Question

Balances of A, B & C sharing profits & losses in proportionate to their capitals, stood as:
A = $Rs.2,00,000$
B = $Rs.3,00,000$
C = $Rs.2,00,000$
A desired to retire from the firm, B and C share the future profits equally, Goodwill of the entire firm be valued at $Rs.1,40,000$ and no Goodwill account being raised. What entry will be passed for payment of Goodwill?

• A. Credit Partner's Capital A/c with old profit sharing ratio for $Rs.1,40,000$.
• B. Credit Partner's Capital A/c with new profit sharing ratio for $Rs.1,40,000$.
• C. Credit A's Capital A/c with $Rs.40,000$ and debit B's Capital A/c with $Rs.10,000$ & C's Capital A/c with $Rs.30,000$.
• D. Credit Partner's Capital A/c with gaining ratio for $Rs.1,40,000$.

Answer 1

Answer: (C)

Credit A's Capital A/c with $Rs.40,000$ and debit B's Capital A/c with $Rs.10,000$ & C's Capital A/c with $Rs.30,000$.

Old ratio (A, B and C) = 2 : 3 : 2

New ratio (B and C) = 1 : 1

Gaining ratio = New ratio - Old ratio

B's gain = (1/2) - (3/7) = 1/14

C's gain = (1/2) - (2/7) =3/14

A's share of goodwill = Total goodwill * A's share

= 140000 * (2/7)

= 40000

In case if no goodwill account is raised adjustment for payment of goodwill to retiring partner will be as follows:

B's capital A/c Dr. 10000

C's capital A/c Dr. 30000

To A's capital A/c 40000