On retirement or death of a partner, the remaining partners who have gained due to change in the profit sharing ratio should compensate the:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Remaining partners (who have sacrificed) as well as retiring partners
Upon the retirement or death of a partner, the remaining partners who have gained should compensate any partner whose share has decreased. This includes two groups:
-
The Retiring/Deceased Partner: They lose their entire share in the firm, so they are the primary party to be compensated. This compensation is usually in the form of their share of goodwill.
-
Any Remaining Partner(s) who have Sacrificed: Sometimes, one of the continuing partners may also sacrifice a part of their share to facilitate the new ratio among the continuing partners.
The compensation is distributed to the partners who have sacrificed (i.e., those whose shares have gone down) in the sacrificing ratio. This group consists of both the retiring partner and any remaining partner who might have sacrificed.