Partners K and L have capital balances of ₹9,00,000 and ₹6,00,000 respectively and share profits in the ratio 3:2. The profits for the last two years were ₹1,20,000 and ₹1,50,000. Goodwill is valued at one times the average profit of these two years. Partner L retires and is bought out at book value. After retirement, a new partner M is admitted with a 25% profit share, leaving K with 75% share. Goodwill is transferred to K and M in proportion to their new profit‑sharing ratios. Determine (i) the amount payable to retiring partner L, (ii) the goodwill transferred to K, and (iii) the goodwill transferred to M.
Answer
(i) ₹6,00,000 (ii) ₹1,01,250 (iii) ₹33,750
The correct answer is (i) ₹6,00,000 (ii) ₹1,01,250 (iii) ₹33,750 — Since L is bought out at book value, amount payable to L = ₹6,00,000.
Step-by-step solution
- Calculate average profit: (₹1,20,000 + ₹1,50,000) / 2 = ₹1,35,000.
- Goodwill = 1 × average profit = ₹1,35,000.
- Determine new profit‑sharing ratios: K = 75%, M = 25%.
- Allocate goodwill: K's share = 75% of ₹1,35,000 = ₹1,01,250; M's share = 25% of ₹1,35,000 = ₹33,750.
- Book value of retiring partner L = his capital balance = ₹6,00,000.
- Since L is bought out at book value, amount payable to L = ₹6,00,000.
Common mistake: Using the old profit‑sharing ratio instead of the new ratio for goodwill distribution
Concept tested: Goodwill allocation on retirement and admission
Published · How this solution was prepared and checked
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