Govind, Sarthak and Ali are partners. Govind retires on 31st March 2020.On that date, the Balance Sheet shows the following balances. Reserve Fund R.s. 30,000; Workmen compensation Fund R.s. 15,000; Investment Fluctuation Fund R.s. 10,000; Investment s R.s. 50,000; Stock R.s. 8,000; patents R.s. 6,000; Machinery R.s. 1, 00,000 and Goodwill R.s. 15,000. The following is agreed upon between the partners on Govind's retirement. a. There is no liability on account of workmen's compensation fund. b. Reserve Fund is not to be distributed
c. Investments are valued at R.s. 46,000.
d. Stock is undervalued by 20 %.
e. Patents are valueless.
f. Goodwill is valued at R.s. 60,000.
Record the necessary journal entries to the above effect, assuming that goodwill is to be adjusted through the partners’ capital account.
Answers
Answer:
Investment fluctuation reserve is created as a provision for any change in the market value of investments. Its a reserve appearing in the balance sheet on the date of admission and it needs to be distributed among the old partners in their profit sharing ratio.
Investments market value=1,10,000
Investment value appearing in balance sheet= 1,20,000
Difference is 10,000 which is to be adjusted from the investment fluctuation reserve account.
The journal entry for this is:-
Investment fluctuation reserve A/c Dr 10,000
To Investments A/c 10,000
Now the balance reserve i.e 14,000 (24,000-10,000) is to be distributed among the partners X and Y. As the question is silent on the ratio of profit sharing, we will assume it to be equal. So, the entry will be:-
Investment fluctuation reserve A/c Dr 14,000
To X's capital A/c 7,000
To Y's capital A/c 7,000
A combined entry for this is:-
Investment fluctuation reserve A/c Dr 24,000
To Investments A/c 10,000
To X's capital A/c 7,000
To Y's capital A/c 7,000