Partners A and B have capital balances of ₹8,00,000 and ₹5,00,000 respectively. The partnership earned a profit of ₹1,80,000 for the year which is shared in the ratio 2:1. Partner B retires and his share is bought out at book value. What amount is payable to B?
Answer
₹5,60,000
The correct answer is ₹5,60,000 — Since the buy‑out is at book value, the amount payable equals the updated capital balance of B, i.e., ₹5,60,000.
Step-by-step solution
- Calculate B's share of profit: (1/3) of ₹1,80,000 = ₹60,000 because profit sharing ratio 2:1 gives B 1 part out of total 3 parts.
- Add B's share of profit to his existing capital: ₹5,00,000 + ₹60,000 = ₹5,60,000.
- Since the buy‑out is at book value, the amount payable equals the updated capital balance of B, i.e., ₹5,60,000.
Common mistake: Forgetting to add the retiring partner's share of profit to his capital before calculating the buy‑out amount.
Concept tested: Buy‑out at book value
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