On retirement/death of a partner, the remaining partners who have gai…

The correct answer is Option (2) → Remaining Partners (who have sacrificed) as well as retiring partners

On retirement or death, goodwill is settled by one rule: every partner who gains pays every partner who sacrifices, to the extent of the gain. The retiring partner always gives up his whole share. But when the continuing partners agree on a new ratio, one of them may end up with a smaller share than before; he too has sacrificed and must be compensated along with the retiring partner.

For example, A, B and C share 2:2:1 and A retires; if B and C agree on 1:4, B’s share falls from 2/5 to 1/5. C gains 3/5 (4/5 − 1/5) and pays for goodwill to both A (who gave up 2/5) and B (who gave up 1/5).

Why the other options are incorrect

• Option (1) Retiring partners only — Incorrect. It leaves out a continuing partner whose share has fallen, though he has given up part of his share too.

• Option (3) Remaining Partners only (who have sacrificed) — Incorrect. The retiring partner gives up his entire share, so he is the first to be compensated.

• Option (4) None of the partners — Incorrect. The goodwill was earned by the efforts of all the partners, so the gain in share has to be paid for.