Chapter 3: Reconstitution of a Partnership Firm – Retirement/Death of a Partner
Accountancy Part 1 • Class 12
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Chapter Analysis
Intermediate10 pages • EnglishQuick Summary
The chapter focuses on the reconstitution of a partnership firm due to the retirement or death of a partner. It covers key processes such as the adjustment of profit-sharing ratios, treatment of goodwill, revaluation of assets and liabilities, and settlement of the outgoing partner's dues. The financial implications of such a reconstitution require meticulous adjustments to ensure fair compensation for the retiring or deceased partner and the continuation of the firm with a redefined structure.【4:1†class-12-accountancy-part-1-chapter-3.pdf】
Key Topics
- •New Profit Sharing Ratio
- •Gaining Ratio
- •Treatment of Goodwill
- •Revaluation of Assets and Liabilities
- •Accumulated Profits or Losses
- •Settlement Methods for Retired/Deceased Partner
- •Adjustment of Partners’ Capitals
- •Impact of Partner's Death on Partnership
Learning Objectives
- ✓Calculate new profit sharing ratio and gaining ratio for remaining partners
- ✓Describe the accounting treatment of goodwill in retirement or death scenarios
- ✓Adjust entries for unrecorded assets and liabilities
- ✓Make adjustments for accumulated profits or losses
- ✓Ascertain the claim of retiring or deceased partner
- ✓Prepare balance sheet for reconstituted firm
Questions in Chapter
What are the different ways in which a partner can retire from the firm?
Page 148
Write the various matters that need adjustments at the time of retirement of a partners.
Page 148
Distinguish between sacrificing ratio and gaining tab.
Page 148
Why do firms revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?
Page 148
Why is a retiring/deceased partner entitled to a share of goodwill of the firm?
Page 148
Explain the modes of payment to a retiring partner.
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How will you compute the amount payable to a deceased partner?
Page 148
Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
Page 148
Discuss the various methods of computing the share in profits in the event of death of a partner.
Page 148
Additional Practice Questions
What is the process of calculating the new profit sharing ratio when a partner retires?
mediumAnswer: To calculate the new profit sharing ratio, adjust the ratio among continuing partners based on their acquiring share from the retiring partner, maintaining the cumulative share distribution in the firm.
Explain the steps involved in revaluating assets and liabilities.
mediumAnswer: Revaluation involves adjusting the book values of assets and liabilities to reflect their current market value. This may include increasing or decreasing the values of assets, factoring in liabilities and transferring the revaluation gains or losses to the remaining partners' capital accounts.
How is goodwill treated in the books when a partner retires?
mediumAnswer: Goodwill is adjusted by debiting or crediting the continuing partners' capital accounts in favor of the retiring partner, reflecting the latter's contribution to the firm's established reputation.
Describe the significance of 'gaining ratio' in partner retirement scenarios.
mediumAnswer: The gaining ratio determines how the shares of profits previously owned by the retiring partner are distributed among the remaining partners, often influencing their compensation obligations.
What are the implications of not adjusting the capital accounts post-retirement?
hardAnswer: Failure to adjust capital accounts can lead to inequities in final payments to retiring partners and imbalanced equity stakes among continuing partners, impacting future financial distributions.