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:} \[ \begin{array}{|l|c|c|} \hline Liabilities & Amount (₹) & Assets & Amount (₹)
\hline \text{Capitals:} & & \text{Land} & 5,00,000
\text{Frank} & 4,00,000 & \text{Building} & 3,00,000
\text{George} & 3,00,000 & \text{Machinery} & 2,00,000
\text{Hemant} & 2,00,000 & \text{Stock} & 1,50,000
\text{Creditors} & 5,00,000 & \text{Debtors} & 2,50,000
\text{Employees’ Provident Fund} & 1,00,000 & \text{Cash} & 3,00,000
\text{General Reserve} & 2,00,000 & &
\hline \text{Total} & 17,00,000 & \text{Total} & 17,00,000
\hline \end{array} \] It was decided that: The value of land having appreciated be brought up to ₹ 6,50,000. Goodwill of the firm was valued at ₹ 2,00,000. Goodwill was not to appear in the books of the firm. Pass the necessary journal entries in the books of the firm.

Hint:

When adjusting asset values or recording goodwill, ensure to update the partners' capital accounts accordingly and avoid recording goodwill in the firm's books if not required.

Answer 1

The journal entries to record the revaluation of land and goodwill are as follows: (i) To record the appreciation in the value of land: \begin{center} \begin{tabular}{|l|c|c|} \hline Particulars & Dr Amount (₹) & Cr Amount (₹)
\hline Land A/c Dr & 1,50,000 &
To Revaluation A/c & & 1,50,000
\hline \end{tabular} \end{center} (ii) To record the goodwill valuation (without affecting the books of the firm): Since the goodwill is not to appear in the books, we will pass the entry to transfer goodwill to the partners' capital accounts as per the new profit-sharing ratio: \begin{center} \begin{tabular}{|l|c|c|} \hline Particulars & Dr Amount (₹) & Cr Amount (₹)
\hline Revaluation A/c Dr & 2,00,000 &
To Frank’s Capital A/c & & 80,000
To George’s Capital A/c & & 40,000
To Hemant’s Capital A/c & & 80,000
\hline \end{tabular} \end{center}