Question

A, B and C sharing profits and losses in the ratio of 3 : 2 : 1, decide to share future profits and losses in the ratio of 4 : 3 : 2. 'Investment Fluctuation Reserve' appeared in the books at ₹ 1,50,000 at the time of change in profit sharing ratio, and Investments (market value ₹ 3,90,000) appears at ₹ 4,50,000. In such a case:

Options

• A's Capital A/c will be Debited by ₹ 5,000

• A's Capital A/c will be Credited by ₹ 5,000

• A's Capital A/c will be Credited by ₹ 45,000

• A's Capital A/c will be Credited by ₹ 40,000

Answer 1

A's Capital A/c will be Credited by ₹ 45,000

Explanation:

Step 1: Calculate the decrease in the value of investments

• Book Value of Investments = ₹ 4,50,000
• Market Value of Investments = ₹ 3,90,000

Loss on investments = ₹ 4,50,000 − ₹ 3,90,000 = ₹ 60,000

Step 2: Adjust Investment Fluctuation Reserve (IFR)

• Investment Fluctuation Reserve = ₹ 1,50,000
• Loss to be adjusted = ₹ 60,000

Balance IFR left = ₹ 1,50,000 − ₹ 60,000 = ₹ 90,000

Since the reserve is no longer required, the remaining ₹ 90,000 is distributed among the old partners in their old profit-sharing ratio (3 : 2 : 1).

Step 3: Distribution of ₹ 90,000

A = ₹ 90,000 × `3/6` = ₹ 45,000

B = ₹ 90,000 × `2/6` = ₹ 30,000

C = ₹ 90,000 × `1/6` = ₹ 15,000

Thus, A's Capital Account is credited by ₹ 45,000.