Reconstitution:of par,tnersh ip

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(A) Select most appropriate answer from the alternatives given below and rewrite the
sentences.
1. Anuj and Eeshan are two partners sharing profits and losses in the ratio of 3:2. They
decided to admit Aaroh for 1/5th share, the new profit sharing ratio will be _ __

a. 12:8:5 b. 4:3:1
C. 12:8:1 d. 12:3:1

2. Difference between Old Ratio - New Ratio on admission of partner is called as

a. Gain ratio b. Sacrifice ratio

C. Profit ratio d. Benefit ratio

3. The method in which goodwill is calculated on the basis of average profit of past
number of years is called as _ __ I
i
a. Average profit method b. Super pro.fit method I

c. · Premium method d. Annuity method

4. _ _ _ is the rate of return normally earned by the firms in the same industry.
a. Average rate of return b. Normal rate of return
c. Excess rate of return d. Premium rate of return

5. When goodwill is withdrawn by the partner, _ _ _ account is credited. (T)

a. Revaluation b. Cash/ Bank
Current d. Profit and Loss Adjustment
C.

6. _ _ _ is credited when _unrecorded asset is ~rought into business. (T)

a. Revaluation Account b. Balance Sheet
c. Trading Account d. Partners capital Account

7. If asset is taken over by the partner, _ _ _ account is debited. (T)

a. Revaluation b. Capital
c. Asset d. Balance Sheet

8. Excess of proportionate capital over actual capital represents _ _ _ . (T}

a. Equal capital b. Surplus Capital
C. Deficit Capital d. Gain

(B) Write the Word/ Term/ Phrase which can substitute each of the following statements.

1. Old ratio - New ratio = _ _ _ . (T)

2. The proportion in which old partners make a sacrifice. (T}

3. Reputation of business measured in terms of money. (T)

4. Name the method of the treatment of goodwill where new partner will bring his share
of goodwill in cash. (T)
 5. Profit which is earned over and above normal profit.
6
· Method under which calculation of goodwill is done on the basis of extra profit
earned above the normal profit. (T)
7.
Capital employed x = . (T)
10.0 ----

8· Method of treatment of goodwill where new partner does not bring his share of
goodwill.

9. The ratio in which general reserve is distributed to the old partners. (T)

10. Profit and loss account balance appearing on liability side of Balance Sheet. (T)

11. An account opened to adjust the value of assets and liabilities at the time of
admission of a partner. (T)

12. An Account which is debited when the partner takes over the asset. (T)

(C) State whether the following statements are True or False with reasons.
1. Change in relationship between the partners is called as Reconstitution of partnership. (T)
Ans: True ·
Reason: -Any kind of change in relationship between the partners affect their profit sharing ratio and hence
is called as Reconstitution of partnership.

2. When new partner brings cash towards his capital, his capital account is debited.
Ans: False
Reason: - When new partner brings cash towards his capital, his capital account is credited .

3. Usually when a new partner is admitted in the firm, there will be an increase in the capital of the firm.
(T)
Ans: True
Reason: - One of the reasons of admitting new partner is to get more capital. Hence, usually when a new
partner is admitted, there will be an increase in the capital of the firm.

4. New Partner can bring capital in cash or kind. (T)

Ans: True
Reason: - New partner has an option of bringing capital either in cash or in the form of assets.

5. New ratio min~s old ratio is equal to sacrifice ratio; (T)

Ans: False
Reason: - Old ratio minus new ratio is equal to sacrifice ratio.

6. Gain ratio is calculated at the time of admission of partner. (T)

Ans: False
Reason: _ At the time of admission of partner, existing partners have to forego certain share in profit and
give it to new incoming partner. Hence, sacrifice ratio is calculated at the time of admission ·of partner.

7. When goodwill is paid privately to the partners, it is not recorded in the books. (T)
A,:ts: True . .
Reason:_ When goodwill is paid privately, the amount dbes not enter business at all and hence no need to
record it in the books.
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· New partner always brings his share of goodwill In cash. (T)
Ans: ~alse

~eason: - New partner may bring his share of goodwill in cash . Alternatively, he might not bring in cash. The
firm may decide to treat goodwill by other methods like raise and write off. Hence, new partner does not
always bring his share of goodwill in cash.
9.
When the goodwill is written off, goodwill account is debited. (T)
Ans: False ·

Reason: - When goodwill is written off, goodwill account is credited.

