Reserves

Correct answer: A. Old partners share equally

A reserve created before the admission of a new partner represents the old partners’ accumulated profit, so it is distributed among them in their old profit-sharing ratio. If that ratio is not given, the usual assumption is that the old partners share equally. The new partner is not entitled to this past accumulation. Exam tip: In the absence of the old ratio, assume equal sharing among the old partners.

Correct answer: A. Credit balance

The direct answer is Option A: Credit balance. A Reserve Fund is created by setting aside a part of profit. Profit increases the owners’ claim and is recorded on the credit side, so the reserve normally has a credit balance. When the reserve is distributed or closed during reconstitution, the Reserve Fund Account is debited and the old partners’ capital or current accounts are credited in the old profit-sharing ratio. Option A is correct because it identifies the normal accounting balance. Option B is wrong because a debit balance usually represents an asset, expense, loss, or deficiency, not a reserve created from profit. Option C is wrong because a reserve is an accounting balance, not cash itself; the cash may have been used elsewhere. Option D is wrong because the reserve does have a balance while it exists. Memory cue: profits and reserves normally carry credit balances; expenses normally carry debit balances.

Correct answer: A. Debit balance

The direct answer is Option A: Debit balance. Advertisement Suspense Expenditure is an expense or deferred expense item. Expenses are recorded on the debit side, so this account normally has a debit balance until it is written off. At admission, the unadjusted amount relates to the period before the new partner joined. Therefore it is written off among the old partners, usually in their old profit-sharing ratio, by debiting their capital or current accounts and crediting Advertisement Suspense Expenditure. Option A is correct because the account represents expenditure. Option B is wrong because credit balances normally represent income, capital, reserves, or liabilities. Option C is wrong because this is not a reserve balance. Option D is wrong because the item is not a liability payable to outsiders. A helpful cue is: suspense expenditure is a past cost, so think debit first and write it off before admission.

Correct answer: A. Because it is created from the profits of previous years

An old reserve is created from profits earned and accumulated before the new partner joined the firm. Therefore, it belongs to the old partners and is distributed among them in their old profit-sharing ratio. The new partner is not entitled to it because they were not a partner during that period. Exam tip: On admission, adjust an old reserve through the old partners’ capital accounts in their old ratio.

Correct answer: A. Because they belong to the period before his admission

Old loss happened before the new partner joined. So it is shared among old partners in old ratio.

Correct answer: A. Because the balances of their capital accounts increase

Accumulated profits are earnings of earlier periods and belong to the old partners. Each old partner’s share, distributed in the old profit-sharing ratio, is credited to that partner’s capital account, increasing its balance. Option B is incorrect because receiving a profit share increases, rather than decreases, capital. Exam tip: On distributing accumulated profits, credit the old partners’ capital or current accounts.

Correct answer: A. Because the loss reduces their capital

Accumulated loss is an unadjusted loss of earlier years. At the time of reconstitution, it is charged to the old partners’ capital accounts in their old profit-sharing ratio, thereby reducing their capital balances; hence, those accounts are debited. Option B is incorrect because a loss decreases, rather than increases, capital. Exam tip: accumulated loss leads to a debit to old partners’ capital accounts, while accumulated profits or reserves lead to a credit.

Correct answer: A. General Reserve Account

An accumulated profit account like General Reserve is closed by debiting it. Then old partners are credited.

Correct answer: A. Debit balance of Profit and Loss Account

Debit balance of Profit and Loss Account is closed by crediting it. Old partners capital accounts are debited.

Correct answer: A. ₹60,000

General reserve represents accumulated profit, whereas a debit balance in the Profit and Loss Account represents accumulated loss. Therefore, net accumulated profit = ₹75,000 − ₹15,000 = ₹60,000. Hence, option A is correct. Exam tip: subtract a debit balance representing loss from the reserve; do not add it.

Correct answer: A. ₹42,000

General Reserve is an accumulated profit, so ₹60,000 is credited to the old partners’ capital accounts. Advertisement Suspense Account has a debit balance and therefore reduces the credit by ₹18,000. Hence, net credit = ₹60,000 − ₹18,000 = ₹42,000. Exam tip: credit accumulated profits and debit losses or items having debit balances while adjusting them among old partners.

Correct answer: A. ₹30,000

The old ratio is 3:2, so A receives 3 out of the total 5 parts. A’s credit = ₹50,000 × 3/5 = ₹30,000. ₹20,000 is B’s share, not A’s share. Exam tip: Accumulated profits or losses are generally distributed among the old partners in their old profit-sharing ratio.

