Reconstitution of a Partnership Firm – Retirement/Death of a Partner

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CBSE Learning Objectives – Key Concepts & Skills You Must Know

Learning Objectives

Calculate new profit sharing ratio and gaining ratio of the remaining partners after the retirement/death of a partner.
Describe the accounting treatment of goodwill in the event of retirement/death of a partner.
Make the necessary entries in respect of unrecorded assets and liabilities.
Make necessary adjustments for accumulated profits or losses.
Compute the new profit sharing's ratio among the remaining partners and explain the mode of its settlement.
Prepare the retiring partner's loan account, if required.
Prepare the deceased partner's executor's account in the case of death of a partner and the balance sheet of a reconstituted firm.

CBSE Revision Notes & Quick Summary for Last-Minute Study

Retirement/Death of a Partner

Terms Introduced in the Chapter

Retirement of a Partner
Executors of Deceased Partner
Death of a Partner
Executor's Account
Gaining Ratio

Summary

New Profit Sharing Ratio:
- The ratio in which the remaining partners will share future profits after the retirement or death of any partner.
- New Share = Old Share + Acquired Share from the Outgoing partner
Gaining Ratio:
- The ratio in which the continuing partners have acquired the share from the retiring or deceased partner.
Treatment of Goodwill:
- Gaining partner(s) compensate the sacrificing partner to the extent of their gain for the respective share of goodwill.
- If goodwill appears in the books, it will be written off by debiting all partners' capital accounts in their old profit sharing ratio.
Revaluation of Assets and Liabilities:
- At the time of retirement/death, some assets may not be shown at their current values, and certain liabilities may be shown at a different value from the obligation to be met by the firm.
- Unrecorded assets and liabilities must be recorded.
Accumulated Profits or Losses:
- Reserves (Accumulated profits) or losses belong to all partners and should be transferred to the capital accounts of all partners.
Payment to Retiring/Deceased Partner:
- May be paid in one lump sum or installments with interest.
Capital Contributions:
- Remaining partners may decide to keep their capital contributions in their profit sharing ratio.

Learning Objectives

Calculate new profit sharing ratio and gaining ratio of the remaining partners after the retirement/death of a partner.
Describe the accounting treatment of goodwill in the event of retirement/death of a partner.
Make necessary entries in respect of unrecorded assets and liabilities.
Make necessary adjustments for accumulated profits or losses.
Ascertain the retiring/deceased partner's claim against the firm and explain the mode of its settlement.
Prepare the retiring partner's loan account, if required.
Prepare the deceased partner's executor's account in the case of death of a partner and the balance sheet of a reconstituted firm.

CBSE Exam Tips, Important Questions & Common Mistakes to Avoid

Common Mistakes and Exam Tips

Common Pitfalls

Misunderstanding the Gaining Ratio: Students often confuse the gaining ratio with the sacrificing ratio. Ensure you understand that the gaining ratio reflects how much share the continuing partners acquire from the outgoing partner.
Incorrect Treatment of Goodwill: Failing to properly account for goodwill can lead to significant errors in calculations. Remember that if goodwill is already recorded, it should be written off in the old profit-sharing ratio.
Neglecting Revaluation of Assets and Liabilities: Students sometimes forget to revalue assets and liabilities at the time of a partner's retirement or death, which can affect the final settlement amounts.
Ignoring Accumulated Profits or Losses: Not transferring accumulated profits or losses to the capital accounts of all partners can lead to discrepancies in the final accounts.

Tips for Exam Preparation

Understand Key Terms: Familiarize yourself with terms like 'New Profit Sharing Ratio', 'Gaining Ratio', and 'Executor's Account'. Knowing these will help you answer questions more effectively.
Practice Journal Entries: Regularly practice journal entries related to the retirement and death of partners, as this is a common area of examination.
Review Balance Sheets: Be comfortable with interpreting balance sheets and understanding how changes in partnership affect them.
Work on Numerical Problems: Solve numerical problems related to the computation of goodwill and the settlement of accounts for retiring or deceased partners to enhance your practical understanding.

CBSE Quiz & Practice Test – MCQs, True/False Questions with Solutions

Multiple Choice Questions

4/5

3/5

1/5

2/5

Correct Answer: A

Solution:

The new share is calculated as the old share plus the acquired share, which is 3/5 + 1/5 = 4/5.

Rs. 15,000

Rs. 22,500

Rs. 30,000

Rs. 45,000

Correct Answer: A

Solution:

The retiring partner's share of goodwill is Rs. 45,000. Since the remaining partners share equally, each should contribute

\frac{1}{3} \times 45,000 = 15,000

The retiring partner's capital account is credited with Rs. 90,000.

