Retirement or Death of a partner Test - 15

Old ratio (A and B) = 2 : 1

Old ratio (P, Q, and R) = 1/5, 1/3 and 7/15 or 3 : 5 : 7

·         New profit sharing ratio: Ratio in which the partners decide to share profits/losses in future.

There are different cases when partnership can have new profit sharing ratio:

·         Sometimes the partners may decide to change their existing profit sharing ratio, without any admission or retirement of partner,

·         At the time of admission of the new partner

·         At the time of retirement or death of an old partner

In the above question profit sharing ratio of C, M and Y is :

1/2 : 2/5 : 1/10 i.e.    5 : 4 : 1 after taking LCM.

If C retires, the new profit sharing ratio between M and Y is 4 : 1 ( because, gaining or sacrificing ration is not given)

The average profit method of Goodwill is calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue. For this, only the normal operational profits are considered which are expected to accrue even in the future based on the same situation and circumstances. Any other non-recurring and extraordinary items are not considered in this calculation of goodwill.

A well-established business develops an advantage of good name, reputation and wide business connections.  In accounting, the monetary value of such advantage is known as "goodwill". It is regarded as an intangible asset. In other words, goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits.

A Memorandum Profit and Loss Adjustment Account will be opened in the books. The increase in the value of assets or decrease in the value of liabilities will be credited to this account. 

Retirement of a partner:

A partner may retire-

a.          with the consent of all the other partners,

b.          in accordance with an express agreement by the partners, or

c.         where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

Old ratio (A, B, and C) = 5 : 3 : 2

According to the Garner Vs Murray rule, the loss arising on insolvency of a partner is a capital loss which should be borne by the solvent partners in their capital ratio. Once a partner is insolvent, the loss arising from him to be borne by the other partners in their capital ratio. Here, the loss on insolvency of C will be shared by A & B in the ratio of their fixed capitals, i.e, 10,000 : 6,000 or 5 : 3.