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FA2


Unit - 3


Amalgamation of Partnership Firms


You have studied in the XIIth standard the unit related to the Final Accounts of Partnership firm. These final accounts are similar to the final accounts of sole trader, with certain changes regarding the distribution of profit/loss in the partners in their profit sharing ratio. But there are different transactions in partnership regarding admission, retirement, death of a partner, amalgamation, dissolution, conversion of partnership firm etc. which affect on the accounting of partnership firm. In this unit you have to learn accounting for amalgamation of partnership firms.

The unit amalgamation of partnership firms covers meaning of amalgamation of partnership firms, objectives of amalgamation of partnership firms, the accounting procedure for amalgamation, the journal entries and ledger posting for amalgamation of partnership firms and the problems solved.


Amalgamation means to merge or to combine two or more business units carrying on same type of business and form a new business unit.

Amalgamation of partnership firms means merger of two or more partnership firms with one another and form a new partnership firm. When two or more existing partnership firms, carrying on same type of business, come together end their separate entity and form a new firm it is called as amalgamation of partnership firms.

Amalgamation may be formed with any one of the following ways:

  1. Merging of two or more existing sole proprietors into each another and form a new partnership firm.
  2. Merging one existing partnership firm with one existing sole proprietor and form a new partnership firm.
  3. Absorbing one existing partnership firm by another existing partnership firm.
  4. Merging two or more existing partnership firms with one another and form a new partnership firm.

Amalgamation of partnership firm is done to achieve the following objectives :

  1. To avoid the cut-throat competition.
  2. To minimize the common expenses of business.
  3. To get advantage of large scale business.
  4. To strengthen the capital position.
  5. To get advantage of expertise of different people, etc.

 


Accounting for amalgamation of partnership firms includes closing the books of accounts of amalgamating / old firms and opening the books of accounts of amalgamated / new firm. There are two methods used for closing the books of accounts -

1. Revaluation Method, and

2. Realisation Method.

In Revaluation Method, a Revaluation or Profit & Loss Adjustment A/c is prepared to record the effect of increase or decrease in the value of assets and liabilities. In Realisation Method, the purchase price is calculated and all assets and outsider liabilities are transferred to Realisation A/c at book values. In this unit the Revaluation Method is followed. As per this method, for closing the books of accounts of old firms journal entries are to be passed taking into consideration the following points:

i)                    Revaluation of Assets and liabilities.

Ii)                 Creation of Goodwill.

Iii)               Close Reserves and other Profit Accounts.

Iv)                Close Loss Account.

v)                  Close Assets and Liabilities Accounts which are not taken over by the new firm.

Vi)                Transfer / close Assets and Liabilities Accounts which are taken over by the new firm.

Vii)             Close Capital Accounts of the partners.

To open the books of accounts of the New Firm the journal entries are to be passed taking into consideration the following points :

  1. Assets of the old firm taken over by the new firm.
  2. Liabilities of the old firm taken over by the new firm.
  3. Capitals of the partners of the old firm taken over by the new firm.
  4. Adjustment of Goodwill.
  5. Adjustment of Capitals of the Partners.

 

Journal Entries and Ledger Accounts for Amalgamation of Partnership Firms: In the amalgamation of partnership firms closing entries and opening entries are to be passed. The closing entries are to be passed to close the books of accounts of amalgamating /old firms and the opening entries are to be passed to open the books of accounts of amalgamated/new firm.

Journal Entries in the Books of Old Firms (Closing Entries)

i)                   For Revaluation of Assets and Liabilities: Assets and Liabilities of the old firms may be revalued at the time of amalgamation. There may be increase or decrease in the values of assets and liabilities which shows profit or loss. To record this profit or loss a Profit & Loss Adjustment A/c or Revaluation A/c is to be opened. The net profit or loss on this account is to be transferred to Partner's Capital A/c in the old profit sharing ratio. For this purpose following journal entries are to be passed.

a)                  For increase in the value of asset and decrease in the value of Liability which shows revaluation profit.

Particular Asset / Liability A/c Dr.

To Profit & Loss Adjustment A/c / Revaluation A/c

b)                 For decrease in the value of asset and increase in the value of liability which shows revaluation loss.

Profit & Loss Adjustment A/c / Revaluation A/c. Dr.

To Particular Asset / Liability A/c

c)                  For closing the Profit & Loss Adjustment A/c / Revaluation A/c and transferring profit.

Profit & Loss Adjustment A/c / Revaluation A/c. Dr.

To Partner's Capital A/c’s

(If there is a loss, a reverse entry will be passed)

Ii)                 For Creation of Goodwill : If there is no goodwill account in the books of the old firm and if it is to be created the following entry will be passed,

Goodwill A/c    Dr.

To Partner's Capital A/c’s

(Goodwill is to be transferred in the old profit sharing ratio)

Iii)              For closing Reserves and Profit Accounts: The balance on these accounts is to     be transferred to Partner's Capital A/c’s in the old profit sharing ratio.

Reserves A/c     Dr.

Profit & Loss A/c (Cr. Balance) Dr.

