Reconstitution of a partnership Firm:Admission of a partner Important Questions for CBSE Class 12 Accountancy Treatment of Goodwill
1. Accounting Treatment of Goodwill When a new partner is admitted, his share in future profits of the firm is equal to the sacrifice of profit by an existing partner or partners of the firm, the amount he pays to compensate this sacrifice is called goodwill.
2. Various cases related to the treatment of goodwill
(i) When premium for goodwill is paid privately by new partner.
In case a new partner pays premium to the old partners privately or directly or outside the business, it will not be recorded because it is an out of business transaction. However, entry will be passed for capital brought in by new partner.
(ii) When premium for goodwill is brought in business by new partner in cash and retained in the business
(a) Write-off the existing goodwill (if any) appearing in the books of the firms
Old Partners’ Capital A/c Dr [In old ratio]
To Goodwill A/c
(b) For bringing premium for goodwill and capital in cash:
Cash/Bank A/c Dr
To Premium for Goodwill A/c
To New Partner’s Capital A/c
(c) For distributing premium to sacrificing (old) partners in their sacrificing ratio:
Premium for Goodwill A/c Dr
To Sacrificing Partners’ Capital A/c
(iii) When premium for goodwill is brought in kind
(a) For bringing premium for goodwill and capital in assets:
Assets A/c Dr
To Premium for Goodwill A/c
To New Partner’s Capital A/c
(b) For distributing premium to sacrificing (old) partners in their sacrificing ratio:
Premium for Goodwill A/c Dr
To Sacrificing Partners’ Capital A/c
(iv) When premium for goodwill is brought in by new partner and is withdrawn by old (sacrificing) partners folly or partly.
(a) For bringing premium for goodwill in cash by new partner
Cash/Bank A/c Dr [Amount of premium]
To Premium for Goodwill A/c
(b) For sharing of premium for goodwill by sacrificing partners
Premium for Goodwill A/c Dr [Amount of premium]
To Sacrificing Partner’s Capital A/c (in sacrificing ratio)
(c) For withdrawal of premium money by sacrificing partners fully/partly ?
Sacrificing Partner’s Capital A/c (Amount withdrawn) Dr
To Cash/Bank A/c
(v) When a new partner brings only a part of premium for goodwill in cash
(a) For amount brought in by incoming Partner
Cash/Bank A/c Dr
To Premium for Goodwill A/c
To New Partner’s Capital A/c
(b) For distributing the total goodwill due from incoming partner to sacrificing (old) partners in their sacrificing ratio
Premium for Goodwill A/c Dr
New Partner’s Capital/ Current A/c Dr
To Sacrificing (old) Partners’ Capital/ Current A/c
(vi) When the new partner is unable to bring his share of premium for goodwill in cash or kind
New Partner’s Capital/Current A/c Dr
To Sacrificing (old) Partners’ Capital/Current A/c
3. Hidden Goodwill Hidden or inferred goodwill is the excess of desired total capital of the firm over the actual combined capital of all the partners.
In case, the value of goodwill is not given at the time of admission of a new partner, it is required to be calculated on the basis of an inferred method of profit sharing ratio or capitalisation.
Previous Years Examination Questions
1 Mark Questions
1.. Under what circumstances will the premium for goodwill paid by the incoming
partner not be recorded in the books of accounts. (Compartment 2014)
Ans. When the incoming partner pays his share of goodwill privately to the sacrificing partners, outside the business, then no entry is passed in the books of the firm.
2. State the need for treatment of goodwill on admission of a partner. (Delhi 2010)
Ans. When a new partner is admitted, his share in future profits of the firm is equal to the sacrifice of profit by an existing partner or partners of the firm. The amount he pays to compensate this sacrifice, is in the form of goodwill. Therefore, it is important to treat goodwill at the time of admission of a partner.
2 Marks Question
3. A and B are partners with capitals of Rs. 90,000 and Rs. 1,00,000 respectively. They decide to admit C into the partnership for 1/4 th share in the future profits. C is to bring a sum of Rs. 80,000 as his capital. Calculate the amount of goodwill. (All India 2008)
4. Hemant and Nishant were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were Rs. 1,60,000 and Rs. 1,00,000 respectively. They admitted Somesh on 1st April, 2013 as a new partner for 1/5 share in the future profits. Somesh brought Rs. 1,20,000 as his capital. Calculate the value of goodwill of the firm and record necessary journal entries for the above transactions on Somesh’s admission.
(All India 2014)
5. Abhay and Beena are partners in a firm. They admit Chetan as a partner with l/4th share in the profits of the firm. Chetan brings Rs. 2,00,000 as his share of capital. The value of the total assets of the firm is Rs. 5,40,000 and outside liabilities are valued at Rs. 1,00,000 on that date. Give the necessary entry to record goodwill at the time of Chetan’s admission. Also show your working notes.
6. Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with l/5th share in the profits of the firm. Ajay brings Rs. 5,00,000 as his share of capital. The value of the total assets of the firm was Rs. 15,00,000 and outside liabilities were valued at Rs. 5,00,000 on that date. Give the necessary journal entry to record goodwill at the time of Ajay’s admission. Also, show your workings. (All India 2013)
7. A and B were partners in a firm sharing profits and losses in the ratio of 3 : 2. They admitted C as a new partner for 3/7th share in the profits and the new profit sharing ratio will be 2 : 2 : 3. C bought tRs. 2,00,000 as his capital and Rs. 1,50,000 as premium for goodwill. Half of their share of premium was withdrawn by A and B from the firm. Calculate sacrificing ratio and pass necessary journal entries for the above transactions in the books of the firm. (All India 2009)
8. A and B were partners in a firm sharing profits in the ratio of 4 : 3. They admitted C as a new partner for 3/7th share in the profits of the firm. The new profit sharing ratio will be 2 : 2 : 3. C brought Rs. 2,00,000 as his capital and Rs. 60,000 for his share of premium as goodwill, half of which was withdrawn by A and B from the firm. Calculate sacrificing ratio and pass necessary journal entries in the books of the firm for the above transactions. (All India 2009)
6 Marks Questions
9. A and B were partners in a firm sharing profits and losses in the ratio of 5 : 3. They admitted C as a new partner. A surrendered l/3rd of his share in favour of C and B surrendered 1/4 th of his share in favour of C. C brought Rs. 1,50,000 for his capital and Rs. 58,000 for his share of goodwill. Calculate new profit sharing ratio of A, B and C, sacrificing ratio of A and B and pass necessary journal entries for the above transactions on C’s admission. (Delhi 2008)
10. B and C were partners in a firm sharing profits and losses in the ratio of 4 : 3. They admitted D as a new partner for l/4th share in the profits which he acquired from B and C in 3 : 4 ratio. D brought Rs. 1,80,000 for his capital and Rs. 42,000 for his 1/4th share in goodwill. Calculate new profit sharing ratio of B, C and D and pass necessary journal entries for the above transactions on D’s admission in the books of the firm. (Delhi 2008)
11. K and Y were partners in a firm sharing profits in 3 : 2 ratio. They admitted Z as a new partner for l/3rd share in the profits of the firm. Z acquired his share from K and Y in 2 : 3 ratio. Z brought Rs. 80,000 for his capital and Rs. 30,000 for his l/3rd share as premium. Calculate the new profits sharing ratio of K, Y and Z and pass necessary journal entries for the above transactions in the books of the firm. (All India 2008)
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