Question

Hari, Kunal and Uma are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2018 they decided to share future profits and losses in the ratio of 2 : 5 : 3. Their Balance Sheet showed a balance of ₹ 75,000 in the Profit and Loss Account and a balance of ₹ 15,000 in Investment Fluctuation Fund. For this purpose, it was agreed that:

1. Goodwill of the firm was valued at ₹ 3,00,000.
2. That investments (having a book value of ₹ 50,000) were valued at ₹ 35,000.
3. That stock having a book value of ₹ 50,000 be depreciated by 10%.

Pass the necessary journal entries for the above in the books of the firm.

Hint:

1. P & L Balance of ₹ 75,000 will be distributed in old ratio.
2. Entry for decrease in the value of Investments:
   

   Investment Fluctuation Fund A/c   ...Dr.	15,000
   To Investment A/c		15,000
   There will be no effect of decrease in the value of investments on Revaluation A/c

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1 Apr. 2018	Hari’s Capital A/c   ...Dr.		37,500
	Kunal’s Capital A/c   ...Dr.		22,500
	Uma’s Capital A/c   ...Dr.		15,000
	To Profit & Loss A/c			75,000
	(Being debit balance of Profit & Loss A/c transferred to partners’ capital accounts in old ratio 5 : 3 : 2)
1 Apr. 2018	Kunal’s Capital A/c   ...Dr.		60,000
	Uma’s Capital A/c   ...Dr.		30,000
	To Hari’s Capital A/c			90,000
	(Being goodwill adjusted through partners’ capital accounts on change in profit-sharing ratio)
1 Apr. 2018	Investment Fluctuation Fund A/c   ...Dr.		15,000
	To Investments A/c			15,000
	(Being decrease in value of investments adjusted against Investment Fluctuation Fund)
1 Apr. 2018	Revaluation A/c   ...Dr.		5,000
	To Stock A/c			5,000
	(Being stock depreciated by 10%)
1 Apr. 2018	Hari’s Capital A/c   ...Dr.		2,500
	Kunal’s Capital A/c   ...Dr.		1,500
	Uma’s Capital A/c   ...Dr.		1,000
	To Revaluation A/c			5,000
	(Being loss on revaluation transferred to partners’ capital accounts in old ratio 5 : 3 : 2)

Working note:

1. Sacrificing and Gaining Ratio

Old ratio = 5 : 3 : 2

New ratio = 2 : 5 : 3

Hari:

`5/10 - 2/10 = 3/10` sacrifice

Kunal:

`5/10 - 3/10 = 2/10 = 1/5` gain

Uma:

`3/10 - 2/10 = 1/10` gain

Therefore:

Hari sacrifices = `3/10`

Kunal gains = `2/10`

Uma gains = `1/10`

Gaining ratio of Kunal and Uma: 2 : 1

2. Goodwill Adjustment

Goodwill of firm = ₹ 3,00,000

Hari’s sacrifice:

`3,00,000 xx 3/10 = 90,000`

Kunal’s gain:

`3,00,000 xx 2/10 = 60,000`

Uma's gain:

`3,00,000 xx 1/10 = 30,000`

Therefore:

Kunal’s Capital A/c Dr. ₹ 60,000

Uma’s Capital A/c Dr. ₹ 30,000

To Hari’s Capital A/c ₹ 90,000

3. Profit & Loss A/c Balance

Debit balance of Profit & Loss A/c = ₹ 75,000

It is distributed among partners in old ratio 5 : 3 : 2

Hari:

`75,000 xx 5/10 = 37,500`

Kunal:

`75,000 xx 3/10 = 22,500`

Uma:

`75,000 xx 2/10 = 15,000`

4. Decrease in Value of Investments

Book value of investments = ₹ 50,000

Revalued amount = ₹ 35,000

Decrease:

₹ 50,000 − ₹ 35,000 = ₹ 15,000

Investment Fluctuation Fund = ₹ 15,000

Hence, the entire decrease is adjusted against the Investment Fluctuation Fund and does not affect Revaluation A/c.

5. Loss on Revaluation of Stock

Book value of stock = ₹ 50,000

Depreciation = 10%

₹ 50,000 × 10% = ₹ 5,000

Therefore:

Loss on Revaluation = ₹ 5,000

Distributed in old ratio 5 : 3 : 2:

Hari:

`5,000 xx 5/10 = 2,500`

Kunal:

`5,000 xx 3/10 = 1,500`

Uma:

`5,000 xx 2/10 = 1,000`