. Hari, Kunal and Uma are partners in a firm sharing profits and losses in the ratio of 5:37. From
1st April, 2018 they decided to share future profits and losses in the ratio of 2:5:3. Their Balance Sheet
showed a balance of 75,000 in the Profit and Loss Account and a balance of * 15,000 in Investment
Fluctuation Fund. For this purpose, it was agreed that:
(1) Goodwill of the firm was valued at 3,00,000.
(ii) That investments (having a book value of 50,000) were valued at 35,000.
(iii) That stock having a book value of 50,000 be depreciated by 10%.
Pass the necessary Journal entries for the above in the books of the firm.
(CBSE 2019)
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The necessary journal entries for the above would be:
Valuation of Goodwill:
Debit: Goodwill Account - 300,000
Credit: Partners' Capital Accounts (Hari, Kunal, and Uma) in the old profit sharing ratio (5:37) - 300,000
Valuation of Investments:
Debit: Investments Account - 35,000
Credit: Investments Fluctuation Account - 15,000
Debit: Partners' Capital Accounts (Hari, Kunal, and Uma) in the old profit sharing ratio (5:37) - 20,000
Depreciation of Stock:
Debit: Stock Depreciation Account - 5,000
Credit: Stock Account - 5,000
Revaluation of Capital Accounts:
Debit: Partners' Capital Accounts (Hari, Kunal, and Uma) in the new profit sharing ratio (2:5:3) - 75,000
Credit: Partners' Capital Accounts (Hari, Kunal, and Uma) in the old profit sharing ratio (5:37) - 75,000
The above journal entries would result in the revaluation of goodwill, investments, and stock and adjustment of balances in the Profit and Loss Account and Investment Fluctuation Fund. The new profit sharing ratio of 2:5:3 would also be reflected in the capital accounts of the partners. These adjustments would provide a clearer picture of the financial position of the firm as of 1st April, 2018.
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