Question

A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. C retires and new profit sharing ratio is agreed at 3 : 1. They also decided to record the effect of the following without affecting their book values:

	₹
General Reserve	1,00,000
Profit & Loss Account	45,000
Advertisement Suspense Account	25,000

You are required to pass the necessary single adjusting entry.

Answer 1

Adjusting Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	A's Capital A/c   ...Dr.		30,000
	To B's Capital A/c			10,000
	To C's Capital A/c			20,000
	(Being single adjustment entry passed for reserves and accumulated profits/losses without changing their book values)

Working note:

1. Calculation of Net Effect to be Adjusted

General Reserve	1,00,000
Profit & Loss Account	45,000
Less: Advertisement Suspense A/c	(25,000)
Net Effect to be Adjusted	1,20,000

2. Calculation of Gaining/Sacrificing Share

Old Ratio (A : B : C): 3 : 2: 1 = `(3/6, 2/6, 1/6)`

New Ratio (A : B): 3 : 1 = `(3/4, 1/4)`

Gaining Share = New Share − Old Share

A's Gain: `3/4 - 3/6 = (9 - 6)/12 = +3/12` (Gain)

B's Gain: `1/4 - 2/6 = (3 - 4)/12 = -1/12` (Sacrifice)

C's Share (Retiring): `0 - 1/6 = -2/12` (Sacrifice)

3. Calculation of Adjustment Amounts

Using the total net effect of ₹ 1,20,000:

A's Debit Amount: `1,20,000 xx 3/12 = 30,000`

B's Debit Amount: `1,20,000 xx 1/12 = 10,000`

C's Debit Amount: `1,20,000 xx 2/12 = 20,000`