Question

Assertion (A): When the market value of Investments is more than the book value, the entire amount of Investment Fluctuation Reserve is credited to old partners in their old profit-sharing ratio.

Reason (R): Investment Fluctuation Reserve is a reserve created out of past profits and hence distributed among old partners in their old ratio.

In the context of the above two statements, which of the following is correct?

Options

• (A) and (R) both are correct and (R) correctly explains (A).

• Both (A) and (R) are correct, but (R) does not explain (A).

• Both (A) and (R) are incorrect.

• (A) is correct, but (R) is incorrect.

Answer 1

(A) and (R) both are correct and (R) correctly explains (A).

Explanation:

Both Assertion (A) and Reason (R) are correct and logically linked. Assertion (A) describes the specific accounting treatment: if the market value of investments exceeds the book value (meaning the reserve isn’t needed to cover a loss), the entire Investment Fluctuation Reserve is distributed. Reason (R) provides the underlying principle that justifies this distribution: the reserve was created from past profits belonging to the old partners. Since the reserve is not required for its intended purpose, it is returned to the creators in their original profit-sharing ratio.