Question

Assets are revalued and liabilities are reassessed at the time of change in profit-sharing ratio so that

• A. assets and liabilities are shown at their present values
• B. gaining partner is not put to an advantage and sacrificing partner is not put to disadvantage & vice versa.
• C. Both (a) and (b).
• D. assets and liabilities are shown at their market values.

Hint:

Whenever there is any change in the constitution of a firm (admission, retirement, death, or change in profit-sharing ratio), a Revaluation Account is prepared.
All old accumulated profits, losses, and revaluation balances must be shared in the Old Profit-Sharing Ratio to ensure equity among partners.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks for the underlying reasons and objectives behind revaluing assets and reassessing liabilities during a change in the profit-sharing ratio among existing partners.

Step 2: Detailed Explanation:

• Concept of Reconstitution of Firm:
  A change in the profit-sharing ratio represents a reconstitution of the partnership firm.
  The old partnership agreement comes to an end, and a new agreement comes into force.
  
• Avoiding Unfair Advantage or Disadvantage (Option B):
  Over time, the value of assets might have appreciated or depreciated, and the value of liabilities might have changed.
  Any gain or loss arising from these changes belongs to the partners in their old profit-sharing ratio because it accumulated during the period prior to the change.
  If the assets and liabilities are not revalued, the gaining partner would get an unfair share of these past gains in the future, while the sacrificing partner would be unfairly disadvantaged.
  Thus, revaluation prevents any unfair advantage or disadvantage.
  
• Updating to Present Values (Option A):
  Revaluation ensures that the assets and liabilities are updated and recorded at their current revised/present values in the books of the reconstituted firm.
  This gives a true and fair view of the financial position of the firm under the new agreement.
  
• Conclusion:
  Since both statements (a) and (b) represent key and valid objectives of the revaluation process, Option (C) is the most comprehensive and correct choice.
  

Step 3: Final Answer:
The correct option is (C) as it correctly includes both (a) and (b).