The document discusses the treatment of goodwill when admitting or retiring a partner from a partnership.
When admitting a new partner C, the goodwill of the existing partnership (Rs. 30,000) is divided according to the new profit sharing ratios. C's share of goodwill (Rs. 6,000) can either be paid in cash or adjusted against the capital accounts of existing partners A and B.
When a partner retires, there are three methods to account for goodwill - raising the total goodwill, raising only the retiring partner's share, or directly adjusting the retiring partner's capital against the gaining partners' capital. The document provides examples of journal entries for each method.
Goodwill is an intangible asset and valued only when there is a change in business like admission of a partner, retirement of a partner and amalgamation of firms
Goodwill is an intangible asset and valued only when there is a change in business like admission of a partner, retirement of a partner and amalgamation of firms
This Slideshow describes about the Retirement and Death of Partners, Rights of Retiring Partners , Adjustments required at the time of Retirement , Calculating Gaining Ratios, etc..
This Slideshow describes about the Retirement and Death of Partners, Rights of Retiring Partners , Adjustments required at the time of Retirement , Calculating Gaining Ratios, etc..
1. Treatment of Goodwill December 9, 2010
Treatment of Goodwill at the time of Admission of Partner
Ex. A and B are partners sharing profits & losses in the ratio of 3 : 2. C is
admitted. New profit sharing ratio of A, B & C is 5:3:2. Sacrifice ratio is 1:1.
Goodwill of the firm = 30,000.
2
C's share of Goodwill = 30,000 = 6,000.
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(A) Goodwill brought in Cash (C) Goodwill is raised
(1) If C brings in cash for Goodwill. Goodwill A/c Dr. (Total) 30000
Cash A/c Dr. 6000 To A’s Capital A/c 18000
To Goodwill A/c 6000 To B’s Capital A/c 12000
(C’s share in Goodwill) (In Old Ratio)
(2) Goodwill A/c Dr. 6000
To A’s Capital A/c 3000
To B’s Capital A/c 3000
(In Sacrific Ratio 1 : 1)
(B) If Goodwill amount is withdrawn (D) If Goodwill is written off
A’s Capital A/c Dr. A’s Capital A/c Dr. 15000
B’s Capital A/c Dr. B’s Capital A/c Dr. 9000
To Cash A/c C’s Capital A/c Dr. 6000
(Actual Amount withdrawn) To Goodwill A/c 30000
(In New Ratio)
Goodwill treatment in retirement :
Method I : Goodwill of the firm is raised
It means entire firms Goodwill is recorded as an Asset.
Method II : Goodwill of the retiring partner is raised:
It means only retiring partners share in Goodwill is recorded as an Asset.
Method III : Goodwill adjustment without opening goodwill A/c : It means
retiring partner’s share of goodwill is adjusted directly to the capital A/c of the
gaining partners.
eg. A,B & C are partners & C retires
Old Profit Sharing Ratio 3 : 2 : 1 (A, B & C)
New Profit Sharing Ratio 3 : 2 (A & B)
Goodwill of firm = 30,000
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2. Treatment of Goodwill December 9, 2010
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C's share of Goodwill = 30,000 = 5,000.
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Method I Method II
Total Goodwill of firm is raised C’s share of Goodwill is raised
Goodwill A/c Dr. 30,000 Goodwill A/c Dr. 5,000
To A’s Capital A/c 15,000 To C’s Capital A/c 5,000
To B’s Capital A/c 10,000
To C’s Capital A/c 5,000
(O R. i.e. 3:2:1)
If Goodwill is written off. If Goodwill is written off
A’s Capital A/c Dr. 18,000 A’s Capital A/c Dr. 3,000
B’s Capital A/c Dr. 12,000 B’s Capital A/c Dr. 2,000
To Goodwill A/c 30,000 To Goodwill A/c 5,000
(N R 3:2) (In Gain /Agreed Ratio)
Method III : It means Retiring partners share of Goodwill is adjusted directly
through the capital a/c’s of the Gaining Partners in their Gain Ratio.
If Goodwill adjustment is to be done without opening Goodwill A/c directly in
Partners Capitals
A’s Capital A/c Dr. 3000 (Remaining Partners)
B’s Capital A/c Dr. 2000
}
To C’s Capital A/c (Retiring Partner)
(C’s share of Goodwill) 5000
(In Gain Ratio)
NR-means New Ratio .
OR-means Old Ratio .
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