Book debts was ₹1,00,000 as given in the balance sheet as on 31st March 2022. On 1st April, 2022 the partners decided to share profits equally instead of distributing the profits in their capital ratio. On that date, bad debts for ₹40,000 were written off and a new provision for doubtful debt is to be maintained @5%. How will you treat their adjustment in revaluation account of the firm?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Revaluation account - debited by ₹43,000
On a change in profit sharing ratio, a fall in the value of assets is a loss debited to the Revaluation Account.
Bad debts written off = ₹40,000
Debtors left = ₹1,00,000 − ₹40,000 = ₹60,000
New provision for doubtful debts = 5% of ₹60,000 = ₹3,000
Total fall in debtors = ₹40,000 + ₹3,000 = ₹43,000, debited to the Revaluation Account