Question

Ram and Shyam are partners sharing profits/losses equally. They admitted Radha into partnership for \(\frac{1}{3}^{rd}\) share. At the time of her admission, the book value of Machinery was 1,35,000. It was provided at the time of admission that the Machinery was undervalued by \(10\%\). Show its impact on Revaluation A/c?

• A. Revaluation A/c is debited by 15,000
• B. Revaluation A/c is debited by 13,500
• C. Revaluation A/c is credited by 15,000
• D. Revaluation A/c is credited by 13,500

Answer 1

The Correct Option is C

This section details how to account for an undervaluation of machinery in the Revaluation Account.

1. Define Undervaluation: Undervaluation occurs when an asset's recorded book value is lower than its true market value. The asset's value must be adjusted upwards to its correct worth.
2. Determine Actual Value: Given the book value of ₹1,35,000 represents 90% of the actual value (due to a 10% undervaluation).
3. Calculate Value Increase: The increase in value needs to be calculated.
   Undervaluation percentage = 10%
   Book Value = ₹1,35,000
   This means 90% of the actual value equals ₹1,35,000.
   Therefore, a 10% increase would be (₹1,35,000 / 90) * 10 = ₹15,000.

Revaluation Account Entry:

An increase in an asset's value results in a credit entry to the Revaluation Account, signifying a gain for the existing partners.

Consequently, the Revaluation Account will be credited by ₹15,000.

The definitive conclusion is:

(3) Revaluation A/c is credited by 15,000

Mathematical Representation (LaTeX):

Let Actual Value be \( x \)
Given that the book value is 90% of the actual value: \( 0.9x = 135,000 \)
Solving for \( x \): \( x = \frac{135,000}{0.9} = 150,000 \)
The increase in value is: Increase in Value = \( 150,000 - 135,000 = 15,000 \)

As the machinery's value has increased, this requires a credit to the Revaluation Account.