Answer :
Explanation:
To adjust the balance sheet for the retirement of Suresh, we need to consider the given adjustments. Here’s the step-by-step process:
1. **Appreciate Buildings by 10%:**
- Buildings = ₹25,000 + 10% of ₹25,000 = ₹25,000 + ₹2,500 = ₹27,500
2. **Write off Creditors of ₹500:**
- Creditors = ₹40,000 - ₹500 = ₹39,500
3. **Depreciate Furniture and Stock by 15%:**
- Furniture = ₹12,000 - 15% of ₹12,000 = ₹12,000 - ₹1,800 = ₹10,200
- Stock = ₹6,000 - 15% of ₹6,000 = ₹6,000 - ₹900 = ₹5,100
4. **Revalue Investment at ₹25,000:**
- Investment = ₹25,000
5. **Goodwill of the Firm (AS 26) valued at ₹25,000:**
- Goodwill needs to be shared among partners in their profit-sharing ratio (2:2:1).
- Ramesh’s share = 2/5 of ₹25,000 = ₹10,000
- Mahesh’s share = 2/5 of ₹25,000 = ₹10,000
- Suresh’s share = 1/5 of ₹25,000 = ₹5,000
6. **Allow Outstanding Salary of ₹15,000:**
- Outstanding Salary = ₹15,000
7. **Interest on Bank Overdraft of ₹500:**
- Bank Overdraft = ₹15,000 + ₹500 = ₹15,500
8. **PDD decreased to ₹500:**
- PDD on Debtors = ₹1,000 - ₹500 = ₹500
- Debtors = ₹50,000 - ₹500 = ₹49,500
9. **Settlement to Retiring Partner (Suresh) by paying cash immediately:**
- Suresh’s final settlement will include his capital account and his share of goodwill and revaluation profit/loss.
### New Balance Sheet Adjustments:
**Assets:**
- Cash at Bank = ₹10,000 - Payment to Suresh
- Cash in Hand = ₹15,000
- Buildings = ₹27,500
- Debtors = ₹49,500
- Furniture = ₹10,200
- Stock = ₹5,100
- Investment = ₹25,000
**Liabilities:**
- Creditors = ₹39,500
- Bills Payable = ₹10,000
- General Reserve = ₹10,000
- Bank Overdraft = ₹15,500
- Outstanding Salary = ₹15,000
**Capital Accounts:**
- Ramesh’s Capital: Adjust for revaluation and goodwill
- Mahesh’s Capital: Adjust for revaluation and goodwill
- Suresh’s Capital: Settle immediately in cash
### Steps to Calculate Revaluation and Capital Adjustments:
**Revaluation Account:**
1. **Revaluation Profit/Loss:**
- Increase in Buildings: ₹2,500
- Decrease in Furniture: ₹1,800
- Decrease in Stock: ₹900
- Increase in Investment: ₹5,000
- Net Revaluation Gain: ₹2,500 + ₹5,000 - ₹1,800 - ₹900 = ₹4,800
**Revaluation Profit Share:**
- Ramesh (2/5) = ₹1,920
- Mahesh (2/5) = ₹1,920
- Suresh (1/5) = ₹960
**Final Capital Adjustments:**
- Ramesh’s Capital: ₹30,000 + ₹1,920 - ₹4,000 (goodwill to Suresh) = ₹27,920
- Mahesh’s Capital: ₹20,000 + ₹1,920 - ₹4,000 (goodwill to Suresh) = ₹17,920
- Suresh’s Capital: ₹15,000 + ₹960 + ₹5,000 (goodwill share) = ₹20,960
**Suresh’s Payment:**
- Payment to Suresh = ₹20,960
**Final Cash at Bank:**
- Cash at Bank = ₹10,000 - ₹20,960 = -₹10,960 (needs adjustment for negative balance, so additional capital or financing needed)
### Adjusted Balance Sheet:
**Assets:**
- Cash at Bank: ₹0 (assuming extra funds arranged)
- Cash in Hand: ₹15,000
- Buildings: ₹27,500
- Debtors: ₹49,500
- Furniture: ₹10,200
- Stock: ₹5,100
- Investment: ₹25,000
**Liabilities:**
- Creditors: ₹39,500
- Bills Payable: ₹10,000
- General Reserve: ₹10,000
- Bank Overdraft: ₹15,500
- Outstanding Salary: ₹15,000
**Capital Accounts:**
- Ramesh’s Capital: ₹27,920
- Mahesh’s Capital: ₹17,920
This adjusted balance sheet reflects all the necessary changes and the settlement made to Suresh.
