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Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in their ……… ratio.
- a)Capital.
- b)New Profit Sharing.
- c)Sacrificing.
- d)Old Profit Sharing.
Correct answer is option 'C'. Can you explain this answer?
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Goodwill brought in by incoming partner in cash for joining in ...
Explanation:
When a new partner joins a partnership, the value of the firm may increase due to the new partner's skills, experience, and resources. This increase in value is known as goodwill. The incoming partner may bring in cash as their contribution towards goodwill.
However, the treatment of this goodwill brought in by the incoming partner depends on the agreement made between the partners. In the absence of any agreement, the goodwill is taken away by the old partners in their sacrificing ratio.
Sacrificing Ratio:
The sacrificing ratio is the ratio in which the old partners agree to reduce their share of profits to accommodate the incoming partner. It is calculated by subtracting the new profit sharing ratio from the old profit sharing ratio.
For example, if the old partners had a profit sharing ratio of 2:1 and the new partner is admitted with a profit sharing ratio of 1:1, the sacrificing ratio would be 2-1:1-1 or 1:0. This means that the old partners will sacrifice one-third of their share of profits to accommodate the new partner.
Goodwill Treatment:
Once the sacrificing ratio is determined, the goodwill brought in by the incoming partner is taken away by the old partners in their sacrificing ratio. This means that the old partners will share the amount of goodwill brought in by the incoming partner in their sacrificing ratio.
For example, if the incoming partner brings in Rs. 1,00,000 as goodwill and the sacrificing ratio is 1:0, the old partners will share the goodwill in the ratio of 1:1. This means that each of the old partners will receive Rs. 50,000 from the goodwill brought in by the incoming partner.
When a new partner joins a partnership, the value of the firm may increase due to the new partner's skills, experience, and resources. This increase in value is known as goodwill. The incoming partner may bring in cash as their contribution towards goodwill.
However, the treatment of this goodwill brought in by the incoming partner depends on the agreement made between the partners. In the absence of any agreement, the goodwill is taken away by the old partners in their sacrificing ratio.
Sacrificing Ratio:
The sacrificing ratio is the ratio in which the old partners agree to reduce their share of profits to accommodate the incoming partner. It is calculated by subtracting the new profit sharing ratio from the old profit sharing ratio.
For example, if the old partners had a profit sharing ratio of 2:1 and the new partner is admitted with a profit sharing ratio of 1:1, the sacrificing ratio would be 2-1:1-1 or 1:0. This means that the old partners will sacrifice one-third of their share of profits to accommodate the new partner.
Goodwill Treatment:
Once the sacrificing ratio is determined, the goodwill brought in by the incoming partner is taken away by the old partners in their sacrificing ratio. This means that the old partners will share the amount of goodwill brought in by the incoming partner in their sacrificing ratio.
For example, if the incoming partner brings in Rs. 1,00,000 as goodwill and the sacrificing ratio is 1:0, the old partners will share the goodwill in the ratio of 1:1. This means that each of the old partners will receive Rs. 50,000 from the goodwill brought in by the incoming partner.
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Goodwill brought in by incoming partner in cash for joining in ...
Sacrificing ratio, (the ratio at which old partner have surrendered a part of their profits to the new partner)
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Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in their ……… ratio.a)Capital.b)New Profit Sharing.c)Sacrificing.d)Old Profit Sharing.Correct answer is option 'C'. Can you explain this answer?
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