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All questions of Reconstitution of a Partnership Firm: Retirement/Death of a Partner for Commerce Exam

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Any change in the relations of partners without affecting the existing of partnership firm is called ____
  • a)
    Retirement
  • b)
    Reassessment
  • c)
    Reconstitution
  • d)
    Revaluation
Correct answer is option 'C'. Can you explain this answer?

Alok Mehta answered
 Meaning of Reconstitution of Partnership Firm 
"Partnership is the relation between persons who have agreed to shore tbi profits of a business carried on by all or any of them acting for all." In short, partnership is the result of an agreement between persons for sharing the profits of a business. A change in the partnership agreement brings to an end of the existing agreement and a new agreement comes into force. This new agreement changes relationship among the members of the partnership firm. When there is change in the relations without affecting the existence of partnership firm, it is called Reconstitution of Partnership Firm'. As a result of reconstitution, the firm continues as a new or reconstituted firm. 

X, Y and Z are partners sharing profits in the ratio of 1/2, 2/5 and 1/10. What will be the new ratio of X and Y after the retirement of Z.
  • a)
    5:4 
  • b)
    4:5
  • c)
    3:2
  • d)
    1:1
Correct answer is option 'A'. Can you explain this answer?

Sharmila Sharma answered
After the retirement of Z, new ratio of X and Y will be 5:4. 
Simplifying, 1/2,  2/5, 1/10  , L.C.M.  is 10
Ratio will be 5:4:1 
Hence , If z will retire then new ratio will be 5:4.

Outgoing partner is not entitled to take _______
  • a)
    His Capital account balance
  • b)
    His share of Loss on Revaluation
  • c)
    His share of profit for the period
  • d)
    Complete goodwill of the firm
Correct answer is option 'D'. Can you explain this answer?

Knowledge Hub answered
Outgoing partner cannot take complete goodwill of the firm. Outgoing partner is entitled for the followings:
(i) His capital account balance
(ii) His share of profit reserves & gains etc.
(iii) Revaluation profit or loss
(iv) His share of goodwill
Note: outgoing partner is entitled for his share of goodwill only and not the complete goodwill of the firm.

The circumstances when change in profit sharing ratio is needed:
  • a)
    At the time of admission/retirement/death
  • b)
    To distribute the revaluation profit
  • c)
    When existing partner’s decide
  • d)
    Both When existing partner’s decide and At the time of admission/retirement/death
Correct answer is option 'D'. Can you explain this answer?

Rohini Verma answered
Change in profit sharing ratio is essential in the following circumstances:
1. When existing partners have decided to change their existing profit sharing ratio to new ratio.
2. When a new partner is admitted 
3. When a partner gets retirement from the firm
4. At the time of death of a partner

This a MCQ (Multiple Choice Question) based practice test of Chapter 2 - Change in Profit sharing ratio of existing Partners of Accountancy of Class XII (12) for the quick revision/preparation of School Board examinations
 
Q  Which of the following is responsible for the Reconstitution of Partnership?
  • a)
    Retirement/death of a partner
  • b)
    Change in existing profit sharing ratio
  • c)
    Change in the value of Debtors
  • d)
    Both Change in existing profit sharing ratio and Retirement/death of a partner
Correct answer is option 'D'. Can you explain this answer?

Ameya Mukherjee answered
Reconstitution of the firm can take place on the following occasions:
1.Change in the profit sharing ratio of the existing partners
2.Admission of a new partner 
3.Retirement of an existing partner
4.Death of a partner

What is the meaning of change in the profit sharing ratio:
  • a)
    In which all partner including the new partner share future profit and loss
  • b)
    Purchase of shares of profit by one partner form another partner
  • c)
    In which all partner including the deceased partner executor partner share future profit and loss
  • d)
    In which all partner including the retired partner share future profit and loss
Correct answer is 'B'. Can you explain this answer?

Anisha Chauhan answered
Sometimes, the partners of a firm may agree to change their existing profit sharing ratio. As a result of this, some partners will gain in future profits while others will lose. In such a situation, the partner who gains by change in profit sharing ratio must compensate the partner who has made the sacrifice. In simple words, it is also known as purchase of shares of profit by one partner form another partner.

