Match each goodwill valuation method or accounting treatment in partnership accounts on the left with its corresponding description or journal entry rule on the right.
- Average Profit MethodGoodwill is calculated as Average Maintainable Profits multiplied by the agreed Number of Years' Purchase.
- Premium for Goodwill MethodThe incoming partner brings cash for goodwill, which is credited to existing partners in their sacrificing ratio.
- Raising Goodwill in BooksDebit Goodwill Account and credit Old Partners' Capital Accounts in their old profit-sharing ratio.
- Writing Off GoodwillDebit All Partners' Capital Accounts in their new profit-sharing ratio and credit Goodwill Account.
Answer
Average Profit Method pairs with calculating goodwill using average profits multiplied by years' purchase; Premium for Goodwill Method pairs with incoming partner paying cash credited to old partners in sacrificing ratio; Raising Goodwill pairs with debiting Goodwill Account and crediting Old Partners in old ratio; Writing Off Goodwill pairs with debiting All Partners in new ratio and crediting Goodwill Account.
Each valuation method and journal entry strictly follows partnership accounting standards: Average Profit Method uses maintainable profits multiplied by years' purchase; Premium for Goodwill compensates old partners in their sacrificing ratio; Raising goodwill credits old partners in their old ratio; Writing off goodwill debits all partners in their new ratio.
Step-by-Step Solution
Key Concept
Treatment and Valuation of Goodwill in Partnership Accounts