Question: Indu, Vijay and Pawan were partners in a firm sharing profits in the ratio of 4: 3: 3. They admitted Subhash into partnership with effect from 1* April, 2022. New profit sharing ratio among Indu, Vijay, Pawan and Subhash will be 3: 3: 2: 2. An extract of their Balance Sheet as at 31% March, 2022 is given below :
The correct answer is –
The correct accounting treatment of ‘investment fluctuation reserve’ at the time of Subhash’s admission is:
JOURNAL Debit: Investment Fluctuation Reserve A/c – 80,000 (the current balance) Credit: Revaluation A/c – 80,000 (to adjust the market value of the investment to its original cost)
Explanation: When Subhash is admitted, the new profit sharing ratio comes into effect. This means that the old balance sheet needs to be revalued to adjust the assets and liabilities to their current market value. In this case, the market value of the investment is lower than its original cost, resulting in a decrease in its value. This decrease in value is reflected in the investment fluctuation reserve account.
Therefore, the investment fluctuation reserve account needs to be debited with the current balance of 80,000 and the revaluation account needs to be credited with the same amount to adjust the market value of the investment to its original cost. Option (A) is the correct answer.
