M and N are partners sharing profit in the ratio of 3 : 1. They admit O as a new partner on 1st April, 2022. O brings ₹40,000 as his share of premium and the new profit sharing ratio is 2 : 2  : 1. Identify the correct option related to treatment of Goodwill.

Premium for Goodwill A/c ........ Rs. 40,000
N's Capital A/c Dr. ........ Rs. 30,000
     To M's Capital A/c  ........Rs.70,000

The correct answer is option 4-
Premium for Goodwill A/c ........ Rs. 40,000
N's Capital A/c Dr. ........ Rs. 30,000
     To M's Capital A/c  ........Rs.70,000

Old ratio = 3:1 (M and N)
O admits
New ratio = 2:2:1

Sacrifice = Old share - New share

Sacrifice of M = 3/4 - 2/5
                    = (15-8)/20
                    = 7/20

Sacrifice of N = 1/4 - 2/5
                    = (5-8)/20
                    = -3/20 (gain)

O brings goodwill = ₹40,000 for 1/5th share.
On basis of O's share the goodwill of the firm = 40,000 x 5
                                                                 = ₹2,00,000

Share of N = 2,00,000 x 3/20
                = 30,000

Share of M = 2,00,000 x 7/20
                 = ₹70,000

As N gains so he will also compensate sacrificing partner M.

The journal entry  for the bringing of goodwill by new partner O. The journal entry for this-
Cash A/c Dr. ₹40,000
    To Premium for goodwill ₹40,000

The journal entry for the distribution of goodwill will be-
Premium for goodwill A/c Dr. ₹40,000
N's Capital A/c               Dr.  ₹30,000
     To M's Capital A/c               ₹70,000