L, M and N are partners sharing ratio 3:2:1. M died and N the son of M is of the opinion that the rightful owner of his father’s share of profit and the profit of the firm be shared between L and N equally. L does not agree to settle the dispute because there is partnership deed which is showing old profit sharing ratio 3:2:1.
  • a)
    Distribute profit between L and N in the ratio of 3:2
  • b)
    Distribute profit between L and N in the ratio of 1:11
  • c)
    Distribute profit between L and N equally
  • d)
    Distribute profit between L and N in the ratio of 3:1
Correct answer is option 'D'. Can you explain this answer?

Sparsh Sen answered
The profit should be distributed among the Land N in Ratio 3:1. Profits cannot be shared equally because there is partnership deed and profit should be distributed accordingly.

How sacrificing ratio is differ from gaining ratio on the basis of mode of calculation
  • a)
    It is calculated by taking difference between gaining and new ratio
  • b)
    It is calculated by taking difference between new and old ratio
  • c)
    It is calculated by taking difference between old and new ratio
  • d)
    It is calculated by taking difference between old and gaining ratio
Correct answer is option 'B'. Can you explain this answer?

Sankar Bose answered
Difference between Sacrificing Ratio and Gaining Ratio

Sacrificing ratio and gaining ratio are two types of ratios that are used in partnership accounting. They are used to calculate the changes in the ownership structure of a partnership due to the admission, retirement or death of a partner.

Sacrificing Ratio

The sacrificing ratio is the ratio in which the old partners sacrifice their share of profits to the incoming partner. It represents the ratio in which the old partners agree to give up their share of profits to the new partner. The sacrificing ratio is calculated by taking the difference between the old ratio and the new ratio.

Formula: Sacrificing Ratio = Old Ratio - New Ratio

Gaining Ratio

The gaining ratio is the ratio in which the incoming partner gains the share of profits from the old partners. It represents the ratio in which the new partner is entitled to share the profits of the partnership. The gaining ratio is calculated by taking the difference between the new ratio and the old ratio.

Formula: Gaining Ratio = New Ratio - Old Ratio

Mode of Calculation

The main difference between the sacrificing ratio and the gaining ratio is the mode of calculation. The sacrificing ratio is calculated by taking the difference between the old ratio and the new ratio, while the gaining ratio is calculated by taking the difference between the new ratio and the old ratio.

Conclusion

In conclusion, the sacrificing ratio and the gaining ratio are two important ratios in partnership accounting. The sacrificing ratio represents the ratio in which the old partners sacrifice their share of profits to the incoming partner, while the gaining ratio represents the ratio in which the incoming partner gains the share of profits from the old partners. The main difference between the two ratios is the mode of calculation. The sacrificing ratio is calculated by taking the difference between the old ratio and the new ratio, while the gaining ratio is calculated by taking the difference between the new ratio and the old ratio.

In case of change in profit sharing ratio among the existing partners who will compensate the existing partners:
  • a)
    Gaining partner shall compensate
  • b)
    Sacrificing partner shall compensate
  • c)
    Only one partner
  • d)
    All Partner’s shall compensate
Correct answer is option 'A'. Can you explain this answer?

Om Desai answered
Whenever there is change in the existing profit sharing ratio, a gainer partner will compensate the sacrificing partner, for this purpose these steps should be followed by the partners:
1.Find out the Gainer due to change in existing profit sharing ratio
2.Find out the Sacrificing partner
3.Now, Debit the gainer partner and credit the sacrificing partner

What should be the amount of compensation if the partners of the firm decide to change their profit share ratio:
  • a)
    Amount of compensation = Value’s of firm goodwill x share of loss sacrificed
  • b)
    Amount of compensation = Value’s of firm goodwill x share of profit sacrificed
  • c)
    Amount of compensation = Profit of the year x share of profit gained
  • d)
    Amount of compensation = Value’s of firm goodwill x share of profit gained
Correct answer is option 'B'. Can you explain this answer?

Jayant Mishra answered
If the partners of a firm decide to change their Profit Sharing Ratio, the gaining partner must compensate the sacrificing partner. Following approach is suggested to deal with the Goodwill at the time of change in Profit sharing ratio:

Step 1: Write off the existing goodwill appearing in the books by passing the following journal entries:

All Partners' Capital/Current A/c Dr (In old ratio)

To Goodwill A/c

Step 2:   Give credit of goodwill to the sacrificing partner and debit to the gaining partner.

