dr. Cr.
Particulars AMT AMT. Particulars AMT. AMT.

To Opening Stock 27490 By Sales 163840

To Purchases 114700 Less: Sales Return 490 163350
To Wages 16360
To Gross Profit c/d 33540 By Closing Stock 28740

192090 By Gross Profit b/d 192090

To Salaries By Discount
To Rent & Rates
33540
To General Expenses
7550 350
To Traveler’s Commission & 1000
2630
Expenses 500
3750
To Interest on Capital for 6
5800
months
T
Z
To Net Profit transferred to
Capital A/c
T 1500
Z

12660
6330
6330

33890 33890

Note: As Profit & Loss A/c is prepaid on date of death of partner T,

Therefore there is no need of preparing Profit & Loss A/c in two columns
i.e. Before Death and After Death of Partner
M/s T & Z
Balance Sheet as at 31st March, 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Capital: T 40,000 Plant & Machinery 21,500
Add: Interest 1,000 Furniture & Fixtures 2,000
Profit 6,330 Stock 28,740
47,330 Debtors 26,400
Less: Drawings 4,500 42,830 Bank 5,520

Capital : Z 20,000
Add: Interest 500
Profit 6,330
26,830 23,330
Less : Drawings 3,500
18,000
Sundry Creditors

84,160 84,160
51
Amount payable to Executor’s of T Rs.
Balance to his Capital A/c 42,830
His share in Goodwill 24,000
66,830

Note:-
Value of Goodwill 3 year’s profit
Total Value of Goodwill Rs. (15000+20000+13000)
Rs. 48,000
T’s share of Goodwill (1/2 x 48,000) Rs. 24,000

Because Z has to purchase the share of T The journal entry will be:
Z’s Capital A/c-------------------------Dr. 24,000
To T’s Capital A/c 24,000

Illustration: - 12 [Death of a Partner in between the year].

K, R & T were sharing in the ratio of 3:2:5 T died on 1st July 2013.
Business was continued & K & R were sharing equally same books of a/c
were continued and following.
Trial balance was extracted as on 31st March, 2014.
Particulars Dr. Cr.
Rs. Rs.
Gross Profit 360000
Salaries 18000
Rent 15000
Insurance 9000
Plant & Machinery 260000
Land & Building 300000
12% Investment 100000
Interest on Investment 6000
K’s Capital 200000
R’s Capital 270000
T’s Capital 350000
Sundry Debtors/Creditors 200000 150000
Bills Receivable/Payable. 75000 60000
Cash 15000
Stock 404000
1396000 1396000

Additional Information:
1] Provide outstanding salary Rs. 2,000
2] Rent was paid Rs. 1,000 per month for the premises acquired on 1st
Oct. 2013.
3] Depreciate Land & Building @ 5% & Plant & Machinery 10% p.a.
4] Plant includes Plant costing Rs. 1, 00,000 acquired on 1st Jan.
2014.

52
5] As per partnership deed:
a] Retiring partners or in case of death of partners balance
should be transferred to loan, Carrying Interest 18% p.a.
b] Goodwill valued Rs. 120000.
c] Provide interest on capital @ of 6% p.a.
6] Sales were Rs. 300000 upto 1st July out of total sales for the year
Rs. 1500000, Prepare P & L A/c, P & L Appropriation A/c for the
year ended 31st March 2014 & Balance Sheet as on that date.

Solution:-
Profit and Loss A/c
for the year ended 31st March 2014
Dr. Cr.
Particulars 3 mth. 9 mth. Particulars 3 mth. 9 mth.
To Salaries (8000+ o/s 2000) 5000 15,000 By-Gross Profit b/d 72000 288000
To Rent 6000 (in sales ratio 1:4)
To insurance 2250 6750 By income from 3000 9000
To Depreciation 3750 11250 Investment
Land & Building 4000 14500
Plant -- 59279
To Int. on T’s executors loan A/c 60000 184221
To Net Profit C/d
75000 2,97,000 75000 297000

Profit & Loss Appropriation A/C.

for the year ended 31st March 2014
Dr. Cr.
Particulars 3 mth. 9 mth. Particulars 3 mth. 9 mth.
To Interest on Capital By Net Profit b/d 60000 184221
K’s 3000 9000
R’s 4050 12150
T’s 5250 --

To Net Profit Transferred to

Capital
A,B,C in 3:2:5 47700
A & B equally 1:1 163071
60000 184221 60000 184221

Balance Sheet
As on 31st March 2014
Liabilities AMT. AMT. Assets AMT. AMT.
Partners Capital Bal. Goodwill 120000
K’s 343845 Land & Building 300000
R’s 401276 745121 Less: Depreciation 15000 285000

Outstanding Salaries 2000 Plant & Machinery 260000

Creditors 150000 Less: Depreciation 18500 241500
Bills Payable 60000 Prepaid rent 9000
T’s executor 439100 12% Investment 100000
Add: Interest at 18% 59279 498379 Interest Accrued On 6000
p.a. for 9 mths. Investment
Sundry Debtors 200000
Bills Receivable 75000
Cash 15000
stock 404000
1455500 1455500

53
 Partners Capital A/C.
Dr. Cr.
Particulars K R T Particulars K R T
To T’s executor By Bal B/d 200000 270000 350000
loan By Goodwill 36000 24000 60000
A/c (bal. -- -- 439100 By Interest on 12000 16200 5250
Transferred) Capital
To Bal. C/d 343845 401276 By Net Profit 14310 9540 23850
(upto 30 June)
By Net Profit 81535 81536 --
(upto 31 March)

343845 401276 439100 343845 401276 439100

Note:- In case of death/Retirement of partner.

I) P & L A/c, P & L app. A/c should be closed upto date of death of
Partner, N.P. should be transferred to old partner in their old ratio.
II) Balance in Retiring / deceased partner should be transferred to
Loan A/c. Interest on loan A/c required to calculate & debit to
Profit & Loss A/c. Then duly net profit should calculated and
transfer to continuing partner’s capital A/c. in their new Ratio.

Illustration 13 :
Jinal and Sameer were in partnership in a wholesale business
sharing profits in the proportion of 3:2. As from 1st April 2013 they
admitted Jatin into partnership giving him one-sixth of the profits. Jatin
brought in Rs. 80,000 in cash of which Rs. 30,000 were considered as
being in payment for his share of goodwill and remainder as his capital.

The following Trial Balance was extracted from the books

as on 31st March, 2014

Debit Rs. Credit Rs.

Sales 2,15,725
Purchases 1,25,730
Discount Received 2,150
Discount Allowed 3,125
Reserve for doubtful debts 1,200
Sundry debtors 40,200
Sundry creditors 32,540
Stock (1st April 2013) 42,820
Carriage inward 3,250
Sundry expenses 7,840
Motor vehicles 50,000
Land and Building 80,000
54
 Cash in hand 5,040
Telephone expenses 3,240
Postage and Stationary 2,690
Rent, rates and insurance 3,200
Bad debts 400
Investments 60,000
Capital accounts Jinal 65,000
Sameer 35,000
Cash paid by Jatin on 1st April 2013 80,000
Jinal 5,000
Sameer 4,000
Jatin 2,000
Bank overdraft 6,920
Total 4,38,535 4,38,535

You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as on that
date having regard to the following information :

1. Stock on 31st March 2014 was Rs. 42,250.

2. Sundry debtors include item of Rs. 1,200 due from a customer on
account of sales, who has become insolvent.
3. Depreciate Land & Building and Motor vehicles at 5% p.a. and 20%
p.a. respectively.
4. Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5. Goods of to the value of Rs. 800 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 600 only.

Books of Jinal, Samir and Jatin

Trading A/c for the year ended 31 - 03 - 2014
Rs. Rs. Rs. Rs.
To opening Stock 42,820 By Sales 2,15,725
To Purchases 1,25,730 By Goods 800
destroyed by fire
To Carriage 3,250
inwards
To Gross Profit 86,975 By closing Stock 42,250
2,58,775 2,58,775

55
 Profit and Loss Account

Rs. Rs. Rs. Rs.

To discount Allowed 3,125 By Gross 86,975
Profit
To old Bad Debts 400 By Discount 2,150
Received
Add : New B.D. 1,200
Add : New RDD 1,950
Less : Old RDD (1,200) 2,350
To Sundry Expenses 7,840
To Telephone Expanses 3,240
To Postage & Stationery 2,690
To Rent, rates & Insurance 3,200
To Depreciation
Land & Building 4,000
Motor Vehicle 10,000 14,000
To loss by fire 200
To Net Profit
Jinal 26,240
Sameer 17,493
Jatin 8,747 52,480
89,125 89,125

Capital Account

Jinal Sameer Jatin Jinal Sameer Jatin

Rs. Rs. Rs. Rs. Rs. Rs.
To 30,000 By 65,000 35,000 80,000
Goodwill Balance
b/d
To 5,000 4,000 2,000 By 18,000 12,000
Drawings Goodwill
To 1,04,240 60,493 56,747 By Net 26,240 17,493 8,747
Balance Profit
c/d
1,09,240 64,493 88,747 1,09,240 64,493 88,747

Balance Sheet as on 31 - 03 - 2014

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Land & 80,000
Building
Jinal 1,04,240 Less (4,000) 76,000
Depreciation
5%
Sameer 60,493 Motor 50,000
Vehicles
Jatin 56,747 2,21,480 Less (10,000) 40,000
Depreciation
56
 20%
Investments 60,000
Closing 42,250
Stock
Debtors 40,200
Trade Creditors 32,540 Bad Debts 1,200
39,000
Bank Overdraft 6,920 Less : RDD 1,950 37,050
Cash Balance 5,040
Insurance 600
Claim
2,60,940 2,60,940

Illustration 14 :

Bhavana, Ravina and Kangana carried on a retail business in

partnership, sharing profits and losses in the ratio 2:1:2.

The following Trial Balance was extracted from the books

as on 31st March, 2014

Particulars Debit Rs. Credit Rs.

Capital A/c Bhavana 90,000
Ravina 52,000
Kangana 66,000
Plant & Machinery 1,50,000
Investments in govt. securities 50,000
Sales Returns 5,000
Sales 5,65,000
Furniture & Fittings 47,000
Motor Vehicles 60,000
Land & Building 1,00,000
Purchases 2,80,000
Stock as on (1st April 2013) 46,000
Salaries and Wages 62,000
Office and Trade Expenses 40,200
Rent, Rates and Insurance 15,500
Professional charges 3,500
Debtors / Creditors 51,600 87,000
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Bhavana 12,000
Ravina 6,000
Kangana 19,000
Bills receivables / Bills payable 18,300 36,200
Printing & Stationery 6,900
Loan from bank 1,20,000
10,16,700 10,16,700

57
 You are given the following additional information :

1. Stock on 31st March 2014 was valued at Rs. 66,500.

2. A debtor of Rs. 1,600 is to be written off and provision against the
remaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st March, 2014
: Printing & Stationary Rs. 2,400 Salaries and Wages Rs. 8,000.
4. Insurance prepaid as on 31st March, 2014 Rs. 2,500.
5. Depreciate Land & Building by 5%, Furniture and Fittings by 10%,
Plant & Machinery & Motor Vehicles by 20%.

You are required to prepare :

1. The Trading and Profit and Loss A/c. for the year ended 31st March,
2014.
2. The Balance Sheet as on that date.

In the Books of Bhavana, Ravina & Kangana

Trading A/c for the year ended 31st March, 2014
Rs. Rs. Rs. Rs.
To opening 46,000 By Sales 5,65,000
Stock
To Purchases 2,80,000 Less : Returns 5,000 5,60,000
To Gross Profit 3,00,500 By closing 66,500
Stock
6,26,500 6,26,500

Profit and Loss Account for the year ended 31st March, 2014

Particulars Rs. Rs. Particulars Rs. Rs.

To Old Bad Debts By Gross Profit b/d 3,00,500
+ New bad debts 1,600
+ New RDD 2,500
- New RDD (500) 3,600
To Salaries 62,000
Add : o/s 8,000 70,000
To Rent, Rates, Insurance 15,500
Less : Prepaid (2,500) 13,000
To Office & Trade Expenses 40,200
To Professional Charges 3,500
To Printing & Stationary 6,900
Add : o/s 2,400 9,300
To Dep
Building 5,000

58
Plant 30,000
Motor Vehicles 12,000
Furniture 4,700 51,700
To Net Profit
Bhavana 43,680
Ravina 21,840
Kangana 43,680 1,09,200
3,00,500 3,00,500

Partners Capital Account

Particulars Bhavana Ravina Kangana Particulars Bhavana Ravina Kangana

Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 12,000 6,000 19,000 By Balance 90,000 52,000 66,000
b/d
To Balance c/d 1,21,680 67,840 90,680 By Net 43,680 21,840 43,680
Profit
1,33,680 73,840 1,09,680 1,33,680 73,840 1,09,680

Balance Sheet as on 31st March, 2014

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Land & Building 1,00,000
A/c’s
Bhavana 1,21,680 Less : Dep 5,000 95,000
Ravina 67,840 Plant & 1,50,000
Machinery
Kangana 90,680 2,80,200 Less : Dep 30,000 1,20,000
Furniture 47,000
Bank loan 1,20,000 Less : Dep 4,700 42,300
Creditors 87,000 Motor Vehicles 60,000
Bills 36,200 Less : Dep 12,000 48,000
payable
O/s Investments 50,000
Expenses
Printing & 2,400 Debtors 51,600
Stationery
Salaries & 8,000 10,400 Less : New BD 1,600
Wages
50,000
Less : New RDD 2,500 47,500
Balance at bank 43,700
Bills Receivable 18,300
Stock 66,500
Prepaid insurance 2,500
5,33,800 5,33,800

59
Illustration 15 :
Karan and Aditya were in a partnership in a retail business sharing
profits in the proportion of 3:2. As from 1st April 2013 they admitted
Ashish into partnership giving him one - fifth of the profits. Ashish
brought in Rs. 32,000 in cash of which Rs. 6,000 were considered as being
in payment for his share of goodwill and remainder as his capital.
The following Trial Balance was extracted from the books
as on 31st March, 2014

Debit Rs. Credit Rs.

Purchases 27,160
Sales 41,265
Sales Returns 525
Purchases Returns 410
Reserve for doubtful debts 1,520
Sundry Debtors 44,020
Sundry Creditors 12,553
Bills Receivable 12,007
Bills Payable 1,195
Stock (1st April 2013) 3,972
Carriage inward 1,718
Office Salaries 980
Furniture 2,050
Postage, stationery and insurance 1,393
Rent, rates and taxes 420
Bad debts 40
Prepaid insurance 24
Outstanding wages 120
Rent accrued but not paid 90
st
Capital accounts (1 April 2013)
Karan 21,500
Aditya 21,000
Cash paid by Ashish on 1st April 2013 32,000
Current accounts :
Karan 5,500
Aditya 5,200
Ashish 6,200
Cash in hand 20,444
Total 1,31,653 1,31,653

60
 You are required to prepare the firm’s Trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as on that
date having regard to the following information :

1. Stock at the end was Rs. 20,000.

2. Sundry debtors include item of Rs. 500 for goods supplied to Karan
and item of Rs. 100 due from customer on account of sales, who was
become insolvent.
3. Depreciation on furniture is to be changed at 10% per annum.
4. Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5. Goods to the value of Rs. 500 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 200 only.
6. Bills receivable include a dishonored bill of Rs. 500.

In the Books of Karan and Aditya

Trading A/c for the year ended 31st March, 2014

Purchase Rs. Rs. Particulars Rs. Rs.

To opening 3,972 By Sales 41,265
Stock
To Purchases 27,160 Less : Returns 525 40,740
Less Returns 410 26,750
To Carriage 1,718 By Goods lost by 500
Inwards fire
To Gross Profit 28,800 By closing Stock 20,000
61,240 61,240

Profit and Loss Account for the year ended 31st March, 2014

Particulars Rs. Rs. Particulars Rs. Rs.

To Old Bad Debts 64 By Gross 28,800
Profit b/d
+ New bad debts 100
+ New RDD 2,196
- New RDD 1,520 840
To Salaries 980
To Postage, 1,393
stationary Insurance
To Rent 420
To dep on Furniture 205
To loss by Fire 300
To Net Profit
Karan 11,838
Aditya 7,892
Ashish 4,932 24,662
28,800 28,800

61
 Partners Current Account

Particulars Karan Aditya Ashish Particulars Karan Aditya Ashish

To Balance b/d 5,500 5,200 12,200 By 3,600 2,400
Goodwill
To Goods taken 500 By Net 11,838 7,892 4,932
Profit
To Balance c/d 9,438 5,092 By Balance 7,268
c/d
15,438 10,292 12,200 15,438 10,292 12,200

Balance Sheet as on 31st March, 2014

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Furniture 2,050
A/c’s
Karan 21,500 Less : Dep 205 1,845
Aditya 21,000 Insurance claim 200
Ashish 32,000 74,500 Sundry Debtors 44,020
Less : Karan 500
Current Less : New bad debts 100
Accounts
Karan 9,438 Add : B R Dishounr 500
Aditya 5,092 14,530 Less new RDD 2,196 41,724
Bills Receivable 12,007
Sundry 12,553 Less : Dishonored 500 11,507
Creditors
Bills 1,195 Cash 20,444
Payable
O/s Wages 120 Closing Stock 20,000
O/s Rent 90 Current A/c of Aashish 7,268
1,02,988 1,02,988

Working Notes :
1. New Profit Sharing Ratio Karan Aditya Ashish
Old Ratio 3/5 2/5
New Partner 1/5
Remaining in old 3/5 × 4/5 2/5 × 4/5
New Ratio 12/25 8/25 5/25

EXERCISES

Theory Questions
1. Define partnership. what are the main features of partnership?
2. Write short note on Profit & Loss Appropriation A/c of a firm.
3. Explain the adjustments in accounts when a new partner is
admitted.
4. Explain division of expenses based on Time Ratio
5. Distinguish between Fixed Capitals and fluctuating Capitals.
6. Write short notes
62
 a) Fixed capital accounts of the partners.
b) Interest on Drawings by the partners.
c) Salary or commission payable to partners.
d) Calculation of new profit sharing ratio on admission of partner.
7. What are rules applicable in the absence of partnership Deed.
a) Interest on Drawings
b) Profit sharing ratio.
c) Interest on partners loan
d) Salary to partner
e) Interest on capital
8. OBJECTIVE:

A) Choose the appropriate word.

i) Partnership is a legal relationship between persons according
the ------------------------
a) Contract Act
b) Companies Act
c) The Indian partnership Act, 1932
d) Income Tax Act 1961.

ii) The profit sharing ratio among the partner may be --------------
from the ratio to share losses.
a) Equal
b) Same
c) In the Capital ratio
d) Different

iii) The maximum number of persons permitted to form a

partnership for Banking business are ------------ partners.
a) 7 b) 15 c) 10 d) 20

iv) The partnership can not be formed to share ------------------ only.

a) profit b) losses c) profit & loss d) Non of the above.

v) The persons who have agreed to carry on the partnership

business are individually known as ---------------
a) firm b) partners c) Directors d) Creditors

vi) It is a ----------------- relationship between persons created

through the partnership Act, 1932.
a) Natural b) Legal c) oral d) Faithfull.

vii) The partnership agreement can be ------------- or written.

a) Oral b) Written as well as oral c) Registered
d) un registered.
viii) In the partnership business the partner’s are collectively called
as ------------------
a) Company b) Association c) Firm d) Partners
63
 ix) To admit a new partner with consent to --------------- partners.
a) Existing b) Majority c) Newly admitted d) One partner

x) In absence of agreement, partners share profit on loss in --------

a) capital ratio b) Equally c) Current Account ratio
d) Time devoted for business.

xi) --------- number of partners allowed in case of Retail business a)

maximum 10 b) maximum 20 c) minimum 50 d) minimum 10

xii) The minor partner cannot be personally liable to share -------- of

the firm
a) commission b) profits c) losses d) none of above

xiii) In absence of agreement Interest on Loan, at ---------- % p.a. is

payable by the firm
a) 12% p.a. b) Nil c) 6% d) As per Bank rate.

xiv) Partners can contribute capital either in Cash/Bank or------------

a) only cash b) in kind c) cash plus in kind d) by cheque

[Ans. I-c, ii-d, iii-c, iv-b, v-b, vi-b, vii-a, viii-c, ix-a, x-b, xi-c, xii-c, xiii-c, xiv- b]

B) Fill in the Blanks.

I. The persons who have agreed to carry on partnership business are -

----------known as partners and ----------- called as a ------------
II. The partnership can not be formed to do -------------- business.
III. The partners may share profit and Loss of the firm -------- ratio.
IV. It is not necessary that partners should contribute ---------- in profit
sharing ratio.
V. A ----------- partner is not personally liable to share the losses of
the firm.
VI. In the absence of a partnership agreement interest on --------should
not be paid to partners.
VII. It is not necessary that partners should contribute -------------- in
profit sharing ratio.
VIII. Maximum numbers of partners in insurance business--------
persons.
IX. A particular partner may not share ---------- of firm at all.
X. In the ----------- of a partnership Deed, each partner have free
access of all partnership records, Books and Accounts.

[Ans. I) Individual ii) illegal iii) different iv) capital v) minor vi) capital vii)
capital viii) Ten ix) losses x) absence].

C) Substitute the following in a single WORD/Term.

I. Written Agreement of partners.
II. Credit balance in Trading A/c

64
 III. A partner not taking part of in partnership business.
IV. A statement showing financial status of a business.
V. Debit balance in profit & Loss A/c
VI. Part of sundry Debtors irrecoverable.
VII. Expenses accrued but not paid
VIII. Expenses paid in advance.
IX. Any remuneration paid or payable to partner’s, then it is necessary
to prepare a special A/c.
X. A partner draws a fixed amount at the end of each month, interest
is calculated for months.
XI. Policy on the lives of the Partner is to insure against changes of
disturbance in the business due to death of any partner
XII. A method in which Partner’s Current Accounts are opened
XIII. A partner who only lends his name to the firm.
XIV. In the absence of partnership Deed, which provisions /rates are
applicable.
[Ans. I-Partnership Deed, ii) Gross profit iii) Dormant partner, iv) Balance sheet, v)
net loss, vi) Bad debts vii) outstanding expenses. Viii) prepaid expenses ix) profit &
loss appropriation x) 5.5 month xi) joint life policy xii) fixed capital xiii) nominal
partner xiv) the Indian partnership Act 1932.

D) Match the following items in column A and column B.

I)
Column A Column B

i) Opening stock a) Trading A/c credit side

ii) Carriage paid on plant b) carriage outwards.
purchased c) 1932
iii) carriage paid on goods sold d) 1956
iv) partnership Act e) Trading A/c debit side
f) plant & machinery
[Ans. I-e, ii-f, iii-b, iv- 1932]

II)

Column A Column B
i) Partnership a) Liability side
ii) Active Partner b) Trading A/c
iii) Outstanding Expenses c) Unlimited Liability
iv) Salaries & Wages d) Working partner
v) Goodwill e) Profit & Loss A/c
f ) Intangible assets

[Ans. I-c, ii- d, iii-a, iv- e, v-f]

65
III)
Column A Column B

i) Return Inwards a) Land & Building

ii) Fixed Assets b) No need of current A/cs.
iii) Reserve for Bad Debts c) Sales Return
iv) Fluctuating Capital method d) Sundry debtors
e) Liability side.

[Ans. I-c, ii-a, iii-d, iv-b]

IV)
Column A Column B

i) Closing stock a) Gross Profit

ii) Trading A/c b) Profit / Losses shares equally
iii) Partnership Agreement silent c) Assets
iv) Partners Salaries d) Profit & loss Appropriation A/c
v) Dormant Partner e) Nominal Partner
f) Sleeping Partner

[Ans. I-e, ii-a, iii-b, iv-d, v-f]

V)
Column A Column B

i) Retirement of Partner a) Executor’s Loan A/c

ii) Goodwill b) Profit & Loss Appropriation
A/c
iii) Partnership Agreement c) Sales Ledger Balances.
iv) Interest on Capital d) Retiring partners loan A/c
v) Doubtful of bad debts e) Intangible Assets.
f) Partnership Deed.
g) Tangible Assets.
[Ans. I-d, ii-e, iii-f, iv-b, v-c]

9. PROBLEMS
Final Accounts
EX.1
Shraddha and Sneha carried on business sharing profits and losses
in the proportion of 1:9. The partnership agreement provided:

a) Interest be allowed at 15% p.a on capital.

b) Shraddha is entitled to get salary Rs.5000 per quarter of a year.
c) Ignore interest on drawings and current account.

66
 Trial Balance as on 31st Dec, 2013

Particulars Dr. Particulars Cr.

