Table of Contents
Profit Distribution
A, B and C are partners in a partnership firm with capital A- Rs.5,00,000; B- Rs.7,00,000 and C- Rs4,00,000. During the year 2012, the firm earned a net profit of Rs. 2,00,000. The partners are to entitled to an interest on capital @ 6% p.a. They also made some drawings on which interest to be charged is A-Rs.400; B-Rs 500 and C- Rs250. A is entitled to Rs.2000 p.m. as salary. B is to get 5% of the net profit after all adjustments as commission. Also 10% of the profits remaining before providing commission to B is to be transferred to General Reserve. Profit are shared among A, B and C in the ratio 1:1:2 respectively.
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Prepare Profit and Loss Appropriation account to show the above adjustments.
Solution
Profit and Loss Appropriation Account
| Particulars | Amount(Rs) | Particulars | Amount(Rs) |
| To Interest on Capital: | By Net Profit | 2,00,000 | |
| A-Rs. 30,000 | By Interest On Drawings | ||
| B-Rs. 42,000 | A- 400 | ||
| C-Rs. 24,000 | 96,000 | B- 500 | |
| To Salary (A) | 24,000 | C- 250 | 1,150 |
| To General Reserve | 8,115 | ||
| To Commission (B) | 7,303 | ||
| To Profit transferred to: | |||
| A-16,433 | |||
| B-16,433 | |||
| C-32,866 | 65,732 | ||
| 2,01,150 | 2,01,150 |
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Admission of Partner
Q#1. Following is the balance sheet of active and sharp who shared profit and loss in the ratio of 3 : 2.
Balance Sheet
Rs. Rs.
Active’s Capital 30,000 Goodwill 10,000
Sharp’s Capital 25,000 Sundry Assets 50,000
Sundry Creditors 10,000 Cash 5,000
65,000 65,000
Blunt was admitted as partner on the date of the balance sheet. The new ratio for sharing profits and losses will be 5 : 3 : 2. Blunt pays Rs. 20,000 as capital but nothing for goodwill which has to be valued on the basis of 2 year’s purchase of 3 years profits. The profits of 3 years were Rs. 10,000, Rs. 12,000 and Rs. 14,000. Draw up the Balance Sheet after giving journal entries and ledger accounts relating to Blunts admission.
Answer: Active’s Capital Rs. 38,400: Sharp’s Capital Rs.30,600: B/S Rs. 99,000
Q#2. The following is the balance sheet of North and East as at January 1, 2001
Liabilities Rs. Assets Rs.
North’s Capital 50,000 Sundry Assets 1,05,000
East’s Capital 40,000 Cash at Bank 15,000
Sundry Creditors 21,000
General Reserve 9,000
1,20,000 1,20,000
North and East were sharing profits and losses in the ratio of 2 : 1. On the above date West was admitted as partner on the conditions that:
- He brings Rs. 30,000 as capital
- He pays Rs. 15,000 as his share of goodwill
- North and East withdraw half of their share of goodwill
- The new profit sharing ratio is to be 3/5 to North, 1/5 East and West each
Give journal entries, ledger accounts and Balance Sheet after West’s admission.
Answer: Balance Sheet Rs. 1,57,500
Q#3. The following was the Balance Sheet of P & Q who were sharing profits 2/3 and 1/3 on 31st December, 2003.
Balance Sheet
Rs. Rs.
P’s Capital 30,000 Sunday Debtors 9,700
Q,s Capital 20,000 Stock 20,000
Sundry Creditors 65,900 Cash at Bank 1,200
Plant & Machinery 35,000
Building 50,000
1,15,900 1,15,900
They agreed to admit R into partnership on the following terms:-
- R was to be given 1/3 share in profits, and was to bring Rs. 15,000 as his capital and Rs. 6,000 as his share of goodwill.
- That the value of Stock and Plant were to be reduced by 10%.
- That a reserve of 5% was to be created in respect of Sundry Debtors.
