Kanika, Disha and Kabir were partners sharing profits in the ratio of 2:1:1. On 31st March, 2016, their Balance Sheet was as under: ₹ Assets Liabilities Bank 53,000 47,000 2,00,000 1,00,000 80,000 Trade creditors Employees' Provident Fund Kanika's Capital Disha's Capital Kabir's Capital Debtors Stock 60,000 60,000 1,00,000 2,40,000 20,000 Fixed Assets Profit and Loss A/C 4,80,000 4,80,000 Kanika retired on 1st April , 2016. For this purpose, the following adjustments were agreed upon: (a) Goodwill of the firm was valued at 2 years' purchase of average profits of three completed years preceding the date of retirement. The profits for the year: 2013-14 were 1,00,000 and for 2014+15 were 1,30,000. 4115 (b) Fixed Assets were to be increased to 3,00,000. (c) Stock was to be valued at 120%. (d) The amount payable to Kanika was transferred to her Loan Account. Prepare Revaluation Account, Capital Accounts of the partners and the Balance Sheet of the reconstituted firm. ​

The items to be taken in the revaluation account are fixed assets and stock.

As per the question, fixed assets are to be increased to Rs 3,00,000. This means that it is now valued at Rs 3,00,000. Rs 60,000 [Rs 3,00,000 - Rs 2,40,000] will be taken in the account.

The stock is to be valued at 120%. Rs 20,000 [1,20,000 - 1,00,000] will be taken in the account.

Since both these assets have an increase in value, they will be recorded on the credit side of the account.

To determine profit/loss, observe the balancing figure. If it appears on the debit side, it is profit. Else, loss.

Credit = Rs 80,000

Debit = Nil

Balancing figure = Rs 80,000 [Dr.]

Each partner gets Rs 40,000, Rs 20,000 and Rs 20,000 respectively [in their old-profit sharing ratio.]

Calculation of goodwill:

Goodwill = Average profit × Number of years' purchase

Average profit = Total profit ÷ Number of years

Total profit = Rs 1,00,000 + Rs 1,30,000 - 20,000 [from the balance sheet; Profit and Loss A/c]

Total profit = Rs 2,10,000

Number of years = 3

Average profit = Rs 2,10,000 ÷ 3 = Rs 70,000

Goodwill = Rs 70,000 × 2 = Rs 1,40,000

Kanika's share of goodwill = Rs 1,40,000 × 2/4 = Rs 70,000

Kanika's share of goodwill will be distributed among the old partners in their gaining ratio/new ratio, i.e., 1:1.*

• Disha's share of goodwill = Rs 70,000 × 1/2 = Rs 35,000
• Kabir's share of goodwill = Rs 70,000 × 1/2 = Rs 35,000

[* - will be required while preparing the capital account.]

The items to be taken in the capital account are the old capital balance, the shares of the profit from revaluation of assets and liabilities, the share of loss from the profit and loss account and the share of goodwill from Kanika's retirement.

Once all the entries have been made, find out the balancing figures.

Credit: Old capital balances of the partners

• Kanika - Rs 2,00,000
• Disha - Rs 1,00,000
• Kabir - Rs 80,000

Credit: Share of profit from the revaluation account

• Kanika - Rs 40,000
• Disha - Rs 20,000
• Kabir - Rs 20,000

Debit: Share of loss from the P/L A/c [in their old ratio]

• Kanika - Rs 10,000
• Disha - Rs 5,000
• Kabir - Rs 5,000

Debit/Credit: Share of goodwill from Kanika's retirement

• Kanika - Rs 35,000 [Debit]
• Disha - Rs 35,000 [Credit Kanika's capital A/c]
• Kabir - Rs 35,000 [Credit Kanika's capital A/c]

Debit: Balancing figures

• Kanika - Rs 3,00,000 [Debit Kanika's loan A/c]
• Disha - Rs 80,000 [Debit]
• Kabir - Rs 60,000 [Debit]

The fixed assets and stock will be recorded with their revised values and the loss from the Profit & Loss A/c will not be recorded as it has already been distributed. The new capital balances of the partners will be recorded.

The Revaluation Account, Capital Account and Balance Sheet have been attached below.