A & B are partners sharing profits & losses in the ratio of 3 : 2. They admit C for 1/4th share in the profits. On the date of admission, there exists a General Reserve of ₹4,60,000. They decided to retain it in the new Balance Sheet. The accounting treatment for it would be :
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → C's capital A/c will be debited by ₹1,15,000
The partners want to keep the General Reserve in the books. C will now share in it, though it was earned by A and B, so C must compensate A and B for his share through an adjusting entry.
C’s share of the reserve = ₹4,60,000 × 1/4 = ₹1,15,000
C is the only new partner, so A and B sacrifice in their old ratio 3 : 2.
A’s share = ₹1,15,000 × 3/5 = ₹69,000; B’s share = ₹1,15,000 × 2/5 = ₹46,000
Entry: C’s Capital A/c Dr. ₹1,15,000 To A’s Capital A/c ₹69,000 To B’s Capital A/c ₹46,000
A and B are credited, not debited, so only Option (1) is right.