Asset Revaluation

Correct answer: A. ₹27,000 profit

Revaluation records changes in the values of assets and liabilities at the time of reconstitution. An increase in an asset increases the firm’s net assets, so it is a gain and is credited to Revaluation Account. An increase in a liability increases the firm’s obligation, so it is a loss and is debited to that account. The net result is calculated as gain minus loss: ₹45,000 − ₹18,000 = ₹27,000. Since the gain is greater than the loss, the account shows a net profit of ₹27,000, which is transferred to the old partners in their old ratio. Therefore option A is correct; ₹63,000 would incorrectly add two unlike effects.

Correct answer: B. ₹7,000 debit

Only the change in the liability, not its full revised balance, is recorded in Revaluation Account. The liability rises from ₹45,000 to ₹52,000, so the increase is ₹52,000 − ₹45,000 = ₹7,000. A higher liability means that the firm now has an additional obligation; it reduces net assets and therefore represents a revaluation loss. Losses are debited to Revaluation Account. The corresponding credit is made to the liability account to bring it to the revised amount of ₹52,000. Thus the correct treatment is a debit of ₹7,000. Crediting it would treat a loss as a gain, while debiting ₹52,000 or crediting ₹45,000 records the wrong amount. Hence option B is correct.

Correct answer: A. It should be debited because liability increase is a loss

An increase in a liability means that the firm must bear an additional obligation. It reduces the net worth of the business and is therefore a revaluation loss. Under the rules of Revaluation Account, losses are debited and gains are credited. Consequently, the ₹11,000 liability increase should be debited to Revaluation Account, with the liability account credited to reflect the revised obligation. The accountant’s credit has reversed the normal treatment and would incorrectly show a gain. It should be corrected by transferring or reversing the wrongly credited amount and recording the liability increase on the debit side. The amount remains ₹11,000; no capital account entry is the primary correction. Hence option A is correct.

Correct answer: A. ₹12,000 loss debit

Revaluation is based on the revised agreed value of an asset, not on whether the asset has physically been sold. The vehicle’s book value is ₹90,000 and its value for the reconstituted firm is reduced to ₹78,000. The decrease is ₹90,000 − ₹78,000 = ₹12,000. A decrease in an asset is a loss because the firm’s net assets are reduced by that amount. Therefore Revaluation Account is debited by ₹12,000 and the vehicle account is credited by ₹12,000, bringing it to the revised value. No sale is required for this adjustment. Option D wrongly treats the full revised value as a loss, while option C ignores the agreed revaluation. Hence option A is correct.

Correct answer: A. ₹14,000

The governing rule is that a decrease in the value of an asset is a loss and is debited to the Revaluation Account. Therefore, the decrease in stock of ₹14,000 is recorded on the debit side. A decrease in a liability, such as a loan, reduces the firm’s obligation and is treated as a gain; hence, the loan decrease of ₹9,000 is credited to the Revaluation Account. It is not added to the stock decrease for finding the debit entry. Thus, ₹14,000 is the debit-side amount, while ₹9,000 appears on the credit side. Options ₹23,000 and ₹5,000 incorrectly combine or offset the two separate entries.

Correct answer: A. ₹7,000 debit

The relevant principle is that a reduction in the book value of an asset creates a revaluation loss. Debtors originally stood at ₹65,000, but their revised value is only ₹58,000. The decrease is therefore calculated as ₹65,000 − ₹58,000 = ₹7,000. Since there was no existing provision, no further adjustment is needed before making this comparison. The ₹7,000 loss is debited to the Revaluation Account, and the revised balance sheet will show debtors at ₹58,000. A credit entry would represent an increase or gain, not a decrease. The figures ₹58,000 and ₹65,000 are balances, not the amount of the revaluation adjustment.

