A, B and C are partners with profit sharing ratio of 2:1 respectively…

The correct answer is Option (1) → Profit and Loss Suspense A/c Dr To C's Capital A/c

Note: For this question, Option (3) could also be a possible answer, as explained below.

C died during the year (on 1 October 2021), so his share of profit from the start of the year up to the date of death must be credited to his capital account at once, without waiting for the year's accounts. The book gives two ways of doing this.

Option (1) Profit and Loss Suspense A/c Dr To C's Capital A/c — Correct. C's share of profit is debited to Profit and Loss Suspense Account and credited to his capital account. The suspense account is later closed by transfer to the capital accounts of the gaining partners A and B.

Option (2) C's Capital A/c Dr To Profit and Loss Suspense A/c — Incorrect. This reverses the entry: it would reduce C's capital, whereas his share of profit has to be added to it.

Option (3) A's Capital A/c Dr B's Capital A/c Dr To C's Capital A/c — Should also be correct. The book allows this single entry in place of the two suspense-account entries: the gaining partners' capital accounts are debited in their gaining ratio and the deceased partner's capital account is credited with his share of profit.

Option (4) C's Capital A/c Dr To A's Capital A/c To B's Capital A/c — Incorrect. This takes the amount away from C and gives it to A and B, the opposite of crediting C with his share of profit.