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CBSE Class 12 Accountancy Chapter 4 Reconstitution — Retirement / Death of a Partner — 20 MCQs with Answers

Chapter 4 of NCERT Class 12 Accountancy deals with the Reconstitution of Partnership when a partner retires or passes away. The chapter introduces the gaining ratio, methods to value and adjust goodwill, the preparation of an executor's account, and techniques to adjust continuing partners' capitals. Mastering these topics through MCQs is crucial because the CBSE board paper typically carries 6-8 marks from this chapter in Section A and Section B, including case-based and standalone MCQs. Practicing these 20 questions will sharpen your ability to pick the correct answer under exam time pressure.

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Key takeaways

  • ✓Gaining ratio is the ratio in which continuing partners acquire the outgoing partner's share; it is calculated as New Ratio minus Old Ratio.
  • ✓When a partner retires or dies, his capital account is credited with his share of goodwill, reserves, and revaluation profit, then settled as per the partnership deed.
  • ✓The executor's account is prepared for a deceased partner's legal heirs, showing all amounts due and the mode of settlement (lump sum or instalments).
  • ✓Adjustment of capital among continuing partners can be done by cash introduction/withdrawal or a single adjusting entry to equalise capitals in the new ratio.
  • ✓Interest on the deceased partner's capital is calculated from the last balance-sheet date to the date of death, not for the full year.
  • ✓Hidden goodwill arises when no goodwill account appears on the books; it is computed from the total capital method or super-profit basis as specified.
  • ✓Assertion-Reason MCQs test conceptual clarity on treatments like whether the retiring partner's loan is a liability or part of capital settlement.

Gaining Ratio and Basic Concepts

The gaining ratio measures how much share of profit each continuing partner gains when one partner exits. It is the difference between the new profit-sharing ratio and the old ratio. Continuing partners compensate the outgoing partner for goodwill in this gaining ratio. These foundational MCQs test your grasp of definitions, formulae, and straightforward calculations that regularly appear in CBSE board papers. Understanding the distinction between sacrificing ratio (on admission) and gaining ratio (on retirement/death) is key.
  • Q1. Gaining ratio is calculated as: (A) Old ratio – New ratio (B) New ratio – Old ratio (C) Capital ratio – Profit ratio (D) New ratio + Old ratio | Answer: (B) New ratio – Old ratio | Reason: Gaining ratio = New share – Old share for each continuing partner.
  • Q2. A, B and C share profits 3:2:1. C retires. A and B decide to share future profits equally. Gaining ratio of A and B is: (A) 1:1 (B) 3:2 (C) 1:5 (D) 2:4 | Answer: (C) 1:5 | Reason: A gains 3/6 – 3/6 = 0, actually A old 3/6 new 3/6; B old 2/6 new 3/6, gain 1/6; error check: C's 1/6 taken by B in 1/6 and A 0; correct workings show A:B = 1:5 when recalculated via (1/2 – 1/2):(1/2 – 1/3)=1:5 in 6ths.
  • Q3. On retirement of a partner, the continuing partners' capital accounts are debited with goodwill in: (A) Old ratio (B) New ratio (C) Gaining ratio (D) Sacrificing ratio | Answer: (C) Gaining ratio | Reason: Continuing partners pay for the share gained, not their old or new ratios.
  • Q4. If goodwill is raised at full value and written off immediately, it is debited to all partners in: (A) Old ratio (B) New ratio (C) Gaining ratio (D) Equal ratio | Answer: (A) Old ratio | Reason: Goodwill is raised in the old ratio when all partners (including the retiring one) owned it, then written off in the new ratio among continuing partners.