Correct answer: A. ₹37,000 gain

The governing rule for unrecorded items is that an unrecorded asset brought into the books is a gain, whereas an unrecorded liability discovered during reconstitution is a loss. The trademark adds ₹55,000 to the firm’s net assets and is credited to the Revaluation Account. The tax liability adds an obligation of ₹18,000 and is debited. Therefore, the net gain is calculated as ₹55,000 − ₹18,000 = ₹37,000. It is not ₹73,000 because the liability must be deducted, not added. A ₹37,000 loss reverses the signs, and ₹18,000 ignores the trademark gain. Thus, option A correctly shows the net revaluation result.

Correct answer: B. ₹20,000 debit

The governing principle is that an unrecorded expense or liability discovered during reconstitution must be recognised, and an increase in liabilities is a revaluation loss. The unpaid interest of ₹20,000 is an additional obligation separate from the principal bank loan of ₹3,00,000. Therefore, only ₹20,000 is debited to the Revaluation Account. The principal amount is not revalued merely because interest is outstanding, so ₹3,00,000 and ₹3,20,000 are inappropriate amounts. It cannot be credited because discovering a liability reduces net assets rather than increasing them. Hence, option B correctly records the additional liability and resulting loss.

Correct answer: A. ₹12,000

The governing rule is that a revaluation loss is transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. The ratio 5:3:2 totals 10 parts. The third partner has two parts, so his share of the loss is ₹60,000 × 2/10 = ₹12,000. Because the amount is a loss, ₹12,000 is debited to his account; a loss reduces his capital or current account. Thus option A is correct. Option B corresponds to the second partner’s three-tenths share, option C corresponds to the first partner’s five-tenths share, and option D represents only one-tenth, so none of those amounts applies to the third partner.

Correct answer: B. Revaluation loss

The governing concept is that a liability discovered during reconstitution reduces the firm’s net assets and therefore creates a loss. The obligation to refund the government grant was not recorded earlier, so it must now be recognised at ₹33,000. This amount is debited to the Revaluation Account as an unrecorded liability and is ultimately transferred to the old partners in their old profit-sharing ratio. It is not a capital gain because no increase in owners’ capital or asset value has occurred. It is not a cash receipt, since the finding represents an obligation to pay, not money received. A revaluation gain would require an increase in assets or decrease in liabilities.

Correct answer: A. ₹13,000 profit

The governing principle is that an increase in assets is a revaluation gain, while an increase in liabilities is a revaluation loss. The asset increase contributes ₹49,000 to the credit side, and the liability increase contributes ₹36,000 to the debit side. The net result is therefore calculated as ₹49,000 − ₹36,000 = ₹13,000 profit. The amounts should not be added because they have opposite effects on the Revaluation Account. ₹85,000 incorrectly treats both increases as gains. ₹13,000 loss reverses the stronger asset increase, and ₹36,000 loss ignores the asset gain. Thus, the correct result is a net revaluation profit of ₹13,000.

Correct answer: A. No net effect

The governing concept is adjustment of bad debts against an existing provision during reconstitution. The bad debts of ₹7,000 are recorded as a loss, but the old provision of exactly ₹7,000 is already available to absorb that loss. Therefore, the bad-debts amount is charged against the provision rather than creating a fresh debit balance in Revaluation Account. The net amount is ₹7,000 − ₹7,000 = nil. Hence option A is correct. Option B would be correct only if no provision existed, while option D incorrectly adds the bad debts and provision instead of offsetting them. Option C reverses the direction of the adjustment.

Correct answer: C. ₹4,000

The governing rule is that an existing provision is used to absorb the amount of bad debts before determining the additional loss. Bad debts total ₹10,000, while the old provision provides ₹6,000 of adjustment. The uncovered portion is therefore ₹10,000 − ₹6,000 = ₹4,000. This uncovered amount is the loss that must be debited to Revaluation Account. Thus option C is correct. Option A incorrectly adds the bad debts and provision, although the provision reduces the loss. Option B ignores the available provision, and option D treats the provision itself as the loss. Since no new provision is required, there is no further adjustment.