Salaries to employees 72,000 Gross Profit for the year 2,17,000
Partner’s Salary 15,000 Carriage Inward Payable 3,000
Rent 12,000 Bills Payable 20,000
Furniture 74,000 Sundry Creditors 35,000
Motor Car 1,11,000 Interest free loan from Reema 145,000
(Balance on 1.1.13
Rs.1,20,000) Shraddha’s Fixed Capital
Depreciation at 10% p.a. upto 15,000 Account 20,000
30.9.13
Sneha’s Fixed Capital account
Insurance 10,000 1,80,000

Bad Debts 3,000

Bills Receivable 30,000
Sundry Debtors 25,000
Stock on 31st December 13 2,10,000
Bank Balance 6,500
Cash on Hand 3,500
Shraddha’s Current Account 7,200
Sneha’s Current Account
Interest on Capital 7,800
18,000
Total
Total

6,20,000 6,20,000

Other Information:-
A. Partner’s current accounts were as under-
Particulars Shraddha Sneha
Opening Balance -- --
Add: Interest credited for 9 months at 12% 1800 16,200
p.a.
Add: Salary for 9 months 15,000 --
16,800 16,200

Less: Withdrawals (24,000) (24,000)

Balance as per Trial Balance 7,200 7,800

B. Fixed Assets are depreciated at the rate of 10% p.a. Provide

balance of depreciation for the year.
C. Through oversight interest on Fixed Capital was provided at the
rate of 12% instead of 15% p.a. as per partnership agreement.
You are required to prepare:-
a) Profit and loss account and Profit and Loss Appropriation Account
for the year ended 31st December, 2013.
b) Balance Sheet as on 31st December, 2013.

67
Ex.2
A and B are partners sharing profits and losses in the ratio 3:2. On
1st October, 2013 they admitted C as a partner on the following
terms:-
a) The new profit ratio to be A-60%; B-30%; C-10%
b) Goodwill of the firm is to be valued at Rs. 27,000/- on 30th
September 2013. No account for goodwill should be opened in the
books of the firms, adjustments, if any, for the same should be
carried out in the capital accounts of the partners.
c) C’s share to be guaranteed by A at the minimum rate of Rs. 36,000
p.a.
d) Apportion gross profit on the basis of sales, Expenses on the basis
of time.
e) No interest is to be credited or charged on partners capital or
current account. The trial balance of the firm as on 31st March,
2014 was as follows before adjusting goodwill.

Particulars Dr. Rs. Particulars Cr. Rs.

Purchases 1,77,660 Creditors 15,000
Salaries 63,000 Capital Accounts:
Debtors 51,180 A 30,000
Drawings B 30,000
A 15,000 C 6,000
B 7,500 Sales (upto 30-9-13 Rs.
1,20,000) 3,06,000
C 7,200 Loan from Edulji ( at 12%
Balance with Bank 33,360 p.a. taken on 31-1-14) 39,000

Electricity Deposit 450

Selling Expenses 5,400
Office Expenses 900
Delivery Van
(Purchased on 30-6-13) 33,750
Furniture at cost
(Purchased on 1-4-13) 9,000
Rent & Rates 18,000
Electricity office 3,600
Total Rs. 4,26,000 4,26,000

You are required to prepare a Balance Sheet as on 31st March,

2014 and Trading and Profit and Loss Account for the year ended on that
date after considering the following
i) Stock on 31-3-14 was Rs. 60,000.
ii) Accrued expenses but not yet paid: Rent Rs. 5500/-, Selling
expenses Rs. 1750/-, Office expenses Rs. 1500/-
iii) Sales & Debtors include goods sent on sale or approval basis Rs.
12000 but not yet approved as on 31.3.14 These goods were
invoiced at a profit of 100% on cost price.
iv) Depreciation is to be provided: Delivery van @ 20% p.a., Furniture
@ 10% p.a.

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Ex. No.3
Prepare Trading, Profit and Loss Account for the year ended 31st
March, 2014 and the Balance Sheet as on that date from the following
information available from the books of HR & Co.

a) Trial Balance as on 31st March 2014

Debit Rs. Credit Rs.

Premises 2,00,000 Capital A/c ‘H’ 1,20,000
Machinery & Equipment 1,50,000 ‘R’ 1,00,000
Bank Balance 35,000 Current A/c ‘H’ 20,000
Bills Receivable 40,000 Sales 11,12,000
Current A/c ‘R’ 15,000 Commission 35,000
Sales Returns 25,000 Bills Payable 45,000
Purchases 6,90,000 Sundry Creditors 2,85,000
Sundry debtors 3,40,000 ‘C’s A/c 75,000
Stock in Trade 80,000
Salaries 40,000
Distribution Expenses 64,000
Sundry Expenses. 76,000
10% Bonds 37,000

Total Rs. 17,92,000 17,92,000

b) Additional Information:
1. Stock in trade on 31st March, 2014 was Rs. 75,000
2. Outstanding salaries as on 31st March 2014 was Rs. 4,.300 and prepaid
insurance included in office expenses was Rs. 2,000.
3. Depreciate premises @ 5% and Machinery & Equipment @ 10%
4. Sales include Rs. 20,000 being goods sent on sale or return basis, the
cost of which was Rs. 15,000. Approval was received for 50% of the
goods sent. Sales also include Rs. 10,000 being sale proceeds of
equipment of the book value of Rs. 8,000 realized on 1-4-2013.
5. Sundry Debtors include Rs. 20,000 on account of dishonoure of a Bill
Receivable accepted by a customer. Only 50% of the amount is likely
to be recovered. On the balance debtors 5% provision for doubtful
debts is to be created.
6. H and R shared Profits and Losses in the ratio 2:1.
7. C was admitted as a partner on 1-10-2014 and deposited Rs. 75,000
with the firm as his capital. ‘C’s is entitled to share 25%, of the
Profit/Losses of the firm. The net profit between the pre admission
and post-admission period is to be on time basis.

69
Ex. 4
Ashok and Ketan are equal partners. Their trial balance as on
31st Mar., 2014 is as follows:

Particulars Dr.Rs. Cr. Rs.

Ashok Capital 2,16,000
Ketan’s Capital 66,000
Opening Stock 43,800
Office Rent (Rs.2000 per month) 23,100
Purchase and Sales 1,19,400 2,16,000
Provident Fund and Provident Fund Investments 24,000 25,000
Debtors and Creditors 84,000 48,000
Discount 1,800 1,200
Furniture 6,000
Drawings : Ashok 15,000
Ketan 15,000 30,000
Returns Outward 3,000
Dead Stock 1,500
Demurrage 600
Freight and Duty 3,000
Advertisements 10,000
Bad Debts Reserve 6,000
Salaries and Wages 25,200
Cash and Bank 12,000 58,800
Sunil’s Loan (1-10-2013) 30,000
Plant and Machinery 83,250
Land and Buildings 2,10,000
Depreciation on Plant & Machinery 6,750
Contribution to Provident Fund 1,800
Insurance Premium (incl. Rs. 3,600 paid for the year ended 9,000
30-9-2014)
Bills Payable 25,200
6,95,200 6,95,200

you are required to prepare final accounts for the year ended 31st March,
2014 after taking into account the following adjustments:
(1) The closing stock was valued at Rs. 110,000
(2) Provide Depreciation on furniture at 10% p.a.
(3) Of the Sundry Debtors Rs. 1,800 are bad and should
be written off. Also maintain a reserve for doubtful debts at 5% on
debtors.
(4) Goods of the value Rs. 6,000 had been received on 25th March,
2014 but the purchase invoice was omitted to be recorded in the
purchase book.
(5) Goods valued at Rs. 4,300, withdrawn for personal use by Ketan,
were recorded as credit sales in the sales book as Rs. 6000.
Ex.5

Ram and Bharat were in partnership in a business sharing profits in

proportion of 2:3. As from 1st January 2014 they admitted Kran in to
partnership giving him one-fifth of the profits. Kran brought in Rs. 30,000
in cash of which Rs. 10000 were considered as being in payment for his
share of goodwill and remainder as his capital.

70
 The following Trail Balance was extracted from the books as on
31st March 2014.

Particulars Dr. Rs. Cr. Rs.

Purchases and sales 1,71,625 3,62,650
Returns 5,250 4,125
Customer and Creditors 90,200 25,525
Bills Receivable & Bills Payables 20,070 11,950
Carriage Inward 15,000 --
Carriage Outward 2,175 --
Stock (01.04.13) 39,725 --
Outstanding Carriage Inward -- 1,200
Bad debts 400 --
Salaries 9,795 --
Furniture 5,000 --
Shop Fittings 15,500 --
Postage and Insurance 3,240 --
Trade Expenses 2,690 --
Rent, Rates and Taxes 4,200 --
Loan to Vishnu (from 01-01-2014) @ 15% 56,000
p.a. --
Prepaid Insurance 240 --
Rent [from 1.10.13 to 31.03.14] -- 6100
Cash in hand 4,440 --
Current A/c
Ram 5,000 --
Bharat 4,000 --
Kran 2,000 --
Capital A/c
Ram -- 15,000
Bharat -- 10,000
Cash paid by Kran 30,000
Computer 40,000
Loan I.C.I.C.I. Bank @ 12% p.a. -- 30,000

4,96,550 4,96,550

You are required to prepare the firm’s Trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as on that
date having regard to the following information.

1) Stock at the end was Rs. 35000.

2) Depreciation on Computer and Furniture is to be charged 10% p.a.
3) One-fifth of the Shop fittings to be written off.
4) Goods worth Rs. 2800 have been destroyed fire and the Insurance Co.
has admitted the claim for Rs. 1,600 only.
5) Bills receivable include a dishonoured bill for Rs. 4,000/-

71
6) Debtors include Rs. 3,000 for goods costing Rs. 2,000, supplied to
Bharat and item of Rs. 3,000 due from Customer on account of sales,
who has become insolvent.
7) Net Sales upto 31.12.2013 were Rs. 2, 83,520.

Hint :
[Net sale = 362650 – Sales Return 5250 – Goods taken by
Bharat Rs. 3,000.
= Rs. 3, 54,400
 Sales Ratio = 2, 83,520: 70,880
= 4:1]

Example 12 :
Siddhanth and Sankalp were in a partnership in a retail business
sharing profits in the proportion of 3:1. as from 1st April 2013 they
admitted Ved into partnership giving him one-fifth of the profits. Ved
brought in Rs. 50,000 in cash of which Rs. 20,000 were considered as
being in payment for his share of goodwill and remainder as his capital.

The following Trial Balance was extracted from the books

as on 31st March, 2014

Debit Rs. Credit Rs.

Purchase and Sales 1,01,620 2,02,650
Discount allowed and received 5,250 4,120
Reserve for doubtful debts 5,200
Sundry debtors and creditors 40,200 17,630
Bills receivable and bills payable 20,070 11,950
Stock (1st April 2013) 39,720
Carriage inward 17,180
Sundry Expenses 9,800
Motor vehicles 5,000
Land and Building 15,500
Telephone expenses 3,240
Postage and stationary 2,690
Rent, rates and insurance 4,440
Bad debts 400
Investments 76,000
Capital accounts
Sankalp 35,000
Siddhanth 30,000
Cash paid by Ved on 1st April 2013 50,000
Drawings
Sankalp 5,000
Siddhanth 4,000
Ved 2,000
Cash in hand 4,440
Total 3,56,550 3,56,550

72
 You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as on that
date having regard to the following information :

1. Stock at the end was Rs. 20,000.

2. Sundry debtors include item of Rs. 300 for goods supplied to Ved and
item of Rs. 1,000 due from customer on account of sales, who has
become insolvent.
3. Depreciation on Motor vehicles is to be changed at 20% p.a. and Land
and Building at 5% p.a.
4. Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5. Goods to the value of Rs. 1,000 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 600 only.
6. Bills receivable include a dishonored bill of Rs. 1,100.
7. Land and Building to be depreciated by 5%.

Example 13 :

Hardik and Yatish carried on a retail business in partnership under

the name Yatrik Associates sharing profits and losses in the ratio 5:3.

Trial Balance of Yatrik Associates as on 31st March, 2014

Particulars Debit Rs. Credit Rs.

R.D.D. 1,980
Loan taken 3,20,000
Sales 9,50,000
Opening Stock 87,585
Purchase 2,99,745
Wages 27,465
Goodwill 1,20,000
Sundry Expenses 16,340
Discount allowed 3,275
Hardik Drawings 4,200
Yatish Drawings 10,170
Debtors 87,765
Bills Receivable 23,395
Hardiks Capital 60,000
Yatish Capital 1,30,000
Creditors 76,775
Bills Payable 32,225
Outstanding Expenses 3,475
Plant and Machinery 4,55,375
Land and Building 2,57,735
Furniture 44,730
Carriage Inwards 16,235
Carriage Outwards 18,325

73
 Office rent 27,525
Salaries 65,565
Repairs 2,355
Bad debts 3,225
Free Sample 18,375
Prepaid Expenses 2,310
Cash in hand 9,120
Salesman Commission 23,200
Discount Received 6,345
Commission Received 13,215
Bank Balance 30,000
16,24,015 16,24,015

You are required to prepare the firm’s trading and Profit and Loss
Account for the year ending 31st March, 2014 and Balance Sheet as on that
date having regard to the following information :

1. Stock on 31st March 2014 was Rs. 1,42,250.

2. Sundry debtors include item of Rs. 2,765 due from a customer on
account of sales, who has become insolvent.
3. Depreciate Land & Building and Plant and Machinery and Furniture at
5% p.a., 10% p.a. and 20% p.a. respectively.
4. Reserve for doubtful debts is to be maintained at 5% on the sundry
debtors.
5. Goods to the value of Rs. 1,845 have been destroyed by fire and the
insurance company has admitted the claim for Rs. 1,000 only.

Example 14 :

Teena, Meena and Beena carried on a retail business in

partnership, sharing profits and losses in the ratio 5:3:2.

The Trial Balance of the firm as at 31st December 2013 was as follows

Particulars Debit Rs. Credit Rs.

Capital A/c’s Teena 80,000
Meena 50,000
Beena 30,000
Current A/c’s Teena 16,000
Meena 12,000
Beena 8,000
Sales 4,65,000
Trade Creditors 37,000
Furniture & fittings 22,000
Freehold Premises (Purchased during the year) 60,000
Leasehold Premises 45,000
Addition and Alterations to leasehold premises 25,000
Purchase 2,80,000

74
 Stock as on (1st January 2013) 42,000
Salaries and Wages 64,000
Office and Trade Expenses 45,200
Rent, Rates and Insurance 10,500
Professional charges 3,500
Debtors 20,600
Provision for Doubtful Debts 500
Balance at Bank 43,700
Drawings : Teena 17,000
Meena 11,000
Beena 9,000
Bills payable 15,200
Bills receivables 18,300
Printing & Stationary 6,900
Loan from bank 10,000
7,23,700 7,23,700

You are given the following additional information:

1. Stock on 31st December, 2013 was valued at Rs. 46,000
2. A debtor of Rs. 600 is to be written off and provision against the
remaining debtors should be made at 5%.
3. Provide for the following outstanding expenses as on 31st December
2013 :
a) Office and Trade Expenses Rs. 2,400 Salaries and Wages Rs.
6,000.
b) Rates prepaid as on 31st December 2013 Rs. 2,500.
4. Depreciate furniture and fittings by 10%.
5. Professional charges include Rs. 2,500 fees paid in respect of the
acquisition of the leasehold premises, which are to the capitalized.
You are required to prepare:
1. The Trading and Profit and Loss A/c. for the year ended 31st
December, 2013.
2. The Balance Sheet as on that date.
3. Partners Current Accounts.



75
 4
PIECEMEAL DISTRIBUTION
Unit Structure:

4.0 Objective
4.1 Introduction
4.2 Classification of Liabilities
4.3 Order of Payment of Cash to Partners
4.4 Important Points
4.5 Check Your Progress
4.6 Illustrations on Piecemeal Distribution
4.7 Exercise

4.0 OBJECTIVE

After studying the unit the student will be able to:

 Classify the liabilities of the business.
 Describe the methods of allocation of cash among the partners.
 Solve the practical problems.

4.1 INTRODUCTION

In the previous chapter we have studied Dissolution of Partnership

Firm. On dissolution of the firm business of the firm is closed, all the
assets of the firm are sold and all the liabilities of the firm are paid off.
The surplus remaining thereafter is paid to the partners against their loan
account and their capital account balances. Here we assume that all these
transactions take place on the same day. But in practice it takes time to
dispose off all the assets. The payment of liabilities has to be done as and
when the cash is available. It has to be in a specific order. This recovery
of assets in installments and payment of liabilities in installments is called
as PIECEMEAL DISTRIBUTION OF CASH.

4.2 CLASSIFICATION OF LIABILITIES

1. External Liabilities
2. Internal Liabilities
3. Partner’s Capital Accounts

4.2.1 External Liabilities

These are amounts payable to outside parties. These are further
classified into
a. Preferential Liabilities:
76
These include amounts payable in priority to all liabilities. These are
Government dues like Income Tax, Sales Tax, Excise Duties etc.
Employees’ Dues like outstanding wages, outstanding salaries, provident
fund dues, etc.

Dissolution expenses: These are the expenses incurred for the purpose of
successful carrying out of dissolution like payment for preparation of
dissolution deed, advertisement and brokerage for disposal of assets.

b. Other Liabilities :

These are further classified into:

Secured liabilities: These are liabilities / loans secured against some or all
the assets of the firm. If it is secured by a charge on a specific asset then
amount realized by sell of that particular asset shall be utilized for
payment of these liabilities. For example bank overdraft secured against
stock, mortgage loan against land and buildings. If these liabilities are not
secured against a specific asset but on all the assets in general then amount
realized shall be first utilized to pay off these liabilities.

Unsecured Liabilities: These are liabilities incurred during the normal

course of business for which no security is given. For example sundry
creditors, bills payable, loan from spouse of partner, etc. these liabilities
are paid when all above liabilities are paid in full. If the amount available
with the firm is not sufficient to pay all these liabilities, then the amount is
paid in the ratio of their out standings.

4.2.2 Internal liabilities

Partner’s loans: If a partner has given any loan to the firm then it will be
paid after all the above liabilities have been paid in full but before
anything is paid to partners against their capital accounts. If two or more
partners have given loans to the firm and cash available is insufficient to
pay these loans in full then the amount will be paid in the ratio of
outstanding balance of the loan.

4.2.3 Partners Capital Account

After all the above liabilities are paid the cash available is paid to partners
against their capital account by adopting any one of the following two
methods.

Excess Capital Method (Highest Relative Capital Method/Quotient

Method) Maximum Loss Method (Not in the syllabus)

4.2.3.1 Excess Capital Methods / Proportionate Capital Method-

This method is applied where the partners have not contributed
their capitals in the profit sharing ratio. Some partner have contributed
77
more capitals than other partners. Hence it is required to pay such partners
before other partners are paid. The method of calculating surplus capitals
is as follows –

Step No. Particulars

I Computation of Adjusted Capital:

Take capital account balances as per Balance Sheet
Add: General Reserve/Reserve funds/Profit and Loss
A/c Credit Balance in Profit Sharing Ratio
Less: Profit and Loss A/c Debit Balance

II Write Profit Sharing Ratio

III Find Capital Contribution per unit of profit i.e. Step I / Step II

IV Find out the partners with lowest capital contribution per unit of
profit. Taking his capital as base find out Proportionate Capital of
all the partners.

V Find out the Excess Capital – Step I - Step IV (Adjusted

Capital – Proportionate Capital)
If there’re more than two partners then do the same process again

VI Write Profit Sharing Ratio

VII Find capital contribution per unit of profit – Step V / Step VI

VIII Find out the partners with lowest capital contribution per unit of
profit. Taking this capital as base find out proportionate capital of
all the partners.

IX Find out the Excess Capital – Step V -- Step VIII

4.3 ORDER OF PAYMENT OF CASH TO PARTNERS:

After cash is paid for all internal and external liabilities cash should be
paid to partners against their capital accounts as follows : (Step No. IX,
Step No. VIII, Step No. IV)

a) Pay to the partner who is having ultimate excess. (Step No. IX)

b) Pay out the excess amount of other partners in their Profit Sharing
Ratio. (Step No. VIII)
c) After the payment of excess capital, the capitals of the partners will
be in their profit sharing ratio. (Step No. IV) All the available cash
should be paid in Profit sharing ratio.

78
 d) If any partner is taken over any asset then it should be assumed
that he brings necessary cash in the firm. It should be added in the
cash available and then total available cash should be distributed
among the partners as above.

e) The balance left unpaid represents loss on realization. Payment

more than the dues represents profit on realization.

4.4 IMPORTANT POINTS

a) If any reserve is to be created for dissolution / realization expenses,

it should be created by setting aside cash after payment of
Government and Employees’ dues. If finally actual expenses are
less than the reserve, the excess should be distributed among the
partners.

b) If there is any contingent liability (like bill discounted with the

bank not yet matured) cash should be set aside after payment of all
external liabilities, but before making any payments to the
partners. If the liability arises it should be paid from the cash
reserved. If the liability does not arise, the cash kept in reserve will
be distributed among the partners when it becomes certain that the
liability is not to be paid.

c) If nothing is mentioned about security of a liability the same

should be treated as unsecured.

d) In case of a secured liability, payment should be made for such

liability only if the asset charged for that liability is realized.
However if any other asset is realized then the secured liability
should be treated at par with other unsecured liabilities and
payment should be made proportionately.

4.5 CHECK YOUR PROGRESS

1. Define the following terms:

 Preferential liabilities
 Adjusted Capital
 Piecemeal Distribution of Cash
 Internal Liabilities

2. Fill in the blanks:

 In Piecemeal Distribution amounts realized from assets are
distributed in the order ___________.
 Excess capital Method is applied where the partners have
not contributed there capitals in the ____________.
 Preferential Liabilities include Government dues like
________.

79
  If two or more partners have given loans to the firm and the
cash is in sufficient for full payment then the loans will be
paid in the________ ratio.

3. Calculate the Adjusted Capital from the following:

X,Y and Z are sharing profits and losses in the ratio 3:2:1.The Capital
Account is showing credit balances of Rs. 60,000, 20,000 and 30,000
respectively ,General Reserve is Rs. 60,000 and P&L A/c Debit Balance
Rs. 12,000.

4.6 ILLUSTRATIONS ON PIECEMEAL DISTRIBUTION

Illustration 1:

P, Q, R are partners sharing profits and losses in the ratio of 4:2:1. they
decided to dissolve the partnership as on 31st March 2014 when their
Balance Sheet was as follows:

Balance Sheet
Liabilities Rs. Assets Rs.
Creditors 23,200 Cash in hand 680
General Reserve 37,800 Investment 60,000
Bank Overdraft 65,000 Stock 2,56,600
Capital : P 1,60,000 Debtors 90,800
Q 3,20,000 Machinery 65,200
R 2,60,000 Furniture 9,800
Building 3,82,920

8,66,000 8,66,000

All creditors have to be paid off Rs.4800/- have to be provided for

realization expenses. Thereafter all cash received should be distributed
among the partners. The amounts were realized in installments as follows
–

Rs.
st
1 60,000
2nd 32,320
3rd 4,60,000
4th 1,83,680

The actual realization expenses were Rs.2400/-. Prepare a statement

showing distribution of cash as per Excess Capital Method.
Solution :
(In the books of P, Q & R a Partnership Firm)
Statement of Excess Capital

80
 P Q R Total Order
Rs. Rs. Rs. Rs.

Capital 1,60,000 3,20,000 2,60,000

Add : General 21,600 10,800 5,400 2,65,500
Reserve
A. Adjusted 1,81,600 3,30,800 2,65,400
Capital
(TotalRs.777800)

B. Profit Sharing 4 2 1
Ratio
C. (A/B) = Capital 45,400 1,65,400 2,65,400
Per Unit

D. Proportionate (1,81,600) (90,800) (45,400) 3,17,800 III

Capital
(P’s capital as
Base)

E. Excess Capital NIL 2,40,000 2,20,000

(A-D)
F. Excess Capital 1,20,000 2,20,000
per Profit Unit

G. Proportionate 2,40,000 1,20,000 3,60,000 II

Excess Capital

H. Final Excess NIL 1,00,000 1,00,000 I

Capital
(E-G)
Total 7,77,800

Payment order:
(1) Pay 1st Rs.100000/- to R.
(2) Then Rs.240000 and Rs.120000 to Q and R respectively.
(3) Then to P, Q and R in their profit sharing ratio 4:2:1.
Statement showing Piecemeal Distribution of Cash

Particulars Cash Bank Creditors P Q R

Rs. O/D Rs. Rs. Rs. Rs.
Balance 680 65,000 23,200 1,81,600 2,30,800 2,65,400
1st Realisation
Realisation Exp. 60,000
Prov.
(4,800)
Paid O/D & 55,880
Creditors (55,880) (41,180) (14,700)
Proportionately
81
Balance due ---- 23,820 8,500 1,81,600 23,080 26,540
IInd Realisation
Paid O/D & 32,320
Creditors
(32,320) (23,820) (8,500)
Balance due - - - 1,81,600 2,30,800 2,65,400
IIIrd Realization- 4,60,000
Paid to C Final
Excess (1,00,000) (1,00,000)
Balance 3,60,000 - - - 2,30,800 1,65,400
(-) Paid to B and C (3,60,000) (2,40,000) (1,20,000)
(2:1)
Balance - 1,81,600 90,800 45,400
IVth Realization
Add : Realization 1,83,680
Exp. Prov not
required 2,400
1,86,080

Paid to all (4:2:1) 1,86,080 (1,06,330) (53,166) (27,964)

Balance (Loss on -
Realisation)
=131720 75,270 37,634 18,816

Illustration 2:-

ABC dissolved their firm on 31st Dec 2013 when their Balance Sheet as
follows :-

Liabilities Rs. Assets Rs.

Capital Sundry Assets 264000
A 60000
B 48000
C 40000 148000
Partner’s Loan:
A 20000
B 16000 36000
Sundry Creditors 80000
264000 264000

Partners shared Profit and Loss in the ratio 2:1:1

Assets were realized as follows.
1st = 50,000, 2nd = 98,000, 3rd = 80,000
Show Piecemeal Distribution of Cash.