To Partner's Capital A/c’s

Iv)               For closing Loss Account: The Profit & Loss A/c showing Dr. Balance is a loss account It appears on the asset side of the Balance sheet. The balance on this account also transferred to Partner's Capital A/c’s in the old profit sharing ratio.

Partner's Capital A/c’s  Dr.

To Profit & Loss A/c’s

v)                  For closing Assets and Liabilities A/c’s which are not taken over by the New Firm: Those assets and Liabilities which are not taken over by the new firm will be either sold away / paid off by the old firm or transferred to Partner / Partner's Capital A/c’s in the capital ratio. The profit or loss on such transaction will be transferred to P & L Adjustment A/c or directly to Partner's Capital A/c’s in the old profit sharing ratio. For this purpose following journal entries are to be passed.

a)                  If an asset is sold away for  cash

Cash  / Bank A/c Dr.

To Particular Asset A/c

b)                 If an asset is taken over by the partner / partners Partner/s Capital A/c               Dr.

To Particular Asset A/c

c)                  If a liability is paid off

Particular Liability A/c  Dr.

To Cash / Bank A/c

d)                 If a liability is taken over by the partner/ partners

Particular Liability A/c  Dr.

To Partner/s Capital A/c

Vi)               For closing Assets and Liabilities which are taken over by the New Firm: The accounts of assets and liabilities which are taken over by the new firm will be closed by transferring them to the New Firm A/c at agreed values.

a)                  For closing Assets

New Firm A/c   Dr

To  Assets A/c

b)                 For closing Liabilities

Liabilities A/c    Dr

To New Firm A/c

Vii)            For closing Partner's Capital A/c’s: Partner's Capital A/c’s of the old firm are to be closed with the net balance by transferring them to the New Firm A/c

Partner's Capital A/c   Dr

To New Firm A/c

 

Ledger Accounts if the Books of the Old Firms

Form the above journal entries the following important ledger accounts will be prepared in the books of old firms.

i)                    Profit & Loss Adjustment A/c / Revaluation A/c

Ii)                 Partner's Capital A/c’s

Iii)               New Firm A/c

Iv)                Good will A/c

v)                  Partner's Current A/c, etc.

Journal Entries in the Books of the New Firm (Opening Entries)

i)                   For Assets, Liabilities and Capitals of  the  Partners of the old firm taken over  by the New Firm:

Assets A/c    Dr.  (at agreed  values)

To Liabilities A/c  (at agreed values)

To Partner's Capital A/c’s  (at transferred balance)

Ii)                 For Adjustment of Goodwill: The good will transferred from the old firm to the new firm may be maintained as it is or may be written off or may be reduced by the New Firm. If the goodwill is written off or reduced the entry will be as follows :

All  Partner's Capital A/c’s Dr.

To Goodwill A/c

(All partner's capital A/c are debited in the new profit sharing ratio)

Iii)              For Adjustment of Capitals: If the capitals of the partners in the nw firm are changed as per the new profit sharing ratio or as per the agreement, there is a need to pass journal entries for the adjustment of capitals. The adjustments of capital may be made in cash or through current A/c’s.

a)                  For cash brought in or through current A/c  for adjustment of shortage of capital

Cash / Bank A/c   Dr.

Particular Partner’s Current A/c Dr.

To Particular Partner’s Capital A/c

 

b)                 For cash paid or through current a/c for adjustment of excess capital

Particular  Partner Capital A/c. Dr.

To Cash / Bank A/c

To Particular Partner Current A/c

 

Ledger Accounts in the Books of New Firm: From the above journal entries the Opening Balance Sheet of the new firm is to be prepared. Also, the Partner's Capital A/c’s, Cash/Bank A/c may be prepared.

 


 

Q.1. (Revaluation Method)

Following are the Balance Sheets of two firms as at 31st Dec, 2005.

 

Liabilities

A & B

C & D

Assets

A & B

C & D

Rs.

Rs.

Rs.

Rs.

Creditors

3,000

25,000

Stock

50,000

75,000

Bills Payable

6,000

----

Debtors

30,000

45,000

Bank Overdraft

----

10,300

Premises

20,000

----

Capitals:

 

 

Plant & Machinery

5,000

20,000

A

50,000

 

Bank

1,500

 

B

50,000

 

Furniture

500

300

C

 

52,500

Defence Bonds

2,000

----

D

 

52,500

 

 

 

 

 

 

 

 

 

 

1,09,000

1,40,300

 

1,09,000

1,40,300

The two firms decided to amalgamate their business as from 1st January 2006. For this purpose it was agreed that:

  1. Premises and Plant and Machinery belonging to A and B should be taken over by the new firm at Rs. 25,000 and Rs. 10,000 respectively.
  2. C and D were to be credited with Rs. 5,000 for the value of certain patent rights they possessed, which became the property of the partnership and which were not included in their Balance Sheet.
  3. All the other assets were taken over at the values stated in the respective Balance Sheets except the Defense Bonds belonging to A and B, which were not taken over.
  4. Both firms undertook to discharge their own liabilities and it was agreed that A and B should introduce cash to make their capitals equal to that of C and D.

 

Pass necessary journal entries in the books of the old firms and the Opening Entries in the books of the New Firm, M/s ABCD.