The retiring partner's capital account is debited with Rs. 90,000.

The continuing partners' capital accounts are debited in the gaining ratio, and the retiring partner's capital account is credited with Rs. 90,000.

The goodwill is written off by debiting all partners' capital accounts in their old profit-sharing ratio.

Correct Answer: C

Solution:

The goodwill is adjusted by debiting the continuing partners' capital accounts in the gaining ratio and crediting the retiring partner's capital account with the share of goodwill.

Rs. 15,000

Rs. 30,000

Rs. 45,000

Rs. 60,000

Correct Answer: A

Solution:

The share of goodwill for the partner with the smallest share (1 part) is calculated as

\frac{1}{6} \times 90,000 = 15,000

Rs. 8,000 profit

Rs. 8,000 loss

Rs. 10,000 profit

Rs. 10,000 loss

Correct Answer: A

Solution:

The reduction in stock is

10\% \times 30,000 = 3,000

. The appreciation in the factory building is

12\% \times 1,00,000 = 12,000

. The total revaluation profit is

12,000 - 3,000 = 9,000

Rs. 18,000

Rs. 20,000

Rs. 24,000

Rs. 36,000

Correct Answer: C

Solution:

The new capital for the partner is calculated by adjusting the original capital in the new ratio. If the total capital is Rs. 60,000, then

\frac{2}{5} \times 60,000 = 24,000

Rs. 5,400

Rs. 4,600

Rs. 6,000

Rs. 5,000

Correct Answer: A

Solution:

The interest amount for Year-II is calculated as Rs. 5,400.

Rs. 30,000

Rs. 40,000

Rs. 45,000

Rs. 50,000

Correct Answer: C

Solution:

Partner R's share of goodwill is calculated as

\frac{2}{9} \times 90,000 = 20,000

. Since P and Q will share equally, the amount credited to R's account is Rs. 45,000.

Rs. 40,000

Rs. 50,000

Rs. 30,000

Rs. 25,000

Correct Answer: A

Solution:

Partner X's share of goodwill is Rs. 80,000. Since Y and Z gain in the ratio of 5:3, Y's share of the gain is

\frac{5}{8} \times 80,000 = 50,000

. Therefore, Y should contribute Rs. 50,000.

Rs. 60,000

Rs. 30,000

Rs. 90,000

Rs. 45,000

Correct Answer: A

Solution:

The total goodwill of the firm is Rs. 1,80,000. Manisha's share of goodwill is

\frac{2}{6} \times 1,80,000 = 60,000

. Therefore, Rs. 60,000 should be credited to Manisha's capital account.

Rs. 72,000 and Rs. 48,000

Rs. 60,000 and Rs. 60,000

Rs. 80,000 and Rs. 40,000

Rs. 90,000 and Rs. 30,000

Correct Answer: A

Solution:

The total capital of Rs. 1,20,000 is divided in the ratio of 3:2, resulting in capital contributions of Rs. 72,000 and Rs. 48,000.

Debit Revaluation Account by Rs. 3,000

Credit Revaluation Account by Rs. 3,000

Debit Stock Account by Rs. 3,000

Credit Stock Account by Rs. 3,000

Correct Answer: A

Solution:

The decrease in the value of stock by Rs. 3,000 should be debited to the Revaluation Account as it represents a loss on revaluation.

Rs. 28,000

Rs. 42,000

Rs. 30,000

Rs. 32,000

Correct Answer: A

Solution:

The share of the partner with the smaller share is calculated as (7/16) * Rs. 70,000 = Rs. 28,000.

It is ignored.

It is distributed among all partners equally.

The retiring partner is compensated for their share of goodwill.

It is transferred to the firm's reserves.

Correct Answer: C

Solution:

The retiring partner is compensated for their share of goodwill, which is adjusted among the remaining partners.

Rs. 45,000

Rs. 30,000

Rs. 60,000

Rs. 15,000

Correct Answer: B

Solution:

The retiring partner's share of goodwill is Rs. 90,000. If the remaining partners share future profits equally, each partner's contribution to settle the retiring partner's share of goodwill is Rs. 90,000 / 3 = Rs. 30,000.

To increase the firm's profit.

To adjust the books to reflect current market values.

To decrease the firm's expenses.

To avoid paying taxes.

Correct Answer: B

Solution:

Revaluating assets and liabilities ensures that the books reflect current market values, which is necessary for accurate settlement with the retiring partner.

