An extract of Balance Sheet as on 31 March 2023: Additional Information: Premises found under-valued by 15% and provision for legal damages to be created up to ₹6,000. On the basis of above information, the journal entry at the time of reconstitution of firm is:Liabilities ₹ Assets ₹ Provision for legal damages 4,800 Furniture 41,000 Premises 85,000
Premises A/c Dr ₹15,000
To Revaluation A/c ₹15,000
Revaluation A/c Dr ₹1,200
To Provision for legal damages A/c ₹1,200
Let's analyze the provided information regarding the balance sheet extract and additional information at the time of reconstitution of the firm. Reconstitution often involves the revaluation of assets and liabilities to their current values. Any increase or decrease in the value of assets and liabilities is recorded through a Revaluation Account.
The Revaluation Account is a nominal account prepared to ascertain the net effect (profit or loss) of revaluing assets and reassessing liabilities at the time of firm reconstitution (like admission, retirement, death of a partner, or change in profit-sharing ratio). Gains on revaluation (increase in asset value, decrease in liability) are credited to this account, while losses (decrease in asset value, increase in liability) are debited.
We need to determine the change in the value of Premises and the provision for legal damages based on the additional information.
The balance sheet shows Premises at ₹85,000. The additional information states that Premises are "under-valued by 15%". This means the current value (₹85,000) represents 100% - 15% = 85% of the actual correct value.
The correct value of Premises is ₹100,000. The increase in the value of Premises is the difference between the correct value and the book value.
An increase in the value of an asset is a gain on revaluation. Assets have debit balances, so increasing an asset requires a debit. The gain is credited to the Revaluation Account.
The balance sheet shows a Provision for legal damages of ₹4,800. The additional information states that the provision is "to be created up to ₹6,000". This means the required provision is ₹6,000.
An increase in a provision (which is a type of liability) is a loss on revaluation. Liabilities have credit balances, so increasing a liability requires a credit. The loss is debited to the Revaluation Account.
Based on the calculations, we need to pass journal entries for the increase in the value of Premises and the increase in the provision for legal damages.
When an asset's value increases, the asset account is debited, and the Revaluation Account is credited.
When a liability or provision increases, the Revaluation Account is debited, and the liability/provision account is credited.
The journal entry at the time of reconstitution combining these effects is:
This set of journal entries separately records the gain on asset revaluation and the loss on liability reassessment using the Revaluation Account.
| Item | Old Value (₹) | New Value (₹) | Change (₹) | Effect on Revaluation A/c | Journal Entry |
|---|---|---|---|---|---|
| Premises | 85,000 | 100,000 | +15,000 (Increase) | Credit (Gain) | Debit Asset A/c, Credit Revaluation A/c |
| Provision for legal damages | 4,800 | 6,000 | +1,200 (Increase) | Debit (Loss) | Debit Revaluation A/c, Credit Provision A/c |
Reconstitution of a firm means any change in the agreement of partnership. This results in a change in the existing relationship between partners but the firm continues. Examples include:
At the time of reconstitution, it is common practice to revalue assets and reassess liabilities so that the new partnership arrangement starts with the current fair values of assets and liabilities. This helps in ensuring that the benefits or losses arising from changes in the value of assets and liabilities up to the date of reconstitution are shared by the partners in their old profit-sharing ratio, before the change takes effect.
The Revaluation Account balance (profit or loss) is ultimately transferred to the partners' capital accounts in their old profit-sharing ratio.
A, B and C are partners sharing profits in the ratio of 3 : 3 : 4. They decide to share the future profits equally. The sacrifice or gain of partners are:
The main source of revenue for 'not for profit' organisation is:
Which of the following would affect the Revaluation Account at the time of reconstitution of a partnership firm?
Match List-I with List-II:
| List-I (Items of cash flow) | List-II (Type of activity) |
|---|---|
| (A) Purchase of tangible assets | (I) Operating activity |
| (B) Issue of shares | (II) Cash and cash equivalents |
| (C) Increase in current assets | (III) Investing activity |
| (D) Marketable securities | (IV) Financing activity |
Choose the correct answer from the options given below:
What are the matters that need adjustments at the time of Reconstitution of partnership?
(A) Preparation of Realisation A/c
(B) Calculation of Sacrificing ratio
(C) Distribution of accumulated profits
(D) Valuation of goodwill
(E) Preparation of partner’s loan A/c
Choose the correct answer from the options given below: