Change in Profit sharing ratio of Partners Test - 5

Adjutment of goodwill amount at the time of change in profit sharing ratio:
Old Ratio = 3:2 and New Ratio 1:1
Geeta’s Sacrifice = 3/5 – 1/2 = 1/10
Sita’s Gain = 2/5 – 1/2 = 1/10
Share in goodwill = 50,000 × 1/10 = 5,000

Adjustment of goodwill at the time of change in profit sharing ratio:
Old Ratio 3:2:1 and New Ratio 1:1:1
X = 3/6 – 1/3 = 1/6 Sacrifice
Y = 2/6 – 1/3 = No Sacrifice/No Gain
Z = 1/6 – 1/3 = 1/6 Gain
Adjustment of goodwill = X’s Share = 3,00,000 × 1/6 = 50,000

Adjutsment of capital of partners:
Old Capitals = 70,000; 40,000 and 80,000
New Capitals = 1,40,000; 1,20,000 and 1,00,000 (3,60,000 in 7:6:5 ratio)
E’s capital A/c 70,000
F’s capital A/c 80,000
G’s capital A/c20,000

General Reserve given in the balance sheet will be credited to the old partners in their old profit sharing ratio. While other items i.e. land and building, loan and creditors are shown in the balance sheet and any change in their value will be shown in the revaluation account.

At the time of reconstitution of a partnership firm all accumulated profits and reserves are written off by the old partners in their old profit sharing ratio. Partners will write off preliminary expenses and advertisement suspense. Patents are not part of reserves and profits.

Employees provident fund is not a free reserve. Partners cannot distribute employees provident fund. Partners can distribute only free reserves and accumulated profits at the time of reconstitution of a partnership firm. In the above question partners will distribute all reserves and retained earnings except employees provident fund.

General reserve is a free reserve created out of the profits. It can be distributed by the partners at the end (if not used). But it cannot be sold because it is a part of profit kept aside for contingencies. Old partners will distribute it in their old ratio (if not utilised during the year).

At the time of reconstitution of a partnership firm some undistributed profits and reserves may exist. These undistributed profits and reserves belong to the existing partners who were the members of the firm before its reconstitution. Such undistributed profits and reserves are, therefore, distributed among the partners in their old profit sharing ratio.

Sometimes a business firm create a compensation reserve, so that in case of any accident, firm can pay the compensation amount, this reserve is known as workmen compensation reserve. It is created out of the profits. Free reserve will be distributed by the partners in their old profit sharing ratio.

The main purpose of creating investment fluctuation reserve is to meet the deficiency of investment value (if any). Partners can distribute this reserve only after meeting the requirement of this reserve.