Question

R, S and T are partners in a firm sharing profits in the ratio of 3 : 3 : 2. From 1st April, 2021, they decided to share profits in the ratio of 3 : 2 : 1. On that date their Balance Sheet showed Contingency Reserve of ₹ 1,92,000. They decided to show this Contingency Reserve in the new Balance Sheet. The correct accounting treatment for the above is:

Options

• S's capital account will be debited by ₹ 24,000 and R and T's capital account will be credited by ₹ 8,000 and ₹ 16,000 respectively.

• T's capital account will be debited by ₹ 24,000 and R and S's capital account will be credited by ₹ 8,000 and ₹ 16,000 respectively.

• R's capital account will be debited by ₹ 24,000 and S and T's capital account will be credited by ₹ 8,000 and ₹ 16,000 respectively.

• S and T's capital account will be debited by ₹ 8,000 and ₹ 16,000 respectively and R's capital account will be credited by ₹ 24,000.

Answer 1

R's capital account will be debited by ₹ 24,000 and S and T's capital account will be credited by ₹ 8,000 and ₹ 16,000 respectively.

Explanation:

Step 1: Old and New Profit-sharing Ratios

Old Ratio (OR) = R : S : T = 3 : 3 : 2

R = `3/8`

S = `3/8`

T = `2/8` = `1/4`

New Ratio (NR) = R : S : T = 3 : 2 : 1

R = `3/6` = `1/2`

S = `2/6` = `1/3`

T = `1/6`

Step 2: Sacrificing/Gaining Ratio

Partner	Old Share	New Share	Gain/Sacrifice
R	`3/8`	`1/2`	Gains = `1/8`
S	`3/8`	`1/3`	Sacrifices = `1/24`
T	`1/4`	`1/6`	Sacrifices = `1/12`

Total sacrifice = `1/24` + `1/12` = `3/24` = `1/8`, which equals R's gain.

Step 3: Adjustment of Contingency Reserve

Reserve = ₹ 1,92,000

Amount to be adjusted:

S sacrifices = `1,92,000 xx 1/24 = 8,000`

T sacrifices = `1,92,000 xx 1/12 = 16,000`

R gains = `1,92,000 xx 1/8 = 24,000`