(a) In case of fluctuating capitals

 
Gaining Partner's Capital A/c                       Dr

To Sacrificing Partner Capital A/c

 
(b) In case of fixed capitals

 
Gaining Partner's Current A/c                       Dr

            To Sacrificing Partner Current A/c

 

The amount of compensation of goodwill is calculated as follow:

Amount of compensation payable By Gaining Partner to Sacrificing Partner = Total Goodwill of the firm x Share Gained

Amount of compensation payable By Sacrificing Partner to Gaining Partner = Total Goodwill of the firm x Share Sacrificed

Goodwill of the firm is 30,000. Gain of A is 1/6 and Sacrifice of B is 1/6. How will be adjust goodwill?
  • a)
    Debit B and Credit A with Rs.5,000
  • b)
    Debit A and Credit B with Rs.5,000
  • c)
    Debit A and B with 15,000 each and Credit Goodwill with Rs.30,000
  • d)
    Debit Goodwill with Rs.10,000 and Credit A and B with Rs.5,000 each
Correct answer is option 'B'. Can you explain this answer?

Arun Yadav answered
In this case adjustment will be made as follows:
1.Goodwill of the firm Rs.30,000 (given)
2.A’s Gain share in goodwill 30,000 × 1/6 = 5,000
3.B’s Sacrifice share of goodwill 30,000 × 1/6 = 5,000
Now, Debit the gainer and credit the sacrificing partner.

A, B and C are sharing profits and losses in the ratio 10:6:4 with effect from 01/04/2013 they decide to share profit and losses equally. Which partner has to sacrifice
  • a)
    B
  • b)
    A
  • c)
    C
  • d)
    All
Correct answer is option 'B'. Can you explain this answer?

Knowledge Hub answered
Calculation of sacrifice or gain:
1.Old Ratio 10:6:4
2.New Ratio 1:1:1
3.A’s Sacrifice (old – new share) 
4.B is gainer (old – new share)
5.C is gainer (old – new share)

P, Q and R are partners sharing profits equally. They decided that in future R will get 1/5 share in profits and remaining profit will be shared by P and Q equally. On the day of change, firm’s goodwill is valued at ` 60,000. Identify the gain or sacrifice of the partners.
  • a)
    P Debit Rs.4,000 and Q Credit Rs.4,000
  • b)
    Q and R debit with 4,000 each and P Credit with 8,000
  • c)
    P Debit with 8,000 Q and R credit with 4,000 each
  • d)
    Q Debit Rs.4,000 and P Credit Rs.4,000
Correct answer is option 'B'. Can you explain this answer?

Gowri Chavan answered
's capital was Rs. 75,000. Find the amount of capital that R brought into the firm.

Initially, all partners shared profits equally. Therefore, the share of each partner in the profits was 1/3.

Let the new profit share of R be x. Then, the profit shares of P and Q will be (1-x)/2 each.

Now, we can equate the initial profit share of R with the new profit share of R to get:

1/3 = x/5

Solving for x, we get:

x = 5/3 * 1/3 = 5/9

Therefore, the new profit shares of P, Q and R are 2/9, 2/9 and 5/9 respectively.

Let the amount of capital that R brought into the firm be y. Then, we can write:

R's capital share = 5/9 * Total capital = (5/9) * 75000 = 41666.67

Since all partners had equal capital shares initially, we can write:

P's capital share = Q's capital share = (1/3) * Total capital = (1/3) * 75000 = 25000

The total capital of the firm is the sum of individual capital shares of all partners. Therefore, we can write:

Total capital = P's capital share + Q's capital share + R's capital share

75000 = 25000 + 25000 + 41666.67

Solving for y, we get:

y = R's capital share = 41666.67 - 50000 = -8333.33

Since the amount of capital cannot be negative, we conclude that R did not bring any capital into the firm. Instead, R may have contributed some other valuable asset or service to the firm, which was considered equivalent to capital.

What adjustments are required when existing partners decide to change their profit sharing ratio:
  • a)
    Goodwill
  • b)
    Realisation Account
  • c)
    Reserves and Accumulated profits
  • d)
    Both Goodwill and Reserves and Accumulated profits
Correct answer is option 'D'. Can you explain this answer?

