Answer based on following information
Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2 : 1 Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance sheet of Azad and Babli as on December 31, 2016 (before Chintan's admission) was as follows:
|
Liabilities |
Amount (₹) |
Assets |
Amount (₹) |
|
Creditors |
8,000 |
Cash in hand |
2,000 |
|
Bills payable |
4,000 |
Cash in bank |
10,000 |
|
General reserve |
6,000 |
Sundry debtors |
8,000 |
|
Capital accounts: *Azad 50,000 *Babli 32,000 |
82,000 |
Stock
|
10,000
|
|
|
|
Furniture |
5,000 |
|
|
|
Machinery |
25,000 |
|
|
|
Building |
40,000 |
|
|
1,00,000 |
|
1,00,000 |
It was agreed that:
(i) Chintan will bring in ₹12,000 as his share of goodwill premium.
(ii) Buildings were valued at ₹45,000, and Machinery at ₹23,000.
(iii) A provision for doubtful debts is to be created at 6% on debtors.
(iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
State journal entry to be passed for treatment of general reserve.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2)-
General Reserve A/c Dr. 6,000
To Azad's capital A/c 4,000
To Babli's capital A/c 2,000
General reserve is distributed between old partners in their old ratio.
Azad = $6,000 \times \frac{2}{3}$ = 4,000
Babli = $6,000 \times \frac{1}{3}$ = 2,000
The journal entry for this is as follows-
General Reserve A/c Dr. 6,000
To Azad's capital A/c 4,000
To Babli's capital A/c 2,000
(Reserve distributed between partners)
This will increase the capital balance of old partners.