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Important Questions Class 12 Accountancy Chapter 3 Reconstitution Partnership

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Change in Profit sharing ratio of Partners

Reconstitution of Partnership 1:  Amit and Kajal were partners in a firm sharing profits in the ratio of 3:2. With effect from January 1, 2015 they agreed to share profits equally. For this purpose the goodwill of the firm was valued at Rs. 60,000. Pass the necessary journal entry. Solution: Old ratio of Amit and Kajal = 3:2 New ratio of Amit and Kajal = 1:1 Sacrifice or Gain Amit =  (Sacrifice) Kajal =  (gain)

Accounting Treatment of Reserves and Accumulated Profits Case (i) When reserves and accumulated profits/losses are to be distributed At the time of change in profit sharing ratio, if there are some reserves or accumulated profits/losses existing in the books of the firm, these should be distributed to partners in their old profit sharing ratio. Journal Entries (i) For Transfer of Reserves & Accumulated Profits Reserve A/cDr. Profit & Loss A/cDr. Workmen’s Compensation Reserve A/cDr. Excess of reserves over Actual Liability Investment Fluctuation Reserve A/cDr. (Excess of Reserves over difference between Book Value & Market Value) To old Partner’s Capital or Current A/c (in old ratio) (ii) For transfer of accumulated Losses. Old Partner’s Capital or Current A/csDr. (in old ratio) To Profit & Loss A/c (Dr. Balance) To Deferred Revenue Expenditure A/c (e.g. Advertisement expense)

2:  Vaishali, Vinod and Anjali are partners sharing profits in the ratio of 4:3:2. From April 1, 2015; they decided to share the profits equally. On the date their book their books showed a credit balance of Rs. 3,60,000 in the profit an loss account and a balance of Rs. 90,000 in the General reserve. Record the journal entry for distribution of these profits and reseves. Solution: Journal

3:  Anjun and Kanchan are partner sharing profits and losses in the ration of 3:2, From April 1, 2015 they decided to share the profits in the ratio of 2:1 On that date, profit and loss account showed a debit balance of Rs. 1,20,000. Record the Journal for transferring this to partner’s capital accounts. Solution: Journal

Case (ii) : When accumulated profits/losses are not be distributed at the time of change in ratio Partners may decide that reserves and accumulated profits/losses will not affected and remains in the books with same figure. In this case, the gaining partner must Compensate the sacrificing partner by the share gained by him i.e. Gaining Partner’s Capital A/c.Dr. To Sacrificing Partner’s Capital A/c

4:  Keshav, Meenakshi and Mohit sharing profit and losses in the ratio of 1:2:2, decide to share future profit equally with effect from April 1, 2015. On that date general reserve showed a balance of Rs. 40,000. Partners do not want to distribute the reservwes. You are required to give the adjusting entry. Solution :  Keshav; Meenakshi; Mohit Old ratio 1/5 : 2/5 : 2/5 New ratio 1/3 : 1/3 : 1/3 Sacrifice or Gain Keshav = 1/5 – 1/3 =  (gain) Meenakishi = 2/5 – 1/3 =  (Sacrifice) Mohit = 2/5 – 1/3 =  (Sacrifice) Journal

5 :  Neha, Niharika, and Nitin are partners sharing profits and losses in the ratio of 2:3:4. They decided to change their ratio and their new ratio is 4:3:2. They also decided to pass a single journal entry to adjust the following without affecting their book values. (Rs.) Profit & Loss account80,000 General Reserve40,000 Advertisement Suspense A/c30,000 You are required to give the single journal entry to adjust the above. Solution : Profit & Loss Account80,000 Add : General Reserve40,000 _____________ Less : Advertisement Suspense1,20,000 Total amount to be adjusted30,000 _____________ 90,000   NehaNiharikaNitin Old ratio2/93/94/9 New ratio4/93/92/9 Sacrifice or Gain Neha = 2/9 – 4/9 = 2/9 (Gain) Niharika = 3/9 – 3/9 = 0 (No change) Nitin = 4/9 – 2/9 = 2/9 (Sacrifice) Journal

Accounting treatment for Revaluation of Assets and Reassessment of Liabilities on change in Profit sharing ratio : At the time of change in profit sharing ratio of existing partners, Assets and liabilities of a firm must be revalued because actual realizable value of assets and liabilities may different from their book values. Change in the assets and liabilities belongs to the period to change in profit sharing ratio and therefore it must be shared in old profit sharing ratio. Revaluation of assets and liabilities may be treated in two ways: (i)  When revised values are to be shown in the books. (ii)  When revised values are not be shown in the books. When revised values are to be shown in the books : In this case revaluation of assets and liabilities is completed with the help of “Revaluation Account”. This account is also known as “Profit and Loss Adjustment Account”. All losses due to revaluation are shown in debit side of this account and all gains due to revaluation are shown in credit side of this account.

