Goodwill Accounting

Raised goodwill represents the reputation of the old firm so old partners are credited in old ratio. This is different from goodwill brought in cash.

The sacrificing ratio is (7:5) so B receives (36000 \times 5/12 = ₹15000). Sacrificing ratio is the basis for goodwill distribution.

Total capital based on C's share is (50000 \div 1/6 = ₹300000). Actual capital is ₹260000 so hidden goodwill is ₹40000.

C's goodwill is (80000 \times 1/4 = ₹20000). A receives (20000 \times 3/4 = ₹15000) in sacrificing ratio.

A's sacrifice is (3/5-1/2=1/10) and B's sacrifice is (2/5-1/3=1/15). Since (1/10) is bigger A sacrificed more.

The governing concept is valuation of goodwill by the weighted-average-profit method and determination of the incoming partner’s premium. First, total goodwill equals weighted average profit multiplied by years’ purchase: ₹72,000 × 2.5 = ₹1,80,000. Since the new partner acquires one-sixth of the firm’s goodwill, his premium is ₹1,80,000 × 1/6 = ₹30,000. Therefore, option A is correct. Option B is the entire goodwill, not the incoming partner’s share. Option C incorrectly divides the profit by six without applying years’ purchase, while option D merely repeats the average profit and ignores the valuation period and the partner’s fraction.

The governing concept is the super-profit method of goodwill valuation. Normal profit is calculated on capital employed at the normal rate: ₹6,00,000 × 10% = ₹60,000. Super profit is the excess of actual average profit over normal profit, so it is ₹88,000 − ₹60,000 = ₹28,000. Goodwill at four years’ purchase is therefore ₹28,000 × 4 = ₹1,12,000. Hence option A is correct. Option C is only the normal profit, and option D is only the super profit before applying four years’ purchase. Option B results from an incorrect multiplication and does not represent the required goodwill.

The governing accounting concept is the net effect of receiving goodwill premium and its subsequent withdrawal by old partners. When the incoming partner brings ₹60,000 in cash, Bank is initially debited by ₹60,000. Old partners withdraw 40% of this premium, which equals ₹60,000 × 40% = ₹24,000; this payment reduces the bank balance. Therefore, net increase in Bank is ₹60,000 − ₹24,000 = ₹36,000. Option A is correct. Option B ignores the withdrawal, while option C states only the amount withdrawn. Option D would be correct only if the entire premium were withdrawn, which is not the case.

The governing concept is the calculation of an incoming partner’s share of goodwill. First determine total goodwill under the weighted-average-profit method: ₹84,000 × 2.5 = ₹2,10,000. The new partner receives one-fifth of the firm, so the premium payable for goodwill is ₹2,10,000 × 1/5 = ₹42,000. Therefore, option A is correct. Option B is the total goodwill of the firm, not the new partner’s premium. Option C divides the average profit by five but fails to apply years’ purchase, and option D is simply the average profit rather than the value of the acquired goodwill share.

This uses the super-profit method of goodwill valuation. Normal profit is calculated on the actual capital at the normal rate of return: Normal Profit = ₹9,00,000 × 8/100 = ₹72,000. Super Profit is the excess of average profit over normal profit, so Super Profit = ₹1,10,000 − ₹72,000 = ₹38,000. Goodwill at three years’ purchase is therefore ₹38,000 × 3 = ₹1,14,000. Option A is correct. Option C is only the normal profit, not goodwill; option D is only the super profit before applying the three-year purchase factor. Option B is not supported by any valid step in the stated method and may arise from multiplying or adding the figures incorrectly.

Under the super profit method, super profit means the excess of maintainable average profit over normal profit. It is calculated as Average Profit minus Normal Profit, and goodwill is generally calculated as Super Profit multiplied by the agreed number of years’ purchase. If average profit is below normal profit, this difference is negative; the business is earning less than the return normally expected on its capital. In the usual school-level treatment, no positive super profit exists, so goodwill is taken as nil, making option A correct. Options B, C and D confuse goodwill with average profit, normal profit or capital, none of which is the required basis here.

The incoming partner’s share of goodwill is calculated by multiplying the firm’s total goodwill by the share acquired. Thus, C’s required premium is ₹200,000 × 1/10 = ₹20,000. Since C actually brings ₹25,000, the amount brought exceeds the required premium by ₹25,000 − ₹20,000 = ₹5,000. Therefore, option A correctly describes the situation as ₹5,000 excess premium. It is not a shortage, because the amount brought is greater than the amount due. The total goodwill is also not zero; ₹200,000 is the stated value of the firm’s goodwill, so options B, C and D are incorrect.

