Asset Revaluation

Direct answer: The reduction in a bank loan is a gain, so option A is correct. A bank loan is a liability because the firm owes money to the bank. When a liability is reduced, the firm’s obligation becomes smaller. This increases net worth and is treated as a gain on revaluation. The reduction is credited to the Revaluation Account; the loan account is reduced by the same amount. Option A is therefore correct. Option B is wrong because an increase in a liability would create a loss, but the question says the loan is reduced. Option C is wrong because the bank loan is not an asset; it is a liability. Option D, drawings, concerns money withdrawn by a partner and has no connection with a liability adjustment. The exact amount of gain would be the old loan minus its revised amount. Memory cue: liability down means gain and Revaluation Account credit.

Investment is an asset and increase in its value is a gain. Credit only the increase to revaluation account.

Bad debt reduces the asset called debtors. It is a loss so it is debited to revaluation account.

Prepaid insurance is an asset. Recording an unrecorded asset credits gain to revaluation account.

Accrued commission is income receivable by the firm, so it is treated as an unrecorded asset. On recording it, the Asset Account is debited and the Revaluation Account is credited. This credit represents a gain, which is transferred to the old partners’ capital accounts. Option B would apply to an unrecorded liability, and no cash entry is made because the amount is only accrued, not received. Exam tip: For an unrecorded asset, remember Asset Dr. To Revaluation.

Outstanding rent is a liability so liability account is credited. Revaluation account is debited for the loss.

Increase in asset and decrease in liability are both gains. Gains are recorded on credit side of revaluation account.

Decrease in asset and increase in liability are both losses. Losses are recorded on debit side of revaluation account.

Revaluation profit = ₹70,000 − ₹30,000 = ₹40,000. This profit is distributed among the old partners in their profit-sharing ratio of 5:3. Since the total ratio is 8, B’s share = ₹40,000 × 3/8 = ₹15,000. ₹40,000 is the total revaluation profit, not B’s individual share. Exam tip: First find the excess of the credit side over the debit side, then apply the concerned partner’s fraction of the old ratio.

Since the debit total exceeds the credit total, the net revaluation loss is ₹64,000 − ₹24,000 = ₹40,000. This loss is distributed in the old profit-sharing ratio of 2:3. Therefore, A’s share is ₹40,000 × 2/5 = ₹16,000. ₹40,000 is the total loss, whereas ₹24,000 is only the credit total. Exam tip: A revaluation loss is debited to the partners’ capital accounts in their old profit-sharing ratio.

Only increase or decrease is recorded in revaluation account. Recording full new value will make profit or loss wrong.

The correct answer is A: profit will be lower or loss will be higher. A decrease in liability is actually a gain because the firm’s obligation becomes smaller. It should be credited to the Revaluation Account. If it is wrongly debited, a gain is treated as a loss. This reduces the calculated profit by the amount of the item; if the account was already showing a loss, the loss becomes larger. Option A is correct. Option B is wrong because the incorrect debit changes the balance and cannot leave profit always correct. Option C is wrong because every wrong debit affects the Revaluation Account result. Option D is wrong because this accounting error does not directly increase goodwill; goodwill is determined separately according to the agreed valuation method. For example, if liability decreases by ₹5,000, correct treatment adds ₹5,000 to credit, but wrong treatment adds ₹5,000 to debit, creating a total error of ₹10,000 in the reported result. Remember: liability reduction is a gain and must be credited.

An unrecorded liability is an obligation that existed but was not shown in the books. When it is discovered during reconstitution, it must be recognised because the firm is responsible for paying it. Recognition of the liability creates a loss in the Revaluation Account. If the firm pays it immediately in cash, cash also decreases by the amount paid. Therefore the final effects are a revaluation loss and a decrease in cash, making option A correct.

For example, if an unrecorded liability of ₹8,000 is paid, the Revaluation Account is debited by ₹8,000 because the firm has incurred a loss, and the Cash Account is credited by ₹8,000 because cash has gone out. The payment does not create a revaluation gain, increase capital, or have no effect. Although the liability itself may be recorded and then settled, the economic result remains the same: net assets fall and cash is reduced. Both parts of option A are therefore necessary.

The gain was recognized when the unrecorded asset was recorded. Sale at the same value gives no additional gain.

Correct value of assets and liabilities before admission affects old partners. Therefore gain or loss is adjusted in old ratio.

Land is an asset and its account is increased to show new value. The increase is credited to revaluation account.

After revaluation the asset is shown at revised new value. In exams do not write the old value by mistake.

Liabilities are shown at revised amount after revaluation. Only the difference goes to revaluation account.

General reserve is accumulated profit and is distributed separately among old partners. Revaluation account is for asset and liability changes.

Goodwill premium relates to sacrifice of old partners. Revaluation account is for revaluing assets and liabilities.

A revaluation profit is distributed among the old partners in their old profit-sharing ratio. B’s share in the 3:1 ratio is 1/(3+1) = 1/4. Therefore, ₹28,000 × 1/4 = ₹7,000 will be credited to B’s Capital Account. ₹14,000 would represent a half share, which is not B’s share in this ratio. Exam tip: Distribute revaluation profit or loss among the old partners in the old ratio.

A revaluation loss is borne by the old partners in their old profit-sharing ratio. A’s share is \(5/9\), so the amount debited to A’s Capital Account is \(₹36{,}000 \times 5/9 = ₹20{,}000\). ₹16,000 is B’s share because B’s ratio is \(4/9\). Exam tip: Use the old ratio for revaluation profit or loss and debit the partners’ Capital Accounts for a loss.

The governing concept is that decreases in asset values are losses and increases are gains, and the Revaluation Account records their net effect. The computer decreases from ₹80,000 to ₹70,000, producing a loss of ₹10,000. The patent increases from ₹40,000 to ₹52,000, producing a gain of ₹12,000. Net result = ₹12,000 gain − ₹10,000 loss = ₹2,000 profit. Therefore, option A is correct. Option B reverses the net direction, option C ignores the computer loss and adds both changes, while option D states only the computer loss rather than the overall result.

Revaluation account is closed after finding profit or loss. The result goes to old partners' capital accounts in old ratio.

When debit and credit are equal the revaluation result is zero. Therefore no profit or loss adjustment is made in old partners' capital.