StudyTunnel Logo
StudyTunnel
by BhamuIntelli Systems LLP

Home

School

CBSE

Class 12 Commerce

Accountancy

Reconstitution of a Partnership Firm – Admission of a Partner

Reconstitution of a Partnership Firm – Admission of a Partner

Action PlanNotesQuestionsMock-Test
Study Action Plan (Sorted by Difficulty)
Accounting Standard 26: Intangible Assets
Accuracy: 44%
Total Attempted25
Total Correct11
Total Incorrect14
Difficulty Level:
High
Profit Sharing and Sacrificing Ratios
Accuracy: 56%
Total Attempted41
Total Correct23
Total Incorrect18
Difficulty Level:
Medium
Goodwill Valuation and Treatment
Accuracy: 71%
Total Attempted28
Total Correct20
Total Incorrect8
Difficulty Level:
Medium
Hidden Goodwill
Accuracy: 75%
Total Attempted4
Total Correct3
Total Incorrect1
Difficulty Level:
Low
Revaluation of Assets and Liabilities
Accuracy: 84%
Total Attempted25
Total Correct21
Total Incorrect4
Difficulty Level:
Low
Reconstitution of a Partnership Firm
Accuracy: 90%
Total Attempted20
Total Correct18
Total Incorrect2
Difficulty Level:
Low
Journal Entries for Partner Admission
Accuracy: 92%
Total Attempted25
Total Correct23
Total Incorrect2
Difficulty Level:
Low
Adjustment for Accumulated Profits and Losses
Accuracy: 100%
Total Attempted9
Total Correct9
Total Incorrect0
Difficulty Level:
Low

Learning Objectives

Top

Learning Objectives

  • Explain the concept of reconstitution of partnership firm.
  • Identify the matters that need adjustments in the books of the firm when a new partner is admitted.
  • Determine the new profit sharing ratio and calculate the sacrificing ratio.
  • Define goodwill and enumerate the factors that affect it.
  • Explain the methods of valuation of goodwill.
  • Describe how goodwill will be treated under different situations when a new partner is admitted.
  • Make necessary adjustments for revaluation of assets and reassessment of liabilities.
  • Make necessary adjustments for accumulated profits and losses.
  • Determine the capital of each partner, if required according to the new profit sharing ratio and make necessary adjustments.
  • Make necessary adjustments on change in the profit sharing ratio among the existing partners.

Practice, Analyze & Improve

Dont just read—test your knowledge! Unlock the Student Workspace to take chapter tests and get instant performance insights.

Deep Analytics

Peer Comparison

Track Progress

Claim Free Account100% Free • No credit card required

Revision Notes & Summary

Top

Admission of a Partner

Key Concepts

  • Reconstitution of Partnership Firm: Change in the existing partnership agreement.
  • Revaluation of Assets: Adjusting the value of assets at the time of a partner's admission.
  • Goodwill: Intangible asset representing the firm's reputation.
  • Profit Sharing Ratio: The ratio in which profits are shared among partners.
  • Sacrificing Ratio: The ratio in which existing partners give up their share of profits for the new partner.

Matters Requiring Adjustments

  1. Goodwill: Adjustments must be made for goodwill to ensure the new partner does not benefit from past profits without compensation.
  2. Revaluation of Assets and Liabilities: Necessary adjustments are made through a Revaluation Account, distributing gains or losses among old partners in their profit-sharing ratio.
  3. Accumulated Profits and Losses: These should be transferred to old partners' accounts in their profit-sharing ratio.
  4. Capital Adjustments: Partners' capitals may need to be adjusted to align with the new profit-sharing ratio.

Treatment of Goodwill

  • Goodwill is valued at the time of a new partner's admission and adjustments are made based on whether the new partner brings in cash for goodwill.
  • If the new partner does not bring cash, their capital account is debited for their share of goodwill, and old partners' capital accounts are credited in their sacrificing ratio.

Examples of New Profit Sharing Ratios

  1. Example 1: A and B share profits in a 3:2 ratio. C is admitted for 1/6 share. New ratio: 3:2:1.
  2. Example 2: A, B, C share profits in 3:2:1 ratio. D is admitted for 10% profits. New ratio: 9:6:3:2.
  3. Example 3: X and Y share profits in 5:3 ratio. Z is admitted for 1/10 share acquired equally from X and Y. New ratio: 23:13:4.