10%

12%

15%

18%

Correct Answer: B

Solution:

The interest rate is calculated as (Interest / Balance b/d) * 100 = (3600 / 30000) * 100 = 12%.

4/5

3/5

2/5

1/5

Correct Answer: A

Solution:

The new share is calculated as Old Share + Acquired Share = 3/5 + 1/5 = 4/5.

Rs. 22,000

Rs. 20,000

Rs. 21,000

Rs. 23,000

Correct Answer: A

Solution:

The total amount due to the retiring partner is Rs. 60,000. The firm decides to pay this amount in three equal installments with an interest of 10% per annum. The first installment will include the interest on the entire amount. Interest for the first year = 10% of Rs. 60,000 = Rs. 6,000. Therefore, the first installment = (Rs. 60,000 / 3) + Rs. 6,000 = Rs. 20,000 + Rs. 6,000 = Rs. 22,000.

The deceased partner's capital account.

The executor's account.

The firm's profit and loss account.

The firm's general reserve account.

Correct Answer: B

Solution:

The executor's account is used to settle the amount due to the deceased partner's legal representatives.

Rs. 9,000

Rs. 13,500

Rs. 27,000

Rs. 18,000

Correct Answer: B

Solution:

The interest for the first year is Rs. 9,000, for the second year is Rs. 6,000, and for the third year is Rs. 4,500. Total interest = Rs. 9,000 + Rs. 6,000 + Rs. 4,500 = Rs. 19,500.

Rs. 10,000

Rs. 12,500

Rs. 5,000

Rs. 7,500

Correct Answer: A

Solution:

Partner Y's share of the general reserve is

\frac{2}{5} \times 25,000 = 10,000

Rs. 50,000

Rs. 40,000

Rs. 45,000

Rs. 30,000

Correct Answer: A

Solution:

The total amount payable to the retiring partner is the sum of the credit balance of his capital account and his share of goodwill:

40,000 + 10,000 = 50,000

Rs. 45,000

Rs. 50,000

Rs. 40,000

Rs. 30,000

Correct Answer: A

Solution:

Partner A's share of goodwill is calculated as

\frac{5}{10} \times 90,000 = 45,000

The reserve is distributed equally among all partners.

The reserve is distributed in the ratio of 3:2:1.

The reserve is transferred to the retiring partner's capital account only.

The reserve is retained in the firm's accounts and not distributed.

Correct Answer: B

Solution:

The general reserve is distributed among all partners in their profit-sharing ratio of 3:2:1.

Rs. 5,000

Rs. 10,000

Rs. 8,333

Rs. 12,500

Correct Answer: A

Solution:

The retiring partner receives

\frac{1}{5} \times 25,000 = 5,000

Rs. 4,000

Rs. 2,000

Rs. 6,000

Rs. 5,000

Correct Answer: B

Solution:

The revaluation profit is Rs. 10,000 (Rs. 60,000 - Rs. 50,000). Partner X's share is (1/5) * Rs. 10,000 = Rs. 2,000.

5/7

3/7

6/7

2/7

Correct Answer: A

Solution:

The new share is calculated as Old Share + Acquired Share = \frac{4}{7} + \frac{1}{7} = \frac{5}{7}.

They are transferred to the retiring partner's account only.

They are distributed among all partners in their old profit-sharing ratio.

They are written off as bad debts.

They remain in the firm's account.

Correct Answer: B

Solution:

Accumulated profits or losses are distributed among all partners in their old profit-sharing ratio at the time of a partner's retirement.

Rs. 5,000

Rs. 10,000

Rs. 15,000

Rs. 20,000

Correct Answer: A

Solution:

The revaluation profit is Rs. 20,000 (120,000 - 100,000). Partner A's share is

\frac{1}{6} \times 20,000 = 5,000

Capital Account

Executor's Account

Goodwill Account

Profit and Loss Account

Correct Answer: B

Solution:

The amount due to a deceased partner is credited to the Executor's Account.

Determine the new profit sharing ratio

Ensure fair settlement with the retiring partner

Calculate the firm's net worth

Adjust the capital accounts of remaining partners

Correct Answer: B

Solution:

Revaluation of assets and liabilities ensures that the retiring partner receives a fair settlement based on the current value of the firm's assets and liabilities.

The first partner should have Rs. 80,000 and the second partner Rs. 40,000.

The first partner should have Rs. 60,000 and the second partner Rs. 60,000.

The first partner should have Rs. 70,000 and the second partner Rs. 50,000.

The first partner should have Rs. 90,000 and the second partner Rs. 30,000.

