ACCOUNTANCY

Chapter : 1

DEPRECIATION, PROVISION AND RESERVES

TWO MARKS QUESTIONS

1. What is Depreciation?
Ans: Depreciation is the permanent decrease in the value of a fixed asset due to its constant use or lapse
of time.
2. State any two causes of depreciation?
Ans : i) Wear and tear and
ii) Passage of time.
3. What is the straight line method of depreciation?
Ans: Under this method, a fixed percentage of the original cost is written off every year, as annual
depreciation.
4. What is the written down value method of depreciation?
Ans: Under this method, depreciation at fixed percentage is calculated every year on the reduced balance
of the asset brought forward from the previous year.
5. What is Provision?
Ans: Provision is a charge against profit to meet certain known liabilities or contingencies.
6. What is Reserve?
Ans: Reserve is an appropriation of profit retained to meet unknown liabilities or contingencies
7. State any two types of reserves?
Ans: i) Capital Reserve and
ii) Revenue reserve

FOURTEEN MARKS QUESTIONS

8. On 01.07.2011 Mr. Radhakrishna purchased second hand Machinery for ₨ 80000 and spent ₨
16,000 on reconditioning and installing it. On 01.01.2012 he purchased new Machinery worth Rs.
60,000. On 30.06.2013, the Machinery which was purchased on 01.01.2012 was sold for Rs. 48,000
and on 01.07.2013 fresh Machinery was acquired at a cost of Rs. 64,000. He writes off depreciation
at 10% on original cost method. The accounts are closed every year on 31 st March. Show the
Machinery account and Depreciation account for three years ending 31.03.2014

Ans: Dr. Machinery A/c Cr.

Date Particulars Amount Date Particulars Amount
1.7.11 To Bank A/c Bought 96,000 31.3.12 By Depreciation A/c Old Machinery
old Machinery (80000 (96000 x 10 % x 9/12 = 7200 New
+ 16000) Machinery = 1500 (60,000 x 10 % x 8,700
1.1.12 To Bank A/c Bought 60,000 3/12))
New Machinery 1,47,300
31.3.12 By Balance c/d

1,56,000 1,56,000
1.4.12 To Balance b/d 31.3.13 By Depreciation A/c Old 96,000 x 10%
= 9,600
1,47,300 New 60,000 x 10 % = 6,000 15,600
31.3.13 By Balance c/d 1,31,700
 1,47,000 1,47,000
1.4.13 To Balance b/d 1,31,700 30.6.13 By Depreciation A/c new 1,500

To Bank A/c (Fresh 64,000 30.6.13 By Bank A/c (sold) 48,000

1.7.13 Machinery)
30.6.13 By P/L A/c (loss) 3,000
31.3.14 By Depreciation A/c (old – 9,600 new
4,800) 14,400
By balance c/d 1,28,800
1,95,000 1,95,000

Calculation of P/L on the sale of new Machinery

Cost 60,000
(1.1.2012) 1,500
(-)Depreciation 58,500
1.4.2012 6,000
(-)Depreciation 52,500
(60,000 x 10%)1.4.2013
(-)Depreciation 1,500
(60,000 x 10 % x 3/12)
51,000

- Selling price 48,000

Loss on sale 3,000

9. From the following details, show machinery A/c and Depreciation A/c for 3 years under
diminishing balance method, charging depreciation at 10% p.a on 31st March every year:
i) Machine ‘A’ purchased on 01.10.2010 for Rs. 50,000
ii) Machine ‘B’ purchased on 31.06.2012 for Rs. 40,000
iii) Machine ‘A’ sold on 31.03.2013 for Rs. 38,000

Ans: Dr. Machinery A/c Cr.

Date Particulars Amount Date Particulars Amount
1.10.10 To Bank A/c (Machine ‘A’ 50,000 31.3.11 By Depreciation A/c (50000 x 2,500
purchased ) 10% x 6/12)
31.3.11 By Balance c/d 47,500
50,000 50,000
1.4.11 To Balance b/d 47,500 31.3.12 By Depreciation A/c (47,500 x 10 %) 4,750
31.3.12 By Balance c/d 42,750
47,500 47,500
1.4.12 To Balance b/d 42,750 31.3.13 BY Depreciation A/c (Machine ‘A’) 4,275
31.6.12 To Bank A/c (Machine ‘B’ 40,000 31.3.13 By Bank A/c (Sold) 38,000
purchased) 31.3.13 By P/L A/c (Loss) 475
31.3.13 By Depreciation A/c (Machine ‘B’) 3,000
(40000 x 10% x 9/12)
31.3.13 By Balance c/d 37,000
82,750 82,750
 1.4.13 To Balance b/d 37,000
Calculation of P/L on the sale of part of the Machine ‘A’
Cost 50,000
(1.10.2010)
2,500
(-)Depreciation 47,500
1.4.2011 4,750
(-) Depreciation 1.4.2012 42,750

(-)Depreciationupto 30.3.2013 4,275

(42750 x 10%)
Book Value 38,475
Sold 38,000
475
Loss
Depreciation A/c : Same procedure followed as in the previous sum

10. A Lease is purchased on 01.04.2008 for a term of 5 years by payment of Rs. 1,25,000. It is proposed
to depreciate the lease by the annuity method charging 10 % interest. If annuity of Re. 1 for 5
years at 10 % is 0.263797, show the Depreciation = 1,25,000 x 0.263797 = 32974.625

Ans: Dr. Machinery A/c Cr.

Date Particulars Amount Date Particulars Amount
1.4.08 To Bank A/c 1,25,000.000 31.3.09 By Depreciation A/c 32,974.625
31.3.09 To Interest A/c 12,500.000 31.3.09 By Balance c/d 104,525.380
1,37,500.000 1,37,500.000
1.4.09 To Balance b/d 1,04,525.380 31.3.10 By Depreciation A/c 32,974.625
31.3.10 To Interest A/c (104525.38 x 10 %) 10,452.530 31.3.10 By Balance c/d 82,003.619
1,14,977.910 1,14,977.910
1.4.10 To Balance b/d 82,003.290 31.3.11 By Depreciation A/c 32,974.625
31.3.11 To Interest A/c (82003.29 x 10 %) 8,200.329 31.3.11 By Balance c/d 57,228.994
90,203.619 90,203.619
1.4.11 To Balance b/d 57,228.994 31.3.12 By Depreciation A/c 32,974.625
31.3.12 To Interest A/c (57228.994 x 10 %) 5,722.890 31.3.12 By Balance c/d 29,977.259
62,951.884 62,951.884
1.4.12 To Balance b/d 29,977.259 31.3.13 By Depreciation A/c 32,974.595
31.3.13 To Interest A/c 2,997.336
32,974.595 32,974.595

PRACTICAL ORIENTED QUESTIONS

11. Prepare Machinery a/c for two years with imaginary figures under Original cost method.

Dr Machinery a/c Cr
1/4/2012 To bank a/c 50,000 31/3/2013 By depreciation a/c 5,000
50,000x10%
 31/3/2013 By bal c/d 45,000
50,000 50,000
1/4/2013 To bal b/d 45,000 31/3/2014 By depreciation a/c 5,000
31/3/2014 By bal c/d 40,000
45,000 45,000

12. Prepare Machinery a/c for two years with imaginary figures under Written down value method.

Dr Machinery a/c Cr
1/4/2012 To bank a/c 50,000 31/3/2013 By depreciation a/c 5,000
50,000x10%
31/3/2013 By bal c/d 45,000
50,000 50,000
1/4/2013 To bal b/d 45,000 31/3/2014 By depreciation a/c 4,500
45,000x10%
31/3/2014 By bal c/d 40,500
45,000 45,000

CHAPTER 2

ACCOUNTING FOR PARTNERSHIP; FUNDAMENTALS

TWO MARKS QUESTIONS

1. Name the methods under which the capital accounts could be prepared in a partnership firm.
Ans : i) Fixed capital method.
ii) Fluctuating capital method
2. What is meant by fluctuating capital system?
Ans : Under the fluctuating capital method, the capitals of the partners fluctuate from year to year
3. What is meant by fixed capital system?
Ans : Under the fixed capital method, the capitals of the partners fixed unless if there is additional
capital or withdrawal of capital.
4. What is a profit and loss appropriation Account?
Ans : The Profit/ Loss appropriation account is the account which shows the appropriation of profits of
the firms among the partners. It records interest on partners’ capital, drawings, loans partners,
salaries or commission etc.
5. Why is a profit/ loss appropriation account prepared by partnership firms?
Ans : It is prepared to know the Net profit/ loss after adjusting special transactions like interest on
capital, partners salaries, commission etc.

