Question

The journal entry for treatment of goodwill, when a new partner brings his share of goodwill in cash and one of the old partners gains, involves the following
(A) Gaining Partner’s Capital Account is debited
(B) Premium for Goodwill Account is debited
(C) Sacrificing Partner’s Capital Account is credited
(D) Gaining Partner’s Capital Account is credited

• A. (A), (B), and (D) only
• B. (A), (B), (C), and (D)
• C. (A), (B), and (C) only
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

To record the treatment of goodwill when a new partner joins and contributes their share of goodwill in cash, and one of the existing partners gains, the following steps are involved in the journal entry process: 

1. Debit the Premium for Goodwill Account: This step is necessary as the amount brought in by the new partner for goodwill is recorded. The Premium for Goodwill Account represents the monetary value brought in by the new partner.

Journal Entry: Debit: Premium for Goodwill Account

1. Debit the Gaining Partner’s Capital Account: Since one of the old partners is gaining from the new partner's entry, we need to adjust the gaining partner's capital account.

Journal Entry: Debit: Gaining Partner's Capital Account

1. Credit the Sacrificing Partner’s Capital Account: The gaining partner compensates the sacrificing partner, thus necessitating a credit to the sacrificing partner's capital account.

Journal Entry: Credit: Sacrificing Partner's Capital Account

Therefore, the correct journal entries highlighted include options (A), (B), and (C) only.

Answer 2

When a new partner is admitted and he brings his share of goodwill in cash, the journal entries related to the treatment of goodwill are as follows:

• (A) Gaining Partner’s Capital Account is debited:
  The gaining partner (the one whose share increases) has to bear the share of goodwill brought in by the new partner. The amount of goodwill brought in by the new partner is debited to the gaining partner’s capital account.
• (B) Premium for Goodwill Account is debited:
  When goodwill is introduced into the business, the Premium for Goodwill account is debited with the value of goodwill brought by the new partner.
• (C) Sacrificing Partner’s Capital Account is credited:
  The sacrificing partners (the ones who give up part of their share) are credited with their respective share of goodwill. This is done in proportion to the share of goodwill they sacrificed.
• (D) Gaining Partner’s Capital Account is credited:
  This is incorrect. The gaining partner’s capital account is debited, not credited, with the share of goodwill.

Thus, the correct answer is: (A), (B) and (C) only