Reserves

Correct answer: B. Capital accounts are debited

The direct answer is option B: the old partners’ capital accounts are debited. An accumulated loss is a loss from an earlier period, before the new partner joined. Since the old partners were responsible for that earlier period, the loss must be borne by them in their old profit-sharing ratio. A debit to a partner’s capital account reduces that capital. Step by step: identify the accumulated loss; distribute it among old partners in the old ratio; debit each old partner’s capital or current account; credit the account representing the loss, usually Profit and Loss Account debit balance or a related adjustment account. Option A is wrong because a credit would increase capital, whereas a loss must reduce capital. Option B is correct because accumulated loss decreases the old partners’ claims in the firm. Option C is wrong because a reserve is an accumulated profit, not the account to be credited for distributing a loss. Option D is wrong because no new cash transaction occurs; the adjustment is made in partners’ accounts. The new partner is not charged with a loss belonging to the pre-admission period. Memory cue: old loss means old partners’ capital debit.

Correct answer: A. Old partners current accounts

Under fixed capital method adjustments are made in current accounts. So reserve profit is credited to old current accounts.

Correct answer: A. Old partners capital accounts

Under fluctuating capital method adjustments go directly to capital accounts. Accumulated loss is debited to old partners.

Correct answer: B. ₹30,000

The General Reserve is distributed among the old partners in their old profit-sharing ratio. The total ratio is 3+2+1=6, and B’s share is 2 parts. Therefore, B’s share = ₹90,000 × 2/6 = ₹30,000. Dividing ₹90,000 equally among the three partners would be incorrect because their ratio is unequal. Exam tip: For distributing reserves, always use the old partners’ old profit-sharing ratio.

Correct answer: A. Because the General Reserve was created from profits earned before admission

The General Reserve is an accumulation of profits earned before the new partner’s admission, so it belongs only to the old partners. It will be distributed between them in their old ratio of 5:1—₹40,000 and ₹8,000—not to the incoming partner. Exam tip: Profits or reserves earned before admission are distributed among old partners in their old ratio.

Correct answer: A. Accumulated profit

A credit balance in the Profit and Loss Account indicates that the business has earned profits that have not yet been distributed or transferred elsewhere. Thus, it represents accumulated profit, not an accumulated loss. At the time of admission of a partner, this balance belongs to the partners who earned it before admission, so it is normally transferred to the old partners’ capital or current accounts in their old profit-sharing ratio. Option B is opposite in meaning because a debit balance represents accumulated loss. Option C is incorrect because the amount is not an obligation payable to an outside party, and Option D is incorrect because it is not an artificial asset. Therefore, option A is correct.

Correct answer: B. Accumulated loss

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

Correct answer: A. Old profit-sharing ratio

Reserves are accumulated from profits earned before the admission of a new partner. Since those earlier profits belong to the existing partners, the reserve must be distributed among them in the ratio in which they were entitled to share those profits at that time. That ratio is the old profit-sharing ratio, so option A is correct. The new profit-sharing ratio applies to profits earned after reconstitution and therefore cannot normally be used for an old reserve. The sacrificing ratio measures the share surrendered by old partners to the incoming partner and is mainly used in goodwill adjustments, not in distributing past reserves. Capital ratio is also irrelevant unless a specific agreement provides otherwise. Thus, the governing principle is ownership of past profits.

Correct answer: A. Because reserves are accumulated profits of past years, not compensation for sacrifice

Reserves are profits earned and accumulated in previous years. Therefore, on the admission of a new partner, they are distributed among the old partners in their old profit-sharing ratio. The sacrificing ratio relates to the sacrifice made by old partners in future profits and is generally used for goodwill adjustment. Option D is incorrect because the new partner’s capital does not determine the ratio for distributing reserves. Exam tip: use the old ratio for reserves and accumulated profits, and the sacrificing ratio for goodwill adjustment.