Working Note – Statement showing Excess Capital

Step No. Particulars Formula A B C
I Balance b/d 60000 48000 40000
II Profit Sharing Ratio - 2 1 1
III Unit Value
(Capital contribution / I  II 30000 48000 40000
Profit)
IV Proportionate Capital X II 60000 30000 30000

82
 V Excess Cap I - IV - 18000 10000
VI Profit Sharing Ratio 1 1
VII Unit Value V  VI - 18000 10,000
VIII Proportionate Capital X VI 10000 10000
IX Excess Capital V -VIII - 8000 -

Payment Chart

A B C
I (9) - 8000 -
II (8) - 10000 10000
III (4) 60000 30000 30000

60000 48000 40000

Solution:

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Claims Sundry Partners Loan Partners Capital
Cr.
A B A B C
01/01/09 Balance b/d - 264000 80000 20000 16000 60000 48000 40000
1st Cash Realised 50000
Less : Paid to (50000) (50000) (50000) - - - - -
Creditors

2nd Balance - 214000 30000 20000 16000 60000 48000 40000

Cash Realised 98000
Less : Paid to (30000) (30000) (30000) - - - - -
Creditors

Balance 68000 184000 - 20000 16000 60000 48000 40000

Less: Paid to (36000) 36000 - 20000 16000 - - -
Partners Loan

Illustration 3:-

ABC were in partnership sharing profits and losses equally. They agreed
to dissolve their partnership on 30th June 2013. When their balance sheet
was as under.

Liabilities Rs. Assets Rs.

Creditors 38000 Bank 3600
Capital Debtors 69000
A 60000 Stock 75400
B 45000 Plant & Machinery 25000
C 30000 135000

173000 173000

The realizations were as follows :-

83
 Expenses
Debtors Plant Stock
July 30000 10000 37000 3000
Aug 20000 8500 23000 2000
Sept 10000 - 1000 -

On 30th Sept remaining debtors amounting to Rs.9000/- were taken over

by B at 50% of book value.
Prepare statement showing Piecemeal Distribution of Cash.
Statement showing Piecemeal Distribution of Cash
Date Particulars Cash Total Creditors Capital
claim A B C
01/07/13 Balance b/d 3600 173000 38000 60000 45000 30000
Less : Paid to Creditors (3600) (3600) (3600) - - -

Balance - 169400 344000 60000 45000 30000

Cash 74000 - - - - -
Less : Paid to Creditors (34400) (34400) (34400) - - -

Balance 39600 135500 - 60000 45000 30000

Less: Paid to A (15000) (15000) - (15000) - -
Balance 24600 120000 - 45000 45000 30000
Less : Paid to B & C (24600) (24600) - (12300) (12300) -
Aug Balance - 95400 - 32700 32700 30000
Cash realized 49500 - - - - -
Less : Paid to A & B (5400) (5400) - (2700) (2700) -
Sep Balance 44100 90000 - 30000 30000 30000
Less : Paid to all partners (44100) (44100) - (14700) (14700) (14700)

Balance - 45900 - 15300 15300 15000

Cash Realized 11000 - - - - -
Add :- Debtors taken 4500 - - - - -
over by B
Balance 15500 - - - - -
Less :- Paid to all in PSR 15500 (15500) - (5166) (5167) (5167)

Loss on Realisation - 30400 - 10134 10133 10133

Working Note – Statement showing Excess Capital

Step No. Particulars Formula A B C
I Balance b/d 60000 45000 30000
II Profit Sharing Ratio 1 1 1
III Unit Value I  II 60000 45000 30,000

IV Proportionate X II 30000 30000 30000

Capital
V Excess Cap I - IV 30000 15000 -
VI Profit Sharing Ratio 1 1 -

VII Unit Value V  VI 30000 15000 -

84
 VIII Proportionate X VI 15000 15000 -
Capital
IX Excess Capital V-VIII 15000 - -

Payment Chart

A B C
I Steps : 9 15000 - -
II Steps : 8 15000 15000 -
III Steps : 4 30000 30000 30000

Total 60000 45000 30000

Illustration 4:-
A, B, C were in business sharing profits and losses 3:4:5 they decided to
dissolve their firm 1st July 2013. Following is the Balance Sheet as on 1st
July 2013.
Liabilities Rs. Assets Rs.
Capital Sundry Assets 36000
A 12000
B 8000
C 4000 24000
Sundry Creditors 10000
A’s Loan 2000

36000 36000

The amt realized were as follows.

15/7 5000
31/7 10000
15/8 5000
31/8 2000
6/9 6000
30/9 5000
Show a detail statement of piecemeal distribution of cash.
14
Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Creditors A’s Loan A B C

1/7 Balance b/d - 36000 10000 2000 12000 8000 4000

15/7 Cash Realised 5000 - - - -
Less : Paid to Creditors (5000) (5000) (5000) - - - -

Balance - 31000 5000 2000 12000 8000 4000

31/7 Cash Realised (10000 - - - - - -
Less : Paid to Creditors ) (5000) (5000) - - - -
(5000)
Balance 5000 26000 - 2000 12000 8000 4000

85
 Less: Paid to A’s Loan (2000) (2000) - (2000) - - -

Balance 3000 24000 - - 12000 8000 4000

Less : Paid to A (3000) (3000) - - (3000) - -

Balance - 21000 - - 9000 8000 4000

Cash realized 5000 - - - - - -
15/8
Less : Paid to A (3000) (3000) - - (3000) - -

Balance 2000 18000 - - 6000 8000 4000

Less : Paid to A & B in (2000) (2000) - - (857) (1143) -
3:4
Balance - 16000 5143 6857 4000
Cash Realized 2000
31/8
Less : Paid to A & B (2000) (2000) (857) (1143) -

Balance - 14000 4286 5714 4000

Cash Realized 6000
6/9
Less : Paid to A & B (4400) (4400) (1886) (2514) -

Balance 1600 9600 2400 3200 4000

Less : Paid to all in PSR (1600) (1600) (400) (533) (667)

Balance - 8000 2000 2667 3333

Cash Realized 5000
30/9
Less : Paid to all in PSR (5000) (5000) (1250) (1667) (2083)

Balance – Loss on - 3000 750 1000 1250

Realisation

Working Notes
1. Step Excess Capital

Step No. Particulars Formula A B C

I Opening bal 12000 8000 4000
II Profit Sharing 3 4 5
Ratio
III Unit Value I  II 4000 2000 800

IV Proportionate X II 2400 3200 4000

Capital
V Excess Cap I - IV 9600 4800 -
VI Profit Sharing 3 4 -
Ratio
VII Unit Value V  VI 3200 1200 -

VIII Proportionate X VI 3600 4800 -

Capital
IX Excess Capital V-VIII 6000 - -

Payment Chart

86
 A B C
Steps : 9 6000 - -
8 3600 4800 -
4 2400 3200 4000

Total 12000 8000 4000

Illustration 5:-
A, B & C are partners, profit sharing ratio 1:1:2. Balance sheet as
on 31st March 2014.

Liabilities Rs. Assets Rs.

Capital Buildings 19750
A 12000 Plant & Machinery 11750
B 9000 Stock 6250
C 6000 27000
A’s Loan 3750
B’s Loan 2500
Creditors 3000
Govt tax 1500

37750 37750

It was mutually agreed that the realization of the asset should be

distributed at the end of each month. Month by realization of assets and
expenses were as follows –

Month Asset Expenses

30th April 7360 360
31st May 9100 850
30th June 7800 300
31st July 4780 280

All the assets were fully realized by 31st July 2014.

Working Note – Statement showing Excess Capital

Step No. Particulars Formula A B C
I Opening bal 12000 9000 6000
II Profit Sharing 1 1 2
Ratio
III Unit Value I  II 12000 9000 3000

IV Proportionate X II 3000 3000 6000

Capital
V Excess Cap I -IV 9000 6000 -
VI Profit Sharing 1 1
Ratio
VII Unit Value V  VI 9000 6000 -
87
 VIII Proportionate X VI 6000 6000 -
Capital
IX Excess Capital V-VIII 3000 - -
Payment Chart

A B C
Steps : 9 3000 - -
8 6000 6000 -
4 3000 3000 6000

Total 12000 9000 6000

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Govt Creditors A’s B’s Capitals

Available Claim Loan Loan
A B C
1/4 Balance b/d - 37750 1500 3000 3750 2500 12000 9000 6000
30/6 Cash Realised 7360
Less : Exp 360
Cash 7000
Less : Paid to Govt (1500) (1500) (1500) - - - - - -

Balance Creditors 5500 36250 3000 3750 2500 12000 9000 6000
Less: Paid to G (3000) (3000) - (3000) - - - - -

Balance 2500 33250 - - 3750 2500 12000 9000 6000

Less : Paid to A & (2500) (2500) (1500) (1000) - - -
B loan
Balance - 30270 - - 2250 1500 12000 9000 6000
31/5 Cash A/c (9100- 8750 - - - - -
300) (3750) (3750) - - (2250) (1500) - - -
Less : Paid to A &
B loan
Balance 5000 27000 - - - - 12000 9000 6000
Less : Paid to A’s (3000) (3000) - - - - (3000) - -
Capital
Balance 2000 24000 - - - - 9000 9000 6000
Less : Paid to A & (2000) (2000) - - - - (1000) (1000) -
B Capital
Balance - 22000 - - - - 8000 8000 6000
30/6 Cash A/c (7800- 7500 - - - - - - - -
300) (7500) (7500) - - (3750) (3750) -
Less : Paid to A &
B
Balance - 14500 - - 4250 4250 -
31/7 Cash 4500 - (1250) (1250)
Less : Paid to A & (2500) (2500)
B
Balance 2000 12000 3000 3000 6000
Less : Paid to all in (2000) (2000) (500) (500) (1000)
PSR
Loss on Realisation - 10000 2500 2500 5000

Balance 32000 148000 - - - 60000 48000 40000

Less : Paid to B (8000) (8000) - - - - (8000) -

Balance 24000 140000 - - - 60000 40000 40000

Less : Paid to B & C (20000) (20000) - - - - (10000 (10000)

88
 )

Balance 4000 120000 - - - 60000 30000 30000

Less : Paid to A, B (4000) (4000) - - - (2000) (1000) (1000)
&C
Balance - 116000 58000 29000 29000
Cash Realized 80000
Less : Paid to all in (80000) (80000) 40000 20000 20000
Profit Sharing Ratio
Loss on realization - 36000 18000 9000 9000

Illustration 6:-
Ajay, Vijay & Vishal were in partnership in profit sharing ration5:3:2.
Balance sheet as on 31st March 2014.
Liabilities Rs. Assets Rs.
Capital Cash 500
Ajay 40000 Debtors 44000
Vijay NIL 40000 Stock 49500
Ajay’s Loan 14000 Vishal Capital 10000
Sunil’s Loan 16000
Bank Loan 4000
Creditors 30000
104000 104000
Realizations were –
15/04/2014 19500
31/05/2014 10000
31/07/2014 20000
31/08/2014 6000
30/09/2014 8000
Vishal brought necessary cash at the time of last realization. Show
Piecemeal Distribution of Cash.

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Creditors Bank Sunil Ajay Ajay Vijay Vishal
Claims Loan
1/4 Balance b/d 500 94000 30000 4000 16000 14000 40000 - (10000)
15/4 Cash Realised 19500

Cash 20000 - - - -
Less : Paid to Creditors, (20000) (20000) (12000) (1600) (6400) - - - -
Bank Loan, Sunil
Balance - 74000 18000 2400 9600 14000 4000 - (10000)
31/5 Cash Realized 10000
Less: Paid to Creditors, (10000) (10000) (6000) (800) (3200) - - - -
Bank Loan, Sunil

Balance - 64000 12000 1600 6400 14000 4000 - (10000)

31/6 Cash Realized 30000
Less: Paid to Creditors, (20000) (20000) (12000) (1600) (6400) - - - -
Bank Loan, Sunil

Balance 10000 44000 - - - 14000 40000 - (10000)

Less : Paid to Ajay Loan (10000) (10000) - - - (10000) - - -
89
 Balance - 34000 - - - 4000 40000 - (10000)
Cash Realised 20000 (4000) - - -
31/7 Less : Paid to Ajay Loan (4000) - - - (4000) - - -

Balance 16000 30000 - - - - 40000 - (10000)

Less : Paid to Ajay Cap (16000) (16000) - - - - (16000) - -
Balance - 14000 - - - - 24000 - (10000)
31/8 Cash Realised 6000 - - - -
Less : Paid to Ajay (6000) (6000) - - (6000) - -
Balance - 8000 - - - - 18000 - (10000)
30/9 Cash Realised 8000 - - - - - -
Add : Cash Received 10000 10000 - - - - - - 10000
from Vishal
Balance 18000 18000 - - - - 18000 - -
Less : Paid to Ajay (18000) (18000) - - - - (18000) - -
- - - - - - - - -

Note - Since only Ajay has Credit Balance in Capital Statement of

excess Capital can not be prorated.

Illustration 7:-
Following is the Balance Sheet of A, B & C who share P&L in the ratio
4:3:1 on 31st March 2013 on which date they dissolve their partnership.
Balance Sheet as on 31st March 2013.
Liabilities Rs. Assets Rs.
Sundry Creditors 26250 Bldg 50000
Bank O/D 8750 Machinery 55000
Capital A/c Stock 20000
A 70000 Debtors 60000
B 30000
C 50000 150000

185000 185000

1. Bank O/D is secured against stock.

2. The assets realized following amounts which were immediately
distributed.
May 31 – Debtors Rs.20000/-
July 31 – Stock Rs.15000/-
Sep 30 – Debtors Rs.25000/-
Oct 31 – Machinery Rs.40000/-
Dec 31 – Bldg Rs.65000/-
No further sums could be realized. Show Piecemeal Distribution.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Opening bal 70000 30000 50000
II Profit Sharing Ratio 4 3 1
III Unit Value I  II 17500 10,000 50000

IV Proportionate X II 40000 30000 10000

Capital
V Excess Cap I - IV 30000 - 40000
VI Profit Sharing Ratio 4 - 1

VII Unit Value V  VI 7,500 - 40000

90
 VIII Proportionate X VI 30000 - 7500
Capital
IX Excess Capital V-VIII - - 32500

Payment Chart
A B C
Steps : 9 - - 32500
8 30000 - 7500
4 40000 30000 10000

Total 70000 30000 50000

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Creditors Bank O/D A B C
1/04/13 Balance b/d - 185000 26250 8750 70000 30000 50000
31 July Cash Realised 20000
Less : Paid to Creditors (20000) (20000) (15000) (5000) - - -
& Bank O/D
Balance - 165000 11250 3750 70000 30000 50000
31 July Cash Realised 15000
Less : Paid to Bank O/D (3750) (3750) - (3750) - - -

Balance 11250 161250 11250 NIL 70000 30000 50000

Less: Paid to Creditors (11250) (11250) (11250) - - - -

Balance - 150000 - - 70000 30000 50000

30 Sep Cash Realized 25000 - -
Less: Paid to Creditors (25000) (25000) - - - - (25000)
Balance - 125000 - - 70000 30000 25000
31 Oct Cash Realised 40000 - - - -
Less : Paid to Creditors (7500) (7500) (7500)
Balance 32500 117500 - - 70000 30000 17500
Less : Paid to A & C (32500) (32500) - - (26000) - (6500)
- -
Balance - 85000 - - 44000 30000 11000
31 Dec Cash Realised 65000 - -
Less : Paid to A & C (5000) (5000) (4000) - (1000)
Balance 60000 80000 - - 40000 30000 10000
Less : Paid to all in PSR (60000) - - (30000) (22500) (7500)
(60000) - -
Loss - 20000 - - 10000 7500 2500
- -

Illustration 8:-
A, B & C are partners sharing profits and losses equally. Their Balance
Sheet as on date of dissolution was follows.
Liabilities Rs. Assets Rs.
Sundry Creditors 11000 Cash 140
General Reserves 18000 Investment 30000
Due to Bank 33000 Stationary 128300
Capital A/c Sundry debtors 45400
A 80000 Bank 32600
B 160000 Furniture 4120

91
 C 130000 370000 Land & Building 191440

432000 432000

All the sundry creditors have to be paid away. A sum of Rs.2400/- has to
be provided for expenses of realization and subject to this all cash received
should be immediately distributed among partners the amount realized
were :-
1 32260
2 36000
3 212000
4 92600

Expenses of realization Rs.3000/-.

Prepare statement showing Piecemeal Distribution of Cash.
Working Note – Statement showing Excess Capital
Step No. Particulars Formula A B C
I Balance b/d 86000 166000 136000
II Profit Sharing Ratio 1 1 1
III Unit Value I  II 86000 166000 136000
IV Proportionate Capital X II 86000 86000 86000
V Excess Cap I - IV - 80000 50000
VI Profit Sharing Ratio - 1 1

VII Unit Value V  VI - 80000 50000

VIII Proportionate Capital X VI - 50000 50000

IX Excess Capital V-VIII - 30000 -

Payment Chart

A B C
Steps : 9 - 30000 -
8 - 50000 50000
4 86000 86000 86000

Total 86000 166000 136000

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Creditors Bank O/D A B C
1 Balance b/d 140 432000 11000 33000 86000 166000 136000
Add : Cash 32260
Less : Distribution Exp (2400)
Less : Paid to Creditors (30000) (30000) (7500) (22500) - - -
& Bank (1:3)

Balance - 402000 3500 10500 86000 166000 136000

2 Cash Realised 36000
Less : Paid to Creditors (14000) (14000) (3500) (10500)

92
 & Bank O/D
Balance 22000 388000 NIL NIL 86000 166000 136000
Less: Paid to Bank (22000) (22000) - - - (22000) -

Balance - 366000 - - 86000 144000 136000

3 Cash Realised 212000 - -
Less: Paid to Bank (8000) (8000) - - - (8000) -
Balance 204000 358000 - - 86000 136000 136000
Less: Paid to Bank & (100000) (100000 - - - (50000) (50000)
Creditors )

Balance 104000 258000 - - 86000 86000 86000

Less : Paid to all (104000) (104000 - - (34666) (34667) (34667)
)

Balance - 154000 - - 51334 51333 51333

4 Cash Realised 92600 - -
Less : Exp (600)
Balance 92000 154000 - - 51334 51333 51333
Less : Paid to all (92000) (92000) - - (30667) (30667) (30666)

Loss on realization - 62000 - - 20666 20666 20667

Illustration 9:-
P, Q & R were in Partnership sharing Profits & Losses in the ratio of
4:5:1. Their Balance Sheet as on 31st December 2013 is as under:-
Liabilities Rs. Assets Rs.
Capital A/c Cash in hand 15000
P 75000 Other Assets 280000
Q 60000
R 15000
Sundry Creditors 50000
Loans
P 30000
Q 15000
Reserves 50000
295000 295000
The Partnership is dissolved and the assets were realized as under:-
1st Realisation: Rs.50000/-
2nd Realisation: Rs.100000/-
3rd Realisation: Rs.85000/-
On the date of the dissolution there was a contingent liability of Rs.5000/-
against the firm which was settled at Rs.3500/- at the time of 2nd
realization. Realisation expenses were estimated at Rs.10000/- but those
actually amounted to Rs.7500/-. R took over stock worth Rs.2500/- at the
93
time of 3rd realization. The firm was forced to pay Rs.3000 to sales tax
authorities as fine out of the 3rd realization for which no provision was
made prepare a statement showing distribution under Excess Capital
Method.

Working Note – Statement showing Excess Capital

Particulars P Q R
Capitals (as given) 75,000 60,000 15,000
Add Reserves 20,000 25,000 5,000
Actual Capitals 95,000 85,000 20,000
PSR 4 5 1
Capitals per unit of PSR 23,750 17,000 20,000
Capitals in PSR 68,000 85,000 17,000
Excess Capital 27,000 NIL 3,000
PSR 4 1
Excess Capital p.u. of PSR 6,750 3,000
Excess Capital in PSR 12,000 3,000
Extra Excess Capital 15,000 NIL

First pay Extra Excess Capital to P Rs. 15,000

Next pay Excess Capital to P and R Rs. 15,000 in the ratio 4:1
Next pay P, Q and R in PSR 4:5:1

28

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Rs. Creditors Loan P Loan Q Capital Capital Capital
Rs. Rs. P Rs. Q Rs. R Rs.
1 Opening Balances 15,000 50,000 30,000 15,000 95,000 85,000 20,000
Add : First 50,000
Realisation
65,000
Less: Cash Kept 15,000
aside for contingent
Liab. Rs. 5,000
estimated realization
exp. Rs. 10,000
50,000
Less: Paid to 50,000 50,000
creditors
NIL NIL
Second Realisation 1,00,000
Add: Surplus
available from
amount
Kept aside for
contingent liab.
(5000-3500) 1,500
10,1500
Less: Paid to P & Q 45,000 30,000 15,000
loan

94
 56,500 NIL NIL
Less: Extra Excess 15,000 15,000
Cap. Paid to P
41,500 80,000
Less: Excess Cap.
To P & Q in the
Ratio 4:1 15,000 12,000 3,000
26,500 68,000 17,000
Less: Paid to P,Q 26,500 10,600 13,250 2,650
& R in PSR 4:5:1
NIL 57,400 71,750 14,350
Third Realisation 85,000
Add: Surplus
available from
amount
kept aside for
estimated
realization
Expenses (10,000 2,500
-7,500)
87,500
Less: Sales Tax 3,000
fine paid
84,500
Less: Stock taken 2,500
Over by R
11,850
Less: Padi to P &
Q for stock taken
over by R 22,500 10,000 12,500 -
62,000 47,400 59,250 11,850
Less: paid to P, Q 62,000 24,800 31,000 6,200
& R in PSR 4:5:1
Loss on - 22,600 28,250 5,650
Realisation

Note:
1) Keep aside cash for estimated realization expenses and contingent
liability at the beginning.
2) Excess amount of RS. 1500 kept aside for contingent liability has been
added to the 2nd realization.
3) Excess amount of Rs. 2500 kept a side for realization expenses has
been added to the third realization.
4) Sales tax fine of Rs. 3000 has to be paid first from the third realization
being preferential creditor.
5) Stock taken over by R Rs. 2500 has been deducted from his capital
balance Rs. 10,000 has been paid to P & Rs. 12,500 to Q for stock
taken over by R.

95
 PSR P Q R
Cash paid 4 5 1
250
(Proportionately in PSR)

Illustration 10:-

The partners X,Y & Z have called upon you to assist them in winding up
the affairs of their partnership on 30th June 2013. Their Balance Sheet as
on that date is given below:

Liabilities Rs. Assets Rs.

Sundry Creditors 34,000 Cash at Bank 12,000
Capital Accounts Sundry Debtors 44,000
X 1,34,000 Stock in trade 28,000
Y 90,000 Plant & Equipment 1,98,000
Z 63,000 Loan – X 24,000
Loan – Y 15,000

3,21,000 3,21,000

1. The partners share profit and losses in the ratio of 5:3:2

2. Cash is distributed to the partners at the end of each month
3. A summary of liquidation transactions are as follows:
July 2013
Rs. 33,000 – Collected from Debtors balance is uncollectible
Rs. 20,000 – Received from sale of entire Stock.
Rs. 2,000 – Liquidation expenses paid
Rs. 16,000 – Cash retained in the business at the end of month
August 2013
Rs. 3000 – Liquidation expenses paid as part payment of his capital, Z
accepted a piece of equipment for Rs. 20,000 (book value Rs. 8,000)
Rs. 5,000 – Cash retained in the business at the end of the month
September – 2013
Rs. 1,50,000 – received on sale of remaining plant & equipment
Rs. 2,000 – liquidation expenses paid. No cash retained in the
business.
Prepare a statement showing distribution of cash by applying
proportionate capital method.

Solution: – Statement of Excess Capital

X Y Z
Rs. Rs. Rs.
Balance 1,34,000 90,000 63,000
Less: Loans 24,000 15,000 -
1,10,000 75,000 63,000
Profit sharing Ratio 5 3 2
Taking X’s capital as the (22,000) (25,000) (31,500)

96
 Basis (1=22,000) 1,10,000 66,000 44,000
9,000 19,000
Profit sharing Ration 3 2
Unit value (3000) (9500)
Taking Y’s Capital as the 9,000 6,000
basis (1= 3000)
- 13,000
Calculation of proportionate Capital after take over of equipment

X Y Z
Rs. Rs. Rs.
Balance on 1.9.2013 1,10,000 67,000 30,000
Profit Sharing Ratio 5 3 2
Unit value (22,000) (22,334) (15,000)
Taking Z’s capital as the basis
1 = 15,000 75,000 45,000 30,000
35,000 22,000 -

Note: If the share of partner in that realisation less than the value of asset
the asset is given to the partner concerned but it disturbs the earlier
calculation of surplus capital. Hence Surplus capital of partners is decided
again.
Statement showing Distribution of Cash

Date Particulars Cash Rs. Total Creditors X Y Z

Rs. Rs. Rs. Rs. Rs.
Balances 34,000 1,34,000 90,000 63,000
Less : Loans 24,000 15,000
taken
2,82,000 34,000 1,10,000 75,000 63,000
June 2013
Cash Balance 12,000
Paid to 12,000 12,000 12,000
Creditors
2,70,000 22,000
July 2013
1st Realisation 53,000
Less: Expenses 2,000
51,000
Less: Cash 16,000
Retained
35,000
Paid to 22,000 22,000 22,000
creditors
13,000 2,48,000 -
Paid to Z 13,000 13,000 13,000
Balance due - 2,35,000 - 1,10,000 75,000 50,000
Aug 2013
Second

97
 Realisation
July Balance 16,000
retained
Less: Expenses 3,000
13,000
Less: Cash 5,000
retained
8,000
Paid to Y 8,000 8,000 - 8,000
Equipment - 20,000 - 20,000
given to Z
- 2,07,000 1,10,000 67,000 30,000
Sep 2013
Final
Realisation
August Balance 5,000
retained
Sale of plant 1,50,000
1,55,000
Less: Expenses 2,000
1,53,000
Less: Paid to X 57,000 57,000 35,000 22,000
&Y
96,000 1,50,000 75,000 45,000 30,000
Paid to X, Y &
Z
In 5 : 3: 2 96,000 96,000 48,000 28800 19200

54,000 27,000 16,200 10,800

Illustration No. 11

Partnership of L, M & N was dissolved on 31st October 2013 on

which date their Balance Sheet stood as under:

Liabilities Rs. Assets Rs.

