Answer & Solution
Answer: Option
A
Solution:
When a new partner is admitted, the firm revalues its assets and liabilities to show their current and fair value.
Any increase or decrease in the value of assets and liabilities represents a profit or loss that has arisen before the admission of the new partner.
Since this gain or loss relates to the period when only old partners existed, it belongs exclusively to the old partners.
Therefore, the profit or loss from revaluation is transferred to the capital accounts of old partners in their old profit-sharing ratio.
Example:
Suppose A and B are partners sharing profits in the ratio 3:2. Their building is recorded at ₹1,00,000, but its current market value is ₹1,50,000.
There is an increase of ₹50,000, which is a gain.
This gain is credited to the Revaluation Account and then transferred to A and B in the ratio 3:2.
So, A gets ₹30,000 and B gets ₹20,000 in their capital accounts.
This adjustment is made before the new partner joins, ensuring that the new partner does not get any share of past gains.
Hence, revaluation is done for the benefit of old partners.
