Multiple choice

Smith was admitted as a new partner with 1/4th share in the firm of Warner and Marsh. Goodwill of the firm was valued at Rs. 1,00,000 and he brought Rs. 25,000 as his share of goodwill. At the time of his admission, Warner sacrificed 1/2 while Marsh gained 1/4 in future profits. The journal entry for adjustment of goodwill brought by Smith will be:

  1. Smith's capital a/c Dr. 25,000 Marsh's capital a/c Dr. 25,000 To Warner's capital a/c 50,000

  2. Premium for goodwill a/c Dr. 25,000 Marsh's capital a/c Dr. 25,000 To Warner's capital a/c 50,000

  3. Premium for goodwill a/c Dr. 25,000 To Marsh's capital a/c 12,500 To Warner's capital a/c 12,500

  4. Warner's capital account Dr. 50,000 To Premium for goodwill 25,000 To Marsh's capital a/c 25,000

  5. None of these
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B Correct answer
Explanation

Warner sacrifices 1/2 share, meaning he gains 1/2 of the goodwill. Marsh gains 1/4, meaning he must pay 1/4 of the total goodwill value (1/4 of 1,00,000 = 25,000). Smith brings 25,000, so the entry debits Premium for Goodwill (25,000) and Marsh's Capital (25,000) to credit Warner's Capital (50,000).

AI explanation

When a new partner brings premium for goodwill, it is credited to the sacrificing partners in their sacrificing ratio. Smith brings Rs. 25,000, and because Warner sacrifices 1/2 and Marsh gains 1/4, Marsh must be debited for Rs. 25,000 to compensate for the gain. The total credit of Rs. 50,000 goes entirely to Warner, resulting in the entry: Premium for goodwill a/c Dr. 25,000, Marsh's capital a/c Dr. 25,000, To Warner's capital a/c 50,000.

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