On Dissolution of a firm, Investment fluctuation reserve appearing in the balance sheet will be:
Answer & explanation
Correct answer: option 4
The correct answer is option 4- Credited to all Partners' Capital A/c in their profit sharing ratio
Investment Fluctuation Reserve is a reserve created out of profits to cover possible losses on investments. Hence, it is in the nature of an accumulated profit.
At the time of dissolution: All reserves and accumulated profits are distributed among partners in their profit sharing ratio.
Therefore: IFR is credited to Partners’ Capital Accounts.
When is Investment Fluctuation Reserve (IFR) transferred to Realisation A/c?
Investment Fluctuation Reserve is transferred to the Realisation Account only when it is treated as a provision against investments, i.e., it is meant to adjust the value of investments at the time of dissolution.
This happens in the following cases:
1. When investments are also transferred to Realisation A/c
- If investments appear in the Balance Sheet and are being realised (sold),
- Then IFR is transferred to Realisation A/c (credit side) to adjust their book value.
2. When IFR is specifically used to cover loss/profit on sale of investments: IFR acts like a valuation adjustment, not just a reserve.
If no such adjustment or linkage is given in the question, IFR is treated as a reserve and transferred to Partners’ Capital Accounts.