Reconstitution of Partnership: Admission, Retirement and Death of a Partner
What the exam tests
Admission, retirement and death of a partner test journal entries and balance sheet adjustments for capital, goodwill, revaluation, reserves and the new profit-sharing ratio. A new partner acquires a share from old partners; the sacrifice ratio is old share minus new share. Goodwill brought in cash or adjusted through capital accounts is credited to the sacrificing partners, not to the incoming partner. Revaluation gains and losses and accumulated reserves belong to the old partners only.
Worked example
X and Y share 3:2 and admit Z for 1/5. Z pays Rs. 50,000 for goodwill. The remaining 4/5 is shared 3:2, so X = 12/25, Y = 8/25, Z = 5/25. X's sacrifice = 3/5 - 12/25 = 3/25; Y's sacrifice = 2/5 - 8/25 = 2/25; sacrifice ratio is 3:2. Goodwill is credited X Rs. 30,000 and Y Rs. 20,000. If Z brings no cash for goodwill, Z's capital account is debited and the sacrificing partners' capital accounts are credited.
Traps
Do not credit goodwill to old partners in the old ratio when the sacrifice ratio differs. Do not revalue assets through the new partner's capital account. Watch the treatment of workmen compensation reserve and investment fluctuation reserve. On retirement or death, the retiring partner's share of goodwill is credited to that partner and debited to continuing partners in their gain ratio. Ensure the balance sheet totals after all adjustments.