Reconstitution of Partnership (Admission of Partner)
Objective Type Questions : Answer in one sentence only.
What is meant by Reconstitution of partnership ?
Reconstitution of partnership refers to a change in the existing relationship of partners due to a change in the existing agreement between them. It may be due to the change in Profit sharing ratio, on the eve of admission of a new partner, retirement or death of an existing partner.
What is meant by admission of partner?
When a new partner joins the firm with the consent of all the other partners, then a new agreement needs to be prepared. Such a procedure of admitting a new partner into a partnership firm is termed as admission of partner.
What is sacrifIce ratio?
The ratio in which the new partner (who has joined a partnership firm) is given the share by the existing partners of the firm is called Sacrifice ratio. So, it is the ratio in which the existing partners Sacrifice their share of Profit in favour of the new partner. Algebraically, it is expressed as:
Sacrifice ratio = Old ratio – New ratio
What does the excess of debits over credits in Profit and loss adjustment account indicate?
The excess of debits over credits in Profit and Loss Adjustment Account indicates the amount of net loss that needs to be shared by the old partners in their old Profit sharing ratio. This is done as the new partner is not liable for any losses due to the past activities of the old partners.
What is revaluation account?
Revaluation Account is an account that is opened at the time of admission, retirement and death of a partner. This account records the effect of every increase or decrease in the value of assets and liabilities. The balance of this account (which may be either Profit or loss) is transferred to the Old Partners’ Capital Accounts, as the new partner has no right over such Profits earned prior to his/her admission.
In what proportion is general reserve distributed amongst the old partners?
The amount of general reserve is to be distributed amongst the old partners in their old Profit sharing ratio. This reserve belongs to the old partners since it was created out of the Profits of the previous years; therefore, the new partners do not receive any share of the general reserve.
When is goodwill account raised in the books of the firm?
Goodwill Account is raised in the books of the firm at the time of admission of a new partner. The incoming partner brings his/her share of goodwill along to compensate the existing partners for the sacrifice made by them in favour of the new partner.
How is sacrifice ratio calculated?
sacrificing ratio is the ratio in which the existing partners sacrifice their share of Profit in favour of the incoming partner. Algebraically, it is expressed as:
sacrifice ratio = Old ratio – New ratio
Why a new partner is admitted?
The following are a few reasons for which a new partner is admitted to a partnership firm:
a. For additional capital amount
b. For endowment of knowledge and skills possessed by him/her
c. To enhance a firm’s future growth prospects and progress
d. To compete with the other firms
e. To replace the outgoing partner at the time of retirement and death of a partner
When is the ratio of sacrifice to be calculated?
Sacrificing ratio needs to be calculated at the time of admission of a new partner. It is done to determine the amount of compensation that is to be paid by the new partner to the old partners in exchange for the sacrifice of Profit share made by them.
Write the word/term or phrase which can substitute each of the following statements.
The account which shows change in the values of assets
Revaluation or profit and Loss Adjustment Account
Explanation: The account which shows change in the values of assets is called Revaluation or Profit and Loss Adjustment Account. This account is opened to record the changes in the values of assets and liabilities, so that the new partner is not put to any advantage or disadvantage.
The proportion in which old partners make a sacrifice.
Ratio of Sacrifice.
Explanation: The proportion in which the old partners make a sacrifice is regarded as the ratio of sacrifice. It is the amount that is foregone by all the old partners equally or by some of the partners in the agreed share.
Excess actual capital over proportionate capital.
Surplus Capital
Explanation: Excess of actual capital over proportionate capital is regarded as surplus capital. This surplus capital is either transferred to the current accounts or can be withdrawn by the old partners as per the terms of the partnership agreement.
Name of intangible asset having a value.
Goodwill
Explanation: An intangible asset is an asset with no physical existence. It cannot be
seen, touched or felt. Goodwill is an intangible asset that has a certain value.
Account which is debited when new partner brings cash for his share of goodwill.
Cash/Bank A/c
Explanation: Cash/Bank A/c is debited when the new partner brings cash for his/her share of goodwill, following the rule "Debit what comes in". This amount of goodwill (premium) is transferred to the capital accounts of sacrificing partners in the sacrificing ratio of the old partners.
