We will discuss the treatment of investments taken over by old partners partly at the time of reconstitution of partnership firm.
How adjustment given in the question
- In a partnership firm there are two partners X and Y who are currently sharing profits equally. Their balance sheet as on 31-Mar was as follows :
| Liabilities | Amount | Assets | Amount |
| Investments | 80000 |
A new partner Z wants to join the partnership and is going to get a 1/4 share of the profits. On the admission of Z, X and Y decide to take over half of the existing Investments equally at their current Book value. The remaining investments were revalued at Rs 50000.
Understand the adjustment
Let's understand the adjustment in two parts.
Part 1 - X and Y will take over half the investments at book value
X and Y will take over half the investments at book value. This means they will withdraw those Investments and such investments will no longer be part of the firm.
X and Y take over half of the Investments which amounts to 40,000 Rupees at the book value. This is like them withdrawing from the business and hence this is part of drawings. There's no profit or loss to calculate in this part because they're taking the Investments at the book value.
Since X and Y are taking over the investments equally so each will get investments worth Rs 20000.
Part 2 - Remaining Investments Revalued
The remaining investments will stay in the firm but those will be revalued.
The remaining Investments also worth 40,000 rupees are revalued. In our example they're now worth Rs 50000 as per question. So there's a revaluation gain of Rs 10,000.
Journal Entry
Part 1
- X Capital A/c Dr.. Rs 20000
- Y Capital A/c Dr.. Rs 20000
- To Investments A/c Rs 40000
X and Y take over 40,000 rupees of investments. This is their drawings from the firm. We will debit X's capital account and Y's capital account with Rs 20,000 each because their capital in the firm is decreasing due to drawings. They are taking assets out of the business so their Capital goes down.
Credit the investments account with Rs 40,000 because the assets of the firm are decreasing.
Part 2
- Investments A/c Dr.. Rs 10000
- To Revaluation A/c Rs 10000
In the journal entry for part two of investments. we'll debit the Investments account with Rs 10,000. This is because the value of the Investments has increased due to revaluation and increase in assets is debited.
We'll credit the revaluation account with Rs 10,000 to show the Profit made from the revaluation.
Treatment in Revaluation Account
There will be no entry in revaluation account for the part 1 of the adjustment as X and Y are taking the investments at book value.
For part 2 of adjustment, the following entry in revaluation account will be made on credit side
| Particulars | Amount | Particulars | Amount |
| By Investments A/c | 10000 |
We'll credit the revaluation account with Rs 10,000 to show the profit made from the revaluation of investments (Rs 50000 - Rs 40000). This represents the revaluation profit from the increase in the value of the remaining Investments.
Treatment in Partner Capital A/c
| Particulars | X | Y | Particulars | X | Y |
| To Investments A/c | 20000 | 20000 |
Part 1 of adjustment - On the debit side of each partner's capital account we will write 'To Investments' Rs 20,000. This represents the drawings they have made from the firm in the form of investments.
There is no entry on the credit side of capital account.
Part 2 of adjustment - No impact in partner's capital account
Treatment in Balance Sheet
| Liabilities | Amount | Assets | Amount |
| Investments | 50000 |
The investments will now be shown at their new re valued amount of Rs 50,000. How we arrived at this figure ?
- Total Investments in the firm Rs 80000
- Less - Investments taken over by X and y Rs 40000
- Balance Book Value of Investments Rs 40000
- Add - Revaluation Gain Rs 10000
- Final Book Value of Investments Rs 50000
There is no impact on the liability side.
Finally
It's important to remember that this adjustment process applies to any asset the Firm owns. The examination question can give any other asset like building, machinery, stock, etc. instead of investment.
Also note that the same steps as explained above apply to do this adjustment whether the question is for a) change in the profit sharing ratio b) admission of a partner c) retirement of a partner or in case of d) death of a partner
