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treatment of goodwill, when new partner brings no cash for goodwill.

Actually this question is about the treatment of current A/c in case of admission when goodwill is not paid by the partner.

asked Sep 22, 2015 in Partnership-Admission by daksh gupta (25 points) 4,837 views

1 Answer

0 votes

In case C (New Partner) is unable to bring his share of goodwill, then adjustment for goodwill be made through the capital accounts/current accounts of the partners. 

Example: A and B share profits equally and they admit C for 1/3 share in the firm and he brings Rs.100000 as capital.  Goodwill for this purpose is valued at Rs.60000 but C is unable to bring in his share of goodwill.  How adjustment for goodwill will be made?

IMP:    Since neither new ratio is given nor sacrifice made by old partners is given, we may safely assume that old partners sacrificed in their old profit sharing ratio i.e. 1:1.  Journal entries to be passed are:

Cash A/c          Dr    100000

  To C’s Capital A/c                      100000

C’s Capital A/c    Dr.    20000

  To A’s Capital A/c                        10000

  To B’s Capital A/c                        10000

(A and B credited in the sacrificing ratio for C’s share of Goodwill)

Note: 1. In this question there is no mention whether the capital accounts are maintained as Fixed or Flucating.  In such a case it is always assumed that capital accounts are Flucating.

2.  In case question mentions that their capital accounts are Fixed, then adjustment on account of goodwill will be made through Current Accounts as given below:

Cash A/c          Dr    100000

  To C’s Capital A/c                      100000

C’s Current A/c    Dr.    20000

  To A’s Current A/c                        10000

  To B’s Current A/c                        10000

(A and B credited in the sacrificing ratio for C’s share of Goodwill)

answered Sep 23, 2015 by jbsclasses (3,971 points)
But Sir According to AS-26  the adjustment of goodwill in this case will be through current account of partners.  I am confused because My Class Teacher has told us to do following entries in this case:
1.  C's Capital A/c - Dr.
      To A's Capital A/c
       To B's Capital A/c
2. C's current A/c - Dr.
     To C's Capital A/c

Please tell me if these entries are right or not.........

     Accounting Standard 26 deals with intangible assets.  This Standard says that self generated intangible assets like goodwill should not be shown in the Balance Sheet.  AS 26 does does not deal with the treatment of goodwill in case of admission/retirement of partner.  It simply says, an intangible asset should be shown in books only if it has been purchased.  Let us now discuss how to compensate old partners when a new partner does not bring  cash for his share of goodwill, In the example I have given above C should have brought Rs.120000 (Rs.100000 as capital and Rs.20000 for goodwill).  Sooner or later C will have to give Rs.20000 to A and B.   If you look at this practically, if C does not have Rs.20000 presently, what options A and B have.  A and B can tell C that (a) we will debit (reduce) your capital account with Rs.20000 now and take credit in our capital accounts.  C can later on bring Rs.20000 and make his capital equal to Rs.100000.  Second alternative is that A and B can debit C's current account with Rs.20000 and take credit in their capital accounts.  At the end of the year when profit is credited to C's current account, he will withdraw Rs.20000 less.  This also amount to payment by C of Rs.20000.

     As I stated in my earlier reply, if nothing is mentioned about the nature of capital accounts (fixed or fluctuating), we assume them to be fluctuating, hence all adjustments including for goodwill are carried out through capital account (first treatment above).

     Secondly, if you look at the language of my question above 'admit C for 1/3 share in the firm and he brings Rs.100000 as capital', this can be interpreted as that C's capital is to be fixed at Rs.100000 and his current account will be debited for the amount of goodwill not brought by C.

    First alternative suggested by me is also suggested in the book by T.S. Grewal.  

    I think you just give a note of your assumption and can use any of the above treatments.  Remember AS 26 does not talk about these entries through current or capital accounts.

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