Correct Answer: A

Solution:

The capital is divided in the ratio of 2:1, resulting in Rs. 80,000 for the first partner and Rs. 40,000 for the second partner.

Rs. 7,000

Rs. 21,000

Rs. 11,000

Rs. 36,000

Correct Answer: C

Solution:

Raj Kumar's share of the general reserve is

\frac{1}{3} \times 36,000 = 12,000

. His share of the Profit and Loss Account (Dr.) is

\frac{1}{3} \times 15,000 = 5,000

. The net adjustment is

12,000 - 5,000 = 7,000

, which should be credited to his capital account.

Rs. 45,000

Rs. 30,000

Rs. 15,000

Rs. 50,000

Correct Answer: A

Solution:

The partner with the largest share receives 5/10 of the goodwill, which is Rs. 90,000 \times \frac{5}{10} = Rs. 45,000.

7:5

5:3

3:2

2:1

Correct Answer: A

Solution:

The gaining ratio is the new profit-sharing ratio, which is 7:5.

Rs. 19,754

Rs. 18,825

Rs. 16,808

Rs. 15,000

Correct Answer: A

Solution:

The balance carried down (c/d) is calculated as the balance brought down (b/d) plus the interest. Here, Rs. 17,638 + Rs. 2,116 = Rs. 19,754.

Rs. 15,000

Rs. 18,600

Rs. 33,600

Rs. 30,000

Correct Answer: A

Solution:

The balance carried down (c/d) is calculated as the balance brought down (b/d) minus the bank payment. Here, Rs. 30,000 - Rs. 15,000 = Rs. 15,000.

Rs. 8,000

Rs. 7,000

Rs. 6,000

Rs. 5,000

Correct Answer: A

Solution:

The loss on revaluation is the difference between the old and new values:

78,000 - 70,000 = 8,000

Rs. 5,664

Rs. 5,400

Rs. 5,664

Correct Answer: A

Solution:

The interest for Year-II is calculated as Rs. 47,200 \times 0.12 = Rs. 5,664.

Credit Revaluation Account by Rs. 5,000

Debit Revaluation Account by Rs. 5,000

Credit Machinery Account by Rs. 5,000

Debit Machinery Account by Rs. 5,000

Correct Answer: A

Solution:

The increase in the value of machinery by Rs. 5,000 should be credited to the Revaluation Account as it represents a gain on revaluation.

Rs. 75,000

Rs. 93,750

Rs. 87,500

Rs. 62,500

Correct Answer: C

Solution:

The total capital is Rs. 1,50,000. The partner with the larger share contributes (5/8) * Rs. 1,50,000 = Rs. 93,750.

Rs. 7,500

Rs. 9,375

Rs. 11,250

Rs. 18,750

Correct Answer: A

Solution:

The partner with the smallest share receives

\frac{2}{10} \times 37,500 = 7,500

Rs. 48,000

Rs. 32,000

Rs. 40,000

Rs. 28,000

Correct Answer: B

Solution:

The retiring partner A's share of goodwill is Rs. 1,20,000. Partner B's share in the new ratio is 4/7. Therefore, B's contribution is (4/7) * Rs. 1,20,000 = Rs. 32,000.

Rs. 3,944

Rs. 5,664

Rs. 2,017

Rs. 4,006

Correct Answer: A

Solution:

The interest amount for Year-III is Rs. 3,944 as given in the records.

To record the deceased partner's share of profits.

To manage the firm's day-to-day expenses.

To hold the deceased partner's share of goodwill until settlement.

To account for the firm's liabilities.

Correct Answer: C

Solution:

The executor's account is used to hold the deceased partner's share of goodwill and other entitlements until they are settled with the legal representatives.

Rs. 20,000

Rs. 30,000

Rs. 40,000

Rs. 25,000

Correct Answer: B

Solution:

Partner C's share of goodwill is

\frac{2}{9} \times 90,000 = 20,000

Assets are revalued at their historical cost.

Liabilities are ignored during revaluation.

Both assets and liabilities are revalued to reflect their current market values.

Only unrecorded assets are considered for revaluation.

Correct Answer: C

Solution:

During the revaluation process, both assets and liabilities are adjusted to reflect their current market values.

Rs. 30,000

Rs. 50,400

Rs. 20,400

Rs. 15,000

Correct Answer: A

Solution:

The balance carried down (c/d) is calculated as the balance brought down (b/d) minus the bank amount, which is Rs. 45,000 - Rs. 20,400 = Rs. 30,000.

