A firm's balance sheet shows the following:

Workmen Compensation Reserve ₹70,000
Workmen Compensation claim ₹90,000

State the journal entry to be passed at the time of Reconstitution of firm.

Workmen Compensation Reserve A/c  Dr. ₹70,000
Revaluation A/c                                 Dr. ₹20,000
      To Workmen Compensation claim                    ₹90,000

The correct answer is Option (1) - 
Workmen Compensation Reserve A/c  Dr. ₹70,000
Revaluation A/c                                     Dr.  ₹20,000
      To Workmen Compensation claim                   ₹90,000

Reserve =  ₹70,000
Claim = ₹90,000
As reserve is less than claim so excess of claim(90,000 - 70,000) i.e. 20,000 is debited to revaluation account as it is a loss of firm.