 

Also prepare the Balance Sheet of the new Firm.

 

Solution:

Journal Entries in the books of A & B

 

Particulars

 

Debit

(Rs)

Credit (Rs)

Plant & Machinery A/c

Dr

5,000

 

Premises A/c

Dr

5,000

 

     To Revaluation A/c

 

 

10,000

(Being appreciation in the value of plant & machinery and premises)

 

 

 

 

 

 

 

Revaluation A/c

Dr

10,000

 

     To A’s Capital A/c

 

 

5,000

     To B’s Capital A/c

 

 

5,000

(Being division of profit on revaluation between A & B)

 

 

 

 

 

 

 

Creditors A/c

Dr

3,000

 

Bills Payable A/c

Dr

6,000

 

     To A’s Capital A/c

 

 

4,500

     To B’s Capital A/c

 

 

4,500

(Being transfer of liabilities not taken over by new firm between partners)

 

 

 

 

 

 

 

A’s Capital A/c

Dr

1,000

 

B’s Capital A/c

Dr

1,000

 

     To Defence Bonds

 

 

2,000

(Being transfer of assets not taken over by new firm between partners)

 

 

 

 

 

 

 

M/s ABCD A/c

Dr

1,17,000

 

      To Bank A/c

Dr

 

1,500

      To Stock A/c

Dr

 

50,000

      To Debtors A/c

Dr

 

30,000

      To Premises A/c

Dr

 

25,000

      To Plant & Machinery A/c

Dr

 

10,000

      To Furniture A/c

Dr

 

500

 (Being various assets taken over by the new firm)

 

 

 

 

 

 

 

A’s Capital A/c

Dr

58,500

 

B’s Capital A/c

Dr

58,500

 

     To M/s ABCD A/c

 

 

1,17,000

(Being transfer of capital accounts to the new firm)

 

 

 

 

Journal Entries in the books of C & D

 

Particulars

 

Debit

(Rs)

Credit (Rs)

Patents A/c

Dr

5,000

 

     To Revaluation A/c

 

 

5,000

(Being patent rights brought into accounts)

 

 

 

 

 

 

 

Revaluation A/c

Dr

5,000

 

     To C’s Capital A/c

 

 

2,500

     To D’s Capital A/c

 

 

2,500

(Being division of profit on revaluation between C & D)

 

 

 

 

 

 

 

Creditors A/c

Dr

25,000

 

Bank Overdraft A/c

Dr

10,300

 

     To C’s Capital A/c

 

 

17,650

     To D’s Capital A/c

 

 

17,650

(Being transfer of liabilities not taken over by new firm between partners)

 

 

 

 

 

 

 

M/s ABCD A/c

Dr

1,45,300

 

      To Stock A/c

Dr

 

75,000

      To Debtors A/c

Dr

 

45,000

      To Plant & Machinery A/c

Dr

 

20,000

      To Patent

Dr

 

5,000

      To Furniture A/c

Dr

 

300

 (Being various assets taken over by the new firm)

 

 

 

 

 

 

 

C’s Capital A/c

Dr

72,650

 

D’s Capital A/c

Dr

72,650

 

     To M/s ABCD A/c

 

 

1,45,300

(Being transfer of capital accounts to the new firm)

 

 

 

 

Journal Entries in the books of M/s ABCD

 

Particulars

 

Debit

(Rs)

Credit (Rs)

Bank A/c

Dr

1,500

 

Stock A/c

Dr

50,000

 

Debtors A/c

Dr

30,000

 

Premises A/c

Dr

25,000

 

Plant & Machinery A/c

Dr

10,000

 

Furniture A/c

Dr

500

 

     To A’s Capital A/c

 

 

58,500

     To B’s Capital A/c

 

 

58,500

(Being assets of A & B taken over)

 

 

 

 

 

 

 

Stock A/c

Dr

75,000

 

Debtors A/c

Dr

45,000

 

Plant & Machinery A/c

Dr

20,000

 

Patent

Dr

5,000

 

Furniture A/c

Dr

300

 

     To C’s Capital A/c

 

 

72,650

     To D’s Capital A/c

 

 

72,650

(Being assets of C & D taken over)

 

 

 

 

 

 

 

Bank A/c

Dr

28,300

 

     To A’s Capital A/c

 

 

14,150

     To B’s Capital A/c

 

 

14,150

(Being cash brought by A & B to make their capitals equal to C & D)

 

 

 

**cash to be brought: 72,650-58,500 = 14,150 each

 

Balance Sheet of M/s ABCD as on 1st Jan, 2006

Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

 

 

 

Stock

 

1,25,000

 

 

 

Debtors

 

75,000

 

 

 

Premises

 

25,000

Capitals:

 

 

Plant & Machinery

 

30,000

A

72,650

 

Cash at Bank

 

29,800

B

72,650

 

Furniture

 

800

C

72,650

 

Patents

 

5,000

D

72,650

2,90,600

 

 

 

 

 

 

 

 

 

 

 

2,90,600

 

 

2,90,600

 


Q.2. (Revaluation Method)

B and S are partners of S & Co. Sharing profits and losses in the ratio of 3:1. S and T are partners of T & Co. Sharing profits and losses in the ratio of 2:1.

