Share of Goodwill Brought in Cash by the New Partner is called : A Assets B Profit C Premium D None of these (2024)

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Share of Goodwill Brought in Cash by the New Partner is called : A Assets B Profit C Premium D None of these? ›

Share of Goodwill Brought in Cash by the New Partner is called Premium.

According to provisions of Indian Partnership Act,1932, whenever a new partner brings cash for his share of goodwill and the same is shared by old partners in their sacrificing ratio it is called nothing but the premium method.

Key Points When a new partner brings their share of goodwill in cash, the amount is debited to the Cash A/c (Cash Account). This is because the new partner is contributing cash to the partnership, which increases the partnership's cash balance.

The incoming partner brings in some amount as his share of Goodwill or Premium to compensate the existing partners for the loss of their share in the future profits of the firm. Thus, at the time of admission of a partner, there are following two ways to treat goodwill.

The premium for goodwill is an additional amount paid by the new partner to compensate to the old partners for the part of profit taken up by him. When this amount of premium is paid privately by the incoming partner to the old partner's, no entry is recorded in the books of accounts.

When a new partner is not able to bring goodwill in cash then his current account is debited and old partners capital are credited in their sacrificing ratio .

The goodwill brought in by a new partner is shared by the old partners. Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in their new profit sharing ratio.

Goodwill is an intangible asset, but also a capital asset. The value of goodwill refers to the amount over book value that one company pays when acquiring another. Goodwill is classified as a capital asset because it provides an ongoing revenue generation benefit for a period that extends beyond one year.

Is goodwill a current asset? No, goodwill is a long-term asset, also known as a noncurrent asset. Current assets are those that your company will consume or sell within one year. Goodwill cannot be sold, and its value lasts beyond one year, which makes it long term.

Goodwill is an intangible asset that results in enhancing the valuation of the business. It causes the purchase price of the company to go up. Goodwill can be determined by subtracting the net fair market value of the assets and liabilities from the purchase price of the company. Also read: MCQs on Goodwill.

When a new partner brings goodwill in cash? ›

On admission of a partner, the amount of goodwill brought in cash is credited to goodwill account.

At the time of admission of a partner, the incoming partner brings in an extra amount to compensate the existing partners for their loss in the super profits because of the addition of his share in the profits of the firm.

It is done to compensate the old partners since they also sacrifice their share in profits. The goodwill brought in by a new partner is shared by the old partners.

Goodwill is a premium paid over the fair value of assets during the purchase of a company. Hence, it is tagged to a company or business and cannot be sold or purchased independently. In contrast, other intangible assets like licenses, patents, etc., can be sold and purchased separately.

Explanation: Goodwill is an intangible asset that arises when one company purchases another for a premium value. Premium on Goodwill is the compensation paid by the incoming partner to the sacrificing partner.

The nature of Premium for Goodwill A/c is Liability. It represents the liability of the firm towards the sacrificing partners.

According to section 32 of the Indian Partnership Act, 1932, when a new partner pays his share of goodwill in cash, then the profit sharing ratio changes. Hence, goodwill will be distributed among old partners at their old profit ratio only.

The retiring or the deceased partner will not be sharing future profits. Therefore all continuing partners pay to retiring partner the share of Goodwill in gaining ratio. It is fair to compensate the retiring or deceased partner for the same.

he goodwill generated on consolidation represents the excess of the cost of acquisition over the Group's share in the market value of the identifiable assets and liabilities of a subsidiary.

What is the new ratio formula? "New Profit Sharing ratio" refers to the remaining partners continuing to divide up earnings and losses after one of the partners has retired from the business. 1. New Ratio = Old Ratio + Gaining ratio.