Sonu, Monu and Gopal are partners in a firm sharing profits and losses in the ratio of 3:2:1. Balance sheet shows workmen compensation reserve of Rs. 48,000. On retirement of Sonu, liability for workmen compensation reserve Rs. 24,000 is to be accounted. What amount of workmen compensation reserve is to be shown in the balance sheet of the reconstituted firm?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → NIL
A Workmen Compensation Reserve is kept out of profits to meet claims of workers. When the firm is reconstituted and the actual liability is known, the reserve is used up in two parts: the amount of the liability is transferred to a provision (claim) account, and the excess, being free profit, is distributed among all the partners in the old ratio. Nothing is left in the reserve.
Reserve in the books = Rs. 48,000
Liability to be provided = Rs. 24,000, transferred to Workmen Compensation Claim (Provision) A/c
Excess = Rs. 48,000 − Rs. 24,000 = Rs. 24,000, credited to Sonu, Monu and Gopal in 3:2:1
Sonu Rs. 12,000; Monu Rs. 8,000; Gopal Rs. 4,000
Workmen Compensation Reserve left = NIL
The Rs. 24,000 does appear in the new Balance Sheet, but as a liability (claim or provision), not as a reserve.