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CMA Intermediate · Financial Accounting · Admission of Partner

On the admission of a new partner into an existing partnership firm, which of the following is a direct legal consequence?

Admission of a partner reconstitutes the firm: the old partnership agreement ends and a new agreement comes into existence, while the business normally continues. It is not a dissolution requiring sale of assets, and existing partners retain their claim to goodwill, usually through the sacrificing ratio.

  1. AThe old partnership is reconstituted and a new partnership agreement comes into existenceCorrect
  2. BThe firm is automatically dissolved and all assets must be sold
  3. CThe existing partners lose their right to share in goodwill
  4. DThe new partner becomes liable only for losses arising after the next balance sheet date

Explanation

Admission changes the constitution of the firm, so the old agreement is replaced by a new one, although the firm usually continues its business. It does not require dissolution or sale of assets. Existing partners keep their rights to goodwill, which is typically shared in the sacrificing ratio. The new partner's liability starts from admission, not from a balance sheet date.

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