Multiple choice

The general reserve appearing in the books of firm of A and B is Rs. 80,000. The profit sharing ratio is 3 : 2. C is admitted as a new partner and the new profit ratio becomes 3 : 5 : 2. The partners decide to continue the balance of general reserve in the books. Pass a single journal entry for the adjustment of general reserve.

  1. C's capital a/c Dr. 16,000 B's capital a/c Dr. 8,000 To A's capital a/c 24,000

  2. A's capital a/c Dr. 24,000 To C's capital a/c 16,000 To B's capital a/c 8,000

  3. General reserve a/c Dr. 80,000 To B's capital a/c 48,000 To A's capital a/c 32,000

  4. C's capital a/c Dr. 16,000 To B's capital a/c 10,000 To A's capital a/c 6,000

  5. None of these
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A Correct answer
Explanation

The general reserve is distributed in the old ratio 3:2. A gets 48,000 and B gets 32,000. In the new ratio 3:5:2, the new shares are A: 24,000, B: 40,000, C: 16,000. The adjustment entry reflects the change in capital accounts to maintain the reserve balance.

AI explanation

When the general reserve is not distributed in cash but is instead adjusted through the partners' capital accounts, the adjustment is based on the sacrifice or gain in the new profit sharing ratio. A's old share was 3/5 and his new share is 3/10, so he sacrifices 3/10, making the adjustment Rs. 24000. B and C gain by 1/10 and 2/10 respectively, resulting in the journal entry debiting C's capital by Rs. 16000 and B's capital by Rs. 8000, and crediting A's capital by Rs. 24000.

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