On 31st October, 2011, they decided to amalgamate and form a new firm M/s. BST & Co. Wherein B, S and T would be partners sharing profits and losses in the ratio of 3:2:1.

Their balance sheets on that date were as under:

 

Liabilities

S & Co.

T & Co.

Assets

S & Co.

T & Co.

Rs.

Rs.

Rs.

Rs.

Due to X & Co.

40,000

-

Cash in hand

10,000

5,000

Due to S & Co.

-

50,000

Cash at bank

15,000

20,000

Other Creditors

60,000

58,000

Due from T & Co.

50,000

-

Reserves

25,000

50,000

Due from X & Co.

-

30,000

Capitals

 

 

Other Debtors

80,000

1,00,000

B

1,20,000

-

Stock

60,000

70,000

S

80,000

1,00,000

Furniture

10,000

3,000

T

-

50,000

Vehicles

-

80,000

 

 

 

Machinery

75,000

-

 

 

 

Building

25,000

 

 

3,25,000

3,08,000

 

3,25,000

3,08,000

 

The amalgamated firm took over the business on the following terms :

 

  1. Goodwill of S & Co. Was worth Rs. 60,000 and that of T & Co. Rs. 50,000. Goodwill account was not to be opened in the books of the new firm, the adjustments being recorded through capital accounts of the partners.
  2. Building, machinery and vehicles were taken over at Rs. 50,000, Rs. 90,000 and
  3. Rs. 1,00,000 respectively.
  4. Provision for doubtful debts has to be carried forward at Rs. 4,000 in respect of debtors of S & Co. And Rs. 5,000 in respect of debtors of T & Co.

 

You are required to:

  1. Compute the adjustments necessary for goodwill.
  2. Pass the journal entries in the books of BST & Co. Assuming that excess/deficit capital (taking T’s Capital as base) with reference to share in profits are to be transferred to current accounts.

 

Solution:

 

Adjustment of Goodwill for raising & writing off

 

Raised in old profit sharing ratio

 

Written off in new ratio

Difference

 

S & Co.

T & Co.

Total

 

 

 

 

3:1

2:1

Rs.

 

3:2:1

 

Rs.

 

B

45,000

-

45,000

Cr.

55,000

Dr.

10,000

Dr.

S

15,000

33,333

48,333

Cr.

36,666

Dr.

11,667

Cr.

T

-

16,667

16,667

Cr.

18,334

Dr.

1,667

Dr.

 

60,000

50,000

1,10,000

 

1,10,000

 

 

 

 

Journal Entries in the books of BST & Co

Particulars

 

Debit

(Rs)

Credit (Rs)

Cash Account

Dr

10,000

 

Bank Account

Dr

15,000

 

T & Co.

Dr

50,000

 

Sundry Debtors

Dr

80,000

 

Stock Account

Dr

60,000

 

Furniture Account

Dr

10,000

 

Machinery Account

Dr

90,000

 

Building Account

Dr

50,000

 

     To Provision for Doubtful debts

 

 

4,000

     To X & Co.

 

 

40,000

     To Sundry Creditors

 

 

60,000

     To B’s Capital Account

 

 

1,65,750

     To S’s capital Account

 

 

95,250

(Sundry assets and liabilities of M/s S & Co. Taken over at the values stated as per  agreement  dated )

 

 

 

Cash Account 

Dr

5,000

 

Bank Account 

Dr

20,000

 

X & Co. Account

Dr

30,000

 

Sundry Debtors A/c

Dr

1,00,000

 

Stock Account 

Dr

70,000

 

Furniture Account

Dr

3,000

 

Vehicles Account

Dr

1,00,000

 

     To Provision for Doubtful Debts

 

 

5,000

     To S & Co.

 

 

50,000

     To Sundry Creditors

 

 

58,000

     To S’s Capital Account

 

 

1,43,333

     To T’s Capital Account

 

 

71,667

(Sundry assets and liabilities of M/s T & Co. Taken over at the values stated as per agreement dated...)

 

 

 

B’s Capital Account

Dr

10,000

 

T’s Capital Account

Dr

1,667

 

     To S’s Capital Account

 

 

11,667

(Adjustment in capital accounts consequent on raising goodwill of S & Co. For Rs. 60,000, T & Co. For Rs. 50,000 and writing off the same in the new ratio between B,S,T as per agreement)

 

 

 

S & Co.

Dr

50,000

 

     To T Co.

 

 

50,000

(Mutual indebtedness of S & Co. And T & Co., cancelled on taking over of the two firms)

 

 

 

B’s Current Account

Dr

54,250

 

     To B’s Capital Account

 

 

54,250

(Amount credited to B’s Capital to bring capital in profit-sharing ratio)

 

 

 

S’s Capital Account

Dr

1,10,250

 

     To S’s Current Account

 

 

1,10,250

(Excess amount in S’s Capital Account transferred to S’s current account to reduce the balance in capital accounts in accordance with the profit sharing ratio)

 

 

 

 

 

Working Notes:

 

Balance of Capital Accounts on transfer of business to M/s BST & Co.

