In the case of a re-constitution of a partnership firm, if the value of decrease in investment exceeds the Investment Fluctuation Fund, the :-

Excess amount of loss will be debited to Revaluation Account

The correct answer is option 1- Excess amount of loss will be debited to Revaluation Account.

If the value of decrease in investment exceeds the Investment Fluctuation Fund, the excess amount of loss will be debited to Revaluation Account.

In the reconstitution of a partnership firm (due to admission, retirement, or change in ratio), if the book value of investments falls and the firm has an Investment Fluctuation Fund (IFF), then the IFF is used first to absorb the loss due to fall in investment value. If the loss is greater than the IFF, the excess loss (i.e. shortfall) is treated as a revaluation loss.

For example- Investment Fluctuation Fund = ₹5,000 Decrease in Investment Value = ₹7,000 Excess loss = ₹2,000. This ₹2,000 is debited to the Revaluation Account.