Ishan Choudhury answered
Change in profit sharing ratio may also necessitate adjustments in the partner’s capital accounts with respect to undistributed profits and reserves, revaluation of assets and reassessment of liabilities, etc. The valuation of goodwill of a firm, its treatment, adjustment regarding undistributed profits and reserves and revaluation of assets and liabilities due to change in the profit sharing ratio of the partners.

A, B and C takes a Joint Life Policy, after five years B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A and C decides to share profits equally. They had taken a Joint Life Policy of Rs. 2,50,000 with the surrender value Rs. 50,000. What will be the treatment in the partner’s capital account on receiving the JLP amount if joint life premium is fully charged to revenue as and when paid?
  • a)
    Rs. 50,000 credited to all the partners in old ratio.
  • b)
    Rs. 2,50,000 credited to all the partners in old ratio
  • c)
    Rs. 2,00,000 credited to all the partners in old ratio
  • d)
    No treatment is required
Correct answer is option 'A'. Can you explain this answer?

Sagarika Pillai answered
's capital account for the surrender value of the policy?

The surrender value of the policy will be credited to the capital account of A, B and C in their profit sharing ratio of 2:2:1. After B's retirement, the new profit sharing ratio will be 3:2 (equal sharing between A and C), so the surrender value will be credited to their capital accounts in the ratio of 3:2.

The entry in the capital accounts will be:

A's capital account: Dr. Rs. 75,000 (3/5 of surrender value)
C's capital account: Dr. Rs. 50,000 (2/5 of surrender value)
To Joint Life Policy account: Cr. Rs. 1,25,000 (total surrender value)

Which of the following is calculated at the time of Retirement of a Partner?
  • a)
    Gaining Ratio
  • b)
    Sacrifice of Retiring Partner
  • c)
    Old Ratio
  • d)
    Sacrifice of the employees
Correct answer is option 'A'. Can you explain this answer?

Pranav Saha answered
At the time of retirement of death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner.

Gaining ratio is the ratio in which continuing partners have ______ the share from the outgoing partner
  • a)
    Sacrificed
  • b)
    Acquired
  • c)
    Acquired and Sacrificed
  • d)
    Both Acquired and Sacrificed
Correct answer is option 'B'. Can you explain this answer?

Aryan Khanna answered
When a partner retires from the firm, his share will be acquired by the continuing partners. The ratio in which they acquire the share of retired partner, is known as gaining ratio.

Balances of M/s. Ram, Rahul and Rohit sharing profits and losses in proportion to their capitals, stood as Ram Rs. 3,00,000; Rahul Rs. 2,00,000 and Rohit Rs. 1,00,000. Ram desired to retire form the firm and the remaining partners decided to carry on, Joint life policy of the partners surrendered and cash obtained Rs. 60,000. What will be the treatment for JLP?
  • a)
    Rs. 60,000 credited to Revaluation Account
  • b)
    Rs. 60,000 credited to Joint Life Policy Account
  • c)
    Rs. 30,000 debited to Ram’s Capital Account
  • d)
    Either ‘a’ or ‘b’
Correct answer is option 'B'. Can you explain this answer?

Aarya Sharma answered
Answer: b) Rs. 60,000 credited to Joint Life Policy Account

Explanation:

When a partner retires or dies, the Joint Life Policy taken on the lives of the partners is surrendered and the cash received is credited to the Joint Life Policy Account. In this case, Ram is retiring and the remaining partners are continuing the business. Therefore, the Joint Life Policy will be surrendered and the cash received of Rs. 60,000 will be credited to the Joint Life Policy Account. This account will then be distributed among the remaining partners in their profit sharing ratio.

 X, Y, Z are partners sharing profits and losses equally. They took a joint life policy of Rs. 5,00,000 with a surrender value of Rs. 3,00,000. The firm treats the insurance premium as an expense. Y retired and X and Z decided to share profits and losses in 2:1. The amount of Joint life policy will be transferred as: 
  • a)
    Credited to X, Y and Z’s Capital accounts with Rs. 1,00,000 each 
  • b)
    Credited to X, Y and Z’s capital accounts with Rs. 1,66,667 each 
  • c)
    Credited to X, and Z capital accounts with Rs. 2,50,000 each 
  • d)
    Credited to Y’s capital account with Rs. 3,00,000 each
Correct answer is option 'A'. Can you explain this answer?

