Question

Bittu and Chintu were partners in a firm sharing profit and losses in the ratio of 4:3. Their Balance Sheet as at 31st March, 2024 was as   

On $1^{\text {st }}$ April, 2024, Diya was admitted in the firm for $\frac{1}{7}$ share in the profits on the following terms:

1. New profit sharing ratio between Bittoo, Chintoo and Diya will be $3:3:1$.
2. Fixed Assets were found to be overvalued by ₹ 1,40,000.
3. Creditors were paid ₹ 4,20,000 in full settlement.
4. Diya brought proportionate capital and ₹ 5,60,000 as her share of goodwill premium by cheque.

Prepare Revaluation Account and Partners' Capital Accounts.

Hint:

In Admission with Proportionate Capital: 1. Perform all adjustments for revaluation, reserves, and goodwill for old partners. 2. Calculate the combined *adjusted* capital of the old partners. 3. Determine the combined *new* profit share of the old partners. 4. Calculate Total Capital of the new firm = (Combined Adjusted Capital) / (Combined New Share). 5. Calculate New Partner's Capital = Total Capital \( \times \) New Partner's Share.

Answer 1

Revaluation Account and Partners' Capital Accounts

1. Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Fixed Assets Adjustment	1,40,000	To Creditors Adjustment	70,000
		To General Reserve Allocation	2,10,000
		Profit on Revaluation:
To Bittu's Share (4/7)	60,000
To Chintu's Share (3/7)	45,000
Total	2,45,000	Total	2,80,000

Explanation:

• Fixed Assets Overvaluation Correction: The value of Fixed Assets was reduced by ₹1,40,000 due to overvaluation, resulting in a debit to the Revaluation Account.
• Creditors Settlement Adjustment: Creditors were settled for ₹4,20,000 against a balance sheet value of ₹4,90,000, representing a reduction of ₹70,000, which is credited to the Revaluation Account.
• General Reserve Distribution: The General Reserve of ₹2,10,000 is allocated to existing partners (Bittu and Chintu) based on their old profit-sharing ratio and credited to the Revaluation Account.
• Profit on Revaluation Distribution: The net profit from revaluation, calculated as the difference between the total credit and debit amounts, is distributed between Bittu and Chintu in their old profit-sharing ratio of 4:3.

2. Partners' Capital Accounts

Debit Side				Credit Side
Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)	Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)
To Balance c/d	11,85,714	8,59,286	1,40,000	By Balance b/d	8,00,000	6,00,000
				By General Reserve	1,20,000	90,000
				By Profit on Revaluation	60,000	45,000
				By Bank (Diya's Capital Contribution)			5,60,000
				By Premium for Goodwill	5,60,000	0
Total	11,85,714	8,59,286	1,40,000	Total	15,40,000	7,35,000	5,60,000

Explanation:

• Opening Balances (Balance b/d): These represent the initial capital balances of the partners as per the previous balance sheet.
• Goodwill Premium Distribution: The premium for goodwill received from Diya is credited entirely to Bittu's Capital Account as he holds the sole sacrificing ratio.
• Diya's Capital Contribution: Diya has contributed ₹5,60,000 as her capital, which is credited to her Capital Account.
• General Reserve Allocation: The General Reserve of ₹2,10,000 from the balance sheet is distributed to Bittu and Chintu in their old ratio of 4:3, amounting to ₹1,20,000 and ₹90,000 respectively.
• Profit on Revaluation Allocation: The profit of ₹1,05,000 derived from the Revaluation Account is distributed between Bittu (₹60,000) and Chintu (₹45,000) according to their old profit-sharing ratio.
• Diya's Proportionate Capital Calculation:
  • Adjusted capital for existing partners:
    • Bittu: ₹8,00,000 (Opening Balance) + ₹1,20,000 (General Reserve) + ₹60,000 (Revaluation Profit) + ₹5,60,000 (Goodwill) = ₹15,40,000
    • Chintu: ₹6,00,000 (Opening Balance) + ₹90,000 (General Reserve) + ₹45,000 (Revaluation Profit) = ₹7,35,000
  • Total adjusted capital of existing partners: ₹15,40,000 + ₹7,35,000 = ₹22,75,000
  • Combined profit share of Bittu and Chintu in the new ratio (3:3:1): 3/7 + 3/7 = 6/7.
  • Total firm capital based on existing partners' share: ₹22,75,000 / (6/7) = ₹26,54,166.67
  • Diya's required capital based on her share (1/7): (1/7) * ₹26,54,166.67 = ₹3,79,166.67
• Closing Balances (Balance c/d): These represent the final balances of each partner's capital account after all adjustments.