Question

A and B are partners sharing profits and losses in the ratio of 3 : 2. They admit C as a new partner from 1st April, 2024. A surrenders `1/3`rd of his share and B surrenders `1/5`th from his share in favour of C. Following balances appeared in their Balance Sheets as of that date:

BALANCE SHEET as at 1st April, 2024
Liabilities	₹	Assets	₹
Investment Fluctuation Reserve	60,000	Investments (at Cost)	4,50,000

Partners decide that the book value of any item in the Balance Sheet is not to be altered but prefer to record the change in profit-sharing ratio by an adjustment entry. Show the adjustment entry under the following alternative cases:

Case 1: If there is no other information

Case 2: If the market value of investments is ₹ 4,35,000

Case 3: If the market value of investments is ₹ 3,50,000

Case 4: If the market value of investments is ₹ 5,00,000

Answer 1

Adjustment Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	C’s Capital A/c   ...Dr.		24,000
	To A’s Capital A/c			12,000
	To B’s Capital A/c			12,000
	(Adjustment for Investment Fluctuation Reserve)
2.	C’s Capital A/c   ...Dr.		18,000
	To A’s Capital A/c			9,000
	To B’s Capital A/c			9,000
	(Adjustment for surplus Investment Fluctuation Reserve)
3.	A’s Capital A/c   ...Dr.		8,000
	B’s Capital A/c   ...Dr.		8,000
	To C’s Capital A/c			16,000
	(Adjustment for loss on investments)
4.	C’s Capital A/c   ...Dr.		44,000
	To A’s Capital A/c			22,000
	To B’s Capital A/c			22,000
	(Adjustment for Investment Fluctuation Reserve and Revaluation Profit)

Working Note:

Calculate the new profit-sharing ratio and the sacrificing/gaining ratio:

Calculate the share surrendered by A and B to C:

Share surrendered by A = `1/3 xx 3/5`

= `3/15`

= `1/5`

Share surrendered by B = `1/5`

Calculate the new shares of A, B, and C:

A’s new share = `3/5 - 1/5`

= `2/5`

B’s new share = `2/5 - 1/5`

= `1/5`

C’s share = Share surrendered by A + Share surrendered by B

= `1/5 + 1/5`

= `2/5`

The new profit-sharing ratio for A, B, and C = `2/5 : 1/5 : 2/5` or 2 : 1 : 2

The sacrificing ratio is the ratio in which the old partners have surrendered their shares for the new partner.

The sacrificing ratio for A and B = `1/5 :  1/5` or 1 : 1

1. The entire reserve of ₹ 60,000 is a profit to be distributed among the old partners in their old profit-sharing ratio of 3 : 2.

C’s Capital Account = `60,000 xx 2/5`

= 24,000

Sacrificing partners’ shares A and B in the net effect are distributed in their sacrificing ratio of 1 : 1.

A’s Capital Account = `24,000 xx 1/2`

= 12,000

B’s Capital Account = `24,000 xx 1/2`

= 12,000

2. Decrease in value of investments = 4,50,000 − 4,35,000

= 15,000

This loss is adjusted against the Investment Fluctuation Reserve.

Net effect = Investment Fluctuation Reserve − Loss

= 60,000 − 15,000

= 45,000

C’s Capital Account = `45,000 xx 2/5`

= 18,000

A’s Capital Account = `18,000 xx 1/2`

= 9,000

B’s Capital Account = `18,000 xx 1/2`

= 9,000

3. Decrease in value of investments = 4,50,000 − 3,50,000

= 1,00,000
Since the loss is more than the reserve, there is a net loss.

Net effect = Investment Fluctuation Reserve − Loss

= 60,000 − 1,00,000

= − 40,000

The gaining partner’s share in the loss is credited, and the sacrificing partners’ shares are debited.

C’s Capital Account = `40,000 xx 2/5`

= 16,000

A’s Capital Account = `16,000 xx 1/2`

= 8,000

B’s Capital Account = `16,000 xx 1/2`

= 8,000

4. Increase in value of investments = 5,00,000 − 4,50,000

= 50,000
The entire Investment Fluctuation Reserve of ₹ 60,000 is a profit, and the increase in investment value of ₹ 50,000 is also a profit.

Total Net Effect = Investment Fluctuation Reserve + Gain on revaluation

= 60,000 + 50,000

= 1,10,000

C’s Capital Account = `1,10,000 xx 2/5`

= 44,000

A’s Capital Account = `44,000 xx 1/2`

= 22,000

B’s Capital Account = `44,000 xx 1/2`

= 22,000