Question

When goodwill is revalued at the time of admission of a partner, how goodwill is distributed amongst the old partners?

• A. Equally.
• B. Capital ratio.
• C. Sacrifice ratio.
• D. New profit sharing ratio.

Answer 1

Answer: (C)

Sacrifice ratio.

In case of admission of a partner, goodwill cannot be raised in the books of the firm because in consideration in money or money;s worth is paid for it. If incoming partner brings any premium over and above his capital contribution at the time of his admission, such premium should be distributed to other existing partners. When a new partner is admitted to a firm, the old partner generally sacrifice in favour of the new partner in terms of lower profit sharing ratio in the future. Therefore, the premium for goodwill brought in by the new partner shall be given to the existing partners on the basis of profit sacrificing ratio.