Question

Following information use in Question NO.5

The following is the information about assets and liabilities of M/s. Hanish LLC and its partners A, B and C. They are sharing profits 9:6:3 with total capital of OMR 169,000 as on 31.3.2020.

Particular	OMR	Particular	OMR
Cash	58,500	Bank Loan	52,000
Sundry Debtors	91,000	Bonds	65,000
Stock	32,500	Bills Payable	104,000
Machinery	52,000	Sundry Creditors	130,000
Land	91,000	Bank Overdraft	32,500
Furniture	32,500	Plant	78,000
Premises	52,000	Profit & Loss A/C	32,500
Building	130,000	Bill Receivable	32,500

The capital contributed by the partners is OMR 78,000, OMR 52,000, and OMR 39,000 respectively. The firm accumulated its past profits in the name General Reserve is OMR 65,000. On 1.4.2020 they decided to admit D into the partnership for 1/5^th of the future profits with the terms that D shall bring in a capital of OMR 65,000.

Goodwill of the firm is being valued at OMR 52,000. The assets like Machinery, Land, Buildings and Plant are to be appreciated by 10% and Stock, Furniture, Premises are to be depreciated by 5%.

The Provision for Doubtful Debts against Sundry Debtors is to be made @ 5%. Discount on Creditors @ 2.5% received from Sundry Creditors. The Provision for outstanding liability is to be created at OMR 5,200 and Bank Loan is to be maintained

Q5.

Journalize the above transactions with narrations and prepare the Revaluation Account. Give your comment with reasons about the values which are debited and credited in the Revaluation

Account.                                                                                                                         (2+2+1 = 5 Marks)

Answer 1

Journal Entries:

Journal Entries
In the books of M/s. Mahima LLC
Date	Particulars	Dr.	Cr.
01-Apr-20	Cash Account Dr.	75,400
	To D's Capital Account		75,400
	(Being amount brought in by Mr. D for Capital - OMR 65,000 and Goodwill - OMR 10,400
01-Apr-20	D's Capital Account	10,400
	To A's Capital Account		5,200
	To B's Capital Account		3,467
	To C's Capital Account		1,733
	(Being Mr. D share of goodwill adjusted to old partners' capital accounts in their sacrificing ratio i.e., 3:2:1)
01-Apr-20	Revaluation Account Dr	15,600
	To Stock Account		1,625
	To Furniture Account		1,625
	To Premises Account		2,600
	To Provision for Doubtful Debts Account		4,550
	To Provision for Outstanding Liability account		5,200
	(Being recording of the reduction in the value of assets and creation of provision for outstanding liability)
01-Apr-20	Machinery Account Dr	5,200
	Land Account Dr	9,100
	Buildings Account Dr	13,000
	Plant Account Dr	7,800
	Discount for Sundry Creditors Account Dr	3,250
	To Revaluation Account		38,350
	(Being recording of the increase in the value of assets and recognition of discount for value of creditors)
01-Apr-20	Revaluation Account Dr	22,750
	To A's Capital Account		11,375
	To B's Capital Account		7,583
	To C's Capital Account		3,792
	(Being profit on revaluation credit to Old partners capital account in their old profit sharing ratio.
01-Apr-20	General Reserve Account Dr	65,000
	To A's Capital Account		32,500
	To B's Capital Account		21,667
	To C's Capital Account		10,833
	(Being general reserve balance approtioned between old partners in old ratio)
01-Apr-20	Profit and Loss Account	32,500
	To A's Capital Account		16,250
	To B's Capital Account		10,833
	To C's Capital Account		5,417
	(Being profit and loss balance approtioned between old partners in old ratio)

Revaluation Account

In the books of M/s. Hanish LLC
Revaluation Account
Particulars	OMR	Particulars	OMR
To Stock Account	1,625	By Machinery Account	5,200
To Furniture Account	1,625	By Land Account	9,100
To Premises Account	2,600	By Buildings Account	13,000
To Provision for Doubtful Debts Account	4,550	By Plant Account	7,800
To Provision for Outstanding Liability account	5,200	By Discount for Sundry Creditors Account	3,250
To Profit on Revaluation
A's Capital Account	11,375
B's Capital Account	7,583
C's Capital Account	3,792
	38,350		38,350

Working Note 1: Computation of sacrificing ratio

In the problem given, it is mentioned that D will be admitted into partnershipfor 1/5th of share.

Here only new partners share is given but the question is silent about the sacrifice made by the old partners.

In such case it is assumed that the old partners will share the remaining share in their old profit sharing ratio.

So, here the sacrificing ratio will be the old partners profit sharing ratio i.e, A, B and C profit sharing ratio.

So the sacrifcing ratio will be 9:6:3 or 3:2:1

Working Note 2: Computation of new profit sharing ratio.

Let's assume Total share in firm = 1

Share of the new partner D = 1/5 or 6/30

Remaining profit for Old Partners = 1 - 1/5 = 4/5 which will shared among the old partners in their old profit sharing ratio.

So A's share = 4/5 x 3/6 = 12/30

B's share = 4/5 x 2/6 = 8/30

C's share = 4/5 x 1/6 = 4/30

New ratio = 12/30 : 8/30 : 4/30 : 6/30 = 12:8:4:6

Thefore New Profit sharing ration of A, B, C and D = 12:8:4:6

Working Note 3: Computation of goodwill to be brought in by Mr. D.

