Arjun, Vasisht and Keshav were partners in a business sharing profits equally. Vasisht retires on 31st March 2022 when the Balance sheet stood as follows:
Balance Sheet as at 31st March 2022
|
Liabilities |
Amount (₹) |
Assets |
Amount (₹) |
|
Bills payable |
3,000 |
Land and Building |
24,375 |
|
Creditors |
525 |
Furniture |
6,000 |
|
General Reserve |
11,250 |
Inventory |
1,050 |
|
Profit and loss A/c |
4,500 |
Debtors |
9,450 |
|
Capital |
|
Bills Receivable |
3,750 |
|
Arjun 11,250 |
|
Cash at Bank |
5,625 |
|
Vasisht 12,375 |
|
Advertisement Suspense |
4,650 |
|
Keshav 12,000 |
35,625 |
|
|
|
|
54,900 |
|
54,900 |
Additional information:
1. Arjun and Keshav decided to share future profits in the ratio of 3 : 2
2. Value of Land and Building appreciated by 12%
3. Value of Goodwill of the firm ₹37,500.
4. A provision for doubtful debts is maintained @ 8%
5. Inventory includes an item of ₹450 which has become obsolete
On the basis of the following information answer the question.
Show the treatment of General Reserve if partners do not want to distribute it.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Arjun's Capital A/c Dr. ₹3,000, Keshav's Capital A/c Dr. ₹750 To Vasisht's Capital A/c ₹3,750
Vasisht’s share of General Reserve = ₹11,250 × 1/3 = ₹3,750
Gain of Arjun = 3/5 − 1/3 = 4/15; gain of Keshav = 2/5 − 1/3 = 1/15, so the gaining ratio is 4 : 1
Arjun’s share = ₹3,750 × 4/5 = ₹3,000
Keshav’s share = ₹3,750 × 1/5 = ₹750
Since the reserve is to stay in the books, it is not transferred. Vasisht is still paid his share: the gaining partners compensate him through their capital accounts in the gaining ratio, the same way a retiring partner’s share of goodwill is adjusted.