Class 12 Accountancy Vol 1 Chapter 4 - Change in Profit - Sharing Ratio Among the Existing Partners

TS Grewal Solutions for Class 12 Accountancy Vol 1 Chapter 4

TS Grewal Solutions for Class 12 Accountancy Chapter 4 – Change in Profit – Sharing Ratio Among the Existing Partners is considered to be an essential concept to be learnt completely by the students. Here, we have provided TS Grewal Accountancy solutions for class 12 in a simple and a step by step manner, which is helpful for the students to score well in their upcoming board examinations.

Class 12 TS Grewal Solutions Accountancy Vol 1 Chapter 4

Question 1

A and B are sharing profits and losses equally. With effect from 1st April, 2019, they agree to share profits in the ratio of 4 : 3. Calculate individual partner’s gain or sacrifice due to the change in ratio.

Solution:

Old Ratio (A & B) = 1 : 1

New Ratio (A & B) = 4 : 3

Sacrificing or Gaining Ratio = Old Ratio − New Ratio


A’s share = \(\frac{1}{2}\) – \(\frac{4}{7}\) = \(\frac{7-8}{14}\) = \(\frac{-1}{14}\)

B’s share = \(\frac{1}{2}\) – \(\frac{3}{7}\) = \(\frac{7-6}{14}\) = \(\frac{1}{14}\)

So, A’s gain and B’s sacrifice = \(\frac{1}{14}\) share

Question 2

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2019, they decide to share profits and losses in the ratio of 5 : 2 : 3. Calculate each partner’s gain or sacrifice due to the change in ratio.

Solution:

Old Ratio (X, Y, and Z) = 5 : 3 : 2

New Ratio (X, Y, and Z) = 5 : 2 : 3

Sacrificing or Gaining Ratio = Old Ratio − New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{5}{10}\) = 0

Y’s share = \(\frac{3}{10}\) – \(\frac{2}{10}\) = \(\frac{1}{10}\) (Sacrifice)

Z’s share = \(\frac{2}{10}\) – \(\frac{3}{10}\) = \(\frac{-1}{10}\) (Gain)

So, Z’s Gain = \(\frac{1}{10}\) and Y’s Sacrifice = \(\frac{1}{10}\)

Question 3

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2019, they decide to share profits and losses equally. Calculate each partner’s gain or sacrifice due to the change in ratio.

Solution:

Old Ratio (X, Y, and Z) = 5 : 3 : 2

New Ratio (X, Y, and Z) = 1 : 1 : 1

Sacrificing or Gaining Ratio = Old Ratio − New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{1}{3}\) = \(\frac{15-10}{30}\) = \(\frac{5}{30}\) (Sacrifice)

Y’s share = \(\frac{3}{10}\) – \(\frac{1}{3}\) = \(\frac{9-10}{30}\) = \(\frac{-1}{30}\) (Gain)

Z’s share = \(\frac{2}{10}\) – \(\frac{1}{3}\) = \(\frac{6-10}{30}\) = \(\frac{-4}{30}\) (Gain)

So, Y’s Gain = \(\frac{1}{30}\) , Z’s Gain = \(\frac{4}{30}\) , and X’s Sacrifice = \(\frac{5}{30}\)

Question 4

A, B and C are partners sharing profits and losses in the ratio of 5 : 4 : 1. Calculate new profit-sharing ratio, sacrificing ratio and gaining ratio in each of the following cases:

Case 1. C acquires 1/5th share from A.

Case 2. C acquires 1/5th share equally form A and B.

Case 3. A, B and C will share future profits and losses equally.

Case 4. C acquires 1/10th share of A and 1/2 share of B.

Solution:

Calculation of New Profit Sharing Ratio

Case 1:

A:B:C = 5:4:1(Old Ratio)

C acquires \(\frac{1}{5}\)th from A

A’s sacrifice = \(\frac{1}{5}\)th

C’s gain = \(\frac{1}{5}\)th

As share = \(\frac{5}{10}\) – \(\frac{1}{5}\) = \(\frac{5-2}{10}\) = \(\frac{3}{10}\)

B’s share = \(\frac{4}{10}\)

C’s share = \(\frac{1}{10}\) – \(\frac{1}{5}\) = \(\frac{1+2}{10}\) = \(\frac{3}{10}\)

A:B:C = 3:4:3

Case 2:

A:B:C = 5:4:1(Old Ratio)

C acquires \(\frac{1}{5}\)th equally from A and B

A’s sacrifice = \(\frac{1}{10}\)th

B’s sacrifice = \(\frac{1}{10}\)th

C’s gain = \(\frac{1}{5}\)th

A’s share = \(\frac{5}{10}\) – \(\frac{1}{10}\) = \(\frac{5-1}{10}\) = \(\frac{4}{10}\)

B’s share = \(\frac{4}{10}\) – \(\frac{1}{10}\) = \(\frac{4-1}{10}\) = \(\frac{3}{10}\)

C’s share = \(\frac{1}{10}\) – \(\frac{1}{5}\) = \(\frac{1+2}{10}\) = \(\frac{3}{10}\)

A:B:C = 4:3:3

Case 3:

A:B:C = 5:4:1(Old Ratio)

A:B:C = 1:1:1 (New Ratio)

A’s share = \(\frac{5}{10}\) – \(\frac{1}{3}\) = \(\frac{15-10}{30}\) = \(\frac{5}{30}\) (Sacrifice)

B’s share = \(\frac{4}{10}\) – \(\frac{1}{3}\) = \(\frac{12-10}{30}\) = \(\frac{2}{30}\) (Sacrifice)

C’s share = \(\frac{1}{10}\) – \(\frac{1}{3}\) = \(\frac{3-10}{30}\) = – \(\frac{3}{10}\) (Gain)