10.
Cash/ Bank Account is credited when goodwill ls withdrawn by the old partners. (T)
Ans: True

Reason: - When goodwill is withdrawn, cash moves out of business and hence cash / bank account is
credited.

11. Revaluation profit is distributed among all partners including new partner. (T)
Ans: False

Reason: - Revaluation profit is on account of increase or decrease in value of assets or liabilities before
admission. Hence it is distributed acnong old partners only.

12. The benefit of unrecorded asset would be avallable to new partner as well.
Ans: False

Reason: - Benefit of unrecorded asset will be enjoyed only by old partners.

(D) Find the odd one.
1. General reserve, Creditors, Machinery, Capital (T)
Ans. Machinery - Others are liabilities of a business organisation.

2. Decrease in Furniture, Patents written off, Increase in BIiis Payable, ROD written off (T)
Ans. RDD written off- Others are debited to Revaluation Account.

3. Super profit method, Valuation method, Average profit method, Fluctuating capital method (T)
Ans. Fluctuating capital
. ~- method - Others are method of determining value of goodwill.

4. Admission of a partner, Retirement of a partner, Death of a partner, Hiring of a manager

Ans. Hiring of a manager - Others results in reconstitution of partnership firm.

(E) Complete the sentences.

1. The-ratio in which the old partners sacrifice their share of profit is called as _ __

2. is the benefit, name, fame, reputation, image of a business

-u-lti_m_a-te-ly helps the business to earn more profits.

;.:, 3. Under
---
years of profit.
goodwill is calculated on the average basis of the past number of
\
I
...,
=---
4. - - - is the profit which is earned over and above the normal profit.

.....
---
method new partner brings his share of goodwill in cash or kind.
~- 5.
Under _ __

( ) Answer in one sentence only.

1F • eant by Reconstitution of partnership? (T)
15
·
Ans: What _m . of pa rt ne rship is the change in the relationsh ip between the partners and change in the share
Reconst1tut1on

E
of profits and losses.

. 2. h · ew partner admitted? (T) . f th t person

L
W Y is n . d
Ans: The new partner is a m1 •tted in the firm to expand the capital
h" f' base as well as to use the ski 11 5 0 a
to .improve t he overall performance of the partners 1p 1rm. -
 "'
3.
What Is sacrifice ratio? (T) .
Ans:
When new partner is admitted, old partners have to sacrifice their share of profit to give th e s~~re of _profit
to new p art ner. Th e ratio
• in
. which the old partners sacrifice their share o f pro f't ·
I ts ca
lied as sacnf1ce ratio.
4.
What Is goodwill 1
Ans: 1 · th b
Goodw·11 • name, fame, reputation, image
·' . ultimate
. IY heIP the business to
earn moreisprofits.
e enef1t, of a business which 5

s.
Ans: When is the ratio of sacrifice calculated for distribution of goodwill? (T)
Sacrifice ratio is calculated when the new partner brings his share of the goodwill in the business.
6.
Ans: What is super profit method of calculation of goodwill? (T) . .
Super profit method of calculation of goodwill is a method in which goodwill is calculated on the baSIS of_
super profits of the firm. Super profits are the profits earned over and above the normal or average profits
7.
What is normal rate of return?
Ans:
Normal rate of return is the rate of return normally earned by the firms in the same induSt ry or it is th e
profit expected by the investor on the capital employed.
8.
Ans: What do you mean by raising the goodwill at the time of admission of a new partner? (T)
th
Raising e goodwill at the time of admission of a new partner means creating goodwill as an asset in th e
books of the firm and crediting the capital accounts of old partners.
9.
State the ratio in which Old Partner's Capltal A/c will be credited for goodwill when the new partner
does not bring his share of goodwill in cash. (T)
Ans:
Old Partner's Capita/ A/c will be credited in old profit sha ring ratio for goodwill when new partner does not
bring his share of goodwill in cash.

