If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?
When goodwill already exists in the books and the new partner brings his share of goodwill in cash, the existing goodwill must be written off first. This is because the existing goodwill belongs to the old partners, and the new partner should not acquire any share in it without making payment for the same.
The journal entry passed to write off existing goodwill is: Old Partners' Capital A/c Dr. (in their old profit-sharing ratio) To Goodwill A/c (Being existing goodwill written off among old partners)
After writing off the existing goodwill, the amount of goodwill brought in by the new partner is recorded through Bank Account and then distributed among the sacrificing partners in their sacrificing ratio.
Explanation
The context explains that on admission, goodwill belongs to the old partners. If existing goodwill remains in books, the new partner would indirectly get a share in it without payment. Hence, it must be written off among old partners in their old ratio before recording the new goodwill brought in by the new partner.
Solution Steps
Step 1: Write off existing goodwill by debiting Old Partners' Capital Accounts in their old profit-sharing ratio and crediting Goodwill Account.
Step 2: Record the new goodwill brought in cash by new partner through Bank Account.
Step 3: Distribute the new goodwill among sacrificing partners in their sacrificing ratio.