FIVE MARKS QUESTIONS

 6. Miss Maheshwari, a partner in a firm has withdrawn the following amounts.
on 30th June 2013 Rs. 3000
on 31st August 2013 Rs. 2400
on 28th February 2014 Rs. 1500
The accounts of the firm are closed on 31st March of every year. Interest is chargeable on drawings
at 8 % per annum. Calculate the interest on Miss Maheshwari’s drawings under product method.
Ans : Calculation of interest on drawings of Miss Maheshwari

𝑟𝑎𝑡𝑒 1
= Total product x x
100 12
Calculation of Total Product

Date of Drawing Amount Months o/s (Till 31st March) Product

on 30th June 2013 Rs. 3000 9 27,000
on 31st August 2013 Rs. 2400 7 16,800
on 28th February 2014 Rs. 1500 1 1,500
45,300

8 1
Therefore Interest on drawings = 45,300 x x = Rs 302
100 12

7. Chirag, Pavan and Prakash were partners in a firm. Drawings made by them are as follows: Chirag
Rs 2,000 on 1st of every month. Pavan Rs. 2500 on the 15th of every month and Prakash Rs. 1500 on
the last date of every month.
Calculate interests on partners’ drawings at 12 % p.a for the year ending 31 st March 2013 under
specific period method.
Ans : Chirag Rs. 2000 on 1st of every month
𝑟𝑎𝑡𝑒 1
Specific Period method = Total drawings x x specific x
100 12
12 13 1
Interest = 24000 x x x = Rs. 1,560
100 2 12
Pavan (15th of every month) Rs. 2,500
12 6
Specific Period method = 30,000 x x = Rs 1,800
100 12
Prakash (last date of every month) Rs. 1,500
12 11 1
Specific Period method = 18,000 x x x = Rs 990
100 2 12
8. Prakash and Praveen commenced business in partnership with a capital of Rs. 50,000 and Rs.
40,000 respectively on 01.04.2001 agreeing to share profit and losses in ration 3:2. For the year
ending 31.03.2002 they earned a profit of Rs 18,000 before allowing for the following .
a) Interest on capital at 5 % p.a.
b) Interest on drawings, Prakash Rs. 300 and Praveen Rs. 500
c) Yearly salary of Praveen Rs. 5,000
Their drawings during the year – Prakash Rs. 8,000 and Praveen Rs. 10,000. Prepare the
Profit and Loss adjustment Account of the firm.
Ans Dr. Profit / Loss Appropriation Account / Adjustment A/c Cr.
Particulars Amount Amount Particulars Amount Amount
To Interest on Capital a/c By P/L a/c (N / P) 18000
By Interest on
Prakash 2500 Drawings a/c
Praveen 2000 4500 Prakash 300
To Praveen Salary a/c 5000 Praveen 500 800
To N/P Transferred to
Prakash 5580
Praveen(3.2) 3720 9300
18800 18800

PRACTICAL ORIENTED QUESTIONS

9. How do you treat the following in the absence of partnership deed?

Ans :

a) Interest on capital - No Interest

b) Interest on drawings - No Interest
c) Interest on Loan - 6 % p.a
Distribution of P/L - Equal
d)
e) Salary to partner - No salary

10. Prepare Profit and Loss appropriation account of a firm using five imaginary figures.

Ans Dr. Profit / Loss Appropriation Account / Adjustment A/c Cr.

Particulars Amount Amount Particulars Amount Amount

By P/L a/c (N / P) By
Interest on drawings
To Interest on Capital a/c a/c 50,000
Arun 1000 Arun 250
Girish 500 1,500 Girish 250
To Girish Salary a/c 2,500 Praveen 500
To Arun's Commission a/c 1,000.000
To N/P transferred to 5580
Arun 22750 9300
Girish (1.1) 22750 45,500.000
50,500 50,500

11. Prepare partners’ capital accounts under Fixed Capital system.

Dr Capital A/c Cr
Particulars A B Particulars A B
By bal b/d 50,000 60,000
To bal c/d 50,000 60,000
 50,000 60,000 50,000 60,000

Dr Current A/c Cr
Particulars A B Particulars A B
By salary 4,000 3,000
By commission 2,000 1,000
By Interest on capital 6,000 4,000
To interest on 2,000 1,500
drawings
To bal c/d 10,000 6,500
12,000 8,000 12,000 8,000

12. Prepare partners’ capital A/c under Fluctuating capital system with imaginary figures.

Dr Capital A/c Cr
Particulars A B Particulars A B
By Bal b/d 40,000 30,000
By commission 2,000 1,000
To drawings 10,000 8,000 By Interest on capital 6,000 4,000
To interest on 2,000 1,500
drawings
To bal c/d 36,000 25,500
48,000 35,000 48,000 35,000

CHAPTER : 3

ADMISSION OF A PARTNER

TWO MARKS QUESTIONS

1. State any two reasons for admitting a partner.

Ans : i) To increase the capital and
ii) To expand the business.
2. What is Sacrifice ration?
Ans : Sacrifice ratio is the ratio sacrificed by the old partners to the new partner

3. When do you prepare a Revaluation account?

Ans : i) Admission / Retirement / Death of a partner
ii) Change in profit sharing ratio

4. How do you close a Revaluation account?

Ans: Revaluation account is closed by transferring the profit/loss on revaluation, to the old partners’
capital accounts in their old ratio.

5. What is Sacrifice ratio?

Ans : Revaluation account is closed by transferring the profit / loss on revaluation, to the old partners’
capital accounts in their old ratio.
6. What is Good Will?
Ans : Good will is the value of good name or reputation of business which attracts more customers and
helps the firm to earn more profits.

7. State any two factors which determine the goodwill of a firm

Ans: i) Profits of the firm
ii) Turnover of the firm

FIVE MARKS QUESTIONS

8. Vidya and Vinaya are partners sharing profits and losses in the ratio of 3 : 2. They admit Vijaya
into the partnership. The new sharing of profit is 4 : 3 :2. Calculate the Sacrifice ratio of Vidhya
and Vinaya

Ans: Sacrifice share = old share – new share

3 4 27 20 27−20 7
Share sacrificed by Vidhya= - = - = =
5 9 45 45 45 45

2 3 18 15 18−15 3
Share sacrificed by Vinaya= - = - = =
5 9 45 45 45 45

Therefore, Sacrifice ratio = 7 :3

9. Kamal and Rajini are partners, sharing profits and losses in the ratio of 5 :3. They admit Sharath
into the partnership. All the partners agree to share profits and losses equally. Calculate the
Sacrifice ratio of Kamal and Rajini.