Answer:
### Adjustments to the Balance Sheet
1. **Appreciate Buildings by 10%**:
- Increase buildings value from Rs 25,000 to Rs 27,500.
2. **Write off a part of Creditors**:
- Decrease creditors by Rs 500, from Rs 40,000 to Rs 39,500.
3. **Depreciate Furniture and Stock by 15%**:
- Reduce furniture value from Rs 12,000 to Rs 10,200.
- Reduce stock value from Rs 6,000 to Rs 5,100.
4. **Revalue Investments**:
- Increase investments from Rs 20,000 to Rs 25,000.
5. **Goodwill of the firm is valued at Rs 25,000**:
- Goodwill needs to be accounted for in the partners' capital accounts.
6. **Allow Outstanding Salary**:
- Add an outstanding salary liability of Rs 15,000.
7. **Interest on Bank Overdraft**:
- Add interest on bank overdraft liability of Rs 500.
8. **Decrease Provision for Doubtful Debts (PDD)**:
- Reduce PDD from Rs 1,000 to Rs 500, increasing the debtors' value by Rs 500.
### Adjusted Balance Sheet:
#### Liabilities:
- **Creditors**: Rs 39,500
- **Bills Payable**: Rs 10,000
- **Bank Overdraft**: Rs 15,500 (includes Rs 500 interest)
- **Outstanding Salary**: Rs 15,000
- **General Reserve**: Rs 10,000
- **Capitals**:
- Ramesh: Rs 30,000
- Mahesh: Rs 20,000
- Suresh: Rs 15,000
#### Assets:
- **Cash at Bank**: Rs 10,000
- **Cash in Hand**: Rs 15,000
- **Buildings**: Rs 27,500
- **Debtors**: Rs 50,000 - Rs 500 (PDD) = Rs 49,500
- **Furniture**: Rs 10,200
- **Stock**: Rs 5,100
- **Investments**: Rs 25,000
### Calculate Suresh's Share of Goodwill and Adjust Capital Accounts:
- **Goodwill**: Rs 25,000
- Suresh's Share: \(\frac{1}{5} \times 25,000 = 5,000\)
- Suresh's total capital including goodwill: Rs 15,000 (original capital) + Rs 5,000 (goodwill) = Rs 20,000
### Settlement to Suresh:
- Suresh is paid Rs 20,000 in cash immediately, reducing the cash at bank from Rs 10,000 to Rs (10,000 - 20,000) = Rs 0 and cash in hand from Rs 15,000 to Rs 5,000 (additional amount needed from partners).
### New Capital Accounts for Ramesh and Mahesh:
- Adjusted General Reserve: Rs 10,000
- Ramesh: \(\frac{2}{5} \times 10,000 = 4,000\)
- Mahesh: \(\frac{2}{5} \times 10,000 = 4,000\)
- Suresh: \(\frac{1}{5} \times 10,000 = 2,000\)
### New Balance Sheet After Adjustments and Suresh’s Retirement:
#### Liabilities:
- **Creditors**: Rs 39,500
- **Bills Payable**: Rs 10,000
- **Bank Overdraft**: Rs 15,500
- **Outstanding Salary**: Rs 15,000
- **Capitals**:
- Ramesh: Rs 34,000 (30,000 + 4,000)
- Mahesh: Rs 24,000 (20,000 + 4,000)
#### Assets:
- **Cash at Bank**: Rs 0
- **Cash in Hand**: Rs 5,000
- **Buildings**: Rs 27,500
- **Debtors**: Rs 49,500
- **Furniture**: Rs 10,200
- **Stock**: Rs 5,100
- **Investments**: Rs 25,000