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Following information use in Question NO.5 The following is the information about assets and liabilities of...

Following information use in Question NO.5

The following is the information about assets and liabilities of M/s. Hanish LLC and its partners A, B and C. They are sharing profits 9:6:3 with total capital of OMR 169,000 as on 31.3.2020.

Particular

OMR

Particular

OMR

Cash

            58,500

Bank Loan

         52,000

Sundry Debtors

            91,000

Bonds

         65,000

Stock

            32,500

Bills Payable

       104,000

Machinery

            52,000

Sundry Creditors

       130,000

Land

            91,000

Bank Overdraft

         32,500

Furniture

            32,500

Plant

78,000

Premises

            52,000

Profit & Loss A/C

         32,500

Building

          130,000

Bill Receivable

32,500

The capital contributed by the partners is OMR 78,000, OMR 52,000, and OMR 39,000 respectively. The firm accumulated its past profits in the name General Reserve is OMR 65,000. On 1.4.2020 they decided to admit D into the partnership for 1/5th of the future profits with the terms that D shall bring in a capital of OMR 65,000.

Goodwill of the firm is being valued at OMR 52,000. The assets like Machinery, Land, Buildings and Plant are to be appreciated by 10% and Stock, Furniture, Premises are to be depreciated by 5%.

The Provision for Doubtful Debts against Sundry Debtors is to be made @ 5%. Discount on Creditors @ 2.5% received from Sundry Creditors. The Provision for outstanding liability is to be created at OMR 5,200 and Bank Loan is to be maintained

Q5.

Journalize the above transactions with narrations and prepare the Revaluation Account. Give your comment with reasons about the values which are debited and credited in the Revaluation

Account.                                                                                                                         (2+2+1 = 5 Marks)

Solutions

Expert Solution

Journal Entries:

Journal Entries
In the books of M/s. Mahima LLC
Date Particulars Dr. Cr.
01-Apr-20 Cash Account Dr.      75,400
To D's Capital Account     75,400
(Being amount brought in by Mr. D for Capital - OMR 65,000 and Goodwill - OMR 10,400
01-Apr-20 D's Capital Account 10,400
To A's Capital Account       5,200
To B's Capital Account       3,467
To C's Capital Account       1,733
(Being Mr. D share of goodwill adjusted to old partners' capital accounts in their sacrificing ratio i.e., 3:2:1)
01-Apr-20 Revaluation Account Dr      15,600
To Stock Account       1,625
To Furniture Account       1,625
To Premises Account       2,600
To Provision for Doubtful Debts Account       4,550
To Provision for Outstanding Liability account       5,200
(Being recording of the reduction in the value of assets and creation of provision for outstanding liability)
01-Apr-20 Machinery Account Dr        5,200
Land Account Dr        9,100
Buildings Account Dr      13,000
Plant Account Dr        7,800
Discount for Sundry Creditors Account Dr        3,250
To Revaluation Account     38,350
(Being recording of the increase in the value of assets and recognition of discount for value of creditors)
01-Apr-20 Revaluation Account Dr      22,750
To A's Capital Account     11,375
To B's Capital Account       7,583
To C's Capital Account       3,792
(Being profit on revaluation credit to Old partners capital account in their old profit sharing ratio.
01-Apr-20 General Reserve Account Dr      65,000
To A's Capital Account     32,500
To B's Capital Account     21,667
To C's Capital Account     10,833
(Being general reserve balance approtioned between old partners in old ratio)
01-Apr-20 Profit and Loss Account      32,500
To A's Capital Account     16,250
To B's Capital Account     10,833
To C's Capital Account       5,417
(Being profit and loss balance approtioned between old partners in old ratio)

