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Difficulty: MediumRevaluation of Assets and Liabilities

Obinna and Nneka are in a partnership sharing profits and losses in the ratio 3:23:2. On 1st July 2025, they agreed to revalue their business assets and liabilities. Land and Buildings (book value ₦500,000\text{₦}500,000) was revalued at ₦650,000\text{₦}650,000, Plant and Machinery (book value ₦300,000\text{₦}300,000) was reduced to ₦240,000\text{₦}240,000, a provision for doubtful debts of 5%5\% was created on Debtors of ₦100,000\text{₦}100,000, and an unrecorded accrued expense of ₦15,000\text{₦}15,000 was recognized. What is Obinna's share of the revaluation profit in Naira (₦\text{₦})?

Answer: 42000 ₦

Answer

Obinna's share of the revaluation profit is ₦42,000.
The total appreciation in asset value gives a revaluation gain of ₦150,000 (Land & Buildings). Total decreases and new liabilities create revaluation losses of ₦80,000 (Plant & Machinery ₦60,000 + Provision for Doubtful Debts ₦5,000 + Accrued Expense ₦15,000). The net revaluation profit is ₦70,000 (₦150,000 - ₦80,000). Allocating this profit according to the existing ratio of 3:2 gives Obinna 3/5 × ₦70,000 = ₦42,000.

Step-by-Step Solution

1
Determine total revaluation gains
Gain on Land and Buildings = ₦150,000
Land and Buildings increased from ₦500,000 to ₦650,000.
2
Determine total revaluation losses
Total revaluation losses = ₦80,000
Sum of asset reduction (₦60,000), new provision for doubtful debts (₦5,000), and accrued expense liability (₦15,000).
3
Calculate net profit on revaluation
Net profit = ₦70,000
Revaluation gains (₦150,000) exceed revaluation losses (₦80,000) by ₦70,000.
4
Apportion net profit to Obinna using his share of the profit ratio
Obinna's share = ₦42,000
Obinna receives 3/5 of the total revaluation profit (3/5 × ₦70,000).

Key Concept

Calculation and Division of Net Profit on Partnership Revaluation
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Topics

Revaluation of Assets and Liabilities

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