Ans: Sacrifice share = old share – new share

5𝑥3 1𝑥8 15 8 7
Kamal = - = - =
8𝑥3 3𝑥8 24 24 24

3𝑥3 1𝑥8 9 8 1
Rajini= - = - =
8𝑥3 3𝑥8 24 24 24

Therefore, Sacrifice ratio = 7: 1

10. A and B are partners, sharing profits and losses in the ratio of 7 :5. They admit C into the
partnership and give him ¼ share and A and B agree to share the remaining shares equally.
Calculate the Sacrifice ratio.
Ans : Sacrifice share = old share – new share
Calculation of New Share = Agreed Share X Remaining Share
 1
Share of C =
4
1 3
Remaining share = 1 - =
4 4
1 3 3
A= x =
2 4 8

1 3 3
B= x =
2 4 8

Therefore Sacrifice ratio

7 3 14−9 5
A= − = =
12 8 24 24

5 3 10−9 1
B= − = =
12 8 24 24

Therefore S R = 5 : 1
11. Raj and Vishnu are partners sharing profits and losses in the ratio of 5 :4. They admit Ashwath
into the partnership. Raj agrees to surrender 1/3 of his share and Vishnu agrees to surrender ¼ of
his share to Ashwath. Calculate the Sacrifice ratio.
Ans :Sacrifice share = old share x surrendered share

5 1 5
Raj = x =
9 3 27

4 1 4 1
Vishnu = x = =
9 4 36 9

5 1 53
Ratio = : =
27 9 27
S. R = 5:3
12. Ahmed and Bharath are partners sharing profits and losses in the ratio 3 : 2. They admit Charles
into the partnership for 1/5 share, which he acquires in the proportion of 2 /25 and 3 /25 from
Ahmed and Bharath. Calculate the new profit share ratio.
Ans :New Share = Old Share - Share Sacrificed
3𝑥5 2 15 2 13
Ahmed = - = - =
5𝑥5 25 25 25 25

2𝑥5 3 10 3 7
Bharat = - = - =
5𝑥5 25 25 25 25
13. Ravi and Rajan are partners sharing profits and losses in the ratio of 7:5. They admit Ramu into
the partnership for 1/8 share which he acquires in the proportion of 1/12 and 1/24 from Ravi and
Rajan. Calculate the new ratio.
Ans :New Share = Old Share - Share Sacrificed
7 1 6
Ravi = - =
12 12 12
 5 1 10−1 9
Rajan = - = =
12 24 24 24

1
Ramu =
8
6 9 1 12∶ 9 ∶3
∴ Ratio = : : = = 12 ∶ 9 ∶ 3
12 24 8 24
14. Dhruva and Ramesh are partners, sharing profits and losses in the ratio of 3/5 : 2/5. They admit
Papu into the partnership and offer him 1/5 share which he acquires in the ratio of ¾ : ¼ from the
old partners. Calculate the new profit sharing ratio.
Ans :New Share = Old Share - Share Sacrificed
Share Sacrificed = Sacrifice ratio x New partner’s share
3 1 3
Share sacrificed by Dhruva = x = :
4 5 20
1 1 1
And by Ramesh = x =
4 5 20
Therefore, New Share =
3 3 12−3 9
Dhruva = - = =
5 20 20 20
2 1 8−1 7
Ramesh = - = =
5 20 20 20
1 4 4
Papu = x = so the new profit sharing ratio is 9 : 7 : 4
5 4 20
Therefore 9 : 7 : 4
15. Deepa and Champa are partners sharing profits and losses in the ratio of 3 : 2. They admit Roopa
into the partnership and give her 1 /4 share. Calculate the new profit sharing ratio
Ans :New Share = Old Share x Remaining Share
1 3
Remaining Share = 1 - =
4 4
3 3 9
Therefore, Deepa’s new share = x =
5 4 20
2 3 6 1 5
Champa’s new share = x = : Roopa’s share = =
5 4 20 4 20

9 6 5
Therefore new profit sharing ratio = : :
20 20 20

= 9:6:5
16. Good will of a firm is valued at 2 times the average profit of the previous 4 years. The profits and
the previous for last 4 years were :

2010-11 Rs 7,000 profit

2011-12 Rs 2,000 Loss
2012-13 Rs. 11,000 profit
2013-14 Rs. 16,000 profit
Calculate the goodwill of the firm

Ans : Total Profit for four years = 7,000 – 2,000 + 11,000 + 16,000 = 32,000
 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 32000
Average Profit == = = Rs 8000
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 4
Therefore goodwill = 8,000 x 2 = Rs 16,000

FOURTEEN MARKS QUESTION

17. Ramya and Rajesh are partners sharing profits and losses in the ratio of 3 :2. Their balance sheet
as on 31.03.2014 was as follows :
Balance Sheet as on 31.03.2014
Liabilities Amount Assets Amount
Creditors 57,000 Cash 21,500
Bills Payable 20,500 Bills Recievable 4,000
General Reserve 20,000 Debtors - 60,000
Profit and Loss A/c 5,000 Less : RBD 3,000 57,000
Capitals Stock 35,000
Ramya 60,000 Furniture 10,000
Rajesh 30,000 Buildings 40,000
Machinery 25,000
1,92,500 1,92,500
on 01.04.2014 Tamya is admitted into the partnership on the following terms:

a) She should bring Rs. 40,000 as capital for 1/4th Share and Rs 25,000 towards goodwill
b) Depreciate Machinery and Furniture by 10 %
c) Appreciate Building by 20 %
d) Increase RBD on debtors to Rs 6,000
e) An amount of Rs. 2,000 due to a Creditor is not likely to be claimed and hence to be written off.
Prepare
i. Revaluation Account
ii. Partners’ Capital Accounts and
iii. New Balance Sheet
iv.
Ans: Dr. Revaluation A/c Cr.
Particulars Amount Particulars Amount

To Machinery A/c (Depreciation 25000 x 10 %) 2,500 By Building A/c (Appreciation - 40000 x 20 %) 8,000

To Furniture A/c (Depreciation 10000 x 10 %) 1,000 By Creditors A/c (Written off) 2,000
To RBD A/c (6000-3000) 3,000
To N/ P Transferred to
Ramya - 2100
Rajesh - 1400 (3 : 2) 3,500
10,000 10,000

Dr. Partner's Capital Accounts Cr.

Particulars Ramya Rajesh Tamya Particulars Ramya Rajesh Tamya
To Balance c/d 92,100 51,400 40,000 By Balance b/d 60000 30000 -
By Reserve 12000 8000 -
By P / L a/c 3000 2000 -
By Revaluation 2100 1400 -
 a/c (Profit) -
By Goodwill a/c 15000 10000 -
By Cash a/c 40000
92,100 51400 40,000 92100 51400 40000
By Balance b/d 92100 51400 40000

New Balance Sheet as on 01.04.2014

Liabilities Amount Amount Assets Amount Amount

Creditors 57,000 Cash 21,500

(-) Written off 2,000 55,000 Add: New Partner
Bills Payable 20,500 Capital 40,000
Goodwill 25,000 86,500
Capitals Bills Receivable 4,000
Ramya 92,100 Debtors 60,000
Rajesh 51,400 Less RBD 6,000 54,000
Tamya 40,000 1,83,500 (3000 + 3000)
Stock
Furniture 10,000
Less : Depreciation 1,000
Buildings 40,000
Add: Appreciation 8,000
Machinery 25,000
Less: Depreciation 2,500
Total 2,59,000 Total 2,59,000
18. Suresh and Satish are partners sharing profits and losses in the ration of 3:2. Their Balance Sheet
as on 31.03.2014 was as follows:
Balance Sheet as on 31.03.2014

