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CMA Intermediate · Financial Accounting · Admission of Partner

A and B share profits 3:2. C is admitted for 1/4 share. The new ratio of A and B is to be unchanged between themselves, but A and B decide to give C his share so that old partners keep their old ratio. Goodwill of the firm is valued at Rs 1,20,000 and C brings his share in cash. What is the amount of goodwill premium C brings, and how much does A receive?

C brings Rs 30,000 as goodwill, being 1/4 of Rs 1,20,000. Since A and B give up shares in their old ratio of 3:2, A receives 3/5 of Rs 30,000, which is Rs 18,000, and B receives Rs 12,000.

  1. ARs 30,000; A receives Rs 18,000Correct
  2. BRs 30,000; A receives Rs 12,000
  3. CRs 40,000; A receives Rs 24,000
  4. DRs 24,000; A receives Rs 14,400

Explanation

C's share is 1/4, so his goodwill premium is 1/4 x 1,20,000 = Rs 30,000. A and B sacrifice in the old ratio 3:2, so A receives 3/5 x 30,000 = Rs 18,000 and B receives Rs 12,000. Rs 12,000 as A's share swaps the ratio.

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