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CMA Intermediate · Financial Accounting · Amalgamation of Partnership Firms

Which statement correctly describes the treatment of goodwill when two firms amalgamate and the new firm's books are to be opened without raising goodwill?

When the new firm does not record goodwill, any goodwill in the old firms' books is written off against the old partners' capital accounts in their old profit-sharing ratio before amalgamation, so the new firm's opening balance sheet excludes it.

  1. AGoodwill of the old firms, if any in their books, is written off through the old partners' capital accounts in their old profit-sharing ratio before amalgamationCorrect
  2. BGoodwill is carried forward in the new firm at the book value of the old firms
  3. CGoodwill is transferred to the partners' current accounts of the new firm
  4. DGoodwill is credited to the creditors of the old firms

Explanation

If the new firm does not intend to record goodwill, the old firms' existing goodwill is written off through the old partners' capital accounts in their old profit ratio. Carrying forward book goodwill would contradict the stated condition. Goodwill is never credited to creditors.

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