(Accountancy) : CBSE Class XII Important Questions Accounts (2008)

Disclaimer: This website is NOT associated with CBSE, for official website of CBSE visit - www.cbse.gov.in

Accountancy : CBSE Class XII Important Questions Accounts (2008)

Recommendation of Accounting Standard 10 (AS-10) – Issued by The Institute of Chartered Accountants of India

According to AS-10 goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. Thus, in case of admission or retirement/death of a partner or in case of change in profit sharing ratio among partners, goodwill, following the accounting standard should not be raised in the books of the firm because no consideration in money or money worth is paid for it. If any partner brings any premium over and above his capital contribution at the time of his admission, such premium should be distributed to other existing partners.
If goodwill is evaluated at the time of change in the constitution of the firm (by way of admission/retirement/death/change in profit sharing ratio), goodwill should not be brought in books since it is inherent goodwill. If it is raised then it should be immediately written off.

Treatment of goodwill

Goodwill of a firm is the result of the efforts made by the existing partners in the past. Therefore, at the time of admission, the new partner who acquires right to share future profit should compensate the existing partners by making payment to them. Such payment is called premium (goodwill). Goodwill is a way for compensating exiting partners for the sacrifice they make on the admission of a new partner. Form accounting point of view, there may be different situations related to treatment of goodwill which are given below:

 

Case 1. The new partner brings his share of premium (goodwill) in cash and the same is paid to old partners privately (i.e. outside the business). In this case, no journal entry is to be made in the books of accounts for premium.

Illustration 1. (When goodwill is paid privately) A, B and C are partners in firm sharing profits in the ratio of 3:2:1. On April 1, 2003 they admit D as a new partner for 1/4th share. D paid Rs. 30,000 privately to A, B and C as his share of premium. Record the accounting treatment, if any, in the books of A, B and C for the same.

 

Solution: Since D has paid goodwill premium to A, B and C privately outside the business, hence no journal entry will be recorded in the books of the firm.

Case 2. When new partner brings goodwill/premium in cash which is retained in the business.

Journal Entries:

  1. Cash/Bank A/c ………………Dr. (Goodwill + Capital amount)
    To Premium/Goodwill A/c (Goodwill Amount)
    To New partner’s capital A/c (Capital amount)
    (Being cash brought by new partners as his share of goodwill and capital)

  2. Premium A/c ……………….Dr.
    To Sacrificing Partner’s Capital/Current A/c
    (Being Premium for goodwill is shared by existing partners in their sacrificing ratio)
    Alternatively, entry nos. (i) and (ii) may be combined as under:
    Cash/Bank A/c ……………..Dr.
    To Sacrificing Partners’ Capital/Current A/c


Illustration 2. (When brought in cash and retained in business)
Lakshmi and Ganesh are partners in a business and sharing profits and losses in the ratio of 3:2 respectively. Their capitals are Rs. 40,0000 and 20,000 respectively. They admit Shanker and give him 1/6 share of future profits on the following terms. That (a) Shanker has to bring Rs. 25,000 as his capital, and (b) Rs. 5,000 as his share of Goodwill. Give Journal entries these transactions.

Cash/Bank A/c………………………………….Dr.
          To Premium A/c (Goodwill)
          To Shanker’s Capital A/c
(Being the amount brought in cash by Shanker as his capital and share of goodwill)

30,000

 

 

5,000

5,000
25,000

 

3,000
2,000

Premium A/c …………………………………… Dr.
           To Lakshmi’s Capital A/c
           To Ganesh’s Capital A/c
(Being goodwill premium brought by Shanker transferred to the capital accounts of Lakshmi and Ganesh in their sacrificing ratio)

 

 

Partners’ Capital Accounts

Particulars

Lakshmi

Ganesh

Shanker

Particulars

Lakshmi

Ganesh

Shanker

To Balance cld

43,000

22,000

25,000

By Balance b/d
By Bank A/c
By Premium A/c

40,000

3,000

20,000

2,000

 

25,000

43,000

22,000

25,000

43,000

22,000

25,000

 

 

Illustration 4. On 1st January, 2003, A and B, sharing profits 2/3 and 1/3 respectively, agree to admit C into partnership on condition that he pays Rs. 30,000 as capital and Rs. 9,000 for 1/6 share of goodwill which he acquires equally from A and B.

Journal Entries

2003
Jan . 1

 

Jan. 1

Cash/Bank A/c.……………………….Dr.
          To Premium A/c (Goodwill)
          To C’s Capital A/c
 (Being the amount brought in cash by C as his capital and share of goodwill

39,000

 

 

9,000

 

9,000
30,000

 

4,500
4,500

Premium A/c ………………………… Dr.
           To A’s Capital A/c
           To B’s Capital A/c
(Being goodwill premium brought by C transferred to the capital accounts of A and B in their sacrificing ratio)

 

Case 3. When goodwill is brought in by the new partner and premium money is withdrawn by the old partners fully or partially

Journal Entries:

Sacrificing Partner’s Capital A/c ………….Dr [Amount withdrawn by Sacrificing partners]
To Cash/Bank A/c

Illustration 5. In the illustration 4.