Case 4:

A:B:C = 5:4:1(Old Ratio)

A’s sacrifice to C = \(\frac{5}{10}\) X \(\frac{1}{10}\) = \(\frac{1}{20}\)

B’s sacrifice to C = \(\frac{4}{10}\) X \(\frac{1}{2}\) = \(\frac{4}{20}\)

C’s gain = \(\frac{1}{20}\) X \(\frac{4}{20}\) = \(\frac{5}{20}\)

A’s share = \(\frac{5}{10}\) – \(\frac{1}{20}\) = \(\frac{10-1}{20}\) = \(\frac{9}{20}\)

B’s share = \(\frac{4}{10}\) – \(\frac{4}{20}\) = \(\frac{8-4}{20}\) = \(\frac{4}{20}\)

C’s share = \(\frac{1}{10}\) – \(\frac{5}{20}\) = \(\frac{5+2}{20}\) = – \(\frac{7}{20}\)

A:B:C = 9:4:7

Question 5

A, B and C shared profits and losses in the ratio of 3 : 2 : 1 respectively. With effect from 1st April, 2019, they agreed to share profits equally. The goodwill of the firm was valued at ₹ 18,000. Pass necessary Journal entries when: (a) Goodwill is adjusted through Partners’ Capital Accounts; and (b) Goodwill is raised and written off.

Solution:

Case a)

Journal

Date

Particular

L.F.

Debit ₹

Credit ₹

1st April

C’s Capital A/c (18,000×1/6)

Dr.

3,000

To A’s Capital A/c (18,000×1/6)

3,000

(Goodwill Adjustment)

Case b)

Journal

Date

Particular

L.F.

Debit ₹

Credit ₹

April 1

Goodwill A/c

Dr.

18,000

To A’s Capital A/c (18,000×3/6)

9,000

To B’s Capital A/c (18,000×2/6)

6,000

To C’s Capital A/c (18,000×1/6)

3,000

(Being goodwill raised in the books)

A’s Capital A/c (18,000×1/3)

Dr.

6,000

B’s Capital A/c (18,000×1/3)

Dr.

6,000

C’s Capital A/c (18,000×1/3)

Dr.

6,000

To Goodwill A/c

18,000

(Being goodwill raised & written off)

Working Note:

Old Ratio (A,B, and C) = 3 : 2 : 1

New Ratio (A,B, and C) = 1 : 1 : 1

Sacrificing or Gaining Ratio = Old Ratio − New Ratio

A’s share = \(\frac{3}{6}\) – \(\frac{1}{3}\) = \(\frac{3}{6}\) – \(\frac{2}{6}\) = \(\frac{1}{6}\) (Sacrifice)

Bs share = \(\frac{2}{6}\) – \(\frac{1}{3}\) = \(\frac{2}{6}\) – \(\frac{2}{6}\) = 0

C’s share = \(\frac{1}{6}\) – \(\frac{1}{3}\) = \(\frac{1}{6}\) – \(\frac{2}{6}\) = \(\frac{-1}{6}\) (Gain)

Goodwill adjustment = ₹ 18,000

A receives = 18,000 X \(\frac{1}{6}\) = ₹3,000

C gains = 18,000 X \(\frac{1}{6}\) = ₹3,000

Question 6

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2018, they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill should be valued at two years’ purchase of the average profit of the preceding five years. The profits and losses of the preceding years ended 31st March, are:

Year

2013-14

2014-15

2015-16

2016-17

2017-18

Profits (₹)

70,000

85,000

45,000

35,000

10,000 (Loss)

You are required to calculate goodwill and pass journal entry.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Y’s Capital A/c

Dr.

3,000

Z’s Capital A/c

Dr.

12,000

To X’s Capital A/c

15,000

(Goodwill amount adjusted on change in profit sharing ratio)

Working Notes 1: Sacrificing (or Gaining) Ratio

Old Ratio (X, Y and Z) = 5 : 3 : 2

New Ratio (X, Y and Z) = 1 : 1 : 1

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{1}{3}\) = \(\frac{15-10}{30}\) = \(\frac{5}{30}\) (Sacrifice)

Ys share = \(\frac{3}{10}\) – \(\frac{1}{3}\) = \(\frac{9-10}{30}\) – \(\frac{-1}{30}\) (Gain)

Z’s share = \(\frac{2}{10}\) – \(\frac{1}{3}\) = \(\frac{6-10}{30}\) – \(\frac{-4}{30}\) (Gain)

Working Notes 2: Goodwill Evaluation

Goodwill = Average Profit X No. of Years’ Purchased

Average Profit = \(\frac{70,000\, +\, 85,000\, +\, 45,000\, +,35,000\, -\, 10,000}{5}\) = ₹ 45,000

No. of Years’ Purchased = 2

So, Goodwill = ₹ 45,000 X 2 = ₹ 90,000

Working Notes 3: Goodwill Adjustment

Credited amount to X’s Capital A/c = 90,000 X \(\frac{5}{30}\) (Sacrifice) = ₹ 15,000

Credited amount to Y’s Capital A/c = 90,000 X \(\frac{1}{30}\) (Gain) = ₹ 3,000

Credited amount to Z’s Capital A/c = 90,000 X \(\frac{4}{30}\) (Gain) = ₹ 12,000

Question 7

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2019 they decided to share profits equally. The Partnership Deed provides that in the event of any change in profit-sharing ratio, goodwill shall be valued at three years’ purchase of the average profit of the last five years. The profits and losses of the past five years are:

Profit − Year ended 31st March, 2015 − ₹ 1,00,000; 2016 − ₹ 1,50,000; 2018 − ₹ 2,00,000; 2019 − ₹ 2,00,000.