Liabilities Amount Assets Amount

Creditors Buildings 50,000
Suresh 40,000 Plant / Machinery 20,000
Satish 30,000 70,000 Furniture 12,000
Creditors 42,000 Stock 10,000
Bills Payable 13,500 Debtors 18,500
Reserve Fund 10,000 Cash 20,000
P and L A/c 5,000
1,35,000 1,35,000

On 01.04.2014 they admit Girish into the partnership on the following terms: She should bring Rs.
40,000 as capital for 1/4th share in future profits.
a) Depreciate plant/ machinery by 10 %
b) Bad debts written of Rs 500, further create RBD at 5 % on debtors.
c) Appreciate Buildings by 20 %
d) Outstanding Salaries Rs. 500.
e) Rent Paid in advance Rs. 600
f) Goodwill of the firm is raised at Rs. 18,000 and is to be retained in business.
Prepare:
i) Revaluation Account
 ii) Partner’s Capital Account and
iii) New Balance Sheet
Ans: Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
To Plant / Machinery A/c 2,000 By Rent paid in Advance 600
(Depreciation)
To Bad Debts 500 By Building A/c 10,000
To RBD 900 (Appreciation)
(18500-500 x 5 %)
To Outstanding salary 500
To N/P transferred to 6,700
Suresh 4,020
Satish 2,080
10,600 10,600

Dr. Partners’ Capital Accounts Cr.

Particulars Suresh Satish Girish Particulars Suresh Satish Girish
To P/L a/c 3,000 2,000 - By Balance b/d 40,000 30,000 -
By Reserve fund 6,000 4,000 -
By Revaluation 4,020 2,680 -
To Balance
c/d 27,820 41,880 40,000 a/c (Profit) -
By Goodwill a/c 10,800 7,200 -
By Cash a/c 40,000
60,820 43,880 40,000 60,820 43,880 40,000
By Balance b/d 57,820 41,880 40,000

New Balance Sheet as on 01.04.2014

Liabilities Amount Amount Assets Amount Amount
Capitals Buildings 50,000
Suresh 57,820 Add Appreciation 10,000 60,000
Satish 41,880 Plant/ Machinery 20,000
Girish 40,000 1,39,700 Less : Depreciation 2,000 18,000
Creditors 42,000 Furniture 12,000
Bills Payable 13,500 Stock 10,000
Outstanding 500 Debtors 18,500
Less : Bad Debts 500
RBD 900 17,100
Cash 20,000
Add: New Partners 40,000 60,000
Capital
Goodwill 18,000
Rent paid in advance 600
Total 1,95,700 Total 1,95,700
19. Sindu and Bindu are partners sharing profits and losses in the ration of 3 :2. Their Balance sheet as
on 31.03.2014 was as follows:
Balance Sheet as on 31.03.2014
Liabilities Amount Assets Amount
Creditors 52,000 Cash at Bank 15,000
 Bills Payable 30,000 Stock 40,000
Reserve Fund 20,000 Debtors 40,000
Capitals Less reserves 1000 39,000
Sindu 60,000 Furniture 10,000
Bindu 40,000 Plant and Machinery 40,000
P and L A/c 8,000 Buildings 50,000
Investments 5,000
Bills receivable 11,000
2,10,000 2,10,000

on 01.04.2014 Indu is admitted into the partnership on the following terms:

a) She should bring Rs. 40,000 as capital and Rs 10,000 towards goodwill for 1/5 share in future
profits.
b) Half of the goodwill is to be withdrawn by the old partners
c) Depreciate plant and machinery and furniture at 10 % each
d) Provision for doubtful debts is to be maintained at 10% on debtors
e) Buildings are to be valued at Rs. 60,000
f) Make a provision for compensation to the workers who were injured in the accident as Rs
15,000
Prepare:
i) Revaluation Account
ii) Partners’ Capital Accounts and
iii) New Balance Sheet
Ans: Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
To Plant/ Machinery A/c 4,000 By Building A/c 10,000
(60000 - 50000)
To Furniture A/c 1,000 By Net loss transferred to
Sindu 7800
To Provision for Bindu 5200 13,000
Doubtful Debts
(40000 x 10 % = 4000 -1000)
To Compensation to workers 15,000
23,000 23,000

Dr. Partners’ Capital Accounts Cr

Particulars Sindu Bindu Indu Particulars Sindu Bindu Indu
To Revaluation a/c 7800 5200 By Balance b/d 60000 40000 -
(N/L) By Reserve Fund 12,000 8000
To Bank A/c 3000 2000 By P/L a/c 4800 3200
(Goodwill withdrawn) By Bank a/c 40000
To Balance c/d 72000 48000 40000
82800 55200 40000 82800 55200 40000
By Balance b/d 72000 48000 40000
New Balance Sheet as on 01.04.2014
Liabilities Amount Amount Assets Amount Amount
Creditors 52,000 Cash at Bank 15,000
Bills Payable 30,000 Add: Capital of 40,000
 Indu
Capitals:
Sindu 72,000 Goodwill 10,000
Bindu 48,000 Less: Goodwill 5,000 60,000
Indu 40,000 1,60,000 withdrawn

Stock
Outstanding 15,000 Debtors 40,000
Compensation to Less : Reserve 4,000 36,000
the workers Furniture 10,000
Less : Derpreciation 1,000 9,000
Plant and Machinery 40,000
Less: Depreciation 4,000 36,000
Buildings 50,000
Add: Increase 10,000 60,000
Investments 5,000
Bills Receivable 11,000
Total 2,57,000 Total 2,57,000

20. Guru and Shukra are partners sharing profits and losses in the ratio of 2:1. Their Balance Sheet as
on 31.03.2014 was as follows:
Balance Sheet as on 31.03.2014
Liabilities Amount Assets Amount
Creditors 50,000 Cash 2,400
Bank Loan 10,400 Vehicle 30,000
B/R 20,000
Reserves 15,000 Debtors 70,000
Profit and Loss A/c 15,000 Less reserves 4,000 66,000
Capitals Stock 62,000
Guru 90,000 Furniture 20,000
Shukra 70,000 Machinery 60,000
BP 10,000
2,60,000 2,60,000

Banu is admitted into partnership on the following terms:

a) He should bring Rs 80,000 as capital for ¼ share and Rs 30,000 towards goodwill
b) Goodwill is withdrawn by the old partners
c) Machinery is depreciated at 10%
d) Furniture is written down by Rs 2,000
e) Increase R.B.D by Rs 2,400
f) An amount of Rs 4,400 due to a Creditor, is not likely to be claimed and hence to be written
off. Prepare:
i. Revaluation Account
ii. Partners’ Capital Accounts and
iii. New Balance Sheet.
Ans: Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
To Machinery A/c 6,000 By Creditors A/c 4,400
 (Depreciation) (Written off)
To Furniture A/c 2,000 By N/L transferred to
(Written down) Guru 4,000
To R. B. D A/c 2,400 Shukra 2,000 (2:1) 6,000
10,400 10,400
Dr. Partners’ Capital Accounts Cr
Particulars Guru Shukra Banu Particulars Guru Shukra Banu
To Revaluation A/c 4,000 2,000 By Balance b/d 90,000 70,000
By Reserve fund 10,000 5,000
To Cash A/c 20,000 10,000 By P/L a/c 10,000 5,000
(Goodwill withdrawn
By Cash a/c 80,000
By Goodwill a/c 20,000 10,000
To Balance c/d 1,06,000 78,000 80,000
1,30,000 90,000 80,000 1,30,000 90,000 80,000
By Balance b/d 1,06,000 78,000 80,000

