Question

Nishu, Rishu and Kishu were partners in a firm sharing profits and losses in the ratio of 8 : 7 : 5. They decided to share future profits and losses in the ratio of 5 : 8 : 7 with effect from 1st April, 2024. Their Balance Sheet as at 31st March, 2024 showed :
General Reserve ₹ 10,00,000.
Debit Balance of ₹ 2,00,000 in Profit and Loss Account.
Goodwill of the firm was valued at ₹ 20,00,000 and revaluation of assets and liabilities resulted in a profit of ₹ 7,00,000. The partners did not want to distribute the General Reserve and the balance of Profit and Loss Account. They also decided that revalued values of assets and liabilities were not to be recorded in the books. Pass a single adjustment entry to give effect to the above. Show your workings clearly.

Hint:

For a single adjustment entry, calculate net change in profit sharing benefits and adjust among gaining and sacrificing partners accordingly.

Answer 1

Old Ratio: Nishu : Rishu : Kishu = 8 : 7 : 5
New Ratio: Nishu : Rishu : Kishu = 5 : 8 : 7 

Step 1: Calculate sacrificing/gaining ratio: 
 

Nishu's Gain = $ \frac{5}{20} - \frac{8}{20} = -\frac{3}{20} $ ⟹ Sacrificing $\frac{3}{20}$ 
Rishu's Gain = $ \frac{8}{20} - \frac{7}{20} = \frac{1}{20} $ ⟹ Gaining $\frac{1}{20}$ 
Kishu's Gain = $ \frac{7}{20} - \frac{5}{20} = \frac{2}{20} $ ⟹ Gaining $\frac{2}{20}$

Step 2: Total adjustment amount = Goodwill + Revaluation Profit – P&L Debit balance
 

$ = ₹ 20,00,000 + ₹ 7,00,000 - ₹ 2,00,000 = ₹ 25,00,000 $

This amount will be adjusted in sacrificing/gaining ratio (3:1:2).

Compensation:
 

Nishu (Sacrificing $\frac{3}{20}$) gets = $ 25,00,000 \times \frac{3}{6} = ₹ 12,50,000 $ 
Rishu (Gaining $\frac{1}{20}$) pays = $ 25,00,000 \times \frac{1}{6} = ₹ 4,16,667 $ 
Kishu (Gaining $\frac{2}{20}$) pays = $ 25,00,000 \times \frac{2}{6} = ₹ 8,33,333 $

Journal Entry:
 

Date	Particulars	Amount (₹)
	Rishu's Capital A/c Dr.	4,16,667
	Kishu's Capital A/c Dr.	8,33,333
	To Nishu's Capital A/c	12,50,000

Final Answer: Pass the above journal entry.