Journal Entries for Goodwill

  • When Goodwill is Brought in Cash:
    • Debit Bank Account
    • Credit Partner's Capital Account
    • Credit Premium for Goodwill Account
  • When Goodwill is Not Brought in Cash:
    • Debit Partner's Current Account for Goodwill
    • Credit Old Partners' Capital Accounts in Sacrificing Ratio.

Balance Sheet Example

LiabilitiesAmount (Rs.)
Ashish Capital80,000
Dutta's Capital35,000
Creditors15,000
Bills Payable10,000
Total1,40,000
AssetsAmount (Rs.)
Land & Building35,000
Plant45,000
Debtors22,000
Less: Provision2,000
Stock35,000
Cash5,000
Total1,40,000

Checklist for Understanding

  1. Identify adjustments needed at the time of a new partner's admission.
  2. Understand the necessity of determining a new profit-sharing ratio.
  3. Define and calculate the sacrificing ratio.
  4. Recognize the treatment of goodwill under different scenarios.
Do you belong in the Top 10%?

Our analytics show that most students struggle with specific concepts in Reconstitution of a Partnership Firm – Admission of a Partner. Take a free diagnostic test to generate your personal Learning DNA profile.

Practice Test – MCQs, True/False

Top

Multiple Choice Questions

A.

Internally generated goodwill

B.

Purchased goodwill

C.

Internally generated brands

D.

Both option_a and option_c
Correct Answer: D

Solution:

AS 26 specifies that internally generated goodwill and brands should not be recognized as intangible assets.

Chapter Concept:

Accounting Standard 26: Intangible Assets

A.

Rs. 30,000

B.

Rs. 1,10,000

C.

Rs. 22,000

D.

Rs. 50,000
Correct Answer: B

Solution:

The total capital of the firm should be Rs. 3,00,000 (Rs. 60,000 \times 5), but the actual capital is Rs. 1,90,000 (Rs. 80,000 + Rs. 50,000 + Rs. 60,000). Therefore, the hidden goodwill is Rs. 1,10,000 (Rs. 3,00,000 - Rs. 1,90,000).

Chapter Concept:

Hidden Goodwill

A.

To increase the firm's capital

B.

To compensate existing partners for their share in super profits

C.

To cover the firm's liabilities

D.

To pay off the firm's debts
Correct Answer: B

Solution:

Goodwill is brought in by a new partner to compensate the existing partners for the loss of their share in super profits.

Chapter Concept:

Goodwill Valuation and Treatment

A.

9:7:4

B.

8:8:4

C.

6:10:4

D.

10:6:4
Correct Answer: A

Solution:

Z acquires 3/20 from X and 1/20 from Y, making the new ratio 9:7:4.

Chapter Concept:

Profit Sharing and Sacrificing Ratios

A.

Admission of a new partner

B.

Change in profit-sharing ratio

C.

Issuance of new shares

D.

Retirement of a partner
Correct Answer: C

Solution:

Issuance of new shares is not a mode of reconstitution of a partnership firm; it is related to corporate share capital.

Chapter Concept:

Reconstitution of a Partnership Firm

A.

New Partner's Capital Account

B.

New Partner's Current Account

C.

Goodwill Account

D.

Bank Account
Correct Answer: B

Solution:

When the new partner does not bring his share of goodwill, his current account is debited for the amount not brought.

Chapter Concept:

Hidden Goodwill

A.

Among all partners in the new profit sharing ratio

B.

Among old partners in the old profit sharing ratio

C.

Only to the new partner

D.

Among all partners equally
Correct Answer: B

Solution:

Accumulated profits are distributed among the old partners in the old profit sharing ratio before the admission of a new partner.

Chapter Concept:

Adjustment for Accumulated Profits and Losses

A.

The ratio in which the new partner sacrifices his share to the old partners.

B.

The ratio in which the old partners agree to sacrifice their share of profit in favor of the incoming partner.

C.

The ratio in which the new partner's capital is divided among the old partners.

D.

The ratio in which the firm's profits are distributed to all partners.
Correct Answer: B

Solution:

The sacrificing ratio is the ratio in which the old partners agree to sacrifice their share of profit in favor of the incoming partner.

Chapter Concept:

Journal Entries for Partner Admission

A.

Transferred to Narender's capital account

B.

Transferred to Rajinder and Surinder's capital accounts in their old profit sharing ratio

C.

