Goodwill Accounting

The governing treatment is that goodwill already appearing in the books belongs to the existing partners because it was created before the new partner’s admission. When a new partner is admitted, this old goodwill is written off by debiting the old partners’ capital or current accounts in their old profit-sharing ratio. It is not distributed to the incoming partner, because the incoming partner did not earn or contribute to the historical goodwill represented by that balance. It is also not a bank transaction, so no bank account is involved merely because the balance is written off. Therefore option A is correct. The new ratio is relevant to future profit sharing, not to writing off old goodwill.

The governing accounting rule is that a transaction is recorded in the firm’s books only when it involves the firm or changes the firm’s assets, liabilities, income or capital accounts. In this case, the incoming partner pays the goodwill premium privately and directly to the old partners. The money does not enter the firm’s bank or cash account, and the firm has not received the premium as an accounting transaction. Consequently, no journal entry is passed in the firm’s books. Option B would apply only if the firm received the money through its bank. Option C is not justified because no goodwill account is being operated in the firm, and option D incorrectly treats a private payment as a firm withdrawal. Hence A is correct.

The governing concept is that, on admission, the new partner’s goodwill premium is calculated by applying the partner’s acquired profit-sharing fraction to the total value of goodwill, unless a separate amount is specifically stated. Here, total goodwill is ₹2,40,000 and the new partner receives 1/8 share. Therefore, premium = ₹2,40,000 × 1/8 = ₹30,000. Hence option A is correct. Option B is the entire goodwill and ignores the partner’s fraction. Option C would represent 1/3 of the goodwill, not 1/8, while option D represents 1/2. Thus only ₹30,000 matches the stated share.

The governing concept is that cash goodwill brought by an incoming partner is credited to the old partners in their sacrificing ratio, because they surrender part of their future profit share. The total sacrifice is 7 + 5 = 12 parts. The first old partner’s fraction is therefore 7/12. His share of the cash premium is ₹72,000 × 7/12 = ₹6,000 × 7 = ₹42,000. Hence option B is correct. Option A uses an incorrect fraction, option C gives the whole premium to the first partner, and option D divides the amount equally. The stated ratio requires distribution of ₹42,000 and ₹30,000 respectively.

When existing goodwill is written off before admission, the Goodwill Account is debited and the old partners’ capital or current accounts are credited in their old profit-sharing ratio. The total old ratio is 4+3+2 = 9. C’s fraction is therefore 2/9. C’s debit is calculated as ₹180,000 × 2/9 = ₹40,000. Thus option A is correct. ₹60,000 represents one-third of the amount, ₹80,000 does not follow C’s 2/9 share, and ₹180,000 is the total goodwill rather than C’s individual adjustment. The admission does not change the ratio used for writing off old goodwill.

The governing principle is the treatment of premium for goodwill when a new partner is admitted. The cash brought by the incoming partner as goodwill is distributed among the old partners in the sacrificing ratio. Consequently, the concerned old partner’s capital account is first credited with his share of the premium, because that amount increases his claim against the firm. If he immediately withdraws the amount, his capital account is then debited for the withdrawal. Therefore the sequence is first credit and then debit, making option A correct. It is not only a debit, because the partner must first receive the goodwill adjustment.

A goodwill premium paid privately is exchanged directly between the incoming partner and the partner or partners entitled to the compensation. Since the money does not enter or leave the firm’s bank account, the firm does not record a bank transaction for it. Therefore option A, no effect, is correct. A bank debit would be appropriate only if the firm actually received money and deposited it in its bank account. A bank credit would indicate a withdrawal or payment from the firm, which has not occurred here. Closing the bank account is entirely unrelated. The accounting treatment must follow the actual flow of money, not merely the existence of a goodwill agreement.

Under the premium method, the new partner brings the agreed premium, which is credited to the Premium for Goodwill Account when received. That temporary account must then be closed by debiting it. The old partners' capital accounts are credited because they are the parties receiving compensation for the profit share sacrificed, and the credit is made in their sacrificing ratio. Thus the entry is Premium for Goodwill Account Dr. to Old Partners' Capital Accounts. Option B reverses the debit and credit logic. Option C records a different capital receipt, and option D concerns a separate goodwill or bank transaction rather than distribution of the premium.

The incoming partner gets a share in profits so goodwill compensates old partners for sacrifice. In exams link goodwill with sacrifice of profit.

Goodwill brought in cash is credited to old partners' capital accounts in sacrificing ratio. Use sacrificing ratio for goodwill distribution.

C's share is (1/5) so his goodwill share is (1/5) of ₹50000 which is ₹10000. Multiply total goodwill by the new partner's share.

Sacrificing ratio shows how much profit the old partners have given up. Goodwill compensation is distributed on this basis.

Existing goodwill is written off by debiting old partners' capital accounts in old profit-sharing ratio. For old goodwill use the old ratio.

According to accounting recognition purchased goodwill is recorded in books. Do not treat self-generated goodwill as a direct asset in exams.

Cash first comes in and is then withdrawn by old partners so final cash does not increase due to goodwill. Check the effect of both entries.

A's old share is (5/8) and new share is (1/2) so sacrifice is (1/8). Sacrifice equals old share minus new share.

When goodwill is not brought in cash the new partner's account is debited for his share. Old partners are credited in sacrificing ratio.

The direct answer is option C, ₹48,000. Goodwill is the value of the reputation and advantages of a firm. When a new partner receives a share, the goodwill belonging to that share is found by multiplying total goodwill by the new partner’s fraction. Here, C’s goodwill share is ₹12,000 and C receives
/4 of the firm. Therefore, ₹12,000 = Total goodwill ×
/4. Dividing by
/4 gives Total goodwill = ₹12,000 × 4 = ₹48,000. Option A, ₹30,000, would give only ₹7,500 for one-fourth, so it is incorrect. Option B, ₹36,000, would give ₹9,000 for one-fourth, so it is also incorrect. Option C works because one-fourth of ₹48,000 is exactly ₹12,000. Option D, ₹60,000, would give ₹15,000 for one-fourth, not ₹12,000. The exam cue is: total goodwill equals the new partner’s goodwill amount divided by the share taken, so divide by the fraction, not multiply by it.

Under average profit method average profit is multiplied by years' purchase. Forgetting years' purchase is a common exam mistake.

Average profit is ₹50000 and goodwill at two years' purchase is ₹100000. First find average then multiply.

Super profit is profit above normal profit and it is multiplied by years' purchase. Always subtract normal profit in exams.

Super profit is ₹20000 and goodwill at three years' purchase is ₹60000. Do not confuse super profit with total profit.

In capitalization method goodwill equals capitalised value minus actual capital. In exams actual capital is deducted not added.

Capitalised value is ₹900000 and actual capital is ₹700000 so goodwill is ₹200000. Convert the rate from percent properly.

Goodwill compensates old partners for profit sacrificed so sacrificing ratio applies. Do not use new ratio for this.