A & B are partners sharing profits & losses in the ratio of 3 : 2. They admit C for 1/4th share in the profits. On the date of admission, there exists a General Reserve of ₹4,60,000. They decided to retain it in the new Balance Sheet. The accounting treatment for it would be:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) - C's capital A/c will be debited by ₹1,15,000.
Old ratio = 3:2
C admit with 1/4th share
As no other information is given so old ratio becomes the sacrificing ratio i.e. 3:2.
General reserve = ₹4,60,000
As firm wants to retain the general reserve so admitting partner share is debited with his share and sacrificing partners credited in the sacrificing ratio.
C share in general reserve = 4,60,000 x 1/4
= ₹1,15,000
A's share = 1,15,000 x 3/5
= ₹69,000
B's share = 1,15,000 x 2/5
= ₹46,000
So journal entry will be for the adjustment of general reserve is as follows-
C's capital A/c Dr. ₹1,15,000
To A's capital A/c ₹69,000
To B's capital A/c ₹46,000
(General Reserve adjusted in the gaining ratio)