Loss − Year ended 31st March, 2017 − ₹ 50,000.

Pass the Journal entry showing the working.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Abbas’s Capital A/c

Dr.

60,000

To Mandeep’s Capital A/c

60,000

(Being adjustment made for a change in the ratio)

Working Notes 1: Sacrifice or Gain Evaluation

Old Ratio (Mandeep, Vinod, and Abbas ) = 3 : 2 : 1

New Ratio (Mandeep, Vinod, and Abbas ) = 1 : 1 : 1

Sacrificing or Gaining Ratio = Old Ratio − New Ratio

Mandeep’s share = \(\frac{3}{6}\) – \(\frac{1}{3}\) = \(\frac{3-2}{6}\) = \(\frac{1}{6}\) (Sacrifice)

Vinod’s share = \(\frac{2}{6}\) – \(\frac{1}{3}\) = \(\frac{2-2}{6}\) = 0

Abbas’s share = \(\frac{1}{6}\) – \(\frac{1}{3}\) = \(\frac{1-2}{6}\) = \(\frac{-1}{6}\) (Gain)

Working Notes 2: Goodwill Evaluation

Goodwill = Average Profit X No. of Years’ Purchased

Average Profit = \(\frac{Total\, Profits\, of\, Past\, Years}{Number\, of\, Years}\)

Average Profit = \(\frac{1,00,000\, +\, 1,50,000\, +\, 2,00,000\, +,2,00,000\, -\, 50,000}{5}\) = ₹ 1,20,000

No. of Years’ Purchased = 3

So, Goodwill = ₹ 1,20,000 X 3 = ₹ 3,60,000

Working Notes 3: Goodwill Adjustment

Debited amount to Abbas’s Capital A/c = 3,60,000 X \(\frac{1}{6}\) (Gain) = ₹ 60,000

Credited amount to Mandeep’s Capital A/c = 3,60,000 X \(\frac{1}{6}\) (Sacrifice)= ₹ 60,000

Question 8

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2, decided to share future profits and losses equally with effect from 1st April, 2019. On that date, the goodwill appeared in the books at ₹ 12,000. But it was revalued at ₹ 30,000. Pass Journal entries assuming that goodwill will not appear in the books of account.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

X’s Capital A/c

Dr.

6,000

Y’s Capital A/c

Dr.

3,600

Z’s Capital A/c

Dr.

2,400

To Goodwill A/c

12,000

(Goodwill written off)

April 1

Y’s Capital A/c

Dr.

1,000

Z’s Capital A/c

Dr.

4,000

To X’s Capital A/c

5,000

(Goodwill adjusted on change in profit sharing ratio)

Working Notes 1: Gain or Sacrificing Ratio Evaluation

Old Ratio (X, Y and Z) = 5 : 3 : 2

New Ratio (X, Y and Z) = 1 : 1 : 1

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{1}{3}\) = \(\frac{15-10}{30}\) = \(\frac{5}{30}\) (Sacrifice)

Ys share = \(\frac{3}{10}\) – \(\frac{1}{3}\) = \(\frac{9-10}{30}\) – \(\frac{-1}{30}\) (Gain)

Z’s share = \(\frac{2}{10}\) – \(\frac{1}{3}\) = \(\frac{6-10}{30}\) – \(\frac{-4}{30}\) (Gain)

Working Notes 2: Old Goodwill Written-off Evaluation

X’s share = 12,000 x \(\frac{5}{10}\) = ₹ 60,000

Y’s share = 12,000 x \(\frac{3}{10}\) = ₹ 3,600

Z’s share = 12,000 x \(\frac{2}{10}\) = ₹ 2,400

Working Notes 3: Goodwill Adjustment

Credited amount to x’s Capital A/c = 30,000 X \(\frac{5}{30}\) (Sacrifice) = ₹ 5,000

Debited amount to Y’s Capital A/c = 30,000 X \(\frac{1}{30}\) (Gain)= ₹ 1,000

Debited amount to Z’s Capital A/c = 30,000 X \(\frac{4}{30}\) (Gain)= ₹ 4,000

Question 9

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2, decided to share future profits and losses equally with effect from 1st April, 2019. On that date, the goodwill appeared in the books at ₹ 12,000. But it was revalued at ₹ 30,000. Pass Journal entries assuming that goodwill will not appear in the books of account.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

A’s Capital A/c

Dr.

6,000

To B’s Capital A/c

6,000

(Profit adjustment for 2018-19 on change in profit sharing ratio)

April 1

B’s Capital A/c

Dr.

9,000

To A’s Capital A/c

9,000

(Goodwill Adjustment made on change in profit sharing ratio)

Partners’ Capital Accounts

Dr.

Cr.

Particulars

A

B

Particulars

A

B

B’s Capital A/c

6,000

Balance b/d

1,50,000

90,000

(Profit Adjustment)

A’s Capital A/c

6,000

A’s Capital A/c

9,000

(Profit Adjustment)

(Goodwill Adjustment)

B’s Capital A/c

9,000

Balance c/d

1,53,000

87,000

(Goodwill Adjustment)

1,59,000

96,000

1,59,000

96,000

Working Notes 1: Gain or Sacrificing Ratio Evaluation

Old Ratio (A and B) = 2 : 1

New Ratio (A and B) = 3 : 2

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

A’s share = \(\frac{2}{3}\) – \(\frac{3}{5}\) = \(\frac{10-9}{15}\) = \(\frac{1}{5}\) (Sacrifice)

B’s share = \(\frac{1}{3}\) – \(\frac{2}{5}\) = \(\frac{5-6}{15}\) – \(\frac{-1}{15}\) (Gain)