  1. If the full amount of goodwill withdrawn by the old partners.

  2. If half of the amount is withdrawn by the old partners

 

Solution:

Journal Entries

(a)

 

 

(b)

A’s Capital A/c.……………………….Dr.
B’s Capital A/c………………………..Dr.
          To Cash A/c
 (Being the full amount of goodwill withdrawal by the old partners)

4,500
4,500

 

2,250
2,250

 

9,000

 

 

4,500

A’s Capital A/c.……………………….Dr.
B’s Capital A/c………………………..Dr.
          To Cash A/c
(Being the half amount of goodwill withdrawal by the old partners)

 

Case 4. When new partner brings his share of premium/goodwill in kind.

  1. Assets A/c …………………….Dr. (Individually)
    To New Partner’s Capital A/c
    To Premium (Goodwill) A/c
    (Being assets contributed by new partner on his admission as his capital and his share of goodwill premium)

  2. Premium A/c ………………….Dr.
    To Sacrificing Partners’ Capital A/cs
    (Being Premium for goodwill is shared by existing partners in their sacrificing ratio)

 

Illustration 6. (Admission of a partner who brings in capital and goodwill in cash and kind) A and B carried in the ratio of 2:1 respectively. They admitted C on 1st April, 2003, for 2/7ths share. The actual value of goodwill, however, on that date was Rs. 21,000. C contributed the following assets towards payment of his capital and goodwill:

Cash

Rs. 1,000

Sundry debtors

Rs. 5,000

Stock

Rs. 6,000

Goodwill

Rs. 5,000

Pass necessary entries in the journal to give effect to the above. Also gives the new profit-sharing ratio of the new partners.

 

Solution:

Journal Entries

2003
April 1

Cash A/c.………………………. Dr.
Sundry Debtors A/c ..………….. Dr.
Stock A/c ……………………….Dr.
Goodwill A/c …………………   Dr.
          To C’s Capital A/c
           To Premium A/c
 (Being assets contributed by C on his admission as his capital and his share of goodwill premium)

1,000
5,000
6,000
5,000

 

 

6,000

 

 

11,000
6,000

 

 

4,000
2,000

 

April 1

Premium A/c.……………………….Dr.
          To A’s Capital A/c
          To B’s Capital A/c
(Being Premium for goodwill is shared by existing partners in their sacrificing ratio)

 

Working Note:

  1. Calculation of New Profit-Sharing Ratio:
    A’s Share =2/3 of 5/7 = 10/21
    B’s Share =1/3 of 5/7 =5/21
    C’s Share 2/7 of 3/3 = 6/21
    New Ratio 10:5:6

  2. C’s share in goodwill = Rs. 21,000 2/7=Rs. 6,000

  3. Calculation of sacrificing ratio:
    A’s Sacrificing = 2/3 – 10/21 = 12/23
    B’s Sacrificing = 1/3 – 5/21 =6/23
    Thus, Sacrificing Ratio between A & B = 2:1

 

Illustration 12. (Hidden Goodwill). A and B are partners with capitals of Rs. 1,60,000 and Rs. 1,20,000 respectively. They admit C as a partner on Jan. 1, 2003, for 1/4th share in the profits of the firm. C brings Rs. 1,60,000 as his share of capital. Give Journal entries on C’s admission.

Solution:

Journal Entries

2003
Jan. 1

 

Jan. 1

 

Cash A/c …………………………….Dr.
     To C’s Capital A/c
(Being amount of capital bought in by C in the firm)

1,60,000

 

50,000

 

1,60,000

 

25,000
25,000

C’s Capital A/c ……………………. Dr.
      To A’s Capital Account A/c
      To B’s Capital Account A/c
(Being Capital Account of A and B credited in the sacrificing ratio for C’s share of goodwill on his admission)

Working Notes:

  1. In the absence of any agreement profits and divided equally.

  2. Calculation of Hidden Goodwill
    C’s Capital = Rs. 1,60,000
    C’s Share = ¼
    (i) Total Capital of new Firm = Rs. 1,60,000 4
    = Rs. 6,40,000
    (ii) A, B and C’s Capital = Rs. 1,60,000+Rs. 1,20,000_Rs. 1,60,000
    = Rs. 4,40,000
    Goodwill of the firm. = 6,40,000-4,40,000 = 1,00,000.

 

BACK