Rohan, Bharti and Leela are partners. On the retirement of Rohan, the goodwill already appears in the balance sheet at Rs. 24,000. The goodwill will be written-off:
Rohan, Bharti and Leela are partners. On the retirement of Rohan, the goodwill already appears in the balance sheet at Rs. 24,000. The goodwill will be written-off:
Solution
When goodwill already appears in the balance sheet at the time of a partner's retirement, it represents an intangible asset that was built up during the period when all partners were actively involved in the firm.
Since this existing goodwill of Rs. 24,000 was accumulated when all three partners (Rohan, Bharti and Leela) were sharing profits, it belongs to all of them in their old profit sharing ratio.
When such existing goodwill is written off, the loss must be borne by all partners including the retiring partner, in the same ratio in which they benefited from it originally.
Journal Entry for writing off goodwill:
| Account Titles | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| Rohan's Capital A/c | xxx | ||
| Bharti's Capital A/c | xxx | ||
| Leela's Capital A/c | xxx | ||
| To Goodwill A/c | 24,000 | ||
| (Being existing goodwill written off in old ratio) |
The amounts debited to each partner's capital account will be in proportion to their old profit sharing ratio.
Why old ratio? The goodwill was created during the tenure of all partners, so all partners must share the burden of writing it off in the same ratio they shared profits earlier.
Why not new ratio? The new ratio is only relevant for future profit-sharing between continuing partners after retirement, not for settling past accumulated balances.
Related questions:
2022: 30 Aug Shift 2