Goodwill Accounting

Purchased goodwill is calculated by comparing the purchase consideration with the fair value of net identifiable assets acquired. Net assets = Total assets − Outside liabilities. Here, net assets = ₹15,00,000 − ₹4,00,000 = ₹11,00,000. Purchased goodwill = Purchase price − Net assets = ₹12,50,000 − ₹11,00,000 = ₹1,50,000. Therefore option A is correct. Option B is only the net asset value, option C is the entire purchase consideration, and option D results from subtracting the purchase price from the gross assets without properly considering liabilities. The excess paid over net identifiable assets represents the goodwill acquired in the purchase.

Total firm value from new partner's capital is (60000 \div 1/6 = ₹360000). Actual capital is ₹300000 so hidden goodwill is ₹60000.

Old goodwill is written off among old partners in old ratio. A's share is (48000 \times 5/6 = ₹40000) debit.

The unbrought goodwill is ₹12000 and it is debited to the new partner's account. Old partners are credited in sacrificing ratio.

A sacrifices (4/7-3/8=11/56) while B's new share (3/8) is more than old (3/7). So only A is the sacrificing partner.

Normal profit is (800000 \times 10% = ₹80000) and super profit is ₹40000. Goodwill is (40000 \times 3 = ₹120000).

C’s incoming share is 1/4, so the total sacrifice by the old partners must also be 1/4. Since A sacrifices 1/6, B’s sacrifice is 1/4 − 1/6 = 1/12. The answer 1/6 represents only A’s sacrifice, not B’s. The goodwill value of ₹72,000 is not needed to calculate the sacrifice ratio; it is relevant for the goodwill adjustment. Exam tip: The incoming partner’s share equals the total sacrifice of the old partners.

The correct answer is A: no entry is made in the firm’s books. A private payment means that the incoming partner pays the old partners personally, outside the firm. The firm neither receives cash nor pays cash, so the firm’s assets, liabilities and capital records are not affected by this payment. Option A is correct because only transactions of the firm are recorded in the firm’s journal. Option B is wrong because the firm does not receive the cash, so Cash Account cannot be debited. Option C is wrong because the firm has not recorded or received goodwill; therefore Goodwill Account is not credited in this situation. Option D is wrong because the new partner’s Capital Account is credited when capital is introduced into the firm, not merely when private goodwill is paid to old partners. The key exam clue is the phrase ‘privately’ and ‘no cash enters the firm’: these words usually mean no entry in the firm’s books.

C's total share is (1/4) and (1/6) is taken from A. B's sacrifice is (1/4-1/6=1/12) so the ratio is (1/6:1/12=2:1).

Credit in old ratio and debit in new ratio gives net benefit to sacrificing partners. This method shows hidden compensation.

A's share falls from (3/4) to (5/8) so he sacrifices (1/8). B's share stays (1/4) so A is the sacrificing partner.

The sum of the new ratio is 4 + 3 + 2 = 9, so C’s share is 2/9. Therefore, Total Goodwill × 2/9 = ₹36,000, giving Total Goodwill = ₹36,000 × 9/2 = ₹1,62,000. Option C is incorrect because it does not correctly divide ₹36,000 by 2/9. Exam tip: When a partner’s share of goodwill is given, calculate total goodwill as the partner’s share divided by that partner’s fractional share.

Direct answer: Option B, ₹93,333 approximately. The first year’s stated profit of ₹90,000 includes an abnormal profit of ₹20,000. Since abnormal profit should not be used in normal maintainable profit, subtract it: ₹90,000 − ₹20,000 = ₹70,000. The adjusted three-year total is ₹70,000 + ₹110,000 + ₹100,000 = ₹280,000. Divide by 3: ₹280,000/3 = ₹93,333.33, reported as about ₹93,333. Option B is correct. Option A, ₹90,000, ignores the adjustment. Option C, ₹100,000, is one of the unadjusted yearly figures, not the average. Option D, ₹106,667, results from an incorrect total or treatment of the abnormal profit. Memory cue: remove abnormal profit before finding average maintainable profit.

Adding back abnormal loss makes second year's profit ₹120000. Average is ((70000+120000+100000+80000)/4=₹92500).

