Goodwill Accounting

Goodwill is the price of the profit share received by the new partner. It is distributed among sacrificing old partners.

The new partner shares profits earlier enjoyed by old partners. So goodwill compensates old partners.

Goodwill premium brought by an incoming partner is not ordinary income of the firm. It is compensation for the old partners who surrender part of their profit shares to the incoming partner. These partners are called sacrificing partners. They lose a portion of their future profit entitlement, so fairness requires that the premium be credited to them. The distribution is made in the sacrificing ratio, which is calculated as old share minus new share.

The premium is therefore given to the sacrificing old partners, making option A correct. It is not distributed to all employees, the bank, or customers. The bank may receive the money initially if the premium is brought in cash, but it does not receive the benefit as a partner. After receipt, the amount is transferred or adjusted in favour of the sacrificing partners. This distinction between receiving cash and receiving the accounting benefit is essential in admission entries.

When a new partner is admitted, the old partners sacrifice a portion of their profit share. The goodwill premium brought by the new partner compensates them for this sacrifice, so it is distributed among the old partners in their sacrificing ratio. Distributing it in the new profit-sharing ratio is incorrect. Exam tip: Remember that goodwill premium is credited in the sacrificing ratio.

The cash brought by the new partner increases the firm’s bank balance, so the Bank Account is debited. The first entry is: Bank A/c Dr. To Premium for Goodwill A/c. A separate entry is then passed to distribute the premium among the old partners in their profit-sharing ratio. Exam tip: When cash or money is received, the Cash or Bank Account is generally debited.

Premium for goodwill is first received from the incoming partner and then distributed to the old partners who sacrifice part of their profit shares. The premium account is used only temporarily for this adjustment. To transfer the amount to the sacrificing partners and close the temporary account, the Premium for Goodwill Account is debited. The old partners’ capital or current accounts are credited in their sacrificing ratio.

The accounting entry is: Premium for Goodwill Account Dr. to Old Partners’ Capital or Current Accounts. Bank Account would be debited when cash is received, but that is a separate entry and not the entry for distribution. The new partner’s capital account is also not debited for this distribution. Goods Account has no relationship with goodwill. Therefore, option A is the correct choice and the explanation supplied is accurate.

Answer: option A, ₹9,000. The new partner’s share of goodwill is found by multiplying the firm’s total goodwill by the fraction of profit or interest acquired by that partner. Here, total goodwill=₹54,000 and the partner’s share=1/6. Therefore, his goodwill share=₹54,000×1/6=₹9,000. Another way to see it is to divide ₹54,000 into six equal parts; each part is ₹9,000, and the partner receives one such part. Option B is the entire goodwill of the firm, not the incoming partner’s portion. Option C, ₹18,000, is one-third of the total, while option D, ₹45,000, is the remaining five-sixths after removing ₹9,000. The key memory cue is: partner’s goodwill share = total goodwill × partner’s fraction.

Goodwill premium brought by the new partner = Total goodwill × New partner’s share = ₹72,000 × 1/4 = ₹18,000. Therefore, option A is correct. ₹72,000 represents the goodwill of the entire firm, not the new partner’s share. Exam tip: Multiply total goodwill by the new partner’s profit-sharing or goodwill-sharing fraction to find the premium.

The goodwill premium to be brought by the new partner = total goodwill of the firm × the share acquired = ₹45,000 × 1/5 = ₹9,000. ₹45,000 is the goodwill of the entire firm, not the amount payable by the new partner. Exam tip: When no other adjustment is specified, calculate the new partner’s goodwill premium according to the share acquired.

The goodwill premium is distributed among the old partners in their sacrificing ratio. The total ratio is 3+1=4, so the first partner’s share is \(\frac{3}{4}\). Therefore, the amount received is \(₹32,000 \times \frac{3}{4}=₹24,000\). ₹8,000 is the second partner’s share. Exam tip: multiply the total premium by the concerned partner’s ratio and divide by the total ratio.

The goodwill premium is distributed among the old partners in their sacrificing ratio. The second partner’s share is 4/(1+4) = 4/5. Therefore, the amount received is ₹50,000 × 4/5 = ₹40,000. ₹10,000 is the first partner’s share, so it is not correct. Exam tip: Add the terms of the sacrificing ratio and use the relevant partner’s term to calculate the share.

