The correct answer is option 4- (A)-(III), (B)-(IV), (C)-(I), (D)-(II).
LIST I
(Type of goodwill)
|
LIST II
(Treatment to done)
|
| (A) Existing Goodwill |
(III) Written off |
| (B) Goodwill premium |
(IV) Credited to sacrificing partner |
| (C) Goodwill paid privately |
(I) No entry passed |
| (D) Hidden goodwill |
(II) Calculated on the basis of capital of partners |
(A) Existing Goodwill-(III) Written off.
When a new partner is admitted, goodwill of the business is valued afresh. For this, the goodwill that already appears in the books of accounts is written off and is transferred to the old partner's capitals accounts in their old profit-sharing ratio. The old partner's capital accounts are debited with their share of goodwill. To ensure fairness and that no partner is unfairly disadvantaged or benefitted by the change, the existing goodwill is written off or adjusted in their old ratio. The journal entry for this- Partner's Capital A/c Dr. To Goodwill A/c .
(B) Goodwill premium- (IV) credited to sacrificing partner.
When a new partner is admitted to the partnership, the existing partners may need to make a sacrifice in their profit-sharing ratios to accommodate the new partner. The sacrifice ratio is the ratio in which existing partners agree to reduce their shares in favor of the new partner. It is calculated by deducting new new ratio from old ratio. When the new Partner brings goodwill in cash. The amount of premium brought in by the new partner is shared by the existing partners in their ratio of sacrifice. The following journal entry will be passed- Premium for goodwill A/c Dr. To Partner's Current/Capital A/c.
(C) Goodwill paid privately- (I) no entry passed.
The amount of premium brought in by the new partner is shared by the existing partners in their ratio of sacrifice. If this amount is paid to the old partners directly (privately) by the new partner, no entry is passed in the books of the firm.
(D) Hidden goodwill- (II) Calculated on the basis of capital of partners
Hidden Goodwill refers to the goodwill that exists in a partnership but is not shown in the books and accounts. It is typically not disclosed to the partners and is often inferred from the arrangement of capital and profit- sharing ratios. Suppose, A and B are partners sharing profits equally with capitals of Rs. 45,000 each. They admitted C as a new partner for one-third share in the profit. C brings in Rs. 60,000 as his capital. Based on the amount brought in by C and his share in profit, the total capital of the newly constituted firm works out to be Rs.1,80,000 (Rs. 60,000 × 3). But the actual total capital of A, B and C works out as Rs. 1,50,000 (Rs. 45,000 + Rs. 45,000 + Rs. 60,000). Hence, it can be inferred that the difference is on account of goodwill i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000). Which is to be shared equally (old ratio) by A and B. This shall raise their capital accounts to Rs. 60,000 each and total capital of the firm to Rs. 1,80,000. In this, C’s Current account will be debited by Rs. 10,000 (his share of goodwill) and A and B’s Capital accounts credited by Rs. 5,000 each. |
