Revaluation of partnership assets

Revaluation of partnership assets

Revaluation of partnership assets is an important process in the life of a partnership, as it ensures that the assets are properly valued, and the capital accounts of partners reflect their fair share of the business. Revaluation is typically done in situations where there are changes in the partnership, such as when a new partner is admitted, a partner leaves, profit-sharing ratios change, or the business is sold.

Revaluation of assets when a new partner is admitted

When a new partner is admitted into the partnership, the assets of the partnership may need to be revalued to reflect their current market value. This ensures that the new partner's capital contribution is aligned with the true value of the business.

Process

1. The assets (e.g., buildings, machinery, inventory) of the business are revalued at their current market prices.
2. The increase or decrease in asset values is recorded as a revaluation surplus or loss.
3. The revaluation surplus (or loss) is then distributed among the existing partners in their profit-sharing ratio.
4. The new partner's share of goodwill is also taken into account, and their capital account is credited with the agreed share of goodwill.

Example

1. The partnership has assets valued at TZS 500,000, but after revaluation, the assets are now worth TZS 550,000.
2. The revaluation surplus of TZS 50,000 is credited to the existing partners' capital accounts based on their profit-sharing ratio.

Revaluation of assets when a partner leaves the firm

When a partner leaves the partnership, the assets must be revalued to determine their fair value at the time of the partner's departure. This ensures that the outgoing partner receives a fair share of the business.

Process

1. The assets are revalued to their current market value.
2. The revaluation surplus or deficit is recorded and adjusted in the capital accounts of the remaining partners.
3. The departing partner's capital account is settled, taking into account any revaluation adjustments, and they receive compensation based on their share of the assets.

Example

1. A partner leaves, and the assets of the business, which were previously valued at TZS 300,000, are now worth TZS 350,000 after revaluation.
2. The revaluation surplus of TZS 50,000 is divided among the remaining partners according to their profit-sharing ratio, and the outgoing partner's capital account is credited accordingly.

Revaluation of assets when there is a change in profit or loss sharing ratios

When there is a change in the profit or loss sharing ratio between the partners, the assets may need to be revalued to ensure that the capital accounts are adjusted to reflect the new ratios. This ensures that the new ratio is based on the current value of the assets.

Process

1. The assets are revalued, and any increase or decrease in value is distributed among the existing partners in their old profit-sharing ratio.
2. The capital accounts of the partners are adjusted to reflect the change in the sharing ratio.
3. The goodwill of the business (if applicable) is also calculated and credited to the partners' capital accounts.

Example

1. The partnership's assets are revalued from TZS 400,000 to TZS 450,000.
2. The increase of TZS 50,000 is shared according to the old profit-sharing ratio of 3:2.
3. The capital accounts of the existing partners are adjusted accordingly, and the new profit-sharing ratio is applied moving forward.

Revaluation of assets when the business is sold

When a business is sold, the assets must be revalued to determine their fair market value. This ensures that the sale price reflects the current value of the business's assets, and the proceeds from the sale can be divided fairly among the partners.

Process

1. The assets are revalued to their current market value.
2. Any revaluation surplus or deficit is recorded and allocated to the partners' capital accounts.
3. The proceeds from the sale are distributed according to the capital accounts of the partners.
4. The final capital balances, after revaluation, are used to settle any outstanding obligations and to divide the business proceeds.

Example

1. The partnership's assets are valued at TZS 600,000, but after revaluation, the value increases to TZS 650,000.
2. The revaluation surplus of TZS 50,000 is distributed among the partners, and the business is sold for TZS 650,000.
3. The proceeds from the sale, after adjusting for goodwill and liabilities, are divided among the partners based on their capital accounts.

Accounting for revaluation of assets

The accounting entries for revaluation of partnership assets depend on whether the revaluation results in a surplus (increase in asset value) or deficit (decrease in asset value):

Revaluation surplus (increase in asset value)

1. Debit the Asset accounts (for the increase in value).
2. Credit the Revaluation Reserve (Goodwill) account.
3. The revaluation surplus is then distributed among the partners in their profit-sharing ratio.

Journal Entry:

• Debit Asset accounts (e.g., buildings, machinery, inventory) – TZS 50,000
• Credit Revaluation Reserve (Goodwill) – TZS 50,000
• Then distribute the revaluation reserve to the partners' capital accounts.

Revaluation deficit (decrease in asset value)

1. Debit the Revaluation Reserve (Goodwill) account (if a balance exists) or directly debit the Profit and Loss account.
2. Credit the Asset accounts for the decrease in value.