A private payment is a transaction between the incoming partner and the old partners personally; it is not a transaction of the partnership firm. Since the firm neither receives the cash nor pays it, no cash account is affected. Similarly, because the payment is not recorded in the firm’s books, no goodwill account, partner capital account or revaluation entry is created. Consequently, the assets, liabilities and partners’ capital balances shown in the final balance sheet remain unchanged. Option A is therefore correct. Option B would apply only if cash were received by the firm, option C would require a recorded goodwill entry, and option D has no accounting basis in this situation.

When an abnormal profit is included in a past year’s result, it should be removed before calculating maintainable average profit. The adjusted third-year profit is ₹125,000 − ₹25,000 = ₹100,000. The four adjusted profits are therefore ₹95,000, ₹105,000, ₹100,000 and ₹115,000. Their total is ₹415,000. Average profit = ₹415,000 ÷ 4 = ₹103,750. Thus option B is correct. Simply averaging the unadjusted figures would include a one-time gain and give ₹110,000, which is not the maintainable average. The adjustment prevents abnormal income from overstating the goodwill valuation.

Goodwill brought by an incoming partner compensates the existing partners for the reduction, or sacrifice, in their profit shares. A partner receives a share of that compensation only when the partner actually sacrifices part of the old share. If the partner’s new profit share is equal to the old share, the sacrifice is zero; if the new share is greater, the partner has gained rather than sacrificed. In both cases, that partner is not entitled to compensation from the incoming partner’s goodwill. Therefore, option A is correct. Capital size, possession of a bank account and the firm’s cash balance do not determine the sacrificing ratio or goodwill entitlement.

The total cash premium brought by C is ₹48,000. The old partners retain 25% of this amount in the business, so the retained amount is ₹48,000 × 25/100 = ₹12,000. The balance is withdrawn by the old partners. Withdrawal = Total premium − Amount retained = ₹48,000 − ₹12,000 = ₹36,000. Therefore, option C is correct. Another equivalent method is to note that the withdrawn proportion is 75%, so ₹48,000 × 75% also equals ₹36,000. Option A represents only the retained amount, option D ignores the retention, and option B does not correspond to either stated proportion.

Under the super profit method, goodwill is calculated from super profit, normally as Super Profit × Number of Years’ Purchase. Super Profit itself is Average Profit − Normal Profit. Here, Super Profit = ₹95,000 − ₹95,000 = ₹0. Since the business earns exactly the normal expected return, it has no extra earning capacity over comparable firms. Therefore, even if a number of years’ purchase were specified, ₹0 multiplied by that number would remain ₹0. Option A is correct. Option B is merely the average or normal profit, not goodwill; option C has no basis in the super-profit formula; and option D cannot be concluded without capital information and is unrelated to this calculation.

When a new partner brings goodwill, the required contribution is calculated as the firm’s total goodwill multiplied by the new partner’s share. C’s required contribution is ₹3,60,000 × 1/9 = ₹40,000. C actually brings ₹50,000. The excess is therefore ₹50,000 − ₹40,000 = ₹10,000. Thus, C has brought ₹10,000 more than the amount required for his 1/9 share, so option A is correct. Option B reverses the comparison, option C ignores the difference, and option D incorrectly treats the whole amount brought as a shortage. The calculation concerns only the goodwill contribution, not C’s capital contribution.

A private payment of goodwill is made directly by the incoming partner to the old partners and does not pass through the firm’s cash or bank account. Consequently, it is not a transaction of the firm and should not be recorded in the firm’s books. If the firm has nevertheless entered it, the error must be corrected by reversing the incorrect entry, restoring the accounts to the position that would have existed had no firm entry been made. Option A is therefore correct. Increasing goodwill further would repeat the error; treating the amount as sales is unrelated to partnership admission; and revaluation profit arises from changes in asset or liability values, not from a private goodwill payment.

The amount retained in the business is calculated by applying the retention percentage to the cash goodwill brought by C. Retained amount = ₹64,000 × 37.5% = ₹64,000 × 3/8 = ₹24,000. The old partners withdraw the balance, so withdrawal = Total goodwill cash − Amount retained = ₹64,000 − ₹24,000 = ₹40,000. Therefore, option C is correct. Option A is only the amount retained in the business, not the withdrawal. Option D ignores the retention, while option B does not follow from the stated percentage. The calculation assumes that the balance is withdrawn as described.

The goodwill required from an incoming partner is calculated by multiplying the firm’s total goodwill by the partner’s incoming share. C’s required goodwill = ₹4,50,000 × 2/15. Since ₹4,50,000 ÷ 15 = ₹30,000, the required amount is ₹60,000. C actually brings ₹65,000, so the excess is ₹65,000 − ₹60,000 = ₹5,000. Therefore, option A is correct. Option B gives the opposite result, option C assumes that the contribution exactly equals the requirement, and option D incorrectly treats the entire amount brought as a deficiency. The calculation relates to goodwill only and does not include capital.