On the admission of a new partner, in which ratio is the goodwill premium brought in cash credited to the old partners’ capital accounts?
Answer and explanation
Correct answer: Sacrificing ratio
On admission, the old partners give up a part of their profit share in favour of the incoming partner. Therefore, the goodwill premium brought in cash by the new partner is credited to the old partners’ capital accounts in their sacrificing ratio. The old profit-sharing ratio need not be the sacrificing ratio. Exam tip: calculate sacrificing ratio as old share minus new share before distributing the premium.
Frequently asked questions
What is the correct answer to this question?
Sacrificing ratio
Why is this the correct answer?
On admission, the old partners give up a part of their profit share in favour of the incoming partner. Therefore, the goodwill premium brought in cash by the new partner is credited to the old partners’ capital accounts in their sacrificing ratio. The old profit-sharing ratio need not be the sacrificing ratio. Exam tip: calculate sacrificing ratio as old share minus new share before distributing the premium.
Which subject and chapter does this question cover?
This is a Class 12 Accountancy question. Chapter: Reconstitution - Admission of a Partner. Topic: Goodwill Accounting.
