Asset Revaluation

A revaluation loss is borne by the old partners in their old profit-sharing ratio. A’s share is 5/9, so A’s loss = ₹54,000 × 5/9 = ₹30,000. Since it is a loss, A’s Capital Account will be debited by ₹30,000. ₹54,000 is the total loss, whereas ₹24,000 results from using an incorrect fraction. Exam tip: Always distribute revaluation profit or loss among the old partners in their old profit-sharing ratio.

Unrecorded liability is a loss and is debited to Revaluation Account. The liability account should be credited.

Insurance claim receivable is an asset and gives gain. It will be credited to Revaluation Account.

The debit total exceeds the credit total in the Revaluation Account. The difference is ₹1,36,000 − ₹1,19,500 = ₹16,500, so there is a revaluation loss of ₹16,500. This loss is transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Exam tip: a higher debit total indicates a loss, whereas a higher credit total indicates a profit.

The direct answer is option C: the ₹32,000 is given to the old partners in their old profit-sharing ratio. A Revaluation Account records increases and decreases in assets and liabilities when a new partner is admitted. If its credit side is greater than its debit side, the difference is a revaluation profit. This profit arose from changes relating to the period before admission, so the incoming partner has no right to it. Step by step: credit items such as increase in assets or decrease in liabilities are compared with debit items such as decrease in assets or increase in liabilities; credit excess equals ₹32,000 profit; that profit is transferred to the old partners’ capital or current accounts; distribution is made in the old ratio. Option A is wrong because the new ratio is used for future profits, not this past revaluation profit. Option B is wrong because the new partner did not own the business during the period in which the gain arose. Option C is correct because old partners bear the old risks and receive past profits in the old ratio. Option D is wrong because sacrificing ratio is mainly used for goodwill compensation, not for distributing revaluation profit. Memory cue: past revaluation profit belongs to old partners, and old profit ratio is used.

The decrease in the value of prepaid rent is ₹24,000 − ₹15,000 = ₹9,000. A reduction in an asset is treated as a loss and is therefore debited to the Revaluation Account. ₹15,000 is the revised recoverable value, not the amount of decrease, so option C is incorrect. Exam tip: decrease in an asset is debited to Revaluation Account, whereas an increase is credited.

Decrease in furniture value = ₹72,000 × 20/100 = ₹14,400. A decrease in the value of an asset is a loss, so it is debited to the Revaluation Account. ₹57,600 is the revised value of the furniture, not the revaluation loss. Exam tip: decrease in an asset is debited, while an increase is credited.

Increase in the building’s value = ₹6,40,000 × 7.5/100 = ₹48,000. An increase in the value of an asset is a gain, so ₹48,000 is credited to the Revaluation Account. ₹6,88,000 is the revised value of the building, not the amount credited. Exam tip: In the Revaluation Account, an increase in an asset is credited and a decrease is debited.

Recognising an unrecorded intangible asset gives gain. Asset is debited and Revaluation Account is credited.

The debit side of Revaluation Account records losses or increases in liabilities. When the provision for doubtful debts is increased, the firm recognizes an additional possible loss because a smaller amount may be collected from debtors. Therefore, the increase is debited to Revaluation Account.

A decrease in an old liability is a gain, because the firm has less obligation. An unrecorded asset found is also a gain, and an increase in an asset raises the firm’s value; these items are credited. Thus the correct choice is option C, increase in provision for doubtful debts. The key is to decide whether the adjustment reduces net assets or increases them.

Increase in machinery value is asset increase so it is a gain. Gains are credited to Revaluation Account.

The direct answer is Option A: Revaluation Account may be needed to recognise the gain or loss belonging to the old partners. A book value is the amount currently shown in the books, while market value is the amount the asset may currently be worth. On admission, an old asset may have a changed market value even if the books have not yet been permanently changed. The difference represents a gain or loss that arose before the new partner joined. Revaluation Account records this difference and transfers the net result to the old partners, so the incoming partner does not receive an unfair share of an old gain or bear an old loss. Option A is correct. Option B is wrong because the account is not primarily made to reduce the new partner’s capital. Option C is wrong because it has no purpose of closing the bank account. Option D is wrong because valuation does not require selling all assets. The account can record an adjustment without any actual sale. Exam cue: revaluation protects the old partners’ claim over changes existing before admission.

