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K, N and P are partners sharing profits and losses in the ratio of 4 : 3 : 2. N retires and the goodwill is valued at Rs. 72,000. K and P decided to share future profits and losses in the ratio of 5 : 3. Identify the correct journal entry in this scenario.

Solution

✅ Correct Option: 1

Calculation of N's share in goodwill:

Total Goodwill = Rs. 72,000

N's share = 39\frac{3}{9} × 72,000 = Rs. 24,000

This amount needs to be compensated to N by the continuing partners K and P.


Calculation of Gaining Ratio:

The gaining ratio determines how much each continuing partner benefits from the retiring partner's share.

Old ratio: K : N : P = 4 : 3 : 2

After N's retirement, new ratio: K : P = 5 : 3

Gain for K = New share - Old share = 58−49=45−3272=1372\frac{5}{8} - \frac{4}{9} = \frac{45-32}{72} = \frac{13}{72}

Gain for P = New share - Old share = 38−29=27−1672=1172\frac{3}{8} - \frac{2}{9} = \frac{27-16}{72} = \frac{11}{72}

Gaining Ratio = 13 : 11


Distribution of N's goodwill share:

K and P will compensate N in their gaining ratio of 13 : 11

K's contribution = 1324\frac{13}{24} × 24,000 = Rs. 13,000

P's contribution = 1124\frac{11}{24} × 24,000 = Rs. 11,000

Journal Entry:

Account TitlesDebit (Rs.)Credit (Rs.)
K's Capital A/c Dr.13,000
P's Capital A/c Dr.11,000
To N's Capital A/c24,000
(Being N's share of goodwill adjusted through gaining partners)

The correct answer is Option 1.

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