Correct answer: A. Profit of ₹26,000

The governing concept is that an increase in an asset creates a revaluation gain, whereas an increase in a liability creates a revaluation loss. The asset-side gain is ₹72,000 and the liability-side loss is ₹46,000. Therefore, net revaluation result = ₹72,000 − ₹46,000 = ₹26,000 profit. This profit is credited to Revaluation Account and later distributed among the old partners in their old profit-sharing ratio. Hence option A is correct. Option C incorrectly adds both changes, although the liability increase must be deducted. Option B reverses the sign of the net result, and option D ignores the asset gain completely.

Correct answer: B. Credit to Revaluation Account

The governing concept is recognition of an omitted accrued income during reconstitution. Commission receivable is an asset because it represents an amount that the firm has earned and expects to collect. Since it was not previously recorded, recognizing ₹15,200 increases the firm’s net assets and creates a revaluation gain. The appropriate entry is Commission Receivable Account Dr. ₹15,200; To Revaluation Account ₹15,200. Therefore the Revaluation Account receives a credit, making option B correct. Option A treats an asset gain as a loss. Option C incorrectly creates a liability to creditors, and option D wrongly charges the new partner’s capital even though the item relates to the firm’s existing position.

Correct answer: B. Loss debited to old partners

The governing concept is interpretation of the balancing figure in Revaluation Account. Debit entries generally represent losses, such as decreases in assets, increases in liabilities, or expenses, while credit entries represent gains. If the debit side exceeds the credit side by ₹59,000, the account has a net debit balance of ₹59,000. This is a revaluation loss. Because the revaluation concerns the firm’s position before the incoming partner becomes entitled to future profits, the loss is transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Thus option B is correct. Options A and C describe profit, and option D confuses revaluation with a capital transaction.

Correct answer: A. Debit ₹7,500

The governing concept is reduction of an asset to its realistic or beneficial value during revaluation. The books show prepaid salary of ₹30,000, but the firm will receive benefit worth only ₹22,500. The excess recorded value is therefore ₹30,000 − ₹22,500 = ₹7,500. This reduction represents a loss because the asset is overstated by ₹7,500. The asset is reduced and Revaluation Account is debited by ₹7,500. Hence option A is correct. Option B gives the wrong direction for a fall in value. Option C records the remaining useful value rather than the reduction, while option D treats the original book value as a gain without considering its reduced benefit.

Correct answer: A. ₹7,500 debit

The governing concept is that an asset which is no longer recoverable or adjustable must be written off during reconstitution. Only the non-adjustable portion is affected; the remaining ₹40,500 continues to be treated as an asset. Writing off ₹7,500 reduces the firm’s net assets and therefore represents a loss. Losses are recorded on the debit side of the Revaluation Account. Hence, ₹7,500 is debited to Revaluation Account and ultimately transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Option B reverses the accounting treatment, while Option C wrongly writes off the entire advance tax balance.

Correct answer: A. ₹52,000

The governing rule is that a revaluation profit arising at the time of admission belongs to the existing partners because it relates to changes in assets and liabilities before the new partner joins. It is therefore distributed in the old ratio, not in the new ratio. The old ratio is 13:11, so the total number of parts is 24. A’s share is calculated as ₹96,000 × 13/24 = ₹4,000 × 13 = ₹52,000. Thus option A is correct. The new ratio 5:4:3 must not be used for this adjustment; using it would incorrectly give the incoming partner a share in a pre-admission gain.

Correct answer: A. ₹2,160 credit

The governing concept is adjustment of an existing provision to the amount required after revaluation. First calculate the new provision: 4% of ₹216,000 = ₹8,640. The old provision already standing is ₹10,800, so it exceeds the required provision by ₹10,800 − ₹8,640 = ₹2,160. This excess is released, increasing the firm’s net assets and creating a revaluation gain. A gain is credited to the Revaluation Account. Therefore, ₹2,160 is credited. Option C treats the entire new provision as a loss instead of comparing it with the old provision, while option B reverses the effect.