What is Investment Fluctuation Fund?
A reserve that is created out of profit to meet the change in the market value of the investment is termed an Investment Fluctuation Fund. Simply put, an amount is kept aside in the reserve in name of fluctuation to meet the changes in the value of the investment. The difference between the book value and the market value of the investment is adjusted through the Investment Fluctuation Fund. A change in value can or cannot be made against this reserve. However, the Accounting treatment of an Investment Fluctuation Fund differs for the 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 a change in profit sharing ratio among existing partners, admission, retirement, death of a 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 of Investment Fluctuation Fund:
Case 1: When the book value and market value of the investment are the same:
Illustration 1:
Harsh, Samarth, and Somya were partners in a firm sharing profits and losses in the ratio 2:1:1. On 23rd March 2019, Samarth dies, and the new profit-sharing ratio between the remaining partners was decided to 3:2. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹12,000 on the liability side and an Investment of ₹20,000 (at cost). Pass necessary Journal entries assuming that the books of accounts are closed.
Solution:
Illustration 2:
Raj, Priya, and Sarthak were partners in a firm sharing profits and losses in the ratio of 1:1:1. On 12th April, 2020, Priya dies, and the new profit-sharing ratio between the remaining partners was decided to 1:2. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹39,000 on the liability side and an Investment of ₹25,000 (at cost). Pass necessary Journal entries assuming that the share of the Investment Fluctuation Fund is only credited to the deceased partner’s capital account.
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 all partners/deceased partner:
Illustration 1:
Radhika, Ramesh, and Pawan were partners in a firm sharing profits and losses in the ratio of 2:3:5. On 3rd August 2021, Ramesh dies, and the new profit-sharing ratio between the remaining partners was decided to be 4:5. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹20,000 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 ₹17,000. Pass necessary Journal entries assuming that the books of accounts are closed.
Solution:
Illustration 2:
Prerna, Arjun, and Aman were partners in a firm sharing profits and losses in the ratio 2:3:5. On 15th January 2019, Arjun dies, and the new profit-sharing ratio between the remaining partners was decided to 2:5. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹8,000 on the liability side and an Investment of ₹28,000 (at cost). The market value of the investment on the date of Balance Sheet was ₹26,000. Pass necessary Journal entries assuming that the share of the Investment Fluctuation Fund is only credited to the deceased partner’s capital account.
Solution:
Note: Investment Fluctuation Fund will be shown on the liability side of the balance sheet at ₹4,200 (8,000 – 3800).
B. Fall in the value is equal to Investment Fluctuation Fund:
Illustration 1:
Peter, Mona, and Sally were partners in a firm sharing profits and losses in the ratio 6:5:4. On 23rd August 2020, Peter dies, and the new profit-sharing ratio between the remaining partners was decided to 2:3. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹25,000 on the liability side and an Investment of ₹60,000 (at cost). The market value of the investment on the date of the Balance Sheet was ₹35,000. Pass necessary Journal entries assuming that the books of accounts are closed.
Solution:
Illustration 2:
Raja, Brian, and Saksham were partners in a firm sharing profits and losses in the ratio 1:3:3. On 18th October 2020, Brian dies, and the new profit-sharing ratio between the remaining partners was decided to 1:2. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹10,000 on the liability side and an Investment of ₹29,800 (at cost). The market value of the investment on the date of the Balance Sheet was ₹19,800. Pass necessary Journal entries.
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 all Partner’s Capital Account/Deceased partner’s Capital Account:
Illustration 1:
Rakesh, Roshan, and Raksha were partners in a firm sharing profits and losses equally. On 3rd August 2021, Roshan dies, and the new profit-sharing ratio between the remaining partners was decided to 4:5. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹11,000 on the liability side and an Investment of ₹55,000 (at cost). The market value of the investment on the date of the Balance Sheet was ₹35,000. Pass necessary Journal entries assuming that the books of accounts are closed.
Solution:
Case 3: When the market value of the investment is more than the book value:
A. Investment Fluctuation Fund distributed among all partners/deceased partner:
B. Profit on Investment value credited to Revaluation Account:
C. Profit on Revaluation distributed among all partners/deceased partner:
Illustration 1:
Kriti, Mansi, and Sadhna were partners in a firm sharing profits and losses in the ratio 2:3:5. On 1st November 2019, Mansi dies, and the new profit-sharing ratio between the remaining partners was decided to 1:1. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹10,000 on the liability side and an Investment of ₹13,500 (at cost). The market value of the investment on the date of the Balance Sheet was ₹18,000. Pass necessary Journal entries assuming that the books of accounts are closed.
Solution:
Illustration 2:
Payal, Sameeksha, and Dhruv were partners in a firm sharing profits and losses in the ratio 1:1:1. On 21st November 2018, Dhruv dies, and the new profit-sharing ratio between the remaining partners was decided to 2:3. On the date of death, the Balance Sheet showed an Investment Fluctuation Fund of ₹18,000 on the liability side and an Investment of ₹27,600 (at cost). The market value of the investment on the date of the Balance Sheet was ₹41,100. Pass necessary Journal entries assuming that the profit on revaluation is only credited to the deceased partner’s capital account.
Solution: