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Reconstitution of a Partnership Firm - Admission of a Partner

Modes of Reconstitution of a Partnership Firm, Admission of a new partner, new profit sharing ratio,Sacrificing ration,Goodwill, adjustment for accumulated profits and losses, revaluation of assets and reassessment of Liabilities,Adjustment of Capitals,Change in profit sharing ratio among the existing partners.

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Exercise 1

  • Q1

    Identify various matters that need adjustments at the time of admission of a new partner.

    Ans:

    The following are the various items that need to be adjusted at the time of admission of a new partner.

    1. Profit Sharing Ratio: Calculation of new profit sharing ratio.

    2. Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.

    3. Revaluation of Assets and Liabilities: Assets and liabilities are revalued to ascertain the current value of the assets and liabilities of the partnership firm. Moreover, the profit or loss due to the revaluation need to be distributed among the old partners.

    4. Accumulated profits, losses and reserves are distributed among the old partners in their old ratio.

    5. Adjustment of capital of the partners.


    Q2

    Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

    Ans:

    When new partner/s is/are admitted, then the old partners in the partnership firm need to sacrifice their share of profit in favour of new partner/s. This reduces the share of old partner/s. Hence it is necessary to ascertain new profit sharing ratio even for old partners when a new partner joins the firm.


    Q3

    What is sacrificing ratio? Why is it calculated?

    Ans:

    Sacrificing ratio refers to the ratio in which the old partners surrender their share of profit in favour of new partner/s.It is calculated by the difference between old ratio and new ratio of the old partner/s.

     
    Sacrificing ratio = Old ratio – new ratio
     
    It is very important to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit. The new partner compensate to old partners by making payment to them in the form of goodwill that is transferred among the old partners in their sacrificing ratio.

    Q4

    On what occasions sacrificing ratio is used?

    Ans:

    The sacrificing ratio is used in following situation:

    1) When the existing partners of a partnership firm mutually agrees on change of profit sharing ratio.

    2) when a new partner is admitted and amount of goodwill brought by him or her is transferred among the old parners in sacrificing ratio of the old partners.


    Q5

    If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

    Ans:

    If some goodwill already exists in the books of old firm, then it should be written off among the old partner's itself in their old profit sharing raito. Following journal entry shall be passed for this:

    Old Partner's Capital Account                          Dr.

                 To Goodwill Account

    (Goodwill Written off in old ratio among the old partners)


    Q6

     Why there is need for the revaluation of assets and liabilities on the admission of a partner? 

    Ans:

    When a new partner joins the firm, it is very important to revalue the assets and liabilities of the firm for asertaining its true and fair values.This is done because the value of assets and liability may have increased or decreased and consequently their corresponding figures in old balance sheet may either be understated or overstated.Moreever it may also be possible that some of assets and liabilites are left unrecorded.

    Thus in order to record the increase and decrease in the market value of assets and liabilities,revaluation account is created and any profit or losses associated with this increase or decrease are distributed among the old partners of the firm.