Goodwill Accounting

The premium for goodwill is distributed among the old partners in their sacrificing ratio. Since the ratio is 1:1, the total premium of ₹20,000 is divided into two equal parts: ₹20,000 × 1/2 = ₹10,000. Thus, each old partner receives ₹10,000. Exam tip: With an equal sacrificing ratio, each partner receives half of the total premium.

The direct answer is A, ₹20,000. Total goodwill is ₹80,000 and the incoming partner receives 1/4 share. Therefore the goodwill premium brought by the new partner is ₹80,000 × 1/4 = ₹20,000. If the question says he brings the full premium in cash, this exact amount is deposited in Bank. Option A is correct. Option B, ₹80,000, is the goodwill of the whole firm, not the new partner’s share. Option C, ₹40,000, represents one-half of the total and has no basis here. Option D, ₹60,000, represents three-fourths of the total, not one-fourth. The accounting idea is that the new partner compensates the old partners for the share of goodwill received. Memory cue: incoming partner’s premium = total goodwill × incoming partner’s fraction.

The premium for the new partner’s 1/5 share is ₹1,00,000 × 1/5 = ₹20,000. After deducting the ₹12,000 paid in cash, ₹20,000 − ₹12,000 = ₹8,000 remains to be adjusted, generally through the new partner’s Capital Account or as agreed by the partners.

When money comes into cash or bank, Bank Account is debited. Only the balance is adjusted through the new partner's account.

If the question asks for goodwill adjustment, entry must be made. Always read the question wording carefully.

Using new partner's capital and share, total capital of the firm is estimated. This may reveal hidden goodwill.

If (1/4) share is (₹50000), total capital is (₹50000 \div 1/4=₹200000). This is useful in hidden goodwill.

₹40,000 represents 1/5 of the estimated total capital. Therefore, total capital = ₹40,000 ÷ 1/5 = ₹2,00,000. Option D incorrectly multiplies ₹40,000 by 4, giving only the amount corresponding to the remaining 4/5, not the total capital. Exam tip: to find the whole from a fractional share, divide the given amount by that fraction.

Hidden goodwill is the unrecorded value of the firm’s reputation and earning advantage. The governing formula is Hidden Goodwill = Estimated Total Capital − Actual Total Capital, provided the estimated capital represents the value of the whole reconstituted firm. Here, the estimated total capital is ₹3,00,000 and the actual total capital is ₹2,60,000. Therefore, hidden goodwill = ₹3,00,000 − ₹2,60,000 = ₹40,000. Option A is correct. Option B incorrectly adds the two figures. Options C and D merely repeat the estimated or actual capital and do not measure the excess value. The positive difference shows that the firm’s implied total value is ₹40,000 greater than the capital recorded in the books.

If there is no difference between estimated and actual capital, hidden goodwill does not arise. In exams check the difference.

The new partner receives a share in future profits. Therefore his account may be debited for goodwill.

Old partners give up a share of future profits for the new partner. Therefore they are credited.

The direct answer is A, 1/5. The new ratio is 2:2:1, so its total is 2 + 2 + 1 = 5. The third number belongs to the new partner; therefore the new partner’s share is 1/5. Option A is correct. Option B, 2/5, would be the share of either partner whose new ratio number is 2, not the incoming partner. Option C, 1/3, would require a total of three equal parts and does not follow from 2:2:1. Option D, 3/5, is not present in the new ratio and would be too large. The old ratio 3:2 is not needed to find the new partner’s share; it may be useful for other calculations, such as sacrifice, but not for this direct question. Memory cue: in a ratio, a partner’s fraction is his number divided by the total of all numbers.

In the new ratio 2:2:1, the total parts are 5 and the new partner’s share is 1 part. Therefore, the new partner’s share of goodwill = ₹50,000 × 1/5 = ₹10,000. ₹20,000 represents 2/5 of the total goodwill, not the new partner’s share. Exam tip: Multiply the new partner’s fraction in the new ratio by the firm’s total goodwill.

When sacrifice is in old ratio, the sacrificing ratio is the old ratio itself. Therefore premium is distributed in old ratio.

On admission of a new partner, the premium for goodwill is compensation for the profit share surrendered by the old partners. Therefore, it is credited to the old partners in their sacrificing ratio, not automatically in their old or new profit-sharing ratio. If the old partners sacrifice equally, their sacrificing ratio is 1:1. The premium must consequently be divided equally between them. Thus, option A is correct. Option B may be correct only when the old ratio happens to equal the sacrificing ratio; option C is not the governing rule, and option D ignores the second partner’s sacrifice.

Often goodwill is adjusted directly through capital accounts. The instruction in the question is very important.

Receiving ₹30,000 from the incoming partner increases the bank balance by ₹30,000. When the old partners immediately withdraw the same amount, the bank balance decreases by ₹30,000. Therefore, the net effect of the two transactions is nil. Exam tip: Record the receipt and withdrawal separately, then calculate their net effect.

Goodwill premium is distributed among the old partners in their sacrificing ratio. When they withdraw the amount, their capital accounts decrease; therefore, the old partners’ capital accounts are debited and the Bank Account is credited. The Bank Account is not debited because cash is going out of the business. Exam tip: remember the withdrawal entry as—Old Partners’ Capital Accounts Dr. To Bank Account.

The cash goodwill is credited to the old partners in their sacrificing ratio. The second partner’s share is 1/(2+1) = 1/3. Therefore, the amount credited to him is ₹18,000 × 1/3 = ₹6,000. ₹12,000 belongs to the first partner, whose sacrifice is 2 parts. Exam tip: Divide the partner’s ratio share by the total ratio to find the partner’s portion of goodwill.

The new partner’s premium for goodwill is the share of the firm’s goodwill attributable to that partner: ₹1,20,000 × 1/6 = ₹20,000. Therefore, the partner should bring in ₹20,000.

Sacrificing ratio shows who gave up how much profit share. Premium for goodwill is distributed on this basis.

Premium Account is used to receive and distribute the amount to old partners. It is closed afterward.

In the old ratio 3:1, the second partner’s share is \(\frac{1}{3+1}=\frac{1}{4}\). Therefore, the amount debited to the second partner is \(₹20,000 \times \frac{1}{4}=₹5,000\). ₹15,000 is the first partner’s share, so it is not correct. In such questions, distribute the written-off goodwill among the old partners in their old ratio.

In capitalization method, normal rate of return is used to find capitalised value of business. It helps in goodwill calculation.