Question

P, Q, and R are partners in a firm sharing profits in the ratio of \(2:2:1\). R retires, and the Balance Sheet of the firm as on that date was as under: Balance Sheet as on the Date of Retirement 
\[\begin{array}{|l|r|l|r|} \hline Liabilities & Amount (Rs.) & Assets & Amount (Rs.) \\ \hline \text{Creditors} & \text{30,000} & \text{Cash} & \text{8,000} \\ \hline \text{General Reserve} & \text{60,000} & \text{Debtors} & \text{75,000} \\ \hline \text{P\&L Account} & \text{15,000} & \text{Stock} & \text{90,000} \\ \hline \text{Workmen's Compensation Reserve} & \text{10,000} & \text{Plant} & \text{1,40,000} \\ \hline \text{Capital Accounts:} & \text{} & \text{Patents} & \text{22,000} \\ \hline \text{\hspace{0.5cm} P} & \text{1,00,000} \\ \hline \text{\hspace{0.5cm} Q} & \text{80,000} \\ \hline \text{\hspace{0.5cm} R} & \text{40,000} \\ \hline \text{Total} & \text{3,35,000} & \text{Total} & \text{3,35,000} \\ \hline \end{array}\]Adjustments: 1. Stock is to be reduced to Rs. 82,000.
2. Plant is to be reduced by Rs. 20,000.
3. Patents are found valueless.
4. There is no liability on account of the Workmen's Compensation Reserve. 

Record the necessary journal entries at the time of retirement.

Hint:

In retirement, always adjust reserves and revaluation gains/losses in the old profit-sharing ratio before settling the retiring partner's dues.

Answer 1

Journal Entries:\[\begin{array}{|l|l|r|r|} \hline Date & Particulars & Dr. (Rs.) & Cr. (Rs.) \\ \hline \text{-}& \text{Revaluation Account Dr.} & \text{70,000} \\ \hline \text{} & \text{\hspace{0.5cm} To Stock} &  \text{} & \text{8,000} \\ \hline \text{} & \text{\hspace{0.5cm} To Plant} &  \text{} & \text{20,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To Patents} &  \text{} & \text{22,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To Workmen's Compensation Reserve} &  \text{} & \text{10,000} \\ \hline \text{--} & \text{General Reserve Dr.} & \text{60,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To P's Capital Account} &  \text{} & \text{24,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To Q's Capital Account} &  \text{} & \text{24,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To R's Capital Account} &  \text{} & \text{12,000} \\ \hline \text{--} & \text{P\&L Account Dr.} & \text{15,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To P's Capital Account} &  \text{} & \text{6,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To Q's Capital Account} &  \text{} & \text{6,000} \\ \hline \text{} &  \text{\hspace{0.5cm} To R's Capital Account} &  \text{} & \text{3,000} \\ \hline \text{--} & \text{R's Capital Account Dr.} & \text{55,000} \\ \hline  \text{} & \text{\hspace{0.5cm} To Cash/Bank Account} &  \text{} & \text{55,000} \\ \hline \end{array}\]

Explanation: 

1. Revaluation account is created to adjust the decrease in the value of assets and liabilities.
2. General Reserve and P&L account balances are transferred to the partners' capital accounts in their profit-sharing ratio.
3. The amount payable to the retiring partner (R) is settled in cash.