How to deal with unrecorded assets on admission.

![If in a question, there are general reserve of Rs. 10000 and there are deferred revenue expenditure of Rs. @2000 and some adjustments are given that are: Building undervalued by 2000 and unrecorded assets- typewriter(having its value being 4500). Then will we have to distribute reserves and accumulated profits in their old ratio and simultaneously record the revised values of assets and liabilities in the books or just have to pass an adjustment entry?

asked Dec 27, 2015 in Partnership-Admission by siddhartha gupta (20 points) 4,819 views
edited Dec 28, 2015 by siddhartha gupta

1 Answer

0 votes
1. Reserves will be credited to old partners in their old profit sharing ratio, the journal entry will be:

General Reserve A/c            Dr.  10000

  To Old Partners' Capital A/cs                  10000

2. Deferred revenue expenditure will be debited to old partners in their old profit sharing ration, the journal entry will be:

Old Partners' Capital A/cs   Dr.  2000

  To Deferred Revenue Exp. A/c                 2000

3. Undervalued building will be brought up to market value through Revaluation A/c.  Similarly unrecorded asset will also be brought in books through Revaluation Account, journal entries for that will be:

Building A/c                           Dr.  2000

Typewriter A/c                       Dr.  4500

  To Revaluation A/c                                     6500

4. Profit on revaluation will be credited to old partners' capital accounts in their profit sharing ratio, the journal entry for that will be:

Revaluation A/c                    Dr.  6500

  To Old Partners' Cap. A/cs                        6500
answered Dec 27, 2015 by jbsclasses (3,971 points)
Definitely you are right sir but in my book revised values are not taken into account instead of this an adjustment entry is passed to adjust partner capital.
Adjustment through the capital accounts are made in those cases where you don't want to alter the values of your assets, liabilities and reserves etc.  For example if you don't want to distribute general reserve, then adjustment through capital accounts can be made.  If A and B are two partners who share profits in the ratio 3:2.  If C is admitted  for 1/4 share and partners do not wish to distribute General Reserve of Rs.10000.

     If General Reserve is not distributed them C on his admission will get 1/4 share in General Reserve equal to Rs.2500 (Rs.10000x1/4).  Can he get it in free? Of course, no.  For this purpose an adjustment entry will be:

C's Capital A/c     Dr. 2500

  To A's Capital A/c                   1500

  To B's Capital A/c                   1000

(A and B credited in their sacrificing ratio 3:2)

Obviously A and B lose Rs.1500 and Rs.1000 respectively in General Reserve so C has to compensate A and B.

sir, in my text it is written in notes that if question is silent whether to disribute reserves and accumulated profits and losses and record the revised value of assets and liabilities or not then it will be assummed that reserves and accumulated profits and losses are to be distributed to old partners in old ratio and revised values of assets and liabilities are not to be recorded in books intead of that an adjustment entry should be passed.

In the absence of specific instructions, we have to assume actions to be taken based on some reasonable logic.  

      Capital Reserve being the undistributed profits should be transferred to partnerss' capital accounts in their old profit sharing ratio because keeping the reserves in the balance sheet does not serve any particular purpose.  I mean it is not required under any disclosure norms etc.

      Goodwill is not raised in books unless the firm has paid for it.  As per AS 26 self generated assets are not shown in books.

       In case of assets and liabilities, it is always better to show them at their market value so as to give a clear picture to the users of the balance sheet (it is also a requirement of IFRS 13.

       So my view is that in absence of any specific instructions, assets and liabilities should be shown at the market value.
Thank you sir
My pleasure.