Question

When required amount for premium for goodwill is not brought in by new partner, goodwill account is raised in the books of the firm by debiting goodwill account and crediting partners capital account in old profit sharing ratio and written off in ______ if it agreed not show goodwill in the books of the firm OR ALTERNATIVELY premium for goodwill should be adjusted through partners capital account by debiting new partners share of goodwill to his account and crediting old partners capital accounts in _________.

• A. new profit sharing ratio, sacrificing ratio
• B. old profit sharing ratio, sacarificing ratio
• C. sacrificing ratio, new profit sharing ratio
• D. capital ratio, new profit sharing ratio

Answer 1

Answer: (A)

new profit sharing ratio, sacrificing ratio

Accounting treatment of goodwill in case of a admission of a new partner:

If the 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 partners 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.

There can be two ways for the treatment of goodwill:

1. Goodwill account is raised in the books of the firm by debiting goodwill account or crediting partners capital A/c in old ratio and written off in new profit sharing ratio.

2. Premium for goodwill should be adjusted through partners capital account by debiting new partners share of goodwill to his account and crediting old partners capital account in sacrificing ratio.