(a)

S & Co.

 

B’s Capital

S’s Capital

 

 

Rs.

Rs.

Rs.

As per Balance Sheet

 

1,20,000

80,000

Credit for Reserve

 

18,750

6,250

Profit on Revaluation

40,000

 

 

Less : Provision for doubtful debts

(4,000)

27,000

9,000

 

 

1,65,750

95,250

 

(b)

T & Co.

 

S’s Capital

T’s Capital

 

 

Rs.

Rs.

Rs.

As per Balance Sheet

 

1,00,000

50,000

Credit for Reserve

 

33,333

16,667

Profit on Revaluation

20,000

 

 

Less : Provision for doubtful debts

(5,000)

10,000

5,000

 

 

1,43,333

71,667

 

Capital in the New Firm

 

B

(Rs)

S

(Rs)

T

(Rs)

Balance as taken over

1,65,750

95,250

 

 

-

1,43,333

71,667

 

1,65,750

2,38,583

71,667

Adjustment for Goodwill

–10,000

+11,667

–1,667

 

1,55,750

2,50,250

70,000

Total capital, Rs. 4,20,000* in the new ratio of 3:2:1, taking T’s Capital as the basis

2,10,000

1,40,000

70,000

Transfer to Current Account

54,250 Dr

1,10,250 Cr

*T’s Capital is Rs. 70,000 and it is 1/6 of total. The total therefore is Rs. 4,20,000.

 

Q.3. (Realisation Method)

P and Q are partners of P & Co. Sharing Profit and Losses in the ratio of 3:1 and Q and R are partners of R & Co., sharing profits and losses in the ratio of 2:1. On 31st March, 2011, they decide to amalgamate and form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on the above date are as under:

Liabilities

P & Co.

R & Co.

Assets

P & Co.

R & Co.

Rs.

Rs.

Rs.

Rs.

Capitals:

 

 

Fixed Assets:

 

 

P

2,40,000

----

Building

50,000

60,000

Q

1,60,000

2,00,000

Plant & machinery

1,50,000

 

1,60,000

R

 

1,00,000

Office equipment

20,000

6,000

Reserves

50,000

1,50,000

Current assets:

 

 

Sundry Creditors

1,20,000

1,16,000

Stock-in-trade

1,20,000

1,40,000

Due to P & Co

----

1,00,000

Sundry debtors

1,60,000

2,00,000

Bank Overdraft

80,000

----

Bank balance

30,000

90,000

 

 

 

Cash in hand

20,000

10,000

 

 

 

Due from R & Co.

1,00,000

----

 

6,50,000

6,66,000

 

6,50,000

6,66,000

 

The amalgamated firm took over the business on the following terms:

 

  1. Building of P & Co. Was valued at Rs. 1,00,000.
  2. Plant and machinery of P & Co. Was valued at Rs. 2,50,000 and that of R & Co. At Rs. 2,00,000.
  3. All stock in trade is to be appreciated by 20%.
  4. Goodwill valued of P & Co. At Rs. 1,20,000 and R & Co. At Rs. 60,000, but the same will not appear in the books of PQR & Co.
  5. Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio.
  6. Provision for doubtful debts has to be carried forward at Rs. 12,000 in respect of debtors of P & Co. And Rs. 26,000 in respect of debtors of R & Co.

 

You are required to prepare the Balance Sheet of new firm and capital accounts of the partners in the books of old firms.

 

Solution:

Balance Sheet of M/s PQR & Co. As at 31st March, 2011

Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Capitals:

 

 

Fixed Assets:

 

 

P

5,52,000

 

Building (100000+ 60000)

 

1,60,000

Q

3,68,000

 

Plant & machinery(250000+200000)

 

4,50,000

R

1,84,000

11,04,000

Office equipment (20000+6000)

 

26,000

 

 

 

Current assets:

 

 

Sundry Creditors

(120000+116000)

 

2,36,000

Stock-in-trade (144000+168000)

 

3,12,000

Bank Overdraft

 

80,000

Sundry debtors (160000+200000)

3,60,000

 

 

 

 

Less: provision for Doubtful debts

 

 

 

 

 

(12000+26000)

(38,000)

3,22,000

 

 

 

Bank balance (30000+90000)

 

1,20,000

 

 

 

Cash in hand

 

30,000

 

 

14,20,000

 

 

14,20,000

 

In the books of P & Co

Partner’s Capital A/c

Particulars

P

Q

Particulars

P

Q

Rs.

Rs.

Rs.

Rs.

To Capital A/c’s

4,89,000

2,43,000

By Balance b/d

2,40,000

1,60,000

M/s PQR & Co.

 

 

By Reserve (3:1)

37,500

12,500

 

 

 

By Profit on Realisation A/c (WN4)

2,11,500

70,500

 

4,89,000

2,43,000

 

4,89,000

2,43,000

 

In the books of R & Co

Partner’s Capital A/c

Particulars

Q

R

Particulars

Q

R

Rs.

Rs.

Rs.

Rs.

To Capital A/c’s

3,68,000

1,84,000

By Balance b/d

2,00,000

1,00,000

M/s PQR & Co.

