At the time of admission of a new partner, if separate investments equal in value to the Reserve Fund are present in the books, what is the correct accounting treatment?

Correct answer: Distribute the Reserve Fund among the old partners in their old profit-sharing ratio and retain the investments as an asset

The Reserve Fund represents accumulated profit earned by the old partners. Therefore, on the admission of a new partner, it is transferred to the old partners’ Capital Accounts in their old profit-sharing ratio. The existence of separate investments of an equal amount does not change this treatment, because the investments are real assets and are not distributed merely because their value matches the Reserve Fund. Hence, option B is incorrect. Exam tip: Distribute accumulated profits or reserves among the old partners, but adjust the related asset only when its sale, revaluation, or distribution is specifically required.