Retiring partner is compensated for parting with the firm’s future profits in favour of remaining partners. The remaining partners contribute to such compensation amount in which ratio?
Answer & explanation
Correct answer: option 1
A Partner has the right to retire from the firm after giving due notice in advance.
A new partnership comes into existence between the remaining partners.
A retiring partner is entitled to get the following:
1) Share in goodwill; Goodwill of the firm is valued and the retiring partners share of goodwill is credited to his capital account.
2) Share in Reserves: Reserves are the undistributed profits and it is also credited to the capital account of retiring partner.
3) Share in revaluation of assets and liabilities: Assets and liabilities are revalued on the date of retirement and retiring partner’s share of profit is credited or the loss is debited to his capital account.