 

 

By Reserve (2:1)

1,00,000

50,000

 

 

 

By Profit on Realisation A/c (WN5)

68,000

34,000

 

3,68,000

1,84,000

 

3,68,000

1,84,000

 

Working Notes:

  1. Calculation of P.C

Particulars

P & Co.

R & Co.

 

Rs.

Rs.

Assets:

 

 

Goodwill

1,20,000

60,000

Building

1,00,000

60,000

Plant & machinery

2,50,000

2,00,000

Office equipment

20,000

6,000

Stock-in-trade

1,44,000

1,68,000

Sundry debtors

1,60,000

2,00,000

Bank balance

30,000

90,000

Cash in hand

20,000

10,000

Due from R & Co.

1,00,000

-

(A)

9,44,000

7,94,000

Liabilities:

 

 

Creditors

1,20,000

1,16,000

Provision for doubtful debts

12,000

26,000

Due to P & Co.

-

1,00,000

Bank overdraft

80,000

-

(B)

2,12,000

2,42,000

Purchase consideration (A-B)

7,32,000

5,52,000

 

2.     Computation of proportionate capital

 

Rs.

M/s PQR & Co. (Purchase Consideration) (Rs. 7,32,000+ Rs. 5,52,000)

12,84,000

Less: Goodwill adjustment

(1,80,000)

Total capital of new firm (Distributed in ratio 3:2:1)

11,04,000

P’s proportionate capital

5,52,000

Q’s proportionate capital

3,68,000

R’s proportionate capital

1,84,000

 

3.     Computation of Capital Adjustments

Particulars

P

(Rs)

Q

(Rs)

R

(Rs)

Total

Balance transferred from P & Co

4,89,000

2,43,000

----

7,32,000

Balance transferred from R & Co

----

3,68,000

1,84,000

5,52,000

 

4,89,000

6,11,000

1,84,000

12,84,000

Less: Goodwill w/off in ratio 3:2:1

(90,000)

(60,000)

(30,000)

(1,80,000)

Existing Capital

3,99,000

5,51,000

1,54,000

11,04,000

Proportionate Capital

5,52,000

3,68,000

1,84,000

11,04,000

Amount to be brought in (paid off)

1,53,000

(1,83,000)

30,000

----

 

4.     Realisation Account (P & Co)

 

Rs.

 

Rs.

To

Building

50,000

By

Creditors

1,20,000

To

Plant & machinery

1,50,000

By

Bank overdraft

80,000

To

Office equipment

20,000

By

M/s PQR & Co.

7,32,000

To

Stock-in-trade

1,20,000

 

(purchase consideration)

 

To

Sundry debtors

1,60,000

 

(W.N.1)

 

To

Bank balance

30,000

 

 

 

To

Cash in hand

20,000

 

 

 

To

Due from R & Co.

1,00,000

 

 

 

To

Partners’ capital A/c’s

 

 

 

 

 

P               2,11,500

 

 

 

 

 

Q                  70,500

2,82,000

 

 

 

 

 

9,32,000

 

 

9,32,000

 

5.     Realisation Account (R & Co)

 

Rs.

 

Rs.

To

Building

60,000

By

Creditors

1,16,000

To

Plant & machinery

1,60,000

By

Due to P & Co.

1,00,000

To

Office equipment

6,000

By

M/s PQR & Co.

5,52,000

To

Stock-in-trade

1,40,000

 

(purchase consideration)

 

To

Sundry debtors

2,00,000

 

(W.N.1)

 

To

Bank balance

90,000

 

 

 

To

Cash in hand

10,000

 

 

 

To

Partners’ capital A/c’s

 

 

 

 

 

Q                 68,000

 

 

 

 

 

R                  34,000

1,02,000

 

 

 

 

 

 

 

 

 

 

 

7,68,000

 

 

7,68,000

 

Q.4. A & B were partner sharing profits and losses in the ratio of 3:1 and C and D were partners sharing equally. Following where their Balance Sheet as on 31st March 2011.

Liabilities

AB & Co.

Rs.

CD & Co.

Rs.

Assets

AB & Co.

Rs.

CD & Co.

Rs.

Capital A/c:

A

B

C

D

Creditors

Bills Payable
(Outstanding Rent)

 

15,000

15,000

-

-

5,000

2,000

 

1,000

 

38,000

 

-

-

12,500

16,000

7,500

4,000

 

750

 

40,750

Goodwill

Plant & Machinery

Furniture

Stock

Debtors

Fixtures

Cash

2,000

10,000

4,000

10,000

9,500

800

1,700

 

38,000

-

13,500

4,500

12,000

8,500

600

1,650

 

40,750

 

The firms are amalgamated on the following terms:

1)     Outstanding rent was paid in full by the respective firms.

2)     Creditors of both the firms were taken by the new firm at a discount of 5%.

3)     Plant & Machinery is subject to 5% depreciation of both the firms.

4)     Furniture of C and D was sold in the market for Rs. 4,000 and furniture A and B was not taken over by the new firm.

5)     Fixtures were not taken over by the new firm.

