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CMA Intermediate · Financial Accounting · Retirement of Partner

Asha, Bhavna and Charu share profits in the ratio 5:3:2. Bhavna retires. On the date of retirement, the firm's balance sheet shows a General Reserve of Rs 50,000. How should the General Reserve be treated in the books of the firm?

General Reserve is distributed among all partners, including the retiring partner, in the old profit-sharing ratio, by crediting their capital accounts, because reserves are undistributed profits that belong to all partners before retirement.

  1. ACredited to the capital accounts of Asha, Bhavna and Charu in 5:3:2Correct
  2. BCredited to the capital accounts of Asha and Charu only, in 5:2
  3. CTransferred to the Revaluation Account as a gain
  4. DRetained as a reserve and not distributed to anyone

Explanation

Accumulated reserves belong to all partners and are distributed among old partners in their old profit-sharing ratio on retirement. So General Reserve is credited to Asha, Bhavna and Charu in 5:3:2 (Rs 25,000, 15,000, 10,000). The retiring partner must receive her share.

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