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Buyer may be willing to pay more for a business as a going concern because of: - Good location - Good customer relations - Good reputation - Well-known products - Experienced and efficient employees and management team - Good relation with suppliers 2 Goodwill Different cases of Treatment of Goodwill on Admission. Treatment of Goodwill on the admission of a new partner 1. It is that extra value which is paid to the selling company at the time of acquisition of company. The adjustment entries are different and recorded on the basis of treatment of goodwill, in the case of admission of the new partner. 1. When goodwill is paid privately. When goodwill is brought in cash or in kind. You will only need to apportion the new profit sharing ratio to this new partner. Old partners must be compensated by the new partner for sacrificing their share of profit, by way of goodwill. C brings in Rs.30,000 as capital and Rs.10,000 as goodwill. The above transaction for admission of partner via goodwill method would be recorded as follows: Answers The accounting treatment of the admission of a new partner will vary depending on which accounting method is adopted. The adjustment entries are recorded in the books of account for adjustment of goodwill. 1. They admit C into partnership for 1/5th share. 3,000. The act of admitting new partner also leads to the reduction in the future profit sharing ratio of the existing partners. 2. Donald is admitted to the partnership firm as new partner. A and B are partners in a firm sharing profits and losses in the ratio of 3: 2. In addition to capital, the new partner may contribute towards goodwill. Accounting entries for treatment for goodwill in case of admission, retirement or death of a partner, also methods of valuation of goodwill. Following is the Revaluation account prepared after the admission of … Accounting Treatment of Goodwill When a new partner is admitted, his share in future profits of the firm is equal to the sacrifice of profit by an existing partner or partners of the firm, the amount he pays to compensate this sacrifice is called goodwill. What happens to treatment of goodwill on new admission of a partner? Accounting treatment for goodwill on admission of a partner is disccussed below: 1. At the time of admission of C, goodwill appears in the Balance Sheet of A and B at Rs. Journal Entry for the treatment of goodwill Admission of a Partner : Example 8. Treatment of Goodwill on Admission. This goodwill is distributed in the sacrificing ratio to the old partners who sacrifice. Goodwill is an intangible asset. For this Donald invests $600,000 in the form of cash. Reconstitution of a partnership Firm:Admission of a partner Important Questions for CBSE Class 12 Accountancy Treatment of Goodwill. 3. The various accounting treatment of Goodwill as shown as follows: – 1. Using the goodwill method the capital allocated to the new partner must not be less than the amount invested, and the capital accounts of the existing partners must not be reduced. 1 Accounting for goodwillAccounting for goodwill 2. For this reason a new partner has to bring extra value apart from capital, this is known as Premium for Goodwill. Same things applies as shown above for both ways but this new partner will never have apportionment using OLD profit sharing ratio. Paid it privately to the existing partner: – Treatment of goodwill on admission of a new partner will be based on the following conditions: Ansh and Vansh are partners sharing profits in the ratio of 1/4 and 3/4 respectively.They admitted Nived as a new partner for 2/3 share in the profits of the firm. Admission of a New Partner – Goodwill Method. Note: In addition to the above treatment, it has to be ensured that Goodwill must not appear in the Balance Sheet as an asset on the date of admission. When new partner brings cash towards goodwill. However, if it appears in the Balance Sheet, then the goodwill account shall be written off by debiting the existing partners’ capital account in the old profit sharing ratio before passing above entries. Whenever a new partner is admitted, he is generally expected to pay cash to old partners for his share of goodwill for the right he acquires to share in profits of the firm in future. The new profit-sharing ratio of the partners will be 5: 3: 2. 2. The book value of the interest he is acquiring in the firm is $700,000. Accounting treatment for goodwill. 1. This goodwill is distributed in the ratio of 3: 2 old sharing. Need to apportion the new partner also methods of valuation of goodwill entries are different and recorded on the of! 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