New Balance Sheet as on 01.04.2014

Liabilities Amount Amount Assets Amount Amount
Creditors 50,000 Cash at Bank 82,400
Less: Written off 4,400 45,600 (2,400 + 80,000)
10,400 Vehicle 30,000
B/R 20,000
Capitals: Debtors 63,000
Guru 1,06,000 Stock 62,000
Shukra 78,000 Furniture 18,000
Banu 80,000 2,64,000 Machinery 54,000
B/P 10,000
Total 3,30,000 Total 3,30,000

21. Hari and Hara are partners, Sharing profits and losses in the ratio 2:3. Their Balance Sheet as on
31.03.2014 was as follows:
Balance Sheet as on 31.03.2014
Liabilities Amount Assets Amount
Creditors 55,000 Cash at Bank 21,500
Bills payable 5,000 Bills receivable 4,500
Reserve Fund 16,000 Stock 35,000
Capitals Debtors 60,000
Hari 40,000 Less reserves 3,000 57,000
Hara 37,000 Buildings 30,000
Furniture 5,000
1,53,000 1,53,000
On 01.04.2014 Manikanta is admitted into the partnership on the following terms:
a) He should bring in Rs 25,000 as capital
b) Goodwill of the firm is valued at Rs. 32,000 and goodwill A/c is to be written off
c) The new profit sharing ratio is 3: 3:2
d) Depreciate stock by 10% and increase buildings by 15%
e) Provision for doubtful debts is to be reduced to Rs.1,000
f) Rs. 600 included in Creditors is not likely to be claimed and hence to be written off
 g) Make a provision for damages against the firm to the extent of Rs. 1,000
Prepare:
i. Revaluation Account
ii. Partners’ Capital Accounts and
iii. New Balance Sheet
Ans: Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
To Stock A/C (Depreciation) 3,500 By Building A/c (Increase) 4,500
By Creditors A/c (Written off) 600
By provision for doubtful debts 2,000
To provision for damages 1,000
To N/P
Transferred to
Hari 1,040
Hara 1,560 (2:3) 2,600
7,100 7,100

Dr. Partners’ Capital Accounts Cr

Particulars Guru Shukra Banu Particulars Guru Shukra Banu
To Goodwill A/c 12,000 12,000 8,000 By Balance b/d 40,000 37,000
(Written off 3:3:2) By Reserve 6,400 9,600
By Revaluation 1,040 1,500
a/c (Profit)
To Balance c/d 48,240 55,360 17,000 By Bank a/c 25,000
By Goodwill a/c 12,800 19,200
60,240 67,360 25,000 60,240 67,360 25,000
By Balance b/d 48,240 55,360 17,000

New Balance Sheet as on 01.04.2014

Liabilities Amount Assets Amount
Creditors 54,400 Cash at Bank 46,500
B/P 5,000 B/R 4,500
Capitals Stock 31,500
Hari 48,240 Debtors (60,000 – 1,000) 59,000
Hara 55,360 Furnitures 5,000
Manikanta 17,000 Buildings 34,500
Provision for damages 1,000
Total 1,81,000 Total 1,81,000

CHAPTER:4

RETIREMENT AND DEATH OF A PARTNER

TWO MARKS QUESTIONS

1. Write any two circumstances for the retirement of a partner

Ans : i) Old age of the partner
ii) Insolvency of that partner
2. What is gain ratio? Why is it required ?
 Ans: The gain ration or benefit ratio is the ratio in which the remaining partners gain or acquire the
share of a retiring partner on his retirement. It is required for the purpose of writing off the
goodwill created to the extent of retiring partner’s share against the capital accounts of the
remaining partners

3. Mention any two modes of payment, on settlement to a retiring partner.

Ans: i) By cash or cheque
ii) Through bank overdraft
iii) Amount due to the retiring partner is treated as loan
4. Who is an executor?
Ans: Executors are the legal representatives of a deceased partner in a partnership firm.

FIVE MARKS QUESTIONS

5. M, N and O are partners sharing profits and losses in the ratio of 5 :3 : 2. N retires from the
business. M and O share future profits in the ratio of 5/8 and 3/8 respectively. Find out the gain
ratio of M and O.
Ans : Gain ratio – New Share – Old Share
5 5 50−40 10
M= - = = 80
8 10 80

3 2 30−16 14
O= - = = 80
8 10 80

i.e = 10 : 14

5:7

6. Sun, Moon and Star were partners sharing profits and losses in the ratio of 4:3:2. Moon retires
from the partnership, the new profit sharing ratio of Sun and Star is 5:3. Find out their gain ratio
Ans: Gain ratio = New ratio - old ratio
5 4 45−32 13
Sun =8 - 9 = = 72
72

3 2 27−16 11
Star =8 - 9 = = 72
72

i.e the gain ratio is 13 : 11

7. Sea, River and Canal are partners sharing profits and losses in the proportion of 4:3:2 respectively.
Canal retires and the remaining partners share the future profits equally. Calculate the gain ratio.
Ans: Gain ratio = New ratio - old ratio
1 4 9−8 1
Sea = - = =
2 9 18 18

1 3 9−6 3
River = - = =
2 9 18 18

i.e the gain ratio is 1:3

8. Zaheer, Ameen and Sikandar are partners, sharing profits in the ratio of 3:2:1. Sikandar retires
and his share is gained by Zaheer and Ameen in the ratio of 1/8 and 1/24 respectively. Calculate the
new profit sharing ratio
Ans :New Ratio = old ratio + Gain ratio
3 1 24+6 30
Zaheer = + = =
6 8 48 48

2 1 8+1 9
Ameen = + = =
6 24 24 24

30 9𝑥2 30 18 30:18
= : = : =
48 24𝑥2 48 48 48

i.e the gain ratio = 30 : 18 = 15 : 9

9. X, Y and Z are partners, sharing profits in the ratio of 2:1:1. Y retires and his share is taken over
by X and Z in the proportion of 1/9 and 1/18. Calculate the new profit sharing ratio
Ans :New Ratio = old ratio + Gain ratio
2 1 18+4 22
X = + = =
4 9 36 36

1 1 9+2 11
Z = + = =
4 18 36 36

22 11
The new profit sharing ratio is = :
36 36

= 22:11

=2:1

10. Ramesh, Prakash, Suresh and Dinesh are partners sharing profits and losses in the ratio of 3:2:1:4.
Ramesh retires and his share is acquired by Prakash and Suresh in the ratio of 3:2. Calculate the
new profit sharing ratio of the remaining partners.
Ans :New Ratio = old ratio + Gain ratio
2 3 10+30 40
Prakash = + = =
10 5 50 50

1 2 5+20 25
Suresh = + = =
10 5 50 50

4 1 20+10 30
Dinesh = + = =
10 5 50 50

40 25 30
The new profit sharing ratio is = : :
50 50 50

= 4:2:3

11. Navab, Jayaram and Mahavir were partners sharing profits and losses in the proportion of 2 :1:1.
Their balance sheet as on 31-3-2013 was as under:

Liabilities Amount Amount Assets Amount Amount

Sundry creditors 25,000 Cash 6,000
 Reserve Fund 20,000 Stock 12,000
Capitals Bills Recievable 6,000
Navab 15,000 Debtors 15,000
Jayaram 10,000 Investments 15,000
Mahavir 10,000 35,000 Buildings 26,000
90,000 90,000
The partnership deed provides that, in the event of death of a partner, his executors are entitled to get the
following:

a) The capital at the date of last Balance sheet

b) His portion of reserve fund
c) His share of profit till the date of his death based on the average profits of the last three years of
profits
d) His share of Goodwill. Goodwill of the firm is twice the average profit of last 3 years profits. The
profits for the last three years were:
2010-11 Rs. 16,000; 2011-12 Rs. 16,000; 2012-13 Rs. 15,520
Mahavir died on July 1st 2013. He had also withdrawn Rs. 5,000 till his death. Prepare Mahavir’s
capital account and his executor’s account.

