Question

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

Liabilities	₹	Assets	₹
Workmen Compensation Reserve	40,000

Show the accounting treatment under the following alternative cases:

Case (i) If there is no other information.

Case (ii) If a claim on account of workmen's compensation is estimated at ₹ 25,000.

Case (iii) If a claim on account of workmen's compensation is estimated at ₹ 40,000.

Case (iv) If a claim on account of workmen's compensation is estimated at ₹ 50,000.

Answer 1

A and B share profits and losses in the old ratio:

A : B = 2 : 3

Workmen Compensation Reserve = ₹ 40,000

Since this reserve relates to the period before the change in ratio, any excess or deficiency is adjusted in the old ratio 2 : 3.

Case (i): No claim exists

If there is no claim, the entire Workmen Compensation Reserve of ₹40,000 is distributed among A and B.

A's share:

`40,000 xx 2/5 = 16,000`

B's share:

`40,000 xx 3/5 = 24,000`

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Workmen Compensation Reserve A/c   ...Dr.		40,000
	To A's Capital A/c			16,000
	To B's Capital A/c			24,000
	(Being the unutilized Workmen Compensation Reserve transferred to partners' capital accounts in their profit-sharing ratio)

Case (ii): Claim = ₹ 25,000

Reserve available = ₹ 40,000

Claim = ₹ 25,000

Excess reserve:

₹ 40,000 − ₹ 25,000 = ₹ 15,000​

This excess is distributed in the old ratio 2 : 3.

A: `15,000 xx 2/5 = 6,000`

B: `15,000 xx 3/5 = 9,000`

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Workmen Compensation Reserve A/c   ...Dr.		40,000
	To Provision for Workmen Compensation A/c			25,000
	To A's Capital A/c			6,000
	To B's Capital A/c			9,000
	(Being provision for workmen's compensation claim created and the balance surplus reserve distributed between partners in their profit-sharing ratio)

Case (iii): Claim = ₹ 40,000

The claim is exactly equal to the reserve:

₹ 40,000 − ₹ 40,000 = 0

Therefore, there is no amount to distribute among the partners.

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Workmen Compensation Reserve A/c   ...Dr.		40,000
	To Provision for Workmen Compensation A/c			40,000
	(Being the entire workmen compensation reserve transferred to provision for workmen compensation claim account)

Case (iv): Claim = ₹5 0,000

Reserve = ₹ 40,000

Claim = ₹ 50,000

Deficiency:

₹ 50,000 − ₹ 40,000 = ₹ 10,000​

This deficiency is a loss on revaluation.

Loss of ₹10,000 is borne by A and B in their old ratio 2 : 3.

A: `10,000 xx 2/5 = 4,000`

B:`10,000 xx 3/5 = 6,000`

Revaluation Loss Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
1.	Revaluation A/c   ...Dr.		10,000
	To Provision for Workmen Compensation A/c			10,000
	(Being the excess of workmen compensation claim over the reserve debited to revaluation account)
2.	Workmen Compensation Reserve A/c   ...Dr.		40,000
	To Provision for Workmen Compensation A/c			40,000
	(Being the entire workmen compensation reserve transferred to provision for workmen compensation claim account)
3.	A's Capital A/c   ...Dr.		4,000
	B's Capital A/c   ...Dr.		6,000
	To Revaluation A/c			10,000
	(Being the revaluation loss transferred to partners' capital accounts in their profit-sharing ratio)