G, H and P are partners. On retirement of G, the goodwill already appears in the Balance Sheet at Rs. 24,000. The goodwill will be written-off
G, H and P are partners. On retirement of G, 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 must be written off before making any other adjustments.
The existing goodwill of Rs. 24,000 represents an intangible asset that was recorded earlier when all the partners (G, H, and P) were actively part of the firm. Since this goodwill was accumulated during the period when all three partners were sharing profits and losses in their old ratio, it belongs to all of them in that same ratio.
Journal Entry for writing off existing goodwill:
| Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| G's Capital A/c | (share in old ratio) | |
| H's Capital A/c | (share in old ratio) | |
| P's Capital A/c | (share in old ratio) | |
| To Goodwill A/c | 24,000 |
The retiring partner G must also bear his share of the loss from writing off goodwill because he was a beneficiary when this goodwill was originally recorded in the books. The old ratio is used because that was the ratio in which all partners shared profits and losses before the retirement.
After writing off the existing goodwill, if the firm decides to raise new goodwill for G's retirement, that would be a separate adjustment where only the continuing partners (H and P) would compensate G in the gaining ratio.
Correct Option: 1 - By debiting all partners' capital accounts in their old profit sharing ratio
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2023: 20 June Shift 2