In the case of a re-constitution of a partnership firm, if the value…

The correct answer is Option (1) → Excess amount of loss will be debited to Revaluation Account

An Investment Fluctuation Fund is a reserve kept aside out of profits to meet a fall in the market value of investments. On reconstitution, a fall in the value of investments is first met out of this fund. When the fall is larger than the fund, the fund is used up and the extra fall is a loss to the old partners, recorded through the Revaluation Account:

• Fall up to the amount of the fund: Investment Fluctuation Fund A/c Dr. To Investments A/c

• Excess of the fall over the fund: Revaluation A/c Dr. To Investments A/c

A loss is always on the debit side of the Revaluation Account, which is why the excess is debited to it.

Why the other options are incorrect

• Option (2) Excess amount of loss will be credited to Revaluation Account — Incorrect. The credit side of the Revaluation Account records gains; a loss is never credited to it.

• Option (3) Excess amount of gain will be debited to Revaluation Account — Incorrect. A fall in value that the fund cannot cover is a loss, not a gain.

• Option (4) Excess amount of gain will be credited to Revaluation Account — Incorrect. A gain would arise only if the investments rose in value; here they have fallen by more than the fund.