Goodwill Settlement

Gaining partners receive the benefit of goodwill so their capital accounts are debited. In exams link the debit side with those who gain.

The retiring partner is entitled to his share of goodwill. In exams connect the receiver with credit.

Under the modern method adjustment is made without opening a goodwill account. In exams identify hidden goodwill through capital adjustment.

On retirement the burden of goodwill is borne by gaining partners in gaining ratio. In exams always calculate the gaining ratio.

After C retires A and B will earn future profits so they bear the burden. In exams look at the continuing partners.

A share is (3/5) so (3/5) of ₹50000 is ₹30000. In exams calculate retiring share from the old ratio.

The deceased partner entitlement is added to his capital account. In exams apply the retirement rule in death cases too.

Goodwill is a right so it is valued and adjusted properly. In exams check goodwill settlement even if the deed is silent.

(1/3) of ₹90000 is ₹30000. In exams calculate goodwill claim as total goodwill multiplied by old share.

Goodwill value is based on profit earning capacity. In exams connect valuation methods with profits.

The governing concept is the average profit method of goodwill valuation. Under this method, goodwill is found by multiplying the average maintainable profit by the number of years’ purchase agreed by the partners. The formula is: Goodwill = Average Profit × Years’ Purchase. Substituting the figures given, Goodwill = ₹20,000 × 3 = ₹60,000. Option B simply repeats the average profit and ignores the three-year multiplier. Option C would require a different profit or period, while option D would correspond to four years at the same average profit. Since the question explicitly states three years’ purchase, the calculated value is ₹60,000, so option A is unambiguously correct.

The correct answer is A: ₹20,000. First add the ratio parts: 5 + 3 + 2 = 10. C's old profit-sharing fraction is therefore 2/10, or 1/5. Goodwill of the whole firm is ₹100,000, so C's share is ₹100,000 × 2/10 = ₹20,000. This is the amount considered for the retiring partner's goodwill claim, subject to the partnership agreement and the stated accounting treatment. Option A is correct because C's ratio part is 2. Option B, ₹30,000, uses B's ratio part 3. Option C, ₹50,000, uses A's ratio part 5. Option D, ₹10,000, would represent only 1/10 and does not match C's stated share. The ratio must be used as a fraction of the total, not as a percentage of the wrong base. Exam cue: retiring partner's goodwill share equals total goodwill multiplied by that partner's old fraction.

The retiring partner’s goodwill share of ₹12,000 is borne by the gaining partners, A and B, in their gaining ratio of 1:1. Thus, each partner’s debit is ₹12,000 × 1/(1+1) = ₹6,000. Debiting ₹12,000 from each partner would charge the total amount twice. Exam tip: Divide the goodwill amount by the sum of the gaining-ratio parts to find each partner’s share.

Gaining partners are debited and the retiring partner is credited. In exams note the direction of the entry.

Not opening goodwill account avoids creating an artificial asset in the balance sheet. In exams treat it as capital adjustment method.

Existing goodwill belongs to all old partners so it is written off in old ratio. In exams first write off existing goodwill.

Old goodwill relates to all old partners so old ratio applies. In exams remember old goodwill with old ratio.

The retiring partner entitlement is based on his old profit share. In exams use old ratio for retiring share.

Goodwill claim is added to the deceased partner capital. In exams add goodwill claim to the payable amount.

Partners who gain bear the goodwill burden in that ratio. In exams use gaining ratio for burden sharing.

Gain is calculated as the new profit-sharing share minus the old share. Thus, A’s gain = \(\frac{1}{2}-\frac{2}{5}=\frac{5-4}{10}=\frac{1}{10}\). Choosing \(\frac{1}{5}\) results from subtracting the fractions without using a common denominator. Exam tip: convert fractions to a common denominator before subtracting.

Gaining share = new share − old share. Therefore, B’s gaining share is \(\frac{3}{8}-\frac{1}{4}=\frac{3}{8}-\frac{2}{8}=\frac{1}{8}\). Option C is only the old share, not the gain. In an exam, use the formula new share − old share to calculate a partner’s gaining share.

The correct answer is A: ₹20,000. The deceased partner's goodwill entitlement is calculated from the firm's total goodwill in proportion to that partner's old share. Here the total goodwill is ₹120,000 and the share is 1/6. Calculate ₹120,000 ÷ 6 = ₹20,000, or equivalently ₹120,000 × 1/6 = ₹20,000. This amount is credited or allowed to the deceased partner's capital or current account and ultimately goes to the legal heirs according to the settlement. Option A is correct. Option B, ₹60,000, is one-half of the goodwill, not one-sixth. Option C, ₹120,000, is the entire firm's goodwill, not the partner's fraction. Option D, ₹10,000, is too small and would correspond to 1/12 of ₹120,000. The calculation assumes the question asks for the partner's share of goodwill and gives no separate agreement changing the treatment. Memory cue: total goodwill divided by the denominator gives the 1/6 share.

A retiring partner’s goodwill share is calculated using that partner’s fraction in the old profit-sharing ratio. The old ratio is 3:3:2, so the total number of parts is 3 + 3 + 2 = 8. A has three of these eight parts; therefore A’s goodwill fraction is 3/8. The denominator must include all partners, including C, so 3/6 is incorrect because it omits C’s two parts. The fraction 2/8 is C’s old share, not A’s, and 1/8 does not represent any partner’s share in the stated ratio. Thus option A is the only fraction that correctly reflects A’s old entitlement and is the correct answer.

Goodwill affects partners capital balances. In exams connect goodwill adjustment with partners capital accounts.