- That the Building account to be appreciated by 20%
- That the goodwill amount was to be withdrawn by the old partners.
Show the profit and loss adjustment account and prepare the opening balance sheet of the new firm.
Answer: Profit on Revaluation Rs. 4,015: P’s Capital Rs. 32,676.66: Q’s Capital Rs. 21,338.34: B/S Rs. 1,34,915.
Q#4. A & B were in partnership sharing Profits and Losses in the proportion of 3/4 and 1/4 respectively. Their balance sheet stood as follows on 31st December, 2002.
Balance Sheet
Rs. Rs.
A’s Capital 40,000 Book Debts 16,000
B,s Capital 10,000 Stock 20,000
Sundry Creditors 37,500 Cash at Bank 22,500
Bill Receivable 3,000
Building 25,000
Furniture 1,000
87,500 87,500
They agreed to admit C into partnership on the following terms:-
- C was to be given 1/5 share in profits, and was to bring Rs. 10,000 as his capital and Rs. 20,000 is goodwill raised in the books of the new firm.
- That the value of Stock and Furniture were to be reduced by 10%.
- That a reserve of 5% was to be created in respect of Sundry Debtors.
- That the Building account to be appreciated by 20%
- That the capital accounts of A and B are re-adjusted on the basis of their profit sharing ratio.
Show the necessary journal entries and ledger account and prepare the opening balance sheet of the new firm.
Answer: B/S Rs. 87,500
Q#5. The following is the Balance Sheet of Rahim and Rahman (who share profits in the ratio of 3:2) as on 1st January, 2004
Liabilities Rs. Assets Rs.
Rahim’s Capital 20,000 Book Debts 10,000
Rahman’s Capital 25,000 Stock 12,000
Sundry Creditors 15,000 Cash at Bank 5,000
Building 18,000
Plant and Machinery 15,000
60,000 60,000
Karim was admitted as partner on the following terms:
- Karim was to be given 1/5 share in profits, and was to bring Rs. 25,000 as his capital and Rs. 10,000 is goodwill.
- The new profit sharing ratio will be 5 : 3 : 2
- The assets are to be revalued Building Rs. 25,000, Plant and Machinery Rs. 12,000, Debtors Rs. 9,500
- It was found that there was a liability for Rs. 1,500 for goods received but not recorded in books.
Show the necessary journal entries and ledger account and prepare the opening balance sheet of the new firm.
Answer: Revaluation Profit Rs. 2,000 : B/S Rs. 87,500
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Q#6. Salman and Imran are partners in a firm sharing profits and losses as Salman 75% and Imran 25%. On 1st January, 2006, their position was as given below:-
Liabilities Rs. Assets Rs.
Salman’s Capital 50,000 Debtors 30,000
Imaran’s Capital 30,000 Stock 10,000
Sundry Creditors 20,000 Cash at Bank 20,000
Plant 40,000
1,00,000 1,00,000
Irfan is now to join the partnership. He agrees to pay the partners Rs. 20,000 by was of goodwill and introduce 1/2 of the combined capital of the two existing partners after depreciating Plant and Stock at 20% and 10% respectively and raising a reserve of 10% against Sundry Debtors. The new partner is to be allowed 1/4th share of the profits of the firm.
Your are asked to record the above transactions in the books of the firm and give resultant Balance sheet of the new firm.
Answer: Salman Capital Rs. 56,000: Imran Capital Rs.32,000 and Irfan Capital Rs. 44,000 : B/S Rs. 1,52,000
Q#7. The following was the Balance Sheet of D, E, and F who were equal partners on 1st June, 2009.
Balance Sheet
Rs. Rs.
D’s Capital 16,800 Book Debts 10,800
E’s Capital 12,600 Stock 11,400
F’s Capital 6,000 Furniture 2,400
Sundry Creditors 6,000 Cash at Bank 600
Bill Payable 3,300 Building 19,500
44,700 44,700
They agreed to take H into partnership and give him a fourth share in the profits on the following terms:-
- That H should bring in Rs. 9,000 for goodwill and Rs. 15,000 as capital.
