1-In the notes of (chapter-retirement and death of a partner) it is written that if there is no adjustment related to WCF, IFF, contingency reserves, then they will not be trahferred to partner's capital account and will be shown in balance sheet. please tell what's the logic behind it?
Treatment of WCF, IFF and Contingency Reserve
Case 1:When WCF is given in the Old Balance Sheet and related adjustment is given in the question.
In this case, WCF, IFF and contingency reserve are transferred to Partners’ Capital Account (credit side) with the excess amount. For example, WCF appears in the Old Balance Sheet of Rs 10,000 and in the adjustment a claim of WCF is given as Rs 7,000. The excess of Rs 3,000 (i.e. Rs 10,000 – Rs 7,000) will be transferred to the credit side of the Old Partners’ Capital Account (in case of admission) or All Partners’ Capital Account (in case of retirement). The amount of Rs 7,000 is to be shown on the Liabilities side of the New Balance Sheet.
Case 2:When WCF is given in the Old Balance Sheet and no related adjustment is given and no further information regarding the treatment in the Balance Sheet is mentioned.
In this case, WCF, IFF and contingency reserve will be transferred to Old Partners’ Capital Account (in case of admission) or All Partners’ Capital Account (in case of retirement) in the old ratio. In this case, the amount of WCF would not be shown in the New Balance Sheet.
Case 3:When WCF is given in the Old Balance Sheet and no related adjustment is given. It is also mentioned that the partners want to show WCF in the New Balance Sheet.
In this case, the amount of WCF is to be shown in the New Balance Sheet with the same amount as it appears in the Old Balance Sheet.
In addition, the following adjusting entry is passed to find out the net effect.
Gaining Partners Capital A/c
To Sacrificing Partners’ Capital A/c
(WCF adjusted between the gaining and sacrificing partners.)
(This question can be related to any type of reconstitution - Change in Profit-Sharing Ratio, Admission, Retirement, Death, etc.)
It means that partners have decided that these amounts will not be changed from what they are now. They will continue to be shown at the existing figures in the balance sheet.
In such a case, we consider the net effect by passing following entry:
Gaining Partners' Capital/Current A/c ...Dr.
To Scarificing Partners' Capital/Current A/c
First calculate the gaining, sacrificing shares and ratio. Then, distribuite the amounts WCF, IFF, etc. on these ratio and put them in above entry.