Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner Long Questions | accountancy Class 12 CBSE

Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Explain the six important matters that require adjustment at the time of admission of a new partner and state why each is necessary.

New profit sharing ratio must be determined because the old ratio changes when a new partner is added; each old partner's sacrifice must be calculated to arrive at the correct new ratio.
Sacrificing ratio is calculated to determine how the incoming partner's premium for goodwill will be distributed among old partners who give up their shares.
Goodwill must be valued and adjusted so that the new partner pays for the pre-existing reputation and super-profit-earning capacity without receiving it for free.
Revaluation of assets and reassessment of liabilities is done to bring assets and liabilities to current values, so pre-admission gains or losses accrue only to old partners.
Accumulated profits and losses (reserves and P&L balance) are distributed among old partners in the old ratio so the new partner neither benefits from nor bears pre-admission results.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 2

Long Form

Compare the three methods of valuation of goodwill and explain which method is considered most accurate and why.

The Average Profits Method values goodwill as average past profits multiplied by agreed years' purchase; it is simple but ignores the return on capital employed and treats total profits (not just excess) as the basis.
The Super Profits Method values goodwill as super profits (average profits minus normal profits) multiplied by years' purchase; it is more scientific as it focuses only on excess earnings over what any similar investment would yield.
The Capitalisation Method involves capitalising either average profits or super profits at the normal rate of return; the capitalisation of super profits is considered the most theoretically sound as it directly reflects what the excess earnings are worth in perpetuity.
The Super Profits and Capitalisation methods are more accurate than the Average Profits Method because they account for the opportunity cost of capital and measure only the true economic advantage of the firm.
In practice, the method to be used is agreed between the parties, as goodwill calculated by one method may differ significantly from another; hence AS 26 requires purchased goodwill to be written off over a period not exceeding 10 years.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Describe all the journal entries passed for goodwill treatment when: (a) new partner brings goodwill in cash and it is retained, (b) new partner brings goodwill and old partners withdraw it, (c) new partner does not bring goodwill and goodwill already exists in the books.

When goodwill is brought in cash: Bank A/c Dr. to New Partner's Capital A/c and Premium for Goodwill A/c; then Premium for Goodwill A/c Dr. to Sacrificing Partners' Capital A/cs individually in sacrificing ratio.
When goodwill is retained in business, no additional entry is passed since the premium amount credited to existing partners' capital accounts stays in the firm.
When partners withdraw goodwill: Existing Partners' Capital A/cs Dr. (individually) to Bank A/c for the amount withdrawn.
When new partner does not bring goodwill and goodwill already exists in books: first, existing goodwill is written off by debiting old partners' capital accounts in old ratio and crediting Goodwill A/c.
After writing off existing goodwill, new value of goodwill is adjusted: Incoming Partner's Current A/c Dr. to Sacrificing Partners' Capital A/cs in sacrificing ratio, for the new partner's share of goodwill.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 4

Long Form

Explain the procedure for preparing a Revaluation Account and state how its balance affects the partners' capital accounts.

For increases in asset values and decreases in liabilities, the respective Asset or Liability Account is debited or credited and Revaluation Account is credited (gain); for decreases in assets and increases in liabilities, Revaluation Account is debited (loss).
Unrecorded assets are debited to the Asset Account and credited to Revaluation Account; unrecorded liabilities are debited to Revaluation Account and credited to the Liability Account.
The balance of the Revaluation Account is computed; a credit balance indicates net gain on revaluation, and a debit balance indicates net loss.
The net gain is transferred by debiting Revaluation A/c and crediting old partners' capital accounts in their old profit sharing ratio; net loss is transferred by debiting old partners' capital accounts and crediting Revaluation A/c.
This process ensures assets and liabilities appear at their current values in the reconstituted firm's books, and the adjustment affects only old partners who were responsible for these assets/liabilities during their tenure.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 5

Long Form

Analyse the steps involved in calculating the new profit sharing ratio when a new partner acquires his share from old partners in a specified ratio different from the old ratio.

Step 1: Identify the new partner's share and the ratio in which he acquires it from each old partner (e.g., Jyoti acquires 3/10, of which 2/10 from Anshu and 1/10 from Nitu).
Step 2: Deduct each old partner's surrendered share from their old share to find their new shares (Anshu: 3/5 minus 2/10 equals 4/10; Nitu: 2/5 minus 1/10 equals 3/10).
Step 3: Express all shares with a common denominator to arrive at the new ratio (4:3:3 for Anshu, Nitu, and Jyoti).
Step 4: Verify that the sum of all new shares equals 1 to confirm the calculation is correct.
Step 5: This new ratio is used for all future profit and loss distribution and also serves as the basis for the new partnership agreement.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Explain how adjustment of partners' capitals is carried out when it is agreed that capitals should be proportionate to the new profit sharing ratio, using a detailed example.

The new partner's capital is used as a base; total capital of the reconstituted firm is determined by dividing new partner's capital by his profit share fraction (e.g., if C brings Rs. 20,000 for 1/4 share, total capital = Rs. 20,000 x 4 = Rs. 80,000).
Each old partner's required capital is calculated by multiplying total capital by their new profit share (e.g., A's share 2/4: required capital = Rs. 40,000; B's share 1/4: required capital = Rs. 20,000).
Compare required capital with each partner's adjusted capital (after goodwill, revaluation, and reserves adjustments); the difference is either brought in or withdrawn.
If adjusted capital exceeds required capital, the partner withdraws the excess; if adjusted capital is less than required, the partner brings in the deficiency.
Alternatively, surplus or deficiency may be transferred to partners' current accounts rather than settled in cash, subject to agreement among partners.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 7

Long Form

Describe the treatment of accumulated profits and losses and their impact on old and new partners at the time of admission.