- That one-half of the goodwill shall be withdrawn by the old partners.
- That stock and furniture be depreciated by 10%
- That a reserve of 5% on Debtor be created for Doubtful Debts
- That a liability for Rs. 1,080 be created against bills discounted
- That the value of liabilities and assets other than cash are not to be altered.
- That the value of the building having appreciated. The building should be valued at Rs. 27,000.
Give the entries necessary to give effect to the above arrangement. Prepare the profit and loss adjustment account and the opening balance sheet of the firm as newly constituted.
Answer: D’s Capital Rs. 18,675: E’s Capital Rs.14,475: F’s Capital Rs. 7,875 and H’s Captial Rs.13,875: B/S Rs. 64,200
Q#8. Salman and Kalim are partners in a firm sharing profits and losses as 3:2. Their balance sheet was as follows on 1st January , 2008.
Liabilities Rs. Assets Rs.
Salman’s Capital 30,000 Debtors 18,000
Kalim’s Capital 25,000 Stock 20,000
Sundry Creditors 15,000 Cash at Bank 2,000
General Reserve 10,000 Plant & Machinery 30,000
Patents 10,000
80,000 80,000
Halim is admitted as partner on the above date on the following terms. He will pay Rs. 10,000 as goodwill for 1/4 share in the profit of the firm. Halim was to introduce Rs. 20,000 as capital and the capitals of the othe partners were to be adjusted in the profit sharing ratio. The assets are to be valued as under, Palnt at Rs. 32,000, Stock at Rs. 18,000, Debtors at book figure less a provision of 5%. It wa found that the creditors included a sum of Rs. 1,400 which was not to be paid. But it was also found that their was a liability for compensation to workers amounting to Rs. 2,000.
Answer: B/S Rs. 95,600
Q#09 The balance sheet of A, B and C sharing profits and losses in the proportion of one-half, one-third and one-sixth respectively was as under on 1st July, 2010
Liabilities Rs. Assets Rs.
Sundry creditors 5,000 Cash 800
Capital Debtors 25,200
A 57,000 Stock 29,000
B 32,000 Machinery 7,000
C 16,000 Land & Building 48,000
1,10,000 1,10,000
D was admitted as a partner and was given 1/16th share on the following terms:-
- He should bring Rs. 8,000 as his capital and Rs. 3,000 as goodwill
- Machinery be depreciated by 12%
- Stock depreciated by 10%
- A provision of 5% on debtors be created
- The land & buildings having appreciated be brought up Rs. 62,000
- That after making the above adjustments, the capital accounts of the old partners (who continue to share in the same proportion as before ) be adjusted on the basis of the proportion of D’s capital to his share in the business. (i.e., actual cash to be paid off to or brought in by the partners as the case may be.)
.
Give journal entries to record the transaction on the admission of D and show the opening balance sheet after his admission.
Answers:-
- New Ratio:- 45 : 30: 15 : 6
- Cash in hand :- 14,800
- Capital
A 60,000
B 40,000
C 20,000
- Balance Sheet 1,33000
Q#10. The balance sheet of A & B was as under on 1st July, 1991
Liabilities Rs. Assets Rs.
Sundry creditors 9,000 Cash 1,000
Reserve 5,000 Debtors 10,000
Capital A 15,000 Stock 12,000
Capital B 12,000 Furniture 2,000
Building 16,000
41,000 41,000
D was admitted as a partner and was given 1/4th share on the following terms:-
- He should bring Rs. 15,000 as his capital.
- His share of goodwill was valued at Rs. 5,000 but he was unable to bring it in cash and therefore it was to be raised
- Stock and furniture be depreciated by 10%
- A provision of 6% on debtors be created
An amount of Rs. 1,000 included in creditors not to be treated as a liability - A provision of Rs. 500 be created against bills discounted.