Ans: Dr. Mahavir’s Capital Account Cr.

Particulars Amount Particulars Amount
To Drawings 5,000 By Balance b/d 10,000
To Mahavir’s Executor’s a/c 18,910 By Reserve (20,000 x 1/4) 5,000
(Balance) By P/L suspense a/c (Note -1) 990
By Goodwill a/c (Note -2) 7,920
23,910 23,910
P / L Suspense A/c (Note -1)
Based on average profit of last 3 years
15,520+16,000+16,000 47,520
= = = 15,840
3 3
Therefore 15,840 X 3/12 X 1/4 = 990
Note -2
Goodwill = Average profit x Number of purchase years
= 15,480 x 2 = 31,680
Therefore, 31,680 x 1/4 = 7,920

Dr. Mahavir’s Executor’s Account Cr.

Particulars Amount Particulars Amount
To Balance c/d 18,910 By Mahavir’s Capital a/c 18,910
18,910 18,910
By balance b/d 18,910

12. Prabhakar, Rajashekar and Vasanth were partners, sharing profits and losses in the ratio of 5:3:2.
Their balance sheet as on 31-3-2013 was as follows:

Liabilities Amount Amount Assets Amount Amount

Creditors 30,000 Cash in hand 13,000
Bills payable 18,000 Cash at bank 22,000
 Capitals Stock 27,500
Prabhakar 50,000 Bills receivable 12,500
Rajashekar 30,000 Debtors 25,000
Vasanth 20,000 1,00,000 Furniture 30,000
Profit and loss Account 12,000 Equipments 30,000
1,60,000 1,60,000
Vasanth died on 30-9-2013, and his dependents were entitled to the following:
a) His capital as per the last balance sheet
b) His share in the profit and loss account
c) His share of goodwill based on two years purchase value of the average profits of last three
years. The profits were:
For 2012 Rs. 18,000 and 2011 Rs. 15,000 for 2010
d) Share of profit or loss on revaluation of assets and liabilities. The total loss on revaluation
was Rs. 6,500.
e) Vasanth was entitled to an annual commission of Rs. 7,000
Prepare Vasanth’s executor’s account

Ans: Dr. Vasanth’s executor’s account Cr.

Particulars Amount Particulars Amount
To Revaluation a/c (Loss) 1,300 By Vasanth Capital a/c 20,000
(6,500 x 2/10) (Share) By P/L A/c 2,400
To Balance c/d 31,200 (12000 x 2/10) (Share)
By Goodwill a/c (Note -1) 6,600
By Commission 3,500
(7,0000 x 6/12)(Months)
32,500 32,500
By Balance b/d 31,200

13. Hari, Giri and Suri were partners sharing profits and losses in the ratio 5:2:1 respectively. Their
Balance sheet as on 31.03.2013 was as under:

Liabilities Amount Amount Assets Amount Amount

Creditors 15,000 Cash at Bank 5,000
Bills payable 9,000 Bills Receivable 12,600
Reverse fund 16,000 Debtors 30,000
Capitals: Less : Reserve 1,600 28,400
Hari 50,000 Stock 20,000
Giri 30,000 Machinery 50,000
Suri 10,000 90,000 Motor car 14,000
1,30,000 1,30,000

Suri retired. The following adjustments are to be made:

1) Stock to be appreciated by 20 %
2) Reserve for doubtful debts to be brought up to 10% on debtors
3) Machinery and Motorcar depreciated by 5% and 10 % respectively
4) Outstanding power charges to be provided for Rs. 1,100
5) Goodwill of the firm was raised for Rs. 35,000 and it has to be written off immediately after Suri’s
retirement.
Prepare:
i. Revaluation Account
ii. Partners’ Capital Accounts and
iii. New Balance Sheet

Ans: Dr. Revaluation Account Cr.

Particulars Amount Particulars Amount
To R D D a/c 1,400 By stock a/c 4,000
(30,000 x 10 % = 3000 - 1600) (Appreciation 20,000 x 20 %)
To Machinery a/c 2,500 By net loss transferred to 2,400
(Depreciation 50,000 x 5 %) Hari 1,500
To Motor Car a/c 1,400 Giri 600
(Depreciation 14,000 x 10 %) Suri 300
To Outstanding power charges 1,100 (5:2:1)
6,400 6,400

Dr. Partner’s capital accounts Cr.

Particulars Hari Giri Suri Particulars Hari Giri Suri
To revaluation 1,500 600 300 By Balance b/d 50,000 30,000 10,000
a/c (loss) By Reserve fund 10,000 4,000 2,000
To Goodwill a/c 25,000 10,000 By Goodwill 21,875 8,750 4,375
(written of 5:2:1)
To Suri Loan a/c 16,075
To Balance c/d 55,375 32,150
81,875 42,750 16,375 81,875 42,750 16,375
By Balance b/d 55,375 32,150
Balance Sheet of Hari and Giri as on 01.04.2014
Liabilities Amount Amount Assets Amount Amount
Creditors 15,000 Cash at Bank 5,000
B/P 9,000 B / R 12,600
Capitals Debtors 30,000
Hari 55,375 Less : Reserve 3,000 27,000
Giri 32,150 87,525 Stock 20,000
Suri’s Loan 16,075 Add : Appreciation 4,000 24,000
Outstanding 1,100 Machinery 50,000
Power charges Less : Depreciation 2,500 47,500
Motocar 14,000
Less : Depreciation 1,400 12,600
1,28,700 1,28,700

14. Father, Mother and Son are partners sharing profits and losses in the ratio of 2:2:1. On 31.03.2014,
their Balance sheet was as under:

Liabilities Amount Amount Assets Amount Amount

 Capitals Bank 15,200
Father 45,000 Furniture 8,000
Mother 35,000 Plant 36,000
Son 20,000 1,00,000 Sundry Debtors 24,000
Sundry creditors 17,000 Stock 22,000
Bills Payable 13,000 Bills Receivable 6,000
Outstanding expenses 1,200 Buildings 40,000
Profit and loss A/c 20,000
1,51,200 1,51,200
Father retires from business due to illness, and the following adjustments are to be made :
1) Goodwill of the firm is valued at Rs. 30,000. Father’s share of good will is to be created and written
off without opening the goodwill A/c.
2) Furniture and plant to be depreciated by 10% each.
3) Buildings appreciated by 20% and stock valued at Rs 24,000
4) Maintain reserve for bad debts at 5% on debtors
5) An item of Rs. 600 included in creditors, not likely to be claimed and hence should be written off.
6) Settlement made to the retiring partner through bank overdraft
Prepare: i. Revaluation Account
ii. Capital Accounts of Partners’
iii. Balance Sheet of the continuing partners
Ans: Dr. Revaluation Account Cr.
Particulars Amount Particulars Amount
To Furniture a/c 800 By building a/c 8,000
(Depreciation) (Appreciation)
To plant a/c 3,600 By Stock a/c 2,000
To R. B. D a/c 1,200 (24,000 – 22,000)
(24,000 x 5 %) By creditors a/c 600
To N/P Transferred to (Written off)
Father 2,000
Mother 2,000
Son 1,000 5,000
10,600 10,600
Dr. Partner’s capital accounts Cr.
Particulars Father Mother Son Particulars Father Mother Son
To Goodwill 8,000 4,000 By Balance b/d 45,000 35,000 20,000
a/c (Written off) By P / L a/c 8,000 8,000 4,000
(2:2:1) By Revaluation 2,000 2,000 1,000
To Bank a/c 67,000 a/c (Profit)
(Paid) By Goodwill a/c 12,000
To Balance c/d 37,000 21,000 (30,000 x 2/5)
(Share only)
67,000 45,000 25,000 67,000 45,000 25,000
By Balance b/d - 37,000 21,000
Balance Sheet of Mother and Son as on 01.04.2014
Liabilities Amount Amount Assets Amount Amount
Capitals Bank -
Mother 37,000 Furniture 8,000 -
Son 21,000 58,000 Less : Depreciation 800 7,200
 Plant 36,000 -
Creditors 17,000 Less : Depreciation 3,600 32,400
Less : written off 600 16,400 Debtors 24,000
B/P 13,000 Less : R B D 1,200 22,800
Outstanding 1,200 Stock 22,000
Expenses Add: Increase 2,000 24,000
Bank Overdraft 51,800 Bills receivable 6,000
(67,000 – 15,200) Buildings 40,000
(Bank) Add : Appreciation 8,000 48,000
1,40,400 1,40,400
15. Vanaja, Girija and Jalaja were partners sharing profits and losses in the ratio of 3:2:1. Their
Balance sheet as on 31.03.2014 was as follows:

