CA Foundation Exam > CA Foundation Notes > Principles and Practice of Accounting > Unit 2: Question & Answer - Treatment of Goodwill in Partnership Accounts
Unit 2: Question & Answer - Treatment of Goodwill in Partnership Accounts | Principles and Practice of Accounting - CA Foundation PDF Download
Ques 1. 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.
Ans: (c)
Ques 2. A & B are partners sharing profits and losses in the ratio 5:3. On admission, C brings Rs 70,000 cash and Rs 48,000 against goodwill. New profit sharing ratio between A, B and C are 7:5:4. Find the sacrificing ratio of A:B.
(a) 3:1.
(b) 4:7.
(c) 5:4.
Ans: (a)
Ques 3. Following are the factors affecting goodwill except:
(a) Nature of business.
(b) E ciency of management.
(c) Location of the customers.
Ans: (c)
Ques 4. Weighted average method of calculating goodwill should be followed when:
(a) Profits has increasing trend.
(b) Profits has decreasing trend.
(c) Either ‘a’ or ‘b’.
Ans: (c)
Ques 5. In the absence of any provision in the partnership agreement, profits and losses are shared
(a) In the ratio of capitals.
(b) Equally.
(c) In the ratio of loans given by them to the partnership firm.
Ans: (b)
Practical questions
Ques 1. Wise, Clever and Dull were trading in partnership sharing profits and losses 4:3:3 respectively. The accounts of the firm are made upto 31st December every year. The partnership provided, interalia, that: On the death of a partner the goodwill was to be valued at three years’ purchase of average profits of the three years upto the date of the death after deducting interest @8 percent on capital employed and a fair remuneration of each partner. The profits are assumed to be earned evenly throughout the year. On 30th June, 2016, Wise died and it was agreed on his death to adjust goodwill in the capital accounts without showing any amount of goodwill in the Balance Sheet. It was agreed for the purpose of valuation of goodwill that the fair remuneration for work done by each partner would be Rs 15,000 per annum and that the capital employed would be Rs 1,56,000. Clever and Dull were to continue the partnership, sharing profits and losses equally after the death of Wise.
The following were the amounts of profits of earlier years before charging interest on capital employed.
You are required to compute the value of goodwill and show the adjustment there of in the books of the firm.
Ans: Computation of the value of goodwill:
Adjustment entry for Goodwill
Journal Entry
(Adjusting entry passed for share of goodwill of Wise through remaining partners’ capital accounts in gaining ratio)
The document Unit 2: Question & Answer - Treatment of Goodwill in Partnership Accounts | Principles and Practice of Accounting - CA Foundation is a part of the CA Foundation Course Principles and Practice of Accounting.
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FAQs on Unit 2: Question & Answer - Treatment of Goodwill in Partnership Accounts - Principles and Practice of Accounting - CA Foundation
| 1. What is goodwill in partnership accounts and how is it treated? |  |
Ans. Goodwill in partnership accounts is an intangible asset that represents the reputation, customer base, and other non-quantifiable factors of a business. It arises when a partnership is valued at an amount higher than the sum of its identifiable assets and liabilities. Goodwill is usually recorded in the books of the partnership as a credit to the capital accounts of the partners in their profit-sharing ratio.
| 2. How is the treatment of goodwill different in admission, retirement, and death of a partner? | |
Ans. The treatment of goodwill varies in different situations. In the admission of a new partner, the incoming partner pays a certain amount of money to the existing partners for acquiring their share of goodwill. The amount paid is then credited to the capital accounts of the existing partners in their profit-sharing ratio.
In the retirement of a partner, the retiring partner's share of goodwill is debited from the capital accounts of the remaining partners in their profit-sharing ratio. The retiring partner may receive a portion of the goodwill amount in cash or as an installment.
In the case of a partner's death, the deceased partner's share of goodwill is debited from the capital accounts of the remaining partners in their profit-sharing ratio. The legal representative of the deceased partner is entitled to receive the deceased partner's share of goodwill in cash or as an installment.
| 3. How is the treatment of goodwill affected by changes in the profit-sharing ratio? | |
Ans. When there is a change in the profit-sharing ratio of partners, the existing balance of goodwill needs to be adjusted. The adjustment is made by recording a journal entry to transfer the existing balance of goodwill to the capital accounts of the partners in their new profit-sharing ratio. The difference between the existing balance of goodwill and the adjusted value is then distributed among the partners' capital accounts in their new profit-sharing ratio.
| 4. Can goodwill be written off or reduced in partnership accounts? | |
Ans. Yes, goodwill can be written off or reduced in partnership accounts. If the goodwill of a partnership is impaired or its value decreases substantially, the partners may decide to write off or reduce the goodwill amount. The write-off or reduction is recorded by debiting the capital accounts of the partners in their profit-sharing ratio and crediting the goodwill account.
| 5. How is the treatment of goodwill different in case of dissolution of a partnership? | |
Ans. In the case of dissolution of a partnership, the treatment of goodwill differs from other situations. The goodwill is generally not distributed among the partners but is sold along with other assets of the partnership. The amount received from the sale of goodwill is used to settle the liabilities of the partnership and distribute the remaining amount among the partners in their profit-sharing ratio. If the goodwill cannot be sold, it is written off by debiting the capital accounts of the partners in their profit-sharing ratio and crediting the goodwill account.
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