Retirement or Death of a Partner

Correct answer: A. Gaining partners compensate the sacrificing or outgoing partner

The governing principle is that goodwill represents the value of the firm’s reputation and expected future benefits. When one partner retires, the continuing partners who obtain an increased share of future profits are the gaining partners. They compensate the outgoing partner for the share of goodwill that belongs to him, generally in the gaining ratio. Therefore option A expresses the correct principle. Equal sharing is not compulsory, cash payment is not the only possible method, and the old ratio may be needed to calculate the outgoing partner’s original entitlement. Hence the other statements are absolute or incorrect.

Correct answer: A. Both may be credited separately

Goodwill and profit earned up to the date of death are separate financial entitlements of the deceased partner. Goodwill compensates the partner’s estate for the value of his interest in the firm’s reputation and future earning capacity, while profit up to death represents his share of profit earned during the period he was a partner. Each amount should therefore be calculated on its own basis and credited separately to the deceased partner’s Capital Account or Executor’s Account. Option A is correct. They are not sales, receiving goodwill does not cancel profit entitlement, and goodwill is not automatically deducted from that profit.