Question

M, N and O are partners in a firm sharing profits in the ratio of 3 : 2 : 1. Goodwill has been valued at ₹ 60,000. On N's retirement, M and O agree to share profits equally. Pass the necessary Journal entry for treatment of N's share of goodwill.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
	O’s Capital A/c	Dr.		20,000
	To N’s Capital A/c				20,000
	(Adjustment of N’s share of goodwill)

Working Notes:

WN1:Calculation of Gaining Ratio

$\begin{array}{l}\text{M :N :O}=3\text{:2:1}\left(\text{Old ratio}\right)\\ \text{M :O =1:1(New ratio)}\\ \text{Gaining Ratio = New Ratio - Old Ratio}\\ \text{M's Gain =}\frac{1}{2}-\frac{3}{6}=\frac{3-3}{6}=0\\ \text{O's Gain=}\frac{1}{2}-\frac{1}{6}=\frac{3-1}{6}=\frac{2}{6}\end{array}$

WN2: Calculation of Retiring Partner’s Share of Goodwill

$\begin{array}{l}\text{N's share of goodwill=60,000}\times \frac{2}{6}=\text{Rs 20,000}\\ \text{N's share of goodwill will be brought by O only.}\\ \text{Therefore, O's Capital A/c will be debited with Rs 20,000}\end{array}$