GOODWILL TREATMENT AT TIME OF ADMISSION/RETIREMENT

 The treatment of goodwill at the time of admission and retirement of a partner depends on whether goodwill is already recorded in the firm's books and the agreement between partners. Here's a breakdown with journal entries:

Admission of a Partner:

Case 1: Goodwill not in the books:

• Option 1: Private payment for goodwill:

• New partner pays existing partners privately for their share of goodwill. No entries are made in the firm's books.

• Option 2: New partner brings capital and premium for goodwill:

• New partner brings cash as capital and additional amount as premium for goodwill.

• Journal Entry:

• Debit Cash (for total amount received)

• Credit Capital Account (new partner)

• Credit Goodwill Account (calculated share for new partner)

• Sacrificing ratio adjustment:

• Existing partners' capital accounts are adjusted (debited or credited) based on their sacrificing ratio (difference between old and new profit-sharing ratios) and the remaining premium for goodwill.

• Journal Entry:

• Debit Goodwill Account (remaining premium)

• Credit Existing Partners' Capital Accounts (in their sacrificing ratios)

Case 2: Goodwill already in the books:

• New partner brings capital and premium for goodwill:

• Similar to Case 1 (Option 2) with Goodwill Account already existing.

• No adjustment to existing partners' capital accounts unless a specific agreement exists.

Retirement of a Partner:

Case 1: Goodwill not in the books:

• Retiring partner is paid their share of goodwill from remaining partners' capital accounts in their gaining ratio (opposite of sacrificing ratio).

• Journal Entry:

• Debit Remaining Partners' Capital Accounts (in their gaining ratios)

• Credit Retiring Partner's Capital Account

Case 2: Goodwill already in the books:

• Two options:

• 1. Goodwill account adjusted:

• Goodwill account is debited with the retiring partner's share.

• Remaining partners' capital accounts are credited in their gaining ratios.

• Journal Entry:

• Debit Goodwill Account (retiring partner's share)

• Credit Remaining Partners' Capital Accounts (in their gaining ratios)

• 2. No adjustment to goodwill:

• Retiring partner receives their share of goodwill directly from remaining partners without affecting the Goodwill Account.