6:  Piyush, Puja and Praveen are partners sharing profits and losses in the ratio of 3:3:2. There balance sheet as on March 31st 2015 was as follows :

Partners decided that with effect from April 1, 2015, they would share profits and losses in the ratio of 4:3:2. It was agreed that : (i)  Stock be valued at Rs. 2,20,000. (ii)  Machinery is to be depreciated by 10% (iii)  A provision for doubtful debts is to be made on debtors at 5%. (iv)  Building is to be appreciated by 20% (v)  A liability for Rs. 5,000 included in sundry creditors is not likely to arise. Partners agreed that the revised value are to be recorded in the books. You are required to prepare journal, revaluation account, partner’s capital Accounts and revised Balance Sheet. Solution: Journal

  Balance Sheet As on April 1, 2015

When revised values are not to be shown in the books. 7 :  In 6, Partners agreed that the revised value of assets and liabilities are not to be shown in the books. You are required to record the effect by passing a single journal entry. Also prepare the revised Balance Sheet. Solution : Gain due to revaluation

Old Ratio = 3:3:2 New Ratio = 4:3:2 Sacrifice or Gain Piyush = 3/8 – 4/9 = -5/72 (Gain) Pooja = 3/8 – 3/9 = 3/72 (Sacrifice) Praveen = 2/8 – 2/9 = 2/72 (Sacrifice) Amount to be adjusted : Piyush =   = Rs. 2,000 Debit Pooja =  = Rs. 1,200 Credit Praveen =  = Rs. 800 Credit Journal

Balance Sheet As on April 1, 2015 Balance Sheet of Vijay, Vivek and Vinay

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Kajal capital A/c 

 Dr. To Amit’s Capital A/c 

  (Adjustment for goodwill on change in profit sharing ratio).

Profit & Loss A/cDr.  General Reserve A/cDr. To Vaishali’s Capital A/c To Vinod’s Capital A/c To Anjali’s Capital A/c (Profit and general reserve distributed in old ratio)

Anjun’s capital A/cDr.  Kanchan’s capital A/cDr. To Profit and Loss A/c (Undistributed losses transferred to partners’ capital accounts in old ratio)

Keshav’s capital A/c 

Dr.  To Meenakshi capital A/c 

To Mohit’s capital A/c 

(Adjustment for General reserve on change in profit sharing ratio)

Neha’s capital A/c 

Dr.  To Nitin’s capital A/c 

(Adjustment for Profit & Loss A/c, General Reserves and Advertisement Suspense A/c)

Sundry creditors  Bank Loan Capital: Piyush 4,00,000 Puja 3,00,000 Praveen  3,00,000

Cash at bank  Sundry debtors Stock Machinery Building

74,000  88,000 2,40,000 3,18,000 4,00,000

Revaluation A/c Dr.  To Stock To Provision for doubtful debts A/c (Revaluation of assets)

20,000  31,800 4,400 85,000 10,800 10,800 7,800

Building A/c  Sundry creditor A/c To Revaluation A/c (Revaluation of assets and liabilities)

Revaluation A/c  To Piyush’s capital A/c To Pooja’s capital A/c To Praveen’s capital A/c (Profit on revaluation)

To Stock  To Machinery To Provision for doubtful Debts To Profits transferred to To Piyush’s capital A/c10,800 To Pooja’s capital A/c10,800 To Praveen’s capital A/c 7,200

Sundry creditors  Bank Loan Capital account : Piyush’s4,10,800 Pooja’s3,10,800 Praveen’s3,0 7,200

Cash at bank  Sundry debtors88,000 Less : provision 5%  4,400 Stock Machinery Building

74,000  83,600 2,20,000 2,86,200 4,80,000

Building  Sundry creditors Less : Loss due to revaluation Stock Machinery Provision for doubtful debts Net gain from revoluation

Piyush’s capital A/c Dr.  To Pooja’s capital A/c To Praveen’s capital A/c (Adjustment for profit on revaluation)

To Pooja’s  To Praveen Capital A/c To Balance b/d

By balance b/d  By Piyaush’s Capital A/c

Sundry creditors  Bank Loan Capital account: Piyush’s3,98,000 Pooja’s3,01,200 Praveen’s3,00 ,800

Cash at bank  Sundry Debtors Stock Machinery Building

74,000  88,000 2,40,000 3,18,000 4,00,000