Lalita, Shivani and Madhuri were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. Madhuri retired from the firm on 31st March, 2025. The balance in her capital account on the date of her retirement was Rs. 1,80,000. Lalita and Shivani agreed to pay her Rs. 2,25,000 in full settlement of her claim. The goodwill of the firm on Madhuri's retirement was :

Q: Lalita, Shivani and Madhuri were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. Madhuri retired from the firm on 31st March, 2025. The balance in her capital account on the date of her retirement was Rs. 1,80,000. Lalita and Shivani agreed to pay her Rs. 2,25,000 in full settlement of her claim. The goodwill of the firm on Madhuri's retirement was :

**Correct option: (D) Rs. 2,70,000** The excess paid to Madhuri over her capital balance = $\text{Rs. }2,25,000 - \text{Rs. }1,80,000 = \text{Rs. }45,000$, which represents her 1/6 share of the firm's goodwill (profit share 3:2:1, so Madhuri's share = 1/6). Total goodwill of the firm = $\text{Rs. }45,000 \times 6$ = **Rs. 2,70,000**.

Reconstitution of a Partnership Firm: Retirement/Death of a Partner

Goodwill on Retirement — Excess Payment Method

Options

(A)Rs. 1,80,000

(B)Rs. 2,25,000

(C)Rs. 45,000

(D)Rs. 2,70,000

Official Answer

Correct option: (D) Rs. 2,70,000

The excess paid to Madhuri over her capital balance = $\text{Rs. }2,25,000 - \text{Rs. }1,80,000 = \text{Rs. }45,000$ , which represents her 1/6 share of the firm's goodwill (profit share 3:2:1, so Madhuri's share = 1/6). Total goodwill of the firm = $\text{Rs. }45,000 \times 6$ = Rs. 2,70,000.

goodwill on retirementexcess payment methodprofit sharing ratioretiring partner settlementcapital account balancereconstitution of partnership

Marking Scheme

11 mark for correctly computing the excess payment of Rs. 45,000 as Madhuri's 1/6 share of goodwill and grossing it up to Rs. 2,70,000 (option D).

Hint

Excess paid over the capital balance = retiring partner's share of goodwill; divide by their profit share to gross up to the firm's total goodwill.

Quick Oral Answer

The excess paid to Madhuri over her capital balance, Rs. 45,000, is her 1/6 share of goodwill; grossing this up by dividing by 1/6 gives the firm's total goodwill of Rs. 2,70,000.

Analysis & Explanation

Concept

When a retiring partner is paid more than their capital account balance in full settlement, the excess represents their share of the firm's goodwill (assuming no other adjustment is mentioned). Total firm goodwill can then be found by grossing up this share.

Working

Madhuri's capital balance on retirement = Rs. 1,80,000
Amount actually paid to her = Rs. 2,25,000
Excess (= Madhuri's share of goodwill) = $\text{Rs. }2,25,000 - \text{Rs. }1,80,000 = \text{Rs. }45,000$
Profit sharing ratio Lalita : Shivani : Madhuri = 3 : 2 : 1, so Madhuri's share = 1/6
Total goodwill of the firm = $\text{Rs. }45,000 \div \left(\frac{1}{6}\right) = \text{Rs. }45,000 \times 6$ = Rs. 2,70,000

This matches option (D).

Why other options are wrong

(A) Rs. 1,80,000 is merely Madhuri's capital balance, not the goodwill.
(B) Rs. 2,25,000 is the total settlement amount, not the goodwill figure.
(C) Rs. 45,000 is only Madhuri's share of goodwill, not the firm's total goodwill.

Common Mistakes

1Treating the full settlement amount (Rs. 2,25,000) as the goodwill figure instead of only the excess over the capital balance.
2Forgetting to gross up Madhuri's share of goodwill (Rs. 45,000) to the firm's total goodwill by dividing by her profit share (1/6).
3Using the wrong profit share for Madhuri (e.g., 1/3 instead of 1/6) by misreading the ratio 3:2:1.

Interesting Facts

This 'excess payment implies goodwill' method is a practical, real-world approach firms use even without a formal goodwill valuation — the settlement amount itself becomes the evidence of goodwill value.

Goodwill valuation disputes are among the most common reasons retiring partners and continuing partners end up in arbitration or civil litigation in India, making a clear excess-payment method valuable for avoiding ambiguity.

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Frequently Asked Questions

How is goodwill determined from the amount paid to a retiring partner?

If a retiring partner is paid more than their capital account balance in full settlement, the excess is treated as their share of goodwill, which can be grossed up using their profit-sharing ratio to find the total firm goodwill.

Why is Madhuri's profit share taken as 1/6 here?

The profit sharing ratio is Lalita : Shivani : Madhuri = 3 : 2 : 1, so Madhuri's share of the total (3+2+1=6 parts) is 1 part out of 6, i.e., 1/6.