10. What is Revaluation Account? (T)

Ans: Revaluation account is an account in which changes made in the values of assets and liabilities are recorded
at the time reconstitution ·of partnership.

11. What does the excess of debit over credits in Profit and Loss Adjustment Account indicate? (T)
Ans: Excess of debit over credit in Profit and Loss Adjustment Account indicates loss on revaluation.

12. What is the treatment of accum,,.dated profits at the time of admission of a partner? (T)
Ans: Accumulated profits are distributed among old partners in their old profit sharing ratio .

·(GJ Calculate the following.

1. A and B are partners in a firm sharing profits and losses in the ratio of 1:1. C is admitted. A surrenders
th th
1/4 share and B surrenders 1/S of his share in favour of C. Calculate the new profit sharing ratio. (T)
Ans: Old Ratio of A and B = 1 : 1 or -1 -1
2 2
I •f•
A s sacn ice = - x - = -
1 1 1
2 4 8
1 1 1
B's Sacrifice= - x - = -
2 5 10
C's Share= A's Share+ B's Share .
1 1 5 4 _ 9
= - +-= - + - - -
g 10 40 40 40
New Ratio = Old Ratio - Sacrifice Ratio
1 1 4-1 _ 3
A's New Share= - - - = - . - - -
2 8 ,8 8
1 1 5- 1 _ 4
B's New Share= - =
10 -
2 10 10

New
.
Ratio of A, B and C -_ . 16 : 40 = 15 : 16 : 9
· 40
40
--·-----------------------------
2. Anika and Radhlka are partners sharing profits In the ratio of 5:1. They decide to admit Sanika in the firm
th
for 1/S share. Calculate the sacrifice ratio of Anika and Radhika. {T) ·
Ans: Balance Ratio= 1- Share of Incoming Partner
_ 1 _ 4
-1----
5 5
New Ratio= Old Ratio x Balance Ratio
AnI"ka, s new ratio=
. -s x -4 = -20
6 5 30
Radh .k , . 1 4
I a s new ratio = - x - = -
4
6 5 30
Sani'k a' s New RatI0 1 .
· = - 1.e. 6
-
5 30
New Ratio = Anika : Radhika : Sanika
_ 20 . 4 . 6
-- . -.-
30 . 30 30
= 10:2:3
Calculation of sacrifice ratio
Sacrifice Ratio = Old Ratio - New R~tio
. 25 20 5
Anika = - - - - = -
30 30 30
Radhika = - =
30 30 . 30
. = - 5 : -1 = 5 : 1
Th us sacn'f'ice ratio
30 30
Please note, since the old and new prof_ i t sharing ratio of the old partners is same (as 10 : 2 is same as 5 : 1)
the sacrifice ratio will also remain the same i.e . 5 : 1.

3. Pramod and Vinod are partners sharing profits and losses in the ratio 3:2. After admission of Ramesh the
new ratio of Pramod, Vinod and Ramesh is 4:3:2. Find out the sacrifice ratio. (T)
Ans: Sacrifice Ratio = Old Ratio - New Ratio
Pramo d ,s sacn'f'ice= -3 - -4 = -27 - -20 = - 7
5 9 45 45 45
. 2 3 18 15 3
Vmod = - - - = - - - = -
5 9 45 45 45
7 3
. = - : - =7 :3
Sacn'f"ice ratio
45 45

4. Profit of 2019-20 - f 30,000; Profit of 2018-1~ - f 20,000; Profit of 2017-18 - , 40,000; Goodwill is
valued at purchase of 2 years. Find goodwill using average profit method.
Ans: Calculation of Goodwill:
Average Profit = Total Profit = (30,000+ 20,000 + 40,000) = 90,000 =30 000

=,
No. of Years 3 3 '
Goodwill = Average Profit x Number of years of purchase= 30,000 x 2 60,000

(H) Complete the table. (T)

1. ~-----, Total Profit
. L I_ _ _ _ _,I = Number of years

2. NRR
Normal Profit= I
L . . . .- - - - ~
I X
100

3. Stock shown in Balance Stock underva lued by 20% Cost of Stock

1,60,000 1 I I