Chapter reconstitution-of-a-partnership-firm-retirement-death-of-a-partner: Reconstitution of a Partnership Firm – Retirement/Death of a Partner Long Questions | accountancy Class 12 CBSE

Chapter reconstitution-of-a-partnership-firm-retirement-death-of-a-partner: Reconstitution of a Partnership Firm – Retirement/Death of a Partner Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Analyse the eight accounting steps involved in the reconstitution of a partnership firm on the retirement of a partner, explaining the purpose of each step.

Step 1: Ascertain new profit sharing ratio and gaining ratio — determines how the retiring partner's share is redistributed and who compensates whom for goodwill.
Step 2: Treatment of goodwill — the retiring partner's share is credited to their capital account and debited to gaining partners in gaining ratio, ensuring fair compensation.
Step 3: Revaluation of assets and liabilities — a Revaluation Account is prepared and net gain/loss is shared among all partners including the retiring partner in the old ratio.
Step 4: Adjustment for unrecorded assets and liabilities — items not appearing in the books are brought into the accounts through Revaluation Account entries.
Step 5: Distribution of accumulated profits/losses — general reserves and accumulated losses are transferred to all partners' capital accounts in old ratio, giving the retiring partner their due share.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Compare the accounting treatment of goodwill when it does not appear in the books versus when it already appears in the books at the time of retirement of a partner.

When goodwill does not appear in the books: the gaining partners' capital accounts are debited in gaining ratio and the retiring partner's capital account is credited with their share of goodwill — no Goodwill Account is opened.
When goodwill already appears in the books: a two-step process is followed — first, the existing goodwill is written off by debiting all partners (including retiring) in old ratio and crediting Goodwill A/c.
Then, in the second step, the retiring partner's share of the current goodwill value is adjusted by debiting gaining partners' capital accounts in gaining ratio and crediting the retiring partner's capital account.
The net effect in both cases is that the retiring partner receives credit for their share of the firm's current goodwill value, while the gaining partners bear the cost in gaining ratio.
Hidden goodwill is a third situation where goodwill is implied from the excess amount agreed to be paid to the retiring partner; this excess is treated as goodwill and adjusted in gaining ratio.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Explain the three methods used to calculate the retiring or deceased partner's share of profit for the intervening period, with a suitable example for each.

Method 1 – Based on previous year's profit: Share = Previous Year's Profit × (Months of intervening period / 12) × Partner's share. Example: If profit is Rs. 1,00,000 and partner with 4/10 share retires after 3 months, share = 1,00,000 × 3/12 × 4/10 = Rs. 10,000.
Method 2 – Based on average profit: Average of last few years' profits is calculated, then proportioned for the intervening period. Example: Average of Rs. 1,36,000 + Rs. 1,54,000 + Rs. 1,00,000 = Rs. 1,30,000; for 3 months with 4/10 share = Rs. 13,000.
Method 3 – Based on sales: Profit ratio from previous year is applied to sales of the intervening period. Example: If sales = Rs. 8,00,000 gave profit of Rs. 1,00,000; for current sales of Rs. 1,50,000: Profit = 1,00,000/8,00,000 × 1,50,000 = Rs. 18,750; partner's share (4/10) = Rs. 7,500.
Journal Entry in all cases: Profit and Loss Suspense A/c Dr. To Retiring/Deceased Partner's Capital A/c. The P&L Suspense A/c is later closed by debiting gaining partners in gaining ratio.
All three methods are acceptable; the choice depends on the agreement between partners as specified in the partnership deed or as agreed at the time of retirement/death.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 4

Long Form

Discuss the three modes of settling the amount due to a retiring partner, including the relevant journal entries and the accounting treatment under Section 37 of the Indian Partnership Act, 1932.