Liabilities Amount Amount Assets Amount Amount

Creditors 32,000 Cash in hand 24,000
Bills payable 24,000 Bills recievable 22,000
General Reserve 36,000 Debtors 42,000
Capitals: Less : RBD 2,000 40,000
Vanaja 70,000 Stock 38,000
Girirja 50,000 Furniture 24,000
Jalaja 30,000 1,50,000 Machinery 40,000
Profit and loss A/c 6,000 Buildings 60,000
2,48,000 2,48,000
Girija retired due to change of residence and the following adjustments were made:
1. Goodwill of the firm was valued at Rs. 30,000 and it has to be retained in the business.
2. RBD increased by Rs. 1,600
3. Buildings to be valued at Rs. 62,000 and stock valued at Rs. 36,500
4. Depreciate Machinery by 10 % and Furniture valued at Rs. 22,700
5. An investment not recorded in the books, costing Rs 1,000 has to be taken into account
6. Girija is to be paid Rs. 20,000 immediately after her retirement and the balance transferred to
her loan account
Prepare:
i. Revaluation Account
ii. Capital Accounts of Partners’
iii. Balance Sheet of the continuing partners

Ans: Dr. Revaluation Account Cr.

Particulars Amount Particulars Amount
To RBD a/c 1,600 By Building a/c 2,000
To stock a/c 1,500 (62,000 – 60,000)
(38,000 – 36,500) By Investment a/c 1,000
To Machinery a/c 4,000 (Unrecorded)
(Depreciation) By N / L transferred to 5,400
To Furniture a/c 1,300 Vanaja 2,700
(24,000 – 22,700) Girija 1,800
Jalaja 900
8,400 8,400
Dr. Partner’s capital accounts Cr.
Particulars Vanaja Girija Jalaja Particulars Vanaja Girija Jalaja
To Revaluation 2,700 1,800 900 By Balance b/d 70,000 50,000 30,000
 a/c (Loss) By Reserve 18,000 12,000 6,000
To Cash a/c - 20,000 - By P / L a/c 3,000 2,000 1,000
(Paid)
To Loan a/c - 52,200 - By Good will a/c 15,000 10,000 5,000
(Balance)
To Balance c/d 1,03,300 - 41,100
1,06,000 74,000 42,000 1,06,000 74,000 42,000
By Balance b/d 1,03,300 - 41,100

Balance Sheet of Vanaja and Jalaja

Liabilities Amount Amount Assets Amount Amount
Capitals 32,000 Cash in hand 24,000 -
B/ P 24,000 Less : Paid to Girija 20,000 4,000
Capitals B/R 22,000
Vanaja 1,03,300 Debtors 42,000
Jalaja 41,100 1,44,400 Less : R. B.D 3,600 38,400
Girija Loan 52,200 Stock 36,500
Furniture 22,700
Machinery 36,000
Buildings 62,000
Goodwill 30,000
Investment 1,000
2,52,600 2,52,600
16. Following is the Balance Sheet of Ramesh, Mahesh and Suresh as on 31.03.2014

Liabilities Amount Amount Assets Amount Amount

Creditors 30,000 Cash 5,500
Bills payable 8,000 Furniture 10,000
Bank loans 14,000 Stock 16,000
Capitals: Book debts 28,000
Ramesh 25,000 Less : RBD 1,500 26,500
Mahesh 20,000 Plant and machinery 25,000
Suresh 15,000 60,000 Buildings 35,000
Reserve fund 12,000 Profit and loss A/c 6,000
1,24,000 1,24,000
Suresh retires from the business on 31.3.2014 and the following adjustments are to be made:
1. Depreciate Machinery by 5 % and Stock by 10%
2. Building appreciated by 20% and Furniture valued at Rs. 12,000
3. RBD increased to Rs. 1,750
4. Interest on Bank loan at 10% is due for 6 months
5. Suresh’s share of goodwill created for Rs. 15,000 and written off immediately.
6. Retiring partner is to be paid Rs. 3,900 immediately and the balance transferred to his loan a/c.
Prepare: i. Revaluation Account
ii. Capital Accounts of Partners’
iii. Balance Sheet of the new firm

Ans: Dr. Revaluation Account Cr.

Particulars Amount Particulars Amount
To Machinery a/c 1,250 By Building a/c 7,000
 To Stock a/c 1,600 By Furniture a/c 2,000
To R.D. D a/c 250
(1,750 – 1,500)
To outstanding interest on 700
Bank loan (14,000 x 10 % x 6/12)
To N/P transferred to 5,200
Ramesh 1,733
Mahesh 1,733
Suresh 1,734
9,000 9,000
Dr. Partner’s capital accounts Cr.
Particulars Vanaja Girija Jalaja Particulars Vanaja Girija Jalaja
To P / L a/c 2,000 2,000 2,000 By balance b/d 25,000 20,000 15,000
To Goodwill a/c 7,500 7,500 - By Reserve 4,000 4,000 4,000
(Written off 1:1:1) By Revaluation 1,733 1,733 1,734
To Cash a/c (Paid) - - 3,900 a/c (Profit)
To Suresh Loan 29,834 By Goodwill - - 15,000

To Balance c/d 21,233 16,233

30,733 25,733 35,734 30,733 25,733 35,734
By balance b/d 21,233 16,233 -
Balance Sheet of Ramesh and Mahesh as on 01.04.2014
Liabilities Amount Amount Assets Amount Amount
Creditors 30,000 Cash 5,500
B/P 8,000 Less : Paid to Suresh 3,900 1,600
Bank Loan 14,000 Furniture 12,000
Add Interest 700 14,700 Stock 16,000
Capitals: Less : Decrease 1,600 14,400
Ramesh 21,233 Bank Debts 28,000
Mahesh 16,233 37,466 Less : R D D 1,750 26,250
Suresh Loan 29,834 Machinery a/c 25,000
Less : Depreciation 1,250 23,750,
Buildings 35,000
Add : Appreciation 7,000 42,000
1,20,000 1,20,000

CHAPTER:5

DISSOLUTION OF A FIRM

TWO MARKS QUESTIONS

1. State any two circumstances under which a partnership firm is dissolved

Ans: i) In accordance with a contract between the partners.
ii) When the business of the firm becomes illegal

2. What is Realisation Account?

Ans :Realisation account is an account prepared at the time of dissolution of a firm to find the P / L on the
realization of assets and payment of Liabilities
 3. State the accounting treatment for : Unrecorded assets/ liabilities
Ans :Unrecorded Asset and unrecorded Liablities It is to be considered in the realization account if such
assets and liabilities are realized or paid

4. How do you close Realisation Account on dissolution of a firm?

Ans :It should be closed by transferring profit / loss to the partners’ capital accounts.

