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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.

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Solution

Existing profit sharing ratio of

A,B and C = 6 : 5 : 4 or 615:515:415

New profit sharing ratio of A and B = 11 : 4 or 1115:415

Gaining ratio = New ratio - Old ratio

A's gain = 1115615=515 (Gain)

B's gain = 415515=115 (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 90,000×415=24,000 Rs

A to compensate B to the extent of the sacrifice made by B, i.e., Rs 90,000×115

JOURNAL

DateParticularsL.F.DebitCredit(Rs)(Rs)A's Capital A/c Dr.30,000 To B's Capital A/c6,000 To C's Capital A/c24,000(Being the compensation of A to C for his share of goodwill and to B for the sacrifice made by him on C'sretirement)


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