Accumulated profits (general reserve, Profit and Loss credit balance) belong entirely to old partners because they were earned before the new partner's admission.
These are transferred to old partners' capital or current accounts by debiting the reserve/P&L Account and crediting each old partner's capital account in their old profit sharing ratio.
Accumulated losses (debit balance of Profit and Loss Account, deferred revenue expenditure) are borne by old partners and transferred by debiting their capital accounts and crediting the P&L/deferred expenditure Account in the old ratio.
The new partner is neither entitled to a share in pre-admission profits nor burdened with pre-admission losses, ensuring equity between incoming and existing partners.
After these transfers, the balance sheet is clean with no undistributed profits or losses, reflecting the true position from which the reconstituted firm commences operations.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 8

Long Form

Explain the concept of sacrificing ratio in detail, highlighting the situations where it differs from the old profit sharing ratio and how it is calculated when only the new ratio is given.

The sacrificing ratio is the ratio in which old partners agree to reduce their profit shares to accommodate the new partner; it may or may not be the same as the old profit sharing ratio.
When nothing is specified about how the new partner acquires his share, it is assumed to be in the old ratio, making the sacrificing ratio the same as the old profit sharing ratio.
When the new profit sharing ratio is given but the sacrificing ratio is not, it is calculated by deducting each old partner's new share from their old share (e.g., Rohit: 5/8 minus 4/7 = 3/56; Mohit: 3/8 minus 2/7 = 5/56; sacrificing ratio = 3:5).
An unusual case occurs when a partner's new share exceeds their old share (as in Illustration 8 where Suresh gains 3/42 while Ramesh sacrifices 10/42); the gaining partner does not share in goodwill but instead compensates the sacrificing partner.
The sacrificing ratio is critical because premium for goodwill is distributed among old partners strictly in this ratio to ensure each partner is compensated in exact proportion to what they gave up.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 9

Long Form

Analyse the accounting treatment required when a change in profit sharing ratio occurs among existing partners, with respect to goodwill, revaluation, and reserves.

When partners change their profit sharing ratio, those who gain a larger share must compensate those who sacrifice, by debiting the gaining partners' capital accounts and crediting the sacrificing partners' capital accounts with appropriate amounts of goodwill value.
Revaluation of assets and liabilities is carried out through a Revaluation Account; any net gain or loss is transferred to all partners' capital accounts in the old profit sharing ratio before the new ratio takes effect.
All accumulated profits such as general reserve and credit balance of P&L Account are transferred to partners' capital accounts in the old ratio, since these belong to the period before the ratio change.
If partners agree, capital accounts are also adjusted to be proportionate to the new profit sharing ratio; deficiencies are brought in as cash and surpluses are withdrawn or transferred to current accounts.
All these adjustments are made simultaneously and in a specific sequence (goodwill, then revaluation, then reserves, then capital) to arrive at revised capital balances before drawing up the new balance sheet.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 10

Long Form

Describe the Super Profits Method of goodwill valuation in detail, including all steps and the components of firm's capital.

Step 1: Calculate the average profits of the firm for the past few years (total profits divided by number of years).
Step 2: Calculate the normal profit by multiplying the firm's capital by the normal rate of return divided by 100; firm's capital includes partners' capital and reserves but excludes fictitious assets and goodwill.
Step 3: Calculate super profits by deducting normal profits from average profits (Super Profit = Average Profits minus Normal Profits).
Step 4: Multiply super profits by the agreed number of years' purchase to arrive at the value of goodwill.
This method is superior to the average profits method because it recognises that the true economic benefit to a buyer is not total profits but only the excess over what a normal investment would yield, thus providing a more realistic valuation.

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Chapter reconstitution-of-a-partnership-firm-admission-of-a-partner: Reconstitution of a Partnership Firm – Admission of a Partner | Long Questions

Explain the six important matters that require adjustment at the time of admission of a new partner and state why each is necessary.

Compare the three methods of valuation of goodwill and explain which method is considered most accurate and why.

Describe all the journal entries passed for goodwill treatment when: (a) new partner brings goodwill in cash and it is retained, (b) new partner brings goodwill and old partners withdraw it, (c) new partner does not bring goodwill and goodwill already exists in the books.

Explain the procedure for preparing a Revaluation Account and state how its balance affects the partners' capital accounts.

Analyse the steps involved in calculating the new profit sharing ratio when a new partner acquires his share from old partners in a specified ratio different from the old ratio.

Explain how adjustment of partners' capitals is carried out when it is agreed that capitals should be proportionate to the new profit sharing ratio, using a detailed example.

Describe the treatment of accumulated profits and losses and their impact on old and new partners at the time of admission.

Explain the concept of sacrificing ratio in detail, highlighting the situations where it differs from the old profit sharing ratio and how it is calculated when only the new ratio is given.

Analyse the accounting treatment required when a change in profit sharing ratio occurs among existing partners, with respect to goodwill, revaluation, and reserves.

Describe the Super Profits Method of goodwill valuation in detail, including all steps and the components of firm's capital.

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