Working Notes 2 : 2016-17 Profit Adjustment

Debited Profit to A’s Capital A/c = 90,000 X \(\frac{3}{5}\) (Sacrifice) = ₹ 6,000

Credited Profit to B’s Capital A/c = 90,000 X \(\frac{3}{5}\) (Sacrifice) = ₹ 6,000

Working Notes 3 : New Goodwill Evaluation

Goodwill = 2014-15 Profit + 2015-16 Profit

= 60,000 + 75,000 = ₹ 1,35,000

Working Notes 4 : Goodwill Adjustment Evaluation

Goodwill debited to A’s Capital A/c = 1,35,000 X \(\frac{1}{15}\) (Sacrifice) = ₹ 9,000

Goodwill credited to A’s Capital A/c = 1,35,000 X \(\frac{1}{15}\) (Gain) = ₹ 9,000

Question 10

Jai and Raj are partners sharing profits in the ratio of 3 : 2. With effect from 1st April, 2019, they decided to share profits equally. Goodwill appeared in the books at ₹ 25,000. As on 1st April, 2019, it was valued at ₹ 1,00,000. They decided to carry goodwill in the books of the firm.

Pass the Journal entry giving effect to the above.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

1st April

Raj’s Capital A/c

Dr.

7,500

To Jai’s Capital A/c

7,500

(Goodwill adjustment)

Working Notes 1: Gain or Sacrificing Ratio Evaluation

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

Jai’s share = \(\frac{3}{5}\) – \(\frac{1}{2}\) = \(\frac{1}{10}\) (Sacrifice)

Raj’s share = \(\frac{2}{5}\) – \(\frac{1}{2}\) = \(\frac{1}{10}\) (Gain)

Working Notes 1: Adjusted Goodwill Evaluation

Adjusted Goodwill = 1,00,000 – 25,000 = 75,000

Goodwill credited to Jai’s Capital A/c = 75,000 X \(\frac{1}{10}\) (Sacrifice) = ₹ 7,500

Goodwill debited to Raj’s Capital A/c = 75,000 X \(\frac{1}{10}\) (Sacrifice) = ₹ 7,500

Question 11

X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2. With effect from 1st April, 2019, they decided to share future profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account showed a credit balance of ₹ 1,50,000. Record the necessary Journal entry for the distribution of the balance in the Profit and Loss Account immediately before the change in the profit-sharing ratio.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

1st April

Profit & Loss A/c

Dr.

1,50,000

To X’s Capital A/c

90,000

To Y’s Capital A/c

60,000

(Balance adjusted in P&L A/c in old ratio)

Working Notes: Profit & Loss Evaluation

X’s Share = 1,50,000 X \(\frac{3}{5}\) (Sacrifice) = ₹ 90,000

Y’s Share = 1,50,000 X \(\frac{2}{5}\) (Sacrifice) = ₹ 60,000

Question 12

X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2. With effect from 1st April, 2019, they decided to share future profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account showed a credit balance of ₹ 1,50,000. Record the necessary Journal entry for the distribution of the balance in the Profit and Loss Account immediately before the change in the profit-sharing ratio.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

1st April

A’s Capital A/c

Dr.

80,000

B’s Capital A/c

Dr.

20,000

To Profit & Loss A/c

1,00,000

(Profit & Loss share)

Question 13

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. They decide to share future profits and losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2019. They also decide to record the effect of the following accumulated profits, losses and reserves without affecting their book values by passing a single entry .

Book Values (₹)

General Reserve

6,000

Profit and Loss A/c (Credit)

24,000

Advertisement Suspense A/c

12,000

Pass an Adjustment Entry.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Z’s Capital A/c

Dr.

5,400

To X’s Capital A/c

5,400

(Being adjustment for General Reserve, Profit and Loss A/c, and Advertisement Suspense A/c made on change in profit sharing ratio)

Working Notes 1:

Adjustments to be made on Net amount = General Reserve + Profit and Loss A/c( Credit) – Advertisement Suspense A/c

Adjustments to be made on Net amount = 6,000 + 24,000 – 12,000 = ₹ 18,000

Working Notes 2: Gain or Sacrificing Ratio Evaluation

Old Ratio (X, Y and Z) = 5 : 3 : 2

New Ratio (X, Y and Z) = 2 : 3 : 5

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{2}{10}\) = \(\frac{3}{10}\) (Sacrifice)

Y’s share = \(\frac{3}{10}\) – \(\frac{3}{10}\) = 0

Z’s share = \(\frac{2}{10}\) – \(\frac{5}{10}\) = \(\frac{-3}{10}\) (Gain)

Credited amount to X’s Capital A/c = 18,000 X \(\frac{3}{10}\) (Sacrifice) = ₹ 5,400

Debited amount to Z’s Capital A/c = 18,000 X \(\frac{3}{10}\) (Sacrifice) = ₹ 5,400

Question 14

A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the Journal entry to distribute ‘Workmen Compensation Reserve’ of ₹ 1,20,000 at the time of change in profit-sharing ratio, when:

(i) no information is given; (ii) there is no claim against it.

Solution:

Journal for case (i) & (ii)

Date

Particulars

L.F.

Debit ₹

Credit ₹

Workmen Compensation Reserve A/c

Dr.

1,20,000

To A’s Capital A/c

60,000

To B’s Capital A/c

36,000

To C’s Capital A/c

24,000

(Distributed Workmen Compensation Reserve)

Note:

In both cases, the distribution for workmen compensation reserve will be in old ratio 5:3:2.

Question 15

X, Y and Z who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the journal entry to distribute ‘Workmen Compensation Reserve’ of ₹ 1,20,000 at the time of change in profit-sharing ratio, when there is a claim of ₹ 80,000 against it.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

Workmen Compensation Reserve A/c

Dr.

