In a partnership, admission of a new partner is followed by retiremen…

In a partnership, admission of a new partner is followed by retirement within two months but revaluation did not occur at either of the event. What is the most significant risk?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Sacrificing partners may be over-compensated or under-compensated.

Revaluation brings assets and liabilities to their current values at the date of each change, so that every gain or loss up to that date goes to the partners who were there when it arose. If assets have risen in value and no revaluation is done on admission, the new partner gets a share of a gain that belongs to the old partners; if they have fallen, he shares a loss that is not his.

When the admission is followed two months later by a retirement, again without revaluation, the retiring partner is settled on book values that do not show the real position. The amounts that should have gone to the partners who gave up their shares are therefore wrong: the sacrificing partners end up paid too much or too little.

Why the other options are incorrect

Option (1) The profit sharing ratio may be distorted. — Incorrect. The new ratio is fixed by agreement among the partners. Revaluation does not decide it.
Option (3) Goodwill may not be distributed. — Incorrect. Goodwill is valued and adjusted separately from revaluation, so skipping revaluation does not stop the goodwill adjustment.
Option (4) Retirement dues becomes difficult to calculate. — Incorrect. The dues can still be worked out from the book figures; the problem is that the figure is unfair, not hard to calculate.

NCERT (2026-27 edition):
Revaluation of Assets and Reassessment of Liabilities – “At the time of admission of a new partner, it is always desirable to ascertain whether the assets of the firm are shown in books at their current values. In case the assets are overstated or understated, these are revalued. … The gain or loss on revaluation of each asset and liability is transferred to this account and finally its balance is transferred to the capital accounts of the old partners in their old profit sharing ratio.”

NCERT (2026-27 edition):
Adjustment for Revaluation of Assets and Liabilities – “At the time of retirement or death of a partner there may be some assets which may not have been shown at their current values. … As learnt in case of admission of a partner, a Revaluation Account is prepared in order to ascertain net gain (loss) on revaluation of assets and/or liabilities and bringing unrecorded items into firm’s books and the same is transferred to the capital account of all partners including retiring/deceased partners in their old profit sharing ratio.”

In a partnership, admission of a new partner is followed by retirement within two months but revaluation did not occur at either of the event. What is the most significant risk?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Sacrificing partners may be over-compensated or under-compensated.

Why the other options are incorrect

Option (1) The profit sharing ratio may be distorted. — Incorrect. The new ratio is fixed by agreement among the partners. Revaluation does not decide it.
Option (3) Goodwill may not be distributed. — Incorrect. Goodwill is valued and adjusted separately from revaluation, so skipping revaluation does not stop the goodwill adjustment.
Option (4) Retirement dues becomes difficult to calculate. — Incorrect. The dues can still be worked out from the book figures; the problem is that the figure is unfair, not hard to calculate.