Test: Retirement And Death Of A Partner - 1 - Commerce MCQ

A partner can get retirement in the following ways:
(1) With the consent of all the partners
(2) Due to ill health
(3) Agreement/contract is over
(4) By giving notice

Outgoing partner cannot take complete goodwill of the firm. Outgoing partner is entitled for the followings:
(i) His capital account balance
(ii) His share of profit reserves & gains etc.
(iii) Revaluation profit or loss
(iv) His share of goodwill
Note: outgoing partner is entitled for his share of goodwill only and not the complete goodwill of the firm.

At the time of retirement of death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner.

Gaining ratio is calculated by deducting the old ratio from the new ratio. The following formula is used to calculate the gain ratio.
Gaining ratio = New ratio – old ratio

At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).

X, Y, and Z are partners sharing profits and losses in the ratio of 8:7:5. Z retires, and his share is taken equally by X and Y. Find the new profit-sharing ratio.

Solution:

1. The original profit-sharing ratio is:
   X : Y : Z = 8 : 7 : 5
2. Z's share is 5 parts out of the total 20 parts (8 + 7 + 5 = 20).
   Z's share = ⁵⁄₂₀
3. Z's share is distributed equally between X and Y. Hence, each of them gets half of Z's share:
   Share added to X = Share added to Y = ⁵⁄₂₀ ÷ 2 = ⁵⁄₄₀
4. New share of X:
   Original share of X + Added share = ⁸⁄₂₀ + ⁵⁄₄₀ = ¹⁶⁄₄₀ + ⁵⁄₄₀ = ²¹⁄₄₀
5. New share of Y:
   Original share of Y + Added share = ⁷⁄₂₀ + ⁵⁄₄₀ = ¹⁴⁄₄₀ + ⁵⁄₄₀ = ¹⁹⁄₄₀
6. Final new profit-sharing ratio of X and Y:
   X : Y = 21 : 19

Answer:

The new profit-sharing ratio is 21:19.

The main purpose of calculating gaining ratio at the time of retirement of a partner is to adjust his amount of goodwill. After calculating his share of goodwill, gainer partners will be debited and outgoing partner will be credited.

To calculate the new profit sharing ratio at the time of retirement, following formula should be used: New Share = Old Share + Acquired Share

Goodwill given in the old balance sheet will be written off by all the partners (including retiring partner) at the time of retirement of a partner. Goodwill will be written off in the old ratio of all the partners.

When a partner retires from the firm, his share will be acquired by the continuing partners. The ratio in which they acquire the share of retired partner, is known as gaining ratio.