Question

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 – 22,500

1. State the reason for reconstitution

2. Give a journal entry to adjust the revaluation profit through capital accounts of partners.

Answer 1

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.