Capital A/cs: Goodwill 80,000
L 1,20,000 Buildings 52,500
M 1,30,000 Furniture 10,000
N 90,000 3,40,000 Stocks 1,52,000
Reserve 60,000 Debtors 1,35,500
Creditors 40,000 Cash 10,000
4,40,000 4,40,000

The partners were sharing profits & loss in the ratio of 3:2:1 respectively.
They decided to distribute the cash as and when it was received L agreed
to work as receiver on a remuneration of Rs. 5,000 and to bear all
expenses of realization when it was completed be found that he had spent

98
Rs. 1050 towards the expenses. Following details of realization were
available:

December 2013 Rs. 45,000

January 2014 Rs. 1,20,000
February 2014 Rs. 1,14,000

There was some stock of the book value of Rs. 9,000 lying unsold and it
was taken over by N at an agreed value of Rs. 5,000.
You are required to prepare the following (using excess capital method)

1. Statement of Surplus Capital

2. Statement showing monthly distribution of cash available.

Solution:
Statement showing surplus capital:

Step Particulars Formula L M N

No. Rs. Rs. Rs.
Capital Balances 1,20,000 1,30,000 90,000
Add: Reserve 30,000 20,000 10,000
I Adjusted Capitals 1,50,000 1,50,000 1,00,000
II Profit sharing Ratio 3 2 1
III Unit values 50,000 75,000 1,00,000
IV Proportionate Capital 1,50,000 1,00,000 50,000
(Base L)
V Surplus Capital - 50,000 50,000
VI Profit sharing ratio 2 1
VII Unit values 25,000 50,000
VIII Proportionate Capital 50,000 25,000
(Base M)
IX Absolute surplus - 25,000

Payment chart (IX, VIII, IV)

I - - 25,000
II - 50,000 25,000
III 1,50,000 1,00,000 50,000
1,50,000 1,50,000 1,00,000

Statement showing Piecemeal Distribution of Cash

Date Particulars Cash Total Creditors Capital Accounts (Adjusted)

Claims
L M N
1/11/13 Balance due 4,40,000 40,000 1,50,000 1,50,000 1,00,000
Cash Balance 10,000
Less: Remuneration to L (5,000)

5,000

99
 Less: Paid to creditors (5,000) (5,000) (5,000)
- 4,35,000 35,000
Dec 13 Realisation in Dec 2013 45,000
Less: Paid to creditors (35,000) (35,000) (35,000)
10,000 4,00,000 -
Less: Paid to M (10,000) (10,000) (10,000)
- 3,90,000 1,50,000 1,50,000 90,000
Jan 14 Realisation in Jan 2014 1,20,000
Less: Paid to M & N to
clear
Surplus capital 90,000 (90,000) (50,000) (40,000)
30,000 3,00,000 1,50,000 1,00,000 50,000
Less: Paid to all partners 30,000 (30,000) (15,000) (10,000) (5,000)
in PSR
- 2,70,000 1,35,000 90,000 45,000
Feb 14 Cash Realised 11,400
Less: Paid to all in PSR 11,400 1,14,000 57,000 38,000 19,000

- 1,56,000 78,000 52,000 26,000

Feb 14 Cash 6,000
Less: Paid to All in PSR (6,000) (6,000) 3,000 2,000 1,000

Loss on Realisation 75,000 50,000 25,000

Illustration 12 :

Avani, Binal and Cindy are partners sharing profits and losses in
the ratio of 4:2:1. They decided to dissolve the partnership as on 31st
March 2013 when their Balance Sheet was as follows :

Balance Sheet as on 31st March, 2013

Liabilities Rs. Assets Rs.

Creditors 16,820 Cash in hand 500
General Reserve 9,780 Investment 16,000
Capital : Avani 16,000 Machinery 38,740
Binal 32,000 Debtors 6,520
Cindy 26,000 Building 980
Furniture 37,860
1,00,600 1,00,600

All creditors have to be paid off. Rs. 300 has to be provided for
realization expenses.

Thereafter all cash received should be distributed among the

partners.
100
 The amounts were realized in installments as follows :

Rs.
1st 20,000
2nd 3,500
3rd 46,000
4th 24,000
The actual realization expenses were Rs. 500. Prepare a statement
showing piecemeal distribution of cash as per Excess Capital Method.

Solution:

Statement of Excess Capital:

Sr. Particulars Avani Banal Cindy

Balance B/f 16,000 32,000 26,000
Add : General Reserve 5,600 2,800 1,400
Total 21,600 34,800 27,400
Profit Sharing Ratio 4 2 1
Unit Value 5,400 17,400 27,400
Proportionate capital taking A as 21,600 10,800 5,400
base
Excess Capital -- 24,000 22,000
Profit Sharing Ratio 2 1
Unit Value 12,000 22,000
Proportionate capital taking B as 24,000 12,000
base
Ultimate Surplus 10,000

Sr. Particulars Cash Total Creditors Avani Binal Cindy

No. Available claims
Balance B/f 500 1,00,600 16,800 21,600 34,800 27,400
Less : reserve for 300
Expenses
Balance 200
Less : paid to 200 200 200
Creditors
Balance 0 1,00,400 16,600 21,600 34,800 27,400
Add 1st Realisation 20,000
Less : paid to 16,600 16,600 16,600
Creditors
Balance 3,400 83,800 0 21,600 34,800 27,400
Less : Paid to Cindy 3,400 3,400 3,400
Balance 0 80,400 21,600 34,800 24,000
2nd realization 3,500

101
 Less : Paid to Cindy 3,500 3,500 3,500
Balance 0 76,900 21,600 34,800 20,500
3rd realization 46,000
Less : paid to Cindy 3,100 3,100 3,100
Balance 42,900 73,800 21,600 34,800 17,400
Less paid to Binal & 36,000 36,000 24,000 12,000
Cindy
Balance 6,900 37,800 21,600 10,800 5,400
Less paid to all in 6,900 6,900 3,943 1,971 986
PSR
Balance 0 30,900 17,657 8,829 4,414
4th Realisation 24,000
Less : realization 200
expenses
Balance 23,800
Less : paid to all in 23,800 23,800 13,600 6,800 3,400
PSR
Loss on Realisation 7,100 4,057 2,029 1,014

Illustration 13:
Jam, Bread and Butter are partners sharing profits and losses in the
ratio of 2 : 2 : 1. They decided to dissolve the partnership as on 31st March
2013 when their Balance Sheet was as follows :

Balance Sheet as on 31st December, 2013

Liabilities Rs. Assets Rs.

Creditors 15,000 Cash in hand 9,000
Income tax Payable 4,000 Investment 7,500
Bank loan (secured on 30,000 Machinery 17,800
stock)
Jams loan 11,000 Debtors 66,400
Capital Jam 40,000 Building 60,000
Bread 40,000 Furniture 9,300
Butter 30,000
1,70,000 1,70,000

Bank took over Stock and could realize Rs. 25,000 only. Rs. 3,000
were paid for repairing furniture to get better price.

Thereafter all cash received was distributed among all other

liabilities and the partners.

The amounts realized and expenses incurred were in installments

as follows.

Month Cash realized Rs. Expenses Rs.

January 2014 13,400 1,400

102
 February 2014 17,200 2,200
March 2014 11,500 1,500
April 2014 32,750 2,750
May 2014 36,640 1,640

Solution:

Statement of Excess Capital:

Sr. Particulars Jam Bread Butter

Balance B/f 40,000 40,000 30,000
Profit Sharing Ratio 2 1 1
Unit Value 20,000 40,000 30,000
Proportionate capital taking Jam as 40,000 20,000 20,000
base
Excess Capital 20,000 10,000
Profit Sharing Ratio 1 1
Unit Value 20,000 10,000
Proportionate capital taking Butter 10,000 10,000
as base
Ultimate Surplus 10,000

Statement Showing Piecemeal distribution of Cash

103
 *after payment of Rs. 25,000 recovered from Stock

Illustration 14 :
Sonam, Nidhi and Pooja are partners sharing profits and losses in
the ratio of 4:2:1. They decided to dissolve the partnership as on 31st
March 2013 when their Balance Sheet was as follows :

Balance Sheet as on 31st March, 2013

Liabilities Rs. Assets Rs.

Capital : Sonam 1,00,000 Land & Building 50,000
Nidhi 60,000 Machinery 1,50,000
Pooja 20,000 Debtors 45,000
10% Bank Loan 40,000 Stock 34,500
(unsecured)
Bills Payable 30,000 Cash and Bank 500
Creditors 30,000
2,80,000 2,80,000

Rs. 800 has to be provided for realization expenses.

Thereafter all cash received should be distributed among the

partners.

The amounts were realized in installments as follows :

104
 Rs.
1st 60,300
2nd 50,000
3rd 79,000
4th 27,700

The actual realization expenses were Rs. 500. Prepare a statement

showing piecemeal distribution of cash as per Excess Capital Method.
Solution:

Statement of Excess Capital:

Sr. Particulars Sonam Nidhi Pooja

Balance B/f 1,00,000 60,000 20,000
Profit Sharing Ratio 4 2 1
Unit Value 25,000 30,000 20,000
Proportionate capital taking Pooja 80,000 40,000 20,000
as base
Excess Capital 20,000 20,000 --
Profit Sharing Ratio 4 2
Unit Value 5,000 10,000
Proportionate capital taking 20,000 10,000
Sonam as base
Ultimate Surplus 10,000

Particul Cash Total BK B.P. Credit Sona Nidh Pooj

ars Availa claims Loa ors m i a
ble n
Balance 500 2,80,0 40,0 30,0 30,000 1,00,0 60,0 20,0
B/f 00 00 00 00 00 00
Add : 60,300
Cash real
Less : 800
reserve
for
Expense
s
Balance 60,000
Less : 60,000 60,000 24,0 18,0 18,000
paid to 00 00
Creditors
Balance -- 2,20,0 16,0 12,0 12,000 1,00,0 60,0 20,0

105
 00 00 00 00 00 00
Add 2nd 50,000
Realisati
on
Less : 40,000 40,000 16,0 12,0 12,000
paid to 00 00
Credit,
loan, bs
Balance 10,000 1,80,0 -- -- -- 1,00,0 60,0 20,0
00 00 00 00
Less : 10,000 10,000 10,0
Paid to 00
Nidhi
Balance -- 1,70,0 1,00,0 50,0 20,0
00 00 00 00
3rd 79,000
realizatio
n
Less : 30,000 30,000 20,000 10,0
Paid to 00
Sonam,
Nidhi
Balance 49,000 1,40,0 80,000 40,0 20,0
00 00 00
Balance -- 91,000 52,000 26,0 13,0
00 00
4th 27,700
Realisati
on
Add : 300
Excess
Re
28,000
Less : 28,000 28,000 16,000 8,00 4,00
paid to 0 0
all in
PSR
Loss on -- 63,000 36,000 18,0 9,00
Realisati 00 0
on

4.7 EXERCISE
Pr.1 A, B, and C carrying on business is partnership decided to dissolve it
on and from 30th Sept. 2013. The following was their Balance sheet on
that date:

106
 Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 8,000
A 2,800 Cash & Bank 1,000
B 200 Advertisement 900
Suspense A/c
C 1,000 4,000
Profit & Loss 3,900
Loan from A 2,000
9,900 9,900
As per the arrangements with the bank, the partners were allowed
to withdraw an amount of Rs.500 only at present and the balance amount
of Rs.500 could be withdrawn only after 1st December,2009

It was decided that after keeping aside an amount of Rs. 2,000

for estimated realization expenses the available cash should be distributed
between the partners immediately.
The following were the realisation.
Fixed Assets Current Assets
Rs. Rs.
31st October, 2013 1,000 1,900
25th November, 2013 2,600 2,000
20th December, 2013 (Final) 1,000 900
Actual realisation expenses amounted to Rs. 1,100 only. Prepare the
statement showing the distribution of cash between the partners. under
excess capital method.
Pr. 2 On 31st December, 2013 the Balance Sheet of the partners X, Y and
Z (sharing Profit and Losses in the ratio of 2:4:6 (respectively) is as
follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Sundry Assets 16,000
A 3,600 Cash 2,000
B 2,400 Advertisement 1,800
Suspense A/c
C 2,000 8,000
Profit & Loss 7,800
Loan from A 4,000
19,800 19,800

On Jan 1, 2014 the partners decide to dissolve the firm and

distribute the proceeds as and when realised.

Prepare a statement showing the distribution according to excess

capital Method. The realisations are as below:

107
 Gross Realisation
Realisation Expenses
Rs. Rs.
March 1, 2014 4,450 150
April 15, 2014 6,850 250
April 30, 2014 2,250 250

Pr. 3 Lamb, Deer and Peacock were in partnership, their respective shares
being 1:2:2. The following was their Balance Sheet on 31st December,
2013. On which date they decided to dissolve the firm.

Liabilities Rs. Assets Rs.

Creditors 30,000 Cash 18,000
Income-Tax payable 8,000 Stock 80,000
Loan from bank 60,000 Debtors 1,20,000
(Secured by pledge of
stock
Deer’s Loan 22,000 Furniture 72,000
Partner’s Capital: Motor car 50,000
Lamb 80,000
Deer 80,000
Peacock 60,000 2,20,000

3,40,000 3,40,000

1. The bank could realize only Rs. 50,000 on disposal of stock

2. A sum of Rs. 6,000 was spent for furniture on getting a better price.
3. Other assets were realised as follows
In January, 2014 Rs. 24,000
In February, 2014 Rs. 30,000
In March, 2014 Rs. 20,000
In April, 2014 Rs. 60,000
In May, 2014 Rs. 70,000

The partners distributed the cash at and when available. Show the
distribution of cash on the basis of ‘Highest relative capital’.

Pr. 4 Gunen, Dinen, and Biren who were partners sharing profit and losses
in the ratio of 3:2:1 decided to dissolve their firm as on 1st January, 2014
on the basis of the following balance sheet:

108
 Liabilities Rs. Assets Rs.
Creditors 50,000 Cash at Bank 10,000
Capital A/cs Debtors 1,10,000
Gunen 40,000 Stock 30,000
Dinen 35,000
Biren 25,000 1,00,000

1,50,000 1,50,000

It was agreed that Dinen will be in charge of realisation at commission of

5% on Realisations and after meeting expenses and his commission the net
amount would be distributed piecemeal as and when realised. The
following schedule of realisation is available.

Month Realisation Expenses

(2014) Rs. Rs.
January 30,000 1,000
February 20,250 1,100
March 35,100 900
April 25,000 1,250
May (Final) 30,250 750
1,40,600 5,000

Prepare a statement to show how the amount will be distributed

amongst the partners.

Pr.5 Partnership of Urmila, Manisha, and Karishma was dissolved on 31st

October, 2013 on which date their Balance Sheet stood as under:

Liabilities Rs. Assets Rs.

Capital A/cs Goodwill 80,000
Urmila 1,20,000 Building 53,000
Manisha 1,30,000 Furniture 10,000
Karishma 90,000 3,40,000 Stock 1,52,000
Reserve 60,000 Debtors 1,35,000
Creditors 40,000 Cash 10,000
4,40,000 4,40,000

The partnership were sharing profits and losses in the ratio of 3:2:1
respectively. They decide to distribute the cash as and when it was
received. Urmila agreed to work as receiver on a remuneration of Rs.
20,000/- and to bear all expenses of realisation. When it was completed,
he found that he had spent Rs. 4,200/- towards the expenses. Following
details of realisation were available:

109
 December 2013 Rs. 32,000
January 2014 Rs. 2,42,000
February 2014 Rs. 1,40,000

There was some stock of the book value of R. 36,000 lying unsold
and it was taken over by Karishma an agreed value of Rs. 20,000.

You are required to prepare the following (Using Excess Capital

Method)

(a) Statement of surplus capital

(b) Statement showing monthly distribution of cash available.



110
 5
AMALMAGATION OF FIRMS I
Unit Structure :

5.0 Objectives
5.1 Introduction
5.2 Meaning and Objectives of Amalgamation
5.3 Treatment in the Books
5.4 Solved Illustrations
5.5 Exercise

5.0 OBJECTIVES

After studying the unit the students will be able to:

 Define the term Amalgamation.
 Calculate the amount of Purchase Consideration
 Understand the accounting procedure for amalgamation.
 After studying the unit the students will be able to solve the practical
problems on amalgamation.

5.1 INTRODUCTION

Business firms grow and expand through business combinations.

Such combinations also help firms to secure operating efficiencies, avoid
competition among them and economies of scale.

Amalgamation means merger or combination of two or more

existing firms. Two or more existing business entities merged themselves
into one entity, is known as amalgamation. After amalgamation of firms,
amalgamating firms [existing/old firms] get dissolved, lose their
existences and new firm is formed which is called as amalgamated firm.

5.2 MEANING AND OBJECTIVES OF

AMALGAMATION

Meaning
A partnership firm is formed with two or more persons. But it can
also be formed in any of the following ways.

A) When two or more sole proprietors form new partnership firm,

B) When one existing partnership firm absorbs a sole proprietorship.
C) When one existing partnership firm absorbs another partnership firm.
111
D) When two or more existing partnership firm from new partnership
firm.

The ICAI has issued Accounting Standard A.S. 14. Accounting for
amalgamation. It is mandatory in nature. The standard classifies the
amalgamation into two categories, namely.
a) Amalgamation in nature of merger.
b) Amalgamation in nature of purchase.

According to Accounting Standard A.S14, the term amalgamation

includes absorptions. [Acquisitions]

There are two methods of accounting for Amalgamations, as per

A.S.14.
1. Pooling of interest method [confined to amalgamation
of companies only]
2. Purchase method.

Objectives of Amalgamation
1. To enlarge the size of the firm.
2. To reduce overhead or expenses.
3. To avoid cut throat competition among the firms carrying on similar /
complementary business
4. To achieve both external and internal economies of large scale i.e.
purchasing bulk quantities, saving in transportation expenses etc.
5. To increase productivity and profitably of the firm.
6. To expand the business operations by having more resources like
broader capital base, more man power.

Consequences
Primarily the following consequences take place upon amalgamation.

1. Dissolution of existing amalgamating firms.

2. Formation of a new firm [called amalgamated firm] to take over
business of existing / old firms.

5.3 TREATMENT IN THE BOOKS OF ACCOUNTS

5.3.1 General Instructions

There are given the following points in the practical problem:

1. Balance sheet of two existing firms / sole Proprietary concerns on date

of amalgamation, which enables to close books of old firms, transferee
capitals balances to new firm.
2. Terms and conditions of amalgamations i.e. revaluation of various
asset and liabilities of both the firms, valuation of Goodwill, disposal
of assets or liabilities not taken over by new firm, certain more
transaction before or after amalgamation.

112
The students are required to:

1. Ascertain purchase consideration.

2. Close books of old firms.
3. Accounting entries in books of new firm.
a. For recording Purchase Consideration.
b. Goodwill treatment.
c. Capital adjustment upon amalgamation.
d. Elimination of inter firm Owings, (if any)
4. Preparation of Balance Sheet of the New Firm.

5.3.2 Purchase Consideration:

Purchase consideration is the agreed amount to be paid by the

purchasing firm to old firm. It can be calculated as follows:

A) Net asset method - Under this method, purchase consideration is

equal to net asset taken over by the New firm at agreed values. Net asset
means all assets taken over at agreed values / other wise at book values
less liabilities taken over by the purchasing firm.

The purchase consideration is calculated as under:

Particulars ₹ ₹
A. Agreed values of assets taken over
Goodwill X
Land & Building X
Stock X
Sundry Debtors X
Cash & Bank X XX
Less: B. Agreed values of liabilities assumed
Sundry Creditors X
Bill Payable X
Bank Loan X
Outstanding Expenses X [XX]
Purchase consideration [A-B] XXX

You are required to take care about the following terms:

i) Business is taken over, implies all assets & Liabilities are taken
over at agreed value unless mentioned that particular asset or
liability is not taken.

ii) Cash / Bank balance should be included in Purchase Consideration,

only to the extent taken over by the new firm & that much balance
should be transferred to Realisation a/c.
iii) If it is mentioned that only trade liabilities are taken over, then
creditors and bills payable are taken over by the by new firm, not any
other liabilities.

113
B) Lump sum method - under this method amount of purchase
consideration is given in lump sum. There is no need to calculate purchase
consideration as it is directly given in the sum i.e. in the problem.

However, difference in Purchase consideration and net assets taken

over, may be Goodwill or Capital Reserve.

Goodwill = Purchase consideration less Net Assets taken over

Capital Reserve = Net Assets less Purchase consideration.

5.3.3 ACCOUNTING PROCEDURES FOR CLOSING BOOKS OF

OLD FIRM (AMALGAMATING FIRM):

Accounting entries in the books of existing firm / sole proprietor:

Open following ledger accounts:

1. Realisation account.
2. Partner’s Capital Account (columnar)
3. New firm account.
4. Cash / Bank account.

Journal Entries in the books of old firm [Amalgamating firm]

STEP I

A] for transferring Balance Sheet items at book value:

1. For transferring sundry assets:

Realization a/c Dr.
To Sundry Assets [individually]

Notes : All the assets should be transferred at book values.

 Cash/Bank bal. should be transferred to the extent it is taken over.

 Debtors should be transferred at gross amount; R.D.D should be
credited to Realization a/c.
 Provision for depreciation should be credited to Realization a/c.
 Fictitious assets and accumulated losses should not be transferred to
Realisation a/c.
 All the assets should be transferred whether taken over or not by the
new firm.

2. For transferring accumulated losses:

Partner Capital a/c Dr.
To Profit & Losses a/c

[In old profit sharing Ratio]

114
 3. For transferring Liabilities:
Sundry Liabilities a/c Dr.
To Realization a/c

4. For transferring Reserves :

Reserves a/c Dr.
To Partners’ Capital a/c [old ratio]

STEP II

1. For recording Purchase consideration:

New Firm a/c Dr.
To Realization a/c

2. For Assets taken over by partner:

Partners Capital a/c Dr.
To Realisation a/c
3. For sale of Asset:
Cash/Bank a/c Dr.
To Realisation a/c

4. For liabilities taken over by partner:

Realisation a/c Dr.
To. Partner Capital a/c

5. For payment of liabilities not taken over:

Realisation a/c Dr.
To Cash / Bank a/c

6. For realization expenses:

Realisation a/c Dr.
To Cash a/c, or,
To Partners Capital a/c [if, paid by
the partner]

7. For asset taken over by creditor in settlement of liabilities:

No entry, as both accountants are already transferred to Realisation a/c. &
their accounts are already closed.

8. For transferring profit on Realisation:

Realization a/c Dr.
To Partners Capital a/c [old p.s.r.]

115
 9. For transferring loss on Realisation:
Partners Capital a/c [old p.s.r.] Dr.
To Realisation a/c

10. For transferring Partners Capital Bal:

Partners Capital A/c [individually] Dr.
To New Firm a/c

11. For final settlement:

Partners Capital a/c Dr.
To Cash a/c

After passing above entries new firms a/c is automatically closed and
books of old. firm [amalgamating firm[ are closed.

5.3.4 ACCOUNTING ENTRIES IN THE BOOKS OF THE NEW

FIRM [AMALGAMATED FIRM]:

 For recording various Assets & liabilities taken over,

A. If net acquired assets is equal to purchase consideration.

[If it is calculated by the Net Asset method]

Sundry Assets a/c

Dr.
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D.A/C [if any]

B. If net acquired assets is more than purchase consideration:

Sundry Assets a/c Dr.

To Liabilities a/c
To A Capital a/c
To B Capital a/c.
To R.D.D.A/C [if any]
To Capital Reserve a/c

C. If net acquired assets is less than the amount of purchase

consideration: [P.C]
Sundry Assets a/c Dr.
Goodwill a/c Dr.*
To Liabilities a/c
To A Capital a/c
To B Capital a/c
To R.D.D. A/C [if any]

116
Note:
 In case p.c. is taken by lump sum method, GOODWILL OR
CAPITAL RESERVE may be bal. fig.
 Partner’s capital accounts shall be credited by the amounts transferred
from old firm.
 Similar entry should be passed for recording various Assets &
liabilities taken over from other firm.

 Goodwill treatment

For writing off Goodwill in new profit sharing ratio.

All Partners Capital A/c Dr.

