Goodwill Accounting

Under fluctuating capital method capital accounts show all adjustments. So goodwill adjustment can also be made through capital accounts.

When the share is taken equally the sacrifice is also equal. Therefore goodwill is distributed in equal sacrificing ratio.

C's required goodwill is (320000 \times 3/16 = ₹60000). A receives (60000 \times 5/6 = ₹50000).

When new share increases the partner is gaining. Goodwill is received only by a sacrificing partner.

A's sacrifice is (7/15-2/5=1/15) and B's sacrifice is (8/15-7/15=1/15). So both sacrifices are equal.

The total profit share is \(1\). A and C receive new shares of \(\frac{2}{5}\) and \(\frac{1}{5}\), respectively. Therefore, B’s new share is \(1-\frac{2}{5}-\frac{1}{5}=\frac{2}{5}\). The distractor \(\frac{3}{5}\) is impossible because A’s and B’s shares alone would then exceed the total profit after including C’s share. Exam tip: when the new shares of the other partners and the incoming partner are known, find the remaining partner’s share by subtracting them from 1.

Sacrifice = Old share − New share. Here, \(\frac{3}{10}=\frac{6}{20}\) and \(\frac{1}{4}=\frac{5}{20}\), so the sacrifice is \(\frac{6}{20}-\frac{5}{20}=\frac{1}{20}\). Therefore, option A is correct. Since the new share is lower than the old share, it represents sacrifice, not gain. Exam tip: In admission questions, calculate each existing partner’s sacrifice as old share − new share.

Direct answer: Option A, cash increases by 5/8 of the goodwill amount. Let the goodwill brought in be G. First, the full amount G enters the business as cash. Then 3/8 of G is withdrawn. The cash left in the business is G − 3G/8 = 5G/8. Thus the final cash effect is an increase of 5/8 of goodwill. Option A is correct. Option B, 3/8, is the amount withdrawn, not the amount remaining. Option C is wrong because cash first comes in and only part is taken out, so there is a net increase. Option D is wrong because cash does not decrease by the full amount; the business retains 5/8 after the withdrawal. For example, if goodwill is ₹8,000, ₹8,000 comes in, ₹3,000 leaves, and ₹5,000 remains. Memory cue: amount received minus amount withdrawn = amount retained.

Direct answer: Option A, 27/50. The old ratio 16:9 gives A’s old share as 16/25 and B’s as 9/25. C receives 1/5, and A and B sacrifice equally. Therefore each old partner sacrifices half of C’s share: 1/5 ÷ 2 = 1/10. A’s new share is old share minus sacrifice: 16/25 − 1/10. Using denominator 50, this is 32/50 − 5/50 = 27/50. Option A is correct. Option B, 23/50, results from an incorrect subtraction. Option C, 16/25, is A’s old share and ignores the sacrifice. Option D, 1/10, is only A’s sacrifice, not A’s final share. The same process gives B’s new share as 9/25 − 1/10 = 13/50, and 27/50 + 13/50 + 10/50 = 1. Memory cue: convert the old ratio into fractions before subtracting sacrifice.

C’s total share is \(1/5\). Since both old partners sacrifice equally, each sacrifices \(1/5 \div 2=1/10\). B’s old share is \(9/(16+9)=9/25\). Therefore, B’s new share is \(9/25-1/10=18/50-5/50=13/50\). Option B is only B’s old share and does not deduct the sacrifice. Exam tip: When sacrifice is equal, divide the incoming partner’s share by the number of sacrificing old partners to find each partner’s sacrifice.

Goodwill is (72000 \div 18% = ₹400000). In this method capitalize super profit at the normal rate of return.

Average profit is lower than normal profit so there is no extra profit. Without super profit goodwill is not considered under this method.

Revaluation account is only for changes in asset and liability values. Putting goodwill compensation there makes revaluation profit or loss incorrect.

A's sacrifice is (1/4 \times 1/4=1/16) and B's sacrifice is (3/16). New shares are (8/16) (4/16) (4/16) so (8:4:4).

Goodwill brought by the incoming partner is credited to the old partners in their sacrificing ratio. In A:B = 1:3, the total parts are 4 and B’s share is 3. Therefore, the amount credited to B is \(₹84,000 \times \frac{3}{4} = ₹63,000\). ₹21,000 is A’s share, not B’s. Exam tip: Calculate each partner’s goodwill share as total goodwill multiplied by that partner’s fraction of the sacrificing ratio.

Old partners are entitled only to required goodwill. The excess amount is treated as the new partner's own amount.

Total value based on C is (220000 \div 1/4 = ₹880000). Actual capital is ₹820000 so hidden goodwill is ₹60000.

Goodwill is first credited to old partners in sacrificing ratio. Withdrawal separately debits their capital accounts.

C’s required share of goodwill \(=\frac{3}{14}\times ₹2,80,000\). Since \(₹2,80,000\div 14=₹20,000\), required goodwill \(=3\times ₹20,000=₹60,000\). Deficiency \(=₹60,000-₹52,000=₹8,000\).

C’s share in the new ratio is 3/(10+7+3) = 3/20. The ₹90,000 goodwill brought by C represents 3/20 of the firm’s total goodwill. Therefore, total goodwill = ₹90,000 × 20/3 = ₹6,00,000. The ₹4,50,000 option is incorrect because 3/20 of it would be only ₹67,500. Exam tip: When the incoming partner’s share and the goodwill brought by that partner are given, use total goodwill = goodwill brought ÷ incoming partner’s share.

Old goodwill is for removing an old book asset. New goodwill compensates sacrifice caused by the admission of the new partner.

When the question clearly gives sacrificing ratio that instruction is primary. If there is conflict follow the question instruction or teacher guidance.

A's share rises from (2/9) to (3/9) and B's share falls from (7/9) to (5/9). Therefore only B sacrificed.

C's required goodwill is (270000 \times 1/9 = ₹30000). Only B sacrifices so the whole amount goes to B.

Goodwill arises from the excess of capitalized value over actual capital. When both are equal there is no excess value.