Correct answer: A. C may get an unfair share in the accumulated profits

A general reserve represents accumulated profits earned by the old partners in earlier years. Therefore, on admission, it should be distributed to A and B in their old profit-sharing ratio of 3:2. If it is not distributed, C may later receive a share in the reserve or profits arising from it, even though C did not earn those past profits. This would unfairly benefit the new partner at the expense of the old partners. Exam tip: On admission, a general reserve is transferred to the old partners’ capital accounts in their old ratio.

Correct answer: C. Zero

Claim and reserve are equal so no balance remains. Nothing will be distributed among old partners.

Correct answer: C. Zero

Investment Fluctuation Reserve is maintained to cover a possible fall in the value of investments. If an actual loss on investment occurs, the reserve is first used to absorb that loss. Here, the reserve is ₹30,000 and the investment loss is also ₹30,000. The entire reserve is therefore consumed by the loss.

The adjustment is ₹30,000 reserve − ₹30,000 loss = zero. Since no excess reserve remains after covering the loss, nothing can be distributed among the old partners. Hence option C, “Zero,” is correct. A distribution of ₹30,000 would be possible only if the reserve were greater than the loss. The old partners receive a surplus only after the relevant loss has been fully adjusted against the reserve.

Correct answer: C. ₹10000

Investment Fluctuation Reserve is available to absorb a fall in the value of investments. The investment loss is ₹35,000, while the reserve can absorb only ₹25,000. The amount not covered by the reserve is calculated as: extra loss = total loss − reserve = ₹35,000 − ₹25,000 = ₹10,000. Therefore, option C is correct. The reserve itself is not the total loss, so ₹25,000 is not the answer; ₹35,000 is the gross loss before adjustment, not the extra loss. The loss is first adjusted against the reserve, and the remaining ₹10,000 is charged to the partners according to the applicable old profit-sharing ratio when the reserve relates to the pre-admission period. Hence the numerical answer is ₹10,000.

Correct answer: A. Identify both and adjust net effect in old ratio

The direct answer is option A: identify both the accumulated profit and accumulated loss, then adjust their net effect among the old partners in the old ratio. Both items relate to the period before admission, so neither belongs to the new partner. An accumulated profit increases old partners’ capital, while an accumulated loss decreases it. If both exist, they can be combined to find the net amount, provided they are comparable amounts. Step by step: list the accumulated profit; list the accumulated loss; subtract the loss from the profit; if profit is larger, credit the net profit to old partners; if loss is larger, debit the net loss; distribute the net result in the old ratio. Option A is correct because it considers both items and prevents double or incomplete adjustment. Option B is wrong because ignoring the loss would overstate the amount credited. Option C is wrong because ignoring the profit would overstate the amount debited. Option D is wrong because these are pre-admission items belonging to old partners, not the new partner. In some accounting presentations the two items may be adjusted separately, but the economic result is the same net effect. Memory cue: old profit plus old loss means calculate the net old-period effect.

Correct answer: A. ₹12,000

The reserve is credited to the partners, while the Advertisement Suspense Account is written off by debiting the partners’ accounts. Therefore, the net amount available for distribution is ₹20,000 − ₹5,000 = ₹15,000. A’s share is ₹15,000 × 4/5 = ₹12,000. Hence, option A is correct. Exam tip: First calculate the net amount after adjusting any debit balance or accumulated loss, and then apply the profit-sharing ratio.

Correct answer: A. It will be distributed among the old partners in their old profit-sharing ratio

A free reserve represents accumulated profit earned before the new partner’s admission. Therefore, ₹12,600 will be distributed among the old partners in their old profit-sharing ratio. It is not given to the new partner; retaining it as a liability would be appropriate only when the reserve relates to an actual claim or known obligation. Exam tip: Distribute a free reserve, such as the General Reserve, among the old partners in their old ratio at admission.

