At the time of admission of a partner following was the extract of Balance Sheet.

What entry will be passed?

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 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