Comprehension Passage
R, S, and M were carrying on business in partnership sharing profits in the ratio 3:2:1, respectively. On March 31, 2017, the Balance Sheet of the firm stood as follows:
Balance Sheet as on March 31, 2017
| Liabilities | Amount (Rs.) |
|---|---|
| Sundry Creditors | 16,000 |
| Capitals: | |
| R | 20,000 |
| S | 7,500 |
| M | 12,500 |
| Total | 56,000 |
| Assets | Amount (Rs.) |
|---|---|
| Building | 23,000 |
| Debtors | 7,000 |
| Stock | 12,000 |
| Patents | 8,000 |
| Bank | 6,000 |
| Total | 56,000 |
Shyam retired on the above mentioned date on the following terms:
(a) Buildings to be appreciated by Rs. 8,800.
(b) Provision for doubtful debts to be made @ 5% on debtors.
(c) Goodwill of the firm to be valued at Rs. 9,000.
(d) Rs. 5,000 to be paid to S immediately and the balance due to him to be treated as a loan carrying interest @ 6% per annum.
After appreciating the building by Rs. 8,800, which of the following is the correct accounting treatment for the building in the firm’s books?
1
The value of the building will be adjusted against the capital accounts of the partners
2
The building will be revalued as a part of the assets and reflected in the new balance sheet
3
The appreciation in the building value will be credited to a special reserve account
4
The building’s appreciation is adjusted by reducing liabilities