Partners P, Q and R have capital balances of ₹7,00,000, ₹5,00,000 and ₹4,00,000 respectively. Their profit‑sharing ratio is 4:3:2. The profits for the last two years were ₹1,00,000 and ₹1,20,000. Goodwill is valued at 2 times the average profit. Partner Q retires. He is bought out at book value plus a 15% premium on his share of goodwill. After retirement, a new partner S is admitted such that the profit‑sharing ratios become P 55%, R 15% and S 30%. Goodwill is transferred to the remaining partners P and R in proportion to their new profit‑sharing ratios. Calculate (i) the amount payable to retiring partner Q, (ii) the goodwill transferred to P, and (iii) the goodwill transferred to R.
Answer
(i) ₹5,84,333 (ii) ₹1,21,000 (iii) ₹33,000
The correct answer is (i) ₹5,84,333 (ii) ₹1,21,000 (iii) ₹33,000 — R’s goodwill = 15% of ₹2,20,000 = ₹33,000.
Step-by-step solution
- Average profit = (₹1,00,000 + ₹1,20,000) / 2 = ₹1,10,000.
- Goodwill = 2 × average profit = 2 × ₹1,10,000 = ₹2,20,000.
- Q’s profit‑sharing fraction = 3/(4+3+2) = 3/9 = 1/3.
- Q’s share of goodwill = ₹2,20,000 × 1/3 = ₹73,333.33.
- Premium on Q’s goodwill share = 15% of ₹73,333.33 = ₹11,000 (rounded to nearest rupee).
- Book value of Q = his capital balance = ₹5,00,000.
- Amount payable to Q = book value + goodwill share + premium = ₹5,00,000 + ₹73,333.33 + ₹11,000 = ₹5,84,333.33 ≈ ₹5,84,333.
- After retirement, goodwill is transferred only to the remaining partners P and R in proportion to their new profit‑sharing ratios (55% and 15%).
- P’s goodwill = 55% of ₹2,20,000 = ₹1,21,000.
- R’s goodwill = 15% of ₹2,20,000 = ₹33,000.
Common mistake: Applying the old profit‑sharing ratio for goodwill transfer instead of the new ratios
Concept tested: Retirement with goodwill premium and reallocation after admission
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