Question

Sunny and Ujjwal were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2024 Timmy was admitted as a new partner for \( \frac{1{5} \)th share in profits which he acquired equally from Sunny and Ujjwal. On the date of Timmy's admission the Balance Sheet of Sunny and Ujjwal showed investments at Rs 5,00,000 and a balance of Rs 2,00,000 in Investment Fluctuation Reserve. Pass necessary journal entries for treatment of Investment fluctuation reserve on the date of Timmy's admission in each of the following cases:

Hint:

Treatment of Investment Fluctuation Reserve (IFR) on Admission/Reconstitution:
1. Calculate the difference: Book Value (BV) - Market Value (MV).
2. If MV \( \ge \) BV (No fall or rise): Distribute entire IFR to old partners in OLD ratio. 3. If MV $<$ BV (Fall in value): * If Fall \( \le \) IFR: Use IFR to cover the fall (Dr. IFR, Cr. Investments). Distribute remaining IFR (if any) to old partners. * If Fall $>$ IFR: Use entire IFR (Dr. IFR). Debit the excess fall to Revaluation A/c (Dr. Revaluation). Credit Investments with total fall. Distribute Revaluation loss to old partners.

Answer 1

Book Value (BV) of Investments = Rs 5,00,000
Investment Fluctuation Reserve (IFR) = Rs 2,00,000
Old Ratio (Sunny : Ujjwal) = 3 : 2
Case (i): Market Value (MV) = Rs 5,00,000
Here, MV = BV. There is no fluctuation in the value of investments. The entire IFR is a free reserve and will be distributed among the old partners in their old profit-sharing ratio.
Sunny's Share = \( \frac{3}{5} \times 2,00,000 = Rs 1,20,000 \)
Ujjwal's Share = \( \frac{2}{5} \times 2,00,000 = Rs 80,000 \)
Journal Entry:
\begin{tabular}{|p{8cm}|r|r|} \hline Particulars & Dr. (Rs) & Cr. (Rs)
\hline Investment Fluctuation Reserve A/c \hspace{1.3cm} Dr. & 2,00,000 &
\indent To Sunny's Capital A/c & & 1,20,000
\indent To Ujjwal's Capital A/c & & 80,000
\textit{(Being IFR distributed among old partners in old ratio 3:2 as market value equals book value)} & &
\hline \end{tabular}
Case (ii): Market Value (MV) = Rs 3,00,000
Here, MV $<$ BV. Fall in value = BV - MV = Rs 5,00,000 - Rs 3,00,000 = Rs 2,00,000.
This fall in value (loss) will be absorbed by the IFR.
Amount of IFR used to cover the loss = Rs 2,00,000.
Remaining IFR = Total IFR - IFR Used = Rs 2,00,000 - Rs 2,00,000 = Rs 0.
Since the entire IFR is utilized, nothing is left to distribute to partners. The investment value is reduced.
Journal Entry:
\begin{tabular}{|p{8cm}|r|r|} \hline Particulars & Dr. (Rs) & Cr. (Rs)
\hline Investment Fluctuation Reserve A/c \hspace{1.3cm} Dr. & 2,00,000 &
\indent To Investments A/c & & 2,00,000
\textit{(Being fall in value of investments adjusted against IFR)} & &
\hline \end{tabular}
Case (iii): Market Value (MV) = Rs 2,00,000
Here, MV $<$ BV. Fall in value = BV - MV = Rs 5,00,000 - Rs 2,00,000 = Rs 3,00,000.
The fall in value (loss) exceeds the IFR available.
Amount of IFR used to cover the loss = Rs 2,00,000 (Full amount).
Excess Loss = Total Fall in Value - IFR Used = Rs 3,00,000 - Rs 2,00,000 = Rs 1,00,000.
This excess loss of Rs 1,00,000 is debited to the Revaluation Account (as it's a loss on revaluation of asset beyond the specific reserve).
Journal Entries:
1. Adjust IFR against the fall in value:
\begin{tabular}{|p{8cm}|r|r|} \hline Particulars & Dr. (Rs) & Cr. (Rs)
\hline Investment Fluctuation Reserve A/c \hspace{1.3cm} Dr. & 2,00,000 &
Revaluation A/c \hspace{3.7cm} Dr. & 1,00,000 &
\indent To Investments A/c & & 3,00,000
\textit{(Being fall in value of investments adjusted against IFR and balance loss debited to Revaluation A/c)} & &
\hline \end{tabular}
2. Distribute the Revaluation Loss to old partners in old ratio (3:2):
Sunny's Share of Loss = \( \frac{3}{5} \times 1,00,000 = Rs 60,000 \)
Ujjwal's Share of Loss = \( \frac{2}{5} \times 1,00,000 = Rs 40,000 \)
\begin{tabular}{|p{8cm}|r|r|} \hline Particulars & Dr. (Rs) & Cr. (Rs)
\hline Sunny's Capital A/c \hspace{3.1cm} Dr. & 60,000 &
Ujjwal's Capital A/c \hspace{3.1cm} Dr. & 40,000 &
\indent To Revaluation A/c & & 1,00,000
\textit{(Being Revaluation loss distributed among old partners in old ratio 3:2)} & &
\hline \end{tabular}