An extract of Balance Sheet as on 31 March 2023

Additional Information :

Premises found under valued by 15% and provision for legal damages to be created upto ₹6,000.

On the basis of above information pass journal entry at the time of reconstitution of firm.

Premises A/c Dr ₹15,000
Revaluation A/c Dr. ₹1,200
     To Revaluation A/c ₹15,000
     To Provision for legal damages A/c ₹1,200

The correct answer is option 2-
Premises A/c Dr ₹15,000
Revaluation A/c Dr. ₹1,200
     To Revaluation A/c ₹15,000
     To Provision for legal damages A/c ₹1,200

Provision for legal damages increase by (6000- 4800) ₹1200 which is loss for the firm so journal entry for this-
Provision for legal damages A/c Dr. 1200
           To Revaluation A/c 1200

Premises value = ₹85,000
Its undervalued by 15%
85 % = 85000
100% = 85000/85 X 100
         = 1,00,000

It means premises are undervalued by ₹15,000. Journal entry for this correction is as follows-
Premises A/c Dr. ₹15,000
        To Revaluation A/c   ₹15,000

So, combined journal entry for both is as follows-
Premises A/c Dr ₹15,000
Revaluation A/c Dr. ₹1,200
     To Revaluation A/c ₹15,000
     To Provision for legal damages A/c ₹1,200