Rs. 64,000

Rs. 80,000

Rs. 96,000

Rs. 100,000

Correct Answer: A

Solution:

The new capital is calculated based on the new ratio. If the total capital remains the same, the partner's new capital is (4/5) * 80,000 = Rs. 64,000.

Rs. 48,750

Rs. 30,000

Rs. 18,750

Rs. 60,000

Correct Answer: A

Solution:

The total amount due is the sum of the capital account balance and the share of goodwill: Rs. 30,000 + Rs. 18,750 = Rs. 48,750.

It remains the same as before.

It is calculated based on the remaining partners' agreement.

It is always divided equally among remaining partners.

It is determined by the retiring partner.

Correct Answer: B

Solution:

The new profit-sharing ratio is determined based on the agreement among the remaining partners after the retirement of a partner.

To adjust the firm's balance sheet to reflect current market values.

To calculate the exact amount of tax payable by the firm.

To ensure the retiring partner receives a fair share of the firm's goodwill.

To determine the new profit-sharing ratio among remaining partners.

Correct Answer: A

Solution:

Revaluating assets and reassessing liabilities ensures that the firm's balance sheet reflects current market values, which is crucial for fairly compensating the retiring partner.

Rs. 19,754

Rs. 20,000

Rs. 18,000

Rs. 15,000

Correct Answer: A

Solution:

The annual installment, including interest at 12% per annum, is calculated to be Rs. 19,754.

It is distributed equally among all partners.

It is credited to the retiring partner's capital account.

It is used to pay off the firm's liabilities.

It is reinvested into the firm's assets.

Correct Answer: B

Solution:

The retiring partner's share of goodwill is credited to their capital account to ensure they receive their fair share of the firm's value.

The old profit sharing ratio

The gaining ratio

The sacrificing ratio

The capital contribution ratio

Correct Answer: B

Solution:

The new profit sharing ratio is determined by the gaining ratio, which is the ratio in which the remaining partners acquire the share from the retiring partner.

It is transferred to the remaining partners' capital accounts.

It is paid out to the retiring partner in full.

It is converted into a loan payable by the firm.

It is used to purchase additional assets for the firm.

Correct Answer: C

Solution:

Upon retirement, the balance in the retiring partner's capital account is often converted into a loan payable by the firm, especially if immediate payout is not feasible.

Rs. 450 credit

Rs. 450 debit

Rs. 2,000 credit

No adjustment required

Correct Answer: A

Solution:

The provision for doubtful debts is higher than the actual bad debts by

2,000 - 1,550 = 450

. Therefore, Rs. 450 is credited to the revaluation account as it is a gain.

Rs. 10,000

Rs. 5,000

Rs. 15,000

Rs. 7,500

Correct Answer: A

Solution:

The retiring partner's share in the general reserve is (1/6) * Rs. 30,000 = Rs. 5,000.

Rs. 15,000

Rs. 19,754

Rs. 20,000

Rs. 25,000

Correct Answer: B

Solution:

The annual installment amount is calculated as Rs. 19,754, including interest at 12%.

Rs. 20,000

Rs. 16,000

Rs. 24,000

Rs. 14,000

Correct Answer: A

Solution:

The appreciation in the building is

20\% \times 1,00,000 = 20,000

. The depreciation in plant and machinery is

10\% \times 40,000 = 4,000

. The net effect on the revaluation account is

20,000 - 4,000 = 16,000

Rs. 3,600

Rs. 3,000

Rs. 3,200

Rs. 3,400

Correct Answer: A

Solution:

The interest amount is calculated as 12% of Rs. 30,000, which is (12/100) * 30,000 = Rs. 3,600.

True or False

Correct Answer: True

Solution:

The gaining ratio reflects how the remaining partners will share the outgoing partner's share.

Correct Answer: True

Solution:

The retiring partner can be compensated either in a lump sum or through installments, which may include interest.

Correct Answer: True

Solution:

The basic rule is that gaining partner(s) compensate the sacrificing partner for their share of goodwill.

Correct Answer: True

Solution:

Assets and liabilities are typically revalued to reflect their current values at the time of a partner's retirement.

Correct Answer: True

Solution:

When a partner retires, the existing partnership deed comes to an end, and a new partnership deed needs to be framed for the remaining partners.

Correct Answer: True

Solution:

At the time of a partner's retirement, adjustments such as provision for doubtful debts are made to reflect the current financial position.

Correct Answer: True

Solution:

The retirement or death of a partner leads to the reconstitution of a partnership firm, requiring a new partnership deed.

Correct Answer: True

Solution:

Revaluation is necessary only if there are assets and liabilities not shown at their current values or if there are unrecorded assets and liabilities.