1,20,000

To X’s Capital A/c

20,000

To Y’s Capital A/c

12,000

To Z’s Capital A/c

8,000

To Workmen Compensation Claim A/c

(Balance adjustment in workmen compensation reserve A/c in old ratio)

80,000

Working Notes: Workmen Compensation Reserve Evaluation

Credited amount to X’s Capital A/c = 40,000 X \(\frac{5}{10}\) (Sacrifice) = ₹ 20,000

Credited amount to X’s Capital A/c = 40,000 X \(\frac{3}{10}\) (Sacrifice) = ₹ 12,000

Debited amount to Z’s Capital A/c = 40,000 X \(\frac{2}{10}\) (Sacrifice) = ₹ 8,000

Question 16

X, Y and Z who are sharing profits in the ratio of 5 : 3 : 2, decide to share profits in the ratio of 2 : 3 : 5 with effect from 1st April, 2019. Workmen Compensation Reserve appears at ₹ 1,20,000 in the Balance Sheet as of 31st March, 2019 and Workmen Compensation Claim is estimated at ₹ 1,50,000. Pass Journal entries for the accounting treatment of Workmen Compensation Reserve.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Workmen Compensation Reserve A/c

Dr.

1,20,000

Revaluation A/c

Dr.

30,000

To Provision for Workmen Compensation Claim A/c

(Being provision created and shortfall charged to Revaluation A/c)

1,50,000

X’s Capital A/c

Dr.

15,000

Y’s Capital A/c

Dr.

9,000

Z’s Capital A/c

Dr.

6,000

To Revaluation A/c

30,000

(Being revaluation loss transferred to Partners’ Capital A/c)

Question 17

A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the journal entry to distribute ‘Investments Fluctuation Reserve’ of ₹ 20,000 at the time of change in profit-sharing ratio, when investment (market value ₹ 95,000) appears in the books at ₹ 1,00,000.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

Investment Fluctuation Reserve A/c

Dr.

5,000

To Investments A/c

5,000

(Adjustment for investment value decrease)

Investment Fluctuation Reserve A/c

Dr.

15,000

To A’s Capital A/c

7,500

To B’s Capital A/c

4,500

To C’s Capital A/c

3,000

(Balance adjustment in Investment Fluctuation Reserve A/c in old ratio)

Working Notes: Investment Fluctuation Reserve Evaluation

Credited amount to X’s Capital A/c = 15,000 X \(\frac{5}{10}\) (Sacrifice) = ₹ 7,500

Credited amount to X’s Capital A/c = 15,000 X \(\frac{3}{10}\) (Sacrifice) = ₹ 4,500

Credited amount to Z’s Capital A/c = 15,000 X \(\frac{2}{10}\) (Sacrifice) = ₹ 3,000

Question 18

Nitin, Tarun and Amar are partners sharing profits equally and decide to share profits in the ratio of 2 : 2 : 1 w.e.f. 1st April, 2019. The extract of their Balance Sheet as at 31st March, 2019 is as follows:

Liabilities

Assets

Investments Fluctuation Reserve

60,000

Investments (At Cost)

4,00,000

Pass the Journal entries in each of the following situations:

(i) When its Market Value is not given;

(ii) When its Market Value is ₹ 4,00,000;

(iii) When its Market Value is ₹ 4,24,000;

(iv) When its Market Value is ₹ 3,70,000;

(v) When its Market Value is ₹ 3,10,000.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credi ₹

(i)

Investment Fluctuation Reserve A/c

Dr.

60,000

To Nitin’s Capital A/c

20,000

To Tarun’s Capital A/c

20,000

To Amar’s Capital A/c

(Being distribution of Investment Fluctuation Reserve)

20,000

(ii)

Investment Fluctuation Reserve A/c

Dr.

60,000

To Nitin’s Capital A/c

20,000

To Tarun’s Capital A/c

20,000

To Amar’s Capital A/c

(Being distribution of Investment Fluctuation Reserve)

20,000

(iii)

Investment Fluctuation Reserve A/c

Dr.

60,000

To Nitin’s Capital A/c

20,000

To Tarun’s Capital A/c

20,000

To Amar’s Capital A/c

20,000

(Investment Fluctuation Reserve distributed)

Investments A/c

Dr.

24,000

To Revaluation A/c

24,000

(Investments revalued)

Revaluation A/c

Dr.

24,000

To Nitin’s Capital A/c

8,000

To Tarun’s Capital A/c

8,000

To Amar’s Capital A/c

8,000

(Revaluation profit transferred to Partners’ Capital A/c)

(iv)

Investment Fluctuation Reserve A/c

Dr.

60,000

To Investment A/c

30,000

To Nitin’s Capital A/c

10,000

To Tarun’s Capital A/c

10,000

10,000

(Investment Fluctuation Reserve distributed)

(v)

Investment Fluctuation Reserve A/c

Dr.

60,000

Revaluation A/c

Dr.

30,000

To Investment A/c

(Decrease in investments set off against IFR and balance debited to Revaluation A/c)

90,000

Nitin’s Capital A/c

Dr.

10,000

Tarun’s Capital A/c

Dr.

10,000

Amar’s Capital A/c

Dr.

10,000

To Revaluation A/c

30,000

(Loss on revaluation transferred to Partners’ Capital A/c)

Question 19

X and Y are partners sharing profits in the ratio of 2 : 1. On 31st March, 2019, their Balance Sheet showed General Reserve of ₹ 60,000. It was decided that in future they will share profits and losses in the ratio of 3 : 2. Pass necessary Journal entry in each of the following alternative cases:

(i) When General Reserve is not to be shown in the new Balance Sheet.

