Reserves

Correct answer: A. Old profit sharing ratio

Accumulated profits are amounts earned before the admission or reconstitution of a new partner. They belong to the partners who were members during that earlier period. Therefore, the benefit must be given according to the old profit-sharing ratio, not according to the ratio that will apply after reconstitution. The correct choice is A, old profit-sharing ratio.

To apply the rule, identify the ratio in force when the profit was earned and divide the reserve or accumulated profit in that ratio. The new ratio is used for future profits only. Cash ratio and liability ratio do not show how partners agreed to share profits, so they are not relevant bases for this distribution.

Correct answer: A. Debited

Accumulated loss is borne by the old partners in their old profit-sharing ratio. Since it reduces their capital, the old partners' capital accounts are debited. Exam tip: accumulated profit is credited to partners' capital accounts, whereas accumulated loss is debited to them.

Correct answer: A. Credited in the old profit-sharing ratio

Accumulated profit or general reserve is income already earned by the firm, so it increases the old partners’ capital balances. It is distributed in the old profit-sharing ratio, and the respective capital accounts are credited. The Revaluation Account is used for gains or losses arising from changes in the values of assets and liabilities, not for distributing reserves. Exam tip: Distribute reserves existing before admission among the old partners in their old ratio.

Correct answer: A. ₹35,000

The general reserve is distributed among the old partners in their old profit-sharing ratio. A's fraction is \(5/(5+2)=5/7\), so A's share is \(₹49,000 \times 5/7=₹35,000\). ₹14,000 is B's share. Exam tip: on admission of a partner, an existing reserve is distributed in the old ratio unless the question specifies otherwise.

Correct answer: A. ₹12,000

The reserve fund is distributed among the old partners in their old profit-sharing ratio. The total ratio is 6 + 4 = 10, and Y’s share is 4/10. Therefore, Y receives ₹30,000 × 4/10 = ₹12,000. ₹18,000 is X’s share because X’s ratio is 6/10. Exam tip: Accumulated reserves distributed at reconstitution are generally credited to the old partners in their old profit-sharing ratio.

Correct answer: A. ₹18,000

A credit balance in the Profit and Loss Account is distributed among the old partners in their old profit-sharing ratio. The total parts are 4+3=7, so B’s share is \(₹42,000 \times \frac{3}{7}=₹18,000\). ₹24,000 is A’s share because A’s fraction is 4/7. Exam tip: For reserves or credit balances at admission, use the old ratio, not the new ratio after admission.

Correct answer: A. ₹16,000

The debit balance of the Profit and Loss Account represents an old loss and is debited to the old partners’ Capital Accounts in their old profit-sharing ratio. B’s share is 4/7, so the amount debited to B = ₹28,000 × 4/7 = ₹16,000. Exam tip: Treat a debit balance as a loss and distribute it among the old partners in their old ratio.

Correct answer: A. General Reserve Account

General reserve normally has a credit balance. To close it, the General Reserve Account is debited, while the old partners’ capital or current accounts are credited in their old profit-sharing ratio. Therefore, the correct answer is General Reserve Account. Exam tip: When a reserve or accumulated profit is distributed, debit the account that is being closed.

Correct answer: A. Profit and Loss Account

To close debit balance Profit and Loss Account is credited. The loss is debited to old partners.

Correct answer: A. Old partners

Capital reserve is also treated as profit created before admission. So it is shared among old partners in old ratio.

Correct answer: A. Because the reserve was created from profits earned before his admission

An old reserve is created from profits earned when the new partner was not yet a member of the firm. Hence, the new partner has no right to that past profit; the reserve is transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Exam tip: Treat reserves existing before admission as an item belonging to the old partners.

Correct answer: A. 3:2

General reserve represents accumulated profits of previous years. At the time of admission, it is distributed only among the old partners in their old profit-sharing ratio, so the ratio is 3:2. The new ratio of 2:2:1 applies to the future distribution of profits, not to the existing reserve. Exam tip: Use the old ratio for adjustments relating to past profits or losses.

Correct answer: A. Dividend Equalisation Reserve

The direct answer is Option A: Dividend Equalisation Reserve. An accumulated profit is a profit earned in earlier periods and retained in the business instead of being distributed immediately. A Dividend Equalisation Reserve is created out of profit to help maintain a stable dividend, so it is a reserve and accumulated profit. On admission of a partner, such a reserve is generally distributed among the old partners in their old profit-sharing ratio. Option A is correct. Option B, Preliminary Expenses, is an expense or deferred expense and is not an accumulated profit. Option C, a Profit and Loss debit balance, represents accumulated loss, not accumulated profit; it reduces old partners’ claims. Option D, Advertisement Suspense Expenditure, is an expenditure item with a debit balance, not a profit reserve. Memory cue: a reserve made from profit is accumulated profit; an expense or debit balance is not.

