Goodwill Accounting

Under the super-profit method, goodwill is measured from the excess earning capacity of the firm. The governing formula is: Goodwill = Super Profit × Number of Years’ Purchase. Super profit is the difference between average maintainable profit and normal profit. Here, super profit is zero, so the calculation is 0 × any finite number of years’ purchase = 0. This indicates that the firm is earning only its normal return and no additional profit is attributable to goodwill under this method. Therefore, option A is correct. Average profit and capital are separate bases, while years’ purchase is only a multiplier, not the goodwill amount itself.

Old partners give up part of future profit so they receive goodwill. Mention sacrifice of future profits as the main reason.

Dividing ₹40000 in (1:3) gives B (3/4) which is ₹30000. Convert sacrificing ratio into total parts.

The correct answer is option A: the debit side. When goodwill money is received in cash or through the bank, the firm’s bank balance increases. Bank is an asset, and an increase in an asset is recorded on the debit side. The entry for receiving cash premium is Bank Account Dr, To Premium for Goodwill Account. Option A is correct. Option B, the credit side, would be used when money leaves the bank or the bank balance decreases. Option C, both sides, is not correct for this single receipt; the bank account is debited, while the other account is credited. Option D, no effect, is wrong because the bank balance definitely changes. Remember the golden rule for personal and real accounts: debit what comes in; for assets, increases are debits.

Goodwill may be adjusted through capital accounts without showing it as an asset. Not opening Goodwill Account does not mean no goodwill exists.

When old partners share the remaining profit in old ratio their sacrifice is also in old ratio. Apply this rule directly.

Goodwill compensation is based on sacrificing ratio not new ratio. In exams identify the purpose before choosing a ratio.

Private payment is outside the firm's books so no entry is passed. In exams separate private transactions from firm transactions.

The correct answer is option A: old partners in the sacrificing ratio. A new partner receives a share that was previously enjoyed by the old partners. The old partners therefore sacrifice part of their profit share, and the incoming partner’s goodwill premium compensates them for that sacrifice. The premium is credited to the old partners’ capital or current accounts in the sacrificing ratio, calculated as old share minus new share. Option A is correct. Option B, all partners in the new ratio, is wrong because the new partner is the payer, not the person being compensated. Option C, the new partner only, is impossible because one cannot credit the premium back to the partner who brought it. Option D, old partners in old ratio, is used only when the question gives no different sacrifice information; here the rule is sacrificing ratio. Exam cue: goodwill premium follows sacrifice, not the new ratio.

First cash is received, then premium is distributed among old partners. Writing entries in correct order is important.

Private payment does not pass through the firm's bank. Therefore no entry is recorded in the firm's books.

Old goodwill was created during the old partnership. It is written off in the old profit-sharing ratio.

Goodwill is an old asset and its benefit belongs to old partners. So old partners' capital accounts are debited in old ratio.

The question clearly states equal sacrifice. In such questions, do not automatically take old ratio as sacrificing ratio.

When sacrifice is stated in old ratio, sacrificing ratio is the old ratio. Distribute premium in this ratio.

Under the simple-years-purchase method, goodwill is found by multiplying the firm’s average profit by the number of years’ purchase. Average profit is ₹60,000, and the valuation is two years’ purchase. Thus goodwill is \\(₹60,000\\times2=₹1,20,000\\). The multiplication uses the profit expected for one normal year and applies it for the stated two years.

Therefore option A, ₹120,000, is correct. The amount ₹60,000 would represent only one year’s purchase, while ₹30,000 and ₹180,000 result from using an incorrect multiplier. This method does not require the capital, normal rate of return, or super profit because none of those figures is given or needed in the stated calculation.

Under the average-profit method, first calculate average profit: (₹40,000+₹50,000+₹60,000)÷3 = ₹1,50,000÷3 = ₹50,000. Goodwill at two years' purchase equals average profit multiplied by the agreed years of purchase: ₹50,000×2 = ₹1,00,000. Therefore option A is correct. ₹50,000 is only the average profit, while the other amounts use an incorrect multiplier or calculation.

In the super-profit method, goodwill is calculated as super profit multiplied by the number of years' purchase. Here, super profit is ₹30,000 and the agreed period is three years. Therefore goodwill = ₹30,000×3 = ₹90,000. Option B merely repeats the super profit and does not apply the purchase period; option C divides instead of multiplying, and option D uses an unsupported figure.

Under capitalization method, expected total value is calculated first. Then actual capital is deducted to find goodwill.

Capitalized value = Average Profit × 100 ÷ Normal Rate of Return. Thus, ₹80,000 × 100 ÷ 10 = ₹8,00,000. Option C incorrectly adds the rate-related amount to profit, whereas capitalization requires dividing the profit by the normal rate of return. Exam tip: use the rate as a percentage in the formula and multiply by 100.

Goodwill = Capitalized value − Actual capital = ₹9,00,000 − ₹7,60,000 = ₹1,40,000. Therefore, option A is correct. Option B represents the actual capital, not the goodwill. In this method, remember that goodwill is the excess of capitalized value over actual capital.

The new partner's capital and share can indicate the whole firm's value. Deduct actual capital to get hidden goodwill.

The correct answer is option A: ₹400,000. C brings ₹100,000 for a 1/4 share. If one-fourth of the firm’s implied total value is ₹100,000, the complete value is four times that amount: ₹100,000 × 4 = ₹400,000. In formula form, total value = amount representing the share ÷ share fraction = ₹100,000 ÷ 1/4 = ₹400,000. Option A is correct. Option B, ₹25,000, divides by 4 in the wrong direction and is smaller than the value of the 1/4 share. Option C, ₹300,000, does not make one-fourth equal to ₹100,000; one-fourth of it is ₹75,000. Option D, ₹500,000, would make one-fourth equal to ₹125,000. The question asks for the implied total value based on the capital relationship, not a separate goodwill valuation. Memory cue: when a fraction’s value is given, divide by that fraction to find the whole.

In admission, goodwill is apportioned among the partners in the profit-sharing ratio of the new firm. Therefore, the new partner’s share of goodwill is calculated according to his share in the new profit-sharing ratio.

When old partners withdraw the amount, their capital and bank both reduce. So capital is debited and bank is credited.