At the time of reconstitution of a partnership firm, what is the effect of recording an unrecorded liability?

It results in a loss to the existing partners

The correct answer is option 2- It results in a loss to the existing partners.

When an unrecorded liability (a previously unknown obligation) is brought into the books during reconstitution (admission, retirement, or death of a partner), it reduces the firm's net assets. This decrease is treated as a loss, which is shared by the existing partners in their old profit-sharing ratio. It doesn't affect reserves directly and certainly doesn’t result in a gain.