Goodwill Settlement

Previously recorded goodwill is removed by crediting the Goodwill Account and debiting the old partners’ capital accounts in their old profit-sharing ratio. Thus, option A identifies the accounts debited.

Compensation for goodwill = Total goodwill × the retiring partner’s old profit-sharing ratio = \(₹75,000 \times \frac{1}{5} = ₹15,000\). Therefore, option A is correct. Option B would result from using a \(\frac{1}{3}\) share instead. Exam tip: Always multiply the firm’s goodwill by the retiring partner’s old share to find the amount payable.

On retirement, the outgoing partner is entitled to receive his or her share of the firm’s goodwill because that partner helped create the firm’s reputation and earning capacity. The continuing partners bear this amount in proportion to their gaining ratio. Therefore, the accounting entry normally debits the gaining partners’ capital or current accounts and credits the retiring partner’s capital account. This directly changes partners’ balances, so it is an adjustment of capital accounts. Stock, bank loan, and tax accounts are not the governing accounts for this settlement; they may be affected in other transactions but do not explain the goodwill adjustment here. Hence option A is correct.

The total of the old ratio \(2:2:1\) is \(5\). C’s old share is \(1\), so C is entitled to \(\frac{1}{5}\) of the firm’s goodwill on retirement. \(\frac{2}{5}\) is the share of either A or B, not C’s share. Exam tip: Find the retiring partner’s old fraction before calculating the goodwill adjustment.

The gaining ratio compares the additional shares acquired by the continuing partners. If they continue in the same ratio as their old ratio with one another, those additional shares are acquired in that same ratio. Therefore, the gaining ratio equals their old ratio with one another.

In the old ratio 3:2:1, A’s and B’s shares are 3/6 and 2/6. In the new ratio 3:2, their shares become 3/5 and 2/5. Therefore, A’s gain is 3/5 − 3/6 = 3/30 and B’s gain is 2/5 − 2/6 = 2/30. Hence, the gaining ratio is 3:2. Exam tip: calculate gaining ratio as new share minus old share for each continuing partner.

When a partner retires or dies, the profit-sharing ratio and the partners’ rights may change. Goodwill is therefore valued so that the retiring or deceased partner’s share can be adjusted fairly. Routine activities such as paying electricity bills, recording attendance, or purchasing stationery do not change the partners’ capital rights. Exam tip: In reconstitution questions, check for goodwill adjustment whenever there is admission, retirement, or death of a partner.

The governing concept is goodwill valuation under the average profit method. In this method, the maintainable average profit of the business is multiplied by the agreed number of years’ purchase. The formula is: Goodwill = Average Profit × Years’ Purchase. For example, if the average profit is ₹20,000 and the agreed period is three years, goodwill will be ₹60,000. The capitalisation method is different because it uses a normal rate of return to determine capitalised value or goodwill. Cash method and stock method are not standard names for this calculation. Therefore the description in the question clearly identifies the average profit method, making option A correct. The other alternatives either deny a method or name irrelevant methods.

Under the average profit method, goodwill = average profit × number of years’ purchase. Therefore, goodwill = ₹25,000 × 4 = ₹1,00,000. ₹25,000 represents the average profit for one year, not the goodwill. In the exam, write the formula first and then multiply.

The retiring partner’s goodwill share is debited to the gaining partners, B and C, in their gaining ratio of 1:2. The total ratio is 1+2=3, so B’s share is ₹24,000 × 1/3 = ₹8,000. ₹12,000 is incorrect because it represents half of the total amount, whereas B’s gain is only 1 out of 3 parts. In the exam, first add the ratio terms and then calculate each partner’s share.

Goodwill represents the value of the firm’s reputation, customer loyalty, and expected future earning capacity. A retiring partner or the legal representative of a deceased partner is entitled to the partner’s share of that goodwill. In the settlement entry, the outgoing partner’s capital account is credited because the firm recognises an amount payable to that partner or executor. The gaining partners’ capital or current accounts are debited because they receive the benefit of the outgoing partner’s share. A customer, bank manager, or seller has no ownership claim merely because the settlement is made. Hence option A correctly identifies the account receiving the credit.

