Goodwill Accounting

When goodwill is not brought in cash, the general adjustment debits the new partner. Sacrificing old partners are credited.

Goodwill arises from reputation and the ability to earn extra profit. In exams treat it as a beneficial intangible asset.

The new partner gets a share in future profits. So goodwill is given to sacrificing old partners.

When a new partner is admitted, the old partners surrender a part of their profit share. The premium for goodwill compensates them for this sacrifice, so it is distributed among the old partners in their sacrificing ratio. The new profit-sharing ratio is not used for distributing the premium. Exam tip: For goodwill premium received from an incoming partner, identify the sacrificing ratio first.

When the cash premium is received, the bank balance increases, so the Bank Account is debited. The basic entry is: Bank Account Dr. To Premium for Goodwill Account. The premium is later transferred to the old partners’ capital or current accounts in their sacrificing ratio; therefore, the Premium Account is not debited in the initial entry. Exam tip: Debit the cash or bank account whenever money is received.

The amount brought as premium is first credited to Premium for Goodwill Account. Later it is distributed to old partners.

When a new partner brings a premium for goodwill, that amount represents compensation for the reduction in the old partners’ profit shares. The Premium for Goodwill Account is a temporary account. When the amount is distributed to the old partners who sacrificed their shares, this temporary account must be closed. Its debit balance is removed by debiting the Premium for Goodwill Account. The sacrificing old partners’ capital or current accounts are credited in the sacrificing ratio.

The entry for distribution is generally: Premium for Goodwill Account Dr. to Old Partners’ Capital or Current Accounts. Bank is not debited at this stage because the cash receipt has already been recorded separately, and the new partner’s capital account is not the account used for distribution. Therefore, option A is correct. Purchases Account has no connection with this adjustment because goodwill is not a purchase of ordinary goods.

The direct answer is A: the new partner’s share of goodwill is ₹15,000. Total goodwill is ₹75,000, and the incoming partner takes \(1/5\) of the business. The required goodwill is found by multiplying total goodwill by the partner’s fraction: \(₹75,000\times1/5=₹15,000\). Option A is correct. Option B, ₹75,000, is the entire firm’s goodwill, not the new partner’s portion. Option C, ₹30,000, would equal \(2/5\) of the total and is too high. Option D, ₹50,000, would equal \(2/3\) of the total and is also unrelated. The fraction must be applied to the total goodwill, not added or divided incorrectly. Exam cue: incoming partner’s goodwill = total goodwill × incoming share.

The new partner’s premium is the firm’s total goodwill multiplied by the partner’s share: ₹96,000 × 1/6 = ₹16,000. Therefore, option A is correct.

The premium for goodwill is distributed among the old partners in their sacrificing ratio. The first partner’s share is \(\frac{4}{4+1}=\frac{4}{5}\). Therefore, his share is \(₹25,000 \times \frac{4}{5}=₹20,000\). ₹5,000 is the second partner’s share. Exam tip: divide the premium according to the total parts of the sacrificing ratio.

Goodwill premium is distributed among the old partners in their sacrificing ratio. The second partner’s share is 3/(2+3) = 3/5; therefore, ₹50,000 × 3/5 = ₹30,000 will be credited to that partner’s account. ₹20,000 belongs to the first partner. Exam tip: Always distribute the premium in the sacrificing ratio, not in the profit-sharing ratio.

An equal sacrificing ratio means that both old partners receive equal shares of the goodwill premium. Therefore, each partner’s share = ₹36,000 ÷ 2 = ₹18,000. ₹36,000 is the total premium, while ₹12,000 and ₹9,000 do not represent two equal parts of the amount. Exam tip: Distribute the goodwill premium among the old partners in their sacrificing ratio.

The total of the old ratio is 5, so the first partner’s share is \(3/5\). Therefore, the amount debited to the first partner’s account is \(₹40,000 \times 3/5 = ₹24,000\). ₹16,000 is the second partner’s share, not the first partner’s. Exam tip: When existing goodwill is written off, the old partners’ Capital or Current Accounts are debited in the old ratio.

The old ratio is 1:2, so the first partner’s share is 1/3 of the total. On writing off goodwill, the amount debited to the first partner’s account is ₹27,000 × 1/3 = ₹9,000. ₹18,000 is the second partner’s share, so it is not correct. Exam tip: Existing goodwill is written off by debiting the old partners’ capital accounts in their old ratio.

