Question

A, B and C sharing profits and losses in the ratio of 4 : 3 : 2, decide to share profits and losses in the ratio of 2 : 3 : 4 with effect from 1st April, 2024. Following is an extract of their Balance Sheet as at 31st March, 2024:

Liabilities	₹	Assets	₹
Investment Fluctuation Reserve	54,000	Investments (At Cost)	6,00,000

Show the accounting treatment under the following alternative cases:

Case (i) If there is no other information.

Case (ii) If the market value of Investments is ₹ 6,00,000.

Case (iii) If the market value of Investments is ₹ 5,91,000.

Case (iv) If the market value of Investments is ₹ 5,28,000.

Case (v) If the market value of Investments is ₹ 6,60,000.

Answer 1

Old profit-sharing ratio:

A : B : C = 4 : 3 : 2

Total = 4 + 3 + 2 = 9

Investment Fluctuation Reserve = ₹ 54,000
Investments at cost = ₹ 6,00,000

The Investment Fluctuation Reserve relates to the period before the change in ratio, so any surplus or deficiency is adjusted among partners in the old ratio 4 : 3 : 2.

Case (i): No other information

When no information about the market value is given, the entire Investment Fluctuation Reserve is distributed among the partners.

A: `54,000 xx 4/9 = 24,000`

B: `54,000 xx 3/9 = 18,000`

C: `54,000 xx 2/9 = 12,000`

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Investment Fluctuation Reserve A/c   ...Dr.		54,000
	To A's Capital A/c			24,000
	To B's Capital A/c			18,000
	To C's Capital A/c			12,000
	(Being the unutilized Investment Fluctuation Reserve distributed among partners in their old profit-sharing ratio)

Case (ii): Market value of Investments = ₹ 6,00,000

Book value = ₹ 6,00,000

Market value = ₹ 6,00,000

There is no fall in value.

Therefore, the entire reserve of ₹ 54,000 is distributed in the old ratio.

A = ₹ 24,000, B = ₹ 18,000, C = ₹ 12,000​

The journal entry is the same as Case (i).

Case (iii): Market value = ₹ 5,91,000

Fall in value:

₹ 6,00,000 − ₹ 5,91,000 = ₹ 9,000​

Reserve available = ₹ 54,000.

After meeting the loss:

₹ 54,000 − ₹ 9,000 = ₹ 45,000​

The remaining ₹ 45,000 is distributed in the old ratio 4 : 3 : 2.

A: `45,000 xx 4/9 = 20,000`

B: `45,000 xx 3/9 = 15,000`

C: `45,000 xx 2/9 = 10,000`

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Investment Fluctuation Reserve A/c   ...Dr.		54,000
	To Investments A/c			9,000
	To A's Capital A/c			20,000
	To B's Capital A/c			15,000
	To C's Capital A/c			10,000
	(Being the decrease in the value of investments adjusted against Investment Fluctuation Reserve and the surplus distributed among partners in their old profit-sharing ratio)

Case (iv): Market value = ₹ 5,28,000

Fall in value:

₹ 6,00,000 − ₹ 5,28,000 = ₹ 72,000​

Reserve available:

₹ 54,000

Amount not covered by reserve:

₹ 72,000 − ₹ 54,000 = ₹ 18,000​

Thus, Loss on Revaluation = ₹ 18,000.

This loss is distributed in old ratio 4 : 3 : 2.

A: `18,000 xx 4/9 = 8,000`

B: `18,000 xx 3/9 = 6,000`

C: `18,000 xx 2/9 = 4,000`

Journal Entries
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
1.	Investment Fluctuation Reserve A/c   ...Dr.		54,000
	Revaluation A/c   ...Dr.		18,000
	To Investments A/c			72,000
	(Being the fall in the value of investments adjusted against Investment Fluctuation Reserve and the excess loss debited to revaluation account)
2.	A's Capital A/c   ...Dr.		8,000
	B's Capital A/c   ...Dr.		6,000
	C's Capital A/c   ...Dr.		4,000
	To Revaluation A/c			18,000
	(Being the revaluation loss transferred to partners' capital accounts in their old profit-sharing ratio)

Case (v): Market value = ₹ 6,60,000

Increase in value:

₹ 6,60,000 − ₹ 6,00,000 = ₹ 60,000​

Since there is an increase, the Investment Fluctuation Reserve is not required to meet any loss.

A. Distribution of Investment Fluctuation Reserve

₹ 54,000 is distributed in old ratio 4 : 3 : 2:

A = ₹ 24,000

B = ₹ 18,000

C = ₹ 12,000

B. Revaluation Profit

Profit on revaluation:

₹ 60,000​

Distributed in old ratio 4 : 3 : 2:

A: `60,000 xx 4/9 = 26,666.67`

B: `60,000 xx 3/9 = 20,000`

C: `60,000 xx 2/9 = 13,333.33`

Journal Entries
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
1.	Investment Fluctuation Reserve A/c   ...Dr.		54,000
	To A's Capital A/c			24,000
	To B's Capital A/c			18,000
	To C's Capital A/c			12,000
	(Being the unutilized Investment Fluctuation Reserve distributed among partners in their old profit-sharing ratio)
2.	Investments A/c   ...Dr.		60,000
	To Revaluation A/c			60,000
	(Being the increase in the value of investments credited to the revaluation account)
3.	Revaluation A/c   ...Dr.		60,000
	To A's Capital A/c			26,666.67
	To B's Capital A/c			20,000
	To C's Capital A/c			13,333.33
	(Being the revaluation profit transferred to partners' capital accounts in their old profit-sharing ratio)