On retirement / death of a partner, the remaining partners who have gained due to the change in profit sharing ratio should compensate the:
On retirement / death of a partner, the remaining partners who have gained due to the change in profit sharing ratio should compensate the:
Solution
Compensation on Retirement/Death of a Partner
When a partner retires or dies, there is a redistribution of profit-sharing ratio among the remaining partners. This creates two categories among the continuing partners:
Gaining Partners: Those who acquire a larger share than what they sacrifice
Sacrificing Partners: Those who sacrifice more than what they gain
Who Should the Gaining Partners Compensate?
The gaining partners must compensate both:
1. The Retiring/Deceased Partner
The gaining partners acquire a portion of the outgoing partner's profit share. Since this includes the outgoing partner's share in goodwill of the firm, the gaining partners must compensate them in the gaining ratio for the goodwill they are taking over.
2. The Remaining Partners (who have sacrificed)
Among the continuing partners, if some partners are sacrificing their share in favor of others, the gaining partners must compensate these sacrificing partners as well. This is because the sacrificing partners are giving up their share of future profits.
Calculation
Gaining Ratio = New Ratio - Old Ratio (when positive)
Sacrificing Ratio = Old Ratio - New Ratio (when positive)
Gaining partners pay compensation based on their gaining ratio to both the retiring partner and the sacrificing continuing partners.
Correct Answer: Option 2 - Remaining Partners (who have sacrificed) as well as retiring partners
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