Correct answer: A. ₹12,000

Accumulated losses are debited to the old partners’ capital accounts in their old profit-sharing ratio. B’s share is 3/10, so B’s debit = ₹40,000 × 3/10 = ₹12,000. ₹28,000 is A’s share, not B’s. Exam tip: Use the old profit-sharing ratio for undistributed reserves and accumulated losses at the time of reconstitution.

Correct answer: A. The new partner may receive an unfair share of profits earned before admission

Accumulated profits and general reserve are earned before the new partner is admitted, so they belong only to the old partners. They should be transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. If this adjustment is not made, the new partner may receive an unfair share of profits earned before admission. Exam tip: On admission, distribute old profits and reserves among the old partners in their old ratio.

Correct answer: A. Burden of old loss may also fall on new partner

An accumulated loss relates to the period before the admission of the new partner and therefore belongs to the old partners. It should be written off or adjusted through the old partners’ capital or current accounts in their old profit-sharing ratio. If this adjustment is omitted, the loss may remain embedded in the firm’s accounts and reduce the effective capital or future distributable profits of the reconstituted partnership. Since the new partner joins after the loss arose, allowing the unadjusted loss to affect the combined business can indirectly make the new partner bear part of an old obligation. Thus, option A identifies the unfair accounting effect. The other options are unrelated: a loss does not create a reserve, does not automatically close cash, and cannot increase General Reserve.

Correct answer: A. Zero

An old reserve is created from profits earned before the new partner’s admission. The incoming partner did not contribute services or capital as a partner during the period in which those profits were generated, so the reserve is not shared with that partner. It is normally transferred to the old partners’ capital or current accounts according to their old profit-sharing ratio. Therefore, the new partner’s share in the old reserve is zero, making option A correct. The new ratio applies to profits earned after admission, not to accumulated profits of the earlier period. A half or full share has no general accounting basis, and an amount equal to the new ratio would wrongly give the incoming partner rights over past profits. Specific contractual provisions could change treatment, but under the usual rule the answer remains zero.

Correct answer: A. 4:1

General reserve represents profits accumulated before the admission of the new partner. Therefore, it is distributed only among the old partners in their old profit-sharing ratio, 4:1. The new ratio of 3:2:1 applies to profits earned after admission, not to the existing reserve. Exam tip: Distribute accumulated old profits, such as general reserve and credit balance of the Profit and Loss Account, in the old ratio.

Correct answer: A. Old profit sharing ratio

It is profit before admission. Therefore it is distributed among old partners in old profit sharing ratio.

Correct answer: A. Old profit-sharing ratio

The debit balance of the Profit and Loss Account represents an accumulated loss arising before the new partner’s admission. Hence, it is debited only to the old partners’ capital or current accounts in their old profit-sharing ratio. The new partner is not made responsible for this past loss. Exam tip: losses existing before admission are borne in the old ratio.

Correct answer: A. General reserve

General reserve is accumulated profit so it is credited to old partners. Other items are losses or expenses.

Correct answer: A. Advertisement suspense expenditure

Advertisement suspense expenditure is old expense. It is debited to old partners capital accounts.

Correct answer: A. ₹8,000

On admission of a new partner, the general reserve is distributed among the old partners in their old profit-sharing ratio. B’s share is 1/(5+1) = 1/6. Therefore, the amount credited to B is ₹48,000 × 1/6 = ₹8,000. ₹40,000 is A’s share, not B’s. Exam tip: Use the old partners’ old ratio for distributing existing reserves.

Correct answer: A. To fairly distribute old results among old partners

Old profits and losses relate to old partners. Therefore they are fairly adjusted on admission.

Correct answer: A. Distributed among old partners in old profit sharing ratio

Dividend Equalisation Reserve is also treated as old accumulated profit. Therefore it is distributed among old partners in old ratio.

Correct answer: A. Period before admission

A General Reserve shown in the balance sheet at the time of admission represents profits retained from earlier accounting periods. Those profits were earned before the incoming partner became a member of the firm. Consequently, the reserve relates to the period before admission and belongs to the old partners, who normally receive it in their old profit-sharing ratio. Option A is therefore correct. It cannot ordinarily relate to the period after admission because the reserve already exists when the new partner enters. It also cannot belong only to the new partner or to the next financial year, since neither period had generated the reserve at the admission date. The distinction is important because future profits are divided in the new ratio, whereas old reserves are settled with the old partners.