# 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)

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

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

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

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

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 = 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

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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