(In New Profit Sharing Ratio)
To Goodwill a/c
(Total Goodwill)

 For elimination inter firm debts:

Before amalgamation one firm might have sold goods to another firm,
which may have remained unpaid, e.g. A sold goods worth ` 25,000 on
credit to B..IF A & B are amalgamated as AB & CO., sundry Debtors of A
includes B ` 25,000 & sundry creditors of B includes A ` 25,000, after
merger, AB & co. have to cancel / reduce / eliminate S. Debtors as well as
S. Creditors by ` 25,000.

Sundry Creditors a/c/Loan a /c[taken] Dr.

To Sundry Debtors a/c/Loan a/c [given]

Capital Balance transferred from old firm may not be in their new P.S.R.,
Total Capital of the new firm may fixed & to be maintained for individual
capital contribution of the partners working should be as under:

 For Capital adjustment in new P.S.R.

Partner A B C D
Capital bal. transferred from old firm x X x x
Less: Goodwill written off [x] [x] [x] [x]
Balance left x X x x
Fixed Capital in new P.S.R ……………… [x] [x] [x] [x]
Surplus or [shortage] in capital to be adjusted x X x [x]

Entry:for transferring Partner’s capital a/c Dr

excess capital:
To Partner’s Current a/c / Cash a/c, or
To Partner’s Loan a/c
Entry for adjusting Partner’s Current a/c / Cash a/c / Partners Dr.
shortage in capital: Loan a/c
To Partner’s Capital a/c
117
  Preparation of Balance Sheet of the New Firm:
Add up all individual assets of both firms taken over by the new firm
at agreed value, show on the Asset side of the Balance Sheet, R.D.D
should be deducted from S. Debtors on assets side of the Balance Sheet.

Add up all individual liabilities of both firms taken over by the new
firm at assumed value, show on the liability side of the Balance Sheet.

All the above figures should be taken from purchase consideration,

after considering additional entries passed in the books of new firm.

5.4 SOLVED PROBLEMS

Illustrations : 1
A and B carrying on independent business and their position on
31.03.2013 is reflected in the Balance Sheet given below:

A B A B
Liabilities ` ` Assets ` `
Sundry 2,20,000 94,000 Stock-in-trade 3,40,000 1,96,000
Creditors
Outstanding 1,500 4,000 Sundry 1,78,000 74,000
Expenses Debtors
Bills Payable 25,000 --- Cash 2,000 400
Capital 3,06,000 1,91,000 Bank 26,000 15.000
Furniture 5,500 3.600
Investments 1,000 ---
5,52,500 2,89,000 5,52,500 2,89,000

Both of them to form a partnership firm from 1.04.2013 in the style

of AB & CO. on the following terms:

a] The capital of the partnership firm would be ` 4,80,000 and to be

contributed by them in the ratio of 2:1.

b] The assets of individual business to be revalued as under:

Assets of A : Stock to be written - down by 15% doubtful debtors

estimated ` 16,526 furniture to be revaluated at
`4,000, market value of investments at `2,000.

Assets of B : Stock to be written - up by 10%, provision for doubtful

debt required at ` 7,100, rest the assets are the be
taken over at book-value.

c] The firm takes over only trade liabilities.

You are required to pass necessary Journal Entries in the books of A

and B. also prepare the opening Balance Sheet of the firm as on 1.04.2013.
118
Solution:
In the books of A

Date Particulars L.F. ` Dr. ` Cr.

1.04.13 Realisation a/c Dr. 5,51,000
To Stock a/c 3,40,000
To Sundry Debtors a/c 1,78,000
To Cash a/c 500
To Bank a/c 26,000
To Furniture a/c 5,500
To investment a/c 1,000
[being transfer of assets at book
value]
Creditors Dr. 2,20,000
Outstanding Expenses a/c Dr. 1,500
Bills Payable a/c Dr. 25,000
Realisation a/c 2,46,500
[being transfer of liabilities at book
value]
Realisation a/c Dr. 1,500
To Cash 1,500
[being outstanding expenses paid]
AB & Co. a/c Dr. 2,37,974
To Realisation a/c 2,37,974
[being Purchase consideration due]
A’s capital a/c Dr. 68,026
To Realisation a/c 68,026
[being realization loss transferred
to Capital a/c]
A’s capital a/c Dr. 2,37,974
To AB & Co. a/c 2,37,974
[being balance in capital a/c
transferred to close the books on
account]

In the books of B

Date Particulars L.F. Amount Amount

1.04.13 Realisation a/c Dr. 2,85,000
To Stock a/c 1,96,000
To Sundry Debtors a/c 74,000
To Cash a/c 400
To Bank a/c 11,000
119
 To Furniture a/c 3,600
[being transfer of assets at book
value]
Realisation a/c Dr. 4,000
To Bank a/c
[being outstanding expenses paid] 4,000
Creditors Dr. 94,000
Outstanding Expenses a/c Dr. 4,000
To Realisation a/c 98,000
[being transfer of liabilities at book
value]
AB & Co. a/c Dr. 2,03,500
To Realisation a/c 2,03,500
[being Purchase consideration due]
B’s capital a/c Dr. 12,500 12,500
To Realisation a/c
[being realization loss transferred
to Capital a/c]
A’s capital a/c Dr. 2,03,500
To AB & Co. a/c 2,03,500
[being balance in capital a/c
transferred to close the books of
account]

Balance Sheet of AB & Co. as on April, 1st 2013.

Liabilities ` ` Assets ` `
Partners Furniture 7,600
Capital
A 3,20,000 Investment 2,000
B 1,60,000 4,80,000 Stock 5,04,600
Sundry 3,14,000 Sundry 2,52,000
Creditors Debtors
Bills 25,000 RDD (23,626) 2,28,374
Payable
Bank 37,000
Cash 90
brought in 82,026
by A
82,926
Less: Paid (43,500) 39,426
to B
8,19,000 8,19,000
120
Calculation of purchase consideration :

Particulars A` B` Total `
A) Assets taken over.
Furniture 4,000 3,600 7,600
Investments 2,000 - 2,000
Stock 2,89,000 2,15,600 5,04,600
Sundry debtors 1,78,000 74,000 2,52,000
Bank 26,000 11,000 37,000
Cash 500 400 900
A 4,99,500 3,04,600 8,04,100
B Less: Liabilities assumed
Sundry Creditors 2,20,000 94,000 3,14,000
Bills Payable 25,000 - 25,000
R.D.D 16,526 7,100 23,626
B 2,61,526 1,01,100 3,62,626
Net Assets taken over by the AB & 2,37,974 2,03,500 4,41,474
Co Purchase consideration (A-B)

A B
Fixed Capital as per agreement ` 3,20,000 1,60,000
Less : Capital balance transferred ` (2,37,974) (2,03,500)
Cash to be introduced + / withdrawn [-] 82,026 (43,500)

Illustration 2
Two partnership firm, carrying on business under the style of Anand
& Co. [partners N & C] and Ashok & Co. [partners K & P] respectively,
decided to amalgamate into 2 A & Co. with effect from 01st April 2014.
the respective Balance Sheet of the both the firms as on 31st March 2014
are a below:

Liabilities Anand & Ashok & Assets Anand & Ashok &
Co ` Co ` Co ` Co `
Capital : C 1,90,000 Goodwill 50,000
K 1,00,000 Land & 1,00,000 -
Building
P 20,000 Stock 2,00,000 50,000
Bank Loan 1,50,000 Sundry 1,00,000 1,00,000
Debtors
Creditors 1,00,000 95,000 Cash in - 15,000
hand
121
 Capital N 40,000
Total ` 4,40,000 2,15,000 Total ` 4,40,000 2,15,000

Profit sharing ratio are N & C = 1 :2, K & P = 1 : 1. Agreed terms are :

A) Land & Building to be devalued by 20%.

B) All stocks are to be appreciated by 50%.
C) Anand & Co owes `50,000 to AK & Co. as on 31st March 2014. This is
settled at ` 20,000.
D) Goodwill to ignored for the purpose of amalgamation.
E) The fixed capitals in the new firm 2A & co. are to be N ` 20,000, C `
30,000, K `10,000 & P ` 40,000.
F) C take over the Bank loan of Anand & Co., & gifted to N the amount
of money to be brought in by N to make up his capital contribution.
G) K is paid off in cash from AK & Co. P bring in sufficient cash to make
up his required capital contribution. Pass necessary Journal entries to
close the books of both firms.
Give Balance Sheet of 2A & Co, as on 01st April, 2014.

Solution:
In the book of Anand & Co.

Date Particulars L.F. Dr. ` Cr. `

31.03.14 Realisation a/c 4,00,000
To land & Building a/c 1,00,000
To stock a/c 2,00,000
To Sundry Debtors a/c 1,00,000
[being various assets
transferred at book value]
Sundry Creditors a/c 1,00,000
Bank Loan a/c 1,50,000
To Realisation a/c 2,50,000
[being various liabilities
transferred at book value]
2A & co. a/c 4,10,000
To Realisation a/c 4,10,000
[being purchase
consideration due]
Realisation a/c Dr. 1,50,000
To C’s Capital a/c 1,50,000
[being Bank loan taken
over by C]
Realisation a/c Dr. 1,10,000
To N’s capital a/c 36,667
122
 To C’s Capital a/c 73,333
[profit on realization
transferred to partner’s
capital]
C’s capital a/c. Dr. 23,333
To N’s capital a/c 23,333
[being Deficit in N’s capital
gifted by C]
N’s capital a/c Dr. 20,000
C’s capital a/c 3,90,000
To 2A & co. 4,10,000
[balanced in capital
accounts of the partners
transferred to 2A & Co.]

In the Books of Ashok & Co.

Date Particulars L.F. Dr. Cr.

31.03.14 Realisation a/c 2,00,000
To Goodwill a/c 50,000
To stock a/c 50,000
To Sundry Debtors a/c 1,00,000
[being various assets
transferred at book value]
Sundry Creditors a/c 95,000
To Realisation a/c 95,000
[being creditors transferred at
book value]
2A & co. a/c 50,000
To Realisation a/c 50,000
[being purchase consideration
due]
K’s capital a/c 27,500
P’s capital a/c 27,500
To Realisation a/c 55,000
[being loss on realization
transferred to partners
equally]
Bank a/c 47,500
To P’s capital a/c 47,500
[being necessary amount
brought in by P to make up his

123
 required capital contribution]
K’s capital a/c. 62,500
To Bank a/c 62,500
[Being excess capital
refunded]
K’s capital a/c 10,000
P’s capital a/c 40,000
To 2A & co. 50,000
[balance in capital accounts of
the partners transferred to 2A
& Co.]

Calculation of Purchase Consideration

Assets Taken Over Anand & Co. ` AK & Co. ` Total `,

Land & Building 80,000 --- 80,000
Stock 3,00,000 75,000 3,75,000
Sundry Debtors 1,00,000 70,000 1,70,000
(A) 4,80,000 1,45,000 6,25,000
Liabilities taken over
Sundry Creditors (B) 70,000 95,000 1,65,000
Purchase Consideration 4,10,000 50,000 4,60,000
[A-B]

Balance Sheet of 2A & Co. 1 April 2014

Liabilities ` Assets `
Partner’s Capital : Land & 80,000
Building
N 20,000 Stock 3,75,000
C 30,000 Sundry Debtors
K 10,000 [1,70,000- 1,50,000
20,000]
P 40,000
1,00,000
Sundry Creditors 1,65,000
Less : Inter-co.
Owing 20,000 1,45,000
C’s Loan 3,60,000
Total ` 6,05,000 Total ` 6,05,000

After adjustment of reduction in inter company owing by `30,000.

124
 C’s capital balance transferred 3,90,000 however bal. required was
30,000. Hence excess capital transferred to c’s loan a/c [3,90,000 30,000].

Sundry creditors A/c Dr. 20,000

To Sundry Debtors A/c 20,000

Inter firm owing eliminated in the books to firm Z A & Co., as

both firms are magead into one.

Illustrations : 3
A and B and C and D are Partner’s in A & Co and C & Co.
respectively. A & B are sharing in the ratio 3,2 and C & D are sharing in
equal proportion. Their balance sheets as on 31st December 2014 were as
under.
Balance Sheet of A & Co as on 31st December, 2014.

Liabilities ` Assets `
Capital Accounts Machinery 60,000
A 75,000 Furniture 5,000
B 50,000 Stock 50,000
Reserves 40,000 Debtors 75,000
Loan from UTI 20,000 Bank 7,000
Bank
Creditors 15,000 Cash 3,000
Total ` 2,00,000 Total ` 2,00,000

Balance Sheet of C.D & Co. on 31st December 2014

Liabilities ` Assets `
Capital Accounts Goodwill 25,000
C 60,000 Furniture 5,000
D 55,000 Stock 70,000
Reserves 25,000 Debtors 45,000
Loan from IDBI 10,000 Bank 3,000
Cash 2,000
Total ` 1,50,000 Total ` 1,50,000

They decided to amalgamate and form a new firm ABCD & Co. on
st
1 January 2015.

Terms of amalgamation :
1) The new firm shall take over all the assets and liabilities of both the
firms.
2) Provision for doubtful debts shall be made at 5% on debtors.

125
3) Goodwill is to be valued at 2 years purchase of the last 4 years average
profits.

4. The profits of the firms are.

Year A & Co. ` C & Co. `

2011 30,000 20,000
2012 45,000 30,000
2013 35,000 40,000
2014 54,000 30,000

5. Machinery of A & Co. is undervalued by ` 15,000. This value is now

to be adjusted property.

You are required to give :

1) Ledger Accounts in the books of both the firms.

2) Balance Sheet of ABCD & Co.

Solution :
In the books of A & Co.
Realisation A/c
Dr. Cr.

Particulars ` ` Particulars ` `
To Machinery 60,000 By Creditors 15,000
To Furniture 5,000 By UTI Loan 20,000
To Stock 50,000 By ABCD & Co 2,58,250
To Debtors 75,000
To Bank 7,000
To Cash 3,000
To Profit on
Realisation
Transferred to
A 55,950
B 37,300 93,250
Total ` 2,93,250 Total ` 2,93,250

126
 Partner’s Capital A/c
Dr. Cr.
Particulars A B Particulars A B
To ABCD & 1,54,950 1,03,300 By Balance 75,000 50,000
Co. b/d
By Reserve 24,000 16,000
By 55,950 37,300
Realisation
Profit
1,54,950 1,03,300 1,54,950 1,03,300

ABCD & Co. A/c

Dr. Cr.
Particulars ` Particulars `
To Realisation A/c 2,58,250 By Partner’s Capital 1,54,950
A/c A
B 1,03,300
2,58,250 2,58,250

In the Books of C & Co.

Realisation A/c.
Dr. Cr.
Particulars ` ` Particulars ` `
To Goodwill 25,000 By IDBI Loan 10,000
To Furniture 5,000 By ABCD & 1,72,750
Co.
To Stock 70,000
To Debtors 45,000
To Bank 3,000
To Cash 2,000
To Profit on
Realisation
transferred to
C 16,375
D 16,375 32,750
Total ` 1,82,750 Total ` 1,82,750

127
 Partner’s Capital A/c.
Dr. Cr.
Particulars ` ` Particulars ` `
To ABCD & Co. 88,875 83,875 By Balance b/d 60,000 55,000
By Reserves 12,500 12,500
By Realisation 16,375 16,375
88,875 83,875 88,875 83,875

ABCD & Co. A/c.

Dr. Cr.
Particulars ` Particulars `
To Realisation A/c 1,72,750 By Partner’s Capital 88,875
C
D 83,875
1,72,750 1,72,750
Balance Sheet of ABCD & Co. as on 1st Jan. 2015

Particulars ` ` Assets ` `
Capital A/c’s Goodwill 1,42,000
A 1,54,950 Furniture 10,000
B 1,03,300 Machinery 75,000
C 88,875 Stock 1,20,000
d 83,875 4,31,000 Debtors 75,000
Creditors 15,000 45,000
Uti Bank Loan 20,000 1,20,000
IDBI Loan 10,000 Less : RDD 6,000 1,14,000
Bank 10,000
Cash 5,000
Total ` 4,76,000 Total ` 4,76,000

Working Notes :

a) Goodwill Valuation Average Profit Method.

Year A & Co C & Co

2010 30,000 20,000
2011 45,000 30,000
2012 35,000 40,000
2013 54,000 30,000
1,64,000 1,20,000

 Average Profit = 1.64,000 / 4 1,20,000 / 4

= 41,000 = 30,000
128
 Goodwill = 2 year purchase of Average profit
= 41,000 x 2 = 30,000 x 2
= 82,000 = 60,000

Working Note Number : 2

Purchase Consideration :

Particulars A & Co. ` C & Co. ` Total `,

Assets taken over at agreed
values
Goodwill 82,000 60,000 1,42,000
Machinery 75,000 - 75,000
Furniture 5,000 5,000 10,000
Stock 50,000 70,000 1,20,000
Debtors 75,000 45,000 1,20,000
Bank 7,000 3,000 10,000
Cash 3,000 2,000 5,000
A 2,97,000 1,85,000 4,82,000
Less : Liabilities taken over at
agreed values
UTI Bank Loan 20,000 - 20,000
IDBI Bank Loan - 10,000 10,000
Creditors 15,000 - 15,000
RDD 5% 3,750 2,250 6,000
B 38,750 12,250 51,000
Purchase Consideration (A-B) ` 2,58,250 1,72,750 4,31,000

Total columns is useful for preparing Balance Sheet of the new firm.

Illustration : 4.
Two independent firms of Partner’s ship carrying on business
under the name and style of XY and sons and AB Associates agreed to
amalgamate their business in to one firm from 31st December, 2013 XY &
Sons had two Partner’s X and Y whereas AB & Associates has two
Partner’s A and B The partner’s shared the profits and losses in ratio of
their capitals. Their balance sheets as on 31st December, 2013 were as
under.
XY & Sons

Liabilities ` Assets `
Capital A/c’s Furniture 5,600
X 56,000 Building 56,000
Y 28,000 Stock 28,560
Creditors 20,000 Debtors 21,000
129
 Bills Payable 8,000 Bank 7,840
Mortgage Loan 7,000
Total ` 1,19,000 Total ` 1,19,000

AB & Associates

Liabilities ` Assets `
Capital A/c’s Furniture 7,000
A 33,600 Stock 25,620
B 22,400 Debtors 28,000
Creditors 28,000 Investments 21,000
Bills Payable 7,000 Bank 9,380
Total ` 91,000 Total ` 91,000
Terms of amalgamations were as under:-

a) The new firm shall carry on business under the name and style AXBY
& Associates
b) Mortgage Loan of XY and Sons and investments of AB & Associates
shall not be taken over by the new firm.
c) Goodwill of XY & Sons was valued at ` 10,200/- and that of AB &
Associates at ` 12,000/-.
d) Building of XY and sons was taken as undervalued by ` 14,000/-.
e) Stock of XY and Sons to be depreciated by ` 5,600/- and that of AB
and Associates to be appreciated of ` 2,800/-.
f) 5% may be provided as Bad Debts Reserve of both the firms.
g) The capital of the new firm shall be ` 1,12,000/- which will be
contributed by each partner in the profit sharing ratio i.e. x-3, Y-2, A-
3, B-2 to be adjusted through current accounts.

You are required to close the books of both the firms by means of
journal entries and also give necessary journal entries in the books of new
firm. Also prepare the balance sheet of the new firm after the
amalgamation.

Solution
Journal entries in the books of XY & Sons.

Sr. Particulars Dr. ` Cr. `

1. Relisation A/c. Dr. 1,11,560
To Furniture 5,600
To Building 56,000
To Stock 28,560
To Debtors

130
 (Being Sundry Assets transferred at 21.000
Book Value)
2. Creditors A/c. Dr. 20,000
Bills Payable A/c. Dr. 8,000
To Realisation A/c 28,000
(Being sundry liabilities transferred
at Book Value)
3. Mortgage Loan A/c. Dr. 7,000
To Bank A/c. 7,000
(Being Mortgage Loan repaid)
4. Realisation A/c. Dr. 840
To Bank A/c 840
(Being remaining bank balance
transferred to Realisation)
5. New Firm A/c. Dr. 1,01,550
To Realisation A/c. 1,01,550
(Being sale of business recorded)
6. Realisation A/c. Dr. 17,550
To X’s Capital A/c 11,700
To Y’s Capital A/c 5,850
(Being profit on Realisation
transferred to Partner’s capital in
profit sharing ratio.)
7. X’s Capital A/c. Dr. 67,700
Y’s Capital A/c. Dr. 33,850
To New Firm A/c 1,01,550
(Being Capital Accounts of both
the Partner’s transferred to new
firm account)

Dr. Realisation A/c. Cr.

Particulars ` Particulars `
To Furniture 5,600 By Creditors 20,000
To Building 56,000 By Bills 8,000
Payable
To Stock 28,560 By AX By A/c 1,01,550
To Debtors 21,000
To Bank 840
To Profit Transferred
to porter’s capital
131
 X : 11,700
Y : 5,850 17,550
Total ` 1,29,550 Total ` 1,29,550

Dr. AXBY A/c. Cr.

Particulars ` Particulars `
To Realisation 1,01,550 By X Capital 67,700
By Y Capital 33,850
1,01,550 1,01,550

Dr. Partner’s Capital A.c. Cr.

Particulars X Y Particulars X Y
To AXB y.s A/c 67,700 33,850 By Balance 56,000 28,000
B/d
By 11,700 5,850
Realisation
A/c
67,700 33,850 67,700 33,850

Journal Entries in the books of AB & Associates.

Sr. Particulars Dr. ` Cr. `

1. Realisation A/c. Dr. 91,000
To Furniture 7,000
To Stock 25,620
To Debtors 28,000
To Investment 21,000
To Bank 9,380
(Being Sundry assets transferred to
Realisation)
2. Creditors A/c. Dr. 28,000
Bills Payable A/c. Dr. 7,000
To Realisation A/c 35,000
(Being sundry liabilities transferred
to Realisation)
3. New Firm A/c. Dr. 48,400
To Realisation A/c 48,400
(Being sale of business recorded)
4. A’s Capital A/c Dr. 12,600

132
 B’s Capital A/c Dr. 8,400
To Realisation A/c 21,000
(Being investments distributed
amongst Partner’s
5. Realisation A/c Dr. 13,400
To A’s Capital 8,040
To B’s Capital 5,360
(Being profit on Realisation
transferred to Partner’s capital.)
6. A’s Capital A/c Dr. 29,040
B’s Capital A/c Dr. 19,360
To New Firm A/c 48,400
(Being A & B’s Capital transferred
to new firm)

Dr. Realisation A/c Cr.

Particulars ` Particulars `
To Furniture 7,000 By Creditors 28,000
To Stock 25,620 By Bills Payable 7,000
To Debtors 28,000 By New Firm 48,400
To Investments 21,000 By Partner’s Capital 21,000
To Bank 9,380
To Profit transferred
To Capital A/c
A 8,040
B 5,360 13,400
Total ` 1,04,400 Total ` 1,04,400

Dr. Partner’s Capital A/c Cr.

Particulars A B Particulars A B
To Realisation 12,600 8,400 By Balance b/d 33,600 22,400
To New Firm 29,040 19,360 By Realisation 8,040 5,360
41,640 27,760 41,640 27,760

133
Dr. A X B Y is A/c Cr.

Particulars ` Particulars `
To Realisation 48,400 By Partner’s Capital
A 29,040
B 19,360
Total ` 48,400 Total ` 48,400

In the books of AXBY (New Firm)

Journal Entries :

Sr. Particulars Debit. ` Credit. `

1. Furniture A/c Dr. 5,600
Building A/c Dr. 70,000
Stock A/c. Dr. 22,960
Debtors A/c Dr. 21,000
Bank A/c. Dr. 840
Goodwill A/c Dr. 10,200
To Creditors A/c 20,000
To Bills Payable A/c 8,000
To RDD A/c 1,050
To X’s Capital A/c 67,700
To Y’s Capital A/c 33,850
(Being assets and liabilities of XY
& Sons taken over)
2. Furniture A/c. Dr. 7,000
Stock A/c. Dr. 28,420
Debtors A/c. Dr. 28,000
Bank A/c. Dr. 9,380
Goodwill A/c. Dr. 12,000
To Creditors A/c 28,000
To Bills Payable A/c 7,000
To RDD A/c 1,400
To A’s capital A/c 29,040
To B’s capital A/c 19,360
(Being assets and liabilities of AB
& Associates taken over)
3. X Capital A/c. Dr. 6,660
Y Capital A/c. Dr. 4,440
A Capital A/c. Dr. 6,660

134
 B Capital A/c. Dr. 4,440
To Goodwill A/c. 22,200
(Being Goodwill written of in new
P.S.R.)
4. X Capital A/c. Dr. 27,440
Y Capital A/c. Dr. 7,010
To X Current A/c 27,440
To Y Current A/c 7,010
(Being excess in capital account of
X & Y transferred to current
account)
5. A’s Current A/c. Dr. 11,220
B’s Current A/c. Dr. 7,480
To A’s Capital A/c 11,220
To B’s Capital A/c 7,480
(Being deficit of capital account
adjusted through current account.)

