Treatment of Goodwill on Retirement of Partner
The retiring partner must be compensated by the remaining partners by the amount of his share of goodwill by passing the following journal entry:
Remaining Partner's Capital A/c (In gaining ratio) Dr.
To Retiring Partner's Capital A/c
Existing goodwill, however, must be written off to all the partners’ capital accounts (including retiring partner) in the old profit-sharing ratio.
All partners’ capital (including retiring partner) A/c (in old ratio) Dr.
To Goodwill A/c
Treatment of Goodwill on Retirement
Hidden Goodwill on Retirement:
There can be case of hidden goodwill in case of retirement also.
If the payment agreed to be made to the retiring partner is in excess of the claim calculated due to him after all the adjustments relating to Reserves, Revaluation etc., that excess is his share of Hidden Goodwill.
Retiring Partner's Share of Hidden Goodwill = Payment Agreed for Retiring Partner - Claim after all the adjustments
This Share of Retiring Partner in Hidden Goodwill should be adjusted through Capital/Current Accounts of the Gaining Partners in Gaining Ratio, by passing the following Journal Entry:
Gaining Partners' Capital/Current A/cs Dr. (Shared in Gaining Ratio)
To Retiring Partner's Capital A/c (Retiring Partner's Share of Hidden Goodwill)
Practice Questions for
Hidden Goodwill in case of Retirement of Partner:
Question 1:
A, B and C are partners sharing profits in 3:2:1. B retires and his capital account after making adjustments for reserves and profit on revaluation exists at ₹70,000. A and C have agreed to pay him ₹1,00,000 in full settlement of his claim. Pass journal entry for treatment of goodwill.
Answer with hints:
(a) B’s share of Hidden Goodwill: ₹30,000
(b) Gaining Ratio: 3:1
(c) A’s Capital A/c Dr. ₹22,500
C’s Capital A/c Dr. ₹7,500
To B’s Capital A/c ₹30,000
Question 2:
X, Y and Z are partners sharing profits in the ratio of 3:1:2. Z retires and his capital, after making adjustments for reserves and gain (profit) on revaluation is ₹2,80,000. X and Y agreed to pay him ₹3,50,000 in full settlement of his claim. Pass necessary Journal entry for the treatment of goodwill if new profit-sharing ratio is decided at 1:1.
Answer with hints:
(a) Z’s share of Hidden Goodwill: ₹70,000
(b) Gaining Ratio: Only Y gains 1/3 share.
(c) Y’s Capital A/c Dr. ₹70,000
To Z’s Capital A/c ₹70,000
Question 3:
A, B and C were partners sharing profits and losses equally. On 1st April, 2024, A retired and amount due to him on account of share of reserves and revaluation profit was 11,00,000. B and C agreed to pay him ₹12,50,000 on retirement. B and C decide to share future profits and losses in the ratio of 3:2. Pass the necessary Journal entries on A's retirement.
Answer with hints:
(a) A’s share of Hidden Goodwill: ₹1,50,000
(b) Gaining Ratio: 4:1
(c) B’s Capital A/c Dr. ₹1,20,000
C’s Capital A/c Dr. ₹30,000
To A’s Capital A/c ₹1,50,000
Question 4:
P, Q and R, are partners sharing profits in the ratio of 4:3:2. Q retires and his capital after making adjustments for reserves and gain (profit) on revaluation stands at ₹89,200. P and R agreed to pay him ₹1,00,000 in full settlement of his claim. Record necessary Journal entry for adjustment of goodwill the new profit-sharing ratio is decided at 5:3.
Answer with hints:
(a) Q’s share of Hidden Goodwill: ₹10,800
(b) Gaining Ratio: 13:11
(c) P’s Capital A/c Dr. ₹5,850
R’s Capital A/c Dr. ₹4,950
To Q’s Capital A/c ₹10,800