You are given the following information on a reconstitution of a firm.

1.	You are given the following information on a reconstitution of a firm. Partners capital Ammu – Rs. 20,000 Beena – Rs. 30,000 Ceema – Rs. 20,000 Old profit sharing ratio – 2:3:1 New Ratio – 1:2:3 Revaluation profit – 22,5001. State the reason for reconstitution2. Give a journal entry to adjust the revaluation profit through capital accounts of partners.
Answer» Reconstitution refers to a change in the nature of relationship among partners due to 1. Change in profit sharing ratio 2. Admission 3. Retirement 4. Death or Amalgamation of two partnership firms. In the firm of Ammu, Beena and Ceema reconstitution of firm takes place because they decided to change their profit sharing ratio: Old ratio = 2:3:1 = 2/6 : 3/6: 1/6 New ratio = 1:2:3 = 1/6 : 2/6: 3/6 Ammu’s sacrice = old ratio – new ratio = 2/6 – 1/6 = 1/6 Beena’s sacrice = old ratio-new ratio = 3/6 – 2/6 = 1/6 Ceema’s gain = new ratio-old ratio = 3/6 – 1/6 = 2/6 Ammu’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 3750 Beena’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 3750 Ceema’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 7500.

You are given the following information on a reconstitution of a firm. Partners capital Ammu – Rs. 20,000 Beena – Rs. 30,000 Ceema – Rs. 20,000 Old profit sharing ratio – 2:3:1 New Ratio – 1:2:3 Revaluation profit – 22,5001. State the reason for reconstitution2. Give a journal entry to adjust the revaluation profit through capital accounts of partners.

Answer»

Reconstitution refers to a change in the nature of relationship among partners due to

1. Change in profit sharing ratio

2. Admission

3. Retirement

4. Death or Amalgamation of two partnership firms.

In the firm of Ammu, Beena and Ceema reconstitution of firm takes place because they decided to change their profit sharing ratio:

Old ratio = 2:3:1 = 2/6 : 3/6: 1/6

New ratio = 1:2:3 = 1/6 : 2/6: 3/6

Ammu’s sacrice = old ratio – new ratio = 2/6 – 1/6 = 1/6

Beena’s sacrice = old ratio-new ratio = 3/6 – 2/6 = 1/6

Ceema’s gain = new ratio-old ratio = 3/6 – 1/6 = 2/6

Ammu’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 3750

Beena’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 3750

Ceema’s revaluation profit = 22,500 × \(\frac{1}{6}\) = 7500.