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Difficulty: MediumRevaluation of Assets and Liabilities

Emeka and Chidi are partners sharing profits and losses in the ratio 3:13:1. On 1st July 2025, they agree to revalue their assets and liabilities as follows: Machinery recorded at ₦150,000 is revalued to ₦180,000; Furniture recorded at ₦80,000 is revalued to ₦70,000; a provision for doubtful debts of 5%5\% is created on Debtors of ₦60,000; and an unrecorded legal expense of ₦5,000 is recognized. What is Emeka's share of the net revaluation profit or loss?

  1. ₦9,000 profitAnswer
  2. B
    ₦3,000 profit
  3. C
    ₦15,000 profit
  4. D
    ₦9,000 loss

Answer

₦9,000 profit
The net revaluation profit is calculated by subtracting all losses and provisions from the asset appreciation gains: +₦30,000 (Machinery) - ₦10,000 (Furniture) - ₦3,000 (Provision) - ₦5,000 (Legal Expense) = ₦12,000 net profit. Multiplying ₦12,000 by Emeka's share of 3/4 yields ₦9,000 profit.

Step-by-Step Solution

1
Calculate gains and losses on asset and liability revaluation
Gain on Machinery = ₦180,000 - ₦150,000 = +₦30,000. Loss on Furniture = ₦80,000 - ₦70,000 = -₦10,000. Provision for Doubtful Debts = 5% of ₦60,000 = -₦3,000. Unrecorded Legal Expense = -₦5,000.
Increases in asset values are gains (credited), while decreases in asset values, new provisions, and unrecorded liabilities are losses (debited) in the Revaluation Account.
2
Calculate net profit or loss on revaluation
Net Revaluation Profit = ₦30,000 - ₦10,000 - ₦3,000 - ₦5,000 = ���12,000 profit.
Total gains exceed total losses by ₦12,000, creating a net credit balance in the Revaluation Account.
3
Share the net revaluation profit to Emeka using the old profit-sharing ratio
Emeka's Share = 33+1×₦12,000=34×₦12,000=₦9,000\frac{3}{3 + 1} \times ₦12,000 = \frac{3}{4} \times ₦12,000 = ₦9,000 profit.
Revaluation profit or loss belongs to existing partners and must be divided using their old profit-sharing ratio.

Key Concept

Revaluation Account Profit Determination and Allocation
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Topics

Revaluation of Assets and Liabilities

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