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P, Q and R sharing profits and losses in the ratio of 3 : 2 : 1, decide to share profits and losses equally with effect from 1st April, 2017. Following is an extract of their Balance Sheet as at 31st March, 2017:

LiabilitiesRsAssetsRsInvestment Fluctuation Reserve30,000Investments (At Cost)5,00,000

Show the accounting treatment under the following alternative cases:

Case (i) If there is no other information.
Case (ii) If the market value of Investments is Rs 5,00,000.
Case (iii) If the market value of Investments is Rs 4,88,000.
Case (iv) If the market value of Investments is Rs 4,46,000.
Case (v) If the market value of Investments is Rs 5,06,000.

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Solution

\(\begin{array}{|c|l|c|c|c|}
\hline
\text{Date} & \text{Particulars} & \text{L.F.} & \text{Dr(Rs)} & \text{Cr. (Rs)}\\\hline
2017 & & & & \\
\text{April 1} & \text{Case (i)} & & & \\
& \text{Investment Fluctuation Reserve A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 30,000 & \\
& \text{To P's Capital A/c} & & & 15,000\\
& \text{To Q's Capital A/c} & & & 10,000\\
& \text{To R's Capital A/c} & & & 5,000\\
& \text{(Transfer of excess Investment Fluctuation Reserve to} & & & \\
& \text{partner's capital accounts in their old profit sharing ratio)} & & & \\

& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Case (ii)} & & & \\
& \text{Same Solution as given in case (i)} & & & \\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Case (iii)} & & & \\
& \text{Investment Fluctuation Reserve A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 30,000 & \\
& \text{To Investments A/c}(5,00,000 -4,88,000) & & & 12,000\\
& \text{To P's Capital A/c} & & & 9,000\\
& \text{To Q's Capital A/c} & & & 6,000\\
& \text{To R's Capital A/c} & & & 3,000\\
& \text{(Transfer of excess Investment Fluctuation Reserve to} & & &\\
& \text{partner's capital accounts in their old profit sharing} & & &\\
& \text{ratio)} & & &\\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Case (iv)} & & & \\
& \text{Investment Fluctuation Reserve A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 30,000 & \\
& \text{Revaluation A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 24,000 &\\
& \text{To Investments A/c} & & & 54,000\\
& \text{(Fall in the value of investments adjusted through} & & &\\
& \text{investment fluctuation reserve and shortfall charged to} & & &\\
& \text{Revaluation Account)} & & &\\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{To P's Capital A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 12,000 & \\
& \text{To Q's Capital A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 8,000 & \\
& \text{To R's Capital A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 4,000 & \\
& \text{To Revaluation A/c} & & & 24,000\\
& \text{(Transfer of loss on revaluation to partner's capital} & & &\\
& \text{accounts in their old profit sharing ratio)} & & &\\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Case (v)} & & & \\
& \text{Investment Fluctuation Reserve A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 30,000 & \\
& \text{To P's Capital A/c} & & & 15,000\\
& \text{To Q's Capital A/c} & & & 10,000\\
& \text{To R's Capital A/c} & & & 5,000\\
& \text{(Transfer of excess investments fluctuation reserve to} & & &\\
& \text{Partners' Capital Accounts in their old profit-sharing} & & &\\
& \text{ratio} & & &\\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Investments A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & 6,000 & \\
& \text{To Revaluation A/c} & & & 6,000\\
& \text{(Value of investment brought up to market value)} & & &\\
& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\
& \text{Revaluation A/c} & & 6,000 & \\
& \text{To P's Capital A/c} & & & 3,000\\
& \text{To Q's Capital A/c} & & & 2,000\\
& \text{To R's Capital A/c} & & & 1,000\\
& \text{(Transfer of profit on revalution in old profit sharing} & & &\\
& \text{ratio)}\\\hline
\end{array}\)

Case (ii) When Reserves and Accumulated Profit/Losses are not to be transferred to Capital Accounts:

If, in case of change in profit sharing ration, there are reserves and accoumulated profits appearing in the Balance Sheet and the partners decide to leave the reserves and accumulated profits undistributed, it will be necessary to pass an adjusting entry for the same. This is, becuase, at present the partners are entitled to share such reserves and profits in the old profit sharing ratio whereas in future they will be entitled to share such reserves and profits in the new profit sharing ratio. Hence, the gaining partner must compensate the sacrificing partner that share of reserves and profits which is proportionate to the share gained by him. For example, suppose A and B sharing profits in the ratio of 2:1 decide to share future profits in equal proportion. Reserves appearing in the Balance Sheet amount to Rs 60,000 and the partners do not want to distribute them. In such a case at present A is entitled to Rs 40,000 and B Rs 20,000 of such reserves but in future, after the change in the profit sharing ratio, each would be entitled to Rs 30,000. Hence, B must compensate A to the extent of Rs 10,000. This amount is proportionate to the 16th share (i.e.,1213) gained by him. The adjustment for this amount is usually made by passing an adjustment entry where in B's Capital Account will be debited and A's Capital Account will be credited with Rs 10,000.


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