Question

Frank, George, and Hemant were partners in a firm sharing profits in the ratio of 5:3:2. They decided to change their profit-sharing ratio to 2:5:3 with effect from 1\textsuperscript{st April, 2023. Their Balance Sheet as at 31\textsuperscript{st} March, 2023, was as follows:} \[ Balance Sheet of Frank, George, and Hemant as at 31\textsuperscript{st March, 2023} \] \[ \begin{array}{|c|c|c|} \hline Liabilities & Amount (₹) & Assets & Amount (₹)
\hline \text{Capitals:} & & \text{Land} & 5,00,000
\text{Frank} & 4,00,000 & \text{Building} & 3,00,000
\text{George} & 3,00,000 & \text{Machinery} & 3,00,000
\text{Hemant} & 2,00,000 & \text{Stock} & 1,50,000
\text{Creditors} & 9,00,000 & \text{Debtors} & 2,50,000
\text{Employees’ Provident Fund} & 1,00,000 & \text{Cash} & 2,00,000
\text{General Reserve} & 2,00,000 & &
\hline Total & 17,00,000 & Total & 17,00,000
\hline \end{array} \] Adjustments: 1. The value of land having appreciated is to be brought up to ₹ 6,50,000. 2. Goodwill of the firm is valued at ₹ 2,00,000. Goodwill is not to appear in the books of the firm.

Hint:

Adjustments for goodwill and revaluation of assets/liabilities are made in the capital accounts based on the partners’ profit-sharing changes.

Answer 1

Journal Entries: \[ \begin{array}{|c|l|c|c|} \hline Date & Particulars & Dr (₹) & Cr (₹)
\hline \text{2023} & 1. Revaluation of Land: & &
\text{Mar 31} & Land A/c \(\rightarrow\) (Appreciation in value) & 1,50,000 &
& To Revaluation A/c & & 1,50,000
& (Increase in the value of land recorded) & &
\hline & 2. Distribution of Revaluation Profit: & &
\text{Mar 31} & Revaluation A/c & 1,50,000 &
& To Frank’s Capital A/c (5/10) & & 75,000
& To George’s Capital A/c (3/10) & & 45,000
& To Hemant’s Capital A/c (2/10) & & 30,000
& (Revaluation profit transferred to partners’ capital accounts) & &
\hline & 3. Goodwill Adjustment: & &
\text{Mar 31} & Frank’s Capital A/c (Sacrificing Share) & 40,000 &
& George’s Capital A/c (Sacrificing Share) & 40,000 &
& To Hemant’s Capital A/c (Gaining Share) & & 80,000
& (Goodwill adjusted among partners in sacrificing/gaining ratio) & &
\hline \end{array} \]