Goodwill Settlement

The retiring partner goodwill share is ₹40000. In 5:3 the first partner burden is (40000 \times \frac{5}{8}=25000).

Goodwill burden falls only on the gaining partner. A partner with zero gain does not bear the burden.

Reduction in share shows sacrifice. In such a situation the actual gaining partner may bear the goodwill burden.

The total of the old ratio is 3+2+2=7. A’s share is \(\frac{3}{7}\), so the amount debited to A’s account is \(₹84,000 \times \frac{3}{7}=₹36,000\). ₹24,000 represents a two-part share, not A’s three-part share. Exam tip: When existing goodwill is written off, partners’ accounts are debited in the old profit-sharing ratio.

Partner C’s share in the old ratio is 3/9. Therefore, the amount debited to C’s account is ₹99,000 × 3/9 = ₹33,000. When existing goodwill is written off, the partners’ capital or current accounts are debited in the old profit-sharing ratio. ₹44,000 is a common distractor because it represents a 4/9 share. Exam tip: Use the old ratio whenever goodwill already appearing in the books is written off.

When old goodwill is removed partners capital accounts are debited and goodwill account is credited. This closes the goodwill account.

Under the average profit method, goodwill = average profit × years’ purchase. Therefore, ₹42,000 × 3.5 = ₹1,47,000. Option B would represent only three years’ purchase, not the given 3.5 years. Exam tip: always multiply the average profit by the stated number of years’ purchase.

Average profit = (₹25,000 + ₹35,000 + ₹45,000 + ₹55,000) ÷ 4 = ₹40,000. Goodwill at 2 years’ purchase = Average Profit × Number of Years’ Purchase = ₹40,000 × 2 = ₹80,000. ₹40,000 is only the average profit, not the value of goodwill. In the examination, calculate the average profit first and then multiply it by the years’ purchase.

Average profit = (₹48,000 + ₹54,000 + ₹60,000) ÷ 3 = ₹54,000. Under the average-profit method, goodwill = average profit × years’ purchase = ₹54,000 × 2.5 = ₹1,35,000. Therefore, option C is correct. Option B does not result from applying the stated 2.5 years’ purchase. Exam tip: calculate the average profit first, then multiply it by the specified years’ purchase.

Super profit = Actual profit − Normal profit = ₹92,000 − ₹74,000 = ₹18,000. Goodwill = Super profit × Years’ purchase = ₹18,000 × 5 = ₹90,000. Therefore, option C is correct. In the examination, calculate super profit first and then multiply it by the years’ purchase.

Super profit is ₹20000 and total goodwill is ₹60000. The retiring partner ( \frac{1}{4} ) share is ₹15000.

Capitalized value is (125000 \times \frac{100}{20}=625000). Goodwill is ₹625000 minus ₹500000 which is ₹125000.

Capitalized value is (78000 \times \frac{100}{10}=780000). Goodwill is ₹780000 minus ₹600000 which is ₹180000.

Hidden goodwill is inferred when the amount payable to a retiring partner exceeds the partner’s adjusted capital. First find the excess representing that partner’s share of goodwill: ₹1,90,000−₹1,60,000=₹30,000. This ₹30,000 is 1/6 of the firm’s total goodwill. Therefore, total hidden goodwill = ₹30,000 ÷ 1/6 = ₹30,000 × 6 = ₹1,80,000. Hence option D is correct. Option A is only the retiring partner’s individual share of goodwill, not the firm’s total hidden goodwill. Options B and C do not result from multiplying the excess by the reciprocal of the partner’s fraction, so they are not supported by the data.

Excess payment is ₹24000. This is ( \frac{3}{8} ) share so total hidden goodwill is (24000 \times \frac{8}{3}=64000).

Payment above adjusted capital often indicates hidden goodwill. Read the excess amount as his goodwill share.

The retiring partner does not bear the burden but receives his share. The burden generally falls on gaining partners.

Goodwill share is a right of the retiring partner. Therefore it is added to the final amount payable.

If gaining ratio is given there is no need for separate calculation. Divide the burden among continuing partners in that ratio.

Calculate the gain of each continuing partner separately. Directly using new ratio is not always correct.

In normal retirement new ratio is not automatically gaining ratio. Gaining ratio is found by comparing old and new shares.

When old goodwill is removed capital accounts are debited in old ratio. This eliminates the existing goodwill from books.

Goodwill adjustment divides entitlement and burden among partners. It is not a purchase or sale of goods.

Goodwill is linked with reputation and ability to earn higher profits. Its value is calculated on that basis.

Goodwill may be valued by different methods, such as the average profit, super profit, or capitalization method. Therefore, the method explicitly specified in the question must be followed, along with its appropriate formula and steps. Always using the average profit or capitalization method is incorrect because it may contradict the question’s instructions. Exam tip: Before calculating, identify and underline the specified valuation method and recall its formula.