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:} \[ Balance Sheet of Frank, George and Hemant as at 31\textsuperscript{st} March, 2023} \] \[ \begin{array}{|c|c|c|} \hline Liabilities & Amount (₹) & Assets & Amount (₹)
\hline Capital:} & & Land} & 5,00,000
Frank} & 4,00,000 & Building} & 3,00,000
George} & 3,00,000 & Machinery} & 3,00,000
Hemant} & 2,00,000 & Stock} & 1,50,000
Creditors} & 9,00,000 & Debtors} & 2,50,000
Employees’ Provident Fund} & 1,00,000 & Cash} & 3,00,000
General Reserve} & 2,00,000 & &
\hline Total} & 17,00,000 & Total} & 17,00,000
\hline \end{array} \] 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 the land’s value is revalued, a corresponding journal entry should be passed, along with any goodwill adjustments.

Answer 1

The general reserve of ₹ 1,00,000 is distributed among the partners in their old profit-sharing ratio of \( 5 : 3 : 2 \). \begin{center} \renewcommand{\arraystretch}{1.5} \begin{tabular}{|p{10cm}|r|r|} \hline Particulars & Dr Amount (₹) & Cr Amount (₹)
\hline General Reserve A/c & 1,00,000 & --
To Frank’s Capital A/c (5/10 of ₹ 1,00,000) & -- & 50,000
To George’s Capital A/c (3/10 of ₹ 1,00,000) & -- & 30,000
To Hemant’s Capital A/c (2/10 of ₹ 1,00,000) & -- & 20,000
(Being general reserve distributed among partners in the old profit-sharing ratio) & &
\hline \end{tabular} \end{center} Explanation: - The general reserve is distributed among Frank, George, and Hemant in their old ratio of \( 5 : 3 : 2 \). - Frank receives ₹ 50,000, George ₹ 30,000, and Hemant ₹ 20,000, which are credited to their respective capital accounts.