Question

When the goodwill is raised at its full value and written off at retirement of a partner, the remaining partners share goodwill in _________.

• A. old profit sharing ratio
• B. new profit sharing ratio
• C. gaining ratio
• D. sacrificing ratio

Answer 1

The correct option is C gaining ratio

The retiring partner is entitled to his/her share of goodwill at the time of retirement because the goodwill is the result of the efforts of all the partners

including the retiring one in the past. When a partner retires from the firm, the continuing partner will gain in future profits. The retiring partner is compensated for his/her share of goodwill by the continuing partners who gains in their gaining ratio.

Journal entry when goodwill adjustment entry need to be made through partner's capital accounts without raising goodwill in the book:

Continuing partner's capital A/c Dr. (in gaining ratio)

To Retiring partner's capital A/c (with his share of goodwill)