Arjun, Vasisht and Keshav were partners in a business sharing profits equally. Vasisht retires on 31^st March 2022 when the Balance sheet stood as follows:

Balance Sheet as at 31^st March 2022

Additional information:

1. Arjun and Keshav decided to share future profits in the ratio of 3 : 2
2. Value of Land and Building appreciated by 12%
3. Value of Goodwill of the firm ₹37,500.
4. A provision for doubtful debts is maintained @ 8%
5. Inventory includes an item of ₹450 which has become obsolete

On the basis of the following information answer the question.

Show the treatment of General Reserve if partners do not want to distribute it.

Arjun's Capital A/c Dr.     ₹3,000
Keshav's Capital A/c Dr.   ₹750
         To Vasisht's Capital A/c          ₹3,750

The correct answer is Option (2) - 

Arjun's Capital A/c Dr.     ₹3,000
Keshav's Capital A/c Dr.   ₹750
         To Vasisht's Capital A/c          ₹3,750

If partners do not distribute the general reserve the share of Vasisht will be adjusted in the gaining ratio.

Vasisht share in general reserve = 11250 x 1/3
                                               = ₹3750

This will be distributed in the gaining ratio(4:1) between remaining partners.

Arjun share = 3750 x 4/5
                  = 3000

Keshav share = 3750 x 1/5
                     = 750

Both partners account is debited with the respective amount of their share to compensate Vasisht for the general reserve.

Note-
Old ratio = 1:1:1 (Arjun, Vasisht and Keshav)
Vasisht retires
New ratio = 3:2 (Arjun and Keshav)

Gain of Arjun = 3/5 - 1/3
                    = (9-5)/15
                    = 4/15

Gain of Keshav = 2/5 - 1/3
                      = (6-5)/15
                      = 1/15

Gaining ratio = 4/15:1/15
                    = 4:1