Rakesh (an existing partner) has been retired from partnership firm and the amount payable to him after all adjustments, works out to be Rs. 1,80,000 but the remaining partners Param and Qaireshi, agreed to pay him Rs. 2,25,000 in full settlement of his claim. What does this extra Rs. 45,000 paid to Rakesh represent?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Hidden Goodwill
The Rs. 1,80,000 due to Rakesh already includes everything he is owed after all adjustments. The extra Rs. 45,000 (Rs. 2,25,000 − Rs. 1,80,000) can only be payment for his share of the firm's goodwill that is not shown in the books.
Why the other options are incorrect
Option (1) Compensation for honesty — Incorrect. There is no such term.
Option (2) Interest on his Capital — Incorrect. Interest on capital is already in the Rs. 1,80,000 worked out after all adjustments.
Option (4) Share in Profit — Incorrect. His share of profit up to retirement is also in the Rs. 1,80,000.
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