Revaluation Account

In the books of M/s. Hanish LLC
Revaluation Account
Particulars OMR Particulars OMR
To Stock Account       1,625 By Machinery Account       5,200
To Furniture Account       1,625 By Land Account       9,100
To Premises Account       2,600 By Buildings Account     13,000
To Provision for Doubtful Debts Account       4,550 By Plant Account       7,800
To Provision for Outstanding Liability account       5,200 By Discount for Sundry Creditors Account       3,250
To Profit on Revaluation
A's Capital Account     11,375
B's Capital Account       7,583
C's Capital Account       3,792
38,350 38,350
Working Note 1: Computation of sacrificing ratio
In the problem given, it is mentioned that D will be admitted into partnershipfor 1/5th of share.
Here only new partners share is given but the question is silent about the sacrifice made by the old partners.
In such case it is assumed that the old partners will share the remaining share in their old profit sharing ratio.
So, here the sacrificing ratio will be the old partners profit sharing ratio i.e, A, B and C profit sharing ratio.
So the sacrifcing ratio will be 9:6:3 or 3:2:1
Working Note 2: Computation of new profit sharing ratio.
Let's assume Total share in firm = 1
Share of the new partner D = 1/5 or 6/30
Remaining profit for Old Partners = 1 - 1/5 = 4/5 which will shared among the old partners in their old profit sharing ratio.
So A's share = 4/5 x 3/6 = 12/30
B's share = 4/5 x 2/6 = 8/30
C's share = 4/5 x 1/6 = 4/30
New ratio = 12/30 : 8/30 : 4/30 : 6/30 = 12:8:4:6
Thefore New Profit sharing ration of A, B, C and D = 12:8:4:6
Working Note 3: Computation of goodwill to be brought in by Mr. D.
In the question the goodwill amount is mentioned for the whole firm. But Mr. D is obliged to bring his share of goodwill only.
Value of Firm Goodwill = OMR 52,000
Share of Mr. D in the firm = 1/5
Share of Goodwill to be brought in by Mr. D on his admission in to Partnership = OMR 52,000 x 1/5 = OMR 10,400/-.
Working Note 4: Sharing of Goodwill brought by Mr. D between the old partners.
As per the accounting principles, goodwill has to be recognised in the books of account only when a consideration has been paid for it and internally generated goodwill can't be recognised as an asset in any case.
The goodwill calculated in Working note 3 is in the nature of internally generated goodwill and it is calculated only for the purpose of admission of a new partner and as a result not eligible for recognition in the books of accounts of partnership firm. So the only way out there is to adjust the goodwill through the Capital accounts of old partners.
Due to admission of new partner, the old partners are losing their share of profit in the partnership firm in their sacrificing ratio calculated in Working Note - 1 and they are to be indemnified for such loss of share. So the goodwill brought in by Mr. D will be shared between the old partners in the sacrificing ratio.
To conclude, by sharing the goodwill brought in by Mr. D between the old partners, we are satisfying the following:
1. Accounting requirement of non recognition of internally generated goodwill.
2. Old partners were indemnified for their loss in share of profit.
So the goodwill of OMR. 10,400/- brought in by Mr. D will be share among Mr. A, B and C in the ratio of 3:2:1.
A's share in Goodwill = OMR 10,400 x 3/6 = OMR 5,200
B's share in Goodwill = OMR 10,400 x 2/6 = OMR 3,467
C's share in Goodwill = OMR 10,400 x 1/6 = OMR 1,733
Working Note 5: For preparation of Revaluation Account
When a new partner is admitted into partneship, assets are revalued and liabilities are reassessed.
A Revaluation account will be opened for this purpose. This account will be reflected with the following entries:
a. Debited with all reduction in value of assets and increase in value of liabilities.
b. Credited with increase in the value of assets and decrease in value of liabilities
The difference in two sides will reflect a profit or loss. This will be transferred to the Capital accounts of old partners in old profit sharing ratio.
The entries to be passed are:
1. Revaluation Account                                            Dr.
To Assets Account                           With the reduction in the value of assets
(individually which show a decrease)
To Liabilities Account                     With increase in the value of liabilities
(individually which have to be increased)
2. Asset Account (Individually)                              Dr.              With the increase in the value of assets
Liabilities Account (Individually)                     Dr.              With the reduction in the value of liabilities
To Revaluation Account
3. Revaluation Account                                            Dr.       With the profit in the old profit sharing ratio.
To Capital A/cs of old partners
(or)
Capital A/cs of old partners                             Dr.       With the loss in the old profit sharing ratio.
To Revaluation Account                                            
As a result of the above entries, the capital account balances of the old partners will change and the assets and liabilities will have to be adjusted to their proper values. They will now appear in the Balance sheet at revised figures.
Revaluation Account workings:
Particulars Amount before reconstitution Change to be made Calculation Amount of Change Debit/(Credit) to Revaluation A/c Amount after reconstitution
Machinery               52,000 Appreciate by 10% +52000 x 10%                                      5,200 Increase in value of asset, so Credit to Revaluation Account                                    57,200
Land               91,000 Appreciate by 10% +91000 x 10%                                      9,100 Increase in value of asset, so Credit to Revaluation Account                                  1,00,100
Buildings             1,30,000 Appreciate by 10% +130000 x 10%                                    13,000 Increase in value of asset, so Credit to Revaluation Account                                  1,43,000
Plant               78,000 Appreciate by 10% +78000 x 10%                                      7,800 Increase in value of asset, so Credit to Revaluation Account                                    85,800
Stock               32,500 Depreciate by 5% -32500 x 5%                                     (1,625) Decrase in value of asset, so Debit to Revaluation Account                                    30,875
Furniture               32,500 Depreciate by 5% -32500 x 5%                                     (1,625) Decrase in value of asset, so Debit to Revaluation Account                                    30,875
Premises               52,000 Depreciate by 5% -52000 x 5%                                     (2,600) Decrase in value of asset, so Debit to Revaluation Account                                    49,400
Sundry Debtors(Provision for Doubtful Debts to be created)               91,000 Create at 5% of Sundry Debtors balance -91000 x 5%                                     (4,550) Decrase in value of asset, so Debit to Revaluation Account                                    86,450
Sundry Creditors
(Discount to be provided)
            1,30,000 Create at 2.5% of Sundry Creditors balance 130000 x 2.5%                                      3,250 Decrease in value of liability, so Credit to Revaluation Account                                  1,33,250
Provision for outstanding liability                     -   Provide OMR 5,200 -5200                                     (5,200) Increase in value of liability, so Debit to Revaluation Account                                     -5,200
Profit / (Loss) on revaluation [Net effect of all the revaluations]                                    22,750
The above profit on revaluation is to be distributed among the old partners in the old profit sharing ratio i.e.,
A's share in Revaluation profit =22750 x 3/6                                    11,375 Debit Revaluation Accout and Credit A's Capital Account
B's share in Revaluation profit =22750 x 2/6                                      7,583 Debit Revaluation Accout and Credit B's Capital Account
C's share in Revaluation profit =22750 x 1/6                                      3,792 Debit Revaluation Accout and Credit C's Capital Account

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