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

Answer:

Profit sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

Answer 2

Working Notes:

WN1: Calculation of Gaining Ratio

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

M :O =1:1 (New ratio)

Gaining Ratio = New Ratio - Old Ratio

$\text { M's Gain }=\frac{1}{2}-\frac{3}{6}=\frac{3-3}{6}=0$

$\text { O's Gain }=\frac{1}{2}-\frac{1}{6}=\frac{3-1}{6}=\frac{2}{6}$

WN2: Calculation of Retiring Partner’s Share of Goodwill

$\text { N's share of goodwill }=60,000 \times \frac{2}{6}=\mathrm{Rs} 20,000$

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

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