At the time of admission of a partner following was the extract of Balance Sheet.
|
Investment fluctuation reserve |
₹2,00,000 |
Investment (market value ₹6,00,000) |
₹6,40,000 |
What entry will be passed?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1)-
Investment Fluctuation Reserve A/c Dr. ₹2,00,000
To Investment A/c ₹40,000
To Partners Capital A/c (Old Ratio) ₹1,60,000
The Investment Fluctuation Reserve (IFR) is created to cover any potential fall in the market value of investments. When a new partner is admitted, we must adjust the reserve based on the current market value of the investments.
Market value decrease = 6,40,000 - 6,00,000
= ₹40,000
This ₹40,000 will be taken from reserve and remaining reserve is transferred to remaining partners in old ratio.
Reserve = 2,00,000
Remaining = 2,00,000 - 40,000
= 1,60,000
The remaining surplus of ₹1,60,000 belongs to the old partners and must be distributed among them in their old profit-sharing ratio.
So, following journal entry passed for it-
Investment Fluctuation Reserve A/c Dr. ₹2,00,000
To Investment A/c ₹40,000
To Partners Capital A/c (Old Ratio) ₹1,60,000