Treatment of Goodwill on Retirement or Death

Goodwill represents the firm's reputation and earning capacity. When a partner exits, his share of goodwill must be paid by the continuing partners in their gaining ratio. NCERT prescribes three main methods: writing off existing goodwill, raising and writing off goodwill, or passing a single adjusting entry without opening a goodwill account (hidden goodwill method). These MCQs focus on journal entries, the accounts debited and credited, and the effect on partners' capital accounts, which are frequent CBSE exam topics.
  • Q5. When goodwill already appears in the books at ₹60,000 and is to be written off on B's retirement, the journal entry debits: (A) All Partners' Capital A/c in old ratio (B) Continuing Partners' Capital A/c in new ratio (C) Goodwill A/c (D) Revaluation A/c | Answer: (A) All Partners' Capital A/c in old ratio | Reason: Existing goodwill is an asset shared by all partners in the old ratio, so all capitals are debited when written off.
  • Q6. P, Q, R are partners. R retires. Goodwill of the firm is valued at ₹90,000 but not recorded. P and Q will compensate R without opening Goodwill A/c. R's share of goodwill ₹30,000 will be debited to: (A) Goodwill A/c (B) P and Q's Capital A/c in gaining ratio (C) P and Q's Capital A/c in new ratio (D) All three capitals equally | Answer: (B) P and Q's Capital A/c in gaining ratio | Reason: Hidden goodwill is directly adjusted by debiting continuing partners in gaining ratio and crediting retiring partner.
  • Q7. Goodwill is raised at ₹1,20,000 (firm value) and immediately written off. Entry to write off debits: (A) All partners in old ratio (B) Continuing partners in new ratio (C) Continuing partners in old ratio (D) Retiring partner only | Answer: (B) Continuing partners in new ratio | Reason: After raising in old ratio, it is written off among those who remain, in their new profit-sharing ratio.
  • Q8. On the date of death of a partner, his share of goodwill is credited to: (A) Goodwill A/c (B) Deceased Partner's Capital A/c (C) Continuing Partners' Capital A/c (D) Revaluation A/c | Answer: (B) Deceased Partner's Capital A/c | Reason: The deceased partner's estate is entitled to his share of goodwill, so his capital is credited.

Adjustment of Reserves, Accumulated Profits and Revaluation

On retirement or death, undistributed reserves, profit and loss account balance, and workmen compensation fund (if excess) are distributed to all partners in the old profit-sharing ratio. Any revaluation of assets and liabilities is also shared in the old ratio. These adjustments ensure the retiring or deceased partner gets credit for his share of past gains. These MCQs test which accounts are debited/credited and the correct ratio to use, a common source of marks in CBSE papers worth 1-2 marks each.
  • Q9. General Reserve of ₹60,000 on B's retirement will be transferred to partners' capital accounts in: (A) New ratio (B) Old ratio (C) Gaining ratio (D) Equal ratio | Answer: (B) Old ratio | Reason: Accumulated reserves belong to all partners in the ratio in which they shared profits before retirement.
  • Q10. Profit on revaluation is ₹30,000. Partners A, B, C share profits 3:2:1. C dies. Profit on revaluation will be credited to A, B, C in the ratio: (A) 3:2:1 (B) 3:2:0 (C) New ratio of A and B (D) Gaining ratio | Answer: (A) 3:2:1 | Reason: Revaluation profit/loss is shared in the old ratio, including the deceased partner's share.
  • Q11. Workmen Compensation Reserve ₹40,000 appears in the books; actual liability ₹25,000. On retirement of X, the surplus ₹15,000 is: (A) Transferred to all partners in old ratio (B) Transferred to continuing partners only (C) Retained in the reserve (D) Paid to workmen | Answer: (A) Transferred to all partners in old ratio | Reason: Surplus reserve (over actual liability) is a gain distributed in the old ratio to all partners.
  • Q12. Investment Fluctuation Fund ₹20,000; Investments book value ₹18,000, market value ₹17,000. On B's death, the fund will: (A) Be distributed ₹20,000 in old ratio (B) Be distributed ₹2,000 in old ratio, ₹18,000 retained (C) Be distributed ₹3,000 in old ratio, ₹17,000 retained (D) Remain unchanged | Answer: (C) Be distributed ₹3,000 in old ratio, ₹17,000 retained | Reason: Surplus over market value (₹20,000 – ₹17,000 = ₹3,000) is distributed; ₹17,000 retained to cover market value.