Ameya Menon answered
's capital accounts in their profit sharing ratio
b)Credited to X and Z's capital accounts in their new profit sharing ratio
c)Credited to Y's capital account
d)Credited to the firm's current account

Answer: b) Credited to X and Z's capital accounts in their new profit sharing ratio

Explanation:
Since Y has retired, the partnership firm is now between X and Z only. They have also decided to share profits and losses in the ratio of 2:1. Therefore, the amount of joint life policy should be transferred to their capital accounts in the new profit sharing ratio. Hence, option b) is the correct answer. Option a) is incorrect because Y is no longer a partner in the firm. Option c) is also incorrect because Y has already received his share of the partnership assets upon retirement. Option d) is incorrect because the joint life policy is a partnership asset and not a current liability of the firm.

Goodwill given in the balance sheet is debited to the partners at the time of retirement in:
  • a)
    Gain Ratio
  • b)
    Sacrificing Ratio
  • c)
    New Ratio
  • d)
    Old Ratio
Correct answer is option 'D'. Can you explain this answer?

Vikas Kapoor answered
At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).

When the New ratio is deducted with Old Ratio we get:
  • a)
    New Ratio
  • b)
    Old Ratio
  • c)
    Sacrifice only
  • d)
    Gain Ratio
Correct answer is option 'D'. Can you explain this answer?

Raghav Shah answered
Gaining ratio is calculated by deducting the old ratio from the new ratio. The following formula is used to calculate the gain ratio.
Gaining ratio = New ratio – old ratio

Why do existing partners change their profit sharing ratio:
  • a)
    Due active participation in management by a partner
  • b)
    Due to change in capital contribution
  • c)
    Due to Tax Policy of Government
  • d)
    Both Due to change in capital contribution and Due active participation in management by a partner
Correct answer is option 'D'. Can you explain this answer?

Srishti Kaur answered
Reasons for Change in Profit Sharing Ratio

There are various reasons why existing partners may change their profit sharing ratio. Some of the reasons are discussed below:

1. Due to Active Participation in Management by a Partner

When a partner is actively involved in the management of the business, it is likely that they will demand a larger share of the profits. This is because they are contributing more than just their capital to the business. They are also contributing their time, skills, and expertise, which are just as important as capital. Therefore, if a partner is actively involved in the management of the business, it may be necessary to adjust their profit sharing ratio accordingly.

2. Due to Change in Capital Contribution

Another reason why partners may change their profit sharing ratio is due to a change in capital contribution. If one partner contributes more capital than the other, it is only fair that they receive a larger share of the profits. Similarly, if one partner reduces their capital contribution, it may be necessary to adjust their profit sharing ratio accordingly.

3. Due to Tax Policy of Government

Sometimes, the government may introduce new tax policies that affect the profit sharing ratio of partners. For example, if the government introduces a new tax on profits, it may be necessary to adjust the profit sharing ratio to ensure that each partner is paying their fair share of the tax.

Conclusion

In conclusion, partners may change their profit sharing ratio for various reasons. However, the most common reasons are due to a change in capital contribution and active participation in management by a partner. It is important for partners to discuss and agree on the profit sharing ratio beforehand to avoid any misunderstandings or disputes in the future.

Goodwill Given in the old Balance Sheet will be:
  • a)
    Written off by the old partners
  • b)
    Written off by the Sacrificing partners
  • c)
    Distributed by Gainer partners
  • d)
    Credited to old Partners Capital accounts
Correct answer is option 'A'. Can you explain this answer?

Vikas Kapoor answered
Goodwill given in the old balance sheet will be written off by all the partners (including retiring partner) at the time of retirement of a partner. Goodwill will be written off in the old ratio of all the partners.

Chapter doubts & questions for Reconstitution of a Partnership Firm: Retirement/Death of a Partner - 4 Months Preparation for Commerce Class 12 Boards 2025 is part of Commerce exam preparation. The chapters have been prepared according to the Commerce exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for Commerce 2025 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

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