Partner’s Capital A/c

Particulars X Y A B Particulars X Y A B
To 6,660 4,440 6,660 4,440 By Old Firm 67,700 33,850 29,040 19,360
Goodwill
To Current 27,440 7,010 - - By Current - - 11,220 7,480
A/c A/c
To Balance 33,600 22,400 33,600 22,400
C/d
Total 67,700 33,850 40,260 26,840 67,700 33,850 40,260 26,840

Balance Sheet of AXBY & Co as on 1st January, 2014

Liabilities ` Assets `
Capital A/c’s Furniture 12,600
X 33,600 Building 70,000
Y 22,400 Stock 51,380
A 33,600 Debtors 49,000
B 22,400 1,12,000 Less:Rdd (2,450) 46,550
Creditors 48,000 Bank 10,220
Bills Payable 15,000 Current A/c’s
Current A/c
X 27,440 A 11,220
Y 7,010 34,450 B 7,480 18,700

135
 Total ` 2,09,450 Total ` 2,09,450

Working Notes

Purchase Consideration:

Particulars XY & Sons AB & Associates

Assets taken over at agreed values
Furniture 5,600 7,000
Building 70,000 -
Stock 22,960 28,420
Debtors 21,000 28,000
Bank 840 9,380
Goodwill 10,200 12,000
Total A 1,30,600 84,800
Less: Liabilities taken over at agreed
values
Creditors 20,000 28,000
Bills Payable 8,000 7,000
RDD 1,050 1,400
B 29,050 36,400
Purchase Consideration: (A - B) 1,01,550 48,400

Illustration : 5
R & Y were partners in O & Co. decided to amalgamate with I &
Co, where D & K, partner : New firm called as AK & Co.

As on 31st December 2013 the balance sheets of the firms were as

follows.
O & Co.

Liabilities ` Assets `
Capital A/c’s Freehold Property 74,000
R 1,53,000 Furniture & Fixtures 18,000
Y 1,10,000 Motor Vehicles 30,000
Creditors 52,000 Stocks 83,000
Investments 8,000
Debtors 68,000
Bank Balance 34,000
Total 3,15,000 Total 3,15,000

136
 I & Co.

Liabilities ` Assets `
Capital A/c’s Property 1,00,000
D 1,13,000 Furniture & Fixture 14,000
K 74,000 Vehicles 18,000
Creditors 60,000 Stock 66,000
Bank Overdraft 9,000 Debtors 58,000
Total 2,56,000 Total 2,56,000

The terms and conditions of amalgamation were as follows.

A. Provision for doubtful debts @ 5% to be made in respect of debtors
and a provision for discount receivable @ 2.5 % to be made in
respect of creditors.

B. A. K. & Co. to take over the old Partner ship assets @ following
values.

O & Co. ` Id Co. `

Stock 84,500 63,900
Motor Vehicles 28,000 13,000
Furniture & fixtures 16,000 -
Property 1,00,000 -
Goodwill 63,000 45,000

C. The property and fixtures of I & Co. not to be taken over by AK

& Co. (these assets were sold for ` 1,35,000 cash on 1st
January, 2013)

D. Y to take over her firm’s investments at a valuation of ` 7,600.

E. The capital of AK & Co. to be ` 5,40,000 and to be contributed

by the Partner’s in profit sharing rations 6:5 : 4:3 any adjustment to
be made in cash.

F. R. Y were sharing in 4:3, D K were sharing in 3:2 ratio.

You are required to give ledger accounts closing the books of old Partner
ship firms and also prepare the balance sheet of AK & Co.

137
Solution:
In the books of O & Co.

Dr. Realisation A/c Cr.

To Property 74,000 By Creditors 52,000

To Fixtures 18,000 By New Co 3,05,400
To Vehicles 30,000 By Capital 7,600
To Stock 83,000
To Investments 8,000
To Debtors 68,000
To Profit transferred to
R Capital A/c 48,000
Y Capital A/c 36,000 84,000
3,65,000 3,65,000
Dr. Partner’s Capital A/c Cr.

Particulars R Y Particulars R Y
To Realisation 7,600 By balance 1,53,000 1,10,000
A/c B/d
To Cash A/c 19,430 14,570 By 48,000 36,000
Realisation
A/c
To A.K. & Co 1,81,570 1,23,830
2,01,000 1,46,000 2,01,000 1,46,000

Dr. A.K & Co. A/c Cr.

To Realisation A/c 3,05,400 By Partner’s Capital

R 1,81,570
Y 1,23,830
3,05,400 3,05,400

138
 In the books of I & Co.

Dr. Realisation A/c Cr.

To Property A/c 1,00,000 By Creditors A/c 60,000

To Fixtures A/c 14,000 By AK & Co. 1,18,500
To Vehicles 18,000 By Cash 1,35,000
To Stocks 66,000
To Debtors 58,000
To Profit transferred to
D 34,500
K 23,000 57,500
3,13,500 3,13,500

Dr. Partner’s Capital A/c Cr.

Particulars D K Particulars D K
To Cash 75,600 50,400 By balance 1,13,000 74,000
B/d
To AK & Co. 71,900 46,600 By 34,500 23,000
Realisation
1,47,500 97,000 1,47,500 97,000

Dr. AK & Co. Cr.

To Realisation A/c 1,18,500 By Partner’s Capital
D 71,900
K 46,600
1,18,500 1,18,500

Dr. Cash A/c Cr.

To Realisation A/c 1,35,000 By Balance B/d 9,000
By D Capital A/c 75,600
By K Capital A/c 50,400
1,35,000 1,35,000

In the books of AK & Co.

Dr. Cash A/c Cr.
To Y Capital A/c 26,170 By R Capital A/c 1,570
To D Capital A/c 48,100 By Balance C/d 1,16,100
To K Capital A/c 43,400
1,17,670 1,17,670

139
 Dr. Partner’ Capital A/c Cr.
Partic R Y D K Parti R Y D K
ulars cular
s
To 1,570 - - - By 1,81,570 1,23,830 71,900 46,600
Cash Old
Firm
To 1,80,000 1,50,000 1,20,000 90,000 By 26,170 48,100 43,400
Balanc Cash
e C/d
Total 1,81,570 1,50,000 1,20,000 90,000 1,81,570 1,50,000 1,20,000 90,000

Balance Sheet of AK & Co.

As On 1st January 2014

Liabilities ` ` Assets ` `
Capital A/c’s Stock 1,48,400
R 1,80,000 Vehicles 41,000
Y 1,50,000 Fixtures 16,000
D 1,20,000 Property 1,00,000
K 90,000 5,40,000 Goodwill 1,08,000
Creditors 1,12,000 Debtors 1,26,000
Less:Prov 2,800 1,09,200 Less:R.D.D (6,300) 1,19,700
Cash 1,16,100
Total ` 6,49,200 Total ` 6,49,200

Working Notes

1. Purchase Consideration

Particulars O & Co. I & Co Total

Assets taken over at agreed values Stock 84,500 63,900 1,48,400
Vehicles 28,000 13,000 41,000
Fixtures 16,000 - 16,000
Property 1,00,000 - 1,00,000
Goodwill 63,000 45,000 1,08,000
Debtors 68,000 58,000 1,26,000
Prov. For discount on creditors 1,300 1,500 2,800
3,60,800 1,81,400 5,42,200
Less: Liabilities taken over at agreed
values
Creditors 52,000 60,000 1,12,000
Reserve for Doubtful Debts 3,400 2,900 6,300
Purchase Consideration 3,05,400 1,18,500 4,23,400

Illustration : 6
Amin & Naman were in business on their own account as business.
They decided to amalgamate as on 31st December 2013, the new business
to be known as Navamin and associates. Them balance sheets as on that
date were as follows:
140
 Amin & Co.

Liabilities ` Assets `
Amin’s Capital 22,000 Freehold Premises 37,000
Sundry Creditors 10,000 Plant 4,000
Bank overdraft 11,000 Stock 1,000
Debtors 1,000
Total 43,000 Total 43,000

Naman & Co.

Liabilities ` Assets `
Naman’s Capital 12,000 Leasehold Premises 15,000
Debtors 4,000
Bank 2,500
Trade Creditors 15,000 Plant 5,000
Stock 500
Total 27,000 Total 27,000

The terms and conditions of a amalgamation were as follows:

A) Profits and losses to be shared in the ratio 2:3.
B) Goodwill to be valued at one year’s purchase of average profits
of previous three years profits.
C) Goodwill to be written off immediately.
D) Freehold property of Amin is not taken over by the firm, which
is sold by him for `32,000 on 1.01.2014 and the proceedsere deposited
in the firm’s bank account.
E) Certain assets to be revalued as follows.

Amin & Co ` Naman & Co `

Leasehold premises - 20,000
Debtors - 3,000
Plant 5,000 -

The profits & losses of the two businesses for the past three years were as
following.

Year Amin & Co Naman & Co

2011 Loss (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000

You are required to prepare:

1. Ledger accounts to close the books of both Amin & Co and Naman
& Co.
141
2. Balance Sheet of the new firin as on 31st December 2013.

Solution

In The Books of Amin & Co.

Dr. Realisation Account Cr.

Particulars ` Particulars `
To Freehold premises 37,000 By Creditors 10,000
To Plant 4,000 By Bank overdraft 11,000
To Stock 1,000 By Navamin of Ass. 29,200
To Debtors 1,000 By Bank (Sale of 32,000
freehold premises)
To bank 32,000
To Profit transferred 7,200
To Amins cap. a/c
82,200 82,200

Dr. Amin’s Capital A/c. Cr.

To New Firm A/c. 29,200 By Balance b/d 22,000

By Realisation A/c 7,200
29,200 29,200

Dr. Bank A/c. Cr.

To Realisation 32,000 By Realisation 32,000

32,000 32,000

Dr. Navamin & Associates Cr.

To Realisation 29,200 By Amin’s Capital A/c 29,200

29,200 29,200

In the Books of Naman & Co.

Dr. Realisation A/c Cr.

To Leasehold premises 15,000 By Creditors 15,000

To Plant 5,000 By Navamin & 30,000
Associates A/c
To Stock 500
To Debtors 4,000
To Bank 2,500
To Profit transferred to 18,000
Naman’s Capital A/c
45,000 45,000
142
Dr. Naman’s Capital A/c Cr.

To New firm A/c 30,000 By Balance B/d 12,000

By Realisation A/c 18,000
30,000 30,000

Dr. Navamin & Associates A/c Cr.

To Realisation A/c 30,000 By Naman’s Capital A/c 30,000

30,000 30,000

Balance Sheet of Navamin & Associates A/c as on 01st January 2014

Liabilities ` Assets `
Capital A/c’s Leasehold Premises 20,000
Amin 29,200 Plant 10,000
Less Goodwill (10,080) Stock 1,500
19,120 Debtors 4,000
Naman 30,000 Bank 34,500
Less Goodwill (15,120)
14,880
Creditors 25,000
Bank overdraft 11,000
Total ` 70,000 Total ` 70,000

Working notes:

I. Goodwill valuation

YEAR AMIN & CO. ` NAMAN & CO `

2011 (2,000) 10,000
2012 21,000 15,000
2013 14,600 17,000
Total Profit 33,600 42,000
Average Profit = 33,600 / 3 42,000 / 3
= 11,200 = 14,000

II. Purchase consideration

Assets taken over at AMIN & CO. NAMAN & CO Total

agreed values ` `
Goodwill 11,200 14,000 25,200
Leashold premises - 20,000 20,000
Plant 5,000 5,000 10,000
Stock 1,000 500 1,500

143
 Debtors 1,000 3,000 4,000
Bank 32,000 2,500 34,500
A 50,200 45,000 95,200
Liabilities Taken over
at agreed values
Creditors 10,000 15,000 25,000
Bank overdraft 11,000 - 11,000
B 21,000 15,000 36,000
Purchase 29,200 30,000 59,200
Consideration (A - B)
Illustration : 7
Mr. Bill and Mr. Will are partners in BW & Co. In a similar type of
business Mr. Mill & Mr. Gill are partners in MG & Co. It was agreed that
on 1st April, 2013 the old firms be amalgamated into one new firm BMW
Group.

The respective Balance Sheets of the Old firms as on 31st March,

2013 were as follows:

Liabilities BW & MG & Assets BW & MG &

CO. ` CO. ` CO. ` CO. `
Capitals Land and 29,600 40,000
Building
- Bill 61,200 - Furniture 7,200 5,600
- Will 44,000 - Vehicles 12,000 7,200
- Mill - 45,200 Stock 33,200 26,400
- Gill - 29,600 Investments 3,200 -
Creditors 20,800 24,000 Debtors 27,200 23,200
Bank - 3,600 Bank 13,600 -
Overdraft
1,26,000 1,02,400 1,26,000 1,02,400

Profit Sharing Ratio :

Bill Will Mill Gill

Old Firms 4 3 3 2
New Firm 6 5 4 3

Terms and Conditions of amalgamation:

1) Provision for doubtful debts @ 5% to be made on Debtors.
2) Rebate on the liabilities of creditors to be provided @ 2%.
3) New Firm to take over the assets of old firms as under:

Assets BW & CO. ` MG & CO. `

Stock ………… 33,800 25,560
Vehicles ………… 11,200 5,200

144
 Furniture ………… 6,400 -
Land & Building ………… 40,000 -
Goodwill ………… 25,200 18,000

4) Furniture and Land & Building not taken over by New Firm were
sold for ` 54,000 on 1st April, 2013 by MG & Co.
5) Mr. Bill to take over investments for ` 3,040.
6) The Capitals of the Partners in the New Firm were to be `
2,16,000 to be contributed in profit sharing ratio; any adjustment to
be made in cash.

You are required to close the books of the Old Firms and prepare the
Opening Balance Sheet of the New Firm. (IDE, Oct. 2003, adapted)

Solution:

Calculation of Purchase Consideration

Particulars BW & CO. MG & CO. Total `

` `
Assets taken
over:
Land & ………… 40,000 - 40,000
Building
Furniture ………… 6,400 - 6,400
Vehicles ………… 11,200 5,200 16,400
Stock ………… 33,800 25,560 59.360
Goodwill ………… 25,200 18,000 43,200
Debtors ………… 27,200 23,200 50,400
Bank ………… 13,600 - 13,600
Rebate on ………… 416 480 896
Creditors
(A) 1,57,816 72,440
Less : Liabilities … … … … 20,800 24,000 44,000
taken over
Creditors
Bank Overdraft … … … … - 3,600 3,600
R.D.D. 1,360 1,160 2,520
(B) 22,160 28,760
Purchases (A) - (B) 1,35,656 43,680
Consideration
(=Capitals tfd.)

145
 IN THE BOOKS OF BW & CO.
Dr. Realisation Account Cr.

Particulars ` Particulars `
To Land & Building 29,600 By Creditors 20,800
To Furniture 7,200 By BMW Group A/c 1,35,656
(P.C)
To Vehicles 12,000 By Bill’s Capital 3,040
(Investments)
To Stock 33,200
To Investments 3,200
To Debtors 27,200
To Bank 13,600
To Partners Capital
Bill (4/7) 19,141
Will (3/7) 14,355 33,496
1,59,496 1,59,496

Dr. Partners’ Capital Accounts Cr.

Particulars Bill ` Will ` Particulars Bill ` Will `

To Realisation 3,040 - By Balance b/d 61,200 44,000
A/c
To BMW Group 77,301 58,355 By Realisation 19,141 14,355
A/c (Profit)
80,341 58,355 80,341 58,355

Dr. BMW Group Account Cr.

Particulars ` Particulars `
To Realisation A/c 1,35,656 By Bill’s Capital A/c 77,301
By Will’s Capital A/c 58,355
1,35,656 1,35,656

IN THE BOOKS OF MG & CO.

Dr. Realisation Account Cr.

Particulars ` Particulars `
To Land & Building 40,000 By Creditors 24,000
To Furniture 5,600 By Bank Overdraft 3,600
To Vehicles 7,200 By Bank A/c (Land & 54,000
Building)
146
To Stock 26,400 By BMW Group A/c 43,680
(P.C.)
To Debtors 23,200
To Partners Capital
Mill (3/5) 13,728
Gill (2/5) 9,152 22,880
1,25,280 1,25,280

Dr. Partners’ Capital Accounts Cr.

Particulars Mill ` Gill ` Particulars Mill ` Gill `

To Bank A/c 32,400 21,600 By Balance 45,200 29,600
b/d
To BMW 26,528 17,152 By 13,728 9,152
Group Realisation
A/c (Profit)
58,928 38,752 58,928 38,752

Dr. BMW Group Account Cr.

Particulars ` Particulars `
To Realisation A/c (P.C.) 43,680 By Mill’s Capital A/c 26,528
By Gill’s Capital A/c 17,152
43,680 43,680

Dr. Bank Account Cr.

Particulars ` Particulars `
To Realisation A/c (Land 54,000 By Mill’s Capital A/c 32,400
& Building) (3/5)
By Gill’s Capital A/c 21,600
54,000 54,000

BALANCE SHEET OF BMW GROUP ON 1-4-2013

Particulars ` Assets `
Partners Capital Goodwill 43,200
- Bill 72,000 Land & Building 40,000
- Will 60,000 Furniture 6,400
- Mill 48,000 Vehicles 16,400
- Gill 36,000 2,16,000 Stock 59,360
Creditors 44,800 Debtors 50,400
Less : Rebate on 896 43,904 Less : Prove. for 2,520 47,880
Creditors D. Debts
Bank Overdraft 3,600 Bank 13,600
Add : Received
from
147
 Will 1,645
Mill 21,472
Gill 18,848
55,565
Less : Paid to Bill 5,301 50,264
2,63,504 2,63,504

Working Notes:

1) Calculation of Excess / Shortage of Capital

In the books of BMW Group

Particulars Bill Will Mill Gill
` ` ` `
Capitals 77,301 58,355 26,528 17,152
Required Capital (` 2,16,000 in 6 72,000 60,000 48,000 36,000
: 5 : 4 : 3)
Excess/(Shortage) of Capital 5,301 (1,645) (21,472) (18,848)

2) Cash received on Sale of assets not taken over by new firm is

distributed amongst partners in P. S. R.

Illustration : 8

A and B were partners sharing profits and losses in the ratio of 3 : 1 and C
and D were partners sharing equally.
Following were their Balance Sheet as on 31st March 2014.

Liabilities ` ` Assets ` `
Capital Accounts: Goodwill 4,000 -
A 30,000 - Plant and 20,000 27,000
Machinery
B 30,000 - Furniture 8,000 9,000
C - 25,000 Stock 20,000 24,000
D - 32,000 Debtors 19,000 17,000
Creditors 10,000 15,000 Fixtures 1,600 1,200
Bills Payable 4,000 8,000 Cash 3,400 3,300
Qutstanding Rent 2,000 1,500
76,000 81,500 76,000 81,500

The firms are amalgamated on the following terms :

1. Outstanding rent was paid in full by the respective firms.
2. Creditors of both the firms were taken by the new firm at a
discount of 5%.
3. Plant and Machinery is subject to 5% depreciation of both the firms.

148
4. Furniture of ‘C’ and ‘D’ was sold in the market for ` 8,000 and
furniture ‘A’ and ‘B’ was not taken over by the new firm.
5. Fixtures were not taken over by the new firm.
6. Stock of ‘A’ and ‘B’ was valued at ` 22,100 and that of ‘C’ and
‘D’ was valued at ` 21,000.
7. Goodwill of M/s A and B is valued at ` 6,000 and that of M/s C
and D at ` 8,000. Goodwill account is not be retained in the books
of the new firm.
8. Capital of each partner in the new firm is to be maintained at ` 25,000
by bringing cash or paying cash, as the case may be.

You are required to prepare :

1. Realisation A/c.
2. Partner’s Capital A/c in the books of both the firms and
3. Amalgamated Balance Sheet of the new firm.

(IDE, Apr. 2011, adapted)

Solution:

Calculation of Purchase Consideration (PC)

Particulars A&B C&D Total

` ` `
Assets taken over:
Goodwill ………… 6,000 8,000 14,000
Plant and Machinery ………… 19,000 25,650 44,650
Stock ………… 22,100 21,000 43,100
Debtors ………… 19,000 17,000 36,000
Cash ………… 1,400 9,800 11,200
(AB: 3,400 - 2,000, …………
CD: 3,300 + 8,000 -
1,500)
(A) 67,500 81,450
Less : Liabilities taken
over
Creditors ………… 9,500 14,250 23,750
Bills Payable ………… 4,000 8,000 12,000
(B) 13,500 22,250
Purchase (A) - (B) 54,000 59,200
Consideration

149
 In the Books of AB Enterprises

Dr. Realisation A/c Cr.

Particulars ` Particulars `
To Goodwill 4,000 By Sundry Liabilities:
To Plant and Machinery 20,000 - Sundry Creditors 10,000
To Furniture 8,000 - Bills Payable 4,000
To Stock 20,000 - Partner’s Capital (8,000 9,600
+ 1,600)
To Debtors 19,000 - ABCD from A/c (PC) 54,000
To Fixtures 1,600
To Cash (3,400-2,000) 1,400
To Profit tfd. to
A’s Capital 2,700
B’s Capital 900 3,600
77,600 77,600

Capital A/c
Particulars A B Particulars A B
` ` ` `
To Realisation A/c 7,200 2,400 By Balance 30,000 30,000
b/d
To New Firm A/c 25,500 28,500 By 2,700 900
Realisation
A/c
32,700 30,900 32,700 30,900

New Firm A/c

Particulars ` Particulars `
To Realisation A/c 54,000 By Capital A/c
A 25,500
B 28,500 54,000
54,000 54,000

150
 In the Books of CD Enterprises
Dr. Realisation A/c Cr.

Liabilities ` Assets `
To Sundry Assets By Sundry Liabilities
- Plant and Machinery 27,000 - Creditors 15,000
- Furniture 9,000 - Bills Payable 8,000 23,000
- Stock 24,000 By Cash (Furniture) 8,000
- Debtors 17,000 By C’s Capital A/c 600
(Fixtures)
- Fixtures 1,200 By D’s Capital A/c 600
(Fixtures)
- Cash 9,800 88,000 By New Firm (PC) 59,200
(3,300 + 8,800 - 1, 500)
To Capital A/c
C 1,700
D 1,700 3,400
91,400 91,400

Capital A/c
Particulars C D Particulars C D
` ` ` `
To Realisation A/c 600 600 By Balance 25,000 32,000
b/d
To New Firm A/c 26,100 33,100 By 1,700 1,700
Realisation
A/c
26,700 33,700 26,700 33,700

New Firm A/c

Particulars ` Particulars `
To Realisation A/c 59,200 By Capital A/c
C 26,100
D 33,100 59,200
59,200 59,200

Balance Sheet as on 31st March 2014

Liabilities ` Assets `
Capital A/cs Goodwill 14,000
A 25,000 Plant and 44,650
Machinery
B 25,000 Stock 43,100
C 25,000 Debtors 36,000
D 25,000 1,00,000
Creditors 23,750
151
 Bills Payable 12,000
Bank O/D 2,000
(13,200 - 11,200)
1,37,750 1,37,750

Capital A/c

Particulars A B C D
` ` ` `
B/f from Old Firm ………… 25,500 28,500 26,100 33,100
Less : Closing Capital ………… 25,000 25,000 25,000 25,000
Balance ………… 500 3,500 1,100 8,100

Cash to be paid back = 13,200.

Illustration 9 :

X and Y are two sole traders. Their Balance Sheets as on 1st January, 2014
are given below:

A’s Balance Sheet as at 1st January, 2014

Liabilities ` Assets `
Sundry Creditors 10,000 Plant & Machinery 7,500
Das Bank Ltd. 5,000 Stock in Trade 10,000
Capital Account 15,000 Sundry Debtors 12,500
30,000 30,000

B’s Balance Sheet as at 1st January, 2014

Liabilities ` Assets `
Sundry Creditors 8,500 Plant & Machinery 10,500
Capital Account 20,000 Stock in Trade 5,000
Sundry Debtors 11,000
Cash at Bank 2,000
28,500 28,500

They agree to amargamate their business as on 1st January, 2014.

The following revaluations were to be made :

1) Plant and Machinery were to be reduced by 10%.

2) Stock in Trade was to be reduced in case of A by 20% and in case of
B by 10%.
3) A reserve of 2 1 % is to be raised against Sundry Debtors.
2

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4) Each partner is to be credited with Goodwill of ` 5,000.
5) The bank overdraft of A is to be paid off by him.

You are required to give the journal entries for recording the above
transactions in the books of A and B give also the amalgamated balance
sheet of the New Firm as on 1st January, 2014.

(IDE, April 2000, adapted)

Solution:

IN THE BOOKS OF A
Journal

No Particulars Debit. ` Credit. `

1. Realisation A/c Dr. 30,000
To Plant & Machinery 7,500
To Stock in Trade 10,000
To Sundry Debtors 12,500
(Being Assets transferred to
Realisation Account)
2. Sundry Creditors Dr. 10,000
To Realisation A/c 10,000
(Being Liabilities transferred to
Realisation Account)
3. M/s A & B A/c Dr. 21,937
To Realisation A/c 21,937
(Being Purchase Consideration
Due)
4. Realisation A/c Dr. 1,937
To A’s Capital A/c 1,937
(Being Profit on realization)
5. Das Bank Ltd. Dr. 5,000
To B’s Capital A/c 5,000
(Being Bank Overdraft taken over
by X personally)
6. A’s Capital A/c Dr. 21,937
To M/s A & B A/c 21,937
(Being Capital account settled)

IN THE BOOKS OF B

153
No Particulars Debit. ` Credit. `
1. Realisation A/c Dr. 28,500
To Plant & Machinery 10,500
To Stock in Trade 5,000
To Sundry Debtors 11,000
To Cash at Bank 2,000
(Being Assets transferred to
Realisation Account)
2. Sundry Creditors Dr. 8,500
To Realisation A/c 8,500
(Being Liabilities transferred to
Realisation Account)
3. M/s A & B A/c Dr. 23,175
To Realisation A/c 23,176
(Being Purchase Consideration
Due)
4. Realisation A/c Dr. 3,175
To B’s Capital A/c 3,175
(Being Profit on realization)
5. B’s Capital A/c Dr. 23,175
To M/s A & B A/c 23,175
(Being Capital Account Settled)

M/s A B & Co.