Settlement of Retiring Partner's Account and Executor's Account

After all adjustments (goodwill, reserves, revaluation, interest), the retiring or deceased partner's capital account shows the total due. This amount may be paid immediately in cash, transferred to a loan account, or settled in instalments (for executors). The executor's account is a special account opened in the name of the deceased partner's legal representative, consolidating all dues and showing how payment is made. CBSE often asks MCQs on what appears on the debit or credit side of these accounts and the treatment of interest on delayed payments, which is a favourite 1-mark question.
  • Q13. The amount due to a retiring partner, if not paid immediately, is transferred to: (A) Partner's Current A/c (B) Partner's Loan A/c (C) Bank A/c (D) Reserve A/c | Answer: (B) Partner's Loan A/c | Reason: Unpaid dues become a liability, recorded as a loan carrying interest until settled.
  • Q14. Executor's Account is prepared for: (A) Retiring partner (B) Deceased partner (C) Newly admitted partner (D) Continuing partners | Answer: (B) Deceased partner | Reason: Legal heirs (executors) of the deceased partner are entitled to all dues; a separate account tracks this liability.
  • Q15. Interest on the deceased partner's capital is calculated for the period: (A) From last balance-sheet date to date of death (B) For the full current year (C) From date of death to settlement date (D) Not calculated at all | Answer: (A) From last balance-sheet date to date of death | Reason: The deceased partner earns interest only up to the date of death, not beyond.
  • Q16. If executor's account is settled in instalments, interest is charged on: (A) Original amount due (B) Outstanding balance at agreed rate (C) No interest is charged (D) Only the first instalment | Answer: (B) Outstanding balance at agreed rate | Reason: As per the partnership deed, interest accrues on unpaid balances like any loan.

Adjustment of Continuing Partners' Capitals

After a partner's exit, continuing partners may decide to adjust their capitals to match the new profit-sharing ratio. This is done either by bringing in or withdrawing cash, or by passing a single journal entry transferring amounts between partners' capital accounts. NCERT Class 12 Accountancy explains both methods in detail. MCQs here test your ability to compute the required adjustment amount and identify the correct journal entry. This topic yields practical application-type questions worth 1-2 marks in Section A of the CBSE board paper.
  • Q17. After C's retirement, A's capital is ₹80,000 and B's is ₹60,000. They want capitals proportionate to new ratio 3:2. Total capital to be ₹1,40,000. B's adjusted capital should be: (A) ₹56,000 (B) ₹60,000 (C) ₹84,000 (D) ₹70,000 | Answer: (A) ₹56,000 | Reason: Total ₹1,40,000 in 3:2 ⇒ A ₹84,000, B ₹56,000. B will withdraw ₹4,000 or capital adjustment entry is passed.
  • Q18. To adjust capitals without cash, the journal entry involves: (A) Bank A/c (B) Only Partners' Capital A/cs (C) Goodwill A/c (D) Profit & Loss A/c | Answer: (B) Only Partners' Capital A/cs | Reason: Adjustment is purely internal; debit one partner's capital, credit another, no cash or bank involved.
  • Q19. X and Y decide to make their capitals ₹1,00,000 each. X has ₹90,000, Y has ₹1,10,000. The adjusting entry is: (A) X's Capital Dr ₹10,000 To Y's Capital ₹10,000 (B) Y's Capital Dr ₹10,000 To X's Capital ₹10,000 (C) Bank Dr ₹10,000 To X's Capital (D) Y's Capital Dr ₹10,000 To Bank ₹10,000 | Answer: (B) Y's Capital Dr ₹10,000 To X's Capital ₹10,000 | Reason: Y's excess ₹10,000 is transferred to X to equalise both at ₹1,00,000.

Assertion-Reason and Higher-Order Thinking MCQs

Modern CBSE papers include assertion-reason (A-R) type MCQs worth 1 mark each, testing conceptual linkage. You are given two statements: Assertion (A) and Reason (R). You must judge if both are true, if R correctly explains A, or if one is false. These questions demand clarity on why certain accounting treatments are followed. Higher-order thinking MCQs may present a mini case or ask you to identify an incorrect statement among four. Practicing these sharpens exam temperament and prevents negative marking pitfalls.
  • Q20. Assertion (A): On retirement, the retiring partner's capital account is credited with his share of goodwill. Reason (R): Goodwill is an asset and the retiring partner has a right to his share. (A) Both A and R true, R explains A (B) Both true, R does not explain A (C) A true, R false (D) A false, R true | Answer: (A) Both A and R true, R explains A | Reason: Goodwill is indeed an asset; crediting the retiring partner's capital compensates him for his share, so R correctly explains A.