6)     Stock of A and B was valued at Rs. 11,050 and that of C and D was valued at Rs. 10,500.

7)     Goodwill of M/s A and B is valued at Rs. 3,000 and that of M/s C and D at Rs. 4,000. Goodwill account is not being retained in the books of the new firm.

8)     Capital of each partner in the new firm is to be maintained at Rs. 12,500 by bringing cash or paying cash, as they may be.

 

You are required to prepare:

 

  1. Realization A/c.
  2. Partners Capital A/c in the books of both the firms and
  3. Amalgamated Balance Sheet of the new firm.

Solution:

Calculation of P.C

Particulars

AB & Co.

CD & Co.

 

Rs.

Rs.

Assets:

 

 

Goodwill

3,000

4,000

Plant & machinery (after 5% depreciation)

9,500

12,825

Stock-in-trade

11,050

10,500

Sundry debtors

9,500

8,500

Cash in hand (1700-1000), (1650+4000-750)

700

4,900

 

 

 

(A)

33,750

40,725

Liabilities:

 

 

Creditors (after 5% discount)

4,750

7,125

Bills Payable

2,000

4,000

 

 

 

(B)

6,750

11,125

Purchase consideration (A-B)

27,000

29,600

 

In the Books of AB & Co

Realisation A/c

Particulars

Rs.

Particulars

Rs.

To Assets:

 

By Liabilities:

 

Goodwill

2,000

Creditors

5,000

Plant & Machinery

10,000

Bills Payable

2,000

Furniture

4,000

O/s Rent

1,000

Stock

10,000

 

 

Debtors

9,500

By Partner’s Capital A/c

4,800

Fixtures

800

(4000+800)

 

To Cash(1700-1000)

700

 

 

 

 

By New Firm A/c (P.C)

27,000

To Profit trfd to:

 

 

 

A’s Capital                               1,350

 

 

 

B’s Capital                                  450

1,800

 

 

 

 

 

 

 

38,800

 

38,800

Note: Furniture of A & B is not taken over by new firm, hence trfd to partner’s capital a/c.


Partner’s Capital A/c

Particulars

A

B

Particulars

A

B

Rs.

Rs.

Rs.

Rs.

To Realisation

(Furniture & Fixture)

3,600

1,200

By Balance b/d

15,000

15,000

To New Firm A/c

12,750

14,250

By Realisation A/c

1,350

450

 

16,350

15,450

 

16,350

15,450

 

New Firm A/c

Particulars

Rs.

Particulars

Rs.

To Realisation A/c (P.C)

27,000

By Capital A/c

 

 

 

A

12,750

 

 

B

14,250

 

27,000

 

27,000

 

In the Books of CD & Co

Realisation A/c

Particulars

Rs.

Particulars

Rs.

To Assets:

 

By Liabilities:

 

Plant & Machinery

13,500

Creditors

7,500

Furniture

4,500

Bills Payable

4,000

Stock

12,000

 

 

Debtors

8,500

By Cash (Furniture)

4,000

Fixtures

600

By C’s Capital A/c (Fixtures)

300

Cash (See Note)

4,900

By D’s Capital A/c (Fixtures)

300

 

 

 

 

To Profit trfd to:

 

By New Firm A/c (P.C)

29,600

C’s Capital                                  850

 

 

 

D’s Capital                                  850

1,700

 

 

 

 

 

 

 

45,700

 

45,700

Note: Furniture of C & D is sold in the market, so cash received is trfd to new firm.

 

Partner’s Capital A/c

Particulars

C

D

Particulars

C

D

Rs.

Rs.

Rs.

Rs.

To Realisation A/c

300

300

By Balance b/d

12,500

16,000

To New Firm A/c

13,050

16,550

By Realisation A/c

850

850

 

13,350

16,850

 

13,350

16,850

 

New Firm A/c

Particulars

Rs.

Particulars

Rs.

To Realisation A/c (P.C)

29,600

By Capital A/c

 

 

 

C

13,050

 

 

D

16,550

 

29,600

 

29,600

 

Balance Sheet of New Firm (after amalagamation)

Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Capitals:

 

 

Goodwill

 

7,000

A

12,500

 

Plant & Machinery

 

22,325

B

12,500

 

Stock

 

21,550

C

12,500

 

Debtors

 

18,000

D

12,500

50,000

 

 

 

 

 

 

 

 

 

Creditors

 

11,875

 

 

 

Bills Payable

 

6,000

 

 

 

Bank O/D

(6,600-5600)

 

1,000

 

 

 

 

 

 

 

 

 

 

 

68,875

 

 

68,875

 

Particulars

A

B

C

D

Balance b/f from Old Firm

12,750

14,250

13,050

16,550

Less: Closing Capital

12,500

12,500

12,500

12,500

Balance Paid in Cash

250

1,750

550

4,050

 

Cash to be paid back = Rs 6,600

 

Q. 5. (Investment Fluctuation Reserve; ledgers of Old Firm)

AB & Co. And CD & Co. Amalgamated with effect from 1-4-2003. Their balance sheet as on 31st March, 2003 was as under:

Liabilities

AB & Co. (Rs.)

CD & Co.