A retiring partner is entitled to a share of the firm’s total goodwill according to the old profit-sharing ratio. Therefore, the old profit-sharing ratio is essential for calculating the goodwill adjustment. The employees’ age, the colour of the passbook and the size of the shop board have no role in this calculation. Exam tip: the retiring partner’s goodwill share is generally calculated as total goodwill × the partner’s old share.

Use the information provided and the specified valuation method—such as the average-profit or super-profit method—to calculate goodwill before making the goodwill adjustment. If the necessary data are not provided, its value cannot simply be assumed.

Total goodwill borne by B and C is ₹30,000 in the ratio \(4:1\), so total parts \(=4+1=5\). C’s share \(=\frac{1}{5}\times ₹30,000=₹6,000\). Therefore, ₹6,000 should be debited to C’s account.

The partnership deed is the agreement that records the partners’ mutually accepted rights, duties, and procedures. Therefore, when it clearly specifies how goodwill is to be valued or settled on retirement, death, or another reconstitution, that contractual method should be followed first. The partners should not ignore the deed or replace its rule with an automatic equal division. Nor does the deed necessarily require immediate cash payment; settlement may be made through capital accounts, current accounts, or a partner’s loan account, depending on the stated arrangement. Subject to applicable law and the facts of the question, the deed governs the accounting treatment. Thus option A is correct.

Goodwill is an asset of the firm. When a partner retires, the continuing partners retain the benefit of the retiring partner’s share in that goodwill. They compensate the retiring partner for that share, usually in the gaining ratio.

Direct answer: Each old partner is debited ₹6,000, so option A is correct, assuming there are three equal old partners. An existing goodwill balance is written off among the old partners in their old profit-sharing ratio. Since the question refers to A, B and C in the retirement context and says they are equal, each partner has an equal fraction, namely 1/3. Thus the amount for each is ₹18,000 ÷ 3 = ₹6,000. Option A is correct because three equal debits total ₹18,000. Option B, ₹9,000, would apply to only two equal partners, not three. Option C, ₹18,000, charges the entire balance to one partner and ignores the old ratio. Option D, ₹3,000, would not remove the whole balance when three partners are involved. In the journal entry, the partners' capital accounts are debited and the goodwill account is credited. Memory cue: write off old goodwill in the old ratio.

The correct answer is A: gain. A partner's change in share is found by comparing the new share with the old share. If A's new share is greater than the old share, A receives an additional portion of future profits. That additional portion is called A's gain, and it is used in calculating the gaining ratio during reconstitution. Option A is correct because new share minus old share is positive. Option B, sacrifice, is the opposite: it occurs when the new share is smaller than the old share and the partner gives up part of the former entitlement. Option C, loss, is not the standard name for this change in partnership share; the partner has gained an entitlement, even though actual profit or loss later depends on business results. Option D, loan, is unrelated: a loan is borrowed money and is not a change in profit-sharing proportion. Memory cue: new share greater than old share means gain; new share smaller means sacrifice.

The retiring partner’s share of goodwill is calculated as total goodwill × the partner’s share = ₹50,000 × 1/10 = ₹5,000. Therefore, option A is correct. Exam tip: Apply the partner’s fraction directly to the total goodwill, not to any remaining amount.

A retiring partner must be compensated for their share of goodwill by the partners who gain that partner’s share of future profits. Thus, the gaining partners adjust their capital or current accounts in favour of the retiring partner in the gaining ratio. Option B is incorrect because the retiring partner’s account is generally credited for this compensation, not debited. Exam tip: remember that goodwill compensation is borne by the gaining partners in the gaining ratio.

The retiring partner is entitled to compensation for their share of the firm’s goodwill. The continuing partners who gain a larger share generally bear this adjustment in their gaining ratio.

No cash payment is necessary when the amount is settled by adjusting the partners’ capital accounts. The accounts record the amount due to the retiring partner and the corresponding adjustment for the continuing partners.

The retiring partner’s share is ₹84,000 × 1/7 = ₹12,000. Therefore, the goodwill compensation due is ₹12,000.

The retiring partner will not share future profits so he is compensated through goodwill. In exams remember goodwill as compensation for future profit share.

The continuing partners get the benefit of goodwill so they compensate the retiring partner. In exams focus on gaining partners.