Question

Rambha and Urvashi were partners in a firm sharing profits and losses in the ratio of 13 : 12. From 1^st April, 2024, they decided to share future profits and losses in the ratio of 12 : 13. On this date, their balance sheet showed a debit balance of ₹ 2,50,000 in Advertising Suspense Account and a balance of ₹ 5,00,000 in Contingency Reserve. Partners decide to write off the balance of the Advertising Suspense Account but decide not to distribute Contingency Reserve.
Pass necessary journal entries for the above transactions on the reconstitution of the firm. Show your working clearly.

Hint:

Fictitious assets like Advertising Suspense are written off in the old ratio before any reconstitution.

Answer 1

1. Calculation of Sacrificing/Gaining Ratio: \ Old Ratio = 13:12, New Ratio = 12:13 \ Rambha: 13/25 to 12/25 → Sacrifice = 13/25 - 12/25 = 1/25 \ Urvashi: 12/25 to 13/25 → Gain = 13/25 - 12/25 = 1/25 \ 2. Journal Entry for Advertising Suspense (Fictitious Asset): \ \begin{tabular}{|l|l|} Particulars & Amount (₹) \ \hline Rambha's Capital A/c Dr. & 1,30,000 \ Urvashi's Capital A/c Dr. & 1,20,000 \ \quad To Advertising Suspense A/c & 2,50,000 \ \hline \end{tabular} \ (Being the fictitious asset written off in old ratio 13:12) \ 3. No entry for Contingency Reserve as it was not to be distributed. % Final Answer Final Answer: \ Advertising Suspense to be written off by partners in old ratio. No adjustment entry is required for Contingency Reserve as per the decision.