Chapter 2: Reconstitution of a Partnership Firm – Admission of a Partner
Accountancy Part 1 • Class 12
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Chapter Analysis
Intermediate56 pages • EnglishQuick Summary
This chapter on 'Reconstitution of a Partnership Firm – Admission of a Partner' discusses how partnerships can be restructured by the introduction of a new partner. It covers various adjustments required during the admission of a partner, such as the treatment of goodwill, revaluation of assets and liabilities, and the adjustment of capital and profit-sharing ratios. It further explains how a new partner acquires shares from old partners, necessitating a new profit-sharing arrangement.
Key Topics
- •Reconstitution of Partnership Firm
- •Goodwill Treatment
- •Profit Sharing Ratio
- •Revaluation of Assets
- •Reassessment of Liabilities
- •Sacrificing Ratio
- •Adjustment of Capitals
- •Admission of New Partner
Learning Objectives
- ✓Explain the concept of reconstitution of a partnership firm.
- ✓Identify adjustments needed for admitting a new partner.
- ✓Calculate new profit sharing and sacrificing ratios.
- ✓Define and value goodwill.
- ✓Adjust for revaluation of assets and reassessment of liabilities.
- ✓Manage changes in the profit-sharing ratio.
Questions in Chapter
Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?
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What is goodwill? What factors affect goodwill?
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Explain various methods of valuation of goodwill.
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If it is agreed that the capital of all the partners should be proportionate to the new profit-sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.
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Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.
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Explain various methods for the treatment of goodwill on the admission of a new partner?
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How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?
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At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.
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Additional Practice Questions
What is the sacrificing ratio and why is it important?
mediumAnswer: The sacrificing ratio is the proportion of profit that old partners sacrifice in favor of a new partner. It is important for determining how the goodwill or premium paid by the new partner will be divided among the old partners.
Explain the concept of 'hidden goodwill' in partnership.
mediumAnswer: Hidden goodwill refers to the implicit value of goodwill deduced when a new partner is admitted without explicit valuation of goodwill at that time. It is calculated based on the capital contribution and profit-sharing ratio.
If the new partner cannot bring cash for goodwill, how should this be treated in the books?
mediumAnswer: If the new partner cannot bring cash for goodwill, the amount can be adjusted through the partner's capital account, crediting the old partners' capital accounts using the sacrificing ratio.
Describe the accounting treatment if the admission of a new partner changes the profit-sharing ratio among existing partners.
hardAnswer: When the profit-sharing ratio changes, the existing goodwill in the books should be adjusted among old partners in the old profit-sharing ratio and then readjusted according to the new ratio.
How do you calculate the new capital for existing partners if a new partner is admitted?
hardAnswer: New capital for existing partners can be calculated based on their new profit-sharing ratio and the agreed base capital brought in by the new partner.