Question: Up to 31st March, 1959, Henry, John and Kenneth had been trading in partnership and sharing profits in the respective proportions of 8, 7 and 5, and the firms balance sheet drawn up as on that date was as follows:
Henry having given notice that he wished to retire on the date mentioned, and it having been determined to admit Lambert as a new partner on the following day, the following terms were agreed:
(a) The balance sheet was to be revised, before the change, by writing up the book value of the freehold property to £7,500, and £200 was to be set aside as a provision against doubtful debts.
(b) Henry was to be credited with £3,000 for his share of Goodwill. He was to be paid £5,000 out of money to be brought in by Lambert, and agreed to leave the balance of the sum remaining due to him as a loan to the firm.
(c) Lambert was to bring in £7,000 in cash and to be entitled to one-fifth of the profits, the other partners, as between themselves, sharing the balance in the same proportion as before.
(d) Finally, adjustments were to be made between the partners; capital accounts to give effect to their agreement that Lambert should purchase one-fifth of the firm's Goodwill, which was to be valued for this purpose at £9,000. No Goodwill account was to appear in the books of the new firm. Write up the partners; capital accounts, showing the entries recording the foregoing, and draw up an initial balance sheet for the new firm.