Distributed equally among all partners

D.

Written off as a loss
Correct Answer: B

Solution:

The general reserve is credited to Rajinder and Surinder's capital accounts in the ratio of 4:1, and the debit balance of the profit and loss account is debited to their capital accounts in the same ratio.

Chapter Concept:

Hidden Goodwill

A.

The existing goodwill is written off in the old profit sharing ratio

B.

The existing goodwill is retained as it is

C.

The existing goodwill is credited to the new partner's account

D.

The existing goodwill is debited to the new partner's account
Correct Answer: A

Solution:

When goodwill already exists in the books, it is written off in the old profit sharing ratio at the time of admission of a new partner.

Chapter Concept:

Goodwill Valuation and Treatment

Experience the StudyTunnel Method

We do not just give you mock tests. We guide you through a gamified, AI-driven learning path designed to guarantee mastery.

Step 1: Practicing the Concepts

Reconstitution of a Partnership Firm – Admission of a Partner

Step 2: Master Boss Exam
Locked • Full Phase Assessment
Step 3: Redemption Arena
Locked • AI Weakness Tracker

True or False

Correct Answer: False

Solution:

According to Accounting Standard 26, internally generated goodwill should not be recognized as an intangible asset.

Chapter Concept :

Accounting Standard 26: Intangible Assets

Correct Answer: True

Solution:

According to the provided excerpts, when a new partner is admitted, any existing goodwill in the books should be written off. This ensures that the new partner does not benefit from the goodwill created by the existing partners before their admission.

Chapter Concept :

Reconstitution of a Partnership Firm

Correct Answer: True

Solution:

The Super Profits Method calculates goodwill based on the excess of actual profits over the normal profits, known as super profits. Goodwill is then valued by multiplying these super profits by a certain number of years' purchase.

Chapter Concept :

Goodwill Valuation and Treatment

Correct Answer: True

Solution:

Goodwill is defined as the present value of a firm's anticipated excess earnings and is considered an intangible asset.

Chapter Concept :

Goodwill Valuation and Treatment

Correct Answer: True

Solution:

Revaluation of assets and reassessment of liabilities ensures that the assets and liabilities are shown at their correct values, which is crucial during the admission of a new partner.

Chapter Concept :

Revaluation of Assets and Liabilities

Correct Answer: False

Solution:

According to Accounting Standard 26, internally generated goodwill should not be recognized as an asset. Purchased goodwill may be recognized but should be written off as early as possible, not exceeding 10 years.

Chapter Concept :

Goodwill Valuation and Treatment

Correct Answer: True

Solution:

Hidden goodwill is inferred from the capital contributions and profit sharing ratios when not explicitly stated.

Chapter Concept :

Hidden Goodwill

Correct Answer: True

Solution:

As per Accounting Standard 26, internally generated goodwill should not be recognized as an asset because it does not meet the recognition criteria for intangible assets.

Chapter Concept :

Accounting Standard 26: Intangible Assets

Correct Answer: True

Solution:

Accumulated profits or losses should be distributed among existing partners before the admission of a new partner to ensure fair adjustments in their capital accounts.

Chapter Concept :

Adjustment for Accumulated Profits and Losses

Correct Answer: True

Solution:

The admission of a new partner changes the existing agreement, leading to the reconstitution of the partnership firm.

Chapter Concept :

Reconstitution of a Partnership Firm

AI Learning Assistant
Top

I can help you understand Reconstitution of a Partnership Firm – Admission of a Partner better. Ask me anything!

Summarize the main points of Reconstitution of a Partnership Firm – Admission of a Partner.
What are the most important terms to remember here?
Explain this concept like I'm five.
Give me a quick 3-question practice quiz.
StudyTunnel Methodology

We dont just provide random mock tests. Our AI-driven, phase-wise learning system is designed to guarantee mastery from your first chapter to your final exam.

1
Master the Concepts

Start with chapter notes, formulas, and common exam mistakes. Practice with thousands of MCQs, True/False, and Descriptive questions with instant solutions.

2
Conquer Boss Exams

Once you master individual chapters, unlock Phase-wise Boss Exams. These milestone tests simulate the actual exam environment to test your retention across multiple subjects.

3
The Redemption Arena

The ultimate learning hack. Our AI tracks every mistake you make and dynamically generates custom tests targeting your weak points until you achieve 100% accuracy.