The total ratio is 1+2+2=5, and C’s share is 2/5. Therefore, the amount debited to C’s account is ₹75,000 × 2/5 = ₹30,000. A revaluation loss is debited to the partners’ Capital or Current Accounts, so the ₹25,000 credit option is incorrect. Exam tip: Always distribute revaluation profit or loss in the old profit-sharing ratio.

The direct answer is option B: ₹22,000 should be credited to the Revaluation Account because a decrease in liability is a gain. A liability is an amount the firm must pay or settle. When that obligation becomes smaller, the firm’s burden decreases and its net position improves. In revaluation accounting, an increase in liability is a loss and is debited, while a decrease in liability is a gain and is credited. Step by step: the liability decreases by ₹22,000; the firm now owes ₹22,000 less; this creates a gain; therefore Revaluation Account is credited by ₹22,000. Option A is wrong because debiting would treat the decrease as a loss, which reverses the rule. Option B is correct because the firm benefits when an existing liability is reduced. Option C is wrong because the adjustment belongs to the firm’s revaluation process, not directly to the new partner’s account. Option D is wrong because goodwill is a separate matter concerning the firm’s reputation and earning capacity; a liability reduction is not automatically goodwill. The opposite rule is also useful: an increase in liability is debited as a loss. Memory cue: less liability means less burden, so credit revaluation.

Finding an unrecorded asset gives gain to the firm. Correct entry debits asset and credits Revaluation Account.

The decrease in the value of computers by ₹20,000 is a loss in the Revaluation Account. The decrease in the loan by ₹8,000 reduces the liability and therefore represents a gain. Hence, the net effect is ₹20,000 loss − ₹8,000 gain = ₹12,000 net loss. Exam tip: A decrease in an asset is a loss, whereas a decrease in a liability is a gain.

The worthless portion causes a loss of ₹28,000, while the increase in the remaining stock creates a gain of ₹12,000. Therefore, the net effect is ₹12,000 − ₹28,000 = ₹16,000 loss. This net loss is debited to the Revaluation Account. Exam tip: treat a decrease in an asset as a loss and an increase as a gain, then find the difference.

The direct answer is option A: ₹4,200 is debited to the Revaluation Account. Prepaid insurance is initially an asset because the firm has paid for insurance that will provide benefit in a future period. Here the balance sheet shows ₹12,600, but ₹4,200 of the insurance has already expired. The expired part no longer gives any future benefit, so it must be removed from the asset. Removing an asset or reducing its value is a loss in revaluation. Step by step: total prepaid insurance is ₹12,600; expired portion is ₹4,200; remaining asset is ₹12,600 − ₹4,200 = ₹8,400; the decrease of ₹4,200 is debited to Revaluation Account. Option A is correct because an expired asset creates a loss. Option B is wrong because a credit represents a gain or increase, not the loss caused by expiry. Option C is wrong because the whole ₹12,600 has not expired; ₹8,400 remains useful. Option D is wrong because the expired amount must be adjusted, so it cannot be ignored. Memory cue: an expired prepaid expense is no longer an asset, so debit the expired portion.

The actual tax liability exceeds the existing provision by ₹5,800 (₹42,800 − ₹37,000). This increase in liability represents a revaluation loss, so ₹5,800 is debited to the Revaluation Account. Exam tip: an increase in a liability is debited to the Revaluation Account, while a decrease is credited.

The old provision was ₹56,000, but the actual liability is only ₹49,000. Thus, the excess provision of ₹7,000 is written back and credited to the Revaluation Account as a gain. ₹49,000 is the total liability, not the gain. Exam tip: A decrease in a liability or provision results in a gain credited to the Revaluation Account.

In revaluation only increase or decrease is recorded. The balance sheet shows the revised value.

When profit or loss is adjusted without changing book values Memorandum Revaluation Account may be used. This is an advanced exam point.

The correct answer is B: old ratio. A Memorandum Revaluation Account is used when partners want to record changes in asset and liability values without permanently changing the book values. Its first part works like an ordinary Revaluation Account. Since the revaluation relates to the period before the new partner’s admission, its profit or loss belongs only to the old partners. Therefore the profit in the first part is shared in the old profit-sharing ratio. Option A, the new ratio, applies to the period after admission, not this first part. Option C, equal ratio, is used only when the agreement says so, not automatically. Option D, sacrificing ratio, is used mainly for goodwill compensation, not for first-part memorandum revaluation profit. Remember: first part equals old revaluation; second part is reversed and follows the new ratio.

Reverse entries restore original book values. Their result is shared among all partners in the new ratio.

On reversal the earlier increase is reversed so asset is treated as decreasing. It gives a loss effect.