Balance Sheet As At 1-1-2014

Liabilities ` ` Assets ` `
Capital Goodwill 10,000
Accounts:
-A 21,937 Plant and 16,200
Machinery
-B 23,175 45,112 Stock 12,500
Sundry 18,500 Debtors 23,500
Creditors
Less : Prov. for 588 22,912
Bad Debts
Cash at bank 2,000
63,612 63,612

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Working Note :

Calculation of Purchase A B A&B

Consideration: ` ` `
Cash at Bank ………… - 2,000 2,000
Plant & Machinery (90% of ………… 6,750 9,450 16,200
book value)
Stock in Trade (Agreed ………… 8,000 4,500 12,500
value)
Debtors (book value) ………… 12,500 11,000 23,500
Goodwill (agreed value) ………… 5,000 5,000 10,000
………… 32,250 31,950
Less:
RDD ( 2 1 % of debtors) ………… (313) (275) 588
2
Creditors (book value) ………… (10,000) (8,500) 18,500
Purchase Consideration (= ………… 21,937 23,175
Capitals tfd.)

Illustration : 10

Vijay and Sanjay were carrying on business of supply of hardware

as sole traders. Their balance sheets as on 31st March, 2014 are given
below:

Liabilities Vijay Sanjay Assets Vijay ` Sanjay

` ` `
Bills Payable 50,000 40,000 Fixed Assets 40,000 50,000
Bank Overdraft 25,000 - Stock 50,000 25,000
Capital A/c 75,000 1,00,000 Book Debts 60,000 55,000
Cash Balance - 10,000
1,50,000 1,40,000 1,50,000 1,40,000

Both the parties decided to amalgamate their business and form a

new partnership firm under the name of M/s Jay on 1st April, 2014. The
terms of amalgamation were as follows:

1) Fixed assets were to be reduced by 10%.

2) Stock of Mr. Vijay to be reduced by 20% and that of Sanjay
increased by 10%.
3) A reserve for 2.5% to be created against book debts.
4) Both the parties to be credited with goodwill of ` 25,000 each.
5) The bank overdraft of Mr.Vijay is to be paid by him.

You are required to prepare necessary Ledger Accounts in the

books of Vijay and Sanjay.

(IDE, Oct.2004, adapted)

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Solution:

Calculation of Purchase Consideration

Particulars Vijay Sanjay

` `
Assets taken over :
Fixed Assets (90%) …………… 36,000 45,000
Stock (80%) (110%) …………… 40,000 27,500
Book Debts …………… 60,000 55,000
Cash …………… - 10,000
Goodwill …………… 25,000 25,000
[A] 1,61,000 1,62,500
Less: Liabilities taken
Bills Payable …………… 50,000 40,000
RDD (2.5% of Debtors) …………… 1,500 1,375
[B] 51,500 41,375
Purchase Consideration [A] - [B] 1,09,500 1,21,125
(=Capitals tfd.)

IN THE BOOKS OF VIJAY

Dr. Realisation A/c Cr.

Particulars ` Particulars `
To Fixed Assets 40,000 By Bills Payable 50,000
To Stock 50,000 By Bank Overdraft 25,000
To debtors 60,000 By M/s Jay P.C.) 1,09,500
To Vijay Capital 25,000
(Overdraft)
To Vijay’s Capital 9,500
(Profit)
1,84,500 1,84,500

Dr. Vijay’s Capital Account Cr.

Particulars ` Particulars `
To M/s Jay )P.C.) 1,09,500 By Balance b/d 75,000
By Realisation A/c 25,000
(Overdraft)
By Realisation A/c 9,500
(Profit)
1,09,500 1,09,500

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Dr. M/s Jay Account Cr.

Particulars ` Particulars `
To Realisation A/c 1,09,500 By Vijay’s Capital 1,09,500
(P.C.) A/c
1,09,500 1,09,500

IN THE BOOKS OF SANJAY

Dr. Realisation A/c Cr.

Particulars ` Particulars `
To Fixed Assets 50,000 By Bills Payable 40,000
To Stock 25,000 By M/s Jay (P.C.) 1,21,125
To Debtors 55,000
To Cash 10,000
To Sanjay’s Capital 21,125,
(Profit)
1,61,125 1,61,125

Dr. Sanjay’s Capital Account Cr.

Particulars ` Particulars `
To M/s Jay (P.C.) 1,21,125 By Balance b/d 1,00,000
By Realisation A/c 21,125
(Profit)
1,21,125 1,21,125

M/s Jay Account

Particulars ` Particulars `
To Realisation A/c 1,21,125 By Sanjay Capital 1,21,125
C.P.C A/c
1,21,125 1,21,125

5.5 EXERCISES

A. Fill in the blanks:

1. The new firm formed after amalgamation is called as ---- Firm.

2. The existing firms getting merged together to from new entity
are called as -------.
3. For calculating Purchase consideration, it is necessary to get Assets
------.
4. If, one of the firm continues in future with taking the other firm’s
business is called ------.

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5. Excess of Assets taken over liabilities is --------.
6. Economies of large-scale combined operations will ------ Fixed
cost per unit.
7. Excess of Net Assets over Purchase Consideration is transferred to -
-------.
8. Purchase Consideration less Net Assets == ------
9. For transferring R.D.D. in the books of old firm ------ a/c is
credited.
10. On amalgamation, Reserve Fund of vendor firm are transferred to -
------ Accounts.
11. -------- is the amount payable by the purchasing firm to the vendor
firm for taking over it’s business.
12. On amalgamation, assets and liabilities of vendor firm
transferred to -------- a/c at book values.
Ans. 1. Amalgamated Firm 2. Amalgamating firm
3. Revalued 4. Absorption
5. Net assets / or Purchase Consideration 6. Reduce
7. Capital Reserve 8. Goodwill
9. Realisation a/c 10. Partner’s Capital A/c
11. Purchase Consideration 12. Realisation a/c.

B. Choose the appropriate word [Multiple Choice]

1. The New firm formed after amalgamation is called as -
a] partnership firm, b] amalgamated firm
c] amalgamating firm d] old firm
2. ----- A/c is opened to find profit / loss on closing of the old firm.
a] profit & loss a/c b] Realisation a/c
c] profit & loss suspense a/c d] profit & loss adjustment a/c
3. The firms which decide to merge together to from ------ entity
are called as Amalgamating Firms.
a] old firm, b] New
c] dormant firm d] none of the above.
4. Provision for depreciation on fixed assets appearing in the
Balance Sheet of vendor firm is credited to ------ a/c.
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
5. On amalgamation of firms, unrecorded assets taken over by partner
is debited ------- to a/c.
a] Assets a/c b] partner’s capital a/c
c] Realisation a/c d] new firm a/c
6. On amalgamation of firm, accumulated losses of old firm are
transferred to.

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 a] credited to old partner’ in old PSR
b] debited to old partner’s in new PSR
c] debited to old partner’s in old PSR
d] none of the above.
7. On amalgamation of firm unrecorded liabilities taken over by
the partner is credited to
a] new firm a/c b] partner’s capital a/c
c] Realisation a/c d] profit & loss a/c
8. Debit balance in Realisation a/c indicates -
a] loss on realisation, b] profit on realization
c] net assets, d] all of the above
9. On amalgamation, expenses on dissolution of vendor firm paid
by partner is to be credited to ------ a/c.
a] new firm a/c, b] partner’s capital a/c,
c] Realisation a/c, d] profit & loss a/c
10. Good will of amalgamated firm written off:
a] credited to old partners in old is PSR,
b] Debited to all new partners in new ratio
c] Goodwill a/c.
d] None of the above.
11. In case of amalgamation.
a] Goodwill of both firms valued,
b] valued goodwill is included in Purchase Consideration
c] both of the above,
d] none of the above.
12. On amalgamation of firms, assets shown in the Balance Sheet
of vendor firm transferred to Realisation a/c at.
a] market value b] Agreed value,
c] Book Value, d] none of the above.
Ans. 1-b, 2-b, 3-b, 4-c, 5-b, 6-c, 7-b, 8-a, 9-b, 10-b, 11-b, 12-c,

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C. Match the following columns:
(I)

COLUMN A COLUMA B
A. Liabilities of vendor firm paid 1. No entry.
firm, on Amalgamation
B. Assets of vendor firm taken 2. Credit to realization a/c.
over by creditors of vendor
firm
C. Reserve fund appearing in 3. Credit to Partner’s capital a/c
balance sheet of vendor firm.
4. Debit to realization a/c

(II)

COLUMN A COLUMA B
A. Deferred Revenue exp. 1. Debit to Goodwill a/c in the
appearing on as on date of books of purchasing firm.
amalgamation
B. Realisation exp. of vendor 2. Credit to New firm’s a/c
firm paid by purchasing firm
a/c
C. Liabilities of vendor firm 3. No entry
taken over by new firm
4. Debit to its partners
5. Debit to old partners in old
PSR

(III)

COLUMN A COLUMA B
A. Profit on realization on 1. Credit to old partner’s capital a/c
amalgamation
B. Debit balance on Realisation 2. Debit to all to partner’s capital
a/c a/c in new PSR
C. Goodwill written off by new 3. Net Assets
firm.
D. Purchase Consideration 4. Loss due dissolution of old firm.
(IV)

COLUMN A COLUMA B
A. Purchase Consideration 1. Amalgamating firm
B. The firms decided to merge 2. Amalgamated firm
C. Repayment of partner’s loan 3. Debit new firm a/c
D. Amalgamation of firm 4. Credit to cash a/c
5. Eliminates competition
Ans. I: a-4, b-1, c-3, II: a-5, b-1, c-4, III:a-1, b-4, c-2, d-3, IV: a-3, b-1, c-4, d-5

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D. Substitute the following in a single WORD / Term / Phrase.
1. The new firm formed after amalgamation.
2. The account opened by old firm to find profit or loss due to
dissolution.
3. Excess of net assets over purchase consideration.
4. Combination of two or more firm coming together to secure
economies of large scale production.
5. The amount payable by purchasing firm to the vendor firm for taking
over its business.

Ans. 1-amalgamated firm, 2-Realisation a/c, 3-Capital Reserve, 4- Amalgamation

of firm, 5-Purchase Consideration.

E. State whether True of False, giving reasons in brief.

1. If creditors took over stock in full settlement of liabilities on
amalgamation, Realisation a/c is credited.
2. On amalgamation of firms, unrecorded assets taken over by new
firm, new firm a/c is debited.
3. On amalgamation of firms, fictitious assets are transferred to the
partner’s capital a/c in their old ratio.
4. On amalgamation of firms, sundry debtors transferred to
Realisation a/c at net amount [after deducting R.D.D]
5. On amalgamation of firms, Profit & Loss a/c is opened to find out
profit or loss due to dissolution of firm.
6. On amalgamation of firms, Goodwill of amalgamated firm is written
off in new profit sharing ratio.
7. The new firm records assets & liabilities taken over at book value,
which were appearing in the books of old firms.
8. On amalgamation of firms, old firms may continue their old
business.
9. On amalgamation of firms, old partners continue to share profits
or losses in their old ratio.
10. On amalgamation of firms, unrecorded liabilities taken over by
partner, partner’s capital a/c is credited.
11. On amalgamation of firms, Realisation a/c is opened in the books
of Amalgamated firm.
12. On amalgamation of firms, Assets realized credited to realization a/c.

Ans: True : 3, 6, 10, and 12.

False: 1, 2, 4, 5, 7, 8, 9, 11.

F. Theoretical
1. What is amalgamation of firms?
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2. What do you understand by the word Purchase Consideration?
3. What are the basic objectives of amalgamation of firm?
4. What are the consequences of amalgamation of the firm?
5. Explain the term ‘Net Asset’
6. How you account for Goodwill in the books of the new firm?
7. What do you mean by the term ‘Trade Liabilities’?

G. Practical Problems:

1.Following are Balance Sheet of two firms M/s AB & CO. and CD &
Co. as on 31st March, 2014.

Liabilities AB & CO CD & CO Assets AB & CO CD & CO

` ` ` `
Capital : A 100,000 Building 80,000 -
B 100,000 Plant & 100,000 70,000
Machinery
C 54,000 Fixtures and 20,000 14,000
Patterns
D 54,000 Furniture 12,000 20,000
Creditors 1,20,000 60,000 Debtors 60,000 50,000
Bills Payable 42,000 36,000 Stock in trade 88,000 42,000
Cash on Hand 2,000 8,000
3,62,000 2,04,000 3,62,000 2,04,000

A & B sharing profits & losses equally and C, D were sharing in

the ratio of 3:2. The two firm were amalgamated on that date, AB, C & D
decided to shares in the ratio of 3:2:3:2 and assets and liabilities were
revalued as follows :

1. Building was appreciated by 20% but Plant and Machinery of

both the firms were to be depreciated by 12.5%.
2. 5% R.D.D should be provided on debtors of both the firms.
3. Fixtures and patterns of AB & CO. were revalued at ` 20,000 that of
CD & CO. ` 18,000.
4. Reserve 2% for discount on creditors of both firms.
5. Furniture of both the firms taken at 120% of book value.
6. Other assets and liabilities were taken over at Book Value.
7. Goodwill of AB & CO. valued at ` 25,000 that of CD & CO. at `
50,000.

Pass necessary Journal Entries in the books of AB & CO., Ledger

Accounts in the books of CD & CO. and prepare the Balance Sheet of the
amalgamated firm.

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 2.A & CO and C & CO. decided to amalgamate on the following terms
and conditions on 1st January, 2014, when their Balance Sheets
were as follows:

Liabilities A & CO C & CO Assets A & CO ` C & CO

` ` `
A’s capital 1,20,000 - Building 2,00,000 -
B’s capital 60,000 - Furniture 12,000 20,000
C’s capital -- 66,000 Investments 60,000 40,000
D’s capital 44,000 Stocks 40,000 50,000
Creditors 20,000 30,000 Debtors 28,000 50,000
Bills Payable 40,000 50,000 Cash at bank -- 30,000
Bank Loan 100,000 --
Total ` 3,40,000 1,90,000 Total ` 3,40,000 1,90,000

Terms of amalgamation:
A. In case of A & Co.
1. Goodwill was valued at ` 25,000.
2. A & Co. should pay its bank loan.
3. Building was taken to be worth ` 2,50,000
4. Stock to be valued at ` 55,000.
5. Provision for doubtful debts to be created at 4% on debtors.

B. In case of C & CO.

1. Goodwill was valued at ` 30,000.
2. Investments were not taken over by the firm.
3. Stock was valued at ` 45,000.
4. Provision for doubtful debts to be created at 5% on debtors.

C. It was further decided that the total capital of the new firms shall be
` 2,00,000 and the capital of each shall be in profit sharing partner shall be
in profit sharing ratio i.e. ` 3:2:3:2. the difference to be transferred to the
current accounts.

3.P & K were in partnership as PK & CO., S and T were in partnership

as ST & CO. They decided to amalgamate on 1st April, 2014 into
the firm, PK & CO. The profit sharing ratio was as under:

P : K C S : T
Old Firm 4 : 1 : 3 : 2
New Firm 6 : 5 : 4 : 3

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 Balance Sheet as on 31st March 2014

Liabilities PK & CO ST & CO Assets PK & CO ST & CO

` ` ` `
Capital : P 30,000 - Property 15,000 20,000
K 22,000 - Fixtures 3,500 2,500
S 25,000 Vehicles 16,500 4,000
T 15,200 Investment 2,000 15,000
Sundry Creditors 11,000 12,000 Debtors 12,000
Bank Overdraft 2,000 Bank bal. 7,200 12,700
Profit & loss 6,800
a/c
63,000 54,200 63,000 54,200

Terms of amalgamation were :

A] Provision for doubtful debts at 5% to be made on debtors and provision
for discount on creditors @ 2% on creditors is to made.

B] New firm to take over assets of old firms at the following values :

Assets PK & CO ` ST & CO `

Stock 17,000 12,000
Vehicles 20,000 2,500
Fixtures 1,000 ---
Property 20,000 ---
Goodwill 30,000 12,000

C] Property and fixtures of PK & CO. not to taken over by PK & CO.
These assets were sold for ` 35,000 cash on 1st April 2014.

D] Kis to take over his firm’s investment at ` 2,500/-

E] The capital of PK & CO. to be ` 100,000 and to be contributed by the

partners in profit sharing Ratio, any adjustment to be made in cash.

Close the books of old firms, and prepare Balance Sheet of the New Firm.
4.The Balance Sheet of the two firms as on 31st December, 2013 were
as follows:

Liabilities P&Q R&S Assets P&Q R&S

` ` ` `
Creditors 10,000 5,000 Cash 2,700 1,500
Outstanding 1,000 500 Investments 3,300 -
Expenses
Loan - 10,000 Debtors 8,000 6,000
Reserve 4,000 2,000 Stock 30,000 24,000
Capital A/c Furniture 6,000 4,000
P 30,000 - Machinery 20,000 22,000
Q 25,000 -

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 R - 24,000
S - 16,000
70,000 57,500 70,000 57,500

Partner’s in both the firms share profits and losses equally.

The two firms decided to amalgamate as from 1st January 2014 on

the following terms and conditions.
a) Goodwill of P & Q was valued at ` 20,000 and that of R & S ` 10,000.
b) The new firm would not take over the Investment of P & Q & the
Loan of R & S.
c) A provision for doubtful debts at 5% on Debtors of both the firms
and also a provision for discount at 2% on Creditors of both the firms
be made.
d) An unrecorded Typewriter with R & S. valued at ` 1,000 was
not taken over by the new firm.
e) Other assets valued as under:
Particulars P&Q` R&S`
Stock 36,000 29,000
Furniture 5,000 2,000
Machinery 17,000 20,000

Your are required to.

i. Accounts to close the books of the old firms; and
ii. Opening Balance Sheet of the new firm. Hints:

Hints :
i. Investment not taken over by the new firm should be transferred to
Capital A/c’s in P.S.R
ii. Loan and R & S not taken over by the new firm should be taken
over by the Partner’s as the cash is not sufficient to play it.
iii. Typewriter worth ` 1,000 not taken by the new firm. It may be
assumed that it is sold by the old firm.

5.The following were the balance sheets of the two firms as on 31st
December, 2013.

Liabilities K&L M&N Assets K&L M&N

` ` ` `

Creditors 25,000 15,000 Bank Balance 21,000 5,000

Bills Payable 5,000 4,000 Investments 10,000 -
Bank Loan 4,000 3,000 Debtors 20,000 15,000
Ks Loan 1,000 - Less: 1,000 19,000
Prov.
Outstanding 2,000 1,000 Due from M & N 4,000

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 Salary
Due to K & L 4,000 Stock 29,000 34,000
Employees 5,000 - Furniture 8,000 5,000
Provident Fund
Investment 3,000 Machinery 20,000 18,000
Fluctuation
Fund
Capital A/c’s Patent Rights 6,000
K 50,000 Advertisement
L 30,000 Suspense 5,000
M 30,000 Goodwill 9,000
N 20,000
Current
Accounts
K 5,000
L 1,000

1,31,000 77,000 1,31,000 77,000

Partner’s in both firms share profits and losses equally.

The two firms decided to amalgamate as from 1st Jan 2014 on the
following terms

a) The new firm shall not take over the furniture of both the firms.
b) The new firm shall take over only the trade liabilities of both the
firms.
c) Goodwill of each firm was valued at two years purchase of the
average profits of the last three years. The profits were:

2011 2012 2013

K&L 7,000 8,000 9,000
M&N 2,000 4,000 6,000

d) Advertising Suspense to be written off by the concerned firm.

e) Current account to be eliminated.
f) Mutual dues between the two firms to be treated as book
adjustments.
g) Assets to be revealed as follows:

166
 K&L M&N
` `
Debtors 18,000 13,000
Investments 9,000 -
Stock 40,000 40,000
Machinery 18,000 16,000
Patent Rights 4,000 -

h) The cash required for working of the new firm was estimated at `
60,000 to be provided by the Partner’s in their new profit- sharing
proportions which was : K 3 ,L 3 ,M 2 , N 2
10 10 10 10
Pass:
i. Closing Entries in the books of old firms; and
ii. Opening entries and Balance Sheet of the new firm.

Hints:
i. Goodwill = Av. Profit x 2
ii. Employee’s PF is a liability.
iii. Investment Fluctuation Fund is a provision against loss on
investment. After adjustment of loss, it should be shared by the
Partner’s.
iv. Trade Liabilities are creditors & B.P only.



167
 6
CONVERSION / SALE OF PARTNERSHIP
FIRM INTO A LTD. CO.
Unit Structure:

6.0 Objectives
6.1 Introduction
6.2 Company Act 2013
6.3 Accounting entries for conversion
6.4 Solved practical problems
6.5 Exercise

6.0 OBJECTIVES

After studying the unit the students will be able to:

 Understand the concept conversion of partnership firm
 Calculate the Purchase consideration
 Explain the journal entries
 Solve the practical problems.

6.1 INTRODUCTION

Partnership firm in India is a major type of business concern which

has led not only to the growth of the economy but also has provided
employment and entrepreneur skills to the business. A growth in this
business results in a need for tremendous expansion. However, a
partnership firm suffers various inherent limitations of insufficient
funding, unlimited liability, skills and competence in handling a business
and so on under such a situation it becomes very necessary for the firm to
change its form. The firm in such a situation may convert itself into either

1) A Joint Stock Company or

2) Limited Liability Partnership Firm to handle the spurt in the growth of
the business.

In case the operations are very voluminous or large scaled a joint

stock company becomes the most desirable solution. However it all
depends on the partners’ argument to change the form of the business.
This change of form may be done by either selling the firm altogether
by converting it to a company.

It has to be done through the following stages:

1. Finding out prospective buyer of the partnership firm who will
purchase the firm and then form a company.

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 (In some cases, the partners may take help of the financial service
providing firms and themselves complete the formalities)
2. Estimate the Purchase Consideration.
3. Transfer assets and liabilities to the companies.
4. Distribute the purchase consideration to the partners.

In the process of conversion or sale the students are required to:

1. Ascertain purchase consideration.
2. Close books of old firms.
3. Preparation of Balance Sheet of the New Firm.

Purchase Consideration (PC): It means the price to be paid to the

partners for giving up their ownership rights.
The previous chapter has already discussed purchase consideration, a
quick reviews is presented here.

It can be calculated as follows:

1. Net Assets Method: Here the PC means Difference between the
agreed values of assets taken over and liabilities accepted by the new
company.

2. Net Payment Method: Here the PC means payment made through

equity shares, preference shares, debentures, and cash to the partners.

3. Lump sum Method: It means large single payment to the partners.

6.2 COMPANY ACT 2013

Section 2(20) of the Act defines a company as, “Any company

farmed and registered under this Act or any previous Act”. Also through
schedule III, the Act has laid down the disclosure requirements of the
financial statements. (The Act is detailed in the following chapter -
Introduction to Company Accounts)
Proforma of Balance sheet as required for the Curriculum

Particulars Note No. `

I) Equity & Liabilities
1. Shareholders’ funds
a. Share Capital
b. Reserves & Surplus
2 Non-Current Liabilities
3 Current Liabilities (CL)
Total

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 II) Assets
1. Non-Current Assets
2. Current Assets (CA)
Total

(The notes to the accounts should provide the contents of each of

the heads of the assets and the liabilities)

6.3 ACCOUNTING ENTRIES FOR CONVERSION

A. In the books of the Partnership Firm.

1. Transfer all assets to the Realisation A/c

Realisation A/c Dr.
To All Assets A/c

2. Transfer liabilities except capital

Liabilities A/c Dr.
To Realisation A/c

3. Create Partners claim (only if there are reserves / profits not added to
the Capital)
General Reserve A/c Dr.
Profit and Loss A/c Dr.
To Partner’s Capital A/c

4. Transfer of Partners loan.

Partners Loans A/c Dr.
To Partner’s Capital A/c

OR
Payment or settlement of partner’s loan
Partner’s Loan A/c Dr.
To Bank / asset A/c

5. Record the Purchase Consideration

New Company A/c Dr.
To Realisation A/c

6. Calculate realization loss or gain and transfer to the capital A/c.

Gain
Realisation A/c Dr.
To Partners’ Capital A/c
Loss :
Partners’ Capital A/c Dr.
To Realisation A/c
7. Receiving the purchase consideration
170
 Shares / Debentures / Cash A/c Dr.
To New Company A/c

8. Disburse the Purchase Consideration to the Partners

Partners’ Capital A/c Dr.
To Shares / Debentures / Cash

B. In books of the new company (Not included in the syllabus)

C. Balance sheet of the New Company (as per format discussed earlier)

Check your progress:

i) State whether the following statements are True or False.
1) Upon conversion the old partnership firm ceases to exist.
2) A company is suitable for the business having large scale operations.
3) Purchase consideration on conversion of a company is settled in shares
and debentures only.
4) Profit or loss on realization should be transferred equally to the
partners.
5) Asset taken over is debited to the partners capital A/c

(Answers : True - 1, 2, 5 - False - 3, 4)

ii) Fill in the Blanks

1) A Joint Stock Company has ------------------ liability.
2) Purchase consideration has to be distributed to the partners in -----------
---------- ratio.
3) ------------------- A/c is debited when cash is taken over by a limited
company.
4) A new company is formed on ----------------- of a partnership firm.
5) ------------------ method of calculating P.C. = Assets - Liabilities.

