Multiple choice

Balances of A, B & C sharing profits & losses in proportionate to their capitals, stood as: A = $Rs.2,00,000$ B = $Rs.3,00,000$ C = $Rs.2,00,000$ A desired to retire from the firm, B and C share the future profits equally, Goodwill of the entire firm be valued at $Rs.1,40,000$ and no Goodwill account being raised. What entry will be passed for payment of Goodwill?

  1. Credit Partner's Capital A/c with old profit sharing ratio for $Rs.1,40,000$.
  2. Credit Partner's Capital A/c with new profit sharing ratio for $Rs.1,40,000$.
  3. Credit A's Capital A/c with $Rs.40,000$ and debit B's Capital A/c with $Rs.10,000$ & C's Capital A/c with $Rs.30,000$.
  4. Credit Partner's Capital A/c with gaining ratio for $Rs.1,40,000$.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A retires. Capitals are 2:3:2. A's share is 2/7. Goodwill is 1,400,000. A's share of goodwill is (2/7) * 140,000 = 40,000. B and C share future profits equally (1:1). Their old ratio was 3:2. B's gain = 1/2 - 3/7 = 1/14. C's gain = 1/2 - 2/7 = 3/14. Gaining ratio is 1:3. B and C must compensate A in this ratio. B pays (1/4) * 40,000 = 10,000. C pays (3/4) * 40,000 = 30,000.

AI explanation

A's capital share is 2/7 of the total capital of Rs. 7,00,000, so A's share of the Rs. 1,40,000 goodwill is Rs. 40,000. B and C share future profits equally, meaning their gaining ratio is 1:1 for the 2/7 share relinquished by A. To record the payment without raising a goodwill account, A's capital account is credited with Rs. 40,000, while B's capital account is debited by Rs. 10,000 and C's by Rs. 30,000, matching their specific gains calculated from their new profit shares.

Keep practicing — related questions