The total parts in the sacrificing ratio are \(2+2+1=5\). The third partner’s share is 1 part, so he receives \(₹25,000 \times \frac{1}{5}=₹5,000\). The amount of ₹10,000 would belong to a partner sacrificing 2 parts. In exams, first add the ratio parts before distributing the goodwill premium.

Equal sacrifice means that the goodwill premium is distributed equally between the two old partners. Therefore, each partner’s share = ₹28,000 ÷ 2 = ₹14,000. ₹28,000 is the total premium, while ₹7,000 and ₹21,000 represent unequal distributions. Exam tip: first write the sacrificing ratio and then distribute the premium in that ratio.

Goodwill already recorded in the books belongs to the old partners. On admission of a new partner, it is written off among the old partners in their old profit-sharing ratio. Therefore, the old ratio is correct; the new ratio is incorrect because it includes the incoming partner. Exam tip: Existing goodwill is written off in the old partners’ old ratio.

When goodwill is written off, the old partners’ capital accounts are debited in the old ratio. The first partner’s share is 4/(4+1) = 4/5, so the amount debited is ₹25,000 × 4/5 = ₹20,000. ₹5,000 is the second partner’s share, not the first partner’s. Exam tip: For an old-ratio adjustment, divide a partner’s ratio by the sum of all old-ratio figures.

When goodwill is written off, the old partners’ capital accounts are debited in their old ratio. The second partner’s share is 1/(2+1) = 1/3, so the amount debited is ₹36,000 × 1/3 = ₹12,000. ₹24,000 is the first partner’s share because that partner has 2/3 of the old ratio. Exam tip: For writing off existing goodwill, debit the old partners in their old profit-sharing ratio.

Writing off old goodwill means removing the existing goodwill asset from the firm’s books. Goodwill normally has a debit balance because it is an asset. To cancel or remove a debit-balance asset, the Goodwill Account must be credited. The corresponding entry is: Old Partners’ Capital or Current Accounts Dr. To Goodwill Account. The old partners are debited in their old profit-sharing ratio because the recorded goodwill belonged to the period in which they were entitled to the profits. Therefore, option A is correct. Debit is used for the partners’ accounts in this entry, not for the Goodwill Account itself.

Writing off old goodwill reduces old partners' capital. Therefore their capital accounts are debited.

Under the average profit method, goodwill = average profit × years’ purchase. Therefore, goodwill = \(₹22,000 \times 3 = ₹66,000\). Option B represents only the average profit, not the goodwill value. In the examination, multiply the average profit by the number of years’ purchase.

Total goodwill of the firm = average profit × years’ purchase = ₹30,000 × 2 = ₹60,000. The new partner’s share of goodwill = ₹60,000 × 1/3 = ₹20,000, so option A is correct. ₹60,000 is the total goodwill of the firm, not the new partner’s share. Exam tip: Calculate the firm’s total goodwill first, then multiply it by the new partner’s share.

Under the average profit method, total goodwill = average profit × years’ purchase. Therefore, ₹16,000 × 4 = ₹64,000. Option B is only the average profit for one year, not the total goodwill. Exam tip: Always multiply the average profit by the given years’ purchase.

Super profit = Average Profit − Normal Profit. Therefore, Super Profit = ₹58,000 − ₹46,000 = ₹12,000. Option C represents only the normal profit, while option D represents only the average profit. Exam tip: Always subtract normal profit from average profit to calculate super profit.

Goodwill will be (₹18000 \times 3=₹54000). Under super profit method, multiply super profit by years' purchase.

Super profit = Average Profit − Normal Profit = ₹52,000 − ₹40,000 = ₹12,000. Goodwill = Super Profit × Years’ Purchase = ₹12,000 × 2 = ₹24,000, so option A is correct. Option B is only the super profit, not the goodwill. Exam tip: Under the super profit method, first calculate super profit and then multiply it by the years’ purchase.

Normal profit is calculated on capital using normal rate of return. It is deducted while finding super profit.