(ii) When General Reserve is to be shown in the new Balance Sheet.

Solution:

(i) If they do not want to show General Reserve in the new Balance Sheet

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

General Reserve A/c

Dr.

60,000

To X’s Capital A/c

40,000

To Y’s Capital A/c

20,000

(Being balance adjustment in General Reserve A/c in old ratio)

Working Notes: General Reserve A/c Evaluation

Share of X = 60,000 X \(\frac{2}{3}\) (Sacrifice) = ₹ 40,000

Share of Y = 60,000 X \(\frac{1}{3}\) (Sacrifice) = ₹ 20,000

(ii) If they want to show General Reserve in the new Balance Sheet

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Y’s Capital A/c

Dr.

4,000

To X’s Capital A/c

4,000

(Being balance adjustment in General Reserve A/c in sacrificing/gaining ratio)

Working Notes 1 : General Reserve A/c in Sacrificing/Gaining Ratio Evaluation

Sacrificing Ratio = Old Ratio – New Ratio

X’s share = \(\frac{2}{3}\) – \(\frac{3}{5}\) = \(\frac{1}{15}\) (Sacrifice)

Y’s share = \(\frac{1}{3}\) – \(\frac{2}{5}\) = – \(\frac{1}{15}\) (Gain)

Working Notes 2 : Compensation by Y to X Evaluation

Amount to be compensated = 60,000 X \(\frac{1}{15}\) = ₹ 4,000

Question 20

Bhavya and Sakshi are partners in a firm, sharing profits and losses in the ratio of 3 : 2. On 31st March, 2018 their Balance Sheet was as under:

Liabilities

Assets

Sundry Creditors

13,800

Furniture

16,000

General Reserve

23,400

Land and Building

56,000

Investment Fluctuation Fund

20,000

Investments

30,000

Bhavya’s Capital

50,000

Trade Receivables

18,500

Sakshi’s Capital

40,000

Cash in Hand

26,700

1,47,200

1,47,200

The partners have decided to change their profit sharing ratio to 1 : 1 with immediate effect. For the purpose, they decided that:

(i) Investments to be valued at ₹ 20,000.

(ii) Goodwill of the firm is valued at ₹ 24,000.

(iii) General Reserve not to be distributed between the partners.

You are required to pass necessary Journal entries in the books of the firm. Show workings.

Solution:

Bhavya and Sakshi Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

31 March

Investment Fluctuation Fund A/c

Dr.

20,000

To Investments A/c

10,000

To Bhavya’s Capital A/c

6,000

To Sakshi’s Capital A/c

4,000

(Being adjustment in the market value of investment and distributed excess amount)

31 March

Sakshi’s Capital A/c (24,000×1/10)

Dr.

2,400

To Bhavya’s Capital A/c (24,000×1/10)

2,400

(Being goodwill adjustment after profit-sharing ratio change)

31 March

Sakshi’s Capital A/c (23,400×1/10)

Dr.

2,340

To Bhavya’s Capital A/c (23,400×1/10)

2,340

(Being general reserve adjustment not distributed)

Working Notes:

Particulars

Bhavya

Sakshi

Old Ratio

3/5

2/5

New Ratio

1/2

1/2

Gain/Sacrifice

(3/5 – 1/2)= 1/10 (Sacrifice)

(2/5 – 1/2)= (-1/10) (Gain)

Question 21

X, Y and Z share profits as 5 : 3 : 2. They decide to share their future profits as 4 : 3 : 3 with effect from 1st April, 2019. On this date the following revaluations have taken place:

Book Values ₹

Revised Values ₹

Investments

22,000

25,000

Plant and Machinery

25,000

20,000

Land and Building

40,000

50,000

Outstanding Expenses

5,600

6,000

Sundry Debtors

60,000

50,000

Trade Creditors

70,000

60,000

Pass necessary adjustment entry to be made because of the above changes in the values of assets and liabilities. However, old values will continue in the books .

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

Z’s Capital A/c

Dr.

760

To X’s Capital A/c

760

(Adjustment of revaluation profit made)

Working Notes 1: Net Profit or Loss Revaluation Evaluation

Particulars

Amount ₹

Increase in Investment

3,000 (Cr.)

Decrease in Plant and Machinery

(5,000) (Dr.)

Increase in Land and Building

10,000 (Cr.)

Increase in Outstanding Expenses

(400) (Dr.)

Decrease in Sundry Debtors

(10,000) (Dr.)

Decrease in Trade Creditors

10,000 (Cr.)

Profit on Revaluation

7,600 (Cr.)

Working Notes 2: Sacrificing or Gaining Ratio

Old Ratio (X,Y, and Z) = 5:3:2

New Ratio (X,Y, and Z) = 4:3:3

Sacrificing or Gaining Ratio = Old Ratio – New Ratio

X’s share = \(\frac{5}{10}\) – \(\frac{4}{10}\) = \(\frac{1}{10}\) (Sacrifice)

Y’s share = \(\frac{3}{10}\) – \(\frac{3}{10}\) = 0

Z’s share = \(\frac{2}{10}\) – \(\frac{3}{10}\) = \(\frac{-1}{10}\) (Gain)

Working Notes 3: Revaluation Profit Evaluation

Credited amount to X = 7,600 X \(\frac{1}{10}\) = ₹ 760

Credited amount to X = 7,600 X \(\frac{1}{10}\) = ₹ 760

Question 22

Ashish, Aakash and Amit are partners sharing profits and losses equally. The Balance Sheet as at 31st March, 2019 was as follows:

Liabilities

Assets

Sundry Creditors

75,000

Cash in Hand

24,000

General Reserve

90,000

Cash at Bank

1,40,000

Capital A/cs:

Sundry Debtors

80,000

Ashish

3,00,000

Stock

1,40,000

Aakash

3,00,000

Land and Building

4,00,000

Amit

2,75,000

8,75,000

Machinery

2,50,000

Advertisement Suspense

6,000

10,40,000

10,40,000

​The partners decided to share profits in the ratio of 2 : 2 : 1 w.e.f. 1st April, 2019. They also decided that:

(i) Value of stock to be reduced to ₹ 1,25,000.

