Question

Aman, Suman and Tanvi were partners in a firm sharing profits and losses in the ratio of 9:8:7. They decided to share future profits and losses in the ratio of 7:9:8 with effect from 1st April, 2024. Their Balance Sheet as at 31st March, 2024 showed: (i) Contingency Reserve of ₹ 24,00,000. (ii) Credit Balance of ₹ 12,00,000 in Profit and Loss Account. Goodwill of the firm was valued at ₹ 42,00,000 and Revaluation of assets and liabilities resulted in a loss of ₹ 6,00,000. The partners did not want to distribute the Contingency Reserve and the Balance of the Profit and Loss Account. They also decided that revalued values of assets and liabilities were not to be recorded in the books. Pass a single adjustment entry to give effect to the above. Show your workings clearly.

Hint:

If revaluation and reserves are not to be distributed, then one single entry using gaining/sacrificing ratio adjusts all the changes.

Answer 1

Based on the question, the firm has resolved the following: - The Contingency Reserve (₹ 24,00,000) will not be distributed. - The Profit and Loss balance (₹ 12,00,000) will not be distributed. - Revalued figures will not be recorded in the books; only an adjustment for the loss of ₹ 6,00,000 will be passed. - Goodwill is valued at ₹ 42,00,000 but will not be raised in the books, requiring an adjustment entry. Let's calculate the Net Effect for Adjustment: 1. Total undistributed reserves: Contingency Reserve + P and L Balance = ₹ 24,00,000 + ₹ 12,00,000 = ₹ 36,00,000 2. Revaluation Loss: ₹ 6,00,000 3. Net gain to be adjusted: = ₹ 36,00,000 - ₹ 6,00,000 = ₹ 30,00,000 4. Gaining Ratio = New Ratio - Old Ratio Old Ratio = 9:8:7 → Aman = 9/24, Suman = 8/24, Tanvi = 7/24 New Ratio = 7:9:8 → Aman = 7/24, Suman = 9/24, Tanvi = 8/24 Gaining Ratio: Aman = 7/24 - 9/24 = -2/24 (Sacrifices) Suman = 9/24 - 8/24 = 1/24 Tanvi = 8/24 - 7/24 = 1/24 Suman and Tanvi are the gaining partners; Aman is the sacrificing partner. Entry: Suman’s Capital A/c Dr. ₹ 15,00,000
Tanvi’s Capital A/c Dr. ₹ 15,00,000
To Aman’s Capital A/c ₹ 30,00,000Final Answer: The adjustment entry debits Suman and Tanvi, and credits Aman by ₹ 30,00,000.