Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Admission of a Partner

Question:

Why the amount of goodwill is paid by new partner?

Options:

For the payment of capital to firm

For sharing the profit by old partners

For purchase of assets by all partners

None of these

Correct Answer:

For sharing the profit by old partners

Explanation:

The premium for goodwill is an additional amount paid by the new partner to compensate to the old partners for the part of profit taken up by him. When this amount of premium is paid privately by the incoming partner to the old partner's, no entry is recorded in the books of accounts.