Accounting Treatment of Investment Fluctuation Fund in case of Admission of a Partner

An investment Fluctuation Fund is a reserve created out of profit to meet the change in the market value of the investment.  An amount is kept aside in the reserve in name of fluctuation to meet the change in the value of the investment. The difference between the book value and the market value of the investment is adjusted through Investment Fluctuation Fund. A change in value can or cannot be made against this reserve. Accounting treatment differs for situations against the difference in market value and cost of investment. During the change in profit sharing ratio or reconstitution of the firm due to change in profit sharing ratio among existing partners, admission, retirement, death of partner, or dissolution of the partnership, the amount of Investment Fluctuation Fund appears in the Balance Sheet and is distributed among the partners in the old profit sharing ratio.

Accounting Treatment Investment Fluctuation Fund:

Case 1: When the book value and market value of the investment are the same:

Illustration 1: 

Amit and Sumi are partners in the firm sharing profit and losses in the ratio of 4:3. They decided to admit Rita as the new partner in the firm and share future profit and losses in the ratio of 3:2:2. On the date of admission, the Balance Sheet showed Investment Fluctuation Fund of ₹12,600 in liability side and Investment of ₹15,000 (at cost). Pass necessary journal entries for the same.

Solution:

Illustration 2: 

J and K are partners in the firm sharing profit and losses in the ratio of 6:4. They decided to admit L as the new partner in the firm for 1/4th share in the firm. On the date of admission, the Balance Sheet showed an Investment Fluctuation Fund of ₹7,900 on the liability side and an Investment of ₹10,500 (at cost). Pass necessary journal entries for the same.

Solution:

Case 2: When the market value of the investment is less than book value:

A. Fall in the value is less than Investment Fluctuation Fund:

i. Fall in Investment value adjusted through Investment Fluctuation Fund:

ii. Excess of Investment Fluctuation Fund distributed among old partners:

Illustration 1:

N and P are partners in the firm sharing profit and losses in the ratio of 5:3. They decided to admit R as the new partner in the firm and decided to share future profit in the ratio of 4:3:1. On the date of admission, the Balance Sheet showed Investment Fluctuation Fund of ₹19,400 in liability side and Investment of ₹40,000(at cost). The market value of the investment on the date of the Balance Sheet was ₹21,400. Pass necessary journal entries for the same.

Solution:

Illustration 2:

Ram and Swayam are partners in the firm sharing profit and losses in the ratio of 4:3. They decided to admit Lachman as the new partner in the firm for 1/4th share in the firm. On the date of admission, the Balance Sheet showed an Investment Fluctuation Fund of ₹7,500 on the liability side and an Investment of ₹15,000(at cost). The market value of the investment on the date of the Balance Sheet was ₹8,900. Pass necessary journal entries for the same.

Solution:

B. Fall in the value is equal to Investment Fluctuation Fund:

Illustration 1:

G and H are partners in the firm sharing profit and losses in the ratio of 1:2. They decided to admit F as the new partner in the firm for 1/3rd share in the firm. On the date of admission, the Balance Sheet showed an Investment Fluctuation Fund of ₹27,300 on the liability side and an Investment of ₹50,000(at cost). The market value of the investment on the date of the Balance Sheet was ₹22,700. Pass necessary journal entries for the same.

Solution:

Illustration 2:

Rita and Reema are partners in the firm sharing profit and losses in the ratio of 3:2. They decided to admit Rani as the new partner in the firm and decided to share future profit in the ratio 2:2:1. On the date of admission, the Balance Sheet showed Investment Fluctuation Fund of ₹9,200 in liability side and Investment of ₹25,500(at cost). The market value of the investment on the date of the Balance Sheet was ₹16,300. Pass necessary journal entries for the same.

Solution:

C. Fall in the value is more than investment fluctuation fund:

i. Loss on investment value adjusted from Investment Fluctuation Fund and Revaluation A/c:

ii. Expense on Revaluation charged from old Partner’s Capital Account: 

Illustration 1:

Amit and Ajay are partners in the firm sharing profit and losses in the ratio of 2:1. They decided to admit Arjun as the new partner in the firm for 1/3rd share in the firm. On the date of admission, the Balance Sheet showed an Investment Fluctuation Fund of ₹12,300 on the liability side and an Investment of ₹25,000(at cost). The market value of the investment on the date of the Balance Sheet was ₹11,200. Pass necessary journal entries for the same.

Solution:

Illustration 2:

X and Y are partners in the firm sharing profit and losses in the ratio of 3:2. They decided to admit Z as the new partner in the firm and decided to share future profit in the ratio 2:2:1. On the date of admission, the Balance Sheet showed Investment Fluctuation Fund of ₹5,100 in liability side and Investment of ₹12,500(at cost). The market value of the investment on the date of the Balance Sheet was ₹6,300. Pass necessary journal entries for the same.

Solution:

Case 3: When the market value of the investment is more than the book value:

A. Investment Fluctuation Fund distributed among old partners:

B. Profit on Investment value credited to Revaluation Account:

C. Profit on Revaluation distributed among old partners:

Illustration 1:

Chand and Pooja are partners in the firm sharing profit and losses in the ratio of 6:4. They decided to admit Minu as the new partner in the firm and decided to share future profit in the ratio 4:3:3. On the date of admission, the Balance Sheet showed Investment Fluctuation Fund of ₹5,500 in liability side and Investment of ₹15,000(at cost). The market value of an investment on the date of the Balance Sheet was ₹20,500. Pass necessary journal entries for the same.

Solution:

Illustration 2:

A and B are partners in the firm sharing profit and losses in the ratio of 3:5. They decided to admit D as the new partner in the firm for 1/4th share in the firm. On the date of admission, the Balance Sheet showed an Investment Fluctuation Fund of ₹13,800 on the liability side and an Investment of ₹32,000(at cost). The market value of the investment on the date of the Balance Sheet was ₹35,500. Pass necessary journal entries for the same.

Solution: