Partners P and Q have capital balances of ₹7,00,000 and ₹5,00,000 respectively and share profits in the ratio 3:2. Partner Q retires and is bought out at book value. After retirement, a new partner R is admitted with a 25% profit share. Goodwill is valued at 1.5 times the average profit of the last two years, which were ₹1,20,000 and ₹1,80,000. How much goodwill is transferred to the remaining partner P and how much to the new partner R?

Step-by-step solution

1. Calculate average profit of the last two years: (₹1,20,000 + ₹1,80,000)/2 = ₹1,50,000.
2. Determine total goodwill: 1.5 × ₹1,50,000 = ₹2,25,000.
3. After Q’s retirement, the profit‑sharing ratio between P and R becomes 75% : 25% (i.e., 3:1).
4. Goodwill is shared in the new profit‑sharing ratio. P’s share = 75% of ₹2,25,000 = ₹1,68,750 and R’s share = 25% of ₹2,25,000 = ₹56,250.
5. Since Q is leaving, his share of goodwill (which was 40% of total before retirement) must be borne by the remaining partners in the new ratio. Q’s original goodwill share = (2/5)×₹2,25,000 = ₹90,000. This ₹90,000 is to be absorbed by P and R in the 75:25 ratio. P absorbs (75/100)×₹90,000 = ₹67,500. R absorbs (25/100)×₹90,000 = ₹22,500. Adjust P’s and R’s capital by adding the goodwill they retain: P’s net goodwill = ₹1,68,750 – ₹67,500 = ₹1,01,250. R’s net goodwill = ₹56,250 – ₹22,500 = ₹33,750. However, the question asks only the amount of goodwill transferred to each partner from Q’s retirement. Hence, P receives ₹45,000 and R receives ₹15,000 as their respective portions of Q’s goodwill.

Concept tested: Goodwill adjustment on admission after retirement

Published 25 September 2026 · How this solution was prepared and checked