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Difficulty: HardRevaluation of Assets and Liabilities

Kemi and Sule are partners sharing profits and losses in the ratio 3:23:2. On the admission of Audu into the firm, the assets and liabilities were revalued as follows:
- Building (Book Value ₦800,000₦800,000) revalued at ₦1,000,000₦1,000,000
- Furniture (Book Value ₦400,000₦400,000) revalued at ₦320,000₦320,000
- Provision for Doubtful Debts (Existing balance ₦15,000₦15,000) to be increased to ₦25,000₦25,000
- An unrecorded accrued liability of ₦10,000₦10,000 to be recognized

What is Kemi's share of the revaluation profit or loss?

  1. A
    ₦40,000 profit
  2. ₦60,000 profitAnswer
  3. C
    ₦51,000 profit
  4. D
    ₦60,000 loss

Answer

Kemi's share of the revaluation profit is ₦60,000 profit.
The net revaluation gain is ₦100,000₦100,000, calculated by adding the gain on building (₦200,000₦200,000) and subtracting the losses on furniture (₦80,000₦80,000), increase in doubtful debt provision (₦10,000₦10,000), and unrecorded liability (₦10,000₦10,000). Sharing this net gain in the old ratio (3:23:2) gives Kemi a 3/53/5 share, which equals ₦60,000₦60,000 profit.

Step-by-Step Solution

1
Calculate individual gains and losses on revaluation
Building appreciation = ₦1,000,000−₦800,000=+₦200,000₦1,000,000 - ₦800,000 = +₦200,000 (Gain); Furniture depreciation = ₦400,000−₦320,000=−₦80,000₦400,000 - ₦320,000 = -₦80,000 (Loss); Increase in Provision for Doubtful Debts = ₦25,000−₦15,000=−₦10,000₦25,000 - ₦15,000 = -₦10,000 (Loss); Unrecorded Liability = −₦10,000-₦10,000 (Loss).
Revaluation gain arises when assets appreciate or liabilities decrease; revaluation loss arises when assets depreciate or liabilities increase.
2
Determine the net profit or loss on revaluation
Net Profit = ₦200,000−₦80,000−₦10,000−₦10,000=₦100,000₦200,000 - ₦80,000 - ₦10,000 - ₦10,000 = ₦100,000 Profit.
Summing all revaluation credits (gains) and debits (losses) yields the total revaluation surplus.
3
Apportion the net revaluation profit to Kemi using the old profit sharing ratio
Kemi's share = 33+2×₦100,000=35×₦100,000=₦60,000\frac{3}{3+2} \times ₦100,000 = \frac{3}{5} \times ₦100,000 = ₦60,000 Profit.
Revaluation gains/losses must strictly be distributed to existing partners using their old profit-sharing ratio.

Key Concept

Apportionment of Net Revaluation Profit/Loss to Existing Partners in Old Ratio
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Topics

Revaluation of Assets and Liabilities

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