CHANGE IN PSR

Meaning of reconstitution of a partnership firm: Whenever the old partnership deed comes to an end and a new partnership deed is formed, any change in the existing agreement of partners is treated as reconstitution of the firm. Which statement best reflects this meaning?

• It is the formation of a company by partners

• It is a change in the existing partnership agreement when the old deed ends and a new deed comes into effect

• It is the final dissolution of the partnership firm and closure of business

• It is the admission of a partner without any change in the agreement

Circumstances when reconstitution of a partnership takes place include: change in profit-sharing ratio among existing partners, admission of a new partner, retirement of an existing partner, death of a partner, and amalgamation of two partnership firms. Which of the following are such circumstances? Select all that apply.

• Change in the profit-sharing ratio among existing partners

• Admission of a new partner

• Retirement or death of a partner

• Conversion of partnership into a company without change in terms

• Amalgamation of two partnership firms

Effect of a change in profit-sharing ratio among existing partners: It leads to dissolution of the existing partnership agreement and a new agreement comes into effect, but not dissolution of the firm. Which option states this effect correctly?

• The firm is dissolved and business closes

• There is no change in the agreement or the firm

• Only capital accounts are affected without any change in agreements

• The existing agreement ends and a new agreement takes effect without dissolving the firm

Issues to be dealt with at the time of a change in profit-sharing ratio include determination of sacrificing and gaining ratios, accounting treatment of goodwill, treatment of reserves/accumulated profits or losses, revaluation of assets and reassessment of liabilities, and adjustment of capital. Which of the following are included? Select all that apply.

• Determination of sacrificing and gaining ratios

• Revaluation of assets and reassessment of liabilities

• Only distributing cash on hand

• Treatment of reserves, accumulated profits or losses

• Adjustment of partners' capitals

Reason partners may change their profit-sharing ratio: Which option matches the note that the change may occur due to a change in an existing partner's role in the firm?

• To comply with a government order unrelated to roles

• Due to a change in an existing partner’s role in the firm

• Because creditors demand a higher interest rate

• To increase the number of partners without role changes

Sacrificing ratio is the ratio in which one or more partners agree to sacrifice their share of profit in favour of one or more partners of the firm. What is the formula for the sacrificing ratio?

• New ratio + Old ratio

• Old ratio − New ratio

• New ratio − Old ratio

• Old ratio × New ratio

When is sacrificing ratio computed? According to the note, it is computed in the case of change in profit-sharing ratio and when there is admission of a new partner. Which items apply? Select all that apply.

• When there is a change in the profit-sharing ratio among existing partners

• When a new partner is admitted

• When a partner withdraws drawings during the year only

• When partners change their capital account method without ratio change

Gaining ratio is the ratio in which one or more partners gain share of profit as a result of a share sacrificed by one or more partners. What is the formula for the gaining ratio?

• Old ratio − New ratio

• New ratio − Old ratio

• Old ratio ÷ New ratio

• Old ratio + New ratio

New profit-sharing ratio: The ratio in which the partners agree to share profits in future on reconstitution is known as the new sharing ratio. Which statement reflects this?

• It is the ratio used prior to any reconstitution

• It is the ratio for sharing past profits only

• It is the ratio agreed for sharing future profits after reconstitution

• It is the ratio for distributing drawings among partners

Treatment of goodwill on change in profit-sharing ratio — when goodwill is adjusted through partners' capital accounts and partners maintain fluctuating capitals, which journal entry is passed?

• Sacrificing Partners’ Capital A/cs Dr. To Gaining Partners’ Capital A/cs

• Gaining Partners’ Capital A/cs Dr. To Sacrificing Partners’ Capital A/cs

• Goodwill A/c Dr. To All Partners’ Capital A/cs in new ratio

• All Partners’ Capital A/cs Dr. To Goodwill A/c