Account which is credited when goodwill is withdrawn by old partners.
Explanation: Cash/Bank A/c is credited when goodwill is withdrawn from the business by the old partners, following the rule "Credit what goes out". The amount brought in by the new partner as goodwill can be either withdrawn by the sacrificing partners fully or partly or can even be retained in the business.
Profit and Loss Account appearing on the asset side of a balance sheet.
Profit & Loss Account (Debit balance) or undistributed losses
Explanation: Profit and Loss Account appearing on the Assets side of the Balance Sheet represents debit balance in the Profit & Loss Account (i.e. undistributed losses). Such losses are to be borne by the old partners in their old Profit sharing ratio.
Account which is opened to record the gains and losses on revaluation.
Profit and Loss Adjustment Account
Explanation: Profit and Loss Adjustment Account is opened to record the gains and losses on revaluation of assets and liabilities, so that the new partner is not put to any advantage or disadvantage. Any Profit or loss on revaluation is shared or borne by the old partners in their old Profit sharing ratio.
Change in the relationship between the partners.
Reconstitution of a partnership
Explanation: Change in the relationship between the partners is regarded as reconstitution of a partnership firm. The reconstitution of partnership firm is said to occur when there exists a change in Profit sharing ratio at the time of admission, retirement or death of a partner.
Select the most appropriate answer from the alternative given below and rewrite the sentence.
Account is debited when unrecorded liability is brought into business.
a) liability
b) revaluation
c) capital
d) current
Revaluation Account is debited when unrecorded liability is brought into business.
Explanation: The Revaluation Account is debited when unrecorded liability is brought into business. An unrecorded liability is one which was earlier omitted from the records and is now being considered (i.e. recorded). This leads to an increase in the amount of liabilities and so, the Revaluation Account is debited.
When goodwill is withdrawn by old partners ________________ a/c is credited.
a) cash/bank
b) capital
c) revaluation
d) Profit and Loss Adjustment
When goodwill is withdrawn by old partners Cash/Bank A/c is credited.
Explanation: When goodwill is withdrawn by the old partners Cash/Bank A/c is credited. This is because of the rule "Credit what goes out". The amount brought in by the new partner may be withdrawn by the sacrificing partners fully or partly.
Excess of proportionate capital over actual capital represents _________________.
a) surplus capital
b) deficit capital
c) Sacrifice
d) equal capital
Excess of proportionate capital over actual capital represents de8cit capital.
Explanation: Excess of proportionate capital over actual capital represents deficit capital. This deficit capital must be brought in by the old partners or it is to be transferred to their current accounts.
The proportion in which old partners make a Sacrifice is called _________________ ratio.
a) capital
b) gaining
c) Sacrifice
d) new
The proportion in which old partners make a Sacrifice is called sacrifice ratio.
Explanation: The proportion in which old partners make a Sacrifice is called Sacrifice ratio. It is the amount that is foregone by all the old partners equally or by some of the partners in the agreed share.
Jay, Vijay and Ajay are three partners sharing Profits in 3:2:1. They decided to admit Sanjay and give him 1/7th share, new profit sharing ratio of partners will be _________________.
a) equal
b) 3:2:1:2
c) 3:2:1:1
d) 2:3:1:2
Jay, Vijay and Ajay are three partners sharing Profits in 3:2:1. They decided to admit
Sanjay and give him 1/7th share, new Profit sharing ratio of partners will be 3:2:1:1.
Explanation: It is calculated as follows:-
Akash, Prakash and Deepak are partners who share profits as 3:2:1. They admit Suraj as a partner and decided to share future profits as 5:3:2:2. The sacrifice ratio will be __________
a) 1:1:0
b) 2:1:1
c) 0:1:3
d) 0:0:2
Akash, Prakash and Deepak are partners who share profits as 3:2:1. They admit Suraj as a partner and decided to share future profits as 5:3:2:2. The sacrifice ratio will be 1:1:0.
Explanation: It is calculated as follows:-
Sacrifice ratio = Old ratio – New ratio
The _____________ ratio is useful for making adjustment for goodwill among the old partners.
a) new
b) sacrifice
c) old
d) Profit and Loss Adjustment
The sacrifice ratio is useful for making adjustment for goodwill among the old partners.
