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Q. L, R and S ae sharing profits and losses in the ratio of 5:3:2. Their General Reserve as 50,000. They decided to share future profits and losses in the ratio of 2:3:5 with effect from 1.4.2016. Goodwill was valued 100,000. They also decided to record the effect of the following revaluations without effecting the books value of the assets and liabilities by passing a single adjusting entry and entry for Goodwill and General Reserve.
Items | Booking Figure | Revised Figure |
Building | 10,00,000 | 11,00,000 |
Machinery | 5,00,000 | 4,80,000 |
Creditors | 1,20,000 | 1,10,000 |
Outstanding expenses | 1,20,000 | 1,50,000 |
Pass the necessary single adjusting entry by showing the workings clearly.
Calculation of Net effect of revaluation items:
add: building 100000
creditors 10000
less: machinery (20000)
o/s exp. (30000)
= 60000
add net effect of reserves and accumulated profits i.e.
gen. reserve : 50000
goodwill : 100000
= 150000
60000 + 150000 = 210000
Calculation of gain and sacrifise:
Old ratio = 5:3:2
New ratio=2:3:5
L's gain/sac. = old-new = 5/10 -2/10 = 3/10 ( sac.)
r's gain/ sac.= 3/10 -3/10 = 0
S's gain/ sac. = 2/10- 5/10 = -3/10( gain)
therefore:
L's share = 210000X 3/10 = 63000
S's share= 210000X -3/10 = 63000.
Entry:
S's capital A/C Dr. 63000
To L's capital A/C 63000
( being adjustment entry passed)
add: building 100000
creditors 10000
less: machinery (20000)
o/s exp. (30000)
= 60000
add net effect of reserves and accumulated profits i.e.
gen. reserve : 50000
goodwill : 100000
= 150000
60000 + 150000 = 210000
Calculation of gain and sacrifise:
Old ratio = 5:3:2
New ratio=2:3:5
L's gain/sac. = old-new = 5/10 -2/10 = 3/10 ( sac.)
r's gain/ sac.= 3/10 -3/10 = 0
S's gain/ sac. = 2/10- 5/10 = -3/10( gain)
therefore:
L's share = 210000X 3/10 = 63000
S's share= 210000X -3/10 = 63000.
Entry:
S's capital A/C Dr. 63000
To L's capital A/C 63000
( being adjustment entry passed)