(Rs.)

Assets

AB & Co.(Rs.)

CD & Co.

(Rs.)

A’s Capital

B’s Capital

C’s Capital

D’s Capital

(General Reserve)

Creditors

(Investment fluctuation Reserve)

1,00,000

2,00,000

-

-

1,00,000

7,50,000

 

50,000

12,00,000

-

-

2,00,000

3,00,000

2,00,000

13,40,000

 

60,000

21,00,000

Land & Building

Plant & Machinery

Stock

Debtors

(Cash & Bank Balance)

Investments

2,80,000

-

3,00,000

2,00,000

 

1,20,000

3,00,000

 

12,00,000

-

8,00,000

4,00,000

4,00,000

 

1,00,000

4,00,000

 

21,00,000

Both the firm amalgamates subject to the following terms:

  1. All the assets and all the liabilities of both the firms shall be taken over by the new firm.
  2. Land and Building shall be appreciated by 20%.
  3. Plant & Machinery shall be depreciated by 10%.
  4. Stock of AB & Co. Shall be increased by Rs. 50,000.
  5. Stock of CD & Co. Shall be taken at Rs. 4, 50,000.
  6. Debtors of AB & Co. Shall be decreased by Rs. 10,000.
  7. Debtors of CD & Co. Shall be taken at Rs. 3, 80,000.
  8. Goodwill of AB & Co. Shall be valued at Rs. 1, 00,000.
  9. Goodwill of CD & Co. Shall be Valued at Rs. 2, 00,000.
  10. Investment of AB & Co. Shall be taken over at Rs. 2,80,000.
  11. Investment of CD & Co. Shall be taken over at Rs. 3,60,000.

You required preparing:

a)     Statement showing calculation of purchase consideration.

b)    Realization A/c and Partners capital A/c in the books of AB & Co.

c)     Realization A/c and Partners capital A/c in the books of CD & Co.

 

Solution:

Calculation of P.C

Particulars

AB & Co.

CD & Co.

 

Rs.

Rs.

Assets:

 

 

Land & Building (2,80,000 x 120%)

3,36,000

 

Plant & machinery (8,00,000 x 90%)

 

7,20,000

Stock-in-trade

3,50,000

4,50,000

Sundry debtors

1,90,000

3,80,000

Cash in hand

1,20,000

1,00,000

Investments

2,80,000

3,60,000

Goodwill

1,00,000

2,00,000

Total

13,76,000

22,10,00

Less: Liabilities

 

 

Creditors

7,50,000

13,40,000

Purchase consideration

6,26,000

8,70,000

 

In the Books of AB & Co

Realisation A/c

Particulars

Rs.

Particulars

Rs.

To Assets:

 

By Liabilities:

 

Land & Building

2,80,000

Creditors

7,50,000

Stock

3,00,000

 

 

Debtors

2,00,000

By Investment Fluctuation Reserve

20,000

Cash & Bank

1,20,000

 

 

Investment

3,00,000

By New Firm A/c (P.C)

6,26,000

 

 

 

 

To Profit trfd to:

 

 

 

A’s Capital                             98,000

 

 

 

B’s Capital                             98,000

1,96,000

 

 

 

 

 

 

 

13,96,000

 

13,96,000


Partner’s Capital A/c

Particulars

A

B

Particulars

A

B

Rs.

Rs.

Rs.

Rs.

 

 

 

By Balance b/d

1,00,000

2,00,000

To New Firm A/c

2,63,000

3,63,000

By Investment Fluctuation Reserve

15,000

15,000

 

 

 

By General Reserve

50,000

50,000

 

 

 

By Realisation A/c (Profit)

98,000

98,000

 

 

 

 

 

 

 

2,63,000

3,63,000

 

2,63,000

3,63,000

Note: Investment Fluctuation Reserve to the extent Rs 20,000 (3,00,000-2,80,000) is trfd to realization A/c, balance treated as reserve distributed between partners.

 

In the Books of CD & Co

Realisation A/c

Particulars

Rs.

Particulars

Rs.

To Assets:

 

By Liabilities:

 

Plant & Machinery

8,00,000

Creditors

13,40,000

Stock

4,00,000

 

 

Debtors

4,00,000

By Investment Fluctuation Reserve

40,000

Cash & Bank

1,00,000

 

 

Investments

4,00,000

By New Firm A/c (P.C)

8,70,000

 

 

 

 

To Profit trfd to:

 

 

 

C’s Capital                             75,000  

 

 

 

D’s Capital                             75,000   

1,50,000

 

 

 

 

 

 

 

22,50,000

 

22,50,000

 

Partner’s Capital A/c

Particulars

C

D

Particulars

C

D

Rs.

Rs.

Rs.

Rs.

 

 

 

By Balance b/d

2,00,000

3,00,000

To New Firm A/c

3,85,000

4,85,000

By Investment Fluctuation Reserve

10,000

10,000

 

 

 

By General Reserve

1,00,000

1,00,000

 

 

 

By Realisation A/c (Profit)

75,000

75,000

 

 

 

 

 

 

 

3,85,000

4,85,000

 

3,85,000

4,85,000

 


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