Correct Answer: True

Solution:

The excerpts mention that the gaining partner(s) compensate the sacrificing partner for their share of goodwill, which involves debiting the gaining partner's capital account.

Correct Answer: False

Solution:

The payment to a retiring partner can be made in one lump sum or in installments, as mentioned in the excerpts.

Correct Answer: True

Solution:

The excerpts state that in the case of a deceased partner, the amount credited to them is transferred to their executor's account.

Correct Answer: True

Solution:

The new profit sharing ratio is indeed calculated by adding the acquired share from the outgoing partner to the old share of the remaining partners.

Correct Answer: False

Solution:

A retiring partner is entitled to a share of the firm's goodwill, as it is a part of their due settlement.

Correct Answer: False

Solution:

The gaining ratio is the ratio in which the continuing partners acquire the share from the retiring or deceased partner.

Correct Answer: False

Solution:

The balance in a retiring partner's capital account is transferred to their loan account, not an executor's account. An executor's account is used in the case of a deceased partner.

Correct Answer: True

Solution:

A retiring or deceased partner is entitled to a share of the firm's goodwill, which is adjusted in the partners' capital accounts.

Correct Answer: False

Solution:

The remaining partners may decide to keep their capital contributions in their new profit sharing ratio, not necessarily the same as before.

Correct Answer: False

Solution:

If goodwill already appears in the books, it is written off by debiting all partners' capital accounts in their old profit sharing ratio.

Correct Answer: False

Solution:

A retiring partner may be paid in one lump sum or in installments with interest.

Correct Answer: True

Solution:

The excerpts mention that goodwill was valued at Rs. 70,000 upon Gagan's retirement.

Correct Answer: True

Solution:

Upon the retirement or death of a partner, the existing partnership deed ends, and a new deed must be created to reflect the new terms and conditions for the remaining partners.

Correct Answer: True

Solution:

The new profit sharing ratio is indeed calculated by adding the acquired share from the outgoing partner to the old share, as stated in the excerpts.

Correct Answer: True

Solution:

The treatment of goodwill is similar in both the retirement and death of a partner, requiring adjustments for the outgoing partner's share.

Correct Answer: True

Solution:

The excerpt indicates that the amount payable to a retiring partner can be transferred to their loan account.

Correct Answer: True

Solution:

The excerpts indicate that the capital of a new firm can be fixed at a predetermined amount, as seen in the example where the capital is set at Rs. 30,000.

Correct Answer: True

Solution:

Assets and liabilities may need to be revalued to reflect their current values at the time of a partner's retirement or death.

Correct Answer: True

Solution:

The reserves or accumulated profits or losses belong to all partners and should be transferred to the capital account of all partners.

Correct Answer: False

Solution:

Revaluation of assets and liabilities is necessary at the time of a partner's retirement to reflect their current values.

Correct Answer: False

Solution:

A retiring partner is entitled to a share of goodwill, and the gaining partners compensate the retiring partner for their share of goodwill, regardless of whether it is recorded in the books.

Correct Answer: False

Solution:

The new profit sharing ratio is recalculated after a partner retires to reflect the changes in the partnership structure.

Correct Answer: False

Solution:

A retiring partner may be paid in one lump sum or installments with interest.

Correct Answer: True

Solution:

If the payment to the retiring partner is deferred, the balance in their capital account is transferred to a loan account.

Correct Answer: True

Solution:

At the time of retirement or death of a partner, there may be unrecorded assets and liabilities which have to be recorded.

Correct Answer: True

Solution:

The firm revalues its assets and reassesses its liabilities at the time of retirement or death of a partner to ensure they are recorded at their current values.

Correct Answer: False

Solution:

The revaluation of assets and liabilities is necessary to reflect their current values, not just for unrecorded items, as mentioned in the excerpts.

Correct Answer: True

Solution:

At the time of retirement or death of a partner, assets and liabilities may need to be revalued to reflect their current values, and any unrecorded assets or liabilities must be recorded.

Correct Answer: False

Solution:

Adjusting capital contributions in the new profit sharing ratio is a choice, not a requirement.

Correct Answer: False

Solution:

A retiring partner may be paid in one lump sum or in installments with interest.

Correct Answer: True

Solution:

A retiring partner may be paid in one lump sum or installments with interest.

Correct Answer: True

Solution:

The reserves (accumulated profits) or losses belong to all the partners and should be transferred to the capital account of all partners.

Correct Answer: True

Solution:

Revaluation of assets and liabilities ensures they are shown at their current values at the time of retirement or death of a partner.