In the question the goodwill amount is mentioned for the whole firm. But Mr. D is obliged to bring his share of goodwill only.

Value of Firm Goodwill = OMR 52,000

Share of Mr. D in the firm = 1/5

Share of Goodwill to be brought in by Mr. D on his admission in to Partnership = OMR 52,000 x 1/5 = OMR 10,400/-.

Working Note 4: Sharing of Goodwill brought by Mr. D between the old partners.

As per the accounting principles, goodwill has to be recognised in the books of account only when a consideration has been paid for it and internally generated goodwill can't be recognised as an asset in any case.

The goodwill calculated in Working note 3 is in the nature of internally generated goodwill and it is calculated only for the purpose of admission of a new partner and as a result not eligible for recognition in the books of accounts of partnership firm. So the only way out there is to adjust the goodwill through the Capital accounts of old partners.

Due to admission of new partner, the old partners are losing their share of profit in the partnership firm in their sacrificing ratio calculated in Working Note - 1 and they are to be indemnified for such loss of share. So the goodwill brought in by Mr. D will be shared between the old partners in the sacrificing ratio.

To conclude, by sharing the goodwill brought in by Mr. D between the old partners, we are satisfying the following:

1. Accounting requirement of non recognition of internally generated goodwill.

2. Old partners were indemnified for their loss in share of profit.

So the goodwill of OMR. 10,400/- brought in by Mr. D will be share among Mr. A, B and C in the ratio of 3:2:1.

A's share in Goodwill = OMR 10,400 x 3/6 = OMR 5,200

B's share in Goodwill = OMR 10,400 x 2/6 = OMR 3,467

C's share in Goodwill = OMR 10,400 x 1/6 = OMR 1,733

Working Note 5: For preparation of Revaluation Account

When a new partner is admitted into partneship, assets are revalued and liabilities are reassessed.

A Revaluation account will be opened for this purpose. This account will be reflected with the following entries: a. Debited with all reduction in value of assets and increase in value of liabilities. b. Credited with increase in the value of assets and decrease in value of liabilities

The difference in two sides will reflect a profit or loss. This will be transferred to the Capital accounts of old partners in old profit sharing ratio.

The entries to be passed are:

1. Revaluation Account                                            Dr.

To Assets Account                           With the reduction in the value of assets

(individually which show a decrease)

To Liabilities Account                     With increase in the value of liabilities

(individually which have to be increased)

2. Asset Account (Individually)                              Dr.              With the increase in the value of assets

Liabilities Account (Individually)                     Dr.              With the reduction in the value of liabilities

To Revaluation Account

3. Revaluation Account                                            Dr.       With the profit in the old profit sharing ratio.

To Capital A/cs of old partners

(or)

Capital A/cs of old partners                             Dr.       With the loss in the old profit sharing ratio.

To Revaluation Account

As a result of the above entries, the capital account balances of the old partners will change and the assets and liabilities will have to be adjusted to their proper values. They will now appear in the Balance sheet at revised figures.

Revaluation Account workings:
Particulars	Amount before reconstitution	Change to be made	Calculation	Amount of Change	Debit/(Credit) to Revaluation A/c	Amount after reconstitution
Machinery	52,000	Appreciate by 10%	+52000 x 10%	5,200	Increase in value of asset, so Credit to Revaluation Account	57,200
Land	91,000	Appreciate by 10%	+91000 x 10%	9,100	Increase in value of asset, so Credit to Revaluation Account	1,00,100
Buildings	1,30,000	Appreciate by 10%	+130000 x 10%	13,000	Increase in value of asset, so Credit to Revaluation Account	1,43,000
Plant	78,000	Appreciate by 10%	+78000 x 10%	7,800	Increase in value of asset, so Credit to Revaluation Account	85,800
Stock	32,500	Depreciate by 5%	-32500 x 5%	(1,625)	Decrase in value of asset, so Debit to Revaluation Account	30,875
Furniture	32,500	Depreciate by 5%	-32500 x 5%	(1,625)	Decrase in value of asset, so Debit to Revaluation Account	30,875
Premises	52,000	Depreciate by 5%	-52000 x 5%	(2,600)	Decrase in value of asset, so Debit to Revaluation Account	49,400
Sundry Debtors(Provision for Doubtful Debts to be created)	91,000	Create at 5% of Sundry Debtors balance	-91000 x 5%	(4,550)	Decrase in value of asset, so Debit to Revaluation Account	86,450
Sundry Creditors (Discount to be provided)	1,30,000	Create at 2.5% of Sundry Creditors balance	130000 x 2.5%	3,250	Decrease in value of liability, so Credit to Revaluation Account	1,33,250
Provision for outstanding liability	-	Provide OMR 5,200	-5200	(5,200)	Increase in value of liability, so Debit to Revaluation Account	-5,200
Profit / (Loss) on revaluation [Net effect of all the revaluations]	22,750
The above profit on revaluation is to be distributed among the old partners in the old profit sharing ratio i.e.,
A's share in Revaluation profit	=22750 x 3/6	11,375	Debit Revaluation Accout and Credit A's Capital Account
B's share in Revaluation profit	=22750 x 2/6	7,583	Debit Revaluation Accout and Credit B's Capital Account
C's share in Revaluation profit	=22750 x 1/6	3,792	Debit Revaluation Accout and Credit C's Capital Account