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CMA Intermediate · Financial Accounting · Admission of Partner

At the time of admission of a new partner, the firm's assets are revalued: stock is increased by Rs 20,000 and a provision for doubtful debts of Rs 5,000 is created. Old partners A and B share 1:1. What is the effect on the Revaluation Account and the capital accounts?

The Revaluation Account shows a net profit of Rs 15,000, being the Rs 20,000 gain on stock less the Rs 5,000 provision. It belongs to the old partners in their old ratio, so A and B are each credited Rs 7,500.

  1. ARevaluation profit of Rs 15,000; A and B capital each credited Rs 7,500Correct
  2. BRevaluation loss of Rs 15,000; A and B capital each debited Rs 7,500
  3. CRevaluation profit of Rs 25,000; A and B capital each credited Rs 12,500
  4. DRevaluation profit of Rs 15,000; A, B and the new partner each credited Rs 5,000

Explanation

Increase in stock is a gain of Rs 20,000 and the provision is a loss of Rs 5,000, giving a net profit of Rs 15,000. It is shared by the old partners only, in their old ratio 1:1, so each gets Rs 7,500. Adding the two amounts (Rs 25,000) ignores that the provision is a loss. The new partner does not share the revaluation result.

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