Correct Answer: True

Solution:

A retiring partner is entitled to a share of the firm's goodwill, which is often compensated by the gaining partners.

Correct Answer: False

Solution:

Goodwill is written off by debiting all partners' capital accounts in their old profit sharing ratio if it already appears in the books.

Correct Answer: False

Solution:

The new profit sharing ratio is calculated after both the retirement and death of a partner.

Correct Answer: False

Solution:

The capital of the new firm is not always fixed at Rs. 1,20,000; it depends on the specific agreement among the partners.

Correct Answer: True

Solution:

Accumulated profits or losses belong to all partners and should be transferred to their capital accounts during retirement or death.

Correct Answer: False

Solution:

Revaluation of assets and liabilities is necessary to reflect their current values, not just for unrecorded assets and liabilities.

Correct Answer: True

Solution:

The new profit sharing ratio is determined by adding the acquired share from the outgoing partner to the old share of the remaining partners, as stated in the excerpts.

Correct Answer: False

Solution:

The accounting treatment of goodwill is similar in both the retirement and death of a partner. The gaining partners compensate the sacrificing partner for their share of goodwill.

Correct Answer: True

Solution:

If goodwill already appears in the books, it will be written off by debiting all partners' capital accounts in their old profit sharing ratio.

Correct Answer: True

Solution:

Both retiring and deceased partners are entitled to their share of goodwill, which is adjusted in the capital accounts of the remaining partners.

Correct Answer: True

Solution:

The retiring partner's due amount can be settled either in one lump sum or through installments, which may include interest.

Correct Answer: False

Solution:

The remaining partners may decide to keep their capital contributions in their profit-sharing ratio, but it is not mandatory.

Correct Answer: True

Solution:

Goodwill is valued and adjusted among partners to compensate the retiring partner for their share of the firm's goodwill.

Correct Answer: True

Solution:

The retirement of a partner leads to the reconstitution of the partnership firm, requiring a new partnership deed.

Correct Answer: False

Solution:

At the time of retirement or death of a partner, adjustments must be made for unrecorded assets and liabilities to ensure the balance sheet reflects the true financial position.

Correct Answer: True

Solution:

The gaining ratio is the ratio in which the continuing partners acquire the share from the retiring or deceased partner, which is used to adjust the goodwill.

Reconstitution of a Partnership Firm – Retirement/Death of a Partner

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Retirement/Death of a Partner

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Multiple Choice Questions

Q1.In the event of a partner's retirement, what is the new profit-sharing ratio if the old share is 3/5 and the acquired share from the outgoing partner is 1/5?

Correct Answer: A

Q2.If a retiring partner's share of goodwill is valued at Rs. 45,000 and the remaining partners decide to share future profits equally, how much should each of the remaining partners contribute to settle the retiring partner's share of goodwill?

Correct Answer: A

Q3.In a partnership firm, if a partner retires and the goodwill is valued at Rs. 90,000, how should the goodwill be adjusted in the books if the continuing partners decide to share future profits in the ratio of 3:2?

Correct Answer: C

Q4.In a partnership firm, if the goodwill of the firm is valued at Rs. 90,000 and is to be adjusted among partners in the ratio of 3:2:1, what is the share of goodwill for the partner with the smallest share?

Correct Answer: A

Q5.In a partnership firm, the partners decide to revalue their assets and liabilities on the retirement of a partner. If the firm's stock is reduced by 10% from Rs. 30,000, and the factory building is appreciated by 12% from Rs. 1,00,000, what is the total revaluation profit or loss?

Correct Answer: A

Q6.If a partner retires and the remaining partners decide to keep their capital contributions in the new profit-sharing ratio of 3:2, what will be the new capital for a partner whose original capital was Rs. 30,000?

Correct Answer: C

Q7.In Year-II, if the balance brought down (b/d) is Rs. 45,000 and the bank payment is Rs. 20,400, what is the interest amount for Year-II?

Correct Answer: A

Q8.A partnership firm has three partners, P, Q, and R, sharing profits in the ratio of 4:3:2. Partner R retires, and the goodwill of the firm is valued at Rs. 90,000. If P and Q decide to share future profits equally, what is the amount of goodwill to be credited to Partner R's capital account?

Correct Answer: C

Q9.In a partnership firm, Partner X retires and the remaining partners, Y and Z, decide to share future profits in the ratio of 5:3. If the goodwill of the firm is valued at Rs. 80,000, how much should Partner Y contribute to compensate Partner X for his share of goodwill?

