Question

M, N and O are partners in a firm sharing profits in the ratio of 3 : 2 : 1. Goodwill has been valued at ₹ 60,000. On N's retirement, M and O agree to share profits equally. Pass the necessary Journal entry for treatment of N's share of goodwill.

Answer 1

Journal

Date	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
	O’s Capital A/c	Dr.		20,000
	To N’s Capital A/c				20,000
	(Adjustment of N’s share of goodwill)

Working Notes:

WN1:Calculation of Gaining Ratio

`"M : N : O" = 3 : 2 : 1` ( Old ratio) 

`"M : O" = 1 : 1` (New share)

`"Gaining ratio = New ratio - Old ratio"`

M's Gain =`1/2 - 3/6 = (3-3)/6 = 0`

O's Gain = `1/2 - 1/6 = (3-1)/6 = 2/6`

WN2: Calculation of Retiring Partner’s Share of Goodwill

N's share of goodwil = `60,000 xx 2/6 = "Rs" 20,000`

N's share of goodwill will be brought by O only.

Therefore, O's Capital A/c will be debited with Rs 20,000