Question

Statement I: General reserve appearing in the Balance Sheet at the time of reconstitution of the firm will always be distributed among the old partners in the old profit sharing ratio.

Statement II: If the partners decide to retain the General Reserve, they may adjust it in the capital, current accounts of the partners in their sacrifice/ gaining ratio by passing the following entry:

Gaining Partner's Capital/Current A/c   ...Dr.	XXX
To Sacrificing Partner's Capital/Current A/с		XXX

In the light of the above statements, choose the most appropriate answer from the options given below:

Options

• Both Statement I and Statement II are correct.

• Both Statement I and Statement II are incorrect.

• Statement I is correct but Statement II is incorrect.

• Statement I is incorrect but Statement II is correct.

Answer 1

Both Statement I and Statement II are correct.

Explanation:

• Statement I is correct because any General Reserve created in the past always belongs to the old partners and must be shared in their Old Profit Sharing Ratio.
• Statement II is correct because if partners mutually agree to retain the reserve in the books, they must pass an adjustment entry via the Gaining Partner to the Sacrificing Partner's capital accounts to balance out the value change.