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

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Question 1

Quick Recall

What is meant by reconstitution of a partnership firm on retirement of a partner?

Reconstitution means the existing partnership deed comes to an end when a partner retires, and a new deed is framed for the remaining partners to continue business on changed terms.
On retirement, the firm's profit sharing ratio, goodwill, and capital structure all change, requiring fresh accounting adjustments.
The remaining partners continue the business with a new agreement reflecting the updated terms and conditions.

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Easy

Question 2

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State any three items that are credited to the retiring partner's capital account.

Credit balance of his capital account and credit balance of his current account (if any) are added to his total dues.
His share of goodwill of the firm is credited based on the agreed valuation at the time of retirement.
His share of accumulated profits and reserves and his share of gain on revaluation of assets and liabilities are also credited.

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Question 3

Quick Recall

What is the new profit sharing ratio? State the formula for calculating a continuing partner's new share.

New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of a partner.
The formula is: New Share of Continuing Partner = Old Share + Share Acquired from the Outgoing/Retiring Partner.
In the absence of specific information, the continuing partners acquire the retiring partner's share in their existing old profit sharing ratio.

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Question 4

Quick Recall

Define gaining ratio and state the formula for calculating a continuing partner's gaining share.

Gaining ratio is the ratio in which the continuing partners have acquired the share of profit from the retiring or deceased partner.
The formula is: Gaining Share of Continuing Partner = New Share – Old Share.
The gaining ratio is needed to determine how much each gaining partner must compensate the retiring/deceased partner for their share of goodwill.

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Question 5

Quick Recall

Madhu, Neha and Tina share profits in the ratio of 5:3:2. If Tina retires, what will be the new profit sharing ratio and gaining ratio of Madhu and Neha?

Since no specific information is given about how Madhu and Neha will acquire Tina's share, they acquire it in their old ratio of 5:3.
New Profit Sharing Ratio between Madhu and Neha = 5:3.
Gaining Ratio of Madhu and Neha = 5:3 (same as old ratio, since they acquire the share in their existing ratio).

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Question 6

Quick Recall

Why is a retiring or deceased partner entitled to a share of the firm's goodwill?

Goodwill is the reputation and earning capacity of the firm that has been built over time through the combined efforts of all the existing partners.
Since the retiring or deceased partner contributed to earning that goodwill during their tenure, they are rightfully entitled to their share of its value.
The continuing partners, who will benefit from the goodwill in the future, must compensate the outgoing partner for their contribution.

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Medium

Question 7

Quick Recall

What journal entry is passed when goodwill does not appear in the books at the time of a partner's retirement?

When goodwill does not appear in the books, the gaining partners' capital accounts are debited individually in their gaining ratio.
The retiring partner's capital account is credited with their share of the firm's goodwill.
Journal Entry: Gaining Partners' Capital A/c Dr. (individually in gaining ratio) To Retiring Partner's Capital A/c (retiring partner's share of goodwill).

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Medium

Question 8

Quick Recall

What is hidden goodwill? Give an example.

Hidden goodwill is the implied value of a partner's share of goodwill determined when the firm pays the retiring partner a lump sum amount exceeding what is due based on capital account balance after all adjustments.
The excess amount paid over and above the adjusted capital balance is treated as the retiring partner's share of goodwill.
Example: If R's adjusted capital is Rs. 60,000 but P and Q agree to pay Rs. 75,000 in full settlement, then Rs. 15,000 is R's share of hidden goodwill, to be debited to P and Q in their gaining ratio.

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Medium

Question 9

Quick Recall

Why is a Revaluation Account prepared at the time of retirement of a partner?

Assets may not be shown at their current values and liabilities may not reflect the actual obligation, so revaluation is needed to determine the true financial position.
The Revaluation Account helps ascertain the net gain or loss arising from revaluation of assets and liabilities and recording of unrecorded items.
The net profit or loss on revaluation is transferred to all partners' capital accounts in the old profit sharing ratio, ensuring the retiring partner receives their fair share.

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Medium

Question 10

Quick Recall

How are accumulated profits (general reserves) treated at the time of retirement of a partner?

Accumulated profits such as general reserves belong to all partners and must be distributed to them at the time of reconstitution.
The journal entry is: Reserves A/c Dr. To All Partners' Capital A/cs (individually) in the old profit sharing ratio.
The retiring partner receives their share of these reserves as part of the total amount due to them.

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Medium

Question 11

Quick Recall

What is the accounting treatment for accumulated losses when a partner retires?

Accumulated losses (debit balance in Profit and Loss Account) are also shared by all partners including the retiring one, as they represent past losses belonging to all.
Journal Entry: All Partners' Capital A/cs (individually) Dr. To Profit and Loss A/c in the old profit sharing ratio.
The retiring partner's share of accumulated losses is deducted from the total amount due to them.

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Medium

Question 12

Quick Recall

State three modes by which the amount due to a retiring partner can be settled.

The entire amount due can be paid immediately in cash or through bank, by debiting the Retiring Partner's Capital A/c and crediting Cash/Bank A/c.
The entire amount can be treated as a loan by transferring the balance to a Retiring Partner's Loan A/c, which is shown as a liability in the Balance Sheet.
The amount can be partly paid in cash immediately and the remaining balance transferred to the Retiring Partner's Loan A/c to be paid later with agreed interest.

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Medium

Question 13

Quick Recall

What does Section 37 of the Indian Partnership Act, 1932 provide in relation to a retiring partner?

Section 37 applies in the absence of any agreement between the firm and the retiring partner regarding the settlement of dues.
Under this section, the outgoing partner has the option to receive interest at 6% per annum on the unpaid balance until the date of actual payment.
Alternatively, the outgoing partner may receive a share of profits earned by the firm using their capital, whichever option they prefer.

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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 | Short Questions

What is meant by reconstitution of a partnership firm on retirement of a partner?

State any three items that are credited to the retiring partner's capital account.

What is the new profit sharing ratio? State the formula for calculating a continuing partner's new share.

Define gaining ratio and state the formula for calculating a continuing partner's gaining share.

Madhu, Neha and Tina share profits in the ratio of 5:3:2. If Tina retires, what will be the new profit sharing ratio and gaining ratio of Madhu and Neha?

Why is a retiring or deceased partner entitled to a share of the firm's goodwill?

What journal entry is passed when goodwill does not appear in the books at the time of a partner's retirement?

What is hidden goodwill? Give an example.

Why is a Revaluation Account prepared at the time of retirement of a partner?

How are accumulated profits (general reserves) treated at the time of retirement of a partner?

What is the accounting treatment for accumulated losses when a partner retires?

State three modes by which the amount due to a retiring partner can be settled.

What does Section 37 of the Indian Partnership Act, 1932 provide in relation to a retiring partner?

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