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031 Suppose A, B and C share profits and losses in the ratio 3: 2: 1 after allowing interest on capital @ 9% p.a. Their capitals on 31st December, 2011 were: A 50,000, B 30,000 and C 20,000. On 1st January, 2012 the business was converted into a limited company and was valued at 1,30,000. A scheme of capitalisation, whereby the mutual interest of partners may remain intact as far as possible is suggested telow: The total capital being 1,00,000 and the value placed on the business being 1,30,000 there is goodwill of 30,000 to be shared by the partners in the ratio of 3:2:1 or A 15,000 B10,000 and C5,000. The capital will now be: A 65,000, B 340,000 and C 3 25,000 Taking B's capital as the basis, A's capital should be 60,000, 1.e. 40,000 * 3/2 and C's capital should be 20,000. Both A and C have 5,000 excess. Since interest on capital is meant to compensate those whose capital is in excess of proportionate limits and since in the case of partners it is an appropriation of profit, it will be proper to give 9% preference shares to A & C for 5,000 each and the remaining amount of 1,20,000 can be in the form of equity shares to be divided among A, B and C in the ratio of 3: 2:1. They will then share the company's profit in the ratio of 3: 2: 1 after alowing preference dividend. Illustration 8 Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola Mr. Shiv who share profits and losses in the ratio of 2:2:1 and Bhagwan Ltd. a company doing similar business Following is the Balance sheet of the firm and that of the company as at 31.3.2012: Liabilities Prabhu Bhagwan Prabhu Bhagwan & Co Lid. & Co. Ltd. 25,000 50,000 Equity share Capital Plant & machinery 2,50,000 8,00.000 Equity shares 10,00,000 Furniture & fixture 1,12,500 10 each Stock in trade 1,00,000 4.25.000 Partners' capital Sundry debtors 1,00,000 4,12,500 Prabhu 1,00,000 Cash at bank 5,000 2,00.000 Bhola 1,50,000 Cash in hand 20,000 50,000 Shiv General reserve 50,000 3,50.000 Sundry creditors 150.000 6.50,000 5,00,000 20,00.000 5,00,000 20.00.000 It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand and cash at bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing 25,000 shares of 10 each at a premium of 2 per share. Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit sharing ratio and bring necessary cash for setlement of their capital. The creditors of Prabhu & Co. includes 750,009 payable to Bhagwan Ltd. An unrecorded liability of 12,500 of Prabhu & Co. must also be taken over by Bhagwan Ltd. Prepare Realisation account, Partners' capital accounts and Cash in hand/Bank account in the books of Prabhu & Co. (6) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co