(1- limited, 2 - Profit sharing, 3 - Partner capital, 4 - dissolution, 5 -

Net assets method)

6.4 SOLVED PRACTICAL PROBLEMS

Illustration 1
A, B and C share profits and losses in the ratio of 3:2:1 respectively. Their
Balance sheet as an 31/12/2018 is as follows:

171
 Capital Goodwill 20,000
A 1,40,000 Land 40,000
B 1,60,000 Building 2,20,000
C 20,000 Machinery 1,00,000
General Reserve 36,000 Vehicles 56,000
Investment Fluctuation 8,000 Furniture 24,000
loan
C’s Loan 66,000 Investment 36,000
Mrs. A’s loan 30,000 Loose Tools 14,000
Creditors 1,52,000 Bills Receivable 40,000
Outstanding Expenses 40,000 Debtors 80,000
Bills Payable 28,000 Provision 4,000 76,000
Bank Over Draft 1,20,000 Cash 38,000
C’s Current A/c 1,12,000
Profit & Loss A/c 24,000
8,00,000 8,00,000

Adjustments :

1) The partners decided to convert the firm into ABC Ltd. a Joint Stock
Company having an authorized capital of 1,00,000 equity shares of `10
each.
2) The purchase consideration was decided at `5,80,000 and settled by
paying `1,00,000 in cash and balance through equity shares.
3) The outstanding expenses was to be settled by the firm.
4) Loose Tools, vehicles, furniture and investments are sold by the firm
at `10,000; `50,000; `25,000 and `42,000 respectively.
5) The Partner’s and their spouses loan are taken over by the respective
partners along with current A/c balances.

Prepare the ledger accounts in the books of the partnership firm.

Solution :
Purchase consideration (P.C.)
P.C. (given) 5,80,000
Settlement
1) Cash / Bank 1,00,000
2) Equity shares 4,80,000 5,80,000
(40,000 shares of `10 each)

172
 Ledger Accounts
Realisation A/c
Dr. Cr.
To Assets A/c By Liabilities A/c
Goodwill 20,000 Creditors 1,52,000
Land 40,000 Bill Payable 28,000
Building 2,20,000 Provision on Debtors 4,000
Machinery 1,00,000 By ABC Ltd. (PC) 5,80,000
Bills Received 40,000 By Furniture 1,000
Debtors 80,000 By Investments 6,000
To loose tools 4,000
To Vehicles 6,000
To P. Capital
(in A 1,30,500
PSR) B 87,000
C 43,500 2,61,000

(gain on realization)
7,71,000 7,71,000

Partners’ Capital A/C

Partners Partners
A B C A B C
To Current - - 1,12,000 By Balance 1,40,000 1,60,000 20,000
A/c b/d
To Profit & 12,000 8,000 4,000 By General 18,000 12,000 6,000
Loss A/c Reserve
(PSR) (PSR)
To Equity 2,40,000 1,60,000 80,000 By 4,000 2,667 1,333
Share in Investment
ABC ltd. fluctuation
period (PSR)
To Bank 70,500 93,667 -- By Loan’s 30,000 -- 66,000
(final (adj 5)
payment
done)
By 1,30,500 87,000 43,500
Realisation
(gain)
By Bank -- -- 59,167
(Cash
brought to
adj. excess)

3,22,500 2,61,667 1,96,000 3,22,500 2,61,667 1,96,000

ABC Ltd. A/c

173
To Realisation 5,80,000 By Bank 1,00,000
A/c By Equity 4,80,000
Shares in ABC
5,80,000 5,80,000

Bank A/c
To Balance b/d (Cash) 38,000 By Balance b/d 1,20,000
To ABC Ltd. 1,00,000 By O/S Expenses 40,000
To loose tools 10,000 By B’s Capital 93,667
To Vehicles 50,000 By A’s Capital 70,500
To Furniture 25,000
To Investments 42,000
To C’s Capital 59,167
3,24,167 3,24,167

Loose Tools A/c

To Balance b/d 14,000 By Bank 10,000

By Realisation (Loss) 4,000
14, 0 00 14,000

Vehicles A/c

To Balance b/d 56,000 By Bank 50,000

By Realisation (Loss) 6,000
56,000 56,000

Furniture A/c

To Balance b/d 24,000 By Bank 25,000

To Realisation (gain) 1,000
25,000 25,000

174
 Investment A/c

To Balance b/d 36,000 By Bank 42,000

To Realisation 6,000
42,000 42,000

Outstanding Expenses A/c

To Bank 40,000 By Balance b/d 40,000

40,000 40,000

Equity Share in ABC Ltd.

To ABC Ltd. 4,80,000 By Partners’

Capital (in PSR)
A (3/6) 2,40,000
B (2/6) 1,60,000
C (1/6) 80,000
4,80,000 4,80,000

Illustration 2
Amar, Akbar and Anthony were carrying on a Partnership business
sharing profits & losses in the ratio of 4 : 3 : 1. Their business was
expanding rapidly and hence they decided to convert their firm to AB Ltd.,
a joint stock company on 1/4/2018.

The Balance sheet of the firm as on 31/3/2018 was as follows :

Capital Property 3,60,000

Amar 4,00,000 Equipment 2,40,000
Akbar 3,00,000 Debtors 3,00,000
Anthony 2,60,000 Stock 2,60,000
Bank Loan 80,000 Bank balance 40,000
Creditors 1,60,000
12,00,000 12,00,000

Adjustments :
1) The Co. agreed to take the assets & liabilities at the following values :

Property - `4,40,000
Equipment - `2,00,000
175
Debtors - `2,75,000
Stock - `2,50,000
Creditors - `1,45,000

2) The Co. agreed to pay `8, 00,000 through equity shares of `10 each and
balance in cash.

3) The expenses of liquidation of the firm amounted to `10,000.

Journalise all the transactions in the books of the partnership firm.

Solution :
I) Calculation of P.C. & its settlement Assets taken over (at agreed
values)

Property - 4, 40,000
Equipment - 2, 00,000
Debtors - 2, 75,000
Stock - 2, 50,000
Creditors - 40,000
12, 05,000

Less : Liabilities
Creditors 1,45,000
Bank Loan 80,000 2,25,000
P.C 9,80,000

Dr. Rs. Cr. Rs.

1. Realisation A/c Dr. 12,00,000
To Property A/c 3,60,000
To Equipment A/c 2,40,000
To Debtors A/c 3,00,000
To Stock A/c 2,60,000
To Bank A/c 40,000
(Being Assets transfer to Realization a/c)
2. Creditors A/c Dr. Bank 1,60,000
loan A/c Dr To 80,000
Realisation A/c 2,40,000
(Being liabilities transfer to realization
A/c)
3. AB Ltd. A/c Dr. 9,80,000
To Realisation A/c 9,80,000
(Being P.C. recorded)
4. Realisation A/c Dr. 10,000
To Bank A/c 10,000
(Being realization expenses paid)
5. Equity Shares in AB Ltd. A/c Dr. Bank 8,00,000
A/c Dr. To 1,80,000
AB Ltd. A/c 9,80,000
176
 (Being P.C. Received)
6. Realisation A/c Dr. To 20,000
Amar’s Capital A/c 10,000
To Akbar’s Capital A/c 7,500
To Anthony’s Capital A/c 2,500
(Being Realisation gain transferred to
Capital)
7. Amar’s Capital A/c Dr Akbar 10,000
Capital A/c Dr. Anthony’s 7,500
Capital A/c Dr To 1,62,500
Bank A/c 1,80,000
(Being Cash paid to Partners)
8. Amar’s Capital A/c Dr. Akbar’s 4,00,000
Capital A/c Dr. Anthony’s 3,00,000
Capital A/c Dr. To Equity 1,00,000
Shares in AB Ltd. A/c 8,00,000
(Being equity shares received in P.C.
settled to the partners)

Partners Capital A/c

WN1
Amar Akbar Anthony Amar Akbar Anthony
To Equity 4,00,000 3,00,000 1,00,000 By Balance 4,00,000 3,00,000 2,60,000
Shares
(8L in
PSR)
To Cash 10,000 7,500 1,62,500 By 10,000 7,500 2,500
Realisation
(Balance) 4,10,000 3,07,500 2,62,500 4,10,000 3,07,500 2,62,500

WN-2 Realisation A/c

To Total Assets 12,00,000 By Total Liabilities 2,40,000
To Partners’ Capital By AB Ltd. A/C 9,80,000
Amar 10,000
Akbar 7,500
Anthony 2,500 20,000
12,20,000 12,20,000

Illustration 3
Kavita and Savita are equal partners. Their Balance sheet as on 31/3/2018
is as follows :

177
 Liabilities Rs. Assets Rs.
Capital
Kavita 1,50,000 Bank 15,000
Savita 1,40,000 Fixed Assets 2,15,000
Creditors 1,00,000 Stock 1,00,000
Bank overdraft 40,000 Debtors 1,00,000
4,30,000 4,30,000

The partners sold the business to KS Ltd. a Company on 1/4/2018.

The value of goodwill was fluid at `15,000 and rest of the assets &
liabilities were taken at the Balance sheet values. The company paid the
purchase consideration through

1) 2500 10% debentures of `100 each and

2) Equity shares of `10 each

Prepare the Balance sheet of the Ltd. Co.

Solution :
I) Calculation of P.C.

Goodwill - 75,000
Bank - 15,000
Fixed Assets 2,15,000
Stock - 1,00,000
Debtors - 1,00,000
5,05,000

Less : Liabilities
Creditors 1,00,000
Bank Overdraft 40,000 1,40,000
P.C 3,65,000

Settlement of P.C.
1) 10% Debenture 2,50,000
(2500 x `100 each)
2) Equity shares (bal) 1,15,000
(11500 shares x `10)
Total 3,65,000

178
II) Balance sheet of KS Ltd. as on 1/4/2018
Particulars Note `
no.
A) Capital & Liabilities
1) Share holders funds
a) Share Capital 1 1,15,000
b) Reserves & Surplus --
2)Non Current Liabilities 2 2,50,000
3) Current Liabilities 3 1,40,000
Total 5,05,000

B) Assets
1) Non Current Assets 4 2,90,000
2) Current Assets 5 2,15,000
Total 5,05,000

Notes to Accounts :

Note 1 : Share Capital

11,500 equity shares of `10 each 1,15,000

(These shares are issued to vendors for settlement of PC so no
consideration has been received hereupon.)

Note 2 : Non Current Liabilities

2500 10% Debenture of `100 each 2,50,000
(There debenture are issued to vendors for settlement of PC o no
consideration has been received hereupon.)

Note 3 : Current Liabilities

Creditors 1,00,000
Bank O/D 40,000
1,40,000
Note 4 : Non Current Assets
Goodwill 75,000
Fixed Assets 2,15,000
2,90,000
Note 5 : Current assets
Stock 1,00,000
Debtors 1,00,000
Bank 15,000
2,15,000

179
Illustration 4
Abhishek, Aishwarya and Aradhya were partners sharing Profit and Loss
in the ratio of 2 : 1 : 1. Their Balance sheet as on 31/12/2018 was as
follows:

Liabilities Rs. Assets Rs.

Creditors 60,000 Bank 30,000
Capital Debtors 60,000
Abhishek 1,80,000 Bills Received 30,000
Aishwarya 1,50,000 Fixed Assets 3,00,000
Aradhya 30,000
4,20,000 4,20,000

On 1/1/2019; they farmed a Ltd. Co. “Pink Ad Films Ltd.” on the

following conditions:

1) Distribute the bank balance amongst themselves.

2) The Company would discharge the P.C. through
a) 10% Debentures - `60,000
b) 15% Preference shares - `1,20,000
c) 15,000 equity shares of `10 each of `12 share
3) The partners agreed to share the debentures as : Aishwarya - `30,000
& Aradhya - `30,000
4) The Preference shares were to be allotted in the PSR and the equity
shares will adjust the remaining capital balances.

Prepare the Realisation A/c and partners capital in the books of the
partnership firm and Balance sheet of the new Co.

Solution :

Calculation of P.C.
1) 10% Debentures 60,000
2) 15% Preference shares 1,20,000
3) Equity shares (15,000 x 12) 1,80,000
(Equity Capital - 15,000 x 10 = 1,50,000 3,60,000 (PC)
Sec Premium - 15,000 x 2 = 30,000)

180
 Realisation A/c

To Debtors 60,000 By Creditors 60,000

To Bill Received 30,000 By Pink Advising 3,60,000
Films Ltd. (PC)
To Fixed Assets 3,00,000
To Partners’ Capital*
Abhishek (2/4) 15,000
Aishwarya (1/4) 7,500
Aradhya (1/4) 7,500 30,000
4,20,000 4,20,000

*(Profit on Realisation = `30,000)

Partners Capital A/c

Abhishek Aishwarya Aradhya Abhishek Aishwarya Aradhya

To Bank 15,000 7,500 7,500 By Balance 1,80,000 1,50,000 30,000
(PSR) b/d
To 10% -- 30,000 30,000 By 15,000 7,500 7,500
Debentures Realisation
To 80,000 46,000 --
Preference
Shares
(PSR)
To Equity 1,00,000 80,000 --
Shares
(Balance)

1,95,000 1,57,500 37,500 1,95,000 1,57,500 37,500

*Note- As the capital and dues of Aradhya are settled through Bank and
debentures she will not be given preference and equity shares.

Pink Ad Films Ltd.

Balance sheet as on 1/1/2019
Particulars Note `
no.
1) Share holders funds
a) Share Capital b) 1 2,70,000
Reserves & surplus 2 30,000
2) Non Current Liability 3 60,000
3) Current Liabilities 4 60,000
Total 4,20,000
Assets

181
 1) Non Current Assets 5 3,00,000
2) Current Assets 6 1,20,000
Total 4,20,000

Notes to Accounts

Note 1 : Share Capital

15% Preference Share Capital 1,20,000
Equity Share Capital 1,50,000
2,70,000
(The entire shares have been issued to the vendors; hence no consideration
is received here upon.)

Note 2 : Reserves & Surplus

Security Premium 30,000
(Refer P.C. Calculation)

Note 3: Non Current Liabilities

10% Debentures 60,000
*(The debentures have been issued to the vendors hence there is no
amount received from them.)

Note 4: Current Liabilities

Creditors 60,000

Note 5: Non Current Assets

Fixed Assets 3, 00,000

Note 6 : Current Assets

Debtors 60,000
Bills Received 30,000
90,000

Illustration 5
Following is the Balance sheet of Amar and Naman sharing Profit & Loss
in the ratio of 2 : 3.

Liabilities Rs. Assets Rs.

Capital Plant & Machinery 4,00,000
Aman 4,00,000 Equipment 4,00,000
Naman 5,00,000 Stock 65,000
Bank Loan 75,000 Debtors 50,000
Creditors 50,000 Bills Received 45,000
Bank 65,000
10,25,000 10,25,000
182
 Aman & Naman sold their business to Mr. Shaman who formed a
new company Namaste Ltd. The Co. took over all the assets at book
values excluding equipment which was taken at `3,00,000. The Co. settled
the P.C. by issuing.

i) 40,000 equity shares of `10 each

ii) 4000 10% Preference shares of `100 each &
iii) 11% Debentures - `1,50,000

Close the books of the partnership firm and prepare the Balance
sheet of the Co.

Solution :
Calculation of P.C.
1) Equity shares (40,000 x `10) 4,00,000
2) 10% Preference shares (4000 x `100) 4,00,000
3) 11% Debentures 1,50,000
P.C. 9,50,000

Calculation of assets & liabilities taken over for finding out goodwill /
Capital reserves

Assets
Plant & Machinery 4,00,000
Equipment 3,00,000
Stock 65,000
Debtors 50,000
Bills Receive 45,000
Bank 65,000
9,25,000

Less : Liabilities
Bank Loan 75,000
Creditors 50,000 1,25,000
Net Assets 8,00,000

**Point to Remember
1) PC > NA = Goodwill
2) PC < NA = Capital Reserve

**In this case, the Company will have Goodwill of `1,50,000.

(PC Rs. 9,25,000- Net Assets Rs. 8,00,000= 1,50,000)

183
 Realisation A/c
To Plant & Machinery 4,00,000 By Bank Loan 75,000
To Equipment 4,00,000 By Creditors 50,000
To Stock 65,000 By Namaste Ltd. 9,50,000
To Debtors 50,000 (PC)
To B / R 45,000
To Bank 65,000
To Partners’ Capital
Aman (2/5) 20,000
Naman (3/5) 30,000 50,000
10,75,000 10,75,000

Namaste Ltd. A/c

To Realisation 9,50,000 By Equity Shares 4,00,000
By Preference Shares 4,00,000
By Debentures 1,50,000
9,50,000 9,50,000

Partners Capital A/c

Amar Akbar Amar Akbar
To Equity Shares 1,60,000 2,40,000 Balance b/d 4,00,000 5,00,000
To Preference 1,60,000 2,40,000 Realization 20,000 30,000
Shares
To Debentures 1,00,000 50,000
(Balance)
4,20,000 5,30,000 4,20,000 5,30,000

Equity Shares in Namaste Ltd. A/c

To Namaste Ltd. 4,00,000 By Aman (2/5) 1,60,000
By Naman (3/5) 2,40,000
4,00,000 4,00,000

Preference Shares in Namaste Ltd. A/c

To Namaste Ltd. 4,00,000 By Aman 1,60,000
By Naman 2,40,000
4,00,000 4,00,000

184
 Debentures in Namaste Ltd. A/c
To Namaste Ltd. 1,50,000 By Aman 1,00,000
By Naman 50,000
1,50,000 1,50,000

Note : As the apportionment ratios are not given, one of the disbursement
has to be used for settling the partners capital A/c. (Here debentures are
settled based on the partners capital’s pending settlement)

Namaste Ltd.
Balance sheet as on ________

I) Capital and Liabilities

1) Share holder’s funds

a) Share Capital 1 8,00,000
b) Reserves & surplus
2) Non Current Liabilities 2 2,25,000
3) Current Liabilities 3 50,000
Total 10,75,000

Assets
1) Non Current Assets 4 8,50,000
2) Current Assets 5 2,25,000
Total 10,75,000

Notes to Accounts
1) Share Capital
10% Preference Share of `100 each 4,00,000
Equity share of `10 each 4,00,000
8,00,000
(These shares are issued to the vendors hence no consideration is received
here upon)

2) Non Current Liabilities

11% Debentures 1,50,000
Bank Loan 75.000
2,25,000
(The Debentures are issued to the vendor for the settlement of PC hence
no consideration is received here upon)

3) Current Liabilities
Creditors 50,000

4) Non Current Assets

Intangible
Goodwill (refer **Point to remember) 1,50,000

185
 Tangible
Plant & Machinery 4,00,000
Equipment 3,00,000
8,50,000
5) Current Assets
Stock 65,000
Debtors 50,000
Bills Received 45,000
Bank 65,000
2,25,000

6.5 EXERCISE

1. Akshay and Raveena were equal partners. Their Balance sheet as on

31/12/2018 was as follows :

Liabilities Rs. Assets Rs.

Capital Bank 1,62,500
Akshay 10,00,000 Debtors 1,75,000
Raveena 12,50,000 Stock 2,25,000
Creditors 1,25,000 L & B 8,00,000
Loans 1,87,500 Plant & Machinery 8,00,000
Office assets 4,00,000
25,62,500 25,62,500

Due to continuous differences amongst them, they decided to sell

their business to Krafts Ltd. on 1/1/19. The Co. agreed to pay the vendors :
i) 10,000 Equity shares of `100 each
ii) 10,000 10% Preference shares of `100 each
iii) 12% Debentures amounting to `3,75,000
The Co. agreed to take over all assets at book values including
office assets that were taken at `3,00,000 L & B at 10,00,000 and plant at
3,00,000.

Journalise the transaction in the books of Akshay & Raveena to

close their business.
(Hint: Realisation A/c gain - 1,25,000)

186
2. Amitabh, Jaya & Rekha were partners sharing Profit & Loss as 3 : 2 :
2. Their Balance sheet as on 31/12/2018 was as follows :

Liabilities Rs. Assets Rs.

Capital Premises 2,40,000
Amitabh 2,42,500 Plant 70,000
Jaya 1,45,000 Inventory 30,000
Rekha 62,500 Debtors 1,50,000
Creditors 40,000
4,90,000 4,90,000

The partners decided to convert the business into a private limited

company on the above date as per the following terms :
1) The Company will issue 3500 equity shares of `100 each and pay the
balance per capital in cash.

2) The Co. agreed to pay `96,000 as goodwill

3) It assumed all the liabilities and assets except stock which was taken
over by Jaya for `10,000.

Journalise the transactions in the books of the partners.

(Hint: P.C. - 5,46,000, Realisation gain - 1,06,000)

3. Alia, Anushka and Dipika were in partnership sharing Profit & Loss in
the ratio of 2:2:1 respectively. They decided to form a company with
immediate effect. The Balance sheet of the firm was as follows.

Liabilities Rs. Assets Rs.

Capital Premises 6,00,000
Alia 4,00,000 Equipment 1,20,000
Anushka 6,00,000 Plant 4,50,000
Dipika 2,00,000 Stock 3,50,000
Bank Loan 2,00,000 Debtors 4,00,000
Creditors 6,00,000 Bank 80,000
20,00,000 20,00,000

1) The new company 3A Ltd. issued 50,000 equity shares of `10 each,
5000 10% Debenture of `100 each and cash `1,00,000 in settlement of
the P.C.
2) The Creditors were absorbed to the extent of 90%.

187
3) The equipments were salvaged by the partners at `50,000 and plant
was valued by the co. at `5,00,000.
Calculate the P.C. and prepare the Balance sheet of 3A Ltd.
(Hint: P.C. - 11,00,000, Net Assets - 9,80,000, Goodwill - 1,20,000, B/S Total
= 17,80,000)

4. Saqib and Huma were equal partners. To ensure smooth conduct of

their expanding business, the decided to convert it to a Ltd. Co. - H.S.
International Ltd. The Balance sheet of the firm was as follows :

Liabilities Rs. Assets Rs.

Creditors 6,10,000 Bank 20,000
Capital A/c Investments 1,50,000
Saqib 5,00,000 Debtors 2,60,000
Huma 3,00,000 Stock 3,30,000
Current A/c Fixed assets 8,80,000
Saqib 1,40,000
Huma 90,000
16,40,000 16,40,000

1) The company revalued the assets as under :

Investments - `1,60,000, Debtors `2,40,000, Stock `4,00,000 & fixed
assets - `8,40,000.
2) The Co. also valued the goodwill of the firm at `2,40,000.
3) The partners received `90,000 cash 1000 12% Debenture of `100 each
and balance equity shares in full settlement of their claim.
Close the books of the partners by preparing appropriate ledgers.
(Hint: Realisation gain - 2,60,000, P.C. - 12,90,000)

5. Jaquiline & Jennifor were partners sharing Profit & Loss at 60% &
40% respectively. Their Balance sheet as on 1st April 2018 was as
follows :

Liabilities Rs. Assets Rs.

Capital Furniture 2,00,000
Jaquiline 6,60,000 Bank 3,00,000
Jenanifer 4,40,000 Debtors 4,80,000
Creditors 3,00,000 Stock 5,20,000
Other liabilities 5,00,000 Investments 4,00,000
19,00,000 19,00,000

188
1) J2 Ltd. was farmed to take over the business from the partners.
2) J2 Ltd. valued the assets of the form as goodwill - `4,00,000 and stock
`3,76,000.
3) Investments were not taken over by the company.
4) The partners were paid `9,56,000 for full settlement of their claim of
the firm.
5) The P.C. was settled through the issue of equity shares of `100 each.

Prepare necessary ledgers in the books of the partnership firm and

a balance sheet of J2 Ltd.
(Hint: Realisation gain - 2,56,000 B/S Total - 17,56,000)

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189
 Question Paper Pattern
(Theoretical Courses)
Maximum Marks: 100
Questions to be set: 06
Duration: 03 Hrs.
All Questions are Compulsory Carrying 15 Marks each.

Question Particular Marks

No
Q.1 Objective Questions 20 Marks
A) Sub Questions to be asked 12 and to be
answered any 10
B) Sub Questions to be asked 12 and to be
answered any 10
(*Multiple choice / True or False / Match the
columns/Fill in the
blanks)
Q.2 Full Length Question 15 Marks
OR
Q.2 Full Length Question 15 Marks
Q.3 Full Length Question 15 Marks
OR
Q.3 Full Length Question 15 Marks
Q.4 Full Length Question 15 Marks
OR
Q.4 Full Length Question 15 Marks
Q.5 Full Length Question 15 Marks
OR
Q.5 Full Length Question 15 Marks
Q.6 A) Theory questions 10 Marks
B) Theory questions 10 Marks
OR
Q.6 Short Notes 20 Marks
To be asked 06
To be answered 04

Note:
Theory question of 15 marks may be divided into two sub questions of 7/8
and 10/5Marks.

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190