5. Give the journal entry for an asset taken over by a partner on dissolution of a firm
Ans: Realization A/c Dr.
To Partner capital account
(Being liabilities taken over by partner)

FOURTEEN MARKS QUESTIONS

6. Kavya ,Kavitha and Karishma are partners sharing profits and losses in the ratio of 3:2:1. They
agree to dissolve the firm as on 31.03.2014, on which date their balance sheet was as follows:
Balance Sheet as on 31.03.2014
Liabilities Amount Assets Amount
Creditors 60,000 Cash at bank 30,000
Bills payable 18,000 Bill receivable 24,000
Kavya’s loan 40,000 Stock 40,000
Reserve fund 36,000 Debtors 80,000
Capitals: Motor car 20,000
Ramesh 90,000 Investments 30,000
Mahesh 60,000 Furniture 26,000
Suresh 30,000 Machinery 60,000
P & L A/c 24,000
3,34,000 3,34,000
The following details are available:
 Assets realized as follows:
Stock Rs. 44,000 Debtors Rs. 80,000 Machinery Rs. 66,000 and Bills Receivable Rs. 20,000
 Furniture is taken over by Kavya at Rs. 30,000. Kavitha took over Investments at Rs. 40,000
and Karishma took over Motor car at Rs. 14,800
 Creditors and Bills payable are paid off at 10% less each
 Realization expenses Rs. 8,000
 One bill of Rs. 2,000 under a discount was dishonored and had to be paid by the Firm.
Prepare i) Realization a/c b) Partner’s capital Accounts and c) Bank A/c
Ans: Dr. Realization Account Cr.
Particulars Amount Particulars Amount
To B/ R a/c 24,000 By Creditor’s a/c 60,000
To Stock a/c 40,000 By B/P a/c 18,000
To Debtors a/c 80,000 By Bank a/c
To Motor car a/c 20,000 (Assets realised)
To Investments a/c 30,000 Stock 44,000
To furniture a/c 26,000 Debtors 80,000
To Machinery a/c 60,000 Machinery 66,000
To Bank a/c 70,200 B / R20,000 2,10,000
(Creditors & B/P paid By Kavya Capital a/c 30,000
78,000 – 7,800) (Furniture)
To Bank a/c 8,000 By Kavitha Capital a/c 40,000
(Realization expenses) (Investments)
 To Bank a/c 2,000 By Karishma Capital a/c 14,800
(Payment of Bill) (Motor car)
To N/P transferred to
Kavya 6,300
Kavitha4,200
Karishma2,100 12,600
3,72,800 3,72,800

Dr. Partner’s capital accounts Cr.

Particulars Kavya Kavitha Karishma Particulars Kavya Kavitha Karishma
To P / L a/c 12,000 8,000 4,000 By balance b/d 90,000 60,000 30,000
To Realisation a/c 30,000 40,000 14,800 By Reserve 18,000 12,000 6,000
(Assets taken over) By Revaluation 6,300 4,200 2,100
To Bank a/c 72,300 28,200 19,300 a/c (Profit)
(Balance)
1,14,300 76,200 38,100 1,14,300 76,200 38,100
Dr. Bank Account Cr
Particulars Amount Particulars Amount
To Balance b/d 30,000 By Kavya’s Loan 40,000
To Realisation a/c 2,10,000 By Realisation a/c 80,200
(Assets Realised) (Payment of Liabilities)
By Kavya’s Capital a/c 72,300
By Kavitha’s Capital a/c 28,200
By Karishma’s Capita a/c 19,300
2,40,000 2,40,000
7. Gagan and Rachith are partners sharing profits and losses equally, agreed to dissolve their
partnership on 31.3.2014. Their Balance Sheet was as follows:
Liabilities Amount Amount Assets Amount Amount
Creditors 25,000 Cash at bank 10,000
Bills payable 10,000 Stock 18,000
Rachith’s Loan 10,000 Debtors 25,000
Reserve fund 5,000 Less : RBD 3,000 22,000
Capitals Bills Recievable 5,000
Gagan 40,000 Motor car 10,000
Rachith 30,000 Furniture 12,000
Machinery 16,000
Buildings 23,000
P & L a/c 4,000
1,20,000 1,20,000
 The assets realized as follows:
Stock Rs. 25,000, Debtors Rs, 20,000, Bills receivable Rs. 4,000. Motor Car Rs. 10,000, Furniture
Rs. 8,000, Machinery Rs. 15,000
 Creditors are taken over by Gagan at book value
 Bills payable were paid by the firm at 5% discount
 Realization expenses amounted to Rs. 2,000
Prepare
a) Realization a/c
b) Partner’s capital Accounts and
c) Bank A/c

Ans: Dr. Realization Account Cr.

 Particulars Amount Particulars Amount
To Stock a/c 18,000 By RBD a/c 3,000
To Debtors a/c 25,000 By Creditors a/c 25,000
To B / R a/c 5,000 By B / P a/c 10,000
To Motor car a/c 10,000 By Bank a/c
To Furniture a/c 12,000 (Assets realised)
To Machinery a/c 16,000 Stock 25,000
To Building a/c 23,000 Debtors 20,000
To Gagan capital-account 25,000 B/R 4,000
(Creditors paid) Motor car 10,000
To Bank a/c 9,500 Furniture 8,000
(B/P paid 10,000 - 500) Machinery 15,000
To Bank a/c 2,000 Building 23,000 1,05,000
(Realization expenses) By N/L Transferred to
Gagan 1,250
Rachith1,250 (1 :1) 2,500
1,45,500 1,45,500

Dr. Partner’s capital accounts Cr.

Particulars Gagan Rachith Particulars Kavya Kavitha
To P / L a/c 2,000 2,000 By balance b/d 40,000 30,000
To Realisation a/c 1,250 1,250 By Reserve 2,500 2,500
(Loss) By Realisation a/c 25,000
To Bank a/c 64,250 29,250 (Creditors)
(Balance)
67,500 32,500 67,500 32,500
Dr. Bank Account Cr
Particulars Amount Particulars Amount
To Balance b/d 10,000 By Rachitha’s Loan 10,000
To Realisation a/c 1,05,000 By Realisation a/c 11,500
(Assets Realised) (Payment of Liabilities)
By Gagan’s Capital a/c
By Gagan’s Capital a/c 64,250
By Rachith’s Capital a/c 29,250
1,15,000 1,15,000

PRACTICAL ORIENTED QUESTION

8. Prepare executor’s loan a/c with imaginary figures showing the repayment in two equal annual
installments along with interest.
Dr Executor’s Loan a/c Cr
Date Particulars Amount Date Particulars Amount
1/4/2011 By bal b/d 20,000
31/3/2012 By interest a/c (20,000x5%) 1,000
31/3/2012 To cash a/c 11,000
(10,000+1,000)
31/3/2012 To bal c/d 10,000
21,000 21.000
1/4/2012 By bal b/d 10,000
31/3/2013 By interest a/c (10,000x5%) 500
31/3/2013 To cash a/c 10,500
(10,000+500)
10,500 10,500