Question

P, Q and R were partners sharing profits in the ratio of 1 : 3 : 2. Following was their Balance Sheet as at 31st March, 2026:

Liabilities	₹	₹	Assets	₹
Sundry Creditors		2,80,000	Land and Building	5,00,000
Outstanding Expenses		15,000	Investments	1,25,000
Workmen Compensation Reserve		60,000	(Market Value ₹ 1,10,000)
Investment Fluctuation Reserve		45,000	Stock	2,20,000
Capital Accounts:			Sundry Debtors	3,20,000
P	2,00,000		Bank Balance	1,60,000
Q	5,00,000		Advertisement Suspense	75,000
R	3,00,000	10,00,000
Total		14,00,000	Total	14,00,000

On 1st April, 2026 they decided to share future profits in the ratio of 4 : 6 : 5. It was agreed that:

1. Claim for Workmen Compensation has been estimated at ₹ 1,00,000.
2. A motor cycle valued at ₹ 30,000 was unrecorded and is now to be recorded in the books.
3. Outstanding expenses were not payable anymore.
4. Value of stock be increased to ₹ 2,90,000.
5. A provision for doubtful debts be created @ 5% on Sundry Debtors.
6. Goodwill is valued at ₹ 1,00,000.
7. The work of reconstitution was assigned to firm’s auditors. They were paid ₹ 20,000 for this work.

Pass journal entries and prepare Revaluation Account.

Answer 1

Old profit-sharing ratio:

P : Q : R = 1 : 3 : 2

New profit-sharing ratio:

P : Q : R = 4 : 6 : 5

Revaluation Account
Particulars	₹	Particulars	₹
To Provision for Workmen Compensation A/c	40,000	By Motor Cycle A/c	30,000
To Provision for Doubtful Debts A/c	16,000	By Outstanding Expenses A/c	15,000
To Bank A/c – Auditor's Fee	20,000	By Stock A/c	70,000
To P's Capital A/c	6,500
To Q's Capital A/c	19,500
To R's Capital A/c	13,000
Total	1,15,000	Total	1,15,000

 

Journal Entries
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
1.	Workmen Compensation Reserve A/c   ...Dr.		60,000
	Revaluation A/c   ...Dr.		40,000
	To Provision for Workmen Compensation A/c			1,00,000
	(Being Workmen Compensation claim provided for and excess claim charged to Revaluation A/c.)
2.	Motor Cycle A/c   ...Dr.		30,000
	To Revaluation A/c			30,000
	(Being unrecorded motor cycle brought into books.)
3.	Outstanding Expenses A/c   ...Dr.		15,000
	To Revaluation A/c			15,000
	(Being outstanding expenses no longer payable written back.)
4.	Stock A/c   ...Dr.		70,000
	To Revaluation A/c			70,000
	(Being stock appreciated to ₹ 2,90,000.)
5.	Revaluation A/c   ...Dr		16,000
	To Provision for Doubtful Debts A/c			16,000
	(Being provision for doubtful debts created at 5%.)
6.	Revaluation A/c   ...Dr.		20,000
	To Bank A/c			20,000
	(Being auditor's fee for reconstitution paid.)
7.	Revaluation A/c   ...Dr		39,000
	To P's Capital A/c			6,500
	To Q's Capital A/c			19,500
	To R's Capital A/c			13,000
	(Being profit on revaluation transferred to partners in old ratio 1 : 3  : 2.)
8.	Investment Fluctuation Reserve A/c   ...Dr.		45,000
	To Investments A/c			15,000
	To P's Capital A/c			5,000
	To Q's Capital A/c			15,000
	To R's Capital A/c			10,000
	(Being fall in value of investments adjusted against reserve and surplus reserve distributed in old ratio.)
9.	P's Capital A/c   ...Dr.		12,500
	Q's Capital A/c   ...Dr.		37,500
	R's Capital A/c   ...Dr.		25,000
	To Advertisement Suspense A/c			75,000
	(Being Advertisement Suspense A/c written off among partners in old ratio.)
10.	P's Capital A/c   ...Dr.		10,000
	To Q's Capital A/c			10,000
	(Being goodwill adjusted between gaining and sacrificing partners on change in profit-sharing ratio.)

Working note:

1: Gain/Sacrifice Ratio

Old shares:

`P = 1/6, Q = 3/6, R = 2/6`

New shares:

`P = 4/15, Q = = 6/15, R = 5/15`

Using denominator 30:

`P : 5/30 -> 8/30`

So P gains: `3/30 - 1/10`

`Q : 15/30 -> 12/30`

R: `10/30 - 10/30 = 0`

Therefore:

P gains `1/10`, Q Sacrifices `1/10`

Goodwill = ₹ 1,00,000

`₹ 1,00,000 × 1/01 ​= ₹ 10,000​`

2: Investment Fluctuation Reserve

Book value of Investments = ₹ 1,25,000

Market value = ₹ 1,10,000

Fall in value:

₹ 1,25,000 − ₹ 1,10,000 = ₹15,000

Investment Fluctuation Reserve = ₹ 45,000

Balance reserve:

₹ 45,000 − ₹ 15,000 = ₹ 30,000

₹ 30,000 is distributed in old ratio 1 : 3 : 2:

`P = 30,000 xx 1/6 = 5,000`

`Q = 30,000 xx 3/6 = 15,000`

`R = 30,000 xx 2/6 = 10,000`

3: Advertisement Suspense A/c

Advertisement Suspense = ₹ 75,000

It is written off in old ratio 1 : 3 : 2:

`P = 75,000 xx 1/6 = 12,500`

`Q = 75,000 xx 3/6 = 37,500`

`R = 75,000 xx 2/6 = 25,000`