Question

P, Q and R sharing profits in the ratio of 3:2:1, decide to share profits and losses equally with effect from 1. 4 .20 . Balance sheet shows Investment fluctuation reserve Rs. 60000and investment (at cost) Rs. 200000. What will be accounting treatment of Investment fluctuation reserve if the market value of investment is Rs. 194000​

Answer 1

Answer:

P, Q and R sharing profits in the ratio of 3:2:1, decide to share profits and losses equally with effect from 1. 4 .20 . Balance sheet shows Investment fluctuation reserve Rs. 60000and investment (at cost) Rs. 200000. What will be accounting treatment of Investment fluctuation reserve if the market value of investment is Rs. 194000

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