(ii) Value of machinery to be decreased by 10%.

(iii) Land and Building to be appreciated by ₹ 62,000.

(iv) Provision for Doubtful Debts to be made @ 5% on Sundry Debtors.

(v) Aakash was to carry out the reconstitution of the firm at a remuneration of ₹ 10,000.

Pass necessary Journal entries to give effect to the above.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

General Reserve A/c

Dr.

90,000

To Ashish’s Capital A/c

30,000

To Akash’s Capital A/c

30,000

To Amit’s Capital A/c

30,000

(Distributed Reserve)

April 1

Ashish’s Capital A/c

Dr.

2,000

Akash’s Capital A/c

Dr.

2,000

Amit’s Capital A/c

Dr.

2,000

To Advertisement Suspense A/c

(Distributed Advertisement Suspense)

6,000

April 1

Revaluation A/c

Dr.

54,000

To Stock A/c

15,000

To Machinery A/c

25,000

To Provision for Doubtful Debts A/c

4,000

To Akash’s Capital A/c (Remuneration)

(Revalued Assets)

10,000

April 1

Land & Building A/c

Dr.

62,000

To Revaluation A/c

62,000

(Revalued Assets)

April 1

Revaluation A/c

Dr.

8,000

To Ashish’s Capital A/c

2,666

To Akash’s Capital A/c

2,666

To Amit’s Capital A/c

2,667

(Profit made)

Question 23

A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. Their Balance Sheet as at 31st March, 2019 stood as follows:

Liabilities

Amount ₹

Assets

Amount ₹

Capital A/cs:

Land and Building

3,50,000

A

2,50,000

Machinery

2,40,000

B

2,50,000

Computers

70,000

C

2,00,000

7,00,000

Investments

1,00,000

General Reserve

60,000

Sundry Debtors

50,000

Investments Fluctuation Reserve

30,000

Cash in Hand

10,000

Sundry Creditors

90,000

Cash at Bank

55,000

Advertisement Suspense

5,000

8,80,000

8,80,000

They decided to share profits equally w.e.f. 1st April, 2019. They also agreed that:

(i) Value of Land and Building be decreased by 5%.

(ii) Value of Machinery has increased by 5%.

(iii) A Provision for Doubtful Debts be created @ 5% on Sundry Debtors.

(iv) A Motorcycle valued at ₹ 20,000 was unrecorded and is now to be recorded in the books.

(v) Out of Sundry Creditors, ₹ 10,000 is not payable.

(vi) Goodwill is to be valued at 2 years’ purchase of last 3 years profits. Profits being for 2018-19 − ₹ 50,000 (Loss); 2017-18 − ₹ 2,50,000 and 2016-17 − ₹ 2,50,000.

(vii) C was to carry out the work for reconstituting the firm at a remuneration (including expenses) of ₹ 5,000. Expenses came to ₹ 3,000.

Pass Journal entries and prepare Revaluation Account.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

April 1

General Reserve A/c

Dr.

60,000

To A’s Capital A/c

30,000

To B’s Capital A/c

18,000

To C’s Capital A/c

12,000

(Distributed Reserve)

A’s Capital A/c

Dr

2,500

B’s Capital A/c

Dr.

1,500

C’s Capital A/c

Dr.

1,000

To Advertisement Suspense A/c

5,000

(Distributed Advertisement Suspense)

Investment Fluctuation Reserve A/c

Dr.

30,000

To Investment A/c

10,000

To A’s Capital A/c

10,000

To B’s Capital A/c

6,000

To C’s Capital A/c

4,000

(Distributed Investment Fluctuation Reserve)

Machinery A/c

Dr.

12,000

Motorcycle A/c

Dr.

20,000

Creditors A/c

Dr.

10,000

To Revaluation A/c

(Revalued Assets)

42,000

Revaluation A/c

25,000

To Land & Building A/c

17,500

To Provision for Doubtful Debts A/c

2,500

To Bank A/c (Remuneration)

(Revalued Assets)

5,000

Revaluation A/c

17,000

To A’s Capital A/c

8,500

To B’s Capital A/c

5,100

To C ’s Capital A/c

3,400

(Being Profit on revaluation transferred to Partners’ Capital A/c)

B’s Capital A/c

Dr.

10,000

C ’s Capital A/c

Dr.

40,000

To A’s Capital A/c

(Adjusted Goodwill)

Revaluation A/c

Dr.

Cr.

