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
If partners do not distribute the general reserve the share of Vasisht will be adjusted in the gaining ratio.
Vasisht share in general reserve = 11250 x 1/3
= ₹3750
This will be distributed in the gaining ratio(4:1) between remaining partners.
Arjun share = 3750 x 4/5
= 3000
Keshav share = 3750 x 1/5
= 750
Both partners account is debited with the respective amount of their share to compensate Vasisht for the general reserve. So, the following entry is passed for this-
Arjun's Capital A/c Dr. ₹3,000
Keshav's Capital A/c Dr. ₹750
To Vasisht's Capital A/c ₹3,750
Note-
Old ratio = 1:1:1 (Arjun, Vasisht and Keshav)
Vasisht retires
New ratio = 3:2 (Arjun and Keshav)
Gain of Arjun = 3/5 - 1/3
= (9-5)/15
= 4/15
Gain of Keshav = 2/5 - 1/3
= (6-5)/15
= 1/15
Gaining ratio = 4/15:1/15
= 4:1