Test: Admission Of A Partner - 2 - Commerce MCQ

When a new partner is admitted into the partnership firm, he brings some amount of premium for goodwill which will be shared/distributed by the sacrificing partners in their sacrificing ratio

Reconstitution on a partnership means change in the number of partners through Admission, Retirement or Death of the partners or change in the ratio of partners. Puchase of Assets will not change the constitution of the partnership.

When there is no proper guidelines or when there is no partnership deed or when partnership deed is silent on the issue of admission of a new partner. In such a case all provisions of the Partnership Act, 1932 will be applicable according to which a new partner can be admitted into the partnership only with the consent of all existing partners.

When a new partners is admitted into the partnership he brings some amount in cash as his capital and some amount for his share in goodwill. The amount he brings for the share of goodwill is known as premium for goodwill.

Correct option is B. Reconstitution of the partnership firm

New profit sharing ratio refers to that ratio in which all the partners (old partners + new partner) will share future profits. It is not compulsory to share future profits equally. If there is no partnership deed or partnership deed is silent on the distribution of future profits, only in that case they will share future profits equally.

Sacrificing ratio refers to that ratio in which old partners will sacrifice their share in the favour of a new partner. To calculate the sacrificing ratio new share should be deducted from the old share of the existing partners’ i.e. old ratio – new ratio.

When a new partner is admitted, old partners will sacrifice some share in favor of new partner, the share they sacrifice in favor of new partner is known as sacrifice share or sacrificing ratio of the old partners.

At the time of admission of a new partner, the main use of sacrificing ratio is to adjust the premium for goodwill brought by a new partner.

Section 31of the Indian Partnership Act provides that a new partner shall not be inducted into a firm without the consent of all existing partners.

A newly admitted partner may acquire his share of profit from one partner or two partners or from all partners in an agreed ratio. He may acquire his share in old ratio of the partners or in an agreed ratio for sacrifice but not in the new ratio of all the partners because new ratio will be fixed after adjusting his share.

The amount of premium for goodwill brought in by the new partner will be shared by the only sacrificing partners in their sacrificing ratio.

Distribution of profit is to be done in new profit sharing ratio:
X = 30,000 × 1/3 = 10,000
Y = 30,000 × 1/3 = 10,000
Z = 30,000 × 1/3 = 10,000

Adjustments to be done at the time of admission of a partner are:
1.Change in profit sharing ratio
2.Adjustment for premium for goodwill
3.Adjustment of old goodwill (given in balance sheet)
4.Revaluation account (revaluation of assets and re-assessment of liabilities)
5.Accumulated profits and reserves
6.Adjustment of capital

Old partners will sacrifice some share in favor of a new partner. In simple words, when a new partner is admitted he acquires his share of profits , this will reduce the old partner’s shares in profits

Admission of a new partner will reconstitute the partnership firm. It means it is the end of old partnership and beginning of a new partnership among the partners. It does not mean the end of the firm.

New profit sharing ratio will be calculated for all the partners because of change in profit sharing ratio agreement among the partners.

Sacrificing ratio is concerned with the old partners who are sacrificing their share in favor of a new partner. New ratio means, new ratio of all the partners (including new and old partners).

Goodwill means good name, good product or reputation earned by a firm through the hard work and honesty of its owners.

It is known as hidden goodwill. Following formula should be used to calculate the value of hidden goodwill: Total Capital of the firm – Combined capital of partners = Hidden Goodwill