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In a partnership, when a retiring partner's share is bought out at book value, which of the following statements is correct?

easy MCQ 1 mark Class 12 · Accountancy · Retirement or Death of a Partner
  1. The retiring partner receives his capital account balance plus his share of goodwill.
  2. The retiring partner receives the amount equal to his capital account balance after adding his share of current year profit and after adjusting for any interest on capital, but no goodwill is considered.
  3. The retiring partner receives the market value of his share multiplied by a premium of 10%.
  4. The retiring partner receives only the original capital contributed, ignoring profit and interest.
Answer
The retiring partner receives the amount equal to his capital account balance after adding his share of current year profit and after adjusting for any interest on capital, but no goodwill is considered.

Step-by-step solution

  1. Identify the meaning of "book value" – it is the balance in the retiring partner's capital account.
  2. Book value includes the original capital contributed plus the share of profit for the current year.
  3. Interest on capital, if any, is also added to the capital account before buy‑out.
  4. Goodwill is not taken into account when the buy‑out is at book value.
  5. Hence the retiring partner gets the balance of his capital account after these adjustments.
Common mistake: Adding goodwill to the buy‑out amount even though it is a book‑value purchase.

Concept tested: Buy‑out at book value

Published · How this solution was prepared and checked

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