On the date of admission of a partner there was a balance of ₹45,000 in the account of machinery. It is found undervalued by 10%. The value of machinery will appear in the new balance sheet at:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → ₹50,000
“Undervalued by 10%” means the book figure is 10% below the true value. So ₹45,000 is 90% of the true value, not the true value less 10%.
90% of true value = ₹45,000
True value = ₹45,000 × 100/90
= ₹50,000
Increase recorded through the Revaluation Account = ₹50,000 − ₹45,000 = ₹5,000. Adding 10% of the book value (₹45,000 + ₹4,500 = ₹49,500) is the common mistake: it takes 10% of the wrong base.