Yashoda and Devi were partners in a firm sharing profits and losses in the ratio of 3:2. On 31st March, 2025, their balance sheet showed land and building at Rs 20,00,000 and furniture at Rs 6,00,000. On that date they admitted Poonam as a new partner for 1/4th share in the future profits of the firm. On Poonam's admission, it was found that land and building is undervalued by 20%. On Poonam's admission, Revaluation Account will be:
Yashoda and Devi were partners in a firm sharing profits and losses in the ratio of 3:2. On 31st March, 2025, their balance sheet showed land and building at Rs 20,00,000 and furniture at Rs 6,00,000. On that date they admitted Poonam as a new partner for 1/4th share in the future profits of the firm. On Poonam's admission, it was found that land and building is undervalued by 20%. On Poonam's admission, Revaluation Account will be:
Show Hint
- debited by Rs 5,00,000
- debited by Rs 25,00,000
- credited by Rs 25,00,000
- credited by Rs 5,00,000
The Correct Option is D
Solution and Explanation
An asset is undervalued when its book value is lower than its true value. Here the book value of the land and building is 80 percent of the true value.
Step 2: Find the true value:
Book value is Rs. 20,00,000, which is 80 percent of the true value.
True value = 20,00,000 / 80 x 100 = Rs. 25,00,000.
Step 3: Find the effect on the Revaluation Account:
Increase in the value = 25,00,000 - 20,00,000 = Rs. 5,00,000. This is a gain to the firm.
A gain on revaluation is credited to the Revaluation Account. Furniture is not revalued, so it has no effect.
Step 4: Why the other options are wrong:
Option (A) has the correct amount, but a debit means a loss. Here the asset value rises, so the account is credited.
Option (B) uses Rs. 25,00,000, which is the new value of the asset, not the change in value, and it is also on the debit side.
Option (C) uses Rs. 25,00,000 too. The account shows only the change in value, which is Rs. 5,00,000.
Final Answer:
Revaluation Account is credited by Rs. 5,00,000, option (D).
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