The correct answer is option A: Old Partners’ Capital Accounts. Before admission, old goodwill is written off because the existing goodwill belongs to the old partners. The entry is: Old Partners’ Capital Accounts Dr, To Goodwill Account. The debit reduces the old partners’ capital balances, usually in their old profit-sharing ratio; the credit removes goodwill from the books. Option A is correct because the old partners bear the write-off. Option B, Bank Account, is wrong because no cash is paid when an existing goodwill asset is written off. Option C, Premium for Goodwill Account, is used when the incoming partner brings goodwill premium, not for removing old goodwill. Option D, New Partner’s Account, is wrong because the new partner was not a partner when the old goodwill arose. Memory cue: old goodwill written off means debit old partners, credit goodwill.

Goodwill Account is credited to remove it from the books. Old partners' capital accounts are debited.

In the average profit method, goodwill is based on earning capacity over normal profit. So first find \(\text{Average profit}\) for the given years, subtract \(\text{Normal profit}\), and then multiply by \(\text{Number of years’ purchase}\). Hence \(\text{Goodwill}=(\text{Average profit}-\text{Normal profit})\times \text{Number of years’ purchase}\).

Under the average profit method, goodwill = Average Profit × Number of Years’ Purchase. Therefore, ₹18,000 × 5 = ₹90,000. Option B is only the average profit, not the goodwill. Exam tip: Multiply the average profit by the given years’ purchase.

Under the average-profit method, the firm’s total goodwill is found by multiplying average profit by the agreed number of years’ purchase. Thus, total goodwill = ₹24,000 × 2 = ₹48,000. The question asks for the incoming partner’s share, not the total goodwill of the firm. Since that partner receives 1/4 of the profits, his goodwill share is ₹48,000 × 1/4 = ₹12,000. Therefore, option A is correct. Option B is the firm’s total goodwill before dividing it among partners. Option C is only the average profit, and option D results from an incorrect division or use of the years’ purchase. The calculation separates total goodwill from the amount attributable to the new partner.

Under super profit method, super profit is multiplied by years' purchase. Earning above normal profit is important.

Super profit = Average Profit − Normal Profit. Therefore, ₹62,000 − ₹50,000 = ₹12,000. Option B is incorrect because it adds the two profits instead of finding their difference. Exam tip: Always subtract normal profit from average profit to calculate super profit.

The governing concept is the super-profit method of valuing goodwill. Super profit is the excess of actual average profit over normal profit, and the agreed years’ purchase indicate how many years of that excess are capitalised. The formula is Goodwill = Super Profit × Years’ Purchase. Substituting the given values gives ₹15,000 × 4 = ₹60,000. Therefore, option A is correct. Option B states only the super profit and ignores the years’ purchase. Option C does not follow the required multiplication, and option D incorrectly adds ₹15,000 and ₹4, treating years’ purchase as a rupee amount. The result is expressed in rupees because goodwill is a monetary valuation of the firm’s earning advantage.

Super profit = average profit − normal profit = ₹70,000 − ₹55,000 = ₹15,000. Goodwill = super profit × years’ purchase = ₹15,000 × 3 = ₹45,000, so option A is correct. ₹15,000 is only the super profit for one year, not the goodwill. In the exam, first calculate super profit and then multiply it by the years’ purchase.

Normal profit is the return that a business is expected to earn on the capital employed when it operates at the normal rate of return for its industry and risk level. The governing relationship is Normal Profit = Capital Employed × Normal Rate of Return / 100. For example, if capital employed is ₹1,00,000 and the normal rate is 10%, normal profit is ₹10,000. Normal profit is used in the super-profit method: Super Profit = Average Profit − Normal Profit. Therefore, option A is correct. Cash payments, sales discounts and drawings may affect particular accounts or cash flows, but none of them alone determines normal profit. The concept is an expected return on capital, not a specific cash transaction.

Under the capitalisation method, the maintainable profit is capitalised at the normal rate of return to determine the estimated total value of the business. If this capitalised value is greater than the actual net assets or actual capital employed, the excess represents goodwill. In formula form, Goodwill = Capitalised Value − Actual Capital, when the difference is positive. Hence, option A is correct. Closing a bank account, having zero sales, or having no partner does not by itself establish goodwill; those events do not provide the required comparison between business value and actual capital.