Question

X and Y were partners in a firm sharing profits and losses in the ratio of 3:2. Their Balance Sheet as at 31st March, 2017 was as follows:

$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Rs}& \text{Assets}& \text{Rs}\\ \text{Creditors}& 42,000& \text{Current Assets}& 2,00,000\\ \text{Employee's Provident Fund}& 20,000& \text{Investment}& 50,000\\ \text{Contingency Reserve}& 30,000& \text{Furniture}& 20,000\\ \text{Profit \& Loss Account}& 45,000& \text{Machinery}& 90,000\\ \text{Workmen Compensation Reserve}& 18,000& \text{Advertisement Expenditure}& \\ \text{Investment Fluctuation Reserve}& 25,000& \text{(Deferred Revenue}& \\ \text{Capitals:}X1,20,000& & \text{Expenditure)}& 20,000\\ Y\underset{–}{80,000}& 2,00,000& & \\ & \underset{–}{\overline{3,80,000}}& & \underset{–}{\overline{3,80,000}}\end{array}$

They admit Z into partnership on 1st April, 2017 and the new profit sharing ratio is agreed at 2 : 1 : 1. It is estimated that:

(i) Claim on account of Workmen's Compensation is estimated at Rs 10,000.

(ii) Market value of Investments is Rs 46,000.

Give necessary journal entries to adjust accumulated profits and losses.

Answer 1

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F.}& \text{Dr.(Rs)}& \text{Cr.(Rs)}\\ 2017& & & & \\ \text{April 1}& \text{Investments Fluctuation Reserve A/c}Dr.& & 4,000& \\ & \text{To Investments A/c}& & & 4,000\\ & \text{(Value of Investments brought down to market value)}& & & \\ & \underset{–}{}& & & \\ & \text{Workmen Compensation Reserve A/c}Dr& & 10,000& \\ & \text{To Provision for Workmen Compensation}& & & \\ & \text{Claim A/c}& & & 10,000\\ & \text{(Provision made for workmen compensation claim)}& & & \\ & \underset{–}{}& & & \\ & \text{Contingency Reserve}Dr.& & 30,000& \\ & \text{Profit \& Loss A/c}Dr.& & 45,000& \\ & \text{Workmen Compensation Reserve}& & & \\ & \text{(Rs 18,000 -Rs 10,000)}Dr.& & 8,000& \\ & \text{Investment Fluctuation Reserve}& & & \\ & \text{(Rs 25,000-Rs 4,000)}Dr.& & 21,000& \\ & \text{To X's Capital A/c}& & & 62,400\\ & \text{To Y's Capital A/c}& & & 41,600\\ & \text{(Transfer of accumulated profits to old partners in}& & & \\ & \text{their old profit sharing ratio i.e. 3:2)}& & & \\ & \underset{–}{}& & & \\ & \text{X's Capital A/c}Dr.& & 12,000& \\ & \text{Y's Capital A/c}Dr.& & 8,000& \\ & \text{To Advertisement Expenditure A/c}& & & 20,000\\ & \text{(Transfer of accumulated loss to old partners in their}& & & \\ & \text{old profit sharing ratio i.e. 3 : 2)}& & & \end{array}$

Working Note: Employee's Provident Fund is outside liability payable by the firm.