Question

P, Q, R and S were partners in a firm sharing profits in the ratio of 5 : 3 : 1 : 1. On 1st January, 2017, S retired from the firm. On S’s retirement the goodwill of the firm was valued at ₹ 4,20,000. The new profit-sharing ratio between P, Q and R will be 4 : 3 : 3.
Showing your working notes clearly, pass necessary journal entry for the treatment of goodwill in the books of the firm on S’s retirement.

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

Explanation:

Gaining ratio = New ratio - Old ratio

$\begin{aligned}&P=\frac{4}{10}-\frac{5}{10}=-\frac{1}{10}(\text { sacrifice })\\&\mathrm{Q}=\frac{3}{10}-\frac{3}{10}=0\\&\mathrm{R}=\frac{3}{10}-\frac{1}{10}=\frac{2}{10}\end{aligned}$

$\begin{array}{l}\mathrm{P}^{\prime} s \text { share }=4,20,000 \times \frac{1}{10}=42,000 \\\\\mathrm{R}^{\prime} s \text { share }=4,20,000 \times \frac{2}{10}=84,000 \\\\\mathrm{S}^{\prime} s \text { share }=4,20,000 \times \frac{1}{10}=42,000\end{array}$