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   

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

1. New profit sharing ratio between Bittoo, Chintoo and Diya will be $3:3:1$.
2. Fixed Assets were found to be overvalued by ₹ 1,40,000.
3. Creditors were paid ₹ 4,20,000 in full settlement.
4. Diya brought proportionate capital and ₹ 5,60,000 as her share of goodwill premium by cheque.

Prepare Revaluation Account and Partners' Capital Accounts.

Hint:

In Admission with Proportionate Capital: 1. Perform all adjustments for revaluation, reserves, and goodwill for old partners. 2. Calculate the combined *adjusted* capital of the old partners. 3. Determine the combined *new* profit share of the old partners. 4. Calculate Total Capital of the new firm = (Combined Adjusted Capital) / (Combined New Share). 5. Calculate New Partner's Capital = Total Capital \( \times \) New Partner's Share.

Answer 1

Revaluation Account and Partners' Capital Accounts

1. Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Fixed Assets	1,40,000	To Creditors	70,000
		To General Reserve	2,10,000
		Profit on Revaluation:
To Bittu (4/7)	60,000
To Chintu (3/7)	45,000
Total	2,45,000	Total	2,80,000

Explanation:

• Fixed Assets Overvalued: Fixed Assets were overvalued by ₹1,40,000, so the asset value decreases which is debited to Revaluation A/c
• Creditors Paid: Creditors were paid ₹4,20,000 in full settlement, whereas the balance sheet show 4,90,000 so the value decreases by 70000 which is credited to Revaluation A/c.
• Bittu and Chintu's share for General Reserve: General Reserve will be distributed to the old partners by old ratio so 2,10,000 is credited to Revaluation A/c.
• Profit Distribution: The profit on revaluation (difference in total value) is distributed between Bittu and Chintu in their old profit-sharing ratio (4:3).

2. Partners' Capital Accounts

Debit Side				Credit Side
Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)	Particulars	Bittu (₹)	Chintu (₹)	Diya (₹)
To Balance c/d	11,85,714	8,59,286	1,40,000	By Balance b/d	8,00,000	6,00,000
				By General Reserve	1,20,000	90,000
				By Profit on Revaluation	60,000	45,000
				By Bank (Diya's capital)			5,60,000
				By Premium for Goodwill	5,60,000	0
Total	11,85,714	8,59,286	1,40,000	Total	15,40,000	7,35,000	5,60,000

Explanation:

• Balances b/d: These are the opening balances from the balance sheet.
• Bittu and Chintu's share for Goodwill: Bittu gets the total amount from Diya because he has the sacrificing ratio so the amount of 5,60,000 is credited to Bittu's Capital account.
• Diya's Capital: Diya brings in ₹5,60,000 as capital, so credit it to her capital account.
• General Reserve: The balance sheet shows 2,10,000 divided by 4/7 and 3/7.
• Profit on Revaluation: This is the profit from the revaluation account distributed between Bittu and Chintu.
• Diya's proportionate capital:
  • Calculate the combined capital of existing partners after adjustments:
    • Bittu: 8,00,000 (Old Capital) + 1,20,000 (General Reserve) + 60,000 (Revaluation Profit) + 5,60,000 (Goodwill) = 15,40,000
    • Chintu: 6,00,000 (Old Capital) + 90,000 (General Reserve) + 45,000 (Revaluation Profit) = 7,35,000
  • Add these adjusted capitals: 15,40,000 + 7,35,000 = 22,75,000
  • Determine the combined profit share of Bittu and Chintu after Diya's admission: The new ratio is 3:3:1 for Bittu:Chintu:Diya. So Bittu and Chintu together have a share of 3/7 + 3/7 = 6/7.
  • Calculate the total capital based on Bittu and Chintu's combined capital and profit share: Total Capital = 22,75,000 / (6/7) = ₹26,54,166.67
  • Calculate Diya's proportionate capital: Diya's Capital = (1/7) * 26,54,166.67 = ₹3,79,166.67
• Balances c/d: This is the final balance in each partner's capital account.