Weighted average profit = Sum of weighted profits ÷ Sum of weights. Thus, the weighted total is (₹60,000 × 1) + (₹80,000 × 2) + (₹1,00,000 × 3) = ₹5,20,000, and the total weight is 1 + 2 + 3 = 6. Therefore, weighted average profit = ₹5,20,000 ÷ 6 = ₹86,666.67, which is ₹86,667 when rounded to the nearest rupee. In the examination, multiply each profit by its corresponding weight before adding.

When profits are increasing giving more weight to recent years gives a better picture. So weighted average method may be more suitable.

Old partners receive the full required goodwill of ₹45000. B's share is (45000 \times 1/3 = ₹15000).

The correct answer is A: the adjustment is generally made through current accounts. Under the fixed capital method, each partner’s Capital Account is kept unchanged except for permanent changes in capital. Routine adjustments such as goodwill, drawings, interest and profit or loss are recorded in Current Accounts. If the incoming partner does not bring goodwill, the amount due to the sacrificing partners can therefore be adjusted through their Current Accounts, according to the agreed terms. Option A is correct because current accounts are used for such changes when capitals are fixed. Option B, cash sales account, records sales revenue and has no role in partner goodwill adjustment. Option C, purchases account, records goods bought for resale and is unrelated to partners’ claims. Option D, bank loan account, records borrowing from a bank and cannot represent the partners’ goodwill compensation. The important distinction is: fixed capital does not mean no adjustment; it means adjustments are kept out of Capital Accounts and made in Current Accounts.

Direct answer: Option A, Principle of compensation for sacrifice. When a new partner is admitted, old partners give up part of their future profit share. This reduction is called sacrifice. Goodwill brought by the new partner is compensation for that sacrifice, so it must be credited to old partners in their sacrificing ratio. Step by step: admission causes sacrifice; goodwill compensates the sacrifice; therefore distribution follows the sacrificing ratio, not the new profit ratio. Option A is correct. Option B, cost price principle, concerns valuation or purchase cost and does not explain goodwill distribution. Option C, prohibition of double entry, is not an accounting principle used here. Option D, cash basis, concerns timing of cash recording and is irrelevant. Memory cue: goodwill follows sacrifice because it pays for the share given up.

C's required goodwill is (150000 \times 1/5 = ₹30000). A receives (30000 \times 7/10 = ₹21000).

A partner who has not sacrificed does not get compensation. The basis of goodwill is sacrifice not capital.

A’s share decreases from 1/2 to 3/8, so A is sacrificing. B’s share increases from 1/3 to 5/12; since 1/3 equals 4/12, B gains 1/12. Therefore, only B is gaining. Exam tip: an increase in the revised share indicates gain, while a decrease indicates sacrifice.

The new profit-sharing shares of A, B and C must add up to 1. Therefore, B’s new share is \(1-\frac{2}{5}-\frac{1}{6}=1-\frac{12}{30}-\frac{5}{30}=\frac{13}{30}\). The original \(3:2\) ratio is not directly needed because A’s and C’s new shares are already given. Exam tip: Find the remaining partner’s share by subtracting all the specified new shares from the total share of 1.

Sacrifice = old share − new share = \(3/5-2/5=1/5\). Since A’s new share is \(1/5\) less than the old share, A has sacrificed \(1/5\) of the profit. If the new share were greater than the old share, the difference would be called gain. Exam tip: always subtract the new share from the old share first; the sign indicates sacrifice or gain.

Direct answer: Option A, ₹9,600. C brings ₹24,000 as goodwill. Old partners withdraw 60%, so the withdrawn amount is ₹24,000 × 60/100 = ₹14,400. The amount left in the business is the original amount minus the withdrawal: ₹24,000 − ₹14,400 = ₹9,600. Option A is correct. Option B, ₹14,400, is the amount withdrawn, not the amount retained. Option C, ₹24,000, would remain only if nothing were withdrawn. Option D, zero, would remain only if 100% were withdrawn. The calculation separates the amount removed from the amount left. Memory cue: after a percentage withdrawal, retained amount equals 100% minus the withdrawal percentage, so 40% of ₹24,000 is ₹9,600.