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INVESTMENT FLUCTUATION RESERVE ACCOUNTING TREATMENT AT THE TIME OF ADMISSION OF A PARTNER
Investment Fluctuation reserve is created out of firm’s profits to meet the fall in the market value of Investments. The difference between the book value and market value of Investment ( Market value of investment being lower) is adjusted against Investment Fluctuation reserve.Excess of Investment Fluctuation reserve is credited to partner’s capital Accounts in their old profit sharing ratio.
The Investment Fluctuation reserves are having a credit balance and appear in the liability side of Balance Sheet and Investments will be shown in the assets side of the Balance Sheet.
At the time of Admission of a Partner, the accounting treatment of Investment Fluctuation reserve is as follows:-
There are three situations arise when such reserves appear in the Balance Sheet:
1. When the Investment made are having a market value equal to book value:-
When the market value of investments is equal to the value of investments shown in the books, then there is no loss or gain on valuation of the investment.
And hence, no adjustment for valuation shall be investment need to be made. Therefore, Investment fluctuation reserve in Balance Sheet should be treated as free reserves and shall be distributed among the existing partners in the old profit sharing.
Investment fluctuation reserve A/c Dr
To Old Partner’s Capital/ Current A/c (in old ratio)
(Being the amount of Investment fluctuation reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio)
2. When the market value of investments is less than the book value of such investment shown in Balance Sheet:-
When the market value of the investment made is less than the carrying value of investment shown in the Balance Sheet, there is a loss on revaluation of such investment. Such losses will be adjusted against the investment fluctuation reserve.
a. When the loss on revaluation of investment is equal to the balance of Investment Fluctuation reserve shown in Balance Sheet.
Investment fluctuation reserve A/c Dr.
To Investments A/c (in old ratio)
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve)
b. When the loss on revaluation of investment is less than the balance of Investment Fluctuation reserve shown in the Balance Sheet.
Investment fluctuation reserve A/c Dr.
To Investments A/c
To Old Partner’s Capital/ Current A/c (in old ratio)
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve and Balance credited to old partner’s capital/Current a/c)
c. When the loss on revaluation of investment is more than the balance of Investment Fluctuation reserve shown in the Balance Sheet.
Investment fluctuation reserve A/c Dr.
Revaluation A/c Dr.
To Investments A/c (in old ratio)
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve and short fall charged to revaluation Account)
Old Partner’s Capital/ Current A/c Dr.
To Revaluation A/c
(Being loss on revaluation transferred to old partners capital/current account)
3. When the market value of investments is more than the book value of such investment shown in Balance Sheet:-
Investment fluctuation reserve A/c Dr.
To Old Partner’s Capital/ Current A/c (in old ratio)
(Being the amount of Investment fluctuation reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio)
Investment A/c Dr.
To Revaluation A/c
(Increase in the value of investment)
Revaluation A/c Dr.
To Old Partner’s Capital/ Current A/c (in old ratio)
(Being Profit on revaluation transferred to old partners capital/current account)
ALSO READ : REVALUATION ACCOUNT/ PROFIT & LOSS ADJUSTMENT ACCOUNT
For Example- A and B are partners as they share profits in the proportion of 3:2. As on 31st March Balance sheet shown Investment fluctuation reserve Rs 30,000 and Investment Rs. 50,000. On the same date, C is admitted into partnership for 1/5th share of profit. Pass accounting Entries from the following cases-
- Market value of Investment Rs. 50,000.
- Market value of Investment Rs. 40,000.
- Market value of Investment Rs. 20,000.
- Market value of Investment Rs. 15,000.
- Market value of Investment Rs. 60,000.
1. Market value of Investment Rs. 50,000
The market value of investments is equal to the value of investments shown in the books, then there is no loss or gain on valuation of the investment. In this case entire amount of Investment fluctuation reserve distributed among the partners in their old ratio. Following entry will be made-
Investment fluctuation reserve A/c Dr 30,000
To A’s Capital A/c 18,000
To B’s Capital A/c 12,000
(Being the amount of Investment fluctuation reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio 3:2)
2. Market value of Investment Rs. 40,000.
Book value of Investment Rs. 50,000
Market value of Investment Rs. 40,000
Loss on revaluation of investment Rs. 10,000 adjusted against Investment fluctuation reserve and Balance of Investment fluctuation reserve credited to old Old Partner’s Capital Accounts in their old profit sharing ratio.
Investment fluctuation reserve A/c Dr. 30,000
To Investments A/c 10,000
To A’s Capital A/c 12,000
To B’s Capital A/c 8,000
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve and Balance credited to old partner’s capital/Current a/c)
3. Market value of Investment Rs. 20,000.
Book value of Investment Rs. 50,000
Market value of Investment Rs. 20,000
Loss on revaluation of investment Rs. 30,000 adjusted against Investment fluctuation reserve.
Investment fluctuation reserve A/c Dr. 30,000
To Investments A/c 30,000
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve.)
4. Market value of Investment Rs. 15,000.
Book value of Investment Rs. 50,000
Market value of Investment Rs. 15,000
Loss on revaluation of investment Rs. 35,000.
Rs. 30,000 adjusted against Investment fluctuation reserve and short fall Rs.5,000 charged to revaluation Account.
Investment fluctuation reserve A/c Dr. 30,000
Revaluation A/c Dr. 5,000
To Investments A/c 35,000
(Being loss on revaluation of investment adjusted against Investment fluctuation reserve and short fall charged to revaluation Account)
A’s Capital A/c Dr. 3,000
B’s Capital A/c Dr. 2,000
To Revaluation A/c 5,000
(Being loss on revaluation transferred to old partners capital/current account in their old ratio 3:2)
5. Market value of Investment Rs. 60,000.
Book value of Investment Rs. 50,000
Market value of Investment Rs. 60,000
Profit on revaluation of investment Rs. 10,000 credited to revaluation Account and entire amount of Investment fluctuation reserve distributed among the partners in their old ratio.
Investment A/c Dr. 10,000
To Revaluation A/c 10,000
(Profit on revaluation of investment Rs. 10,000 credited to revaluation Account)
Investment fluctuation reserve A/c Dr 30,000
To A’s Capital A/c 18,000
To B’s Capital A/c 12,000
(Being the amount of Investment fluctuation reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio 3:2)
Revaluation A/c Dr. 10,000
To A’s Capital A/c 6,000
To B’s Capital A/c 4,000
(Being profit on revaluation transferred to old partners capital/current account in their old ratio 3:2)
ALSO READ : ACCOUNTING TREATMENT OF GOODWILL AT THE TIME OF ADMISSION OF A NEW PARTNER