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:
- 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.
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.
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.
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:
- 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. |
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 :
- 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 |
|
|
| ||
| 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:
- 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 |
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:
- 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 |
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:
- 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 |
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:
- 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 |
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 |