Question
A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2019 stood as follows:
Liabilities 
Amount (₹) 
Assets 
Amount (₹) 

Capital A/cs:  Land and Building  3,50,000  
A  2,50,000  Machinery  2,40,000  
B  2,50,000  Computers  70,000  
C  2,00,000  7,00,000  Investments (Market value ₹ 90,000)  1,00,000 
General Reserve  60,000  Sundry Debtors  50,000  
Investments Fluctuation Reserve  30,000  Cash in Hand  10,000  
Sundry Creditors  90,000  Cash at Bank  55,000  
Advertisement Suspense  5,000  
8,80,000  8,80,000 
They decided to share profits equally w.e.f. 1st April, 2019. They also agreed that:
(i) Value of Land and Building be decreased by 5%.
(ii) Value of Machinery be increased by 5%.
(iii) A Provision for Doubtful Debts be created @ 5% on Sundry Debtors.
(iv) A Motor Cycle valued at ₹ 20,000 was unrecorded and is now to be recorded in the books.
(v) Out of Sundry Creditors, ₹ 10,000 is not payable.
(vi) Goodwill is to be valued at 2 years' purchase of last 3 years profits. Profits being for 201819 − ₹ 50,000 (Loss); 201718 − ₹ 2,50,000 and 201617 − ₹ 2,50,000.
(vii) C was to carry out the work for reconstituting the firm at a remuneration (including expenses) of ₹ 5,000. Expenses came to ₹ 3,000.
Pass Journal entries and prepare Revaluation Account.
Solution
Journal
Date 
Particulars 
L.F. 
Debit Amount (₹) 
Credit Amount (₹) 

2019 





April 1 
General Reserve A/c 
Dr. 

60,000 


To A’s Capital A/c 



30,000 

To B’s Capital A/c 



18,000 

To C’s Capital A/c 



12,000 

(Reserve distributed) 





A’s Capital A/c 
Dr 

2,500 


B’s Capital A/c 
Dr. 

1,500 


C’s Capital A/c 
Dr. 

1,000 


To Advertisement Suspense A/c 



5,000 

(Advertisement Suspense distributed) 





Investment Fluctuation Reserve A/c 
Dr. 

30,000 


To Investment A/c 



10,000 

To A’s Capital A/c 



10,000 

To B’s Capital A/c 



6,000 

To C’s Capital A/c 



4,000 

(Investment Fluctuation Reserve distributed) 





Machinery A/c 
Dr. 

12,000 


Motor Cycle A/c 
Dr. 

20,000 


Creditors A/c 
Dr. 

10,000 


To Revaluation A/c 



42,000 

(Assets revalued) 





Revaluation A/c 


25,000 


To Land & Building A/c 



17,500 

To Provision for Doubtful Debts A/c 



2,500 

To Bank A/c (Remuneration) 



5,000 

(Assets revalued) 





Revaluation A/c 


17,000 


To A’s Capital A/c 



8,500 

To B’s Capital A/c 



5,100 

To C ’s Capital A/c 



3,400 

(Profit on revaluation transferred to Partners’ Capital A/c) 





B’s Capital A/c 
Dr. 

10,000 


C ’s Capital A/c 
Dr. 

40,000 


To A’s Capital A/c 



50,000 

(Goodwill adjusted) 




Revaluation A/c
Dr. 

Cr. 

Particulars 
Amount (₹) 
Particulars 
Amount (₹) 

Land & Building A/c 
17,500 
Machinery A/c 
12,000 

Provision for Doubtful Debts A/c 
2,500 
Motor Cycle A/c 
20,000 

Bank A/c (Remuneration) 
5,000 
Creditors A/c 
10,000 

Profit transferred to: 




A 
8,500 




B 
5,100 




C 
3,400 
17,000 




42,000 

42,000 
Working Notes:
WN1: Calculation of sacrifice or gain
A : B : C = 5 : 3 : 2 (Old ratio)
A : B : C = 1 : 1 : 1 (new ratio)
sacrificing (or gaining ratio) = old ratio  new ratio
A's share = `5/10  1/3 = (1510)/30 = 5/10` (sacrifice)
B's share = `3/10  1/3 = (910)/30 = 1/30` (gain)
C's share = `2/10  1/3 = (9610)/30 = 4/30` (gain)
WN2: Valuation of Goodwill
Goodwill = Average profit x No. of years purchase
= 1,50,000 x 2
= Rs 3,00,000
WN3: Adjustment of Goodwill
Amount credited to A's apital A/c = `3,00,000 xx 5/30 = "Rs" 50,000`
Amount debited to B's capital A/c = `3,00,000 xx 1/30 = "Rs" 10,000`
Amount debited to C's capital A/c = `3,00,000 xx 4/30 = "Rs" 40,000`