Question 1

What does reconstitution of a partnership firm refer to?

Accepted Answer

Changing the existing partnership agreement without dissolving the firm — Reconstitution of a partnership firm involves making changes in the existing partnership agreement, such as admission, retirement, or change in profit-sharing ratio, without dissolving the firm. The firm continues its business under modified terms.

Question 2

Which of the following is NOT a reason for reconstitution of a partnership firm?

Accepted Answer

Dissolution of the firm — Reconstitution involves changes within the partnership without ending the firm. Dissolution means the firm ceases to exist, which is not reconstitution.

Question 3

Which account is prepared to record changes in asset and liability values on admission of a new partner?

Accepted Answer

Revaluation Account — The Revaluation Account is prepared to record the increase or decrease in assets and liabilities to their current market values on admission of a new partner.

Question 4

Goodwill on admission of a new partner is adjusted by crediting the capital accounts of:

Accepted Answer

Old partners only — Goodwill is credited to the old partners’ capital accounts in their old profit-sharing ratio to compensate them for the new partner’s share in goodwill.

Question 5

Which method of goodwill valuation calculates goodwill as Average Profit multiplied by Number of Years' Purchase?

Accepted Answer

Average Profit Method — The Average Profit Method values goodwill by multiplying the average profit of the firm by the number of years' purchase agreed upon.

Question 6

Calculate goodwill using Super Profit Method if the actual profit is ₹2,50,000, normal profit is ₹2,00,000, and number of years' purchase is 3.

Accepted Answer

₹1,50,000 — Given: Actual Profit = ₹2,50,000, Normal Profit = ₹2,00,000, Number of Years' Purchase = 3
Find: Goodwill
Formula: Goodwill = Super Profit × Number of Years' Purchase
Solution:
Step 1: Super Profit = Actual Profit - Normal Profit = ₹2,50,000 - ₹2,00,000 = ₹50,000
Step 2: Goodwill = ₹50,000 × 3 = ₹1,50,000
Answer: ₹1,50,000
Note: Students often forget to subtract normal profit from actual profit to find super profit.

Question 7

On admission of a new partner, the revaluation account shows a debit balance of ₹20,000. How is this loss shared among the old partners?

Accepted Answer

Shared among old partners in their old profit-sharing ratio — Loss on revaluation is borne by old partners only, in their old profit-sharing ratio, as it relates to the firm before the new partner's admission.

Question 8

Which entry correctly adjusts reserves on admission of a new partner when reserves amount to ₹50,000?

Accepted Answer

Debit Reserves Account ₹50,000; Credit Old Partners’ Capital Accounts ₹50,000 in old profit-sharing ratio — Reserves belong to old partners and are credited to their capital accounts in old profit-sharing ratio by debiting the Reserves Account.

Question 9

Prepare the journal entry for the new partner bringing ₹1,00,000 as capital and ₹30,000 as goodwill in cash on admission.

Accepted Answer

— Journal Entry:
Bank Account Dr. ₹1,30,000
  To New Partner’s Capital Account ₹1,00,000
  To Goodwill Account ₹30,000
Explanation: The new partner brings ₹1,00,000 as capital and ₹30,000 as goodwill in cash. Bank account is debited with total cash received, and capital and goodwill accounts credited accordingly.

Question 10

Explain the importance of preparing partners’ capital accounts after the admission of a new partner.

Accepted Answer

— Partners’ capital accounts show each partner’s equity in the firm after admission. They reflect adjustments for goodwill, revaluation profits or losses, reserves, and the new partner’s capital contribution. Maintaining these accounts ensures transparency and clarity in the firm’s financial position, facilitating accurate profit-sharing and preparation of the new balance sheet.

Question 11

Which of the following best describes the balance of the Revaluation Account after adjusting assets and liabilities on admission?

Accepted Answer

It represents the net profit or loss due to revaluation — The balance of the Revaluation Account after adjusting assets and liabilities shows the net gain or loss arising from revaluation, which is shared among old partners.

Question 12

On admission, if the new partner does not bring goodwill in cash, how is goodwill adjusted?

Accepted Answer

By debiting the new partner’s capital account and crediting old partners’ capital accounts in sacrificing ratio — If goodwill is not brought in cash, the new partner’s capital account is debited and old partners’ capital accounts are credited in the sacrificing ratio to compensate old partners.

Question 13

Which of the following is NOT adjusted during admission of a new partner?

Accepted Answer

Firm’s bank overdraft limit — Bank overdraft limit is not adjusted during admission; only goodwill, reserves, accumulated profits, and revaluation of assets and liabilities are adjusted.

Question 14

A firm’s assets are revalued upward by ₹40,000 and liabilities are decreased by ₹10,000 on admission of a new partner. What is the balance of the Revaluation Account?

Accepted Answer

₹50,000 (Profit) — Given: Increase in assets = ₹40,000, Decrease in liabilities = ₹10,000
Find: Balance of Revaluation Account
Formula: Balance = Increase in assets + Decrease in liabilities
Solution:
Step 1: Balance = ₹40,000 + ₹10,000 = ₹50,000
Answer: ₹50,000 profit on revaluation
Note: Profit on revaluation is credited to old partners' capital accounts.

Question 15

Why is goodwill considered an intangible asset in partnership accounting?

Accepted Answer

— Goodwill is an intangible asset because it represents the firm’s reputation, brand value, and earning capacity beyond its tangible assets. It cannot be seen or touched but has monetary value and affects the firm’s profitability.

Reconstitution of a Partnership Firm

Reconstitution of a Partnership Firm — Study Notes

Introduction

Admission of a Partner

Treatment of Goodwill on Admission

Practice Questions — Reconstitution of a Partnership Firm

All 4 Chapters in Accountancy-I