These are the options for the Question: L, M and N are partners sharing profits in the ratio of 5: 3: 2. They
decided to share profits equally with effect from 1″ April, 2022. On that date, there was a balance of % 2,00,000 in General Reserve and 4 credit balance of 2 4,00,000 in the Profit and Loss Account. The Journal Entry for the above on account of change in profit sharing ratio will be:
JOURNAL
Particulars Debit Credit
Amt. (%) | Amt. (%)
(A) | General Reserve A/c Dr. | 2,00,000
To Profit and Loss A/e 2,00,000
(B) | M’s Capital A/c Dr. 80,000
N’s Capital A/c Dr. 20,000
To L’s Capital A/c 1,00,000
(C) | General Reserve A/c Dr. | 2,00,000
Profit and Loss A/c Dr. | 4,00,000
To L’s Capital A/c 2,00,000
To M’s Capital A/c 2,00,000
To N’s Capital A/c 2,00,000
(D)_| General Reserve A/c Dr. | 2,00,000
eo Profit and Loss A/e Dr. | 4,00,000
To L’s Capital A/c 3,00,000
To M’s Capital A/e 1,80,000
To N’s Capital A/c 1,20,000
The correct answer is (D): The journal entry for the change in profit sharing ratio will be: Particulars Debit Credit General Reserve A/c Dr. 2,00,000 Profit and Loss A/c Dr. 4,00,000 To M’s Capital A/c 1,80,000 (5/10th of 3,60,000) To N’s Capital A/c 1,20,000 (3/10th of 3,60,000) To L’s Capital A/c 3,00,000 (2/10th of 3,60,000) Explanation: As the partners have decided to share profits equally with effect from 1st April, 2022, the new profit sharing ratio will be 5:5:5. This means that each partner’s share in the profits will be equal. Therefore, the total profits will be divided into five equal parts and each partner will get one-fifth of the profits. In this case, the General Reserve of Rs. 2,00,000 will not be distributed among the partners, as it is a reserve and not a profit. Hence, it will be transferred to the partners’ Capital Accounts in the old profit sharing ratio of 5:3:2. Also, the credit balance in the Profit and Loss Account of Rs. 4,00,000 will be distributed among the partners in the new profit sharing ratio of 5:5:5. Therefore, M will get 5/10th of Rs. 4,00,000, i.e., Rs. 1,80,000, N will get 3/10th of Rs. 4,00,000, i.e., Rs. 1,20,000 and L will get 2/10th of Rs. 4,00,000, i.e., Rs. 2,00,000.
