Arjun and Kavya were partners in a firm sharing profits and losses in the ratio of 3:2. Their Balance Sheet as at 31st March, 2025 was as follows:
Liabilities Amount (Rs) Assets Amount (Rs) Capitals:
Arjun 4,80,000
Kavya 5,20,000 10,00,000 Building 6,00,000 Investment Fluctuation Reserve 1,00,000 Investments 2,80,000 Creditors 4,00,000 Stock 3,76,000 Debtors 1,60,000 less Provision 7,000 1,53,000 Cash 91,000 Total 15,00,000 Total 15,00,000
On 1st April, 2025, Raghav was admitted as a new partner for 1/4th share in the profits of the firm on the following terms:
(i) Raghav shall bring Rs 5,00,000 as his capital.
(ii) Goodwill of the firm was valued at Rs 4,00,000. Raghav was unable to bring his share of goodwill premium in cash.
(iii) Provision for doubtful debts was to be created @ 10% on debtors.
(iv) Investments were valued at Rs 2,00,000 and building was to be brought down to Rs 5,00,000.
(v) Capitals of Arjun and Kavya were to be adjusted on the basis of Raghav's capital in the business. Actual cash was to be paid off or brought in by the old partners as the case may be.
Prepare Revaluation Account and Partners' Capital Accounts.
Arjun and Kavya were partners in a firm sharing profits and losses in the ratio of 3:2. Their Balance Sheet as at 31st March, 2025 was as follows:
| Liabilities | Amount (Rs) | Assets | Amount (Rs) |
| Capitals: Arjun 4,80,000 Kavya 5,20,000 | 10,00,000 | Building | 6,00,000 |
| Investment Fluctuation Reserve | 1,00,000 | Investments | 2,80,000 |
| Creditors | 4,00,000 | Stock | 3,76,000 |
| Debtors 1,60,000 less Provision 7,000 | 1,53,000 | ||
| Cash | 91,000 | ||
| Total | 15,00,000 | Total | 15,00,000 |
On 1st April, 2025, Raghav was admitted as a new partner for 1/4th share in the profits of the firm on the following terms:
(i) Raghav shall bring Rs 5,00,000 as his capital.
(ii) Goodwill of the firm was valued at Rs 4,00,000. Raghav was unable to bring his share of goodwill premium in cash.
(iii) Provision for doubtful debts was to be created @ 10% on debtors.
(iv) Investments were valued at Rs 2,00,000 and building was to be brought down to Rs 5,00,000.
(v) Capitals of Arjun and Kavya were to be adjusted on the basis of Raghav's capital in the business. Actual cash was to be paid off or brought in by the old partners as the case may be.
Prepare Revaluation Account and Partners' Capital Accounts.
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Solution and Explanation
Raghav gets 1/4 share, so the old partners share the remaining 3/4 in their old ratio 3:2.
Arjun new share = 3/4 x 3/5 = 9/20. Kavya new share = 3/4 x 2/5 = 6/20. Raghav share = 1/4 = 5/20.
New ratio of Arjun, Kavya and Raghav is 9:6:5.
Sacrifice: Arjun 3/5 - 9/20 = 12/20 - 9/20 = 3/20. Kavya 2/5 - 6/20 = 8/20 - 6/20 = 2/20. Sacrificing ratio is 3:2.
Step 2: Find the revaluation items:
Provision for doubtful debts: new provision is 10% of Rs. 1,60,000 = Rs. 16,000. The old provision is Rs. 7,000, so Rs. 9,000 more is needed. It is a loss.
Building is brought down from Rs. 6,00,000 to Rs. 5,00,000. This is a loss of Rs. 1,00,000.
Investments fall from Rs. 2,80,000 to Rs. 2,00,000, a fall of Rs. 80,000. The Investment Fluctuation Reserve of Rs. 1,00,000 absorbs it first.
The unused balance of the reserve is Rs. 1,00,000 - Rs. 80,000 = Rs. 20,000. It goes to Arjun and Kavya in the old ratio 3:2, that is Rs. 12,000 and Rs. 8,000.
Step 3: Prepare the Revaluation Account:
Total loss = Rs. 9,000 + Rs. 1,00,000 = Rs. 1,09,000. It is shared in the old ratio 3:2: Arjun Rs. 65,400 and Kavya Rs. 43,600.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Provision for Doubtful Debts A/c | 9,000 | By Loss transferred to Capital A/cs: | |
| To Building A/c | 1,00,000 | Arjun (3/5) | 65,400 |
| Kavya (2/5) | 43,600 | ||
| Total | 1,09,000 | Total | 1,09,000 |
Step 4: Treat goodwill:
Goodwill of the firm is Rs. 4,00,000, so Raghav share is 1/4 x Rs. 4,00,000 = Rs. 1,00,000.
Raghav cannot bring it in cash. His Current Account is debited with Rs. 1,00,000.
Arjun and Kavya get the premium in the sacrificing ratio 3:2: Arjun Rs. 60,000 and Kavya Rs. 40,000.
Step 5: Fix the new capitals:
Capitals are adjusted on the basis of Raghav capital. Raghav brings Rs. 5,00,000 for 1/4 share.
Total capital of the new firm = Rs. 5,00,000 x 4 = Rs. 20,00,000.
Arjun new capital = 9/20 x Rs. 20,00,000 = Rs. 9,00,000. Kavya new capital = 6/20 x Rs. 20,00,000 = Rs. 6,00,000.
Arjun capital before cash = 4,80,000 - 65,400 + 12,000 + 60,000 = Rs. 4,86,600. So he brings 9,00,000 - 4,86,600 = Rs. 4,13,400.
Kavya capital before cash = 5,20,000 - 43,600 + 8,000 + 40,000 = Rs. 5,24,400. So she brings 6,00,000 - 5,24,400 = Rs. 75,600.
Step 6: Prepare the Partners Capital Accounts:
| Particulars | Arjun (Rs.) | Kavya (Rs.) | Raghav (Rs.) | Particulars | Arjun (Rs.) | Kavya (Rs.) | Raghav (Rs.) |
|---|---|---|---|---|---|---|---|
| To Revaluation A/c (loss) | 65,400 | 43,600 | By Balance b/d | 4,80,000 | 5,20,000 | ||
| By Investment Fluctuation Reserve | 12,000 | 8,000 | |||||
| By Raghav Current A/c (goodwill) | 60,000 | 40,000 | |||||
| By Cash/Bank A/c | 5,00,000 | ||||||
| To Balance c/d | 9,00,000 | 6,00,000 | 5,00,000 | By Cash/Bank A/c (brought in by old partners) | 4,13,400 | 75,600 | |
| Total | 9,65,400 | 6,43,600 | 5,00,000 | Total | 9,65,400 | 6,43,600 | 5,00,000 |
Step 7: Check:
Total capital Rs. 9,00,000 + Rs. 6,00,000 + Rs. 5,00,000 = Rs. 20,00,000, as fixed above.
Cash brought in: Rs. 4,13,400 + Rs. 75,600 + Rs. 5,00,000 = Rs. 9,89,000.
Final Answer:
Loss on revaluation Rs. 1,09,000 (Arjun Rs. 65,400, Kavya Rs. 43,600). Closing capitals: Arjun Rs. 9,00,000, Kavya Rs. 6,00,000, Raghav Rs. 5,00,000. Arjun brings Rs. 4,13,400 and Kavya brings Rs. 75,600.
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