Question

Question 3 :

Furniture of vendor firm recorded in
the books at Rs.2,50,000, were taken
over by the partner at an agreed
value of Rs.1,75,000, the amount to
be debited to partners' capital
account will be:
Rs. 2,50,000
Rs.75,000
Rs.4,25,000
Rs. 1,75,000

Answer 1

Rs. 2,50,000

Explanation:

When a partnership distributes inventory items (hot asset) to its partners, the basis of the inventory items is used to record the transaction. Only when partnerships distribute assets other than hot assets will the fair market value of the assets be used to record the transaction.

The logic is that inventory items are valued at lower of cost or market value. This means that inventory items are already valued at FMV or cost, whichever is less. If the partnership recorded the transaction using Rs.1,75,000, then it would have to record a loss, and distributions cannot generate losses to a partnership. The only way to record the inventory items at Rs.1,75,000 is that previously the partnership writes down inventory.