Mode 1 – Lump sum payment: Entire amount paid immediately in cash. Journal Entry: Retiring Partner's Capital A/c Dr. To Cash/Bank A/c. This settles the account fully at once.
Mode 2 – Treated entirely as loan: Full amount is transferred to Retiring Partner's Loan A/c. Journal Entry: Retiring Partner's Capital A/c Dr. To Retiring Partner's Loan A/c. Interest is charged annually and loan repaid in instalments.
Mode 3 – Part cash and part loan: Some amount paid immediately; balance transferred to loan. Journal Entry: Retiring Partner's Capital A/c Dr. To Cash/Bank A/c (amount paid) To Retiring Partner's Loan A/c (balance).
For instalments including interest: (a) Interest Entry — Interest A/c Dr. To Retiring Partner's Loan A/c; (b) Payment Entry — Retiring Partner's Loan A/c Dr. To Cash/Bank A/c. These entries repeat till loan is cleared.
Section 37 of the Indian Partnership Act, 1932 provides that in absence of any agreement, the outgoing partner may choose either to receive interest at 6% p.a. on the unpaid amount or a share of profits earned with their capital, whichever they prefer.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 5

Long Form

Explain the three situations that arise when the continuing partners adjust their capitals after retirement of a partner, with journal entries for each situation.

Situation 1 – When total new capital is specified: Partners compute their share of specified total capital in new profit sharing ratio. Example: If total capital is Rs. 1,20,000 and ratio is 2:1, Mohit needs Rs. 80,000 and Sohan Rs. 40,000. If existing balances are Rs. 82,000 and Rs. 41,000, both withdraw excess: Capital A/c Dr. To Cash A/c.
Situation 2 – When total capital is not specified: Sum of existing capital balances of continuing partners is treated as the total new capital. This total is then divided in the new profit sharing ratio to find each partner's required capital, and deficits/surpluses are settled in cash.
Situation 3 – When continuing partners contribute the retiring partner's share: Total capital of new firm = sum of continuing partners' capitals + amount payable to retiring partner. New capitals are computed in new ratio and each partner brings in the required amount. Journal: Bank A/c Dr. To Partners' Capital A/cs.
For excess capital withdrawal: Partners' Capital A/c Dr. To Cash/Bank A/c. For additional capital brought in: Cash/Bank A/c Dr. To Partners' Capital A/c.
The purpose of capital adjustment is to ensure that each continuing partner's capital contribution is proportionate to their share in future profits, creating a fair and balanced financial base for the reconstituted firm.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Distinguish between the accounting treatment at the time of retirement of a partner and the death of a partner, highlighting the key differences.

Similarity: The accounting steps — new profit sharing ratio, goodwill, revaluation, accumulated profits, and settlement of dues — are the same in both cases.
Key difference in timing: Retirement normally occurs at the end of an accounting period, making profit calculation straightforward. Death can occur at any time during the year, requiring calculation of profit for the intervening period.
Recipient of amount: In retirement, the amount is paid to the retiring partner directly. In death, the total amount due is transferred to the Deceased Partner's Executor's Account and paid to the legal representatives/executors.
Account opened: A Retiring Partner's Loan Account is opened if a living partner cannot be paid immediately. For a deceased partner, an Executor's Account is opened, and payments go to the heirs.
The profit for the intervening period in death cases is calculated using last year's profit, average profit, or sales-based method, and is credited via Profit and Loss Suspense Account — a step that may not always arise in retirement if it occurs at year-end.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 7

Long Form

Explain with journal entries the complete accounting treatment of revaluation of assets and liabilities at the time of retirement of a partner, covering all possible scenarios.

For increase in asset value: Assets A/c Dr. To Revaluation A/c. For decrease in asset value: Revaluation A/c Dr. To Assets A/c.
For increase in liability: Revaluation A/c Dr. To Liabilities A/c. For decrease in liability: Liabilities A/c Dr. To Revaluation A/c.
For unrecorded asset: Assets A/c Dr. To Revaluation A/c. For unrecorded liability: Revaluation A/c Dr. To Liabilities A/c.
If Revaluation Account shows a profit: Revaluation A/c Dr. To All Partners' Capital A/cs (individually in old ratio). If it shows a loss: All Partners' Capital A/cs Dr. To Revaluation A/c.
The retiring partner's share of revaluation profit is credited to their capital account, and their share of revaluation loss is debited. This ensures the retiring partner bears or benefits from changes in asset values that occurred during their tenure.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 8

Long Form

Analyse the three possible situations that can arise when computing the new profit sharing ratio of continuing partners when a partner retires.