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

Debit balance of Profit and Loss Account shows old loss. It is debited to old partners in old ratio.

Correct answer: A. ₹12000

Preliminary expenses are treated as an accumulated loss or an expense arising before the new partner’s admission. Therefore, the amount should be borne by the old partners in their old profit-sharing ratio of 2:1. The total parts are 2 + 1 = 3, so the first partner’s share is 2/3 of ₹18,000. Calculation: ₹18,000 × 2/3 = ₹12,000. Hence, ₹12,000 will be debited to the first partner and option A is correct. The second partner would bear ₹6,000, which explains option B but not the amount asked. Option C represents an equal half-share and ignores the stated ratio, while option D charges the entire expense to the first partner. The ratio must be applied to the total accumulated expense.

Correct answer: A. ₹6,000

Advertisement Suspense Account is a fictitious asset and is written off among the old partners in their old profit-sharing ratio. B’s share is 2/7, so the debit to B’s Capital Account is ₹21,000 × 2/7 = ₹6,000. ₹10,500 represents half the amount, not B’s 2/7 share. Exam tip: Write off such items among old partners in their old profit-sharing ratio.

Correct answer: A. Entire amount will be shared among old partners

If there is no claim the whole reserve is old profit. So it is shared among old partners in old ratio.

Correct answer: A. ₹20,000

₹70,000 will be used to meet the workmen compensation claim. The excess reserve is ₹90,000 − ₹70,000 = ₹20,000, which is distributed among the old partners through their capital or current accounts in their old profit-sharing ratio. ₹70,000 is the claim amount, not the distributable amount. Exam tip: When a reserve exceeds the related claim, distribute the excess among the old partners.

Correct answer: A. ₹7,000

The governing concept is the treatment of a Workmen Compensation Reserve when an actual claim is made. The claim is first compared with the reserve already available. Here, the claim is ₹42,000 and the reserve is ₹35,000. Therefore, the amount not covered by the reserve is calculated as ₹42,000 − ₹35,000 = ₹7,000. This uncovered amount is the excess claim and is generally treated as a loss through the Revaluation Account, subject to the partnership agreement. Option A is correct because it gives this difference. Option B merely repeats the reserve, option C gives the total claim rather than the excess, and option D incorrectly adds the two amounts.

Correct answer: A. Investments

Investment Fluctuation Reserve is governed by the principle that a reserve may be created to protect against a possible fall in the market value of investments. It is therefore specifically connected with investments shown as assets in the balance sheet. The reserve is used when the actual decrease in the value of those investments has to be adjusted. Option A is correct because it names the asset whose value may fluctuate and create the need for this reserve. Stock may require a general provision for loss or obsolescence, but it is not the asset covered by this particular reserve. Cash and furniture are also unrelated to Investment Fluctuation Reserve.

Correct answer: A. ₹14,000

The decrease in the value of investments is ₹1,50,000 − ₹1,36,000 = ₹14,000. This loss is adjusted against the Investment Fluctuation Reserve. Since the reserve is ₹22,000, ₹8,000 will remain after the adjustment and may be distributed among the partners. Exam tip: First calculate the actual fall in investment value, then adjust it against the available reserve.

Correct answer: A. ₹16,000

The decrease of ₹11,000 in investments is adjusted against the Investment Fluctuation Reserve of ₹27,000. Therefore, the balance is ₹27,000 − ₹11,000 = ₹16,000. This balance is distributed among the old partners in their old profit-sharing ratio. Exam tip: Only when the decrease exceeds the reserve is the excess loss transferred to the Profit and Loss Account.

Correct answer: A. ₹5,000 loss in the Revaluation Account

The ₹21,000 decrease in investments will first be adjusted against the Investment Fluctuation Reserve of ₹16,000. The remaining ₹5,000 (₹21,000 − ₹16,000) is debited to the Revaluation Account as a loss. It is not transferred to General Reserve or treated as a cash profit. Exam tip: Use the reserve first and charge any excess decrease to the Revaluation Account.

Correct answer: A. The entire reserve will be distributed among old partners

The governing rule is that Investment Fluctuation Reserve is maintained only to cover a possible fall in the value of investments. If the investments have increased in value and there is no loss or claim requiring adjustment, the reserve is no longer needed. On admission, an existing reserve of this nature is normally released and credited to the old partners in their old profit-sharing ratio because it was created from profits earned before the new partner joined. Thus, option A is correct. Option B is wrong because the reserve belongs to the old period, while options C and D do not represent the normal accounting treatment.

Correct answer: A. ₹30,000

The general reserve is distributed among the partners in their old profit-sharing ratio. The total ratio is 1+2+3 = 6, and C’s share is 3/6. Therefore, C’s amount = ₹60,000 × 3/6 = ₹30,000. ₹20,000 would result from incorrectly taking C’s share as 2/6. Exam tip: Use the old profit-sharing ratio when distributing an existing reserve.