Change in Profit-Sharing Ratio
VERY SHORT ANSWER QUESTIONS
VERY SHORT ANSWER QUESTIONS
Q.1. What is meant by reconstitution of partnership firm?
Ans. Partnership is the result of agreement and any change in existing agreement brings to an end the existing agreement and a new agreement comes into force. It amounts to reconstitution of the firm.
Q.2. State any three circumstances other than (i) admission of a new partner (ii) retirement of a partner and (iii) death of a partner when need for valuation of goodwill of a firm may arise.
Ans. in addition to admission retirement and death of a partner the need for valuation of profit sharing in the following circumstance:
Change in the profit sharing ratio amongst the existing partners.
Dissolution of a firm involving sale of business as a going concern
Amalgamation of partnership firms.
Q.3. What is meant by change in profit-sharing ratio?
Ans. A change in profit sharing ratio implies purchase of share of profit by one or more partners from other partner or partners.
Q.4. What is the sacrificing ratio?
Ans. The ratio in which one or more of the existing partners surrender some of their old share in favour of one or more of other partners is called sacrificing ratio. Sacrificing ratio is computed by deducting the new ratio from the old ratio.
Q.5. What is the formula for calculating sacrificing ratio?
Ans. Sacrificing Ratio=Old Ratio- New Ratio
Q.6. What is meant by sacrificing partners?
Ans. The partners whose share have decreased as a result of change in profit sharing ratio are called sacrificing partners,
Q.7. Give two circumstances in which sacrificing ratio may be applied.
Ans. (i) At the time of admission of a new partner.
(ii) At the time of change in profit sharing ratio of existing partners.
Q.8. Define Gaining Ratio.
Ans. The ratio in which one or more partners gain some portion of other partners share of profit is called gaming ratio. It is calculated by deducting old ratio from the new ratio.
Q.9. Give the formula for calculating the Gaining ratio of a partner in a partnership firm.
Ans. Gaining Ratio= New Ratio- Old ratio.
Q.10.What is meant by gaining partners?
Ans. The partners whose shares have increased as a result of change in profit sharing ratio are called gaming partners’
Q.11 Give two circumstances in which the gaining ratio may be applied.
Ans. (i) At the time of retirement of a partner.
(ii) At the time of change in profit sharing ratio of existing partners.
Q.12. Define goodwill.
Ans. Goodwill is the value of the permutation of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same type of industry.
Q.13. Give two characteristics of goodwill.
Ans. (i) It is an intangible asset not a fictitious asset. It is a valuable asset.
(ii) It is helpful in earring excess profits.
Q.14. Name any two factors affecting goodwill of a partnership firm.
Ans. (i) Favorable Location of the business.
(ii) Efficiency of Management.
Q.15. How is goodwill valued under the average profits method?
Ans. Under this method normal past profits of the business for a number of years are totalled and average is calculated goodwill is then calculated by multiplying the average profits by agreed number of years purchase (such as two or three)
Q.16. What is meant by super profits?
Ans. Super profits is the excess of actual average profits over normal profits.
Q.17. How is goodwill valued under the super profits method?
Ans. Under this method first super profits are calculated by deducting normal profit from the average profit and then goodwill is calculated by multiplying the given number of years purchase.
Q.18. How does goodwill value the capitalization of the average profits method?
Ans. First of all capitalized value of Average profits is calculated as per the following formula:
Capitalized value of Average = Average Profits x 100
Normal rate of return
Thereafter goodwill is calculated as follows:
Goodwill=Capitalised value of average profits-Capital Employed
Q.19.Enumerate two main steps involved in valuing the goodwill accounting to super profit method.
Ans. (i) Ascertain super profits by subtracting normal profits from average profits
(ii) Calculate goodwill by multiplying super profits with number of years purchase.
Q.20. How does goodwill is valued the capitalisation of super profit method?
Ans. Goodwill = super Profit x 100
Normal Rate of Return
Q.21. State the ratio in which the partners share profits or losses on revaluation of assets and liabilities when there is a change in profit sharing ratio amongst existing partners?
Ans. In old profit sharing Ratio.
Q.22. How are the accumulated profits and losses distributed when there is change in profit sharing ratio amongst existing partners?
Ans. Accumulated profits are credited to the capital accounts of all the partners in their old profit sharing ratio and accumulated losses are debited to their capital accounts in old profit sharing ratio.
Q.23. Why is goodwill considered an intangible asset but not a fictitious asset?
Ans. Goodwill cannot be seen or touched it can only be felt hence it is treated as an intangible asset but it is not a fictitious asset because fictitious asset do not have a value whereas goodwill has a value and it can be purchase or sold with any other asset.
Q.24.How does the factor location affect the goodwill of a firm?
Ans. Better location will attract more customers resulting in increase in sales and profits which will increase the value of goodwill.
Q.25. How does the factor Efficiency of Management affect the goodwill of a firm?
Ans. If the manager is capable and competed the firm will earn high profits which will increase the value of goodwill.
Q.26. How Does The Factor Quality Of Product Affect The Goodwill Of A Firm?
Ans. Better quality of product will increase the sales and profits which will increase the value of goodwill.
Q.27.How does the market situation affect the value goodwill of a afirm?
Ans. The monopoly condition or limited competition enables the concern to earn high profits which leads to higher value of goodwill.
Q.28. How does the nature of business affect the value of goodwill of a firm?
Ans. A firm which produces goods having a stable demand will be able to earn more profits and hence will have more goodwill.
Q.29. Distinguish between average profits and super profits.
Ans. Average profit is the average of the profits of past few years whereas super profit is the excess of average profits over normal profits.
Q.30. When there is change in the profit sharing ratio amongst existing partners does it require adjustment for goodwill?
Ans. Yes Because the gaining partner will be acquiring a part of future profits which otherwise would belong to the sacrificing partner. Hence the gaining partner must compensate the sacrificing partner by paying the proportionate amount of goodwill.
Q.31. When there is change in profit sharing ratio amongst existing partners. Should the assets and liabilities be revalued?
Ans. Yes. Because the profit or loss on revaluation should by credited or debited to the accounts of the partners in their old profit sharing ratio.
Q.32. What is the nature of a Revaluation Account?
Ans. Revolution Account is a nominal account in nature.
Q.33. Why are Reserves & Surplus distributed at the time of reconstitution of the firm?
Ans. These belong to old partners as such these should be distributed among them.