Particulars

Amount

(₹)

Particulars

Amount

(₹)

Land & Building A/c

17,500

Machinery A/c

12,000

Provision for Doubtful Debts A/c

2,500

Motorcycle A/c

20,000

Bank A/c (Remuneration)

5,000

Creditors A/c

10,000

Profit transferred to:

A

8,500

B

5,100

C

3,400

17,000

42,000

42,000

Working Note 1: Sacrificing or Gaining Ratio

Old Ratio (A:B:C) = 5:3:2

New Ratio (A:B:C) = 1:1:1

Sacrificing or Gaining Ratio = Old Ratio – New Ratio

A’s share = \(\frac{5}{10}\) – \(\frac{1}{3}\) = \(\frac{15-10}{30}\) = \(\frac{5}{30}\) (Sacrifice)

B’s share = \(\frac{3}{10}\) – \(\frac{1}{3}\) = \(\frac{9-10}{30}\) = \(\frac{1}{30}\) (Gain)

C’s share = \(\frac{2}{10}\) – \(\frac{1}{3}\) = \(\frac{6-10}{30}\) = \(\frac{4}{30}\) (Gain)

Working Notes 2: Goodwill Evaluation

Goodwill = Average Profit X No. of Years Purchased

= 1,50,000 X 3 = 3,00,000

Working Notes 3: Goodwill Adjustment Evaluation

Credited amount to A = 3,00,000 X \(\frac{5}{30}\) = ₹ 50,000

Debited amount to B = 3,00,000 X \(\frac{1}{30}\) = ₹ 10,000

Debited amount to C = 3,00,000 X \(\frac{4}{30}\) = ₹ 40,000

Question 24

A, B and C are sharing profits and losses in the ratio of 2 : 2 : 1. They decided to share profit w.e.f. 1st April, 2019 in the ratio of 5 : 3 : 2. They also decided not to change the values of assets and liabilities in the books of account. The book values and revised values of assets and liabilities as on the date of change were as follows:

Book values (₹)

Revised values (₹)

Machinery

2,50,000

3,00,000

Computers

2,00,000

1,75,000

Sundry Creditors

90,000

75,000

Outstanding Expenses

15,000

25,000

Pass an adjustment entry.

Solution:

Journal

Date

Particulars

L.F.

Debit ₹

Credit ₹

2019

April 1

A’s Capital A/c

(30,000X \(\frac{1}{10}\) = 3,000

Dr.

3,000

To B’s Capital A/c

3,000

(Being entry adjustment for change in ratio)

Working Note 1: Sacrificing or Gaining Ratio

Old Ratio (A:B:C) = 2:2:1

New Ratio (A:B:C) = 5:3:2

Sacrificing or Gaining Ratio = Old Ratio – New Ratio

A’s share = \(\frac{2}{5}\) – \(\frac{5}{10}\) = – \(\frac{4-5}{10}\) = \(\frac{1}{10}\) (Gain)

B’s share = \(\frac{2}{5}\) – \(\frac{3}{10}\) = \(\frac{4-3}{10}\) = \(\frac{1}{10}\) (Sacrifice)

C’s share = \(\frac{1}{5}\) – \(\frac{2}{10}\) = \(\frac{2-2}{10}\) = 0

Question 25

​X, Y and Z are partners sharing profits and losses in the ratio of 7 : 5 : 4. Their Balance Sheet as at 31st March, 2019 stood as:

Liabilities

Assets

Capital A/cs:

Sundry Assets

7,00,000

X

2,10,000

Y

1,50,000

Z

1,20,000

4,80,000

General Reserve

65,000

Profit and Loss A/c

25,000

Creditors

1,30,000

7,00,000

7,00,000

Partners decided that with effect from 1st April, 2019, they will share profits and losses in the ratio of 3 : 2 : 1. For this purpose, the goodwill of the firm was valued at ₹ 1,50,000. The partners neither want to record the goodwill nor want to distribute the General Reserve and profits.

Pass a Journal entry to record the change and prepare Balance Sheet of the constituted firm.

Solution:

Journal

Date

Particulars

L.F.

Debit

Amount

(₹)

Credit

Amount

(₹)

April 1

X’s Capital A/c

Dr.

15,000

Y’s Capital A/c

Dr.

5,000

To Z’s Capital A/c

20,000

(Goodwill, General Reserve and Profit and Loss Account Adjustment made on change in profit sharing ratio)

Balance Sheet as on April 1st, 2019

Liabilities

Assets

Capital A/c s:

Sunday Assets

7,00,000

X

1,95,000

Y

1,45,000

Z

1,40,000

4,80,000

General Reserve

65,000

Profit and Loss A/c

25,000

Creditors

1,30,000

7,00,000

7,00,000

Working Note 1: Sacrificing or Gaining Ratio

Old Ratio (X:Y:Z) = 7:5:4

New Ratio (X:Y:Z) = 3:2:1

Sacrificing or Gaining Ratio = Old Ratio – New Ratio

X’s share = \(\frac{7}{16}\) – \(\frac{3}{6}\) = – \(\frac{21-24}{48}\) = \(\frac{-3}{48}\) (Gain)

Y’s share = \(\frac{5}{16}\) – \(\frac{2}{6}\) = \(\frac{15-16}{48}\) = \(\frac{-1}{48}\) (Gain)

Z’s share = \(\frac{4}{16}\) – \(\frac{1}{16}\) = \(\frac{12-8}{48}\) = \(\frac{4}{48}\) (Sacrifice)

Working Note 2: Reserve , Profit & Loss, Goodwill Adjustment

Total amount adjusted = Reserve + Profit & Loss + Goodwill Adjustment

= 65,000 + 25,000 + 1,50,000 = ₹ 2,40,000

Debited amount to X’s Capital = 2,40,000 X \(\frac{3}{48}\) = ₹ 15,000

Debited amount to Y’s Capital = 2,40,000 X \(\frac{1}{48}\) = ₹ 5,000

Credited amount to Z’s Capital = 2,40,000 X \(\frac{4}{48}\) = ₹ 20,000

Working Note 3:

Partners’ Capital Accounts

Dr.

Cr.

Particulars

X

Y

Z

Particulars

X

Y

Z

Z’s Capital A/c

15,000

5,000

Balance b/d

2,10,000

1,50,000

1,20,000

X’s Capital A/c

15,000

Y’s Capital A/c

5,000

Balance c/d

1,95,000

1,45,000

1,40,000

2,10,000

1,50,000

1,40,000

2,10,000

1,50,000

1,40,000

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