Question

X, Y and Z are partners sharing profits and losses in the ratio of 1 : 3 : 2. X retires on 1st April, 2025 and the new profit sharing ratio between Y and Z is agreed at 1 : 2. Following balances appeared in their Balance Sheet as at that date:

BALANCE SHEET as at 1st April, 2025
Liabilities	Amount (₹)	Assets	Amount (₹)
Investment Fluctuation Reserve	1,20,000	Investments (at cost)	6,00,000

Y and Z decide that book value of any item in the Balance Sheet is not to be altered but prefer to record the change in profit sharing ratio by an adjustment entry. Show the adjustment entry under the following alternative cases:

Case:

1. If there is no other information
2. If the market value of investments is ₹ 5,52,000
3. If the market value of investments is ₹ 4,50,000
4. If the market value of investments is ₹ 6,30,000

Answer 1

Journal entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
Case 1	Z’s Capital A/c      ...Dr.		40,000
	To X’s Capital A/c			20,000
	To Y’s Capital A/c			20,000
	(Being Z’s share of investment fluctuation reserve adjusted in gaining or sacrificing share)
Case 2	Z’s Capital A/c      ...Dr.		24,000
	To X’s Capital A/c			12,000
	To Y’s Capital A/c			12,000
	(Being Z’s share of investment fluctuation reserve of ₹ 1,20,000 less ₹ 48,000 for fall in the value of investments adjusted in gaining or sacrificing share)
Case 3	X’s Capital A/c       ...Dr.		5,000
	Y’s Capital A/c       ...Dr.		5,000
	To Z’s Capital A/c			10,000
	(Being Z’s share of fall in the value of investments ₹ 1,50,000 less reserve ₹ 1,20,000 adjusted in gaining or sacrificing share)
Case 4	Z’s Capital A/c      ...Dr.		50,000
	To X’s Capital A/c			25,000
	To Y’s Capital A/c			25,000
	(Being Z’s share of investment fluctuation reserve ₹ 1,20,000 plus ₹ 30,000 for increase in the value of investments adjusted in gaining or sacrificing share)

Working Note:

Gaining Ratio = New Ratio – Old Ratio

Y = `1/3-3/6=(9-6)/18=3/18`

Z = `2/3-2/6=(12-6)/18=6/18`

Gaining Ratio = 3 : 6 = 1 : 2

Y sacrifices 1/6; Z gains 2/6

Z = ₹ `1,20,000xx2/6` = ₹ 40,000