Question

A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2019, they decided to admit C, and their new ratio is decided to be equal. Pass the necessary journal entry to distribute the Investment Fluctuation Reserve of ₹ 60,000 at the time of C’s admission, when Investment appear in the books at ₹ 2,10,000 and its market value is ₹ 1,90,000.

Answer 1

JOURNAL
Date	Particular	L.F	Dr. (₹)	Cr. (₹)
2019
April 1	Investment Fluctuation Reserve A/c   ...Dr.		60,000
	To Investment A/c			20,000
	To A’s Capital A/c			24,000
	To B’s Capital A/c			16,000
	(The transfer of excess investment fluctuation reserve to partner’s capital accounts in old profit-sharing ratio)

Working Note:

Book Value of Investment = ₹ 2,10,000

Market Value of Investment = ₹ 1,90,000

Fall in Value = ₹ 2,10,000 − ₹ 1,90,000

= ₹ 20,000

The fall in the value of the investment of ₹ 20,000 is adjusted against the Investment Fluctuation Reserve of ₹ 60,000. The remaining reserve is then distributed among the old partners.

Remaining Reserve = ₹ 60,000 − ₹ 20,000

= ₹ 40,000

A’s share = `40,000 xx 3/5`

= 24,000

B’s share = `40,000 xx 2/5`

= 16,000