Question

The journal entry for treatment of goodwill, when a new partner brings his share of goodwill in cash and one of the old partners gains, involves the following
(A) Gaining Partner’s Capital Account is debited
(B) Premium for Goodwill Account is debited
(C) Sacrificing Partner’s Capital Account is credited
(D) Gaining Partner’s Capital Account is credited

• A. (A), (B), and (D) only
• B. (A), (B), and (C) only
• C. (A), (B), (C), and (D)
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

Accounting Treatment for Goodwill Brought in by a New Partner 

When a new partner is admitted into an existing partnership, they often bring in a monetary contribution, referred to as goodwill, to compensate the existing partners for the firm's established reputation and value. Proper accounting treatment of this goodwill is essential.

Accounting Entry for Goodwill

The accounting entry when a new partner introduces goodwill depends on the method used for its treatment. There are two primary methods for accounting goodwill:

• Premium Method
• Revaluation Method

In the Premium Method, the goodwill amount is credited to the sacrificing partners' capital accounts.

Premium Method - Accounting Entry

• Debit - Cash/Bank Account
• Credit - Premium for Goodwill Account

Journal Entry When Sharing Goodwill

Under this method, the sacrificing partner(s) share the goodwill contribution.

• Debit - Premium for Goodwill Account
• Credit - Sacrificing Partner's Capital Account

Conclusion

Based on the discussion above, Option 3 holds some merit.

Answer 2

Goodwill Recording: Balancing Gains and Sacrifices 

Goodwill is recorded in accounting to balance the gains and sacrifices made by partners in various situations, such as:

• Admission of a new partner
• Retirement or death of a partner
• Changes in the profit-sharing ratio among existing partners

The underlying principle is that when a partner joins or leaves a firm, or when the profit-sharing ratio changes, it affects the future profitability and, therefore, the value attributable to each partner.

Here's a breakdown:

• Gaining Partner(s): Partners who benefit from the change (e.g., a new partner joining or existing partners increasing their profit share) gain an advantage in future profits. They compensate the sacrificing partners.
• Sacrificing Partner(s): Partners who give up a portion of their profit share (e.g., existing partners giving up a share to a new partner or partners reducing their share due to a change in ratio) make a sacrifice. They receive compensation from the gaining partners.

Goodwill, in this context, represents the monetary value assigned to the firm's reputation and expected future earnings. By recording goodwill and adjusting the partners' capital accounts, the accounting system ensures that the partners are fairly compensated for their respective gains and sacrifices.

In summary, the recording of goodwill is a mechanism to equitably distribute the value of the firm's intangible assets among the partners, reflecting the changes in their ownership and future profit entitlements.