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CMA Intermediate · Financial Accounting · Admission of Partner

A and B share profits 3:2. Their balance sheet shows General Reserve of Rs 50,000 and Profit and Loss Account (debit balance) of Rs 20,000. C is admitted for 1/5 share. How should the reserve and the debit balance be treated in the books on C's admission?

Reserves and accumulated losses at admission are shared by the old partners in their old profit ratio. Net reserve Rs 30,000 is credited 3:2, so A gets Rs 18,000 and B Rs 12,000, because the new partner has no claim on past profits or losses.

  1. ACredit A's capital Rs 18,000 and B's capital Rs 12,000 for reserve; debit A Rs 12,000 and B Rs 8,000 for the lossCorrect
  2. BTransfer both to the Revaluation Account
  3. CCredit the reserve to the Capital Accounts of all three partners in the new ratio
  4. DLeave both balances unchanged in the books since the firm continues

Explanation

Accumulated reserves and losses belong to the old partners and are distributed in the old ratio 3:2. Reserve Rs 50,000 gives A Rs 30,000 and B Rs 20,000; loss Rs 20,000 debits A Rs 12,000 and B Rs 8,000. Net effect: A credited Rs 18,000 and B Rs 12,000. Sharing in the new ratio would wrongly give the new partner a share.

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