Partners M and N have capitals ₹120,000 and ₹180,000 respectively with a profit‑sharing ratio of 2:3. After 4 years, partner O wishes to be admitted with a capital of ₹80,000. Goodwill of the firm is valued at 12% of the average profit of the last five years, which are ₹110,000, ₹130,000, ₹120,000, ₹140,000 and ₹150,000. O will not pay cash for goodwill; instead, the existing partners will adjust O’s goodwill share in their capital accounts. O’s profit‑sharing ratio after admission will be 2/9 of total profit. Determine (i) total goodwill of the firm, (ii) the amount of goodwill attributed to O, and (iii) the amounts credited to M’s and N’s capital accounts respectively.
Answer
Total goodwill ₹15,600; O’s goodwill ₹3,466.67; credited to M ₹1,386.67 and to N ₹2,080.00
The correct answer is Total goodwill ₹15,600; O’s goodwill ₹3,466.67; credited to M ₹1,386.67 and to N ₹2,080.00 — Thus, the goodwill amounts are allocated as calculated.
Step-by-step solution
- Compute average profit: (₹110,000+₹130,000+₹120,000+₹140,000+₹150,000)/5 = ₹130,000.
- Goodwill = 12% of ₹130,000 = ₹15,600.
- O’s share of goodwill is proportional to his profit share: 2/9 × ₹15,600 = ₹3,466.67.
- The existing partners share O’s goodwill in their old profit‑sharing ratio 2:3 (i.e., 2/5 and 3/5).
- M’s credit = (2/5) × ₹3,466.67 = ₹1,386.67.
- N’s credit = (3/5) × ₹3,466.67 = ₹2,080.00.
- Thus, the goodwill amounts are allocated as calculated.
Common mistake: Using the new profit‑sharing ratio instead of the old ratio for goodwill distribution
Concept tested: Goodwill allocation on admission without cash
Published · How this solution was prepared and checked
← All Reconstitution of Partnership Firm Admission of Partner questions