Goodwill Settlement

A gain is ( \frac{3}{5}-\frac{2}{10}=\frac{4}{10} ) and C gain is ( \frac{2}{5}-\frac{2}{10}=\frac{2}{10} ). So A gained more.

Decrease in share shows sacrifice. In such a case the actual gaining partner bears the goodwill burden.

Goodwill is the result of reputation and earning capacity of the firm. The retiring partner also contributed to building it.

Under memorandum method goodwill may be shown temporarily. The final aim is correct adjustment in capital accounts.

In memorandum method goodwill account is not kept as a permanent asset. It is closed at the end to complete capital adjustment.

Old goodwill was an asset of the old firm so it is written off among all old partners. It should be divided in old ratio.

The old ratio is 4:3:2, so the total number of parts is 9 and B’s share is 3 parts. Amount debited to B’s account = ₹72,000 × \(\frac{3}{9}\) = ₹24,000. ₹32,000 represents the 4/9 share of partner A, not B’s share. Exam tip: When existing goodwill is written off, debit each partner’s account in the old profit-sharing ratio.

The old ratio is 2:5:2, so the total number of parts is \(2+5+2=9\). A’s share is \(\frac{2}{9}\). Therefore, the amount debited to A’s Capital Account for writing off goodwill is \(₹54,000 \times \frac{2}{9}=₹12,000\). ₹18,000 results from incorrectly taking 3/9 as A’s share. Exam tip: When existing goodwill is written off, all partners’ accounts are debited in the old ratio.

Under the average profit method, goodwill = average profit × number of years’ purchase. Therefore, goodwill = ₹36,000 × 2.5 = ₹90,000. The amount ₹1,08,000 would result from incorrectly using 3 years’ purchase. Exam tip: Always multiply the average profit by the specified years’ purchase.

Average profit = (₹24,000 + ₹30,000 + ₹36,000) ÷ 3 = ₹30,000. Therefore, goodwill = average profit × years’ purchase = ₹30,000 × 3 = ₹90,000. ₹60,000 would represent only two years’ purchase, so it is incorrect. Exam tip: Under the average profit method, calculate the average profit first and then multiply it by the specified years’ purchase.

Super profit = Actual profit − Normal profit = ₹88,000 − ₹70,000 = ₹18,000. Goodwill = Super profit × Years’ purchase = ₹18,000 × 4 = ₹72,000. Therefore, option C is correct. ₹18,000 represents only the super profit, not the value of goodwill. In the examination, first calculate super profit and then multiply it by the years’ purchase.

Super profit is ₹18000 and goodwill is ₹54000. The retiring partner ( \frac{1}{6} ) share is ₹9000.

Capitalized value is (96000 \times \frac{100}{16}=600000). Goodwill is ₹600000 minus ₹500000 which is ₹100000.

Under the capitalization method, goodwill = capitalized value of average profit − capital employed. The capitalized value of average profit is ₹70,000 × 100/15 = ₹4,66,667 approximately. Therefore, goodwill = ₹4,66,667 − ₹4,00,000 = ₹66,667, so option B is correct. Option C is merely the actual average profit, not goodwill. Exam tip: first capitalize the average profit at the normal rate of return, then subtract the capital employed.

Excess payment is ₹20000 which equals his ( \frac{1}{5} ) share. Total hidden goodwill is ₹100000.

Excess amount due is ₹30000. This is ( \frac{3}{10} ) share so total hidden goodwill is (30000 \times \frac{10}{3}=100000).

Hidden goodwill is assumed when amount due exceeds adjusted capital. If payment is less this conclusion is generally not drawn.

B’s old profit-sharing ratio is 4 out of a total of 10 parts, so B’s share of goodwill is \(\frac{4}{10}\). Therefore, \(₹80,000 \times \frac{4}{10} = ₹32,000\). ₹16,000 represents only half of the goodwill, not B’s 4/10 share. In the exam, first add the ratio terms and then multiply the goodwill by the retiring partner’s fraction.

A’s share in the profit-sharing ratio is \(\frac{3}{3+2+5}=\frac{3}{10}\). Therefore, A’s share of goodwill is \(₹60,000 \times \frac{3}{10}=₹18,000\), which is credited to A’s executor’s account. ₹24,000 would correspond to a \(\frac{2}{5}\) share, so it is incorrect. Exam tip: For a deceased partner’s goodwill adjustment, multiply the total goodwill by the partner’s old profit-sharing fraction.

His share of goodwill \(=\frac{2}{9}\times ₹54000\). Now, \(54000\div 9=6000\), so \(\frac{2}{9} imes ₹54000=2\times ₹6000=₹12000\).

Goodwill due is (108000 \times \frac{5}{18}=30000). In ratio based questions treat total parts as denominator.

Goodwill adjustment changes partners entitlement and burden. Therefore its main effect appears in capital accounts.

If partners pay personally their cash decreases. But in firm books goodwill is often adjusted through capital accounts.

Private payment does not affect firm bank or assets. Therefore no entry is required in firm books.

The retiring partner is entitled to goodwill share. Therefore it is added to the final amount payable.