3 Questions
What happens to the profit sharing ratio in a partnership when there is a change in profit sharing ratio?
It is adjusted based on the new profit sharing ratios
How is goodwill typically treated in a partnership when there is a change in profit sharing ratio?
It is revalued and adjusted among the existing partners
What happens to the share of a retiring partner in a partnership?
It is proportionally redistributed among the remaining partners based on their existing profit sharing ratios
Study Notes
Changes in Profit Sharing Ratio in a Partnership
- When there is a change in profit sharing ratio, the existing partners' capital accounts are adjusted to reflect the new profit sharing ratio.
- The profit sharing ratio change affects the distribution of profits and losses among the partners.
Treatment of Goodwill in a Partnership
- When there is a change in profit sharing ratio, goodwill is typically written off or rebalanced to reflect the new profit sharing ratio.
- The goodwill is adjusted to prevent any partner from gaining or losing due to the change in profit sharing ratio.
Retirement of a Partner
- When a partner retires, their share in the partnership is transferred to the remaining partners.
- The retiring partner's capital account is closed, and their share is absorbed by the continuing partners.
- The goodwill of the retiring partner is also transferred to the remaining partners.
Test your knowledge on partnership fundamentals, profit sharing ratio changes, valuation and treatment of goodwill, admission of new partners, retirement and death of partners, and the dissolution of partnerships.
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