Correct answer: A. Amount of that liability or claim

A related claim or liability is first adjusted against special reserve. Only the balance is shared among old partners.

Correct answer: C. Zero

General Reserve represents accumulated profits belonging to the old partners. When the entire reserve is transferred to the old partners’ capital or current accounts, the reserve account is debited and closed. Therefore, its balance in the balance sheet is zero. ₹18,000 would be possible only if half the reserve were distributed, but the question states that the entire amount is distributed. Exam tip: A reserve that is fully distributed has a nil balance after reconstitution.

Correct answer: A. Partner with 6 parts

Correct shares are 30000 and 20000 while equal sharing gives 25000 each. The partner with 6 parts loses ₹5000.

Correct answer: A. General Reserve

General Reserve is an amount accumulated by appropriating profits from previous years, so it represents accumulated profit. The debit balance of the Profit and Loss Account represents accumulated loss, while Advertisement Suspense Account and Preliminary Expenses represent unamortised or fictitious expenses. Exam tip: a reserve and a credit balance of the Profit and Loss Account indicate accumulated profit; a debit balance indicates accumulated loss.

Correct answer: C. Preliminary Expenses

Preliminary Expenses is a fictitious asset to be written off. It is debited to old partners in old ratio.

Correct answer: A. ₹10,000

Writing off preliminary expenses is a loss to the partnership, so it is debited to the old partners in their old profit-sharing ratio. A’s share is \(2/3\); therefore, the amount debited to A’s Capital Account is ₹15,000 × \(2/3\) = ₹10,000. ₹5,000 is B’s share, not A’s. Exam tip: Adjust accumulated losses and expenses written off among old partners in their old ratio unless the question specifies otherwise.

Correct answer: A. Old profits belong to old partners

The direct answer is Option A: adding reserves to old partners’ capital is based on the principle that old profits belong to the old partners. A reserve is usually an amount created out of profits earned in earlier periods and retained in the business. A new partner enters only from the date of admission, so that partner did not contribute to earning those earlier profits. Therefore, before admission, the reserve is credited or otherwise adjusted in favour of the old partners in their old profit-sharing ratio. Option A is correct. Option B is wrong because new profits earned after admission may be shared according to the new agreement, but they are not what this reserve represents. Option C is wrong because a reserve is not always a liability; its accounting treatment depends on its nature, and general reserves represent accumulated profits. Option D is wrong because capital is not necessarily equal to cash; it may include non-cash contributions and accounting adjustments. The fair rule is simple: past profit stays with past partners. Exam cue: reserve existing before admission belongs to old partners.

Correct answer: B. ₹30,200

The Reserve Fund is distributed among the old partners in their old profit-sharing ratio. The second partner’s share is 2/5. Therefore, the share = ₹75,500 × 2/5 = ₹30,200. Option A uses 3/5, which is the first partner’s share. Exam tip: For distributing reserves or accumulated profits on admission, use the old partners’ old ratio.

Correct answer: A. No direct effect

The direct answer is option A: there is no direct effect on the new partner’s capital from distributing accumulated profits. Accumulated profits, such as a general reserve or undistributed past profit, were earned before the new partner joined. They therefore belong to the old partners and are transferred to their capital or current accounts in the old ratio. Step by step: identify the accumulated profit; confirm that it arose before admission; calculate each old partner’s share in the old ratio; credit only the old partners. The new partner’s capital is not credited merely because a reserve exists. Option A is correct because the reserve adjustment is made among old partners. Option B is wrong because the new partner does not automatically receive old profits, so capital does not always increase. Option C is wrong because capital does not always decrease; there is no direct adjustment to it in this case. Option D is clearly wrong because nothing in reserve distribution makes the new partner’s capital zero. The new partner’s capital can be affected by separate matters, such as the capital introduced, goodwill arrangements, or agreed adjustments, but not directly by distribution of old accumulated profit. Memory cue: pre-admission reserve goes to old partners, not the incoming partner.