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Difficulty: MediumTreatment and Valuation of Goodwill

Match each goodwill scenario or valuation method in partnership accounting on the left with its corresponding accounting treatment or formula on the right.

  • Raising firm goodwill at full value upon the admission of a new partnerDebit Goodwill Account; Credit Old Partners' Capital Accounts in their old profit-sharing ratio
  • Writing off goodwill immediately after it has been raised in fullDebit All Partners' Capital Accounts (including new partner) in their new ratio; Credit Goodwill Account
  • Valuation of goodwill using the Capitalization of Super Profit methodCalculate as Super ProfitNormal Rate of Return×100\frac{\text{Super Profit}}{\text{Normal Rate of Return}} \times 100
  • Goodwill premium paid privately by a new partner directly to existing partnersNo journal entry is recorded in the books of the partnership firm

Answer

1. Raising goodwill at full value matches with debited to Goodwill Account and credited to Old Partners' Capital Accounts in their old profit-sharing ratio. 2. Writing off goodwill matches with debited to All Partners' Capital Accounts in their new ratio and credited to Goodwill Account. 3. Capitalization of Super Profit method matches with Super Profit divided by Normal Rate of Return multiplied by 100. 4. Private payment of goodwill premium matches with no entry in the partnership books.
Each partnership scenario directly corresponds to its established double-entry bookkeeping rule or mathematical formula: raising goodwill credits old partners in their old ratio, writing off debits all partners in their new ratio, super profit capitalization divides super profit by the normal rate of return, and private transactions require no entries in the firm's accounts.

Step-by-Step Solution

1
Analyze the journal entry for raising goodwill.
Raising goodwill creates an asset (Debit Goodwill) and recognizes the past efforts of old partners (Credit Old Partners' Capital in Old Ratio).
Goodwill created before admission belongs exclusively to existing partners.
2
Analyze the journal entry for writing off goodwill.
Writing off goodwill eliminates the intangible asset (Credit Goodwill) and charges all partners according to the new profit distribution (Debit All Partners' Capital in New Ratio).
If goodwill is not retained in the books, all partners bear the write-off in their agreed future sharing proportions.
3
Identify the formula for Capitalization of Super Profit.
Goodwill = Super ProfitNormal Rate of Return×100\frac{\text{Super Profit}}{\text{Normal Rate of Return}} \times 100.
This determines the capital amount required to generate the excess profit at the standard return rate.
4
Evaluate private settlement of goodwill.
Private settlements bypass the firm's accounting record.
Only business entity transactions are recorded in financial accounting.

Key Concept

Treatment and Valuation of Goodwill in Partnership Accounts
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Topics

Treatment and Valuation of Goodwill

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