Explanation: Sacrificing ratio is useful for making adjustment of goodwill among the old partners because the amount of goodwill brought in by the new partner is distributed amongst the old partners in their sacrificing ratio. This ratio represents the amount of profits which is foregone by them in favour of the new partner.
Krishna and Balram, who are equal partners, admit Arjun into partnership for 1/4th share, their new profit sharing ratio will be ________________.
a) 3:3:1
b) equal
c) 3:3:2
d) 2:2:1
Krishna and Balram, who are equal partners, admit Arjun into partnership for 1/4th share, their new profit sharing ratio will be 3:3:2.
Explanation: It is calculated as follows:
Let the total share be 1.
If any asset is taken over by partner from the firm _________________ account will be debited.
a) capital
b) revaluation
c) asset
d) Profit and Loss Adjustment
If any asset is taken over by partner from the firm capital account will be debited.
Explanation: If any asset is taken over by a partner from the firm, then his/her Capital Account is debited. The capital account of a partner has credit balance, which, on taking over of an asset, gets reduced to the extent of the value of the asset so taken over.
In case of admission of a partner, the profit or loss on revaluation of assets and liabilities is shared by _________________ partners.
a) all
b) old
c) new
d) none of these
In case of admission of a partner, the profit or loss on revaluation of assets and liabilities is shared by old partners.
Explanation: In case of admission of a partner, the profit or loss on revaluation of assets and liabilities is shared by the old partners in their old profit-sharing ratio. This is because profit on revaluation of assets and liabilities is a gain for the existing partners only and the new partner has no right on such profits earned prior to his/her admission.
State 'True' or 'False'
When goodwill is paid privately, no entry in the books of account is required.
True
Explanation: Goodwill/Premium paid outside the business does not have any link with the business; so, no entry is recorded in the books of accounts.
The goodwill brought in by a new partner is shared by the old partners.
True
Explanation: Goodwill brought in by a new partner is shared by the old partners in their sacrificing ratio. At the time of admission, the new partner acquires the right to share future profits; so, in exchange, he/she should compensate the sacrificing partners. Such compensation is known as premium for goodwill.
The goodwill brought in by the new partner is shared by all partners.
False
Explanation: Goodwill brought in by the new partner is shared only by the old partners in their sacrificing ratio. The new partner has no right on goodwill brought in by him.
Profit on revaluation account is distributed between the old partners on admission of a partner.
True
Explanation: Revaluation Account is prepared to record the effect of changes in the values of assets and liabilities prior to the admission of a new partner. If there is any profit on such revaluation, then it belongs to the existing partners only, since the new partner has no right on such profit arising out of revaluation.
The new partner must pay his share of goodwill in cash only.
False
Explanation: The new partner can pay his share of goodwill either in cash or kind. Besides this, the amount can also be paid privately (i.e. outside the business).
A new partner is admitted in the firm for getting additional capital and skill.
True
Explanation: There can be many reasons for admitting a new partner in a firm. For example, if the firm is short of capital, then a new partner can be admitted with the approval of all the partners. The new partner brings his or her share of capital, besides the skills possessed by him.
The credit balance of revaluation account means loss on revaluation account.
True
Explanation: The credit balance in the Revaluation Account represents the losses on revaluation of assets and liabilities. Such losses occur when the decrease in the value of assets and increase in the value of liabilities is more than the increase in the value of assets and decrease in the value of liabilities.
If the goodwill account raised up, goodwill account is debited.
False
Explanation: If the goodwill account is raised, then goodwill or premium account is credited, whereas, cash/ bank account is debited if the amount is brought in cash.
When goodwill is written off, goodwill amount is debited.
False
Explanation: If old (or existing) goodwill appears in the books of a firm, then at first, it is written off by debiting the Old Partners’ Capital Accounts in their old profit sharing ratio and crediting the Goodwill Account.
On admission of a partner, the amount of goodwill brought in cash is credited to goodwill account.
True
Explanation: As per Accounting Standard 26 issued by The Institute of Chartered Accountants of India (ICAI), if any partner brings in a certain amount of goodwill in cash, then cash/bank account is debited and goodwill account is credited. Such premium is distributed among the sacrificing partners in their sacrificing ratio.
