Question

A, B and C were partners in a firm sharing profits in the ratio of 6 : 5 : 4. Their capitals were A : Rs 1,00,000, B : Rs 80,000 and C:Rs 60,000 respectively. On 1st April, 2009, C retired from the firm and the new profit sharing ratio between A and B was decided as 11 : 4. On C's retirement, the goodwill of the firm was valued at Rs 90,000. Showing your calculations clearly, pass necessary Journal Entry for the treatment of goodwill on C's retirement.

Answer 1

Existing profit sharing ratio of

A,B and C = 6 : 5 : 4 or $\frac{6}{15}:\frac{5}{15}:\frac{4}{15}$

New profit sharing ratio of A and B = 11 : 4 or $\frac{11}{15}:\frac{4}{15}$

Gaining ratio = New ratio - Old ratio

A's gain = $\frac{11}{15}-\frac{6}{15}=\frac{5}{15}$ (Gain)

B's gain = $\frac{4}{15}-\frac{5}{15}=\frac{1}{15}$ (Sacrifice)

Thus, A is the only gaining partner. He will compensate not only C but also, B, the sacrificing partner.

Goodwill of the firm = Rs 90,000.

C's Share of goodwill = Rs 90,000$\times \frac{4}{15}=24,000$ Rs

A to compensate B to the extent of the sacrifice made by B, i.e., Rs $90,000\times \frac{1}{15}$

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F.}& \text{Debit}& \text{Credit}\\ & & & \left(\text{Rs}\right)& \left(\text{Rs}\right)\\ & \text{A's Capital A/c}Dr.& 30,000& & \\ & \text{To B's Capital A/c}& & & 6,000\\ & \text{To C's Capital A/c}& & & 24,000\\ & (\text{Being the compensation of A to C for his share of}& & & \\ & \text{goodwill and to B for the sacrifice made by him on C's}& & & \\ & \text{retirement})& & & \end{array}$