Multiple choice

Deepak, Farukh and Lilly were partners in a firm sharing profits in the ratio of $3 : 2 : 1$. On $28.2.2015$ Farukh retired from the firm. On Farukh's retirement there was a balance of $Rs 12,000$ in Workmen's Compensation Reserve which was no more required. On Farukh's retirement this amount will be:

  1. Debited to the capital accounts of the partners in their profit sharing ratio.

  2. Credited to the capital accounts of the partners in their profit sharing ratio.

  3. Credited to the capital accounts of Deepak and Lilly in their profit sharing ratio.

  4. Credited to the capital account of Farukh.
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B Correct answer
Explanation

Workmen's Compensation Reserve is a liability created out of profits. Upon retirement, any unutilized balance in this reserve is distributed among all partners in their old profit-sharing ratio.

AI explanation

When a reserve like Workmen's Compensation Reserve is no longer required, the entire balance is first transferred to the partners' capital accounts in their old profit sharing ratio. The existing partners and the retiring partner all receive credit for the distribution of the reserve. Therefore, the Rs 12,000 balance will be credited to the capital accounts of all the partners in their profit sharing ratio.

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