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CMA Intermediate · Financial Accounting · Admission of Partner

A and B share profits 3:2. C is admitted for a 1/5 share. C brings Rs 40,000 as his share of goodwill in cash, and the firm's goodwill is not to be shown in the books. The goodwill amount is credited to the old partners in their sacrificing ratio. What is the first step in finding the amount credited to each old partner?

The first step is to determine the sacrificing ratio of A and B, because the goodwill premium brought in by the new partner is credited to the old partners in the ratio in which they give up their share, not equally or in the old ratio.

  1. ADetermine the sacrificing ratio of A and BCorrect
  2. BDebit Goodwill account with Rs 40,000
  3. CCredit C's capital account with Rs 40,000
  4. DDivide the goodwill equally between A and B

Explanation

Premium brought in by the new partner is shared by the old partners in their sacrificing ratio, so that ratio must be computed first. Sacrifice = old share minus new share. The other options either record goodwill in the books, which is not wanted, or ignore the sacrificing ratio.

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