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Objective type questions : Chapter 4 - Reconstitution Of Partnership (Retirement Of Partnership)

Objective type questions :
Answer in one sentence only.

Who is a retiring partner?

ANSWER:

A partner retiring from a firm, i.e. ceasing to be a partner of the firm due to agreement between them or at his own will or due to any other reason, is called a retiring partner.

What is gaining ratio?

ANSWER:

Gaining ratio is the ratio in which the continuing partners acquire the retiring partner’s share. It is calculated on retirement or death of a partner for adjusting the retiring partner’s share of goodwill. The formula for calculation of gaining ratio is as follows:
Gaining Ratio = New Ratio – Old Ratio

How would you treat General Reserve on retirement of a partner?

ANSWER:

The amount of general reserve is transferred to the capital accounts of all the partners in their profit sharing ratio. This is done to give the retiring partner his amount of share in the accumulated profits of the firm. Hence, All Partners’ Capital Accounts are credited with their respective shares.

How is amount due to a retiring partner settled?

ANSWER:

The amount due to a retiring partner is assumed to be paid through loan if nothing is mentioned in the question regarding the mode of payment. The capital account of the retiring or deceased partner is closed by transferring the balancing figure to the credit side of the Retiring/Deceased Partner’s Loan A/c. The Retiring/Deceased Partner’s Loan A/c will be shown on the Liabilities side of the New Balance Sheet (post retirement/death).

How would you adjust retiring partner’s share of goodwill without opening goodwill account?

ANSWER:

The retiring partner is paid his share of goodwill by debiting the Remaining Partners’ Capital Accounts in their gaining ratio and crediting the Retiring Partner’s Capital Account with the amount of premium.

When is the gaining ratio to be calculated?

ANSWER:

Gaining ratio needs to be calculated at the time of retirement or death of a partner for adjusting the retiring (or deceased) partner’s share of goodwill.

Write the term / word / phrase which can substitute each of the following statements :
The account which shows revaluation of assets and liabilities.

ANSWER:

Revaluation or Profit and Loss Adjustment Account

Explanation: The account which shows revaluation of assets and liabilities is called Revaluation or Profit and Loss Adjustment Account.  This account records the revised values of assets and liabilities, so that the retiring partner can be paid his share of profits that the firm has earned till the date of his retirement.

Debit balance of revaluation account.

ANSWER:

Loss on revaluation

Explanation: Debit balance of Revaluation Account represents "Loss on revaluation." Such loss is transferred to All Partners’ Capital Accounts in their old profit-sharing ratio (including the retiring partner).

The proportion in which the continuing partners benefit due to retirement of partner.

ANSWER:

Gaining Ratio

Explanation: The proportion in which the continuing partners benefit due to retirement of a partner is called gaining ratio. It is calculated on the retirement or death of a partner for adjusting the retiring/deceased partner’s share of goodwill.

Excess of actual capital over proportionate capital.

ANSWER:

Surplus Capital

Explanation: Excess of actual capital over proportionate capital is regarded as surplus capital.  This implies that the actual capital of the partners is more than what the capital should be on a proportionate basis. It is to be transferred to the current account or it may be withdrawn by the partners as per the terms of the agreement.

The method under which amount payable to the retiring partner is paid off at a time.

ANSWER:

Lump-sum method

Explanation: The method under which the amount payable to a retiring partner is paid off at a time is termed as Lump-sum method. Under this method, nothing is to be transferred to his loan account, as the payment is made in one single instalment and accordingly, no interest is to be paid to him.

Capital account of a retiring partner always shows balance.

ANSWER:

Credit balance

Explanation: The capital account of a retiring partner always shows credit balance. This is because the amount due to him in the form of share in profits of revaluation account, share of goodwill, accumulated profits and reserves, etc. is always more than the amount which decreases his claim such as drawings, share in accumulated losses, etc.

Select the most appropriate answer from the alternatives given below :

The profit or loss from revaluation on retirement of partner is shared by ___________.
a) all the partners
b) the remaining partners
c) only retiring partner
d) none of these

ANSWER:

The profit or loss from revaluation on retirement of a partner is shared by all the partners.

