Question

Why is the value of goodwill determined when a firm is reconstituted?

Answer 1

Reconstitution of firm takes place when there is a new admission of a partner, retirement of partner, death of a partner or simply a change of terms of a partner. At the time of reconstitution of a firm, all assets and liabilities need to be revalued, goodwill need to be determined, reserves must be distributed among all partners in old profit sharing ratio. All these adjustments need to be done before reconstitution of firm because it is the combined effort of all parrtners and hence should be distributed among old partners in their old profit sharing ratio.