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Difficulty: MediumAdmission of a New Partner

Halima and Segun are partners in a retail enterprise sharing profits and losses in the ratio of 3:23:2. They admit Tunde into the partnership with a 15\frac{1}{5} share of future profits. Tunde pays ₦50,000\text{₦}50,000 as capital contribution and ₦20,000\text{₦}20,000 as premium for goodwill. What amount of the goodwill premium should be credited to Segun's capital account?

  1. ₦8,000\text{₦}8,000Answer
  2. B
    ₦12,000\text{₦}12,000
  3. C
    ₦10,000\text{₦}10,000
  4. D
    ₦20,000\text{₦}20,000

Answer

The amount of goodwill premium to be credited to Segun's capital account is ₦8,000\text{₦}8,000.
When a new partner pays a premium for goodwill upon admission, the premium is shared among the old partners in their sacrificing ratio. Because no separate sacrificing agreement is given, the existing profit-sharing ratio (3:23:2) serves as the sacrificing ratio. Segun's proportion is 25\frac{2}{5}, which equates to 25×₦20,000=₦8,000\frac{2}{5} \times \text{₦}20,000 = \text{₦}8,000.

Step-by-Step Solution

1
Determine the sacrificing ratio of the existing partners.
Since no specific new ratio or sacrifice proportion is stated, Halima and Segun sacrifice in their existing profit-sharing ratio of 3:23:2.
When a new partner is admitted without specifying a change in the relative ratio between existing partners, they sacrifice in their old profit-sharing ratio.
2
Calculate Segun's share of the goodwill premium.
Segun's share = 23+2×₦20,000=25×₦20,000=₦8,000\frac{2}{3+2} \times \text{₦}20,000 = \frac{2}{5} \times \text{₦}20,000 = \text{₦}8,000.
Goodwill premium brought in by an incoming partner is credited to existing partners' capital accounts in their sacrificing ratio.

Key Concept

Accounting treatment of goodwill premium brought by an incoming partner upon admission
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Admission of a New Partner

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