Explanation: Revaluation profit arising on retirement of a partner is shared by all the partners in their old profit sharing ratio (including the retiring partner).

X, Y, and Z are partners sharing profits in the ratio of 5:3:2. If Y retires then new ratio will be ___________.
a) 5:2
b) 5:3
c) 3:2
d) 1:1

ANSWER:

X, Y, and Z are partners sharing profits in the ratio of 5:3:2. If Y retires, then the new ratio will be 5:2.

Explanation: The new profit sharing ratio between X and Z can be calculated by simply striking out the share of the retiring partner, i.e. Y. In the given question, Y retires. So, his share will be taken out and the remaining partners will share future profits or losses in the ratio of 5:2.

When goodwill is raised at its full value and it is written off __________ account is to be credited.
a) cash
b) goodwill
c) all partners capital account
d) loan

ANSWER:

When goodwill is raised at its full value and it is written off, goodwill account is to be credited.

Explanation: When goodwill is raised in the books of the firm at its full value and it is written off, then Goodwill Account is to be credited and all partners’ Capital Accounts are to be debited in their old profit sharing ratio.

Increase in the value of assets should be ___________ to profit and loss adjustment account.
a) debited
b) credited
c) added
d) none of there

ANSWER:

Increase in the value of assets should be credited to profit and loss adjustment account.

Explanation: Increase in the value of assets represents appreciation and is a gain for the firm. Therefore, the increased value (of asset) is shown on credit side of the Revaluation Account.

If the goodwill is raised to the extent of retiring partners share ___________ account is to be debited.
a) cash
b) goodwill
c) all partner’s capital
d) retiring partners  capital

ANSWER:

If the goodwill is raised to the extent of retiring partner’s share, goodwill account is to be debited.

Explanation: If the goodwill is raised to the extent of the retiring partner’s share, Goodwill Account is to be debited. It means that the continuing partners have not compensated their share in favour of the retiring partner; so, there is no need to calculate gaining ratio. Still, the retiring partner’s share of goodwill is to be paid, due to which the goodwill account is to be debited.

State whether the following statements are true or false :

Gaining ratio means old ratio minus new ratio.

ANSWER:

False

Explanation: Gaining ratio is the ratio in which continuing partners acquire the retiring partner’s share. In other words,
Gaining Ratio = New Ratio – Old Ratio

Hence, the given statement is incorrect.

Retiring partner’s share in profit up to the date of his retirement will be debited to the profit and loss suspense account.

ANSWER:

True

Explanation: The retiring partner is entitled to his share of profits or losses that have arisen till the date of his retirement. Such shares are dispensed to the retiring partner by debiting the Profit & Loss Suspense Account and crediting the Retiring Partner’s Capital Account. Profit and Loss Suspense Account is opened if any partner retires during the middle of the year as against the usual case of retirement at the year end.

Amount due to a retiring partner if not paid, appears as his loan in the books of the firm.

ANSWER:

True

Explanation: Amount due to a retiring partner, if not paid, appears as his loan in the books of the firm, as it represents a liability that needs to be paid. Also, interest @ 6% p.a. is allowed till the date such amount remains outstanding.

Revaluation account is also called Realisation account.

ANSWER:

False

Explanation: Revaluation Account is different from Realisation Account. Revaluation Account is prepared at the time of admission, retirement or death of a partner, which records the effect of changes in the value of assets and liabilities, whereas, Realisation Account is prepared at the time of dissolution of a firm to record the realisation of assets and settlement of liabilities.

Retirement of a partner leads to dissolution of the firm unless otherwise agreed upon.

ANSWER:

True

Explanation: The above statement is true, especially where there are only two partners in a firm and one of them retires. In order to continue the partnership, the firm needs to admit a new partner. Otherwise, the firm will be dissolved.

Profit on revaluation account is transferred to continuing partners’ capital account only.

ANSWER:

False

Explanation: Revaluation Profit is credited to All Partners’ Capital Accounts (including the retiring partners) in their old profit sharing ratio.

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