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 follows:

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

• (i) New profit sharing ratio between Bittu, Chintu and Diya was 3 : 3 : 1 .
• (ii) Fixed Assets were found to be overvalued by ₹ 1,40,000.
• (iii) Creditors were paid ₹ 4,20,000 in full settlement.
• (iv) Diya brought proportionate capital and ₹ 5,60,000 as her share of goodwill premium by cheque.

Prepare Revaluation Account and Partners' Capital Accounts. 

Hint:

Steps for Admission Problem: 1. Calculate Sacrificing Ratio (Old - New). 2. Prepare Revaluation A/c for changes in asset/liability values. Distribute profit/loss in OLD ratio. 3. Adjust Goodwill: Cr. Sacrificing Partners (in Sacrificing Ratio), Dr. Gaining Partners (if existing goodwill adjusted) or Cr. Premium for Goodwill (if brought in cash). 4. Distribute existing reserves/accumulated profits/losses in OLD ratio. 5. Prepare Capital Accounts, posting all adjustments. 6. Calculate new partner's proportionate capital if required: Find adjusted capitals of old partners, determine total firm capital based on their combined share, then find new partner's share.

Answer 1

1. Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
Fixed Assets (Overvaluation)	1,40,000	Creditors (Settlement)	70,000
		Profit on Revaluation:
		Bittu (4/7)	40,000
		Chintu (3/7)	30,000
Total	1,40,000	Total	1,40,000

Explanation:

• Fixed Assets: An overvaluation of fixed assets by ₹ 1,40,000 necessitates a debit to reduce their value.
• Creditors: A settlement of ₹ 4,20,000 for creditors of ₹ 4,90,000 results in a revaluation profit of ₹ 70,000 (₹ 4,90,000 - ₹ 4,20,000).
• Revaluation Profit Distribution: The total revaluation loss of ₹ 70,000 is distributed between Bittu and Chintu according to their old profit-sharing ratio (4:3).
  • Bittu's share of loss: (₹ 70,000) * 4/7 = ₹ 40,000
  • Chintu's share of loss: (₹ 70,000) * 3/7 = ₹ 30,000

2. Partners' Capital Accounts

Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)	Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)
To Revaluation A/c	40,000	30,000		By Balance b/d	8,00,000	6,00,000
To General Reserve A/c (4/7)	1,20,000	90,000		By General Reserve A/c (₹ 2,10,000*4/7)	1,20,000	1,20,000
				By Bank (Capital)			5,60,000
To Bank A/c				By Bank(Goodwill)	5,60,000
				By Partner capital/ premium		5,60,000
To Balance c/d	15,20,000	6,60,000	5,60,000
Total	16,80,000	7,80,000	5,60,000	Total	16,80,000	7,80,000	5,60,000

Explanation:

• Opening Balances: Balances b/d represent the initial capital amounts from the Balance Sheet.
• Revaluation Loss: The loss from revaluation is debited to the partners' capital accounts in their old profit-sharing ratio (4:3).
• General Reserve Distribution: The general reserve of ₹ 2,10,000 is allocated to the existing partners (Bittu and Chintu) based on their old profit-sharing ratio (4:3).
  • Bittu: ₹ 1,20,000 (₹ 2,10,000 * 4/7)
  • Chintu: ₹ 90,000 (₹ 2,10,000 * 3/7)
• Diya's Capital Contribution: Diya is credited with ₹ 5,60,000 for her capital.
• Bittu's Goodwill: Bittu is credited with ₹ 5,60,000 for goodwill.
• Chintu's Premium: Chintu is credited with ₹ 5,60,000 for premium received from the incoming partner.

Working Notes for Diya Capital Calculation:
Diya is admitted for a 1/7th share. Her capital contribution implies that 1/7th of the total capital is ₹ 5,60,000. Therefore, the total capital of the firm is ₹ 56,00,000 (₹ 5,60,000 * 7). The amount paid by Diya will be distributed as goodwill to the existing partners.