- The buildings be treated as worth Rs. 20,000
It was agreed that except cash the other assets and liabilities were to be shown at the same old figure in the balance sheet.
Give journal entries to record the transaction on the admission of D and show the balance sheet after his admission.
Retirement of Partner
Q#1. Rahim, Karim and Rashid are in partnership. Sharing profits and losses in the ratio of their capitals. Rashid wishes to retire from the firm. The following is their balance sheet on 31st December, 2007.
Liabilities Rs. Assets Rs.
Rahim’s Capital 9,000 Debtors 17,128
Karim’s Capital 12,000 Stock 1,250
Rashid’s Capital 3,000 Bills Receivable 2,872
Sundry Creditors 8,542 Cash at Bank 1,150
Profit & Loss a/c 2,000 Furniture & Fixture 8,540
Loans 2,458 Plant 6,060
37,000 37,000
The values of the assets as agreed upon among the three partners are as follows:-
Provision for doubtful debts. Rs. 172; sundry debtors (less discount and bad debts), Rs. 16,000 ; Stock less 10%; Furniture and Fixtures Rs. 5,425 ; Plant Rs. 8,000. Prepare the partners capital accounts and the balance sheet of the new firm after the above adjustments have been brought into effect.
Answer: Rahim’s Capital Rs. 8,775 : Karim’s Capital Rs.11,700 : Rashid’s Capital Rs. 2,925 : B/S Rs. 34,400
Q#2. A and B are partner sharing profits and losses as A, 3/5 and B, 2/5. The following is their balance sheet on 1st January, 2008.
Liabilities Rs. Assets Rs.
A’s Capital 20,000 Debtors 15,000
B’s Capital 15,000 Stock 10,000
Reserve Account 15,000 Goodwill 6,000
Sundry Creditors 7,500 Cash at Bank 6,000
Cash in Hand 1,000
Plant & Machinery 19,500
57,500 57,500
B retires form the business owing to illness and A takes it over. The following revaluations are made:-
- The goodwill of the firm is valued at Rs. 15,000.
- Depreciation:- Plant & Machinery by 10% and Stock by 15%.
- A Bad Debts Provision is raised against Debtors at 5% and a Discount Reserve against Creditors at 2%.
A liability of Rs. 500 included in creditors is not likely to arise and should be written back. You are asked to journalise the above transactions in the books of the firm. Give the balance sheet of A.
Answer:- B’s Loan Rs. 23,180 ; B/S Rs. 62,300
Q#3. Old and Young are partner sharing profits and losses equally. The following is their balance sheet on 31st December, 2009.
Liabilities Rs. Assets Rs.
Old’s Capital 5,000 Debtors 8,150
Young’s Capital 4,000 Stock 3,250
Sundry Creditors 7,000 Cash at Bank 100
Freehold Premises 3,000
Machinery 1,500
16,000 16,000
It is agreed that Old shall retire from 31st December, 2010, and that young shall take over the business on the following terms.
- The goodwill of the firm to be agreed as worth Rs. 1,000.
- Stock to be agreed as worth Rs. 2,750.
- A reserve for Doubtful Debts 4% on Debtors.
- Old to be paid out as Rs. 2,000 of the amount due to him by a mortgage at 5% annum secured on the Freehold Premises and as to the balance by a bill of exchange (without interest) at 12 months.
Set out journal entries recording the matter (i) to (iv) above and the balance sheet of young on 31st December. 2010 after the adjustments have been made.
Answer: B/S Rs. 16,174
Q#4. A, B and Care partners sharing profits and losses in the ratio of 3 : 2 : 1. On 1st January, 2009 B retired. On that date the balance sheet was as follow.
Liabilities Rs. Assets Rs.
