Revaluation of Assets & Re-assessment of liabilities

1 Mark Question

1. Why are assets and liabilities revalued at the time of admission of a partner? (Compartment 2014)

Ans. Assets and liabilities are revalued at the time of admission of a partner, so that profit or loss arising on account of revaluation, may be adjusted among old partners in their old profit sharing ratio, since it belongs to them.

2 Mark Question

1. State any two reasons for the preparation of revaluation account on the admission

of a partner. (All India 2008)

Ans. At the time of admitting a new partner, revaluation account is prepared for the below stated reasons:

1. An incoming partner will not likely to suffer any loss relating to the period prior to his admission.
2. Old partners will not like to share the gain relating to the period prior to his admission.

3. What is a revaluation account? (All India 2008)

Ans. The account which is prepared to record changes in the value of assets and liabilities at the time of admission, retirement, death and change in profit sharing ratio is called revaluation account.

8 Marks Questions

1. W and R were partners in a firm sharing profits in the ratio of 3: 2 respectively.

On 31st March, 2013, their balance sheet was as follows

Balance Sheet as at 31st March, 2013

Liabilities Amt (₹) Assets Amt (₹)

Creditors 17,500 Cash 2,500

Investment Fluctuation Fund Debtors 4,000 10,000

Capital A/cs (—) Provision for Doubtful Debts 350 9,650

W 20,000 Stock 12,500

R 15,000 35,000 Plant 17,500

Bank Loan Patents 10,000 10,350

Investments 10,000

Goodwill 4,000

66,500

B was admitted as a new partner on the following conditions:

1. B will get 4/15th share of profits.
2. B had to bring Rs. 15,000 as his capital.
3. B would pay cash for his share of goodwill based on 2.5 years purchase of average profit of last 4 years.
4. The profits of the firm for the years ending 31st March, 2010, 2011, 2012 and

2013 were Rs. 10,000, Rs. 7,000, Rs. 8,500, and Rs. 7,500 respectively.

1. Stock was valued at Rs. 10,000 and provision for doubtful debts was raised up to X
2. Plant was revalued at Rs. 20,000.

Prepare revaluation account, partners' capital account and the balance sheet of the new firm. (Compartment 2014)

Dr Revaluation Account Cr

Particulars Amt (₹) Particulars Amt (₹)

To Stock A/c (12,500 - 10,000) 2,500 By Plant (20,000 - 17,500) 2,500

To Provision for Doubtful Debts A/c (500 - 350) 150 By Loss in Revaluation Transferred to

W's Capital A/c 90

R's Capital A/c 60 150

2,650