Journal Entry:

• Debit Revaluation Reserve (or Profit and Loss) – TZS 50,000
• Credit Asset accounts (e.g., buildings, machinery, inventory) – TZS 50,000

Key points to remember in asset revaluation

1. Goodwill might also be calculated when admitting a new partner or when there's a change in the profit-sharing ratio, and the revaluation surplus could be part of goodwill calculations.
2. Revaluation ensures that partners' capital accounts reflect the true value of the partnership and can also prevent any unfair treatment during changes in the partnership structure.
3. The increase or decrease in value of the assets is shared among the partners in their existing profit-sharing ratio unless a different agreement is made.

Example

Amina and Brenda share profits in the ratio of 3:1. Their balances as at 31st December 2020 were as follows:

Statement of financial position as at 31st December, 2020

Assets	TZS
Non-Current Assets
Buildings	10,000,000
Fixtures	4,000,000
Current Assets
Inventory	8,000,000
Accounts Receivable	6,000,000
Bank	12,000,000
Total Assets	40,000,000
Capital and Liabilities	TZS
Capital Accounts
Amina	12,000,000
Brenda	8,000,000
Reserve	14,000,000
Current Liabilities
Accounts Payable	6,000,000
Total Capital and Liabilities	40,000,000

On 1st January, 2021, Calista was admitted into partnership on the following conditions:

1. That Calista pays TZS 4,000,000 for 1/5 share of profits;
2. New profit sharing ratio is 3:1:1
3. That Calista pays TZS 2,000,000 for goodwill. Half of this sum is to be withdrawn by Amina and Brenda;
4. That inventory and fixtures reduced by 10% each, and a 5% provision for doubtful debts be created on accounts receivable;
5. That the value of buildings be appreciated by 20%.

Required: Prepare all the necessary ledger accounts and a statement of financial position after admission (assuming partners decide to maintain the revised values).

Dr. Bank Account Cr.

Date	Details	TZS	Date	Details	TZS
1st Jan., 2021	Balance b/d	12,000,000	1st Jan., 2021	Amina's capital	750,000
2nd Jan., 2021	Calista's capital	6,000,000	1st Jan., 2021	Brenda's capital	250,000
			2nd Jan., 2021	Balance c/d	17,000,000

Dr. Inventory Account Cr.

Date	Details	TZS	Date	Details	TZS
1st Jan., 2021	Balance b/d	8,000,000	1st Jan., 2021	Revaluation	800,000
			1st Jan., 2021	Balance c/d	7,200,000

Dr. Fixtures Account Cr.

Date	Details	TZS	Date	Details	TZS
1st Jan., 2021	Balance b/d	4,000,000	1st Jan., 2021	Revaluation	400,000
			1st Jan., 2021	Balance c/d	3,600,000

Dr. Partners Capital Account Cr.

Details	Amina	Brenda	Calista	Details	Amina	Brenda	Calista
Bank	750,000	250,000	-	Balance b/d	12,000,000	8,000,000	-
Amina's capital	-	-	1,500,000	Bank	-	-	6,000,000
Brenda's capital	-	-	500,000	Calista's capital	1,500,000	500,000	-
Balance c/d	15,375,000	9,125,000	4,000,000	Reserve	2,250,000	750,000	-
				Revaluation	375,000	125,000	-

Statement of Financial Position as at 1st January, 2021

Details	TZS	TZS
Non-current assets
Buildings	12,000,000
Fixtures	3,600,000
Current assets
Inventory	7,200,000
Accounts receivable	6,000,000
Less: Provision for doubtful debts	(300,000)
Bank	17,000,000
Total assets		45,500,000
Capital and liabilities
Capital accounts:
Amina		15,375,000
Brenda		9,125,000
Calista		4,000,000
Current liabilities
Accounts payable		17,000,000
Total capital and liabilities		45,500,000

Amount of goodwill to be withdrawn by Amina and Brenda

Amount paid by Calista for goodwill	TZS 2,000,000
Amount to be withdrawn by Amina and Brenda	TZS 1,000,000
Amount withdrawn by Amina	TZS 750,000
Amount withdrawn by Brenda	TZS 250,000
Ratio of Withdrawal	3:1 (Loss of Profit Ratio)

Revaluation amounts

Fixtures	10% × TZS 4,000,000 = TZS 400,000
Inventory	10% × TZS 8,000,000 = TZS 800,000
Buildings	20% × TZS 10,000,000 = TZS 2,000,000
Provision for Doubtful Debts	5% × TZS 6,000,000 = TZS 300,000

Distribution of profit to old partners in old ratios

Amina's Share	3 × TZS 500,000 = TZS 375,000
Brenda's Share	1 × TZS 500,000 = TZS 125,000

Loss ratio computation

Old Profit-sharing Ratio (A and B)	3:1
New Profit-sharing Ratio (A, B, and C)	3:1:1
Loss by A on Admission of C	Loss by A = (3/4) × (15 - 12) = 3/20 = TZS 3
Loss by B on Admission of C	Loss by B = (1/4) × (5 - 4) = 1/20 = TZS 1
Loss Sharing Ratio	3:1