A’s Capital 15,000 Debtors 10,000
Provision 500 9,500
B’s Capital 12,000 Stock 11,000
C’s Capital 10,000 Patent 3,000
Bill Payable 5,000 Cash at Bank 500
Expenses owing 2,000 Plant 30,000
Creditors 10,000
54,000 54,000
- Goodwill was to valued at Rs. 12,000 but no goodwill account was to be raised.
- The new ratio between A and C will be 3 : 2.
- Expenses owing it to be brought down to Rs. 1,500.
- Plant to be valued at 10% reduced and patents at Rs. 4,000.
- The total capital of the newly constituted firm was fixed at Rs. 25,000 to be contributed by the partners in the profit sharing ratio.
Answer: B’s Loan Rs. 15,000 : B/S Rs. 57,000
Dissolution of Partnership
Q#1. B and W are equal partner in retail book shop. They decide to retire and dispose off their business as on 31st December, 2001. When their Balance Sheet Stood as follows.
Liabilities Rs. Assets Rs.
W’s Capital 960 Debtors 840
B’s Capital 3,050 Stock 2,060
Sunday Creditors 480 Cash at Bank 120
Lease 1,250
Fixtures 220
4,490 4,490
The lease and Fixtures were sold for Rs. 2,700 and cash received. The Book Debts were collected and realized Rs. 752. The Stock was sold by auction for Rs. 1,340 after the payment of commission and expenses. The Sundry Creditors were paid off, Rs. 38 being allowed for discount. The expenses of realization amounted to Rs. 87. Prepare the necessary accounts to show the result of realization and the amounts received by each partner.
Answer: Profit on Realisation. Rs. 373 : B receives Rs. 3,236.50 : W receives Rs. 1,146.50.
Q#2. Shahid and Rayasat are equal partner in a business. They decide to retire and sell their business as on 31st December, when their Balance Sheet Stood as follows.
Liabilities Rs. Assets Rs.
Shahid’s Capital 15,000 Debtors 11,240
Rayasat’s Capital 10,000 Stock 12,125
Sunday Creditors 10,500 Cash at Hand 2,000
Bank Loan 5,500 Plant & Machinery 10,635
Goodwill 5,000
41,000 41,000
Plant and Machinery realized Rs. 9,500, Stock Rs. 11,500, Sundry Debtors, Rs. 11,000. The expenses of liquidation amounted to Rs. 1,000. The Bank Loan was paid in full, Sundry Creditors were paid off, Rs. 525 being allowed a discount. Pass journal entries necessary to close the firm’s books. Show the realization a/c and partner’s capital a/c.
Answer: Loss on Realisation. Rs. 7,475 : Shahid receives Rs. 11,262.50 : Rayasat receives Rs. 6,262.50.
Q#3. A, B and C are in partnership. Sharing profits and losses in the proportion of 1/2, 1/3 and 1/6 respectively. On 31st March, 2006, they decide to dissolve the partnership and the position of the firm of on this date is represented by the following balance sheet:-
Liabilities Rs. Assets Rs.
A’sCapital 60,000 Debtors 50,000
B’s Capital 40,000 Stock 50,000
C’s Capital 10,000 Cash at Bank 3,000
Sunday Creditors 40,000 Land and Building 57,000
Loan A’s Account 10,000
1,60,000 1,60,000
During the course of realization a liability under suit for damages is settled at Rs. 20,000 as against Rs. 5,000 only provided for in the books of the firm. Land & Building were sold for Rs. 40,000 and the Stock and Sundry Debtors realized Rs. 30,000 and Rs. 42,000 respectively. The expenses of realization amounted to Rs. 1,200. You are required to close the books of the firm.
Answer: Loss on Realisation. Rs. 61,200 : A receives Rs. 29,400 : B receives Rs. 19,600 : C brings, Rs. 200.
Q#4. A, B and C are in partnership. Sharing profits and losses in the ratio 3:2:1 was as follows on 31st January, 2005.
Liabilities Rs. Assets Rs.
