Unit 3 | unit 3 amalgamation of firms

FA2

Unit - 3

Amalgamation of Partnership Firms

3.1 Introduction

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.

3.2 Meaning of Amalgamation of Partnership Firms

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:

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

3.3 Objectives of Amalgamation of Partnership firms

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

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

3.4 Accounting Procedure for Amalgamation of Partnership Firms

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 :

Assets of the old firm taken over by the new firm.
Liabilities of the old firm taken over by the new firm.
Capitals of the partners of the old firm taken over by the new firm.
Adjustment of Goodwill.
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.

3.5 Solved Examples

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
Liabilities	Rs.	Rs.	Assets	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:

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.
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.
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.
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.
Liabilities	Rs.	Rs.	Assets	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 :

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.
Building, machinery and vehicles were taken over at Rs. 50,000, Rs. 90,000 and
Rs. 1,00,000 respectively.
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:

Compute the adjustments necessary for goodwill.
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		Written off in new ratio
	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.
Liabilities	Rs.	Rs.	Assets	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:

Building of P & Co. Was valued at Rs. 1,00,000.
Plant and machinery of P & Co. Was valued at Rs. 2,50,000 and that of R & Co. At Rs. 2,00,000.
All stock in trade is to be appreciated by 20%.
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.
Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio.
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
Particulars	Rs.	Rs.	Particulars	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
Particulars	Rs.	Rs.	Particulars	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:

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:

Creditors

Bills Payable
(Outstanding Rent)

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:

Realization A/c.
Partners Capital A/c in the books of both the firms and
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
Particulars	Rs.	Rs.	Particulars	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
Particulars	Rs.	Rs.	Particulars	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

1,00,000

4,00,000

21,00,000

Both the firm amalgamates subject to the following terms:

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