Correct Answer: A

Correct Answer: A

Q11.When a partner retires, the remaining partners may decide to keep their capital contributions in their new profit-sharing ratio. If the new profit-sharing ratio is 3:2, and the total capital of the firm is Rs. 1,20,000, what will be the capital contributions of the remaining partners?

Correct Answer: A

Q12.A partnership firm decides to revalue its stock at the time of a partner's retirement. The stock was originally valued at Rs. 30,000, but its market value is now Rs. 27,000. How should this decrease be recorded in the Revaluation Account?

Correct Answer: A

Q13.In a partnership firm, if the goodwill is valued at Rs. 70,000 and the partners decide to share it in the ratio of 9:7, what is the share of the partner with the smaller share?

Correct Answer: A

Q14.How is the share of goodwill treated when a partner retires?

Correct Answer: C

Q15.In a partnership firm, a partner retires and the goodwill of the firm is valued at Rs. 90,000. If the remaining partners decide to share future profits equally, what is the amount each partner should contribute to settle the retiring partner's share of goodwill?

Correct Answer: B

Q16.What is the purpose of revaluating assets and liabilities at the time of a partner's retirement?

Correct Answer: B

Q17.If the interest for Year-III is Rs. 3,600 and the balance brought down (b/d) is Rs. 30,000, what is the interest rate?

Correct Answer: B

Q18.In the event of a partner's retirement, if the old share is 3/5 and the acquired share from the outgoing partner is 1/5, what is the new share?

Correct Answer: A

Q19.In a partnership firm, the capital account of a retiring partner shows a credit balance of Rs. 60,000. The firm decides to pay the retiring partner in three equal installments with an interest rate of 10% per annum on the unpaid balance. What will be the amount of the first installment?

Correct Answer: A

Q20.In the event of a partner's death, which account is used to settle the amount due to the deceased partner's legal representatives?

Correct Answer: B

Q21.A partner retires from a firm, and the firm decides to pay his dues in three yearly installments with an interest rate of 10% per annum. If the amount due is Rs. 90,000, what is the total interest paid over the three years?

Correct Answer: B

Q22.A firm has a general reserve of Rs. 25,000. If partner X retires and the reserve is to be distributed among partners X, Y, and Z in the ratio of 2:2:1, how much will partner Y receive?

Correct Answer: A

Q23.If a partner's capital account shows a credit balance of Rs. 40,000 and he is entitled to a share of goodwill valued at Rs. 10,000 upon retirement, what will be the total amount payable to him?

Correct Answer: A

Q24.If the goodwill of a firm is valued at Rs. 90,000 and is to be adjusted among partners A, B, and C in their gaining ratio of 5:3:2, how much goodwill will partner A be credited with?

Correct Answer: A

Q25.A partnership firm has a general reserve of Rs. 25,000. If a partner retires and the profit-sharing ratio is 3:2:1, how should the reserve be distributed among the partners?

Correct Answer: B

Q26.A firm has a general reserve of Rs. 25,000. If a partner retires and the reserve is to be distributed among three partners in the ratio of 2:2:1, how much will the retiring partner receive?

Correct Answer: A

Q27.On the retirement of Partner X, the firm revalues its machinery from Rs. 50,000 to Rs. 60,000. If the profit-sharing ratio is 2:2:1, what is the revaluation profit to be credited to Partner X's capital account?

Correct Answer: B

Q28.In the event of a partner's retirement, what is the new profit-sharing ratio if the old share is 4/7 and the acquired share from the outgoing partner is 1/7?

Correct Answer: A

Q29.What happens to the accumulated profits or losses at the time of a partner's retirement?

Correct Answer: B

Q30.Upon the retirement of Partner A, the firm revalues its machinery from Rs. 100,000 to Rs. 120,000. If the profit-sharing ratio is 3:2:1, what is the revaluation profit to be credited to Partner A's capital account?

Correct Answer: A

Q31.Which account is credited with the amount due to a deceased partner?

Correct Answer: B

Q32.When a partner retires, the revaluation of assets and liabilities is necessary to:

Correct Answer: B

Q33.If the capital of the new firm is fixed at Rs. 1,20,000 after a partner's retirement, and the remaining partners decide to keep their capitals in the ratio of 2:1, how much capital should each partner bring in or withdraw?

Correct Answer: A

Q34.A firm has a general reserve of Rs. 36,000 and a Profit and Loss Account (Dr.) of Rs. 15,000. If Raj Kumar retires and the remaining partners decide to maintain their capital contributions in their profit-sharing ratio, what is the net adjustment to Raj Kumar's capital account?