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

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

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Easy

Question 1

Quick Recall

What is meant by reconstitution of a partnership firm?

Reconstitution means any change in the existing partnership agreement, such as admission, retirement, or death of a partner.
It results in the end of the existing agreement and formation of a new agreement among the partners.
The firm continues to exist even after reconstitution, but with a changed composition or changed terms.

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Question 2

Quick Recall

Under what circumstances is a new partner admitted into a partnership firm?

A new partner is admitted when the firm needs additional capital to expand its business operations.
Admission also occurs when the firm requires managerial help or expertise that existing partners cannot provide.
According to the Partnership Act 1932, a new partner can only be admitted with the unanimous consent of all existing partners unless the deed provides otherwise.

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Question 3

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What are the two main rights a newly admitted partner acquires in the firm?

The first right is the right to share the assets of the partnership firm.
The second right is the right to share the profits of the partnership firm.
For these rights, the new partner must bring an agreed amount of capital and, in established firms, also pay premium for goodwill.

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Question 4

Quick Recall

Define sacrificing ratio and state the formula to calculate the sacrifice of a partner.

Sacrificing ratio is the ratio in which old partners agree to sacrifice their share of profit in favour of the incoming partner.
The sacrifice by a partner equals: Old Share of Profit minus New Share of Profit.
This ratio is used to distribute the premium for goodwill brought in by the new partner among the old partners.

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Easy

Question 5

Quick Recall

What is goodwill? When does goodwill exist for a firm?

Goodwill is the monetary value of a firm's advantage of good name, reputation, and wide business connections built over time.
In accounting, goodwill is the value of the reputation of a firm in respect of profits expected in future over and above normal profits.
Goodwill exists only when the firm earns super profits; a firm earning normal profits or incurring losses has no goodwill.

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Question 6

Quick Recall

List any four factors that affect the value of goodwill of a firm.

Nature of business: firms producing high value-added products or having stable demand earn more profits and thus have higher goodwill.
Location: businesses at central or high-traffic locations tend to have higher goodwill due to greater customer access.
Efficiency of management: well-managed firms enjoying high productivity and cost efficiency earn higher profits, leading to higher goodwill.
Market situation: monopoly or limited competition enables firms to earn higher profits, thereby increasing goodwill value.

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Short Answer

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Medium

Question 7

Quick Recall

State any four circumstances in which valuation of goodwill becomes necessary in a partnership firm.

Goodwill valuation is needed at the time of change in profit sharing ratio among existing partners.
It is needed at the time of admission of a new partner into the firm.
Goodwill valuation is necessary at the time of retirement or death of a partner.
It is also required at the time of dissolution of a firm involving sale of business as a going concern, or amalgamation of partnership firms.

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Medium

Question 8

Quick Recall

What is the Average Profits Method of valuing goodwill? State the formula used.

Under the Average Profits Method, goodwill is valued at an agreed number of years' purchase of the average profits of the past few years.
It is based on the assumption that a new business will not earn profits for the first few years, so the buyer pays for those expected profits as goodwill.
Goodwill equals Average Profits multiplied by the agreed number of years' purchase, where Average Profits equals Total Profits divided by Number of Years.

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Short Answer

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Medium

Question 9

Quick Recall

What are super profits? How are they calculated?

Super profits are the excess of actual average profits of a firm over the normal profits expected on the capital employed.
Normal Profit equals (Firm's Capital multiplied by Normal Rate of Return) divided by 100, where firm's capital includes partners' capital and reserves but excludes fictitious assets and goodwill.
Super Profit equals Average Actual Profits minus Normal Profits.

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Medium

Question 10

Quick Recall

Explain the concept of hidden goodwill with an example.

Hidden goodwill arises when the value of goodwill is not stated at admission but must be inferred from the new partner's capital contribution and profit share.
If A and B each have capital of Rs. 45,000 and C is admitted for 1/3 share bringing Rs. 60,000, the implied total capital is Rs. 1,80,000 (Rs. 60,000 x 3), while actual total capital is Rs. 1,50,000.
The difference of Rs. 30,000 represents the firm's goodwill, of which C's share (1/3 of Rs. 30,000 = Rs. 10,000) is debited to C's current account and credited to A and B in old ratio.

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Medium

Question 11

Quick Recall

How is the premium for goodwill treated when the new partner brings it in cash and the existing goodwill already appears in the books?

When the new partner brings goodwill in cash, it is credited to a Premium for Goodwill Account and then distributed to old partners in their sacrificing ratio.
If goodwill already exists in the books, it must be written off at the time of the new partner's admission.
The existing goodwill is written off by debiting the old partners' capital accounts in their old profit sharing ratio and crediting the Goodwill Account.

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Medium

Question 12

Quick Recall

What journal entry is passed when a new partner cannot bring his share of goodwill and no goodwill account exists in the books?

When the new partner does not bring goodwill and no goodwill exists in books, the incoming partner's Current Account is debited.
The sacrificing partners' Capital Accounts are credited individually in their sacrificing ratio.
This entry recognises the obligation of the new partner to the sacrificing old partners without creating a goodwill asset in the books.

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Short Answer

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Medium

Question 13

Quick Recall

Why is it necessary to prepare a Revaluation Account at the time of admission of a new partner?

Assets and liabilities in the books may not reflect their current market values, so revaluation ensures they are shown at correct amounts.
The Revaluation Account captures all gains and losses from revaluation and any unrecorded assets or liabilities.
Its net balance is transferred to old partners' capital accounts in their old ratio, ensuring that gains or losses from pre-admission changes are borne only by the old partners.

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

What is meant by reconstitution of a partnership firm?

Under what circumstances is a new partner admitted into a partnership firm?

What are the two main rights a newly admitted partner acquires in the firm?

Define sacrificing ratio and state the formula to calculate the sacrifice of a partner.

What is goodwill? When does goodwill exist for a firm?

List any four factors that affect the value of goodwill of a firm.

State any four circumstances in which valuation of goodwill becomes necessary in a partnership firm.

What is the Average Profits Method of valuing goodwill? State the formula used.

What are super profits? How are they calculated?

Explain the concept of hidden goodwill with an example.

How is the premium for goodwill treated when the new partner brings it in cash and the existing goodwill already appears in the books?

What journal entry is passed when a new partner cannot bring his share of goodwill and no goodwill account exists in the books?

Why is it necessary to prepare a Revaluation Account at the time of admission of a new partner?

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