Situation (a) – Default: Continuing partners acquire the retiring partner's share in their old profit sharing ratio. No calculation needed — the new ratio between remaining partners is the same as their old ratio among themselves.
Situation (b) – Specified acquisition ratio: Continuing partners acquire the retiring partner's share in a specified ratio (not the old ratio). New Share = Old Share + Acquired Share from outgoing partner. Example: If Suresh (3/10 share) retires and Naveen and Tarun acquire in 2:1, Naveen gets 2/3 × 3/10 = 2/10 extra; new share = 5/10 + 2/10 = 7/10.
Situation (c) – Specified new ratio: Partners simply agree on a new ratio. This directly becomes the new profit sharing ratio, but the gaining ratio must be separately calculated as New Share – Old Share.
In situations (b) and (c), the gaining ratio must be explicitly computed because the partners are not acquiring in their old ratio, and this gaining ratio is essential for adjusting goodwill.
When a continuing partner sacrifices instead of gaining (new share less than old share), they are credited for goodwill in proportion to their sacrifice — a special case that arises mainly in situation (c).

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 9

Long Form

Prepare the list of items that constitute the total amount due to a retiring partner, distinguishing between items that are added and items that are deducted.

Items ADDED (Credits) include: credit balance of capital account; credit balance of current account; share of goodwill; share of accumulated profits/reserves; share of gain on revaluation; share of profit up to retirement date; interest on capital; salary or commission due up to retirement date.
Items DEDUCTED (Debits) include: debit balance of current account; share of goodwill to be written off; share of accumulated losses; share of loss on revaluation; share of losses up to retirement; drawings up to retirement date; interest on drawings.
The credit items represent what the retiring partner has earned or is entitled to, while the debit items represent obligations the partner must discharge before receiving their net dues.
After all credits and debits are recorded in the partner's capital account, the resulting balance represents the net amount due to (or from) the retiring partner.
This net balance is then settled either by immediate cash payment, transfer to a loan account, or a combination of both, depending on the firm's financial position and the terms of the partnership deed.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 10

Long Form

Evaluate the significance of the gaining ratio in the reconstitution of a partnership firm on retirement of a partner, explaining its calculation with two different scenarios.

Significance: The gaining ratio determines how much each continuing partner must contribute toward compensating the retiring/deceased partner for their share of goodwill. Without it, the compensation cannot be fairly apportioned.
Scenario 1 – Old ratio remains new ratio: If A, B, C share profits in 5:3:2 and B retires, A and C acquire B's share in their existing ratio 5:2. Gaining ratio = 5:2 (same as old ratio). No separate calculation needed.
Scenario 2 – New profit ratio is specified: If A, B, C share profits in 5:3:2 and B retires with A:C deciding 2:3 as new ratio, gaining shares are: A's gain = 2/5 – 5/10 = -1/10 (sacrifice); C's gain = 3/5 – 2/10 = 4/10 (gain). C alone compensates both B and A.
The gaining ratio is also used to close the Profit and Loss Suspense Account (for intervening profit) — the suspense amount is debited to gaining partners in gaining ratio.
Correctly computing the gaining ratio is critical for board exams as errors here cascade into incorrect goodwill adjustments and incorrect capital account balances, affecting the final Balance Sheet.

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Chapter reconstitution-of-a-partnership-firm-retirement-death-of-a-partner: Reconstitution of a Partnership Firm – Retirement/Death of a Partner | Long Questions

Analyse the eight accounting steps involved in the reconstitution of a partnership firm on the retirement of a partner, explaining the purpose of each step.

Compare the accounting treatment of goodwill when it does not appear in the books versus when it already appears in the books at the time of retirement of a partner.

Explain the three methods used to calculate the retiring or deceased partner's share of profit for the intervening period, with a suitable example for each.

Discuss the three modes of settling the amount due to a retiring partner, including the relevant journal entries and the accounting treatment under Section 37 of the Indian Partnership Act, 1932.

Explain the three situations that arise when the continuing partners adjust their capitals after retirement of a partner, with journal entries for each situation.

Distinguish between the accounting treatment at the time of retirement of a partner and the death of a partner, highlighting the key differences.

Explain with journal entries the complete accounting treatment of revaluation of assets and liabilities at the time of retirement of a partner, covering all possible scenarios.

Analyse the three possible situations that can arise when computing the new profit sharing ratio of continuing partners when a partner retires.

Prepare the list of items that constitute the total amount due to a retiring partner, distinguishing between items that are added and items that are deducted.

Evaluate the significance of the gaining ratio in the reconstitution of a partnership firm on retirement of a partner, explaining its calculation with two different scenarios.

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