Eduprobe
Question:
C and D are partners in a firm sharing profits in the ratio of 4:1. On 31/3/2016, their balance sheet was as follows: Liabilities Amount (Rs) Assets Amount (Rs) Sundry Creditors 40,000 Cash 24,000 Provision for Bad Debts 4,000 Debtors 36,000 Outstanding Salary 6,000 Stock 40,000 General Reserve 10,000 Furniture 80,000 Plant Machinery 80,000 Capitals: C 1,20,000 D 80,000 2,00,000 2,60,000 2,60,000 On the above date, E was admitted for 1/4th share in the profits on the following terms: (i) E will bring Rs. 1,00,000 as his capital and Rs. 20,000 for his share of goodwill premium, half of which will be withdrawn by C and D. (ii) Debtors Rs. 2,000 will be written off as bad debts and a provision of 4% will be created on debtors for bad and doubtful debts. (iii) Stock will be reduced by Rs. 2,000, furniture will be depreciated by 4,000 and 10% depreciation will be charged on plant and machinery. (iv) Investments Rs. 7,000 not shown in the Balance Sheet will be taken into account. (v) There was an outstanding repairs bill of Rs. 2,300 which will be recorded in the books. Pass necessary journal entries for the above transactions in the books of the firm on E's admission.
Solution:
Journal Entries on E's Admission
1. Goodwill Adjustment:
E's share of goodwill = Rs. 20,000
Goodwill brought in by E = Rs. 20,000
Share of goodwill withdrawn by C = (20,000/2) * (4/5) = Rs. 8,000
Share of goodwill withdrawn by D = (20,000/2) * (1/5) = Rs. 2,000
Journal Entry:
| Account Title | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Bank Account | 20,000 | |
| C's Capital Account | 8,000 | |
| D's Capital Account | 2,000 | |
| Goodwill Account | 20,000 | |
| Being goodwill brought in by E and distributed to C and D |
2. Bad Debts and Provision for Bad Debts:
Bad Debts written off = Rs. 2,000
New debtors balance = 36,000 - 2,000 = Rs. 34,000
Provision for bad debts = 4% of 34,000 = Rs. 1,360
Existing provision = Rs. 4,000
Additional provision required = 1,360 - 4,000 = -Rs. 2,640 (Credit Balance)
Journal Entry:
| Account Title | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Bad Debts Account | 2,000 | |
| Provision for Bad Debts Account | 2,640 | |
| Debtors Account | 2,000 | |
| Being bad debts written off and provision adjusted |
3. Stock, Furniture and Plant & Machinery Adjustments:
Stock reduced = Rs. 2,000
Furniture depreciation = Rs. 4,000
Plant & machinery depreciation (10% of 80,000) = Rs. 8,000
Journal Entry:
| Account Title | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Depreciation Account | 14,000 | |
| Stock Account | 2,000 | |
| Furniture Account | 4,000 | |
| Plant & Machinery Account | 8,000 | |
| Being depreciation on assets and reduction in stock |
4. Investments and Outstanding Repairs:
Investments introduced = Rs. 7,000
Outstanding Repairs = Rs. 2,300
Journal Entry:
| Account Title | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Investments Account | 7,000 | |
| Outstanding Repairs Account | 2,300 | |
| Bank Account (Investment) | 7,000 | |
| Being investment introduced and outstanding repairs recorded |
5. E's Capital and Current Account:
E's Capital Introduced = Rs. 1,00,000
Journal Entry:
| Account Title | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Bank Account | 100,000 | |
| E's Capital Account | 100,000 | |
| Being capital introduced by E |
6. Outstanding Salaries:
No entry is required since this is already recorded as a liability in the Balance Sheet.