Goodwill Settlement

Capitalized value is (250000 \times \frac{100}{10}=2500000). Goodwill is ₹2500000 minus ₹1800000 which is ₹700000.

Goodwill is (45000 \times 3.16986=142643.7) which is approximately ₹142644. Use the annuity factor in this method.

The excess ₹84000 is his ( \frac{7}{20} ) goodwill share. Total hidden goodwill is (84000 \times \frac{20}{7}=240000).

Goodwill is the deceased partner entitlement. Therefore executor account is credited to increase the amount payable.

A negative value means his new share is less than old share. It should be read as sacrifice and not as gain.

New ratio and gaining ratio may differ. Always compute actual gain by new share minus old share.

Goodwill is the value of reputation and ability to earn more than normal profit. Therefore earning basis is important.

In average profit method average profit is multiplied by years purchase. In super profit method normal profit is deducted first.

Normal profit is based on capital and normal rate of return. It is needed before calculating super profit.

Old goodwill relates to old partners. New goodwill is considered separately for retirement settlement.

Old goodwill is written off in old ratio. New goodwill entitlement and burden are adjusted by a different rule.

In memorandum method goodwill is first raised for the old firm. Therefore old partners are credited in old ratio.

If goodwill is not to be kept in the new firm it is written off among continuing partners in new ratio. This closes goodwill account.

In direct method goodwill account is not opened. Therefore new goodwill does not become an asset in the balance sheet.

General reserve is accumulated earning of old partners. It is adjusted separately from goodwill in old ratio.

Goodwill share is credited to the retiring partner account. Therefore it can reduce or reverse a debit balance.

If cash is not paid the amount due may be kept in the retiring partner loan account. This separates settlement from payment timing.

Private payment is made from partners personal funds. Firm books record only firm transactions.

The governing concept is that goodwill adjustments at reconstitution must reflect both the previous entitlement and the revised entitlement. First identify whether existing goodwill is to be written off or adjusted. Next calculate the required goodwill amount under the stated method. Finally, charge or distribute that amount to the partners who gain from the change, using their gaining ratio, unless the question expressly specifies another basis. This prevents double counting and preserves the correct compensation for sacrificing or gaining partners. Option A is correct. Option B ignores essential old-ratio information, option C concerns an unrelated bank procedure, and option D substitutes capital ratio for the profit-sharing basis without authority.

The retiring partner goodwill entitlement is based on his old profit share. Then the burden is divided in gaining ratio.

Gaining ratio = New Profit-Sharing Ratio − Old Profit-Sharing Ratio. A positive difference means that the partner has acquired an additional share from the retiring partner and is therefore a gaining partner who compensates for goodwill. A negative difference represents sacrifice, not gain. Exam tip: Positive difference means gain; negative difference means sacrifice.

Goodwill burden falls on the partner whose future profit share increases. The sacrificing continuing partner may also be compensated.

A share rises from ( \frac{8}{12} ) to ( \frac{5}{6} ) while B share falls. Therefore only A actually gains.

Under the old ratio, A’s share was 4/9, whereas under the new ratio it is 3/7. With a common denominator, A’s share falls from 28/63 to 27/63, so A sacrifices 1/63. C’s share rises from 3/9, or 21/63, to 4/7, or 36/63; therefore, C gains. Hence, only C actually gains from B’s retirement. Exam tip: Compare each continuing partner’s old and new shares; an increase indicates a gaining partner.

Under the old ratio, A’s share was \(\frac{1}{10}\) and B’s share was \(\frac{4}{10}\). Under the new ratio of 2:3, A’s share becomes \(\frac{4}{10}\) and B’s share becomes \(\frac{6}{10}\). Thus, A’s gain is \(\frac{4}{10}-\frac{1}{10}=\frac{3}{10}\), while B’s gain is \(\frac{6}{10}-\frac{4}{10}=\frac{2}{10}\). Therefore, the gaining ratio is 3:2. Exam tip: Calculate gaining ratio by subtracting each partner’s old share from the new share; do not use the new ratio directly.