A’sCapital 20,000 Debtors 10,000
B’s Capital 15,000 Less Provision 500 9,500
C’s Capital 10,000 Cash 1,500
Sunday Creditors 12,000 Machinery 25,000
General Reserve 3,000 Stock 11,000
Patents 5,000
Goodwill 8,000
60,000 60,000
On the above date the firm was dissolved. The assets except cash realized Rs. 50,000. The Creditors were paid Rs. 11,500 in full settlement. Expenses of dissolution came to Rs. 1,000.
Answer: Loss on Realisation. Rs. 9,000 : A receives Rs. 17,000 : B bring Rs. 13,000 : C brings, Rs. 9,000.
Q#5. X and Y are in partnership sharing profits and losses in the proportion of 3/5 and 2/5. The following is their balance sheet as on December 31, 2008.
Liabilities Rs. Assets Rs.
X’sCapital 6,000 Debtors 1,960
Y’s Capital 2,000 Investments 2,080
Bank Loan 1,000 Cash 363
Sunday Creditors 528 Furniture 250
Reserve for Contingencies 500 Stock 875
Freehold Building 4,500
10,028 10,028
They decide to dissolve the partnership on this date and the assets, with the exception of the investments and cash are sold on 15th January, 2008 for Rs. 6,900. The investments the market value of which at this is Rs. 2,200 are taken over at that amount by Y, who agrees to discharge the bank loan. The expenses of winding up are Rs. 110. The creditors are paid Rs. 503 in full settlement.
You are required to prepare the necessary ledger accounts to record the dissolution of the firm and close its books on 30th January, 2008.
Answer: Loss on Realisation. Rs. 650 : X receives Rs. 5,910 : Y bring Rs. 740
Q#6. Rahim, Karim and Munir are partner sharing profits and losses as to 2:2:1. Their balance sheet on 31st December, 2009 is as follow.
Liabilities Rs. Assets Rs.
Rahim’s Capital 10,000 Debtors 4,000
Karim’s Capital 4,000 Stock 5,000
Munir’s Capital 2,000 Plant and Machinery 9,000
Sundry Creditors 4,000 Fixture 2,000
Reserve Fund 5,000 Cash 5,000
25,000 25,000
They decided to dissolve the business. The following are the amounts realize: Plant and Machinery Rs. 8,500; Fixtures Rs. 1,500; Stock Rs. 7,000; and Sundry Debtors Rs. 3,700.
Creditors allowed a discount of 2% and Rahim agreed to bear all realization expenses. For this service Rahim is paid Rs. 120. actual expenses amounted to Rs. 900. There was an unrecorded asset of Rs. 500 which was taken over by Karim at Rs. 400.
Prepare the necessary accounts to close the books of Rahim, Karim and Munir.
Answer: Profit on realization Rs. 1060
Q#7. The following was the balance sheet of A, B and C on 31st March, 2005.
| Assets | Rs. | Liabilities | Rs. |
| Furniture | 3500 | Capital Account | |
| Investment | 65,000 | A | 65,000 |
| Stock | 75,000 | B | 10,000 |
| Sundry debtors | 25,000 | Sundry creditors | 1,10,000 |
| Cash in bank | 12,500 | Reserve | 15,000 |
| C – overdrawn | 19,000 | ||
| 2,00,000 | 2,00,000 |
The firm was dissolved as on that date. For the purpose of dissolution, the investments were realized at Rs. 60,000 and stock at Rs. 40,000. A took over the furniture at book value. The debtors realized Rs. 18,000.
The creditors were paid Rs. 1,07,000 in full satisfaction of their claims. Expenses of realization came to Rs. 400. In addition, B is entitled to commission of 10 per cent on amounts waived by creditors .
Assuming that C is insolvent and is unable to bring in anything in respect of his debt to the firm. Show the realization and capital accounts of all the partners. The final adjustments are to be made in accordance with the decision in Garner vs Murray. Assume the capitals are not fixed.
Answer: Loss on realization Rs. 44,700; A receives, Rs. 42,700; C Rs. 10,200