On the retirement of partner A, the final amount due to him after all adjustments was calculated to be ₹90,000. However, the continuing partners B and C decided to pay him ₹1,10,000 in full settlement.

What does the extra ₹20,000 paid to A represent?

Hidden Goodwill

The correct answer is option 2- Hidden Goodwill.

Extra amount of ₹20,000 is the Hidden Goodwill.

When a partnership firm decides to settle the accounts of a retiring or deceased partner by making a lump sum payment, any amount paid to that partner in excess of their due amount, which is determined based on their capital account balance after adjusting for accumulated profits, losses, revaluation of assets and liabilities, and other factors, is regarded as their portion of goodwill, often referred to as "hidden goodwill." P and Q agree to pay ₹75,000 to settle R's claim. This implies that Rs.15,000 represents R's portion of the firm's goodwill. To account for this, the amount of Rs.15,000 will be debited to the capital accounts of P and Q in their gaining ratio and credited to R's capital account.