Case I) A and B are partners sharing profits in 3:2. They take C as new partner who is “supposed to bring” rs 25000 against capital and RS 10000 against goodwill. New profit sharing ratio is 1:1:1. C is able to bring RS 30000 only. How will this be treated in the books of the firm.
Case II) A and B are partners sharing profits in 3:2. They take C as new partner who is “supposed to bring” rs 25000 against capital and RS 10000 against goodwill. New profit sharing ratio is 1:1:1. C is able to bring only his share of capital. How will this be treated in the books of the firm.
Options of both the cases are: i)A and B will she goodwill brought by C as 4000:10000 ii) Goodwill will be raised to RS 30000 in old profit sharing ratio. iii) Both iv) None
I am confused abt the two scenarios. a)What is the difference btw “bring Rs X only” and “bring only his share of capital” in terms of accounting? B) what is the answer and what is the reason behind it? Please elaborate.
In what cases do we raise(or don’t) goodwill in old profit sharing ratio, raise it in new profit sharing ratio or both ?
09 October 2007
GOODWILL IS DESCRIBED AS WHAT IS ATTRIBUATABLE TO EXISTING REPUTATION for the firm NAME. SO THE QUESTION OF A NEW PARTNER SHARING GOODWILL DOES NOT ARISE. IT BELONGS TO OLD PARTNERS SINCE IT IS ATTRIBUTED TO THEIR EFFORTS. IF NEW PARTNER C REFUSES TO BRING THE AGREED AMOUNT OF GOODWILL ,IT MEANS HE IS DISPUTING THE VALUATION OF GOODWILL ,OR EVEN THE EXISTENCE OF GOODWILL FOR THE FIRM. IF IT IS AGREED BY EXISTING PARTNERS TO SHARE THE GOODWILL AMOUNT BROUGHT BY NEW PARTNER,THEY ONLY BENEFIT AND NO ENTRY IN BOOKS OF THE FIRM.BUT TO THIS EFFECT THE(AMENDED) PARTNERSHIP AGREEMENT SHALL HAVE A STIPULATION.
SIMILARLY IF IT IS AGREED TO RAISE GOODWILL IN BOOKS ,THEN THE SAME CAN BE REFLECTED IN THE BOOKS.AGAIN THE DEED OF PARTNERSHIP IS GOVERNING DOCUMENT. IF NEW PARTNER BRINGS ONLY CAPITAL, ENTRY IN BOOKS WILL BE MADE ONLY FOR CAPITAL INDUCTION ,CREDITING CAPITAL AND DEBITING BANK. IF GOODWILL BROUGHT BY NEW PARTNER IS TO RETAIN IN THE BOOKS WITHOUT BEING PAID TO OLD PARTNERS , ( SUBJECT TO THEIR WRITTEN UNDERSTANDING),GOODWILL WILL APPEAR AS ASSET IN THE RECONSTITUTED B/S OF THE FIRM.
WHY GOODWILL IS RAISED SUDDENLY IN THE BOOKS ON ADMISSION OF A NEW PARTNER IS THAT THE FRUITS OF LABOUR PUT IN BY OLD PARTNERS IS VALUED AND PAID TO THEM AS PER THE UNDERSTANDING. IN SUCH CASES AS THE NEW PARTNER WAS NOT INVOLVED IN THE OLD FIRM ACTIVITIES AND HAS NO CONTRIBUTION OF CASH OR KIND, HE IS NOT ENTITLED TO ANY SHARE.IT IS THE PRICE OF HARD WORK PUT IN BY OLD PARTNERS AND THE REPUTATION THEY BROUGHT TO THE BUSINESS WITH THEIR EFFORTS.SO NATURALLY, A NEW PERSON HAS NO SAY OR RIGHT TO SHARE THE SAME. AS FOR RATIO OF RAISING GOODWILL,IT IS THE ABSOLUTE UNDERSTANDING BETWEEN ALL THE PARTNERS AND THE RELEVANT CLAUSES GOVERNING GOODWILL AS STIPULATED IN PARTNERSHIP AGREEMENT.IT SHOULD NOT BE A BLOATED OR UNREALISTIC VALUATION. cases are also there where due to induction of a new person the firm may benefit.in such cases the old partners pay some amount to the new partner or may raise goodwill in the books and the sharing of the same among the partners is decided by partners mutually. R.V.RAO
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