Creditors were recorded at ₹2,25,000 and were settled by mutual agreement for ₹2,10,500. What effect will be recorded in the Revaluation Account at the time of reconstitution?

Correct answer: Gain of ₹14,500

The creditors’ liability decreased from ₹2,25,000 to ₹2,10,500, resulting in a reduction of ₹14,500. A decrease in liability is a gain for the firm, so ₹14,500 is credited to the Revaluation Account. Option A is incorrect because the reduction creates a gain, not a loss; ₹2,10,500 is the settlement amount, not the gain. Exam tip: When a liability is settled for less than its book value, the difference is treated as a gain on revaluation.