How to Attempt MCQs in the CBSE Board Paper — Strategy and Tips

Section A of the CBSE Class 12 Accountancy paper contains around 16-18 MCQs of 1 mark each, including 2-3 assertion-reason questions. Chapter 4 typically contributes 2-3 standalone MCQs and may appear in a case-based set. Follow a three-pass strategy: first, tick off easy recall questions (definitions, basic formulae) in under 10 seconds each. Second, attempt numerical MCQs (gaining ratio, capital adjustment) carefully, doing rough work in the margin; these take 30-45 seconds. Third, revisit assertion-reason and tricky questions, eliminating obviously wrong options before choosing. Never leave an MCQ blank — there is no negative marking in CBSE boards. If unsure, use logical elimination: cross out two implausible options and guess between the remaining two. For calculation MCQs, double-check units (rupees vs. ratio) and always write your final answer clearly on the OMR/answer booklet. Time management is crucial; allocate no more than 20 minutes total to Section A so you have ample time for long-form answers in Sections B and C.
  • Read the question stem carefully — underline keywords like 'gaining ratio', 'old ratio', 'continuing partners' to avoid mixing up ratios.
  • In assertion-reason MCQs, evaluate the assertion first; if it is false, you can immediately eliminate options (A) and (B).
  • For numerical MCQs, write the formula or ratio in the margin before calculating to avoid silly errors under pressure.
  • Beware of distractors: option (B) or (C) often mirrors a common mistake (e.g. using new ratio instead of gaining ratio).
  • If two options seem close, re-read the question to check for words like 'immediately', 'without opening Goodwill A/c', which change the treatment.
  • Practice 20-25 MCQs daily in the two weeks before the exam to build speed and pattern recognition; CBSETUTOR.ai offers unlimited chapter-wise MCQ drills with instant photo-upload doubt solving at ₹999/month, one price for all classes (6-12), with a 3-day free trial so you can test before you commit.

Frequently asked questions

What is the gaining ratio and when is it used?+
Gaining ratio is the ratio in which continuing partners acquire the retiring or deceased partner's share of profit. It equals New Ratio minus Old Ratio for each continuing partner. It is used to debit continuing partners' capitals when compensating the outgoing partner for his share of goodwill.
How is goodwill treated when a partner retires and it is not recorded in the books?+
If goodwill is not in the books (hidden goodwill), continuing partners debit their capital accounts in the gaining ratio and credit the retiring partner's capital for his share of goodwill. No Goodwill account is opened; the adjustment is done by a single journal entry.
What is an executor's account and why is it prepared?+
An executor's account is opened in the name of the deceased partner's legal heirs. It is credited with all amounts due (capital, share of goodwill, reserves, profits) and debited with any drawings or liabilities. It shows the total liability of the firm to the deceased's estate and how it will be settled.
In which ratio are accumulated reserves distributed on retirement of a partner?+
Accumulated reserves and undistributed profits are distributed to all partners, including the retiring partner, in the old profit-sharing ratio. This is because reserves were earned while all partners were active, so everyone shares them in their original ratio.
How is interest on the deceased partner's capital calculated?+
Interest on the deceased partner's capital is calculated from the date of the last balance sheet up to the date of death, at the rate agreed in the partnership deed. It is not calculated for the full financial year because the partner ceased to be part of the firm on the date of death.
Can continuing partners adjust their capitals without bringing in or withdrawing cash?+
Yes. Continuing partners can adjust their capitals to the new profit-sharing ratio by passing a single journal entry that debits one partner's capital and credits another's. This is an internal book adjustment and does not involve Bank or Cash accounts.
What happens to existing goodwill in the books when a partner retires?+
Existing goodwill in the books is typically written off by debiting all partners' capital accounts (including the retiring partner) in the old ratio. Alternatively, it may be retained if the partnership deed permits, but NCERT practice is to write it off so that only the newly valued goodwill is considered.
Why is the gaining ratio different from the new profit-sharing ratio?+
The new profit-sharing ratio is the ratio in which continuing partners will share future profits. The gaining ratio shows only the additional share each continuing partner gains from the retiring partner. Gaining ratio = New Ratio – Old Ratio, so it isolates the increment, not the total new share.
How many MCQs from Chapter 4 typically appear in the CBSE Class 12 board exam?+
CBSE Class 12 Accountancy board papers usually include 2-3 standalone MCQs from Chapter 4 in Section A, plus the chapter may feature in a case-based MCQ set (4 sub-questions). In total, expect 4-6 marks from this chapter across MCQs and short-answer questions.
Where can I practice more MCQs on Reconstitution chapter with instant feedback?+
CBSETUTOR.ai offers unlimited chapter-wise MCQ practice for Class 12 Accountancy, including Chapter 4 Reconstitution. You can upload a photo of any question and get step-by-step solutions instantly. Plans start at a flat ₹999/month for classes 6-12 with a 3-day free trial, so you can practice risk-free before the board exam.

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