What is the effect on old partners capital when old reserve is distributed?

Correct answer: Capital increases

The direct answer is Option A: Old partners’ capital increases. A reserve is an accumulated profit earned for the old partnership. When it is distributed on admission, each old partner receives his or her share according to the old profit-sharing ratio. The accounting entry credits the old partners’ capital or current accounts because a credit increases their claim. Option A is correct. Option B is wrong because distributing an old reserve does not reduce the old partners’ capital; it adds their share of past profit. Option C is wrong because there is no rule that capital becomes zero. Option D is wrong because the distribution definitely affects the old partners’ accounts. The new partner does not receive this old reserve because the profit was earned before admission. Exam cue: old reserve equals old profit; old profit is credited to old partners.